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to Tort & Insurance Law Journal
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INTELLECTUAL PROPERTY LAW AND INSURANCE:
RECENT DEVELOPMENTS
This article discusses recent federal and state case law developments in the area of
insurance coverage of intellectual property claims. By necessity the article discusses
cases that do not actually involve intellectual property but nevertheless will affect
resolution of coverage disputes in intellectual property litigation.
Perhaps the most highly publicized, if not the most important, insurance case in the
intellectual property arena to be decided in the last year is Bank of the West v. Superior
Court.1 This case, which expressly limits its focus to indemnity issues, may signal an end
to the comparatively liberal "California approach" to insurance policy interpretation in
intellectual property cases. This approach, dating back to CNA Casualty of California
v. Seaboard Surety Co.,2 usually finds that only a minimal causal connection is required
between "advertising" and resulting "injury" and that the various listed offenses which
constitute "advertising injury" are ambiguous. The ambiguous term is automatically
construed against the insurer,3 resulting in coverage for the insured.
The case underlying the coverage dispute involved a program developed by Bank
of the West to allow consumers to finance automobile insurance premiums through
installment payments. The bank did not advertise the program direcdy to consum
ers. Rather, the bank informed insurance agents of the program, promising to pay
commissions to agents who procured customers for the bank. When a consumer
requested an installment plan, the agent would ask for a down payment of 20%
316
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Intellectual Property Law 317
to 30%, obtain the consumer's power of attorney, and apply for a loan in the
customer's name. The customer eventually received notice from the Bank of the
loan's acceptance and its terms; but until receipt of such notice, many consumers
were unaware that a loan had been made or what the terms were, which included
substantial interest and penalties.
A consumer class action alleging violations of California's Unfair Business Prac
tices Act4 followed. The class action was eventually setded by the bank for $ 500,000
and a promise to change the program. The bank turned to its CGL carrier, Industrial
Indemnity Company, claiming that the setdement of the litigation constituted
"damages" for "unfair competition" that had occurred in the course of the bank's
"advertising activities." The California Supreme Court, following its earlier decision
in Chern v. Bank of America,5 held that the Unfair Business Practices Act does not
permit recovery of damages, but only injunctive and restitutionary relief, and that
there was therefore no coverage because the class action complaint did not seek
"damages" for "unfair competition," as required by the policy.
The problem came down to interpretation of certain terms in the policy. The
supreme court acknowledged that while the term "unfair competition" in the
abstract might be ambiguous, the term must be construed in the context of the
particular policy at issue.6 It held that in the context of an insurance policy which
provides for indemnification of damages caused by "unfair competition," that term
could not possibly include the Unfair Business Practices Act, because that act does
not provide for recovery of damages.7 The court stated:
If contractual language is clear and explicit, it governs. On the other hand, "[i]f the
terms of a promise are in any respect ambiguous or uncertain, it must be interpreted
in the sense in which the promisor believed, at the time of making it, that the promisee
understood it." This rule, as applied to a promise of coverage in an insurance policy,
protects not the subjective beliefs of the insurer but, rather, "the objectively reasonable
expectations of the insured." Only if this rule does not resolve the ambiguity do we
then resolve it against the insurer.8
Following this principle, the court found that the term "unfair competition," as
used in the policy, unambiguously referred to the common law tort of unfair
competition (which is limited, the court explained, to "palming off'). Because the
complaint did not allege, and could not be amended to allege, "palming off," it
upheld denial of indemnity.9
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318 Tort & Insurance Law Journal, Volume XXIX, Number 2, Winter 1994
The court also affirmed the insurance company's denial of coverage on the
alternative ground that the alleged damages did not have a sufficient causal connec
tion to the bank's "advertising activities." The court emphasized the fact that while
the alleged damages were suffered by consumers, the program, to the extent that
it was advertised at all, was advertised only to insurance agents. Even though the
bank's advertisements to the agents resulted in inadequately disclosed loans being
made to consumers, the court found the causal connection so remote as to constitute
no connection at all.10 The court concluded that the requirement of a causal connec
tion between an "advertising injury" and the policyholder's "advertising activities"
"best articulates the insured's objectively reasonable expectations about the scope
of coverage," and affirmed denial of coverage on this alternative theory as well.11
As mentioned above, this decision appears to depart markedly from the way in
which California courts previously interpreted arguably ambiguous language in insur
ance policies. Just how substantial a departure remains to be seen. Although some
commentators have argued that Bank of the West's influence will be limited to cases
alleging only claims of violation of the California Unfair Business Practices Act, there
are already indications that the case's narrow rule of construction and causation re
quirement will extend to intellectual property cases generally in California, and per
haps elsewhere.12 However, a number of courts have found that a duty of defense
arose from similar policies in a range of cases decided after the California Supreme
Court's ruling in Bank of the West, as discussed infra. The only fair conclusion to be
drawn from the decision is that the law in California is in a state of flux.
