Speculation is Cheap: Hartford Has No Duty to Defend a Claim That Could Have Been

Will The Ninth Circuit See Things Differently?

On March 19, 2013, the United States District Court for the Northern District of California ruled that Hartford Casualty did not have a duty to defend Purplus in an action by Adobe for copyright and trademark infringement as there was no potential for an “advertising injury.”

The Purplus court granted a motion filed by defendant Hartford Casualty Insurance Company (Hartford) to dismiss the complaint filed by Purplus, Inc., a Hartford policyholder.  Purplus filed its complaint in July 2012 seeking a declaratory judgment and asserting claims for breach of contract and bad faith based on Hartford’s refusal to defend or indemnify Purplus under a business liability policy in connection with an October 2009 complaint filed by Adobe against Purplus and its owner, Paul Santos.

The Adobe complaint alleges that Adobe manufactures and distributes software, including Adobe Acrobat, Flash, Illustrator, and Photoshop, and owns exclusive intellectual property rights to such titles. The Adobe Complaint alleges that although Adobe did not authorize Purplus or its owner to sell or distribute Adobe software, Purplus used its website to sell and distribute computer software, including unauthorized copies of Adobe products. Adobe contends that such activity constituted copyright and trademark infringement, entitling Adobe to monetary damages, injunctive relief and attorney’s fees.  Adobe describes a “systematic, unauthorized copying, distribution and use of Adobe’s software products … through sales through various Internet sites … commonly known as software piracy … are willful and cause substantial damage to Adobe and to the software industry. Adobe also claimed that Purplus “through Internet sites, including … purplus.net, … made, offered for sale, sold, and distributed unauthorized copies of Adobe Software ….”

Purplus tendered the Adobe complaint to Hartford in January 2010 and Hartford responded that the complaint did not allege a covered claim and, as such, it had no obligation to defend or indemnify Purplus.  Insisting that the Adobe complaint alleged a potential for an “advertising injury,” Purplus sent Hartford examples of its advertising.  Hartford maintained its no-coverage position on the grounds that Adobe never claimed that Purplus copied Adobe’s advertising ideas or infringed any copyrighted advertisements. Thereafter, Purplus retained counsel in the Adobe action, paid for its own defense and eventually settled with Adobe for a “five-figure amount.”

The policy requires Hartford, inter alia, to pay those sums that Purplus becomes legally obligated to pay as damages because of “personal and advertising injury.” The focus of the coverage action was whether the allegations in the Adobe complaint revealed a potential liability for an “advertising injury,” defined in the policy as “an infringement, in the insured’s advertisement, of another’s copyrighted advertising idea or style, or non-trademarked slogan.”

The court first reviewed Adobe’s causes of action: copyright infringement of Adobe software and trademark infringement for Adobe’s trademarks. The court ruled that these legal claims do not trigger the duty to defend and noted that Purplus concedes they are not covered. Recognizing that factual allegations can trigger a duty to defend even in the absence of technical legal claims, the court examined whether Adobe’s use of the phrase “advertising, sale and/or offer for sale” constituted a potential “advertising injury” triggering the duty to defend. The court stated that Adobe’s use of the term “advertising” in its trademark cause of action does not “transform trademark infringement allegations into advertising injuries” and relied on Bank of the West v. Superior Court, 2 Cal. 4th 1254, 1275 (1992)  to reason that, even if an insured advertises the infringing product, where the claim is based on the sale or importation of the product and not the advertisement, “patent infringement does not ‘occur in the course of … advertising activities.’”  Reviewing the standards for duty to defend under California law, the Purplus court concluded that there were no legal causes of action or factual allegations in the Adobe complaint that revealed a potential liability for an advertising injury that would trigger a duty to defend.

The Purplus court next examined the insured’s extrinsic evidence argument, i.e., that Hartford must provide a defense because there were advertisements pertaining to Adobe that Purplus had posted on its website and provided to Hartford following the filing of the Adobe complaint and were thus known to Hartford.  The court rejected the insured’s position, quoting the language from Storek v. Fidelity & Guaranty Insurance Underwriters, Inc., 504 F. Supp. 2d 803 (N.D. Cal. 2007).

[T]here can be “no evidence to impose a duty to defend when the underlying lawsuit sets forth neither the facts nor the legal claims necessary to bring the lawsuit within the terms of the policy.”  Additionally, “the duty to defend is broad, but not so expansive that it requires an insurer to undertake a defense as to claims that are both factually and legally untethered from the third party’s complaint.”

The Storek court had ruled that the insurer was not obligated to defend its insured based upon mere ‘speculation’ as to claims a third party might have asserted.

Lastly, the court considered the intellectual property exclusion and concluded that the exclusion was a bar to coverage because the causes of action did not trigger the exclusion’s exception for copyright violation of another’s advertising idea or style or an infringement of a non-trademarked slogan.

At first blush, the court’s conclusion regarding extrinsic evidence may seem counterintuitive, particularly in light of the penchant for California courts to give an insured every benefit of the doubt when examining the duty to defend. However, this ruling is no more than an astute court’s proper interpretation of a liability policy. The Purplus court was not willing to look beyond the legal causes of action and allegations in the complaint to find the potential for coverage under the policy. The court was not willing to pull the word “advertising” from the complaint, couple it with examples of advertisements the insured provided to Hartford and speculate about a claim that could have been brought, but was not brought, by third-party Adobe against the insured. Rather, the court looked at the crux of the suit which was the sale of the insured’s products that infringed on Adobe’s trademark and concluded that a claim of trademark infringement does not occur in the course of advertising activities.

On April 18, 2013, Purplus filed a notice of appeal with the 9th Circuit Court of Appeals based on these issues:

Whether Hartford had a duty to defend because the allegations of the Adobe complaint satisfied California’s “potential for coverage” test for the duty to defend

  1. Whether the District Court erred in applying California law governing extrinsic evidence as a trigger of the duty to defend
  2. Whether the District Court erred in granting the motion to dismiss without leave to amend.
  3. Whether the District Court erred in granting the motion to dismiss without leave to amend.

 

Will Purplus persuade the 9th Circuit that the Hartford owed it a duty to defend in the Adobe action?  Stay tuned…

If you have questions, please contact Anne-Marie Regan, at 617 456 8057 or amregan@PrinceLobel.com.