Intellectual property rights have become some of the most valuable assets a business can own in our interconnected world. Because of their value, the owners of utility patents, design patents, trade dress, trademarks, copyrights, and trade secrets zealously protect and defend these intangible assets.
Some insureds assume incorrectly liability policies provide coverage for all intellectual property suits
Many businesses wrongly believe that if someone sues them for infringing on intellectual property rights, they will have some coverage under their commercial general liability (“CGL”) policy’s advertising injury coverage. Over the years, however, insurance companies have tightened the definitions and exclusions to limit advertising injury coverage for claims arising out of patent, trademark, and copyright infringement lawsuits.
Businesses that only have CGL policies as their liability insurance can have a tough road if sued for allegedly infringing a patent, trademark, or copyright. If their CGL carrier does not defend under a reservation of rights because some non-infringement count in the complaint might have coverage, the insured will have to pay their legal defense costs that can easily reach six-figures and possibly pay an onerous settlement or judgment.
Not surprisingly companies that find themselves with this coverage gap often claim that the relatively standard intellectual property exclusion in their policies somehow does not apply to their infringement claim. In some cases, insureds have successfully argued for defense costs, if not indemnity coverage, in suits against them for infringing another business’ intellectual property rights.
Most times, however, insureds who seek to extend their CGL policy to provide intellectual property coverage wind up as three-time losers. First, they lose the legal cost in defending the original intellectual property suit for which their insurance company has denied coverage. Then they may wind up paying a settlement or judgment for their infringement. Finally, if they sue their insurer for coverage, they may have to pay the legal fees for an unsuccessful coverage suit attempting to extend their CGL policies coverage to an intellectual property claim.
Sterngold Dental LLC (“Sterngold”), an Attleboro dental appliance manufacturer, founded in 1897, recently learned this coverage lesson the hard way in a Federal Appeals Court decision, Sterngold Dental LLC v. HDI Global Insurance.
Sterngold’s CGL Policy with HDI Global Insurance.
For the period January 1, 2016, to December 31, 2016, Sterngold purchased its commercial liability insurance from HDI Global Insurance (“HDI”), an Illinois insurer writing surplus line insurance in Massachusetts. 
The HDI policy covered Sterngold for legal liability for bodily injury, property damage, product liability/completed operations, and personal injury and advertising injury. Sterngold paid HDI $56,498.00 for a policy with a $1,000,000.00 limit of liability on each coverage with general aggregate limits of $1,000,000.00 for products liability/completed operations and for the other coverages including personal injury and advertising injury coverage.
The policy defined personal and advertising injury that HDI would defend and indemnify Sterngold to include:
‘Personal and advertising injury’ means injury…arising out of one or more of the following offenses:
* * *
- The use of another’s advertising idea in your ‘advertisement;’ or
- Infringing upon another’s copyright, trade dress, or slogan in your ‘advertisement.'”
Under the policy, an “Advertisement” was defined to “mean[] 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.”
The policy further expanded the term “Advertisement” to include for purposes of this definition:
- Notices that are published include material placed on the Internet or on similar electronic means of communication; and
- Regarding web sites, only that part of a web site that is about your goods, products, or services for the purposes of attracting customers or supporters is considered an advertisement.
A competitor sues Sterngold for patent and trademark infringement
Sterngold competed with a Florida company, Intra-Lock International Inc. (“Intra-Lock”) over a wide range of dental product including specialized dental implants.
One successful product Intra-Lock sold was a coating for dental implant threads that encouraged the dental implant to bond to bone tissue following implant installation. This process occurs in other protheses, such as those used with amputees. Medically, this process of bone-bonding is called “osseointegration.”
Based on the type of process involved in Intra-Lock’s coating for dental implants that assisted osseointegration, Intra-Lock applied to the United States Patent and Trademark Office to register the term OSSEAN as a trademark for its osseointegrative coatings on dental implants. In June 2008, Intra-Lock’s OSSEAN trademark became a federally registered trademark.
In early 2016, Sterngold began identifying its competing osseointegrative coatings for dental implants with the unregistered trademarks: OSSEO™ and OSSEOs™.
Intra-Lock wasted no time in contesting Sterngold’s competing trademark. In May 2016, Intra-Lock International, Inc. (“Intra-Lock”) commenced a three-count civil action against Sterngold in the United States District Court for the Southern District of Florida. The first two counts alleged infringement of two separate patents held by Intra-Lock.
In its trademark infringement count, Intra-Lock alleged it had “acquired value, name and brand recognition, and goodwill in the OSSEAN [trade]mark as a result of continual and substantial advertising, promotion, and intestate commercial activity related to its OSSEAN products.” It further alleged that Sterngold had willfully intended to trade on Intra-Lock’s reputation and cause dilution of its OSSEAN® mark by Sterngold’s use of their OSSEO™ and OSSEOs™ marks. (Note: The ® symbol means a federally registered trademark. The ™ symbol is only a public notice the owner considers a mark proprietary. However, without registration, the owner may only have common law rights arising out of the mark’s use in commerce).
