General Practice, Solo & Small Firm DivisionMagazine

Volume 17, Number 3
April/May 2000




When a client is sued for patent, trademark, or copyright infringement, one of its primary concerns will most likely be its defense costs. Indeed, the cost of defending against an infringement claim, which often involves expensive discovery and the use of expert witnesses, can be staggering. Thus, it is crucial to determine at the outset whether the costs of your client's defense will be covered by its insurance policies.

Unless intellectual property is a primary part of your client's business, your client is unlikely to have obtained a specialty-risk policy that provides coverage for intellectual property claims. However, depending on the type of claim asserted, the "advertising injury" coverage included in your client's commercial general liability (CGL) policy may provide a basis for coverage.

CGL policies are usually based on standard forms provided by the Insurance Services Office. A form CGL policy enumerates various types of covered "offenses" alleged to have been committed by the insured. In order for the insured's allegedly infringing conduct to give rise to a duty to defend under the policy, the conduct must fit into one of the enumerated "advertising injury" offenses and also must be considered "advertising activity." In addition, the injury claimed by the plaintiff must arise out of the insured's advertising activity during the policy period.

It is important to keep in mind that an insurer's duty to pay for the insured's defense costs is broader than its duty to indemnify the insured for any damages for which it is held liable. An insurer has a duty to defend whenever the facts alleged in the complaint against the policyholder potentially or arguably fall within the coverage of the policy. Thus, even if your client's insurance company is ultimately not required to provide indemnification, it may still be obligated to pay for what can be highly expensive litigation.

Is It an "Advertising Injury" Offense?

To determine whether your client's allegedly infringing activity is covered by its CGL policy, first you must determine whether it fits within one of the policy's enumerated "advertising injury" offenses. That will depend in part on which standard CGL form the policy is based on, because the standard forms were revised, in relevant part, in 1976, 1986, and 1998.

The 1976 form policy defined "advertising injury" as "injury arising out of an offense committed during the policy period occurring in the course of the named insured's advertising activities, if such injury arises out of libel, slander, defamation, violation of right of privacy, piracy, unfair competition, or infringement of copyright, title or slogan."

The 1986 form policy provides coverage for "injury arising out of" libel, slander, or product disparagement, violation of right of privacy, "misappropriation of advertising ideas or style of doing business," or "infringement of copyright, title or slogan."

The 1998 form policy includes libel, slander, or product disparagement, violation of right of privacy, "the use of another's advertising idea in your advertisement," or "infringing upon another's copyright, trade dress or slogan in your advertisement."

Copyright and Trademark Infringement

Of the various types of intellectual property claims, copyright infringement is most clearly included in all three versions of the CGL form language, all of which expressly include "infringement of copyright" or "infringing upon another's copyright." Thus, not surprisingly, courts considering the issue have held that claims of copyright infringement are included within the enumerated "offenses" of the CGL form policies. Whether trademark and patent infringement and misappropriation of trade secrets are included in the CGL form language is not as clear.

The 1976 form policy provides coverage for "unfair competition," which courts have interpreted to mean, in this context, the passing off of one's goods as those of another. However, trademark infringement is not necessarily covered by the 1976 form policy because the policy expressly excludes infringement of a trademark other than a title or slogan. Moreover, this exclusion remains applicable where both an unfair competition claim and a trademark infringement claim are asserted based on the same activity.

Your client's defense against trademark infringement has a better chance of being covered if its CGL policy is based on the 1986 form, which does not contain the exclusion for infringement of a trademark other than a title or slogan. Whether your client's defense costs are covered will depend instead on the court in which it is litigating.

For example, state courts in California, Illinois, and Louisiana, and U.S. Courts of Appeals in the First, Second, Fifth, Eighth, and Ninth Circuits, among others, have held that the 1986 form language "misappropriation of advertising ideas or style of doing business" includes trademark infringement. Other courts, most notably the Sixth Circuit, have held that that language does not include trademark infringement. Some courts have also held that trademark infringement is included in the enumerated offense of "infringement of copyright, title or slogan."

Whether the 1998 CGL form policy includes trademark infringement within its enumerated offenses is unclear, because courts have not yet had the opportunity to interpret the language. However, since the 1998 language expressly includes infringement of a "trade dress or slogan," but not a trademark, it could be interpreted as not covering trademark infringement.

