It is an event that all corporate risk managers dread. An envelope arrives at your office that contains a letter accusing your company of infringing on various intellectual property rights of the sender. Or worse yet, the envelope contains a lawsuit against your company seeking substantial monetary damages and a request for an injunction to prevent you from continuing to sell your products or otherwise engaging in your business. An expensive, time-consuming and potentially devastating legal dispute lies ahead. What can you do to minimize the exposure your company faces?
Recent years have witnessed a sharp increase in the number of lawsuits alleging infringement of various intellectual property rights.[1] Several factors, such as the recent downturn in the economy, the growth of web-based businesses, increased globalization of the marketplace, increased competition, the continual quest for a competitive edge, and the new importance placed upon the value of intellectual property assets have contributed to this trend. Moreover, due to the inherent complexities of intellectual property law, the time, resources and costs that are required to litigate these cases are substantial, and the potential exposure such litigation poses to a company can threaten its very existence.
As a corollary to this trend, the availability of insurance coverage against infringement claims through Commercial General Liability ("CGL") polices generally, and the "advertising injury" coverage provided in standard CGL policies specifically, has taken on vital importance, not only because the policy proceeds will indemnify the company for damages that it may be ordered to pay to the third party claimant and which are covered by the policy, but also because most standard CGL policies require the insurer to defend the company's against the claims at the insurer's expense. Obviously, a defense paid for by the insurer not only can save the company a substantial sum of money but, in many cases, is the only way a company, particularly a smaller organization, can afford to defend itself at all.
This article seeks to:
(1) Provide risk managers with a basic understanding of the types of coverage that are typically provided for intellectual property claims in a standard CGL policy and the sort of conduct that may be covered;
(2) Provide guidelines to risk managers on what steps to take when faced with a claim of intellectual property infringement and;
(3) Provide practical advice concerning what steps can be taken to maximize a company's insurance coverage against such a claim.
Basic Insurance Concepts Concerning Intellectual Property Claims
An exhaustive treatment of potential coverage issues that can arise under the advertising injury portion of standard CGL policies is beyond the scope of this article. However, in order for risk managers to evaluate potential coverage against an intellectual property claim and to effectively address such claims, a basic understanding of a few key concepts involving the advertising injury coverage provided in standard CGL policies is necessary.
Scope of advertising injury coverage under standard CGL policies
Most standard CGL policies currently in use contain an advertising injury section that provides coverage to the insured for claims of damage made by third parties against the insured for specific, listed offenses. This coverage only recently became part of standard-form CGL policies and the standard advertising injury language utilized by the Insurance Services Office ("ISO") has changed several times in recent years. These modifications have altered the scope of coverage provided in standard CGL policies.
Prior to 1973, no "advertising injury" coverage was provided under CGL policy forms. However, where the 1973 CGL form was used, the insured could obtain a separate broad form endorsement that provided for advertising injury. Beginning in 1986, the CGL form was rewritten to include advertising injury as part of the standard policy form. The 1986 form also made significant changes to the scope of the advertising injury coverage provisions contained in the broad form endorsement under the 1973 policy form. Revised advertising injury language also was introduced in 1996, 1998 and 2001. Additionally, some policies use and define the term "advertisement" or "advertising" that can impact the scope of coverage available for intellectual property claims depending on the unique facts of the insured's claim. Other policies do not define these terms.
Thus, due to the different advertising injury forms currently in use, risk managers should attempt to locate and review the specific advertising injury language in all potentially applicable policies, particularly because some older policies may contain an earlier version of the language that provides broader coverage. Careful analysis of the specific advertising injury language is made all the more important because courts around the country have reached varied and, frequently, inconsistent results concerning whether a particular intellectual property claim is potentially covered by the advertising injury language used in the policy. These determinations generally turn on which advertising injury form is used in the policy.
The twin duties of defense and indemnity
Generally speaking, under standard CGL policies the insurer has two principal duties: the duty to defend its insured in the event of a lawsuit alleging claims that are potentially covered under the policy and the duty to indemnify the insured by paying policy proceeds in the event a judgment is entered against the insured for claims covered under the policy.
Courts have routinely held that an insurer's duty to defend a claim is broader than its duty to indemnify its insured for that claim and have required insurers to defend its insured against claims that potentially fall within the coverage provisions of the policy, even if coverage seems unlikely or remote. In fact, some courts have held that a duty to defend its insured in suits in which any claim is covered, even if other alleged claims are not, against groundless, false or fraudulent claims, and against certain claims which the insured could reasonably expect coverage; in other words, the bare possibility of coverage can be sufficient to require the insurer to defend its insured. Conversely, an insurer's duty to indemnify its insured is more narrowly drawn. The insurer is obligated to indemnify its insured only for damages that are actually covered by the policy and not subject to any exclusions.
