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Vol. 5, Iss. 6
31 May, 2016
 
 


David A. Gauntlett: Dean Of The “Coverage B” Bar

David Gauntlett, of Gauntlett & Associates in Irvine, California is the Dean of the “Coverage B” Bar. While no Blue Ribbon panel was convened to reach that conclusion, sometimes one isn’t needed. He just is. For over three decades, David has been litigating cases, for policyholders, involving coverage for intellectual property and various types of personal and advertising injuries. He has been lead counsel in such cases pending in over 30 states. When I see a Coverage B decision, the first thing I do is to check to see if David represented the policyholder. And so often he did. A Westlaw search: “personal or advertising w/5 injury and Gauntlett” returns an incredible 148 results. And some are precedent-setting.

The 1979 graduate of Boalt Hall School of Law, University of California at Berkeley, is a nationally recognized speaker and has been an adjunct professor at Boalt Hall, where he taught “Insurance Coverage for Intellectual Property, Antitrust and E Commerce.” David is also the author of numerous articles as well as the treatise “Insurance Coverage of Intellectual Property Assets.”

David was kind enough to answer four questions about his long time on the front lines of Coverage B. He touches on the history of coverage for intellectual property and various types of personal and advertising injuries, how he got started, some of his most significant cases and issues that he sees on the horizon.

1. The Obvious Question – What Led You in the Direction to Focus on Intellectual Property and Part B Coverage Cases?

It started with the 1976 ISO CGL policy, which included within its definition of the advertising injury offense “unfair competition” and “piracy.” That policy was drafted after the eight drafters took a Seaboard Surety policy, issued to advertising agencies, and added an exclusion for advertisers, broadcasters and publishers. Having accomplished that act, the eight drafters presumed that they had sufficiently limited its scope. None of the eight drafters were lawyers – none of them had any intellectual property litigation experience, or a sense of how those torts might interact with the policy they had drafted. It was sold for a 15 percent premium over cost.

Between 1986 and 2001, insurers made changes to policy language, substituting, adding or eliminating certain phrases relating to personal and advertising injury. As these changes were being made to Coverage B of the CGL policy over the years, I saw opportunities for coverage. A number of insurers, through a combination of redefinition and the inclusion of problematic phrases, sought to limit IP coverage. They have not, however, done so appropriately nor eviscerate the settled rule that a duty to defend one claim requires that the entire lawsuit be defended. Any significant reduction in coverage should be called to the insured’s attention. But that has not been true in this case. Such conduct runs afoul of state regulatory provisions such as that in New York Insurance Law section 3426(e).

For over a decade, few practicing had focused on the advertising coverage much less assessed its impact on intellectual property cases. Recall that until1984, when the Federal Circuit was created, there was very little high level litigation of IP torts by major law firms. Then, the Federal Circuit was created, and it became obvious that there was a value to patent litigation. Over time, IP firms grew from prosecution houses to litigation firms. Finally, they became absorbed into general practice firms, so the people with the expertise on the litigation end, which is where you need the expertise to think about the issue, became involved. Previously, IP firms had not focused on anything like the general business corporate situation, because they were boutique, specialty firms that did not have the expertise to deal with many other corporate issues. As for corporate counsel, they did not task personnel who dealt with IP litigation to investigate insurance, because it was not considered a big issue.

There has been a failure to combine the right practice elements. This is changing. Major law firms have coverage specialists; they also have antitrust and IP litigation groups, who now interact more. However, again, it remains interesting how disparate those elements are, and how few firms fuse those disciplines.

There isn’t a very large bar of policyholder attorneys who have the right background to litigate coverage issues for intellectual property cases, because you need to fuse those two disciplines. Most coverage attorneys have not litigated IP cases. IP attorneys may occasionally litigate a coverage case, but their coverage background tends to be isolated and, missing a few distinctions, they have often obtained disappointing results in litigation. Therefore, the results of policyholders have been uninspiring, given what the potential could have been, and still could be.

Certainly, the coverage results for patent claims has been disappointing; it is very difficult to procure under CGL policies. In trade secret misappropriation, there have been a couple of successful coverage cases, one from the Wisconsin Supreme Court, Fireman’s Fund Insurance Co. of Wisconsin v. Bradley Corp., 660 N.W.2d 666 (Wis. Sup. Ct. 2003), but often, it is because the court looks beyond the trade secret claim, and finds other elements of litigation that potentially implicate coverage.

