United States: Insuring Intellectual Property Costs

by Kevin Walsh

In the information age, the intangible asset is king. As patents, trademarks, trade secrets and copyrights play an ever-increasing role in shaping corporate destiny, disputes over intellectual property have multiplied. Insurance can play a valuable role in mitigating the liability and cost which ensue.

The insurance industry, ever aware that a swelling tide of litigation creates buoyant demand for new products, has recently developed insurance policies designed both to fund the prosecution of infringement actions and to protect defendants who have been sued in such actions. Those unwilling to rely upon insurance policies untested in the courts need not despair, however. Many traditional liability policies afford broad protection for certain types of intellectual property liability.

Most comprehensive general liability policies sold today provide insurance for liability arising from "advertising injury." This additional coverage represents a significant enhancement of benefits available to the policyholder. A business alleged to have engaged in intentionally tortious conduct, including certain types of copyright and trademark infringement, as well as unfair competition, may be entitled to both defense and indemnity payments under the advertising injury endorsement.

Advertising injury coverage was first introduced as an endorsement to the standard-form comprehensive general liability policy in 1973. This endorsement provided for the payment of damages occurring "in the course of advertising activities." The endorsement proved to be a popular enhancement and in 1986 was revised and included in the body of the policy. (Some insurance companies have continued to employ the 1973 version.)

Virtually all of the offenses itemized in the advertising injury provision are commercial torts. Advertising injury coverage is therefore uniquely tailored to the needs of business, and a familiarity with the types of liability for which it affords insurance is essential.

Copyright Infringement. A business accused of copyright infringement may be entitled to defense and indemnity payments pursuant to its advertising injury coverage. Copyright infringement is a scheduled offense in the standard form policy’s definition of advertising injury.

The alleged infringement need not be caused solely by advertising activity. Rather, it may be sufficient if the distribution and marketing activities which constituted the alleged infringement were accomplished, in part, by advertising (please see endnote 1). On occasion, however, insurance companies have attempted to deny coverage by contending that the advertising activity of a policyholder is not the cause of the injury in question. Although the language of the policy itself does not require such a causal connection, certain courts have nonetheless inferred such a requirement (please see endnote 2).

Trademark and Trade Dress Infringement. The advertising injury endorsement affords coverage for claims arising from the infringement of "titles" and "slogans." At least one court has held that the infringement of both "titles" and "slogans" can include trademark infringement, since a slogan or any other combination of words is capable of trademark significance, if used in such a way as to identify and distinguish the seller’s goods or services from those of others (please see endnote 3). Another court has held that trademark infringement necessarily occurs in the course of advertising because a trademark is essentially an advertisement (please see endnote 4). Other courts have found that trademark infringement constitutes the misappropriation of advertising ideas or style of doing business, another scheduled offense in the endorsement (please endnote 5). The Sixth Circuit has held to the contrary, however, by relying on the historical distinction between trademark infringement and the tort of misappropriation (please see endnote 6).

Unfair Competition. Most policies containing an advertising injury provision afford coverage for "unfair competition," although some sold after 1986 do not. Since "unfair competition" is a commonly alleged business tort, this element of coverage is potentially of great value to corporate purchasers of insurance. One of the most frequently litigated issues concerns which allegations of "unfair competition" fall within the coverage grant.

Insurance companies typically argue that "unfair competition" coverage should be defined narrowly. At common law, they contend, unfair competition was traditionally equated with the offense of "passing off," the attempt to sell one’s goods as those of another. Some courts, most notably the Supreme Court of California in Bank of the West, (please see endnote 7) appear to have accepted this argument and have limited the scope of coverage for "unfair competition."

Other courts have held, however, that "unfair competition" must be construed broadly to include a variety of improper business practices. The Third Circuit, for example, has observed that "[a] broader interpretation of the term than in Bank of the West would be particularly reasonable in Pennsylvania as that state’s legislature has defined ‘[u]nfair methods of competition’ to include a host of activities in addition to passing off goods or services as those of another." (please see endnote 8) Logic suggests that the scope of available coverage should be determined by the understanding of the average policyholder, rather than the evolution at common law of the cause of action for unfair competition.

Insurance companies sometimes dispute coverage on the ground that the unfair competition at issue did not occur in the course of a policyholder’s advertising activity. Some courts have accepted this argument. Indeed, the Tenth Circuit recently affirmed summary judgment on behalf of an insurance company and observed that "the fact that [the policyholder] may have advertised the competing product to consumers simply did not cause . . . injuries." (please see endnote 9)

Patent Infringement. Patent infringement is usually not an itemized offense in the advertising injury definition, and few patent claims have passed muster in the courts as "advertising injury." At least one policyholder has demonstrated, however, that patent infringement may be a form of "piracy," which itself is an itemized offense in certain policies (please see endnote 10).

On occasion, a policyholder may enjoy patent coverage by virtue of an express endorsement to the policy. In Elan Pharm. Research Corp. v. Employers Insurance of Wausau, (please see endnote 11) for instance, the policyholder sought to recover the costs of defending against certain patent infringement claims. An endorsement to the policy defined "advertising injury" to include "infringement of copyright, title, trademark, patent or slogan." Wausau, the insurance company, conceded that its policy afforded coverage for suits alleging patent infringement, but argued that Elan had not engaged in sufficiently widespread advertising activity, and its activity had not demonstrated a sufficient relation to the alleged injury.

