Where the Rubber Meets the Road—Intentional Trademark Infringement and Insurance Coverage

June 2003

It is important to understand what constitutes intentional trademark infringement to determine if the intentional acts exclusion in a business advertising clause of a CGL policy would apply. If you are an insurance company, and you have just been served with a claim by one of your insureds on a business advertising injury such as a trademark infringement, the first step to determine whether the intentional acts exclusion will apply is to look at the complaint itself. Jurisdiction is key.

by Sanford E. Warren Jr.
Winstead Sechrest & Minick

One sunny bright afternoon as you are peacefully sitting in your office in the insurance company, you receive a notice of a complaint and a claim that’s been made against one of your insureds. Sure enough, one of the companies to which you have issued a commercial general liability (CGL) insurance policy has been sued for trademark infringement in federal court. Indeed, in the complaint itself, the plaintiff has alleged that your insured has intentionally and deliberately infringed the plaintiff’s trademark.

The defendant—your insured—obviously disagrees with this fact and when looking through its CGL policy comes to the “business advertising” clause. Trademark and copyright infringements and other advertising injuries are held by the courts most of the time to be covered under the “business advertising” clause of the CGL policy and, as such, it will be up to you—the insurance company—to pay for the costs of defense and any settlement up to the policy limits of the CGL policy.

Was the Infringement Intentional?

One of the few exceptions to this general rule, however, for the insurance company is whether the infringement was intentional or not. Most “business advertising” clauses in a typical CGL insurance policy have an exclusion for intentional torts or intentional acts of the insured. The courts have routinely held that intentional torts in the “business advertising” arena are not covered, and there is no duty to defend if indeed it is intentional. For example, see Rhein Building Company v Gehrt, 21 F Supp 2d 896 (ED Wis 1998); ABC Distributing, Inc. v Lumbermens Mutual Insurance Co., 646 F2d 207 (5th Cir 1981); and U.S.A. Nutrasource, Inc. v CNA Insurance Company, 140 F Supp 2d 1049 (ND Cal 2001).

Thus, the underlying issue most insurance companies have to determine is whether a trademark infringement is intentional and, if so, there is no coverage. Is the information in the complaint enough? As always, in the legal profession, it depends. After all, any plaintiff filing a lawsuit against a defendant for trademark infringement will almost always make the allegation that such trademark infringement is willful and intentional.

In the case of Federated Mutual Insurance Company v Power Lift LLC, 152 F3d 925 (9th Cir Cal 1998), however, the court held that a mere allegation of knowing wrongdoing is not enough to exonerate an insurance company from its obligation to defend. See also Montrose Chemical Corp. v Superior Court, 6 Cal 4th 287, 300-01 (1993). Indeed, the Ninth Circuit reasoned that since intentional wrongdoing is not a necessary element of a trademark infringement claim, there could still be a duty to defend until an intentional act is proven. See also Official Airline Guides, Inc. v Gross, 6 F3d 1385 (9th Cir 1993).

Additionally, in Union Insurance Company v The Knife Company, Inc., 897 F Supp 1213 (WD Ark 1995), the court held that since intent is not a required element of a trademark infringement cause of action, there can be a finding of liability against the insured even if the infringement were innocent and therefore there is a duty to defend despite an allegation of willfulness.

On the other hand, in ABC Distributing, Inc. v Lumbermens Mutual Insurance Company, (cited above), the court held that an insurance company, in determining whether it has a duty to defend an action against its insured, may rely on the allegations of the complaint. In interpreting the law of Florida, the Fifth Circuit adopted the Florida State Supreme Court’s ruling that the allegations in the complaint govern the duty of the insurer to defend. See National Union Fire Insurance Company v Lennox Liquors, Inc., 358 S2d 533 (Fla 1977), where the Florida Supreme Court held that the original complaint filed did not allege facts which would bring the cause within the coverage of the insurance policy since the only cause of action alleged was one of intentional acts and therefore the insurance company had no duty to defend.

