High Point Design, LLC v. LM Ins. Corp.

Citation: 911 F.3d 89Docket: Docket No. 16-1446-cv; August Term, 2016

Court: Court of Appeals for the Second Circuit; December 19, 2018; Federal Appellate Court

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High Point Design, LLC sought a defense from its insurers—LM Insurance Corporation, Liberty Mutual Fire Insurance Company, and Liberty Insurance Corporation—under insurance policies covering advertising injuries. The insurers denied the defense, claiming the underlying litigation's counterclaim only involved trade dress infringement, not an advertising injury. The U.S. District Court for the Southern District of New York granted High Point's partial summary judgment motion, ruling that the counterclaim's reference to High Point "offering" infringing items for sale encompassed advertising, thus necessitating Liberty's defense. However, the court noted that Liberty's obligation to defend arose only after High Point provided relevant discovery demands.

High Point, which sells footwear wholesale, was insured under several commercial general liability (CGL) and umbrella policies from Liberty from November 2008 to November 2012. The CGL policy specifies coverage for damages due to "personal and advertising injury," obligating the insurer to defend against suits seeking such damages, regardless of the allegations' validity. The policy defines "personal and advertising injury" to include infringements related to advertising, while also outlining exclusions for certain intellectual property rights but clarifying that the use of another's advertising idea in one's advertisement is not excluded.

Among High Point's products is the Fuzzy Babba slipper, sold through various retailers, while Buyer's Direct Inc., a competitor, manufactures a similar product, the Snoozie, which is protected by a design patent. The court vacated the earlier damages award and remanded the case for the determination of legal fees incurred after the provision of discovery demands.

Buyer's Direct issued a cease-and-desist letter to High Point, claiming that the Fuzzy Babba slipper infringed on its design patent for the Snoozie. In response, High Point sought a declaratory judgment asserting that its product did not infringe on Buyer's Direct's patent and claimed that the Snoozie's patent was invalid or unenforceable. Buyer's Direct counterclaimed for patent and trade dress infringement and filed a third-party complaint against Retailers for selling the alleged infringing slippers. High Point was accused of infringing the '183 Patent through its manufacturing and sales practices.

Buyer's Direct requested extensive discovery from High Point, including marketing materials and information about personnel responsible for advertising High Point's products. After being served with counterclaims, High Point informed its insurer, Liberty, about the claims and sought a defense and indemnification. Liberty disclaimed coverage, prompting High Point to initiate litigation for insurance coverage against Buyer's Direct's counterclaims.

In January 2015, High Point sought partial summary judgment, which the district court granted in March, determining that Liberty had a duty to defend High Point under both its commercial and umbrella insurance policies, interpreting the "offering for sale" language as constituting an advertising injury. By April 2016, High Point's damages were stipulated at $1.35 million, leading to a final judgment of $1,657,450.44, which included prior payments from Liberty. The case is now under appeal, with the appellate court reviewing the district court's summary judgment and the interpretation of the insurance policy de novo, focusing on the definition of "personal and advertising injury" as it relates to copyright and trade dress infringement.

The CGL policy excludes "advertising injury" related to the infringement of intellectual property rights, including trademarks and trade dress. Trade dress, as a type of trademark, is implicitly excluded from coverage. However, the policy contains a secondary exclusion that clarifies coverage for trade dress infringement in advertisements, allowing claims based on advertisements depicting High Point's products while denying coverage for claims related to the products or their packaging. This creates an inconsistency, as liability exists for advertising-related trade dress infringement but not for infringement related to the actual product or packaging.

New York insurance law governs the analysis of whether High Point faced claims of advertising injury. Key principles include: the insurer's duty to defend is broad and exceeds the duty to indemnify; a defense is required whenever allegations in a complaint fall within the insurer's risk scope, regardless of their validity; if any claims arise from covered events, the insurer must defend the entire action; and insurers must consider facts beyond the complaint's allegations. Consequently, an insurer can deny a defense only if there is no conceivable basis for coverage under the policy. If allegations are potentially covered, the insurer has a duty to defend.

