The IP Exclusion: The Elephant in the Room

GL coverage for trade secret misappropriation claims, sometimes considered IP claims, also has been litigated in many jurisdictions, with mixed results. Typically, such claims have focused on allegedly misappropriated marketing plans and/or customer lists. Courts have found that misappropriation of such information alone may not be sufficient to establish advertising injury coverage because the “causal nexus” between the advertising and the alleged injury is lacking. E.g., The Frog, Switch & Manufacturing Co. v. The Travelers Ins. Co., 193 F.3d 742 (3rd Cir. 1999). But the use of such information (e.g., reaching out to customers or market segments) may be sufficient. E.g., Sentex Systems, Inc. v. The Hartford Acc. & Indem. Co., 93 F.3d 578 (9th Cir. 1996). The IP exclusion has not much reared its head in
the trade secret coverage cases.

Patent Infringement Claims

Perhaps most interesting, the IP exclusion has not surfaced in any material way in the rapidly growing body of decisional law on GL coverage for patent infringement claims. Given the significant expense of defending patent cases, and the rules in many jurisdictions, including California, which require insurers to defend an entire case where even one potentially covered claim is asserted, patent defendants, the policyholder bar and insurers increasingly have focused on patent coverage. This interest also is fueled by the rapid and widespread deployment of developing technologies for advertising.

The harbinger of this trend probably was Amazon.com Int'l, Inc. v. American Dynasty Surplus Lines Ins. Co., 85 P.3d 974 (Wash.Ct.App. 2004), in which the court found that a GL advertising injury provision was triggered by allegations of infringement of a patented technique for sampling music. The court noted that “patent infringement may constitute advertising injury where an entity uses an advertising technique that is itself patented.” But the court did not mention an IP exclusion, a form of which likely existed on Amazon's coverage. Since Amazon.com, the Ninth and Tenth Circuits similarly have found that alleged infringement of patents on advertising technologies constitute advertising injury at least sufficient to trigger a GL insurer's duty to defend. Hyundai Motor America v. National Union Fire Ins. Co. of Pittsburgh, PA, 600 F.3d 1092 (9th Cir. 2010); DISH Network Corp. v. Arch Specialty Ins. Co., 659 F.3d 1010 (10th Cir. 2011). But these courts too did not construe or apply an IP exclusion. This may be explained in part by the fact that the coverage litigation proceeded at a relatively early stage of the underlying patent litigation and was focused on the duty to defend. Typically, where the facts of the underlying case have not been finally determined, and pleadings are fluid, it is more difficult for insurers to meet the high burdens of proof necessary to invoke exclusions. In any event, with the continued rise in “Non-Practicing Entity” fueled patent litigation, much of which is focused on the retail and consumer sectors, it is a safe bet that more cases involving advertising-related patents, and more coverage litigation regarding such cases, will follow.

Privacy Claims

Most current GL policy forms cover “personal and advertising injury” claims as described above. They also cover claims resulting from the “oral or written publication, in any manner, of material that violates a person's right of privacy.” Accordingly, many emerging varieties of privacy claims, including those based on security breaches and under laws such as the Electronic Communications Privacy Act, also may be covered by standard-form GL policies. Insurers may assert that such claims are within IP exclusions. But aside from a rash of decisions in various jurisdictions going both ways on whether claims under the Telephone Consumer Protection Act (TCPA ' so called “junk fax” cases) are covered under standard-form “personal injury” invasion of privacy provisions (compare Auto Owners Ins. Co. v. Websolv Computing, Inc., 580 F.3d 543 (7th Cir. 2009) and Valley Forge Ins. Co. v. Swiderski Electronics, Inc., 860 N.E.2d 307 (Ill. 2006)), decisions on those issues are (so far) few and far between, and decisions regarding application of IP exclusions to such claims are virtually nonexistent.

Defamation

It also bears mention that claims routinely made alongside patent, trademark, copyright, trade secret claims or other classic alleged IP claims ' such as defamation, trade libel and other forms of disparagement ' may trigger coverage under policy clauses covering “personal and advertising injury offense” or “oral or written publication, in any manner, of material that slanders or libels a person or organization or disparages a person's or organization's goods, products or services.” Such defamation allegations, if made, will trigger most GL coverage, and require that the insurer pay for defense. See, e.g., Atlantic Mut. Ins. Co. v. J. Lamb, Inc., 100 Cal.App.4th 1017 (2002) (patent case in which defendant allegedly falsely stated that plaintiff was improperly selling products subject to defendant's patent triggered personal injury coverage). And insurers will have a difficult, if not impossible task to establish that such defamation claims are IP claims subject to common exclusions.