The law in Wisconsin is the “four corners” rule, and the alleged taking of proprietary information was at issue. That was the core of the case, but one of the allegations also related to the taking of a design. The court said the allegations of the “taking of a design,” the misuse of the design, and the advertising based on the misuse of the design implicated coverage for “trade dress.” The court did not reach the issue of whether trade dress claims fell within the “misappropriation of style of doing business” coverage in the 1986 ISO form at issue, as there was separate coverage for trade dress as a form of trademark infringement coverage under the policy, which it found was broad enough to encompass trade dress.

This policy had a variant version of the 1986 ISO that included trademark infringement coverage – this happens on occasion. The court found there was a defense, and it did so by inferring that the misuse of the design would necessarily implicate a trade dress liability, even though trade dress, as a label for a count, had not been specifically pled. That is, by the way, how the law is supposed to work.

The Wisconsin Court of Appeal reversed, because it did not see that inference. Typically, whether a court finds a defense or not, is determined by how it views the inferences from the underlying allegations, as well as what law it applies. Obviously, if an insured has a better factual record from which to draw these inferences, by virtue of discovery that it propounded to the plaintiff, it has a better opportunity to argue the potentiality of coverage. Thus, it is always easier for the insured if the court considers facts beyond the pleadings.

2. What Are Your Most Satisfying Wins, in Terms of Difficulty of the Case, Dollars, Case Law Made and/or Whatever Other Criteria That You Use to Define Satisfying?

Aetna Cas. & Sur. Co. v. Watercloud Bed Co., Inc., No. SA CV 88-200 AHS, 1988 U.S. Dist. LEXIS 17572, 1988 WL 252578 (C.D. Cal. Nov. 17, 1988) (The first case nationally to find coverage for patent infringement lawsuit. The asserted claims could have involved advertising activity because the insured offered to sell infringing products triggering distinct liability for active inducement of patent infringement. The court found that there had not yet been an adjudication of willfulness so despite a prayer for such relief and or an award of treble damages a defense arose. Moreover, the insurer's motion for summary judgment on the duty to indemnify was not yet ripe.)

Union Ins. Co. v. Land & Sky, Inc., 247 Neb. 696, 529 N.W.2d 773 (Neb. 1995) (The first State Supreme Court to address coverage for patent infringement issues, concluded that the insured was entitled to a defense for claims of inducing patent infringement of a waterbed patent. Applying Nebraska law, it found that no public policy intruded to avoid coverage for claims of inducing patent infringement. It also found that piracy could encompass patent infringement and that a causal nexus could arise between claims of inducement and the insured’s advertising activities.)

Hewlett-Packard Co. v. CIGNA Property & Casualty Ins. Co., No. 99-20207 SW, 1999 U.S. Dist. LEXIS 20655 (N.D. Cal. Aug. 24, 1999) and Hewlett Packard Co. v. ACE Property & Casualty Co., No. C-99-20207 JW, 2003 WL 22126601 (N.D. Cal. March 4, 2003 and Hewlett Packard Co. v. ACE Property & Casualty Co., No. C-99-20207 JW, U.S.D.C. N.D. Cal. Nov. 23, 2003) motion for reconsideration denied. (Package inserts allegedly containing “fear, uncertainty and doubt” materials were advertisements. That the policy’s territory was broad enough to encompass claims filed in the U.S. so long as potential injury arose outside of the U.S. Extraterritorial advertisements of HP in the underlying action bore a causal relationship to false advertising claims against HP. False advertising as well as trade libel claims also fell within the policy’s coverage for the “advertising injury” offense of “unfair competition.” The court subsequently affirmed a special master award of over $50 million for defense fees and prejudgment interest to HP.)

Burgett, Inc. v. Am. Zurich Ins. Co., 830 F. Supp. 2d 953 (E.D. Cal. 2011) (Coverage for explicit disparagement was implicated by the false advertising claims in light of prior authority including E.piphany, Inc. v. St. Paul Fire & Marine Ins. Co., 590 F. Supp. 2d 1244, 1252-1253, N.D. Cal., 2008 [litigated by G&A]. Because Burgett represented to Samick [claimant] it was the only holder of the SOHMER trademark, potential coverage for implied disparagement arose. The trademark exclusion was of no moment because “while the underlying complaint does not explicitly state a claim of disparagement, the Court finds that the complaint could be amended to state a claim for the same.”)

