Trademark Dilution “Blurring” Claims Fall Outside Standard Exclusions
Trademark Dilution “Blurring” Claims Fall Outside Standard Exclusions
By David A. Gauntlett*
Introduction
A typical trademark suit will assert various causes of action with names familiar to the average person, including the well-known trademark “infringement.” Unfortunately for policyholders, these claims are typically excluded by a policy’s IP exclusion.[1] Though less known, trademark “dilution” is also common and can often be leveraged to attain coverage for the entire suit. This path to coverage is rarely recognized by insurance claims handlers, leading to a quick denial. Luckily, experienced coverage counsel can explain that mistake and secure coverage despite an initial denial.
Dilution by “Blurring” Often Implicates Offense “f”
“Blurring” occurs when the public is confused through its identification with dissimilar goods. This creates the possibility that any association with the terminology used by the claimant, whether or not it qualifies as a trademark, leads to liability because of unfair competition. It is a distinct basis for liability apart from weakening of the trademark.[2]
Offense “f” of “personal and advertising injury” provides coverage for “the use of another’s advertising idea in your ‘advertisement’.” This policy language naturally extends to “blurring” claims. Most courts have adopted broad interpretations for the undefined term “advertising idea,”[3] allowing it to capture most of the content that generates a “blurring” claim.[4] Policyholders should note that coverage will be limited to blurring via trade dress or other non-trademark elements in jurisdictions that have concluded a trademark is not an “advertising idea.”[5]
Because the claim falls within offense “f,” it bypasses the standard “Intellectual Property” exclusion. It precludes coverage for infringement of specific intellectual property as well as “other intellectual property rights,” but that is followed by the statements that “[u]nder this exclusion, such other intellectual property rights do not include the use of another's advertising idea in your ‘advertisement’.”[6]
Trademark Dilution Injury Is Distinct from Injury for Infringement
An allegation of dilution is distinct from an allegation of trademark infringement, as evidenced by the distinct elements necessary to prove liability. Trademark dilution claims do not require allegations or proof of consumer confusion.[7] The dilution theory grants protection to strong, well-recognized marks even in the absence of a likelihood of confusion, if defendant’s use is such as to diminish or dilute the strong identification value of the plaintiff’s mark even while not confusing customers as to source, sponsorship, affiliation or connection. The underlying rationale with dilution doctrine is that a gradual attenuation or whittling away of the value of a trademark, resulting from use by another, constitutes an invasion of the senior user’s property right in its mark and gives rise to an independent commercial tort.[8]
Because of these distinctions, a claim for trademark dilution is an alternative to and does not supplement a claim for trademark infringement.[9] The latter can only occur where there is a likelihood of confusion; the former, where there is no consumer confusion as to product source. The distinction is further highlighted by commentary in a treatise by Professor Welkowitz.[10]
Switchmusic.com., Inc. v. U.S. Music Corp.[11] highlights the distinction between infringement and dilution. There, a guitar manufacturer filed suit against another guitar manufacturer, who filed a cross-complaint for common law trademark and trade dress infringement, as well as for dilution under the Lanham Act.[12] The plaintiff moved for summary judgment, and the Court granted its motion on the infringement claims because, “there is no likelihood of confusion” but denied the motion with regard to dilution because, “the Ninth Circuit has determined that tests for dilution and likelihood of confusion for trademark infringement are directed at different actions[.]”[13]
“Knowing Violation” Exclusion Is Also Avoided
The standard language for a “Knowing Violation” exclusion precludes coverage for “‘[p]ersonal and advertising injury’ caused by or at the direction of the insured with the knowledge that the act would violate the rights of another and would inflict ‘personal and advertising injury’.” The majority of courts have concluded that this exclusion only allows an insurer to deny a defense if the alleged misconduct requires the scienter that would trigger the exclusion. Because trademark dilution liability can result from reckless or negligent action, the insurer must defend, even if knowledge is alleged in the underlying complaint.
This analysis was confirmed in W. Bend Mut. Ins. Co. v. Ixthus Med. Supply, Inc.[14] In the underlying case, Ixthus faced a variety of allegations, including causes of action for trademark infringement, trademark dilution, and unfair competition under both federal and New York state laws.[15] The Wisconsin Supreme Court called out the insurer’s attempts to obfuscate the relevant issues by focusing the court’s attention on “the ‘story’ this 156-page complaint tells—that Ixthus ‘deliberately and willfully’ participated in a ‘fraudulent scheme.’”[16] The court properly ignored the “story” of the complaint and narrowed its focus to the claims, like trademark dilution, that did not trigger any exclusions.[17]
Conclusion
Obtaining coverage for intellectual property lawsuits can be difficult. Insurers have recognized the costs of defending and indemnifying such actions, so standard policies exclude the major intellectual property offense (e.g., patent, trademark, and copyright infringement). Fortunately, supplemental claims (like trademark dilution) are often included with the primary causes of action. Experienced coverage counsel can often leverage these into coverage by carefully evaluating the factual allegations therein.
