Gauntlett on Intellectual Property/Antritrust Insurance : Insurance Policyholder Advocate & Attorney David Gauntlett : Gauntlett Law Firm : Insurance Recovery, Policy Interpretation : Irvine, Orange County, California

Citing Discover Financial Services LLC v. National Union Fire Ins. Co., 527 F. Supp. 2d 806, 824 (N.D. Ill. 2007), which also addressed insurance coverage for Katz’ patent infringement claims, the court acknowledged that “Discover Financial omitted the Katz patents at issue in this case which specifically include claims relating to advertising.”

Incredibly, the court found this factor not essential to its ultimate finding. However, it was clearly germane to the Discover Financial court, and close analysis of the fact allegations evidences that the relevant precedent was not Discover but Hyundai Motor Am. v. Nat’l Union Fire Ins. Co., 600 F.3d 1092, 1098 (9th Cir. (Cal.) 2010), citing Amazon.com Int’l, Inc. v. Am. Dynasty Surplus Lines Ins. Co., 85 P.3d 974, 977 (Wash. Ct. App. 2004). These cases found patented “advertising techniques” which implicated potential “advertising injury” coverage under the “misappropriation of advertising ideas” offense. Especially as one of the pertinent patents, #5,828,734 at Claim 219, provides, “A telephone interface system ... wherein said selective operating format involves advertising a product for sale.” Discover Financial, 527 F. Supp. 2d at 813.

An even closer case the court’s order did not reference is Amazon.com, Inc. v. Atlantic Mutual Ins. Co., No. C05-00719RSM, 2005 WL 1711966 (W.D. Wash. July 21, 2005), which found the “virtual shopping cart” patent met the test because “[t]he ‘virtual shopping cart’ is a feature of plaintiff's advertising techniques [that] . . . monitors the frequency and duration of access to various pages by customers, thereby providing important marketing feedback to plaintiff.” Id. at *9.
 

The pertinent coverage, an exception to the IP exclusion under which Microsoft need establish liability, was “infringement of copyright . . . in your ‘advertisement.’ ” Id. at *5.

To trigger coverage under the advertising injury provisions of the Policies, the Underlying Lawsuit must have alleged, and judgment must have been entered, on the theory of potential for liability on one of the listed offenses and the offense was committed in the course of advertising the insured's goods, products or services. See Bank of the West v. Superior Court, 2 Cal.4th 1254, 1277 (1992). The California Supreme Court in Bank of the West held that there can be no coverage where the alleged injury had no causal connection to the insured's advertising activities. Id. at 1276.

Id. at *5.

As the court explained:

Here, the EEE Defendants' alleged copyright infringement did not have any causal relationship with its advertising as required to fall under the coverage for “advertising injury.” The allegations in Microsoft's complaint and the judgment entered in its favor concern merely the fact that the EEE Defendants infringed Microsoft's software copyrights by importing and selling the software in the United States when it was only licensed for sale abroad and to educational institutions. The judgment and the complaint upon which it was entered does not relate to any content in advertising or injury caused therefrom.

Id. at *6.

The other problem is that the alleged copyright infringement was deemed to be intentional, which is how the court characterized personal and advertising injury “arising out of an offense committed by, at the direction of or with the consent or acquiescence of the insured with the expectation of inflicting ‘personal and advertising injury.’ ” The court found that this implicated California Insurance Code § 533, precluding coverage for willful misconduct.

Clearly Microsoft could have planned against pirates in such a way that it could have obtained a judgment that was more likely to be enforceable against the insurer but elected not to do so. That decision was costly as it simply obtained the benefit of relief as a practical matter but no damages.

Wisconsin is a four-corner state looking rigorously at the allegation of the complaint and nothing beyond. Articulating the basis for a defense determination, the Court observed:

“The test is whether the complaint arguably asserts a form of liability covered by the policy.” Hamlin Inc. v. Hartford Accident & Indem. Co., 86 F.3d 93, 96 (7th Cir.1996) (applying Wisconsin law) . . . .

Id. at *5.

