Feature

Getting the Right Fit: Tailoring Off-the-Rack Insurance to Cover IP Disputes

By Erica J. Van Loon and Justin Thiele

Published in Landslide Vol. 11 No.2, ©2018 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.

Intellectual property (IP) litigation is often complex, invoking overlapping areas of law. Accordingly, the insurance coverage offered for IP liability is equally as complicated. Attorneys who practice and counsel on these matters would be well served in gaining a greater understanding of the entire universe of insurance offerings in order to better serve their clients. Evaluating the client’s needs, recommending and securing coverage, and successfully tendering claims to the underwriter all require a strong knowledge of the relevant fits, cuts, and styles the variety of policies can take. But the picture becomes even thornier when clients whose businesses revolve around new media and innovative intellectual property seek ways to manage their risk. As we will discuss in this article, a basic understanding of the insurance landscape can give an IP practitioner invaluable foresight into how existing coverages will react when combined with novel IP claims—whether it be an off-the-rack general business liability policy or more couture IP coverage.

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What’s Covered: The Policies

An off-the-rack policy does not provide the sort of tailored fit that a bespoke offering can, especially when it comes to defense against IP suits. A comprehensive general liability (CGL) insurance plan is the stock coverage that most businesses will reach for. These policies are largely identical between insurers, and many providers use an industry standard form. This is the ISO CGL form, put out by the Insurance Services Office1 and sold to insurers nationwide. These policies typically cover no more than the basic, garden-variety species of liability the average business may expect to encounter.

The type of IP exposures a business may face—infringement of copyright, trademark, or patent—are certainly a form of “liability.” But this is not the sort of liability that a CGL policy contemplates under its broadest coverage. Instead, IP liability in these policies is covered as a type of “advertising injury” under a different, discrete clause of the CGL.2 For this coverage, courts interpreting the clause will generally find such an injury has happened where: (1) a claim against the insured falls within one or more enumerated “advertising injury” offenses listed in the policy; (2) an “advertising activity” by the insured has occurred; and (3) a causal nexus exists between one of the “advertising injury” offenses and the insured’s “advertising activity.”3 Naturally, the definition of “advertising activity” will be governed by the precise terms of the policy.4 Generally, however, such activity is usually related to the marketing activities of a business. Courts have routinely found that IP infringement claims that arise out of a defendant’s marketing fall within such coverage. This makes intuitive sense, as nothing is more commercial than advertising, and misuse of a copyright or trademark in selling goods or services is an invitation to an infringement suit.

This leaves vulnerable, however, many areas of risk. What about when the goods or services themselves—and not their promotion—are the source of potential liability: for example, the media company that produces entertainment, or the consulting service that provides detailed written reports to its clients? These companies may be inviting IP litigation not as to an ancillary part of their business but as to the very product they sell: the movie that is sued for copyright infringement, or the software that is sued for patent infringement. This is not the sort of business the CGL policy is written to protect.5 And, in fact, these policies almost always expressly disclaim infringement coverage outside the advertising injury context (as explained in discussion of IP exclusion clauses, below).

Boehm v. Scheels All Sports, Inc.,6 is a good example of the complicated path to liability coverage under a CGL policy. In that case, sports photographers brought suit against a group of defendants, sports memorabilia dealers, alleging unauthorized copies and sales of their works. The memorabilia dealers tendered the claims to their insurers for coverage under their general business policies’ advertising injury clauses.7 In sorting out which coverage applied to the various defendants, the court turned to the specific acts of infringement alleged in the complaint. For example, the first defendant was alleged only to have sold or distributed infringing photographs—not to have advertised them. This, in the court’s view, was insufficient to trigger coverage for an advertising injury, because no advertising activity was alleged.8 The second defendant’s policy contained a specific disclaimer foreclosing all coverage for advertising injuries. The court was not convinced by this defendant’s argument that it had a “reasonable expectation” of universal business coverage over the claim.9 Finally, as to the third defendant, the court found an advertising injury was alleged where the complaint stated this defendant had advertised its infringing photographs on Amazon, and then found this was sufficient to trigger the insurer’s liability.10 Despite this, the insurer still escaped liability because the policy contained a prior-publication exclusion, and the third defendant admitted in interrogatories that it had begun advertising the photographs well before the policy began.11

Instead, companies engaged in the IP producing business are better served by accessorizing their policies by negotiating and securing more tailored coverage options. These typically take the form of a rider to, or an entirely separate policy from, an insured business’s CGL policy.

