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National Law Journal
October 25, 1999
INTELLECTUAL PROPERTY
Intellectual Property
Assets Raise Insurance Issues
Companies may seek
coverage specifically designed for IP- and Internet-related risks.
John F. Cahill and
Timothy J. Fitzgibbon
The internet has revolutionized global
communications and commerce.(1) In an
increasingly competitive global economy, intellectual property assets are likely
to be among a business's most important and valuable assets. It is important,
therefore, that intellectual property lawyers anticipate emerging risks and
understand the relationship between various types of intellectual property
offenses and insurance.
The rapidly evolving technological capabilities
and capacity of the Internet will present a host of new challenges to
intellectual property practitioners. Internet technology now permits virtually
instantaneous global transmission of text, photographs, documents and graphics
in digital form. Once information has been disseminated on the Internet,
however, it becomes extremely difficult to control or monitor any subsequent
use, distribution or modification of the material.
Moreover, existing intellectual property rights
are subject to a variety of regulatory regimes that were developed when
geographical limitations and political boundaries were critical factors in
defining commercial markets and territories. The recent controversy surrounding
MP3 technology -- a means of transmitting music over the Web -- demonstrates how
the Internet's interactive capabilities may dramatically affect how content and
material is used and distributed.(2)
Other early cases also demonstrate that the
Internet's unique capabilities may implicate a variety of potentially
conflicting intellectual property rights and interests.(3)
The recent wave of Internet-related patents may also give rise to contentious
litigation over various Internet-related business processes.(4)
In short, the risks are great and the stakes are
high. Faced with an actual or potential intellectual property related claim,
counsel should consider the possibility of insurance coverage under one or more
of the client's policies.
CGL insurance policies
One of the most common types of business
insurance policy is the commercial general liability (CGL) policy. The typical
CGL policy provides coverage for "bodily injury," "property
damage" and "personal and advertising injury" to a third party
that occurs during the policy period.(5)
Under the CGL policy, the carrier has a right
and duty to defend a policyholder against covered claims that occur during the
policy period. The carrier also has a duty to indemnify the insured for damages
up to the policy's limit of liability for claims that are covered under the
policy.
The typical intellectual property claim under
the CGL policy most often implicates the advertising injury portion of the
policy. The advertising injury provision applies only to injuries caused by a
specified offense, committed in the coverage territory, during the policy
period, in the course of advertising the insured's goods, products or services.
This form of coverage was initially introduced as an endorsement to the 1973
version of the CGL policy.
The original endorsement defined
"advertising injury" as "injury arising out of an offense
committed during the policy period occurring in the course of the named
insured's advertising activities, if such injury arises out of libel, slander,
defamation, invasion of privacy, piracy, unfair competition or infringement of
copyright title or slogan."
In a more recent version of the CGL policy,
which was introduced in 1986, "advertising injury" is defined to
include certain specified offenses, such as defamation, invasion of privacy,
misappropriation of advertising ideas or style of doing business; and
"infringement of copyright, title or slogan."(6)
It is significant that the 1986 revision deleted piracy and unfair competition
from the definition of "advertising injury."(7)
Advertising injury required
The majority of courts have found that coverage
applies only for those offenses specifically enumerated in the definition of
"advertising injury" and committed directly in connection with the
insured's advertising activities.(8) The majority
of courts have also concluded that the required advertising activity must be
directed at a broad audience.(9)
For example, although copyright infringement is
a specified offense under the CGL, not all forms of copyright infringement are
covered. The majority of courts have held that for coverage to be available, the
copyright injury must be causally connected to copyright infringement in the
course of advertising.(10) Thus, in Microtech
Research v. Nationwide Mutual Insurance Co., the U.S. Court of Appeals for the
9th Circuit found that allegations of computer "palming off" did not
rise to advertising liability because the alleged damages arose from the
misappropriation of computer code and not from advertising.(11)
The courts are also divided on the issue of
whether trademark-related offenses are covered under the CGL's advertising
provision. Although trademarks are not a specifically listed offense, courts
have used several different rationales to find coverage for a variety of
trademark-related offenses.(12) However, other
courts have rejected claims that trademark infringement is covered as
advertising injury under the CGL policy.(13)
The courts have generally been unreceptive to
arguments that the advertising injury provision of the CGL policy covers claims
of patent infringement.(14) According to some
commentators, however, the 1996 amendment to the federal patent statute, which
added "offer[ing] for sale" as a specific ground of patent
infringement, may provide additional support for claims of coverage under the
CGL's advertising provision.(15)
Finally, most CGL policies exclude coverage for
"an offense committed by an insured whose business is advertising,
broadcasting, publishing or telecasting." The CGL policy generally does not
provide coverage for purely injunctive or declaratory relief. Increasingly, the
policy may also specifically exclude coverage for intellectual property claims.(16)
In addition to the CGL, there are several other
types of insurance policies that may provide some degree of intellectual
property coverage. However, there is little specific case law relating to these
other types of policies.
