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June 19, 2018 Articles

Is There Insurance Coverage for Trade Secrets Litigation?


By Brian Esler and Seth Row

Trade secrets litigation can be expensive. Insurance can help defray that expense. But will insurance cover a claim of trade secret misappropriation? Maybe.

Coverage is driven by state law, which means unique state law variations. However, most states have adopted some form of two guiding principles: (1) Policies are to be construed against the insurer and in favor of coverage, and (2) the insurance company’s duty to provide a defense for its insured against a potentially covered claim is broader than its duty to indemnify (i.e., actually pay the claim).

With insurance coverage issues, the devil is always in the details of the specific applicable policy and the specific allegations of the complaint. That said, there are generally two sources of potential coverage for claims of trade secret misappropriation: the “advertising injury” rider provided in most commercial general liability (CGL) policies and various provisions offered in most directors’ and officers’ (D&O) policies.

Advertising Injury Coverage

Most CGL policies provide some form of liability coverage for “advertising injury.” While definitions can vary (and newer policies generally have more restrictive endorsements), “advertising injury” is usually defined as an injury other than property damage or bodily injury, including libel, slander, invasion of privacy, copyright infringement, and misappropriation of advertising ideas.

Trade secret “misappropriation,” especially if such misappropriation involves allegations of stolen marketing plans and customer lists, would seem to fall within that scope. However, such policies usually also require that the “misappropriation” occur in the course of advertising activities or “in connection with the insured’s advertising of its goods or services.” The coverage usually requires that the “advertising idea” has been used “in your [the policyholder’s] advertisement.” So what misappropriation is really covered?

A number of courts have examined whether trade secret misappropriation claims can give rise to either a duty to defend or a duty to indemnify under the advertising injury rider to a typical CGL policy, with decidedly mixed results. Many jurisdictions look to Ninth Circuit and California law for precedent in this area. E.g., Winklevoss Consultants, Inc. v. Fed. Ins. Co., 991 F. Supp. 1024, 1026 (N.D. Ill. 1998); Tradesoft Technologies, Inc. v. Franklin Mut. Ins. Co., 746 A.2d 1078, 1087 (N.J. Ct. App. 2000) (both looking to Ninth Circuit and California law to interpret advertising injury coverage). In an early but still instructive case, the Ninth Circuit held that a complaint that alleged that the defendant used the plaintiff’s trade secrets (including customer lists, marketing techniques, and billing methods) to solicit the plaintiff’s customers fell within the scope of “misappropriation of advertising ideas.” Syntex Sys., Inc. v. Hartford Accident & Indem. Co., 93 F.3d 578 (9th Cir. 1996). The court concluded that “advertising cannot be limited to written sales materials, and the concept of marketing includes a wide variety of direct and indirect advertising strategies.” Syntex Systems, 93 F.3d at 580. Similarly, the Eighth Circuit held that an insurer had a duty to defend its insured because the underlying claims of trade secret misappropriation were arguably within the scope of the policy’s advertising injury clause. John Deere Ins. Co. v. Shamrock Indus., Inc., 929 F.2d 413 (8th Cir. 1991).

Although these decisions may have opened the door slightly to the possibility of coverage for trade secret misappropriation, later cases (and ISO changes) have tried to close the door. For instance, one later case flatly stated that “a complaint charging trade secret misappropriation does not allege advertising injury.” Lexmark Int’l, Inc. v. Transp. Ins. Co., 327 Ill. App. 3d 128, 138, 761 N.E.2d 1214, 1223 (2001). By 2001, the ISO (which prepares standard forms for insurers) had come out with a new CGL form for advertising injury coverage that explicitly states that such insurance did not apply to any alleged injury “arising out of the infringement of . . . trade secret or other intellectual property rights.” ISO Form CG 00 01 10 01.

