Thursday, November 23, 2006

Insurer's claim of no duty to defend fails to gel

Ohio Casualty Insurance Company v. Cloud Nine, LLC, 2006 WL 3327652 (D. Utah)

Years ago, I clerked for then-Chief Judge Edward Becker on the Third Circuit, a great man who is much missed. We had a case about insurance coverage for trademark infringement; one important question was whether trademark infringement counted as “advertising injury.” At the time, almost all precedent suggested that it didn’t, but Judge Becker concluded that, as a trademark is a type of promotional matter, trademark infringement allegations might trigger an insurer’s duty to defend. See Frog, Switch & Mfg. Co., Inc. v. Travelers Ins. Co., 193 F.3d 742, 749 (3d Cir.1999) ("A trademark can be seen as an 'advertising idea': It is a way of marking goods so that they will be identified with a particular source.... [A]llegations of trademark infringement arguably allege misappropriation of an advertising idea."). Since then, more courts have adopted the rationale in Frog, Switch, in the absence of an exclusion for trademark infringement, and this case follows that pattern (indeed, it concludes that the majority rule is that set forth in Frog, Switch).

The policy here covered “advertising injury,” which included “[t]he use of another's advertising idea in your ‘advertisement,’” which in turn was defined as “a notice that is broadcast or published to the general public or specific market segments about your goods, products or services for the purpose of attracting customers or supporters.” There was a standard exclusion for knowingly tortious acts, which isn’t that important at the duty to defend stage because even though the underlying complaint may allege intentional infringement, the plaintiff could ultimately recover without showing intent. The insurer thus can’t use the intentional acts exclusion to defeat the duty to defend against trademark infringement claims.

The underlying lawsuit involved alleged breach of a license agreement allowing the defendants to make and sell a patented elastomer gel known as “Gelastic,” “GellyComb,” and “Intelli-Gel.” The relevant claims were for federal and common-law trademark infringement, deceptive trade practices under state law, and misrepresentation and false designation of origin under federal law, all based on defendants’ use of plaintiff’s trade names in advertising, including on their websites and with their goods.

The court found that the allegations triggered the insurer’s duty to defend. An “advertising idea” is an idea for calling public attention to a product or business, including discrete images or text in an ad. The trade names GellyComb etc. “expressly describe and promote the gel-like and elastic qualities of the material, calling the public's attention to the desirable qualities of [the] products.” Thus, those trade names are advertising ideas as an average reasonable insurance customer would understand them. (The court probably doesn’t mean to suggest that only descriptive trademarks are advertising ideas; a valid suggestive, arbitrary or fanciful trademark would also convey information and attract attention.) The presence of the trade names on defendants’ websites constitutes advertising, since a business website, “except for the web pages concerning the business's contact information and history, is generally an advertisement for the business's goods, services or products” and counts as a notice broadcast or published to the public.

There must also be a causal connection between the advertising and the alleged injury in order for a claim to count as “advertising injury.” The plaintiff sought relief prohibiting defendants from using the trade names on their websites, in advertising or in any other way. This shows a causal connection between the injury and the use of plaintiff’s advertising ideas in defendants’ ads. Defendants’ advertising caused plaintiff’s injury – it didn’t just expose that injury (as, for example, advertising the availability of products that infringed a patent might).

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