In the traditional media market, the coverage is typically referred to as media liability coverage. This can be significantly broader and cover a laundry list of potential liability arising from operation of a media business. A typical example of this specialty coverage, in a policy once held by Sony Computer Entertainment America, included “(a) defamation, (b) invasion of privacy or publicity, (c) infringement of copyright, title, slogan, trademark, or trade dress, (d) unfair competition (but only in conjunction with wrongful acts described in section (c)), (e) unauthorized use of name or likeness, (f) unintentional failure to credit on a matter, and (g) defective advice, incitement, or ‘negligent publication.’”12 Such an all-encompassing policy—which leaves little risk unmanaged—is expensive. The above-quoted policy cost Sony $10 million per year.13

Another narrower subspecies is errors and omissions (E&O) coverage. Such coverage is “a specialized form of insurance which typically protects . . . producers . . . from claims such as violation of rights of privacy and publicity, quasi-contractual claims from submitters of ideas, copyright infringements, and violations of Section 43(a) of the Lanham Act.”14 This coverage is commonly seen as de rigueur in the media industry for particular endeavors, such as the acquisition of IP assets, production of film and television, or distribution of content. Indeed, some courts and scholarly commentators view the existence of E&O coverage as policy support for the copyright law’s lack of lenience for innocent infringers.15

Insurance coverage, being a creature of contract, can be custom-sewn for virtually any of the insured’s purposes. Customers may find that there are further options which are bespoke to their particular needs. Consulting with a competent insurance agent is essential to exploring all options.

IP Exclusion Policies

Insureds and practitioners need to be aware that coverage which may, at first read, seem broad enough to include the whole universe of IP liability could be tightly circumscribed by certain exclusions and disclaimers. Policies with exclusions such as the following may warrant alterations in order to fashion a better fit.

A common limitation to the advertising injury coverage of a CGL policy is a field of entertainment limitation endorsement. These are particularly common where the insured is in the media business. With this exclusion, often virtually any activity at all related to the entertainment industry will not trigger coverage for IP litigation defense and indemnity—even when the claim arises purely from marketing and not content.16

Found in virtually all coverage, even specialty coverage, are exclusions for deliberate or willful infringement.17 Insurers are understandably unwilling to write a blank check for their customers to conduct their business with impunity or lax internal control; such exclusions put the onus on the insured to mitigate risk as much as possible by creating and sticking to strong anti-infringement policies. The same motivation drives exclusion of coverage for punitive damages awards in IP infringement litigation.18 Similar exclusions exist in CGL policies, including the known falsity exclusion (which disclaims coverage for any injury incurred knowingly),19 or the prior publication exclusion (which excludes coverage for any liability that arose before the beginning of the policy).20 These exclusions, which nearly always appear in concert with each other, can create a somewhat dramatic undercutting of what may seem, at first glance, like broad IP liability coverage.

Offensive Insurance

Defending against IP litigation is expensive. So is pursuing an IP infringement claim. To that end, insurers have developed and offer infringement abatement insurance. Unlike traditional liability defense insurance, where the triggering “loss” is receiving a summons and complaint, for a scrupulous IP owner the loss comes when another party commits infringement. Therefore, such coverage arises to remedy the loss by funding and pursuing infringement litigation against the unlawful user.

Such boutique coverage is not simple to obtain or exploit.