Since that 2001 ISO change, coverage for trade secret allegations has been considerably harder to find. Hence, in a more recent case examining a variation of the 2001 ISO form, a California court concluded that the exclusion for trade secret misappropriation applied to defeat coverage. S.B.C.C., Inc. v. St. Paul Fire & Marine Ins. Co., 186 Cal. App. 4th 383, 396–97 (2010). Similarly, a Georgia district court concluded that trade secret misappropriation did not constitute any type of advertising injury. Transp. Ins. Co. v. Freedom Elecs., 264 F. Supp. 2d 1214, 1218–19 (N.D. Ga. 2003). The Fifth Circuit held that an insurer had no duty to defend or indemnify its insureds when the underlying lawsuit alleged only solicitation of confidential information and customers from a competitor. Nationwide Mut. Ins. Co. v. Gum Tree Prop. Mgmt., LLC, 597 F. App’x 241, 246–47 (5th Cir. 2015). Just recently, an Illinois district court similarly found that a complaint that accused the insured of misappropriating a customer list and sales information did not give rise to coverage under the “advertising injury” provisions of the insured’s CGL policy. Sentinel Ins. Co., Ltd. v. Yorktown Indus., Inc., 2017 WL 446044 (N.D. Ill. Feb. 2, 2017).

Nonetheless, policies can differ in the wording of their advertising injury coverage and not all policies follow the ISO forms precisely. Moreover, because many states have statutes and case law favorable to policyholders, a policyholder’s demand for coverage may still prove useful, especially if the complaint alleges something more than trade secret misappropriation. For instance, in another recent Illinois case, a federal district court found for the insured because it made an early tender in a trade secrets dispute, which tender was denied unconditionally by the insurer. Caveo, LLC v. Citizens Ins. Co. of Am., Inc., 2016 WL 5477537 (N.D. Ill. Sept. 29, 2016). The underlying complaint alleged that the insured and its employees had allegedly used “confidential, proprietary, trade secret and copyrighted material” to prepare marketing materials and webinars. After the insured’s tender was denied, the insured settled the underlying lawsuit and then sued its insurer. Although the main thrust of the claims was trade secret misappropriations, the inclusion of the word “copyright” in the complaint convinced the district court that the insurer had at least a duty to defend, which duty it breached by denying coverage:

Here, based on the allegations of the underlying complaint, the case remained at least potentially within the scope of coverage, and that possibility could not be negated absent factual information that might have been obtained in discovery while [the insurers] honored their duty to provide a defense with a reservation of rights. If—but only if—those negating facts later became apparent, [ the insurers] could then have sought a declaration that they did not owe a duty to defend (or indemnify).

Caveo, 2016 WL 5477537, at *3.

Having found that the insurer owed a duty to defend when the tender was made, the district court then concluded that the insurer was estopped from later raising any policy defenses to coverage and was liable to its insured for the amount of any reasonable settlement plus litigation expenses incurred. Id. at *4.

Similarly, a federal district court in California found that, because the underlying complaint did not unambiguously state that all the information allegedly misappropriated by the insured was a trade secret nor was trade secret misappropriation the only claim in the complaint, there were arguably covered claims that gave rise to the insurers’ duty to defend. MGA Entm’t, Inc. v. Hartford Ins. Grp., 2012 WL 12893421, at *14–15 (C.D. Cal. Feb. 6, 2012).

Even more recently, the Ninth Circuit (in an unpublished decision, applying Oregon law) reversed a district court’s grant of summary judgment to insurers in a coverage dispute with its insured over the insurers’ duties to defend and indemnify. Willowood USA, LLC v. Allied World Assurance, 696 F. App’x 276 (9th Cir. Aug. 17, 2017). (The authors’ law firm was counsel for the insured in this case.) The underlying litigation involved a claim of an alleged breach of a confidentiality agreement, along with related Lanham Act claims (i.e., trademark and unfair competition). Because the plaintiff’s second amended complaint specifically alleged injury from the insured’s alleged use of an advertising idea, the Ninth Circuit remanded with instructions to enter summary judgment to the insured against the insurer on the duty to defend and found that a fact issue remained for trial on the insurer’s duty to indemnify and reimburse for the insured’s settlement payment in the underlying lawsuit. Id. at 278.

