A recent case in the Northern District of California offers two cautionary tales to policyholders. First, when buying insurance, companies should understand their risks and ensure that the policies they’re buying match those risks as closely as possible. Second, when a claim arises, policyholders must carefully consider all the allegations, not just the formal causes of action, in the complaint to determine whether they might trigger an insurer’s defense obligation. Continue Reading CGL Coverage for False Advertising and Intellectual Property Claims: Sometimes It’s There, but You Need to Know Where to Look for it
Policyholders should always consider the potential for coverage under their CGL policies if they suffer a data security breach. However, as the cases described in my article for Corporate Counsel, coverage is highly fact-dependent and subject to interpretation by the courts even in the absence of a data-related exclusion. The addition of such an exclusion narrows the policyholder’s options.
As a result, policyholders should carefully consider their insurance programs and the unique risks that their businesses face in light of their own computer systems, third-party computer systems on which they rely and the data they collect and/or hold. They should consider whether technology errors and omissions liability or cyberinsurance would more effectively address their risks. With the help of their insurance brokers and counsel, companies can negotiate and tailor those policies to their risks and exposures relating to computer systems, personally identifiable information and confidential third-party business information. Some businesses may choose to rely exclusively on their CGL policies for protection against data breach lawsuits. But that decision should be made deliberately after understanding all the risks and options.
Read the full article: Data Security Breach Liability: Is Your Business Covered?
We recently litigated and successfully settled an insurance coverage case that offers a model for managing a case thoughtfully. Too often, parties reflexively dive into litigation with its procedural hurdles and delays, unbounded discovery, and often unnecessary motion practice, without considering whether a more efficient but fair alternative exists. Our group regularly seeks to fashion a sensible case-specific dispute resolution process at the outset. These models also allow us to offer creative fee arrangements that build incentives to optimize the costs and recoveries for the client.
Our client company and its officers were named in an intellectual property lawsuit. The same insurer provided CGL and D&O policies. It denied coverage under the CGL. It initially agreed to defend under the D&O policy but later withdrew its defense over our objections.
On June 12, 2014, the California Supreme Court issued its decision in the closely watched case of Hartford Casualty Insurance v. Swift Distribution, Inc., S207172. I reported on the Court of Appeals decision last year on this blog in the post "California Supreme Court to Decide Scope of Implied Disparagement; Implications for Coverage in IP and False Advertising Cases" and related article "California To Draw The Lines In Disparagement Liability".
The Court affirmed the Court of Appeals ruling that an insurer did not have a duty to defend its insured against allegations that it had infringed a competitor’s trademark and patents by producing and selling a similar looking music equipment cart with a very similar name (“Multi-Cart” vs. “Ulti-Cart”). Id. The insured argued that there was a potential for covered damages, and hence a duty to defend, because the underlying complaint alleged facts supporting a claim of implied disparagement, and its general liability policy covered damages because of the publication of material that “disparages a person’s or organization’s goods, products or services.” The Court found no potential for liability based on disparagement, either express or implied, reasoning that the insured was not alleged to have identified the competitor or its product, or to have “necessarily referred to and derogated” the claimant’s product.
The California Supreme Court has granted review of the Court of Appeal’s decision in Hartford Casualty Insurance Company v. Swift Distribution, Inc., 210 Cal. App. 4th 915 (2d Dist. Ct. App. Oct. 29, 2012), review granted 152 Cal. Rptr. 3d 420 (Feb. 13, 2013). Swift will resolve a hot debate about the scope of implied disparagement liability under California law. The result likely will determine whether insurers must defend a variety of lawsuits involving allegations of intellectual property infringement, unfair competition and false advertising.
The Court of Appeal in Swift held that an insurer did not have a duty to defend its insured against allegations that it had infringed a competitor’s trademark and patents by producing and selling a similar looking music equipment cart with a very similar name (“Multi-Cart” vs. “Ulti-Cart”). 210 Cal. App. 4th at 923-929. The appeals court rejected the insured’s argument that the allegations triggered a duty to defend under its general liability policy’s “personal and advertising injury” coverage for liability arising from “disparage[ment] [of] a person’s or organization’s goods, products or services . . . .” Id. The court found no potential for liability based on disparagement, either express or implied, reasoning that the insured was not alleged to have identified the competitor or its product, or to have suggested that the insured’s product was superior to that of the competitor. Id.
