The Insurance and Reinsurance Report

Fifth Circuit: Contract Exclusion Does Not Apply to Copyright Infringement Claim

Looney Ricks Kiss Architects, Inc. v. State Farm Fire & Cas. Co. (5^th Cir. (La.) April 4, 2012)

The Fifth Circuit recently predicted that the Louisiana Supreme Court would apply a “but for” test when construing an insurance policy’s breach-of-contract exclusion. As a result, the court held that two insurers were obligated to defend and indemnify their mutual insured against a copyright infringement claim because the insurers failed to show that the injury would not have occurred but for the breach of contract.

Looney Ricks Kiss Architects (“LRK”), an architecture firm, filed a copyright infringement action against a former client, Steve Bryan, and his affiliate building companies (the “Bryan defendants”). The complaint alleged that LRK created a design known as the Island Park Apartments, which was constructed by the Bryan defendants. LRK and the Bryan defendants entered into a contract pursuant to which LRK retained all common law and statutory rights to the building’s architectural drawings, specifications, and technical drawings. LRK also registered the Island Park Apartments with the United States Copyright Office as an Architectural Work and Technical Drawing.

LRK sued the Bryan defendants for copyright infringement after the Bryan defendants obtained permits to construct the Cypress Lake Apartments in Louisiana, which LRK alleged infringe on its copyrighted work. The Bryan defendants’ insurers, Lafayette Insurance Company (“Lafayette”) and State Farm Fire and Casualty Company (“State Farm”) issued policies that covered copyright infringement, but excluded injury arising out of a breach of contract.

The Fifth Circuit noted that the Louisiana Supreme Court has not addressed whether a breach-of-contract exclusion precludes liability for a statutory tort that an insured has a contractual obligation not to commit. Making an Erie guess, the Fifth Circuit observed that courts in other jurisdictions have used two tests when deciding whether a breach-of-contract exclusion applies: the “but for” test and “incidental relationship” test. The Fifth Circuit concluded that the Louisiana Supreme Court would likely apply a “but for” test to a breach-of-contract exclusion, such that the exclusion would apply only where the injury would not have but for the breach of contract. Since LRK’s claim emanated from a source other than contract law, i.e., federal copyright law, the Fifth Circuit held that the breach-of-contract exclusion did not apply. Therefore, Lafayette and State Farm were obligated to defend and indemnify the Bryan defendants against LRK’s claim.

For a copy of the decision, click here

Carrie Appler and Rick Cohen

South Carolina Supreme Court Holds Coverage For Advertising Injuries Includes Trademark Infringement Claims

Super Duper, Inc. v. PennsylvaniaNat. Mut. Ins. Co., et. al..

(Supreme Court of South Carolina, September 14, 2009)

As an issue of first impression in South Carolina was whether a policy’s inclusion of an advertising injury also encompassed trademark infringement claims pertaining to educational materials for children.  Mattel Inc. challenged the insured’s registration of four trademarks and the insured subsequently brought a declaratory judgment action in federal district court to determine if its trademark infringed on Mattel’s trademarks.  Super Duper was insured by Travelers and Pennsylvania Nat. Mut. Ca. Ins. Co. (Penn National) under commercial general liability insurance policies for “advertising injury;” however, both insurers denied coverage and refused to provide a defense.   The insured defended itself, subsequently loosing on its trademark infringement claims.  Thereafter, the insured bought the subject action seeking a declaratory judgment and damages for failure to defend and indemnify, breach of contract, and bad faith.

While the court did not provide a determination on the ultimate coverage questions, it did rule on the four certified questions presented by the federal district court regarding the policies.  As to the Travelers’ policy, the issue was whether an underlying suit premised upon trademark infringement by the insured qualifies as injury arising out of the offense of “misappropriation of advertising ideas or style of doing business.”  Relying heavily on the precedent of State Auto Property & Casualty Insurance Co. v. Travelers Indemnity Co. of America, 343 F.3d 249 (4^th Cir. 2003), which interpreted the same policy provision, the Supreme Court rejected the insurers’ argument that “misappropriation” refers to the common law tort of misappropriation, and instead applied the common meaning of misappropriation (i.e., to appropriate dishonestly for one’s own use), thereby concluding that trademark infringement fits squarely within this definition.  Again, based primarily on State Auto, supra, the court also held that a trademark can qualify as an “advertising idea or a style of doing business,” and thus joined the majority of courts in holding that misappropriation may include a claim related to the wrongful use of a trademark under a CGL policy.  Likewise, the court affirmatively answered the second certified question that that trademark claims qualify under the policy as injury arising out of the offense of “infringement of copyright, title or slogan,” concluding that the terms “title and slogan” are generally synonymous with a trademark. 

 

As to Penn National’s policies, which included a definition of “advertisement,” the Supreme Court also answered the two certified questions in the affirmative.  Specifically, the court held that use of another’s advertising idea may include trademark infringement because a trademark is an advertising device.  Lastly, the court held that a trademark may also include a product’s slogan, and therefore, trademark infringement potentially relates to the improper use of another’s slogan, which is a term contained within the policy provision.

 

For a copy of the decision, click here

 

By Paul C. Steck and Daniel W. Gerber

http://www.goldbergsegalla.com/attorneys/Steck.html

http://www.goldbergsegalla.com/attorneys/Gerber.html