Insurance Coverage For Patent Infringement Claims

Courts across the country, and particularly in California, have long been reluctant to construe standard commercial general liability (“CGL”) insurance policies to provide coverage for patent infringement lawsuits. However, the Ninth Circuit's recent decision in Hyundai Motor v. Nat. Union Fire Ins., ___ F.3d ___ , 2010 WL 1268234 (9th Cir. 2010), suggests that, at least when the patented invention is itself a method of advertising, an insurer will owe a duty to defend a patent infringement lawsuit under the “advertising injury” provisions of many standard CGL policies. This development is particularly significant for two reasons. First, the court found that the duty to defend arose out of language that appears in many standard liability insurance policy forms, especially at the excess layers. Second, it interpreted the policy under the law of California, which often serves as the leader in significant developments nationwide in insurance coverage litigation.

Advertising Injury Coverage

Two types of coverage are typically are available under CGL policies. The first covers the damages that the policyholder is legally obligated to pay because of property damage or bodily injury, and the second covers the policyholder's legal obligation to pay damages because of personal injury and advertising injury. The “property damage” provisions do not cover intellectual property claims because virtually every standard CGL policy defines “property damage” to require injury to tangible property. However, policyholders periodically have sought coverage for patent infringement suits under the advertising injury provisions.

There have been three relevant changes to the language of the standard form primary CGL policies, embodied in the 1973, 1986 and the 1998 forms issued by the Insurance Services Office (ISO), the entity that drafts many standard insurance policy forms. The 1973 form provided the option of adding to the policy an advertising and personal injury endorsement, which defined “advertising injury” as “injury arising out of an offense committed ' in the course of the named insured's advertising activities, if such injury arises out of ' piracy ' or infringement of copyright, title or slogan.” The 1986 CGL form changed the definition of advertising injury to eliminate “piracy” but to add coverage for, among other things, “misappropriation of advertising ideas or style of doing business.” Finally, in 1998, the form changed again. This version eliminated the separate definition of advertising injury, instead using the defined term “personal and advertising injury.” This form makes minor changes to the copyright and trade dress provision, and more significantly, does not include the 1986 form's “misappropriation” language. It has been replaced by the phrase “the use of another's advertising idea in your 'advertisement.'” However, many excess liability insurance policies continue to use the definition of “advertising injury” in the 1986 form.

Prior Case Law Interpreting Advertising Injury Provisions

Although policyholders met with some success seeking coverage for patent infringement suits under the 1973 endorsement, claims under the 1986 form, which the Hyundai court construed and which is still in wide use, generally have not been successful, especially in California. As the Hyundai court acknowledged, it and the California courts have rejected past claims that patent infringement constitutes advertising injury. Hyundai, ___ F.3d at 5208. Across the country, courts rejecting advertising injury claims have found that the allegations of the patent infringement complaint were insufficiently connected to advertising, although some courts also have suggested that patent infringement itself could not constitute advertising injury as a matter of law. See, e.g., Cigna Lloyds Ins. Co. v. Bradleys' Elec. Inc., 33 S.W.2d 102 (Tex. App. 2000) (rejecting claim of coverage for patent infringement suit under 1986 form language in light of Texas law); ABB Flakt, Inc. v. Nat'l Union Fire Ins. Co., 731 A.2d 811 (Del. 1999) (rejecting coverage for patent infringement claim under variously worded advertising injury provisions); Filenet Corp. v. Chubb Corp., 735 A.2d 117 (N.J. App. 1999) (finding that alleged infringement did not arise out of advertising injury and suggesting that patent infringement generally does not constitute advertising injury); Iolab Corp. v. Seaboard Sur. Co., 15 F.3d 1500 (9th Cir. 1994) (rejecting claim of coverage for patent infringement suit under “piracy” advertising injury provisions interpreted in light of California law).

In California, until the 1994 amendments to the Patent Act, 35 U.S.C. ' 271, courts held that, as a matter of law, infringement of a patent could not constitute “advertising activity.” See, e.g., Simply Fresh Fruit, Inc. v. P & C Services, Inc., 94 F.3d 1219, 1222-23 (9th Cir. 1996). This rejection was based on the absence in the statute of an “offer to sell” as an infringing act; rather, infringement was defined as making, using or selling a patented invention. Courts reasoned that, because an offer to sell was not an infringing act, there could not be a connection between advertising and infringement. Because, after the 1994 amendments, the statute now proscribes offers to sell patented inventions, this rationale is no longer in play. See Homedics, Inc. v. Valley Forge Ins. Co., 315 F.3d 1135, 1139 (9th Cir. 2003) (“With the addition of 'offers to sell' to the patent statute, it is no longer clear that advertising can never give rise to a direct patent infringement action.”).

