Insurance Coverage for Trade Secret Lawsuits under CGL Policies

INSURANCE COVERAGE FOR TRADE SECRET LAWSUITS UNDER CGL POLICIES

By David A. Gauntlett[*]

The defendant in a trade secret lawsuit can often turn to its Commercial General Liability (“CGL”) insurance policy find coverage for its defense and liability. Such coverage can be determined by subjecting the claims and to a three-part test to determine the applicability of a policy’s personal and advertising injury provisions. If that coverage applies, the next hurdle is to ensure that the intellectual property (“IP”) exclusion present in many policies will not bar a defense. Luckily for policyholders, courts have recognized multiple pathways to coverage in the face of these obstacles.

Policy Language for Personal Injury Coverage

The typical CGL policy includes language such as the following: “’Personal and advertising injury’ means injury . . . arising out of . . . oral or written publication, in any manner, of material that violates a person’s right of privacy. . .” This language can be applied to trade secret claims.

It may also be possible to obtain explicit coverage for trade secret claims by purchasing Media Liability Coverage, regardless of the applicability of the CGL policy.

The Three Part Test

The plain language of the “invasion of privacy” offense only requires that three elements be met: (1) oral, written or electronic publication of material, (2) that violates the right of privacy, and (3) of a person.[2]

It is immaterial that the underlying claimant did not expressly allege a cause of action for invasion of privacy.  The Policy does not limit coverage to the tort of invasion of privacy.[3]

(1)    An Oral, Written or Electronic Publication of Material

There is no “advertising” predicate to the “personal and advertising injury” coverage for “invasion of privacy.”  All that is required is a “publication.” In defamation law, “publication” encompasses communication to a single individual other than one named. So in context, the offense can be violated without widespread disclosure.[4] For example, in Sprint Lumber, Inc. v. Union Ins. Co.,[5] the court found that a company that “[challenged a competitor’s] ability to carry on its operation” and “[conveyed] false information. . . in a way that casts negatively on [the competitor to its] customers” had sufficiently published that information for the purposes of triggering the insurer’s duty to defend a potential disparagement claim.[6]

The publication of material element is satisfied if the complaint alleges that the defendant exported the plaintiff’s trade secret.  Even if the defendant solicited the secrets to just one person, the element would have been satisfied because the law does not require disclosure to a large group of people; disclosure to a “single individual” suffices.

(2)    Violates The Right Of Privacy

Where a policy term is undefined, courts look to the plain and ordinary meaning of that term, often the term’s dictionary definition. A contract, and an insurance policy in particular, must be interpreted “according to its plain and ordinary meaning.”[7]  To ascertain the plain and ordinary meaning of a term, courts look to dictionaries and even thesauri.[8]  In Black’s Law Dictionary, the “right of privacy” is defined as:

the right to be left alone; the right of a person to be free from unwarranted publicity; and right to live without unwarranted interference by the public in matters with which the public is not necessarily concerned.[9]

This element is satisfied where the plaintiff’s unique information was not known to the general public, or where trade secrets were provided to the defendants under confidentiality obligations which limited the use of such trade secrets by the defendants. If the defendants knowingly and willfully misappropriated trade secrets and confidential and proprietary information without the plaintiff’s authorization or consent, the violation of privacy element is met.

(3)    Of A Person

Where the term “person” is not defined, the court must rely on the ordinary or commonly understood definition of the term, including its dictionary definition:

A “person” is an entity (such as a corporation) that is recognized by law as having the rights and duties of a human being.[10]

Therefore, a company can be a “person” for these purposes.

The Standard Intellectual Property Exclusion May Not Bar Potential Coverage

Many CGL policies contain exclude intellectual property offenses from coverage, under language such as the following:

[This policy excludes] "[p]ersonal and advertising injury" arising out of the infringement of copyright, patent, trademark, trade secret or other intellectual property rights. Under this exclusion, such other intellectual property rights do not include the use of another's advertising idea in your "advertisement".

However, this exclusion does not apply to infringement, in your "advertisement", of copyright, trade dress or slogan.[11]

This exclusion, however, only applies where the claim is strictly and clearly for one of the described IP injuries. In practice, many trade secret claims are accompanied by other claims such as a claim for taking of proprietary rights. Such claims are routinely asserted in trade secret lawsuits. A Motion to Dismiss is ill-suited to render irrelevant such fact allegations as a basis for potentially covered liability.[12]

The Ninth Circuit recently clarified that such an exclusion could not encompass vague fact allegations asserting some claims for theft of proprietary information.[13] The appellate court reversed the district court’s application of the IP exclusion to a suit “centered around allegations that [the underlying defendant] misappropriated client information, marketing information, marketing emails, software product keys, and other proprietary information.”[14] The appellate court alternatively clarified that the ambiguity of the term “suit” did not extend to eliminate coverage where the insured prosecuted, but did not defend, trade secret claims.[15] The “arising out of” provision in Travelers’s IP exclusion must be narrowly construed.[16]

Any pertinent fact allegations that support a defense suffice, even if they do not reflect the gravamen of the asserted claims for relief.[17]

