Glenmark Pharmaceutical, Inc. USA v. Franklin Mutual Ins. Co., , No. L-3114-06, 2008 WL 5194305 (N.J. Super A.D., Sept. 15, 2008)

Posted on January 15, 2009 by David Gauntlett

In a per curiam decision a New Jersey state trial court analyzing a 1986 ISO policy provision found allegations for breach of a confidentiality agreement between two pharmaceutical companies triggered a defense. The court disagreed and found that these sole conduct in issue was violation of the written confidentiality agreement thereby triggering contract exclusion.

Tags: , , , , , ,

Imbrie v. State Farm Fire & Cas. Co., No. CV-08-888-ST, 2008 WL 4737950 (D. Or. Oct. 24, 2008) (Stewart)

Posted on November 4, 2008 by David Gauntlett

The underlying lawsuit asserted claims for relief for unfair competition under California Bus. & Prof. Code § 17200, as well as intentional interference with contractual relationships and other counts. The court, analyzing a 1986 ISO CGL policy, found no duty to defend the alleged allegations of trade secret misappropriation implicated by these fact assertions. No analysis of invasion of privacy was proffered.

The alleged wrongful acts by the Imbries, who were

former employees of the claimant as independent contractor real estate salespersons assisting clients in the purchase and sale of investment properties throughout the U.S., asserted various acts of unfair competition, to wit:

(1) stealing M & M's customers by persuading them to abandon their listing agreements with M & M and sign one with plaintiffs; and (2) misappropriating M & M's confidential, proprietary business forms, in particular its form representation agreement and purchase agreement, for use in plaintiffs' day-to-day business operations.

Id. at *5.

Applying Oregon law, Magistrate Stewart formulated a meaning for “advertising idea” in the phrase “misappropriation of advertising ideas” as “misappropriat[ing] a plan, conception, or design aimed at calling M & M's services to the attention of the public.” Id. at *6.

Adopting this definition, the court claimed it was similar to that found by other courts:

Other courts have similarly defined “advertising idea.” See Atl. Mut. Ins. Co. v. Badger Med. Supply Co., 191 Wis 2d 229, 239, 528 NW2d 486, 490 (1994) (consulting dictionary definitions, including Webster's, to determine that “[a]n advertising idea ... is an idea for calling public attention to a product or business, especially by proclaiming desirable qualities so as to increase sales or patronage”); Am. Econ. Ins. Co. v. Reboans, Inc., 852 F Supp 875, 879 (ND Cal 1994) (“ ‘advertising ideas or style of doing business' refers to the mode of presenting a product to the public”).

Id. at *6 n.1.

The court found no potential coverage. It reasoned:

The M & M Complaint contains no such allegation. While it does allege that plaintiffs stole M & M's form documents and that these form documents are “material” to M & M's success, the M & M Complaint does not tie these forms to any advertising idea conceived or employed by M & M. According to the M & M Complaint, the major advantage M & M receives from these forms is that they “clearly define the obligations and liabilities of the parties with particular care to the interests of M & M.” This does not pertain to “advertising ideas.”

Id. at *6.

Looking to dictionary definitions, the court deduced that “misappropriation of a style of doing business” is the misappropriation of M&M’s “peculiarly distinctive technique or methods or characteristics” of “commercial or mercantile activity.” Id. at *6.

The court found that, so defined, “style of doing business” was akin to trade dress and that misappropriation must not be of just one minute facet of a business. It reasoned, “[A] style of business is what sets one company apart from its competitors in the same industry.” Id. at *7.

The court also explained that “style of business” in context refers to “a company’s comprehensive manner of operating its business.” Atlantic Mutual, 191 Wis. 2d at 239, 528 N.W.2d at 490, quoting St. Paul Fire & Marine Ins. Co. v. Advanced Interventional Sys., Inc., 824 F. Supp. 583, 585 (E.D. Va. 1993). Id. at *7.

Since the misappropriation focused on customers and proprietary forms, the court found this provision not implicated.