In salient part, it requires submitting a comprehensive overview of the claim, discussion of the discovery and history of the infringement, projection of the costs of the infringement over the remaining life of the property, evaluation of the prospects for success, comparison of the respective property of insured and alleged infringer, proposed court and counsel, litigation budget, and an opinion letter from independent patent counsel.21

In other words, the potential plaintiff will need to conduct an evaluation with the insurer to determine the strengths of the claim and—most importantly to the insurer—the likelihood and amount of recovery for attorney fees. Insurers in these situations effectively become litigation financiers, driven by prudence to evaluate the risk of and return on the investment in going after an infringer—in no small part because these underwriters often stake out a return on attorney fees recovery.

Old Policies, New Tricks

The insurance industry—like the legal industry—can often be slow to change fashions. Reactive, rather than proactive, is often the attitude of this classically conservative industry. However, coverage of IP liability for the world of new media, particularly the Internet, has shown indications of forward-thinking adaptation by insurers. Much of this arises from the industry’s practice of writing coverage policies with broad baseline protection that is then trimmed and hemmed by exclusions and disclaimers.

For example, a media liability policy, such as the one described above, simply provides coverage for an entire range of IP, defamation, and unfair competition claims in connection with the customer’s particular line of business. Applying this coverage to the world of new media, then, can simply be accomplished by a change in definition of the covered business activities of the policyholder. One particular exemplar policy, for an Internet publisher, covers the following, among other things: “infringement of a copyright, title, slogan, trademark, trade name, trade dress, service mark or service name including, without limitation, infringement of a domain name, deeplinking or framing, resulting from the Insured’s Electronic Publishing.”22 “Deeplinking” describes the practice of linking to the content of another’s website while bypassing the website’s top-level home page, which typically has the effect of also bypassing important copyright, trademark, and attribution notices, as well as any digital content control the victim’s website may have implemented.23 This sort of esoteric risk surely was not on any actuary’s mind until the past decade or two.

But insurers and policyholders can still find themselves playing catch-up when new or unusual claims—separate from the established and well-known IP infringement causes of action—appear in case law or statute. In a recent case from Maryland, Ellicott City Cable, LLC v. Axis Insurance Co., a small local cable TV provider contracted with DirecTV, through an agent, to obtain programming to distribute to local subscribers.24 DirecTV brought suit alleging that the provider had distributed its content to more subscribers than allowed in their contract, and that this constituted violations of federal law prohibiting unauthorized transmission of data—the data consisting of the copyrighted television program streams.25 The provider tendered the claim to its insurer, Axis, under a policy that broadly covered the provider’s media operations, but excluded claims arising from “unauthorized access to, unauthorized use of, or unauthorized alteration of any computer or system, hardware, software, program, network, data, database, communication network or service, including the introduction of malicious code or virus by any person.”26 Axis refused to provide a defense.

To resolve the dispute, the court had to reckon with the definition of “data”—did its definition cover television programming, or something narrower and more computer-based? Did it matter that the television signals were transmitted digitally, rather than by analog signal? The court settled on a narrow interpretation of “data,” mostly because the policy contained explicit references to television programming and copyrighted material elsewhere in precise terms.27 The case may seem like an esoteric set of circumstances, but it serves as fair warning to practitioners: what may seem like a case grounded in copyright or other intellectual property may trigger unforeseen results when a policy’s exclusions are read together in a case with unconventional statutory claims. Had the policy in this case been written slightly differently, the court may have been forced to find the underlying claims excluded from coverage by the “data” exclusion.

An example of the uneasy intersection of IP protection, the Internet, and insurance coverage is found in St. Luke’s Cataract & Laser Institute v. Zurich American Insurance Co.28 In Florida, an oculoplastic surgeon employed by an eye clinic launched websites on behalf of his clinic with information on eye surgery for prospective patients.29 Some years later, the surgeon resigned from the clinic and began his own surgery practice—but took the websites, including their domain names and virtually all of their content, with him.30 The clinic, after becoming aware of this, obtained copyright registrations on the pages and brought suit against the surgeon for infringement under the Copyright Act, plus claims under the Digital Millennium Copyright Act (DMCA) related to removal of a copyright notice.31 The surgeon’s insurance policy covered advertising injury liability, and the surgeon tendered the claim to his insurers. The insurers agreed to provide a defense, but reserved their right to assert a defense to coverage.32