Errors and omissions
The traditional professional liability, or
errors and omissions (E&O), insurance policy complements the CGL policy by
providing coverage for certain economic losses experienced by third parties. The
E&O policy generally excludes the types of injury that are covered under the
CGL policy.
In recent years, many carriers have developed
and marketed professional liability policies that are specifically targeted at
technology-oriented companies. These policies are unique to a particular carrier
and provide varying degrees of coverage for various
intellectual-property-related offenses.(17) The
cost of defense under an E&O policy, unlike with the CGL, generally is
included in the policy's limits of liability, and defense expense reduces the
amount of available coverage. The E&O policy also may be issued subject to
deductibles or retentions while providing coverage only for those covered claims
that are made during the policy period.
There are various types of media or
communications liability policies that provide coverage for certain specified
offenses, including various IP offenses, which stem from the content of
information that is disseminated by the insured in its covered media or
advertising activities.(18) These policies
generally are used by businesses that are particularly prone to
advertising-related claims, such as publishers, broadcasters or advertising
agencies. As with professional liability policies, the terms and conditions of
coverage can vary dramatically depending on the carrier.(19)
New Internet risks
The virtually unprecedented nature of the
Internet and related activities inevitably will present a variety of new
insurance and risk-management-related issues.(20)
The Internet's broad geographic reach, together with the resulting uncertainty
of its effect on traditional intellectual property rights, will almost certainly
increase the risk, complexity and associated expense of intellectual property
disputes. Moreover, many of these emerging risks are not covered by the CGL or
the other available policies.(21)
The Internet is a global phenomenon. However,
many domestic insurance policies provide coverage only for actions arising in
the United States, its territories or Canada. The Internet's global reach may
significantly increase the potential for intellectual property offenses and
disputes in locations outside the United States. In the Internet age, some form
of global coverage may be necessary for even the smallest enterprise.
The multimedia capabilities of the Internet also
expose many companies to risks that were previously considered unique to the
relatively few companies engaged in publishing, broadcasting and advertising.
Depending on the specific circumstances, these media-related risks may not be
covered by the traditional CGL policy. Moreover, if a company doing business on
the Internet is deemed to be in the business of broadcasting, publishing,
telecasting or advertising, it will be deprived of even the limited intellectual
property-related coverage that may be available under the CGL's advertising
provisions.(22)
Internet insurance
In response to the new challenges presented by
Internet-related activities, several major insurance companies are beginning to
offer specialized insurance products that provide intellectual property and
content coverage for Internet-related activities.(23)
These new policies incorporate some of the content and
intellectual-property-oriented protections that previously were provided by
E&O and media liability policies.
These coverages are similar to professional
liability and media liability policies and generally cover specified offenses on
a claims-made and defense-within-limits basis. The professional liability and
specialty policies that are tailored toward specific intellectual property and
Internet risks may provide a policyholder with more control over defense,
including selection of counsel and terms of settlement.
These policies may also provide coverage for
injunctive and declaratory relief. Although these policies generally exclude
patent-related offenses, specialized insurance policies are available for
patent-related liability, including related injunction proceedings.(24)
The Internet has already revolutionized how a
business interacts with its customers and business partners. These same economic
and technological realities also require that IP attorneys and their clients
reassess their intellectual property risk-management strategy, including the
role played by insurance.
