'Advertising' vs. 'Solicitation': The Impact on Available Advertising Injury Coverage

While insureds often seek liability coverage for damages arising from bodily injury or property damage, an increasing number of insureds are seeking coverage for “advertising injury” in an age of growing technology and intellectual property disputes. Coverage for “advertising injury,” generally found in Part B of a commercial liability policy, insures against injuries that occur in the “course of advertising [the insured's] goods, products or services.” “Advertising injury” is defined to include injury arising from a specific, finite category of offenses, including:

1. Oral or written publication of material that slanders or libels a person or organization or disparages a person's or organization's goods, products, or services;
2. Oral or written publication of material that violates a person's right of privacy;
3. Misappropriation of advertising ideas or style of doing business; or
4. Infringement of copyright, title, or slogan.

Lawsuits implicating advertising injury often involve claims of defamation, patent, trademark and copyright infringement, and violation of privacy torts. Under the threshold requirements to coverage, the insured's alleged conduct, in addition to falling within an enumerated offense, must have occurred within the course of “advertising.” Recent decisions confirm that whether an insured is “advertising” depends strongly on the nature of the insured's communication, and the identity of the insured's targeted audience.

The Majority of Courts Define 'Advertising' in Terms of Public Dissemination

Adhering to the majority view, a handful of courts have recently affirmed that “advertising” must involve some “measure of public dissemination” in order to potentially trigger advertising coverage, as opposed to more direct solicitation aimed at a limited group of people. In Continental Cas. Co. v. Consolidated Graphics et al., 646 F.3d 210 (5th Cir. 2011), the insured sought coverage for allegations that it misappropriated trade secrets, engaged in unfair business practices, and breached its fiduciary duty. The underlying complaint specifically alleged that the insured's employee obtained and disseminated proprietary and confidential information about a competitor company to a handful of customers. The insured sought advertising injury coverage under a primary policy issued by Sentry Insurance Company (“Sentry”), and an excess policy issued by Continental Casualty Company (“Continental”). The policies insured against offenses committed by the insured within the course of “advertising [its] goods and services,” but did not define “advertising.”

The court first acknowledged that an insurer's duty to defend under Texas law is broad, and is determined by comparing the allegations of the complaint with the terms and conditions of the applicable policy. Despite a broad duty to defend, the Fifth Circuit reasoned that dissemination of information to a handful of people did not qualify as “advertising” as that term was commonly used and understood, and therefore did not trigger the insurers' duty to defend. The Fifth Circuit cited to various Texas cases, including ANR Production Co. v. Am. Guarantee & Liability Ins. Co., 981 S.W.2d 889 (Tex. App. 1998), in support of its holding. Consolidated Graphics adopted ANR's rejection of the insured's overly broad interpretation of “advertising” to include any type of representations related to the insured's business:

In holding that the insurer had no duty to defend, the [ANR] court explained that “advertising is defined as advising, announcing, or publishing a matter to the public. It is distinguished from other forms of communication in that it calls a matter to the public's attention.” The court further noted that if it accepted the insured's broad definition of advertising, “any time parties negotiated any type of contract, there would be potential for coverage under advertising injury for representations or omissions made during the negotiations.”

Consolidated Graphics concluded, based on consistent Texas precedent, that the employee's solicitation of a handful of people was not a form of “advertising” but was a form of “direct dealings.” The complaint did not trigger the insurers' duty to defend despite the fact that the solicitations were aimed at creating business for the insured. See Hameid v. Nat'l Fire Ins. Co. of Hartford, 71 P.3d 761 (Cal. 2003) (adopting a similar definition of “advertising,” the California Supreme Court reasoned that allegations that the insured made telephone calls and sent mailers to a competitor's customers did not qualify); See also Sport Supply, Inc. v. Columbia Casualty Co., 335 F.3d 453 (5th Cir. 2003) (interpreting “advertising” in the conventional sense to include a public announcement that “induces the public to patronize a particular establishment or to buy a particular product.”).