Intra-Lock sought under the federal statutes allowing a registered trademark owner to obtain against a willful infringer, such as Intra-Lock claimed Sterngold was:
- A preliminary and permanent injunctive relief enjoining Sterngold from further infringement;
- Damages consisting of Sterngold’s profits from the infringing trademarked products;
- Damages sustained by Intra-Lock;
- The trebling of all damages; and
- A statutory award to Intra-Lock of its legal costs in bringing a trademark infringement suit against Sterngold.
HDI denies coverage to Sterngold under its policy’s intellectual property exclusion
Once Sterngold received a federal summons waiver on Intra-Lock’s lawsuit, it retained counsel, accepted service of the summons, filed an answer and counterclaim, and, in early August 2016, tendered Intra-Lock’s suit to HDI requesting defense and indemnity under the definition of “Advertising” and the provisions of the “personal and advertising injury” insuring agreement.
Sterngold had no other coverage, beyond what coverage HDI might provide, that would respond to Intra-Lock’s lawsuit.
In early September, HDI issued Sterngold a denial letter based on its policy having an intellectual property exclusion that stated, “This insurance does not apply to:
“Personal and advertising injury” arising out of the infringement of copyright, patent, trademark, trade secret or other intellectual property rights. Under this exclusion, such other intellectual property rights do not include the use of another’s advertising idea in your “advertisement.”
The exclusion, however, had an exception that did allow for coverage where certain types of infringement occurred in an insured’s “advertisement.” This exception to the above exclusion stated:
However, this exclusion does not apply to infringement, in your “advertisement,” of copyright, trade dress, or slogan.”
In October 2016, Sterngold again requested the HDI to defend alleging that there was a lack of basis for HDI to deny coverage for the third count alleging trademark infringement. HDI, however, again refused to provide coverage on October 19, 2016.
In December of 2016, Sterngold and Intra‑Lock mediated the claim in the United States District Court and in January 2017 after Sterngold had settled the suit, Sterngold and Intra-Lock stipulated the dismissal of Intra-Lock’s lawsuit with prejudice.
In February 2017, Sterngold again demanded that HDI pay the damages it had paid in settling the action and its legal fees based upon its claim of coverage for the trademark count. HDI again refused based upon the intellectual property exclusion in its policy.
Sterngold’s suit against HDI for coverage based on the exception to the policy’s intellectual property exclusion
On September 13, 2017, Sterngold filed a six-count complaint in the United States District Court against HDI claiming:
- A breach of the insurance contract between Sterngold and HDI;
- A breach of the covenant of good faith and fair dealing Massachusetts law implies in every agreement;
- HDI acting in bad faith in dealing with Sterngold;
- Professional negligence by HDI by not adequately assessing Sterngold’s coverage claims;
- HDI violated M.G.L. c. 93A by its failure to defend Sterngold and settle the Intra-Lock suit according to the Policy; and
- Asking the District Court to enter a declaratory judgment declaring that HDI had a duty to defend Sterngold and provide coverage for Intra-Lock’s suit under the Policy.
In its District Court suit, Sterngold’s focused on HDI having breached its obligations under the policy because Count III of the Intra-Lock Action, for trademark infringement, triggered coverage and whether the facts alleged therein asserted a covered or potentially covered claim.
In the District Court, HDI moved to dismiss Sterngold’s coverage suit based upon its assertion that the unambiguous intellectual property exclusion barred coverage for Count III of Inter-Lock’s complaint against Sterngold.
The District Court Judge, after a hearing, ruled in favor of HDI on its motion to dismiss and dismissed Sterngold’s complaint. Sterngold filed an appeal to the First Circuit Court of Appeals alleging legal error in the District Court’s decision.
The Court of Appeals reviews the dismissal de novo but to no avail for Sterngold
On appeal, the First Circuit Court of Appeals characterized the issue arising out of Sterngold’s appeal as a “sophisticated insurance coverage question.”
The Appellate Court first addressed the issue of HDI’s duty to defend. As the court noted, if an insurer has no duty to defend then logically, it has no obligation to indemnify since, as a matter of law, the duty to defend is substantially broader than the duty to indemnify. The judges noted that under Massachusetts law which applied to the HDI policy, an insurer in evaluating its duty to defend had to first compare the allegations of the complaint against the provisions of the insurance policy. Also, the insured must be given the benefit of a favorable interpretation if there are two reasonable but conflicting interpretations of the policy as applicable to the complaint.
The court noted that in Massachusetts, “the bar is not high” for finding a duty to defend. However, first, the insured has the burden to show that the policy’s insuring agreements apply to at least one court or cause of action in the complaint. If any count of the complaint in question falls within the coverage grant of the policy, the insurer must defend both the covered and uncovered counts of the complaint unless the insurer can show that an exclusion in the policy bars coverage.
Sterngold argued on appeal that Count III of Intra-Lock’s complaint asserted an advertising injury within the scope of coverage afforded by the policy, and, therefore HDI had a duty to defend Intra-Lock’s suit.
