Insurance Coverage Implications of Settling Intellectual Property Disputes: Pitfalls and Opportunities
I. THE BUSINESS PROBLEM
In the complex world of high-stakes intellectual property and antitrust coverage litigation, the precise language used in the settlement of these disputes has insurance coverage implications. An insurer which owes its policyholder a defense has a duty to settle claims brought against its policyholder.
Intellectual property attorneys may fail to recognize the importance of drafting the settlement agreement in a manner that ensures its client will receive the maximum benefit from its insurance. The following settlement agreement provisions may raise coverage problems:
? Inclusion of a license for ongoing conduct;
? Reference to defendant’s rights to affirmative claims for attorneys’ fees against the plaintiff and characterizing the settlement as in lieu of same;
? The failure to allocate a portion of the settlement related to past damages as opposed to future business benefits where ongoing use of licensed goods, products or services is envisioned.
A. Settlements Which Confer Business Rights on Alleged Infringers Through License Provisions May Require Allocation Where a Business Benefit is Conferred on the Settling Party
Settlements should recite that monies paid are for past damages. If a prospective license fee is negotiated, and ongoing use of products or services covered by the license will occur, some allocation of settlement payments to that business benefit should be made. Absent a conferral of business benefits to the insured, a non-defending insurer or an insurer who refuses to fund a reasonable settlement may be liable for the full amount of a settlement even if it includes uncovered claims.
In Zurich Ins. Co. v. Killer Music, Inc., 998 F.2d 674, 679 (9th Cir. 1993) the court stated, “We recognize that the settlement agreement represents, in part, an exchange of cash consideration for the rights to Pfeifer’s songs, not simply compensation for damages from copyright infringement.” As a result, on remand, the court required the separation of the award into the “compensation” for rights to songs and the damages from copyright infringement. Critically, the policyholder acknowledged the viability of the underlying plaintiff’s copyright by seeking to license the right to play songs subject to copyright protection.
In Platinum Technology, Inc. v. Federal Ins. Co., 282 F.3d 927 (7th Cir. (Ill.) 2002), the court found that the license components of a technology transfer in association with a settlement were a benefit that accrued to the insured which was chargeable to the insurer. The court ruled that Platinum purchased the “Platinum” trademark, worth $4M in the settlement/assignment agreement, and that this $4M cash payment was not made as part of a reasonable settlement agreement to relieve Platinum of its liability from trademark infringement.
B. Settlements That Reflect Affirmative Claims for Damages Against Underlying Plaintiffs May Unnecessarily Vest Insurers with Subrogation Rights That Preclude the Insured’s Full Settlement Reimbursement
In TIG Ins. Co. v. Nobel Learning Communities, Inc., No. 01-4708, ___ F. Supp. 2d ___, 2002 U.S. Dist. LEXIS 10870, at *40-41 (E.D. Pa. June 18, 2002), the court found that fees incurred in prosecution of counterclaims against the underlying plaintiff as well as those expended in defending the copyright infringement claims were compensable.
Critically, however, once compelled to pay all defense fees including those related to prosecution, the recitals in the settlement agreement provided a pathway to the insurers to recover such fees. The settlement agreement recited that the $175,000 was paid to Nobel
“to compensate them for a portion of their legal fees incurred in connection with the prosecution of its claims . . . in connection with the Litigation.” Because the court . . . determined that TIG is liable for the prosecution of the affirmative claims as of October 20, 2001, TIG is entitled to the setoff to the extent of $175,000 against Nobel’s post-counterclaim fees, costs and expenses.
The court therefore found that there was a right by the carrier to offset this portion of the sum from the settlement agreement against their defense obligation to avoid “double recovery” to the insured.
III. THE PRACTICE SOLUTION
The practice points are threefold:
First, where affirmative benefits are obtained in a settlement and confirmed by way of a license, allocation of the lowest amount justifiable to the rights transferred by license may be advisable.