However, the 1994 amendments, which added an “offer to sell” to the Patent Act, did not open the gates to a flood of coverage actions based on patent infringement suits. Instead, courts emphasized other rationales for rejecting claims. For example, construing the 1986 form language, courts interpreting California and Washington law found that there is no duty to defend when the invention is not itself an advertising idea or style of doing business. See, e.g., Homedics, 315 F.3d at 1141. Some courts have read this requirement quite restrictively. For example, in Auto Sox USA, Inc. v. Zurich North America, 88 P.3d 1008 (Wash. App. 2004), the court rejected a duty-to-defend claim when the patent covered a method of attaching advertising signs to vehicles. The court reasoned that although the invention related to a product used to advertise, the invention itself related to the “the manner in which a rooftop sign is attached to a vehicle,” rather than “ideas about how to solicit customers” with the sign ' and the insurer did not have a duty to defend. Id. at 1011. Nonetheless, even under these restrictive standards and prior to Hyundai, some courts did find a duty to defend under the 1986 form language where the patentee alleges infringement of a patent that embodies an advertising idea. For example, Amazon.com International, Inc. v. American Dynasty Surplus Lines Ins. Co., 85 P.3d 974 (Wash. App. 2004), held that the insurer owed a duty to defend a claim of infringement where the patent covered a method for previewing music. Because the patentee alleged that Amazon used its technology to allow customers to preview music before buying the music from the company, the court found the advertising injury provision applied. In the court's view, “the alleged injury derived not merely from the misappropriation of the code, but from its use as the means to market goods for sale.” Id. at 978 (emphasis in original). The Hyundai decision is a continuation of this line of cases, and cites Amazon as persuasive authority.

Hyundai: Case Background

In 2005, Orion IP, LLC, a well-known non-practicing entity, brought suit against 20 automobile manufacturers. Orion alleged infringement of patents describing methods of generating customized product proposals. It accused a feature of Hyundai's Web site called Build Your Own Vehicle, or “BYO,” which allowed customers to create customized car images and pricing information online.

While most defendants in the Orion patent infringement action settled, Hyundai proceeded to trial ' and lost. The trial resulted in $34 million verdict against Hyundai, as well as an unspecified sum in attorneys' fees.

Shortly after Orion filed its lawsuit, Hyundai notified its commercial general liability insurers, National Union and American Home, of the Orion lawsuit and asked those insurers to defend Hyundai under the standard “advertising injury” provisions of their CGL policies. Those policies contained standard language reciting a duty to defend against suits seeking damages for “misappropriation of advertising ideas or style of doing business.”

The insurers refused to defend, and Hyundai brought suit on the policies in Los Angeles. Hyundai sought a declaration that the insurers owed a duty to pay for Hyundai's defense against the Orion action. The Ninth Circuit held that the insurers owed a duty to defend.

Hyundai Court's View

When a Plaintiff Alleges That Its Patent Covers and Is Infringed by Advertising Methods, an Advertising Injury May Be Established

Under the law in California and virtually every other state, a liability insurer owes a duty to defend if the allegations in the complaint against the insurer (and, in many but not all states, facts outside of the complaint that are brought to the attention of the insurer) could support a claim that the insurance policy potentially covers.

Applying this well-established rule, the Ninth Circuit looked at the three facts that Hyundai would have to show in order to obtain coverage for the Orion lawsuit under the “advertising injury” insuring agreement: 1) “advertising” during the policy period; 2) the potential for liability for a covered offense (in this case, misappropriation of advertising ideas); and 3) a causal connection between the injury alleged and the “advertising.” The court found that the underlying complaint potentially alleged each of these facts.

The Court's Reasoning

The Ninth Circuit first addressed whether the Orion complaint alleged an “advertising” activity. In most states, including California, “advertising” refers to attempts to sell the insured's goods or services to the general public. The court looked to the allegations of Orion's complaint, and concluded that because Orion alleged that the BYO feature constituted “marketing methods” and “marketing systems,” the complaint alleged “advertising.” Because the “advertising” took place on a Web site that was accessible to hundreds of millions of potential customers, the court found that the “advertising” was directed to the general public.

