Is Your Commercial General Liability Insurance Enough?

 

Protecting Your most Important Asset

Intellectual property (trademarks and service marks, trade dress, trade secrets, copyrighted material and patented material)is one of the most value assets any corporation, research organization, or non-profit has. (In this article, the word “corporation” refers to corporations, research organizations, and non-profits collectively.)  Indeed, intellectual property may be the only asset of many young technology-based corporations.

Will CGL insurance policy protect you for damages that must be paid or legal fees incurred if a competitor were to sue you for infringing its intellectual property? 

 

The Costs of Litigation

Intellectual property related risks, and the financial costs associated with them can be quite large.  To cite just one well publicized example, in late 1999 Amazon.com, Inc. filed suit against Barnesandnobel.com, Inc, Amazon’s chief competitor, alleging that Barnesandnoble had copied Amazon's patented 1-Click technology, a technology that allowed customers to “checkout” quickly on-line by presetting credit card and shipping information, thereby clicking only once.

On December 1, 1999, the United States District Court for the Western District of Washington issued a preliminary injunction enjoining Barnsandnoble.com from using its Express Lane service technology for making online purchases, a technology that Barnesandnoble.com had touted in 1998 as a “major enhancement” to its online site, but which Amazon.com alleged infringed Amazon.com’s 1-Click patent. Although the Court of Appeals for the US Federal Circuit dissolved the injunction in February 2001, Barnesandnoble.com was forced to reconfigure its “Express Lane” in the middle of the crucial Christmas buying seasonn implementing the modificatiosn in the middle of a Christmas season that was pivital . Defending the litigation to the Federal Circuit no doubt distracted Barnesandnoble.com executives from their managerial duties and cost the corporation considerably in attorneys’ fees.

              Unfortunately, legal fees incurred in defending litigation, even against allegations that are clearly without merit, can easily amount to several hundreds of thousands of dollars.  In 1999, the American Property Law Association estimated that mounting a successful defense to allegations of copyright infringement could cost a minimum of $150,000 and that mounting a successful defense to allegations of patent infringement could cost ten times as much.  Moreover, some well established technology companies use litigation as a business strategy, choosing to litigate against smaller, less well-funded technology based competitors.

Corporations that are just beginning operations should give serious consideration to the type and scope of insurance that they need. Older, established corporations would be well served to examine periodically their insurance policies to confirm whether they adequately protect the corporation for intellectual property related risk.

 

 

Commercial General Liability

Some corporations with a place of business in the US may be required to hold commercial general liability (“CGL”) insurance or other types of insurance under the laws of the state or municipality in which they are located. Even corporations that are not required by law to hold insurance may find that business partners or contractual collaborators insist that they hold CGL insurance.

  Each CGL policy is unique, and the language of each policy should be read carefully and evaluated to determine whether it offers coverage in commensurate with the risk to which the corporation is subject.  However, generally speaking, CGL policies cover claims for (1) bodily injury, (2) damage to property, (3)other personal injury (including slander and libel),and (4)advertising injury or “piracy.”  CGL policies cover not only money paid out in satisfaction of judgments and settlements up to the policy limit of liability for incidents in these four areas, but also, unrelated to the policy limits, the legal fees associated with defending claims that fall within their scope.

 

Commercial General Liability Insufficient for IP

Most CGL policies do not, on their face, cover claims for what is traditionally considered intellectual property infringement. Some practitioners argue that infringement of trademark, trade dress, copyright, trade secret, and patent, unfair competition and antitrust claims fall under the scope of advertising liability, and there is U.S. case law holding that some CGL policies cover these types of claims.  However, most insurers vociferously reject this argument, citing cases which have held that what is plainly not included within the coverage is by definition excluded.  Because this issue has proved to be highly contentions, many insurers have recently moved to exclude patent infringement liability expressly.

An insured subject to claims of intellectual property infringement that seeks coverage under its CGL may have to first litigate the insurance policy with its insurer to settle the question of whether the defense of the infringement is covered by the CGL policy language or not.  This usually involves a trial in which the insurer’s duty to defend the insured is determined by comparing the facts alleged in the underlying complaint construed liberally with the provisions of the insurance policy at issue.  If the underlying complaint discloses a potential or a possibility for liability within the coverage of the policy, the insurer has a duty to defend the insured.

Because such litigation is fraught with uncertainty, a forward-looking technology-focused company would be wise to consider technology insurance at the outset, rather than counting on defending an intellectual property infringement with a windfall-like indemnification received as a result of court ruling that the claim falls within the scope of the CGL policy.　

Therefore, a technology-focused corporation may, as part of its overall business planning strategy, wish to seek broader intellectual property specific coverage. Please consult knowledgeable counsel as soon as possible if you or one of your affiliates receives any type of communication claiming infringement of a third party’s intellectual property rights, whether it be a warning letter an invitation to take a license, or a claim of infringement.