In analyzing the defense, the court observed:

Specifically, KI contends that S & P's amended complaint alleges injury arising out of the “[u]nauthorized taking or use of any advertising idea, material, slogan, style or title of others.”

Id. at *6.

Here, the plain language of the pertinent provision requires that St. Paul pay damages resulting from KI's advertising of its products that arise from misappropriating someone else's advertising. The word “advertising,” as used in this provision of the policy, is intended to modify not just “idea,” but each of the terms that follow. Otherwise, the enumerated offense would extend far beyond the area of advertising. Thus, St. Paul agreed to indemnify KI against liability for damages incurred where, in advertising its own products, KI misappropriated an idea, material, slogan, style or title from the advertising of another. In the context of this case, St. Paul would be required to indemnify KI for any damages KI incurred in advertising its own products if KI was found to have taken or used any of S & P's advertising ideas, materials, slogans, styles or titles without S & P's consent. Since S & P's lawsuit had nothing to do with its own advertising but was instead all about KI's alleged theft of its furniture design, it seems clear that no covered claim was alleged.

Id. at *7.

The court’s construction would add words of limitation not set forth in the policy to wit, that it is not possible to promote a product similar to that of a competitor, such that its mere promotion would be a misappropriation of an advertising idea, especially where the character of the liability as here, depended upon the content of advertising which would include physical display of furniture as an advertisement for the product itself on showroom floors falling within the broad meaning of the definition of the term “advertising” in St. Paul’s policy, which means, “attracting the attention of others by any means for the purpose of seeking customers or increasing sales or business.” Id. at *3.

Articulating the later argument, KI asserted:

First, . . . “S & P's allegations that KI took and improperly displayed CAMPUS in the KI showroom implicates coverage under the advertising materials language of the policy.” . . . Second . . . KI contends that “the aesthetic nature of [S & P's] design is the true advertising idea and style because it was designed to appeal to consumers through unique appearance,” . . . .

Id. at *7.

The court found that the physical display of the campus furniture in a showroom was made at a time when it purported to be representing the campus line and therefore could not be part of the misrepresentation conduct. Second, the court found that there is no evidence that the campus desk and chair that KI displayed at the showroom in 1995 were created by S & P for the purpose of advertising.

The court, thus, looks to the understanding that the claimant had in using materials misappropriated, not the effect of what the defendant did with those materials, which could be deemed to implicate advertising material. As liability attaches for the defendant’s conduct that could be actionable, the court’s focus appears improper.

The court specifically rejected the notion that the product itself by virtue of its design constitutes advertising, even under St. Paul’s broad definition of that term.

Instead, advertising is communication about a product, and as such it cannot logically be the product itself. This distinction is implicit in St. Paul's definition: “Advertising means attracting the attention of others [to the product] by any means for the purpose of seeking customers or increasing sales or business.” The advertising-the means or act of attracting attention-needs an object; it is not itself the object.

Id. at *9.

The addition of the bracketed phrase “to the product” is but one possible meaning. It does not look at all possible meanings of the term advertising, which is required in a duty to defend analysis nor the potential that a product can logically be an advertisement for itself in some circumstances. As these possibilities are not even examined by the court, and the court takes what it believes is the most logical understanding of how advertising is to be understood, it has only shown that there is one possible reading of the policy under which coverage would not arise, not that it couldn’t occur potentially herein. Although the court cites a number of cases for the proposition that the product cannot be in advertising for itself, they are an equally significant number and more of them recent than the court’s opinion, embracing the contrary view.

The court’s citations include Westport Reinsurance Management, LLC v. St. Paul Fire & Marine Ins. Co., 80 Fed. Appx. 277, 279 (3rd Cir. 2003) (product itself is not advertising); Green Machine Corp. v. Zurich-American Ins. Group, 313 F.3d 837, 841 (3rd Cir. 2002). (Marketing strategy or style of attracting customers was theft of underlying method, not an advertising idea.); Accessories Biz, Inc. v. Linda and Jay Keane, Inc., 533 F. Supp. 2d 381, 388 (S.D.N.Y. 2008) (“Advertising idea” does not include product itself, thus samples could not be a form of advertising.); Hosel & Anderson, Inc. v. ZV II, Inc., 2001 WL 392229, *2 (S.D.N.Y. 2001) (“[t]he product itself is not an advertisement within the meaning of the policy”).