Liberty's obligation to defend High Point hinges on the interpretation of "advertising injury" within standard business insurance policies. There is significant ambiguity in case law regarding the conditions under which advertising causes such an injury. Courts must compare the complaint's allegations with the policy terms; if the claim broadly fits within the policy, the insurer must defend regardless of the claim's validity. Liberty contends that the district court wrongly determined its duty to defend High Point. However, the counterclaim's "offer for sale" allegation and related discovery requests for advertising materials activate Liberty's duty to defend. Under New York law, "offer for sale" encompasses advertising, and similar interpretations apply to "marketing." The policy defines "Advertisement" as a paid announcement aiming to attract customers, while the umbrella policy covers injuries from paid announcements leading to copyright infringement. Although "offering for sale" can include non-advertising activities, displaying a product in a manner that leads to customer confusion, as alleged by Buyer's Direct against High Point, qualifies as an advertising injury. The display of infringing trade dress in advertisements can create confusion and exploit the goodwill of the original design, supporting a claim for damages. The case of R.C. Bigelow illustrates that, under a liberal interpretation of the duty to defend, allegations of advertising injury resulting from similar actions are sufficient to require insurer coverage.

Bigelow asserted that Celestial's trade dress infringement claims were covered by the advertising injury provision of its insurance policy, as the allegedly infringing trade dress appeared in Bigelow's advertisements. The slippers were advertised without packaging, showcasing their trade dress as part of the sales offer. Even if the counterclaims did not initially inform Liberty of its duty to defend, requests for discovery related to advertisements directly engaged High Point's advertising. New York law does not limit an insurer's duty to defend based solely on the complaint's language; it requires a broader consideration of underlying facts that could indicate liability for covered acts. The absence of a specific "advertising injury" label in the counterclaim does not prevent an insured from seeking defense coverage. Buyer's Direct's discovery demands serve as extrinsic evidence that aligns the counterclaim's "offering for sale" allegations with potential advertising damages.

Liberty's reliance on the Feldman Law Group case is misguided, as it was decided under Pennsylvania law, which restricts the duty to defend to claims explicitly stated within the complaint's language. In contrast, New York law allows for a more expansive interpretation, looking beyond the complaint's four corners. Liberty also contends that its duty to provide a defense only arose after receiving Buyer's Direct's discovery demands. High Point counters, asserting that Liberty waived its right to contest damage amounts on appeal due to a prejudgment stipulation that acknowledged $1,350,000 in defense costs incurred for the counterclaims.

The stipulation between the parties resolves all remaining trial issues, allowing for a judgment to be entered. High Point contends that this stipulation prevents Liberty from appealing the defense costs owed, but it does not waive Liberty's right to appeal, which remains intact. Liberty is entitled to argue that its duty to defend was not triggered until it received discovery demands from High Point. The district court indicated that its ruling on Liberty's duty to defend was based primarily on the "offering for sale" language, but Liberty's liability for defense costs should only accrue from the date it was made aware of the discovery requests. The court confirms that an insurer's duty to defend arises when there is actual knowledge of facts indicating a reasonable possibility of coverage. Liberty was informed of the relevant discovery demands on February 12, 2013. Consequently, the district court's judgment is vacated, and the case is remanded for a determination of the legal fees incurred from that date onward. The conclusion affirms Liberty's obligation to provide a defense but modifies the damages award, instructing further proceedings to ascertain the exact costs owed. Judge Newman concurs with the decision but expresses reservations about the interpretation of the "offering for sale" phrase in the context of the counterclaim.

Judge Pooler’s opinion is contested regarding the interpretation of Coverage B in Liberty Mutual's policy (No. YV5-Z21-093433-020) concerning "personal and advertising injury." The policy obligates Liberty Mutual to cover legal obligations arising from trade dress infringement in advertisements. The crux of the disagreement centers on whether High Point Design LLC's underlying lawsuit included a claim of "advertising injury" linked to trade dress infringement. In that lawsuit, High Point sought to invalidate Buyer's Direct, Inc.'s design patent for Snoozie slippers, while BDI counterclaimed that High Point's Fuzzy Babba slippers infringed both the design patent and the trade dress of the Snoozie slippers.

