Thursday, August 23, 2012

Business Liability Coverage & IP Issues: You're Not Covered.

A case recently filed in California reminds us that so-called “business liability policies” do not cover all business-related liabilities—especially when the liabilities involve claims of intellectual property infringement.

Some background:

Purplus is a California company that sells software online.  In 2009, Adobe sued Purplus in federal court for copyright and trademark infringement, alleging that Purplus illegally made, offered for sale, and distributed copies of Adobe’s software.  

Purplus owned and maintained a “business liability” policy through Hartford Insurance Company.  The policy provided coverage for “personal and advertising” injuries.  (What’s that mean?  Good question.  Read on….)

Purplus asked Hartford to cover the costs of its defense in the Adobe litigation, but Hartford refused to do so.

Jump cut: Time passes, and the parties settle the case.  As part of the settlement, Purplus pays Adobe an (undisclosed) five-figure settlement amount.  Purplus again asks Hartford to pay for the costs of the litigation and the settlement, bur Hartford again says, “no.”

Second jump cut:  Now it’s July 2012.  Purplus files a lawsuit against Hartford seeking reimbursement for Purplus's legal expenses and the five-figure settlement amount that Purplus paid to Adobe.  Purplus’s theory is that the “advertising injury” portion of the insurance policy required Hartford to cover Adobe’s claims of intellectual property infringement.

Huh?  How does copyright or trademark infringement fall under the category of “advertising injury”?  (Actually, I don’t think it does…but let’s keep analyzing this.)

Now, dear readers, try to follow this logicPurplus “advertised” Adobe’s software by displaying Adobe's software for sale at Purplus’s website. Presumably, those advertisements led to sales.  The sales motivated Adobe to sue Purplus.  If not for Purplus’s “advertising” activity, Purplus wouldn’t have made any sales.  Without sales, there likely would have been no lawsuit.

See, “advertising” was at the heart of this whole thing—so Hartford should have covered Purplus’s litigation expenses, right?


The way I see it, Adobe’s lawsuit for intellectual property infringement had nothing to do with advertising.  Admittedly, Purplus did advertise Adobe’s software through its website, but that doesn’t mean that the case involved an “advertising injury”.  Taking Purplus’s argument a bit further, one could always invoke an “advertising injury” by engaging in intellectual property infringement, and then advertising and selling the infringing materials through a website.   

Let me put it this way: intellectual property infringement might, or might not, involve advertising.  (Want an example?  Go to a local flea market and see if you can buy bootlegged versions of music or movie DVDs.  Those DVDs are all examples of unadvertised intellectual property infringement.)  The fact that a person may use advertising as a means to promote and sell allegedly infringing materials doesn’t transform an IP infringement case into an “advertising injury”.

Purplus’s case is pending in California, but I don’t think it has much chance of success.  
But Purplus’s situation highlights something that you need to know about so-called “business liability” policies.  Very often, the only intellectual property matters covered under business liability policies are matters in which the insured unintentionally uses someone else’s trademark or copyrighted materials in the insured’s advertisements or promotions.  

For example, if I advertised a product I was selling and my advertisement unintentionally included copies of Coca-Cola’s trademarks, then I might incur an advertising-related injury for which I might be covered under a business liability policy.  But it is highly unlikely that I could use Coca-Cola’s trademarks, advertise the fact that I was doing so, and then claim an “advertising injury” if Coca-Cola sued me for trademark infringement.

The point is this: business liability policies come in all shapes and sizes.  Don’t assume your company is covered, especially with regard to intellectual property issues, just because your company has a business liability policy.  

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