Worried About Ad Injury Claims? Don't Believe The Hype

Worried About Ad Injury Claims? Don't Believe The Hype

If you are like many claims examiners, you have probably resigned yourself to the belief that advertising injury claims, especially those involving intellectual property issues, are always going to be expensive, convoluted and time-consuming. While this may be the case from time to time, the majority of these claims usually can be handled economically, simply and efficiently. This, in turn, promotes early resolution and, at the same time decreases liability for the plaintiff’s attorney’s fees, which are typically recoverable in intellectual property cases.

Advertising injury basically refers to a group of offenses that are covered under a liability policy, if committed during the policy period in the course of advertising the insured’s goods, products or services. There are only a few, relatively limited, exclusions. The offenses fall into two broad categories:

• dignitary offenses, such as libel, slander, disparagement and invasion of privacy through oral or written publication of material

• intellectual property offenses, such as infringement of copyright, title or slogan, or misappropriation of advertising ideas or style of doing business.

This latter group of offenses is the least common form of advertising injury and oftentimes the most complex.

Reserving your rights

The first step in successfully handling any advertising injury claim is deciding on an appropriate reservation of rights. In many states, certain reservations will entitle the insured to select independent counsel at your expense while other will not, thus enabling you to select defense counsel of your choice. If you are in one of these states, it is helpful to select your reservations carefully, depending on the facts of your case.

The most common, and usually the most helpful, reservation in an advertising injury claim is simply the definition of advertising injury in the policy. The definition lists the offenses that are covered, meaning that any other offenses that may be alleged in the complaint are not covered. A complaint, for example, might allege copyright infringement and unfair competition. The former is a covered offense and the latter is not. By reserving the definition of advertising injury, you protect yourself from an adverse verdict on the unfair competition claim. This reservation, moreover, typically does not entitle the insured to independent counsel at the insurer’s expense.

Another potential reservation is the portion of the insuring agreement providing that the offense must be committed in the course of advertising the insured’s goods, products or services. This is sometimes called the "advertising nexus." Without an advertising nexus, there is no coverage for copyright infringement or any of the other advertising injury offenses. If the plaintiff’ injury directly arises out of the insured’s advertising, there is no need to take this reservation.

Most of the time, however, the issue is not so clear-cut. The alleged injury could arise partly out of the insured’s advertising activities and partly out of unrelated conduct. There could be a legal question as to whether the insured’s alleged conduct amounts to advertising at all. In these cases, it is best to take this reservation. It is doubtful that this reservation would entitle the insured to independent counsel at your expense.

You may also have a policy period defense. The policy covers advertising injury that occurs during the policy period. This means that the offense must be committed during the period when your policy is in force. If all the conduct alleged in the complaint took place while you had a policy in force, then this reservation will not be helpful. If, on the other hand, there is a question as to when the offenses were committed, or if there were offenses both during and outside your policy period, this reservation should be taken. Again, this reservation most likely will not trigger the insured’s right to independent counsel at your expense.

You may also have a policy period defense. The policy covers advertising injury that occurs during the policy period. This mean that the offense must be committed during the period when your policy is in force. If all the conduct alleged in the complaint took place while you had a policy in force, then this reservation will not be helpful. If, on the other hand, there is a question as to when the offenses were committed, or if there were offenses both and during and outside your policy period, this reservation should be taken. Again, this reservation most likely will not trigger the insured’s right to independent counsel at your expense.

The reservations that need to be considered most carefully are the various advertising injury exclusions as well as non-coverage for "intentional acts." It is these reservations that are most likely to entitle the insured to independent counsel at your expense.

As a practical matter, the various advertising injury exclusions may not be particularly helpful and should only be reserved if they are directly on point. For example, the exclusion for advertising injury arising out of breach of contract could apply to a claim for copyright infringement arising out of the breach of a licensing agreement. If the application of a particular exclusion to your case seems questionable, you might want to consider the benefits of waiving it and maintaining control of the defense versus asserting it and driving up the costs of handling the claim.

Contrary to popular belief, an intentional act reservation is rarely helpful in an intellectual property case. Intent to harm is not an element of any intellectual property tort. Your insured can be liable for copyright infringement, even if he or she did not even intend to copy the plaintiff’s work. It is also a rare case where the insured actually intends to harm the plaintiff in an intellectual property matter. Usually, the insured is just trying to make a profit and has no intent to harm the plaintiff. Although the complaints in these cases are typically infused with inflammatory allegations about intentional conduct, treble and punitive damages and the like, these allegations seldom pan out.

By limiting your reservation of rights to coverage issues that actually apply to your claim, you simplify the claim handling process and also make it possible to maintain control of the defense in cases where it is appropriate to do so.