'Right of Publicity' Claims

One of the few areas in which an IP exclusion actually has been applied, and recently was found to bar coverage, is in the context of “right of publicity” claims. Most policyholders have understood for years (if not decades) that a standard form GL policy's personal injury coverage for invasion of privacy extends to third-party claims for infringement of a person's likeness or right of publicity. In Aroa Marketing, Inc. v. Hartford Ins. Co. of the Midwest, 198 Cal.App.4th 781 (2011), California's Second District Court of Appeal confirmed this is the case under California law, as it is in other jurisdictions. However, the Aroa court went on to find that a Hartford policy exclusion for claims arising out of “any violation of any intellectual property rights such as copyright, patent, trademark, trade name, trade secret, service mark or other designation of origin or authenticity” barred coverage for a model's claim for unlawful use of her likeness. The court did so relying on Black's Law Dictionary, and a California case (Comedy III, involving the Three Stooges) which had expressly stated that the right of publicity “protects
a form of intellectual property.”

On the heels of Aroa, another California court recently came close to applying an IP exclusion, but stopped short. In Oglio Entertainment Group, Inc. v. Hartford Cas. Ins. Co., 200 Cal.App.4th 573 (2012), the music label Oglio was sued by an artist who recorded “lounge-style” versions of popular rock and hip hop songs under the stage name “Richard Cheese.” Cheese claimed, among other things, that Oglio had breached a recording contract and violated his rights of publicity. Oglio claimed that Cheese's allegations triggered personal and advertising injury coverage under a Hartford policy. Hartford denied coverage on the grounds that the policy did not cover the right of publicity, and that the right of publicity is an “intellectual property right,” which was specifically excluded by an IP exclusion. While the trial court ruled that a couple of exclusions, including the IP exclusion applied, the Court of Appeal did not assess or construe the IP exclusion, and ultimately determined that Cheese's allegations had never triggered the personal and advertising injury clauses of the policy.

Important Lessons

The Aroa decision, and to some extent the Oglio decision, have important lessons, not only for policyholders facing infringement of likeness/right of publicity litigation, but also for those potentially facing disputes over IP exclusions in the context of claims such as trademark, patent and invasions of privacy. First, Aroa and Oglio are applicable only to GL policies. Increasingly, policyholders are buying errors and omissions, cyberliability or other “claims made” and catastrophe policies which are specifically crafted to cover claims such as infringement of likeness/right of publicity and/or classes of classic IP claims. Aroa and Oglio should have little if any bearing on issues raised under such policies.

Second, Aroa confirms that at least under California law, IP exclusions still must be construed narrowly, and in the event of ambiguity, against the insurer and in favor of coverage. These standards generally are applicable in many other jurisdictions as well. Common forms of IP exclusion contain language, including descriptions of the IP claims themselves, that is ambiguous or unclear. And context matters. For example, a common phrase used in such exclusions, “arising out of” has been held to require a causal connection, and must be considered in the context of the underlying claims. To the extent the potentially covered advertising or personal injury activity does not “arise out of” the IP claim, the exclusion should not be applicable. In Oglio, the court suggested that had a slightly different, earlier form of Hartford “personal and advertising injury” coverage been at issue, the outcome might have been different.

Third, Aroa and Oglio confirm that coverage can be highly dependent on the format of the facts alleged in the underlying case. The court in Aroa suggested that, even though certain right of publicity claims are “intellectual property” claims, the outcome may have been different had the model's complaint alleged or referred to an injury to her feelings or peace of mind from the misappropriation of her image. While under the law of some states, coverage is determined solely based on the “8 corners” of the policy and underlying complaint, in other states including California, the insurer also must consider other information that the policyholder provides, and reasonable inferences that can be drawn from the underlying pleadings and court documents. Accordingly, policyholders should consider providing insurers with parts of document productions, testimony or expert reports that can even more clearly show the existence of potentially covered claims. Although sometimes complicated, the detailed protective orders often used in IP cases can successfully
be navigated with insurers.

