This and That by Dennis Wade

Fuzzy slippers. Ugly sweaters.  You can secure a design copyright or trademark registration for just about anything.  Just pay the registration fee. And that is precisely why the insurance industry over, say, the last 15 to 20 years has tried to tighten-up the broad form Advertising Injury Coverage in the standard CGL policy. Have insurers succeeded by excluding “pure” infringement claims and better defining “advertising” in the coverage grant?  Well, the answer, as with most attempts to limit the scope of coverage in the modern era, is “yes” and “no.”  I have long maintained that– in the age of the internet and desktop publishing–Advertising Injury Coverage is often a trap for the unwary, exposing insurers to millions, literally, millions of dollars in defense fees.

A recent decision by the Second Circuit (December 19, 2018),   High Point Design, LLC v. LM Insurance Corporation, Liberty Mutual Insurance Company, Liberty Insurance Corporation nicely illustrates my concern about the meaning of “advertising” in the age of the internet and modern media.  In High Point, the Second Circuit recognized merely offering an infringing item for sale may not constitute “advertising” so as to trigger coverage.  But, equally, the Circuit recognized that most modern retailers, save perhaps for some mom and pop bodegas, use the internet and other forms of media to market what they are “offering for sale,” and thus, almost by definition, “advertising” is implicated, and thus a duty to defend may be triggered and owing.

Now let’s get to the facts.  The Liberty CGL policy defined “personal and advertising injury” to include an “injury…arising out of…[i]nfringing upon another’s copyright, trade dress or slogan in [High Point’s] advertisement.”  “Advertisement” was defined as “a paid announcement that is broadcast or published in the print, broadcast or electronic media to the general public or specific market segments about your goods, products or services for the purpose of attracting customers or supporters.”  The Liberty CGL wording excluded coverage for:

“Personal and advertising injury” arising out of the infringement of copyright, patent, trademark, trade secret or other intellectual property rights or out of securities fraud.  Under this exclusion, such other intellectual property rights do not include the use of another’s advertising idea in your “advertisement.”

However, this exclusion does not apply to infringement, in your “advertisement,” of copyright, trade dress or slogan.

As my opening suggests, the product at issue was fuzzy footwear.  Buyer’s Direct manufactured “Snoozie” slippers and they sent High Point a cease and desist letter claiming that High Point’s sale of “Fuzzy Babba” slippers infringed their patented design.  High Point then brought a declaratory judgment action seeking a ruling that no infringement had taken place.  And here is where the trouble began.  Buyer’s Direct asserted a counterclaim against High Point contending the infringement also involved the very “offering for sale” of the infringing footwear.

With the service of the counterclaim, High Point sought a defense from Liberty premised on the notion that the “offering for sale” language in the counterclaim triggered a defense obligation. Liberty refused to pick-up the defense, reasoning that the wording of the counterclaim only alleged injury for infringement, not advertising.  The District Court ruled against Liberty, finding that Advertising Injury coverage was indeed triggered because of the “offered for sale” language coupled with discovery demands in the underlying litigation in which Buyer’s Direct sought discovery of the advertising materials High Point used in connection with the slippers.  The District Court (Katherine B. Forest, J.) ruled that Liberty owed High Point a defense from day one of the litigation.

The Second Circuit agreed with Judge Forest. Yet, the Circuit found that the defense obligation was triggered only after High Point received discovery demands aimed at determining how the offending slippers were advertised.  As Judge Newman put it in his concurring opinion:

From the universe of all such claims, it covers only claims for slipper advertising that infringes another product’s trade dress.  It is arguable that Liberty’s liability for defense costs began not when Liberty became aware of [Buyer’s Direct] document demand, but only later when High Point assembled its response to the document request and brought to Liberty’s attention particular ads depicting the Fuzzy Babba slippers.  Such ads, viewed in light of the Policy’s coverage of liability for trade dress infringement in an advertisement, would have shown Liberty that its insured faced at least a reasonable risk of liability to [Buyer’s Direct].

The takeaway from this bitterly fought slipper contest is that insurers must be wary of bottoming decisions on the pleadings alone in IP contests.  Claims for the sale of infringing products in the modern era rarely involve the simple act of “offering for sale.” Care must be taken to ascertain whether the offending product was “advertised” within the meaning of the policy definition–with an awareness that the advertising definition will be liberally construed.

And that’s it for this This and That.  If you admit to wearing fuzzy slippers or simply wish to discuss this troubling case further, please call or email Dennis.