How Insurance Can Save You Millions in IP Litigation

The intellectual property (IP) litigation trend in the fashion and apparel industry does not appear to be going out of style anytime soon.  Fashion and apparel companies routinely face allegations of copyright, trademark and trade dress infringement. 

The cost of defending such lawsuits can be significant, which often factors into companies' decisions to settle cases.  Many fashion and apparel companies do not know that those defense costs (and any ultimate damages) may be covered by an often overlooked form of insurance found in most comprehensive general liability policies, called "advertising injury."

What is advertising Injury coverage and where is it found?
Advertising injury coverage is often included in standard comprehensive general liability (CGL) insurance policies.  Depending on the particular policy language, advertising injury coverage applies to various types of alleged acts in connection with the policyholder's advertising of its products.  Most standard advertising injury policy forms cover advertising injury arising out of libel, slander, defamation, violation of right of privacy and infringement of copyright title or slogan.  Some older policy forms also cover advertising injury arising out of unfair competition and piracy, and some newer policy forms include misappropriation of advertising ideas or style of doing business.

What types of IP claims are covered?
Courts have applied advertising injury coverage to lawsuits against fashion and apparel companies alleging various types of IP claims, including trademark infringement, copyright infringement, trade dress infringement, unfair competition, false representation and false designation of origin.  See e.g., A Touch of Class Imps., Ltd. v. Aetna Cas. and Sur. Co., 901 F. Supp. 175 (S.D.N.Y. 1995); W. Am. Ins. Co. v. Moonlight Design, Inc., 95 F.Supp.2d 838 (N.D. Ill. 2000); B.H. Smith, Inc. v. Zurich Ins. Co., 285 Ill.App.3d 536 (Ill. App. Ct. 1996); and E.S.Y., Inc. v. Scottsdale Ins. Co., 2015 WL 6164666 (S.D. Fla. 2015). 

Courts have been less inclined to apply advertising injury coverage to patent infringement claims.  However, some authority exists for applying advertising injury coverage to claims for infringement of a patented advertising method.  See Dish Network Corp. v. Arch Specialty Ins. Co., 659 F.3d 1010 (10th Cir. 2011) and Hyundai Motor Am. v. Nat'l Union Fire Ins. Co. of Pittsburgh, PA, 600 F.3d 1092 (9th Cir. 2010).

What constitutes advertising for purposes of coverage?
To trigger "advertising injury" coverage, the alleged acts at issue must have a connection to advertising.  "Advertising" or "advertisement" may be defined in the policy at issue. 

For example, one common policy form defines "advertisement" as "a notice that is broadcast or published to the general public or specific market segments about your goods, products or services for the purpose of attracting customers or supporters" including "material placed on the Internet or on similar electronic means of communication."  See ISO Form CG 00 01 12 07, Sec. V, ¶1.  The definition further provides that "only that part of a website that is about your goods, products or services for the purpose of attracting customers or supporters is considered an advertisement."  Id.

IP claims against fashion and apparel companies often include allegations regarding advertising that are sufficient to trigger advertising injury coverage.  For example, in W. Am. Ins. Co. v. Moonlight Design, Inc., 95 F.Supp.2d 838, a bridal dress distributor sought insurance coverage for a lawsuit alleging that the distributor infringed a competitor's copyrights of bridal dress designs and falsely represented and designated the origin of those designs. 

The underlying complaint alleged, among other things, that the distributor infringed upon the competitor's copyright by "advertising, promoting, offering for sale, selling and distributing bridal dresses…that are piratical copies" including publishing advertisements in bridal publications comprising photographs of the alleged infringing dresses.  Id. at 843. 

The complaint further alleged that "by virtue of the foregoing conduct and acts" the distributor "falsely represented and designated the origin of its bridal dress designs and has caused confusion in the marketplace…"  Id. at 844.  Applying New York law, the court held that these allegations were sufficient to trigger the insurer's duty to defend the distributor in the underlying lawsuit under the advertising injury coverage in the policy at issue.  Id.

In A Touch of Class Imps., Ltd. v. Aetna Cas. and Sur. Co., 901 F. Supp. 175, the policyholder was sued for trademark infringement based on its use of the phrase "Touch of Class" in connection with the advertising and sale of its jewelry. The policyholder incurred legal expenses and ultimately suffered a judgment of $1 million in the trademark infringement lawsuit.

The policyholder sought advertising injury coverage under its CGL policy.  "Advertising injury" was defined in the policy as "injury arising out of an offense committed…in the course of the named insured's advertising activities, if such injury arises out of…infringement of copyright, title or slogan."  Id. at 176. 

The court held that the advertising injury coverage applied to the defense costs and the judgment in the trademark lawsuit because it was "clear that [the policyholder] used the trademark in connection with the advertising and sale of its jewelry." The court further reasoned that the phrase "Touch of Class" qualified as a covered "title or slogan" because it was used "as an attention-getting device…to convey a sense of style, fashion and class."  Id. at 177.

A recent decision extended advertising injury coverage to allegations regarding hang tags and labels used on clothing.  In E.S.Y., Inc. v. Scottsdale Ins. Co., 2015 WL 6164666, the policyholder sought coverage for a lawsuit alleging that its hang tags and labels infringed a competitor's copyrighted design.  The insurer denied coverage, claiming that the hang tags cannot constitute advertisements because they are part of the garments themselves.  Id. at *8.  In analyzing this issue, the court noted that hang tags are "not detached from the product in the way a billboard or magazine advertisement is."  Id at *9. 

Nonetheless, the court held that the hang tags were advertisements, sufficient to trigger the insurer's duty to defend, because "the hang tags' special design presumably had the additional function of attracting consumers to the garments themselves and to the brand more generally."  Id. at *8.

How to maximize insurance coverage for IP claims
As the cases above demonstrate, advertising injury coverage can be a powerful tool in offsetting defense costs (and potentially any ultimate damages) in IP and other lawsuits.  Coverage for IP risks might also be found in specialty policies, such as intellectual property, multimedia or umbrella policies.  To maximize coverage for IP risks under any type of policy, consider involving insurance coverage counsel in the negotiation and purchase of the policy, as well as the claim process. 

Tara Kowalski is a partner and Alexis A. Smith is an associate at Jones Day, the largest law firm in the U.S., and one of the few featuring a full-service IP practice.