Gauntlett on Insurance

Dissent Challenges Court's Opinion that "Negligent Publication" Relates to a Narrow Tort Relating to "Defective Advice" or "Incitement"

dgauntlett@gauntlettlaw.com (David Gauntlett) — Tue, 19 Aug 2008 12:17:23 -0800

Sony Computer Entm’t Am., Inc. v. American Home Assur. Co., ___ F.3d ___, 2008 WL 2736012 (9th Cir. (Cal.) 2008) (Hall, Schroeder; dissent by Bybee)

Affirming district court Judge Hamilton, the court found no duty to defend arising out of negligent misrepresentation, false advertising under BPC § 17500, unfair business practices under BPC § 17200, and other related claims.

The pertinent policy, issued through an AIG entity, American Home Assurance Co., provided multimedia professional liability coverage and supplemented a policy, also issued by the same insurer, for commercial general liability coverage. The court appears to have assumed applicable law to be that the insurer’s construction of policy terms must be reasonable as opposed to a viable potential definition, in direct contrast to the Supreme Court of California’s recent analysis in MacKinnon. Thus, it stated:

"Accordingly, a provision is ambiguous 'only if it is susceptible to two or more reasonable constructions despite the plain meaning of its terms within the context of the policy as a whole.'"

Id. at *3.

The court derived this interpretation from its belief that

"The terms in an insurance policy must be read in context and in reference to the policy as a whole, with each clause helping to interpret the other. Cal. Civ.Code § 1641; Bay Cities Paving & Grading, Inc. v. Lawyers' Mutual Ins. Co., 5 Cal.4th 854, 867, 21 Cal.Rptr.2d 691, 855 P.2d 1263 (1993); Palmer v. Truck Ins. Exch., 21 Cal.4th 1109, 1115, 90 Cal.Rptr.2d 647, 988 P.2d 568 (1999)."

Id. at *3.

Quoting Bank of the West, 2 Cal. 4th at 1265, it stated:

"A court faced with an argument for coverage based on an assertedly ambiguous policy language 'must first attempt to determine whether coverage is consistent with the insured's reasonable expectations,' id., and '[i]n so doing ... must interpret the language in context, with regard to its intended function within the policy,' id."

Id. at *3.

Notably, this “reasonable expectations” approach in Bank of the West and the cases it cites was only called into force where there was a structural or contextual inconsistency. Thus, in Bank of the West, statutory provisions under 17500 had no damage remedy. Absent a damage remedy, the “as damages” provision was not triggered, and the definition of unfair competition dovetailing with the liability under that section was not a viable possibility. The court confuses this level of contextual reading with that arising from what, at base, is simply a preferred construction that the court deems most reasonable from that possibly chosen among others. At issue was the meaning of the term “negligent publication,” undefined in the AISLIC policy or in lay or legal dictionaries or in a California statute. The court noted:

"Sony argues that the term 'negligent publication' should have a broad meaning which it derives from stringing together the dictionary definitions of 'negligent' and 'publication.' According to Sony, 'negligent publication' in the AISLIC policy refers to 'a communication of information to the public, lacking or exhibiting a lack of due care or concern.' Sony argues that this definition, broad enough to include the false advertising and negligent misrepresentation claims in the Kim/Kaen lawsuits, is the plain meaning of the term."

Id. at *4.

The court disagreed. Accordingly, the court contended that the ordinary and popular sense of the word was not derived from an examination of dictionary definitions because it was not contextually available. The court further contends that “negligent publication” is enumerated among other torts and thus refers to a narrow tort relating to defective advice and incitement, not a broad tort distinct from those terms. Id. at *5.

However, the court’s supposition is demonstrably erroneous as disparagement, harm to the character or reputation of any person or entity, interference with rights of privacy or publicity, unauthorized use of name or likeness, unintentional failure to credit on a matter, and defective advice and incitement and negligent publication are clearly not simple torts which clearly defined prima facie elements. Rather, the offenses use generic and lay language. To adopt the court’s interpretation is to add words of limitation not set forth in the policy under the guise of construing context.

Nor does the context analysis the court relies on support such a narrow interpretation. American Motorists Ins. Co. v. Allied-Sysco Food Servs., Inc., 19 Cal. App. 4th 1342, 1347, 1350-51, 24 Cal. Rptr. 2d 106 (1993) limited humiliation’s meaning to the kind of humiliation envisioned based on the previous torts asserted in connection with it, which were indeed limited to tort theories – libel, slander, defamation of character, and invasion of the right of privacy. Id. at *5.

The court also makes the supposition that the negligent publication definition that Sony offers would give it too broad an amplitude and make other offenses redundant. Not so. The court’s supposition is demonstrably inaccurate. Sony’s definition would not dovetail with the liability for defamation, infringement of copyright, nor a number of the other offenses listed.

The court also sought to define the policy based on the fact that it was labeled a media liability policy and thus must be limited to the kind of claims normally faced by media publishers such as defamation and copyright infringement.

Again, the court is reading in words of limitation not set forth in the policy based on its supposition as to what the parties might have intended that the insurer did not bother to craft into the language. The purported case law the court cites is tort law, not construction of other media liability policies, inventing a tort of negligent publication which is not borne out by the authorities that it cites. And indeed, the court’s definition of negligent publication made it redundant of the definition of placing another in a false light, which is one of the offenses necessarily implicated by coverage for invasion of privacy.

It is no surprise that “negligent publication,” as the court deduces it as an actionable tort, has not been construed to encompass liability like that identified by Sony. Nor need this matter. There is no rule that requires the court to define what torts the carrier may have envisioned covering under broad generic language. Indeed, previous case law from courts of appeal, including the Lebas decision from Judge Croskey, often describes offenses, such as “misappropriation of advertising ideas or style of doing business,” that cannot be gauged to limit their scope to any particular tort but may encompass a range of wrongful behavior.

Case law elsewhere is fully in accord with this notion. Indeed, the conjecture that insurers must have intended to limit their coverage to torts where they clearly did not select limited tort language has the court simply rewriting the policy for the insurer’s benefit. The court thus concluded:

"[W]e hold that the term 'negligent publication' in the AISLIC policy refers to a very narrow tort in which the publication of material encourages or instructs readers to engage in harmful conduct. We reject Sony's expansive definition as inconsistent with the context of the policy as a whole and unsupported by the case law. Sony, a sophisticated purchaser, clearly could have purchased coverage for product defects or false advertising – indeed, Sony previously held an insurance policy with AISLIC that covered 'any error or omission, misstatement, misleading statement or misinterpretation' – yet the policy at issue in this lawsuit did not include such coverage."

Id. at *8.

In a backhanded way, the court clarifies that where an insured could have purchased broader coverage and had in the past, its decision to not do so must be read to limit the scope of the policy before it. This turns on its head the typical rules that place the burden on the insurer to write appropriate policy language, especially where a narrower form of policy was available but not selected by a particular insurer. See Fireman’s Fund Ins. Cos. v. Atlantic Richfield Co., 94 Cal. App. 4th 842, 115 Cal. Rptr. 2d 26 (2001).

The court also rejected suggestions that the applicable exclusions clarified the scope of the coverage from which the exclusion took away possible coverage. A products liability cover was found inapplicable because, as the court stated:

"The Kim/Kaen complaints did not allege that the defects in the PlayStation 2 caused them to experience a loss of use of game discs or DVDs. . . .

. . . [T]hough it is undisputed that certain discs did not properly play on the PlayStation 2, the complaints never suggested that the discs themselves did not function properly on other devices. Id. In this respect, the suit is easily distinguishable from the loss of use cases Sony cites, in which the insured's defective property rendered the property of a third party unusable. See Anthem Elecs., Inc. v. Pac. Employers Ins. Co., 302 F.3d 1049, 1057 (9th Cir.2002) (defective circuit boards inserted into scanners of third party plaintiff rendered scanners unusable) . . . ."

Id. at *10.

In a thoughtful dissent, Judge Bybee disagreed with the construction of the AISLIC policy. Critically, the dissent’s analysis is not addressed in the majority opinion. The dissent noted that the phrase “negligent publication” is not a term but a phrase made up of two individual words that have meaning both individually and in combination. The court reasoned:

"Turning to the dictionary, the word 'negligent' means “lacking or exhibiting a lack of due care or concern.' WEBSTER'S II NEW COLLEGE DICTIONARY 732 (1999). The word 'publication' means 'communication of information to the public.' Id. at 895, 51 Cal.Rptr.2d 566. Given the ordinary meaning of those words, a layperson might properly understand that the phrase 'negligent publication' means something like “communication of information to the public lacking or exhibiting a lack of due care or concern.' "

Id. at *13.