In this case the California Supreme Court clarified several critical propositions of
insurance coverage law as they apply to the determination of a duty of defense
following its decision in Bank of the West. The underlying case involved a minor's
claim seeking damages as a result of her junior high school teacher's sexual and
other misconduct. In a separate criminal proceeding, the teacher had pleaded nolo
Unfair Business Practices Act, a person found to have violated the act would simply shift the loss to
his insurer and, in effect, retain the proceeds of his unlawful conduct. Such a result would be inconsistent
with the act's deterrent purpose." 10 Cal. Rptr. 2d at 546, 833 P.2d at 553.
10. 10 Cal. Rptr. 2d at 551, 83 3 P.2d at 558.
11. 10 Cal. Rptr. 2d at 552, 83 3 P.2d at 559. In affirming denial of coverage, the court claimed
to be adhering to the fundamental axiom that the "goal of contractual interpretation is to give effect
to the mutual intention of the parties." 10 Cal. Rptr. 2d at 545, 83 3 P.2d at 552 (citing Cal. Civ.
Code ? 1638). While the court's eminendy reasonable and logical arguments might have been among
the objectively reasonable expectations of the average business lawyer, there is no discussion of how such
an intricate analysis might have entered the consciousness of the average consumer buying the subject
insurance.
12. See, e.g., Standard Fire Ins. Co. v. People's Church of Fresno, 985 F.2d 446 (9th Cir. 1993);
Chatton v. National Union Fire Ins. Co., 13 Cal. Rptr. 2d 318, 1991 Cal. App. LEXIS 1267 (Cal.
Ct. App. 1992).
13. 17 Cal. Rptr. 2d 210, 846 P.2d 792 (Cal. 1993).
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Intellectual Property Law 319
As of the time of the summary adjudication proceedings, there remained unresolved factual
disputes concerning [the teacher's] conduct apart from his molestation of Barbara. . . .
Although lacking in specificity, the complaint evinced a possibility that [the teacher] would
be hdd liable for damages within the coverage of the policy stemming from [the teacher's]
negligent nonsexual conduct in his public rdationship with Barbara.14
In reaching its conclusion, the court reaffirmed the principles governing the duty
to defend. First, facts extrinsic to the complaint may give rise to a duty to defend
when they reveal the possibility that the claim may be covered by the policy.15
Second, any doubt whether the facts give rise to a duty to defend are resolved in
the policyholder's favor.16 Third, the court does not look to whether non-covered
acts or claims predominate in the third party's action, but rather to whether there
is any potential for liability under the policy. Fourth, an insurer has a duty to defend
the entire third-party action if any claim encompassed within it potentially may be
covered until the insurer produces undeniable evidence supporting an allocation of
a specific portion of the defense costs to a non-covered claim. Fifth, the insurer's
duty to defend includes the obligation to defend the insured against groundless, false
or fraudulent claims. Sixth, no public policy forbids the defense of claims alleging
intentional acts because a contract to defend a policyholder upon mere accusation
of a willful act does not encourage such willful conduct.
Horace Mann stands out as a resounding reaffirmation of the protective holdings
of Gray v. Zurich Insurance Co.}1 notwithstanding a possible trend toward restricting
coverage and cutting back on the protection of policyholders for which the Califor
nia courts have justifiably gained a reputation.
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320 Tort & Insurance Law Journal, Volume XXIX, Number 2, Winter 1994
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Intellectual Property Law 321
In this case, which also arose after announcement of the decision in Bank of the
West, summary judgment was granted sua sponte by the district court in favor of
the insured, finding that the insurer owed a duty of defense in an action alleging
patent infringement. The court also found that inducement of patent infringement24
on the facts before it occurred "in the course of advertising activities, and that,
therefore, the allegations of the complaint triggered a duty of defense under the
policy.
F. St. Paul Fire & Marine Insurance Co. v. Advanced Interventional Systems26
In this federal declaratory relief action Judge Ellis of the Eastern District of Virginia
denied that a duty of defense or indemnity was owed for an underlying claim of
direct infringement or inducement of patent infringement. Applying California law
(which differed markedly in several key aspects from the law of Virginia) under
normal choice of law principles, the court found that patent infringement did not
potentially fall within any of the offenses listed under the definition of advertising
injury. The court rejected the argument, made in the Del Astra case, that patent
infringement arguably was included in the term "misappropriation of style of doing
business," reasoning that this referred to a company's comprehensive manner of
doing business and was essentially the same thing as infringement of trade dress.
The court distinguished the Omnitel decision because here the policy did not contain
the key terms "piracy" and "unfair competition."