Insured’s recorded statement

After issuing the reservation of rights, the next major step in successfully handling an advertising injury claim is to take the insured’s recorded statement. This is your opportunity to question the insured about issues that will be important to you in evaluating the claim. Although each claim is, of course, case -specific, there are a number of general topics that should be covered with the insured in almost every intellectual property case:

• the nature, history and background of the insured’s business

• the insured’s business hierarchy-i.e., principals, employees, independent contractors or anyone else with knowledge of the infringing conduct

when the infringements stated and, if ever, stopped

• the approximate number of infringements

• the insured’s profits from the alleged infringing activities, and related overhead and expenses

• what, if any, business records the insured has relating to the conduct alleged in the complaint.

• whether any criminal charges or actions are pending against the insured

• whether any injunctions or impound orders are in place against in insured.

• any prior dealings between the plaintiff and in injured, including licenses, transfers, assignments, contracts, etc.

• any cease-and-desist or demand letters from the plaintiff, and the insured’s response, if any.

• whether the insured ever sought or received advice from any lawyer on the issues alleged in the complaint. If possible, obtain a copy of his or her report, research, etc.

• the insured’s explanation for his or her own conduct and the insured’s response to all material allegations in the complaint.

• the nature and extent of the insured’s advertising and the content of any advertisements converting the goods, products of services at issue in the case.

If you are able to cover all of these issuers with the insured, you will have many of the facts necessary to evaluate liability, damages and coverage. You will also have better sense for what needs to be further covered by defense counsel, either in subsequent meetings with the insured or in discovery directed to the plaintiff.

Insured’s documents

You should also begin the process of obtaining documents from the insured at an early stage. The reason for this is that intellectual property cases, as a general rule, are very document-intensive. In many cases, these claims are resolved based solely on business records, without any formal written discovery or depositions.

Consider sending a detailed letter to the insured, or to his or her counsel, requesting copies of any and all correspondence between the plaintiff and the insured, contacts, invoices, purchase orders and any other potentially relevant documents. Also, try to get a sense for how the insured keeps his or her business records. Business records include accounting records, invoices, checks, credit slips and purchase orders.

As a general rule, the more records the insured has, the better. The insured’s records may show that he or she only sold a few infringing items, which may lead to an early resolution. If the insured has no records or only unreliable records, the plaintiff will have the upper hand in proving damages. If the records are manageable, ask the insured to make copies, or else arrange to have a service copy them.

Another important ser of documents to obtain for your file is the insured’s advertising file. Since the offenses listed in the policy are generally only covered if they occur in the course of advertising the insured’s goods, products or services, it is important to establish the "nexus" between the alleged offices and the insured’s advertising. Find out what the insured has in the way of advertising materials. Ask for copies of actual advertisements, if they are available.

Finally, it might be helpful to schedule at least an informal inspection of the insured’s operation, especially if the insured is a small business or a sole proprietorship. This gives you an opportunity to meet the insured personally and to assess his or her credibility. This also allows you to see the insured’s business operation and records management program for yourself.

Discovery & experts

Litigation of intellectual property disputes is often venued in federal court. This can be very beneficial from a claims examiner’s standpoint. Most federal courts require that counsel meet in person shortly after the answer is filed for the purpose of exchanging documents, witnesses, insurance information and preliminary damage calculations, among other items. Plaintiff’s counsel will frequently "preview" his or her case at the meeting, and will provide copies of many important documents concerning both liability and damages. If the case you are handling is venued in federal court, make sure to request copies of the documents and other disclosures exchanged by both attorneys at the meeting, as well as a copy of the joint report of this meeting, which the attorneys submit to the court.

Discovery in intellectual property litigation tends to be very case-specific. There are no "form interrogatories" or standard questions that apply to all such cases. I have found that narrow and tailored discovery can be very effective in these types of cases, as opposed to broad, shotgun-type discovery, since you get the answers to the most important questions more quickly and efficiently. In most cases, you can obtain the information you will need to evaluate a claim based solely on the initial exchange of documents between counsel and some quick and focused written discovery.

Sometimes the plaintiffs counsel will insist on deposing your insured prior to engaging in settlement negotiations. In any event, discovery in intellectual property cases usually should not be any more expensive or time consuming than discovery in other types of tort cases. If discovery in your case seems to be escalating , by all means call the defense attorney and ask him or her to explained to the specific purposed for all the contemplated discovery, Perhaps everyone can agree on what discovery is really necessary without jeopardizing the insured’s interests in the litigation.

It is not unusual in an intellectual property case for the defense attorney to require the services of multiple consultants and/or experts. Sometimes a consultant or expert will be needed in connection with substantive issue in the case, such as whether a particular trademark has developed "secondary meaning" or whether there is a "substantial similarity" between two works in a copyright case. Defense counsel frequently will need to hire both an accountant and an economist to evaluate the plaintiff’s claim for lost profits or loss of good will. Sometimes an industry expert or consultant is also helpful.

Evaluation

Once you have gathered all the pertinent information and documents from the sources discussed above, you can complete your evaluation. You will need to first cover the following factual issues:

• the number of copyrights and/or trademarks at issue

• whether any or all of the copyrights and/or trademarks are registered

• number of infringements by the insured

• quality and quantity of plaintiff’s evidence with regard to lost profits or other damages, and with regard to the insured’s conduct

• quality and quantity of the insured’s evidence, including primarily business records

• whether the plaintiff is seeking actual or statutory damages

• strength of the plaintiff’s claim or mark

• strength if any available defenses such as "fair use" of the plaintiff’s work or mark, the statute of limitations, "unclean hands" and good faith.