Had M&M claimed to be an industry leader in the use of prepared-form documents and that it gained a competitive advantage distinctly from such use, the court intimated a different result might attend. While there was a gain in efficiency of operations, it was not sufficient to transform the conduct into “misappropriation of style of doing business.”
Tags: , , , , ,

Assessing Your Insurance Portfolio As an IP Owner to Maximize Value

Posted on July 28, 2008 by David Gauntlett
New Insurance Policies Covering Cyberspace Torts

Insurers now issue so-called cyberspace policies and also provide for net security coverage that addresses a host of exposures emanating from a company’s greater dependence on information services. Coverage for cyberspace intellectual property defense risks and prosecution opportunities, especially of patent and trade secret claims, is available only through policies specifically covering IP risks. You should carefully evaluate the wide array of available policies to maximize coverage for your company’s needs. The larger your client’s revenues and, hence, its premium payments, the greater your ability to negotiate favorable coverage terms.

Traditional offense-based advertising injury/personal injury CGL policies have a better track record than non-CGL policies in covering internet- and cyberspace-related torts. But the definitions of claims specified by the various ISO forms sometimes are murky and could require a case to proceed to trial to clarify whether coverage will arise. Common exclusions and questions about causal nexus also may apply to bar coverage. Errors and Omissions and Directors and Officers policies typically cover wrongful acts and require particularized conduct, either by a professional or a director/officer, to trigger coverage.

Cyberspace, Net Secure, and Intellectual Property Defense as well as pursuit policies offer a rich variety of solutions for addressing common e-commerce problems. As an adjunct to traditional policies, they give policyholders an improved coverage position that should minimize transaction costs. As the hypotheticals reviewed herein reveal, many common problems confronted by policyholders are best addressed under new forms of coverage where price point is a key consideration.

Nevertheless, a combination of broadly written traditional CGL Coverage with new form Cyberspace and Net coverage may present a winning package. Articulating hypothetical problems which your company could encounter and asking a prospective insurer to address whether its policy would cover given claims in writing is an effective way to “test drive” these new policies and find insurers who are willing to work for your business. However, because some of the narrower forms of cyberspace policies arguably do nothing more than duplicate the coverage that should be available under CGL and E&O/D&O policies, however, you must carefully review the policy language before selecting your company’s coverage.

Savvy corporate counsel will assure that the potential litigation exposure of their company governs the choice of its insurance policies. Many risks may not trigger net secure and cyberspace policies. But the significant exposure posed by cyberspace perils calls for having proactive, offense-based coverage in place before it is needed.

Cyberspace Policies

Unlike ISO policy forms, cyberspace policies offered by the current marketplace have not congealed into any standardized form. Indeed, insurers use product differentiations, protected by copyright, as a significant competitive strategy. It is therefore essential that you discuss with the vendor its specific policy language.

Cyberspace policies typically provide coverage for damages and defense costs arising out of enumerated offenses, such as defamation, invasion of privacy, misappropriation of name or likeness, or alleged violations of intellectual property rights stemming from information disseminated by the insured in covered media or advertising activities. They may also be endorsed to provide E&O coverage for the content of the covered information.

Media/Professional Insurance Agency, Inc., for example, issues a policy for Cyberspace Liability Plus™ Insurance that covers claims arising out of defamation and various intellectual property offenses, as well as “Piracy and plagiarism” (which according to at least one court makes that definition redundant) and the misuse of an intellectual property right, in the context of cyberspace activities. Iolab Corp. v. Seaboard Surety Co., 15 F.3d 1500, 1506 (9th Cir. 1994) (Placed in context, the intended meaning of the language is clear. “In the context of policies written protect against claims of advertising injury, ‘piracy’ means misappropriation or plagiarism found in the elements of the advertisement itself – in its text form, logo, or pictures – rather than in the product being advertised.”).

Although you can expect pertinent exclusions and other endorsements to exclude coverage available in a given factual scenario – typically for patent, trade secret, and antitrust claims – you will find the scope of the insuring grant in these policies a good place to start negotiating desired coverage (see sidebar for a list of cyberspace coverage vendors).

Net Secure Policies

Marsh’s Net Secure policy contains the elements common to most such policies. It addresses both first- and third-party losses and is underwritten by a consortium of insurers. It focuses on the more traditional kind of operational issues that companies encounter and addresses cyberspace property damage coverage.

Coverage A in the Marsh Net Secure policy includes a variety of perils, such as inadvertent mistake, error, or omission in the creation, distribution, installation, maintenance, modification, processing, repair, testing, or use of your computer system, and the introduction or spread of a computer virus, as well as other related forms of interruption to electronic information processing systems. The policy kicks in when there is “direct loss resulting from damage to forms of electronic data, information assets, computer programs or data processing media.”

