Insurance Coverage In Trademark Disputes

Fendi's suit, which commenced in 2006, concluded in 2013 with entry of a judgment of treble Ashley Reed's profits of nearly $30 million. Another Fendi suit involved Ashley Reed customers, Burlington Coat Factory and Cohoes (collectively BCF), who brought indemnity claims against Ashley Reed. That case resulted in an additional judgment of nearly $250,000 in favor of these retailers against Ashley Reed for profits they paid in settling with Fendi, as well as attorney fees and costs.

Under three liability insurance policies for “advertising injury,” Ashley Reed sought indemnification from its insurance carrier for these judgments. The insurance company then filed a declaratory judgment action against both Ashley Reed and Fendi seeking a declaration of no coverage; Ashley Reed and Fendi counterclaimed for coverage. (Burlington Coat Factory intervened as a party defendant on the same grounds.)

The district court granted summary judgment to the insurer, finding no coverage for any claim.

Legal Principles and Practices

The Ashley Reed decision implicates several principles of both insurance and trademark law and practice.

Insurance Forms and Language. Most businesses carry a commercial general liability (CGL) policy. The coverage language used is standard across the insurance industry, and is drafted by a central organization, the Insurance Services Office (ISO). While the ISO form is used by many insurance companies, that form has itself been updated several times, notably in 1986 and 1998.

The portion that is frequently fought over in trademark-related insurance cases concerns coverage for “advertising injury.” The 1998 ISO form, which was before the Ashley Reed court, defines advertising injury as:

a) oral or written publication of material that slanders or libels a person or organization or disparages a person's or organization's goods, products or services;

b) oral or written publication of material that violates a person's right of privacy;

c) the use of another's advertising idea in your “advertising”; or

d) infringing upon another's copyright, trade dress or slogan in your “advertising.”

Sub-part (c) was asserted by Ashley Reed and Fendi as providing coverage, a trademark assertedly being an “advertising idea.” (The insurance company did not dispute this point.) That sub-part, notably, contains the limitation “in your advertising.” That limitation was added by the ISO in 1998, and proved to be crucial to the decision.

Duty to Defend vs. Duty to Indemnify. Insurance policies generally include both coverage for legal costs to defend against suits within the policy coverage (duty to defend), and coverage for damages payments that may be entered against the insured (duty to indemnify). It is commonplace law that the duty to defend is generally broader than the duty to indemnify in both scope and interpretation. More importantly, in most jurisdictions, whether there is a duty to defend is determined solely by the allegations of the complaint, which are read liberally to determine if they even possibly implicate coverage. Most reported cases are duty-to-defend type cases, and unsurprisingly, coverage is often found.

Ashley Reed was different because the defendants were seeking indemnification for a judgment entered after a full-blown determination on the merits. In such a situation, the law requires the court to scrutinize the basis of the award against the insured to determine if it was within the scope of coverage.

Trademark Remedies. The third legal area involved in the decision is trademark remedies. Trademark owners rarely seek their own damages, because they are very difficult to prove. Instead, trademark owners generally seek disgorgement of the defendant's profits.

Some courts have required a showing of willful infringement before they will even allow consideration of a profits award. The U.S. Court of Appeals for the Second Circuit so held in George Basch v. Blue Coral, 968 F. 2d 1532 (2d Cir. 1992). Other courts, notably the U.S. Court of Appeals for the Third Circuit in Banjo Buddies v. Renosky, 399 F.3d 168 (3d Cir. 2005), have held the George Basch holding was superseded by a 1999 amendment to the statute. District courts in the Second Circuit are divided about whether George Basch is still good law.

The Trademark Act also contains two special monetary remedies for counterfeiting cases. Section 1117(b) provides for mandatory treble damages or treble profits where the counterfeits were sold either knowingly or with willful blindness. Section 1117(c) allows for election of statutory damages, up to $200,000 “per counterfeit mark per type of goods or services,” going up to $2 million for “willful” infringement.

Ashley Reed Decision

The intersection of these three legal areas resulted in the denial of coverage. First, the district court noted that the basis for Ashley Reed's liability was the sale ' not advertising ' of counterfeit goods. Ashley Reed conceded in its papers that the sales by it and Burlington Coat Factory were the basis for finding violations of the Trademark Act. Furthermore, the Fendi complaints contained no allegations concerning advertising (which is somewhat unusual in trademark cases). Finally, the monetary awards were based on profits made on sales of counterfeit Fendi goods ' not from any advertising.

