Hyundai Motor America v. National Union

Hyundai teaches a practical lesson: Policyholders should examine their CGL policies, and the allegations in complaints from pending patent litigation, to determine whether they indicate a plausible advertising injury. Hyundai provides one example of allegations that are sufficient to constitute advertising injuries in a state that defines the term narrowly.

Maximilian A. Grant is a partner and co-chair of the Latham & Watkins' Global Intellectual Property Litigation Practice Group. Christine G. Rolph is a partner and global co-chair of Latham & Watkins' Products Liability, Mass Torts and Consumer Class Action Practice Group. Clement J. Naples and Gregory K. Sobolski* are associates in the firm specializing in patent litigation. *Not licensed to practice law in DC; all work supervised by a member of the DC Bar.

Defendants in patent infringement actions have new reason to scrutinize their Commercial General Liability (“CGL”) insurance policies. On April 5, 2010, the Court of Appeals for the Ninth Circuit held that allegations of patent infringement involving a method of advertising constitute “advertising injury,” triggering an insurer's duty to defend a patent infringement suit. Hyundai Motor Am. v. Nat'l Union Fire Ins. Co. of Pittsburgh, PA, No. 08-56527 (9th Cir. Apr. 5, 2010). Hyundai is the first case to find under California state insurance law that patent infringement allegations constitute advertising injuries covered by a CGL policy. This decision may have significant implications for insurers and defendants in patent actions related to methods of advertising.

Background

Hyundai Motor America (“Hyundai”) operates a Web site with a “build your own” (“BYO”) vehicle feature. The BYO feature allows users to “build” a customized vehicle by selecting from various options, such as paint color, engine type, and GPS navigation. After building the vehicle, the user receives, among other things, images of the customized vehicle and pricing.

In 2005, Orion IP, LLC (“Orion”), a patent holding company with rights to two patents purportedly covering systems such as Hyundai's BYO feature, sued Hyundai and 19 other car companies for patent infringement in the U.S. District Court for the Eastern District of Texas. Orion IP LLC v. Mercedes-Benz USA LLC, No. 05-322 (E.D. Tex. filed Aug. 30, 2005). Orion alleged that the “methods practiced on [Hyundai's] websites,” and Hyundai's “marketing methods [and] marketing systems” infringed Orion's patents. The underlying marketing method and system was Hyundai's BYO feature.

Because Orion's infringement allegations were directed at Hyundai's “marketing” practices, Hyundai sought defense costs for the Orion suit from its insurers, National Union Fire Insurance Company and American Home Assurance Company (“Insurers”) under the “advertising injury” clauses in five of Hyundai's CGL policies, which had effective coverage dates ranging from 1997 to 2002. Hyundai's policies stated in relevant part:

COVERAGE B. PERSONAL AND ADVERTISING INJURY LIABILITY

1. Insuring Agreement

a. We [Defendants] will have the right and duty to defend the insured against any “suit” seeking those damages [caused by, among other things, "advertising injury"].

b. This insurance applies to: ' (2) “Advertising injury” caused by an offense committed in the course of advertising your goods, products or services '

SECTION V ' DEFINITIONS

1. “Advertising injury” means injury arising out of one or more of the following offenses:

'

c. Misappropriation of advertising ideas or style of doing business;

'

Notably, Hyundai's CGL policies did not contain an exclusion for patent infringement claims. Hyundai argued that the policy language triggered the Insurers' duty to defend because Orion's patent infringement allegations concerned the “misappropriation of advertising ideas.” The Insurers disagreed and refused to defend Hyundai in the suit. On May 29, 2007, a jury found that Hyundai willfully infringed one of Orion's patents and awarded $34 million in damages. Hyundai appealed to the Federal Circuit, which on May 17, 2010 reversed the lower court's denial of judgment as a matter of law on validity, and accordingly vacated the remainder of the lower court's judgment, including the damages award. Orion IP LLC v. Hyundai Motor Am., No. 2009-1130 (Fed. Cir. May 17, 2010).

