Fifth Circuit Finding That Trademark is Not Advertising Limits Coverage B

Coverage B, the lesser-known part of the standard commercial general liability policy, provides coverage for personal injury and advertising injury. Coverage is defined by certain enumerated “offenses.” In regard to advertising injury, the offenses include misappropriation of advertising ideas or style of doing business.

The issue recently addressed by the Fifth Circuit, in Sport Supply Group Inc. v. Columbia Cas. Co., is whether trademark infringement can involve misappropriation of an advertising idea. Sport Supply v. Columbia Cas. Co., 2003 WL 21417432 (5th Cir., July 7, 2003) The court reached its conclusion in a convoluted analysis: rather than construing the insuring agreement, the court presumed coverage and focused its attention on the exclusions. One of the exclusions is for breach of contract, other than misappropriation of advertising ideas under an implied contract. Because the court concluded that the allegations at issue arose out of breach of contract, it focused on whether the exception to the exclusion applied. While the actual holding is somewhat limited, because the exception is basically the same as the insuring language, the case is certain to have a far reaching effect.

The debate over coverage for trademark infringement has a long history. Under the 1973 general liability form, when advertising injury coverage was available only by endorsement, infringement of trademarks was specifically excluded. The 1986 ISO Form incorporated Coverage B into the standard liability coverage. The 1986 form redefined the offenses and abandoned the exclusion for trademark infringement. The advertising injury offenses, as redefined, included misappropriation of advertising ideas or style of doing business. The deletion of the exclusion led to arguments that trademark infringement was intended to be covered as it was no longer specifically excluded. Of course, there was also a counter- argument that the exclusion was unnecessary, as the definition of covered offenses did not include trademark infringement, either specifically or generically.

This latter argument reached its apex when it formed the basis for the controversial opinion in Advance Watch Co., Ltd. v. Kemper Nat’l Ins. Co., 99 F.3d 795 (6th Cir. 1996). In Advance Watch, the Sixth Circuit held that the offense of “misappropriation” is limited to the common law tort of misappropriation—a tort largely unknown to most lawyers, let alone policyholders. The court also noted that trademark infringement was well-recognized, and it’s omission—by name—from the enumerated offenses indicated an intent not to insure it.

Paradoxically, the argument of exclusion by omission forms the basis for most current case law rejecting coverage for patent infringement under Coverage B, but has never been widely adopted in regard to trademarks. The reasoning in Advance Watch has been criticized and rejected by most jurisdictions, that employ a broader, “common and ordinary” meaning of misappropriation.

Indicative of the cases rejecting Advance Watch is Frog, Switch & Manufacturing Co. v. Travelers Ins. Co., 193 F.3d 742, 747 (3rd Cir. 1999). Under this broader interpretation of advertising ideas, many courts have presumptively concluded that trademark infringement is covered. In Frog, Switch, the court noted that “the trademark depends for its effectiveness on communicating a message to consumers about the marked good, which is the essence of advertising, and therefore allegations of trademark infringement arguably allege misappropriation of an advertising idea.” This sentiment has been echoed by a number of courts, who concluded that trademark “inherently and necessarily” implicates advertising. All indications were that Texas had also rejected the narrow holding of Advance Watch. See Industrial Molding Corp. v. American Manufacturers Mut. Ins. Co., 17 F.2d 633, 639, vacated by settlement, 22 F.Supp.2d 569 (N.D. Tex. 1998); Bay Electric Supply, Inc. v. Travelers Lloyds Ins. Co., 61 F.Supp.2d 611, 616 (S.D. Tex. 1999).

While “misappropriation” is a common route to coverage, other courts have held that trademark infringement falls within the offense of infringement of title or slogan. Other courts, however, have rejected this argument, concluding that “title” means a name of a literary or artistic work, and not merely legal title, and that a trademark is not necessarily a slogan.

Fifth Circuit takes it on
Against this backdrop, the Fifth Circuit tackled the issue of coverage for trademark infringement, applying Texas law. In Sport Supply Group, the court addressed coverage for a counterclaim asserting trademark infringement. The claim arose out of alleged breach of a licensing agreement, under which Sport Supply was allowed to use the “Macgregor” trademark on certain sporting goods. MacMark, owner of the trademark, accused Sport Supply of breaching the licensing agreement by attempting to sell products bearing the Macgregor trademark on the Internet. After the dispute was settled, Sport Supply sought to recover the costs of defending the counterclaim from its insurer, Columbia.