On the claim of direct patent infringement, the court denied coverage on the
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322 Tort & Insurance Law Journal, Volume XXIX, Number 2, Winter 1994
ground that there was no connection between the harm alleged and the insured's
advertising activities. Relying on Bank of the West, the court held that there was no
causal connection if the infringement claim is based on the sale of the product rather
than the advertisement itself. As to the claim of inducement of infringement,
however, the court found that "this claim does clear one of the hurdles, because
any successful claim premised on this theory would certainly 'result from' the
advertising of AIS' products."
Nevertheless, the court found that nothing in the facts alleged would permit AIS
to plead any of the five offenses enumerated in the policy in lieu of, or alternatively
to, the inducement claim. As a consequence, it held that the inducement of infringe
ment claim triggered no duty to defend or indemnify under the policy.
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Intellectual Property Law 323
A "clear line of authority" in California directs that "even an act which is 'intentional'
or 'willful' within the meaning of traditional tort principles will not exonerate the
policyholder from liability under ? 53 3 unless it is done with 'preconceived design to
inflict injury.' "34
30. Id.
31. E-Z Loader Boat Trailers v. Traveler's Indem. Co., 726 P.2d 439 (Wash. 1986).
32. Id.
33. 998 F.2d 674 (9th Cir. 1993).
34. Id. at 678.
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324 Tort & Insurance Law Journal, Volume XXIX, Number 2, Winter 1994
Because the plaintiff had not proven an intent to cause harm in the underlying
case, the court found that the "intentional acts" exclusion did not apply.
V. TRADEMARK CASES
Here, the court found an express duty to defend claims of trademark infringement
within the policies' 1986 ISO coverage for "misappropriation of advertising ideas
or style of doing business" as well as "infringement of . . . tide or slogan." The
court distinguished the earlier New York cases of A. Myers & Sons v. Zurich American
Insurance Group*7 and Jerry Madison Enterprises v. Grasant Manufacturing,39 stating
that "these cases clearly required a causal connection between 'advertising injury'
and 'advertising activities'?i.e., the injury must occur as a result of advertising."
The court reasoned that the earlier cases had denied coverage because "advertising"
was not a "necessary ingredient" of the copyright and patent infringement alleged
therein. Here, however, the trademark allegations clearly involved advertisements
per se.
The court noted that the appropriate definition of "advertising" is, as defined
in Black s Law Dictionary: "To advise, announce, apprise, command, give notice of,
inform, make known, publish. To call a matter to public attention by any means
whatsoever.. . ."39 Interpreting the scope of the phrase "misappropriation of adver
tising ideas or style of doing business," the court found that these terms had no
clear definition in the common law. It reasoned: "However, in the ordinary sense
of these terms, misappropriation of an 'advertising idea' would mean the wrongful
35. No. 93-8668 (San Francisco County, Cal. Super. Ct. July 30, 1993).
36. 818 F. Supp. 553 (W.D.N.Y. 1993).
37. 545 N.E.2d 1206, 546 N.Y.S.2d 818 (N.Y. 1989).
38. No. 89-CV-2345, 1990 U.S. Dist. LEXIS 1649 (S.D.N.Y. 1990).
39. Black s Law Dictionary 54 (6th ed. 1990).
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Intellectual Property Law 325
taking of the manner by which another advertised its goods or services. This would
include the misuse of another's trademark or trade name."40
Similarly, the court noted that the offenses of "tide" and "slogan" are not defined
in the policy. Accordingly, it is necessary to look at the meaning of these terms in
the common law and in ordinary language. Because "tide" is defined as "a mark,
style or designation; a distinctive appellation; the name by which anything is
known,"41 infringement of tide can include trademark or trade name infringe
ment."42
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326 Tort & Insurance Law Journal Volume XXIX, Number 2, Winter 1994
had already settled their differences. However, the court found that another insurer
owed a duty of defense under its policy. The court reasoned:
Although citing the Bank of the West decision, the court noted that "This sort
of conduct was recognized under the common law as unfair competition." The
court also found that it was a reasonable inference, from the evidence presented,
that "some sort of advertising activity took place in [plaintiff s] solicitation of
customers using the allegedly stolen customer list." The court concluded that this
solicitation was enough to give rise to a duty to defend.
The complaint in the underlying action pleaded claims against the insured, Mer
chants, for intentional interference with business relations and misappropriation of
trade secrets (specifically, a customer list). The policy's list of offenses included in
the definition of "advertising injury" did not include trade secret misappropriation.
Nevertheless, the court held that policy term "infringement of copyright, tide or
slogan" arguably included a claim of infringement of the plaintiff s "tide to the
customer list."
The court went on to hold that the offense entided "misappropriation of advertis
ing ideas" was vague enough to include theft of a customer list. The court found
the requisite causal connection with "advertising activities" because the customer
list was used by the insured as part of its direct mailing campaign. Based on the
foregoing analysis the court found both a duty to defend and to indemnify.
45. Id.
46. 794 F. Supp. 611 (S.D. Miss. 1992).
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