Duty to Defend and Advertising Injury
The insured sued its liability insurer seeking declaratory relief and to recover reasonable costs of its defense in a third-party action that alleged patent infringement against the insured. This case is Hyundai Motor America v. National Union Fire Insurance Company of Pittsburgh, PA., 600 F.3d 1092 (C.A. 9, 2010).
After Hyundai (the insured) placed certain features on its website, a third party sued for patent infringement. The insured sought defense and indemnification from its insurer, National Union Fire. The insurer declined to defend and the insured defended itself. Later, Hyundai sued National Union seeking to recover its defense costs. Hyundai asserted that the insurer had a duty to defend because the claims against Hyundai constituted allegations of, among other things, misappropriation of advertising ideas and this met the policy definition of an advertising injury. However, the district court ruled against Hyundai and granted summary judgment to National Union. This appeal followed.
The U.S. Court of Appeals took note of the three required elements to establish a duty to defend for an advertising injury that the California Supreme Court had specified in prior cases. These three elements are: the insured must show that it was engaged in advertising during the policy period when the alleged advertising injury occurred; the allegations against the insured have to create a potential for liability under one of the covered offenses (as defined in the policy); and, a causal connection must exist between the alleged injury and the advertising.
The court said that the term “advertising” means widespread promotional activities usually directed to the public at large. In keeping with this definition, the insured argued that it placed the subject matter on its website to promote its products and so, this constituted advertising. The insurer disagreed and said the subject matter that caused the insured to be sued was meant as a high tech one-on-one solicitation, and advertising does not encompass solicitation. The court reviewed the allegations against Hyundai and noted that the claims against the insured include the phrases “marketing methods” and “marketing systems”, that is, widespread promotional activities directed toward the public. In other words, the court said, the complaint against the insured clearly alleged advertising activities.
As for the allegations creating a potential for liability, the court found that, depending on the context of the facts and circumstances, patent infringement can qualify as an advertising injury if the patent involves any process or invention that could reasonably be considered an advertising idea. In the underlying case against the insured, the complaint alleged violation of a method patent involving advertising ideas. The circuit court saw this as alleging the misappropriation of advertising ideas which, in turn, met the definition of advertising injury in the policy. The potential for liability on the part of the insured did exist.
The causal connection between the alleged injury and the advertising was seen by the court as simply finding whether the advertising activities actually caused the injury. In this instance, the use of the subject matter in the website of Hyundai did violate the patent and it was this use that caused the injuries. The court found that the alleged injury derived not merely from misappropriation of the idea, but from its use as the means to market goods for sale. In other words, the infringement occurred in the advertising itself. The allegations against the insured therefore satisfied the causation requirement for a potential advertising injury.
The judgment of the district court was reversed and remanded.
Editor's Note: This case is presented to showcase the three required elements to establish the duty to defend for an advertising injury, as promulgated by the California Supreme Court and accepted by the Ninth Circuit. It is not known if the policy in question here included the exclusion of patent infringement that is in the current CGL form; however, the court did note that (at least under California law) patent infringement allegations can qualify as an advertising injury under certain conditions, and as such, can require a defense under the terms of the general liability policy.