Product Liability: An Update from the PLC
A Fair Trial Shouldn’t Cost Millions: Colorado Rejects Excess Interest on Appeal
By Theresa Wardon Benz and Kristen Ferries
Imagine it: You lose at trial, but you have a strong appellate issue—the trial court gave an erroneous pattern jury instruction on the meaning of “design defect.” You appeal, seeking clarification of the pattern instruction and a new trial in which the jury is properly instructed, and you are successful. After several years on appeal, your case is ready for retrial and, despite the accurate instructions, you lose again. To add insult to injury, the trial court applies a whopping 9% interest rate from the date the claim accrued through the entire appeal and retrial—a period of nearly ten years—even though the market interest rate during that time was just one to three percent. Your client is now faced with a judgment including nearly $2 million in “prejudgment” interest that accrued during the pendency of your successful appeal.
The purpose of accruing interest on appeal is “to eliminate the financial incentive (or disincentive) to appeal and to ensure that the judgment creditor whose satisfaction is delayed due to an unsuccessful appeal receives the time value of his or her money judgment.” Ford v. Walker, 2022 CO 32, ¶ 65, __P.3d __ (Colo. 2022) (quoting Rodriguez v. Schutt, 914 P.2d 921, 928 (Colo. 1996)). But the statute governing prejudgment interest in Colorado was ambiguous about what interest rate applies when the judgment is reversed but remanded for a new trial. The statute states:
If a judgment for money in an action brought to recover damages for personal injuries is appealed by a judgment debtor and the judgment is affirmed, postjudgment interest [at a market rate] is payable from the date of judgment through the date of satisfying the judgment. If a judgment for money in an action to recover damages for personal injuries is appealed by a judgment debtor and the judgment is modified or reversed with a direction that a judgment for money be entered in the trial court, postjudgment interest [at a market rate] is payable from the date of judgment through the date of satisfying the judgment. This postjudgment interest is payable on the amount of the final judgment.
C.R.S. § 13-21-101(2) (emphasis added). So, the statute is clear that a market-based interest rate applies in three situations: when a judgment debtor appeals and the judgment is (1) affirmed, (2) modified, or (3) reversed with directions to enter a new judgment, the market-based interest rate applies. But what happens when a judgment is appealed, reversed, and remanded for a new trial? Thanks to Ford’s pursuit of a second appeal to clarify the meaning of section 13-21-101(2), appellants now have an answer to that question: market-based interest—and nothing more—accrues during the pendency of a successful appeal, regardless of the outcome of the retrial.
The Walker case involved a product liability claim concerning the plaintiff’s twenty-year-old Ford Explorer. The plaintiff was rear-ended at approximately 35 miles per hour by an inattentive college student and sustained whiplash injuries. The driver’s seat yielded rearward in the crash. Plaintiff argued that the rearward yield caused him injuries, while Ford argued that the rearward yield absorbed crash forces and actually prevented further injuries. The existence and severity of the plaintiff’s injuries was fiercely contested at trial—although the plaintiff was still able to go about his daily activities (including caring for his young daughter and skiing expert terrain at Colorado’s largest ski areas), his friends and family testified that he suffered from non-specific injuries related to the crash. He claimed millions in damages associated with past and future medical care, lost wages, and pain and suffering.
At the first trial, the trial court provided the pattern jury instruction on design defect over Ford’s objection. That instruction permitted the jury to find the existence of a design defect so long as the evidence satisfied the “consumer expectations test.” Ford objected to the pattern instruction because the supreme court had previously held that the risk-benefit test—not the consumer expectations test—governs in design defect cases. The consumer expectations test is satisfied if an ordinary consumer would not “expect” the vehicle to perform the way it did—regardless of whether the vehicle design was the safest one on the market. And the alleged defect at issue—the seat’s rearward yield during a rear-end collision—was particularly susceptible to the trial court’s error because an ordinary consumer might not expect the force of a rear-end collision to cause the driver’s seat to yield rearward, but in reality, that rearward yield absorbs crash forces that would otherwise injure the driver. The plaintiff’s lawyer took advantage of the error by peppering both his opening statement and closing argument with references to a (hypothetical) baby in the back seat, which he argued could have been injured in a crash by the yielding seat. The plaintiff’s lawyer actually argued: “This thing is going to come down and whack the you-know-what out of it, this collapsed seat. And you’ve got a little kid sitting back there.” But there was no child in the backseat during the crash—the driver was the only person in the vehicle. The jury returned a verdict for the plaintiff, and the trial court entered judgment in March 2013.
Ford appealed. Ford argued that the risk-benefit test, which requires that the benefits of a particular design be outweighed by the risk that design presents to consumers, is the appropriate test in a design defect case. See Ortho Pharm. Corp. v. Heath, 772 P.2d 410, 413 (Colo. 1986). The court of appeals reversed, holding that the pattern instruction on the consumer expectations test “misapplies Colorado law.” Walker v. Ford Motor Co., 2015 COA 124, ¶ 3. But the plaintiff sought certiorari in the Colorado Supreme Court (which affirmed), so the case was not remanded for retrial until late 2018. The jury in the retrial returned a verdict for the plaintiff, apportioning just 40% of the fault to Ford. Still, Ford’s share of the damages amounted to more than $2 million.
But then the plaintiff requested 9% “prejudgment” interest from the date of the crash in 2009 until satisfaction of the judgment ten years later, which amounted to nearly $2 million in interest accrued during the pendency of Ford’s successful appeal alone. Ford objected, arguing that the relevant statute (quoted above) required that a market-based interest rate be applied because Ford, a “judgment debtor,” appealed “a judgment for money in an action brought to recover damages for personal injuries.” On appeal, Ford simply stated the obvious: a defendant should not be penalized to the tune of $2 million for pursuing a successful appeal. This was particularly true considering the supreme court had previously stated that prejudgment interest on appeal should never create a “financial incentive (or disincentive) to appeal.” Rodriguez, 914 P.2d at 929. But the court of appeals affirmed, refusing to further interpret an ambiguous statute that had been revised by the supreme court on several previous occasions. See Walker v. Ford Motor Co., 2020 COA 164, ¶ 13, 490 P.3d 996, 998 (Colo. App. 2020) (noting that “[j]udicial attempts to construe section 13-21-101 in a manner that aligns with perceived legislative intent have, in the past, created more problems than they have solved”). Ford successfully obtained certiorari.
