Preferred Pathways to Secure Trade Secret Coverage

Preferred Pathways to Secure Trade Secret Insurance Coverage

By David A. Gauntlett*

Many trade secret litigators presume that insurance coverage for trade secret lawsuits is not readily available. But, this overstates the viability of the insurer’s arguments against coverage. Indeed, insurance coverage trade secret insurance has been a primary focus of our law firm for decades.[1] In the mid-1980’s, when Media Liability policies were first launched there were 3 principal exclusions for claims on antitrust, patent, and trade secret claims. The addition of trade secrets was because insurers were quietly providing insurance coverage for such claims under Commercial General Liability (“CGL”) policies for a number of years in a variety of recurring fact scenarios.

Much the same is true under Errors and Omissions (“E&O”) policies where the purported taking of confidential information are asserted along with to trade secret allegations. Claims arising out the rendering of professional services as well as the marketing of those services are often conjoined. Media Liability carriers appreciate this connection which is why they elected to expressly excluded trade secret claims. These insurers left the term Trade Secrets undefined inviting a narrow construction of the exclusionary term. This is an area that is often utilized as an insurance opportunity.

INSURERS’ DISPUTE OVER TRADE SECRET COVERAGE

A recent decision hits an E&O insurer against Travelers, the CGL carrier, seeking contribution toward defense fee reimbursement for over $5.6M in fees at issue.[2] Coverage arose for Borden-Perlman under claims of tortious interference and defamation. After being accused by a human resources company of hiring one of its employees in an effort to poach its business,[3] Traveler’s disclaimed coverage asserting that Borden-Perlman’s claims in the underlying action fall within multiple exclusions within their CGL policy. The exclusions included Financial Services and Professional Services exclusions. In 2018, the court determined that in order for Traveler’s Professional Services Exclusion to apply, it must demonstrate that “Borden-Perlman made the alleged defamatory statements in the course of providing professional services.”[4]

As the District Court in New Jersey has yet to rule, in a recently filed Opposition to Defendant’s Summary Judgment[5], Republic Franklin argued that coverage for defamation and disparagement provided within Traveler’s CGL policy.[6] It contended that:

“[T]he defamation claim is separate [from the confidential information allegations] and alleges that B-P defamed Orchestrate by claiming: (1) Orchestrate was not timely processing insurance claims; (2) Orchestrate was not providing the discounts it is promising; (3) Orchestrate was using incorrect insurance forms; and (4) insurers were not allowed to use Orchestrate…Orchestrate does not allege that its defamation claim arose out of “other intellectual property rights,” and the intellectual property exclusion therefore does not apply.”[7]        

TRADE SECRET COVERAGE UNDER “ADVERTISING INJURY” POLICIES

Fact allegations conjoined with misappropriation of trade secrets claims may evidence “unfair competition” under prior policy forms. In Kurisu v. Michigan Millers Mutual Insurance Co.[8], the California Court of Appeals determined that claims for trade secret misappropriation fell within the scope of unfair competition where:

[A] former employee's use of confidential information obtained from his former employer to compete with his old employer and to solicit the business of his former employer's customers, is regarded as unfair competition.[9]

Sentex, Sys. v. Hartford Accident & Indem. Co.,[10] concluded that alleged use by the defendant of pervasive advertising and promotional activities including allegedly confirmed customer lists in advertisements triggered defense obligations under 1986 ISO CGL policy. The court observed that:

“Although ESSI’s president disclaimed having seen its trade secrets in Sentex’s written sales material, he testified that the information was used to market Sentex products in other ways. In this day in age, advertising cannot be limited to written sales materials, and concepts of marketing includes a wide variety of direct and indirect advertising strategies. It is significant that ESSI’s claims for misappropriation of trade secrets relate to marketing and sales and not to secret related to the manufacture and production of security systems.”[11]

While subsequent decisions addressing narrower policy language are less compressive, fact allegations have reached distinct results none of which have undercut the logic of this opinion’s analysis as applied to the facts and policy language before it.  

In a subsequent decision, Align Tech., Inc. v Fed. Ins. Co.[12], the a court declined to broadly construe a labelled Intellectual Property exclusion which barred coverage for “unfair competition” expressly added to its intellectual property exclusion. It explained that to apply the IP exclusion to bar coverage for tortious interference assertions that arise outside the scope of intellectual property would establish “such a broad definition [of unfair competition] would stretch the term far beyond its context embedded within an exclusion for ‘intellectual property’...[and] would disappoint the reasonable expectations of the insured, violat[ing] the general rules of construing insurance contracts[,] and most particularly exclusions, in favor of the insured.”[13]

TRADE SECRET CLAIMS MAY FALL WITHIN D&O INSURANCE COVERAGE  

Similarly, under a D&O policy, Woodspring Hotels LLC v. National Union Fire Insurance Co.[14] held that the insurer could not deny coverage where the claimant sued an employee, who was formerly employed by the competitor, for providing unlawful access to a competitor’s protected computer system. As copying proprietary information and then communicating it to its competitor alleged claims that were broader than a mere claim for misappropriation of trade secrets.