As the underlying litigation wound its course, the surgeon and the clinic ultimately entered into a $2.4 million settlement—without the involvement of the surgeon’s insurers. The insurers then refused to indemnify the surgeon’s settlement debt, pointing to an “unauthorized use” exclusion in the surgeon’s policy: claims were not covered if they arose “out of the unauthorized use of another’s name or product in your e-mail address, domain name or metatag, or any other similar tactics to mislead another’s potential customers.”33 In a separate action against the insurers to compel indemnification, the district court ruled for the insurers and found that the action fell within the exclusion because the surgeon’s disputed conduct was fundamentally a misappropriation of the clinic’s domain names for the purpose of misleading consumers.34

In a per curiam opinion, the Eleventh Circuit reversed. The Eleventh Circuit found that the district court had erred in conflating copyright infringement of web pages with misappropriation of a domain name: the clinic’s original claims were based in the infringement of the content of the websites, not the use of the domain names (although this was part of the complaint’s allegations).35 The court of appeals was not swayed by the insurers’ argument that the copyright infringement “arose out of” the surgeon’s theft of the domain name; the infringement claim would have arisen regardless of whether the surgeon had used old or new domain names.36 For the same reasons, the Eleventh Circuit held that the DMCA claim for removal of a copyright notice was also not excluded from the surgeon’s coverage.37 The Eleventh Circuit got it correct in this instance, but the history of the dispute shows that these sorts of questions may not be intuitive to all parties and the courts. For every issue of first impression of the coverage of IP protection on the Internet, there is a corresponding issue to resolve with insurance coverage for liability.

Conclusion

As IP counsel are aware, the legal landscape shifts daily with each new technological innovation. Often, the intersection with insurance products is not seamless. Advising your clients usually boils down to one crucial question: Who is going to pay? Insurance coverage in this area shifts just as rapidly, so it is important to keep abreast of changing policies as well as recent court decisions to best serve your clients.

Endnotes

1. Insurance Services Office, Inc. (ISO) is an insurance industry analysis firm that provides standard policy language forms to the industry. See About ISO, Verisk, https://www.verisk.com/insurance/brands/iso/about/ (last visited Oct. 23, 2018).

2. David P. Miranda, Insurance Coverage for Intellectual Property Litigation, N.Y. St. B.J., July/Aug. 2005, at 42.

3. David A. Gauntlett, What Insurance Coverage Remains for Trademark Infringement Claims after Years of Policy Language Changes?, 107 Trademark Rep. 1032, 1043 (2017).

4. The Ninth Circuit enumerated some examples from a policy it analyzed, including: “Advertising means attracting the attention of others by any means for the purpose of: seeking customers or supporters; or increasing sales or business.” Manzarek v. St. Paul Fire & Marine Ins. Co., 519 F.3d 1025, 1029 (9th Cir. 2008).

5. However, as with any contract, minute differences in language—down to punctuation—can yield dramatically different results. In Phoenix Control Systems, Inc. v. Insurance Co. of North America, 796 P.2d 463, 465 (Ariz. 1990), the Supreme Court of Arizona interpreted the following general liability coverage enumeration: “Any infringement of copyright or improper or unlawful use of slogans in your advertising.” The plaintiff, who sought coverage for an ongoing copyright infringement suit arising out of its use of software in its products, argued that this construction required coverage of any copyright claims, regardless of use in advertising. Id. The court, strictly applying the rule of antecedents to find that “in your advertising” modified only “improper or unlawful use of slogans,” agreed and held the insurer liable to defend. Id. at 466.

6. 202 F. Supp. 3d 1030 (W.D. Wis. 2016).

