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.