Such a meaning obviously dovetails with coverage for false advertising in a number of cases. The court found that an exclusion can clarify an ambiguity in an insuring clause in favor of coverage. American Alternative Ins. Corp. v. Superior Court, 135 Cal. App. 4th 1239, 37 Cal. Rptr. 3d 918, 924 n.2 (2006) (“Unquestionably, it may be considered part of the general circumstances impacting an insured's objectively reasonable expectations as to the scope and extent of coverage under a policy.”). Id. at *14.

The court thereafter reasoned:

"Exclusion P provides contextual evidence for the phrase 'negligent publication' within the affirmative coverage section of the AISLIC policy. If there was no affirmative coverage for false advertising or misrepresentation in advertising then the policy would have no need for an exclusion specifying that those claims were not covered. Why recite that certain acts are expressly excluded from the policy if they were never covered in the first place?"

Id. at *14.

At best, in the dissent’s view, the majority’s interpretation leaves Exclusion P meaningless and the other contra-indications referenced by the majority send mixed signals. Although the dissent does not take issue with the tort-focused analysis of the majority, had it done so the context arguments would not survive scrutiny. The dissent also was “puzzled” as to why cases that “do not yield one clear definition of ‘negligent publication’ should be seen as a limited set.” Id. at *15.

The dissent also noted:

"I am unaware that Sony missed any secret deadline after which a term may no longer be used in new judicial contexts, and the possible usages for the term is closed to the conjunction of the ways in which it had thus far been used."

Id. at *15.

In a telling part of the opinion, Judge Bybee states:

"I fear that in the course of implementing the common law system, we have become so adept at looking to judicial cases to obtain the solutions to the challenges we encounter, that we have come to believe that even when determining the ordinary and popular meaning of words, the solution is to be found in case law. The California Supreme Court has admonished that absent evidence that the parties intended the provision to have a specialized meaning that a term must be construed as would a layperson, and not as it might be analyzed by an attorney or an insurance expert, or, I might add, a judge. See E.M.M.I. Inc., v. Zurich Am. Ins. Co., 32 Cal.4th 465, 9 Cal.Rptr.3d 701, 84 P.3d 385, 390 (Cal.2004). I am quite certain that a layperson looks to a dictionary to determine the meaning of a phrase, not to case law."

Id. at *14.

Use of Different Copyrighted or Trademarked Materials on Separate Occasions Prevents Triggering of the "Knowing Violation" Exclusion

dgauntlett@gauntlettlaw.com (David Gauntlett) — Thu, 14 Aug 2008 17:46:01 -0800

Wausau Business Ins. Co. v. Fisher Printing Co., Inc., 2008 WL 2704874 (N.D. Ill. July 8, 2008) (Kennelly)

The underlying suit asserted unlawful intentional copying of copyrighted images and repeated use of Ashley’s protected trademarks and images. The court, applying Illinois law, focused principally on the exclusions.
The court found the exclusion inapplicable, following Taco Bell Corp. v. Continental Cas. Co., 388 F.3d 1069 (7th Cir. (Ill.) 2004):

Ashley's description of Fisher's activity indicates the use of separate and distinct protected images without authorization, not (as in Taco Bell ) different permutations of a general concept. . . . The exhibits in Ashley's complaint also show separate copyright or trademark applications for each image that Fisher allegedly used without authorization. . . . Rather than one continuous use of a general idea with uncertain boundaries, see Taco Bell, 388 F.3d at 1074, publishing copyrighted or trademarked works involves, as least as characterized in Ashley's suit against Fisher, the use of separate images with “pretty definite metes and bounds,” not an ongoing use of a single general idea with uncertain boundaries. Id. If an infringer uses different copyrighted or trademarked material on separate occasions, he commits a set of “fresh wrongs” each time, and each occasion represents a separate publication, not simply a repetition of an earlier infringement. Id. at 1073.
Id. at *3.

If some of the issues allegedly used by Fisher without authorization were published after policy inception, a defense for the suit arises. The court found the “knowing violation” exclusion inapplicable because

A complaint that alleges, but does not require, proof of intent as a predicate for liability does not “plainly predicate liability on a theory of intentional misconduct.” To establish an infringement of copyright, a plaintiff needs to show only ownership of the copyright and copying of protected expression by the defendant. See Microsoft Corp. v. V3 Solutions, Inc., No. 01 C 4693, 2003 WL 22038593, at *9 (N.D.Ill. Aug.28, 2003) (citing Feist Publ'ns, Inc. v. Rural Tel. Serv. Co., 499 U.S. 340, 361, 111 S.Ct. 1282, 113 L.Ed.2d 358 (1991)). The plaintiff's ability to prevail does not depend on whether the defendant acted knowingly or intentionally. Id. (“Neither lack of knowledge nor intent are defenses to a copyright infringement claim”).
Id. at *5.

The court did not, however, find that Wausau’s conduct met the standard for vexatious and unreasonable conduct under 215 ILCS 5/155. Id. at *6.

Protocol for Coverage Assessment at Time of Litigation

dgauntlett@gauntlettlaw.com (David Gauntlett) — Mon, 11 Aug 2008 15:15:19 -0800

Insurance Coverage Questionnaire

1. Is the company a defendant/counterdefendant in litigation?
2. Are any claims for damages, including mere quests for attorneys’ fees or such other and further relief, sought against it?
3. What jurisdiction is the lawsuit filed in?
4. What is the principal place of business and state of incorporation of the insurers who issue policies that might respond to such risk?
5. Where is the principal place of business and place of incorporation of the corporate entity that issued the insurance policy that might respond to these claims?
6. What representations have insurers made regarding the scope of coverage, either in advertisements rendered in connection with solicitation of their products, or in express representation to the company, made to its brokers or directly to the company at the time of policy issuance?
7. What representations re the scope of coverage have been made in any materials provided to the broker and/or company?

8. What causes of action are asserted under what theories of recovery?
9. What past experience has the company had with this or other insurers under similar policy language involving similar claims for relief?
10. Under the law most favorable to the company of those potentially available to it, what reasonable meanings does its policy language have that may be compared to the fact allegations against the company?
11. What potential for amendment may exist in the underlying lawsuit consistent with the theories of recovery and the character of relief sought that might trigger coverage under the policy?
12. What is the likely exposure to the company in light of the damage claims available and anticipated costs of litigation to defend the lawsuit?
13. At what point does first-dollar coverage attach in light of the company’s SIR?
14. Does this equation change in light of the policies issued to company’s subsidiaries or acquired entities that may be implicated in light of who are joined as defendants in the suit or the character of the relief sought and the conduct at issue?
15. Assessing all these factors, what is the potential coverage available to respond to such claims, and what if any further action is appropriate in light of this analysis with respect to pursuit of coverage?

Creation of an Insurance Coverage Protocol

Whatever you can measure you can control. The Accounting Standards Board now includes the value of IP rights on a company’s balance sheet, recognizing the value of intangible assets to a company’s bottom line. Critically, what you can value you can also insure. The risk created by not having an intake system to assess the potential coverage posed by claims for damages in intellectual property and antitrust lawsuits is threefold:

(1) Attorneys’ fees and costs incurred prior to notice to your insurer are not covered in most jurisdictions;

(2) In some jurisdictions, such as New York and Illinois, a delay of less than one year in providing notice will deprive a company of realizing any benefits from its insurance coverage;

(3) Even where notice is provided, in some jurisdictions, unless pertinent facts from the underlying action which supplement the information available from the complaints are provided to the insurers, such facts may not be used to establish coverage as they were not “known” to the insurer.

Creation of an effective Protocol requires integrating coverage available, including hypotheticals which the insurers who issued policies concede will trigger coverage. Once created, customized software can be developed to systematically assess whether a new claim should be reported, and if so when, to whom, and including what facts to secure coverage.

Notice Considerations in Seeking Reimbursement of Defense Fees Where an Insured Has a Self-Insured Retention

dgauntlett@gauntlettlaw.com (David Gauntlett) — Thu, 07 Aug 2008 15:05:38 -0800

Where a company has a significant self-insured retention, the date for notice may dovetail with the exhaustion of the amount of SIR, creating a potential for full recapture of all fees that could have otherwise been incurred had more timely notice been provided. Moreover, the pertinent policies at issue may be those not presently in place, but those issued many years ago on an “occurrence” basis. Thus many major intellectual property cases continue for a number of years. A 1990 lawsuit which was resolved in 2000, with constructive notice provided in 1991, may permit pursuit of a claim against an insurer for several years.

