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Assessing whether an Insurance Policy Triggers the Insurer's Duty to Defend in an Intellectual Property Case

By Scott M. Slaby
Fay, Sharpe, Fagan, Minnich & McKee LLP

     When a client is faced with a suit alleging infringement of another person’s intellectual property, a factor that may affect the client’s approach to the litigation is whether the client’s defense is covered by the client’s general comprehensive liability insurance policy. In particular, the client may wish to know if its alleged infringing acts will trigger the insurance carrier’s duty to defend. In Westfield Companies v. O.K.L. Can Line, 804 N.E.2d 45, 155 Ohio App.3d 747 (Ohio Ct. App. 2003), the First District Court of Appeals for the State of Ohio addressed an insurance carrier’s duty to defend as it applied to trade dress infringement.

     The duty to defend is generally governed by state law. In Ohio, the allegations set forth in the complaint govern the insurer’s duty to defend the insured. The insurer’s duty is triggered where 1) the complaint’s allegations bring the action within a coverage provision, regardless of the ultimate outcome, or 2) the complaint states a claim that is “potentially or arguably” within the policy, or there is some doubt as to whether the complaint pled a theory of recovery within the coverage. The insurer may reserve its rights to assert defenses regarding coverage. There is no duty to defend where conduct alleged in the complaint is “indisputably outside” the policy’s coverage.

     In O.K.L., the appellate court affirmed a lower court’s grant of summary judgment that Westfield had a duty to defend O.K.L. in an action for trade dress infringement. Alcoa sued O.K.L. for trade dress (and patent) infringement related to a fluid bearing ram assembly manufactured by O.K.L. Alcoa alleged that O.K.L’s assemblies had “identical distinctive features and similar overall configuration” to the configuration of certain Alcoa ram supports. Alcoa alleged that O.K.L. copied the features and configuration of Alcoa’s product, which caused actual confusion or a likelihood of confusion as to the origin of O.K.L.’s product. That is, O.K.L.’s acts allegedly caused confusion as to whether Alcoa or O.K.L. was the source of the goods. The complaint did not include any dates for the alleged infringing acts. O.K.L. tendered the defense to Westfield, and Westfield rejected the tender. The trial court granted partial summary judgment to O.K.L. regarding Westfield’s duty to defend. Westfield appealed that part of the decision.

     O.K.L.’s commercial general liability policy with Westfield applied to personal or advertising injury caused by an offense arising out of O.K.L.’s business. The policy defined personal and advertising injury as an injury arising out of certain enumerated offenses, including “infringing upon another’s copyright, trade dress, or slogan” in O.K.L.’s advertisement. The policy also defined advertisement as “a notice that is broadcasted or published to the general public or specific market segment about your goods, products or services for the purposes of attracting customers or supporters.” The appellate court then examined whether Alcoa’s complaint triggered Westfield’s duty to defend under the policy.

     The court applied a four-part test to determine if Alcoa’s complaint alleged acts that triggered Westfield’s duty to defend. Namely, the court looked to see if the complaint 1) stated a claim covered by the policy’s advertising injury provisions; 2) alleged that O.K.L. engaged in advertisement as defined by the policy; 3) alleged a causal connection between Alcoa’s injury and O.K.L.’s advertisement; and 4) alleged any acts that would trigger any exclusions in the policy and bar coverage.

The complaint satisfied the first prong because Alcoa alleged that O.K.L. infringed Alcoa’s trade dress. As noted above, trade dress infringement was a specifically enumerated offense covered by the policy.

     The second prong was satisfied because, while Alcoa’s complaint did not specifically use the words advertisement or advertising, the complaint alleged that O.K.L. “sold and marketed” the accused product and that the sales and marketing confused buyers or potential buyers. The court stated that these allegations arguably satisfied the definition of advertisement set forth in the policy. The appellate court distinguished Poof Toy Prods., Inc. v. U.S. Fidelity & Guaranty Co., 891 F. Supp. 1228 (E.D. Mich. 1995), which held that 1) marketing constituted advertising activity in a policy that defined advertising activity as calling something to the attention of the public, especially by means of printed or broadcast paid announcements; and 2) trade-dress infringement inherently involved advertising injury. The O.K.L. court stated that, while it agreed that trade-dress infringement necessarily involves advertising, the specific definition of advertising in O.K.L.’s policy required more than just allegations that O.K.L.’s use of Alcoa’s trade dress was likely to cause confusion among consumers. Under O.K.L.’s policy, advertising required a notice intended to attract customers not just creation of the product itself. The court found Alcoa possibly alleged that O.K.L. engaged in advertising as set forth in the policy by the complaint’s use of “marketing” and the existence of a public ad on O.K.L.’s website that depicted for sale the accused product.

