The following information is presented by Ms. Erin Fay and Ms. Julie Frymark.

Ms. Fay is an associate at Crivello, Carlson, and Mentkowski, S.C. She is also a biomedical engineer and registered patent attorney. Her practice includes intellectual property litigation, insurance law, engineering litigation, and commercial litigation.

Ms. Frymark is an associate at Crivello, Carlson, and Mentkowski, S.C. She was previously the editor-in-chief of the Valparaiso University Law Review and published her article, entitled: Trademark Dilution: A Proposal to Keep the Infection from Spreading, 38 Val. U.L. Rev. 165 (2003). She also has had experience in the fields of biology and chemistry. Her practice includes intellectual property, insurance law, and business/commercial litigation.

This article about businessowners and intellectual property is entitled: Businessowners Beware: You May Have Insurance, But Does It Cover Your Intellectual Property? The article is presented in the Dec Page in two parts. The first part is in the April FC&S issue and the second part will be presented in the May FC&S issue.

Businessowners Beware: You May Have Insurance, But Does It Cover Your Intellectual Property?

Intellectual property is a term generally used to describe patents, trademarks, and copyrights. Much like a real piece of property, intellectual property owners are protected against trespassers, also known as infringers. However, defending or initiating an intellectual property lawsuit can be daunting and extremely expensive. For example, the typical patent infringement lawsuit can generate substantial sums in attorneys' fees alone, with the remedies for the plaintiff ranging from lost profits to reasonable royalties. Trademark lawsuits can be less expensive, yet the fees from litigation can also lead to six-figure claims for attorneys' fees.

Of course, the first step for intellectual property owners should be one of risk management. Savvy owners take the appropriate steps to avoid becoming involved in an intellectual property dispute, realizing this step is paramount to protect one's property. Those who own intellectual property should initiate an effective intellectual property legal compliance program. Unfortunately, many companies only create such compliance programs in response to litigation.

Lawsuit expenses are covered by an intellectual property owner's business liability insurance. Typically, this is found under the commercial (or comprehensive) general liability (CGL) policy. Among the numerous policy clauses, there are usually provisions for advertising injury and for personal injury. It is the advertising injury provision that traditionally is relied upon to create a duty on the part of the insurance company to defend certain lawsuits. Less often, the personal injury provision of these insurance contracts creates such a duty. (Note that the current CGL form provides coverage for this area under coverage B, personal and advertising injury liability.)

Courts have generally held, subject to any individual exclusions or endorsements that the insured's policy may contain, that copyright actions are covered under the advertising injury provision of a CGL form. Trademark lawsuits are less frequently covered under the CGL policy language. Finally, patent infringement is rarely covered by CGL policies. Occasionally, a court may hold that coverage may be applicable if the complaint alleged facts that stemmed from any sort of advertising of the product at issue. The likelihood of coverage, therefore, is inversely proportionate to the cost of litigation, since patent infringement lawsuits are the most costly to litigate, while copyright lawsuits are traditionally cheaper.

This article will analyze the recent case law regarding insurance coverage of copyright, trademark, and patent claims. Specifically, the authors focused on CGL policies and whether these created a duty to defend an intellectual property owner, or conversely, an infringer of someone's intellectual property.

The following are recent cases pertaining to copyright law and insurance coverage.

Copyright claims regarding insurance coverage are the least litigated. Typically, the strict policy language leaves very little room for the insurer to dispute coverage. Most insurance policies that provide coverage for copyrights do so for infringement that is committed while in the course of advertising.

Architectural plans and drawings constitute a large portion of copyright insurance coverage claims. As a general premise, these cases are usually decided in favor of the insured; however, this is not always true. The Idaho Supreme Court in Construction Management Systems, Inc. v. Assurance Company of America, 23 P.3d 142 (Idaho 2001) held in favor of the insurance company by accepting the rationale that for there to be coverage under an insurance policy, a causal connection had to be present. The court maintained that this connection must exist between the material that was copyrighted and the application of that material in the actual advertising.

This case was not the first to utilize this reasoning; cases in the Fifth, Ninth, and Tenth circuits have held that a causal nexus must be present between the injury alleged and the advertising activities of the insured. Moreover, the Eighth Circuit in GRE Insurance Group/Tower Insurance Company, Inc. v. Complete Music, Inc., 271 F.3d 711 (8th Cir. 2001) reasoned that in a copyright infringement case, the insured bears the burden of establishing that it infringed upon a copyright in the course of its advertising if the insurer is to provide coverage under the liability policy.

