Tell me if you've heard this one before. A start-up company, Winkler
Widgets, Inc. (WW), makes widgets in a market sector populated by a handful
of competitors. You ask Wink Winkler, the company's CEO, chief engineer,
and head bottle-washer, if he is interested in a specialty-risk insurance
policy that would provide defense for any future patent infringement claims.
After all, WW does make widgets in a field occupied by competitors with
moderate patent portfolios. Mr. Winkler passes on the patent infringement
policy and only takes out a commercial general liability (CGL) policy.
WW later implements a broad campaign to launch its new product, the Wizard
Widget. A WW competitor is so impressed with the Wizard advertising that it
sues WW for patent, copyright, and trademark infringement. Mr. Winkler calls
his general counsel and asks, "Can he afford to fight this
lawsuit?" Then Counsel gives the following sage advice to Mr.
Winkler.
- A word is not a crystal, transparent and unchanging, it is the skin
of a living thought and may vary greatly in color and content according to
the circumstances and time in which it is used. —Oliver Wendell Holmes
Jr. (1841-1935)
In other words, Mr. Winkler may not need to worry about the costs of a
defense because his insurer may have a duty to defend the lawsuit. Counsel
may be able to use the CGL policy so that its "advertising injury"
coverage extends to cover the claims for patent, copyright, and trademark
infringement. If you think Counsel has turned Holmes’s quote on its ear,
consider the following.
Standard Insurance Services Office, Inc. (ISO), CGL policies place a duty
to defend and indemnify an insured against claims constituting an
"advertising injury" if:
- The activity is one that is specifically enumerated by the
policy,
- The named insured’s activity constitutes an advertising
injury, and
- The advertising activity causes one of the specifically
enumerated offenses.1
Each prong from this three-part test is considered below. You will quickly
see that various CGL policies provide a great deal of ammunition for Mr.
Winkler's counsel to find coverage you may not have imagined. As a
result, you may need to consider provisions and specific exclusions
concerning specific intellectual property (IP) claims if the uncertainty in
the law disturbs you. On the other hand, if you are the risk manager of a
corporation, you may want to make sure that there are no specific
exclusions in your CGL policy.
Prong 1: Specifically Enumerated Activities (1986 ISO CGL Policy)
Various versions of ISO CGL policies have existed in the past. Each such
policy has tweaked each of the three prongs in one way or the other.
Regarding the first prong, the 1986 ISO CGL enumerates several activities
that require coverage such as:
- "Misappropriation of advertising ideas or style of doing
business," or
- "Infringement of copyright, title or slogan."
Patents and Copyrights
There is some certainty here. Most courts have held that patent
infringement constitutes neither a "misappropriation of advertising
ideas or style of doing business," nor "infringement of copyright,
title or slogan."2 In contrast, copyright
infringement claims are specifically listed as an enumerated right and
consequently covered.
Trademarks
In contrast, courts have split on whether trademark infringement, and its
common law cousin "unfair competition," are covered by the 1986 ISO
CGL. For example, some courts hold that a trademark is inherently an
advertising idea.3 Consequently, any infringement
of the trademark constitutes a misappropriation of an advertising idea. Other
courts disagree.
The split in interpretation also extends to claims for false advertising
and trade dress infringement.4 Of particular
interest, even if Mr. Winkler finds himself in a jurisdiction that denies
coverage for trademark infringement, all has not been lost. For example, some
parties have garnered coverage by arguing a term, which might normally be
considered a trademark (e.g., "The Wearable Light"), may also
constitute a slogan.5 This is an important nuance
because slogans are specifically included in the coverage under the 1986 ISO
CGL policy.
Trade Secrets
When a trade secret concerns something like a list of customers, courts
have inconsistently found coverage because such lists constitute methods of
gaining customers, which in turn entail "advertising ideas." In
contrast, trade secrets dealing with technical matters, such as a recipe for
producing a certain type of plastic, have consistently been held to require
coverage.6
Prong 1: Specifically Enumerated Activities (1998 ISO CGL Policy)
The 1998 ISO CGL differs from the 1986 ISO CGL policy in its enumeration
of activities that require coverage, such as:
- "Infringing upon another's copyright, trade dress or slogan in
your advertisement," or
- "The use of another's advertising idea in your
advertisement."
Patents
If you want clarity, look elsewhere! The courts have yet to provide any
real direction on whether the 1998 CGL policy will coverage patent
infringement claims. Of course some legal commentators are skeptical as to
whether the changed wording will provide any new grounds for coverage. More
than likely, the new wording will not provide any more coverage for patent
claims than currently exists, i.e., none. Still, a determinative answer
remains to be seen.
Trademarks
In contrast to the 1986 ISO CGL standard policy, the 1998 policy
specifically covers trade dress infringement. Considering trade dress and
copyright infringement are specifically included, courts may unsurprisingly
find that trademark infringement is not covered because it was not
specifically addressed when the authors could have easily done so.
Unfortunately, there is little case law that actually treats coverage for
trademark infringement under the 1998 ISO CGL policy. Consequently, there is
still uncertainty concerning this form of intellectual property.
Trade Secrets and Copyrights
Simply put, nothing has really changed here. Trade secrets are treated the
same. As for copyrights, just like the 1986 policy, copyright infringement is
specifically addressed.
Summary
Prong 1 of the three-part test for whether coverage exists is less than
crystal clear. Patent infringement is usually not covered under the 1986 ISO
policy. Its interpretation under the 1998 policy is unclear, but probably
will be the same. Copyright is covered. Trade secrets are largely fact
sensitive and turn on just how technical the subject matter of the trade
secret is. Trademarks are largely split according to which state law governs
the policy.