Potentially covered "offenses" under advertising injury language
Depending on the scope of coverage afforded by the relevant policy language, courts have held that a wide variety of intellectual property claims constitute "offenses" that are potentially covered by the various iterations of the advertising injury language contained in many CGL policies, thereby triggering the insurer's duty to defend its insured against such claims. For example, claims of copyright, trademark and trade dress infringement, trade secret misappropriation and unfair competition have been held to be offenses that are potentially covered under the relevant policy.[2] However, the majority of courts that have addressed the issue hold that claims of patent infringement are not covered by the relevant advertising injury language because such claims typically do not involve "advertising" activity by the insured.[3] This issue is discussed in greater detail in the next section. Finally, most CGL policies require that the offense occur during the policy period.
The causation requirement
Assuming that a potentially covered "offense" is present, in order for coverage to exist the offense must be committed, depending on the language of the advertising injury coverage, "in the course of" or during an advertising activity or, under the terms of the 1998 form, in an "advertisement." Put another way, there must be a causal connection or relationship between the alleged advertising offense of the company and the alleged damage to the third party. The offense must actually occur in the process of advertising or, at a minimum, the advertising must directly cause the damage.
A simple example that satisfies this requirement is a situation where a company uses a photograph of a product to advertise the product on its web site or in its catalog and it turns out that the photograph is copyrighted and cannot be used without the permission of the copyright owner. In this situation, the photograph has been used without permission to advertise the company's product, thereby causing damage to the copyright owner and triggering a potential for coverage.
Common exclusions
The risk manager should be aware that most standard CGL policies contain several important exclusions that may bar coverage even if a claim appears to fall within the advertising injury portion of the policy. For example, most CGL policies exclude coverage for intentionally inflicted injuries, violations of criminal laws, punitive damages and offenses that occurred prior to the policy period. This list is by no means exhaustive and the policy should be carefully reviewed so that all potentially applicable exclusions can be evaluated.
Guidelines for Handling Minimizing the Risk Posed by Intellectual Property Claims:
Steps to Be Taken in the Event of a Claim
If the company is presented with a claim from a third party alleging some form of intellectual property infringement, whether the claim is made orally or in writing, the risk manager should take several actions immediately.
Review all applicable policies
All insurance policies should be reviewed, not just those few that the company believes may provide coverage. For example, the CGL policy that is the subject of the claim may have an "excess" or "umbrella" policy that provides broader coverage than the underlying CGL policy. Also, all language of the policies should be reviewed. Often the "fine print" of the policy provides broader coverage than initially believed.
Notify all possible insurers immediately
Most CGL policies contain written provisions that require the company to provide prompt, written notice to the insurer of any claims that may potentially be covered by the policy. Once all policies have been thoroughly reviewed, provide written notice of the claim to the insurer at the earliest opportunity. Specifically request that the insurance defend and indemnify the company against the claim. Prompt notice to the insurer is critical; it is the law in many jurisdictions that delay in notifying the insurer of a claim may allow the insurer to deny coverage under the policy if the insurer has been prejudiced by the delay. Finally, prudence dictates that notice be given to the insurer even if there is uncertainty as to whether the claim is covered under the policy.
Calendar relevant deadlines
Many CGL policies contain provisions that place time limits on notifying the insurer of a claim, suing the insurer for breach of the insurance policy or taking other action. Review the policy thoroughly and calendar all relevant deadlines to avoid forfeiting any rights under the policy. Consider asking the insurer to sign a "tolling" agreement that stops these deadlines from running so that the claim can be fully investigated and the insurer can make its coverage determination.
Keep accurate records
Immediately create a separate file for the claim so that all correspondence, e-mails, memoranda and other documents can be easily retrieved. Also include a complete copy of the insurance policies with important parts of the policy marked or highlighted for easy reference. Create a "contact" sheet that lists the names, addresses, telephone numbers and other contact information for the insurer, the claims adjuster if one is assigned, attorneys and other individuals involved in handling the claim. Finally, provide updates at regular intervals (e.g., every two weeks or 30 days) to the insurer regarding the claim, such as correspondence from the third party claimant or its attorney, service of a lawsuit and other significant developments.
