Insurance for "Advertising Injury
Liability" Provides Coverage for Trademark and Trade Dress Infringement
Claims
An issue that has been extensively litigated in recent
years is whether insurers have a duty to defend claims for trade dress and
trademark infringement under the "advertising injury liability" provisions
contained in many standard Commercial General Liability (CGL) insurance
policies. This issue is of major importance to any business sued for
trademark or trade dress infringement, because the defense of these types
of claims (even if the case is only litigated through the preliminary
injunction stage) can be extremely expensive. The insurance industry has,
for the most part, resisted defending these claims. The courts, however,
have overwhelmingly sided with the insureds on this issue and have, in all
but one case, found that allegations of trademark or trade dress
infringement invoke an insurer's duty to defend under the advertising
injury liability provisions of standard CGL policies.
A. The Relevant Policy Language
The relevant policy language is as follows:
COVERAGE B. PERSONAL AND ADVERTISING INJURY
LIABILITY
1. Insuring Agreement
b. This insurance applies to:
. . .
(2) "Advertising Injury" caused by an offense
committed in the course of advertising your goods, product or
services;
but only if the offense was committed in the
"coverage territory" during the policy period.
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DEFINITIONS
- "Advertising Injury" means injury arising out of
one or more of the following offenses:
- 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;
- Oral or written publications of material that
violates a person's right of privacy;
- Misappropriation of advertising ideas or style of
doing business; or
- Infringement of copyright, title or slogan.
The litigation over the application of this policy
language to trademark and trade dress claims has focused primarily on
definition 1.c.: "Misappropriation of advertising ideas or style of doing
business."
B. Setting the Stage: The Rules of Insurance
Contract Intrepretation
1. Insurance Policies Are Construed Against
Insurers
The general rule is that the terms of an insurance
contract will be given their plain and ordinary meaning, and if a term has
two or more equally plausible meanings, the term will be considered
ambiguous and will be construed in favor of the insured. Mazza v.
Medical Mutual Ins. Co. of North Carolina, 311 N.C. 621, 630, 319
S.E.2d 217, 223 (1984). "The test in deciding whether the language is
plain or ambiguous is what a reasonable person in the position of the
insured would have understood it to mean, and not what the insurer
intended." Southeast Airmotive Corp. v. United States Fire Ins.
Co., 78 N.C. App. 418, 420, 337 S.E.2d 167, 169 (1985). An
ambiguous term must be construed in favor of the insured. Woods v.
Nationwide Insurance Co., 295 N.C. 500, 506, 246 S.E.2d 773, 777
(1978).
Even if the terms of the policies are not ambiguous,
"[i]nsurance policies are to be strictly construed against the insurer."
Christ Lutheran Church v. State Farm Fire and Casualty Co.,
122 N.C. App. 614, 616, 471 S.E.2d 124, 125, aff'd, N.C. , 477
S.E.2d 33 (1996). "[T]he terms of an insurance contract must be given
their plain, ordinary and accepted meaning unless they have acquired a
technical meaning in the field of insurance, or unless it is apparent that
another meaning was intended." Wake County Hospital System, Inc.
v. National Casualty Co., 804 F. Supp. 768, 773 (E.D.N.C. 1992),
aff'd, 996 F.2d 1213 (4th Cir. 1993).
In the policies at issue, the terms "misappropriation,"
"advertising idea," and "style of doing business," are undefined. The
insurance industry's position is that these policy provisions must be
given a narrow construction, which would excuse the insurers from
defending trademark or trade dress claims. As discussed below, however,
the courts (with one exception) have rejected the insurers' narrow
interpretation of these undefined terms, and have determined that these
undefined terms must be given their common, layman's meaning, and at best
are ambiguous and must be construed in favor of the insured. In either
event, the courts have found the terms are broad enough to require a
defense of trademark and trade dress claims.
2. The Duty to Defend is Broader Than the Duty
to Pay
Standard CGL policies require an insurer to defend any
claim against the insured that is potentially covered by the policy, even
if the insurer is not ultimately liable for a judgment. This means the
insurer must pay for the cost of defending any lawsuit that contains a
claim against the insured that might be covered by the policy. The
insurer's obligation to pay for the defense of a trademark or trade dress
claim is a significant benefit in and of itself, because of the large
costs that can be associated with the defense of these claims.
