Mid-Continent Casualty Co. v. Kipp Flores Architects,
L.L.C., No. 14-50649 (5th Cir. Feb. 26, 2015)
KFA, an architecture firm, got a judgment in a jury trial
against a builder, Hallmark Design Homes, for copyright infringement for
building hundreds of buildings from KFA’s designs without licensing them. KFA
initially licensed Hallmark to build 11 different house designs once, but
Hallmark built several hundred more copies without paying. Its complaint alleged that Hallmark used
depictions of structures based on its works in promotional and advertising
materials and “used the structures themselves to advertise their infringing
structures.” Hallmark filed for bankruptcy, but the trial went forward because
Hallmark was potentially covered by the policies at issue here. The jury found that
Hallmark had infringed KFA’s copyrights and that KFA had an unsecured claim in
Hallmark’s bankruptcy in the amount of $3,231,084 plus costs.
Hallmark’s insurer, Mid-Continent, sought a declaratory
judgment that it had no duty to indemnify. Its policies excluded coverage for
copyright infringement, but exempted advertising injury from that exclusion,
and allowed the holder of a judgment against Hallmark to recover under the
policies. The district court found
coverage under the advertising injury provision of Hallmark’s policy, holding
Mid-Continent liable in the amount of the prior judgment plus attorney’s fees.
Mid-Continent appealed and the court of appeals affirmed.
Texas tries to give every policy term meaning as well as to
give terms their ordinary meaning unless the policy itself shows intent to give
a term a technical meaning. Ambiguity will be construed against the insurer. The
“facts actually established in the underlying suit control the duty to
indemnify.” The policies at issue
defined “personal and advertising injury” as “injury . . . arising out of one
or more of the following offenses: . . . infringing upon another’s copyright,
trade dress or slogan in your ‘advertisement.’” “Advertisement” 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.” This included material on the internet
or other electronic communications, as well as “only that part of a web- site
that is about your goods, products or services for the purpose of attracting
customers or supporters.”
Mid-Continent argued that the previous judgment never found
there was an advertising injury. “The
insurer’s duty to indemnify depends on the facts proven and whether the damages
caused by the actions or omissions proven are covered by the terms of the
policy. Evidence is usually necessary in the coverage litigation to establish
or refute an insurer’s duty to indemnify.”
However, a coverage suit often requires the parties to submit evidence
of facts which were not specifically covered at the earlier trial, since issues
relevant to the question of coverage can be irrelevant to the question of the
insured’s liability. Thus, courts can make necessary factual findings related
to such issues in coverage actions.
The issue of “advertising injury” was irrelevant to
copyright infringement liability but essential to coverage under the policy.
Because the jury determined that the houses themselves infringed KFA’s
copyright, the key question here was whether the houses themselves were
“advertisements.” The policy language, plus KFA’s “ample” evidence that
Hallmark used the infringing houses for marketing purposes, showed that they
were ads.
KFA presented evidence that the houses themselves were used
to attract customers, in addition to evidence of website and print promotional
materials; the houses themselves were Hallmark’s primary form of marketing. “One of Hallmark’s representatives testified
in deposition in this suit that homebuyers never bought houses sight unseen,
but rather would look at the model homes Hallmark built as well as elevations
and floor plans in the sales office or on the website. In addition, Hallmark
put up yard signs with its contact information on the sites of homes it built
to attract customers.”
Mid-Continent argued that, regardless of these facts, a
house could not be an “advertisement.” The policies defined an ad 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,” and Mid-Continent argued that as a matter of common
sense, a house can’t be a notice, nor can it be “broadcast or published.”
However, the policies never specified that “notice” must
take any particular form and never excluded from the definition a physical
object, nor did they define “broadcast” or “published.” “Notice” in the OED is
defined sweepingly as the “act of imparting information” or “something which imparts information.” Case law had construed “notice” very broadly,
and “publish” was comprehensively defined as “to make public or generally
known” or “to make generally accessible or available for acceptance or use (a
work of art, information, etc.); to present to or before the public.”
Texas law also recognized advertising as “call[ing] to the
public attention by any means whatsoever” for purposes of the Texas Deceptive
Trade Practices Act, or as a “marketing device[] designed to induce the public
to patronize” a particular establishment, or “a public notice drawing attention
to” the attributes of a business. This
accorded with the “common understanding of the term as referring to a device
for the solicitation of business.”
Hallmark’s primary means of marketing its business to the public was
through the use of the homes themselves, both through model homes and yard
signs on the property of infringing homes it had built. Indeed, there was no evidence that Hallmark’s
customers saw any marketing materials other than the houses themselves. “Under
the undisputed facts, Hallmark’s use of the infringing houses satisfies not
only the policies’ expansive definition of “advertisement” and Texas law’s
similarly broad construction of the term but also common sense.” Thus, the infringing houses, as used by
Hallmark, were “advertisements.” See also King v. Cont’l W. Ins. Co., 123
S.W.3d 259, 265 (Mo. Ct. App. 2003) (same result).
Mid-Continent argued that the policy excluded coverage for
Hallmark’s marketing activities because advertising necessarily was an activity
or item distinct from the product being advertised. The facts peculiar to Hallmark’s business—where
the houses themselves were Hallmark’s primary means of marketing—and the broad
policy language at issue justified rejection of this argument.
Next, the court agreed that Hallmark’s liability was
“because of” a covered advertising injury.
KFA did not have to prove that the infringing advertisement swayed a
particular buyer’s decision. Nor was KFA barred from recovery because the
damages award included non-covered damages for infringement in the construction
and sale of the houses themselves. Even
if infringement in construction and sale could be distinguished from
infringement in Hallmark’s use of the houses as advertisements (how?),
copyright law didn’t distinguish between those infringements for purposes of
damages. Thus, KFA would have received a
full recovery—here, actual damages—for any type of infringement, making the
advertising injury damages separate and independent from other damages
resulting from infringement by construction and sale.
Mid-Continent then failed to meet its burden of proving an
exclusion applied. Mid-Continent argued
that breach of contract was excluded (except implied contracts over advertising
ideas), and that KFA and Hallmark entered into architectural services
agreements. But KFA stated a claim only for copyright infringement, not breach
of contract. Neither side ever argued
that there’d been a breach: Hallmark argued unsuccessfully that KFA never
terminated the agreements, so it had granted Hallmark an implied license to
continue using KFA’s designs. Copyright infringement could only have occurred
after Hallmark lost its license. All the damages in the suit were copyright
damages, not contract damages. Thus, Mid-Continent failed to show that the
prior judgment was related to breach of contract.
Mid-Continent also claimed that the cause of action came
from pre-policy conduct, but the pre-policy conduct was when Hallmark had a
valid license from KFA.
Moreover, Mid-Continent wasn’t allowed to argue that
Hallmark’s use of KFA’s designs wasn’t infringement under 17 U.S.C.
§120(a). Mid-Continent wasn’t allowed to
relitigate facts established in the prior liability case, and the jury
specifically found copyright infringement.
Finally, KFA got its attorney’s fees, based on a contingency
fee agreement between KFA and its lawyers (minus a reduction for time spent not
on the breach of insurance contract claim).
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