Depending on the jurisdiction, claims such as defamation, product disparagement, unfair competition, interference with economic advantage, and their factual underpinnings should be scrutinized along with the pertinent policy language to see if they trigger the policyholder's insurer's duties, such as the duties to defend and indemnify. Such coverage can often be found in commercial general liability (CGL) policies providing coverage for "Advertising Injur[ies]," directors' and officers' liability (D&O) policies providing coverage for "Wrongful Acts," errors and omissions policies, specialized coverage for the movie industry, and Internet and cyber policies providing coverage for infringement and other cyber-based liabilities.
Significantly, though, finding coverage for additional claims does not begin when a lawsuit is filed. It is best to start when the policy procurement (or renewal) process begins. Companies should be cognizant of the types of potential (and sometimes creative) claims they could face so that they secure the right coverage in advance of a claim. For example, if a policy excludes IP claims, it might provide coverage for unfair competition or product disparagement. Similarly, if a general liability policy excludes coverage for Internet-based activities, the policyholder needs to ensure—before suit—that other policies are in place to respond if coverage is desired.
Example Claims That May Give Rise to Insurance Coverage
Claims that IP litigants should look closely at to maximize the potential for coverage include the following:
Unfair competition claims. IP litigation often includes claims other than the basic patent-, trademark-, or copyright-infringement claim. Common additional claims can include claims for unfair competition and unfair business practices. Counsel should review pleadings and demand letters to determine whether a plaintiff is alleging unfair competition/business practices claims, and scrutinize the type of relief sought for these claims, whether it is damages, restitution, injunctive relief, or something else. Litigants might be surprised at how far courts will go to find a covered "advertising injury."
Typically, a claim for "damages" is important. In some states, statutory unfair competition claims that seek only disgorgement of "ill-gotten gains" or restitution may not be covered, while common-law unfair competition claims that seek damages may be covered. See, e.g., Bank of the W. v. Superior Court, 2 Cal. 4th 1254, 1263 (Cal. 1992) ("term 'unfair competition' as used in [CGL] policy language defining 'advertising injury' refers to the common law tort of unfair competition rather than to conduct prohibited by unfair business practice statutes"). Some courts find that a complaint in essence seeks damages even where the plaintiff has pursued or sought other nonmonetary relief. Although only nonmonetary remedies, such as restitution or injunctions, may be available for some statutory unfair competition claims, D&O policies and some others might provide coverage for these nonmonetary remedies. Compare Equine Assisted Growth & Learning Ass'n v. Carolina Cas. Ins. Co., 266 P.3d 733, 735 (Utah 2011) ("claim" in organization liability insurance policy defined to include a "written demand for . . . non-monetary relief"), with Level 3 Commc'ns v. Fed. Ins. Co., 272 F.3d 908, 909–11 (7th Cir. 2001) (denying coverage and noting that "an insurer should not be responsible for the costs associated with the return of improperly obtained property").
Trade dress and "slogan" claims. In Acuity v. Ross Glove Co., No. 2011 AP 1464, 2012 Wisc. App. LEXIS 274, at *1 (Wis. Ct. App. Apr. 4, 2012), the court found that the insurance company had a duty to defend the policyholder for trade-dress infringement under the policy's advertising-injury coverage. Similarly, when a trademark-infringement action alleges the use of a phrase as an "attention-getting device" or "slogan," and not merely as a trademark, the policyholder may be entitled to coverage under the advertising-injury provisions enumerating infringement of a "slogan." In Ultra Coachbuilders, Inc. v. General Security Insurance Co., No. 02 CV 675, 2002 U.S. Dist. LEXIS 13027, at *1 (S.D.N.Y July 15, 2002), Ford had sued Ultra Coachbuilders for infringing on the certification mark. Although the insurer denied coverage, the district court found that if "the alleged infringement of Ford's unregistered marks 'Quality Vehicle Modifier' or the abbreviation, 'QVM,' could support a claim of slogan infringement, there is a duty to defend." See also Hudson Ins. Co. v. Colony Ins. Co., 624 F.3d 1264 (9th Cir. 2010) (finding that allegations by National Football League properties that the policyholder company had sold league jerseys, including the use of the words "Steel Curtain" in reference to the Pittsburgh Steelers, were covered under the advertising-injury provision).