The Colorado Supreme Court held that applying an above-market interest rate during the pendency of an appeal results in financial “incentives and disincentives [that] are out of whack and are precisely what the legislature sought to eliminate by requiring a market-based postjudgment interest rate whenever the judgment is ‘appealed by the judgment debtor.’” Walker, 2022 CO 32, ¶ 71. The supreme court explained as follows:
By switching from the fixed interest rate of nine percent to the market-based postjudgment interest rate whenever the judgment debtor appeals the judgment, the legislature ensured both that the successful plaintiff would be fairly compensated for the time value of the judgment and that any incentive or disincentive to appeal would be neutralized.
Id. (footnote omitted). The court recognized that the legislature’s purpose to “eliminate the financial incentive (or disincentive) to appeal” could only be accomplished if a market-based interest rate is applied when the judgment debtor appeals regardless of the outcome of the appeal. As the supreme court stated:
At the time the decision to appeal is made, the judgment debtor has no way of forecasting the final outcome of the case. Nor would it be fair to expect the judgment debtor to gaze into a crystal ball before deciding whether to appeal the judgment. . . . Had Ford known that a fixed, above-market interest rate would apply until satisfaction of any new money judgment at the retrial, it would have been financially disincentivized to appeal the judgment. The risk of having a nine percent interest rate throughout the pendency of this case (more than a decade) may have scared Ford off from pursuing its meritorious appeal.
Id. ¶¶ 74-75. The court also noted that application of an above-market interest rate on appeal would “impact development of the law” because judgment debtors would be “dissuaded from pursuing meritorious appeals of trial errors” and then “those errors would never be corrected and would likely be repeated.” Id. ¶ 76. The Walker case is a perfect example: “the trial court's error on an issue of law—how to properly instruct juries in design defect cases—would have gone uncorrected, as neither Walker I nor Walker II would have been penned.” Id. ¶ 76.
In sum, the Walker court emphasized that (1) defendants have a right to pursue meritorious appeals free from financial penalty and (2) use of market-based interest rates on appeal benefits the public because decisional law is clarified and developed through resolution of meritorious appeals. Thus, the Colorado Supreme Court held in no uncertain terms that a market-based interest rate—and nothing more—shall be applied to a judgment once the defendant appeals.
This result is significant for defense attorneys advising their clients on whether to appeal an adverse judgment, particularly when the appeal could drag on for years. Prior to the Walker decision, defendants faced uncertainty as to the financial risk involved in pursing an appeal—sure, we might win on appeal, but if we lose at the retrial, we could be saddled with millions in excess “prejudgment” interest. Now, judgment debtors can decide whether to appeal based on the appeal’s merits alone, confident that even in the event of a loss at retrial, the interest accrued on the judgment during the appeal will be commensurate with what they accrued on the market during that time, and nothing more.
Theresa Wardon Benz is a partner at Wheeler Trigg O’Donnell LLP in Denver. She focuses her practice on nationwide high-stakes appeals and trials and is an accomplished appellate practitioner with experience in state supreme courts, federal courts of appeal, and the U.S. Supreme Court—benz@wtotrial.com.
Kristen Ferries is an associate, also at Wheeler Trigg O’Donnell LLP in Denver. She represents clients in complex trials and appeals, particularly in the recreation industry—ferries@wtotrial.com.
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Insurance Law: Covered Events
Professional Liability Insurance Law SLG Leadership Notes
By William McVisk
Edited by Allyson L. Moore
The ILC’s Professional Liability SLG offers opportunities for members to participate and learn about developments in professional liability coverage issues. The SLG tries to meet quarterly. At these meetings we discuss business and have discussions of relevant professional liability topics. For example, earlier this year, we had a discussion about how insurers should deal with situations in which their insured ceases cooperation with the defense of the claim. In addition, SLG members have the opportunity to publish in DRI publications, such as The Brief Case. In May, two of our members published articles, and another article is being published in this issue. If you are interested in joining the SLG, giving a presentation at one of our meetings, or publishing an article related to professional liability, please contact me at wmcvisk@tresslerllp.com or co-Chair Brian Bassett at bbassett@tlsslaw.com.
Advertising Injury and Personal Injury SLG Leadership Note
By Daniel I. Graham, Jr.
Edited by Allyson L. Moore
In courtrooms throughout the country, judges are assessing the types of 21st century risks and exposures to which “personal and advertising injury” liability coverage might apply. And as they do, they contribute to an ever-evolving legal landscape with outcomes that can vary from state to state and courtroom to courtroom.
Biometrics and violations of privacy. Misuses of social media. The infringement of intellectual property. Disparagement and defamation.
The Advertising Injury and Personal Injury Subcommittee brings together practitioners throughout North America to share their experience with this developing body of case law. Our members share their insights in DRI publications. We speak on cutting-edge topics at the Insurance Law Committee’s popular educational events, including the Insurance Coverage and Claims Institute and the Insurance Coverage and Practice Symposium.
We welcome your involvement and encourage you to join the Advertising Injury and Personal Injury Subcommittee. Please do not hesitate to contact me at dgraham@nicolaidesllp.com for more information.
And if our subcommittee isn’t for you, please know that the Insurance Law Committee offers its members plenty of other subcommittees where they can learn, contribute, and participate. Come join us!
Insurance Law: The Vermont Supreme Court Weighs in on COVID-19 Business Interruption Claims
By Matt Borick and Walter Judge
Edited by Allyson L. Moore
The Facts
The insured in the case, Huntington Ingalls Industries, is the largest military shipbuilder in the U.S., with more than 42,000 employees. Huntington purchased an “all risk” property insurance policy in March 2020 from its captive insurance subsidiary, Vermont-based Huntington Ingalls Industries Risk Management LLC, which, in turn, purchased policies from multiple reinsurers to cover its obligations. The policy at issue covered all real and personal property “against all risks of direct physical loss or damage to property.” The policy also contained a business interruption clause covering “[l]oss due to the necessary interruption of business conducted by [Huntington], whether total or partial . . . caused by physical loss or damage insured herein.” Notably, the policy did not include the standard-form virus exclusion that has been available in the insurance industry since 2006.
Not long after Huntington obtained the policy, the first COVID-19 case arose among Huntington’s shipyard employees. By September 2020, more than 1,000 employees had been infected, and by April 2021, more than 6,000 infections had occurred. During the course of these infections, Huntington and its captive sought coverage from the reinsurers under the reinsurance policies for property damage, business interruption, and other losses suffered as a result of the virus, the pandemic, and civil authority orders. Coverage was denied.
