Advertising injury coverage became part of the standard commercial general liability policy in the mid-1980s. Since then, insureds have sought coverage for intellectual property lawsuits -- including patent infringement suits -- under that coverage.
Most courts eventually came to the position that advertising injury coverage did not cover patent infringement lawsuits. Courts often held that patent infringement did not occur in the course of advertising so there was no causal connection; and that an insurer has no duty to defend such lawsuits. This causal connection issue was one of three issues courts looked at: was there a covered offense or tort (e.g. copyright infringement); was there advertising by the insured, and was there a causal connection between the first two. Courts focused on the language of the patent infringement statute which prohibited making, using or selling a product which infringed a patent. It was settled that patent infringement was not covered under advertising injury.
But in 1994 the U.S. signed the General Agreement on Tariffs and Trade (GATT) Treaty, and Congress amended various laws to conform to treaty requirements. One of these changes was to the patent infringement statute to add the phrase "offers to sell": Now the patent infringement statute prohibited making, using, selling or offering to sell a patented invention.
This change led to a new group of cases analyzing coverage under this new statute. Insureds argued that an offer to sell can include an advertisement which some courts accepted. But standard policy language had changed by this point making it difficult for insureds to find a covered offense or tort. There have been just a handful of cases finding patent infringement to be covered.
Hyundai v. National Union
In Hyundai v. National Union, Orion, a patent holding company, sued Hyundai for patent infringement. Orion held a patent to a computer-based system which would create customized product proposals, including pictures and text, to be used in a creating a proposal. Orion claimed that a "build your own vehicle" feature, and a parts catalog, on Hyundai's website infringed.
The court followed the three-part approach: is there a covered offense or tort; was there advertising and was there a causal connection between them?
Advertising injury here included the offense or tort of "use of another's advertising idea." The court noted that "patent infringement can qualify as an advertising injury if the patent involves any process or invention which could reasonably be considered an advertising idea." The court held that Orion alleged "violation of a method patent involving advertising ideas." Orion alleged that Hyundai infringed the patent by using the patented techniques as part of its own "marketing method" or "marketing system," and therefore Orion's patent infringement claim alleged the use of advertising ideas.
The Court noted that "advertising" meant "widespread promotional activities usually directed to the public at large," but that it did not encompass "solicitation" under California law.
The Court held that the Hyundai BYO feature was widely distributed to the public at large, to millions of unknown web-browsing potential customers, even if the precise information conveyed to each user varied with user input. So the BYO feature constituted "advertising."
A causal connection existed between the alleged injury and the "advertising" because the patent concerned the method of advertising, and the advertisement itself infringed on the patent.
Amazon.com. v. American Dynasty
This case also determined that patent infringement is covered as advertising injury.
Intouch held patents for "interactive music preview technology" that enabled customers to listen to samples of music over the internet. Intouch sued Amazon alleging that its song preview feature infringed on the Intouch patents.
One "advertising injury" offense or tort was "misappropriation of advertising ideas or style of doing business." The court noted that misappropriation of an advertising idea may be accomplished by the "wrongful taking of another's manner of advertising," by "the wrongful taking of an idea concerning the solicitation of business and customers," or by "the wrongful taking of the manner by which another advertises its goods or services." The court held that "patent infringement may constitute an advertising injury where an entity uses an advertising technique that is itself patented.
The misappropriation of an advertising idea must have occurred in the elements of advertising itself. Patent infringement arising from the manufacture of an infringing product is not an advertising injury even if the infringing product is advertised. But, patent infringement may constitute an advertising injury "where an entity uses an advertising technique that is itself patented." Because the alleged injury derived not just from misappropriation of the music technology, but from its use as a means of marketing goods, the court held that the insurer had a duty to defend Amazon.com.
DISH Network v. Arch Specialty
Other cases have also come to the opposite conclusion in analogous circumstances. The Federal District Court in Colorado followed Hyundai v. National Union, but came to the opposite conclusion on a different type of patent.
In this case, Ronald A. Katz of Technology Licensing LP sued DISH, formerly known as EchoStar Satellite Communications, for patent infringement. Katz alleged that DISH had infringed upon the company's patents concerning automated telephone systems, including the DISH customer service telephone system that allowed DISH customers to perform pay-per-view ordering and customer service functions over the telephone.
The offense or tort of "misappropriation of advertising ideas" means the "wrongful taking of the manner by which another advertises its goods or services" or the "wrongful taking of an idea about the solicitation of business." The misappropriation of advertising ideas must occur "in the elements of the advertising itself, in its text, form, logo, or pictures, rather than in the product being advertised." (That is to say, there must be advertising and a causal connection). DISH's use of the patented technology as a means of communicating and interacting with its customers did not constitute a misappropriation of a "style of doing business" because DISH merely misappropriated a technology. The court found that there was no duty to defend.
Discover Financial v. National Union
A Federal District Court in Illinois also found no duty to defend in a similar case. In that case, Katz sued Discover alleging that Discover infringed on his company's patents for "interactive call processing systems," which involved the integration of telephone systems with computer systems, which teach and enable telephone callers to exchange information with computer systems through telephone network. Katz claimed that: Discover "operated automated telephone systems, including without limitation the Discover Bank and Discover Card automated customer service systems." These are systems "that allow their customers to perform banking, credit card and other functions over the telephone. Discover infringed Katz patents by "making, using, offering to sell and/or selling" these automated telephone systems in the United States.
Katz's claims did not constitute "misappropriation of advertising ideas or style of doing business." There was no misappropriation, or "the wrongful taking of the manner by which another advertises its goods or services" or the wrongful taking of "an idea about the solicitation of a business."
The court also found that Katz┐s allegations made no reference to Discover's advertising activities. Instead, Katz accused Discover of "making, using, offering to sell, and/or selling of automated telephone systems..." These allegations had no apparent connection to advertising activities.
Even if there were misappropriation of advertising ideas, it had to have occurred "in the elements of the advertising itself?in its text, form, logo or pictures?rather than the product being advertised." The using or selling of automated telephone systems that have the ability to advertise goods or services or solicit business did not involve any elements of advertising. The mere fact that Discover┐s allegedly infringing telephone systems, are capable of advertising goods or carry promotional messages did not transform the technology into an advertising idea.
Discover's alleged patent infringement was not committed in the course of Discover's advertising its goods, products and services." Simply because Discover's allegedly infringing automated phone system had advertising and promotional capabilities was not by itself conclusive as to whether Katz's injury occurred during the course of advertising. There were no allegations that Discover's automated telephone system existed for the purpose of promoting products. Therefore, National Union did not have a duty to defend.
This array of decisions suggests that policyholders and insureds must examine their cases and compare them with the cases above to similarities and differences in the facts alleged and in the insurance policy language.
Standard policy forms now define advertisement to include material on the web and internet, and those policies now includeintellectual property exclusions. These can completely change the outcome, so insurers and insureds will want to review this language as well.
Timothy M. Thornton, Jr. is a partner in the Los Angeles-based insurance coverage and litigation firm Nelsen, Thompson, Pegue & Thornton APC.
He may be contacted at firstname.lastname@example.org.
November 1, 2011
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