Coverage B of the Marsh policy extends business income and extra expense coverage to include disruption, interruption, delay, or suspension of your internet and network activities during the period of recovery. The same litany of perils as enumerated in Coverage A triggers rights under this coverage.

Intellectual Property Policies

Policies that expressly provide for defense and/or prosecution of patent, trademark/trade dress, trade secret, and copyright claims obviously represent the most direct form of coverage for intellectual property claims. Intellectual property policies have the advantage of removing any ambiguity regarding the scope and extent of coverage. See DAVID A. GAUNTLETT, INSURANCE COVERAGE FOR INTELLECTUAL PROPERTY ASSETS, § 17.04 n.7 (Aspen Law and Business Division of Aspen Publishers, Inc., Gaithersburg, NY, 1999) (2007 Supplement).

One example of such coverage was historically available from the American International Specialty Lines Insurance Co. Called patent infringement indemnity insurance, it provided coverage of patent infringement claims caused by the “manufacture, use, distribution, advertising or sale” of any “covered product,” as long as the insured’s infringement was not intentional. You could endorse this policy to include other forms of intellectual property, such as trade secret, trademark, trade dress, or copyright.

Although a cyberspace policy may more economically protect your company from the latter three offenses, the patent defense policy expressly excludes them, absent an endorsement. At present for U.S.-based insurers, the sole resource for this insurance is the Intellectual Property Insurance Services Corporation based in Louisville, Kentucky. For significant corporations with a significant presence in Europe willing to procure patent defense insurance over a significant SIR (Self-Insured Retention), a number of opportunities through European-based insurers are becoming available. Similar risk-specific policies are available for the other intellectual property claims.

Intellectual property prosecution policies provide the necessary funding for you to pursue lawsuits in order to stop the infringement of your IP assets. Coverage of this type can be particularly important to companies that have a lot of their value tied up in these assets. Given the high cost of litigating intellectual property claims, smaller companies may lack the resources to pursue infringers and thus face the unfortunate prospect of standing idly by while infringement dilutes their valuable IP assets. Investing in coverage of this type can effectively eliminate this risk. Pursuit insurance has funded two cases that reached the U.S. Supreme Court. See Markman v. Westview Instruments, Inc., 52 F.3d 967 (Fed. Cir. 1995), aff’d, 517 U.S. 370 (1996); In re Lockwood, 50 F.3d 966 (Fed. Cir. 1995), vacated, 515 U.S. 1182 (1995) (after withdrawal of jury demand); see also Summit: Conn. Indem. Co. v. Markman, 1993 WL 304056 (E.D. Pa. 1993) (insured able to pay for the suit because his carrier had paid for two other suits involving the same patent).
Tags: , , , , ,

Selecting the Coverage That Suits Your Company

Posted on July 24, 2008 by David Gauntlett
Opportunities in Procuring Cyberspace Coverage

So how can you protect your company from cyberspace risks? How can you ensure that your company has the insurance coverage it needs to negotiate confidently in e-commerce? In order to select the coverage that best suits your company, you must consider its stage of growth and its potential for experiencing dangers unique to the e-commerce landscape. Once you have made this assessment, you should weigh some basic practical factors before making a final decision.

Stage of Growth

The type of coverage you advise your company to obtain depends on its stage of growth. Insurance consultants vary in their recommendations. For example, one group suggests that companies should wait until a mature phase before purchasing intellectual property defense coverage. This group advises you to acquire multimedia/cyberspace liability; professional liability/E&O insurance, including coverage for software and hardware errors and omissions; and D&O and umbrella liability, during your company’s growth phase. See William Gallagher & Assoc., Insurance Milestones for High Technology Companies, www.hightechinsurance.com. Other consultants suggest intellectual property, infringement, and E&O coverage in the startup phase, deferring computer software and media property coverage and D&O liability insurance to the growth phase. See www.insurernewmedia.com.