Media Liability Policies Can Offer Meaningful Coverage for Trade Secret and Companion Claims

Companies looking for trade secret coverage without the hurdles of navigating a CGL exclusion may be able to solve their problem with a Media Liability policy. Such policies often cover the defense of lawsuits against “injury” that explicitly encompasses misappropriation of information. “Misappropriation” is an expansive term which includes proprietary information and trade secret claims.[18] There is, however, a distinction that several cases have highlighted: wrongfully misappropriated “confidential information” may not rise to the level of a trade secret, meaning that such misappropriation does not trigger an IP exclusion and should therefore warrant coverage in any event.[19]

Prescient policyholders will embrace broader coverage available in Media Liability Policies as part of a well-structured insurance coverage portfolio.[20]

Conclusion

While it is likely that a trade secret claim may implicate CGL coverage, it is always helpful to engage coverage counsel early in the process of defending a lawsuit to ensure that the proper legal framework is laid, so that the policy and its benefits are activated.

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[*] David A. Gauntlett is a principal of Gauntlett & Associates and represents policyholders in insurance coverage disputes regarding intellectual property, antitrust, and business tort claims, as well as in the underlying actions. He also serves as an expert witness on insurance coverage issues and represents policyholders and their counsel on a range of fee dispute issues with their insurers. Mr. Gauntlett can be reached at (949) 514-5662 or dag@gauntlettlaw.com. For more information, visit Gauntlett & Associates at www.gauntlettlaw.com.

[2] LensCrafters, Inc. v. Liberty Mutual Fire Ins. Co., No. C 04-1001 SBA, 2005 WL 146896, at *11 (N.D. Cal. Jan. 20, 2005).

[3] Id. at *10 (“[N]othing in the Liberty Policies limits ‘right of privacy’ to common law right of privacy.  Nor is the “right of privacy” offense limited to common law rights.  See also Hooters of Augusta, Inc. v. American Global Ins. Co., No. 04-11077, 2005 WL 3292089, at *3–4 (11th Cir. (Ga.) Dec. 6, 2005).

[4] LensCrafters, Inc., 2005 WL 146896, at *10.

[5] 2021 Mo. App. LEXIS 431, *20-21 (W.D. Division One, April 6, 2021).

[6] Id.

[7] Voorhees v. Preferred Mut. Ins. Co., 607 A.2d 1255, 1260 (N.J. 1992); see also Boddy v. Cigna Property & Cas. Companies, 334 N.J. Super. 649, 760 A.2d 823 (2000).

[8] Boddy, 760 A.2d at 827.

[9] Black’s Law Dictionary 1195 (6th ed. 1990).

[10] Black’s Law Dictionary 1162 (7th ed. 1999).

[11] ISO Policy CG 00 01 04 13.

[12] Cisco Sys. v. Wilson Chung, 2020 U.S. Dist. 92497 *76-77 (N.D. Cal. May 26, 2020) (“Here, the court will allow plaintiff leave to amend its trade secret misappropriation claims against Chung and He only to allege the independent economic value of the purportedly misappropriated trade secret information with the requisite specificity.”).

[13] My Choice Software, LLC v. Travelers Cas. Ins. Co. of Am., 2020 U.S. App. LEXIS 26328 *2-3 (9th Cir. Aug. 19, 2020).

[14] My Choice Software, LLC v. Travelers Cas. Ins. Co. of Am., 2019 U.S. Dist. LEXIS 165591 *13 (C.D. Cal. Aug. 12, 2019).

[15] See David A. Gauntlett, Three 2020 Coverage Cases Clarify Coverage Availability (Feb. 17, 2021), https://www.gauntlettlaw.com/news/three-2020-coverage-cases-clarify-coverage-availability.

[16] Similar logic supported the decision in Align Tech Ins. Co. v. Federal Ins. Co., 673 F. Supp. 2d 957, 972 (N.D. Cal. 2009) (“Accepting Federal’s argument would allow it to cobble together the most favorable allegations from both parties and disregard the rest.”); see also Hershey Creamery Co. v. Liberty Mut. Ins. Co., 386 F. Supp. 3d 447, 454 (M.D. Pa. 2019) (“Nothing in the Complaint. . . limits. . . to only those specific instances of improper usage mentioned in previous paragraphs.”).

[17] See Pension Trust Fund v. Federal Ins. Co., 307 F.3d. 944, 951 (9th Cir. 2001) (“[t]he duty to defend does not usually turn on whether facts supporting a covered claim predominate or generate the claim.”).

[18] See U.S. Golf Assn. v. Arroyo Software Corp., 69 Cal. App. 4th 607, 618 (1999) (including in “misappropriation” the taking of property which “the plaintiff invested substantial time, skill or money in developing. . .”).

[19] See, e.g., Healthcare Systems v. Humana, 880 F. Supp. 1572 (N.D. Ga. 1995).

[20] Gauntlett & Associates assists policyholders in securing appropriate insurance coverage for their anticipated risks, working closely with qualified insurance brokers.