The Insurance-Intellectual Property Interface: Traps for the Unwary

Intellectual property litigators are often required to assess and pursue insurance coverage that may be available for policyholders they represent in ongoing litigation. More than assuring prompt notice of a potentially covered claim is required to meet these responsibilities. Five issues intellectual property defense counsel need to focus on in assuring that insurance coverage opportunities are properly vetted include:

1. Provide prompt notice to insurers, including accurate statements regarding the availability of insurance under the Federal Rules of Civil Procedure (R.C.P.) 26(f);
2. keep insurers who may potentially owe a defense for a complaint or counterclaim apprised of facts as they develop in the underlying action even if they are not admissible in the forum in which coverage law may apply;
3. make sure that pre-tender fees are recoverable by giving notice to all potentially applicable insurers and linking in the brokers for each to engage them in communications with the insurers as well;
4. make sure settlement authority is obtained before contacting the claimant even early on in a lawsuit to avoid a bar to recovery under the “voluntary payments” doctrine; and
5. make sure defensive fees are recovered even if they are part of the prosecution of affirmative relief, such as a counterclaim or pursuit of a lawsuit after a counterclaim is filed, as “conducted against” liability fees are recoverable in most forums.

Proper Notice to Insurers Under F.R.C.P. 26(f) Does Not Limit Notice to Filed Lawsuits

Coverage for Complaints Requiring a Formal Suit

Even though a policy may limit the obligation to defend any “suit,” attorneys’ fees expended in response to a claim where a party seeks damages against a policyholder (or threatens legal action) may inevitably lead to a lawsuit. This “suit” will trigger the insurer’s duty to assist policyholders, avoiding the argument that all policy benefits are precluded because of the failure to give prompt notice, which is often worth the early warning. If an insurer treats the notice as a “notice of circumstance” under Claims Made and Reported policies, such as Directors & Officers or Media Liability, this could be beneficial.

Counterclaims and Third-Party Complaints

A complaint is not the only pleading to consider. Counterclaims and third-party claims can also trigger an independent defense obligation. The duty to defend must be assessed at the outset of the case based upon facts and inferences known to an insurer from the pleadings, available information and its own investigation at the time of the tender of defense.

While some forums limit the duty to defend to the four corners of the pleading, viewed in light of the policy language, even those forums often look to inferences from the allegations of the pleading. The duty to defend lasts through appeal and includes fees necessary to address post-judgment motions. Policy benefits can be critical to litigants who have not resolved their suit. The insurer’s duty to fund an appeal does not, however, include the duty to collateralize an appeal bond so appellants may have to fund an adverse judgment while an appeal is pending.

IP Defense Counsel Must Assure that Clients Do Not Lose Coverage

Intellectual property attorneys may have a duty to apprise their clients of the need to notify their clients’ insurers of claims as part of their retention in order to fully represent their clients’ interests in a lawsuit for which they are counsel of record. This duty is heightened when there is an obligation in a federal court action to give the notice to the opposing counsel of any coverage that may be available under F.R.C.P. 26(f).

Cease and Desist Letters

Receipt of a demand to cease and desist from alleged intellectual property infringement, or seeking to license under asserted IP rights, may trigger an obligation to give notice to an insurer. If not notified of such a claim, an insurer may successfully argue in a number of forums that this failure precludes any policy benefits.

In jurisdictions such as New York and Illinois, case law can preclude policy benefits for even a few months’ delay in providing notice to an insurer.

Illinois

In Amerisure Ins. Co. v. Laserage Tech. Corp., 2 F. Supp. 2d 296 (W.D.N.Y. 1998), the court concluded potential coverage under “personal injury” policy language for claims of disparagement based on allegations that the insured’s competitor accused it of wrongfully telling mutual potential customers that the competitor’s product infringed its patent because “wrongfully asserting that a competitor’s product infringes patents clearly defames the competitor and disparages his product.”  Nevertheless, a defense was unavailable because Laserage waited from August to October of 1995 before altering its insurers to the lawsuit against it and actively engaged counsel to defend its interests.  This delay triggered application of Illinois’ late notice rules which required notice be provided to all impact insurers as soon as practicable under the applicable policy language.

New York

Several cases applying New York law concluded that pre-suit cease and desist letters could eviscerate potential liability so that the failure to advise of an insurer of those claims could preclude potential coverage for a subsequently filed lawsuit, as the asserted claims required prompt notice to the insurer to avoid loss of policy benefits as precluded pre-tender fees.

Prof’l Prod. Research Inc. v. Gen. Star Indem. Co., 623 F. Supp. 2d 438, 445 (S.D.N.Y. 2008) citing Technaoro Inc. v. U.S. Fidelity & Guar. Co., 2006 WL 3230299, at *7 (S.D.N.Y. Nov. 7, 2006) (five-month delay unreasonable in advertising injury case) (A statute effective January 1, 2009 modifies New York law prospectively to require a prejudice standard for delayed or incomplete notice. But this new standard will not apply to coverage in place before that date.).

