United States: Ninth Circuit finds coverage for patent infringement claim under advertising injury coverage within a general liability policy

The U.S. Ninth Circuit Court of Appeals recently ruled that an insurer owed a policy holder a defense under a general liability policy where the alleged patent infringement constituted "advertising injury" under the definitions of the policy. As this conclusion shows, the ever-changing nature of the Internet can give rise to a defense obligation in circumstances that may not be anticipated by an insurer, particularly those involving patents on novel technologies that are used by many modern businesses on their websites.

Background

In Hyundai Motor America v. National Union Fire Ins. Co. of Pittsburgh, PA, No. 08-56527 (9th Cir. Apr. 5, 2010), the motor vehicle company brought suit against its insurer after Hyundai was denied a defense by its insurer in a patent infringement claim. The underlying lawsuit involved allegations by Orion IP, LLC ("Orion"), a patent holding company, that Hyundai's website had features that violated patents held by Orion. These patents were alleged to cover a "build your own vehicle" feature on the Hyundai website and a parts catalogue feature, both of which allowed users to navigate a series of menus that resulted in the provision of customized information in response to user input. Orion brought suit against Hyundai and twenty other car companies in the underlying lawsuit, claiming that the implementation of these features constituted patent infringement (the other manufacturers settled before trial).

The complaint against Hyundai alleged in part that:

In response to the underlying lawsuit, Hyundai sought a defense from its insurer, claiming that the allegations of the complaint sought damages based on a type of "advertising injury," as defined in the insurance policy.

Hyundai's insurance policy contained the following provisions:

Hyundai claimed that its insurer owed a duty to defend, claiming that the complaint alleged injuries based on the "misappropriation of advertising ideas," and as such, the injuries constituted "advertising injuries." The insurer disagreed with Hyundai and denied all coverage. As a result, Hyundai covered the cost of its own defense, and was ultimately found liable for patent infringement (with a jury awarding Orion $34 million in damages). On May 17, 2010, the U.S. Court of Appeals for the Federal Circuit vacated the verdict, dismissing the case, finding that Orion's patent was not valid insofar as certain of the claims were anticipated. The court found that the jury could not reasonably find that the claims were not anticipated in light of clear and convincing evidence that a prior system taught by an Electronic Parts Catalog, generated proposals for customers including price and graphical information. The court noted that this would have reasonably led to the development of Orion's patented "Computer-Assisted Parts Sales Method."

Subsequently, Hyundai sued its insurer to recover the cost of its defense. The District Court found in favor of the insurer, holding that the allegations in the complaint did not constitute "advertising injury" under the policy. Hyundai appealed to the Ninth Circuit Court of Appeals.

Appeal

On appeal, the Ninth Circuit reversed the District Court, finding that the insurer owed Hyundai a defense under the "advertising injury" provision of the insurance policy.

The court stated that a carrier "must defend a suit which potentially seeks damages within the coverage of the policy," holding that coverage can only be excused where there is no conceivable theory under which coverage could arise.

In holding that coverage was present, the court concluded that Hyundai's website constituted an "advertisement," as it was a marketing tool presented to the public at large. This widespread dissemination of the website removed it from being considered an individual solicitation, which generally does not constitute an "advertisement" under a policy. Further, the court held that the offense could constitute the misappropriation of an advertising idea – a covered offense – if the patent could reasonably be considered to cover an advertising idea. The court held that the patent at issue covered a method of displaying information to the public at large in an attempt to facilitate increased sales – in other words, it covered a method of advertising. The court noted that patent infringement may constitute an advertising injury "where an entity uses an advertising technique that is itself patented." As such, the court concluded that the complaint alleged the misappropriation of this advertising idea, and further alleged that it was used by Hyundai in the course of advertising. In conclusion, the court held that the damages alleged against Hyundai were allegedly caused by the infringement of the patent, and thus, a defense should have been provided.

Conclusion

This case highlights the changing landscape of advertisements and patent infringement in an Internet economy. Patents covering Internet technologies have been granted at an increasing rate in recent years, making it easier than ever for a business to commit patent infringement without intent or even the knowledge that the allegedly infringed patent exists. Such claims are now commenced regularly. While the Federal Appellate Court for California has found that certain patent infringement claims can be covered under the advertising injury coverage in a policy, it will be interesting to follow other jurisdictions to see if they follow this ruling. The Media/Cyber Practice Network of Wilson Elser's Insurance Practice will follow these developments and report in due course.

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