Do Not Accept No for an Answer If Insurers Deny Coverage for IP Claims

Do Not Accept No for an Answer If Insurers Deny Coverage for IP Claims

By David A. Gauntlett

Coverage Law for IP Lawsuits is Complex and The Law Is Underdeveloped

Commercial General Liability policies (“CGL”) have wrestled with articulating limits for coverage triggered under its “advertising injury” coverage since its inception in 1976 as an add-on element to the standard form CGL policy. Broad coverage for piracy and unfair competition, thereafter replaced in 1986 by “misappropriation of an advertising idea or style of doing business” and in 1998 by “use of another’s advertising idea in your ‘advertisement,’” are notable for not being terms that have any clear definable limits as is the case for traditional torts. Thus, courts have had to assess their scope when analyzing what intellectual property torts might fall within their ambit. Especially where facts, not labels, are causes for actions that control and the duty to defend is adjudged from the layman’s perspective in reading policy language, this has led to inconsistent decisions, reversals upon further review of the nature of the torts claims asserted and their intersection with the insured’s coverage law, and uncertainty flowing from all the above.

As the Chief Judge of the Third Circuit noted in Frog, Switch & Mfg. Co. v. Travelers Ins. Co.:[1]

The policies covered claims against the insured for “advertising injury.” The definition of “advertising injury” in standard business insurance policies has trouble and in some cases confounded courts for years…the applicability of these categories to a variety of torts has been the subject of numerous cases in federal courts. With varying degrees of success, insured parties of patent infringement, trademark or trade secrets or other confidential information, and actions alleging harm to consumers rather than competitors.

Citing Advance Watch Co., Ltd. v Kemper National Ins. Co.,[2] the court in Frog, Switch noted that:

Advanced Watch has been sharply criticized for ignoring the real contours of intellectual property litigation, which often proceeds under a bewildering variety of different labels covering the same material facts.[3]

The complexity of this area of law is highlighted by disputes respecting the adoption of the Restatement of Insurance Coverage Law which insurers argue is too favorable to policyholder and should not be adopted by various state legislatures. That work, however, is a useful reference to determine whether the law in the forum where the matter will be pursued is in accord with its recommended views or not. Much of coverage law is yet to be developed in this area. The absence of a settled standard on any particular issue should not preclude policyholders from pursuing claims that have yet to be litigated where the viability or theories of insurance recovery have yet to be established.

Court Interpretations of Coverage for IP Lawsuits as Problematic

The Frog, Switch panel explained in fn. 8 why prior “advertising injury” causal analyses were flawed leading to a problematic solution:

Some courts have solved the problem by requiring that the injury be complete in the advertisement, requiring no further conduct…. We believe that this formulation is a reasonable way to limit the scope of causation. Thus, if an advertisement invaded a person’s privacy (causing an advertising injury), and the insured’s product also invaded a person’s privacy (causing an advertising injury), the advertisement would cause part of the total harm and would constitute a complete tort in itself. In such a case, we think that there would be a duty to defend.[4]

The Frog, Switch panel’s speculation about the nexus required by the policy language was between “injury” and the covered “advertising injury” offense. It failed to parse and properly construe the policy language.

In a later court decision, Atlantic Mut. Ins. CO. v. J. Lamb, Inc.,[5] Justice Croskey, a respected juris and wrote a treatise with substantial expertise in insurance coverage law, explained:

Unlike coverage for bodily injury and property damage, which is “occurrence” based, there is no requirement for personal injury [and advertising injury] coverage that there be an “accidental” occurrence. All that is required is that the injury arise out of the conduct of the insured’s business. Thus, even an intentional tort, such as those alleged in the [underlying complaint], may be covered. The triggering event is the insured’s wrongful act, not the resulting injury to the third party claimant. Indeed, coverage will exist for a personal injury [and advertising injury] “offense,” committed during the term of the policy, even if the injury occurs after the policy expires.[6]

Equally germane to this coverage analysis are applicable principles of coverage law which include:

• [T]he duty to defend where, under the facts alleged, reasonably inferable, or otherwise known, the complaint could fairly be amended to state a covered liability.[7]

• The technical label on a case of action does not dictate the duty to defend whether the claimed caused of action was omitted out of negligence or “for strategic adversarial reasons.” [8]

• “[R]emote facts buried within causes of action that may potentially give rise to coverage are sufficient to invoke the defense duty…[and the] law does not require that the insured’s conduct proximately cause the third party claim in order to trigger the defense duty.”[9]

Where Frog, Switch court’s analysis applied Pennsylvania law which only looked into the complaint allegations, it did consider the possibility that the coverage for “misappropriation of an advertising idea” may encompass “misuse of an advertising idea” as well as the preferred dictionary definition of the term “misused” as understood by a layperson.[10] Instead, the court in Frog, Switch presumed that offense was limited to a “wrongful taking.”

