Coverage for trade dress infringement doesn't extend to trademark claim

The policies didn’t define ‘trade dress infringement’ or ‘trademark infringement,’ but did distinguish the terms with their plain language.

The State Farm policies in question don’t define the terms “trade dress infringement” or “trademark infringement,” Phipps wrote for the court. But the policies do distinguish the two terms with their plain language, U.S. Court of Appeals for the Third Circuit Judge Peter Phipps wrote. The concepts of trademark and trade dress have much in common, with trade dress often treated as a subspecies of trademark. (Credit: Alexskopje/Shutterstock.com)

The U.S. Court of Appeals for the Third Circuit ruled that a commercial liability insurance policy’s coverage of trade dress infringement claims does not extend to losses for trademark infringement.

The appeals court upheld a ruling from the U.S. District Court for the District of New Jersey that said the insurer is not obligated to cover trademark or copyright infringement claims by Avaya, a communications technology company, against an alleged seller of pirated Avaya software licenses.

Third Circuit Judge Peter Phipps, joined by Judges Kent Jordan and David Porter, affirmed a decision by U.S. District Judge Madeline Arleo that granted summary judgment to State Farm Fire and Casualty Co. in its declaratory judgment suit against Dedicated Business Systems International and a principal, Jason Hines.

U.S. Court of Appeals for the Third Circuit Judge Peter Phipps. Photo by Diego M. Radzinschi/ALM

DBSI, headquartered in Fairfield, New Jersey, was an authorized reseller of Avaya communications systems, the court said. In 2013, the authorized reseller arrangement came to an end, but DBSI continued to access Avaya software license portals without authorization from Avaya, according to court papers. By doing so, they were “allegedly able to distribute pirated licenses to customers for a handsome profit,” using Avaya’s trade name and trademarks to falsely convince consumers that its product was valid and approved by Avaya, Phipps said.

Avaya, viewing DBSI as a “massive illegal software piracy operation,” sued that company for trademark infringement. State Farm, in response, notified DBSI that it appointed counsel to represent it in the suit. But State Farm reserved its right to withdraw if it determined the claims were outside the scope of its policies.

The State Farm policies in question don’t define the terms “trade dress infringement” or “trademark infringement,” Phipps wrote for the court. But the policies do distinguish the two terms with their plain language. The concepts of trademark and trade dress have much in common, with trade dress often treated as a subspecies of trademark, Phipps wrote.

A trademark infringement claim has three elements: a valid and legally protectable mark;  owned by the plaintiff; that, when used by the defendant to identify goods or services, “is likely to create confusion concerning the origin of the goods or services,” Phipps said. But a claim for trade dress infringement has different elements. It requires articulation of the specific features of the distinct trade dress sought to be protected, followed by proof that an infringing design is nonfunctional; distinctive, either inherently or through secondary meaning; and likely to confuse consumers, Phipps said.

“For State Farm to have a duty to defend the Avaya lawsuit against DBSI and its officer, Avaya’s operative complaint must potentially state a claim for trade dress infringement. But it does not.” Phipps wrote.

“The operative complaint never mentions ‘trade dress.’ Nor does it provide a basis for reasonably inferring such a claim. It does not contain the requisite description of the specific features of a trade dress that it seeks to protect. Nor does it include allegations regarding two essential elements of a trade dress infringement claim: nonfunctionality and distinctiveness. Thus, Avaya’s complaint lacks allegations necessary for a trade dress claim, and the District Court did not err in applying New Jersey law to conclude that State Farm did not have to defend DBSI and its officer in the Avaya litigation,” Phipps wrote.

Bradley Mortensen and Elizabeth Sutton of Kennedys Law in Philadelphia represented State Farm. Sutton declined to comment on the ruling.

The lawyer for DBSI and Hines, Eugene Killian Jr. of Killian & Salisbury in Iselin, New Jersey, did not respond to a reporter’s call seeking comment.

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