Importantly, BDI's counterclaim did not mention "advertising injury" or assert that High Point's advertisements harmed BDI. Despite this, the District Court determined that Liberty Mutual had a duty to defend based on BDI's patent infringement claim, interpreting "offering for sale" to encompass advertising. Judge Pooler agreed that "offering for sale" can relate to advertising but opted not to rely solely on that interpretation. Instead, the opinion suggested that the discovery demands for advertising materials in the underlying litigation further justified Liberty's duty to defend.

The opinion draws an analogy to a previous case, Century 21, Inc. v. Diamond State Insurance Co., arguing that "marketing" includes advertising. However, the dissent highlights that "marketing" is broader than "advertising" and emphasizes the distinction between "offering for sale" and "advertising." The dissent asserts that while advertising aims to persuade customers to purchase goods, "offering for sale" merely indicates availability for sale. It concludes that it is a misinterpretation to equate "offering for sale" with "advertising" under the specific definitions provided in the policy.

"Offering for sale" in the context of the lawsuit refers to a method of patent infringement as defined under 35 U.S.C. § 271(a). BDI's usage of this phrase in its counterclaim aimed to support its patent infringement claim rather than to invoke an advertising injury claim. The court referenced a prior ruling in Feldman Law Group, P.C. v. Liberty Mutual Insurance Co., which clarified that "offering for sale" did not encompass "advertising." However, this precedent was deemed not applicable because it was based on Pennsylvania law, while New York law allows for consideration of materials beyond the underlying complaint. 

The opinion highlights that the phrase "offering for sale" does not create a duty to defend in this case, similar to Feldman. Judge Pooler's ruling proposed that High Point's discovery request to Liberty Mutual for all advertising documents related to its accused products triggered Liberty's duty to defend, but only for costs incurred after Liberty became aware of this request. This timing effectively rendered the interpretation of "offering for sale" as a secondary point. 

The opinion indicates that if the "offering for sale" language had triggered liability under the Policy, it would have applied to defense costs from the moment Liberty learned of BDI's counterclaim. The District Court's prior ruling, which is now vacated, suggested that Liberty's duty to defend may have been contingent upon the specifics of BDI's document request. It is argued that Liberty’s obligation for defense costs might only have begun when High Point responded to the document request and highlighted specific ads. Nonetheless, the probability that High Point's advertising would depict its slippers meant that Liberty's knowledge of the document request was sufficient to establish a duty to defend and liability for subsequent defense costs. The conclusion aligns with Judge Pooler's opinion, except for the noted aspect regarding when Liberty's liability commenced, leading to a remand for a determination of defense costs incurred after Liberty's awareness of the document request.

Liberty modified its liability policy to specifically include "trade dress" infringement occurring "in" an advertisement, replacing the previous phrase "copyright, title or slogan" with "copyright, trade dress or slogan." While Liberty's umbrella policy continues to define "advertising injury" as "infringement of copyright, title or slogan," the exclusion provision from the Bigelow case only excluded "advertising injury" related to patent infringement or securities fraud, not trademark infringement. Thus, trade dress infringement in an advertisement was not excluded from coverage. The distinction between "personal injury" and "advertising injury" is unclear in this context. BDI's counterclaim referenced the trade dress of its slippers acquiring secondary meaning through advertising, which supported its claim but did not affect Liberty's duty to defend, as the policy excludes coverage for trade dress infringement by a product while providing coverage only for advertising-related infringement. Judge Pooler's opinion draws on the Bigelow case to interpret "offering for sale," but that case does not clarify "advertising injury" as defined in Liberty's policy. Instead, the Bigelow definition included "copying advertising ideas or advertising style," which differs from the current policy's inclusion of trade dress infringement in advertisements. The Bigelow court ruled that allegations of copying packaging in advertisements sufficiently alleged infringement of advertising ideas or style.