Where the jurisdiction has a long statute of limitations for breach of contract (i.e., six years in Minnesota, four years in California), a lawsuit that ended three and a half years ago, where constructive notice occurred in 1991 for a lawsuit filed in 1990, may permit recovery of attorneys’ fees under a policy issued in 1986, if allegations of the complaint triggered liability for damages within that policy period. The policy forms in existence as of 1986 may be far broader than those present today. Thus the archeological effort to assess for audit purposes whether the existing insurance coverage best responds to present risks may, as an added benefit, reveal pathways to recovery of outstanding attorneys’ fees long ago incurred by the corporation.This opportunity may be referred to as “meat on the table” which may have been left without notice by the corporation. Another benefit of such an audit is to create a protocol to assess what kinds of claims may properly trigger notice to an insurer.

Although some major corporations may have policy provisions that do not require direct notice of a claim until the self-insured retention is achieved, there may be no tracking mechanism that dovetails with the policy notice clause, especially where different kinds of policies are at issue. Thus a policy form that requires notice when 50% of the retention is exhausted would require careful tracking of litigation expense to see when that threshold had been achieved.

Similarly, a list of hypothetical fact scenarios that would trigger coverage, as exemplars of the kind of lawsuits that should be highlighted and brought to the attention of the coverage oversight designee, is critical. Indeed the best way to assure that proper reporting occurs of such claims is to designate someone with knowledge of both the insurance coverage, templates for situations which may implicate coverage, as well as knowledge of all litigation matters filed against the company, with the task of assessing coverage at a preliminary level to ascertain whether reporting is appropriate.

Outside coverage counsel can enhance the ability of the coverage coordinator to achieve such a goal. Where the corporation presently has in effect pathways for product liability, environmental, securities law, and other non-routine, someone within the IP counsel department can be tasked with assessing coverage for such circumstances. It is also essential that the potential form in which a coverage action may be pursued is factored into this analysis.

Insurance Coverage for Corporate Counsel

dgauntlett@gauntlettlaw.com (David Gauntlett) — Tue, 05 Aug 2008 14:56:46 -0800

Corporate Counsel May Be Defendants in IP Litigation and Fall Under Express Provisions of the Corporation’s D&O As Well As E&O Coverage

Many IP litigation matters involve direct exposure to officers and directors of a company under theories of inducement of infringement, whether patent, copyright, or trademark. Similarly, trade secret misappropriation claims may implicate either current or ex-employees. Where the allegedly wrongful conduct occurred while the officer or director was an employee of the company, its policies may be implicated. It is therefore essential in auditing the company’s assets to assess under what circumstances its Errors and Omissions and/or Directors and Officers coverage may include intellectual property coverage. This follows because the capacity in which an employee or officer acts in rendering services for the company may dovetail with its professional activities as well as involve its general business conduct, thereby implicating coverage under an E&O policy.

Similarly, a Directors and Officers policy, while typically implicated in a securities fraud/shareholder derivative suit, would not come into play for intellectual property or antitrust claims. A recent survey reveals that fully 85% of such policies do not include express exclusionsfor intellectual property or antitrust claims. As such policies are written on a claims-made basis, so long as the claim is asserted in a year in which no exclusion arises, potential coverage may be implicated. Such exclusions, however, may be readily included in policy forms. To guard against such a likelihood, a longer term (i.e., three- to five-year form) policy written on a claims-made basis, which may not be endorsed during subsequent years in a way that limits coverage without an express negotiation regarding same, including reduction in premium, should be obtained.

Where the officer named is also corporate counsel, specific insurance for such counsel’s activity should be reviewed to assure that it may encompass intellectual property lawsuits, at least to the same extent as that offered by the corporation’s coverage.

Tracking Corporate Counsel Fee Expenses in IP Litigation in Coverage for Defense Costs

Where the corporate counsel is not named as a party but its energies are devoted to tracking, overseeing and active involvement in litigation, recapture of those fees as if they had been rendered by outside counsel is becoming an option. Ironically this potential flows out of the PLCM case, where an insurance company’s corporate counsel sought and successfully obtained reimbursement for its fees. PLCM Group, Inc. v. Drexler, 22 Cal. 4th 1084, 1088 (2000), citing Garfield Bank v. Folb, 25 Cal. App. 4th 1804, 1807 (1994).

The court found that the reasonable value of in-house counsel’s legal services is recoverable by the prevailing party where counsel is actively engaged in preparing for trial.). Thus the insurance industry has established precedent that can be best used by its own corporate policyholder clients to seek reimbursement for the fees their inside counsel attain.

A key problem in this respect is that many corporate counsel do not record time the same way as outside counsel. Reconstruction of the time expended by such counsel or creation of other mechanisms for tracking reimbursement of such expenses after the fact can be expensive. PLCM Group, 22 Cal. 4th at 1096.

The declaration of the attorney as to the number of hours spent on the case is sufficient evidence to support a fee award. Martino v. Denevi, 182 Cal. App. 3d 553, 559 (1986). Contemporaneous time records are not required for a recovery of attorney’s fees (id); however, in PLCM the Falik Declaration was explicitly based upon a review of two sets of contemporaneous records of work done: the electronic files stored on her computer directory for this case and the paper files maintained in chronological order throughout the litigation. Indeed, pleadings, depositions, and other evidence of the actual work performed by counsel are on their own sufficient to ascertain the reasonable amount of fees. Melnyk v. Robledo, 64 Cal. App. 3d 618, 624 (1976).

Some proactive mechanism to record time spent in interacting with matters in which potential coverage may arise is another element of the protocol that companies should prepare to obtain maximum recapture of litigation fees, both internal and external, in matters which may be subject to coverage.

On May 14, 2008 HP obtained a judgment of over $51,000,000 for post-tender attorneys’ fees, including several million dollars of in-house fees based on reconstructed contemporaneous billing records reflecting interaction with outside counsel.

IPO Owners As Licensors - Opportunities To Enhance Value

dgauntlett@gauntlettlaw.com (David Gauntlett) — Fri, 01 Aug 2008 14:46:34 -0800

Key questions that an IPO owner, as licensor, needs to ask are the following:

1. Is your licensee insured?

2. Is his insurance adequate?

3. Is your company named as an additional insured under his policy?

4. Does your license agreement require his insurance to step up to the plate before your indemnification provisions are triggered?

5. Are indemnification issues covered under patent owner’s policies?

In assessing the answers to each of these questions, it is evident that consideration of insuranceis significant not only for the licensor, but assuring that potential licensees have adequate insurance to fulfill their contract obligations is critical. For example, when entering into any form of software licensing agreement where the character of the software in use could create exposure for the company, it is important to know what rights of indemnification against the licensee for making use of a product outside the scope of its intended use within the terms of the contract is of no benefit if there is no recourse as a practical matter. A licensee with no assets is a worthless target. A licensee, however, that has adequate insurance coverage which names the licensor as an additional insured can make a big difference.

IPO Owners As Beneficiaries of Coverage Available to Their Co-Venturers or Those of Acquired Companies

dgauntlett@gauntlettlaw.com (David Gauntlett) — Wed, 30 Jul 2008 14:40:50 -0800

Coverage Opportunities Under Policies Issued to Affiliated Companies May Be Broader Than Those Available to the Company

While major corporations may find that access to insurance is limited by their self-insured retention, there are nevertheless many situations where a major corporation having acquired a smaller corporation otherwise succeeded to its legal rights, including those to pursue insurance under its policies, may provide broader and lower attachment point coverage than the corporation. The following questions should be asked to assess whether this opportunity exists in any litigation matter, where a corporation is sued along with its recently acquired subsidiary or new subsidiaries as co-defendants.

These scenarios should be reviewed:

● Umbrella policies may define a policy term (joint venturer) so as to include the acquiring company in a suit where both parties are named as a defendant.

● “Occurrence” coverage under policies of acquired companies; this coverage may be broader than that available to the acquiring company.

● (International Insurance Policies)

A number of insurers, including Cigna and Chubb, have issued policies through the mid-1990s that define the scope of coverage in a way that would render these policies as broad as a domestic policy providing CGL coverage.

A Case Study -- How Cigna’s International Coverage Required it to Defend Antitrust Counterclaims in a U.S. Lawsuit

In Hewlett-Packard Co. v. CIGNA Property and Casualty Ins. Co., No. 99-20207 SW, 1999 U.S. Dist. LEXIS 20655 (N.D. Cal. Aug. 24, 1999), the court analyzed an international policy whose territory was defined as “worldwide for claim or suit resulting from an occurrence outside the United States of America . . . .” The court found that a claim for damages which emanated from conduct outside the United States for an action pending within the United States triggered a defense.