The Court assumes an advertising injury but any coverage barred by the intellectual property exclusion
Sterngold focused on the specific provision in the exclusion regarding the coverage grant for “another’s advertising idea” or “infringing upon other’s copyright, trade dress or slogan in [an] ‘advertisement.'” Sterngold argued Sterngold had used Intra‑Loc’s advertising idea by the inclusion of the OSSEO and OSSEOs trademarks in Sterngold’s online advertising. The court remarked that the term “advertising idea” as used in the policy was undefined but did have limits based upon Massachusetts law. The federal judges quoted from this case’s rule that “if the insured took an idea for soliciting business or an idea about advertising, then the claim” constitutes an advertising injury for the use of another’s advertising idea.” See Agency Checklists’ article of September 18, 2018, “Insurers Have Duty To Defend Suit Claiming Misappropriation of ‘Advertising Idea.’”
While questioning whether Sterngold’s use of inclusion of the OSSEO and OSSEOs trademarks in Sterngold’s online advertising could constitute “use of another’s advertising idea in Sterngold’s “Advertisement, the Court decided it did not have to resolve that issue. Instead, they assumed for purposes of their decision that the third count in Intra-Loc’s complaint advanced the claim for an advertising injury.
The Court then focused on the policy’s intellectual property exclusion, which stated that there would be no coverage for “‘Personal and advertising injury’ arising out of the infringement of …trademark…or other intellectual property rights.”
The judges applied the generally accepted meaning the term “arising out of.” in Massachusetts law, this term means “originating from,” “growing out of,” “flowing from,” “incident to,” or having a connection with.” Using those synonymous terms, the court had no problem finding that Intra-Lock’s trademark infringement claim found in Count III of its complaint was an advertising injury claim “arising out of the infringement of…trademark.”
Sterngold’s argument that the claim arose from its use of Intra-Lock’s advertising idea received little credence from the Court. They pointed out that Intra-Lock’s complaint labeled its claim against Sterngold as arising out of the “Infringement of Intra-Lock’s OSSEAN Trademark.” The conduct described as Sterngold’s violation was that it “willfully infringed upon and diluted [Intra-Lock’s] trademark OSSEAN.” Although the Court noted some of the concern expressed by Intra-Lock involved the content of Sterngold’s online advertising, Inta-Lock complained about this online advertising only as to how this advertising impacted the uniqueness and strength of Intra-Lock’s OSSEAN mark.
Based on this analysis, the Court ruled:
Given the gravamen of Intra-Lock’s claim, the [intellectual property] exclusion fits like a glove. Consequently, the conclusion is irresistible that HDI owed no duty either to defend or indemnify Sterngold with respect to Intra-Lock’s claim.”
Sterngold’s two additional arguments for coverage rejected by Court
Sterngold made two additional arguments that the Court addressed. Sterngold focused on the reference in the first sentence of the intellectual property exclusion to “other intellectual property rights” and the second sentence of the exclusion which provided:
Under this exclusion, such other intellectual property rights do not include the use of another’s advertising idea in your “advertisement.”
Sterngold argued that since “other intellectual property rights” did not include the use of another’s advertising idea in your ‘advertisement’ and since Intra-Lock’s advertising injury arose from Sterngold’s use of Intra-Lock’s advertising idea, the policy should provide coverage.
The Court, however, rejected this interpretation noting that the intellectual property exclusion had two parts. The first sentence listed a series of intellectual property-related claims, including trademark infringement. A comma separated each of the identified excluded claims, and the catch-all phrase “or other intellectual property rights,” upon which Sterngold relied, had the conjunction “or” differentiate it from the other excluded claims in the listing. To the court, the repeating of the phrase in the second sentence of the exclusion not in connection with the listed intellectual property-related claims in the phrase “use of another’s advertising idea” made the language clear that the listed excluded intellectual property items were not included in the exception to the exclusion.
As the court put it “even if a trademark infringement claim involves an injury stemming from the use of an advertising idea, the catch-all phrase “other intellectual property rights” will not encompass the claim.” To the court, any other reading made meaningless the plain language contained in the first sentence of the intellectual property exclusion.
Court rejects Sterngold’s final claim that its infringing trademarks were actually covered “slogans”
Sterngold’s final attempt to obtain coverage rested on its assertion that the use of the OSSEO and the OSSEOs trademarks in Internet advertising because they were actually “slogans” and thus within the exception to the intellectual property exclusion. This exception provided:
However, this exclusion does not apply to infringement, in your “advertisement,” of copyright, trade dress, or slogan.”
The court rejected this final argument by listing the allegations of the Intra‑Loc complaint and pointed out that Intra‑Loc never pressed anything resembling a slogan infringement claim. The Court pointed out that its complaint never used the word “slogan.” Instead, the Court noted that nowhere in the complaint was there any characterization of the trademark “OSSEAN” as something other than a trademark.
Finally, the judges quoted the definition of a “slogan” as “a phrase expressing the names and nature of an enterprise … or a catchphrase used in advertising or promotion.” To the court, Sterngold’s argument failed because there was nothing in the case record that would bring the OSSEAN trademark within the four corners of that definition.
The Court ruled against Sterngold’s last argument finding that the intellectual property exclusion’s carve-out did not apply “because Intra-Lock plainly did not assert a slogan infringement claim.”
The Court then affirmed the judgment of the District Court dismissing Sterngold’s coverage suit against HDI.
