When a company is sued for trademark infringement, in-house counsel must assess whether insurance coverage is available for defending and indemnifying against the suit. Courts generally have ruled in favor of policyholders when carriers have denied coverage.
But in October 2001, apparently in response to growing claims for coverage arising out of lawsuits alleging trademark infringement, insurance carriers modified the standard commercial general liability policy in an attempt to exclude coverage for trademark infringement and related claims. No case opinion has yet to interpret this exclusion.
But even under the older language, carriers sometimes will contest coverage and in-house counsel must be prepared to take a firm position if the insurance company improperly refuses to provide coverage.
When corporate counsel first receives notice that the company has been sued for trademark infringement and related claims, such as trade dress infringement or violation of the Lanham Act, they should immediately send a copy of the complaint to the company’s insurance agent, and instruct the agent to put the insurance company on notice of the claim. This will protect the company’s rights to any coverage arising out of the lawsuit.
Under pre-2001 policies, trademark infringement claims would fall under the “advertising injury” provision of CGL policies. The traditional coverage afforded by the standard CGL policy for trademark infringement is under the “advertising injury” provision, defined in part as injury arising out of “misappropriation of advertising ideas or style of doing business,” or “infringement of copyright, title or slogan.”
There is some disparity among courts as to whether the “advertising injury” clause requires an insurance company to defend and indemnify the insured in the event of trademark infringement actions.
In Massachusetts, for example, one case concerned a carrier’s duty to defend an insured for claims made under an advertising injury provision of a policy, although the case does not involve claims of trademark infringement specifically.
In Smartfoods, Inc. v. Northbrook Property and Casualty Co., 35 Mass. App. Ct. 239 (1993), distributors sued the policyholder when it was purchased by Frito-Lay Acquisition Corp., which had forced the policyholder to use Frito-Lay’s own network of distributors.
The court found no advertising injury, because the insured’s original proposals, in which it solicited the participation of distributors, did not conform to ordinary notions of calling the attention of the public to the merits of the product. It held that no “advertising injury” occurred and the carrier did not have to defend against the distributors’ claims, stating “[w]ide dissemination of information is typically the objective of advertising.” Smartfoods, Inc., 35 Mass. App. Ct. at 243.
While no Massachusetts court has yet examined whether the advertising injury provision of a traditional CGL policy requires an insurer to provide coverage for claims of trademark infringement, the U.S. District Court for the District of New Hampshire ruled that trademark infringement claims did fall within the terms of the advertising injury provision.
In P.J. Noyes Co. v. American Motorists Ins. Co., 855 F. Supp.492 (D. New Hampshire 1994), the trial court judge said the carrier had a duty to defend and provide coverage for the policyholder, which allegedly had infringed the plaintiff’s trademark — “Dustfree Precision Pellets” used to identify food pellets for laboratory animals.
The trademark owner sued for false designation of origin and misrepresentation, trademark infringement, and common law trademark infringement and unfair competition. The court found that although the underlying action was for trademark infringement, that infringement occurred as a result of the insured using the other entity’s trademark in its own advertising. P.J. Noyes Co., 855 F. Supp. at 495. The judge ruled that the carrier was required to provide coverage as long as the advertising that resulted in the infringement did not occur before the policy was purchased.
In P.J. Noyes Co., the judge appeared to follow the majority view of applying the advertising injury provision to trademark infringement claims.
In J.A. Brundage Plumbing & Roto-Rooter, Inc. v. Massachusetts Bay Ins. Co., 818 F. Supp. 553 (W.D.N.Y. 1993), the trial judge determined, after comparing the allegations of the complaint to the “advertising injury” language in the CGL policy, that the carrier had to provide coverage for the insured’s improper use of the name “Roto-Rooter” in violation of its franchise agreement with Roto-Rooter, Inc.
Roto-Rooter, Inc. sought a declaratory judgment that J.A. Brundage Plumbing had misappropriated advertising ideas and style of doing business, as well as violated federal trademark infringement law and diluted the distinctive “Roto-Rooter” name.
The court determined that the misappropriation of advertising ideas “would mean the wrongful taking of the manner by which another advertises its goods or services.” This would include the misuse of another’s trademark or trade name. Thus, the carrier was obligated to provide coverage. J.A. Brundage Plumbing, 818 F. Supp. at 557.
However, in contrast, the judge in American Economy Ins. Co. v. Reboans, Inc., 852 F. Supp. 875 (N.D. Cal. 1994) denied coverage, concluding that the misappropriation doctrine had “no place in the field of trademarks, which are already adequately protected.”
The insured was sued for allegedly selling counterfeit products. The plaintiff asserted claims of federal trademark infringement, federal trademark counterfeiting, and false representations and designations of origin.
The judge ruled the carrier had no duty to defend or indemnify on the basis that the misappropriation doctrine was developed to protect those property rights not already protected by intellectual property remedies. The judge also said that a trademark is not an advertising idea or style of doing business. American Economy Ins. Co., 852 F.Supp.at 881.
The judge noted, “misappropriation should be limited to its narrow, common law meaning.” Id. at 882. And, in examining the reasonable expectations of the policyholder and carrier when entering into the contract, the judge found that because the plaintiff’s injuries stemmed from the insured’s counterfeiting of the plaintiff’s products, those injuries did not occur in the course of the insured’s advertising activities. Accordingly, the insured had no reasonable expectation that the policy would cover those activities. Id. 852 F.Supp. at 882.