The Lawsuit
Following the denial of coverage, Huntington and its captive (collectively, “plaintiffs”) filed suit in the Vermont Superior Court seeking a declaratory judgment that they were entitled to coverage under the policy. The suit alleged that Huntington suffered “direct physical loss or damage to property” when the virus lingered in the air for several hours at the shipyard and when infected droplets fell onto and adhered to surfaces for several days, transforming them into “fomites.” The suit further alleged losses in the form of disruption of operations, schedule impacts, increased expenses to continue operating, lost profits, and other losses.
The Superior Court concluded that plaintiffs had not alleged sufficient facts to support a viable claim for coverage, and therefore entered judgment on the pleadings in favor of the reinsurers. The basis for the decision was that Huntington did not suffer loss of property (i.e., because the shipyard continued to operate despite the presence of the virus) but rather suffered uncovered income losses. The decision was bolstered by a majority approach emerging in federal and state courts that, as a matter of law, the presence of the virus on property does not constitute “direct physical loss or damage to property.”
The Decision on Appeal
Plaintiffs appealed the dismissal to the Vermont Supreme Court. On appeal, the Supreme Court recognized that the key issues to decide were (a) the interpretation of the phrase “direct physical loss or damage to property” and (b) whether the facts as alleged by plaintiffs were sufficient – at the pleadings stage of the case – to state a claim for physical loss or damage that should survive a motion to dismiss. By a 3-to-2 vote of the Justices, the Court found that plaintiffs had sufficiently alleged a claim that, if ultimately proven before a trier of fact, would demonstrate coverage under the policy, and therefore the Court reversed the dismissal and reinstated the case.
The majority first examined the phrase “direct physical loss or damage to property,” noting that the Court was not bound by the out-of-state decisions that have interpreted the phrase so as to foreclose COVID-19-based property damage claims. After a lengthy discussion, the majority stated as follows:
“Direct physical damage” requires a distinct, demonstrable, physical change to property. “Direct physical loss” means persistent destruction or deprivation, in whole or in part, with a causal nexus to a physical event or condition. Purely economic harm will not meet either of these standards.
On the way to reaching this interpretation, the majority explained that “a distinct, demonstrable, physical alteration need not necessarily be visible; alterations at the microscopic level may meet this threshold,” and that “[i]f a distinct, demonstrable change to property occurred that caused an interruption in business operations, that change will likely need some type of physical remediation or repair to address that alteration.”
Then, in applying this interpretation to plaintiffs’ allegations, the Court began by observing the “extremely liberal” and “exceedingly low” pleading standard that applies in Vermont’s state courts—namely that a pleading may be dismissed only where it is “beyond doubt that there exist no facts or circumstances that would entitle [plaintiffs] to relief.” Against this standard, the majority found that plaintiffs sufficiently alleged “direct physical damage” by their claim that “the virus physically altered property in [Huntington’s] shipyards when it adhered to surfaces.” The majority also pointed to the allegation that “as a result of such physical alternations to its property, [Huntington] has had to take steps to remedy the situation by physically altering its property,” which steps were “beyond mere cleaning.” Under these circumstances, the majority was “inclined to allow experts and evidence to come in to evaluate the validity of insured’s novel legal argument before dismissing this case based on a layperson’s understanding of the physical and scientific properties of a novel virus.” Finally, the majority concluded its analysis with a caveat:
Although the science when fully presented may not support the conclusion that presence of a virus on a surface physically alters that surface in a distinct and demonstrable way, it is not the Court’s role at this stage in the proceedings to test the facts or evidence . . . .
To be clear, this opinion does not state that what occurred in insured’s shipyards is “direct physical loss or damage to property” under the policy. We merely conclude that insured has alleged enough to survive a Rule 12(c) motion under our extremely liberal pleading standards.
The remaining two Justices who heard the appeal dissented, arguing that as a matter of law “direct physical loss or damage to property” does not occur when human-generated droplets of a virus come to rest on surfaces. This is consistent with the majority of cases to date, which ultimately rest on the notion that COVID-19 harms people, not property. The dissent contended that in order for an event to physically damage property under the terms of the policy, the event must “alter the property’s tangible characteristics” and “require[] the property to be repaired, rebuilt, or replaced.” While the dissent accepted as true that plaintiffs had sufficiently alleged that infected droplets became contagious fomites at the shipyard, this did not “alter the appearance, shape, color, structure, or other material dimension of the property.” In other words, “fomite does not physically change property,” and simply wiping away fomites from a surface does not constitute a “repair” to the property. The dissent further argued that the other measures Huntington took were to protect people rather than to repair property. And in response to the majority’s position that plaintiffs had pled a novel claim that could be further developed, the dissent characterized the claim as a metaphysical one that should be rejected.
The Takeaway
The Vermont Supreme Court’s decision in Huntington Ingalls Indus., Inc. et al. v. Ace American Ins. Co. et al. is not the first in the U.S. to conclude that COVID-19 business interruption lawsuits should not be dismissed without the development of further evidence, but it is the first such decision by a state’s highest court. But what does the decision really mean? First, at a high level the decision is a clear reminder that the liberal pleading standard remains alive and well in Vermont, notwithstanding the much tougher “plausibility” standard adopted in the federal courts back in 2007 and since adopted by a number of states. Second, the decision paves the way for similar COVID-19-related claims, especially in Vermont, to advance into the discovery, expert witness, and summary judgment phases, where litigation costs can ramp up quickly and significantly. What remains to be seen—as the majority acknowledges in the opinion—is whether insureds will be able to prove that the SARS-CoV-2 virus actually causes “direct physical loss or damage to property,” thereby triggering coverage. For now, we will just need to wait and see.
Walter E. Judge, Jr., is a member of the Burlington firm of Downs Rachlin Martin, PLLC, Vermont’s largest law firm. He focuses on commercial litigation, insurance law, products liability, and intellectual property litigation. He is a past DRI State Representative for Vermont, and a member of DRI’s Commercial Litigation Committee. He is a member of the Tri-State Defense Lawyers Association, which is the SLDO for northern New England.
Matthew S. Borick is a member of Downs Rachlin Martin PLLC, where his practice areas include commercial litigation, privacy and data security, insurance law, and intellectual property. He is a member of DRI and the Tri-State Defense Lawyers Association.
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Insurance Law: Covered Events (Cont.)