Second, where a paid-up license through the terms of a settlement agreement is negotiated, and no new rights are obtained by the defendant, the full sum should be recoverable. Recitals in the settlement agreement should clarify that the license was agreed upon to avoid continuing litigation expense and uncertainty, not because defendant attributed any independent economic value from its extension.
Third, where a counterclaim is asserted and a settlement ensues, the agreement should not reference the value of those claims that were surrendered as part of the case’s resolution. THE “KNOWLEDGE OF FALSITY” EXCLUSION SHOULD HAVE NO APPLICATION TO IP CLAIMS
IV. THE “KNOWLEDGE OF FALSITY” EXCLUSION
1986 ISO POLICY
This insurance does not apply to:
(1) advertising injury:
. . . .
(5) arising out of oral or written publication of material if done by or at the direction of the insured with knowledge of its falsity . . . . .
This provision excludes “oral or written publication of material whose first publication took place before the policy period.” Courts have split on whether the first publication exclusion applies to all advertising injuries or only to libel, slander, and invasion of privacy. This issue arises because the predicate qualifying phrase in the definition of the policy’s “advertising injury” offenses for “oral or written publication of material” does not modify the offenses for “misappropriation of advertising ideas or style of doing business” or “infringement of copyright, title or slogan.” The latter offenses typically encompass a range of intellectual property torts.
V. CASE LAW FINDING THAT “KNOWLEDGE OF FALSITY” EXCLUSION DOES NOT APPLY
In Adolfo House v. Travelers Property and Casualty Ins. Co., 165 F. Supp. 2d 1332, 1342 (S.D. Fla. 2001) the court, noting the existence of some contrary outcome, held that the knowledge of falsity exclusion only applies to libel, slander, and invasion of privacy. It stated:
Even if the exclusion were broadly interpreted to apply to trade dress or trademark infringement claims, this would not render it applicable here as an absolute coverage bar. Despite the fact that some of the underlying suits’ allegations are intentional in nature, the suit also asserted non-intentional grounds for relief. In such circumstances where the complaint’s allegations leave open the possibility that Adolfo House might be liable for unintentional acts of trade dress infringement, it may be said that the complaint contains allegations which “fairly and potentially bring the case” within the policy coverage, thus requiring the insurer to defend the entire claim.
In Walter L. Maddox, III v. St. Paul Fire & Marine Ins. Co., 179 F. Supp. 2d 527 (W.D. Pa. 2001), the court found that the language of the first publication exclusion is ambiguous because it is reasonably susceptible to more than one interpretation. The alternative reasonable interpretation – requiring the prior publication to cause the same injury as the later publication – is suggested both by the context of the language and the way others have interpreted it.
VI. 1998 ISO POLICY LANGUAGE CONTAINS A NEW EXCLUSION THAT IS SIMILAR IN CHARACTER TO THE “KNOWLEDGE OF FALSITY” EXCLUSION BUT IS MORE RESTRICTIVE
This insurance does not apply to:
a. “Personal and advertising injury”
(1) Caused by or at the direction of the insured with the knowledge that the act would violate the rights of another and would inflict “personal and advertising injury.”
In TIG Ins. Co. v. Nobel Learning Communities, Inc., No. 01-4708, 2002 U.S. Dist. LEXIS 10870 (E.D. Pa. June 18, 2002), the court fount it unnecessary to address the “knowledge of falsity” exclusion and instead focused on the more restrictive exclusion referenced above. It stated, “TIG argues that the relevant injury alleged against Nobel in the counterclaim is willful copyright infringement and that such is subject to the policy exclusion of ‘injury which is caused by or at the direction of the insured with the knowledge that the act would violate the rights of another and cause personal and advertising injury.’” Id. at *20-21. The court rejected that the above-referenced 1998 exclusionary language applied because it found that the intentional aspects of a willful copyright infringement claim were not the only basis for liability since innocent copyright infringement was implicated as an element for recovery.
