Insurance Recovery for Restitutionary Intellectual Property Claims

Insurance Recovery for Restitutionary Intellectual Property Claims

By David A. Gauntlett*

Insurance Recovery for Restitutionary Relief in Intellectual Property Lawsuits

Insurance recovery in intellectual property lawsuits is often not limited to “compensatory damages”. Claimants who suffer a Loss in an intellectual property dispute may secure recovery that is not limited to “compensatory damages”.[1] Licensing revenue is commonly recoverable in the successful pursuit of trademark infringement lawsuits. Where insurance is procured through Directors and Officers (“D&O”) or Errors and Omissions (“E&O”) policies, they permit recovery “compensatory damages”.

Even Commercial General Liability (“CGL”) policies, which typically have an “as damages” limitation on triggers of coverage for claims against a policyholder, may, if such a claim exists, permit recovery of a “damage” award not formulated based on “compensatory damages.” While case law precludes recovery for disgorgement, absent express limiting policy language that precludes their award, many forms of resitutionary relief may be recoverable.

Recovery for Non-Compensatory IP “Damage” Claims

While facts supporting liability for intellectual property claims vary, two overarching aspects of intellectual property claims are: (1) the payment of an infringer’s profits as remedy, and (2) making the defendant whole for the improper use of its intellectual property allowing a form of restitutionary remedy. Unlike many civil torts claims, however, intellectual property “damages” can evidence forms of “Loss” calculated based on the present and future value of the infringed material that is dependent on the often  unpredictable consumer’s market.[2]

By contrast, disgorgement of monies secured based on alleged acts of unjust enrichment in connection with intellectual property litigation are not uncommon. In Harper & Row, Publishers, Inc. v. Nation Enterprises,[3] a magazine acquired copies of a former president’s memoirs and printed them before the magazine that had actually bought them. The court reasoned that “actual damages are often difficult to quantify with reasonable precision, infringement cases usually focus upon the other portion of this damage, commonly referred to as disgorgement of the infringer’s profits.”[4]

Coverage for these restitutionary claims is distinct from securing a “compensatory damages” award which is typically the focus of a CGL policy.[5] Multiple courts have held that “money damages” and return of profits resulting from intellectual property infringement claims can constitute covered “damages” under CGL policies.[6] Claims for damages can include equitable claims for unjust enrichment.[7]

In Limelight Prods. v. Limelite Studios, Inc.,[8] by contrast, awarded the Plaintiff production company covered “damages” resulting from an underlying trademark infringement claim as the term “damages” within the policy must be interpreted “broadly in favor of the insured because…the policies, selected that term, and chose not to define or restrict it.” The court further reasoned that “ill-gotten profits [are] merely another form of damages that the statute [15 U.S.C. 1117(a)(2)] permits to be presumed.”[9]

Moreover, in Bank of the West v. Superior Court[10], the court analyzed for disgorgement claims nested within a unfair competition cause of action under B.P.C. 17200 as potentially coverage claims for “advertising injury.” The court held that “‘[r]eimbursement of response costs… is not restitutive in the narrow sense’… the distinction between what [payment of restitution] is insurable and what is not, [is that coverage it barred] in ‘situations in which the defendant is required to restore to the plaintiff that which was wrongfully acquired.’”[11]

Recovery Under D&O and E&O Policies as Restitionary Relief

“Wrongful Acts” coverage under D&O and E&O policies may support an award of restitutionary recovery for intellectual property claims.[12] Under D&O policies, “Loss” is often defined to mean “any amount which Insureds are legally obligated to pay for a claim[s] made against them for ‘Wrongful Acts’, and shall include but not be limited to damages, judgments, settlements and costs...”[13] As such, many courts have broadly defined the terms “Loss” to encompass “Damages” applying to restitutionary recovery, so long as the monies secured at the time were not wrongfully obtained and made claimant(s) whole.[14]

Insurance Recovery for Royalties Repayment as Restitutionary Award

The fact that a royalty is calculated to compensate the claimant, the lessening revenue loss due to the infringers conduct does not make that recovery perforce uncovered. Inconsistent with policyholder rights to secure reimbursement for damage claims articulated in the context of a remedy that is deemed restitutionary but is in fact compensatory in characters.

In Owens-Brockway v. International Insurance Co.,[15] settlement payments in satisfaction of  a judgment for past royalties constituted recoverable damages where the underlying plaintiff sued for patent infringement. Owens sought reimbursement for the $22.5 million payment under its “advertising injury” coverage. Relying on AIU Insurance Co. v. FMC Corp.[16] and Bank of the West v. Superior Court,[17] the court reasoned that: “Owens paid ‘damages’ as that term is plainly and ordinarily defined. B&H suffered ‘loss’ or ‘detriment’ because it was deprived of income during the period of Owens' infringement on B&H's patents. Owens' payment was ‘compensation’ for that loss insofar as it ‘remunerated’ B&H for its lost royalties or license fees.”[18]

Significantly, the court also noted that the patent infringement statute under which the underlying plaintiff sought relief provided for “damages adequate to compensate for the infringement.”[19] It was thus “objectively reasonable for Owens to expect that its patent infringement settlement with B&H was insurable ‘damages.’”[20]

Conclusion

Insurance recovery for restitutionary claims may arise even though they extend beyond an award of “compensatory damages.” Under broad definitions of the term “Damages,” policyholders can secure relief for restitutionary remedies including disgorgement of profits or an award of royalties. Where claimants receive monetary awards, award that seek to make them whole, relief for such restitutionary compensation may be recoverable under CGL and D&O as well as E&O policies.