TRAX, LLC v. Cont’l Cas. Co., No. 10-CV-6901, 2012 WL 3777042, 2012 U.S. Dist. LEXIS 123141 (N.D. Ill. Aug. 29, 2012) (After a three-day trial, Gauntlett & Associates obtained judgment against Continental Casualty Company, a CNA company, in the aggregate sum of $2,152,587.60 in principal and prejudgment interest - the entire amount sought - against an insurer that had refused to settle a copyright infringement/trade secrets infringement case against its insureds. Applying Virginia law, which the Court had earlier ruled was applicable and which, the Court asserted, required the insureds to allocate their settlement payment, the Court found the insureds' $1.95 million settlement amount was 100% allocable to the covered copyright claim, with 0% allocable to the non-covered trade secrets claim. The Court also found no portion of the settlement sum was allocable to dismissed insolvent co-defendants, or to the value of a software license recited in the settlement agreement.)

Michael Taylor Designs, Inc. v. Travelers Property Cas. Co. of America, 495 F. App’x 830 (9th Cir. 2012) (Ninth Circuit affirmed ruling concluding that implicit disparagement arises despite absence of express allegations denigrating another’s products in false advertising dispute).

General Star Indem. Co. v. Driven Sports, Inc., 2015 U.S. Dist. LEXIS 7966 (E.D.N.Y. Jan. 23, 2015) (Judge Joseph F. Bianco predicted that the New York court of appeals would follow the emerging trend represented by decisions in diverse state Supreme Court decisions in Illinois, Texas, Pennsylvania, Washington and other earlier decisions in refusing to allow recoupment of defense fees paid even if no potential for coverage ever arose.)

Mkt. Lofts Cmty. Ass’n v. Nat’l Union Fire Ins. Co., 2016 U.S. Dist. LEXIS 64014 (C.D. Cal. May 4, 2016) (Denying insurer’s motion for summary judgment based on findings that there was insufficient evidence to conclusively eliminate potential for coverage and a reasonable juror could find that the defendant failed to conduct an adequate investigation prior to denying coverage).

3. What Do See as Emerging Issues on the Intellectual Property and Part B Coverage Front (in addition to cyber)?


Lawyer/broker malpractice: Shaya B. Pac., LLC v. Wilson, Elser, Moskowitz, Edelman & Dicker, LLP, 38 A.D.3d 34 (N.Y. App. Div. 2006) (Legal malpractice arose where defense counsel failed to give notice to an excess insurer where it was evident that the demand for damages exceeded the commercial general liability policy limits. The defense counsel was insurer appointed counsel. The law firm retained by primary carrier to defendant’s insured in a pending action has an obligation to investigate whether the insured has excess coverage available. If so, it must file a timely notice of excess claim on the insured’s behalf. The appellate court reversed the trial court grant of a Motion to Dismiss.)

Patent plus: Concept Enters., Inc. v. Hartford Ins. Co. of the Midwest, 2001 U.S. Dist. LEXIS 6901 (C.D. Cal. May 22, 2001) (A duty to defend a trade dress infringement claim arose where it was asserted in conjunction with excluded claims causes of action for patent infringement, therefore implicating defense duties for the entire lawsuit. Hartford attempted to pay only 15% of the bills, based on its calculation of relative liability exposure for the covered trade dress re uncovered patent infringement claims. This approach was rejected by the court as inconsistent with the California Supreme Court’s Buss decision requiring an “immediate and complete defense” of all claims subject to right to reimbursement after performance. It concluded that any attempt to lessen the rate payable was unavailing under Civil Code § 2860 where less than all fees due were paid. The conduct constituted bad faith as a matter of law, entitling the insured to fees it incurred in its coverage dispute with Hartford.)