A recent decision purporting to apply New York law in Frankenmuth Mut. Ins. Co. v. Hockey Cup, LLC, No. 18 C 8142, 2019 U.S. Dist. LEXIS 160278 (N.D. Ill. Sep. 20, 2019) relied heavily upon Gelfman v. Capitol Indem. Corp., 39 F. Supp. 3d 255 (E.D.N.Y. 2014). Gelfman held that it was “undisputed” that the Gelfmans learned of the underlying plaintiffs’ possibility of suing them “when the [underlying plaintiffs’] attorney sent the Gelfmans, through their then counsel, a cease-and[-]desist letter dated May 31, 2007, demanding that they stop their infringing activities and threatening to take legal action.” Id. at 263 (emphasis added). The insurer in Gelfman became aware of the dispute “more than thirteen months later, … after the [underlying suit] commenced[.]” Id. In turn, Gelfman relied upon Prof’l Prod. Research, Inc. v. Gen. Star Indem. Co., 623 F. Supp. 2d 438, 442 (S.D.N.Y. 2008), which determined that late notice arose on the basis of two C&D letters sent to the insured, one of which alleged that the insured’s product was infringing on underlying plaintiff’s trade dress and the other of which alleged that the underlying plaintiff “has been and continues to be damaged.” (emphasis added)

While superficially relevant, Gelfman and Prof’l Prod. featured C&D letters that threatened to take legal action or made demands for damages. The Court conceded that the March 2017 email in Hockey Cup “stops short of threatening legal action.” Instead, it characterized the letter as “leav[ing] no doubt that the NHL intended to enforce its trademark rights against A&R.” But that inference was improperly drawn in favor of Frankenmuth, who sought summary judgment.

“Conducted Against” Liability Fees Are Recoverable

D.R. Horton, Inc. v. Mt. States Mut. Cas. Co., 69 F. Supp. 3d 1179 (D. Colo. 2014) explains why the majority of jurisdictions allow defensive recovery of attorneys’ fees where they include a counterclaim or even an initial suit in a lawsuit, including a covered counterclaim that triggers a defense obligation. As the court reasoned, id. at 1198:

A number of cases have held that the duty to defend includes paying for affirmative claims filed by the insured in some circumstances. For example, when the insured defendant files a counterclaim arising from the same facts as part of its defense strategy, several courts have held that the insurer must pay the costs of the counterclaim as well as the costs of directly refuting the plaintiff’s claim.

Significantly, D.R. Horton concluded that a fee reimbursement for pursuit of “affirmative claims” was not limited to prosecution for a claim of affirmative relief in the same distinct legal forum. (citing IBP, Inc. v Nat’l Union Fire Ins. Co. of Pittsburgh, PA, 299 F. Supp. 2d 1024, 1031 (D.S.D. 2003)).

Ensuring Pre-Tender Fees Are Recoverable by Providing Prompt Notice to Insurers

A failure to provide notice even where it does not preclude the right to any defense may limit a client to recovery of only post-notice attorneys’ fees. There are three significant issues posed by late notice of a claim for an insured or its counsel to an insurer.

First, will late notice forfeit the insured’s right to obtain any benefits under its policy for either defense or indemnity?

Second, will prejudice be a burden of the insurer or insured in those jurisdictions that follow a prejudice rule? In jurisdictions where notice is a condition precedent has time passed so that no benefits are available or are only pre-tender fees precluded?

Third, where pre-tender fees are barred in the majority of jurisdictions, including Alabama, Connecticut, Georgia, Michigan, Minnesota, Pennsylvania, Texas and Utah, as well as California and New York, it is critical to provide notice as soon as possible.

IP Counsel May Have Duty to Refer Cases to Coverage Counsel

The growing number of IP counsel may have a heightened duty to secure the assistance of coverage counsel in jurisdictions that make the trigger of coverage “facts known to the insurer” rather than “facts plead” or “facts available to an insurer.”

This problem is compounded in an increasing number of jurisdictions where “facts known to the insurer” determine whether an insured can secure coverage. The “facts known” standard raises the bar for IP defense counsel because counsel’s ethical duties to their insured clients may no longer be discharged by advising an insured to contact its IP insurance broker providing notice to the insurer on risk as of the date of the filing of the complaint. This notice may not sufficiently protect an insured’s right to policy proceeds in many cases. Relying on a corporation’s internal resources (or that of its insurance brokers) to assure that appropriate notice given to all potentially covered claims will not guarantee they attain all available policy benefits.

The Role of IP Counsel in Insurance Coverage Disputes

Fed. R. Civ. P. 26(f) contemplates that clients will look to their IP defense counsel for advice on all aspects of the case. Some IP defense counsel include this paragraph in their retainer agreement:

We are being retained as your intellectual property counsel. We do not practice insurance coverage law nor will we render advice on whether or not claims asserted against an insured are potentially covered or which insurers should be notified of a claim. Our representation is limited to the underlying intellectual property litigation matters.

The following additional paragraph is preferable:

We recommend you retain insurance coverage counsel in addition to consulting your insurance broker to assure notification is properly provided for all claims asserted against your company and seek their advice on what additional facts beyond the pleadings should be forwarded to your insured to enhance your company’s projects for securing insurance coverage.

Take the Safest Course

The safest course is to advise clients in writing to always investigate the potential for coverage whenever damages are sought against them, whether by way of complaint or counterclaim. If a client seeks advice or the prospects for a favorable recovery against its insurer, the client should be promptly referred to coverage counsel. Such counsel’s expertise may be required to analyze, in light of applicable choice of law rules, which forum is best to address late notice issues.

In either event, a client’s exercise of business judgment to not pursue such a claim would not be chargeable to intellectual property counsel unless the defense counsel had an opportunity to persuade the insured not to abandon coverage benefits and did not seek to associate coverage counsel to have the insured revisit that issue in light of advice pertinent to the risks and opportunities where coverage was available.

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