Prong 2: Act Must be an "Advertising Activity"
Even if Prong 1 is satisfied because the activity in question fits within
an "enumerated activity," the activity must also constitute an
"advertising activity." But what is an "advertising
activity?" While some argue that an "advertising injury" is
strictly defined by the enumerated activities, some courts have not limited
their analysis in such a manner.
Patents
Courts have traditionally held that patent infringement could not be read
to be an "advertising activity." Then, in 1996 patent laws were
amended to include "offering [a infringing device] for sale" as a
form of patent infringement. In doing so, the legal waters were muddied with
courts splitting on whether using an advertisement to offer an infringing
product for sale constitutes advertising activity.7
Trademarks, Trade Secrets, and Copyrights
Decisions regarding offenses concerning these intellectual property rights
are largely fact-based. In general, although there are numerous exceptions,
the more people exposed to the activity, the greater the chances are that the
activity will constitute "advertising." The following are examples
of activities that constitute "advertising activity."
- Use of ill-gotten customer lists to contact customers wherein the
customer lists constitute trade secrets.
- Promotion of copyright protected paper products to large retailers, and
not the general public, still constitutes advertising activity.
- Small, targeted mailing of protected work to select clients when the
population of potential clients is small.
- Distribution of letterhead wrongfully incorporating another's
trademark.
- Use of a domain name that incorporates another's
trademark.8
- A contractor placing a sign with his contact information outside a home
he wrongfully built using copyright-protected plans.9
The following are examples of activities that do not constitute
"advertising activity."
- Use of ill-gotten customer lists because the work was not distributed
to the public at large but instead, constituted person-to-person
persuasion.
- Display of an unauthorized copy of a copyright protected artwork.
Modifications to the 1998 ISO CGL have been made to clarify what
constitutes an "advertising injury." For example,
"[A]dvertisement does not include the design, printed material,
information or images contained in, on or upon the packaging or labeling of
any goods or products."10 Case law
interpreting this change, however, is scarce.
Summary
Prong 2 of the three-part test for whether coverage exists is less than
crystal clear. Remarkably, there is little guidance on the 1996 patent law
changes. As for other forms of intellectual property, case law determinations
are largely fact based.
Prong 3: Adverting Activity that Constitutes an Enumerated Offense Must
Cause Complained of Injury
Finally, even if the activity in question satisfies the first and second
prongs of the three-prong test, the insured faces a tough obstacle in showing
the complained of injury was "caused" by the enumerated advertising
activity. The following are examples of activities that satisfy the causation
element.
- Display, distribution, marketing and offering for sale of unauthorized
copies of copyrighted works.
- Use of customers’ lists to contact customers wherein the lists
contained detailed information about the customer and the customer's
preferred services.
- Trade dress infringement where an advertisement displayed the
infringing device.
- Trademark infringement where the trademark was displayed in the
advertisement.
- Inducement to patent infringement or contributory patent infringement
through advertising of infringing device.
- Use of "magazine.com" domain name which constituted trademark
infringement of the "magazines.com" trademark.11
- Advertisement of videotapes wherein the videotapes utilized
copyright-protected audio recordings and further wherein the videotapes
themselves were considered to be advertisements.
- Sale of a patented product by mail order catalogue, thereby
demonstrating that the advertisement itself is directly linked to the
prohibited sale of the product.
- Wrongfully building a home using copyright-protected plans, in
conjunction with the display of signage touting the builder's name,
caused the advertisement injury.12
The following are examples of activities that do not satisfy the causation
element.
- Patent infringement based on activities other than "offering to
sell" a protected device or service, such as the manufacture of the
protected device.
- Copyright infringement where the injury was due to customers buying
copyright protected software and not where the advertisement itself
constituted copyright infringement.
- Advertising a product that was developed from wrongfully acquired trade
secrets that concerned a method for cooking chicken.
- Copyright infringement for software that contained a feature for
generating bills that displayed advertisements.
No doubt you will notice that some of the above factual scenarios and
their holdings are in conflict with one another. Furthermore, some of the
scenarios that passed the "prong 3 muster" seem like they
shouldn't pass either of the first two prongs, but courts have held that
they did. In addition, one cannot escape the extremely fact-sensitive nature
of cases in this area of law. When cases are fact-dependent, the odds of
conflicting opinions being made skyrockets. Therefore, the only way to
address the resultant uncertainty is by modifying standard policies to be
less ambiguous. For example, the 1998 ISO CGL policy insists that the offense
occur "in your advertisement" rather than "in the course of
advertising." However, case law is scarce on how this change will be
interpreted.
Conclusion
Uncertainty exists regarding whether a CGL policy's "advertising
injury" may be used to cover trade secret misappropriation or patent,
trademark, trade dress or copyright infringement. Analyzing the law on a
state-by-state basis provides some clarity. Even then, however, important
changes to "advertising injury" clauses have yet to be interpreted
in many jurisdictions. Therefore, the best way to address the resultant
uncertainty is by modifying standard policies to be less ambiguous if the
marketplace allows you to do so.
E.E. ("Jack")
Richards II is an associate with Winstead Sechrest
Minick in Austin, Texas, where he specializes in intellectual property,
technology, litigation, dispute resolution, and nanotechnology. He received
his BS degree from Texas A&M and his JD degree, cum laude, from the
University of Houston Law Center. Before entering law school, he worked as an
engineer for a start-up company in the medical device industry, focusing on
electronics and software related to cardiac data (electrophysiology and
hemodynamics). Mr. Richards can be reached at