Uncertainty exists regarding whether a CGL policy's "advertising injury" claim may be used to cover trade secret misappropriation, 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.
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.
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.
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."
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.
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.
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.
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.
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.
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 IIis 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).
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