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"A Duty to Defend Patent Infringement"

Daily Journal

In a case of first impression, the 9th U.S. Circuit Court of Appeal held, for the first time under California law, that patent infringement can be covered as a "misappropriation of advertising ideas" under the advertising injury portion of a general liability policy, where the patent is on a method of web based advertising.

In Hyundai Motor America v. National Union etc. et al., Case No. 08-56527, filed April 5, Hyundai maintained a Web site that it used to advertise its cars and parts catalog. Potential customers could log on to the Web site and use a "build your own vehicle" feature that displayed product and pricing information on an interactive basis. Any potential customer could navigate through the site, input desired options and requirements, and generate a customized product proposal. This web-based technology is widely used as an advertising method to draw interested customers to the possibility of purchasing their "custom made" vehicles.

In the underlying lawsuit, Hyundai (along with other major automobile manufacturers) was alleged to have infringed on a third party's (Orion's) "method patents" for a computer-based system to dynamically create a customized proposal for the potential customer. Hyundai tendered the defense of the underlying lawsuit to its general liability carriers (National Union and American Home), on the grounds that the alleged patent infringement constituted an "advertising injury." The policies defined advertising injury to include "misappropriation of advertising ideas." The insurers declined to defend, and Hyundai brought suit (the "coverage action").

In the coverage action, the District Court granted summary judgment in favor of the insurers. On appeal, the 9th Circuit reversed and remanded, with instructions to enter summary judgment in favor of Hyundai, holding that "in the context of the facts of this case, the third-party infringement claims constituted allegations of "misappropriation of advertising ideas" for purposes of the insurance policy." Thus, the court found a duty to defend.

This is the first time that a court, interpreting California law, has specifically held that patent infringement can constitute an advertising injury that may be covered under a liability policy, where the patent is on an advertising process as opposed to a patent on the product being advertised. As the court noted, under California law there are three required elements to establish a duty to defend for "advertising injury." First, the insured must show that it was engaged in "advertising" (widespread promotional activities usually directed to the public at large) during the policy period when the alleged injury occurred. Second, that the claims against the insured create a potential for coverage under one of the enumerated offenses, such as "misappropriation of advertising ideas." Finally, there must be a causal connection between the alleged injury and the advertising. Hameid v. Nat'l Fire Ins. of Hartford, 31 Cal. 4th (Cal. 2003).

In Hyundai, the court had no difficulty in finding that the interactive feature of the Web site constituted "advertising," noting that such a web-based interactive process, whereby potential customers enter a Web site and generate customized proposals, was not merely a "one-on one solicitation" as the insurers argued. While the "build your own vehicle" feature has some similarities to solicitation (which is generally not covered under advertising injury coverage), the court explained that where such a feature is "widely distributed to the public at large, to millions of unknown web-browsing potential customers," it constitutes "advertising" within the meaning of the policy, "even if the precise information conveyed to each user varies with user input."

Second, and significantly, the court found that patent infringement can constitute a "misappropriation of advertising ideas" where the patent at issue involves "any process or invention which could reasonably be considered an 'advertising idea." Neither the 9th Circuit nor the California courts have previously held that certain types of patent infringement could constitute advertising injuries. This is important because Hyundai gives great breadth to the meaning of the term "misappropriation of advertising ideas." Unlike "infringement of copyright, title, or slogan," patent infringement was not specifically listed under the policy definition of advertising injury. Yet, the court extended the scope of advertising injury to patent infringement where the patent is on an advertising process.

Third, the court found that the causal connection linking the advertisement and the alleged advertising injury required by Hamid was satisfied. As the Hyundai court explained, when the advertisement itself infringes on the patent (as opposed to the product being advertised infringing on the patent), the causal requirement is met. This has long been a bone of contention between insurers and policy holders. Prior to Hyundai, insurers have generally prevailed in arguing that there has been no causal connection between the advertising activity and the injury, because the patent infringement has been on the use or sale of the product being advertised, which is independent of the advertisement itself. But, as the Hyundai court made clear, "when the patent infringement occurs in the course of the advertising the causal connection is established."

In today's "information age," where interactive advertising over the Internet blurs the line between advertisements and processes, any business engaged in Web-based advertising should carry general liability coverage as broadly worded as possible to protect against similar infringement claims. The Hyundai case provides some comfort to policyholders in its adoption of an expansive interpretation of the term "advertising idea" that is more in conformity with modern business practices.

Nossaman LLP is a national law firm with 170 professionals working seamlessly across the United States with offices in Los Angeles, San Francisco, Orange County, Sacramento, San Diego, Seattle, Washington, D.C., and Austin, Texas.  Whether it is working to finance and develop public infrastructure, provide healthcare services, litigate complex matters in unique niches such as land use and environmental law, financial services, insurance recovery, employment, and eminent domain; entitle private development, manage natural resources, complete real estate and business transactions, or increase business profitability, clients rely on Nossaman to get results.

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