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Vol. 4, Iss. 12
December 16, 2015

Mid-Continent Casualty Co. v. Kipp Flores Architects, LLC, 602 Fed. Appx. 985 (5th Cir. 2015)

Court Turns CGL Policy Into One For Product Copyright Infringement

By Joshua Mooney


Joshua Mooney is a Partner at White and Williams, LLP and Co-Chair of the firm’s Cyber Group. Josh’s practice focuses on insurance law in connection with privacy rights, advertising injury, cyber and data security liability, and media/entertainment liability. He also writes The Coverage Inkwell, a blog on IP, privacy, and cyber liability coverage issues.

In Mid-Continental Cas. Co. v. Kipp Flores Architects, LLC, the United States Court of Appeals for the Fifth Circuit held that a house is an “advertisement” for purposes of the duty to indemnify under Coverage B. The decision turned a CGL policy into insurance for product copyright infringement, and its logic can lead to a parade of the horribles. For this reason, Kipp Flores is worthy of Coverage Opinions’s Top Ten.

The background facts for the case are straightforward and unremarkable. Plaintiffs, Kipp Flores Architects (“KFA”), was an architecture firm that designed homes and licensed its designs to builders. The insured, Hallmark Design Homes (“Hallmark”), built a large number of homes using KFA’s designs, but without a license. KFA sued Hallmark for copyright infringement, seeking damages under the Copyright Act. KFA alleged that: “Defendants have created, published and used non-pictorial depictions of structures based on KFA’s Copyrighted Works in promotional and advertising materials. Defendants have published and used these infringing materials in the course of advertising their infringing structures. Furthermore, defendants have used the structures themselves to advertise their infringing structures.”

Hallmark had a series of CGL policies covering damages “because of” “personal and advertising injury,” defined in part as injuring arising out of the “infringing upon another’s copyright, trade dress or slogan in your ‘advertisement.’” The policies defined “advertisement” in part as “a notice that is broadcast or published to the general public or specific market segments about your goods, products or services for the purpose of attracting customers or supporters.” The policies had an exclusion for Infringement Of Copyright, Patent, Trademark Or Trade Secret which prohibited coverage for: “‘Personal and advertising injury’ arising out of the infringement of copyright, patent, trademark, trade secret or other intellectual property rights. However, this exclusion does not apply to infringement, in your ‘advertisement’, of copyright, trade dress or slogan.”

The underlying action went to trial, and the jury returned a verdict in KFA’s favor for $3.3 million. Coverage litigation ensued to determine the insurer’s duty to indemnify the insured for the verdict, and the parties cross-moved for summary judgment.

The insurer argued that there was no duty to indemnify because the alleged copyright infringement in the home designs took place in the homes themselves, and not in an “advertisement,” as defined in the policies. The insurer also argued that the damages entered against Hallmark were for the homes’ infringement, and not “because of” copyright infringement in advertisements themselves to satisfy the meaning of “personal and advertising injury.” Finally, the insurer argued that the IP exclusion applied. Strong arguments. However, the trial court denied the insurer’s motion and granted KFA’s cross-motion for coverage. The Fifth Circuit affirmed.

On appeal, the insurer argued that it had no duty to indemnify because the homes themselves could not constitute an “advertisement,” and that the $3.3 million verdict was not damages “because of” an advertising injury to implicate coverage. The Fifth Circuit disagreed. Noting that the insurer itself “conceded that KFA presented evidence that the houses themselves were Hallmark’s primary form of marketing,” the Court concluded that the houses constituted “notice that is broadcast or published to the general public” to fall within the policies’ definition for “advertisement.”

Stating that the policies did not define “notice” or “published,” the Court reasoned that a house could be an advertisement the terms were understood to have very broad meanings: “It is important to note that the policies never specify that “notice” must take any particular form (e.g., a writing or a website) and never exclude from the definition a physical object, nor do they define “broadcast” or “published.” Among other things, the Oxford English Dictionary defines “notice” sweepingly as the “act of imparting information” or “something which imparts information.” The few cases interpreting the policy language at issue here (“a notice that is broadcast or published”) have construed “notice” very broadly. Under the policy language, such notice need only be broadcast or published to qualify as an advertisement. While “broadcast” generally implies radio or television advertisement, “publish” is much more comprehensively defined as “to make public or generally known” or “to make generally accessible or available for acceptance or use (a work of art, information, etc.); to present to or before the public.” [Emphasis added.]

In other words, because the terms “notice” and “broadcast” were not restricted to forms of communication, such as oral or written, or electronic, and because they did not exclude a house in a written definition, the terms could mean a house.

Because the insured insisted that the homes were the “primary marketing device” to sell the homes, and because the copyright infringement was in the homes themselves, the Court concluded that the underlying action alleged infringement of copyright in the insured’s advertisement: “In this case, it is undisputed that Hallmark’s primary means of marketing its construction business was through the use of the homes themselves, both through model homes and yard signs on the property of infringing homes it had built, all of which were marketed to the general public. Mid–Continent even contends there is no evidence that Hallmark’s customers saw any marketing materials other than the houses themselves. Under the undisputed facts, Hallmark’s use of the infringing houses satisfies not only the policies’ expansive definition of “advertisement” and Texas law’s similarly broad construction of the term but also common sense. We therefore conclude that the infringing houses in this case, as used by Hallmark, all qualify as “advertisements” under the policies.” [Emphasis added.]

Wait. What? This brings a whole new meaning to an old real estate agent motto that “a good house just sells itself.”

The Fifth Circuit summarily dispatched the insurer’s remaining arguments. Because the homes constituted an “advertisement,” the Court reasoned that the underlying verdict was for damages “because of” “personal and advertising injury” to satisfy the policies’ insuring agreements. In addition, the Court held that the IP Exclusion’s carve-out exception for “infringement, in your ‘advertisement’. . . of copyright” applied, thereby making the exclusion inapplicable.

To support its decision, the Court emphasized concessions made by the insurer, however, all the concessions in the world should not have converted a house into an advertisement. This decision potentially is a dramatic shift in judicial construction of insurance coverage for copyright infringement in advertising injury. Traditionally, courts recognized that advertising injury coverage only covered copyright infringement in the advertisement, not in the product itself. Here, Kipp Flores eradiated that important distinction. Because the homes in question were deemed to be the best means to market the builder’s work, the homes – the infringing products themselves – were converted into advertisements for purposes of insurance coverage. By logical extension, an insured need only contend that an infringing product sells itself in order to qualify for “personal and advertising injury” coverage. The Court called this “common sense.” Yet, using a product to sell itself is not uncommon. It’s the primary tool of designer-ware and brand names. It’s the primary tool for counterfeit and grey-market products. Coverage for infringement in the products themselves was never the risk Coverage B was to insure. Kipp Flores may put a change to that.

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