HNRK Coverage Corner

On December 19, 2018, the Second Circuit issued a decision in High Point Design, LLC v. LM Ins. Corp., Docket No. 16-1446-cv, holding that a counterclaim alleging patent and trade dress infringement in an “offer[] for sale” triggered an insurer’s duty to defend under the “advertising injury” provision of a CGL Policy.

This coverage action arose from a dispute over the Fuzzy Babba slipper, manufactured and distributed by High Point.  High Point filed a declaratory judgment action, seeking a declaration that the slipper did not violate a patent held by Buyers Direct Inc., and Buyers Direct filed a counterclaim for patent and trade dress infringement. High Point then sued its CGL carrier (Liberty), which refused to defend the counterclaim.  District Judge Katherine B. Forrest of the SDNY held that the counterclaims' use of “the phrase ‘offering for sale’ . . . could be broadly construed as promoting or advertising,” thus triggering the duty to defend a claim for "advertising injury."  The Second Circuit, in a decision by Judge Pooler, agreed that the CGL carrier was required to defend the counterclaims, explaining:

Whether Liberty owes High Point a defense turns on the meaning of what constitutes an “advertising injury.” There is much confusion in the caselaw concerning when an advertising injury is caused by advertising within the meaning of standard business insurance policies. Courts are to compare the allegations of the complaint to the terms of the policy. If, liberally construed, the claim is within the embrace of the policy, the insurer must come forward to defend its insured no matter how groundless, false or baseless the suit may be.

Here, Liberty argues that the district court erred in finding Liberty owed High Point a duty to defend. We disagree, and find that the “offer[] for sale” alleged in the counterclaim, coupled with the discovery demands seeking advertising materials, triggered Liberty’s duty to defend.

Viewed broadly as required under New York law, an “offer for sale” extends to advertising. We determined in Century 21 [v. Diamond State Ins. Co., 442 F.3d 79, 83 (2d Cir. 2006)] that “marketing,” as used in a similar insurance agreement, extends to advertising. “Marketing” includes activities that are not advertising, but the term also must be understood to refer to activities that accord with the common use of ‘advertising. Similarly, while the term “offer for sale” includes activities that are not advertising, it also includes advertising activity. Indeed, the purpose of most advertising is to “offer for sale” various goods and services. The CGL at issue here recognizes this, defining “Advertisement” to mean “a paid announcement that is broadcast or published in the print, broadcast or electronic media to the general public or specific market segments about your goods, products or services for the purpose of attracting customers or supporters.” The umbrella policy covers an “injury arising out of paid announcements in the print or broadcast media resulting in . . . [i]nfringement of copyright, title or slogan.” The phrase “offering for sale” may have multiple meanings, some of which do not implicate advertising activity. For example, simply placing an item on the counter with a sign indicating its price is an “offer for sale” even though it is not advertising. Liberty argues that High Point’s advertising could not have caused any advertising injury within the meaning of the policies because the advertising simply displayed the allegedly infringing product. But Buyer’s Direct’s claim that it was injured by High Point’s “offering for sale” the infringing slippers suffices to demonstrate that an advertising injury may have resulted from the use of the infringing trade dress in advertisements. The slippers were not sold encased in packaging of any kind—they were simply displayed as slippers. Displaying the infringing trade dress in an advertisement is an advertising injury for which damages can be awarded where, as here, it is a means by which the alleged infringer creates customer confusion and trades on the offended party’s goodwill and protected designs. . . .

Even if the counterclaims, standing alone, did not place Liberty on notice of its duty to defend, the discovery demands seeking information related to the paid advertisements place High Point’s advertising squarely at issue.

The Court vacated Judge Forrest’s damages award, however, reasoning that the insurer’s duty to defend did not arise when the counterclaims were filed, but only when the discovery demands were served. Judge Newman issued a concurring opinion, taking issue with the majority’s conclusion that the term “offering for sale” includes advertising.  (“The purpose of most (perhaps all) advertising is to persuade the public to buy the advertised goods and services.  “Offering for sale” is simply the act of making a product available for sale.  It is a distortion of language to say that “offering for sale” sometimes means “advertising.”)  Judge Newman also pointed out an apparent contradiction in Judge Pooler’s opinion:  although the decision states that “an ‘offer for sale’ extends to advertising”, the Court held that the counterclaims (which alleged an “offer for sale”) did not trigger the duty to defend; the CGL carrier only had to pay for defense costs as of the date the demand for discovery of advertising information was served.  (“If the existence of the words “offering for sale” in the patent infringement portion of BDI’s counterclaim, whatever their meaning, triggered liability under the Policy, that liability would have covered defense costs incurred from the date Liberty became aware of BDI’s counterclaim.  That was the District Court’s holding, which is now vacated.”)

This decision demonstrates that New York courts will look outside the four corners of the complaint to determine the duty to defend.  More precisely, New York law does not permit the insurer to employ a “wooden application of the ‘four corners of the complaint’ rule” “when it has actual knowledge of facts establishing a reasonable possibility of coverage” – even if those facts are not pled in the complaint. See Fitzpatrick v. American Honda Motor Co., 78 N.Y.2d 61, 66-67 (1991). On the other hand, as previously explained on this blog, an insurer may not rely on evidence outside the “four corners” of the complaint to avoid its duty to defend. The majority opinion also offers a close reading of a policy exclusion, demonstrating how to parse what Judge Pooler called the “convoluted structure apparently favored by insurance companies.”