Coverage for Intellectual Property
Coverage for Intellectual Property
Claims Under CGL Insurance Policies†
Sidney J. Hardy
Eugene T. Rhee
I.
Introduction
Most of us have business clients who advertise their goods or services. Suppose one
day next week one of your clients calls and advises you that her business has been sued by a
competitor who claims to have been tortiously injured as a result of your client’s trademark
infringement, misappropriation of marketing ideas, and copyright infringement. Your client
wants to know whether her business has insurance coverage for these claims.
Over the past twenty-five years, countless lawsuits have been filed by policyholders
against their insurers seeking coverage for intellectual property claims under the “Advertising Injury” provisions of their Commercial General Liability (“CGL”) policies. In fact,
one federal district court judge observed that the number of lawsuits brought in this area
constituted a “litigation explosion.”1
Media liability policies are specifically designed to provide tailored coverage to companies in the business of publishing, broadcasting, and advertising. Those specialized policies
are beyond the scope of this article; rather, the focus here will be on coverage for intellectual
property claims under the “Advertising Injury” provision of the standard CGL policy.
†
Submitted by the authors on behalf of the FDCC Intellectual Property Section.
1
Winklevoss Consultants, Inc. v. Federal Ins. Co., 991 F. Supp. 1024 (N.D.Ill. 1998).
337
FDCC Quarterly/Spring 2008
Sidney J. Hardy is a director in the law firm of McCranie,
Sistrunk, Anzelmo, Hardy, Maxwell & McDaniel, P.C., which
has offices in Metairie and Covington, Louisiana. He received
his bachelor’s degree from the University of Alabama Law
School in 1980. Mr. Hardy has represented clients in matters
involving professional liability, transportation and trucking,
construction, products liability, retail employment matters,
commercial disputes, environmental claims, and class actions. During his career, he has tried jury cases in almost
all of these practice areas. He has extensive experience in
representing both primary and excess insurance carriers
in all stages of litigation. Mr. Hardy is currently serving as
managing partner of the firm.
II.
Evolution of the Policy Language
Coverage for advertising injury first appeared in CGL policies in 1973 by way of endorsement. In 1986, the Insurance Services Office, Inc. (“ISO”), an entity which compiles
and publishes forms used by insurers, amended the CGL policy by moving this coverage
into the policy itself. It provided coverage for “Advertising Injury” which was “caused by
an offense committed in the course of advertising your goods, products, or services.” “Advertising Injury” was defined as follows:
1. “Advertising Injury” means injury arising out of one or more of the following
offenses:
a. oral or written publication of material that slanders or libels a person or
organization or disparages a person’s or organization’s goods, products, or
services;
b. oral or written publication of material that violates a person’s right of privacy;
c. misappropriation of advertising ideas or style of doing business; or
d. infringement of copyright, title or slogan.2
2
ISO Form CG 00 01 11 86.
338
Coverage for Intellectual Property
Eugene T. Rhee is an associate with the law firm of McCranie,
Sistrunk, Anzelmo, Hardy, Maxwell & McDaniel, P.C. He
received his bachelor’s degree in 1998 from Louisiana State
University and his J.D. in 2002 from Paul M. Herbert Law
Center at Louisiana State University. His practice focuses on
general civil litigation, insurance defense and commercial
litigation. He is admitted to practice in all Louisiana State
courts, and all United Sates District Courts of Louisiana and
the United States Court of Appeals for the Fifth Circuit. He
is a member of the Louisiana State Bar Association as well
as the Federal and American Bar Associations.
The 1986 form amended the prior endorsement with a change in the definition of “Advertising Injury,” by deleting piracy and unfair competition as covered offenses and by also
eliminating the exclusion for trademark infringement.
In 1998, the CGL form underwent another revision. In this edition, the phrase “misappropriation of advertising ideas or style of doing business” was deleted and replaced by “the
use of another’s advertising idea in your ‘advertisement.’” Paragraph (d) of the covered offenses was also changed. Instead of providing coverage for “infringement of copyright, title,
or slogan,” the 1998 version provided coverage for “infringing upon another’s copyright,
trade dress or slogan in your advertisement.”
The 1998 revision also defined “advertisement” as:
...a notice that is broadcast or published in the general public or specific market
segments about your goods, products or services for the purpose of attracting customers or supporters.3
The 2001 revisions are characterized primarily by new and broad exclusions. The 2001
revision excludes personal and advertising injury arising out of “copyright, patent, trademark,
trade secret, or other intellectual property rights.”4
It does not, however, apply to “infringement, in your ‘advertisement,’ of copyright,
trade, or slogan.” The new revision also excludes advertising injury coverage for website
3
ISO Form CG 00 01 07 98.
4
ISO Form CG 00 01 10 01.