The Plaintiff, also, claim that CB's customer list is a trade secret, they “failed to prove that this list is anything more than a compilation of business cards containing contact information or that such information is not readily ascertainable by proper means.…Thus,… CB's customer list does not qualify as a trade secret.[15] The court reasoned that:

ESA's claim under Count V is broader than a misappropriation of a trade secret. Count V relates to unlawful access of ESA's protected computer system with the damage related to copying and communicating ESA information.[16]

Relying on Hartford Fire Insurance Co. v. Vita Craft Corp.[17], it noted for the proposition that claims outside the scope of excluded trade secret claims might arise to trigger a defense obligation. Lemko Corp. v. Federal Insurance Co.[18] was distinguished because “the complaint explicitly alleged that the information involved proprietary trade secrets and confidential information and that the information misappropriated ‘are statutory “trade secrets”.…'”[19] 

CONCLUSION

Trade secret disputes often include fact allegations that address an array of different liability theories often articulated under counts such as tortious interference as well as misappropriation offering coverage that trade secret litigators should explore. In those 20 jurisdictions which, like California, allow facts beyond the complaint to be evaluated, motion activity and discovery may help elicit facts that clarify why a defense duty exists for such claims.[20] As many insurers seek to denude the scope of coverage under CGL policy directing policyholders to secure Media coverage, the absence of trade secret misappropriation means that obtaining effective, broad ISO- based CGL policies to enhance that available under Media Liability insurance is still key.[21]

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* David A. Gauntlett is a principal of Gauntlett & Associates and represents policyholders in insurance coverage disputes. For more information, visit Gauntlett & Associates at www.gauntlettlaw.com.

[1] See, David A. Gauntlett, Insurance for Trade Secret Lawsuits Under CGL Policies. www.gauntlettlaw.com (Aug. 5, 2021)

[2] Republic Franklin Ins. Co. v Travelers Cas. Ins. Co. of Am., Case No. 2:17-cv-04593, 2018 U.S. Dist. LEXIS 47172 (3rd Cir. (N.J.) Mar. 22, 2018)

[3] Eli Flesch, Utica Fights To Keep Travelers In $5.6M Trade Secret Suit. Law360 (Dec. 9, 2021) 

[4] Republic Franklin Ins. Co., at *7

[5] Republic Franklin Ins. Co. v. Travelers Cas. Ins. Co. of Am., Case No. 2:17-04593, Plaintiff’s Opposition to Defendant’s Summary Judgment. (Filed: Dec. 8, 2021) 

[6] Id. at p.3

[7] Id. at p.17

[8] Kurisu v. Michigan Millers Mut. Ins. Co., 1993 Cal. LEXIS 6096 (1993)

[9] Kurisu, 28 U.S.P.Q.2d at 1433 n. 7

[10] Sentex Sys. v. Hartford Accident & Indem. Co., 93 F. 3d 578 (9th Cir. (Cal.) 1996)

[11] Id. at 580

[12] Align Tech, Inc. v. Fed. Ins. Co. 673 F. Supp. 2d 957 (N.D. Cal. 2009)

[13] Id.  at 970-971

[14]Woodspring Hotels LLC v. National Union Fire Insurance Co., 2018 Del. Super. LEXIS 186 (Del. Sup. Ct. May 2, 2018).

[15] Id. at *29 (citing Beard Research, Inc. v. Kates, 8 A.3d 573, 590 n.103 (Del. Ch. 2010)

[16] Id. at *32-33

[17] Hartford Fire Insurance Co. v Vita Craft Corp., 911 F. Supp. 2d 1164, 1170 (D. Kan. 2012).

[18] Lemko Corp. v Federal Insurance Co., 70 F. Supp. 3d 905, 906, 920 (N.D. Ill. 2014).

[19] Woodspring, 2018 Del. Super. LEXIS 186, at *35.

[20] Tela Bio, Inc. v. Fed. Ins. Co., 761 Fed. Appx. 140, 143 (3rd Cir. (Pa.) 2019) (“Under Pennsylvania law, the insurer has a duty to defend the insured only if “the factual allegations of the complaint against the insured state a claim which would potentially fall within the coverage of the policy.”)

[21] See, David A. Gauntlett, Finding Appropriate Media Policy Coverage. www.gauntlettlaw.com (Oct. 22, 2021); David A. Gauntlett, Insurance Coverage for and IT Consultant’s Role in Media/Cyber Policy Application. www.gauntlettlaw.com (Oct. 14, 2021).