Several courts in Wisconsin have analyzed issues similar to those present in the Construction Management case. Specifically, the Eastern District of Wisconsin in Rhein Building Company v. Gehrt, 21 F. Supp. 2d 896 (E.D. Wis. 1998) held that the insurer under the policy language was not required to defend an infringement claim regarding architectural plans even though the policy specifically provided for advertising insurance. The court held that the items infringed were the architectural plans, not the homes. This analysis was founded on the fact that there was not any evidence that the plans were ever actually advertised to the public; therefore, based on the policy language, a duty to defend was not present.

In 2004, the Seventh Circuit, in Taco Bell Corporation v. Continental Casualty Company v. Zurich American Insurance Company, 388 F.3d 1069 (7th Cir. 2004), held that even though a prior publication exclusion existed in the liability insurance policy, the insurance company still had a duty to defend. The exclusion in the policy precluded coverage for injuries stemming from advertising where the initial publication occurred before the policy was in place. Despite the applicable exclusion, the court rationalized that because the insured's commercials, which contained slight variations on a basic idea, were broadcast before and during the policy period; the insurer had a duty therefore to defend all of the claims against the insured.

While there are various coverage questions regarding copyright law, even more issues have surfaced in litigation pertaining to trademark law. The following cases are evidence of that point.

Trademark law and insurance policies have seen a trend comparable to that of copyright law. By and large, when courts have held that a trademark has been infringed, the courts rely upon the advertising injury language of the policy; that is, whether the trademark infringement is covered under that specific language. If a court maintains that the insurance policy is applicable, the next step is often that the court will find that the misappropriation of advertising ideas has occurred.

On a national level, there have been numerous cases that have interpreted trademark claims under insurance policies. Like copyright, for coverage to exist in a trademark claim, there must be a causal link between the alleged injury and the advertising in question. After this general premise, courts are not as uniform regarding the next step to be taken.

Some courts, including the Sixth Circuit in Advance Watch Company v. Kemper National Insurance Company, 99 F.3d 795 (6th Cir. 1996), have held that the insurance policy would have expressly stated that the insurance coverage was applicable to a trademark infringement claim if coverage existed. In contrast, other courts have based their findings on the opposite premise; namely, that if trademark infringement claims were not meant to be included under a policy, a specific exclusion provision would have been present in the policy language. A court in Texas , in Bay Electric Supply, Inc. v. Travelers Lloyds Insurance Company, 61 F. Supp. 2d 611 (S.D. Tex. 1999), agreed with this latter rationale when it expressly rejected the reasoning in the Advance Watch case on this basis.

The Fourth Circuit, in Superperformance International, Inc. v. Hartford Casualty Insurance Company, 332 F.3d 215 (4th Cir. 2003), reasoned that an insurer must defend a trademark action if any (not all) of the alleged claims are covered by the policy language. Moreover, the California Court of Appeals, in Peerless Lighting Corporation v. American Motorists Insurance Company, 82 Cal. App. 4th 995 (Cal. Ct. App. 2000), addressed the specific interpretation of policy language when it analyzed the meaning of the term “advertising”. The court held that advertising as presented in the policy did not include a particular product that was specifically manufactured for a specific customer through a bidding process.

Wisconsin courts have sparingly analyzed issues similar to those addressed on a national scale. The Wisconsin Court of Appeals in an unpublished decision—Regent Insurance Company v. Tanner, 608 N.W.2d 436 (Wis. Ct. App. 1999)—held that coverage was precluded because an exclusion for advertising injuries was present. Moreover, Wisconsin courts have held that the language in policies applying to advertising injuries should be narrowly construed when the policy language only provides coverage for specific violations.

The Supreme Court of Wisconsin has asserted that allegations of unfair competition in violation of the Lanham Act can result in the possibility of insurance coverage. The Supreme Court, in Fireman's Fund Insurance Company of Wisconsin v. Bradley Corporation, 2003 WI 33, stated that a claim for trade dress infringement can arguably fall within the advertising injury's infringement of trademark provision in the policy. The Court also stated that an insurer's duty to defend is founded upon the nature of the claim and not on the merits. Based upon the policy language in this matter, the Court held that the causes of action did fit within the parameters of the advertising injury coverage.