339
FDCC Quarterly/Spring 2008
designers, and internet search, access, content, or service providers. Also excluded is unauthorized use of another’s name or product in the policyholder’s e-mail address, domain
name or metatag...” The fourth exclusion covers “personal and advertising injury” arising
out of an electronic bulletin board or chat room that the policyholder hosts, owns, or over
which he exercises control.
The 2001 revisions formally acknowledged certain internet activities constituting advertising as follows:
Material placed on the internet or on similar electronic means of communication;
and
Regarding websites, only that part of a website that is about your goods, products
or services for the purposes of attracting customers or supporters.5
III.
The Coverage Test
In adjudicating coverage disputes under the “Advertising Injury” provisions of CGL
polices, courts have adopted a three prong test:
1. the suit must have alleged a cognizable advertising injury;
2. the infringing party must have engaged in advertising activity;
3. there must have been some causal connection between the advertising injury
and the advertising activity.6
The insured’s claim must satisfy all three prongs of the test in order for the court to hold
that the insurer has a duty to defend and/or indemnify its insured.
The first prong requires a determination of whether the infringing party was engaged in
advertising activity. Prior to the 1998 CGL revisions, the term “advertising” was not defined
in the policies, and courts were free to offer their own definitions of advertising, no matter
how expansive or restrictive.
To what extent does solicitation constitute advertising? In Peerless Lighting Corp. v.
American Motors Insurance Co.,7 a single customer was solicited and the court held that
unfair competition was not committed in the course of “advertising” the insured’s goods or
services. In other words, “soliciting” and “advertising” were different activities.
5
ISO Form CG 00 01 10 01.
6
State Farm Fire & Casualty Co. v. Steinburg, 393 F.3d 1226, 1123 (11th Cir. 2004).
7
98 Cal. Rptr. 2d 753 (Ct. App. 2000).
340
Coverage for Intellectual Property
In Central Mutual Insurance Co. v. Stunfence, Inc.,8 the original plaintiff, Gallagher,
alleged that the insured, Stunfence, had infringed upon the overall appearance of Gallagher’s
products by placing Stunfence signs on Gallagher’s products. In finding that the display
of a competitor signs on one’s own product did not constitute advertising, the trial judge
noted that while arguably some signs such as billboards would fit the policy’s definition of
“advertising,” signs on a competitor’s products did not.9
The universe of what might be considered advertising has been considerably narrowed
as a result of the 1998 and 2001 policy text revisions. For example, the 1986 revision provided coverage for “advertising injury” caused by an offense committed in the course of
advertising your goods, products, or services....” Consequently, courts have used the “in the
course of” language to find advertising activity.
However, the 1998 revisions limited coverage to those offenses that took place “in your
advertisement.” The more restrictive language significantly reduced the fringe areas within
which some judges found coverage.
The determination of what is and what is not advertising is by its nature an inherently
fact intensive inquiry, and it will undoubtedly be the source of continued litigation. Direct
mail solicitations aimed at a certain segment of the population may or may not be considered advertising. Another source of litigation may be promotional material distributed at
conventions or trade shows.
Many courts have confused prongs two and three, the “cognizable advertising injury”
and the “causal connection between the advertising injury and the advertising activity.” It
certainly may be argued that in order to have an advertising injury, there has to be a causal
connection between the advertising activity and the resulting injury. Therefore, many courts
have used a similar analysis in determining whether there was a cognizable advertising injury, or in the alternative, determining whether there was a causal connection between the
advertising injury and the advertising activity itself.
In State Farm Fire & Casualty Co. v. Steinberg,10 Steinberg, an investment firm, was
sued by a competitor for allegedly interfering with the original plaintiff’s business relationships, misappropriating trade secrets, and misappropriating that company’s client lists.
Steinberg sought coverage under his State Farm CGL policy, claiming that the offenses set
forth in the plaintiff’s lawsuit constituted “infringement of copyright, title, or slogan” and/or
“misappropriation of advertising ideas or style of doing business.”11
8
292 F. Supp. 2d 1072 (N.D. Ill. 2003).
9
Id.
393 F.3d 1226 (11th Cir. 2004).
10
Id. at 1232.
11
341
FDCC Quarterly/Spring 2008
The trial court did not agree with Mr. Steinberg, and the appellate court affirmed the
trial court’s summary judgment in favor of State Farm. This court found that the misappropriation of confidential customer lists could not be held to fall within the policy language
regarding misappropriation of either “advertising ideas” or “style of doing business.”12
In Frog, Switch & Manufacturing Co. v. Travelers Insurance Co.,13 one of the insured’s
competitors filed suit claiming that the insured entered a particular product market by using
the competitor’s proprietary trade secrets, confidential business information, and technology
misappropriated via a former employee. In considering whether this was an advertising injury,
the court noted that “allegations of unfair competition or misappropriation have to involve
an advertising idea, not just a non-advertising idea that is the subject of advertising.”14 In
other words, the injury occurred not because of the policyholder’s advertising, but because
of other conduct.
