Category Archives: Counterfeiting

MARCH MADNESS: A MAN’S ADVERTISEMENT IS HIS CASTLE (OR CONVERTING COVERAGE B INTO IP INSURANCE)


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Two and-a-half months into 2015, and we are having a different kind of march madness for Coverage B advertising injury decisions.  The latest is Mid-Continental Cas. Co. v. Kipp Flores Architects, LLC, — Fed. App’x –, 2015 WL 795822 (5th Cir. Feb. 26, 2015), where the United States Court of Appeals for the Fifth Circuit held that a house is an advertisement for purposes of the duty to indemnify under Coverage B.

The background facts for the case are straightforward and unremarkable.  Plaintiffs, Kipp Flores Architects (“KFA”) is an architecture firm that designs homes and licenses its designs to builders.  The insured, Hallmark Design Homes (“Hallmark”) built a large number of homes using KFA’s designs without a license.  KFA sued Hallmark for copyright infringement, seeking damages under the Copyright Act.  Id. at *1.  KFA alleged that:

Defendants have created, published and used non-pictorial depictions of structures based on KFA’s Copyrighted Works in promotional and advertising materials. Defendants have published and used these infringing materials in the course of advertising their infringing structures. Furthermore, defendants have used the structures themselves to advertise their infringing structures.

Hallmark had a series of CGL policies covering damages “because of” “personal and advertising injury,” defined in part as injuring arising out of the “infringing upon another’s copyright, trade dress or slogan in your ‘advertisement.’” Id. at *3.  The policies defined “advertisement” in part 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 policies had an IP exclusion, which prohibited coverage for:

i. Infringement Of Copyright, Patent, Trademark Or Trade Secret

“Personal and advertising injury” arising out of the infringement of copyright, patent, trademark, trade secret or other intellectual property rights.

However, this exclusion does not apply to infringement, in your “advertisement”, of copyright, trade dress or slogan.  [Id. at *4.]

The underlying action went to trial, and the jury returned a verdict in KFA’s favor for $3.3 million.  Id. at *2.  Coverage litigation ensured to determine the insurer’s duty to indemnify that verdict, and the parties cross-moved for summary judgment.

The insurer argued that there was no duty to indemnify because the alleged copyright infringement in the home deigns took place in the homes, not in an “advertisement,” as defined in the policies.  The insurer also argued that the damages entered against Hallmark were for the homes’ infringement, and not “because of” “personal and advertising injury,” and that, in any event, the IP exclusion applied.  The trial court denied the insurer’s motion and granted KFA’s motion.  The Fifth Circuit affirmed.

The insurer argued that it had no duty to indemnify because the homes themselves could not constitute an “advertisement,” and that the $3.3 million verdict was not damages “because of” an advertising injury to implicate coverage.  The Fifth Circuit disagreed.  Noting that the insurer itself “conceded that KFA presented evidence that the houses themselves were Hallmark’s primary form of marketing,” the Court concluded that the houses, themselves, constituted “notice that is broadcast or published to the general public” to fall within the policies’ definition for “advertisement.”

Stating that the policies did not define “notice” or “published,” the Court reasoned that the terms were understood to have very broad meanings:

It is important to note that the policies never specify that “notice” must take any particular form (e.g., a writing or a website) and never exclude from the definition a physical object, nor do they define “broadcast” or “published.” Among other things, the Oxford English Dictionary defines “notice” sweepingly as the “act of imparting information” or “something which imparts information.”  The few cases interpreting the policy language at issue here (“a notice that is broadcast or published”) have construed “notice” very broadly.  Under the policy language, such notice need only be broadcast or published to qualify as an advertisement. While “broadcast” generally implies radio or television advertisement, “publish” is much more comprehensively defined as “to make public or generally known” or “to make generally accessible or available for acceptance or use (a work of art, information, etc.); to present to or before the public.”

Id. at *6 (emphasis added).

In other words, because the terms “notice” and “broadcast” were not restricted to forms of communication, such as oral or written, or electronic, and because they did not exclude a house in a written definition, the terms could mean a house.

Because, according to Hallmark, the homes were the “primary marketing device” used by the builders to sell the homes, and because the copyright infringement was in the homes themselves, the Court concluded that the underlying action alleged infringement of copyright in the insured’s advertisement:

In this case, it is undisputed that Hallmark’s primary means of marketing its construction business was through the use of the homes themselves, both through model homes and yard signs on the property of infringing homes it had built, all of which were marketed to the general public.  Mid–Continent even contends there is no evidence that Hallmark’s customers saw any marketing materials other than the houses themselves.  Under the undisputed facts, Hallmark’s use of the infringing houses satisfies not only the policies’ expansive definition of “advertisement” and Texas law’s similarly broad construction of the term but also common sense. We therefore conclude that the infringing houses in this case, as used by Hallmark, all qualify as “advertisements” under the policies.

Id. at *7 (emphasis added). Wait. What?  This brings a whole new meaning to the phrase “the house just sells itself.”