*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. Mr. Gauntlett can be reached at (949) 553-1010 by voicemail or dag@gauntlettlaw.com. For more information, visit Gauntlett & Associates at www.gauntlettlaw.com.
[1] A standard IP exclusion precludes coverage for claims “arising out of the infringement of copyright, patent, trademark, trade secret or other intellectual property rights” with certain enumerated exceptions. Navigators’ Form NAV NP3 + Cyber (07/16) CGL Policy.
[2] Ringling Bros.-Barnum & Bailey, Combined Shows, Inc. v. B.E. Windows, Corp., 937 F. Supp. 204, 209 (S.D.N.Y. 1996) (citing Deere & Co. v. MTD Prods., Inc., 41 F.3d 39, 43 (2d. Cir. 1994)); see also Ringling Bros.-Barnum & Bailey Combined Shows, Inc. v. Utah Div. of Travel Development, 955 F. Supp. 605, 614-15 (E.D. Va. 1997) (discussing the inadequacies of current definitions of blurring and determining that blurring requires consumers to mistakenly associate a defendant's mark with a plaintiff's famous trademark).
[3] Hyman v. Nationwide Mut. Fire Ins. Co., 304 F.3d 1179, 1188 (11th Cir. (Fla.) 2002) (defining it as “any idea or concept related to the promotion of a product to the public”)
[4] Id. at 1189 (“We have no trouble finding that a product's trade dress may fall within the definitions of ‘advertising idea’ or ‘style of doing business.’”)
[5] Sport Supply Grp., Inc. v. Columbia Cas. Co., 335 F.3d 453, 459 (5th Cir. (Tex.) 2003) (minority view—trademark not an “advertising idea”). But see Gen. Cas. Co. of Wisconsin v. Wozniak Travel, Inc., 762 N.W.2d 572, 579 (Minn. 2009) (majority view—trademark is an “advertising idea”).
[6] See Posada v. Aspen Specialty Ins. Co., No. 8:22-cv-1578-CEH-AAS, 2023 U.S. Dist. LEXIS 55419, *60–63 (M.D. Fla. Mar. 30, 2023) (rejecting application of IP exclusion for offense (f) claims under identical policy language).
[7] The law of trademark dilution protects the holder’s proprietary interest in the uniqueness of the mark and is predicated on the absence of consumer confusion. See Restatement (Third) of Unfair Competition § 25, comment (f) (1995); J. Thomas McCarthy, McCarthy on Trademarks and Unfair Competition § 24:70 at 24-124.8 – 24-124.9 (4th ed. 2002) (Dilution claims require showing that “among a significant number of customers who are not confused, the defendant’s use will illegally dilute by blurring or tarnishment.”); Mattel Inc. v. MCA Records Inc., 296 F.3d 894, 903 (9th Cir. (Cal.) 2002) (“By contrast to trademark infringement, the injury from dilution usually occurs when consumers aren’t confused about the source of a product . . . [w]hereas trademark law targets ‘interference with the source signaling function’ of trademarks, dilution protects owners ‘from an appropriation of or free riding on’ the substantial investment they have made in their marks.”).
[8] McCarthy on Trademarks, at 24-124.
[9] Id.
[10] DAVID S. WELKOWITZ, TRADEMARK DILUTION: FEDERAL, STATE & INTERNATIONAL LAW § 109, at p. 5 (2005) (“Dilution protection represents a different perspective about trademarks. Instead of protecting against confusion, the object of dilution is protected by the ‘distinctive quality’ of the trademark. . . . Most important, this erosion of power is assumed to occur in the absence of any consumer confusion. . . . One might reasonably describe diluting uses of the mark as source distractors. That is, they distract the viewer from the primary source — identifying content of the mark.”)
[11] 416 F. Supp. 2d 812 (C.D. Cal. 2006).
[12] Id. at 816.
[13] Id. at 826.
[14] W. Bend Mut. Ins. Co. v. Ixthus Med. Supply, Inc., 385 Wis. 2d 580, 603 (2019).
[15] Id. at 590.
[16] Id. at 603.
[17] Id. at 604–05.