Mistaken Denial of Coverage for Trademark Dilution Claims

Mistaken Denial of Coverage for Trademark Dilution Claims

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.

Trademark Dilution Triggers Coverage under Offense (d)

Commercial General Liability (“CGL”) policies provide coverage for “personal and advertising injury,” which includes offense (d): “oral or written publication, in any manner, of material that slanders or libels a person or organization or disparages a person's or organization's goods, products or services.”[2] Though trademark suits rarely include a labeled cause of action for “disparagement,” that is of no moment.[3] A typical trademark “dilution” claim includes sufficient factual allegations to implicate offense (d) coverage while being sufficiently distinct from trademark “infringement” to avoid the policy’s IP exclusion.

Even if the explicit claims for dilution do fall within an exclusion, it is not the label of the cause of action but the facts that control. A claim that is based on dilution by “tarnishment”[4] (as opposed to dilution by “blurring”[5]) may state grounds for potential coverage which falls within offense (d). Those policies that narrowly only protect libel or slander as opposed to disparagement, such as that issued by the Chubb entities regarding the same conduct, might call into question the viability of the source of products and thus tarnish the reputation of the company as well as question the viability of its products, and thus trigger a defense. One can infer from allegations of tarnishment that that the underlying Plaintiff’s products have been diminished in value by association with the purportedly inferior products of the policyholder.

Rosequist's Lanham Act claim alleged, in essence, that MTD had distributed promotional materials to its customers that contained photographs of Rosequist's distinctive and high-quality furniture. MTD pulled a “bait-and-switch” on its customers, however, by displaying in its showroom “cheap synthetic knock-offs” of Rosequist's products, running the risk that consumers would be confused and misled, as to the origin of the items on display. Rosequist claimed this conduct would “dilute and tarnish” her trade dress.[6]

A later case citing Michael Taylor found the following fact allegations sufficient to implicate offense (d) coverage:

Defendant Keating [induced] purchasers and others to believe, contrary to the fact, that the products sold by Defendant Keating are rendered, sponsored or otherwise approved by, or connected with Plaintiff Glidewell. Defendant Keating's acts have damaged, impaired and diluted that part of Plaintiff Glidewell's goodwill symbolized by its trademark BRUXZIR® to Plaintiff Glidewell's immediate and irreparable damage[.]

. . .

Plaintiff Glidewell has no control over the composition or quality of the goods sold under the confusingly similar trademark by Defendant Keating. As a result, to the extent Defendant's products are inferior to Plaintiff Glidewell's products, Plaintiff Glidewell's valuable goodwill, developed at great expense and effort by Plaintiff Glidewell, is being harmed by Defendant Keating's unauthorized use of the confusingly similar trademark, and is at risk of further damage.[7] 

“Oral or Written Publication” Is Key to Coverage

In Michael Taylor, the underlying Plaintiff alleged that:

[The policyholder] entice[d] customers interested in Rosequist's products into MTD's showrooms, where they would then be “steered instead” to the imitation products. The term “steered” fairly implies some further statements, presumably oral, were being made by MTD personnel to convey the information that the imitation products were the Rosequist furniture depicted in the brochures.[8]

Two subsequent cases both noted this “steering” and the implied additional statements as a requirement for coverage stemming from a dilution by “tarnishment” cause of action stemming from common law palming-off claims for relief.[9]

Trademark Dilution Claims Based on “Tarnishment” Are Not Excluded IP Claims

Trademark dilution claims protect property right interests and are distinct in character from claims for trademark infringement. Professor Welkowitz explained the distinctions in his treatise:

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.[10]

Despite these distinctions, Keating Dental Arts, Inc. v. Hartford Cas. Ins. Co.[11] saw both the district court and the Ninth Circuit, which affirmed the lower court’s decision, determine that there was no duty to defend. The court concluded that the claims asserted, which purportedly supported potential coverage for “implicit disparagement” and preceded Swift, “[were all] based on trademark infringement, and all of the factual allegations in the complaint track the elements of a trademark claim,” which was excluded.[12] As a result, the court determined that “any such [implicit disparagement] claim . . . arises out of potential consumer confusion caused by the alleged trademark violation.”[13]

