When is a house an advertisement?

Mid-Continent Casualty Co. v. Kipp Flores Architects, L.L.C., No. 14-50649 (5th Cir. Feb. 26, 2015)
KFA, an architecture firm, got a judgment in a jury trial against a builder, Hallmark Design Homes, for copyright infringement for building hundreds of buildings from KFA’s designs without licensing them. KFA initially licensed Hallmark to build 11 different house designs once, but Hallmark built several hundred more copies without paying.  Its complaint alleged that Hallmark used depictions of structures based on its works in promotional and advertising materials and “used the structures themselves to advertise their infringing structures.” Hallmark filed for bankruptcy, but the trial went forward because Hallmark was potentially covered by the policies at issue here. The jury found that Hallmark had infringed KFA’s copyrights and that KFA had an unsecured claim in Hallmark’s bankruptcy in the amount of $3,231,084 plus costs.
Hallmark’s insurer, Mid-Continent, sought a declaratory judgment that it had no duty to indemnify. Its policies excluded coverage for copyright infringement, but exempted advertising injury from that exclusion, and allowed the holder of a judgment against Hallmark to recover under the policies.  The district court found coverage under the advertising injury provision of Hallmark’s policy, holding Mid-Continent liable in the amount of the prior judgment plus attorney’s fees. Mid-Continent appealed and the court of appeals affirmed. 
Texas tries to give every policy term meaning as well as to give terms their ordinary meaning unless the policy itself shows intent to give a term a technical meaning. Ambiguity will be construed against the insurer. The “facts actually established in the underlying suit control the duty to indemnify.”  The policies at issue defined “personal and advertising injury” as “injury . . . arising out of one or more of the following offenses: . . . infringing upon another’s copyright, trade dress or slogan in your ‘advertisement.’” “Advertisement” was defined 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.” This included material on the internet or other electronic communications, as well as “only that part of a web- site that is about your goods, products or services for the purpose of attracting customers or supporters.”
Mid-Continent argued that the previous judgment never found there was an advertising injury.  “The insurer’s duty to indemnify depends on the facts proven and whether the damages caused by the actions or omissions proven are covered by the terms of the policy. Evidence is usually necessary in the coverage litigation to establish or refute an insurer’s duty to indemnify.”  However, a coverage suit often requires the parties to submit evidence of facts which were not specifically covered at the earlier trial, since issues relevant to the question of coverage can be irrelevant to the question of the insured’s liability. Thus, courts can make necessary factual findings related to such issues in coverage actions.
The issue of “advertising injury” was irrelevant to copyright infringement liability but essential to coverage under the policy. Because the jury determined that the houses themselves infringed KFA’s copyright, the key question here was whether the houses themselves were “advertisements.” The policy language, plus KFA’s “ample” evidence that Hallmark used the infringing houses for marketing purposes, showed that they were ads.   
KFA presented evidence that the houses themselves were used to attract customers, in addition to evidence of website and print promotional materials; the houses themselves were Hallmark’s primary form of marketing.  “One of Hallmark’s representatives testified in deposition in this suit that homebuyers never bought houses sight unseen, but rather would look at the model homes Hallmark built as well as elevations and floor plans in the sales office or on the website. In addition, Hallmark put up yard signs with its contact information on the sites of homes it built to attract customers.”
Mid-Continent argued that, regardless of these facts, a house could not be an “advertisement.” The policies defined an ad 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,” and Mid-Continent argued that as a matter of common sense, a house can’t be a notice, nor can it be “broadcast or published.”
However, the policies never specified that “notice” must take any particular form and never excluded from the definition a physical object, nor did they define “broadcast” or “published.” “Notice” in the OED is defined sweepingly as the “act of imparting information” or “something   which imparts information.”  Case law had construed “notice” very broadly, and “publish” was 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.”
Texas law also recognized advertising as “call[ing] to the public attention by any means whatsoever” for purposes of the Texas Deceptive Trade Practices Act, or as a “marketing device[] designed to induce the public to patronize” a particular establishment, or “a public notice drawing attention to” the attributes of a business.  This accorded with the “common understanding of the term as referring to a device for the solicitation of business.”  Hallmark’s primary means of marketing its business to the public was through the use of the homes themselves, both through model homes and yard signs on the property of infringing homes it had built.  Indeed, there was 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.”  Thus, the infringing houses, as used by Hallmark, were “advertisements.” See also King v. Cont’l W. Ins. Co., 123 S.W.3d 259, 265 (Mo. Ct. App. 2003) (same result).
Mid-Continent argued that the policy excluded coverage for Hallmark’s marketing activities because advertising necessarily was an activity or item distinct from the product being advertised.  The facts peculiar to Hallmark’s business—where the houses themselves were Hallmark’s primary means of marketing—and the broad policy language at issue justified rejection of this argument.
Next, the court agreed that Hallmark’s liability was “because of” a covered advertising injury.  KFA did not have to prove that the infringing advertisement swayed a particular buyer’s decision. Nor was KFA barred from recovery because the damages award included non-covered damages for infringement in the construction and sale of the houses themselves.  Even if infringement in construction and sale could be distinguished from infringement in Hallmark’s use of the houses as advertisements (how?), copyright law didn’t distinguish between those infringements for purposes of damages.  Thus, KFA would have received a full recovery—here, actual damages—for any type of infringement, making the advertising injury damages separate and independent from other damages resulting from infringement by construction and sale.
Mid-Continent then failed to meet its burden of proving an exclusion applied.  Mid-Continent argued that breach of contract was excluded (except implied contracts over advertising ideas), and that KFA and Hallmark entered into architectural services agreements. But KFA stated a claim only for copyright infringement, not breach of contract.  Neither side ever argued that there’d been a breach: Hallmark argued unsuccessfully that KFA never terminated the agreements, so it had granted Hallmark an implied license to continue using KFA’s designs. Copyright infringement could only have occurred after Hallmark lost its license. All the damages in the suit were copyright damages, not contract damages. Thus, Mid-Continent failed to show that the prior judgment was related to breach of contract.
Mid-Continent also claimed that the cause of action came from pre-policy conduct, but the pre-policy conduct was when Hallmark had a valid license from KFA.
Moreover, Mid-Continent wasn’t allowed to argue that Hallmark’s use of KFA’s designs wasn’t infringement under 17 U.S.C. §120(a).  Mid-Continent wasn’t allowed to relitigate facts established in the prior liability case, and the jury specifically found copyright infringement.
Finally, KFA got its attorney’s fees, based on a contingency fee agreement between KFA and its lawyers (minus a reduction for time spent not on the breach of insurance contract claim).
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