by James Kachmar
The Ninth Circuit recently addressed the issue of whether a “first publication” exclusion in an insurance policy applies to trademark infringement claims. In United National Insurance Company v. Spectrum Worldwide, Inc., et al., decided February 2, 2009, the Ninth Circuit resolved a split among lower courts and held that a “first publication” exclusion did apply under California law.
In December 1997, Sunset Health Products, Inc. (“Sunset”) hired Spectrum to advertise and distribute a diet drink called “Hollywood 48 Hour Miracle Diet” drink. Celebrity Products Direct, Inc. (“Celebrity”) was formed a short time later and began selling a similar product, “The Original Hollywood Celebrity Diet” drink. Spectrum then terminated its contract with Sunset and begin marketing the Celebrity diet drink. Sunset made repeated demands that Spectrum cease infringing on its Miracle Diet trademark.
In October 2001 Sunset sued Spectrum for trade dress infringement and alleged that Spectrum “deliberately” made Celebrity Diet’s packaging and labeling so similar to Sunset’s Miracle Diet drink that it confused consumers. The court issued a TRO in Sunset’s favor after comparing Sunset’s 1998 label with Spectrum’s 1998 and 2001 labels to determine that the 2001 label constituted an immediate harm to Sunset. However, in a subsequent preliminary injunction hearing, Spectrum offered evidence that it changed its 1998 label in 1999 and that its 1999 label was so similar to its 2001 label that Sunset was not in danger of experiencing immediate harm since the competing labels had been used for nearly three years. The trial court accepted Spectrum’s argument concerning its 1999 label and denied Sunset a preliminary injunction on that basis. Spectrum continued to profit from the sale of Celebrity Diet drink as the case continued.
In 2001, Spectrum purchased a $1 million excess liability policy. The excess policy included a provision which indemnified Spectrum for damages resulting from an “advertising injury” that included infringement of copyright, title or slogan. The excess policy, however, contained an exclusion stating that the policy did not cover “an `advertising’ injury . . . arising out of oral or written publication of material whose first publication took place before the beginning of the policy period [April 26, 2001].”
After Sunset and Spectrum made cross-motions for summary judgment, they entered into a settlement for $3.2 million which was to be paid by Spectrum’s insurers. United National contributed $420,000 to the settlement and then filed a complaint against Spectrum for reimbursement of its settlement contribution arguing that the “first publication” exclusion in the excess policy voided its indemnification obligations. The trial court considered the court’s findings in the Sunset action and held that Spectrum’s 1999 label formed the substance of Sunset’s advertising injury and, therefore, the excess policy’s “first publication” exclusion applied.
On appeal, Spectrum argued that the excess insurance policy’s “first publication” exclusion did not apply because: (1) first publication exclusions do not apply to infringement actions in California; and (2) even if the clause applied to the infringement action, summary judgment was not proper because there was a triable issue of fact as to whether the first published infringing material occurred before the excess insurance policy became effective. The Ninth Circuit rejected each of these arguments in turn.
The Ninth Circuit began by recognizing that “insurance policy interpretation is a question of California law which requires courts to initially look to the insurance policy language in order to ascertain its plain meaning.” Importantly, the court “must give effect to the parties’ `mutual intention’ at the time they formed the contract.” The Ninth Circuit also recognized that “if a policy provision is capable of two or more reasonable constructions, it is `ambiguous,’ and courts `must resolve the ambiguity in favor of the insured [here Spectrum] consistent with the insured’s reasonable expectations’.” Furthermore, the Ninth Circuit recognized that insurance policy exclusions “must be `conspicuous, plain and clear,’ otherwise they are `strictly construed’ in favor of the insured.”
Applying these insurance contract interpretation principles, the Ninth Circuit concluded that the excess insurance policy’s “first publication” exclusion was clear and explicit. In examining the exclusion’s language, the Court concluded that the plain reading revealed that the parties’ “intended to exclude from coverage any copyright infringement injury that arose from an oral or written publication of material first published before the policy became effective.”
Spectrum argued that the exclusion language was ambiguous because the definition of “advertising injury” did not use the word “publication” in that section, citing Arnette Optic Illusions, Inc. v. ITT Hartford Group, Inc., 43 F.Supp.2d 1088 (C.D. Cal. 1998). Spectrum argued that because two reasonable interpretations existed, the exclusion was ambiguous and must be interpreted in its favor as the insured.
The Ninth Circuit rejected this argument; stating that it would require the Court to ignore the misappropriation and infringement sections of the exclusion provision. The Court reasoned that this would contradict “California policy that instructs courts: (1) to `give effect to every part if reasonably practicable’; and (2) not to `strain’ to find ambiguities.” The Court found that it could not accept Spectrum’s argument while complying with California contract interpretation principles. Furthermore, the Ninth Circuit recognized that a split in legal authority did not necessarily render the exclusion ambiguous. Rather, based on a plain reading of the insurance policy, the Ninth Circuit concluded that the “first publication” exclusion was unambiguous and clearly applied to infringement claims under California law.
After finding that the exclusion provision applied, the Court held that summary judgment was properly granted in United National’s favor. The Court recognized that Spectrum was attempting to take contradictory positions between the current action against United National and the previous Sunset action. The Court found that the doctrine of judicial estoppel applied in order “to prevent litigants from `playing fast and loose’ with the court by taking one position, gaining advantage from that position, then seeking a second advantage by later taking an incompatible position.” Spectrum could not argue in the action brought by United National that it was the 2001 label, and not the 1999 label, that constituted Sunset’s infringement claim. The Court ruled that to allow Spectrum to make this argument would result in Spectrum’s “gaming” of the courts and “allow [Spectrum] the possibility of prevailing on the very position it successfully discredited” in the prior Sunset action. Thus, the Ninth Circuit held that the trial court had properly granted summary judgment in favor of United National.
With its decision in United National, the Ninth Circuit has clarified that under California law, a “first publication” exclusion provision can apply to trade dress infringement claims and could potentially bar an insured from obtaining indemnification under an insurance policy for liability resulting from an “advertising injury.”
James Kachmar is a shareholder in Weintraub Genshlea Chediak Tobin & Tobin’s litigation section. He represents corporate and individual clients in both state and federal courts in various business litigation matters, including trade secret misappropriation, unfair business competition, stockholder disputes, and intellectual property disputes. For additional articles on intellectual property issues, please visit Weintraub’s law blog at www.theiplawblog.com.