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* David A. Gauntlett is a principal of Gauntlett & Associates. For more information, visit Gauntlett & Associates at www.gauntlettlaw.com. 

[1] Restatement of Restitution and Unjust Enrichment § 42 (2010) (providing restitution as a remedy for “misappropriation or infringement of another’s legally protected rights” in intellectual property)

[2] Richard C. Wolf & Serona Elton, Proving Disgorgement Damages in a Copyright Infringement Case is a Three-Act Play, 84 Fla. Bar J. 26 (2010)

[3] Harper & Row, Publishers, Inc. v. Nation Enterprises, 471 U.S. 539  (1985)

[4] Id. at 567

[5] Christopher C. French, Insurability of Claims for Restitution, 18 U. Pa. J. Bus. L. 599 (2016)

[6] See, also, School Union No. 37 v. United Nat. Ins. Co., 617 F.3d 554, 563 (1st Cir. (Mass.) 2010) (“[T]he Policy lacks a definition of the term “money damages”…we find it unlikely that an ordinary insured would interpret damages as excluding monetary compensation in the form of reimbursement…we therefore decline to limit policy coverage in this case to…tort-like monetary damages.”); American Employers' Insurance Co. v. DeLorme Publishing Co., Inc., 39 F.Supp.2d 64, 79 (D. Maine 1999) (“Applying Maine Law to construe the policy, we interpret the word “damages” broadly in favor of the insured…Hence, a claim for an accounting for lost profits under the Lanham Act is a claim for “damages.”); In re Estate of Mark F. Corriea, 719 A.2d 1234 (D.C. App. 1998) (“The remedy of disgorgement…is meant ‘to provide just compensation for the wrong, not to impose a penalty’; it is ‘given in accordance with the principles governing equity jurisdiction, not to inflict punishment but to prevent an unjust enrichment’…we decline to hold such restitution ‘uninsurable.’”).

[7] Wayne Mut. Ins. Co. v. McNabb, 45 N.E. 3d 1081, 1089 (Ohio Ct. App. Dist. 2016) (“This plain and ordinary meaning of ‘damages’ is necessarily broad enough to include restitution of money because ‘restitution damages’ are defined as ‘[d]amages awarded to a plaintiff when the defendant has been unjustly enriched at the plaintiff’s expense.’”)

[8] Limelight Prods. v. Limelite Studios, Inc., 60 F.3d 767, 769 (11th Cir. (Fla.) 1995)

[9] Id.

[10] Bank of the West v. Superior Court, 2 Cal. 4th 1254 (Cal. 1992); See, David A. Gauntlett, Bank of the West v. Superior Court: A Dubious Export, IPL Newsletter (1998)

[11] Id. at 1270

[12] Sernet v. Twin City Fire Ins. Co., 2014 N.Y. MIsc. LEXIS 4519, *10 (N.Y. County 2014) (Following settlement of the underlying case addressing patent infringement which awarded restitution, the court reasoned that recovery is possible but “since the plaintiffs may only recover under the policy…to the extent that [the insured] would be afforded indemnification coverage,…they have no claim.”)

[13] Christopher C. French, Insurability of Claims for Restitution, 18 U. Pa. J. Bus. L. 599 (2016) citing International Insurance Co. v. Alfred M. Johns, 874 F. 2d 1447, 1452 n.9 (11th Cir. (Fla.) 1989)

[14] See, William Beaumont Hosp. v. Fed. Ins. Co., 552 Fed. Appx. 494, 498 (6th Cir. (Mich.) 2014) (“Wages withheld from nurses in a class action were covered classes because the money was legally obtained as opposed to illegally obtained.); Alstrin v. St. Paul Mercury Ins. Co., 179 F. Supp. 2d 376, 398-401 (Dist. De. 2002) (In light of the fact that D&O policies are intended to cover security fraud claims, disgorgement that is legally gained is covered.); Weisberger v. Home Ins. Cos., 76 Ohio App.3d 391, 395, 601 N.E.2d 660 (8th Dist. 1991) (Insurance policy defined “damages” to exclude “restitution of legal fees, costs, and expenses”).

[15] Owens-Brockway Glass Container, Inc. v. Int’l Ins. Co., 1993 U.S. Dist. LEXIS 20250 (E.D. Cal. Mar. 24, 1993), summary judgment granted, 884 F. Supp. 363 (E.D. Cal. 1995), aff'd, 94 F.3d 652 (9th Cir. 1996).

[16] AIU Ins. Co. v. FMC Corp., 51 Cal. 3d 807, 274 Cal. Rptr. 820 (Cal. 1990).

[17] Supra, n. 6

[18] Owens-Brockway, at *4.

[19] Id.

[20] Id. at *6