Hunton Insurance Recovery Blog

The Second Circuit has ruled a claim alleging an “offer for sale” infringed on a patent constitutes an advertising injury sufficient to trigger a defense under commercial general liability insurance.  In High Point Design LLC v LM Insurance Corporation, the plaintiff High Point brought a declaratory-judgment action against Buyer’s Direct, Inc. after the latter directed High Point to cease-and-desist in the sale of its Fuzzy Babba slippers.  Buyer’s Direct responded with a counterclaim alleging trade dress infringement, claiming that High Point’s offers for sale in retail catalogs infringed on Buyer’s Direct’s own slipper trade dress.  Buyer’s Direct sought discovery of all advertising, marketing and promotional materials related to High Point’s fuzzy footwear to substantiate its claims.

High Point tendered the counterclaim to its insurer, Liberty Mutual, for a defense and coverage.  Liberty denied the claim based on the policy’s trademark-infringement exclusion.  High Point brought suit seeking a declaration of the parties’ rights under the policies.  On High Point’s motions for summary judgment, the district court ruled that High Point was entitled to coverage because the counterclaim did not fall into the trademark-infringement exclusion and was a covered loss under the policy’s advertising injury coverage.  Following the ruling, the parties entered into a damages stipulation based on the date the claim was tendered to Liberty.

On appeal, the Second Circuit affirmed in part.  Judge Rosemary Pooler, writing for the panel, agreed that the counterclaim did not come within the “convoluted” language of the trademark-infringement exclusion.  The panel also held that an “offer for sale” constituted an advertising injury under the policy.  “Indeed,” held the court, “the purposes of most advertising is to ‘offer for sale’ various goods and services.”  Thus, it was clear to the court that the counterclaim alleging trade dress infringement in the “offering for sale” was sufficient to trigger a defense under the policy.

The court further held, however, that even if the counterclaims, standing alone, did not place Liberty on notice of its duty to defend, discovery demands in the underlying case seeking information related to the paid advertisements place High Point’s advertising squarely at issue.  This was sufficient for the court since, under New York law, the duty to defend is not limited to the four corners of the complaint, but is informed by the underlying facts available to the insurer.  Thus, relying on the totality of information available, the court held that there was the potential for High Point to be held liable for an advertising injury, triggering the duty to defend.  The Second Circuit invalidated the damages stipulation, however, noting that it was not until the insurer became cognizant of the additional information supplied by Buyer’s Direct’s discovery requests that the duty to defend arose.

High Point Design is an important decision for at least three reasons.  First, the decision is a reminder that claims arising from the alleged misappropriation of intellectual property may be covered under traditional general liability and umbrella insurance policies even where the policy contains a seemingly applicable intellectual property exclusion.  Second, the decision illustrates the significance that evidence extrinsic to the four corners of the complaint can have when considering the duty to defend in jurisdictions that permit consideration of such evidence.  Finally, the decision illustrates the importance of having all claims evaluated by a coverage specialist or attorney to determine whether a potential for coverage exists.