Second, the court addressed whether Orion's patent infringement claim could constitute a “misappropriation of advertising ideas.” The court found that, under California law, a claim for patent infringement can constitute an advertising injury, so long as the plaintiff in the underlying lawsuit alleges infringement of a patent covering a “process or invention which could reasonably be considered an 'advertising idea.'” It found that the allegations of the Orion complaint sufficed, as Orion alleged that it owned a patent covering “a method for displaying information to the public at large for the purpose of facilitating sales.” The court distinguished prior decisions that had rejected a duty to defend against a patent infringement action on the ground that they did not involve a claim of infringement of an advertising idea. Finally, the court considered whether a causal connection existed between the advertisement and the alleged advertising injury. The court found that when the advertisement itself is the patented activity, this element is satisfied. The court distinguished this situation from, for example, an offer to sell an infringing product. (Interestingly, however, the court left open the question whether an advertisement could induce another to infringe, such that the causal connection could be established.)

Significance

After Hyundai, a defendant in a patent infringement action claiming that a Web site or other advertising mechanism has infringed a patent may be entitled to a duty to defend from its liability insurer. Although the Hyundai decision involved California law, many other states follow the lead of California in addressing insurance issues, and Hyundai therefore is likely to have persuasive value across the country.

Conclusion

A duty to defend is a valuable asset. In California and many other states, a liability insurer with a defense duty, at least initially, must pay all of the insured's reasonable and necessary defense costs for the entire underlying action, even if the insurer potentially covers only some of the claims in the underlying action. Also, while insurers may quibble with the hourly rates that competent patent infringement litigators charge, compromises on payment are possible, and the insurers must pay all of the insured's “costs” and expert witness fees, which in some instances may exceed the defense costs. Certainly, liability insurers with a defense duty have paid as much as tens of millions of dollars of defense costs for potentially covered claims, even if the insurance policies in the end do not provide coverage for the ultimate judgment or settlement.

Courts across the country, and particularly in California, have long been reluctant to construe standard commercial general liability (“CGL”) insurance policies to provide coverage for patent infringement lawsuits. However, the Ninth Circuit's recent decision in Hyundai Motor v. Nat. Union Fire Ins. , ___ F.3d ___ , 2010 WL 1268234 (9th Cir. 2010), suggests that, at least when the patented invention is itself a method of advertising, an insurer will owe a duty to defend a patent infringement lawsuit under the “advertising injury” provisions of many standard CGL policies. This development is particularly significant for two reasons. First, the court found that the duty to defend arose out of language that appears in many standard liability insurance policy forms, especially at the excess layers. Second, it interpreted the policy under the law of California, which often serves as the leader in significant developments nationwide in insurance coverage litigation.

Advertising Injury Coverage

Two types of coverage are typically are available under CGL policies. The first covers the damages that the policyholder is legally obligated to pay because of property damage or bodily injury, and the second covers the policyholder's legal obligation to pay damages because of personal injury and advertising injury. The “property damage” provisions do not cover intellectual property claims because virtually every standard CGL policy defines “property damage” to require injury to tangible property. However, policyholders periodically have sought coverage for patent infringement suits under the advertising injury provisions.

There have been three relevant changes to the language of the standard form primary CGL policies, embodied in the 1973, 1986 and the 1998 forms issued by the Insurance Services Office (ISO), the entity that drafts many standard insurance policy forms. The 1973 form provided the option of adding to the policy an advertising and personal injury endorsement, which defined “advertising injury” as “injury arising out of an offense committed ' in the course of the named insured's advertising activities, if such injury arises out of ' piracy ' or infringement of copyright, title or slogan.” The 1986 CGL form changed the definition of advertising injury to eliminate “piracy” but to add coverage for, among other things, “misappropriation of advertising ideas or style of doing business.” Finally, in 1998, the form changed again. This version eliminated the separate definition of advertising injury, instead using the defined term “personal and advertising injury.” This form makes minor changes to the copyright and trade dress provision, and more significantly, does not include the 1986 form's “misappropriation” language. It has been replaced by the phrase “the use of another's advertising idea in your 'advertisement.'” However, many excess liability insurance policies continue to use the definition of “advertising injury” in the 1986 form.