Trade secret plus: Jaco Envtl., Inc. v. Am. Int’l Specialty Lines Ins. Co., 2009 U.S. Dist. LEXIS 51785 (W.D. Wash. May 19, 2009) (JACO moved for partial summary judgment on the question of whether its insurer, American International Specialty Lines Insurance Company (“AISLIC”), breached its contractual duty to defend JACO in a lawsuit brought by one of JACO’s competitors for claims including unfair competition and false advertising.)

Trademark plus: Spaulding Decon, LLC v. Federated National Ins. Co. fka AVIC, Case No. 14-CA-011618 (Florida Circuit Court, Hillsborough County, July 10, 2015) (A Motion to Dismiss was denied where fact allegations for covered unfair competition alleged liability beyond the excluded trademark infringement.)

Class action suits in false advertising cases: Basic Research, LLC v. Admiral Ins. Co., 2013 UT 6 (Utah 2013): The Utah Supreme Court admitted that the ISO policy language could cover “misuse” of an advertising idea “including deceitful advertising,” “where the underlying injury is directly caused by the deceitful advertising, regardless of the product’s failure to perform.” But then the court said that “in the instant case the ‘use’ of the slogan is not the wrongdoing … Rather they claim damages due to the allegedly false nature of those slogans and the resulting inducement to by a defective product.”)

Insurance Coverage To Facilitate Coverage For Antitrust/False Advertising Cases: Am. Inst. of Intradermal Cosmetics v. Soc’y of Permanent Cosmetic Professionals, 2014 U.S. Dist. LEXIS 160395 (C.D. Cal. Nov. 14, 2014) (permitting filing of a Third Amended Complaint in an antitrust lawsuit. The new pleading asserted fact allegations of disparagement nested within Sherman Act claims in order to facilitate securing insurance coverage benefits for the ongoing settlement negotiations with the defendant’s insurers. Judge Feess found it noteworthy that it was only upon the receipt of the specific insurance policies “that Plaintiff could assess, with retained insurance coverage counsel, how to proceed with additional claims that would trigger coverage.”)

4. What Other Areas of Insurance Coverage Have You Focused on and Activities Have You Pursued to Keep Your Perspective on Coverage Issues Fresh?

Each year, our firm reinvigorates its insurance practice, focusing on new coverage opportunities as well as pushing the envelope in coverage areas where we have traditionally focused on “personal and advertising CGL coverage and other forms of coverage for intellectual property disputes.

For example, our focus includes:

• Class action antitrust litigation
• Class action false advertising lawsuits
• Wage and hour class action lawsuits looking to CGL policies, Omissions, Employment Practices Liability, Employee Benefits Liability and Directors and Officers policies

We also focus on business solutions that use insurance assets. Hence, the title of my treatise, “Insurance Coverage of Intellectual Property Assets,” 2d Ed., © 2015, Wolters Kluwer. These include:

• Helping companies structure appropriate insurance coverage for
- intellectual property claims
- antitrust and class action false advertising exposure
- Wrap policies for complex construction projects
- Trust insurance for high value estates
- Directors and Officers/Errors and Omissions insurance for medical technology and other high-risk perceived areas of practice

• Assisting companies with corporate due diligence related to deal-making and:
- Negotiating representations in warranty insurance in connection with deal-making
- Reviewing portfolios of insurance in connection with proposed M&A activity to unearth buried treasure, i.e., insurance coverage opportunities that the parties may have not surmised that can create value for whichever party in a particular transaction could benefit from the availability of defense/settlement/indemnity reimbursement

We undertake expert witness/consulting work for: “Legal malpractice lawsuits” for failure to provide timely notice to insurers and Errors and Omissions disputes regarding the scope of coverage in various forms of malpractice claims. We also represent Plaintiffs in securing coverage benefits in antitrust, intellectual property, employment, and other disputes

Finally, we have expanded the frontiers of insurance coverage availability by focusing on new areas of coverage, for cyber liability exposure, helping to identify appropriate coverages, taking advantage of existing coverage where cyberspace claims arise, and looking to new frontiers of coverage based on risks which have little footprint in liability coverage analysis, such as nanotechnology claims, virtual reality, and the interface between international and domestic insurance programs in a range of contexts.

As one underwriter at Lloyds referred to our firm’s practice, we are their “quality control department.” As a sage commentator observed, “we secure insurance coverage where everyone knows that it does not exist.”

 
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