Insurance Coverage of Intellectual Property Claims
INSURANCE COVERAGE OF INTELLECTUAL PROPERTY CLAIMS
Charles M. Dalziel, Jr., Principal
Dalziel Law Firm
Generally in the 38 years of experience I have had both pursuing intellectual property claims and defending them, I have almost never seen any effort made to involve either the plaintiff’s or the defendant’s insurance carrier in the proceedings. The client, whether plaintiff or defendant, does not immediately pull out its Business Package Policy with multiple policy forms, endorsements and exclusions to look for coverage, and the attorney does not ask for it. So the first party coverage is never explored. And often, both prior to suit or in suit, the plaintiff does not ask the defendant about his insurance. In this paper we will give practical tips for exploration of potentially existing coverages, primarily touching of third party claims.
A. Necessary But Often Neglected Inquiries
A plaintiff’s attorney potentially pursuing an intellectual property claim should utilize state statutes or informal pre-suit discovery to obtain information about the defendant’s insurance. There may be many coverage options available through the defendant’s insurance policies. Pre-suit in our state, requests can be made both to a known insurer, and to the defendant(s) directly, to disclose insurance coverage limits, all carriers, dates of coverage, who is an insured, etc. In response, many times the requestor receives a declarations page for the policies maintained.
A defendant’s attorney, really before diving into defending the action recently served on her client, needs to obtain from the client a copy of all insurance policies in force, both “occurrence” policies and “claims-made” policies. Here we are talking about defending major IP claims. And IP claims are generally “major.” For example, for patent litigation involving sums of $1-25 million, the average cost of defense is $1.6 million through discovery, and $2.8 million through resolution.[1] Defense of trade secret litigation through trial averages over $700,000, and the cost of defending non-compete/nondisclosure agreement litigation can easily exceed $500,000.[2] Defendants would be greatly served by their attorneys helping them with utilizing the duty to defend so that the insurer(s) pays defense costs and expenses. Obviously, accessing a duty to indemnify can be even more advantageous to the client.
B. Tendering the Claim or Suit
Not tendering the claim or case as soon as reasonably practicable could well extinguish the claim under the notice condition of a CGL Policy, and could violate conditions of other policies the client might want to access. So waiting around to decide whether to tender can be foolish. Many states have ruled that delays in reporting for a certain number of days or months is a per se breach of the notice condition of the insurance policy. And though prejudice from late notice is required in some states, in many it is not. So tendering is a generally good idea. Plus, the insured receives surprising leverage when it makes a tender. The tender generates four possible responses:
1. Denial of coverage. The denial must be within a certain enumerated period of time in certain states, and within a reasonable time in others. The denial should be in a letter explaining the basis for the denial of coverage. The general rule is that in the situation of a denial, the insurer is limited to the grounds for non-coverage actually communicated in the denial letter. There is ample authority that other grounds are waived, or that the insurer is estopped from asserting those other grounds. The insurer whose basis for denial is determined by a court to be inapplicable may be in breach of the duty to defend as a matter of law. Hoover v. Maxum Indemnity Co., 291 Ga. 402, 730 S.E.2d 413 (2012). This makes a bad faith claim against the insurer attractive. So, flatly denying coverage, for say a $25 million loss for a specific reason or reasons, is pretty gutsy, given potential bad faith liability.
2. Defend without trying to reserve rights. This waives coverage defenses in most states.
3. Obtain a bilateral non-waiver agreement preserving coverage defenses, which is usually paired with the provision of a defense. The coverage issues are sorted out later, possibly during the suit, possibly after resolution of the underlying case. The agreement generally preserves all the insurer’s coverage issues for later adjudication.
4. Send a unilateral reservation of rights letter and promptly file a declaratory judgment action regarding coverage while providing a defense. The letter usually raise several grounds for non- coverage, but here the insurer is allowed to reserve the right to raise other issues not in the first letter. 28 U.S.C. § 2201 et seq. is the Federal Declaratory Judgment Act. Diversity exists in many cases. There are also state statutes permitting Declaratory Judgment actions in insurance coverage cases. There must be an actual case or controversy which can be decided by the court granting an order delivering specific relief. Aetna Life Ins. Co. v. Haworth, 300 U.S. 227, 240-241 (1937). The declaratory judgment action can be characterized as an act of good faith by the insurer, seeking a binding ruling from the court on coverage, while honoring the duty to defend, as opposed to the high-wire act of a flat denial, which if ruled improper begs for a bad faith action. Id. The declaratory action necessarily involves costs and attorneys’ fees, but the court in the action may be asked to stay the underlying case, cutting off or delaying costs incurred in that action. If the declaratory judgment action is filed in federal court, and the liability case in state court, the general rule by statute is that the federal court will not stay a state court proceeding, however. See 28 U.S.C. A. § 2283 (the “Anti-Injunction Act”). Even if an injunction or stay is not sought or granted, the fact that a declaratory judgment action is pending tends in a strange way to give the insured leverage in the global war of the litigation.