Prior Case Law Interpreting Advertising Injury Provisions

Although policyholders met with some success seeking coverage for patent infringement suits under the 1973 endorsement, claims under the 1986 form, which the Hyundai court construed and which is still in wide use, generally have not been successful, especially in California. As the Hyundai court acknowledged, it and the California courts have rejected past claims that patent infringement constitutes advertising injury. Hyundai, ___ F.3d at 5208. Across the country, courts rejecting advertising injury claims have found that the allegations of the patent infringement complaint were insufficiently connected to advertising, although some courts also have suggested that patent infringement itself could not constitute advertising injury as a matter of law. See, e.g., Cigna Lloyds Ins. Co. v. Bradleys' Elec. Inc. , 33 S.W.2d 102 (Tex. App. 2000) (rejecting claim of coverage for patent infringement suit under 1986 form language in light of Texas law); ABB Flakt, Inc. v. Nat'l Union Fire Ins. Co. , 731 A.2d 811 (Del. 1999) (rejecting coverage for patent infringement claim under variously worded advertising injury provisions); Filenet Corp. v. Chubb Corp. , 735 A.2d 117 (N.J. App. 1999) (finding that alleged infringement did not arise out of advertising injury and suggesting that patent infringement generally does not constitute advertising injury); Iolab Corp. v. Seaboard Sur. Co. , 15 F.3d 1500 (9th Cir. 1994) (rejecting claim of coverage for patent infringement suit under “piracy” advertising injury provisions interpreted in light of California law).

In California, until the 1994 amendments to the Patent Act, 35 U.S.C. ' 271, courts held that, as a matter of law, infringement of a patent could not constitute “advertising activity.” See, e.g., Simply Fresh Fruit, Inc. v. P & C Services, Inc. , 94 F.3d 1219, 1222-23 (9th Cir. 1996). This rejection was based on the absence in the statute of an “offer to sell” as an infringing act; rather, infringement was defined as making, using or selling a patented invention. Courts reasoned that, because an offer to sell was not an infringing act, there could not be a connection between advertising and infringement. Because, after the 1994 amendments, the statute now proscribes offers to sell patented inventions, this rationale is no longer in play. See Homedics, Inc. v. Valley Forge Ins. Co. , 315 F.3d 1135, 1139 (9th Cir. 2003) (“With the addition of 'offers to sell' to the patent statute, it is no longer clear that advertising can never give rise to a direct patent infringement action.”).

However, the 1994 amendments, which added an “offer to sell” to the Patent Act, did not open the gates to a flood of coverage actions based on patent infringement suits. Instead, courts emphasized other rationales for rejecting claims. For example, construing the 1986 form language, courts interpreting California and Washington law found that there is no duty to defend when the invention is not itself an advertising idea or style of doing business. See, e.g., Homedics, 315 F.3d at 1141. Some courts have read this requirement quite restrictively. For example, in Auto Sox USA, Inc. v. Zurich North America , 88 P.3d 1008 (Wash. App. 2004), the court rejected a duty-to-defend claim when the patent covered a method of attaching advertising signs to vehicles. The court reasoned that although the invention related to a product used to advertise, the invention itself related to the “the manner in which a rooftop sign is attached to a vehicle,” rather than “ideas about how to solicit customers” with the sign ' and the insurer did not have a duty to defend. Id. at 1011. Nonetheless, even under these restrictive standards and prior to Hyundai, some courts did find a duty to defend under the 1986 form language where the patentee alleges infringement of a patent that embodies an advertising idea. For example, Amazon.com International, Inc. v. American Dynasty Surplus Lines Ins. Co. , 85 P.3d 974 (Wash. App. 2004), held that the insurer owed a duty to defend a claim of infringement where the patent covered a method for previewing music. Because the patentee alleged that Amazon used its technology to allow customers to preview music before buying the music from the company, the court found the advertising injury provision applied. In the court's view, “the alleged injury derived not merely from the misappropriation of the code, but from its use as the means to market goods for sale.” Id. at 978 (emphasis in original). The Hyundai decision is a continuation of this line of cases, and cites Amazon as persuasive authority.

