Coverage for Patent Infringement Lawsuits under CGL Policies

Coverage for Patent Infringement Lawsuits under CGL Policies – Still Viable

By David A. Gauntlett

INTRODUCTION

Most Commercial General Liability (“CGL”) policies do not explicitly include patent infringement as a covered offense. Also, many policies expressly exclude patent infringement coverage in an Intellectual Property (“IP”) exclusion. Based thereon, insurers will often deny coverage for patent infringement claims because they fall outside the coverage scope of its CGL policy. Patent infringement claims, however, can still secure coverage under various pathways.

ISO IP EXCLUSION CANNOT BAR BROAD OFFENSE-BASED COVERAGE

 Many Insurers Still Provide Pathways to Coverage Beyond the IP Exclusion

While few litigated patent coverage cases have arisen in last decade, this is a function of three (3) facts. First, significant companies have continued to received CGL policy coverage in the form of umbrella policies with no IP exclusion as they absorb, through self-insured retention, routine defense fees expenditure liability. Second, a number of intellectual property lawsuits are conjoined with allegations of disparagement, tortious interference, or unfair competition which may implicate coverage under offenses (d), (e), and (f) based on the pertinent fact allegations asserted.[1] These claims tend to be acknowledged by the insurers and, subsequently, defended. Third, a claim for patent infringement may secure coverage under “advertising injury” falling outside the scope of a policy’s IP exclusions under a standard ISO intellectual property exclusion.

Some insurers, not writing on ISO CGL policy forms such as Travelers and Hartford, have issued CGL policies with restrictive intellectual property exclusions which bar defense benefits if there is an IP claim in any suit; Hartford writes the most restrictive version. This leads to coverage for claims that seem to be excluded. disparagement (d).

Suits Including Covered Claims Beyond Patent Infringement Trigger Defense

Courts generally interpret the IP exclusion to extend to other claims based on the same set of facts that comprise the IP claim, for example an unfair competition claim that is fundamentally the same as a concurrently asserted trademark infringement claim. For example, in Land's End at Sunset Beach Cmty. Ass'n, Inc. v. Aspen Specialty Ins. Co.,[2] the court determined that the fact allegations in the underlying action for the counterclaims of false designation and unfair competition “require elements of proof beyond [intellectual property] use and that those types of claims may exists absent [intellectual property] infringement does not alter the analysis…[and] depend on [the insured’s] use of [the intellectual property].”[3]

 Declaratory Relief Claims for Implicit Disparagement May Implicate Coverage

Any injury alleged in a lawsuit that also alleges IP infringement claims may still seek coverage[4] where claims fall within coverage for offense (d). It matters not whether such claims support liability for Lanham Act as unfair competition. Instead, it is a form of implied disparagement. Moreover, the policy language does not require the claimant disparaged to be the party suing. It need only suffer injury arising out of disparagement direct to the organization which seeks policy benefits for defense of disparagement claims. For example, in Hartford Fire Ins. Co. v. Vita Craft Corp,[5] the court determined that Vita’s policy covering slander and libel was not limited to persons directly slandered or libeled and can apply to persons of a third party that are by virtue slandered or libeled.[6]

This approach is wholly consistent with proper analysis of offense-based policy language.  As Judge Croskey saliently observed:

Like advertising injury, “personal injury” is a term of art that described coverage for certain enumerated offenses that are spelled out in the policy. . . . Coverage for [advertising injury] is not determined by the nature of the damages sought in the action against the insured, but by the nature of the claims made against the insured in that action.  Under the [advertising injury] policy provision, “[c]overage … is triggered by the offense, not the injury or damage which a plaintiff suffers.”[7]

In Hartford Casualty Ins. Co. v. Swift,[8] the Court set forth the two elements of a disparagement claim: “A false or misleading statement [that] (1) must specifically refer to the plaintiff's product or business, and (2) must clearly derogate that product or business.” These elements may be satisfied “by clear implication.”[9]

Notably, Swift cites the court’s argument in Burgett, Inc. v. Am. Zurich Ins. Co.[10] explaining that an insured is “‘potentially liable for disparagement by implication’ when face with a suit alleging it had made a false claim to be ‘the only owner’ of a particular trademark.”[11] Burgett, explained:

(“[T]hus, by implication, represented that Persis did not have the rights to the SOHMER trademark… [A] potential finding of disparagement by implication is bolstered by the fact that Persis alleges that it was the only owner of the SOHMER trademark…[w]hile the underlying complaint does not explicitly state a claim for disparagement, the Court finds that the complaint could be amended to state a claim for the same.”)[12]

The disparagement offense encompasses variously labelled different torts, including commercial disparagement, trade libel, and injurious falsehood, each of which has its own elements.[13] It does not matter if the offense could be, but was not, defined by a singular tort: “The word ‘offense’ cannot be read to limit coverage only to a particular ‘cause of action’ or ‘claim.’ The word ‘offense’ simply does not have this meaning in either common usage or legal usage.”[14] Rather, the question is whether the substance of the fact allegations could potentially give rise to liability, regardless of whether all elements are articulated in the claim.