The court’s analysis is unusual. Rather than addressing whether trademark infringement is an enumerated offense, in the first instance, the court jumped to the issue of whether the exclusion of breach of contract applies. The exclusion applies to advertising injury arising out of breach of contract “other than misappropriation of advertising ideas under an implied contract.” Giving a broad interpretation to “arising out of” the court concluded that the allegations all stemmed from the breach of the licensing agreement.

The court then focused on whether the exception, for misappropriation of advertising ideas under implied contract, would restore coverage. Notably, the misappropriation language is almost identical to the language defining the offense. The court noted both the majority opinions, finding coverage for trademark infringement, and the minority opinion of the Sixth Circuit in Advance Watch. The court then turned to an analysis of trademark law, especially as it has been construed and applied by Texas courts. It reasoned that trademarks serve two essential functions. They aid consumers with brand identification to identify the source of a product and they protect the economic investment of the trademark owner. Thus, the court concluded that the “primary function of a trademark is to serve as a label — a mark that identifies and distinguishes a particular product.”

It then contrasted the nature of a trademark with Texas cases addressing the meaning of “advertising.” The court reasoned that advertising should be understood to mean a device for the solicitation of business. The court also reasoned that this meaning was distinct from the label that identified and distinguished a product.

The court distinguished those cases suggesting that a trademark is inherently advertising, reasoning that those courts adopted a broad and abstract definition of “advertising” that was not in accord with Texas law. Instead, the court looked at Texas cases using advertising in a “conventional sense” as reference to a common device for soliciting business. Accordingly, the court concluded that the exception to the exclusion did not apply, and that coverage was therefore excluded.

The Fifth Circuit also rejected the reasoning of Advance Watch, finding that the narrow and technical interpretation of “misappropriation” as a reference to the common law tort violated the tenet of construction, under Texas law, that requires undefined terms used in a policy to be given their common and ordinary meaning.

The court noted in passing that most of the cases that have analyzed coverage for trademark infringement have construed the coverage provisions, not the exclusions provisions. The court distinguished its own analysis, but acknowledged that the reasoning of these cases was clearly helpful. This passing acknowledgement of the similarity between the exclusion and the defined offense is a pointed understatement. The Fifth Circuit has undoubtedly created new law and proposed an intermediate interpretation of “misappropriation of advertising ideas.” Whether any other course will follow suit remains to be seen.

Interestingly, the Fifth Circuit did not specifically disapprove of the Texas District Courts that have concluded coverage exists for trademark or trade dress infringement. In several instances, the court referenced the opinion in Bay Electric, as indicative of the courts finding coverage and the reasoning they employ. In a footnote, the court addresses Bay Electric’s comment that the Texas Supreme Court has adopted a very broad definition of advertising. The Fifth Circuit accepted that the Texas courts define advertising broadly, in regards to forms of solicitation, but the court also noted that “it does not, however, follow that the Texas courts definition of ‘advertising’ is sufficiently broad to include all types of trademarks.”

What is uncertain is whether the Fifth Circuit intended to suggest that some types of trademarks could also constitute advertising. There is also the issue of trade dress. Even more clearly than trademark, most courts have concluded that trade dress is presumptively advertising. While this issue is not addressed in the Fifth Circuit’s opinion, one could argue that trade dress serves essentially the same function—it allows the customer to recognize and distinguish a product, but does not entice the customer. Yet, the nature of trade dress comes closer to “intuitive” sense that the tradedress is, itself, inherently advertising.

While its legacy remains to be seen, the opinion in Sport Supply has undoubtedly revived the debate over coverage for trademark infringement. It has also undoubtedly reduced the coverage expectations of many small businesses, who have come to assume that minor intellectual property offenses, such as trademark infringements are “part of the package.”

Bradley is a partner in the Dallas office of Thompson, Coe, Cousins & Irons, L.L.P. She is a member of the Insurance Litigation and Coverage Section and leads the firm’s coverage practice. She has represented agents in disputes with policyholders and insurers and routinely represents insurers in evaluating and litigating coverage issues under general and professional liability policies, commercial auto and trucking policies, commercial property policies and homeowners policies.

Topics Texas