The Fifth Circuit easily dispatched the insurer’s remaining arguments.  Because the homes constituted an “advertisement,” the underlying verdict was for damages “because of” “personal and advertising injury.”  In addition, the IP Exclusion’s carve-out exception for “infringement, in your ‘advertisement’. . . of copyright” applied.  Id. at *8.

What Does This Case Mean?  The logical path of this decision can lead to a parade of the horribles.  With one swoop, the Fifth Circuit turned a CGL policy into insurance for product copyright infringement.  To support its decision, the Court emphasized concessions made by the insurer, but really, all the concessions in the world should not have converted a house into an advertisement (i.e., a notice that is broadcast or published to the general public).

Seriously, consider for a moment the implication this decision: an insured need only contend that an infringing product sells itself in order to qualify for “personal and advertising injury” coverage.  The Court called this “common sense.”  Yet, using a product to sell itself is not that uncommon.  It’s the primary tool in counterfeit merchandising.  Same with knock-off products and fake art.  What about infringing music – should Sam Smith have called his lawyer or his broker?

In two months, we have seen some significant developments in “personal and advertising injury” coverage.  First, a placard on a store shelf can implicate coverage.  Now, the infringing product itself – where there is no evidence of use of other marketing materials – can implicate coverage.  And its only March.

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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.

 

http://www.amazon.com/Mepxy-Brush-Marker-Assortment-Display/dp/B009OR26C0

206208-2

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Product Disparagement and The Duty To Defend: Swift Distribution Affirmed; Charlotte Russe Disapproved


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June 13, 2014.  In the November 2, 2012 issue of The Coverage Inkwell, I discussed the California Court of Appeal decision in Hartford Cas. Ins. Co. v. Swift Distribution, Inc., 148 Cal. Rptr. 3d 679 (Cal. Ct. App. 2012), noting its importance because (1) it provided a reminder as to why claims of “passing off” should not constitute trade libel to implicate coverage under general liability policies, and (2) its sharp criticism of Travelers Prop. & Cas. Co. v. Charlotte Russe Holding, Inc., 144 Cal. Rptr. 3d 12 (Cal. Ct. App. 2012).  Charlotte Russe had held that allegations of placing fashionable apparel in a markdown display constituted trade disparagement to implicate a duty to defend.

Yesterday, the Supreme Court of California affirmed Swift Distribution and scaled back product disparagement claims for implicating a duty to defend under Coverage B of general liability policies.  Hartford Cas. Ins. Co. v. Swift Distribution, Inc., — P.3d –, 2014 WL 2609753 (Cal. June 12, 2014).  The decision also disapproves Charlotte Russe and should call into doubt other decisions that broadly construe trade libel and product disparagement to implicate a duty to defend in product knock-off and passing-off litigation.

In essence, the underlying action was a “passing off” case.  The plaintiff Gary-Michael Dahl (“Dahl”) manufactured and sold the “Multi–Cart,” a cart that could be manipulated into various configurations to move music, sound, and video equipment quickly and easily.  The insured, Swift Distribution d/b/a Ultimate Support Systems (collectively, “Ultimate”) began selling an alleged knock-off, the “Ulti-Cart.”  Dahl commenced a lawsuit against Swift Distribution for patent and trademark infringement, unfair competition, dilution of a famous mark, and false advertising.  Dahl asserted that Ultimate’s false and misleading advertisements and use of a “nearly identical mark” were likely to cause consumer confusion or mistake, or to deceive the public “as to the affiliation, connection, or association” of the two parties.  Id. at *1.  The complaint attached Ultimate’s advertisements, which did not name the Multi-Cart or any other product.

Ultimate tendered its defense under its general liability policy, which provided coverage for “personal and advertising injury,” defined in part as “injury … arising out of … [o]ral, written or electronic publication of material that slanders or libels a person or organization or disparages a person’s or organization’s goods, products or services.”  Id. at *2.

Ultimate argued that the underlying action involved a claim of disparagement.  Id.  The insurer disagreed and denied coverage, explaining that that there could be no disparagement absent a specific statement about a competitor’s goods.  Id.  Coverage litigation ensued.  The trial court held that the insurer had no duty to defend and the California Court of Appeal affirmed.  The Supreme Court of California also affirmed.  In doing so, it clarified the meaning of commercial disparagement, including product disparagement and trade libel.  Id. at *3.

Noting that disparagement emerged from the common law tort for slander of title, the Court explained that the tort had expanded to include statements disparaging the quality of property rather than simply its ownership, a form of disparagement commonly referred to as trade libel, and also came to encompass a broader theory of economic or commercial injury caused by a false, derogatory statement.  Id. at *5.  This expansion, in turn, created confusion.

“Confusion surrounds the tort of ‘commercial disparagement’ because not only is its content blurred and uncertain, so also is its very name. The tort has received various labels, such as ‘commercial disparagement,’ ‘injurious falsehood,’ ‘product disparagement,’ ‘trade libel,’ ‘disparagement of property,’ and ‘slander of goods.’ These shifting names have led counsel and the courts into confusion, thinking that they were dealing with different bodies of law.  In fact, all these labels denominate the same basic legal claim.”

