Patent Infringement as an Advertising Injury Under CGL Coverage

In the Press · April 9, 2010

Consider the Risks: An Insurance Law Blog

On April 5, 2010, the United States Court of Appeals for the Ninth Circuit, in what is likely to be a significant decision, reversed and remanded the district court’s ruling, finding that, under California law, National Union is liable for defense costs in connection with an underlying patent infringement suit against Hyundai Motors regarding its use of a “build your own” car feature on its Web site in Hyundai Motor v. National Union Fire Ins. After National Union denied coverage, Hyundai defended itself and apparently was found liable for the infringement. Notably, Hyundai did not seek recovery for the underlying judgment.

The case is significant because it represents the first time that a court applying California law has found coverage for a patent infringement under the advertising injury coverage under a CGL policy. Specifically, the court found that the complaint by the software patent holder which alleged that “methods practiced on [Hyundai’s] various websites … making and using supply chain methods, sales methods, sales systems, marketing methods, marketing systems and inventory systems covered by one or more [of plaintiff’s patents]” injured the patent holder satisfied the three required elements of advertising injury coverage under California law:

(1) that Hyundai was engaged in “advertising” during the policy period when the alleged “advertising injury” occurred; (2) that the underlying allegations “created a potential for liability under one of the covered offenses (i.e., misappropriation of advertising ideas)”; and (3) that a causal connection existed between the alleged injury and the “advertising.”

Id. citing Hameid v. Nat’l Fire Ins. of Hartford, 71 P.3d 761, 764-765 (Cal. 2003).

The appeals court rejected the insurer’s argument that the activity was non-covered “solicitation” and found that the alleged use of the patented program on Hyundai’s Web site was broad-based “advertising,” notwithstanding that the purpose of the system was to tailor the car maker’s offering based on specific input by each prospective customer. Given the availability of the build your own program to all site visitors, this finding by the court is not surprising. The court’s rulings on the other two prongs – that the alleged patent infringement was a misappropriation of an advertising ideas, and that there was a causal connection between the advertisement and the injury, however, are far more noteworthy.

According to the court, no prior decision based on California law had found a patent infringement claim to constitute an advertising injury offense. Indeed, it is difficult to see a patent as an advertising idea, rather than as an idea which simply happens to be related to advertising. Hyundai makes cars, not user customization products. While user customization of cars on Hyundai’s Web site may constitute “an advertising idea,” the misappropriation or infringement alleged against Hyundai was not of the customization of a car, but the misappropriation of a patented method of allowing products to be customized based on user input. Nevertheless, the court made exactly that connection based on its use of a “context approach” and dicta in California and federal cases applying California law which, under their facts, found the element not to have been satisfied:

In Mez Industries, Inc. v. Pacific National Insurance Co., 90 Cal. Rptr. 2d 721, 733 (Ct. App. 1999), the California Court of Appeals explained that a “contextual reasonableness” analysis applies to that question. We must determine, in the context of the case and in light of common sense, whether a lay person reasonably would read the phrase “misappropriation of advertising ideas” to include the patent infringement claim at issue. Id. More precisely, the proper test is whether the patents at issue “involve any process or invention which could reasonably be considered an ‘advertising idea.’ ”

Id. The court also considered Amazon.com International, Inc. v. American Dynasty Surplus Lines Insurance Co., 85 P.3d 974 (Wash. Ct. App. 2004) (applying Washington law) as persuasive authority. In that case, the court found “advertising injury” in a claim by a patent holder against Amazon for its use of music preview technology.

As for the final element, a causal connection between the advertisement and the alleged injury, the court noted prior California decisions which rejected coverage for patent infringement claims where the advertisement was of an infringing product, or where the advertisement merely alerted the patent holder of the infringement. In contrast, the Hyundai court held:

[T]here is a direct causal connection between the advertisement (i.e., the use of the BYO feature on the Web site) and the advertising injury (i.e., the patent infringement). Because the use of the patented method was itself an advertisement that caused the injuries alleged in the third-party complaint, Hyundai has established the requisite causal connection.

Id.

While the court could tie allegations regarding Hyundai’s Web site’s use of the patented “build your own” method to the underlying claimants injury, it is certainly debatable whether this construction meets the court’s acknowledged common sense context approach. Clearly, to the extent that the operation of Hyundai’s Web site was itself infringing activity, that activity began well before the Web site went live and constituted an “advertisement,” and the decision to incorporate the patented method was essence of the infringement.

While the impact of the decision will no doubt be substantial on the parties and on other carriers with similar policy provisions under California law, it would seem that amendments to the CGL Personal and Advertising Injury coverage, which some insurers adopted beginning in 2001, should preclude this result. That amendment involved an express exclusion of patent infringement from Personal and Advertising Injury coverage.