The Court's Characterization of the Relevant Communication

Whether an insured engages in “advertising,” even under the more narrow “public dissemination” definition of that term, may depend on how a court characterizes the insured's communication. For example, two jurisdictions have recently held that automated websites and systems potentially accessible to millions of people qualify as forms of “advertising,” despite possessing elements of direct customer solicitation. In Hyundai Motor v. Nat'l Union Fire Ins. Co. of Pittsburgh et al., 2010 U.S. App. LEXIS 6978 (9th Cir. 2010), the insured was sued for infringement when it used a patented computer system in its build-your-own-vehicle website. The site allowed customers to create their own individualized car by picking the parts and features that the customer desired. The Ninth Circuit reasoned that while the website contained elements of solicitation aimed at discrete customers using the build-your-own-vehicle feature, the site was better characterized as communication aimed at “millions of unknown web-browsing potential customers ' “

Additionally, in Dish Network Corp. et al. v. Arch Specialty Ins. Co. et al., 734 F. Supp. 2d 1173 (2010), the district court for the district of Colorado held that an insured's telephone network qualified as “advertising,” partially because of the procedural posture of that case. At issue in Dish Network was whether the insured's automated telephone system qualified as a form of mass communication or solicitation. The system permitted any number of customers to participate in pay-per-view and customer service functions with Dish Network and other cable providers over the telephone. Conversations related to these services were primarily limited to interactions between the consumer and the insured's representative.

Plaintiffs' underlying complaint alleged that Dish Network committed patent infringement by using the interactive processing capabilities. Certain insurers filed a declaratory judgment against Dish Network, and sought summary judgment on the grounds that the infringement allegations did not allege injury arising from the insured's advertising. The District Court for the District of Colorado held that the telephone system could qualify under the majority definition of “advertising,” despite acknowledging that telephone calls are effectively “a two-party interaction.” The court noted that the complaint as pled was unclear about whether the insured's actions were “advertising,” even when the allegations were read in favor of the insured. The court further reasoned, however, that the insured was entitled to all reasonable inferences at the summary judgment stage, and cited to Hyundai in support of the conclusion that websites, even those with an individual customer component, qualified as forms of “advertising.” The court therefore resolved the issue for purposes of summary judgment in the insured's favor, holding that “[Dish's] activities constitute 'advertising.'”

The Minority of Courts Follow a Broader Definition of 'Advertising'

In contrast to the majority approach, a minority of jurisdictions have held that “advertising” refers more broadly to any form of communication related to the insured's business, including direct solicitation. Courts have generally reached this holding on the grounds that “advertising” is an ambiguous term that should be read in favor of coverage and the insured. In Acuity v. Kishan Bagadia et al., 750 N.W.2d 817 (Wis. 2008), the insured was a software vendor that purchased computer software and resold it to customers. The insured sought coverage for allegations that it used a competitor's computer trademark in its trade magazines, materials the insured shipped to customers in response to phone requests, and individually packaged computer disks. Acuity denied coverage for the trademark claim on the basis that the insured's conduct amounted to solicitation and not “advertising” sufficient to trigger advertising injury coverage.

The Wisconsin Supreme Court recognized that jurisdictions have generally adopted two definitions of “advertising”:

We consider the various definitions of “advertising.” Dictionaries of common usage define the term as “calling the public's attention to a product or business by proclaiming its qualities or advantages in order to increase sales or arouse a desire to buy or patronize.” Citations omitted. A standard narrow definition and a standard broad definition of “advertising” have evolved in the common law. The standard narrow definition is: “widespread announcement or distribution of promotional materials.” Citations omitted. The standard broad definition is: “any oral, written, or graphic statement made by the seller in any manner in connection with the solicitation of business.” Citations omitted.