Fourth and finally, timing and location can matter. Where a GL policy provides a duty to defend, it is generally advantageous to the policyholder to determine the applicability, vel non, of an IP exclusion early. In most jurisdictions, standards applicable to the duty to defend are much broader, and more easily satisfied than standards applicable to the duty to indemnify for a settlement or judgment. In some cases, it is possible that the law of more than one jurisdiction could apply to the insurance issues associated with an IP case. Policyholders should be cautious in taking positions as to applicable law, and should evaluate early the likelihood the insurer will take pre-emptive action in a jurisdiction of its choice.

The courts have given little direct guidance on whether and how IP exclusions on GL policies may apply to a great variety of claims. As the value and number of IP claims mount, time likely will tell how the courts will handle the IP exclusion elephant.

Martin Myers is a partner in the San Francisco office of Jones Day and is co-leader of Jones Day's Insurance Liability & Recovery Practice. He is nationally recognized for extensive experience in insurance recovery for technology-focused enterprises. For more information, e-mail [email protected] or go to www.jonesday.com/insurance_recovery.

So-called Intellectual Property (“IP”) exclusions in commercial general liability (“GL”) insurance policies have received relatively little attention from the courts. However, the ubiquity of new advertising technologies, recent appellate decisions confirming GL “personal and advertising injury” coverage for patent claims, and new claims that policyholders are facing for alleged electronic invasions of privacy may well turn the IP exclusion into the proverbial “elephant in the room.” Many courts have found GL coverage for a broad variety of IP claims. Even though a recent California Court of Appeal decision found that a form of IP exclusion barred coverage for certain “infringement of likeness” claims under a GL policy, that decision confirms that IP exclusions must be narrowly construed, are highly dependent on specific wording used, and will not routinely bar coverage in a broad variety of cases that insurance companies will argue are focused on or arise from IP claims. In other words, the denial of claims based upon the IP exclusion can be successfully challenged.

Advertising Injury Claims

Courts routinely have held that classic IP claims that involve the infringement or misappropriation of an advertisement, an “advertising idea” or technology involving advertising can trigger coverage under standard GL policy forms. Trademark and trade dress claims, primarily under the Lanham Act, have been perhaps the most heavily litigated of advertising injury IP claims. Since the landmark 1990s decisions in cases such as Lebas Fashion Imports v. ITT Hartford Ins. Group , 50 Cal.App.4th 548 (1996), and J.A. Brundage Plumbing & Roto-Rooter, Inc. v. Massachusetts Bay Ins. Co. , 818 F.Supp. 553 (W.D.N.Y. 1994), the vast majority of courts considering the issues have found coverage for trademark-related claims. After all, as many courts have noted, trademarks are “a species of advertising.” GL “advertising injury” coverage forms have continued to evolve and ostensibly to narrow, partially in response to court decisions finding coverage. A current form promulgated by the Insurance Services Office and licensed for use by many large insurers applies to “use of another's advertising idea in your advertisement,” and “infringing upon another's copyright, trade dress or slogan in your advertisement,” where “advertisement” is specifically defined, and includes web pages “about your goods, products or services for the purposes of attracting customers or supporters.”

GL coverage for trade secret misappropriation claims, sometimes considered IP claims, also has been litigated in many jurisdictions, with mixed results. Typically, such claims have focused on allegedly misappropriated marketing plans and/or customer lists. Courts have found that misappropriation of such information alone may not be sufficient to establish advertising injury coverage because the “causal nexus” between the advertising and the alleged injury is lacking. E.g. , The Frog, Switch & Manufacturing Co. v. The Travelers Ins. Co. , 193 F.3d 742 (3rd Cir. 1999). But the use of such information (e.g., reaching out to customers or market segments) may be sufficient. E.g. , Sentex Systems, Inc. v. The Hartford Acc. & Indem. Co. , 93 F.3d 578 (9th Cir. 1996). The IP exclusion has not much reared its head in
the trade secret coverage cases.

Patent Infringement Claims

Perhaps most interesting, the IP exclusion has not surfaced in any material way in the rapidly growing body of decisional law on GL coverage for patent infringement claims. Given the significant expense of defending patent cases, and the rules in many jurisdictions, including California, which require insurers to defend an entire case where even one potentially covered claim is asserted, patent defendants, the policyholder bar and insurers increasingly have focused on patent coverage. This interest also is fueled by the rapid and widespread deployment of developing technologies for advertising.