Coverage When Punitive Damage Awards Are Compensatory Damages Against Attorneys
By William McVisk
Edited by Allyson L. Moore
Many professional liability insurance policies, like other third-party liability policies, exclude coverage for punitive damages. Also, in many states the courts have ruled that punitive damages are not insurable. E.g., Public Service Mut. Ins. v. Goldfarb, 53 N.Y.2d 392, 400, 425 N.E.2d 810, 814 (1981) (insurance for punitive damages against public policy); Ford Motor Co. v. Home Ins. Co., 116 Cal.App.3d 374, 383, 172 Cal.Rptr. 59 (1981); Butterfield v. Giuntoli, 448 Pa.Super. 1, 18, 670 A.2d 646, 654 (1995) (direct liability for punitive damages is uninsurable, but vicarious liability for punitive damages is insurable). This is important for insurers because punitive damage awards are typically higher than compensatory damage awards—and can be as high as ten times the amount of a compensatory award. State Farm Mut. Auto. Ins. Co. v. Campbell, 538 U.S. 408, 425 (2003).
However, while insurers may be protected from covering punitive damage awards levied directly against their attorney clients, a recent case from the Illinois Supreme Court shows that defense attorneys at least may be liable to pay compensatory damages for a punitive damage award levied against the attorney’s client. In Midwest Sanitary Service, Inc. v. Sandberg Phoenix & Von Gontard, P.C., 2022 IL 127327, __ N.E.3d __ (2022), the plaintiffs filed a legal malpractice suit against their attorneys seeking reimbursement for a punitive damages award against them, allegedly due to the attorneys’ professional negligence. The defendant law firm moved to dismiss, arguing that punitive damages could not be awarded against attorneys due to Illinois public policy and a statutory prohibition on punitive damage awards for legal malpractice, 735 ILCS 5/2-1115.
In the underlying case, Midwest Sanitary Service had been sued for retaliatory discharge by a former employee who alleged that he was terminated after reporting health and safety violations to the Illinois Environmental Protection Agency. The trial resulted in a verdict of $160,000 in compensatory damages and $625,000 in punitive damages. The plaintiffs alleged that the defendant attorneys failed to list all of the witnesses they intended to call at trial, which led to six defense witnesses being barred, failed to disclose a voicemail message from a customer, which led to a “missing evidence” instruction, and failed to discuss settlement with opposing counsel without discussing that stance with the client, all of which allegedly resulted in the award of punitive damages.
The first basis of the attorneys’ motion to dismiss was that § 2-1115 of the Illinois Code of Civil Procedure, 735 ILCS 5/2-1115, prohibited an award of punitive damages in a legal malpractice case. Section 2-1115 provides that in any action for legal malpractice, “no punitive … damages shall be allowed.” The court rejected this argument, however, finding that the award of punitive damages in the underlying case, which the malpractice plaintiffs had paid, were compensatory damages in the malpractice case. The court explained that the punitive damages paid in the underlying retaliatory discharge case “are an element of compensatory damages in the legal malpractice action because they do not punish the attorneys’ alleged misfeasance or nonfeasance. In other words, the damages make [the plaintiff] whole by compensating it for the entirety of its pecuniary loss ….” 2022 IL 127327, ¶ 28.
The defendants in Midwest then argued that prior Illinois courts, like courts in several other states, had concluded that lost punitive damages were not recoverable in a legal malpractice case. For example, in Tri-G, Inc. v. Burke, Bosselman & Weaver, 222 Ill.2d 218, 856 N.E.2d 389 (2006), the court considered a legal malpractice case in which the plaintiffs sought to recover both compensatory and punitive damages they would have recovered in the underlying case in the absence of the defendants’ negligence. The court in Tri-G ruled that lost punitive damages could not be recovered in legal malpractice cases for several reasons. First, such an award would be “illogical” if the plaintiff had already been awarded full compensation for the damages it actually sustained. Id. at 267. Second, allowing recovery of lost punitive damages in a legal malpractice case “contravenes the nature of punitive damages, as they are not awarded as compensation, ‘but serve instead to punish the offender and to deter that party and others from committing similar acts of wrongdoing in the future.’” Id. The court also found that § 2-1115 of the Code barred recovery of punitive damages in a legal malpractice action, and it would be absurd to conclude that if lawyers cannot be compelled to pay punitive damages for their own conduct, they could nevertheless be compelled to pay punitive damages attributable to misconduct of others. Id. at 267-68. Additionally, the court considered that an award of lost punitive damages would be speculative and would make it less likely that cases would settle because of the potential for dissatisfied clients to seek recovery for negligent undervaluation of punitive damages claims. Finally, it would exact a societal cost by making it more difficult for consumers to obtain legal services or obtain recovery for legal malpractice.
The court in Midwest distinguished the Tri-G case and other cases precluding recovery for lost punitive damages, noting initially that the plaintiff in Midwest had paid compensatory damages and was therefore not speculating about the amount of damages, and now sought to be made whole in the legal malpractice action. Midwest, 2022 IL 127327, ¶ 33. As a result, the punitive damages “became an element of compensatory damages.” Id. Also, there would be no need to speculate about the amount of damages, since that amount was determined in the underlying case and paid by the legal malpractice plaintiffs. This would also mean that settlement of cases would not be made more difficult because the damages paid are fixed. Id. ¶ 35. Finally, there would be no risk of societal cost because the damages recoverable from the attorney in the legal malpractice case would be based on proof of the attorneys’ negligent acts and proof that the negligence proximately caused the damages actually paid. Id. ¶ 37.
The Midwest case is not the first case that allowed the recovery of punitive damages awarded in an underlying case from attorneys in a legal malpractice case. The Supreme Court of Kansas allowed such a recovery in Hunt v. Dresie, 241 Kan. 647, 740 P.2d 1046 (1987), and a Colorado court allowed the recovery of punitive damages paid in the underlying action in Scognamillo v. Olson, 795 P.2d 1357 (Col. App. 1990). The common thread in all of these cases was the courts’ conclusion that punitive damages awarded in the underlying cases had become compensatory damages in the legal malpractice cases provided that the plaintiffs could prove that the award of punitive damages was proximately caused by the attorneys’ malpractice in the underlying case.
In contrast, courts have refused to allow awards against plaintiffs’ attorneys for the failure to receive punitive damages in underlying cases for the reasons discussed in the Tri-G case. E.g., Ferguson v. Lieff, Cabraser, Helman & Bernstein, 30 Cal.4th 1037, 1046, 69 P.2d 965 (2003); Green v. Kanazawa, 2017 WL 10647711 (U.S. D.C. HA 2017) (unreported); Osborne v. Keeney, 399 S.W.3d 1, 23 (Ky. 2012); Friedland v. Djukic, 191 Ohio App 3d 278, 284, 945 N.E.2d 1095, 1100 (2010); but see Jacobsen v. Oliver, 201 F. Supp. 2d 93, 100 (D.D.C. 2002) (D.C. law); Elliott v. Videan, 164 Ariz. 113, 119-20, 791 P.2d 639 (Ariz. Ct. App. 1989).
