August 02, 2012 Articles

Coverage for Suits Alleging Infringement of Business Method Advertising Patents

Companies need to realize that contamination under a first party property policy is very different from pollution under a third party liability policy

by Erin L. Webb and Courtney Alvarez

Though patent infringement claims are generally not thought of as covered under commercial general liability (CGL) insurance policies, allegations involving certain types of business method patents may be covered because they constitute advertising. Several patented methods of advertising have been the subject of recent disputes. As courts have pointed out, a principled distinction exists between suits alleging infringement of advertising patents and suits involving an allegedly infringing product that is later advertised.

Recent allegations between Yahoo! and Facebook, among others, highlight an area of CGL coverage that some courts have stated applies to patent infringement suits involving advertising patents, such as pay-per-click sidebar advertising on webpages.

Though policy wordings may differ, in general, most CGL policies cover personal and advertising injury liability. That means that if the policyholder company is sued, and the claims involve personal injury or advertising injury as defined by the particular policy, the policyholder is potentially entitled to a defense and indemnity for any liability. Many CGL policies also specifically exclude patent infringement claims, but an exception to that exclusion may grant coverage back for claims relating to advertising.

Ninth Circuit Cases

The U.S. Court of Appeals for the Ninth Circuit held that patent infringement claims could constitute covered advertising injury in Hyundai Motor America v. National Union Fire Insurance Co. of Pittsburgh, PA, 600 F.3d 1092 (9th Cir. 2010). In Hyundai, the Ninth Circuit held that CGL insurers had a duty to defend claims alleging that two features on Hyundai’s website, a build your own vehicle feature and a parts catalogue feature, infringed on two existing patents. Id. at 1098-99. Hyundai’s insurance policy provided a defense for any suit seeking damages caused by an advertising injury. Id. at 1096. The policy granted coverage for liabilities arising out of an alleged advertising injury, which was defined to include, in pertinent part, “[m]isappropriation of advertising ideas or style of doing business; or . . .[i]nfringement of copyright, title, or slogan.” Id. Hyundai argued that the patent infringement claim against it was, in essence, a claim for the misappropriation of advertising ideas. Id. The Ninth Circuit agreed, finding that a patent infringement suit could allege an advertising injury where a patent involved a process or invention that could be considered an advertising idea or “‘where an entity uses an advertising technique that is itself patented.’” Id. at 1100-02 (quoting Iolab Corp. v. Seaboard Sur. Co., 15 F.3d 1500, 1507 n.5 (9th Cir. 1994)). The underlying complaint against Hyundai alleged that the build your own vehicle feature on Hyundai’s website was a previously patented method of advertising or an advertising idea. Id. at 1100-01.

The Ninth Circuit also considered whether a causal connection existed between the injury and the advertising. Id. at 1102-04. The Washington Court of Appeals has noted that this causal requirement often presents the biggest challenge to the prospects for patent infringement defendants to obtain insurance coverage, because “[t]he basis of such claims is typically the sale of infringing products, not [the methods of] advertisement.” Amazon.com Int’l, Inc. v. Am. Dynasty Surplus Lines Ins. Co., 85 P.3d 974, 977 (Wash. Ct. App. 2004). But, as the Ninth Circuit noted in Hyundai, a causal connection exists when the patent concerns the method of advertisement, rather than the product being advertised. See Hyundai 600 F.3d at 1102. Under this logic, Hyundai’s method of advertising its various vehicles and parts infringed the patents, so the causal connection between the injury and the advertising was present. See id. at 1103-04.

Tenth Circuit Cases

The Tenth Circuit also has held that coverage may exist for claims alleging infringement of business method patents, this time based on an “exception to an exclusion” contained in the insured’s policies. In DISH Network Corp. v. Arch Specialty Insurance Co., 659 F.3d 1010, 1028 (10th Cir. 2011), the Tenth Circuit found that the trial court had incorrectly granted summary judgment to insurers regarding coverage for a case involving patent disputes. The underlying case against the policyholder alleged that the policyholder, a cable network, had infringed patented systems that allowed customers to order pay-per-view services and conduct other customer service functions over the telephone. Id. at 1012-13. The insurers had conceded that “at least six of the claims DISH may have infringed explicitly mention advertising or product promotion.” Id. at 1013. The Tenth Circuit held that the policyholder’s “alleged unlicensed use” of the telephone technology “potentially includes advertising activities.” Id. at 1027. The court explained an important distinction: that “this is not a case in which an insured manufactured an infringing product and then merely advertised its misdeed.” Id. (citing Microtec Research, Inc. v. Nationwide Mut. Ins. Co., 40 F.3d 968, 971 (9th Cir. 1994)).

The Tenth Circuit examined primary and excess insurance policies sold to the policyholder by five different insurers. Id. at 1013. The Arch insurance policy contained an exclusion barring coverage for “‘any claim . . . [a]rising out of the infringement of copyright, patent, trademark, trade secret or other intellectual property rights.’” Id. at 1013-14. The exclusion contained an exception, however, stating that it did not apply to “‘to infringement, in [the insured’s] ‘advertisement,’ of copyright, trade dress or slogan.’” Id. at 1014. After finding that a suit for patent infringement could allege covered advertising activity, the Tenth Circuit remanded the case to the district court to address whether the Arch policy’s intellectual property exclusion barred coverage for DISH’s claims. Id. at 1028-29.

As these cases highlight, policyholders should not overlook potential CGL coverage for patent infringement lawsuits, particularly given the recent rise in litigation over business method patents involving online advertising. Many online businesses create revenue by placing clickable advertisements on their websites. The type of individualized, customer data-driven advertising involved in the disputes between Facebook and Yahoo! is also on the rise. These types of patented business methods are often described as advertising patents. While specialized policies on the market exist that provide coverage for intellectual property disputes, coverage may also be available under CGL policies.

However, pursuing an insurance claim may be a complex and challenging process. Policyholders should consider obtaining the assistance of coverage counsel who, because many issues can significantly affect the existence or amount of recovery under an insurance policy, can help the policyholder comply with policy requirements and present its claim in a manner that will maximize coverage under the insurance policies.

Keywords: insurance, coverage, litigation, advertising injury, patent infringement, intellectual property, business method

Erin L. Webb and Courtney Alvarez, Dickstein Shapiro LLP, Washington, DC

Copyright © 2012, 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).