The harbinger of this trend probably was Amazon.com Int'l, Inc. v. American Dynasty Surplus Lines Ins. Co. , 85 P.3d 974 (Wash.Ct.App. 2004), in which the court found that a GL advertising injury provision was triggered by allegations of infringement of a patented technique for sampling music. The court noted that “patent infringement may constitute advertising injury where an entity uses an advertising technique that is itself patented.” But the court did not mention an IP exclusion, a form of which likely existed on Amazon's coverage. Since Amazon.com, the Ninth and Tenth Circuits similarly have found that alleged infringement of patents on advertising technologies constitute advertising injury at least sufficient to trigger a GL insurer's duty to defend. Hyundai Motor America v. National Union Fire Ins. Co. of Pittsburgh, PA , 600 F.3d 1092 (9th Cir. 2010); DISH Network Corp. v. Arch Specialty Ins. Co. , 659 F.3d 1010 (10th Cir. 2011). But these courts too did not construe or apply an IP exclusion. This may be explained in part by the fact that the coverage litigation proceeded at a relatively early stage of the underlying patent litigation and was focused on the duty to defend. Typically, where the facts of the underlying case have not been finally determined, and pleadings are fluid, it is more difficult for insurers to meet the high burdens of proof necessary to invoke exclusions. In any event, with the continued rise in “Non-Practicing Entity” fueled patent litigation, much of which is focused on the retail and consumer sectors, it is a safe bet that more cases involving advertising-related patents, and more coverage litigation regarding such cases, will follow.

Privacy Claims

Most current GL policy forms cover “personal and advertising injury” claims as described above. They also cover claims resulting from the “oral or written publication, in any manner, of material that violates a person's right of privacy.” Accordingly, many emerging varieties of privacy claims, including those based on security breaches and under laws such as the Electronic Communications Privacy Act, also may be covered by standard-form GL policies. Insurers may assert that such claims are within IP exclusions. But aside from a rash of decisions in various jurisdictions going both ways on whether claims under the Telephone Consumer Protection Act (TCPA ' so called “junk fax” cases) are covered under standard-form “personal injury” invasion of privacy provisions (compare Auto Owners Ins. Co. v. Websolv Computing, Inc. , 580 F.3d 543 (7th Cir. 2009) and Valley Forge Ins. Co. v. Swiderski Electronics, Inc. , 860 N.E.2d 307 (Ill. 2006)), decisions on those issues are (so far) few and far between, and decisions regarding application of IP exclusions to such claims are virtually nonexistent.

Defamation

It also bears mention that claims routinely made alongside patent, trademark, copyright, trade secret claims or other classic alleged IP claims ' such as defamation, trade libel and other forms of disparagement ' may trigger coverage under policy clauses covering “personal and advertising injury offense” or “oral or written publication, in any manner, of material that slanders or libels a person or organization or disparages a person's or organization's goods, products or services.” Such defamation allegations, if made, will trigger most GL coverage, and require that the insurer pay for defense. See, e.g. , Atlantic Mut. Ins. Co. v. J. Lamb, Inc. , 100 Cal.App.4th 1017 (2002) (patent case in which defendant allegedly falsely stated that plaintiff was improperly selling products subject to defendant's patent triggered personal injury coverage). And insurers will have a difficult, if not impossible task to establish that such defamation claims are IP claims subject to common exclusions.

'Right of Publicity' Claims

One of the few areas in which an IP exclusion actually has been applied, and recently was found to bar coverage, is in the context of “right of publicity” claims. Most policyholders have understood for years (if not decades) that a standard form GL policy's personal injury coverage for invasion of privacy extends to third-party claims for infringement of a person's likeness or right of publicity. In Aroa Marketing, Inc. v. Hartford Ins. Co. of the Midwest , 198 Cal.App.4th 781 (2011), California's Second District Court of Appeal confirmed this is the case under California law, as it is in other jurisdictions. However, the Aroa court went on to find that a Hartford policy exclusion for claims arising out of “any violation of any intellectual property rights such as copyright, patent, trademark, trade name, trade secret, service mark or other designation of origin or authenticity” barred coverage for a model's claim for unlawful use of her likeness. The court did so relying on Black's Law Dictionary, and a California case (Comedy III, involving the Three Stooges) which had expressly stated that the right of publicity “protects
a form of intellectual property.”