The fundamental problem in Frog, Switch’s analysis is that it cites Sorbee Int’s Ltd. v Chubb Custom Ins. Co.[11] which makes a problematic distinction between “misuse in advertising of any idea” and “misappropriation of advertising ideas.” As a result, this analysis fails to contemplate that “misuse of an advertising idea” fairly satisfies the potential for coverage in both cases. Having asked the wrong question because it did not formulate an appropriate articulation of the scope of “misappropriation of advertising ideas” in application to the facts, the court’s analysis in Frog, Switch misses the appropriate articulation of the required causal nexus. Furthermore, it improperly requires that the injury bear a causal nexus to Frog’s advertising activities as opposed to arising out of that offense – a very broadly defined activity under the law of virtually every other jurisdiction.[12]

Moreover, the false advertising claims at issue evidence “misuse of advertising ideas” of the claimant. While conceding that a trademark can reference an “advertising idea” under the “misappropriation of an advertising idea” offense, the allegations for false advertising are not limited to trademark misuse. The court noted, “Frog took the dipper bucket design itself and lied about the design origin.” This conduct misappropriating the design origin is encompassed by the definition of an “advertising idea.”

In addition, the Frog, Switch court’s rejection of potential coverage for “disparagement” under offense (d) is questionable. As held in JAR Laboratories, LLC v. Great Am. E&S Ins. Co.,[13] the court determined that publication of statements that claim product origination is at minimum a false statement of “equivalence” if not “superior” constituting disparagement. The court explained:

[A] statement equating a competitor’s product with an allegedly inferior one is logically indistinguishable from, and no less disparaging than, a statement describing one’s one product as ‘superior’ to the competitors’… [allegedly causing] injuries flowing from [the insured’s] advertisements, not from consumers’ discovery that the advertisements were false.”[14]

Conclusion

While coverage for IP lawsuits remain rather complex to navigate, it is well worth the pursuit as coverage for IP lawsuits has evolved to making coverage after a denial for IP claims possible. Policyholders too often miss out on the coverage benefits owed to them for IP claims. It is recommended to seek the assistance from coverage counsel who have the expertise in the complex pathways to pursue rightful recovery in IP lawsuits.

 
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[1] Frog, Switch & Mfg. Co. v. Travelers Ins. Co., 193 F.3d 742, 744, 746-747 (3rd Cir. (Pa.) 1999)

[2] Advance Watch Co., Ltd. v Kemper National Ins. Co., 99 F.3d 795 (6th Cir. (Ohio) 1996)

[3] Frog, Switch, 193 F.3d., at 747

[4] Id. at fn.8 (Distinguishing that “[c]ausation does not equate to insurance coverage,” the court determined that “[w]hile Amsco’s underlying complaint specifically alleges that Frog’s advertising contributed to its injuries, thus sufficiently alleging a causal connection between the advertising and the injury, that is not enough to trigger the insurer’s duty to defend.”)

[5] Atlantic Mut. Ins. Co. v. J. Lamb, Inc., 100 Cal. App. 4th 1017 (2nd Cir. 2002)

[6] Id. at 1032-1033

[7] Scottsdale Ins. Co. v. MV Transportation, 36 Cal. 4th 643, 654 (2005)

[8] Hudson Ins. Co. v. Colony Ins. Co., 624 F.3d 1264, 1269 (9th Cir. (Cal.) 2010)

[9] Pension Trust Fund v. Fed. Ins. Co., 307 F.3d 944, 951 (9th Cir. (Cal.) 2002)

[10] Frog, Switch, 193 F.3d., at 748-49

[11] Sorbee Int’l Ltd. v. Chubb Custom Ins. Co., 735 A.2d 712, 714 (Pa. Super. 1999)

[12]My Choice Software, LLC v. Travelers Cas. Ins. Co. or Am., 823 Fed. Appx. 510, 512 (9th Cir. (Cal.) 2020) citing Tower Ins. co. v. Capurro Enter., 2012 U.S. Dist. LEXIS 46443, *30 (N.D. Cal. Apr. 2, 2012) distinguishing Continental Cas. Co. v. Richmond, 763 F.2d 1076 (9th Cir. (Cal.) 1985) (Broadly construing the phrase “arising out of” to equate “origination, growth, or flow from the event.”)

[13] JAR Laboratories, LLC v. Great Am. E&S Ins. Co., 945 F. Supp. 2d 937, 944 9N.D. Ill. 2013)

[14] Id.