Defendants argued, however, based on prior cases (which, notably were duty-to-defend cases), that since all trademark infringement involves misidentification of the source of goods, that perforce always involves advertising. In rejecting that argument, the district court noted the insurance policy language restricting coverage to liability that arises from use of an advertising idea “in your advertising.” Ashley Reed's interpretation would render that limitation meaningless. Thus, using a counterfeit trademark in the sale of goods is not use “in your advertising.”

Open Questions

After the Ashley Reed decision, it appears that obtaining insurance coverage for awards in trademark cases will be more difficult. Furthermore, there were additional issues the decision raised which were not resolved.

The insurer raised two additional arguments against coverage, which the Ashley Reed court declined to reach. First, it argued, since the counterfeiting defendants had been found to be knowing counterfeiters (which led to the mandatory trebling of profits under Section 1117(b)), a policy exclusion for publications of materials “done by or at the direction of the insured with knowledge of its falsity” applied. Second, the insurer argued that the policy's promise to pay “as damages because of ' 'advertising injury'” did not encompass an award of profits. The district court declined to reach either argument.

Two other arguments were implicated by the case. Although not directly argued in Ashley Reed, an award of treble profits in a trademark counterfeiting case constitutes a form of punitive damages, which implicates the ex post facto clause. See, Louis Vuitton v. Spencer Handbags, 765 F.2d 966, 971 (2d Cir. 1985). It has long been the law in many jurisdictions that there is no insurance coverage for punitive damages. See, e.g., Soto v. State Farm, 83 N.Y.2d 718, 722 (1994).

Another, more subtle argument that the Ashley Reed court did not have to deal with concerns liability versus remedies. In examining the underlying award, that court noted three things: a) Fendi's complaint did not allege infringement through advertising; b) the basis for liability was sales of counterfeit Fendi items, not their advertising; and c) the basis of the treble profits award was profits gained from sales, not advertising.

The latter two factors highlight another open issue: Does the “advertising injury” have to be the causative factor of the finding of liability or of the monetary remedy imposed? While this distinction makes little difference in most cases, it looms large in trademark cases.

Strategy

Most trademark practitioners include allegations of infringement through advertising in their complaint, since most defendants do engage in advertising using the mark at issue, and advertising is a recognized form of infringement. If the defendant has a CGL policy, that will often trigger a duty to defend, and insurance counsel will become involved. That can be advantageous to the trademark owner ' it is often easier to deal with counsel, and insurance companies may be willing to contribute to settlement to end litigation.

On the other hand, trademark owners should be aware that, in a “big case” that they expect to take to trial and seek large awards, there is a strong chance that the insurer will not have to cover any award. Many of the “big cases” involve blatantly willful infringers, whose bad faith looms large as a reason for an award. Conversely, however, bad faith makes insurance coverage less likely. So trademark owners should not expect an insurance policy to make good on large awards in trademark cases.

Fendi's experience is illustrative of the mixed results that can be expected. It engaged in over six years of litigation against what it (and other luxury brands) considered a major thorn in its side. It ended up with a judgment of over $30 million against the counterfeiters. That amount now appears to be uncollectible from either Ashley Reed and its principals, or their insurance carrier. A party like Fendi will still have strong reasons to pursue a major counterfeiter, but expectations of actual payment of a large damages award should not be one of them.

Milton Springut is a partner at Springut Law. Tal S. Benschar , a partner at the firm, assisted in the preparation of this article. Note: The authors were counsel for Gucci in two cases involving Ashley Reed. The Gucci cases are unconnected to the insurance case that is the subject of this article. This article originally appeared in the New York Law Journal, an ALM sibling publication of The Intellectual Property Strategist.

On Aug. 20, 2014, summary judgment was granted to the plaintiff insurance company, upholding its denial of coverage to indemnify judgments in two trademark counterfeiting cases. United States Fidelity & Guarantee v. Ashley Reed Trading, 'F. Supp. 2d', 2014 WL 4160218 (SDNY). The opinion provides insight to trademark practitioners about insurance coverage and provides information about strategies for trademark owners' enforcement efforts.