As Judge Williams found:

HP argues that the Nu-kote Counterclaim alleges activities that fall within the territorial limitations of the Policy because HP distributed in foreign markets package inserts intimating that the HP cartridges are not refillable.
. . . .
CIGNA contends that any [fear, uncertainty and doubt] allegedly suffered by consumers and distributors in foreign markets is irrelevant because there is no allegation or evidence that Nu-kote sold inkjet refill products outside of the United States during the Policy period.
. . . .
However, in the realm of advertising injury, the locus of the misrepresentation and the site of the resulting injury could easily be disjointed. For example, it is conceivable that a false statement in Maine could diminish a competitor’s sales in Florida. . . . The territorial limitation in the Cigna Policy emphasizes the location of the occurrence, not the location of the resulting damages. . . . Because Nu-kote could possibly claim damages to domestic business based, at least in part, on HP’s extraterritorial acts, the Court finds that the Policy Territory requirement is satisfied.

Id. at *10-13.

This follows because as long as an advertising activity occurs outside the United States which could create liability, it matters not whether the lawsuit itself was within the U.S. It takes little imagination to conceive of a number of IP litigation matters where advertising conduct which may be identical to that within the U.S. but takes place in a number of foreign countries, often in translated versions of the same advertisements emanating from U.S. sources, creates potential coverage.

On May 14, 2008 a judgment of over $51,000,000 was entered in HP’s favor, including nearly all of its post-tender defense fees at rates of up to $600 per hour plus in-house counsel fees and pre-judgment interest at 10% per annum from date of invoice.

Assessing Your Insurance Portfolio As an IP Owner to Maximize Value

dgauntlett@gauntlettlaw.com (David Gauntlett) — Mon, 28 Jul 2008 14:36:15 -0800

New Insurance Policies Covering Cyberspace Torts

Insurers now issue so-called cyberspace policies and also provide for net security coverage that addresses a host of exposures emanating from a company’s greater dependence on information services. Coverage for cyberspace intellectual property defense risks and prosecution opportunities, especially of patent and trade secret claims, is available only through policies specifically covering IP risks. You should carefully evaluate the wide array of available policies to maximize coverage for your company’s needs. The larger your client’s revenues and, hence, its premium payments, the greater your ability to negotiate favorable coverage terms.

Traditional offense-based advertising injury/personal injury CGL policies have a better track record than non-CGL policies in covering internet- and cyberspace-related torts. But the definitions of claims specified by the various ISO forms sometimes are murky and could require a case to proceed to trial to clarify whether coverage will arise. Common exclusions and questions about causal nexus also may apply to bar coverage. Errors and Omissions and Directors and Officers policies typically cover wrongful acts and require particularized conduct, either by a professional or a director/officer, to trigger coverage.

Cyberspace, Net Secure, and Intellectual Property Defense as well as pursuit policies offer a rich variety of solutions for addressing common e-commerce problems. As an adjunct to traditionalpolicies, they give policyholders an improved coverage position that should minimize transaction costs. As the hypotheticals reviewed herein reveal, many common problems confronted by policyholders are best addressed under new forms of coverage where price point is a key consideration.

Nevertheless, a combination of broadly written traditional CGL Coverage with new form Cyberspace and Net coverage may present a winning package. Articulating hypothetical problems which your company could encounter and asking a prospective insurer to address whether its policy would cover given claims in writing is an effective way to “test drive” these new policies and find insurers who are willing to work for your business. However, because some of the narrower forms of cyberspace policies arguably do nothing more than duplicate the coverage that should be available under CGL and E&O/D&O policies, however, you must carefully review the policy language before selecting your company’s coverage.

Savvy corporate counsel will assure that the potential litigation exposure of their company governs the choice of its insurance policies. Many risks may not trigger net secure and cyberspace policies. But the significant exposure posed by cyberspace perils calls for having proactive, offense-based coverage in place before it is needed.

Cyberspace Policies

Unlike ISO policy forms, cyberspace policies offered by the current marketplace have not congealed into any standardized form. Indeed, insurers use product differentiations, protected by copyright, as a significant competitive strategy. It is therefore essential that you discuss with the vendor its specific policy language.

Cyberspace policies typically provide coverage for damages and defense costs arising out of enumerated offenses, such as defamation, invasion of privacy, misappropriation of name or likeness, or alleged violations of intellectual property rights stemming from information disseminated by the insured in covered media or advertising activities. They may also be endorsed to provide E&O coverage for the content of the covered information.

Media/Professional Insurance Agency, Inc., for example, issues a policy for Cyberspace Liability Plus™ Insurance that covers claims arising out of defamation and various intellectual property offenses, as well as “Piracy and plagiarism” (which according to at least one court makes that definition redundant) and the misuse of an intellectual property right, in the context of cyberspace activities. Iolab Corp. v. Seaboard Surety Co., 15 F.3d 1500, 1506 (9th Cir. 1994) (Placed in context, the intended meaning of the language is clear. “In the context of policies written protect against claims of advertising injury, ‘piracy’ means misappropriation or plagiarism found in the elements of the advertisement itself – in its text form, logo, or pictures – rather than in the product being advertised.”).

Although you can expect pertinent exclusions and other endorsements to exclude coverage available in a given factual scenario – typically for patent, trade secret, and antitrust claims – you will find the scope of the insuring grant in these policies a good place to start negotiating desired coverage (see sidebar for a list of cyberspace coverage vendors).

Net Secure Policies

Marsh’s Net Secure policy contains the elements common to most such policies. It addresses both first- and third-party losses and is underwritten by a consortium of insurers. It focuses on the more traditional kind of operational issues that companies encounter and addresses cyberspace property damage coverage.

Coverage A in the Marsh Net Secure policy includes a variety of perils, such as inadvertent mistake, error, or omission in the creation, distribution, installation, maintenance, modification, processing, repair, testing, or use of your computer system, and the introduction or spread of a computer virus, as well as other related forms of interruption to electronic information processing systems. The policy kicks in when there is “direct loss resulting from damage to forms of electronic data, information assets, computer programs or data processing media.”

Coverage B of the Marsh policy extends business income and extra expense coverage to include disruption, interruption, delay, or suspension of your internet and network activities during the period of recovery. The same litany of perils as enumerated in Coverage A triggers rights under this coverage.

Intellectual Property Policies

Policies that expressly provide for defense and/or prosecution of patent, trademark/trade dress, trade secret, and copyright claims obviously represent the most direct form of coverage for intellectual property claims. Intellectual property policies have the advantage of removing any ambiguity regarding the scope and extent of coverage. See DAVID A. GAUNTLETT, INSURANCE COVERAGE FOR INTELLECTUAL PROPERTY ASSETS, § 17.04 n.7 (Aspen Law and Business Division of Aspen Publishers, Inc., Gaithersburg, NY, 1999) (2007 Supplement).

One example of such coverage was historically available from the American International Specialty Lines Insurance Co. Called patent infringement indemnity insurance, it provided coverage of patent infringement claims caused by the “manufacture, use, distribution, advertising or sale” of any “covered product,” as long as the insured’s infringement was not intentional. You could endorse this policy to include other forms of intellectual property, such as trade secret, trademark, trade dress, or copyright.

Although a cyberspace policy may more economically protect your company from the latter three offenses, the patent defense policy expressly excludes them, absent an endorsement. At present for U.S.-based insurers, the sole resource for this insurance is the Intellectual Property Insurance Services Corporation based in Louisville, Kentucky. For significant corporations with a significant presence in Europe willing to procure patent defense insurance over a significant SIR (Self-Insured Retention), a number of opportunities through European-based insurers are becoming available. Similar risk-specific policies are available for the other intellectual property claims.

Intellectual property prosecution policies provide the necessary funding for you to pursue lawsuits in order to stop the infringement of your IP assets. Coverage of this type can be particularly important to companies that have a lot of their value tied up in these assets. Given the high cost of litigating intellectual property claims, smaller companies may lack the resources to pursue infringers and thus face the unfortunate prospect of standing idly by while infringement dilutes their valuable IP assets. Investing in coverage of this type can effectively eliminate this risk. Pursuit insurance has funded two cases that reached the U.S. Supreme Court. See Markman v. Westview Instruments, Inc., 52 F.3d 967 (Fed. Cir. 1995), aff’d, 517 U.S. 370 (1996); In re Lockwood, 50 F.3d 966 (Fed. Cir. 1995), vacated, 515 U.S. 1182 (1995) (after withdrawal of jury demand); see also Summit: Conn. Indem. Co. v. Markman, 1993 WL 304056 (E.D. Pa. 1993) (insured able to pay for the suit because his carrier had paid for two other suits involving the same patent).

Selecting the Coverage That Suits Your Company

dgauntlett@gauntlettlaw.com (David Gauntlett) — Thu, 24 Jul 2008 16:27:28 -0800

Opportunities in Procuring Cyberspace Coverage

So how can you protect your company from cyberspace risks? How can you ensure that your company has the insurance coverage it needs to negotiate confidently in e-commerce? In order to select the coverage that best suits your company, you must consider its stage of growth and its potential for experiencing dangers unique to the e-commerce landscape. Once you have made this assessment, you should weigh some basic practical factors before making a final decision.