Hyundai: Case Background

In 2005, Orion IP, LLC, a well-known non-practicing entity, brought suit against 20 automobile manufacturers. Orion alleged infringement of patents describing methods of generating customized product proposals. It accused a feature of Hyundai's Web site called Build Your Own Vehicle, or “BYO,” which allowed customers to create customized car images and pricing information online.

While most defendants in the Orion patent infringement action settled, Hyundai proceeded to trial ' and lost. The trial resulted in $34 million verdict against Hyundai, as well as an unspecified sum in attorneys' fees.

Shortly after Orion filed its lawsuit, Hyundai notified its commercial general liability insurers, National Union and American Home, of the Orion lawsuit and asked those insurers to defend Hyundai under the standard “advertising injury” provisions of their CGL policies. Those policies contained standard language reciting a duty to defend against suits seeking damages for “misappropriation of advertising ideas or style of doing business.”

The insurers refused to defend, and Hyundai brought suit on the policies in Los Angeles. Hyundai sought a declaration that the insurers owed a duty to pay for Hyundai's defense against the Orion action. The Ninth Circuit held that the insurers owed a duty to defend.

Hyundai Court's View

When a Plaintiff Alleges That Its Patent Covers and Is Infringed by Advertising Methods, an Advertising Injury May Be Established

Under the law in California and virtually every other state, a liability insurer owes a duty to defend if the allegations in the complaint against the insurer (and, in many but not all states, facts outside of the complaint that are brought to the attention of the insurer) could support a claim that the insurance policy potentially covers.

Applying this well-established rule, the Ninth Circuit looked at the three facts that Hyundai would have to show in order to obtain coverage for the Orion lawsuit under the “advertising injury” insuring agreement: 1) “advertising” during the policy period; 2) the potential for liability for a covered offense (in this case, misappropriation of advertising ideas); and 3) a causal connection between the injury alleged and the “advertising.” The court found that the underlying complaint potentially alleged each of these facts.

The Court's Reasoning

The Ninth Circuit first addressed whether the Orion complaint alleged an “advertising” activity. In most states, including California, “advertising” refers to attempts to sell the insured's goods or services to the general public. The court looked to the allegations of Orion's complaint, and concluded that because Orion alleged that the BYO feature constituted “marketing methods” and “marketing systems,” the complaint alleged “advertising.” Because the “advertising” took place on a Web site that was accessible to hundreds of millions of potential customers, the court found that the “advertising” was directed to the general public.

Second, the court addressed whether Orion's patent infringement claim could constitute a “misappropriation of advertising ideas.” The court found that, under California law, a claim for patent infringement can constitute an advertising injury, so long as the plaintiff in the underlying lawsuit alleges infringement of a patent covering a “process or invention which could reasonably be considered an 'advertising idea.'” It found that the allegations of the Orion complaint sufficed, as Orion alleged that it owned a patent covering “a method for displaying information to the public at large for the purpose of facilitating sales.” The court distinguished prior decisions that had rejected a duty to defend against a patent infringement action on the ground that they did not involve a claim of infringement of an advertising idea. Finally, the court considered whether a causal connection existed between the advertisement and the alleged advertising injury. The court found that when the advertisement itself is the patented activity, this element is satisfied. The court distinguished this situation from, for example, an offer to sell an infringing product. (Interestingly, however, the court left open the question whether an advertisement could induce another to infringe, such that the causal connection could be established.)

Significance

After Hyundai, a defendant in a patent infringement action claiming that a Web site or other advertising mechanism has infringed a patent may be entitled to a duty to defend from its liability insurer. Although the Hyundai decision involved California law, many other states follow the lead of California in addressing insurance issues, and Hyundai therefore is likely to have persuasive value across the country.

Conclusion

A duty to defend is a valuable asset. In California and many other states, a liability insurer with a defense duty, at least initially, must pay all of the insured's reasonable and necessary defense costs for the entire underlying action, even if the insurer potentially covers only some of the claims in the underlying action. Also, while insurers may quibble with the hourly rates that competent patent infringement litigators charge, compromises on payment are possible, and the insurers must pay all of the insured's “costs” and expert witness fees, which in some instances may exceed the defense costs. Certainly, liability insurers with a defense duty have paid as much as tens of millions of dollars of defense costs for potentially covered claims, even if the insurance policies in the end do not provide coverage for the ultimate judgment or settlement.