Directors’ and Officers’ Coverage

Companies often purchase D&O insurance to protect their directors and officers for claims made against them based on actions they took while a director or officer. This is essentially “errors and omissions” insurance for the company’s directors and officers. Unlike a typical CGL policy, these are usually claims-made policies with defense costs as part of the covered “loss,” so defense costs reduce the policy’s available indemnity limits. These policies cover claims against the corporation’s directors and officers, as well as the corporation’s indemnification obligations to its directors and officers for such claims. Typically, these policies cover any allegation against the director or officer of a “wrongful act,” which includes a wide variety of errors or omissions. Most modern D&O policies also contain “entity” coverage for the corporation, although the scope may vary from the coverage provided to directors and officers.

Corporate defendants have successfully looked to their D&O policies to provide coverage when their executive employees are accused of trade secret misappropriation. For example, a district court in California found that when a company and one of its officers were sued by a competitor for alleged trade secret misappropriation, the company’s D&O insurer should have provided at least initial coverage. Acacia Research Corp. v. National Union Fire Ins. Co., 2008 WL 4179206 (C.D. Cal. Feb. 8, 2008). Again, this case involved a defendant who timely tendered to its carrier, the insurer denied coverage, and the insured later settled the lawsuit and then sued the insurer. The California district court held that the allegation that the officer misappropriated trade secrets constituted a “wrongful act” under the policy and that the insurer should therefore have provided coverage. The court awarded judgment to the insured for all the fees incurred in defending the underlying lawsuit, as well as the full amount of the settlement paid by the insured in the underlying trade secret lawsuit. Another California court found that, although a D&O policy’s trade secret exclusion meant the company had no coverage, that exclusion might not apply to officers who were jointly liable for settlement payment and may have their own individual damages. Parallax Design & Constr. v. Certain Underwriters at Lloyd’s of London, 2007 WL 1227687 (Cal. Ct. App. Apr. 26, 2007).

A Georgia district court similarly found D&O coverage for a defendant sued for misappropriation of confidential information or trade secret information or both, even in the face of a specific policy exclusion for trade secret misappropriation, because the lawsuit alleged more than just trade secret misappropriation by describing the misappropriated information as either “confidential” (covered) or “trade secret” (not covered). Medassets, Inc. v. Fed. Ins. Co., 705 F. Supp. 2d 1368 (N.D. Ga. 2010). Because the lawsuit included covered non-trade-secret claims, there was an arguable basis for coverage.

Most recently, on May 2, 2018, a Delaware court held in that a Computer Fraud and Abuse Act claim, in a complaint otherwise focused on trade secret violations, triggered the insurer’s duty to defend under a D&O policy. Woodspring Hotels v. Nat’l Union Fire Ins., 2018 WL 2085197 (Del. Super. Ct. May 2, 2018). There, the court rejected the argument that a broad intellectual property exclusion applied, as the complaint did not specify that the computer data taken were intellectual property or a trade secret.


The takeaway for defense counsel is that while obtaining coverage for allegations of trade secret misappropriation is a long shot, it still may be worth at least making the claim to your client’s insurance company to preserve the possibility of coverage. And for plaintiff’s counsel, be aware that your pleadings may give rise to an insured defense (even though the defendant’s policy may not be available ultimately to pay a settlement), so decide ahead of time whether you want to plead into coverage (or plead out of it).

Brian Esler is a partner at Miller Nash Graham & Dunn, LLP, in Seattle, Washington. Seth Row is a partner in the firm's Portland, Oregon, office. Seth serves in the leadership of the American Bar Association’s Section of Litigation and the ABA’s Insurance Coverage Litigation Committee. The authors would also like to thank their colleague Christian Hawthorne McClenny for her help in providing research for this article.

Copyright © 2018, American Bar Association. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or downloaded or stored in an electronic database or retrieval system without the express written consent of the American Bar Association. The views expressed in this article are those of the author(s) and do not necessarily reflect the positions or policies of the American Bar Association, the Section of Litigation, this committee, or the employer(s) of the author(s).