Product disparagement. The duty to defend may be triggered by the mere implication of "disparagement" or trade libel. For example, in Travelers Property Casualty Co. v. Charlotte Russe Holding, Inc., 207 Cal. App. 4th 969, 978 (2012), the court found that the factual allegations asserted were enough to require the insurer to defend, even where not all of the elements of a claim for trade libel were pled. See also Winklevoss Consultants, Inc. v. Fed. Ins. Co., 11 F. Supp. 2d 995 (N.D. Ill. 1998) (finding that allegations of the complaint fit the offense of disparagement, and rejecting the insurer's argument that the policy offense is synonymous with common-law commercial disparagement).
Invasion of privacy. Data-breach claims and complaints alleging improper controls on the release of private information—including names, addresses, Social Security numbers, and credit-card information, for example—are becoming more common. The defense and resolution of these cases can be costly. If the facts impliedly give rise to additional claims for invasion of privacy, an insurer could be liable for defending a complaint in its entirety, and other "cyber risk" policies might provide coverage even if a general liability policy does not respond. The advertising-injury provisions of many policies may also cover the improper invasion of the right of privacy.
Tortious interference claims. Lawsuits seeking to enforce rights under the copyright and trademark laws may also include claims of tortious interference with contract or prospective business relationships. These claims also may be covered under policies typically procured by entertainment and technology companies. See Guardian Trust Co. v. Am. States Ins. Co., 1996 U.S. Dist. LEXIS 13076, *26–28 (D. Kan. July 30, 1996); Nolan & Co. Graphics & Adver., Inc. v. Liberty Mut. Fire Ins. Co., 1993 U.S. Dist. LEXIS 3884, *14–16 (N.D. Ill. Mar. 26, 1993).
Malicious prosecution and abuse-of-process claims. In IP litigation, a defendant might allege that the copyright holder or the infringer is using, or has used, the judicial system improperly to abuse the protections afforded to copyright and trademark holders. These claims may encompass the elements of covered claims of malicious prosecution or abuse of process. It is importantly to note that these claims may trigger important benefits, including a defense duty on the part of the insurer. See Carolina Cas. Ins. Co. v. Nanodetex Corp., 2013 U.S. App. Lexis 17181, *21–24 (10th Cir. Aug. 19, 2013) (policy excluding coverage for "malicious prosecution" still provided coverage for "malicious-abuse-of-process" claim); Lunsford v. Am. Guar. & Liab. Ins. Co., 18 F.3d 653, 656 (9th Cir. 1994) (CGL policy that promised to defend an insured against "malicious prosecution" claims includes a duty to defend against "abuse of process" claims); Toll Bros. v. Gen. Accident Ins. Co., 1999 Del. Super. LEXIS 313, *28–29 (Del. Super. Ct. Aug. 4, 1999) (same).
In sum, claims that appear to be based on conduct beyond mere infringement may be covered under a company's various liability policies. Even if a policy might not cover an ultimate settlement or judgment, an insurer might still have the duty to defend its insured: The duty to defend is typically based on the "potential" for liability under a covered claim, and it therefore is broader than the duty to indemnify. See Johansen v. Cal. State Auto. Ass'n, 15 Cal. 3d 9 (Cal. 1975).
Four Rules for Maximizing Insurance Coverage
With these general propositions in mind, the IP litigator should consider the following four rules for maximizing insurance coverage.
1. Review your insurance policy and negotiate better terms. Policy forms change over the years. Older CGL policies provided coverage for "advertising injury," which included infringement of copyright title or slogan. More current versions provide coverage for "oral or written publication of material that violates a person's right of privacy, misappropriation of adverting ideas or style of doing business," or "infringement of copyright, title or slogan" in an "advertisement." Some policies include broadly worded IP exclusions or "field of entertainment" exclusions. A policyholder should discuss thoroughly with its broker or coverage counsel the important aspects of its business. Indeed, a broker that understands a policyholder's business can add value in selecting and negotiating the right coverage and can be an important ally if a dispute later arises.
Companies may need to look to other types of policies, such as IP insurance, errors and omissions coverage, or media and technology policies that list "infringement of copyright, title or slogan, or trademark" as covered "wrongful acts" to ensure the best chance of broad coverage. Policyholders must also be cognizant of proposed changes that an insurer may want to make to a renewal policy. Catching changes or seeking revisions to language can prevent controversies over what the policy provisions might cover.
