Hybrid Promotions, LLC designed, developed and distributed brand name and private-label apparel for customers including Wal-Mart. Hybrid was the supplier for both the MMA Elite and the knock-off products at issue to Wal-Mart, and Hybrid, pursuant to a supplier agreement, agreed to defend and indemnify Wal-Mart from any claims arising out of misappropriation or infringement of trademark, trade dress, and copyright. Wal-Mart tendered UBM’s claim to Hybrid and Hybrid assumed the defense of Wal-Mart pursuant to the supplier agreement.
Hybrid sought coverage from its commercial general liability carrier, Federal Insurance Company. Federal denied coverage because the alleged infringement of UBM’s registered trademark “was not caused by an offense of infringing, in that particular part of Hybrid’s advertisement about its goods, products or services” as required by the policy. Federal’s position was that any advertising or promotion of the infringing products was done by Wal-Mart’s placement of the signs by the MMA Elite products, and the infringement was not “in that particular part of [Hybrid’s] advertisement”.
After settling UBM’s lawsuit, Hybrid filed a complaint against Federal for breach of contract and breach of the implied covenant of good faith and fair dealing duties. The parties filed cross-motions for summary judgment with regard to Federal’s duty to defend Hybrid. The issue was whether the allegations in the UBM lawsuit created a potential for advertising injury coverage under Federal’s policy. Hybrid argued that the lawsuit alleged that it was “the combination of Walmart’s display of MMA Elite signage alongside retail displays, racks and artwork designed and supplied by Hybrid (advertising its private label merchandise) together, which violated UBM’s MMA Elite trademark.”
Relying upon the Federal policy’s requirement that the trademark infringement be “in that particular part of [Hybrid’s] advertisement of [Hybrid’s] goods”, the Court agreed with Federal and found no coverage was afforded because the UBM lawsuit alleged infringement was caused solely by Wal-Mart’s placement of the displays.
The Court acknowledged that Hybrid designed and supplied the displays of the knock-off merchandise alleged in the UBM lawsuit, but determined that the underlying action alleged that it was Wal-Mart’s placement of these displays near the trademarked products and signs that gave rise to the false and misleading perceptions—not Hybrid’s signs themselves. The court held that the policy does not cover infringement that is merely connected or related to Hybrid’s products; rather, it must be “in” Hybrid’s advertisements and regarding Hybrid’s products.
Hybrid filed an appeal with the Ninth Circuit, which is pending.
What to Watch
The issue on appeal turns on whether UBM’s allegations that Hybrid’s advertisements, which contributed to the misleading perception, potentially constituted “in that particular part of” Hybrid’s advertisements, or whether this phrase will be read narrowly to provide coverage for only those offenses “in” the policyholder’s advertisement. In other words, unless the infringement took place on Hybrid’s displays, no coverage is afforded. Either way, the Court will have to explain how to handle similar allegations of policyholder advertisements contributing to the infringing offense in the context of the phrase “in that particular part.”
What is certain is that, much like the similarly-worded exclusions for “that particular part of” real property on which the insured is performing operations, the use of the phrase “in that particular part” will continue to cause confusion and litigation. Policyholders, like Hybrid, have argued and will continue to argue that the phrase is ambiguous and should be construed in favor of coverage. See, e.g., Bituminous Cas. Corp. v. Kenway Contracting, Inc., 240 S.W.3d 633 (Ky. 2007), as modified (Dec. 21, 2007), as modified on denial of reh’g (Jan. 24, 2008) (“if the property damage arose out of those operations, was ambiguous because the phrase “that particular part of real property” and the term “operations” were not defined and because both insurer and contractor suggested reasonable interpretations in light of plain meaning of the words used”); MTI, Inc. v. Employers Ins. Co. of Wausau, No. 17-6206, 2019 WL 321423, at *3 (10th Cir. Jan. 25, 2019) (finding that the exclusion is “facially ambiguous”). Further, we will see additional litigation regarding the Hybrid Court’s proximity argument. What if the infringing offense was not initially “in” the Hybrid display, but was later added to the display by Wal-Mart by way of a sticker containing a MMA Elite trademark? Even more, what if the sticker was designed and manufactured by Hybrid? Does coverage depend upon whether Hybrid approved of the addition of the infringing sticker on its advertisement?
The issue becomes further complicated by the extensive use of the internet and social media. What does “in that particular part” mean with regard to advertising in the digital age? What if Company A re-Tweets Company B’s infringing offense? Is the offense “in that particular part of” Company A’s “advertisement”? We should expect to see an increase in the number of cases regarding what constitutes an “advertisement” and what constitutes “in” an advertisement.
Stacy R.C. Berliner is with Brouse McDowell LPA