United States: Hunton Insurance Recovery Blog: IP Lawsuit Triggers Insurers' Duty To Defend

A federal court in Pennsylvania has held that Liberty Mutual must defend its insured, Hershey Creamery Company, in an intellectual property infringement lawsuit because the suit raises claims that potentially implicate coverage under the policies' personal and advertising injury coverages. The court further found that the alleged wrongful conduct was not subject to the policies' IP infringement exclusion.

Hershey Creamery Company v. Liberty Mutual Fire Insurance Co. arose from a suit against Hershey Creamery by a competitor in Delaware, concerning a line of frozen milkshake products that the competitor alleged was confusingly similar to the competitor's products. The underlying suit alleged that Hershey Creamery "unlawfully copied [the competitor's] self-serve milkshake machine and related marketing designs, display, and verbiage." Hershey Creamery provided notice of the claim to Liberty Mutual, and the insurer agreed to defend Hershey Creamery, subject to a reservation of rights. But after dismissal of some of the claims against Hershey Creamery, Hershey Creamery's insurers withdrew their defense because they believed the remaining trademark and copyright claims were barred by the policies' IP infringement exclusion. Hershey Creamery filed a declaratory judgment action alleging that its general liability and umbrella insurers breached their duties to defend and indemnify Hershey Creamery. The parties moved for summary judgment.

According to Hershey Creamery, the policies provide personal and advertising injury coverage subject to various exclusions, including one that bars coverage for personal and advertising injury "arising out of infringement of copyright, patent, trademark, trade secret or other intellectual property rights," except for "the use of another's advertising idea in [the policyholder's] advertisement." The exclusion also does not apply to infringement in the policyholder's "advertisement" of copyright, trade dress, or slogan.

The insurers argued that the exception to the exclusion applied only if Hershey Creamery allegedly infringed in its advertising by advertising some idea, trade dress, or slogan, but because none of the allegations in the complaint against Hershey Creamery implicated infringement in an "advertisement," the insurers argued there could not be coverage. Hershey Creamery argued that the allegations were broad enough to trigger coverage under the exception for Hershey Creamery's alleged use of advertising ideas and slogans in its advertisements.

The district court agreed with Hershey Creamery. The court first recognized that the duty to defend was broad and required only that the factual allegations present an injury that is potentially within the scope of the policy's coverage. Applying these principles, the court found that the competitor's allegations that Hershey Creamery copied the display kiosk (including its advertising slogans), the milkshake containers (including use of the competitor's slogans), and the signage atop the merchandizing sections (displaying its slogans) were sufficient to create at least a potential for coverage under the policies. Furthermore, given that the insurers were relying on an exclusion to deny coverage, it was the insurers' burden to demonstrate that the IP infringement exclusion, in fact, barred any possibility of coverage.

The court found that a potential for coverage existed on the face of the policy after concluding that the alleged trademark infringement "might or might not fall within the policy's coverage." Because the complaint makes clear that the competitor believed Hershey Creamery infringed upon its advertising ideas and slogans—and specifically did so in advertising for the competing milkshakes—there is a sufficient nexus between advertising and injury to trigger the duty to defend.

The Hershey Creamery decision is one of several recent decisions where insurers wrongfully denied coverage based upon a failure to recognize a potentially applicable exception to an exclusion. And, where the claim involves an insurer's duty to defend, a policyholder need only establish potential coverage for a single claim in a multi-count complaint to obligate the insurer to defend the entire lawsuit. Thus, when faced with a denial of coverage based on the application of a policy exclusion, whether IP-related or otherwise, policyholders should carefully consider whether there is a possibility that one of the claims against it might implicate coverage under the policy. Conversely, insurers should be mindful of their broad duty to defend and their burden of proving no possibility of coverage where they choose to decline a defense. As was the case in Hershey Creamery, this is especially important in disputes involving IP claims. Because the insurer's duty to defend is governed by the actual allegations and not mere labels or characterizations of the suit as a whole, claims that are clearly IP-related may nevertheless trigger a defense where they have a sufficient nexus to advertising ideas and slogans.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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