—David A. Gauntlett, Gauntlett & Associates

Intellectual property cases are expensive to litigate. When a brand owner finds itself charged with infringement of intellectual property rights, it is always worth a close examination of any applicable insurance policies to determine whether the carrier has a duty to defend the claims.

Here are five key points that intellectual property litigators should focus on:

First, facts evidencing potential insurance coverage may not be evident from the face of a complaint/counterclaim. In jurisdictions (including Minnesota) where facts known to the insurer, as well as those pled, must be evaluated as well as inferences from those facts, it is often critical to propound Requests for Admission and follow-up Interrogatories to evidence potential coverage.

  • Burgett, Inc. v. American Zurich Ins. Co., No. 2:11-cv-01554-MCE-JFM, 2011 WL 5884251, at *6-7 (E.D. Cal. Nov. 23, 2011) (A press release suggesting that the defendant is not a trademark infringer but has the rights to promote products, which the trademark owner contends the defendant does not, may call into question the claimant’s rights, especially where it asserts publicly in its own marketing materials, its rights to occupy the field.)

Second, insurer claim representatives may not possess necessary distinctions to accurately gauge whether a defense is due or not for intellectual property claims. Indeed, the distinctions necessary to evaluate whether, for example, a business method patent claim is one employing an advertising technique or methodology that might implicate coverage is well beyond the work experience, as well as training of claims representatives assigned to address such issues.

  • DISH Network Corp. v. Arch Specialty Ins. Co., 659 F.3d 1010, 1012-14, 1016, 1018-20 (10th Cir. (Colo.) 2011).

Third, the right to independent counsel (as opposed to insurance panel counsel) is an important issue that should always be addressed when an insurer is asked to defend a suit. An insured should not make a short-term decision to accept the “appointed counsel” whose selection may be not in its long term interests. Appointed counsel is unlikely to possess significant intellectual property defense experience or be familiar with the company’s operations and overall IP program.

Equally critical, “independent counsel” can require insurer funding of affirmative claims for relief (whether by counterclaim or otherwise) that are “conducted against liability” at the insurer’s expense. Absent participation by independent counsel, appointed counsel is unlikely to be authorized to pursue such claims at the insurer’s expense.

  • Ultra Coachbuilders, Inc. v. General Sec. Ins. Co., 229 F. Supp. 2d 284, 289 (S.D.N.Y. 2002) (“In fact the counterclaims, alleging unfair competition and interference with competitive advantage, were used to argue (albeit unsuccessfully) that the injunction application was barred by the doctrine of unclean hands, see Ford Motor Co. v. Ultra Coachbuilders, Inc., 57 U.S.P.Q.2d 1356, 2000 WL 33256536, at *10 (C.D.Cal.2000), and were thus ‘inextricably intertwined with the defense of [defendant’s] claims and necessary to the defense of the litigation as a strategic matter.’ Safeguard Scientifics, Inc. v. Liberty Mut. Ins. Co., 766 F.Supp. 324 (E.D.Pa1991).”)

Fourth, the mere provision of notice to a carrier on risk as of the date of suit may be insufficient. All carriers on risk from the date of the first alleged wrongful conduct should be given notice of a lawsuit/claim. It may not be evident from the complaint which insurer is first on risk. Further fact development in the underlying action may be necessary to deduce the answer to that question. In the interim, so long as it is possible that conduct could arise creating covered damage exposure, all insurers who issued policies during that period of potential exposure should receive notice.

Where potential damages are greater than the policy limits, umbrella insurers in relevant years may also need to be noticed. Some jurisdictions such as New York (prior to January of 2009) and Illinois follow a Draconian late notice rule which could divest an insured of policy benefits where a delay as little as three months from the date of suit occurs.

In the absence of actual notice, constructive notice may be an arguable basis for contending that the insurer has a duty to defend a case. Notice to a broker, however, will not suffice as brokers are typically agents of the insured, not the insurer. Also, it is critical to not have brokers in meetings as there is no privilege for their participation, even though they may desire to know what has happened to the policies they have sold to the insured and how the insured is benefiting from these policies. These communications can be separately communicated by coverage counsel so as to keep the broker informed but no in a way that anything communicated would not be detrimental to the insured’s interests.

Fifth, policyholders should consider the possibility that narrow policy provisions are illusory because they purport to provide broad advertising injury or personal injury coverage and then take virtually any meaningful coverage away under the guise of an intellectual property exclusion.

  • Aurafin-OroAmerica, LLC v. Federal Ins. Co., 188 Fed. Appx. 565, 567 (9th Cir. (Cal.) 2006) (“It is unclear what the exclusion meant when it excluded statements made in ‘defense of’ intellectual property rights.”)
  • Align Tech., Inc. v. Federal Ins. Co.,673 F. Supp. 2d 957, 969 (N.D. Cal. 2009) (“Federal’s language does not put an insured reasonably on notice that Federal will not cover claims in a lawsuit whenever that lawsuit also includes a claim for intellectual property. Thus, the ‘regardless’ clause does not conclusively eliminate coverage for all of the claims in the Cross-Complaint.”)

Equally problematic is Travelers’ Web Xtend Liability policy (CG D2 34 01 05) which eliminates coverage for “f. the use of another’s advertising idea in your ‘advertisement’ ” and “g. infringement of . . . trade dress in your ‘advertisement.’ ” At least one court has found that this endorsement far from eliminating the previous personal and advertising injury coverage must provide a defense under its terms as well as that of the endorsement.

  • Premier Pet Products, LLC v. Travelers Property & Cas. Co. of America, 678 F. Supp. 2d 409, 417 (E.D. (Va.) 2010) (“An ‘endorsement is not a complete contract in itself.’ Id. Certainly a five-page endorsement that purports to change sections of the original sixteen-page policy cannot be read to replace entirely the underlying policy. The Court will consider, to the extent necessary, the entirety of the contract before it.” (emphasis added)).

What is your experience in obtaining insurance coverage for the defense of IP claims?