After factoring in price point, most companies planning to emphasize e-commerce benefit, on balance, by procuring cyberspace, net secure, and D&O policies to supplement their CGL coverage and by putting off E&O/professional liability coverage till their growth or even mature phase. You may decide to rely on the courts to read offenses, such as piracy, idea misappropriation, and unfair competition, broadly enough to encompass the cyberspace torts of patent infringement and trade secret misappropriation, as they have done with CGL policies using the same language. Before you make that decision, however, you should carefully consider the law of the forum that will be applied to your policy. See American Nat’l Fire Ins. Co. v. Methods Research Corp., No. 99 C 7484, 2000 U.S. Dist. LEXIS 17748, at *8 (N.D. Ill. Dec. 5, 2000) (New Jersey law); West Am. Ins. Co. v. Moonlight Design, Inc., 95 F. Supp. 2d 838, 842 (E.D. Ill. 2000) (New York law); Zurich Ins. Co. v. Sunclipse, Inc., 85 F. Supp. 2d 842, 850 (N.D. Ill. 2000) (California law). Indeed, choosing an insurer may also mean choosing the jurisdiction. See Lumbermen’s Mut. Cas. Co. v. Dillon Co., Inc., No. 3:98-CV2013 (EBB), 2000 U.S. Dist. LEXIS 13330, at *10-11 (D. Conn. Aug. 31, 2000) (law of forum, Connecticut).

In general, your company should obtain intellectual property defense coverage as quickly as possible. Express intellectual property defense insurance tends to be more expensive than either cyberspace or net secure coverage. Sometimes you can procure the benefits of such policies by endorsing a cyberspace policy to include express coverage for trade secret or patent lawsuits. IP prosecution coverage may make sense for a startup if select intellectual property assets (patent or copyright) are key to the successful launch of your company’s products. In the current competitive insurance market, your aggressive purchase of a broader range of insurance products than your company may have traditionally procured makes good economic sense.

If you represent a more mature company, you may find that cyberspace and net secure coverage is more significant than traditional forms of E&O/professional liability coverage. If you must make a tradeoff for economic reasons, you could well make this tradeoff.

Dangers of E-Commerce Landscape

E-commerce activities create a potential liability that blends traditional exposure to privacy, defamation/disparagement, and intellectual property claims with new exposure to a variety of internet-specific claims, such as computer crimes, advertising error on websites, and trade secret misappropriation facilitated by email. Before shopping for a cyberspace policy, develop a series of hypothetical e-commerce risks for your company and require insurers to opine about whether their proposed policies would provide coverage for resulting claims. The more specific your hypotheticals are, the more valuable the prospective insurer’s coverage analysis will prove.

The following hypotheticals illustrate some of the exposure problems faced by companies in e-commerce. Imagine the following two scenarios, for example:

1. Your VP for marketing leaves to join a startup competitor that seeks to duplicate and offer for sale your entire line of products on its website, by shipping directly from the same vendors with whom your company has been doing business. It plans to charge 15 percent less than you charge for each product. To complicate matters, your competitor employs an innovative click-and-tab order system for which your company just received a business method patent.

2. Your satellite connection for streamed, online product advertisements goes down for more than a week because of cyberterrorist activity, just as your competitor gets its website with interactive order placement access up and running.

What do you do? Can your existing insurance coverage help? What additional insurance could you have procured that might have softened the blow from these risks?

Different Scenarios

Scenario One: Competitor’s Offer for Sale

If your ex-employee astutely purchased a cyberspace policy, the carrier may be compelled to defend thereunder, but your company could claim damages for its successful prosecution of the pirate. The pirate’s liability would be based on his theft of a list of customers that includes detailed information about their needs and wants, as well as the identity of pricing and delivery models of your company’s products vendors, or components suitable for assembly into products.

Receiving coverage for your new competitor’s activities under a traditional CGL policy would be problematic. Under the current 1998 ISO policy form, such conduct may not be deemed “the use of another’s advertising idea in your ‘advertisement.’” A court could view your lawsuit as one for theft of product information rather than for the content of the advertisement of those products. Disputes over these issues have led to numerous coverage cases, many of which have favored insurers. Although the logic of some of these cases is questionable, their existence should embolden insurers to deny indemnity for such claims. See Associated Aviation Underwriters v. Vegas Jet, LLC, 106 F. Supp. 2d 1051, 1055 (D. Nev. 2000) (The court found no causal nexus between the insured’s advertising and the alleged injury and, thus, no defense due where the insured allegedly funneled confidential trade secrets, including business strategy, pricing information, and client lists that were used to take away plaintiff’s present and future customer base.). Of course, as a plaintiff, your company could choose to highlight those elements of your lawsuit that might trigger coverage and thereby improve your prospects of obtaining an insurer-funded settlement or damage award.