Stage of Growth

The type of coverage you advise your company to obtain depends on its stage of growth. Insurance consultants vary in their recommendations. For example, one group suggests that companies should wait until a mature phase before purchasing intellectual property defense coverage. This group advises you to acquire multimedia/cyberspace liability; professional liability/E&O insurance, including coverage for software and hardware errors and omissions; and D&O and umbrella liability, during your company’s growth phase. See William Gallagher & Assoc., Insurance Milestones for High Technology Companies, www.hightechinsurance.com. Other consultants suggest intellectual property, infringement, and E&O coverage in the startup phase, deferring computer software and media property coverage and D&O liability insurance to the growth phase. See www.insurernewmedia.com.

After factoring in price point, most companies planning to emphasize e-commerce benefit, on balance, by procuring cyberspace, net secure, and D&O policies to supplement their CGL coverage and by putting off E&O/professional liability coverage till their growth or even mature phase. You may decide to rely on the courts to read offenses, such as piracy, idea misappropriation, and unfair competition, broadly enough to encompass the cyberspace torts of patent infringement and trade secret misappropriation, as they have done with CGL policies using the same language. Before you make that decision, however, you should carefully consider the law of the forum that will be applied to your policy. See American Nat’l Fire Ins. Co. v. Methods Research Corp., No. 99 C 7484, 2000 U.S. Dist. LEXIS 17748, at *8 (N.D. Ill. Dec. 5, 2000) (New Jersey law); West Am. Ins. Co. v. Moonlight Design, Inc., 95 F. Supp. 2d 838, 842 (E.D. Ill. 2000) (New York law); Zurich Ins. Co. v. Sunclipse, Inc., 85 F. Supp. 2d 842, 850 (N.D. Ill. 2000) (California law). Indeed, choosing an insurer may also mean choosing the jurisdiction. See Lumbermen’s Mut. Cas. Co. v. Dillon Co., Inc., No. 3:98-CV2013 (EBB), 2000 U.S. Dist. LEXIS 13330, at *10-11 (D. Conn. Aug. 31, 2000) (law of forum, Connecticut).

In general, your company should obtain intellectual property defense coverage as quickly as possible. Express intellectual property defense insurance tends to be more expensive than either cyberspace or net secure coverage. Sometimes you can procure the benefits of such policies by endorsing a cyberspace policy to include express coverage for trade secret or patent lawsuits. IP prosecution coverage may make sense for a startup if select intellectual property assets (patent or copyright) are key to the successful launch of your company’s products. In the current competitive insurance market, your aggressive purchase of a broader range of insurance products than your company may have traditionally procured makes good economic sense.

If you represent a more mature company, you may find that cyberspace and net secure coverage is more significant than traditional forms of E&O/professional liability coverage. If you must make a tradeoff for economic reasons, you could well make this tradeoff.

Dangers of E-Commerce Landscape

E-commerce activities create a potential liability that blends traditional exposure to privacy, defamation/disparagement, and intellectual property claims with new exposure to a variety of internet-specific claims, such as computer crimes, advertising error on websites, and trade secret misappropriation facilitated by email. Before shopping for a cyberspace policy, develop a series of hypothetical e-commerce risks for your company and require insurers to opine about whether their proposed policies would provide coverage for resulting claims. The more specific your hypotheticals are, the more valuable the prospective insurer’s coverage analysis will prove.

The following hypotheticals illustrate some of the exposure problems faced by companies in e-commerce. Imagine the following two scenarios, for example:

1. Your VP for marketing leaves to join a startup competitor that seeks to duplicate and offer for sale your entire line of products on its website, by shipping directly from the same vendors with whom your company has been doing business. It plans to charge 15 percent less than you charge for each product. To complicate matters, your competitor employs an innovative click-and-tab order system for which your company just received a business method patent.

2. Your satellite connection for streamed, online product advertisements goes down for more than a week because of cyberterrorist activity, just as your competitor gets its website with interactive order placement access up and running.

What do you do? Can your existing insurance coverage help? What additional insurance could you have procured that might have softened the blow from these risks?

Different Scenarios

Scenario One: Competitor’s Offer for Sale

If your ex-employee astutely purchased a cyberspace policy, the carrier may be compelled to defend thereunder, but your company could claim damages for its successful prosecution of the pirate. The pirate’s liability would be based on his theft of a list of customers that includes detailed information about their needs and wants, as well as the identity of pricing and delivery models of your company’s products vendors, or components suitable for assembly into products.

Receiving coverage for your new competitor’s activities under a traditional CGL policy would be problematic. Under the current 1998 ISO policy form, such conduct may not be deemed “the use of another’s advertising idea in your ‘advertisement.’” A court could view your lawsuit as one for theft of product information rather than for the content of the advertisement of those products. Disputes over these issues have led to numerous coverage cases, many of which have favored insurers. Although the logic of some of these cases is questionable, their existence should embolden insurers to deny indemnity for such claims. See Associated Aviation Underwriters v. Vegas Jet, LLC, 106 F. Supp. 2d 1051, 1055 (D. Nev. 2000) (The court found no causal nexus between the insured’s advertising and the alleged injury and, thus, no defense due where the insured allegedly funneled confidential trade secrets, including business strategy, pricing information, and client lists that were used to take away plaintiff’s present and future customer base.). Of course, as a plaintiff, your company could choose to highlight those elements of your lawsuit that might trigger coverage and thereby improve your prospects of obtaining an insurer-funded settlement or damage award.

Your trade secret and common law misappropriation claims may constitute “misappropriation of ideas under implied contract” or “misuse of an intellectual property right in content,” as outlined in Media/Professional Insurance Co.’s cyberspace liability policy. The precise description of goods on your company’s website or in its catalogs involves “disseminating content in or for the Cyberspace Activities.” An insurer should not broadly construe the policy’s exclusion for unfair trade practices so as to vitiate coverage, nor should the exclusion for employer-employee relations apply to post-separation conduct. Your company should obtain reimbursement for damages, subject to the amount of any self-insured retention.

Infringement claims for violation of the click and tab protocol would require acquisition of an intellectual property defense policy or litigation under a CGL policy. If the claim implicates a CGL policy form, the more recent the policy form, the less likely a court would be to find that a defense arose for your competitor’s offer for sale infringement.

You might obtain reimbursement for the cost of litigating the prosecution under a policy for pursuit of trade secret infringers, such as the one issued by CNA or Litigation Risk Management through its London-based syndicate. (See sidebar for list of insurance coverage products that address intellectual property disputes). Clearly, cost considerations are key in this area. Given the significant costs of IP litigation – patent lawsuits typically run more than $1 million a year to litigate – procurement of such coverage could be essential. Short-term pricing sensitivity may not be the best focus.

Claims for trade secret and patent infringement are less likely to fall within the scope of cyberspace or CGL policies than other intellectual property claims. The safest bet is to procure express intellectual property defense coverage to avoid litigation with insurers.

Scenario Two: Satellite Connection Loss

This scenario is a classic case in which traditional property damage and crime policies will not be responsive, even with extended business interruption coverage. Net secure policies, like the one issued by Marsh, however, fit the scenario perfectly. They are most likely to address the new range of risks posed by e-commerce in a first-party context, that is, in cases in which the insured looks to its own carrier for reimbursement of damages rather than seeking defense and indemnity for claims asserted against it.

The Marsh policy’s property coverage applies to a “direct loss resulting from deleting . . . disrupting or destroying your Electronic Data, Electronic Information Assets,” caused by an attack, unauthorized access, or unauthorized use. Cyberterrorism could constitute all three. You could recover for loss of business income, which would be determined by a number of factors, including the probable net income if no covered loss had occurred. Although this policy has an exclusion for satellite failure, it should not apply in cases in which the problem is interference with a functioning satellite.

Checklist of Other Factors

Engaging in e-commerce activity without the protection of cyberspace or net secure coverage could be like trying to hack your way through the jungle with a pocket knife instead of a machete. The instrument works; it is simply not long enough, strong enough, or hard enough to go the distance. If, after evaluating your company’s risk, you decide it should obtain nontraditional coverage, you should assume that all problematic exclusions are negotiable. The stronger a showing your company can make of its internal risk management activities and its lack of problematic exposure in the past, the more likely insurers are to extend broader coverage.

Finally, when deciding which cyberspace or net secure policy to procure to supplement your company’s coverage portfolio, keep the following pointers in mind:

● Avoid policies that insurers can cancel for any reason.

● Make sure that the policy covers sublicensees, subsidiaries, affiliates, joint venturers, subcontractors, and distributors.

● Avoid policies that automatically cancel coverage in the event of a merger or acquisition.

● Procure policies with worldwide territorial coverage.

● Obtain a policy with no security screening as a prerequisite for coverage.

● Avoid policies with a breach of contract exclusion.