As the courts are not uniform in this regard, it may prove difficult at the outset of litigation for an insurance company to decide whether an allegation of trademark infringement would normally come within the business advertising injury clause of its CGL policy and, therefore, require a duty to defend merely because there is an allegation of willfulness or intentional infringement.

What Constitutes Trademark Infringement?

The real question is: What constitutes an intentional trademark infringement? First, one must understand that the governing standard in trademark infringement actions is a likelihood of confusion. See, for example, Sun-Fun Products, Inc. v Suntan Research & Development Inc., 656 F2d 186 (5th Cir 1981). In that case, the Fifth Circuit stated that whether two marks are likely to be confused depends on a number of factors, including the following.

• The type of trademark
• The similarity of design
• The similarity of the product
• The identity of retail outlets and purchasers
• The similarity of advertising media used
• The defendant’s intent
• Evidence of actual confusion

In Sun-Fun Products, Inc., although the products themselves were decidedly dissimilar, the court held that there was trademark infringement because evidence of intentional deception carries special weight in the calculus of determining likelihood of confusion. In that case, one of the parties had actually testified that he had been instructed to copy the plaintiff’s product. Obviously, direct evidence of copying is a strong indication of intentional trademark infringement.

In Wynn Oil Company v American Way Service Corporation, 943 F2d 595 (6th Cir 1991), the court held that although intentional infringement is not necessary for a finding of likely confusion, the presence of that fact strengthens the likelihood of confusion. The district court had found that defendants acted intentionally based on underlying findings that the plaintiff was not a credible witness; that he had a prior knowledge of the plaintiff’s mark; and that the proper approach calls for looking to the entire record in trying to determine whether there was intentional infringement.

Many circuits have held that intent to infringe can be shown by circumstantial evidence. See, for example, Water Technologies Corp. v Calco Ltd., 850 F2d 660 (Fed Cir), cert. denied 488 U.S. 968 (1988); Jellibeans, Inc. v Skating Clubs of Georgia, Inc., 716 F2d 833 (11th Cir 1983); Frisch’s Restaurants, Inc. v Elby’s Big Boy, 670 F2d 642 (6th Cir), cert. denied 459 U.S. 916 (1982).

Factors that go to this type of inference and circumstantial evidence include knowledge of another’s prior use of the mark, whether there is a federal registration such that defendants had constructive notice of the mark, and defendant’s continued use of the mark after being notified of the plaintiff’s prior use. The likelihood that defendants acted intentionally is also increased if there is an extremely close relationship with the defendants and the market in which the plaintiff’s mark would be used. Finally, deliberate copying of a mark has long been held to be an intentional trademark infringement. See for example Piper Aircraft Corporation v Wag-Aero, Inc., 741 F2d 925 (7th Cir 1984).

Conclusion

In sum, if you are an insurance company, and you have just been served with a claim by one of your insureds on a business advertising injury such as a trademark infringement, the first step to determine whether the intentional acts exclusion will apply is to look at the complaint itself. Perform some research to determine whether you are in a jurisdiction where, if there is an allegation of intentional tort or wrongdoing on the face of a complaint, that is sufficient to allow the exclusion to apply. If not, or if the case law is unpredictable in that jurisdiction, then perform a factual investigation and find out exactly how the insured decided to use their mark.

• Did they actually perform a trademark search?
• Did they know about the plaintiff’s trademark beforehand?
• Did they set out to deliberately palm off their goods for that of the plaintiff?
• Did they have knowledge of the plaintiff’s registered trademark?

Should they have had knowledge of the plaintiff’s registered trademark?

These and similar factual investigations would then give the insurance company enough confidence to at least make an initial determination on whether to deny coverage or not. Basically, you need to understand what constitutes intentional trademark infringement to determine if the intentional acts exclusion in a business advertising clause of a CGL policy would apply.

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