Assuming that other courts follow the lead of the courts in Midwest, Hunt, and Scognamillo, it will mean that attorneys who defend cases seeking punitive damages are at risk that the punitive damages award against their client could be part of a damage claim against them for malpractice, while attorneys for plaintiffs seeking punitive damages have no risk that they could be liable for lost punitive damages caused by their malpractice. The court reasoned that compensatory damages were designed to make the client whole for what they lost due to the lawyer’s negligence, and that included punitive damages which they could have recovered in the underlying suit but for that negligence. Id. The court also reasoned that while “lost punitives” do not punish the wrongdoer, them may indirectly further the goal of deterrence by ensuring that attorneys will be motivated to exercise reasonable care to investigate claims for punitive damages. Id. at 101-02.
In other states, though, even plaintiffs’ attorneys may be liable for punitive damages their clients were unable to recover due to their attorneys’ negligence. E.g., Jacobsen v. Oliver, 201 F. Supp. 2d 93, 100 (D.D.C. 2002) (D.C. law); Elliott v. Videan, 164 Ariz. 113, 119-20, 791 P.2d 639 (Ariz. Ct. App. 1989). In Jacobsen, the court considered a situation in which the underlying plaintiffs had been held hostage in Lebanon by a group supported and controlled by the Iranian government. They sued Iran, and the court entered a default judgment for $9 million in compensatory damages against Iran, which was recovered after Congress passed legislation to permit hostage victims to recover compensatory damages in full. The plaintiffs then sued the law firm that had represented them in the suit against Iran, arguing that the lawyers did not seek punitive damages in the underlying suit. Applying D.C. law, the court concluded that legal malpractice plaintiffs could recover “as compensatory damages” those damages that would have been available as punitive damages in the underlying action. 201 F. Supp. 2d at 101.
Given that the courts in all of these cases have characterized the recovery of punitive damages awarded in the underlying cases as compensatory damages in the legal malpractice case, it will be difficult to argue that such damages do not fall within the coverage of a legal malpractice insurance policy, despite the fact that they were originally punitive in nature. As a result, insurers should be cognizant of the risk that damages in legal malpractice cases can be substantially increased because of the potential that the plaintiffs can recover for punitive damage awards resulting from the attorneys’ negligence.
William McVisk is a partner in Tressler LLP’s Chicago office and is a member of the firm’s Insurance Law practice group. He focuses on complex insurance coverage litigation, including third-party bad faith and coverage actions involving professional liability coverages. He is also the Illinois State Representative for DRI and chairs DRI’s Insurance Law Committee’s Professional Liability SLG.
Trade Secret Misappropriation Claims and the “Advertising Injury” Coverage Issues They Present
By Daniel I. Graham, Jr.
Edited by Allyson L. Moore
Introduction
Peter Policyholder leaves Acme Widgets to open his own competing business, Policyholder Inc. Soon after starting its business, Policyholder Inc. purchases a liability policy issued by Insurance Company that includes “advertising injury” coverage.
Later in the year, Acme files suit against Policyholder Inc., asserting causes of action for the misappropriation of trade secrets. In its complaint, Acme alleges that Policyholder Inc. stole Acme’s proprietary customer lists in order for Policyholder Inc. to start its own competing business. Policyholder Inc. is also alleged to have taken Acme’s secret schematics in developing its competing widget products. Policyholder Inc. tenders the Acme complaint to Insurance Company, seeking a defense in the Acme lawsuit …
Many liability insurance policies provide coverage for “advertising injury” or “personal and advertising injury,” terms generally defined to mean injury arising out of certain enumerated offenses. A question for the courts is often what type of wrongful conduct these enumerated offenses encompass, and it is a question that can arise in the context of trade secret misappropriation claims.
This article will introduce the reader to threshold considerations in evaluating whether a liability policy’s “advertising injury” or “personal and advertising injury” coverage potentially encompasses trade secret claims brought against the insured. Preliminarily, the article will provide an overview of the various types of intellectual properties that can constitute trade secrets. Next, the article will acquaint the reader with certain requirements that must be satisfied to involve a liability policy’s “advertising injury” and “personal and advertising injury” coverage. Thereafter, the article will discuss how courts have answered the question of “advertising injury” and “personal and advertising injury” coverage for trade secret claims and consider the rationale they employed in making those determinations. Last, this article will provide an overview of certain policy exclusions that may operate to preclude coverage for trade secret claims.
What Is A Trade Secret?
A trade secret encompasses a type of intellectual property, usually unknown to the general public, which affords its owner a competitive advantage in the marketplace. Section 757 of the Restatement of Torts defines trade secret to mean “any formula, pattern, device or compilation of information which is used in one’s business . . . . It may be a formula for a chemical compound, a process of manufacturing, treating or preserving materials, a pattern for a machine or other device, or a list of customers.” Restatement of Torts § 757 cmt. b (Am. Law Inst. 1939).
In preparing the Uniform Trade Secrets Act (UTSA), the National Conference of Commissioners on Uniform State Laws defined “trade secret” to mean information, “including a formula, pattern, compilation, program device, method, technique, or process, that: (i) derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use, and (ii) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.” Uniform Trade Secrets Act, § 1(4) (amended 1985), 14 U.L.A. 529 (Supp. 2010).
Many states have since adopted the UTSA, or developed their own statutes to define what information constitutes a “trade secret.” For example, the Illinois Trade Secrets Act (765 ILCS 1065) defines trade secret to mean:
[I]nformation, including but not limited to, technical or non-technical data, a formula, pattern, compilation, program, device, method, technique, drawing, process, financial data, or list of actual or potential customers or suppliers, that:
(1) is sufficiently secret to derive economic value, actual or potential, from not being generally known to other persons who can obtain economic value from its disclosure or use; and
(2) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy or confidentiality.
765 ILCS 1065/2(d). See also La. Stat. Ann. § 51:1431(4) (Louisiana); Cal. Civ. Code § 3426.1(d) (California); and Fla. Stat. § 688.002(4) (Florida).