The Facts

Ashley Reed Trading and its principals, Scott and James Ressler, are well-known to the trademark counterfeiting bar. They have been sued by a number of trademark owners for counterfeiting activities (including Gucci, Tommy Hilfiger, Polo, and Fendi). The United States also sued them in a civil action for unlawful importation of counterfeit goods, and James Ressler was a defendant in two criminal cases brought in the Northern District of Georgia related to the importation of counterfeit goods, eventually pleading guilty to the charges in one of them.

Fendi's suit, which commenced in 2006, concluded in 2013 with entry of a judgment of treble Ashley Reed's profits of nearly $30 million. Another Fendi suit involved Ashley Reed customers, Burlington Coat Factory and Cohoes (collectively BCF), who brought indemnity claims against Ashley Reed. That case resulted in an additional judgment of nearly $250,000 in favor of these retailers against Ashley Reed for profits they paid in settling with Fendi, as well as attorney fees and costs.

Under three liability insurance policies for “advertising injury,” Ashley Reed sought indemnification from its insurance carrier for these judgments. The insurance company then filed a declaratory judgment action against both Ashley Reed and Fendi seeking a declaration of no coverage; Ashley Reed and Fendi counterclaimed for coverage. (Burlington Coat Factory intervened as a party defendant on the same grounds.)

The district court granted summary judgment to the insurer, finding no coverage for any claim.

Legal Principles and Practices

The Ashley Reed decision implicates several principles of both insurance and trademark law and practice.

Insurance Forms and Language. Most businesses carry a commercial general liability (CGL) policy. The coverage language used is standard across the insurance industry, and is drafted by a central organization, the Insurance Services Office (ISO). While the ISO form is used by many insurance companies, that form has itself been updated several times, notably in 1986 and 1998.

The portion that is frequently fought over in trademark-related insurance cases concerns coverage for “advertising injury.” The 1998 ISO form, which was before the Ashley Reed court, defines advertising injury as:

a) oral or written publication of material that slanders or libels a person or organization or disparages a person's or organization's goods, products or services;

b) oral or written publication of material that violates a person's right of privacy;

c) the use of another's advertising idea in your “advertising”; or

d) infringing upon another's copyright, trade dress or slogan in your “advertising.”

Sub-part (c) was asserted by Ashley Reed and Fendi as providing coverage, a trademark assertedly being an “advertising idea.” (The insurance company did not dispute this point.) That sub-part, notably, contains the limitation “in your advertising.” That limitation was added by the ISO in 1998, and proved to be crucial to the decision.

Duty to Defend vs. Duty to Indemnify. Insurance policies generally include both coverage for legal costs to defend against suits within the policy coverage (duty to defend), and coverage for damages payments that may be entered against the insured (duty to indemnify). It is commonplace law that the duty to defend is generally broader than the duty to indemnify in both scope and interpretation. More importantly, in most jurisdictions, whether there is a duty to defend is determined solely by the allegations of the complaint, which are read liberally to determine if they even possibly implicate coverage. Most reported cases are duty-to-defend type cases, and unsurprisingly, coverage is often found.

Ashley Reed was different because the defendants were seeking indemnification for a judgment entered after a full-blown determination on the merits. In such a situation, the law requires the court to scrutinize the basis of the award against the insured to determine if it was within the scope of coverage.

Trademark Remedies. The third legal area involved in the decision is trademark remedies. Trademark owners rarely seek their own damages, because they are very difficult to prove. Instead, trademark owners generally seek disgorgement of the defendant's profits.

Some courts have required a showing of willful infringement before they will even allow consideration of a profits award. The U.S. Court of Appeals for the Second Circuit so held in George Basch v. Blue Coral, 968 F. 2d 1532 (2d Cir. 1992). Other courts, notably the U.S. Court of Appeals for the Third Circuit in Banjo Buddies v. Renosky, 399 F.3d 168 (3d Cir. 2005), have held the George Basch holding was superseded by a 1999 amendment to the statute. District courts in the Second Circuit are divided about whether George Basch is still good law.

The Trademark Act also contains two special monetary remedies for counterfeiting cases. Section 1117(b) provides for mandatory treble damages or treble profits where the counterfeits were sold either knowingly or with willful blindness. Section 1117(c) allows for election of statutory damages, up to $200,000 “per counterfeit mark per type of goods or services,” going up to $2 million for “willful” infringement.