Coverage Lawsuit

On Jan. 9, 2008, Hyundai filed an insurance coverage lawsuit against its Insurers in the U.S. District Court for the Central District of California, alleging that the Insurers had a duty to defend Hyundai in the Orion suit and seeking declaratory relief as well as reimbursement for Hyundai's $5 million defense costs (Hyundai did not seek to recover the $34 million verdict). Hyundai Motor Am. v. Nat'l Union Fire Ins. Co. of Pittsburgh, PA, No. 08-0020-JVS (C.D. Cal. filed Jan. 9, 2008). The Insurers moved for summary judgment on June 23, 2008, arguing that allegations of patent infringement did not constitute “advertising injury” under Hyundai's CGL policies, and, in the alternative, that Hyundai could not demonstrate a “causal connection between its advertising and Orion's alleged injury.” The district court agreed and dismissed the case after granting the Insurers' motion for summary judgment. Hyundai appealed the decision to the Court of Appeals for the Ninth Circuit. Hyundai Motor Am. v. Nat'l Union Fire Ins. Co., No. 08-56527 (9th Cir. Apr. 5, 2010) (B. Fletcher, Pregerson, and Graber, JJ.).

California law requires an insurer to defend any suit that potentially seeks damages within the policy's coverage. See Id. at 5200. The Ninth Circuit panel walked through the three-part test articulated by the California Supreme Court to determine if the Insurers had a duty to defend. The test requires that:

(1) [Hyundai] was engaged in “advertising” during the policy period when the alleged “advertising injury” occurred; (2) [Orion's] allegations created a potential for liability under one of the covered offenses (i.e., misappropriation of advertising ideas); and (3) a causal connection existed between the alleged injury and the “advertising.”

Id. at 5201-02 (quoting Hameid v. Nat'l Fire Ins. of Hartford, 71 P.3d 761, 764-65 (Cal. 2003)).

Is Hyundai's BYO Feature Advertising?

Under California law, the interpretation of “advertising” includes “'widespread promotional activities usually directed to the public at large,'” but not solicitation. See Id. at 5202 (quoting Hameid, 71 P.3d at 766). Though solicitation lacks a precise definition in the case law, California courts generally have understood solicitation to mean the targeting of a discreet and defined population, as opposed to an outreach to the general public. See Hameid, 71 P.3d at 766-69 (reviewing cases defining “solicitation”).

Hyundai argued that the BYO feature was advertising because it placed the feature on its Web site as a way of marketing its products to as wide an audience as possible. Hyundai argued that its Web site is widely accessible and generally targeted to the public-at-large, and that the BYO feature was part of its marketing and advertising efforts. Hyundai contended that such widespread efforts should not be considered the type of targeted activities sufficient to constitute solicitation. The Insurers argued that Hyundai's BYO feature was solicitation because the BYO feature created a custom proposal and a price tailored to an end-user's specifications.

The court agreed with Hyundai. While recognizing that the end result of a user's interaction with the BYO feature was a specialized proposal, the court found that the wide distribution of the BYO feature to the public at large was not limited or targeted such that it could be considered a solicitation. Hyundai Motor, No. 08-56527, slip op. at 5204. The court likened the BYO feature to a pre-Internet invention that a car company might include in a newspaper circulation:

[I]magine a more crude, paper-only version. The invention includes tabbed sliders and plastic overlays; the user chooses various options and follows directions to assemble the various physical parts. The resulting composite display shows the user's choices, along with pricing information displayed in a cut-out window. And imagine that Hyundai included one of these crude forms of the BYO feature as an insert in a general-circulation newspaper. It seems clear that this “invention” would constitute “advertising,” even though the individual newspaper readers might each select different options and arrive at entirely different final “displays.”

Id. at 5205.

May Misappropriation of Advertising Ideas Include Patent Infringement?

The court next addressed whether Orion's patent infringement claim was a “misappropriation of advertising ideas.” Guided again by California law, the court drew on a “contextual reasonableness” test to determine whether Orion's asserted patents “'involve any process or invention which could reasonably be considered an 'advertising idea.”” Id. at 5205-06 (quoting Mez Indus., Inc. v. Pac. Nat'l Ins. Co., 90 Cal. Rptr. 2d 721, 733 (Ct. App. 1999)).

Relying on Orion's complaint, Hyundai argued that Orion's infringement allegations were literally based on Hyundai's “marketing” activities. Orion had alleged that Hyundai's “marketing method” and “marketing system” were infringing Orion's patents. The court interpreted the allegation to mean that Orion believed it had patented a “process or invention which could reasonably be considered an advertising idea.” Id. at 5207.