In North Carolina, as in most states, an insurer's duty
to defend is broader than its duty to indemnify. Waste Management
of Carolinas, Inc. v. Peerless Ins. Co., 315 N.C. 688, 691, 340
S.E.2d 374, 377 (1986). An insurer's duty to defend is measured by the
facts alleged in the pleadings in the underlying action. Id. When
the pleadings state facts demonstrating that the alleged injury is covered
by the policy, then the insurer has a duty to defend, regardless of
whether or not the insurer is ultimately liable. Id. Allegations of
facts that describe a hybrid of covered and excluded events, or pleadings
that disclose a mere possibility that the alleged injury is
covered, suffice to impose a duty to defend on the insurer. See
St. Paul Fire & Marine Ins. Co. v. Vigilant Ins. Co., 919
F.2d 235, 240 (4th Cir. 1990) (in North Carolina, insurer avoids its duty
to defend only if "the facts are not even arguably covered by the
policy").
To determine whether an insurer has a duty to defend,
the policy provisions at issue must be analyzed and compared with the
facts alleged in the underlying action. This is commonly referred to as
the "comparison test": the pleadings in the underlying action are read
side-by-side with the policy to determine whether the events and injuries
alleged are arguably covered or clearly excluded. Waste Management,
315 N.C. at 691-92, 340 S.E.2d at 378; Imperial Casualty and
Indemnity Co. v. Radiator Specialty Co., 862 F. Supp. 1437, 1444
(E.D.N.C. 1994), aff'd, 67 F.3d 534 (4th Cir. 1995). Any doubt as
to coverage is to be resolved in favor of the insured. Id.
In addition, where the insurer knows or reasonably could
ascertain facts that, if proven, would make a case of possible coverage
under its policy, the duty to defend remains and is not discharged, even
if the facts alleged in a third-party complaint appear to negate coverage.
Waste Management, 315 N.C. at 691-92, 340 S.E.2d at 378.
The only instance in which an insurer has no duty to defend is when the
allegations in the pleadings plainly indicate that the event in question
is not covered, and the insurer has no knowledge of the facts otherwise.
An insurer may not, however, refuse to defend based on information outside
the pleadings if any plausible reading of the pleadings suggests the
possibility of coverage. Id.
C. The Overwhelming Majority of Courts Have
Concluded that Insurers Must Defend Trademark and Trade Dress Claims
In the last four years, at least fourteen different
courts have addressed whether claims for trademark or trade dress
infringement fall within the "advertising injury" policy language. All but
one have found that insurers have a duty to defend these claims under the
relevant policy language. A comparison of two of the most recent appellate
cases to discuss this issue, Lebas Fashion Imports of USA v. ITT
Hartford Ins. Group, 59 Cal. Rptr.2d 36, 50 Cal. App 4th 548
(1996), and Advance Watch Co., Ltd. v. Kemper Nat'l Ins. Co.,
99 F.3d 795 (6th Cir. 1996), demonstrates the contrast between the
majority (Lebas) and minority (Advance Watch)
view.
1. Lebas
In Lebas, the insured (Lebas) was an
importer and wholesaler of men's clothing. A third party, Larouche, which
manufactured and sold high fashion perfumes and cosmetic products under
the trademarks "DRAKKAR" and "DRAKKAR NOIR," filed a lawsuit against
Lebas. Larouche alleged that Lebas was infringing Larouche's trademark by
selling men's clothing under the name "DRAKKAR" and by advertising those
clothing products under the names "DRAKKAR" and "DRAKKAR NOIR." Lebas
tendered defense of the action to its insurer, Hartford, under a CGL
policy it had purchased from Hartford, which provided coverage for
"advertising injury" for "an offense committed in the course of
advertising the insured's goods, products or services." The term
"advertising injury" was defined to include "misappropriation of
advertising ideas or style of doing business" and "infringement of
copyright, title or slogan." Hartford denied coverage and refused to
defend.
Lebas then sued Hartford for breach of its duty to
defend. The California Court of Appeals held that Larouche's trademark
infringement claim was potentially covered by the Hartford "advertising
injury" policy language and that Hartford had breached its duty to defend.
In reaching this conclusion, the court engaged in a sound, thorough
interpretative analysis, like that mandated by North Carolina law. First,
the court noted that the terms "misappropriation," "advertising idea," and
"style of doing business" were not defined in the Hartford policy.
Hartford argued that the term "misappropriation" was strictly limited to
refer only to the common law tort of misappropriation, and that
"advertising idea" was limited to a circumstance where one party is
presented with an idea or plan for an advertising campaign or promotion by
another who has a protected interest in it, and the first party used the
idea without compensating the creator.
