Insurance for Trademark Infringement: Why the Best Defense May Cost You in the End

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Posted In: Insurance Recovery

on August 10, 2015

Companies purchase commercial general liability (“CGL”) insurance policies to protect themselves from unforeseen issues that may arise. One area of coverage that is still evolving relates to intellectual property claims, including trademark infringement. While CGL policies often provide coverage and defense for various intellectual property claims, it is not always easy to determine when the insurer’s duty to defend a trademark claim has been triggered. Sometimes, obtaining coverage for such a trademark claim means sacrificing a stronger defensive position.

Often, the first step in a trademark dispute is the cease-and-desist letter. This type of letter often includes a threat from a trademark owner to the alleged infringer that if the alleged infringer receiving the letter does not stop using the trademark, then the trademark owner who sent the letter will file a lawsuit for trademark infringement and seek a number of legal remedies, including injunctive relief and monetary damages. In many cases, the cease-and-desist letter is enough to create a controversy between the parties that the receiving party may have jurisdiction to file a preemptive action for a declaratory judgment of noninfringement.

The reasons for a preemptive filing for a declaratory judgment of noninfringement are two-fold. First, it allows the company accused of infringement to set the stage and portray the situation to the court on their terms. By being the party to initially file the complaint, the company can gain some control over the litigation, the way the story is told, and the underlying theory of the case. Second, and perhaps most importantly, it allows the company accused of infringement to choose the litigation forum. This can be essential to a strong defense. The company that files first can choose a local forum and avoid increasing travel costs, or it can choose a forum that may be more sympathetic to its case. In the race to file, it is almost always better to be first.

For purposes of insurance coverage, however, even if the company alleging you infringed on its trademark has shown that a lawsuit is imminent and you file first purely for strategic reasons, the insurer may not have a duty to defend you under your CGL policy. In determining whether or not the insurer has a duty to defend in any of these scenarios, you must look to the language in the policy. The language in policies often differs which is why it is important to read your policy and understand your coverage as the insured in Hester v. Navigators Ins. Co., 917 F. Supp.2d 290 (S.D. N.Y. 2013) discovered.

In Hester, the dispute began when Tremaine Neverson, a rapper, sent David Hester, a T.V. personality on the show “Storage Wars” on A&E, a cease-and-desist letter related to the phrase “YUUUP!” Hester used the word as a catch-phrase and slogan when bidding on abandoned storage units on the show and sells merchandise featuring the word. Neverson uses the word as his catch-phrase during performances and also sells merchandise with the word “YUUUP!” featured. The cease-and-desist letter demanded Hester assure Neverson he would comply with Neverson’s demands or Neverson would “pursue the legal and equitable remedies available to him to protect and enforce his rights.” Hester placed his CGL insurer on notice of the cease-and-desist letter and the insurer denied any duty to Hester, arguing that the cease-and-desist letter was not a “suit” as defined by the policy.

Hester filed a declaratory judgment action that he did not infringe on Neverson’s rights and a claim for tortious interference with Hester’s relationship with A&E. After Hester again placed the insurer on notice, the insurer refused to provide a defense or pay for attorney fees until the counterclaim was filed. The insurer based this decision on the policy language which stated that the insurer has a “right and duty to defend the insured against any ‘suit’ seeking those damages” and that at the insurer’s discretion it may “investigate any offense and settle any claim or ‘suit’ that may result.” After receiving Hester’s complaint, Neverson filed a counterclaim against Hester and the insurer agreed to provide a defense to Hester to the counterclaim, but only covered a portion of the fees and costs associated with the lawsuit.

The Hester court held that the insurer’s duty to defend Hester did not arise until Neverson filed his counterclaim. This is due to the fact that cease and desist letters are not civil proceedings and, while there are certain circumstances where a demand letter can be sufficiently threatening to rise to that level, those exigent circumstances were not present in this case. Additionally, while Hester’s declaratory action did begin a civil proceeding, it was not filed against Hester but by Hester. Therefore, the court determined there was no duty to defend until the counterclaim was filed.

Other courts take a more expansive view, and hold that claims brought by the insured for the purpose of limiting the insured’s own liability are defensive in nature, and covered by the policy. See Ultra Coachbuilders, Inc. v. General Sec. Ins. Co., 229 F.Supp.2d 284, 289 (S.D.N.Y.2002) (holding that counterclaims were covered by the insurer’s defense obligation where they were “inextricably intertwined with the defense of [defendant’s] claims and necessary to the defense of the litigation as a strategic matter”), quoting Safeguard Scientifics, Inc. v. Liberty Mut. Ins. Co., 766 F.Supp. 324, 334 (E.D.Pa.1991); Aerojet-General Corp. v. Transport Indemn. Co., 948 P.2d 909, 926 (Cal.1997) (holding that defense costs include expenses that were part of an objectively reasonable and necessary effort to “avoid or at least minimize liability”); TIG Ins. Co. v. Nobel Learning Communities, Inc., E.D.Pa. No. 01-4708, 2002 U.S. Dist. LEXIS 10870, 41 (June 19, 2002) (holding that defense costs for affirmative claims are covered “where the claims were part of the same dispute and could defeat or offset liability”), quoting Safeguard, 766 F. Supp. at 333-334.

While a CGL policy can provide coverage for various intellectual property issues including some forms of trademark infringement, courts may not always interpret them in a way that allows for the best or most effective defense. If your company is the first to file the lawsuit in order to resolve the dispute preemptively, you may face an argument that you should be stuck paying the bill in the end. On the other hand, waiting for a “suit” to obtain insurance coverage may mean that you are fighting an infringement battle in a distant and unfriendly forum. Policyholders who have issues with trademark infringement disputes should work with their insurance broker and/or coverage counsel to properly weigh any risks that you may be taking when defending or responding to trademark infringement claims.

This blog is intended to provide information generally and to identify general legal requirements. It is not intended as a form of, or as a substitute for legal advice. Such advice should always come from in-house or retained counsel. Moreover, if this Blog in any way seems to contradict advice of counsel, counsel's opinion should control over anything written herein. No attorney client relationship is created or implied by this Blog. © 2024 Brouse McDowell. All rights reserved.