● Obtain insurance policies with limits high enough to address the legal fees and/or settlement exposure that the referenced risks warrant.

● Make sure the definition of a claim encompasses as broad a set of factual scenarios as possible.

● Make sure the underwriting requirements are reasonable and may be properly addressed by personnel within your company in a timely, cost-effective manner.

● Procure coverage for all risks that your company wishes to insure as part of its portfolio.

Also, be cautious of risk management recommendations that your company accept a significant self-insured retention. The most important benefit that liability coverage provides to your company is a first-dollar defense. A copayment and/or minimum deductible that requires your company to share the cost of litigation, when negotiated in tandem with a provision that assures your company’s control of counsel, may lessen premium expense in a manner that still preserves effective policyholder options. Forfeiting the right to an insurer-funded defense in cyberspace litigation can be penny-wise and dollar foolish.

When Can an Insurer Be Compelled to Pay the Full Amount of the Contemplated Settlement of an Underlying Action?

dgauntlett@gauntlettlaw.com (David Gauntlett) — Tue, 22 Jul 2008 12:27:22 -0800

Insurer Refuses to Defend a Potentially Covered Lawsuit and A Settlement Requiring Insured Contribution Arises

Insurer Attempts to Limit Settlement Payments to Those Claims for Which the Insurer Is Exposed to Liability

In many lawsuits a number of distinct claims are asserted, some falling within, others outside of, coverage. In this scenario, what rights does an insured have to compel its insurer to fund a settlement of “mixed” claims against it? The answer will depend in part on what forum’s law applies. This in turn depends on what law the court chooses to apply. This determination will turn on where the suit initiated over coverage issues is pursued, as well as what choice of law rules that forum will apply.

In Warfield-Dorsey Co. v. The Travelers Cas. & Sur. Co. of Illinois, 66 F. Supp. 2d 681, 686-687 (D. Md. 1999), the underlying action was settled within three months of Travelers’ denial of a defense to its insured. Analyzing the insurer’s obligation to fund the settlement, the court stated:

Particularly in a case where all of the claims in the underlying action have been settled but only some of them qualify for coverage, many more factors must be considered by a court in determining whether the insurer has a duty to indemnify the insured for all or part of the amounts paid in settlement. . . . “It is the extent of the defendants’ exposure to liability and not mere allegations in the plaintiffs’ complaint that govern the appraisal of reasonableness.”

Applying this “alternate exposure to liability” test, the court found that there might

be “fact” issues precluding determination of whether the claims asserted permitted the insured to charge the insurer with the full obligation of the settlement. However, without specifying what methods might be adopted or who might bear the burden of proof in such a context, the court leaves little guidance for such a determination.

Insurer Attempts to Allocate Uncovered Claims in Connection With A Settlement

As a practical matter, the rule which holds the insurer accountable for the full amount of any reasonable and non-collusive settlement reached by the parties so long as covered claims were asserted makes the most sense. This rule is consistent with the law that governs when an insurer denies a defense and seeks to obtain reimbursement for that portion of the defense fees which it claims are uncovered claims. In those few jurisdictions that have recognized an insurer’s right to reimbursement, a refusal to defend deprives the insurer of any right to seek allocation of defense fees.

Case Study of the Insurer’s Obligation to Pay Entirety of Settlement of Mixed Claims

With this backdrop, it is useful to analyze a recent decision finding that design patent claims as well as trade dress claims in a conjoined lawsuit are both subject to indemnity.

In EKCO Group, Inc. v. Travelers Indem. Co. of Illinois, Civil No. 99-236-JD, Opinion No. 2000 DNH 249, 2000 U.S. Dist. LEXIS 17702 (D.N.H. Nov. 29, 2000), the underlying case had settled. The parties adopted an order which clarified that both the trade dress and design patent infringement cases were covered by the agreement. In addressing indemnity for the design patent, the court felt compelled to assess whether there was independent coverage for the claim. This, despite its finding that it need not address this issue in analyzing the duty of defense because the duty to defend extended to the entire lawsuit. The burden of proof is, however, on the insurer where it denies a defense.

Addressing the causal nexus between the EKCO advertising and design patent infringement claim as well as the requirement that the allegations constitute “misappropriation of an advertising idea,” the court stated:

The allegations pertaining to infringement of the design patent are substantially the same as the allegations of trade dress infringement. The appearance of the tea kettles was a form of advertising used to call public attention to the kettles for purposes of selling them. EKCO infringed Chantal’s design patent when the infringing kettles were offered for sale and sold. Therefore, the patent infringement claimed in the complaint was caused, in part, by EKCO offering for sale its tea kettles that were advertised by appearance to be Chantal tea kettles.

Id. at *36.

This case was subsequently reversed on appeal in EKCO Group v. Travelers Indem. Co., 273 F.3d 409 (1st Cir. (N.H.) 2001). There the court noted:

Nothing in the Chantal complaint suggests that it was concerned with EKCO’s design of its brochures or annual reports or that the graphics or typography were invented by or borrowed from Chantal. The misappropriation offenses charged by Chantal in its complaint were the physical reproduction and sale of a look-alike teapot by EKCO.

Id. at 415. This approach ignores the fact that a design patent can be infringed by an “exposure for sale” under 35 U.S.C. § 28. Thus, the advertising brochures used to promote the product also evidence infringement.

This latter analysis would have been unnecessary in jurisdictions such as Wisconsin, where a non-defending insurer could not interject coverage issues to challenge its obligation to pay a non-collusive, reasonable settlement.

Insurer Refuses to Defend a Potentially Covered Lawsuit and an Adverse Judgment Arises

Equally critical is whether the insurer has agreed to defend under a reservation of rights or simply refused to defend. In the latter case policyholders in many jurisdictions may be able to establish that the full amount of any settlement is due to the insured once the insurer is given notice of the fact of settlement and given an opportunity to participate and refuses to do so or does not participate in the settlement.

In U.S. Fire Ins. Co. v. Green Bay Packaging, Inc., 66 F. Supp. 2d 987, 998-999 (E.D. Wis. 1999), the court, having found that claims bearing the label “interference with prospective economic advantage” triggered the defense for acts of disparagement within the policy’s “personal injury” coverage for “oral or written publication of material that disparaged the goods, products or services of another.” In finding that indemnity was proper for the entire settlement based on those claims, it stated:

Where a claim consists of a variety of acts, some of which are covered and others that are not, it is well settled that resulting liability falls within the terms of the insurance policy unless the uncovered risk is the sole cause of damages. . . . Only if the damage award was totally unrelated to the conduct within the coverage of the insurance policy will the insurer not be liable.

Although the court addressed indemnity for a damage award, it is clear that in a settlement, the same rule would be treated in the same fashion under its logic.

IP Owners As Defendants/Counterdefendants

dgauntlett@gauntlettlaw.com (David Gauntlett) — Thu, 17 Jul 2008 16:25:34 -0800

Issues to Confront in Assessing the Potential for Insurance Coverage

In assessing the impact of coverage on litigation strategy, the following questions must be considered:

(1) What are the goals of the plaintiff or counterclaimants in monetary versus nonmonetary relief?

(2) Will your company’s carriers contribute to a settlement if nonmonetary issues can be resolved?

(3) Can you procure full reimbursement for the attorneys’ fees you incur in defense of IP/antitrust litigation, even if you are also a plaintiff?

(4) Is there an issue of allocation re recovery of attorneys’ fees in such a situation or simply where there are some claims that are covered and others that are not – again, depending upon the forum whose coverage law will apply?(5) What if you do not have first dollar coverage and the catastrophic loss provisions of your self-insured retention do not permit the attachment of any right to reimbursement of attorneys’ fees until the threshold level is met (i.e., $5M-$50M) is not uncommon for major corporations?

(6) What goals of the plaintiff or counterclaimants are monetary versus non-monetary?

(7) Can your carriers contribute to a settlement if non-monetary issues can be resolved?

(8) Can you procure full reimbursement for attorneys’ fees incurred in defense of IP litigation, even if you are also a plaintiff?

(9) Is there an issue of allocation re recovery of attorneys’ fees?

(10) What if you do not have first dollar coverage – catastrophic loss that exceeds SIR for attorneys’ fees incurred or for damage exposure ($5M, $10M, $15M, $20M, $25M)?

In answering these questions, you may well recognize opportunities for involvement of insurer proceeds in either limiting defense costs or avoiding them entirely.