The court noted that, as in North Carolina, where there
is no evidence that the parties intended any technical meaning for a
non-defined term in the policy, the ordinary meaning of that term must be
applied, and that if two or more constructions of a word are reasonable,
then an ambiguity exists which must be construed against the insurer. The
court rejected Hartford's restrictive definition of the terms
"misappropriation" and "advertising idea" as "unreasonably narrow," 59
Cal.Rptr. 2d at 45, instead finding that the terms did not have a single,
clear meaning and were therefore ambiguous. While the policy terms could
certainly mean what Hartford contended they did, an equally reasonable
alternative definition also existed:
In our view . . . it is equally reasonable, for
example, to ascribe to the term misappropriation the more general
meaning of "to take wrongfully" as it is to limit it to its technical
common law sense. Similarly, while the misappropriation of an
"advertising idea" certainly would include the theft of an advertising
plan from its creator without payment, it is also reasonable to apply it
to wrongful taking of the manner or means by which another advertises
its goods or services. As we have already explained, one of the basic
functions of a trademark is to advertise the product or services of the
registrant. For the same reason, a trademark could reasonably be
considered an integral part of an entity's "style of doing business."
One need look no further than today's current crop of expensive
television commercials advertising high fashion jeans, heavily endorsed
athletic shoes or distinctively styled fast food restaurants to know the
truth of that statement.
59 Cal.Rptr. 2d at 44 (citations omitted). Given this
ambiguity, the court found that, reading the policy language as a layman
would, it was objectively reasonable for Lebas to expect coverage for
trademark infringement under the policy language:
It appears to us, reading the policy as a layman
would, that an objectively reasonable purpose of the phrase
"misappropriation" of either an "advertising idea" or a "style of doing
business" is an attempt to restrict or more narrowly focus the broader
coverage potentially encompassed by the general term, "unfair
competition" which was utilized in the earlier policy language. When
read in light of the fact that a trademark infringement could reasonably
be considered as one example of a misappropriation, and taking into
account that a trademark could reasonably be considered to be part of
either an advertising idea or a style of doing business, it would appear
objectively reasonable that "advertising injury" coverage could now
extend to the infringement of a trademark.
Id. Consequently, Larouche's trademark
infringement claim was "sufficient to charge the commission of an act
potentially covered under the policy," and Hartford breached its duty to
defend. Id. The court noted that this conclusion was in accordance
with the "significant number of federal cases" that had reached the same
conclusion. Id. at 47.
2. Advance Watch
This contractual interpretation contrasts sharply with
the reasoning of Advance Watch Co., Ltd. v. Kemper Nat'l Ins. Co.,
99 F.3d 795 (6th Cir. 1996), the only decision finding that an allegation
of trademark infringement does not at least potentially allege
"misappropriation of advertising ideas or style of doing business." In
Advance Watch, the insured, Advance, advertised and sold
pens under a licensing agreement with Pierre Cardin and used the Pierre
Cardin trademark and stylized "PC" logo on the pens. Advance was sued by
A.T. Cross Company ("Cross"), which alleged that the Pierre Cardin pens
advertised and sold by Advance had "a trade dress, product design and
configuration which are reproductions, counterfeits, copies and colorable
imitations" of Cross pens, particularly in their imitation of Cross'
frusto-conical top trademarks.
Cross alleged claims for (1) trade dress infringement
under the Lanham Act, (2) trademark infringement under the Lanham Act, (3)
common law trade dress and trademark infringement under Rhode Island law,
(4) common law unfair competition, and (5) dilution. Advance tendered
defense of the action to its insurer under a CGL policy that provided
coverage for "advertising injury liability," and which defined
"advertising injury" as "misappropriation of advertising ideas or style of
doing business" and "infringement of copyright, title or slogan." The
insurer denied coverage and declined to provide a defense, and Advance
sued for breach of the duty to defend.
The Sixth Circuit reversed the district court's
conclusion that Travelers had breached its duty to defend, instead holding
that no potential for coverage existed. In reaching this conclusion, the
court narrowly construed the provisions at issue in exact accordance with
the position espoused by the insurer.