The Insurers had two responses. First, they argued that misappropriation of advertising ideas must relate to the content of the challenged advertisement, meaning the “elements of the advertisement itself ' its text, form logo, or pictures ' rather than in the product being advertised.” Id. at 5207 (internal quotation omitted). The court made quick work of this argument, stating that the BYO feature was the advertisement, itself, as opposed to the underlying product being advertised (i.e., a Hyundai vehicle). Id.

Second, the Insurers argued that in a claim for misappropriation of advertising ideas, the source of the advertising idea must be a competitor, and Orion, a patent holding company, is not Hyundai's competitor. The Ninth Circuit responded that the language of Hyundai's insurance policies did not establish such a requirement. Id. at 5208.

Agreeing with Hyundai, the court held that Orion's patent infringement allegations created the potential for liability based upon a misappropriation of advertising ideas. Notably, Hyundai marks the first time a circuit court has expressly found a patent infringement claim to constitute a misappropriation of advertising ideas in the context of an “advertising injury” analysis. Distinguishing prior California state and Ninth Circuit decisions as having performed contextual analyses that did not preclude the possibility that patent infringement could be advertising injury, the Ninth Circuit panel found support for its decision in a Washington Court of Appeals decision, Amazon.com Int'l, Inc. v. Am. Dynasty Surplus Lines Ins. Co., 85 P.3d 974 (Wash. Ct. App. 2004), and held that patent infringement may constitute advertising injury where it is the advertising technique and/or its elements that are patented.

Causal Connection Between 'Advertising' and 'Advertising Injury'

Hyundai's final task was to causally link the advertisement (i.e., its BYO feature) to Orion's alleged patent infringement injury. The Hyundai court noted that previous California state and Ninth Circuit decisions had failed to find the requisite causal connection when the alleged link was based on the advertisement of an allegedly infringing product, as opposed to the advertisement, itself, constituting an infringement. The court added again, however, that courts in earlier decisions specifically recognized that a causal connection could exist where the patent covered the actual method of advertising and the injury to the patent owner flowed from the practice of that patented method. Hyundai Motor, No. 08-56527, slip op. at 5210.

According to the Ninth Circuit, the dispositive issue was whether the BYO advertising itself caused infringement of Orion's patented method. The court answered affirmatively, writing:

[T]he use of the BYO feature in the website is itself an infringement of the patent because it is the use of the BYO feature that violates the patent (and not the design of the car, for instance, or the method of manufacturing the car, or the car's engine, or anything related to the car for sale). Furthermore, and critically, it is that use that caused the injuries alleged by Orion. ' Accordingly, there is a direct causal connection between the advertisement (i.e., the use of the BYO feature on the website) and the advertising injury (i.e., the patent infringement).

Id. at 5212.

Having met the three requisite prongs, the Ninth Circuit held that, “in the context of the facts of this case, the third-party patent infringement claims constituted allegations of 'misappropriation of advertising ideas' for purposes of the insurance policy.” Id. at 5213. The court reversed the district court's grant of summary judgment and remanded with instruction to enter summary judgment for Hyundai on its duty to defend the claim. Id.

Implications and Practice Considerations

The Ninth Circuit removed any doubt that under California law a patent infringement claim can constitute advertising injury when the allegedly infringing product or method is the advertising itself, possibly triggering an insurer's duty to defend. Importantly, Hyundai involved California law, which defines “advertising” narrowly. Courts in other states have defined “advertising” more expansively to include targeted marketing to small groups or even certain forms of solicitation, relying on the rationale that the policy drafter (i.e., the insurance company) could have included a narrow definition of “advertising,” but did not. Accordingly, in such states, the non-drafting party should receive the benefit of a broad definition. Thus, courts applying the law of states with broader definitions of advertising will likely more often find coverage in these suits.

Hyundai teaches a practical lesson: Policyholders should examine their CGL policies, and the allegations in complaints from pending patent litigation, to determine whether they indicate a plausible advertising injury. Hyundai provides one example of allegations that are sufficient to constitute advertising injuries in a state that defines the term narrowly.

Maximilian A. Grant is a partner and co-chair of the Latham & Watkins' Global Intellectual Property Litigation Practice Group. Christine G. Rolph is a partner and global co-chair of Latham & Watkins' Products Liability, Mass Torts and Consumer Class Action Practice Group. Clement J. Naples and Gregory K. Sobolski* are associates in the firm specializing in patent litigation. *Not licensed to practice law in DC; all work supervised by a member of the DC Bar.