The Eleventh Circuit was of a contrary view, holding that the dissemination of information to pharmaceutical trade journals constituted "advertising activity." The court rejected Wausau’s argument that patent infringement qualified as advertising injury only in those cases where advertising itself infringes the patent: "Although such a restriction has some appeal in the context of copyright or trademark infringement . . . it is difficult to comprehend how an advertisement could ever infringe a patent."

A company which is sued for trademark or copyright infringement or unfair competition must, of course, defend itself. One of the significant benefits afforded by the comprehensive general liability policy is the provision of a legal defense to the policyholder, which need demonstrate only the potential for insurance coverage to establish its right to such a defense.

Under New York law, insurance companies have a duty to defend if there is a "reasonable possibility that the insured may be held liable for some act or omission covered by the policy." (please see endnote 12) Moreover, the insurance company must defend the entire action even if only one claim is potentially within the policy’s coverage (please see endnote 13).

The sanctions available against an insurance company which fails to provide a timely defense are often severe. In cases of a conflict of interest which arises from an insurance company’s reluctance to afford coverage for a claim, a policyholder is typically entitled to select independent counsel.

In addition to the broad coverage afforded by the advertising injury endorsement, two new types of intellectual property policies are now available. One type of policy, typically marketed to start-up ventures without the financial resources to prosecute a costly infringement action, is designed to do little more than contribute to the legal costs of prosecuting such an action.

Those policies now available appear, however, to have certain limitations:

Some might argue that this product affords provisional funding rather than true insurance, since the policyholder or its counsel must, among other things, first demonstrate the validity of its patent to its insurers.

The second type of policy now available is more traditional in nature, providing defense and indemnity protection to a policyholder accused of patent or trademark infringement. Like the policy which funds the costs of an infringement action, this policy has been largely untested in the courts.

Prospective insureds should note, moreover, that the policyholder must first obtain an opinion letter regarding the validity of its patents, which some might consider an insurance policy in itself. Available limits of coverage may also be inadequate for some policyholders.

Even if a company chooses not to purchase these new types of policies, which are now being aggressively promoted, it should not assume that it is unprotected against claims of intellectual property infringement. In fact, it may already possess the most valuable coverage available to it, tucked securely within the four corners of its comprehensive general liability policies.

Kevin Walsh is a partner in the Litigation Department at Whitman Breed Abbott & Morgan LLP. Frank Morreale, an associate of the firm, assisted in the preparation of this article. To discuss these isues with Kevin, please call him at 212-351-2562 or e-mail him at kwalsh@WBAM.com.

1. See J.I.P. Inc. v. Reliance Insurance Co., 1998 U.S. App. Lexis 27538.
2. See GAF Sales & Servs., Inc. v. Hastings Mut. Ins. Co., 568 N.W.2d 165, 168 (Mich. App. 1997).
3. See, e.g., A Touch of Class Imports, Ltd. v. Aetna Cas. and Sur. Co., 901 F. Supp. 175 (S.D.N.Y. 1995) (granting summary judgment in favor of policyholder because the policyholder used the phrase "Touch of Class" as a "title or slogan" and because it was used in connection with the advertising and sale of its jewelry.).
4. See Noyes v. American Motorists Ins. Co., 855 F. Supp. 492, 495 (D.N.H. 1994) ("But for the use of the term in the packaging, literature and advertisements, there would have been no trademark infringement.").
5. See Energex Systems Corp. v. Fireman’s Fund Ins. Co., No. 96-5993, 1997 U.S. Dist. LEXIS 8894 (S.D.N.Y. June 25, 1997) (further noting that "[a]lthough the word advertising was not used in the complaint, it is clear that the confusion which was created through [the policyholder’s] communications with its customers took place through advertising"); Gemmy Indus. Corp. v. Alliance General Ins. Co., No. 98-14, 1998 U.S. Dist. LEXIS 18519 (N.D. Tex. Nov. 18, 1998) (collecting cases) (applying Texas law and finding a duty to defend, but granting summary judgment in favor of insurance companies based on failure of policyholder to comply with standard notice provisions).
6. Advance Watch Co. v. Kemper Nat’l Ins. Co., 99 F.3d 795 (6th Cir. 1996) (applying Michigan law).
7. 833 P.2d 545 (Cal. 1992).
8. Granite State Insur. Co. v. Aamco Transmissions, Inc., 57 F.3d 316, 319 (3d Cir. 1995) (affirming summary judgment for insurance company on other grounds).
9. Novell, Inc. v. Federal Ins. Co., 141 F.3d 983, 988 (10th Cir. 1998) (applying Utah law).
10. Union Ins. Co. v. Land and Sky, Inc., 529 N.W. 2d 773 (Neb. 1995), but see InteliCAD Computers, Inc. v. Travelers Property Cas. Co., No. 97-975 (N.D. Okla. Oct. 1, 1998) (observing that the majority of published decisions state that patent infringement is not piracy related to advertising).
11. 144 F.3d 1372 (11th Cir. 1998).
12. Meyers & Sons Corp. v. Zurich Am. Ins. Group, 74 N.Y.2d 298, 302 (1989).
13. See Seaboard Sur. Co. v. Gillette Co., 64 N.Y.2d 304, 310-11 (1984

This publication is intended to provide general information to our clients and friends. All facts and law discussed are as of the date of intial publication and may not reflect significant later developments. The material is not intended to convey an exhaustive treatment of the subject matter. It is not presented as legal advice nor is it to be used as a substitute for legal advice applicable to a particular situation. Always consult your attorney for specific legal advice.