Ashley Reed Decision

The intersection of these three legal areas resulted in the denial of coverage. First, the district court noted that the basis for Ashley Reed's liability was the sale ' not advertising ' of counterfeit goods. Ashley Reed conceded in its papers that the sales by it and Burlington Coat Factory were the basis for finding violations of the Trademark Act. Furthermore, the Fendi complaints contained no allegations concerning advertising (which is somewhat unusual in trademark cases). Finally, the monetary awards were based on profits made on sales of counterfeit Fendi goods ' not from any advertising.

Defendants argued, however, based on prior cases (which, notably were duty-to-defend cases), that since all trademark infringement involves misidentification of the source of goods, that perforce always involves advertising. In rejecting that argument, the district court noted the insurance policy language restricting coverage to liability that arises from use of an advertising idea “in your advertising.” Ashley Reed's interpretation would render that limitation meaningless. Thus, using a counterfeit trademark in the sale of goods is not use “in your advertising.”

Open Questions

After the Ashley Reed decision, it appears that obtaining insurance coverage for awards in trademark cases will be more difficult. Furthermore, there were additional issues the decision raised which were not resolved.

The insurer raised two additional arguments against coverage, which the Ashley Reed court declined to reach. First, it argued, since the counterfeiting defendants had been found to be knowing counterfeiters (which led to the mandatory trebling of profits under Section 1117(b)), a policy exclusion for publications of materials “done by or at the direction of the insured with knowledge of its falsity” applied. Second, the insurer argued that the policy's promise to pay “as damages because of ' 'advertising injury'” did not encompass an award of profits. The district court declined to reach either argument.

Two other arguments were implicated by the case. Although not directly argued in Ashley Reed, an award of treble profits in a trademark counterfeiting case constitutes a form of punitive damages, which implicates the ex post facto clause. See, Louis Vuitton v. Spencer Handbags, 765 F.2d 966, 971 (2d Cir. 1985). It has long been the law in many jurisdictions that there is no insurance coverage for punitive damages. See, e.g., Soto v. State Farm, 83 N.Y.2d 718, 722 (1994).

Another, more subtle argument that the Ashley Reed court did not have to deal with concerns liability versus remedies. In examining the underlying award, that court noted three things: a) Fendi's complaint did not allege infringement through advertising; b) the basis for liability was sales of counterfeit Fendi items, not their advertising; and c) the basis of the treble profits award was profits gained from sales, not advertising.

The latter two factors highlight another open issue: Does the “advertising injury” have to be the causative factor of the finding of liability or of the monetary remedy imposed? While this distinction makes little difference in most cases, it looms large in trademark cases.

Strategy

Most trademark practitioners include allegations of infringement through advertising in their complaint, since most defendants do engage in advertising using the mark at issue, and advertising is a recognized form of infringement. If the defendant has a CGL policy, that will often trigger a duty to defend, and insurance counsel will become involved. That can be advantageous to the trademark owner ' it is often easier to deal with counsel, and insurance companies may be willing to contribute to settlement to end litigation.

On the other hand, trademark owners should be aware that, in a “big case” that they expect to take to trial and seek large awards, there is a strong chance that the insurer will not have to cover any award. Many of the “big cases” involve blatantly willful infringers, whose bad faith looms large as a reason for an award. Conversely, however, bad faith makes insurance coverage less likely. So trademark owners should not expect an insurance policy to make good on large awards in trademark cases.

Fendi's experience is illustrative of the mixed results that can be expected. It engaged in over six years of litigation against what it (and other luxury brands) considered a major thorn in its side. It ended up with a judgment of over $30 million against the counterfeiters. That amount now appears to be uncollectible from either Ashley Reed and its principals, or their insurance carrier. A party like Fendi will still have strong reasons to pursue a major counterfeiter, but expectations of actual payment of a large damages award should not be one of them.

Milton Springut is a partner at Springut Law. Tal S. Benschar , a partner at the firm, assisted in the preparation of this article. Note: The authors were counsel for Gucci in two cases involving Ashley Reed. The Gucci cases are unconnected to the insurance case that is the subject of this article. This article originally appeared in the New York Law Journal, an ALM sibling publication of The Intellectual Property Strategist.