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Can you get insurance coverage for the costs of patent litigation?

Advertising injury claims and D&O insurance are two creative ways to get around IP exclusions

The conventional wisdom in both the insurance world and the intellectual property world is that there is no coverage for patent infringement liability. Like most pieces of conventional wisdom there is some amount of truth to the perception, but there also are important exceptions to the rule, and, in fact, there are certain types of patent cases which may be covered under standard liability policies. Given the high costs associated with patent litigation, companies are wise to explore whether each and every patent case that they face may be among those that are covered.

The most common argument in support of coverage for patent cases is to assert that there is a covered “advertising injury” offense under standard commercial general liability (CGL) policies. Advertising injury (sometimes called “personal and advertising injury”) coverage is triggered by allegations of an enumerated “offense” in the course of advertising. One of the offenses that will trigger advertising injury coverage is defined as “use of the advertising idea of another.”

Over the years, policyholders have argued, with varying degrees of success, that at its core a patent infringement case alleges theft of another’s idea, and therefore such cases can qualify under this language.

Courts consistently have rejected this argument in cases where the only nexus to advertising is that the infringing product is being advertised. However, the argument has been accepted when the infringing device or method itself is used in the advertising or sale of a product. The argument first succeeded in a pair of cases involving, Int’l Inc. v. Am. Dynasty Surplus Lines Ins. Co., 85 P.3d 974 (Wash. App. 2004), and Amazon Inc. v. Atlantic Mutual Ins. Co., 2005 WL 1711966 (W.D. Wash. July 21, 2005).

These cases found coverage for several well-known features of Amazon’s business model that enabled the marketing and selling of products: the virtual shopping cart, electronic catalogs, electronic customer identification and the 30-second music sample. These features are all techniques that assist in advertising (defined broadly to include all aspects of the marketing and sales process), and therefore suits alleging that Amazon infringed patents covering these technologies qualified as alleging “use of another’s advertising idea.”

In one of the leading cases of 2010, the 9th Circuit accepted the same reasoning in Hyundai Motor Am. v. Nat’l Union Fire Ins. Co. of Pittsburg, 600 F.3d 1092 (9th Cir. 2010). Hyundai was sued for patent infringement based on the “build your own vehicle” feature on its web-page, which allowed customers to select from a menu of features and then see a photograph and various information about the virtual vehicle they have created.

Recognizing that this feature is an advertising technique, the 9th Circuit followed the same reasoning as the Amazon cases and found coverage. In 2011, the 10th Circuit reached the same result in Dish Network Corp. v. Arch Specialty Ins. Co., 659 F.3d 1010 (10th Cir. 2011). The Dish Network patents alleged to have been infringed involved a telephone interface system that allowed customers to complete multiple tasks over the phone, including ordering pay-per-view programs. Finding the progeny of case law persuasive, the 10th Circuit reversed the lower court’s denial of coverage. 

There is, however, a major caveat to the line of cases mentioned above, and because of that caveat, only a sub-set of cases alleging use of another’s advertising technique will be covered. In 2002, the Insurance Services Organization (ISO), a drafting organization that creates standard policy forms utilized by many major insurers, created a standard exclusion for trademark, copyright, patent infringement and trade secret theft. There is a carve-out to the exclusion with respect to copyright and trademark infringement, but not so with respect to patent infringement.

The key to success in seeking coverage for patent lawsuits, therefore, is finding policies without an IP exclusion. Some policyholders are able to purchase such policies through their bargaining power, their willingness to pay higher premiums or carelessness on the part of the insurer, agent and/or broker. 

In addition to the “advertising idea” line of cases, there are other theories that can be used to explore coverage for patent litigation. The well-known rule that just one potentially covered claim triggers the duty to defend the entire complaint can be invoked if a patent infringement suit includes a claim for copyright infringement, trademark infringement, defamation or any of several business torts that sometimes are asserted in patent cases.

It also is important to look at lines of coverage other than general liability, such as directors and officers insurance (D&O), errors and omissions or media liability. We once helped a policyholder obtain coverage for a patent infringement case under a D&O policy because the suit named an officer of the company as co-defendant, and the side of the D&O policy providing individual officers with coverage lacked an IP exclusion.

Given the high costs of patent cases and unpredictability of coverage under conventional policies, when a major piece of litigation comes along, it is worthwhile to take a close look at standard liability policies. At least three companies, Amazon, Hyundai and Dish Network, did so, and the effort proved to be worthwhile.

Contributing Author

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Richard Milone

Richard D. Milone is the Chair of Kelley Drye & Warren LLP’s Insurance Recovery practice, which has attorneys in Washington, D.C., New York and Los...

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Contributing Author

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Mahmood Ahmad

S. Mahmood Ahmad is an associate in the Insurance Recovery practice in the Washington D.C. office of Kelley Drye & Warren LLP.  He can be...

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