Last week, the U.S. Court of Appeals for the Sixth Circuit ruled that there was coverage for first-party and third-party losses arising from the theft of customer credit card information by hackers under a crime policy’s computer fraud endorsement. See DSW Inc. v. National Union Fire Ins. Co. of Pittsburgh, Pa., Case No. 10-4576/5608 (Aug. 23, 2012). The Sixth Circuit found that the National Union crime policy at issue covered third-party liability losses even though the insuring agreement limited coverage to loss “resulting directly from” the “theft of any Insured property by Computer Fraud.” The Sixth Circuit also rejected National Union’s argument that an exclusion barring coverage for “any loss of proprietary information, Trade Secrets, Confidential Processing Methods or other confidential information of any kind” applied. The court reasoned that, while credit card information might be considered confidential in some circumstances, it could not have been the type of confidential information envisioned by the exclusion. Otherwise, the exclusion would vitiate the coverage that the policy promised to provide.
This is yet another example showing that insureds should read all of their insurance policies carefully for possible coverage when they suffer a loss or are involved in litigation. Insureds are more commonly buying technology errors and omissions coverage or more specific cyber policies that could cover this type of loss, but the endorsement on the National Union crime policy is not uncommon.
I was quoted in this Law360 article (http://www.law360.com/insurance/articles/372903, sign-in required) about the Sixth Circuit’s ruling that policies often have slight differences in policy language that can make a big difference to insureds. That is especially true of policies that cover privacy and cyber risks.
Farella partner Tyler Gerking will be a panelist on this important program focused at the nexus of intellectual property and insurance coverage law.
Topics to be Covered
- Coverage for unauthorized disclosure of personally identifiable information, including coverage for notification obligations arising from data security breaches
- Coverage for hacker, malware and denial of service attacks
- Coverage for loss or damage to data stored in the cloud
- Availability of coverage under traditional CGL policies for certain cyber risks
Register here to attend in person or via Webcast.
Tuesday, June 5, 2012
5:00 pm to 6:00 pm
Bar Association of San Fancisco
The Ninth Circuit recently held in Hyundai Motor America v. National Union Fire Ins. Company of Pittsburgh, PA that third-party patent infringement claims against Hyundai gave rise to a duty to defend. The case is a testament to the importance of broadly considering the potential for insurance coverage of all claims. The Court has just recently summarily rejected National Union’s request that the Ninth Circuit certify the coverage question to the California Supreme Court. Thus, this opinion will remain the last word on the subject for the time being.
Hyundai’s website included “build you own vehicle” and parts catalogue features which allowed website users to obtain customized vehicle and pricing information based on their own input. Hyundai was sued by a patent holding company which owned patents covering methods for generating product proposals for potential automobile customers. Hyundai sought defense of the third-party claim under an “advertising injury” coverage on the basis that the coverage extended to claims for injuries arising out of “Misappropriation of advertising ideas.”
The court found that the patent infringement alleged against Hyundai constituted “misappropriation of advertising ideas” applying the “contextual reasonableness” standard articulated by the California Court of Appeal in Mez Industries, Inc v. Pacific National Ins. Co. Under that test, the court asks whether, in the context of the case and in light of common sense, the patents at issue “‘involve any process or invention which could reasonably be considered an ‘advertising injury.’” Here, the patents involved “a method of displaying information to the public at large for the purpose of facilitating sales, i.e., a method of advertising.” Thus, the allegations of the underlying complaint alleged facts within the scope of coverage.
Hyundai was also required to show that it was engaged in “advertising” and that a causal link existed between the alleged injury and the advertising. The “build you own vehicle” feature was found to be “advertising” even though it necessarily provided customized information to specific individuals based on those individuals’ input, because the feature is widely distributed to the public at large. Regarding the causal connection, the court stated:
When the patent infringement occurs independent of the actual advertisement of the underlying product, because the patent concerns the underlying product . . . then the causal connection typically is not established. When the patent infringement occurs in the course of the advertising, however, the causal connection is established.
In Hyundai, the patents covered the method for advertising (not the vehicles being advertised) and use of the “build your own vehicle” feature itself was infringement. Thus the causal connection was met.