Specific language of the policies could be determinative in each of these cases and the court does not cite it thereby running afoul of the rule that a policy must be interpreted in light of particular language not purported general rules instructions may not have application therein.

The court distinguished Fireman’s Fund Ins. Co. v. Bradley Corp., finding there that the court found that express coverage for trademark encompassed trade dress fact allegations. Consumer confusion caused by the mistaken impression through presentation of a product could be an advertising idea as the court noted. Indiana Ins. Co. v. Super Natural Distributors, Inc., 2003 WI App. 244, 2003 WL 22336427, *10 (Wis. Ct. App. 2003); Superformance Intern., Inc. v. Hartford Cas. Ins. Co., 203 F. Supp. 2d 587, 597 (E.D.Va. 2002).

The court distinguished Acuity Mutual Ins. Co. v. Bagadia, 750 N.W.2d 817 (Wis. 2008) because there, sending of copyrighted software samples and advertising of trademarked software was part and parcel of the injury alleged. The absence of alleged injury based on consumer confusion or any advertising of the product, even though it is implicit from the fact allegations referenced. The fact that in both Bradley and Bagadia, the claimant was a competitor of the insured defendant and the court’s view was noteworthy. It characterized a section of the complaint referring to display or advertising of the products as surplusage, as they were “not a component of any injury (since they do not relate to the merits of any of the claims).” Id. at *11.

The court seems fixated on whether the fact allegations support the theory of damages as articulated in the complaint, not as the court was compelled to do under applicable Wisconsin law, whether the facts could support recovery under any theory that might implicate possible coverage. Thus, the court cites, but does not consider the import of Curtis-Universal, Inc. v. Sheboygan Emergency Services, Inc., 43 F.3d 1119, 1122 (7th Cir. (Wis.) 1994). Skipping in its citation the part of the Seventh Circuit’s opinion that emphasized that the theory of relief, which it described as a legal label, was of no moment.

The same analysis was apropos as to Federal’s policies where “infringement of copyrighted advertising materials” was the offense analyzed.

[E]ven if the complaint in the underlying action could be read to allege copyright or trademark infringement based on KI's alleged misappropriation of S & P's furniture designs, there is certainly no allegation that KI made infringing use of copyrighted advertising materials, unless one regards the design itself as advertising, an argument that I have already fully addressed and rejected above.

Id. at *13.

• St. Paul’s payment of $780,000 in defense fees and $315,000 to settle a lawsuit was no small matter and that it entitled St. Paul to potential reimbursement if issues could be factually addressed to the court’s satisfaction.

• There was no authority for the proposition that reimbursement is not permitted even though Wisconsin law may stay proceedings in the underlying claim until the coverage question is resolved, since there is a direct action statute permitting that remedy.

• The complexity attending resolution of commercial general liability coverage issues made this an inappropriate policy.

• The right to reimbursement was a majority position, even though that appears not be true anymore with the recent spade of cases, including General Agents Ins. Co. of Am., Inc. v. Midwest Sporting Goods, Co., 828 N.E.2d 1092, 1101 (2005). Id at *18.

• A motion for leave to amend to file a counterclaim seeking reimbursement remains.

causal connection between the alleged patent infringement of the 336 Patent and any advertisement by defendants, this was sufficient to bar coverage. Citing Hyman v. Nationwide Mut. Ins. Co., 304 F.3d 1179, 1191 (11th Cir. 2002) (stating, in interpreting a policy with similar language to that at issue here, that “the injury for which coverage is sought must be caused by the advertising.”). Id. at *6.

There were no enumerated offenses arising out of the insured, Allied’s business even if the causal nexus could be satisfied. Looking to the other operative offense, the court observed:

[T]he underlying Suit does not allege that Defendants made use of another’s advertising idea.

Id. at *7.

Notably, nothing about the character with patent in issue is explained that would make an advertising idea implicated as the pertinent patent covers the method for fighting fire in confined areas using nitrogen expanded foam.

as well as misappropriation.