Your trade secret and common law misappropriation claims may constitute “misappropriation of ideas under implied contract” or “misuse of an intellectual property right in content,” as outlined in Media/Professional Insurance Co.’s cyberspace liability policy. The precise description of goods on your company’s website or in its catalogs involves “disseminating content in or for the Cyberspace Activities.” An insurer should not broadly construe the policy’s exclusion for unfair trade practices so as to vitiate coverage, nor should the exclusion for employer-employee relations apply to post-separation conduct. Your company should obtain reimbursement for damages, subject to the amount of any self-insured retention.

Infringement claims for violation of the click and tab protocol would require acquisition of an intellectual property defense policy or litigation under a CGL policy. If the claim implicates a CGL policy form, the more recent the policy form, the less likely a court would be to find that a defense arose for your competitor’s offer for sale infringement.

You might obtain reimbursement for the cost of litigating the prosecution under a policy for pursuit of trade secret infringers, such as the one issued by CNA or Litigation Risk Management through its London-based syndicate. (See sidebar for list of insurance coverage products that address intellectual property disputes). Clearly, cost considerations are key in this area. Given the significant costs of IP litigation – patent lawsuits typically run more than $1 million a year to litigate – procurement of such coverage could be essential. Short-term pricing sensitivity may not be the best focus.

Claims for trade secret and patent infringement are less likely to fall within the scope of cyberspace or CGL policies than other intellectual property claims. The safest bet is to procure express intellectual property defense coverage to avoid litigation with insurers.

Scenario Two: Satellite Connection Loss

This scenario is a classic case in which traditional property damage and crime policies will not be responsive, even with extended business interruption coverage. Net secure policies, like the one issued by Marsh, however, fit the scenario perfectly. They are most likely to address the new range of risks posed by e-commerce in a first-party context, that is, in cases in which the insured looks to its own carrier for reimbursement of damages rather than seeking defense and indemnity for claims asserted against it.

The Marsh policy’s property coverage applies to a “direct loss resulting from deleting . . . disrupting or destroying your Electronic Data, Electronic Information Assets,” caused by an attack, unauthorized access, or unauthorized use. Cyberterrorism could constitute all three. You could recover for loss of business income, which would be determined by a number of factors, including the probable net income if no covered loss had occurred. Although this policy has an exclusion for satellite failure, it should not apply in cases in which the problem is interference with a functioning satellite.

Checklist of Other Factors

Engaging in e-commerce activity without the protection of cyberspace or net secure coverage could be like trying to hack your way through the jungle with a pocket knife instead of a machete. The instrument works; it is simply not long enough, strong enough, or hard enough to go the distance. If, after evaluating your company’s risk, you decide it should obtain nontraditional coverage, you should assume that all problematic exclusions are negotiable. The stronger a showing your company can make of its internal risk management activities and its lack of problematic exposure in the past, the more likely insurers are to extend broader coverage.

Finally, when deciding which cyberspace or net secure policy to procure to supplement your company’s coverage portfolio, keep the following pointers in mind:

● Avoid policies that insurers can cancel for any reason.

● Make sure that the policy covers sublicensees, subsidiaries, affiliates, joint venturers, subcontractors, and distributors.

● Avoid policies that automatically cancel coverage in the event of a merger or acquisition.

● Procure policies with worldwide territorial coverage.

● Obtain a policy with no security screening as a prerequisite for coverage.

● Avoid policies with a breach of contract exclusion.

● Obtain insurance policies with limits high enough to address the legal fees and/or settlement exposure that the referenced risks warrant.

● Make sure the definition of a claim encompasses as broad a set of factual scenarios as possible.

● Make sure the underwriting requirements are reasonable and may be properly addressed by personnel within your company in a timely, cost-effective manner.

● Procure coverage for all risks that your company wishes to insure as part of its portfolio.

Also, be cautious of risk management recommendations that your company accept a significant self-insured retention. The most important benefit that liability coverage provides to your company is a first-dollar defense. A copayment and/or minimum deductible that requires your company to share the cost of litigation, when negotiated in tandem with a provision that assures your company’s control of counsel, may lessen premium expense in a manner that still preserves effective policyholder options. Forfeiting the right to an insurer-funded defense in cyberspace litigation can be penny-wise and dollar foolish.
Tags: , , , ,