In reaching its conclusion, the Sixth Circuit first
found that the terms "misappropriation," "advertising idea," and "style of
doing business" were unambiguous, and must be accorded either a common law
or narrow meaning. The court found that "misappropriation" cannot be read
to include trademark infringement yet (perhaps implicitly noting the
difficulty with its position) also held that the term "does not
necessarily refer only to the common-law tort of misappropriation." 99
F.3d at 802. The court did little to reconcile this conclusion with the
fact that the reasonable expectation of an insured would accord
"misappropriation" (a term undefined in the policy) a much less technical
and much more common meaning, instead concluding that its reading of the
term "is not a technical or strained one:"
A layperson might at first glance read the term so
broadly as to include in its scope trademark and trade dress
infringement and a good deal of other conduct of the general nature of
taking something which belongs to another. Such a reading, however,
would expand the meaning of the term to the extent of not having any
distinctive meaning at all, and would lead to the absurd result of
providing coverage for liability for trademark infringement without any
mention of the word "trademark."
Id. at 803. The court dismissed, in shorthand
fashion and with little discussion, the extensive body of caselaw which
holds that claims for trademark or trade dress infringement constitute
advertising injury under the policy language, as either improperly failing
to consider the common law tort of misappropriation or as distinguishable
on the facts. Id. at 804-05.
D. Problems with the Advance Watch Approach
The difficulties with the Sixth Circuit's analysis are
apparent. First, in holding that "misappropriation" is limited to the
common law tort of misappropriation or something closely akin thereto,
Advance Watch failed to consider the critical point noted
by Lebas and other courts: the term "misappropriation" is
undefined in the policy, and an equally common and obvious definition for
the term exists -- "wrongful taking" -- which is in fact more apparent to
a layperson than the arcane common law meaning of the term. The
Advance Watch court instead wholeheartedly endorsed the narrow
approach advocated by the insurer, ignoring the fact that the term is
undefined in the policy and the plain meaning of the term is just as
easily -- if not more likely -- the dictionary definition rather than a
legalistic, narrow definition.
Under the Sixth Circuit's reasoning, "misappropriation"
could only conceivably mean the common law tort of misappropriation. Of
course, as noted by Lebas, a claim for trademark
infringement includes all of the elements of a claim for common law
misappropriation, with the additional statutory element that the
unauthorized use be likely to cause consumer confusion. Lebas,
59 Cal.Rptr.2d at 45. Thus, a claim for trademark infringement is nothing
but a type of misappropriation. While all trademark infringement is
misappropriation, not all misappropriation is trademark infringement.
Limiting coverage only to the narrowest possible interpretation of the
policy, where the policy uses general, undefined terminology, certainly
appears contrary to the rules for policy interpretation.
Second, Advance Watch's reliance on the
failure of the policy to specifically mention trademark infringement as a
covered offense carries little weight. Insurers often argue that the
failure of the policy to explicitly list trademark or trade dress
infringement as a covered offense conclusively establishes that coverage
for such an offense cannot exist under the policy. In support of this
assertion, insurers rely on cases which hold that claims for patent
infringement are not covered under policy language providing coverage for
"misappropriation of advertising ideas or style of doing business." This
is what the Sixth Circuit did in Advance Watch. This
analysis misses the mark, however, because there is a fundamental
difference between patent infringement claims and trade dress or trademark
claims, which prevents patent infringement claims from being considered
"misappropriation of advertising ideas or style of doing business." As the
first court to address this issue noted:
In [certain cases cited by the insurer] the courts
found that one could allege a claim for copyright or patent infringement
without advertising ever occurring. Trademark or tradename infringement,
in contrast, necessarily involves advertising, or use, of the mark or
name to identify the merchants's goods or services. Thus, where it is
possible to state a claim for patent infringement or copyright
infringement without necessarily alleging that such activities occurred
in advertising one's goods, it is not possible to allege a claim for
trademark, servicemark or trade name infringement without the infringing
mark being used to identify the goods or services to the public. This
use qualifies as advertising under the definition above.
J.A. Brundage Plumbing v. Massachusetts Bay Ins.
Co., 818 F. Supp. 553, 558 (W.D.N.Y. 1993), vacated by reason
of settlement, 153 F.R.D. 36 (W.D.N.Y. 1994).
Even cases holding that there is no coverage for patent
infringement claims have noted the fundamental difference between a patent
infringement claim and a trade dress claim:
Patent infringement involving only the patents used in
the manufacture of a single device does not even approach the showing of
pervasive similarity in the overall manner of doing business that courts
have previously recognized as necessary to successfully prove
misappropriation of a "style of doing business."
St. Paul Fire & Marine Ins. Co. v. Advanced
Interventional Systems, Inc., 824 F. Supp. 583, 585 (E.D. Va.
1993), aff'd, 21 F.3d 424 (4th Cir. 1994). A patent infringement
claim is not covered by the policy language because a patent does not
constitute an "advertising idea" or a "style of doing business."