The Ninth Circuit also reiterated the familiar principles establishing the breadth of the duty to defend. The Ninth Circuit held that the carrier must defend a third-party suit which potentially seeks damages within the coverage of the policy, and that a carrier may terminate its defense only if the third party complaint can by no conceivable theory raise a single issue which might be covered. And, while it is not clear that extrinsic facts (i.e., those not pled in the third-party complaint) may end the duty to defend, it is well established that extrinsic facts known to the insurer that present the potential for coverage may be considered to find coverage.
Again, the Hyundai Motors opinion is a testament to the importance of reviewing all incoming claims (whether in complaint, cross-complaints, etc.) for the potential of insurance coverage. Insurance coverage can exist for many different types of claims, including patent, antitrust and business tort litigation, and experienced coverage counsel can often quickly identify, from a simple review of the complaint, claims that are potentially covered and worth pursuing further.
Adequate preparation is essential for any mediation, and mediations involving insurance coverage issues are no exception. Whether the focus of the mediation is the insurance coverage dispute itself, or whether the insurer is attending a mediation of the underlying action (with an expectation that it will fund any settlement), the insured can and should take certain steps to ensure a more productive session.
1) Select the right mediator
Only the attorneys handling the case can judge which mediator has the right style and temperament to handle their specific matter. An additional consideration, however, should be whether the mediator has some experience with insurance coverage issues. Like many litigators, some mediators view insurance coverage as a somewhat rarefied and obscure area of law. A mediator with little or no insurance coverage experience may hesitate to roll up his or her sleeves, focus on the insurance policy language and the legal rules which govern its interpretation, and work out whatever coverage issues exist between your client and the insurer.
On a more practical level, a mediator with insurance coverage experience will be familiar with the carrier thought process and have a better understanding of how decisions are made within an insurance company. Therefore, a mediator with such experience can better motivate and persuade the carrier, working through any internal hurdles to decision-making and ultimate resolution.
2) Ensure decision-makers are in attendance
When attorneys agree to mediate, it is frequently assumed that their respective clients will attend. Insurance companies frequently make precisely the opposite assumption, and will only send their attorneys to a mediation. While an insurer’s unwillingness to send a representative may appear obstructionist, in part it simply reflects the reality that in-house insurance claims handlers frequently manage hundreds of files at a time, and simply can’t be in two places at once. At the same time, anyone who has participated in a mediation attended by attorneys only knows that such sessions typically are not productive.
The best way to ensure that a fully-authorized carrier representative attend the mediation is for the insured to expressly insist upon it, and to do so early, often, and forcefully. If you’re considering mediation, bring the carrier into the loop as soon as possible regarding scheduling. Even if the insurer does not ultimately agree to send a representative, you will have a record of your attempts to accommodate the carrier’s schedule.
3) Prepare the way the insurer prepares
Before a mediation, review all reservation of rights letters and other significant correspondence. Know the history of the file and remind yourself of all the various bases for the insurer’s reservation of rights and when they were first raised. Issues which have been lying dormant for months, and which the policyholder may have assumed the insurer has abandoned, often resurface at mediation. If you are mediating an underlying liability case, be sure defense counsel is prepared to appropriately explain the insured’s potential exposure. Indeed, it is usually advisable for defense counsel to deliver a pre-mediation report to the insurer, detailing the case status and the insured’s potential exposure. (Where the insurer either is not defending or is defending subject to a reservation of rights, privilege concerns can be addressed by delivering the report orally, rather than in writing.)
Keep in mind that a primary goal of the insurer will be to emerge from the mediation having terminated any defense obligation, and having paid less than the full limits of its policy. If the insurer has been funding the defense, know where the defense costs stand – how much has been paid to date, and how much defense costs will be in the future if the matter is not resolved. Future defense costs can be a significant factor in motivating the insurer to settle the case. Getting a good handle on defense costs is particularly important if the policy is a “wasting limits” policy. You’ll want to know exactly how much of the policy limits are left, and how much is already “spoken for” (i.e., outstanding defense billings that the insurer has not yet paid).
Make sure your client and defense counsel are prepared with your position on tough questions or issues that may arise during the mediation, such as: (1) the insurer insisting that the insured contribute to funding the settlement; (2) the insurer announcing its intention to seek recoupment of amounts expended, pursuant to Buss v. Superior Court and Johansen; or (3) the insurer requesting either a full policy release, or a release of all potential future claims related to the issue being mediated (e.g., in environmental exposures, the possibility that a regulatory agency will re-open an enforcement action).