The existence of two reasonable definitions, according to the court, meant that “advertising” was an ambiguous term that should be read in the insured's favor. Applying the broad definition of “advertising” to include statements made in connection with the solicitation of the insured's business, the court held that the insured's mailings, magazines, and personalized computer disks, despite being direct communications with customers, qualified. See also General Casualty Co. of Wisconsin v. Wozniak Travel, Inc. et al., 762 N.W. 2d 572 (Minn. 2009) (adopting Acuity, the court reasoned that in the absence of a policy definition, “advertising” is an ambiguous term that should be read in favor of the insured to mean any statement made in connection with the solicitation of business).

Conclusion

Insurers and practitioners faced with a claim that potentially triggers advertising injury coverage, in addition to evaluating whether the allegations against the insured fall within the enumerated offenses, must also determine whether the claimant's injuries arose from the insured's “course of advertising.” This initially requires a determination of whether the jurisdiction at issue follows the majority or minority approach to defining “advertising.”

The majority of courts faced with this term have looked to the plain and ordinary meaning to define “advertising” as a communication that contains some “measure of public dissemination” or mass appeal. Those courts have additionally rejected the notion that “advertising” refers to discrete, targeted communication. Even when a court accepts the more narrow definition of advertising to include only episodes of mass communication, however, whether a complaint alleges “adverting” may ultimately depend on how a court defines the insured's conduct and audience. Hyundai Motor and Dish Network are relevant examples of decisions where courts determined that the insured's communication, while it possessed elements of direct solicitation, contained a sufficient amount of mass appeal to qualify as “advertising.”

While the majority of courts look to its plain and ordinary meaning, still other courts have followed the minority rule to hold that “advertising” is an ambiguous term that should be read in favor of the insured. An insurer or practitioner assessing available coverage in a minority jurisdiction must be keenly aware of the increased likelihood that a much wider range of the insured's communication will qualify as “advertising” and potentially trigger “advertising injury” coverage.

William P. Shelley is chairman of Cozen O'Connor's Global Insurance Group and a member of this newsletter's Board of Editors. Samantha Evans is an associate in Cozen O'Connor's Global Insurance Group in the Philadelphia office.

While insureds often seek liability coverage for damages arising from bodily injury or property damage, an increasing number of insureds are seeking coverage for “advertising injury” in an age of growing technology and intellectual property disputes. Coverage for “advertising injury,” generally found in Part B of a commercial liability policy, insures against injuries that occur in the “course of advertising [the insured's] goods, products or services.” “Advertising injury” is defined to include injury arising from a specific, finite category of offenses, including:

1. Oral or written publication of material that slanders or libels a person or organization or disparages a person's or organization's goods, products, or services;
2. Oral or written publication of material that violates a person's right of privacy;
3. Misappropriation of advertising ideas or style of doing business; or
4. Infringement of copyright, title, or slogan.

Lawsuits implicating advertising injury often involve claims of defamation, patent, trademark and copyright infringement, and violation of privacy torts. Under the threshold requirements to coverage, the insured's alleged conduct, in addition to falling within an enumerated offense, must have occurred within the course of “advertising.” Recent decisions confirm that whether an insured is “advertising” depends strongly on the nature of the insured's communication, and the identity of the insured's targeted audience.

The Majority of Courts Define 'Advertising' in Terms of Public Dissemination

Adhering to the majority view, a handful of courts have recently affirmed that “advertising” must involve some “measure of public dissemination” in order to potentially trigger advertising coverage, as opposed to more direct solicitation aimed at a limited group of people. In Continental Cas. Co. v. Consolidated Graphics et al., 646 F.3d 210 (5th Cir. 2011), the insured sought coverage for allegations that it misappropriated trade secrets, engaged in unfair business practices, and breached its fiduciary duty. The underlying complaint specifically alleged that the insured's employee obtained and disseminated proprietary and confidential information about a competitor company to a handful of customers. The insured sought advertising injury coverage under a primary policy issued by Sentry Insurance Company (“Sentry”), and an excess policy issued by Continental Casualty Company (“Continental”). The policies insured against offenses committed by the insured within the course of “advertising [its] goods and services,” but did not define “advertising.”