In view of the considerable uncertainty of
coverage under CGL policies, the use of policies that are specifically designed
to address the specific IP and Internet-related risks of a company may be a more
prudent and cost-effective risk-management strategy. In any event, intellectual
property counsel should be cognizant of the relationship between intellectual
property and the potential for insurance coverage, and should be proactive in
addressing this issue.(25)
_____________________________
John F.
Cahill (cahill@clm.com) is counsel, and Timothy
J. Fitzgibbon (fitzgibbon@clm.com) a
partner, in the Washington, D.C., office of New York's Carter, Ledyard and
Milburn, specializing in intellectual property, telecommunications, technology
and media matters, including insurance coverage.
This article is reprinted with
permission from the October 25, 1999 edition of the National Law Journal.
© 1999 NLP IP Company
Endnotes
1. See Millennium Enterprise Inc. v.
Millennium Music L.P., 33 F. Supp. 907, 913-914 (D. Ore. 1999).
2. See Recording Indus. Assoc. of Amer. v. Diamond Multimedia
Sys. Inc., 180 F.3d 1072 (9th Cir. 1999).
3. See complaint in Washington Post v. Total News Inc., 97
Civ. 1190 (S.D.N.Y. Feb. 20. 1997), (www.bna.com/e-law/cases/totalset.html);
complaint in Ticketmaster v. Microsoft Corp., No. 97-3055 (E.D. Calif. April 28,
1997), (www.jmls.edu/cyber/cases/ticket1.html);
Porsche Cars North Amer. Inc. v. Porsch.com, 1999 WL 378360 (E.D. Va. June 8,
1999).
4. See Julia King, "Net Patents Stir Debate,"
Computerworld, Aug. 23, 1999, at 1.
5. See Daniel J. Langin, "Risk Management and Insurance
Coverage for Commercial Online Activity," Corporate Counsel Quarterly,
14:3, at 28-41 (1997).
6. A.D. Windt, Insurance Claims & Disputes, 3d ed., §
11.29, 335-343 (1993).
7. See Steve M. Winder, "Insurance Coverage for
Intellectual Property Claims: Understanding 'Advertising Injury' Provisions in
Liability Policies," Intellectual Prop. J., 12, 127, 129-131 (1998).
8. Bank of the West v. Superior Court of Contra Costa County,
2 Cal. 4th 1254 (1992).
9. See, e.g., Smartfoods Inc. v. Northbrook Prop. and Cas.
Co., 618 N.E.2d 1365 (Mass. Ct. App. 1993).
10. See Michael A. Rossi, "Advertising Injury and
Multimedia Liability Risks Coverage," The Risk Report, Vol. XX: 2, at 2
(1997).
11. 40 F.3d 968 (9th Cir. 1994).
12. See, e.g., Lebas Fashion Imports of USA v. ITT Hartford
Ins. Group, 59 Cal. Rptr.2d 36, 44 (1996), rev. denied, 1997 Cal. Lexis 296
(Jan. 22, 1997).
13. See, e.g., Advance Watch Co. Ltd. v. Kemper National
Ins. Co., 99 F.3d 795, 803 (6th Cir. 1996).
14. See, e.g., Genecor Indus. v. Wasau Ins. Co, 857 F. Supp.
1560 (M.D. Fla. 1994); Nat'l Union Fire Ins. Co. of Pittsburgh v. Siliconix
Inc., 726 F. Supp. 264 (N.D. Calif. 1989); but see Union Ins. Co. v. Land &
Sky, 529 N.W.2d 773, 777-78 (Neb. 1995).
15. See Windt, supra n. 6, § 1129 at 154 (1999 Cum. Supp.).
16. Rossi, supra n. 10, at 8.
17. Langin, supra n. 5, at 35.
18. Rough Notes, Policy Form and Manual Analysis, § 3601,
1-2 (December 1995).
19. Rossi, supra n. 10, at 8.
20. See, e.g., Langin, supra n. 5, at 34-35.
21. Rossi, supra n. 10, at 8.
22. Id.
23. See Langin, supra n. 5, at 37.
24. See Rossi, supra n. 10, at 6.
25. See, e.g., Jordache Enters. Inc. v. Brobeck, Phleger
& Harrison, 40 Cal.App.4th 609, (1996) amended 972 P.2d 1174 (1996).
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