This analysis, however, pre-dated the Ninth Circuit’s My Choice decision.[14] Therein, the court set new precedent for how narrowly IP exclusions must be interpreted, particularly attacking the bad habit of courts to broadly interpret “arising out of” language even when used in an exclusion.[15]

Conclusion

It does not matter if a lawsuit asserting liability for trademark infringement is conjoined with allegations of trademark dilution based on tarnishment. So long as the elements to assert “injury arising out of . . . material that . . . disparages a person's or organization's goods, products or services” are asserted (or capable of amendment), a defense is compelled. It matters not that concurrent  trademark infringement claims are alleged because the ISO IP exclusion must preclude a defense “in all possible worlds.”[16] Properly presented trademark dilution claims which include fact allegations supporting liability for implicit or explicit disparagement may trigger a defense even where there is a robust IP exclusion in place.

*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) 514-5662 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] Navigators’ Form NAV NP3 + Cyber (07/16) CGL Policy.

[3] Atlantic Mut. Ins. Co. v. J. Lamb, Inc.,, 100 Cal. App. 4th 1017, 1034 (2002) (“The scope of the duty does not depend on the labels given to the causes of action in the third party complaint[.]”)

[4] Dilution by “tarnishment” occurs when there is “similarity between a mark or trade name and a famous mark that harms the reputation of the famous mark.” 15 U.S.C. § 1125(c)(2)(C).

[5] Dilution by “blurring occurs when there is “similarity between a mark or trade name and a famous mark that impairs the distinctiveness of the famous mark.” 15 U.S.C. § 1125(c)(2)(B).

[6] Michael Taylor Designs, Inc. v. Travelers Prop. Cas. Co. of Am., 761 F. Supp. 2d 904, 907 (N.D. Cal. 2011) aff’d, 495 F. App’x 830 (9th Cir. (Cal.) 2012).

[7] Keating Dental Arts, Inc. v. Hartford Cas. Ins. Co., No. SACV 13-0419-DOC(ANx), 2013 U.S. Dist. LEXIS 192466, *15 (C.D. Cal. Oct. 7, 2013).

[8] Michael Taylor, 761 F. Supp. 2d at 912.

[9] Hartford Cas. Ins. Co. v. Swift Distribution, Inc., 210 Cal. App. 4th 915, 928 (2012) aff’d, 59 Cal. 4th 277 (2014) (“Thus even under the analysis of Michael Taylor Designs, Inc., the Dahl complaint did not allege disparagement and did not create a possibility of coverage under the advertising injury provision of the Hartford insurance policy.”); Jarrow Formulas, Inc. v. Steadfast Ins. Co., No. 2:10-CV-801-JST (SSx), 2011 U.S. Dist. LEXIS 40200, *21–22 (C.D. Cal. Apr. 12, 2011) (“The [Michael Taylor] court held that the publication that attempted to pass off the allegedly infringing inferior products was not, by itself, sufficient to support a potential claim for disparagement.”)

[10] DAVID S. WELKOWITZ, TRADEMARK DILUTION: FEDERAL, STATE & INTERNATIONAL LAW § 109, at p. 5 (2005).

[11] Keating Dental Arts, Inc. v. Hartford Cas. Ins. Co., 627 F. App'x 671 (9th Cir. (Cal.) 2015).

[12] Id. at 671.

[13] Id.

[14] My Choice Software, Ltd. Liab. Co. v. Travelers Cas. Ins. Co. of Am., 823 F. App'x 510 (9th Cir. (Cal.) 2020).

[15] Id. at 512 (“Applying the ‘arising out of’ exclusionary language to the allegations asserted in the Trusted Tech cross-complaint runs counter to the principle that ‘insurance coverage is interpreted broadly so as to afford the greatest possible protection to the insured, [whereas] . . . exclusionary clauses are interpreted narrowly against the insurer.’”) (quoting MacKinnon v. Truck Ins. Exch., 31 Cal. 4th 635, 648 (2003)).

[16] Atlantic Mut. Ins. Co. v. J. Lamb, Inc.,, 100 Cal. App. 4th at 1039; but see David A. Gauntlett, Three 2020 Coverage Cases Clarify Coverage Availability, https://www.gauntlettlaw.com/news/three-2020-coverage-cases-clarify-coverage-availability (Feb. 17, 2021).