By way of comparison, the Alabama Trade Secrets Act defines “trade secret” as follows:
A “trade secret” is information that:
a. Is used or intended for use in a trade or business;
b. Is included or embodied in a formula, pattern, compilation, computer software, drawing, device, method, technique, or process;
c. Is not publicly known and is not generally known in the trade or business of the person asserting that it is a trade secret;
d. Cannot be readily ascertained or derived from publicly available information;
e. Is the subject of efforts that are reasonable under the circumstances to maintain its secrecy; and
f. Has significant economic value.
Ala. Code § 8-27-2(1).
Under these statutes, someone can misappropriate another’s trade secrets by: acquiring a trade secret by improper means; using a trade secret in breach of confidence; disclosing the trade secret despite a request to maintain its secrecy; or utilizing the trade secret with actual or constructive knowledge that the trade secret was acquired by accident or mistake.
“Advertising Injury” and “Personal and Advertising Injury” Coverage: A Primer
In seeking defense against or indemnity for trade secret misappropriation claims, some insureds have looked to the “advertising injury” or “personal and advertising injury” coverage of their liability policies.
“Advertising injury” coverage has been a component of many liability policies for decades. In its 1998 Commercial General Liability Form, the Insurance Services Office (“ISO”) introduced “personal and advertising injury” coverage, which replaced “advertising injury” and “personal injury” as separate coverage provisions.
Unlike “bodily injury” and “property damage” liability coverage, the existence of “advertising injury” and “personal and advertising injury” coverage is not based upon a predicate accidental “occurrence.” Instead, to potentially implicate the “advertising injury” or “personal and advertising injury” coverage in the first instance, the insured must be potentially liable for injury arising out of one of the wrongful offenses enumerated in the definition of “advertising injury” or “personal and advertising injury.” Typically, the insuring agreement in the “advertising injury” coverage additionally requires that the enumerated offense be committed in the course of advertising the named insured’s goods, products, and services.
In certain instances, some insureds have argued that trade secret claims implicate the “advertising injury” offenses of “misappropriation of advertising ideas or style of doing business” (the “misappropriation offense”) or “infringement of copyright, title or slogan” (the “infringement offense”) or the “personal and advertising injury” offense of “use of another’s advertising idea in [the named insured’s] advertisement.”
Many liability policies do not define the terms “advertising idea” or “style of doing business.” Construing the terms in accordance with their plain and ordinary meaning, some courts have viewed the misappropriation of advertising ideas to involve the “wrongful taking of another’s manner of advertising,” “the wrongful taking of an idea concerning the solicitation of business and customers,” or the “the wrongful taking of the manner by which another advertises its goods or services.” Amazon.com Int’l, Inc. v. Am. Dynasty Surplus Lines Ins. Co., 120 Wash.App. 610, 85 P.3d 974, 976 (Wash. Ct. App. 2004) (internal citations omitted).
Meanwhile, courts have understood “style of doing business” to pertain to the “comprehensive manner” in which a company operates its business. Poof Toy Prods., Inc. v. United States Fidelity and Guar. Co., 891 F. Supp. 1228, 1232 (E.D. Mich. 1995). Courts have viewed the phrase to be analogous to a company’s trade dress.
Evaluating Trade Secret Claims Under the “Advertising Injury”/“Personal and Advertising Injury” Coverage Lens
In assessing whether a trade secret claim potentially involves one of the enumerated “advertising injury” or “personal and advertising injury” offenses, a threshold consideration is the nature of the trade secret at issue. Generally, courts are unwilling to find “advertising injury” coverage where the trade secret at issue is technical in nature. For example, in Frog, Switch & Manufacturing. Co., Inc. v. Travelers Insurance Co., 193 F.3d 742 (3d Cir. 1999), the Third Circuit Court of Appeals concluded that the insured’s alleged misappropriation of trade secrets and confidential business information, including drawings and prints related to a dipper bucket product line, did not trigger the “advertising injury” coverage.
Rejecting arguments that the insured’s alleged misappropriation of trade secrets relating to the manufacture of a product-line involved a misappropriation of advertising ideas or style of doing business, the Third Circuit explained: “The complaint did not allege that the misappropriated dipper bucket design served as an indication of origin, or that [the claimant’s] identifying marks were misused. Nor did [the claimant] allege that [the insured] took an idea about advertising dipper buckets (the idea of claiming a revolutionary new design as an enticement to customers); it alleged that [the insured] took the dipper bucket design itself and lied about the design’s origin.” The Third Circuit therefore concluded the insurer had no duty to defend its insured against the trade secret claims. See also United Ohio Ins. Co. v. Durafloor Indus. Flooring and Coating, Inc., 2017 WL 961453 (Conn. Super. Ct. Jan. 24, 2017) (no duty under “personal and advertising injury” coverage to defend trade secret claims involving floor-coating systems and processes); Westfield Ins. Co. v. Factfinder Marketing Research, Inc., 168 Ohio App.3d 391, 860 N.E.2d 145 (2006) (insured’s alleged appropriation of trade secrets concerning proprietary methods of analyzing market research did not constitute a misappropriation of advertising ideas); Pennsylvania Pulp & Paper Co. v. Nationwide Mut. Ins. Co., 100 S.W.3d 566 (Tex. Ct. App. 2003) (because trade secrets at issue were technical in nature, complaint did not potentially seek damages for “misappropriation of advertising ideas or style of doing business”).
Courts have reached different results in their coverage inquiry, however, when the trade secrets at issue are marketing techniques and customer lists. For example, in Merchants Co. v. American Motorists Insurance Co., 794 F. Supp. 611 (S.D. Miss. 1992), the district court concluded that the insured’s alleged misappropriation of another’s customer list, which the claimant maintained was a trade secret under Alabama law, implicated the “advertising injury” coverage on two bases. First, the Merchants court found that the allegations potentially involved an “infringement of title.” Because title was not defined in the policy, the court believed the term could pertain to an ownership interest. Second, the court concluded that the allegations also involved a “misappropriation of advertising ideas,” opining that, “in the ordinary or popular sense, a customer list may be fairly said to be an ‘advertising idea.’”
The insurer maintained that, even if the insured’s activities involved an “advertising injury” offense, there still was no coverage because the wrongdoing was not committed “in the course of advertising,” as required by the policies. But the court disagreed. Because the claimant alleged that the insured had used the allegedly appropriated customer lists to send flyers to customers, the Merchants court concluded that the advertising nexus was satisfied.