The rule set down by the court in American Economy is not the majority rule with regard to insurance coverage for trademark infringement under traditional CGL policies.
So long as the injury is related to the insured’s advertisement of its products and services, claims for trademark infringement, dilution, counterfeit, and other related unfair competition actions generally are covered by traditional CGL policies.
Reservation Of Rights
With respect to the duty to defend, it is important for corporate counsel to realize that the insurer may make a reservation of rights, even though it provides a defense for the insured.
However, the carrier relinquishes all control of the case once it makes a reservation of rights and has no authority to defend the insured in a manner contrary to the wishes of the insured. Three Sons, Inc. v. The Phoenix Ins. Co., 257 N.E.2d 774, 357 Mass. 271 (1970).
Most practitioners have interpreted this holding to mean that when an insurer makes a reservation of rights, the insured may retain its own counsel at the insurer’s expense. However, no case law has explicitly held that the insured has such a right.
Trademark infringement and related claims provide unique challenges for insurance carriers. In the typical tort case, the plaintiff is solely looking for money and the carrier can pay a certain amount to resolve the claim.
But monetary damages often play no role or only a minor role in trademark infringement cases. The plaintiff’s primary goal is to cause the defendant to change the offending name or mark. As a result, often the carrier’s duty to defend the company is of paramount importance because no monetary damages are likely to be awarded.
Additionally, the carrier may have to be more creative than usual in order to serve its insured. For instance, the carrier may want to pay its insured the costs incurred in changing the offending name or mark in order to settle the dispute and stop defense costs.
Also, it is important to note that the carrier is not only obligated to defend a policyholder against claims brought under the advertising injury provision of traditional CGL policies, but also the carrier may be required to indemnify the insured for any damages awarded.
In Limelight Productions, Inc. v. Limelite Studios, Inc., 60 F.3d 767 (11th Cir. 1995), the owners of the mark “limelight” were successful in their claims of trademark infringement against the policyholder, and the insurance company was required to indemnify the insured for the profits awarded to the plaintiff in the underlying action.
The court reasoned that although the ill-gotten profits were not really losses as defined under the policy, because the policy language did not explicitly exclude the coverage, the insurer was obligated to indemnify the insurer for those wrongful profits.
The court said the insurer was aware both of the terms of the Lanham Act when it drafted the policy and the fact that insurers are required to provide coverage for violations of the Lanham Act that occur as “advertising injury.” Therefore, because the Lanham Act allows the court to award the injured party the ill-gotten profits of the infringer, and because the carrier did not specifically exclude coverage for such an award of damages, the insurer must indemnify the insured for those damages, in addition to the actual damages recovered by the plaintiff. Id. at 769.
Recent Modifications To The CGL Policy
In a clear effort to exclude coverage for trademark infringement and related claims, insurance companies have modified the standard CGL policy to exclude coverage for advertising injury “arising out of the infringement of copyright, patent, trademark, trade secret or other intellectual property rights.”
However, the exclusion “does not apply to infringement, in your ‘advertisement’ of copyright, trade dress or slogan.”
While research has disclosed no cases interpreting this exclusion, it appears that the insurance carriers stand a good chance of avoiding coverage obligations for trademark infringement claims unless those claims specifically involve the company’s use of another’s trade dress or slogan in its advertisements.
Thus, it is likely that traditional trademark infringement claims, involving the adoption of a trade name or mark, would not be covered unless the company uses in its advertisements a mere copy of the plaintiff’s trade dress or protected slogan.
The modified coverage form was enacted in October 2001, and only could apply to claims after that time. Therefore, counsel with coverage pursuant to a CGL policy should check to see which form was in effect at the time of the alleged trademark infringement.1
In short, insurance carriers are proactively seeking to disclaim any obligation to defend or indemnify policyholders for trademark infringement and related claims. Corporate counsel should carefully examine the relevant version of the insurance policy be prepared to take a firm position if the insurance carrier improperly refuses to provide coverage. If the carrier disclaims coverage and corporate counsel believes coverage is available, the remedy is to bring a declaratory judgment action against the carrier seeking a declaration that the carrier is obligated to provide coverage.
If successful, the carrier would have to pay the company’s attorneys’ fees incurred in bringing the action, would have to pay defense counsel’s fees to defend the company in the trademark infringement suit, and may have to pay monetary damages if awarded to the plaintiff in the trademark infringement suit.
Coupled with the costs associated for the carrier in defending the declaratory judgment suit, carriers have a significant incentive to be reasonable in deciding whether to provide coverage for trademark infringement and related claims.
In addition, while most insurance carriers have modified their standard commercial liability policies in an effort to avoid a duty to cover trademark infringement claims, carriers may consider (for an additional premium, of course) specifically adding coverage for trademark infringement and related claims. For counsel employed by companies in the high-tech or consumer fields, such special coverage may be worth considering.
1 Generally speaking, commercial liability policies are triggered based on the date the alleged injury is claimed to have occurred. In other words, if a lawsuit alleges that a company infringed a trademark beginning on Jan. 1, 2000, the policy in effect on Jan. 1, 2000 would be the relevant policy, even if the lawsuit is not filed until after that date, such as sometime in 2002.
Robert R. Pierce and Thomas E. Kenney are shareholders in the Boston law firm of Pierce & Mandell, P.C., where they concentrate their practices in the areas of commercial litigation, including insurance defense and coverage, as well as trademark and patent litigation and trademark registration prosecution.