Insurers – who bear the burden of crafting unambiguous policy language defining the contours of coverage – constantly face difficulty in attempting to predict unexpected liability. And sometimes, Courts can make this job far more difficult.  For example, a recent Fifth Circuit decision held that a copyright infringement exclusion did not apply to exclude coverage for a judgment against the insured in a case alleging, well, copyright infringement.

In Mid-Continent Casualty Company v. Kipp Flores Architects, Mid-Continent Casualty Company (“Mid-Continent”) filed a declaratory judgment action seeking a declaration that it had no duty to indemnify a home builder for copyright infringement alleged by an architectural firm.

Licensing Home Designs

The insured, a Houston area builder, entered into license agreements with an architecture firm to utilize the firm’s home designs.  Under the license agreements, the home builder could reuse the home designs to build additional homes, but was required to pay a license fee in advance of building the home.  According to the underlying lawsuit brought by the architect, the builder failed to do so with regards to hundreds of homes, and a judgment in excess of $3 million was rendered in favor of the architect.

The Underlying Claims

The operative complaint indicated that the architect alleged that the builder “created, published and used non-pictorial depictions of structures based on . . . copyrighted works in promotional and advertising materials.  Defendants have published and used these infringing materials in the course of advertising their infringing structures.”  These allegations make clear that the architect wasn’t suing for the use of copyrighted pictures of houses that the builder posted online, for example, but rather that the homes themselves – built according to a copyrighted design – that were used for “show” were in essence being used as marketing.  In other words, it was the house design, not pictures of the house used in advertisements, that infringed the architects copyright.

A Coverage Battle Ensues

Mid-Continent declined coverage and filed a declaratory action, alleging that there is no coverage because the judgment came squarely within the exclusion for “‘personal and advertising injury’ arising out of the infringement of copyright, patent, trademark, trade secret, or other intellectual property rights.”

But the exclusion contained an exception for “infringement, in your ‘advertisement,’ of copyright, trade dress or slogan.”  The insured argued that the judgment came within the exception to the exclusion, arguing that the homes themselves could constitute an “advertisement.”

Whereas other products are not inherently advertisements, homes present an interesting case study.  Because homes are all unique and are generally not purchased sight unseen, the Fifth Circuit found that there was sufficient evidence in the record to support a finding that the use of these home designs constituted advertisements:

[I]t is undisputed that [the] primary means of marketing[] construction business [is] through the use of the homes themselves, both through model homes and yard signs on the property of infringing homes . . . all of which [are] marketed to the general public.

The Court gave the policy’s definition of “advertisement” – a notice that is “broadcast or published” – short shrift, finding that making the homes available for viewing by the public constituted “broadcasting” or “publishing.”

The Importance of Limiting Intellectual Property Liability

Because various areas of intellectual property law offer protection beyond actual damages, limiting potential liability for these potential actions is of the utmost importance.  For instance, under § 504(b) of the Copyright Act, one harmed by infringement can seek to recover not only their actual damages, but also to recover the profits to the infringer as a result of the infringement.

Various other provisions of U.S. intellectual property law include broader protection than just actual damages, including a provision granting treble damages for willful patent infringement.  It is because of these broader protections inside the overarching intellectual property framework that liability must be appropriately limited.

Conclusion

The Fifth Circuit’s stretch here is an important note of caution for insurers and coverage lawyers. Any product brought to market could conceivably be considered an “advertisement” for the company that produced it. Is a pharmaceutical product that gets marketed by offering free samples in a doctor’s office an “advertisement” such that a patent suit against the drug-maker might trigger “advertising injury” coverage? One can imagine the troubling examples that could flow from this decision. Does such a broad reading of the exception render the exclusion illusory? These are the questions that vex underwriters as they grapple with policy language and unexpected fact patterns, allegations, and coverage rulings such as this Fifth Circuit decision.