Finding Insurance Coverage In IP Disputes Under Traditional and Non-Traditional Insurance Policies
Insurance coverage is often a hidden asset on a company’s balance sheet. Nowhere is this more evident than in the area of IP litigation. Thus, companies involved in trademark, copyright, patent, unfair competition and trade secret litigation routinely fail to exhaust the opportunities for coverage for such suits that may be afforded under both their traditional and non-traditional insurance policies. The result is that companies end up financing both their defense costs and indemnity obligations, in circumstances where those obligations should have been absorbed in the first instance by their liability carriers.
Traditional insurance products include Comprehensive General Liability (CGL) and Directors’ and Officers’ (D & O) insurance. Each of these policies is designed to cover specific risks. Nevertheless, recent case law has confirmed that these policies may provide coverage in the context of IP litigation, in ways that may be counter-intuitive and therefore overlooked.
When a company is sued for trademark or copyright infringement, or for torts such as defamation or invasion of privacy, the first policy that ought to be consulted is the CGL Policy. That policy will typically contain at least two forms of coverage that could be implicated in connection with IP litigation - socalled "advertising injury" coverage and "personal liability" coverage.
Advertising injury coverage has the greatest potential application to IP disputes. Courts have interpreted this coverage to apply to trademark infringement, trade dress infringement, copyright infringement and, in rarer cases, to unfair competition. The touchstone of advertising coverage is establishing that the claim or injury has arisen in connection with the insured’s advertising activities. The precise scope and meaning of "advertising activities" will necessarily depend on the law of the jurisdiction involved.
By contrast, personal injury coverage typically addresses, among other things, a libelous, defamatory or disparaging communication, or a violation of another’s right of privacy. The concept of "disparagement" is key, as it could be implicated where a company is deemed to have "disparaged" a competitor’s goods or services in a communication or advertisement. In such an instance, a claim of trade libel might be covered under this portion of a CGL policy.
D & O insurance is designed to, among other things, reimburse a company for the cost of providing for a legal defense of its officers and directors. Although D & O insurance is typically considered in connection with shareholder suits, or securities litigation, it can also provide especially broad coverage in the context of IP litigation. This is because coverage under a D & O policy is triggered by the commission of a "wrongful act" on the part of a company’s directors or officers - and under applicable case law a "wrongful act" can be any negligent or even intentional misconduct. Moreover, if the D & O policy also provides so-called "entity coverage", such coverage could serve as a resource when the company itself is a defendant in IP litigation.
The following examples will help illustrate the circumstances in which CGL and D & O policies have been found to cover liabilities associated with IP litigation.
- Patent infringement claims. Several recent US cases have found coverage under CGL policies for patent infringement where the underlying technology is used as part of an insured's advertising activities. Thus, in one recent case, the Court determined that patent infringement was covered under the "misappropriation of advertising ideas" offense where infringed software itself constituted or embodied the advertising technique. In another case, involving a car manufacturer, the court found coverage for infringement of a business method patent arising out of the manufacturer’s "build your own vehicle" feature on its website.
Coverage for patent infringement claims is even more likely to be found under a company's D&O policy. This is because the trigger for coverage under such a policy (a "Wrongful Act") is sufficiently broad to cover a wide range of alleged or actual wrongdoing, whether negligent, reckless or even intentional. Thus, in a recent New York case patent infringement claims were held to be potentially within the coverage provision applicable to "wrongful acts".
- Misappropriation of trade secrets. Claims of IP theft or misappropriation of trade secrets are difficult to fit into the coverage parameters of typical CGL or D&O policies. Nevertheless, a minority of cases have found coverage under the "advertising injury" provisions of CGL policies. The theory behind some of these cases has been that the theft of a customer list (or other trade secrets) may constitute one of the enumerated "offenses" in advertising injury coverage, such as "misappropriation of advertising ideas or the style of doing business".
Where misappropriation of trade secrets overlaps a claim for unfair competition, there may be additional coverage opportunities. For example, several cases have held that the "disparagement" by one company of another's goods, products or services may trigger coverage under the "personal injury" portion of a CGL policy. Thus, a claim arising from trade libel or product disparagement may well be covered under this portion of a company’s CGL policy.
Finally, there may be significantly greater opportunities for coverage in respect to these kinds of claims under a D & O policy. Thus, in one recent case, the Court determined that a company’s D&O carrier was obligated to reimburse the company and its officer for defense fees and settlement paid in an IP theft/trade secrets case. In another case, the Court held that a claim alleging misappropriation of confidential information was covered under D&O policy.
- Statutory claims. The "violation of right of privacy" offense contained in a CGL policy's "advertising injury" coverage has found application in a number of statutory contexts that involve IP issues. For example, a recent case held that coverage applied for alleged violations by an insured of the Electronic Communications Privacy Act. In that case, the court found that claims arising from a company’s use of a software program to track information about customer's internet activities for use in marketing efforts were covered under the pertinent CGL policy. In another case, the Court held that an insured’s violation of its customers’ right of privacy was triggered by the insured’s "publication" of information contained on credit card receipts and hence coverage was found under the company’s CGL policy.
In addition to utilizing the coverage afforded under traditional insurance policies, companies involved in IP disputes may also want to explore the newer insurance products that have been developed in recent years. Because those policies are specifically tailored to cover particular risks, companies with large IP portfolios or those engaged in significant online sales activities ought to consider them.
Among these newer products is IP Value Insurance. The principal purpose of that insurance is to indemnify an IP portfolio owner for the loss of revenue or value associated with IP assets which may lose value as a result of challenges to the validity or enforceability of particular assets (e.g., trademarks, copyrights or patents) making up the IP portfolio.
Another new product is IP infringement insurance, which indemnifies an IP portfolio owner for defense costs, and potentially for any judgments or settlements, arising out of claims for infringement which may be asserted against an IP portfolio owner by third parties. This form of insurance is especially important because it "fills the gap" in coverage left by CGL and D & O policies. This "gap" may be of particular concern with respect to patent infringement claims, because CGL policies will not typically provide coverage for such claims unless the infringement is directly tied to the insured’s "advertising activities".
Computer network and cyberspace liability issues have also spawned new insurance products that should be considered. Although traditional policies may cover some risks associated with computer networks and cyberspace liability issues, computer network and cyberspace liability policies should especially be considered by companies that are engaged in significant online sales activities.
The need for such policies is highlighted by a few examples.
If a company’s computer network is disabled, even temporarily, it could mean a loss of both important data and, while the system is down, business income. Traditional property policies will not ordinarily respond to such losses because information that is stored electronically is not generally held to be tangible "property". For this reason, traditional first-party property and business interruption policies will not generally respond to these kinds of losses.
In the same vein, suppose that your company’s computer network inadvertently passes on a computer virus to a customer’s or client’s computer system. Or suppose that one of your employees sends a personal email, or posts a message on a blog or message board, that disparages or defames a third person. The claims arising from these kinds of activities would not necessarily be covered under traditional insurance policies.
To "fill the gap" several new policy forms have been developed. Among these is the so-called “network security” policy which addresses, among other risks, fraud and extortion, denial of service attacks, sabotage and business interruption, viruses and negligent security. In addition, there are so-called "cyber-liability" or "cyber-risk" policies which are specifically designed to address such risks as invasion of privacy, online trespass and certain intellectual property infringements.
The bottom line is that companies involved in IP disputes ought not to assume that they are obligated to bear the entire economic risk associated with those disputes. Resort should be had to both their traditional insurance policies and, in appropriate cases, the emerging insurance products which have been developed in recent years.