The central question asked by courts in analyzing the issue of advertising injury/causation
is: What caused the harm to the original plaintiff? Was the harm caused by misappropriation
of advertising ideas, or was the true harm to the original plaintiff caused by other conduct,
i.e., misappropriating customer lists, or copying the design of another product? As with most
other issues, the establishment of the causal connection more often than not depends upon
the philosophy of the judge before whom the matter is pending.
IV.
Treatment of Specific Intellectual Property Claims
This section of this article will examine various intellectual property claims and the
treatment these claims have received by courts. Most, if not all of the decisions referred to
involve interpretation of pre-2001 CGL policies. Again, as noted above, the 2001 revisions
significantly restricted coverage for intellectual property claims under CGL policies.
A. Patents
A United States patent is a property right that grants the owner of the patent the power
to exclude others from making, using, selling, and offering to sell a new, non-obvious useful
invention in the United States for up to twenty years.15 Policyholders, on the whole, have
been unsuccessful in obtaining coverage under the advertising injury provisions of CGL
policies for patent infringement claims.
Id. at 1226.
12
193 F.3d 742 (3d Cir. 1999).
13
Id. at 748.
14
James R. Warnot, Jr. & Daniel C. Glazer, Insurance Coverage for Intellectual Property and Cyberspace
Liability, 652 PLI/Lit 407, 409 (2001).
15
342
Coverage for Intellectual Property
The biggest problem that the policyholder has with patent claims is with the issue of
causation. Courts uniformly reject arguments that the mere advertisement of an infringing
product satisfies the casual connection requirement.
In 1996, Congress amended 35 U.S.C.A. 271(A) to include an “offer to sell” an infringing product as a direct patent infringement. The law is unsettled under the 1998 and earlier
versions of the CGL, but the 2001 revisions specifically exclude claims for personal and
advertising injury arising out of patent rights. Thus, the possibility of success in obtaining
coverage for patent infringement in connection with advertising is very remote.
B. Trademarks and Trade Dress
Trademarks and service marks are devices used in connection with the sale or advertisement of products or services of a particular merchant to distinguish them from similar products
of services of others and to identify the source of the trademark products or service marked.
The Lanham Act provides that the term “trademark” includes “any word, name, symbol
or device, or any combination thereof, adopted and used by a manufacturer or merchant to
identify his goods and distinguish them from those manufacturers sold by others.”16
Although trademarks and service marks certainly may be trademarked for service-marked
titles or slogans, they may also be symbols or emblems.17
Trade Dress is the distinctive packaging, shape or overall appearance of a product, such
as the design of the traditional Pepsi or Coca-Cola bottle.
The 1976 broad form endorsement excluded coverage for “infringement of trademark,
service mark, or trade name.” However, as referenced above, the 1986 revisions did not
specifically exclude trademark infringement, and as a result many policyholders have been
successful in persuading courts to find coverage under the “Advertising Injury” provision of
their CGL policies for trademark infringement. Policyholders argued that claims of trademark
infringement prompted coverage under either or both of the following areas:
1. Infringement of copyright, title, or slogan; or
2. Misappropriation of advertising ideas or style of doing business.
The definition of “title” as it relates to infringement has also been the subject of judicial
discussion. In Advance Watch Co. v. Kemper National Insurance Co.,18 one of the competitors
of the policyholder filed a lawsuit alleging that the policyholder had diluted the distinctiveness of the competitor’s trademark and therefore infringed upon its trademark. The Sixth
Circuit Court of Appeals upheld a finding of no coverage, stating as follows:
L. Altman, Callmann on Unfair Competition, Trademarks and Monopolies, §17:1 (4th ed. 2002).
16
15 U.S.C. §1127; Shakespeare Co. v. Silstar Corp. of Am., 802 F. Supp. 1386 (D.S.C. 1992).
17
99 F.3d 795 (6th Cir. 1996).
18
343
FDCC Quarterly/Spring 2008
In the present action, we conclude that the reasonable expectation of these parties
as to coverage rests on the fact that “misappropriation of advertising ideas or style
of doing business” refers to a grouping of actionable conduct fairly well delineated
by case law, and does not refer to another, distinct grouping of actionable conduct
which has come to be commonly referred to in case law and in legal treatises as
“trademark and trade dress infringement.”19
In other words, because the policy did not specifically state that coverage would be provided
for infringement of trademark, such infringement was not a covered offense.