What Insurance Coverage Will Your Litigation Against Defendants Trigger That May Benefit Them or Your Company?

dgauntlett@gauntlettlaw.com (David Gauntlett) — Tue, 15 Jul 2008 16:22:52 -0800

Discover What Insurance Your Litigation Opponent Possesses

Insurance coverage is a two-way street. Where you are litigating against a competitor of similar size and economic resources, it is likely that its insurance portfolio will mirror yours because of market conditions. Pursuant to Federal Rule of Civil Procedure 26(c), you can readily ascertain policies issued to it which may respond to claims asserted in your lawsuit. Parties that contend there is no coverage because their own review of their policies reveals no coverage or due to their receipt of a denial letter from their insurer must be tested. Your opponent’s views on the scope of its coverage can be tested in litigation.

It is important, in this effort, to not limit analysis to Commercial General Liability policies but to pursue umbrella and excess coverage, Errors and Omissions policies, Directors and Officers policies, as well as new forms of multimedia, cyberspace, and net security policies. While your opponent may object that this information is privileged, some level of inquiry is required to clarify whether a Rule 26(c) disclosure has been properly made.
Modify the Relief Sought in Litigation to Factor in the Availability of Insurance Coverage

One of the benefits of obtaining information about your adversary’s insurance coverage is that, in a number of jurisdictions, you can name the insurer as a party to the lawsuit you are pursuing and participate actively in the coverage dispute by clarifying what claims are being asserted and in so doing potentially impact the coverage available to the defendant.

For example, virtually every form of insurance policy requires that a form of damages be sought to entitle the defendant to a defense. While this may be limited merely to a quest for attorneys’ fees, pure claims for injunctive relief without the “such other and further relief” clause included in the complaint may not trigger a defense. Whether this is so will depend on what jurisdiction’s coverage laws apply. In a state such as Texas, where the “eight corners” rule is pertinent, pleadings define the scope of claims for insurance purposes. Thus, even if you seek further relief beyond an injunction, until that further relief becomes part of a formal pleading, no defense may be triggered. Feed Store, Inc. v. Reliance Ins. Co., 774 S.W.2d 73 (Tex. Ct. App. 1989), reh’g denied July 27, 1989; Reller (applying Florida law).

You may, however, wish to trigger coverage by your opponent, especially where it is a sizable company with significant resources and the availability of insurance coverage will not markedly enhance its ability to sustain the litigation, the benefit of coverage can well be to force its insurer to contribute at an earlier phase in the lawsuit and to fund its resolution. Similarly, where you believe damage claims are likely and the character of the damages sought may fall within the defendant’s coverage, having an insurer forced to pay that sum will make it easier to settle the case. Intellectual property cases, of course, often seek primarily nonmonetary relief.

What Insurance Coverage Will Litigation Against Your Company Trigger That Benefits Its Interests

Using Insurance Proceeds to Settle Litigation While Achieving Business Goals

Where the business issues predominate, as is often the case in trademark infringement litigation, procuring a judgment may be less significant than eliminating the competitor’s improper use of your trademarks. Nevertheless, where the monetary aspects of the dispute can be addressed by insurance coverage, so that recapturing litigation costs from the competitor need not come out of its company proceeds, resolving nonmonetary disputes may be simplified.

Each scenario is fact-driven, but assessing insurance as a tool for dispute resolution gives your company the benefit of being an insurance coverage-savvy litigator. Nor should outside counsel be expected to have full knowledge of the intricate interrelationship between insurance coverage and IP claims.

The Role of Policyholder Insurance Counsel in Enhancing the Value of IP Assets – The Insurance Coverage Audit

Outside coverage counsel’s expertise can effectively bridge the gaps in knowledge of these issues, facilitate insurer involvement in defense, reimbursement, and settlement, and create better continuity between defense firms entitled to reimbursement of fees who will not be perceived by an insurer as adversarial to their interests. Where the disputes over amounts due are between the company and its coverage counsel, and not the outside lawyers, coverage counsel who represent the insured can be the intermediary between the company and its insurers who advocates the company’s interests. This role for coverage counsel is especially useful where the outside law firm may occasionally represent insurers so it either has direct or at least business conflicts, as is the case for many major general practice litigation firms. In such a case, an independent coverage firm is ideally positioned to champion the company’s right to reimbursement for outside fees incurred without placing outside counsel in any conflict with insurers whom they must deal with on a business basis for other matters.

Special Opportunities and Pitfalls Posed by Insurance Coverage When Pursuing a Smaller Company

Where the defendant is a small company and where damage liability may be difficult to establish, and even if successfully done, may not create a return equal to the attorneys’ fees to obtain it, focusing only on recovery that is essential to the company’s mission may minimize expenses and assure that the defendant does not procure insurance coverage. Once the character of that coverage is ascertained through discovery, the company may elect to broaden its claims, including seeking damages which it may have heretofore eschewed, where it knows that that activity will not trigger a right to a defense funded by an insurer.

There is nothing more disconcerting for a company than to find that it is the only party paying litigation expenses in a bitterly fought dispute. There are numerous examples of small companies who have ended up funding their competitor’s counterclaim litigation expenses by pleading into coverage.

Thus a small company named Verteq who was a plaintiff in an intellectual property matter against a larger competitor received a counterclaim which triggered coverage. Given the fact that proof that the counterclaim was not viable involved the same legal action necessary to win its suit as plaintiff for violation of intellectual property rights, its competitor helped fund the litigation against it. Indeed, when a dispute arose over the rate of reimbursement, which was resolved in an arbitration under California law, the insurer’s unwillingness to pay the full rate was found to be improper.

Verteq received reimbursement for all attorneys’ fees expended at the full rate, pre-judgment interest from date of invoice, and the attorneys’ fees incurred in the arbitration to prove same. The latter fees were recoverable because the court found that Northbrook Insurance Co.’s reimbursement of counsel at a rate of only $150/hr. for litigation pending through 1994 was improper and constituted a breach of the covenant of good faith and fair dealing. While this result may not attend in every case, the net result was that the competitor ended up funding, via its ill-considered counterclaim, the entire cost of a successful litigation against it, without requiring the plaintiff to meet the standard for recovery of its attorneys’ fees under the underlying intellectual property statute under which it sought relief.

This same result was repeated by HP in a case where it pursued affirmative claims for relief against a patent infringer but drew a counterclaim for trade libel nested within various antitrust counts that ultimately led to a $51 million damage award in HP’s favor for 100% of attorneys’ fees expended at rates of up to $600 per hour and pre-judgment interest at 10% per annum from the date of invoice.

Recommendations for IP Owners Serving as Defendants/Counterdefendants

Based on these cases, the following observations are in order.

First, under the law of some jurisdictions, an insurer will be obligated to completely fund any non-collusive and reasonable settlement following its denial of a defense.

Second, in other jurisdictions that require a showing that all claims must fall within coverage, the standard for establishing a defense and for establishing indemnity under settlement may not be equivalent. Thus, facts beyond those in the pleadings and settlement agreement may be pertinent.

Third, because of these factors, coverage counsel should participate in the structuring of a settlement, as well as monitoring of a case as it proceeds to trial, since jury instructions, special verdicts, and interrogatories may address fact issues that determine coverage for any judgment that could arise in the underlying action.

IPO Owners As Plaintiffs

dgauntlett@gauntlettlaw.com (David Gauntlett) — Thu, 10 Jul 2008 16:19:24 -0800

How to Get an Insurer to Pursue Patent Infringers with Attorneys You Choose at Its Expense – The Advent of Patent Pursuit Policies

As the cost of patent infringement litigation escalates, the average case will require more than $1,000,000 to pursue through trial according to a 1999 AIPLA (American Intellectual Property Law Association) survey. Many patent holders have been successful in procuring damages, principally via reasonable royalty awards, that make such lawsuits financially worthwhile. Lawsuits that do settle between major corporations are typically resolved through cross-licensing of patents possessed by each corporation. The net effect of these cases is to generate new marketing alliances.

For companies that do not have a significant patent portfolio that they can exchange with a competitor to resolve infringement disputes, the inability to afford costly patent litigation may mean the abandonment of a key market advantage, central to the company’s strategy. For such companies, the ability to afford patent infringement is a matter of economic survival.

Some years ago, creative patent attorneys appreciated the insurance industry seeking solutions to this issue. Persuaded that an advance of monies to fund such lawsuits could often be paid back from the proceeds realized through successful litigation, some select insurers began underwriting a new form of insurance – pursuit coverage that placed insurers and companies with patent rights into partnership in their efforts to realize the full benefit of the patents the companies had procured.
Known as “pursuit,” “abatement” or “enforcement” coverage, the purpose of this policy is to reimburse a policyholder for legal expenses it incurs in its pursuit of an infringer. This is really not a true form of insurance, but rather a risk-transfer mechanism with certain insurance-like aspects in the trigger of coverage.