Finally, Advance Watch failed to
appreciate a critical concept: a trademark is itself a form of
advertising. As noted by Lebas:
A trademark is but a species of advertising, its
purpose being to fix the identity of the article and the name of the
producer in the minds of people who see the advertisement, so that they
may afterwards use the knowledge themselves and carry it to others
having like desires and needs for such article.
59 Cal.Rptr.2d at 41 (quoting Northam
Warren Corp. v. Universal Cosmetic Co., 18 F.2d 774, 774 (7th
Cir. 1927)). Many other courts have noted that a trademark or trade dress
is itself a form of advertising, and consequently any claim regarding
infringement of the trade dress derives from advertising activity. See
Poof Toy Products, Inc. v. USF&G Co., 891 F.Supp. 1228,
1235-36 (E.D. Mich. 1995)("allegations of trademark and trade dress
infringement inherently involve advertising activity. . . . there can be
no trademark/trade dress infringement without advertising having
occurred."); J.A. Brundage Plumbing, 818 F. Supp. at 553.
The Sixth Circuit made no attempt to explain why a trademark or trade
dress could not be considered an "advertising idea."
The Advance Watch opinion also made no
attempt to explain how trade dress cannot be a "style of doing business."
Courts have consistently noted that trade dress is equivalent to a "style
of doing business" or overall business appearance. St. Paul Fire
and Marine Ins. Co. v. Advanced Interventional Systems, Inc., 824
F. Supp. 583, 585, aff'd, 21 F.3d 424 (4th Cir. 1994) (court notes
that policy language of "style of doing business" expresses "essentially
the same concept as the more widely used term: `trade dress'");
Owens-Brockway Glass Container, Inc. v. International Ins. Co.,
884 F. Supp. 363, 369 (E.D. Cal. 1995) ("`style of business' refers to the
outward appearance or signature of a business, the sort of claim comprised
under trade dress"), aff'd, 94 F.3d 652 (9th Cir. 1996);
Two Pesos Inc. v. Taco Cabana Int'l, Inc., 505
U.S. 763, 770-71, 112 S. Ct. 2753, 2758, 120 L. Ed. 2d 615 (1992) (finding
as protectable trade dress the style of presentation of the plaintiff's
Mexican restaurant, including "a festive eating atmosphere having interior
dining and patio areas with artifacts, bright colors, paintings and
murals"). An allegation of trade dress infringement is, therefore, an
allegation of "misappropriation of style of doing business," which the
Advance Watch opinion fails to recognize.
E. The Lebas Analysis is Consistent with North
Carolina Law
The analysis of Lebas is the most sound
contractual analysis and the most comparable to North Carolina law of the
courts that have considered the issue. As explained by Lebas
and numerous federal district courts, the plain meaning of
"misappropriation of advertising ideas or style of doing business"
potentially includes coverage for trademark or trade dress infringement.
Importantly, the reasoning in Lebas
mirrors the contractual analysis required by North Carolina law: where a
term is undefined in an insurance contract, it is given its ordinary
meaning, and where a term has two or more equally plausible meanings, it
is ambiguous and must be construed in favor of the insured.
Advance Watch, on the other hand, turned this analysis on its
head by adopting the restrictive definition espoused by the insurer,
without consideration of the fact that the term "misappropriation" was
undefined in the policy and has an ordinary, layman's meaning that is at
odds with the technical definition urged by the insurer.
F. What Will the Future Hold?
In view of the fact that there is a split of authority
on the application of the "advertising injury liability"coverage to claims
for trademark and trade dress infringement, litigation over this issue is
likely to continue for some time. Because insurance contract
interpretation is a question of state law, insurers can contest coverage
in any state in which the appellate courts have not specifically addressed
the issue. Even though there is a clear majority view, most insurers are
likely to adopt a "wait and see" position to determine whether
Advance Watch gains any following, or whether other courts follow
the Lebas analysis.
Lawyers defending trademark or trade dress infringement
claims should ask their clients for copies of all insurance policies and
have their clients put their carriers on notice of the claims. If the
insurer refuses to defend a claim that is potentially covered under the
relevant policy language, the insured may either institute a declaratory
judgment action immediately, or file an action for breach of contract
after the underlying litigation is resolved.
David Dreifus is a litigation partner
in the Raleigh office of Poyner & Spruill, L.L.P. and coordinates the
firm's intellectual property practice.
Attorneys
The purpose of this Web site is to provide general
information about legal developments. Because the facts in each situation
vary, any legal precedents noted may not be applicable to individual
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