The court first acknowledged that an insurer's duty to defend under Texas law is broad, and is determined by comparing the allegations of the complaint with the terms and conditions of the applicable policy. Despite a broad duty to defend, the Fifth Circuit reasoned that dissemination of information to a handful of people did not qualify as “advertising” as that term was commonly used and understood, and therefore did not trigger the insurers' duty to defend. The Fifth Circuit cited to various Texas cases, including ANR Production Co. v. Am. Guarantee & Liability Ins. Co. , 981 S.W.2d 889 (Tex. App. 1998), in support of its holding. Consolidated Graphics adopted ANR's rejection of the insured's overly broad interpretation of “advertising” to include any type of representations related to the insured's business:

In holding that the insurer had no duty to defend, the [ANR] court explained that “advertising is defined as advising, announcing, or publishing a matter to the public. It is distinguished from other forms of communication in that it calls a matter to the public's attention.” The court further noted that if it accepted the insured's broad definition of advertising, “any time parties negotiated any type of contract, there would be potential for coverage under advertising injury for representations or omissions made during the negotiations.”

Consolidated Graphics concluded, based on consistent Texas precedent, that the employee's solicitation of a handful of people was not a form of “advertising” but was a form of “direct dealings.” The complaint did not trigger the insurers' duty to defend despite the fact that the solicitations were aimed at creating business for the insured. See Hameid v. Nat'l Fire Ins. Co. of Hartford , 71 P.3d 761 (Cal. 2003) (adopting a similar definition of “advertising,” the California Supreme Court reasoned that allegations that the insured made telephone calls and sent mailers to a competitor's customers did not qualify); See also Sport Supply, Inc. v. Columbia Casualty Co. , 335 F.3d 453 (5th Cir. 2003) (interpreting “advertising” in the conventional sense to include a public announcement that “induces the public to patronize a particular establishment or to buy a particular product.”).

The Court's Characterization of the Relevant Communication

Whether an insured engages in “advertising,” even under the more narrow “public dissemination” definition of that term, may depend on how a court characterizes the insured's communication. For example, two jurisdictions have recently held that automated websites and systems potentially accessible to millions of people qualify as forms of “advertising,” despite possessing elements of direct customer solicitation. In Hyundai Motor v. Nat'l Union Fire Ins. Co. of Pittsburgh et al., 2010 U.S. App. LEXIS 6978 (9th Cir. 2010), the insured was sued for infringement when it used a patented computer system in its build-your-own-vehicle website. The site allowed customers to create their own individualized car by picking the parts and features that the customer desired. The Ninth Circuit reasoned that while the website contained elements of solicitation aimed at discrete customers using the build-your-own-vehicle feature, the site was better characterized as communication aimed at “millions of unknown web-browsing potential customers ' “

Additionally, in Dish Network Corp. et al. v. Arch Specialty Ins. Co. et al., 734 F. Supp. 2d 1173 (2010), the district court for the district of Colorado held that an insured's telephone network qualified as “advertising,” partially because of the procedural posture of that case. At issue in Dish Network was whether the insured's automated telephone system qualified as a form of mass communication or solicitation. The system permitted any number of customers to participate in pay-per-view and customer service functions with Dish Network and other cable providers over the telephone. Conversations related to these services were primarily limited to interactions between the consumer and the insured's representative.

Plaintiffs' underlying complaint alleged that Dish Network committed patent infringement by using the interactive processing capabilities. Certain insurers filed a declaratory judgment against Dish Network, and sought summary judgment on the grounds that the infringement allegations did not allege injury arising from the insured's advertising. The District Court for the District of Colorado held that the telephone system could qualify under the majority definition of “advertising,” despite acknowledging that telephone calls are effectively “a two-party interaction.” The court noted that the complaint as pled was unclear about whether the insured's actions were “advertising,” even when the allegations were read in favor of the insured. The court further reasoned, however, that the insured was entitled to all reasonable inferences at the summary judgment stage, and cited to Hyundai in support of the conclusion that websites, even those with an individual customer component, qualified as forms of “advertising.” The court therefore resolved the issue for purposes of summary judgment in the insured's favor, holding that “[Dish's] activities constitute 'advertising.'”