However, the Advance Watch decision is the minority view. Most courts, in considering
the pre-1998 advertising injury policy text, have found coverage for trademark infringement
as a “misappropriation of an advertising idea or style of doing business.” For example, in
Frog Switch, the court stated as follows: “A trademark can be seen as an “advertising idea”:
It is a way of making goods so that they will be identified with a particular source.”20
Finally, in some cases, the outcome has hinged up on the meaning of “infringement of
...title.” In other words, what kind of “title” has to be infringed upon to trigger advertising
injury coverage? A California court found the definition of “title” to be “the name of a literary or artistic work.”21
The definition of “title” was given a much broader interpretation in Houbigant, Inc.
v. Federal Insurance Co.22 Houbigant, the fragrance manufacturer, claimed that one of its
licensees had infringed upon Houbigant’s trademark by selling a “watered down” version of
one of Houbigant’s trade secrets to competitors and by using Houbigant’s name to sell nonHoubigant products.23 The Third Circuit Court of Appeals held that the term “title” includes
“any name, appellation, epithet, [or] word by which a product or service is known.”24
C. Copyright
Copyright protects the expression of an idea affixed in a tangible medium. The copyright of a work includes books, musical compositions, dramatic works, films, graphic and
sculpture works, audio/visual works, sound recordings, and architectural works. Software
Id. at 804.
19
The Frog, 193 F.3d at 749; see also Northam Warren Corp. v. Universal Cosmetic Co., 18 F.2d 774 (7th
Cir. 1927).
20
Palmer v. Truck Ins. Exchange, 988 P.2d 568 (Cal. 1999).
21
374 F.3d 192 (3d Cir. 2003).
22
Id.
23
Id. at 198 (citing Villa Entrrs. Mgmt., Ltd v. Fed. Ins. Co., 821 A.2d 1174, 1187 (N.J. Super. T/ Law
Div. 2002)).
24
344
Coverage for Intellectual Property
programs are also protected by copyright law, although some software may also be entitled
to protection under Patent and Trade Secret Laws as well.25
Copyright was always included as one of the enumerated offenses through the 1998 CGL
revision. Nevertheless, there is very little case law concerning copyright infringement.
However, it should be noted that the intellectual property exclusions contained in
the 2001 CGL revisions exclude personal and advertising injury arising out of copyright
infringement, along with injury resulting from patent, trademark, and trade secret infringement. However, the exclusion does not apply to copyright if the infringement takes place
in “your advertisement.”
D. Trade Secrets
Most of the litigation under “advertising injury” provisions of CGL policies pertaining
to trade secrets relate to customer lists or advertising strategies. In Hayward v. Centennial
Insurance Co.,26 Mr. Hayward, an employee of a San Francisco area pre-press service, left his
employer and joined a competitor. His former employer, In Sync, filed a complaint alleging
breach of contract, breach of fiduciary duty, and misappropriation of trade secrets. Hayward
tendered defense to his insurance carrier, Centennial, and Centennial denied coverage.
The trial court granted Centennial’s motion for summary judgment and the appeals
court affirmed the trial court’s action. The court noted that In Sync alleged that Hayward had
misappropriated trade secrets in bringing confidential information, marketing plans, data,
and customer and supplier identities to his new employer. In Sync’s complaint was limited
on its face to allegations of solicitation of customers. Since In Sync’s complaint alleged
wrongful solicitation, not advertising, the complaint on its face absolved Centennial of the
duty to defend Hayward.
What appears to have doomed Hayward’s claim was that there was very little concerning “advertising” which was involved in In Sync’s claims against him.
Because the 2001 ISO form specifically excludes trade secrets, it is now doubtful
whether coverage can be found or liability allegedly arising out of misappropriation of trade
secrets.
Warnot, supra note 15.
25
430 F.3d 989 (9th Cir. 2000).
26
345
FDCC Quarterly/Spring 2008
V.
Conclusion
The trend in CGL policies has been toward limitation of coverage for infringement of
intellectual property rights. The complaint alleging intellectual property infringement must
be scrutinized closely—does the plaintiff claim injury as a result of “advertising” or “marketing” activities of your client? CGL policies should be scrutinized closely to determine
which version of advertising injury coverage applies. As noted, coverage is much more
expansive under the 1986 version than under the later versions.
Finally, keep in mind that any attempt to invoke coverage under the advertising injury
provision of the policy will most likely result in a flat denial of coverage, or a declaratory
judgment sought by the insurer. Most of the cases cited above involve decisions in which
the courts found only a duty to defend; they did not address actual coverage. It is reasonable to assume that some of the policyholders who prevailed in having the insurer assume
their defense were later disappointed when it was decided that there was no coverage for
the injuries alleged.
Given the uncertainty of coverage for intellectual property infringements under CGL
policies, the best advice you can give your business clients is to purchase insurance products
specially designed to cover these risks.
346