Advertising Injury Defined by 9th Circuit

By: ja, May 4, 2010

By Rebecca Aherne

On April 5, 2010, the 9th Circuit Court of Appeals, in Hyundai Motor America v. National Union Fire Ins. Co., held the insurer had a duty to defend a patent infringement claim under the advertising injury provision.  The insured, Hyundai, placed certain features on its website.  It was sued by Orion IP LLC for patent infringement for the use of the features.  Hyundai sought a defense from National Union on the ground the lawsuit alleged covered “advertising injury” because the infringement concerned its advertising methods.  National Union declined to defend.  Hyundai sued the insurer seeking to recover its defense costs.  The district court found in favor of National Union.  The Court of Appeals reversed the decision holding the infringement claims against Hyundai constituted allegations of “misappropriation of advertising ideas.”  The case was remanded to the district court with instructions to grant summary judgment to Hyundai for declaratory relief on the duty to defend.

Hyundai’s website contained a “build your own vehicle” (BYO) feature which allowed users to navigate a series of questions to select automobile colors, engines, options, etc. In response to the input, the feature displayed customized vehicle images and pricing information.  Orion held patents concerning methods of generating customized product proposals for potential customers of an automobile dealer.  Orion alleged Hyundai’s BYO feature infringed its patent.

The National Union policy provided the company would defend Hyundai against suits seeking damages for “advertising injury” caused by an offense committed in the course of advertising Hyundai’s products.  “Advertising injury” is defined as including the “misappropriation of advertising ideas or style of doing business.”  Hyundai asserted the patent infringement claims in the Orion action were claims alleging the misappropriation of advertising ideas.

Three elements are needed to establish a duty to defend for an advertising injury:  1) the insured was engaged in advertising during the policy period when the alleged advertising occurred; 2) the allegations against the insured created a potential for liability under one of the covered offenses; and 3) a causal connection existed between the alleged injury and the advertising.

“Advertising” means widespread promotional activities directed to the public at large, but does not include solicitation.  Orion’s complaint alleged advertising activities because it alleged Hyundai’s BYO feature constituted making and using supply chain methods, sales methods, sales systems, marketing methods, marketing systems, and inventory systems.  Marketing methods or systems fits within the definition of advertising.  The court rejected National Union’s argument, that each individual’s use of the BYO feature constitutes an individualized solicitation, on the ground the feature is widely distributed to the public at large even though the precise information conveyed to each user varies with user input.

The court next determined that a lay person reasonably would read the phrase “misappropriation of advertising ideas” to include the Orion infringement claim.  Patent infringement claims can qualify as an advertising injury if the patent involves any process or invention which could reasonably be considered an advertising idea.  Orion patented a method of displaying information to the public at large for the purpose of facilitating sales and its complaint alleged that Hyundai violated its patent by using the patented technologies as part of its marketing method.  Thus, Orion’s claim alleged a misappropriation of advertising ideas.

The Court of Appeals also found a casual connection between the advertisement and the alleged advertising injury, because Hyundai’s advertising constituted the use of the patented marketing tool.  The casual connection was established as the infringement occurred in the course of advertising.  The court distinguished those situations in which the infringement occurs independent of advertisement of the underlying product.  The causal connection is not typically established if the patent concerns the underlying product.  For example, in Iolab v. Seaboard Sur. Co., 15 F. 3d 1500, a patent holder sued the insured for infringement regarding the manufacture and sale of an intraocular lens.  The court held there was no causal connection because the infringement claim was based, not on the advertising of the lens, but on its manufacture and sale.

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