• length of time the case has been pending, and the attorney’s fees and expenses incurred.

In the event you conclude that your insured faces some exposure to the plaintiff, the most important factor in evaluating an intellectual property claim is determining where the insured’s conduct falls on a scale from purely innocent to purely willful.

Where the insured falls on this scale affects the amount of actual or statutory damages that may be awarded against him or her, not to mention attorney’s fees, costs of suit and any other types of damages. The factors to be considered regarding the insured are as follows:

• was the insured’s conduct illegal and did he know it was illegal

• did he have prior knowledge of the plaintiff’s work, mark or style of doing business

• is the insured engaged in a pattern of infringements

• did he intend to preoccupy the plaintiff’s work, mark or style of doing business

• did the insured intend to injure the plaintiff

• did he receive a cease-and-desist letter

• did the insured, in fact, cease and desist from any further infringements after receiving a cease-and desist letter

• did the insured, in fact, cease and desist from any further infringements after receiving a cease-and-desist letter from the plaintiff

• did he respond substantively to the cease and desist letter.

• did the insured, in fact, cease and desist from any further infringements after receiving a cease and desist letter

• is the insured’ own work copyrighted or trademarked

• has the plaintiff made any prior claims against the insured, or has the insured been involved in prior intellectual property litigation

• has the insured, in bad faith, failed or refused to negotiate

• has he violated any injunctions

• are any defenses available to the insured.

• has the insured engaged in bad faith litigation tactics

• has he sought the advice of counsel prior to any alleged infringements and, if so, has he followed or disregarded such advice?

The more information you can uncover on each of these topics, the more accurately you will be able to evaluate the plaintiff’s claim.

Declaratory relief

There will be some cases where you have a particularly strong coverage defense that affects you evaluation of the claim. In such cases, it may be helpful to retain coverage counsel to provide an opinion and possibly to prosecute a declaratory relief action for purposes of resolving the coverage issue.

Declaratory relief is usually available and is most helpful when the coverage issue is extrinsic to the issues raised in the underlying action, such as:

• whether any offenses took place during your policy period.

• whether the conduct alleged against the insured amount to "advertising," or

• whether the offenses alleged against the insured were committed in the course of advertising his or her goods, products or services.

Declaratory relief, however, normally is not available when the coverage issue is directly related to the issues in the underlying action, such as whether the insured committed an intentional act.

Resolution

Most intellectual property offenses, such as copyright, trademark and trade dress infringement, essentially involve strict liability on the part of the defendant. As discussed above, intent to infringe is not an element of these torts, merely committing an infringement is enough to establish liability, Complete defenses to an infringement claim are available, but rare. It follows that the majority of these claims will be resolved at one point or another.

I have previously mentioned the benefits of resolving these cases, if appropriate, at the earliest opportunity. What makes sense most of the time is to obtain answers to the basic questions through focused, written discovery and possibly limited depositions, and then to make a reasonable settlement offer based on your evaluation. Most of the time, a settlement can be negotiated informally between the attorneys representing the plaintiff and the insured.

Alternative Dispute Resolution (ADR) can be an effective means of resolving an intellectual property case. In cases venued in federal court, the parties are required to conduct some type of settlement conference, be it before the magistrate assigned to the case, or a random federal judge or a private judge. If you use a private judge, make sure he or she has a fair amount of experience in handling intellectual property cases otherwise you will just be wasting your time and money.

There are several unique issues that often arise in connection with intellectual property settlement agreements. There will almost always be some provision for injunctive relief. For example, the insured will promise to stop manufacturing a dress utilizing a specific design. The injunctive relief portion of the settlement may even be embodied in a separate document, often called a consent decree. This is a pleading that is actually filed with the court and immediately enforceable in the event of a subsequent infringement.

The settlement agreement may contain detailed recitals and warranties. This is especially common when a case is settled in its early stages. The insured may be asked, for example, to warrant that he or she only sold a particular number of infringing copies of the plaintiff’s work and that, if the number turns out to be higher, the agreement is voidable.

Plaintiff’s counsel will almost always insist on an attorney’s fee clause and, in addition, may try to insert a liquidated damage clause. Liquidated damage clauses should be challenged, since they expose the insured to crippling damages and other relief in the event of even the most minor violation of the injunction.

Advertising injury claims do not have to be expensive, convoluted or time-consuming. Once you know the factual, legal and procedural issues that are important from your standpoint as a claims examiner you can successfully investigate, handle, evaluate and-if appropriate-resolve these claims just as you would any other type of claim.

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Curtis L. Metzgar is an insurance defense attorney with the law firm of Crandall, Wade & Lowe, based in Rancho Cucamonga, Calif.