Id.  Disparagement, the Court concluded, is often included as “a specific example of the more general principle of injurious falsehood.”  Id.  For purposes of insurance coverage, disparagement has come “to mean a knowingly false or misleading publication that derogates another’s property or business and results in special damages.”  Id. at *6.

Working within the confines of this understanding, the Court concluded that when evaluating whether a claim of disparagement has been alleged for purposes of the duty to defend, courts require:

that the defendant’s false or misleading statement have a degree of specificity that distinguishes direct criticism of a competitor’s product or business from other statements extolling the virtues or superiority of the defendant’s product or business. . . . A false or misleading statement (1) must specifically refer to the plaintiff’s product or business, and (2) must clearly derogate that product or business.  Each requirement must be satisfied by express mention or by clear implication.

Id. at *7 (emphasis added).

According to the Court, “[w]hat distinguishes a claim of disparagement is that an injurious falsehood has been directed specifically at the plaintiff’s business or product, derogating that business or product and thereby causing that plaintiff special damages.”  Id. at *9 (emphasis in original).  The specificity requirements “limit the type of statements that may constitute disparagement, especially since advertisements and promotional materials often avoid express mention of competitors.”  Id.

Examining the case before it, the Court held that the allegations in the underlying Dahl action failed these specificity requirements to assert a product disparagement claim to implicate a duty to defend:

Consumer confusion resulting from the similarity of the Ulti–Cart to the Multi–Cart may support a claim of patent or trademark infringement or unfair competition in certain circumstances, but it does not by itself support a claim of disparagement. Even if the Ulti–Cart was named and designed to mimic the Multi–Cart, that fact does not derogate or malign the Multi–Cart in any way.

Id. at *11.  The Court held that “[t]here is no coverage for disparagement simply because one party tries to sell another’s goods or products as its own.”  Id.  Moreover, “a party’s attempt to copy or infringe on the intellectual property of another’s product does not, without more, constitute disparagement.”  Id.

In fact, underlying allegations pertaining to the likeness of the products belied any assertion that the lawsuit alleged product disparagement:

Dahl repeatedly asserted that the two products were “nearly identical, folding transport carts.”  Indeed, Dahl’s claims relied heavily on the fact that the mark and design of the two products were nearly indistinguishable.  A false or misleading statement that causes consumer confusion, but does not expressly assert or clearly imply the inferiority of the underlying plaintiff’s product, does not constitute disparagement.  Because the alleged likeness of the two products did not derogate the Multi–Cart, we reject Ultimate’s theory of disparagement based on consumer confusion over the product name and design.

Id. at *12.

Allegations that Ultimate claimed its “Ulti-Cart” was superior, without specific reference to Dahl’s “Multi-Cart,” also were insufficient to constitute a disparagement claim.  Id. at *13.  The Court outright rejected Ultimate’s assertion otherwise:

Were we to adopt Ultimate’s theory of disparagement, almost any advertisement extolling the superior quality of a company or its products would be fodder for litigation. Proliferation of such litigation would interfere with “the free flow of commercial information.

Id. 

The Court’s disapproval of Charlotte Russe

Critically, the California Supreme Court also put a stop to the logic expressed in Charlotte Russe.

In its discussion, the Court was careful to preserve the doctrine of implied disparagement in instances, for example, where an insured falsely alleges that its product is the only such product available, or that its product is superior to all other productsId. at *9-10.  In those instances, the alleged derogatory statements possess the requisite specificity and reference to a plaintiff’s product.  Id.  The Court, however, concluded that the claim of disparagement recognized in Charlotte Russe departed from the requisite specificity requirements.

Rejecting the logic expressed by the California Court of Appeal in Charlotte Russe, and approving the sharp criticism levied against in by the Appeal Court in Swift Distribution, the California Supreme Court stated:

There is no question that Charlotte Russe’s discounted prices on People Liberation’s clothing specifically referred to People Liberation’s product.  But a mere reduction of price may suggest any number of business motivations; it does not clearly indicate that the seller believes the product is of poor quality.  Disparagement by “reasonable implication” [citations omitted] requires more than a statement that may conceivably or plausibly be construed as derogatory to a specific product or business.  A “reasonable implication” in this context means a clear or necessary inference.  Charlotte Russe’s prices did not carry an implication clear enough to derogate People Liberation’s product for purposes of a disparagement claim. We disapprove Charlotte Russe to the extent it is inconsistent with this opinion.

Id. at *10.

What This Case Means.  To be clear, the doctrine of implied disparagement remains.  However, the Swift Distribution decision scales back the types of assertions that may implicate the duty to defend for product disparagement under general liability policies.  One may not simply fish for some purported disparagement to conjure up a duty to defend.  Instead, California courts will require a degree of specificity towards the plaintiff’s products in the purported derogatory remark in order to implicate coverage.

In addition, the next time you pass by huge markdowns for apparel, know that the Supreme Court of California, too, does not view that as disparagement.  Happy shopping.

Questions are welcome.

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