Insurers Pay For Misuse Of Brand Name

The case involves Federal Insurance, a subsidiary of Warren, N.J.-based Chubb Group; two perfume manufacturers, Dana Perfume Corp. and Houbigant LTEE, LTD; and the perfume maker Houbigant.

Both Dana and Houbigant LTEE were insured under commercial general liability and commercial excess umbrella policies issued by Federal.

Houbigant is seeking $320 million and other costs for litigation from Federal on the policies. The perfume maker accused the two manufacturers of infringing upon its trademark by not living up to the terms of the manufacturing agreement.

In its decision (Houbigant Inc. vs. Federal Insurance Co., No. 03-1286?July 6, 2004) the 3rd U.S. Circuit Court of Appeals, based in Philadelphia, reversed a lower court decision that followed a line of federal and state decisions on trademark infringement. The lower court held that the law extended only to infringement of trademarked names of "works of art."

A bankruptcy court, overseeing the bankruptcy of the manufacturers Houbigant had licensed to make and sell certain products, agreed to a settlement in which Houbigant would be paid $50 million for patent infringement by the now bankrupt companies. Houbigant was allowed to pursue the balance of what it said it is owed through the manufacturer's insurers. The perfume maker is seeking a total award of $320 million plus litigation costs.

John Schryber, a partner at Patton Boggs, LLP, in Washington, D.C., who represented Houbigant and argued the case before the appeals court, said the ruling would have "nationwide impact," presumably requiring insurance companies to rewrite language in all their commercial liability policies and exposing liability insurers to lawsuits from existing policyholders who may have been sued for trademark infringement but denied coverage.

The Third Circuit noted that limiting trademark coverage to names of "works of art" would "create endless litigation over what constitutes literary or artistic work."

The challenge before the court is the reasoning of the "work of art" limitation. The argument is that the product allegedly infringed?a commercially marketed perfume?is a "work of art." Rather than reach the vexing "what is art?" issue, the court agreed that the limitation was contrived, Mr. Schryber said.

Mr. Schryber's comment was that, "The insurance industry is concerned that it is being held to the plain meaning of a contract which the insurers drafted. There is nothing in a commercial liability policy that suggests any 'work of art' limitation, and the Third Circuit, to its credit, was not willing to follow a line of poorly reasoned cases that effectively put courts in the business of deciding the inherently subjective question of 'what is art?'"

A spokesperson for Chubb said the company does not comment on ongoing litigation.