7. Id. at 1032.

8. Id. at 1035–36.

9. Id. at 1036–37.

10. Id. at 1037–38.

11. Id. at 1038–39.

12. Sony Computer Entm’t Am. Inc. v. Am. Home Assur. Co., 532 F.3d 1007, 1010 (9th Cir. 2008).

13. Id.

14. Miziker Entm’t Grp., Ltd. v. Clarendon Nat’l Ins. Co., No. 01-3219, 2002 WL 32348830, at *4 (E.D. Pa. Oct. 1, 2002) (quoting Donald E. Biederman et al., Law and Business of the Entertainment Industries § 9.2.1 (3d ed. 1996)).

15. “[L]iability for copyright infringement proceeds on the principle that ‘as between two innocent parties (i.e., the copyright owner and the innocent infringer) it is the latter who should suffer since he, unlike the copyright owner, either has an opportunity to guard against the infringement by diligent inquiry, or at least the ability to guard against liability for infringement by an indemnity agreement from his supplier or by an “errors and omissions” insurance policy.’ ” Pinkham v. Sara Lee Corp., 983 F.2d 824, 829 (8th Cir. 1992) (citing 3 Melville B. Nimmer & David Nimmer, Nimmer on Copyright § 13.08, at 139 (1992)).

16. An example of such language is: “We won’t cover personal injury or advertising injury that results from the content of, or the advertising or publicizing for, any Properties or Programs which are within your Field of Entertainment Business.” Manzarek v. St. Paul Fire & Marine Ins. Co., 519 F.3d 1025, 1029 (9th Cir. 2008).

17. James T. Borelli, Caveat Emptor: A Buyer’s Guide to Media Liability Insurance, Comm. Law., Winter 2006, at 23–24.

18. Id.

19. Del Monte Fresh Produce N.A., Inc. v. Transp. Ins. Co., 500 F.3d 640 (7th Cir. 2007) (holding that language excluding injury “[a]rising out of oral or written publication of material, if done by or at the direction of the insured with knowledge of its falsity” precluded coverage for a complaint “based on allegations that Del Monte knowingly submitted fraudulent patent applications, knowingly sent false letters to competitors regarding its patent rights, and knowingly engaged in fraudulent patent litigation”).

20. Capitol Indem. Corp. v. Elston Self Serv. Wholesale Groceries, Inc., 559 F.3d 616, 618 (7th Cir. 2009) (interpreting policy language that “insurance does not apply to ‘personal injury’ or ‘advertising injury’ [a]rising out of oral or written publication of material whose first publication took place before the beginning of the policy period” and holding that coverage lay even for the insured’s prior publication where the infringement liability arose only during the policy period).

21. 6 J. Thomas McCarthy, McCarthy on Trademarks and Unfair Competition § 33:21 (5th ed. 2018).

22. 2 Robert D. Brownstone & Tyler G. Newby, Data Security and Privacy Law § 14:35 (2017).

23. See, e.g., Ticketmaster Corp. v. Tickets.com, Inc., No. CV99-7654, 2000 WL 1887522 (C.D. Cal. Aug. 10, 2000) (describing the defendant’s practice of ostensibly offering tickets through its own web portal, which in reality directed users directly to Ticketmaster web pages for individual events, bypassing Ticketmaster.com’s home page).

24. 196 F. Supp. 3d 577, 580 (D. Md. 2016).

25. Id. at 580–81.

26. Id. at 583.

27. Id. at 585 (“To interpret ‘data’ as including DirecTV’s television programming would effectively broaden the scope of the exclusion to eliminate any coverage for piracy.”).

28. 506 F. App’x 970, 972 (11th Cir. 2013).

29. Id. at 972–73.

30. Id. at 973.

31. Id.

32. Id.

33. Id. at 974.

34. Id. at 975.

35. Id. at 977.

36. Id. at 978.

37. Id. at 978–79.

Erica J. Van Loon is a partner with Lathrop Gage’s Los Angeles office. She focuses her practice on complex copyright, trademark, patent, rights of publicity, trade secrets, invasion of privacy, defamation, business interference, and other media and entertainment claims.

Justin Thiele is an associate in Glaser Weil’s Century City office. His practice focuses on copyright, trademark, and trade secrets litigation.

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