An August 21, 2015 decision of the United States District Court entered judgment on the pleadings against an insured because of a broad intellectual property exclusion in a commercial general liability policy issued by Charter Oak Insurance Company (“Charter Oak”).
With the exponential growth of the Internet, intellectual property, such as patents, copyrights, trademarks, trade dress, and trade secrets have become increasingly valuable business assets. However, many companies fail to have adequate insurance coverage for their intellectual property risks. Such was the situation in PTC, Inc. v. Charter Oak Ins. Co. United States District Court of Massachusetts, Civil Action No. 1:14-cv-14056-DPW.
Claim of copyright infringement leads to suit
The insured in this case, PTC, Inc., formerly known as Parametric Technology Corporation, is a worldwide software company headquartered in Massachusetts. One of PTC’s 28,000 customers was a California company, Flextronics. Flextronics had a master agreement that allowed it to use specified copies of the PTC software. PTC’s software code was subject to a federal copyright filing. Under federal law, the infringement of a copyright carries severe civil sanctions including that the infringer must:
- Pay the actual dollar amount of damages and profits.
- Pay a penalty of up to $150,000 for each work infringed depending on willfulness.
- Pay all the attorney fees and court costs of the copyright holder; and
- Be enjoined from committing any further infringements.
In 2012, PTC notified Flextronics that it had evidence that Flextronics had violated PTC’s software copyrights and software licenses. Flextronics took PTC’s allegations of copyright infringement most seriously and began an investigation of its computer software usage.
As a result of its investigation, Flextronics brought an action in California against PTC seeking a declaration that there had been no copyright violations, but also sued PTC alleging that “PTC has used that hidden embedded technology to access, obtain, and transmit information in Flextronics’ computers that it is not entitled to access, obtain, or transmit.” Flextronics also asserted that PTC was engaged in a scheme to improperly claim copyright infringement against its customers. This scheme, Flextronics alleged, consisted of PTC making legal threats to bring copyright infringement actions based upon information that it garnered from the “hidden embedded technology” in its software. According to Flextronics, PTC knew that this information was unreliable and improperly obtained, but used it anyways to extort settlement payments.
Charter Oak denies any coverage for the Flextronics suit based on intellectual property exclusion
PTC eventually tendered Flextronics’ suit seeking additional coverage from Charter Oak, its CGL carrier under the policy’s “Amendment of Coverage B – with its Personal and Advertising Injury Liability-Technology that covered “personal injury” as injury other than ‘advertising injury’, caused by … oral or written publication, including publication by electronic means of, a material that…discloses information about a person’s private life”.
In response to PTC’s tender to Charter Oak of the Flextronics complaint, PTC received a flat out denial of both defense and indemnity. Charter Oak asserted that the policy’s intellectual property exclusion barred coverage.
This particular exclusion barred coverage for “personal injury” or “advertising injury” “…arising out of any actual or alleged infringement or violation of any of the following rights or laws, or any other “personal injury” or “advertising injury” alleged in any claim or “suit” that also alleges any such infringement or violation: (1) Copyright; (2) Patent; (3) Trade dress; (4) Trade name; (5) Trade mark; (6) Trade secret; or (7) Other intellectual property rights or laws.
PTC sues for defense coverage claiming intellectual property exclusion does not apply or is ambiguous
Under Massachusetts law, the duty to defend contained in a liability policy is far broader than the duty to indemnify. In many cases the slightest question of possible coverage for a lawsuit results in the insurance carrier providing the insured a conditional defense under a reservation of rights.
After Charter Oak’s denial, PTC filed suit against Charter Oak and immediately moved for judgment on the pleadings asking the Court to declare “that the intellectual property exclusion that Charter Oak relied on did not relieve Charter Oak from defending PTC in the Flextronics Action…”
PTCs main argument was that Flextronics’ complaint did not allege that PTC had violated any copyright laws or other intellectual property rights or laws and therefore, the intellectual property exclusion should not bar its right to receive a defense under the policy. Flextronics’ complaint included claims for Violation of the Computer Fraud and Abuse Act; Violation of the California Computer Data Access and Fraud Act; Trespass to Chattels; Conversion and a declaration that Flextronics: (1) had not infringed upon PTC’s copyrights; and (2) had not breached its software license agreements with PTC. PTC had counterclaimed for copyright infringement against Flextronics, but PTC argued that the intellectual property exclusion did not apply where the insured counter-sued for copyright infringement.
Under Massachusetts law, the duty to defend contained in a liability policy is far broader than the duty to indemnify
Charter Oak argued, in opposition, that the intellectual property exclusion was so broad that it encompassed any complaint that alleged issues relating to copyright infringement even if the complaint alleged no infringement against the insured. Additionally, Charter Oak argued that the counterclaim filed by PTC brought the whole case within the exclusion because the exclusion was broad enough to bar all coverage where there were copyright claims brought by the insured against the plaintiff as a counterclaim.
Court rules intellectual property exclusion bars coverage even though no copyright violation alleged
In a 25-page decision, the Federal Judge hearing the case, Douglas P. Woodlock, analyzed the arguments made by PTC that the Flextronics complaint had no count alleging a copyright violation. The Court indicated that even though Flextronics’ allegations were more accurately understood as “allegations of allegations of copyright infringement” the broad language of the Charter Oak intellectual property exclusion still applied.
The District Court agreed with Charter Oak that based upon the simple reading of the exclusion, the exclusion barred coverage because of the allegations that were woven into the complaint relating to copyright infringement.
The Court noted that the introduction of Flextronics’ complaint alleged that PTC’s made false and reckless allegations of copyright infringement to extort settlements and, in particular, to have made false and reckless copyright infringements allegations against Flextronics. The Court found that these allegations were sufficient to bring the case within the exclusion even though “Flextronics did not make a direct claim for copyright infringement because there was no allegation that PTC itself infringed a copyright belonging to Flextronics.”
PTC made a further argument that because the language of the policy was silent as to whether it applied if the insured “did not itself commit the act triggering the exclusion” it must be ambiguous and, therefore, construed in favor of coverage under Massachusetts law. The Court agreed that the predicate statement that if the exclusion were ambiguous PTC would be entitled to coverage. However, the Court found that the exclusion was not ambiguous and did not just apply to allegations against the insured. Instead, the court found that the intellectual property exclusion extended to any personal injury “arising out of an actual or alleged infringement,” or “any personal injury alleged in a suit that also alleges such infringement.”
The Court finally found that this intellectual property exclusion was significantly broader than those that had been previously construed under Massachusetts law.
Copy of the Federal Court’s decision
A copy of the decision can be accessed by clicking on this link: PTC, Inc. v. Charter Oak Ins. Co.