Maintain adequate coverage
The company's insurance policies, including all CGL policies, should be evaluated at regular intervals to avoid uninsured gaps in coverage. These gaps can be caused through delays in securing renewal or replacement coverage leading to a "window" in which no policy is in effect, failure to report claims in a timely manner, changes in the policy renewal language regarding what must happen during the policy period and purchasing inadequate policy limits. Also, pay close attention to new endorsements or changes to an existing or renewed policy to avoid unintended deletion or reduction of coverage for intellectual property claims.
Retain copies of expired policies
Many intellectual property claims are "ongoing" in that the alleged infringing activity occurs over a period of time and is continuous in nature. For example, a company may have been displaying a copyrighted image or copyrighted text on its web site for several years before the company receives a claim. Because most CGL policies are in effect for one year periods, it is vital that the company retain policies even after they have expired so that when a claim is made, the company will be able to locate prior policies and tender the claim to all insurers that had policies in effect during the period of time the alleged infringement occurred. This is especially important because many companies do not stay with the same insurer for extended periods of time and frequently switch carriers to obtain a better premium rate.
Seek advice of counsel experienced in insurance coverage issues
Once an intellectual property claim has been made against the company, appropriate in-house or outside counsel should be consulted, even if a lawsuit has not yet been filed. This will enable counsel to fully examine coverage issues at the outset of the dispute and begin efforts to persuade the insurer to defend the action.
Consider purchasing broader insurance coverage for intellectual property claims
In recent years, in the wake of increased intellectual property litigation, a specialized market has developed to offer broader coverage for intellectual property claims than that provided in standard CGL policies. If the company relies to any significant extent on intellectual property to conduct its business (for example, if the company licenses and sells goods bearing the registered trademark of another company or individual), it probably faces a greater risk of drawing a claim or lawsuit for infringement of the intellectual property upon which it relies. In such a case, the company should consider purchasing specialty insurance that provides broader coverage than the coverage available in standard CGL policies.
Conclusion
To minimize the serious threat posed by a claim of intellectual property infringement, risk managers must take proactive steps to ensure that their company is protected to the greatest extent possible. The status and coverage provisions of the company's CGL policies, particularly the advertising injury language, must be regularly reviewed and modified to provide the broadest scope of coverage possible. Risk managers also must ensure that CGL policies are timely renewed to avoid gaps in coverage and should implement comprehensive written guidelines for handling claims that are made against the company for infringement of intellectual property rights. All CGL policies should be retained even after they expire since several years may pass before a claim of infringement is made.
Implementing and strictly adhering to these steps will minimize disruption to the company's business in the event of an intellectual property dispute and will position the company to get the most out of its insurance coverage in the event litigation ensues.
NOTES
[1] For purposes of this article, the term "intellectual property" loosely refers to copyrights, trademarks and service marks, trade dress, patents and trade secrets, as well as unfair competition claims that derive from the infringement on or misappropriation of any the foregoing.
[2] See American Economy Ins. Co. v. Reboans, Inc., 900 F. Supp. 1246 (N.D. Cal. 1994) (trademark infringement); Dogloo, Inc. v. Northern Ins. Co. of New York, 907 F. Supp. 1383, 1389 (C.D. Cal. 1995) (misappropriation of a product design, i.e. "trade dress"); Lebas Fashion Imports of USA, Inc. v. ITT Hartford Ins. Group, 50 Cal. App. 4th 548, 59 Cal. Rptr. 2d 36 (1996) (trademark infringement); Sentex Sys. Inc. v. Hartford Accident & Indemn. Co., 882 F. Supp. 930 (C.D. Cal. 1995), aff'd. 93 F.3d 578 (9th Cir. 1996) (misappropriation of trade secrets); Bank of the West v. Superior Court, 2 C. 4th 1254 (1992) (common law claim of unfair competition based on "palming off"). Copyright infringement is a listed offense under most CGL advertising injury forms, although the 2001 CGL form limits coverage to copyright infringement in the insured's advertisement, which appears intended to provide narrower coverage than earlier CGL forms.
[3] See Aetna Casualty & Surety Co. v. Superior Court, 19 Cal. App. 4th 320 (1993) (patent infringement not covered); Mez Indus., Inc. v. Pacific Nat'l Ins. Co., 76 Cal. App. 4th 856, 90 Cal. Rptr. 2d 721 (1999) (same result); Maxconn Inc. v. Truck Ins. Exchange, 74 Cal. App. 4th 1267, 88 Cal. Rptr. 2d 750 (1999) (same result).
Dan E. Chambers is an associate in Business Litigation with the law firm of Rutan & Tucker LLP in Costa Mesa, California. He can be reached at (714) 662-4645 or dchambers@rutan.com.