In Sentex Systems, Inc. v. Hartford Accident & Indemnity Co., 882 F. Supp. 930 (C.D. Cal. 1995) (applying California law), the district court was asked whether the insured’s alleged misappropriation of a competitor’s customer lists, methods of bidding jobs, methods and procedures for billing, marketing techniques, and other inside and confidential information to promote and advertise its product and solicit business triggered a duty to defend under the insurer’s “advertising injury” coverage. Id. at 935. Relying in part on the Merchants decision, the district court concluded that the insured had a reasonable expectation for coverage under the “misappropriation” and “infringement of title” offenses of its “advertising injury” coverage for its alleged use of the claimant’s customer lists and marketing information.
Finding it to be significant that the trade secrets at issue involved marketing and sales information, rather than information pertaining to the “manufacture and production” of a product, the Ninth Circuit Court of Appeal affirmed the district court’s determination. Sentex Systems, Inc. v. Hartford Acc. & Indem. Co., 93 F.3d 578 (9th Cir. 1996). But it did so with qualification. The Ninth Circuit cautioned, “we do not necessarily agree with the district court’s broader conclusion . . . . that allegations of the misappropriation of a customer list, because it comes within common law concepts of unfair competition, can alone trigger coverage under the language of these policies pertaining to ‘misappropriation of advertising ideas.’” Id. at 581.
Since the Ninth Circuit’s affirmance, several courts have relied on Sentex as a basis to conclude that a liability policy’s “advertising injury” coverage encompasses claims of marketing-relating trade secrets. E.g., Tradesoft Technologies v. Franklin Mut. Ins., 329 N.J. Super. 137, 746 A.2d 1078 (2000) (holding misappropriation offense potentially encompassed alleged infringement of confidential business plans, customer surveys and marketing studies, thus triggering duty to defend); Kinko’s v. Shuler, 255 Wis. 2d 834, 646 N.W.2d 854 (Wis. Ct. App. 2002) (insured’s alleged misuse of claimant’s trade secrets, including sales, promotion and marketing strategies deemed to involve misappropriation offense).
Not all courts have embraced the Merchants and Sentex rationale, however. For example, the Eleventh Circuit Court of Appeals expressly disagreed with the Merchants decision’s view that the infringement offense’s reference to title could encompass an ownership interest in property. State Farm Fire & Cas. Co. v. Steinberg, 393 F.3d 1226, 1232 (11th Cir. 2004) (applying Florida law). Guided by other authority the court deemed to be more persuasive, the Eleventh Circuit opined that, when “title” was read in the context of the infringement offense (“infringement of copyright, title, or slogan”), the term more aptly referred to a name or appellation. With that understanding, the Eleventh Circuit concluded that the infringement offense did not encompass the insured’s alleged misappropriation of a competitor’s confidential customer list. The court held that the trade secret claim, likewise, did not involve a misappropriation of either an “advertising idea” or “style of doing business.”
In GAF Sales & Service, Inc. v. Hastings Mutual Insurance Co., 224 Mich. App. 259, 568 N.W.2d 165 (1997), the Michigan Court of Appeals rejected the Merchants decision and held that the misappropriation of customer lists did not involve a misappropriation of an advertising idea. Similarly, in Liberty Corporate Capital Ltd. v. Security Safe Outlet, 577 Fed. Appx. 399 (6th Cir. 2014) (Kentucky law), the Sixth Circuit Court of Appeals concluded that the insured’s alleged use of a competitor’s confidential customer database and mailing list did not involve the use of another’s advertising idea because there were no allegations that the trade secrets at issue involved advertising plans, strategies, schemes, or designs. See also We Do Graphics, Inc. v. Mercury Cas. Co., 124 Cal. App. 4th 131, 21 Cal. Rptr. 3d 9 (Cal. Ct. App. 2004) (insured’s alleged taking of another’s confidential customer information was not the misappropriation of an advertising idea and did not implicate “advertising injury” coverage).
In Air Engineering, Inc. v. Industrial Air Power, LLC, 346 Wis.2d 9, 828 N.W.2d 565 (Wis. Ct. App. 2013) (Wisconsin law), the Court of Appeals of Wisconsin was asked to evaluate whether the insured’s alleged appropriation and use of a competitor’s website source code and internet advertising system obligated the insurer to defend the insured under the “personal and advertising injury” coverage. In assessing the underlying trade secret claims, the court noted that the trade secret at issue was the claimant’s proprietary internet advertising system. Despite the technical nature of the advertising system, the court observed that the claimant reportedly used the system to direct advertisements tailored to a particular customer. Because the Air Engineering court deemed the trade secret at issue to be an idea that called public attention to a product to increase sales, the court reasoned that the allegations involved the “use of another’s advertising idea,” which the insured was alleged to have used in its “advertisement.” Accordingly, the Air Engineering court held that the insurer had a duty to defend its insured in the dispute.
More recently, in Great American Insurance Co. v. Beyond Gravity Media, Inc., 560 F. Supp. 3d 1024 (S.D. Tex. 2021) (Texas law), a Texas federal court concluded that the insured’s alleged use of a franchiser’s confidential marketing information was sufficient to potentially implicate the “use of another’s advertising idea” offense of the insurer’s “personal and advertising injury” coverage.
In that case, the insured was a former franchisee of Code Ninjas LLC, an educational business that offered its child students a curriculum of computer programming, math, and teamwork skills. The insured ultimately parted ways with Code Ninjas, opening its own competing “Dojo Tech” or “CoDojo” education center.
Code Ninjas filed suit against the insured, alleging inter alia that the insured had acquired Code Ninjas’ confidential and proprietary information by participating in Code Ninjas’ training programs, franchise conferences, and communications, only to use that information to create and advertise its competing business. Code Ninjas asserted several causes of action against the insured, among them, claims for breach of the covenant of confidentiality in the parties’ franchise agreement, misappropriation of trade secrets in violation of Defend Trade Secrets Act and under Texas law, unjust enrichment, and knowing, malicious, willful, and intentional unfair competition.
Before the case ultimately settled, the insurer brought a declaratory judgment action against its insured, seeking a determination that it had no duty to either defend or indemnify the insured against Code Ninjas’ lawsuit.
The threshold consideration for the Beyond Gravity court was whether the lawsuit’s allegations triggered the insurer’s “personal and advertising injury” coverage, in the first instance. Noting that the parties had agreed the plain meaning of “advertising idea” referred to a “concept about the manner in which a product is promoted to the public,” id. at 1033, the Beyond Gravity court concluded that Code Ninjas’ allegations potentially implicated the “use of another’s advertising idea” offense of the insurer’s “personal and advertising injury” coverage.
