Defendants AIC and Clarendon (there are various cross-claims at issue, but I’ll ignore them) issued entertainment insurance policies to Tool, a rock band. Cameron De Leon sued Tool for infringing his artwork and for defamation. The trial court found that AIC didn’t have a duty to defend, and the court of appeals reversed.
Tool sells various items of merchandise with artwork on them, and its website also has artwork (including some at issue in the underlying action). The website is specifically designed to advertise the band and its merchandise, and the band members don’t run it themselves; they hired someone else to do so.
De Leon was paid for his work but never signed a WFH agreement and claimed the copyright to at least 10 works of visual art. He alleged that any oral implied licenses he granted to Tool were revocable and limited in time and scope, that Tool exceeded those licenses and De Leon revoked them, and that Tool kept using the works anyway. Specifically, he alleged that he created the strikingly phallic Wrench logo for promotional fliers and T-shirts, to be freely used by Tool "for a reasonable period of time" (there’s a term designed to be trouble-free!) but Tool exceeded that license by using it for too long and by using the logo on other merchandise, such as underwear, keychains, hooded sweatshirts, and stickers. In addition, Tool allegedly used other De Leon works in connection with merchandise, on album covers, in its videos, on its website and during its concerts.
De Leon’s complaint didn’t allege a claim for defamation, but did allege that Tool made misrepresentations to third parties that disparaged and defamed De Leon and caused Hot Topic and other third parties to cease doing business with him. He also alleged that he lost the use of at least three original works, which were never returned to him.
The policy had an entertainment industry exclusion (EIE), which provided: “This policy does not apply to Personal Injury or Advertising Injury arising out of the development, pre-production, production, post-production, distribution, exploitation, or exhibition of motion pictures, … audio cassettes, music, musical recordings, … or other similar materials and properties.” It also had an exclusion for material published prior to the policy period. The trial court ultimately held that the EIE precluded coverage because De Leon alleged that Tool used the art in connection with public performances, promotional fliers, and T-shirts “for” Tool’s CDs, albums and DVDs, and that those purposes were part of Tool’s general effort to develop, distribute, exploit or exhibit its music. The court also found that the allegations of loss of use of tangible property, which constituted “property damage” weren’t caused by a covered “occurrence.”
Tool appealed, and the court of appeals reversed. Tool argued that the EIE was about the creation of music, not collateral activities such as merchandising. AIC argued that merchandise was just one way of exploiting Tool’s music, and because the advertising injury/property damage occurred in the course of such efforts, e.g., to secure a merchandise contract with Hot Topic, it wasn’t covered.
An insurer can’t escape its basic duty to defend by means of an unclear exclusionary clause. Though this exclusion was conspicuous (a separate page in a 171-page policy), it still needed to be plain and clear, read as a layperson would read it. “Arising out of” is interpreted broadly when it appears in a coverage clause, and narrowly in an exclusionary clause, in order to protect the insured. The court agreed with Tool’s argument that, if only a minimum connection to music were needed, everything it does has such a connection, rendering the policy illusory. AIC argued that the policy wasn’t illusory because at least one conceivable claim would be covered: if Tool’s former bassist sued Tool’s current bassist, alleging that the current one defamed the former one on his personal Twitter account by stating that he was too washed up to play for Tool, that would not arise from Tool’s exploitation of its music and would be covered. The court disagreed: “such a statement would fall within the [trial] court's broad definition of being incidental to Tool's music.” AIC hinted that Tool could have paid more for a broader policy, but that doesn’t make its interpretation of this one non-illusory.
Thus, the alleged advertising injuries arose from the exploitation of Tool’s merchandise, not Tool’s music, for purposes of the exclusion.
The policy also excluded injury arising out of publication of material whose first publication took place before the beginning of the policy period. The trial court found that the allegation that De Leon created the works at issue between 1991-2002 created the potential that one of the works might have been first published during the policy period, but AIC argued that the attached exhibits conclusively established first publication prior to the policy period. Even if that were true, the defamation allegations remained, establishing a potential for coverage. (Also, it can’t be the case that the date of authorized publication (or creation, as alleged) is dispositive—it must be the date of unauthorized publication by the insured. Otherwise if someone gets a policy in 2011 and then is sued for infringement, beginning in 2012, of a work first published in 2000, the exclusion would apply. But perhaps the court is just going quickly over this issue because it’s not dispositive and AIC’s real argument is that all the infringement allegedly started before the policy period.)