4) Brief the coverage issues promptly and thoroughly
Without the pressure of a court-imposed deadline, attorneys often ignore the mediator’s deadlines for mediation briefs, submitting them just a day or two before the mediation. Attorneys representing policyholders should resist this temptation. Insurance companies are large bureaucracies, charged with monitoring thousands of claims at any given time. As noted above, the representative responsible for your client’s file is typically handling hundreds of other claims at the same time. To ensure that the representative has time to fully review and absorb your mediation brief, and to procure appropriate settlement authority based on the arguments made therein, submit your brief on time. (Indeed, you should confirm well in advance of the mediation that the parties will be exchanging briefs. Otherwise, the first time the insurer representative will be hearing your best articulation of your client’s coverage position will be at the mediation itself.)
Finally, insurance coverage issues are often best addressed in separate and/or private submissions to the mediator. In a mediation of the underlying case, a separate submission on the coverage issues is usually appropriate, with the submission going only to the mediator and the insurance carrier. Separate or private submissions may also be appropriate in cases where multiple insurance carriers are involved. The carriers will undoubtedly have differing views regarding which among them has the greatest obligation to fund settlement. In such cases, carve out an agreement in advance that will allow each carrier to do a private submission that is shared only with the insured and the mediator (but not the other carriers). The insured may also provide a private submission with its views on allocation, or with leverage points that can be used separately with each carrier.
Like any other step in litigation, success in mediation depends on advance planning and preparation, as well as giving careful consideration to the viewpoint of your ultimate decision-makers. Taking the above steps will help ensure that you are thoroughly prepared to address any issues that may arise at the mediation itself.
Disputes over intellectual property that include allegations of anti-competitive conduct may raise a potential for insurance coverage. Common allegations in this context which can trigger a duty to defend under the “personal injury” or “advertising injury” coverages found in the standard CGL policy include disparagement of another’s products. A recent decision by Judge James Ware in the Northern District of California held that allegations of implicit disparagement of a competitor’s products create a potential for coverage. In E.piphany, Inc. v. St. Paul Fire & Marine Ins. Co. (N.D. Cal. Dec. 16, 2008), false representations by an insured concerning only its own products that did not specifically identify a competitor’s product or business were sufficient to trigger the insurance carrier’s obligation to defend against allegations of disparagement of another’s products.
The insured, E.piphany, manufactured and sold software products that enable businesses to more efficiently manage and optimize their customer interactions. The key selling point between competing products in this market is whether the software is written in Java and is fully compliant with J2EE application server technology. E.piphany falsely advertised its product suite as “all Java” and “fully J2EE.” Although E.piphany’s products had never been “all Java” or “fully J2EE,” E.piphany continued to make numerous claims that its product was the first product suite designed and built on a unified J2EE-based platform, and even represented falsely that it has “a couple of year lead” its competitors.
E.piphany was sued by one of its competitors, Sigma Dynamics, Inc., for false advertising and unfair competition under 15 U.S.C. § 1125(a) and California’s Unfair Competition Law. E.piphany tendered the lawsuit to its insurance carrier, and the carrier denied coverage on the ground that Sigma’s complaint did not allege “personal injury” or “advertising injury” within the coverage provided by the policy.
On cross-motions for summary judgment in the coverage case, the court held that there was a potential for coverage, and therefore a duty to defend, because E.piphany could be held liable for disparagement. Although E.piphany only made claims about the superiority of its own products, these claims necessarily implied the inferiority of Sigma’s competing products.
In making this determination, the court recognized that California courts have not explicitly determined whether a cause of action for disparagement can lie where a publication does not expressly identify the disparaged product or business. The court pointed to a California Supreme Court case which addressed First Amendment limits on defamation claims as support for its holding that disparagement by implication is actionable under California law. The court also noted that at least one other jurisdiction (Illinois) has found that a duty to defend can be triggered even though the competitor did not specifically allege that the insured disparaged a specific product or business.
Following the E.piphany decision, it is important for insureds to consider whether allegations of anti-competitive conduct may trigger a duty to defend for disparagement, implicit or otherwise. Conversely, if you or your client are considering asserting claims against a competitor, it is important to consider whether the allegations could trigger a duty to defend in favor of your opponent.