Both Federal and St. Paul initially denied a defense, and thereafter St. Paul reconsidered, though subject to a right to seek reimbursement. The court found that allegations that KI displayed the CAMPUS furniture in its showroom without authorization does not amount to a claim KI improperly used S&P advertising materials.

The key issue in the court’s view is whether the unique aesthetic design of the furniture may be considered in and of itself to be an advertising idea or material such that its unauthorized use or display would constitute advertising injury under the relevant policy language. Id. at *8.

The court rejected KI’s suggestion that the product itself by virtue of its design constitutes “advertising.” The court reasoned:

It is not the product per se that is the advertising, because even the best product can lie dormant in a forgotten cellar somewhere and no one would say its intrinsic qualities alone had “advertised” it. Instead, advertising is communication about a product, and as such it cannot logically be the product itself. This distinction is implicit in St. Paul's definition: “Advertising means attracting the attention of others [to the product] by any means for the purpose of seeking customers or increasing sales or business.” The advertising – the means or act of attracting attention – needs an object; it is not itself the object.

Id. at *9.

Relying on New York case law, the court surveyed none that reached an opposite conclusion on this point.

[See] Accessories Biz, Inc. v. Linda and Jay Keane, Inc., 533 F.Supp.2d 381, 388 (S.D.N.Y.2008) (“L & J argues that the Samples themselves are a form of advertising, but New York courts have routinely held that the phrase ‘advertising idea’ does not include the product itself.”); Hosel & Anderson, Inc. v. ZV II, Inc., 2001 WL 392229, *2 (S.D.N.Y.2001) (“[t]he product itself is not an advertisement within the meaning of the policy”).

Id. at *9.

On closer examination, each of these cases deals with the precise policy language at issue or involves an improper assumption that liability attaches because the advertising aspect and nexus to same are met. The product may constitute a form of “advertising injury” offense under certain circumstances; i.e., it’s an advertising idea. Unique trade dress as well as design patent claims would appear to meet this criteria.

Recharacterizing the suit as one simply based on misappropriation of design and not its promotional use, the court does not parse the specific allegations, which suggest the latter.

Distinguishing other cases, the court found that false advertising fact allegations, which created a mistaken impression about the original product, could trigger a defense. Indiana Ins. Co. v. Super Natural Distributors, Inc., 2003 WI App 244, 2003 WL 22336427, at *10 (Wis. Ct. App. 2003); Superformance Int’l, Inc. v. Hartford Cas. Ins. Co., 203 F. Supp. 2d 587, 597 (E.D. Va.2002).

In Acuity Mutual Ins. Co. v. Bagadia, 750 N.W.2d 817 (Wis. 2008), the court found that sending samples of a trademarked or copyrighted product to potential customers met the causal nexus between injury and advertising activity and that advertising likely materially contributed to consumer confusion. Id. at 831. The court found, on the fact allegations, no injury alleged based on consumer confusion or any advertising of the product. Kreuger, 2008 WL 4962669, at *10.

The court found the absence of any competitive relationship between KI and S&P critical, as S&P had never developed or sold any of the furniture itself. KI was simply a former distributor who decided to create its own duplicative furniture line. In a telling part of the opinion, the court describes certain parts of the opinion where references to display or advertising of products are asserted as “essentially surplusage.” Id. at *11. The court continued:

These citations within the complaint are not a component of any injury (since they do not relate to the merits of any of the claims), but rather are offered as simply background material or evidence.

Id. at *11.

This attempt to parse what are fact allegations that are the thrust of the allegations does not prove that there is no possibility for coverage under the fact allegations noted that could relate to liability for the dissemination of misappropriated items as a separate ground for relief. The court found it telling that KI was not alleged to have stolen S&P’s advertising idea, material, slogan, style, or title. Id. at *12.

The court found that St. Paul’s failure to specify in its counterclaim a request for reimbursement of defense fees barred it from such relief. The court, after serving authority and determining that the right to reimbursement was a majority not minority rule, agreed to permit St. Paul the right to amend its pleading but not to recover relief thereon, which would be the subject of further proceedings.