A critical component to secure CGL coverage is satisfying the “as damages” component in the insuring agreement which extends coverage for ‘Damages caused by injury arising out of [injury arising out one or more of the following offenses]’”. These offenses include (d) “disparagement” So understood, as long as a quest for “attorney’s fees” are “damages” and the fact allegations assert liability trigger coverage under either or both these offenses a Declaratory Relief action can implicate a duty to defend. Notably, the “as damages” element of CGL policies is met by the claim for attorney’s fees such claims as frequently asserted.[15]

 CONCLUSION

Since patent infringement is not expressly address in GCL policies, insurer’s will often deny coverage for such claims, however, there are various pathways to secure coverage for patent infringement claims. It is recommended that policyholders seek the assistance of coverage counsel who have expertise in navigating these pathways to secure the benefits they deserve.

 
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[1] Seagate Tech. v. Nat’l Union Ins. Co., 2009 U.S. Dist. LEXIS 147456, *11 (N.D. Cal. July 9, 2009) (“The alleged statements made by Plaintiff May have violated Cornice’s right to be free from disparagement and unfair competition, but they did not violate Cornice’s rights related to intellectual property.”)

[2] Land's End at Sunset Beach Cmty. Ass'n, Inc. v. Aspen Specialty Ins. Co., 745 F. App'x 314, 319-20 (11th Cir. 2018);

[3] See also, Marvin J. Perry, Inc. v. Hartford Cas. Ins. Co., 412 F. App'x 607, 614 (4th Cir. 2011)).

[4] My Choice Software, Ltd. Liab. Co. v. Travelers Cas. Ins. Co. of Am., 823 F. App'x 510, 511-12 (9th Cir. 2020)) citing Spandex House, Inc. v. Hartford Fire Ins. Co., 407 F. Supp. 3d 242, 247 (S.D.N.Y. Aug. 26, 2019); aff’d, Spandex House, Inc. v. Hartford Fire Ins. Co., 816 Fed. Appx. 611 (2d Cir. (N.Y.) 2020) ("Any injury or damage alleged in any claim or 'suit' that also alleges an infringement or violation of any intellectual property right, whether such allegation of infringement or violation is made by you or by any other party involved in the claim or 'suit' . . .")

[5] Hartford Fire Ins. Co. v. Vita Craft Corp., 911 F. Supp. 2d 1164, 1178 (D. Kan. 2012) (“Hartford's policy language clearly obligated it to defend where the underlying plaintiff alleged that it suffered damages ‘arising out of’ the insured's publication of material which . . . disparaged the good, products or services of a person or organization.”)

[6] See also, Del Monte Fresh Produce N.A., Inc. v. Transp. Ins. Co., 2006 U.S. Dist. LEXIS 58986, *20 (N.D. Ill. Aug. 8, 2006), aff’d, 500 F.3d 640 (7th Cir. 2007) (“Similar to Knoll and Sun, Del Monte allegedly disseminated disparaging information about its competitors… Viewed liberally, Del Monte's alleged efforts to publicly disparage its competitors' pineapples inevitably promoted its extra-sweet pineapples.”)

[7]Atlantic Mut. Ins. Co. v. J. Lamb, Inc., 100 Cal. App. 4th 1017, 1032 (2002).

[8] Hartford Cas. Ins. Co. v. Swift, 59 Cal. 4th 277, 284 (2014) 

[9] Id. at 291 

[10] Burgett, Inc. v. Am. Zurich Ins. Co., 830 F. Supp. 2d 953, 964 (E.D. Cal. 2011) 

[11] Swift, 59 Cal. 4th, at 294 

[12] Burgett, 830 F. Supp. 2d, at 964 

[13] Winklevoss Consultants, Inc. v. Federal Ins. Co., 11 F. Supp. 995, 999-1000 (N.D. Ill. 1998) (“[T]he policy offense of ‘disparagement’ is not synonymous with common law commercial disparagement.”)

[14] McCormack Baron Mgmt. Servs., Inc. v. Am. Guar. & Liab. Ins. Co., 989 S.W. 2d 168, 171 (Mo. 1999). 

[15] U.S. Liab. Ins. Co. v. A&B Mkt. Plus, Inc., 2019 U.S. Dist. LEXIS 81372, *14-15 (S.D. Cal. May 13, 2019) (“In fact, courts have extended the base principle found in AIU Insurance and held that "damages" include awards of attorney's fees where the underlying action falls within the scope of coverage. For example, in Health Net, the court indicated that an undefined "damages" term would encompass payment of attorney's fees to the extent that the attorney's fees are traceable to a covered wrongful act, but that an otherwise uncovered event could not invoke coverage on the basis of a claim for attorney's fees alone. Health Net, 206 Cal. App. 4th at 257.”)