Industries Likely to Benefit from Pursuit Coverage

Infringement Insurance: Offensive Exposed Industries:

– Legal Costs to Prosecute an Infringer – Manufacturing
– Covers Scheduled Patents Only – Consumer Products [Toys,
– Prior Approval Required to Commence Apparel, Personal Care, etc.]
Litigation – Computers – Hardware &
– Insurer Shares in the Recovery Software
– Limits over $1M – Electronics
– Premium under $100,000 – Furniture
– Medical
– Food

Coverages Available for Pursuit of Patent Infringement Lawsuits

As yet, few of these policies have been interpreted. Nevertheless, a number of intellectual property counsel have procured reimbursement of the fees that they reasonably incurred in patent litigation. Typical issues will revolve around whether: (1) a viable infringement claim exists; and (2) facts not disclosed at time of application bar the right to pursue a claim (i.e., on sale bar applies because products within patent claims were advertised one year or more prior to application for the patent). The patents issued to Markman and Hilton Davis were both covered by pursuit insurance. A number of major insurers are considering extending similar coverage. The ensuing decade may well see such policies change the complexion of patent infringement litigation.

Restoring Balance to the IP/Insurance Interface

dgauntlett@gauntlettlaw.com (David Gauntlett) — Tue, 08 Jul 2008 16:09:37 -0800

While some counsel may object that there is less predictability associated with the active pursuit of intellectual property interests, then true of product launches that create liability exposure, the differences are simply matters of degree. New product launches that create exposure are driven by a company’s marketing programs, as are core advertisements that create liability for intellectual property and antitrust risks. While some companies may elect to self-insure at high levels to reduce premium expense in this area, before that decision is made, it makes sense to look at what benefits might have already been available under existing policies for previously litigated antitrust and intellectual property claims.

Most major corporations have procedures, either through existing personnel or through the aid of consultants, that:
• Identify and evaluate the full range of IP;
• Determine the level of patent, copyright or trademark infringement by the company or others;
• Reduce exposure to legal action by managing risk;
• Protect residual risk through insurance.

The challenge comes in the last component through identifying products in the marketplace that can create similar opportunities for reimbursement and designing protocols to assure that the maximum policy benefits available to the company are properly secured.

Seven Questions Intellectual Property Owners Should Ask Regarding Insurance Coverage

dgauntlett@gauntlettlaw.com (David Gauntlett) — Thu, 03 Jul 2008 16:03:30 -0800

The following seven propositions illustrate important issues which intellectual property owners need to be aware of to maximize the value of those assets. They include:

1. What claims you assert in litigation your opponents right to a defense and indemnity under their insurance coverage.

2. What insurance coverage will litigation against your company trigger that benefits its interests?

3. What new forms of insurance coverage are available to IPOs that will expand opportunities to transfer litigation costs to its insurers?

4. Can an insurance coverage audit reveal hidden opportunities to recapture monies paid for defense fees/settlements and/or judgments under existing insurance policies and, given the exposure revealed by a review of past coverage opportunities, is the present insurance portfolio properly attuned to risks your company now confronts.

5. Does the company’s history of acquisitions, joint venture relationships and other forms of corporate interaction expand the coverage opportunities available to it in a manner that requires revisitation of the potential for coverage under previously filed and existent lawsuits?

6. Can knowledge of insurance coverage help corporations reallocate risks arising from licensing activities to better assure against problems posed by defaulting or underperforming licensees?

7. Is the company’s existing coverage for corporate counsel adequate, and can new efforts be taken to track corporate litigation monitoring costs to better preserve their recapture as part of their insurers defense obligations?

Trademark Infringement/Contribution

dgauntlett@gauntlettlaw.com (David Gauntlett) — Tue, 01 Jul 2008 01:00:00 -0800

Royal Indem. Co. v. Hartford Ins. Co. of the Midwest, No. B196406, 2008 WL 2009747 (Cal. Ct. App. (2d. Dist.) May 12, 2008

Two carriers. Both agreed to defend disparagement claims in a trademark/unfair competition lawsuit brought against the insured. Royal permitted the insured to choose independent counsel, Sheppard Mullin, while Hartford contended that it was entitled to appoint counsel, Sedgwick. Hartford decided that no conflict of interest arose precluding it from choosing counsel as it wished.

The court concluded that a conflict of interest arose requiring Hartford to accede to its insured’s request for counsel. Its appointment of Sedgwick, therefore, did not suffice to discharge its defense duty.

"An insurer is not liable for losses caused by an insured’s willful acts. (Ins. Code § 533.) Because intentional acts are excluded from coverage, an inherent conflict may present itself in third party litigation: the insured seeks a verdict that either he is not liable or that his liability emanates from negligent conduct covered by his insurance policy; by contrast, the insurer has an economic interest in establishing either that its insured is free from liability or that liability emanates from intentional conduct not covered by the policy. Independent counsel is warranted when the insurer's 'best interests are served by a finding of willful conduct because it thus may not be deemed liable.'" (Previews, Inc. v. California Union Ins. Co. (9th Cir.1981) 640 F.2d 1026, 1028.) Id. at *4.

Hartford, by preserving various elements of its right to attack exclusionary conduct including the “knowledge of its falsity” exclusion, created a conflict. (Compare James 3 Corp. v. Truck Ins. Exchange (2001) 91 Cal.App.4th 1093, 1103 [insurer “agreed to defend the insureds against the trademark infringement and related claims without any reservation of rights”].) The court noted that in a “mixed action” where some claims are covered and others not, there is a potential for conflict even apart from the intentional acts exclusion issue previously noted.

“[I]n cases involving multiple claims against the insured, some of which fall within the policy coverage and some of which do not, the insurer may be subject to substantial temptation to shape its defense so as to place the risk of loss entirely upon the insured.” (Tomerlin v. Canadian Indemnity Co. (1964) 61 Cal.2d 638, 647.)
In a mixed action, there is a potential conflict of interest because '[t]he insured will want any judgment limited to covered claims, while the insurance company will be better off if judgment is imposed on claims not covered under the policy.' (Croskey et al., Cal. Practice Guide: Insurance Litigation, supra, at ¶ 7:785, p. 7B-96.) 'It seems doubtful that the conflict of interest can be avoided merely by the insurer's instructing defense counsel to ignore coverage defenses.'” (Id., ¶ 7:788, p. 7B-98.) Id. at *5.

The insured scored a complete victory and is not required to pay any money in the counterclaims. Therefore, the alleged violation of the cooperation clause was not problematic and, even though the insured refused to allow Sedgwick to serve as counsel because it believed it was entitled to retain independent counsel, that action did not sufficiently prejudice Hartford so as to eliminate its duty to pay for independent counsel.

The court noted that Hartford did not waive a “no voluntary payments” clause of non-compliance and thus it was not before the court. Moreover, Royal agreed to pay Sheppard Mullin’s fees as independent counsel.

Since Royal was on the hook for the payments, the insured was not making voluntary payments as Royal was not acting as a “volunteer.” Equitable contributions, therefore, arose against Hartford in favor of Royal Indemnity Co.

The court also found that prejudgment interest was recoverable in favor of Royal and that a stipulation that read, “[i]f the Court determines that Royal has a right of recovery, Royal's damages shall be $150,000” did not bar such recovery because it related to damages, not prejudgment interest.

Knowledge That Act Would Inflict "Personal or Advertising Injury" Exclusion

dgauntlett@gauntlettlaw.com (David Gauntlett) — Thu, 26 Jun 2008 01:00:00 -0800

North Plainfield Bd. of Educ. v. Zurich American Ins. Co., No. 05-4398 (MLC), 2008 WL 2074013 (D.N.J. May 15, 2008)

Few courts have found what one court recently mischaracterized as the “knowing violation of rights of another” exclusion bars even a defense for otherwise potentially covered claims. The court found this exclusion evidenced an additional reason for not finding a defense due.

The court reasoned:

The “knowing violation of rights of another” exclusion states that Coverage B does not apply to “‘[p]ersonal and advertising injury’ 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’”. (Id.) To state a claim for tortious interference with prospective economic advantage, the plaintiff must show not only that he or she had a reasonable expectation of economic advantage, but also that the defendant acted with “malice”, which is defined as intentionally inflicting harm without justification or excuse. . . . See Printing Mart-Morristown, 563 A.2d at 37. . . . ([A]sserting that the Board (1) “willfully published statements”, (2) intended to blacken D & D's reputation, (3) “intentionally and deliberately interfered” with D & D's contracts, subcontracts, and relationship with the Surety, and intentionally interfered with D & D's prospective economic advantage).

Id. at *22.

The court presumes that all facts precisely asserted could only create liability in a manner which would involve the intent to inflict harm without justification or excuse. It is not evident, however, from the case cited under New Jersey law, that malice, as defined therein, is an essential element for recovery under an interference with prospective economic advantage count. It appears, rather, to be an added element which could enhance the damage award. Nor does the court look at other fact allegations which are sufficient to create liability under that count which would not require an intent to harm.