Trademark infringement on hang tags is covered advertising injury

E.S.Y., Inc. v. Scottsdale Ins. Co., 2015 WL 6164666, No. 15–21349–CIV (S.D. Fla. Oct. 14, 2015)

Scottsdale insured ESY under a commercial general liability insurance policy, with coverage for advertising injury.  Exist, an apparel maker, later sued ESY for infringing its copyright and trademark in its Exist Shield Mark by using a “Liquid Energy Shield Mark” on labels and hang tags for its competing garments.  Exist further alleged that the use of the Liquid Energy Shield Mark was a false or misleading description of fact/false designation of origin, and that this also violated state law.

Advertising injury, under the policy, included:

d. Oral or written publication, in any manner, of material that slanders or libels a person or organization or disparages a person’s or organization’s goods, products or services;

* * *

f. The use of another’s advertising idea in your “advertisement”; or

g. 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....” There were exclusions for knowing violation of the rights of another as well as for infringement of “copyright, patent, trademark, trade secret, or other intellectual property rights,” but the exclusion didn’t apply to infringement in an “advertisement” of copyright, trade dress or slogan.

In order to have coverage, the insured has to show that an alleged violation “gave rise to an ‘advertising injury,’ ” and that “there exists a ‘causal connection’ between that injury and the ‘advertising activity’ undertaken by” the insured.

ESY argued that the underlying complaint alleged disparagement, which could result from a false comparison suggesting another brand is inferior. But the allegedly infringing similarity here didn’t make any express comparison, nor did the implicit reference dishonor or denigrate Exist: “imitation is not disparagement as there was no comparison suggesting Exist’s brand was inferior to Plaintiffs’.”  Though Exist alleged it suffered reputational harm by being associated with ESY, that just means Exist thought itself superior to ESY; it doesn’t mean that ESY allegedly suggested that it was better than Exist.

ESY’s arguments about “[t]he use of another’s advertising idea in your ‘advertisement,’ ” and “[i]nfringing upon another’s copyright, trade dress or slogan in your ‘advertisement’ ” fared better.  The insurer argued that the accused hang tags were part of the garments themselves, not advertisements.  The court disagreed.  Though something that was part of the product might not be an ad, the hang tags were attached to the garments but not part of the garments themselves.  They provided information and also “presumably had the additional function of attracting consumers to the garments themselves and to the brand more generally. If the hang tags’ only purpose was to provide information, they would not need such a particular aesthetic.”  Indeed, many products don’t have “fanciful” hang tags; instead they have labels “lest they detract from the product’s appeal. The hang tags here presumably did the opposite—they attracted the consumer.”  Given the rule that ambiguities are resolved in favor of coverage, “advertisement” was broad enough to cover the hang tags.

Did they hang tags allegedly use another’s advertising idea?  “[T]he Eleventh Circuit, applying Florida law, has construed the term to mean ‘any idea or concept related to the promotion of a product to the public.’ ” So, for basically the same reasons a hang tag is an advertisement, it is also an advertising idea, and the complaint was also fairly read to allege that the hang tags were trade dress. 

Further, the underlying complaint alleged copyright infringement, which was concededly covered.

Was there “a causal connection between [the advertising] injury and the advertising activity undertaken by” ESY?  Selling an infringing product isn’t enough to create a causal connection: the alleged misconduct has to be committed in an advertisement.  Again, that was what the underlying complaint alleged here.

The infringement exclusion didn’t bar coverage because it expressly carved out infringement in an “advertisement,” as here.  The knowing violation also didn’t apply because, though the underlying complaint alleged a knowing violation, the underlying plaintiff could recover without showing intentional infringement.  There can’t be a duty to indemnify without a duty to defend, and under the insurer’s logic that the allegations sufficed to trigger the exclusion, it could end up after trial with a duty to indemnify—if the underlying plaintiff showed liability for non-willful infringement—without having had a duty to defend.