Some policies contain a duty to defend, permitting the insurer to appoint its preferred defense counsel after suit is filed. A savvy policyholder, however, might have excellent counsel who knows the company and can avoid the expenditure of significant defense fees in learning its operations, people, and practices. Policies that contain a duty to pay or duty to advance defense costs can preserve the insured's right to control the defense. Still other policies might have a panel counsel listing, requiring the selection of one of the insurer's favored counsel to control the defense.
And "buyer beware" of policies that might attempt to eliminate the policyholder's right to independent counsel where there is a conflict of interest between the policyholder and its insurer. A conflict arises where an insurer reserves its rights later to deny coverage, based on the fact that a complaint states causes of action for both covered and uncovered claims, remedies, or parties. Many states have statutory schemes requiring an insurer to appoint independent counsel if there is a chance that appointed counsel could steer the defense away from coverage. Negotiating the addition of favored—and well-qualified—defense counsel as part of a policy purchase or renewal can prevent a dispute.
A number of states allow the recoupment of defense costs, indemnity payments, or both, where the insurer can show that defense costs, settlement, or judgments were larger because of the inclusion of uncovered claims. See, e.g., Buss v. Superior Court, 6 Cal. 4th 35 (Cal. 1997) (insurer can seek reimbursement of those "[d]efense costs that can be allocated solely to the claims that are not even potentially covered"); Valley Forge Ins. Co. v. Health Care Mgmt. Partners, Ltd., 2010 U.S. App. LEXIS 17097 (10th Cir. Aug. 26, 2010). Other states disallow such attempts. See Nat'l Sur. Corp. v. Immunex Corp., 297 P.3d 688 (Wash. 2013)(an insurer may not unilaterally condition its reservation-of-rights defense on making the insured absorb the defense costs if a court ultimately determines there is no coverage).
The adage that you get what you pay for can be true when purchasing coverage. Thus, a policyholder should not let price be the sole arbiter of which policy to purchase. The strength and claims practices of particular insurance companies should be considered. Not all insurance companies are created equal or treat policyholders with the same consideration. Buying a policy that does not provide the right protection from the inception can be far costlier later on if it does not provide the desired coverage.
2. Push back when an insurer denies or limits coverage. Insurance companies are quick to deny coverage, sometimes in the apparent hope that the policyholder will just go away. A policyholder should not be persuaded to give up bargained-for promises so easily. Policies can be complicated beasts.
It seems that insurers generally are attempting to convince the customer when selling the policy that everything is covered and convince the court when a claim is made that nothing is covered. The miracle of it all is that the English language can be subjected to such abuse and still remain an instrument of communication.
Universal Underwriters Ins. Co. v. Travelers Ins. Co., 451 S.W.2d 616 (Ky. 1970).
How an insurer describes or categorizes coverage under the "deluxe" policy it sold, or its conclusion that there is no coverage, should not be accepted at face value. An insurer's "now you see it, now you don't" approach to coverage should be carefully scrutinized and challenged where warranted.
There is a vast body of law devoted to coverage issues. While a policy might appear to say one thing or limit coverage in a particular manner, case law might say that identical (or similar) policy language does not apply in the manner advocated by the insurer. For example, the "prior publication" exclusion can be invoked to deny coverage. However, if there are facts or allegations that show that a publication is continuing (which is usually a question of fact), the duty to defend may still be triggered. See Capitol Indem. Corp. v. Elston Self-Serv. Wholesale Groceries Inc., 551 F. Supp. 2d 711, 728 (N.D. Ill. 2008), aff'd, 559 F.3d 616 (7th Cir. 2009).