In doing so, the Beyond Gravity court emphasized Code Ninjas had alleged that the insured had appropriated Code Ninjas’ branding and confidential marketing services and strategies— “including information about upcoming advertising campaigns”—to redirect students to the insured’s competing school. Id. As such, the court found that the trade secret allegations implicated the “personal and advertising injury” coverage.
Despite this determination, however, the Beyond Gravity court ultimately concluded that the insured had no defense or indemnity obligations owing the insured in connection with the Code Ninjas lawsuit—because, as discussed below, whether a claim triggers a liability policy’s insuring agreement is only one step in the coverage inquiry.
Do Any Policy Exclusions Apply?
Even if a trade secret claim potentially involves one of the enumerated “advertising injury” or “personal and advertising injury” offenses, certain exclusions may nevertheless operate to preclude coverage. For example, many recent liability forms include an exclusion titled “Infringement of Copyright, Patent, Trademark of Trade Secret,” which excludes coverage for “personal and advertising injury” arising out of the infringement of various intellectual properties, including trade secrets (the “Infringement exclusion”). Courts have found the Infringement exclusion to squarely preclude coverage for trade secret misappropriation claims. See, e.g., Scottsdale Ins. Co. v. PTB Sales, Inc., 2019 WL 1460617 (C.D. Cal. Feb. 11, 2019), aff’d, No. 19-55350, 2020 WL 4014162 (9th Cir. July 16, 2020) (California law); Evanston Ins. Co. v. Clartre, Inc., 158 F. Supp. 3d 1110 (W.D. Wash. 2016) (Washington law).
In addition to the Infringement exclusion, some insurance companies have added by endorsement an “Access or Disclosure of Confidential Information” exclusion (the “Access/Disclosure exclusion”). The Access/Disclosure exclusion typically provides that the endorsed insurance policy does not apply to “personal and advertising injury” “arising out of any access to or disclosure of any person’s or organization’s confidential or personal information, including patents, trade secrets, processing methods, customer lists, financial information, credit card information, health information or any other type of nonpublic information.”
Turning again to the Beyond Gravity decision, for example, the court held that both the Infringement exclusion and the Access/Disclosure exclusion operated to preclude coverage for Code Ninjas’ misappropriation of trade secret claims. In making its determination, the court noted that Code Ninjas alleged throughout its complaint that the insured had infringed on Code Ninjas’ trade secrets and confidential information to promote its competing business in violation of the parties’ franchise agreements. The Beyond Gravity court found such allegations to fit squarely within the Infringement and Access/Disclosure exclusions’ scope. Beyond Gravity, 560 F. Supp. 3d at 1037, 1038. See also Lionbridge Technologies, LLC v. Valley Forge Ins. Co., 552 F. Supp. 3d 148, 158 (D. Mass. 2021), appeal filed, No. 21-1698 (1st Cir., Sep. 14, 2021) (Massachusetts law) (because claimant’s damages emanated from the insured’s alleged unlawful access to and misappropriation of the claimant’s trade secrets and confidential business information, Infringement and Access/Disclosure exclusions operated to preclude coverage). But see Sprint Lumber, Inc. v. Union Ins. Co., 627 S.W.3d 96, 112-13 (Mo. Ct. App. 2021) (Missouri law) (Infringement exclusion and Access/Disclosure exclusion did not apply to extinguish insurer’s duty to defend where underlying allegations also involved insured’s alleged disparagement of competitor’s goods, products, and services, outside of exclusions’ scope).
In addition, many liability forms include an exclusion titled “Breach of Contract,” which excludes coverage for “advertising injury” or “personal and advertising injury” arising out of breach of contract, other than misappropriation of advertising ideas under an implied contract. This exclusion can be particularly relevant where the trade secret claims against the insured are alleged to also violate employment, confidentiality, or licensing agreements with the claimants.
By way of example, in Pennsylvania Pulp & Paper Co., the court opined that, even if the underlying trade secret allegations involved an “advertising injury” offense, the insurer would still have no duty to defend because the claims arose from insured’s alleged breach of its license agreement with the claimant. 100 S.W.3d at 573. As such, the policy’s breach of contract exclusion precluded coverage for the trade secret claim. See also Beyond Gravity, 560 F. Supp. 3d at 1037 (breach of contract exclusion encompassed allegations that insured used competitor’s confidential information and branding in violation of the non-competition and confidentiality covenants of the parties’ franchise agreements, thereby relieving insurer of its duty to defend underlying claims).
Of course, there are other exclusions that pertain to “advertising injury” and “personal and advertising injury” coverage, including those that exclude coverage for “advertising injury” or “personal and advertising injury”: caused by or at the direction of the insured with the knowledge that the act would violate the rights of another and would inflict “personal and advertising injury” (the “Knowing Violation Of Rights Of Another” exclusion); arising out of oral or written publication, in any manner, of material, if done by or at the direction of the insured with knowledge of its falsity (the “Material Published With Knowledge Of Falsity” exclusion); arising out of oral or written publication, in any manner, of material whose first publication took place before the beginning of the policy period (the “Material Published Prior To Policy Period” exclusion); and arising out of a criminal act committed by or at the direct of the insured (the “Criminal Acts” exclusion). Practitioners may wish to consider the application of these exclusions, depending on the substance of the allegations made against the insured and the time periods during which the insured allegedly engaged in the misappropriation of trade secrets.
Conclusion
This article, which expresses the opinions of the author and does not necessarily reflect the views of Nicolaides Fink Thorpe Michaelides Sullivan LLP or its clients, demonstrates the different approaches courts can take in evaluating whether a liability policy’s “advertising injury” or “personal and advertising injury” coverage extends to misappropriation of trade secret claims. While the discussion above may be instructive, it is a general one. Whether a particular trade secret claim potentially implicates a liability policy’s “advertising injury” or “personal and advertising injury” coverage is necessarily a fact-specific inquiry, and one that should consider the substance of the trade secrets at issue, the nature of the allegations brought against the insured, and the terms, limitations, and exclusions contained in the insured’s liability policy.
Daniel I. Graham, Jr., is a founding partner with Nicolaides Fink Thorpe Michaelides Sullivan LLP. He assists his insurance company clients in evaluating the coverage issues that intellectual property infringement, privacy, and unfair business practice claims present and represents his clients’ interests in technology-related coverage disputes throughout the country. Dan is an active member of DRI’s Insurance Law Committee.
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