C. Policy Forms Potentially Providing Coverage
A tender should be made concerning specified policies or forms. The insurer is bound to avoid state law claims of unfair settlement practices in responding to the tender. The insurer has to consider the “four corners” of the complaint, and the “four corners” of the policies or specific forms, but also may be required to conduct additional investigation of the facts, to request information from the insured, and to consider settlement initially. Consideration of all these matters may place duties on the insurer in connection with the coverage decision such as (1) to defend all claims in a complaint, even if only one is covered and there are several non-covered; (2) to consider facts outside the complaint supplied by the insured or known or readily knowable by the insurer; (3) to defend lawsuits potentially within the policy’s coverage; and (4) to resolve all coverage doubts in favor of the insured. Given the application of these rules, tendering a major claim could be a good idea. Here are some of the policy forms which might provide coverage:
1. Commercial General Liability (“CGL”) Form provides Coverage A “Damage to Property” and Coverage B “Advertising Injury.”
(a) Coverage A--Property Damage must be “damage to tangible property,” but cut out of the definition of tangible property is electronic data. So this makes coverage a claim for intellectual property claims under Coverage A difficult, although certain physical property could possibly be taken by a new employee defendant, like a laptop computer with customer and other confidential information, or a company cell phone, or tangible records, which might fit into the definition of property damage. An exclusion for expected or intended injury from the perspective of the defendant is a hurdle, however, although this exclusion has been limited in surprising ways. Allstate Ins. Co. v. Justice, 229 Ga. App. 137 (1998) (gunshot might not be excluded if insured fired in self-defense).
(b) Coverage B Advertising Injury--“Advertisement” means 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 can include internet publications or portions of websites about the insured’s products. Some CGL policy forms also define “advertising injury.”
Several insureds in reported litigation are seeking coverage for IP claims under Coverage B of the CGL as “advertising injury.” Coverage B generally provides indemnity for sums the insured becomes legally obligated to pay as damages because of “personal and advertising injury.” Coverage B uses the definitions in Section V of the CGL for “personal and advertising injury.” The personal and advertising injury definition in Section V means injury, including “bodily injury” arising out of listed “offenses.”
Seven Coverage B offenses are identified; Two, “use of another’s advertising idea in your advertisement” (offense f.) or “infringing of another’s copyright, trade dress or slogan in your advertisement” (offense g.) are the most relevant offenses potentially providing coverage in intellectual property cases. Two exclusions in Coverage B also deal directly with infringement, so the coverage can be narrowly construed. But in the interesting case of Princeton Express v. DM Ventures USA LLC, 206 F.Supp. 3d 1252 (S.D. Fla. 2016), the court ruled the application of the exclusion would make the policy illusory, and so found coverage.
Advertisement” means 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 can include internet publications or portions of websites about the insured’s products. Some CGL policy forms also define “advertising injury.”
Claims of coverage under Coverage B for copyright infringement have been upheld in Bear Wolf, Inc. v. Hartford, 819 So.2d 818 (Fla. App. 4th Dist. 2002); AMCO Inc. Co. v. Lauren Spencer, Inc., 500 F.Supp.2d 721 (S.D. Ohio). For trademark infringement, CAT Internet Services v. Providence Washington, 333 F.3d 138 (3rd Cir. 2002) found coverage, as did State Auto v. Travelers, 343 F.3d 249 (4th Cir. 2003). And coverage for trade dress infringement is easier to find. R.C. Bigelow, Inc. v. Liberty Mutual, 287 F.3d 242 (2nd Cir. 2002); Westfield Insurance Co. v. Factfinder Marketing, 168 Ohio App. 3d 391, 401 (2006); Pizza Magic v. Assurance Co of America, 447 F.Supp.2d 766 (W.D. Ky. 2006). Coverage for patent infringement is more of a long shot and sometimes is expressly excluded. But see Hyundai v. National Union, 600 F.3d 1092 (9th Cir. 2010).
Cases in the Eleventh Circuit and its District Courts finding coverage under Coverage B for intellectual property claims are Land’s End v. Aspen Specialty Ins. Co., 2017 WL 4416829 (M.D. Fla. 2017); Hyman v. Nationwide Mutual Insurance Co., 304 F.3d 1179 (11th Cir. 2002) and St. Luke’s v. Zurich, 506 Fed. Appx. 970 (2013). Cases denying coverage are IVFMD Florida v. Allied Prop. & Cas. Inc. Co., 679 Fed. Appx. 769 (11th Cir. 2017); Allstate v. Airport Mini-Mall, 2017 WL 4280628 (N.D.Ga., Totenberg J., 2017). Just the fact some cases do find coverage speaks in favor of a tender.
