Some Vestiges of Patent Infringement Coverage Remain

By | November 18, 2010

Despite multiple changes in general liability insurance forms, redefined offenses, and the addition of exclusions, there are still instances in which coverage for patent infringement may exist. Under the standard CGL policy, the coverage is provided in two sections.

Coverage A, the more common section, applies to bodily injury and property damage caused by an occurrence. Coverage B applies to personal and advertising injury offenses.

Coverage B is offense-based, not occurrence-based, includes a number of intentional or quasi-intentional torts including personal injury torts, like defamation or invasion of property, and torts between business competitors, such as disparagement.

The newer ISO forms specifically include some infringement of intellectual property rights in an advertisement, but specifically exclude patent infringement. Older forms, however, may still encompass broader offenses such as misappropriation of an advertising idea or style of doing business, piracy or unfair competition. The older forms also require, however, that the offense be committed in the course of advertising.

The Advertising Dilemma

Early on, some courts concluded that patent infringement could not be covered because the infringement could not occur in the course of an advertisement. The revision of the patent laws, however, encompassed not only sale of an infringing product but offers of sale, which then gave rise to the specter of coverage. Most courts, however, still concluded that no coverage is afforded where an advertisement merely “reveals” the offending activity; to implicate coverage, the offense must actually occur in the course of the advertising itself.

A number of courts concluded that patent infringement is not intended to be included among the generic group of common business torts, as there is no specific reference to patents in these forms. A few courts, however, have continued to carve out a niche and to find coverage where all the requisite elements are satisfied. This typically includes a patented process involved in the advertising itself, an infringement of that process, and an older insurance form that broadly defines the offenses and does not include an express exclusion for patent infringement.

The most significant example is Amazon.com International, Inc. v. American Dynasty Surplus Lines Insurance Company, 85 P.3d 974 (Wash. App. 2004). In Amazon.com, it was the music sampling procedure on the Web site that involved a patented process which was allegedly infringed. Unlike an image of a patented product design, the patented “interactive music preview technology” was actually used on the Web site and was effectively an advertisement for sale of the music.

The policy, an older form, included “misappropriation of advertising ideas” among the covered offenses. The court drew the distinction between manufacture of a product that is then advertised and use of an advertising technique that is itself patented, and observed that infringement of the technique was the essence of the claim. The court also had no trouble finding the Web site involved the widespread dissemination of promotional material to the public and therefore constituted advertising. Finally, while acknowledging that infringement of a software program imbedded in a Web site would typically not be covered, the music preview technology itself was the means of advertising, and satisfied the requirement of a causal connection.

By contrast, a dispute over a patented process for affixing signs to the tops of vehicles was not covered. Auto Sox USA, Inc. v. Zurich North America, 88 P.3d 1008 (Wash. App. 2004). While the patented design facilitated advertising, it was not itself an advertising idea.

Conflicting Cases

Cases involving coverage for patent infringement — at least under standard, non-specialty forms — are on the wane, as both the case law and the policy revisions have restricted coverage. These concepts were recently revisited, however, in two cases, with opposite outcomes: DISH Network Corporation v. Arch Specialty Insurance Company, 2010 U.S. Dist. Lexis 85400 (D. Colo., August 19, 2010) and Hyundai Motor America v. National Union Fire Insurance Company of Pittsburgh, PA, 600 F.3d 1092 (9th Cir. 2010).

In the Dish Network case, the claimants alleged Dish Network’s customer service telephone system that allowed customers, among other things, to order pay-per-view broadcasts, infringed upon their patented process. Dish Network argued its insurers owed it a defense, as the allegations included a telephone interface system that advertised products for sale. The court drew upon prior law to conclude that a duty to defend would exist only if the insured was engaged in advertising; there was potential liability for a covered offense (i.e., misappropriation of advertising ideas); and a causal connection existed between the injury and the advertising.

Turning first to the advertising element, the court noted the distinction between solicitation, which typically involves one-on-one marketing, and advertising, which includes more widespread dissemination to a public audience. (The court also rejected an argument that ISO’s drafting history, which included admitted changes to avoid coverage for patent infringement, was acceptable extrinsic evidence of ambiguity.) While noting that the individual telephone conversations were one-on one, the court analogized to the Web site in Amazon.com, and concluded the use of the telephone systems was advertising.

The court then turned to the key issues of whether there was a covered offense and whether it occurred in the course of advertising. Like the court in Amazon.com, the court in DISH Network concluded that coverage for patent infringement was not always precluded, and could exist where there was an advertisement that included a patented advertising technique.

Unlike Amazon.com, however, the court concluded there was no covered offense. There was no misappropriation of an advertising idea because it was the process — the “technology” of the phone system that allowed offers to customers, and not the offers themselves, that were at issue. The court reasoned that, while the interactive music technology in Amazon.com was incorporated in the advertisement, and not merely a means of conveyance, the telephone system used by DISH was not an advertising idea, nor was it a “style of doing business.”

The Hyundai case involved a Web site feature (BYO) that allowed users to “build your own” vehicle. In response to questions, a customized vehicle image was compiled and displayed. The claimant alleged infringement of its patented method for generating customized product proposals for auto deals. (There were also allegations of violation of a separate patent for the sale of parts on the Web site.) The patent holder, Orion, sued a number of auto companies, including Hyundai.

As in DISH Network, the court first struggled with the issue of whether the use of the feature was solicitation or advertising. While the use of the BYO feature was by individual customers the court nevertheless concluded that the BYO feature was distributed to the public at large.

The court also found that the patented BYO process was, itself, an advertising idea. The court reviewed prior case law and observed that, while most cases rejected coverage for patent infringement, the reasoning left open the possibility of coverage in circumstances where the process itself can be considered an advertising idea. Analogizing to Amazon.com, the court held that requirement was satisfied. Finally, the court concluded that the advertisement caused the injury, and did not merely reveal the infringement.

These cases demonstrate that, despite insurers’ efforts to eradicate coverage for patent infringement under CGL policies, some vestiges still remain. In the age of Internet advertising and interactive Web sites, a careful review of the policy could lead to unexpected benefits for the insured and unexpected exposure for the insurer.

Bradley is a partner in the Dallas law firm of Tollefson Bradley Ball & Mitchel LLP.

Was this article valuable?

Here are more articles you may enjoy.