California courts have limited the seemingly broad "field of entertainment" exclusion, finding that the provision did not eviscerate all coverage or the insurer's duty to defend. Manzarek v. St. Paul Fire & Marine Ins. Co., 519 F.3d 1025, 1032–33 (9th Cir. 2008) ("field of entertainment" exclusion narrowly construed and did not bar coverage for advertising claims); Vivid Video, Inc. v. N. Am. Specialty Ins. Co., 1999 U.S. Dist. LEXIS 15322, at *12 (C.D. Cal. June 30, 1999) ("[S]ince the Field Endorsement is capable of two reasonable interpretations it must be construed against [the insurer], and such does not eliminate [the insurer's] duty to defend" the underlying action). Indeed, in Tool Touring, Inc. v. The American Insurance Co., 2012 WL 1595124 (Cal. Ct. App. 2d Dist. 2012), the Court of Appeal required the insurer to defend, ruling that the elimination of coverage based on the trial court's broad application of an "entertainment industry exclusion," which excluded coverage for personal and advertising injury arising out of the insured's music, was so broad as to render the coverage "illusory."
And although an insurer might contend that it has the obligation to pay only a small hourly rate for defense counsel, those issues also can be negotiated. Indeed, if an insurer attempts to deduct defense fees or costs after a so-called audit, there is good case law that can be used to recoup defense costs that are "reasonable and necessary" to the defense. Thus, at first blush, what may appear to an insurer as an excluded claim or defense cost may not actually be one. The failure to contact coverage counsel or push back on a declination can result in an improper declination.
3. Keep your insurer informed. IP lawyers and their clients want an insurer to pay defense costs through the defense and to participate meaningfully at mediation or court conferences to fund a settlement on behalf of the insured. There are numerous points in the anatomy of a defense when counsel should consider advising an insurer of the circumstances. Policyholders should give notice promptly because some courts hold that an insurer is not obligated to pay pre-notice defense costs, absent extraordinary circumstances. See, e.g., Faust v. Travelers, 55 F.3d 471, 471 (9th Cir. 1995) (refusing to impose a prejudice requirement in denying an insured's request for reimbursement of defense costs incurred prior to tender of the lawsuit); Scottsdale Ins. Co. v. Am. Empire Surplus Lines Ins. Co., 791 F. Supp. 1079, 1084–85 (D. Md. 1992) (although insurer could not deny coverage by virtue of the insured's late notice because the insurer was not prejudiced thereby, the insurer was not obligated to pay the defense costs incurred prior to tender); Xebec Dev. Partners, Ltd. v. Nat'l Union Fire Ins. Co., 12 Cal. App. 4th 501, 565 (1993) (existence or absence of prejudice is irrelevant with respect to payment of defense costs incurred prior to tender because notice is a condition precedent to the insured's right to coverage). Indeed, errors and omissions policies are typically "claims made" policies, requiring a claim against the insured and often notice to the insurer, during the policy to preserve coverage.Later lawsuits might arguably "relate back" to earlier actions, such as demand letters or administrative activities. A wise policyholder should carefully consider the risks and benefits of giving notice of pre-lawsuit demands and claims. Defense counsel should also provide prompt notice of amended complaints, the addition of new theories of recovery, the pleading of the right to punitive damages, dismissals of claims (with the caution that dismissing the only covered claim might result in the loss of coverage), and similar milestone events.
Defense counsel should provide information for the insurer's file, including regular status reports that accurately reflect a settlement potential and the possibility and magnitude of a negative judgment. A claims handler is not going to be in a position to set an accurate reserve or fund a settlement without facts showing the potential for liability, and it is too late to wait until the mediation before providing the factual and legal support justifying a significant settlement contribution. In addition to early notice of a claim, reports setting out the theories of liability, a worst-case scenario, and information supporting settlement can also assist—assuming careful preservation of privileged information and avoidance of information that might go to coverage disputes.
4. Consult a coverage specialist. Finally, coverage counsel "know this stuff" and have arguments "in the can" that defense counsel might not recognize or be able to raise on their clients' behalf. And as an aside, some courts have held that the failure to pursue insurance coverage can give rise to a claim against defense counsel. See, e.g., Jordache v. Brobeck Phleger & Harrison, 18 Cal. 4th 739 (Cal. 1998) (attorneys' failures to consider insurance allowed the insurers to raise an objectively viable defense to coverage and increased the client's costs, giving rise to a claim). Better safe than sorry.
What might appear to be a nuisanceor ancillary claim tacked onto a complaint alleging infringement of IP can trigger valuable benefits under a policy. If coverage is denied, insurance coverage counsel should be consulted, at least to take a second look at the issues. With insurance policies and claims, things are not always as they appear!
Keywords: litigation, intellectual property, insurance, coverage, advertising injury, insurance policy