For an excellent overall view of how coverage issues are raised and decided, read Foliar Nutrients, Inc. v. Nationwide Agribusiness Ins. Co., 133 F. Supp. 3d 1372 (M.D. Ga. 2015, Sands J). Judge Sands in dealing with coverage for a counterclaim in IP litigation finds coverage under Coverage B, and rules the “Knowing Violation” Exclusion only applies where the insured has actual knowledge that its act would cause an intended result (so that it does not apply). Judge Sands notes the duty to defend in Georgia is broad, the insured is allowed to bring facts outside the complaint to seek coverage, and the insurer in response must investigate. The field is titled in favor of the insured, as demonstrated in this case and others from multiple jurisdictions.
2. Errors & Omissions Liability
There is potential coverage for intellectual property claims under this form, which brokers tout as providing broad form coverage of an expanded list of insureds, at high limits. See MedAssets, Inc. v. Federal Ins. Co., 705 F. Supp. 2d (1368) (N.D. Ga. 2010, Story, J.) (for E&O analysis, although decision is no coverage).
3. Employment Practices Liability Insurance (“EPLI”)
The definitions of “Wrongful Act” and “Workplace Tort” and “Retaliation” offer some gray area creating potential for argument of coverage of claims against onboarding “Employees” as “Individual Insureds” who have made misrepresentations to their former employers or to the current employer about the existence of non-disclosure, non-solicit or non-disclosure agreements or the source of intellectual property they currently possess. The EPLI policy may be written on a claims-made basis, so the policy period analysis will be different than under a CGL policy, where the focus is on whether the occurrence or offense happened during the policy period.
4. Directors and Officers Liability (“D&O”)
While a D&O policy may have agreements to indemnify broad enough to provide initial coverage for an IP claim, there can be an exclusion for any actual or alleged misappropriation of ideas or trade secrets. In MedAssets, Inc. v. Federal Ins. Co., 705 F. Supp. 1368 (N.D. Ga. 2010), this was exclusion 7. In a recent policy I reviewed, it was a more broadly written exclusion 4, and exclusion 5 was for unfair trade practices. While that exclusion might effectively deny coverage to direct claims of misappropriation of trade secrets, it does not reach claims for misappropriation of confidential information, intentional interference with customer’s relationships to obtain confidential pricing information, or tortious interference in using the improperly obtained confidential information. So, coverage under a D&O policy is possible.
A D&O policy covers “Loss” which includes damages, settlements, judgments, interest and “Defense Costs,” as well as quite possibly punitive damages. Deliberate Acts and acts where the insured got a pecuniary advantage to which they were not legally entitled are excluded.
5. Media Liability – Policy forms providing this coverage are now sold to regular companies which blog and publish articles and other internet content. Media Liability coverage can be accessed possibly for copyright infringement, invasion of privacy, trademark infringement, defamation, etc.
6. New Coverages
Insurers are now marketing intellectual property insurance of various kinds.
(a)Intellectual property insurance-defense policies. These provide coverage when the client has to defend misappropriation, infringement or tortious interference claims. Some insurers offering this coverage have panel counsel they claim are experts to defend such suits, although the insured under some other policy forms can chose its own counsel.
(b)Abatement Insurance – Here the insured has a plaintiff’s policy which reimburses plaintiff’s litigation expenses for efforts to enforce the insured’s IP rights.
(c)Opinion Only Insurance – The insured can insure IP rights, and if it is the alleged perpetrator or victim of alleged infringement, it may receive a full IP legal opinion from panel counsel, which may aid early resolution. This insurance is targeted at start-ups.
(d)Combination Policy Including Defense & Abatement & Indemnity.
(e)After the Event Insurance and Litigation Funding – These products can be applied for after alleged infringement has already occurred.
7. Other Coverages Worth Investigating
Review the entire Package Policy for all types of liability forms (our law firm’s is 181 pages long).
(a)Umbrella, Data Breach, Cyber Liability, etc. Umbrella policies are specifically written to provide broader coverage than the general liability policy. Data Breach Liability and Cyber Liability Forms included in a package policy provide specific coverage which the CGL arguably or specifically does not.
(c)First Party Coverage for insured’s intellectual property losses – Particularly study the Business Owner’s Policy, Section I – Property coverage for Covered Property, i.e., Section 1a(c) “Business Personal Property” (potentially excludes “computer equipment” and “electronic data,” however). Cyber Insurance forms which provide broader coverage than the traditional property coverage may be in the insured’s stack of forms. The attorney must look at the whole package.
CONCLUSION
A big IP case warrants careful study of available insurance policies and the case law.
[1] Neumeyer, Managing Costs of Patent Litigation, February 5, 2013, www.ipwatchdog.com/2013/02/05 (figures from American Intellectual Property Association).
[2] Rowe, Trade Secret Litigation and Free Speech: Is It Time to Restrain the Plaintiffs?, 50 Boston College Law Review 1425, 1451 (2009) (also using figures from American Intellectual Property Association).