Patent Infringement

None of the CGL form policies specifically includes patent infringement, and courts considering the issue have reached mixed results under each version of the policy language. Many courts have held that direct patent infringement, i.e. making, using, or selling a patented invention, is not included in the "piracy" or "unfair competition" offenses enumerated in the 1976 form policy.

Although a few courts have held that patent infringement is included in the "piracy" offense, and the U.S. Court of Appeals for the Federal Circuit recently suggested that it may be included, they often have denied coverage because the infringing activity did not take place "in the course of advertising," as required by the form language. Nonetheless, where the infringing activity occurs in the course of advertising, as may be the case where the patentee brings a case for inducement of patent infringement, an insurance company may have a duty to defend under the 1976 form policy.

There is room to argue that patent infringement is included within the enumerated offenses in the 1976 form policy, but most courts have held that it is not included within the "misappropriation of advertising ideas or style of doing business" or "infringement of copyright, title or slogan" offenses in the 1986 form policy. Moreover, since the 1998 form policy contains similar language, it is likely that the courts would find that patent infringement is not included within that language either, although they have not yet considered the issue.

Prior to 1996, another obstacle to insurance coverage for patent infringement claims was the requirement that the insured's allegedly infringing activity be "advertising activity," because it was not an act of patent infringement to advertise (rather than make, use, or sell) a device. However, since the Patent Act was amended in 1996 to make the "offer for sale" of a device embodying a patent invention an act of infringement, this problem may no longer exist.

Trade Secrets

Whether an insurance company has a duty to defend against a claim for misappropriation of trade secrets primarily turns on the type of trade secret alleged to have been misappropriated. If, for example, your client is alleged to have misappropriated a marketing strategy, business model, or customer list, its activities may be deemed included within the offense of "misappropriation of advertising ideas or style of doing business."

In contrast, many courts have held that misappropriation of trade secrets such as manufacturing and production techniques, mathematical formulas, proprietary software, and the like is not included within any of the enumerated offenses. However, if the claim is based on the disclosure of technical trade secrets in the insured's advertising, it may arguably be covered.

Sufficient Causal Nexus

Regardless of the type of intellectual property claim asserted, an insurer has a duty to defend pursuant to "advertising injury" coverage only if there is a sufficient causal nexus between the insured's "advertising activities" and the "advertising injury" alleged in the complaint. The 1976 and 1986 form CGL policies both require that the advertising injury "arise out of" the insured's advertising activities.

The courts generally have interpreted this language to mean that the advertising activities must have caused the advertising injury, but the courts have disagreed with respect to the degree of causation required. While some courts require direct or proximate causation, others seem to require only a temporal connection between the advertising injury and advertising activities.

Many courts have reasoned that patent infringement arises out of the making, using, or selling of a product embodying the claimed invention, not out of the advertising of that product, and therefore have held that the insurer has no duty to defend because the causation requirement has not been satisfied. In contrast, because the facts giving to claims for inducement or contributory patent infringement, or the "offer for sale" of infringing goods, are considered more closely connected to the insured's advertising activities, courts are more likely to hold that the causation requirement has been satisfied.

Similarly, the causation requirement is less of an obstacle to coverage for trademark infringement claims, since those claims generally allege that the insured has used a confusingly similar trademark to identify its goods or services, often in its advertising. The 1998 CGL form seeks to clarify the causation requirement-and perhaps make it even stricter-by requiring that the allegedly infringing activity occurs "in your advertisement."

The First Step

At the outset of any intellectual property dispute, it is important that you conduct an examination of both the language of your client's CGL policy and the tendencies of the court in which the litigation has been filed to determine whether your client's insurer has a duty to defend. It is also essential to notify the insurer of the claim to avoid forfeiting coverage.

Finally, given the courts' tendencies to find, for various reasons, that patent infringement claims are not covered by standard CGL policies, it may be prudent to recommend to your clients that are heavily involved in technology-based industries that they obtain specialty-risk coverage.

Susan R. Schick is an associate at Cowan, Liebowitz & Latman, P.C., in New York City, specializing in intellectual property litigation.

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