Trademark infringement on hang tags is covered advertising injury

E.S.Y., Inc. v. Scottsdale Ins. Co., 2015 WL 6164666, No.
15–21349–CIV (S.D. Fla. Oct. 14, 2015)
Scottsdale insured ESY under a commercial general liability
insurance policy, with coverage for advertising injury.  Exist, an apparel maker, later sued ESY for
infringing its copyright and trademark in its Exist Shield Mark by using a
“Liquid Energy Shield Mark” on labels and hang tags for its competing garments.  Exist further alleged that the use of the
Liquid Energy Shield Mark was a false or misleading description of fact/false
designation of origin, and that this also violated state law.

Advertising injury, under the policy, included:
d. Oral or written publication, in
any manner, of material that slanders or libels a person or organization or
disparages a person’s or organization’s goods, products or services;
* * *
f. The use of another’s advertising
idea in your “advertisement”; or
g. 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….” There were exclusions for knowing violation of the rights of
another as well as for infringement of “copyright, patent, trademark, trade
secret, or other intellectual property rights,” but the exclusion didn’t apply
to infringement in an “advertisement” of copyright, trade dress or slogan.
In order to have coverage, the insured has to show that an
alleged violation “gave rise to an ‘advertising injury,’ ” and that “there
exists a ‘causal connection’ between that injury and the ‘advertising activity’
undertaken by” the insured.
ESY argued that the underlying complaint alleged
disparagement, which could result from a false comparison suggesting another
brand is inferior. But the allegedly infringing similarity here didn’t make any
express comparison, nor did the implicit reference dishonor or denigrate Exist:
“imitation is not disparagement as there was no comparison suggesting Exist’s
brand was inferior to Plaintiffs’.” 
Though Exist alleged it suffered reputational harm by being associated
with ESY, that just means Exist thought itself superior to ESY; it doesn’t mean
that ESY allegedly suggested that it was better than Exist.
ESY’s arguments about “[t]he use of another’s advertising
idea in your ‘advertisement,’ ” and “[i]nfringing upon another’s copyright,
trade dress or slogan in your ‘advertisement’ ” fared better.  The insurer argued that the accused hang tags
were part of the garments themselves, not advertisements.  The court disagreed.  Though something that was part of the product
might not be an ad, the hang tags were attached to the garments but not part of
the garments themselves.  They provided
information and also “presumably had the additional function of attracting
consumers to the garments themselves and to the brand more generally. If the
hang tags’ only purpose was to provide information, they would not need such a
particular aesthetic.”  Indeed, many
products don’t have “fanciful” hang tags; instead they have labels “lest they
detract from the product’s appeal. The hang tags here presumably did the
opposite—they attracted the consumer.”  Given the rule that ambiguities are resolved
in favor of coverage, “advertisement” was broad enough to cover the hang tags.
Did they hang tags allegedly use another’s advertising idea?  “[T]he Eleventh Circuit, applying Florida
law, has construed the term to mean ‘any idea or concept related to the
promotion of a product to the public.’ ” So, for basically the same reasons a
hang tag is an advertisement, it is also an advertising idea, and the complaint
was also fairly read to allege that the hang tags were trade dress. 
Further, the underlying complaint alleged copyright
infringement, which was concededly covered.
Was there “a causal connection between [the advertising]
injury and the advertising activity undertaken by” ESY?  Selling an infringing product isn’t enough to
create a causal connection: the alleged misconduct has to be committed in an
advertisement.  Again, that was what the
underlying complaint alleged here.

The infringement exclusion didn’t bar coverage because it
expressly carved out infringement in an “advertisement,” as here.  The knowing violation also didn’t apply
because, though the underlying complaint alleged
a knowing violation, the underlying plaintiff could recover without showing intentional infringement.  There can’t be a duty to indemnify without a
duty to defend, and under the insurer’s logic that the allegations sufficed to
trigger the exclusion, it could end up after trial with a duty to indemnify—if the
underlying plaintiff showed liability for non-willful infringement—without having
had a duty to defend. 

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