A Picture Is Worth a Thousand Words — and a Duty to Defend

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Every now and then, a decision comes along that could have a broad impact in coverage, even if the court that issued the decision ostensibly wishes otherwise.  Selective Ins. Co. of SE v. Creation Supply, Inc., 2015 WL 522247 (Ill. Ct. App. Feb. 9, 2015), is one of those cases.  It is well settled that, for intellectual property cases, the sale of an infringing product in of itself does not implicate coverage under “personal and advertising injury.”  Nor should it.  Yet, should the mere presence of a placard on a shelf display in a store alter that analysis?  In Creation Supply, the court thought so.

The facts of the case are straightforward.  Underlying plaintiffs filed a lawsuit alleging that the insured, Creation Supply, infringed their trademarks by copying their brand of “COPIC” double-ended, alcohol-based colored markers.  According to the lawsuit, the insured’s brand of markers, called “MEPXY” markers, possessed the same squarish bodies and end-caps as the COPIC markers, thereby making the two brands look alike.  Id. at *1.  Plaintiffs contended that Creation Supply’s copy-cat design caused consumer confusion in violation of the Lanham Act.  Id.

Creation Supply sought coverage under its general liability policy.  The policy defined “personal and advertising injury” in part as injury arising out of “[i]nfringing upon another’s copyright, trade dress or slogan in your ‘advertisement’.”  Id. at *2 (emphasis added).  The policy defined “advertisement 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.”  Id.

The policy also had an intellectual property exclusion, which prohibited coverage for:

Arising out of the infringement of copyright, patent, trademark, trade secret or other intellectual property rights. Under this exclusion, such other intellectual property rights do not include the use of another’s advertising idea in your “advertisement.”

However, this exclusion does not apply to infringement, in your “advertisement,” of copyright, trade dress or slogan.

The insurer denied coverage, stating that the lawsuit – in essence, a trademark infringement action – did not allege “personal and advertising injury,” and that, in any event, coverage was excluded by the intellectual property exclusion.

Coverage litigation ensued and Creation Supply moved for partial summary judgment, arguing that the underlying action alleged trade dress infringement in an advertisement.  Id. at *3.  The basis of Creation Supply’s argument was that the appearance of the markers themselves constituted trade dress in an “advertisement,” thereby implicating “personal and advertising injury” coverage.  The trial court disagreed and denied the motion on the ground that a product cannot be an “advertisement” to implicate coverage.  Id.

After the court’s decision, Creation Supply renewed its motion on the grounds that certain retail store displays – namely, placards placed along shelves that depicted the markers themselves – triggered coverage because the displays constituted an advertisement in which the markers’ trade dress was depicted.  Id.  The trial court agreed and granted Creation Supply’s renewed motion.

On appeal, the insurer argued that the underlying action did not allege “personal and advertising injury” because the lawsuit sought damages not for the infringement of trade dress in an advertisement, but for the slavish copying of the COPIC markers’ squarish design.  Id. at *6.  In other words, the lawsuit was no different than any other intellectual property infringement action.  Creation Supply argued that the configuration in the markers constituted trade dress in an advertisement.  In the alternative, Creation Supply argued that the shelf displays constituted an advertisement.  Because they depicted the markers, the lawsuit implicated “personal and advertising injury” coverage.  Id.

The court agreed with Creation Supply’s second argument:

The placards are more than the mere display of the product itself and affirmatively serve to attract customers.  The shape and design of the marker is prominently displayed in the placard, which is the source of the underlying trade dress claim. If, for example, the retail product display merely included a large bin containing the markers and nothing more, then Selective would have a valid argument that the retail product display did not constitute advertising as contemplated under the policy. That is not the case here. We find that the retail product display of the MEPXY markers constitutes an “advertisement” which satisfies the first element required to trigger coverage.

Id. at *7.

Here is my problem.  Plaintiffs were not suing because of the manner in which the MEPXY markers were displayed in stores or even the manner in which they were being advertised.  The lawsuit was about trademark infringement in a product and resulting unfair competition.  (The underlying complaint never used the phrase “trade dress infringement,” by-the-way.  Id. at *11.)  The lawsuit was an infringement action and had nothing to do with advertising.  Nevertheless, because a placard in a shelf display depicted the infringing product, a duty to defend was implicated.  Many stores have placards and signs pointing out products.  Does this create a whole new avenue of coverage?

The court seemed to recognize the new waters is was charting.  The opinion seeks to limit the case to the facts before it, and the court expressly stated that its decision did not mean that every retail display can implicate coverage:

Our conclusion does not mean that all retail product displays constitute advertising activity for purposes of triggering the duty to defend. We specifically limit our finding to the factual circumstances of this case and the particular display configuration at issue here.

Id.  Yet, if the court were trying to close Pandora’s box, it’s uncertain how it could render its decision and still hope to do so.

The court also rejected the insurer’s argument that the intellectual property exclusion applied.  After its determination that the lawsuit alleged infringement of trade dress in Creation Supply’s “advertisement” to satisfy the definition for “personal and advertising injury,” this outcome was not a hard to predict.  The court merely had to conclude that the exclusion’s carve-out exception applied:

We have previously found that the underlying complaint alleges trade dress infringement in Creation Supply’s advertisement.  Considering the policy language, “this exclusion does not apply to infringement, in your ‘advertisement,’ of copyright, trade dress or slogan,” we find that this exception to the exclusion applies. Therefore, the intellectual property exclusion in Selective’s policy is not applicable here.

Id. at *12.

What does this case mean?  Admittedly, addressing coverage issues involving intellectual property, especially trademarks and trade dress, in the context of Coverage B can get tricky.  Yet, this case pushes the envelope to an extreme by allowing a shelf display to implicate coverage for what otherwise is a classic infringement action.  A link to such a display is provided below.  So is a picture.  (The black-and-white-and-red colored placard above the markers created the coverage.)   The court’s attempt to limit the decision to the facts suggests that the court itself struggled with a level of discomfort over the broad implication of its decision.  It will be interesting to see if other courts reject it or follow it.




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