     The causal connection prong was also satisfied. The basis for this prong stems from a common policy provision that the advertising injury “arise out of” an offense set forth in the policy. The appellate court noted that Ohio courts do not require that the insured’s acts be the proximate cause of the injuries. Rather, Ohio courts interpret the “arising out of” language to mean that the injury “flow from,” “have its origin in,” or “grow out of” the allegedly infringing acts. The court found that the “gist” of Alcoa’s complaint alleged that the accused O.K.L. product created consumer confusion that flowed from O.K.L.’s marketing of the accused product to potential consumers. The basis for this conclusion stemmed from Alcoa alleging that O.K.L. copied, sold and marketed an infringing product confusingly similar to Alcoa’s product (without indicating that O.K.L. was the source of the product) and these acts damaged Alcoa by lost sales, revenue, profits, business reputation, goodwill, and diminished distinctiveness of Alcoa’s product.

     Finding the first three prongs satisfied, the court examined whether, in view of the complaint, any exclusions in the policy barred coverage to O.K.L. The court found that no exclusions applied.

     While perhaps not a groundbreaking case, Westfield v. O.K.L. provides a good, general overview of Ohio law as it applies to determining whether an insurer’s duty to defend is triggered in intellectual property related cases, and in particular trade dress cases. The four part test is a useful starting point to help a client assess whether its policy covers the allegations set forth in the complaint.

     An issue arises when a client is charged with an act that is not specifically enumerated in the client’s policy. Specifically, can the insurer’s duty to defend still be triggered?    Fewer policies provide coverage for advertising injuries arising out of patent infringement or trademark infringement. In some instances it may be possible to fit an act not specifically enumerated in the policy into another category. See, e.g., Cincinnati Ins. Co. v. Zen Design Group, Ltd., 329 F.3d 546 (6th Cir. 2003) (finding the phrase “The Wearable Light” used in conjunction with the registered trademark SAPPHIRE could be considered a slogan so as to fall within policy’s provision that the advertising injury arise out of infringement of copyright, title, or slogan). Courts, however, may take the approach that an offense, such as patent infringement or trademark infringement, which is a common and distinct category of actionable conduct, is not covered unless specifically enumerated in the policy. See, e.g., Sholodge, Inc. v. Traverlers Indemnity Co. of Ill., 168 F.3d 256 (6th Cir. 1999).

    An interesting question is whether trade dress infringement, if not specifically enumerated, may fall within another category of actionable conduct typically included in general liability policies, e.g., misappropriation of advertising ideas or style. In Advance Watch Co., Ltd. v. Kemper Nat’l Ins. Co., 99 F.3d 795 (6th Cir. 1999), the Sixth Circuit Court of Appeals held that trademark and trade dress infringement did not fall within misappropriation of advertising ideas or style of doing business. Conversely, in Hyman v. Nationwide Mutual Fire Ins. Co., 304 F.3d 1179 (11th Cir. 2002), the Eleventh Circuit Court of Appeals held that, in some circumstances, trade dress infringement may fall under such a policy provision. The Eleventh Circuit sharply criticized Advance Watch and noted that Advance Watch appears to be in the minority on this issue. The Eleventh Circuit also noted that courts within the Sixth Circuit, namely Michigan, have also criticized Advance Watch. The O.K.L. court did not have to address this issue because trade dress was specifically enumerated in O.K.L.’s policy with Westfield. Courts across the country are split on the issue, and Ohio courts have not addressed the issue. Thus, if not specifically enumerated in a policy, it may be possible in Ohio to fit acts alleged to be trade dress infringement within a provision such as misappropriation of advertising ideas or style of doing business.

     As seen in Westfield v. O.K.L., assessing whether a complaint triggers an insurer’s duty to defend is not always easy.
It requires careful analysis of the complaint and whether the complaint meets the requirements defined by the policy. Westfield v. O.K.L. provides a good starting point to help your client analyze whether acts alleged to infringe another party’s intellectual property rights will be covered by your client’s insurance policy such that the carrier may be required to defend the case.