The Minority of Courts Follow a Broader Definition of 'Advertising'

In contrast to the majority approach, a minority of jurisdictions have held that “advertising” refers more broadly to any form of communication related to the insured's business, including direct solicitation. Courts have generally reached this holding on the grounds that “advertising” is an ambiguous term that should be read in favor of coverage and the insured. In Acuity v. Kishan Bagadia et al., 750 N.W.2d 817 (Wis. 2008), the insured was a software vendor that purchased computer software and resold it to customers. The insured sought coverage for allegations that it used a competitor's computer trademark in its trade magazines, materials the insured shipped to customers in response to phone requests, and individually packaged computer disks. Acuity denied coverage for the trademark claim on the basis that the insured's conduct amounted to solicitation and not “advertising” sufficient to trigger advertising injury coverage.

The Wisconsin Supreme Court recognized that jurisdictions have generally adopted two definitions of “advertising”:

We consider the various definitions of “advertising.” Dictionaries of common usage define the term as “calling the public's attention to a product or business by proclaiming its qualities or advantages in order to increase sales or arouse a desire to buy or patronize.” Citations omitted. A standard narrow definition and a standard broad definition of “advertising” have evolved in the common law. The standard narrow definition is: “widespread announcement or distribution of promotional materials.” Citations omitted. The standard broad definition is: “any oral, written, or graphic statement made by the seller in any manner in connection with the solicitation of business.” Citations omitted.

The existence of two reasonable definitions, according to the court, meant that “advertising” was an ambiguous term that should be read in the insured's favor. Applying the broad definition of “advertising” to include statements made in connection with the solicitation of the insured's business, the court held that the insured's mailings, magazines, and personalized computer disks, despite being direct communications with customers, qualified. See also General Casualty Co. of Wisconsin v. Wozniak Travel, Inc. et al., 762 N.W. 2d 572 (Minn. 2009) (adopting Acuity, the court reasoned that in the absence of a policy definition, “advertising” is an ambiguous term that should be read in favor of the insured to mean any statement made in connection with the solicitation of business).

Conclusion

Insurers and practitioners faced with a claim that potentially triggers advertising injury coverage, in addition to evaluating whether the allegations against the insured fall within the enumerated offenses, must also determine whether the claimant's injuries arose from the insured's “course of advertising.” This initially requires a determination of whether the jurisdiction at issue follows the majority or minority approach to defining “advertising.”

The majority of courts faced with this term have looked to the plain and ordinary meaning to define “advertising” as a communication that contains some “measure of public dissemination” or mass appeal. Those courts have additionally rejected the notion that “advertising” refers to discrete, targeted communication. Even when a court accepts the more narrow definition of advertising to include only episodes of mass communication, however, whether a complaint alleges “adverting” may ultimately depend on how a court defines the insured's conduct and audience. Hyundai Motor and Dish Network are relevant examples of decisions where courts determined that the insured's communication, while it possessed elements of direct solicitation, contained a sufficient amount of mass appeal to qualify as “advertising.”

While the majority of courts look to its plain and ordinary meaning, still other courts have followed the minority rule to hold that “advertising” is an ambiguous term that should be read in favor of the insured. An insurer or practitioner assessing available coverage in a minority jurisdiction must be keenly aware of the increased likelihood that a much wider range of the insured's communication will qualify as “advertising” and potentially trigger “advertising injury” coverage.

William P. Shelley is chairman of Cozen O'Connor's Global Insurance Group and a member of this newsletter's Board of Editors. Samantha Evans is an associate in Cozen O'Connor's Global Insurance Group in the Philadelphia office.