On the heels of Aroa, another California court recently came close to applying an IP exclusion, but stopped short. In Oglio Entertainment Group, Inc. v. Hartford Cas. Ins. Co. , 200 Cal.App.4th 573 (2012), the music label Oglio was sued by an artist who recorded “lounge-style” versions of popular rock and hip hop songs under the stage name “Richard Cheese.” Cheese claimed, among other things, that Oglio had breached a recording contract and violated his rights of publicity. Oglio claimed that Cheese's allegations triggered personal and advertising injury coverage under a Hartford policy. Hartford denied coverage on the grounds that the policy did not cover the right of publicity, and that the right of publicity is an “intellectual property right,” which was specifically excluded by an IP exclusion. While the trial court ruled that a couple of exclusions, including the IP exclusion applied, the Court of Appeal did not assess or construe the IP exclusion, and ultimately determined that Cheese's allegations had never triggered the personal and advertising injury clauses of the policy.

Important Lessons

The Aroa decision, and to some extent the Oglio decision, have important lessons, not only for policyholders facing infringement of likeness/right of publicity litigation, but also for those potentially facing disputes over IP exclusions in the context of claims such as trademark, patent and invasions of privacy. First, Aroa and Oglio are applicable only to GL policies. Increasingly, policyholders are buying errors and omissions, cyberliability or other “claims made” and catastrophe policies which are specifically crafted to cover claims such as infringement of likeness/right of publicity and/or classes of classic IP claims. Aroa and Oglio should have little if any bearing on issues raised under such policies.

Second, Aroa confirms that at least under California law, IP exclusions still must be construed narrowly, and in the event of ambiguity, against the insurer and in favor of coverage. These standards generally are applicable in many other jurisdictions as well. Common forms of IP exclusion contain language, including descriptions of the IP claims themselves, that is ambiguous or unclear. And context matters. For example, a common phrase used in such exclusions, “arising out of” has been held to require a causal connection, and must be considered in the context of the underlying claims. To the extent the potentially covered advertising or personal injury activity does not “arise out of” the IP claim, the exclusion should not be applicable. In Oglio, the court suggested that had a slightly different, earlier form of Hartford “personal and advertising injury” coverage been at issue, the outcome might have been different.

Third, Aroa and Oglio confirm that coverage can be highly dependent on the format of the facts alleged in the underlying case. The court in Aroa suggested that, even though certain right of publicity claims are “intellectual property” claims, the outcome may have been different had the model's complaint alleged or referred to an injury to her feelings or peace of mind from the misappropriation of her image. While under the law of some states, coverage is determined solely based on the “8 corners” of the policy and underlying complaint, in other states including California, the insurer also must consider other information that the policyholder provides, and reasonable inferences that can be drawn from the underlying pleadings and court documents. Accordingly, policyholders should consider providing insurers with parts of document productions, testimony or expert reports that can even more clearly show the existence of potentially covered claims. Although sometimes complicated, the detailed protective orders often used in IP cases can successfully
be navigated with insurers.

Fourth and finally, timing and location can matter. Where a GL policy provides a duty to defend, it is generally advantageous to the policyholder to determine the applicability, vel non, of an IP exclusion early. In most jurisdictions, standards applicable to the duty to defend are much broader, and more easily satisfied than standards applicable to the duty to indemnify for a settlement or judgment. In some cases, it is possible that the law of more than one jurisdiction could apply to the insurance issues associated with an IP case. Policyholders should be cautious in taking positions as to applicable law, and should evaluate early the likelihood the insurer will take pre-emptive action in a jurisdiction of its choice.

The courts have given little direct guidance on whether and how IP exclusions on GL policies may apply to a great variety of claims. As the value and number of IP claims mount, time likely will tell how the courts will handle the IP exclusion elephant.

Martin Myers is a partner in the San Francisco office of Jones Day and is co-leader of Jones Day's Insurance Liability & Recovery Practice. He is nationally recognized for extensive experience in insurance recovery for technology-focused enterprises. For more information, e-mail [email protected] or go to www.jonesday.com/insurance_recovery.