Advertising Injury and Offering For Sale

Whether an activity is advertising such that it comes within the advertising injury coverage grant of a commercial general liability (CGL) policy is a difficult and complicated question.  Maybe it shouldn’t be, but the coverage grant combined with exclusions to avoid coverage for intellectual property infringement claims and coverage write-backs within exclusions makes it complicated.

It certainly has vexed the courts.  In the face of this confusion, the U.S. Court of Appeals for the Second Circuit has held that an offering for sale may be advertising and that a duty to defend arises.

In High Point Design, LLC v. LM Ins. Corp., No. 16-1445-cv (2d Cir. Dec. 19, 2018), the Second Circuit affirmed a district court order finding that an insurer had the duty to defend a counterclaim under the personal and advertising injury coverage of a CGL policy, but vacated the award of damages and remanded the matter to determine the amount of legal fees incurred.  The case is about two manufacturers of slippers fighting over alleged infringement of a design patent.  One of the claims brought (a counterclaim) was for patent and trade dress infringement.  The counterclaim stated that the party has infringed and is still infringing the specified patent by manufacturing, importing, selling and/or offering for sale the product that embodies the subject matter of the patent.  The counterclaiming party served discovery demands seeking advertising and marketing materials.

The party faced with the infringement claim asked its insurance carrier to defend and the carrier disclaimed because the counterclaim only alleged injury for trade dress and patent infringement and not advertising injury.  The policyholder brought an action seeking a defense under its insurance policies.

The primary policy had the typical CGL language for personal and advertising injury and defined advertising injury to include injury arising out of infringing upon another’s copyright, trade dress or slogan in the insured’s advertising.  Advertisement was defined as “a paid announcement that is broadcast or published in the print, broadcast or electronic media to the general public or specific market segments about your goods, products or services for the purpose of attracting customers or supporters.”

The relevant exclusion was for personal or advertising injury arising out of the infringement of intellectual property rights (enumerated and in general), but the exclusion did not apply to infringement in the insured’s advertisement of copyright, trade dress or slogan.

In affirming the district court’s finding that a duty to defend arose, the Second Circuit took a swipe at the insurance industry.  It characterized the exclusion as a “convoluted structure apparently favored by insurance companies,” in that “the exclusion had its own exclusion.”  The court went on to say that “[i]t strikes us as odd that there is no coverage for liability arising from trade dress infringement caused by an insured’s product or its packaging, but there is liability arising from trade dress infringement caused by a photo or drawing of the same product in an advertisement.”

Putting aside the existence of specialized policies that cover trade dress and patent infringement, the court affirmed the district court’s finding that offering for sale extends to advertising. The court outlined the four basic principles of New York insurance law on the depth and breadth of the duty to defend (exceedingly broad, regardless of whether the allegations are groundless, arguably arises from covered events a full defense is required, and it is not limited to the four corners of the complaint).

So how is offering for sale an advertising injury?  The offer for sale is similar to marketing and extends to advertising even though it includes other activities. Even though an offer for sale may have multiple meanings, the court found that the allegation that the party was injured by the offering for sale the infringing slippers “suffices to demonstrate that an advertising injury may have resulted from the use of the infringing trade dress in advertisements.”  The court opined that displaying the infringing trade dress in an advertisement without any packaging is an advertising injury . The court held that the allegations of an offer for sale coupled with the discovery demands seeking advertising materials triggered the duty to defend.

Ultimately, the court found that the timing for damages was not triggered until the insurance company was provided with the discovery demands seeking advertising information and remanded the case back for a recalculation of damages.  The duty to defend, held the court, did not trigger until it has actual knowledge of facts establishing a reasonable possibility of coverage.   There was also a concurring opinion that did not agree with the analysis of the majority on the phrase “offering for sale” in the counterclaim.

Leave a Reply

Your email address will not be published. Required fields are marked *