Tuesday, May 11, 2010

patent infringement as advertising injury

Hyundai Motor America v. National Union Fire Ins. Co., No. 08-56527 (9th Cir. 2010)

This advertising injury case addresses nontraditional advertising and should be noted by any advertiser engaged in such practices; I expect the insurers have already paid heed. Hyundai put a design-your-own-vehicle feature on its website, and as a result a third party sued it for patent infringement. Hyundai contended that this was “advertising injury,” but the defendants declined to defend. The Ninth Circuit agreed with Hyundai.

Hyundai’s “build your own vehicle” (BYO) feature “allowed users to navigate through a series of questions on a menu (to select, for example, colors, engine and transmission types, and options).” The output was customized vehicle images and price information. Hyundai’s parts catalogue feature likewise allowed users “to navigate through a series of menus (to choose, for example, a model, engine system, and sub-system) and displayed customized parts images and pricing information.”

Orion IP, an NPE, had two patents, one on a method of generating customized product proposals for potential customers of an automobile dealer by using a computer-based system “to dynamically create customized, printed proposals for potential purchasers of a product.” The invention is “[a]n electronic system for creating customized product proposals [that] stores a plurality of pictures and text segments to be used as building blocks in creating the proposal.” The other patent was similar, but aimed at the sale of parts. In 2005, Orion sued Hyundai, and 19 other car companies, for patent infringement.

Hyundai had a policy that covered advertising injury, which included “[m]isappropriation of advertising ideas or style of doing business.” After defendants refused to defend, a jury found against Hyundai and awarded $34 million in damages. Hyundai sought to recover its defense costs, though not the damage award. The district court held that patent infringement is not “advertising injury,” and that Hyundai couldn’t show a causal connection between its advertising and Orion’s alleged injury.

First, was the BYO feature advertising? Defendants argued that, because the feature created customized proposals for individual users, it was high-tech one-on-one solicitation, not widespread promotional activity directed at the public at large, as required for “advertising” under relevant precedent. However, the underlying Orion complaint—which largely determines the duty to defend—identified the BYO feature as “marketing methods” and “marketing systems,” both of which fit squarely within the definition of advertising. But the insurer could also look at Hyundai’s website. Was it one-on-one solicitation? True, it does “little, if anything,” until the user inputs personal preferences. But, unlike prior cases finding solicitation rather than advertising, the BYO feature was not limited to “a discrete number of known potential customers.” The BYO feature “is widely distributed to the public at large, to millions of unknown web-browsing potential customers, even if the precise information conveyed to each user varies with user input. All the users are still using the same BYO feature.”

The next question was whether Orion’s patent infringement claim constituted “misappropriation of advertising ideas.” Would a layperson reasonably read the phrase to include this patent infringement claim? In other words, do the patents at issue involve a process or invention that could reasonably be considered an “advertising idea”? Answer: yes. This was a patent in a method of “displaying information to the public at large for the purpose of facilitating sales, i.e., a method of advertising.” Orion’s own complaint referred to Hyundai’s “marketing method” or “marketing system.”

Defendants argued that “misappropriation of advertising ideas” had to relate to the actual content of the challenged ad. Prior cases held that advertising injury requires a claim concerning the “elements of the advertisement itself —in its text[,] form, logo, or pictures—rather than in the product being advertised.” Iolab Corp. v. Seaboard Sur. Co., 15 F.3d 1500, 1506 (9th Cir. 1994). But reliance on that quotation was misplaced, because the BYO feature was the “form” of the ad. The BYO feature was definitely not the product being advertised, which is the point of the line-drawing.

Next, defendants argued that the source of the advertising idea had to be a competitor. Nothing in the policy’s text supported that claim. “Nor can we discern any contextual, public-policy, or logical significance to who owns the legal rights to the advertising idea in question.” Next!

When an advertising technique is patented, patent infringement may constitute advertising injury.

Finally, there must be a causal connection between the advertisement and the alleged advertising injury. Courts have rejected causation when the patents at issue were allegedly infringed by the underlying product for sale. When the ad itself allegedly infringes, however, there’s a causal connection. The use of the BYO feature on the website was itself an infringement, and it was that use that caused Orion’s injuries.

Reversed and remanded with directions to grant summary judgment to Hyundai on its claim for declaratory relief on the duty to defend.

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