Patent infringement as advertising injury

Dish Network Corp. v. Arch Specialty Ins. Co., --- F.3d ----, 2011 WL 4908108 (10th Cir.)

Dish got sued for patent infringement and its insurers refused to defend on the grounds that the underlying complaint didn’t allege advertising injury. The district court agreed with the insurers, and the court of appeals reversed.

The 23 patents in suit were allegedly infringed when Dish used “automated telephone systems, including without limitation the DISH Network customer service telephone system, that allow [Dish's] customers to perform pay-per-view ordering and customer service functions over the telephone.” Each patent outlined numerous possible applications; at least six of the claims Dish may have infringed explicitly mention advertising or product promotion.

Dish was insured by five insurers, each promising coverage for “advertising injury.” Most of the policies defined advertising injury as injury arising out of:
1. 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;
2. Oral or written publication of material that violates a person's right to privacy;
3. Misappropriation of advertising ideas or style of doing business; or
4. Infringement of copyright, title or slogan.
The National Union policy spoke of injury arising “solely” out of those types of offenses, and the Arch policy referred in relevant part to “[t]he use of another's advertising idea in your 'advertisement.'” Arch’s policy also excluded "any claim ... [a]rising out of the infringement of copyright, patent, trademark, trade secret or other intellectual property rights," but the exclusion "does not apply to infringement, in [the insured's] 'advertisement,' of copyright, trade dress or slogan."

The district court ruled that the complained-of conduct was not “misappropriation of an advertising idea” because the complaint didn’t allege that the patented technologies were themselves incorporated as an element of Dish’s communications with consumers.

The court of appeals first held that patent infringement can be “advertising injury” in appropriate circumstances. It then found that the underlying complaint could be read to allege "misappropriation of advertising ideas or style of doing business" and that such misappropriation could be causally linked to the injury of which the underlying plaintiff complains.

Under Colorado law, courts compare the allegations of the underlying complaint with the terms of the applicable policy. There’s a duty to defend when the underlying complaint alleges any facts or claims that might fall within the ambit of the policy. “Any ambiguity in a policy must be construed against the insurer and in favor of coverage.” While numerous cases categorically rule out advertising injury coverage for patent infringement, many of them focus on the policy terms "misappropriation of style of doing business" or "infringement of title." Those cases are mostly distinguishable from the facts: they dealt with “products the insured happened to advertise, rather than a means of advertising that the insured used to market its own products.” Several courts have held that “where an advertising technique itself is patented, its infringement may constitute advertising injury.”

Dish’s policies don’t expressly cover patents, though they specifically list certain other intellectual property offenses. Other courts have accepted the argument that silence means exclusion. But the court here found that "misappropriation of advertising ideas," in context, was ambiguous and had to be construed in favor of coverage. The language is unambiguous with respect to patent claims about the product/service being sold, but ambiguous where the advertising idea misappropriated happens to be a patented technology. Faced with conflicting authority, the court of appeals concluded that an ordinary person wouldn’t reasonably expect the words "misappropriation of advertising ideas" to exclude coverage for a suit alleging the misappropriation of a patented advertising idea, “even if the word ‘patent’ appears nowhere in the policy.” “To rule otherwise would risk ‘ignoring the real contours of intellectual property litigation, which often proceeds under a bewildering variety of different labels covering the same material facts’” (quoting Frog, Switch & Mfg. Co. v. Travelers Ins. Co., 193 F.3d 742, 747 (3d Cir. 1999)). “Moreover, to categorically exclude patent coverage merely because a policy enumerates other intellectual property violations would conflict with the principle, well established in Colorado, that exclusions are strictly construed against the insurer and ‘must be written in clear and specific language.’” Further, the IP exclusion in Arch’s policy demonstrated that other insurers could have used more precise language if they’d wanted.

The underlying complaint’s allegations couldn’t reasonably be read to allege misappropriation of a style of doing business, but it could potentially allege misappropriation of advertising ideas. Except for the Arch policy, which the parties didn’t discuss separately, the policies didn’t define “advertising.” The insurers argued that advertising means widespread distribution of promotional materials to the public at large. But under any definition offered, the underlying complaint can be read to potentially allege the misappropriation of advertising ideas, since some of the patents explicitly claim the capacity for advertising. The underlying complaint provided insufficient insight into what "pay-per-view ordering and customer service functions" entailed. “We cannot rule out the possibility that these activities involve not only the passive acceptance of sales requests, but also the active promotion of products through the dissemination of information, such as pricing and programming options. [The patents] conceivably allow Dish not only to sell the product a consumer calls up to purchase, but also to make up-sell offers tailored to the specific caller.” This was enough to constitute advertising. Since there was potential coverage, the duty to defend could be triggered even if there might ultimately be no duty to indemnify.

The court of appeals disagreed with the district court’s reasoning that Dish couldn’t have misappropriated advertising ideas because it didn’t incorporate patented technologies as a substantive element of its communications and interactions with customers. Instead, it was sufficient that Dish allegedly misappropriated "a means of conveying content to and tailoring its interactions with its customers." The form, not the substance, of the ads was key.

Further, the court of appeals rejected the insurers’ argument that any promotion Dish engaged in must be excluded from coverage as "one-on-one solicitation" simply because a telephone conversation is a two-party interaction. Though the transaction may be customized, the feature was intended for use by the public at large. “[A]dvertisements do not become solicitation simply because they are not viewed by a multitude of potential customers simultaneously. Indeed, even a billboard advertisement on a public road may promote a product to only one driver at a time if traffic is light. It is the availability of an advertisement to the general public, as opposed to the number of people on the phone line at a given moment, that we consider dispositive.”

However, Dish didn’t misappropriate a style of doing business because it wasn’t alleged to have copied the specific manner in which the patent holder operated its own business or to have copied any trade dress. The court of appeals declined to decide whether a patented process could be so comprehensive and detailed as to constitute a style of doing business even absent any actual past usage by, or identification with, a particular business; the allegations here didn’t rise to that level, since they were only about certain patented technologies used as part of a business.

The next question was whether the complained-of injury arose in the course of advertising, as the policy language requires. Courts have split on causation: one line of cases finds causation if the alleged advertising activities alone would be actionable. The insurers, though, argued that the proper test was whether the injury could have arisen in the absence of advertising.

The court of appeals started with a determination of what the alleged injury actually is and where it arose. The insurers argued that the injury was inflicted by Dish's development of infringing technology, and "[t]he infringement was complete as soon as Dish developed the telephone system with advertising capabilities--before any customer actually heard the system's recorded material." “If true, this would be a strong argument against the existence of any causal connection ….” But there was no record evidence or case in support of the insurers’ argument, and the underlying complaint apparently contradicted it by alleging ongoing harm from the use of the patented technologies. Even if Dish had used the telephone systems only for advertising, the patentee could still have alleged infringement of some of the patent claims at issue. Thus, the advertising alone was potentially actionable. To the extent that cases decided under other states’ laws hold that there’s no coverage if harm could have occurred without advertising, they conflicted with Colorado’s rule that a duty to defend arises wherever the complaint even potentially alleges conduct within the policy language. Moreover, the insurers’ argument would seem to require that advertising be the sole cause of the injury, but only National Union used “solely” in its policy. “To impose a duty to defend under the other policies only if advertising alone, and nothing else, caused injury would give the other four insurers the benefit of a ‘more rigorous’ causation standard than they bargained for. Colorado law does not allow us to alter the parties' contracts in this way.”

Thus, the court of appeals reversed and remanded to deal with unresolved issues, including those relating to language variances in the Arch and National Union policies.