More recently, the Seventh Circuit, in Charter Oak Fire Insurance Company v. Hedeen & Companies, C.V., 280 F.3d 730 (7th Cir. 2002), held that under Wisconsin law, the use of a manufacturer's trademark by another company allegedly created actual confusion among the public and resulted in unlawful profits. It was argued that the use was in the course of the companies' advertising. As such, the insurer was obligated to defend the insured companies in a trademark infringement lawsuit. The Seventh Circuit decided that the insurer was liable for all the costs that were incurred by the insured in defending the lawsuit. Like the Fourth Circuit in the Superperformance case, the Court went on to comment that even though the complaint stated theories of liability that were not covered under the policy, the insurer still had a duty to defend all the claims asserted against its insured.

Identity Theft:

Many insurers offer identity theft coverage, either included on a homeowners policy, added by endorsement, or as a stand-alone policy. The cost is minimal, usually about $25. But is it worth it?

Bruce Mohl, in a February 6, 2005 article for the Boston Globe (“Providers Push Insurance Covering Theft of Identity”) notes that in 2004 more than 9 million Americans were victims of identity theft. Despite this number, skeptics say in actuality this represents only 4.25 percent of the adult population, and less than 1 percent of those victims had new accounts set up in their names. Joanna Crane, identity theft program manager at the Federal Trade Commission, was quoted as saying that the type of expenses which are covered by typical insurance—attorney fees, loan reapplication fees, mailing and phone costs, and lost wages—rarely consist of much.

But as a precaution, how can individuals protect themselves? These tips from Margie Wylie, writing on nj.com (Everything Jersey) and quoting Sheila Gordon, director of victim services at the Identity Theft Resource Center : Don't carry an entire checkbook. Shred credit-card offers, convenience checks, pay stubs, and tax returns. Never carry a Social Security card, and if any cards such as a health insurance card have the SS number on it, carry a photocopy with the SS number blacked out. Remember that credit bureaus are required to provide one free copy of your credit report per year (this is being rolled out on a section-by-section of the country basis; check to see if your state qualifies). A few states allow the consumer to put a “security freeze” on his or her credit account. When this happens, any merchant attempting to view information is locked out of viewing it, making it virtually impossible to open a new account. The down side is that putting the freeze in effect or taking it off can take considerable effort, particularly if the customer decides to take out a new mortgage or open a new account. Federal law allows victims of identity theft to put a “fraud alert” on their credit histories; merchants seeing this are to verify the identity of the person opening an account.

Homeowners Case of Note:

Homeowners cancellation provisions often state that the insurer can cancel by advising the named insured in writing of the date the cancellation takes effect. The cancellation notice can be delivered, or mailed to the named insured at the mailing address shown in the Declarations. Often, the provision adds “Proof of mailing will be sufficient proof of notice.”

What is “proof of mailing” and “proof of notice”? A recently decided case addressed this issue.

Dr. Van Natta attempted to apply for a loan using a home formerly belonging to his mother as collateral. He was told that fire insurance would be required. He contacted an agent, who placed the insurance and told him that the insurer would inspect the property to verify its insurability.

The insurer inspected the property, advised there was a fire risk problem, and issued notice of cancellation dated Sept. 2, 2002. Notice was mailed on Sept. 4. State statute required thirty days notice from the date of mailing.

The agent received a copy on Sept. 9, and attempted to contact the insured to tell him the insurer would rescind the notice if the fire risk problem was rectified. The agent did not hear from the insured until Oct. 7, when the insured called to tell him there had been a fire on Oct. 5.

At trial, and on appeal, the court affirmed that the coverage was cancelled. The insured denied he had received the notice, but admitted he had received a letter from the insurer which he had not opened because he assumed it was a bill that could wait. Both courts looked at the insurer's customary procedures for mailing: notice prepared and placed in a properly addressed and stamped envelope, and delivered to the post office. The insurer had a certificate of mailing from the post office documenting the Sept. 4th mailing. The appeals court also looked at Couch on Insurance (3rd Ed. 2000) and noted that this authority indicated that the insured's denial of receipt did not, without more evidence, overcome the presumption of delivery.

The insurer proved notice had been mailed; therefore, without additional information, the court held that was enough to prove receipt. This case is Estate of Van Natta v. Foremost Insurance Co., 2005 WL 425497 (Iowa App.).