Insurer Has Duty to Defend Patent Infringement Claim When Patent Concerned Marketing Methods

PUBLICATIONS

James C. Chow

Insurance

INSURANCE NOTES

07.27.2010

Courts have held that claims for patent infringement do not allege damages covered by general liability policies because the damages for infringing a patent on a product are not caused by “advertising activities.” Hyundai Motor America v. National Union Fire Insurance Company, 600 F.3d 1092 (9th Cir. 2010), presents a unique case involving patents in the advertising itself.

In that case, Hyundai placed certain features on its website. Orion, a patent-holding company, sued Hyundai for patent infringement. Hyundai sought a defense from National Union. Hyundai asserted that Orion’s suit alleged an “advertising injury” as that term is defined in National Union’s policy. National Union disagreed and declined to defend Hyundai.

In the ensuing coverage suit, the Ninth Circuit of Appeals, applying California law, identified the three elements required to establish a duty to defend for “advertising injury”: (1) Hyundai was alleged to have engaged in “advertising” during the policy period when the “advertising injury” occurred; (2) Orion’s allegations created a potential for liability for one of the “advertising injury” offenses (i.e., misappropriation of advertising ideas); and (3) a causal connection existed between the alleged injury and the “advertising.”

With respect to the first element, the Ninth Circuit observed that Orion alleged that Hyundai’s website features constituted “making and using supply chain methods, sales methods, sales systems, marketing methods, marketing systems and inventory systems.” Noting that “advertising” means widespread promotional activities usually directed to the public at large, the Ninth Circuit concluded that Hyundai’s alleged use of “marketing methods” and “marketing systems” fit squarely within the definition of “advertising” activities within the meaning of the policy.

As to the second element, the Ninth Circuit determined that Orion alleged a “misappropriation of advertising ideas,” an offense under the policy’s “advertising injury” definition. The complaint even referred to a “violation of a method patent involving advertising ideas.” The Ninth Circuit observed that Orion alleged it had patented a method of displaying information to the public at large for the purpose of facilitating sales and that Hyundai violated that method patent by using the patented techniques as part of its own “marketing method” or “marketing system.”

Regarding the causal link element, the Ninth Circuit noted that Hyundai’s use of certain features in its website (i.e., the advertisement) itself allegedly infringed the patent and concluded that Hyundai established the requisite causal connection between the “advertising” and the injury.

Consequently, the Ninth Circuit held that Orion’s patent infringement claim alleged “advertising injury” arising out of a “misappropriation of advertising ideas” under the policy, giving rise to National Union’s duty to defend Hyundai.