An insurance coverage issue that frequently recurs is the question of coverage under a D&O insurance policy for intellectual property disputes. In the following guest post, Peter S. Selvin of the TroyGould law firm takes a look at several recent case decisions examining the question of coverage under a D&O insurance policy for IP claims. This article previously appeared in the November 12, 2014 issue of the Daily Journal.
I would like to thank Peter for his willingness to publish his guest post on my site. I welcome guest post submissions from responsible authors on topics of interest to readers of this blog. I encourage anyone who thinks they might be interested in submitting a guest post to contact me directly. Here is Peter’s guest post.
Fans of the Bard will remember the scene in which Hamlet chides his friend Horatio about the narrowness of his vision: “There are more things in heaven and earth…Than are dreamt of in your philosophy.” (Hamlet, I, v, 167-68) The same can be said about practitioners, and even some insurance professionals, who associate directors and officers liability insurance (D&O insurance) exclusively with litigation involving shareholders, debt holders or other corporate stakeholders. This is a misconception because the broad definition of the term “wrongful act” (which is the trigger for coverage in virtually all D&O policies) may confer coverage in a variety of contexts, including where companies or individuals are sued for IP infringement.
The typical policy definition of a wrongful act ordinarily includes “(a) any actual or alleged error or misstatement or misleading statement or act or omission or breach of duty by directors and officers while acting in their individual or collective capacities; and (b) any matter claimed against them solely by reason of their being directors or officers of the company.” Knepper and Bailey, Liability of Corporate Officers and Directors (8th ed. 2010), Section 24.06 at p. 24.21.
Importantly, a wrongful act is sufficiently broad to cover a wide range of alleged or actual wrongdoing, whether negligent, reckless or even intentional. See, e.g., Independent Sch. Dist No. 697 vs. St. Paul Fire & Marine Ins. Co., 515 N. W. 2d 576, 579 (Minn. 1994) (claim for intentional age discrimination constitutes wrongful act based on “breach of duty”). Thus, where a claim arises from negligent or non-negligent actions allegedly committed by the officer or director, the insurer is obligated to reimburse the corporation for amounts advanced by the corporation to defend the officer or director. See, e.g., FDIC v. Gordinier, 783 F. Supp. 1181, 1183 (D. Minn. 1992) (wrongful act encompassed “losses caused by deliberate, intentional or knowing acts, unless otherwise excluded.”), rev’d on other grounds sub nom, FDIC vs. St. Paul Fire & Marine Ins. Co., 993 F. 2d 155 (8th Cir. 1993).
The following recent examples illustrate how coverage has been found under D&O policies for claims arising out of IP litigation.
In Acacia Research Corp. vs. National Union Fire Ins. Co. of Pittsburgh, PA, 2008 WL 4179206 (C.D. Cal. 2008), a company (Combimatrix) and one of its officers (Montgomery) were sued by a competitor (Nanogen) for the theft of technology and misappropriation of trade secrets. In essence, Nanogen’s lawsuit alleged that Montgomery had developed certain technology while he had been employed at Nanogen and that he improperly shared that technology with Combimatrix after he became employed at that company.
Combimatrix was insured under a D&O policy issued by National Union. After Nanogen filed suit, Combimatrix tendered the case to National Union. After acknowledging receipt of the tender, National Union preliminarily advised that the Nanogen’s theft of trade secrets lawsuit would not be covered under the policy. Apart from this preliminary communication, however, National Union did not issue any formal coverage letter to Combimatrix until nearly three years after the Nanogen litigation was filed.
Nineteen months into the litigation, but before National Union issued its first formal coverage letter, Combimatrix settled Nanogen’s lawsuit. Although National Union ultimately denied coverage for the suit, and failed to reimburse Combimatrix for the fees incurred or the settlement costs incurred therein, Combimatrix brought suit against National Union for breach of the policy and for bad faith.
One of the key issues in coverage litigation was whether the IP related claims asserted by Nanogen in underlying case met the policy definition of wrongful acts. In addressing this issue, the court in coverage litigation held as follows:
“The Court finds that all defense costs incurred by Combimatrix arose out of its indemnification of Montgomery for alleged wrongful acts committed by Montgomery. Specifically, the underlying Nanogen action centered on Nanogen’s accusations that Montgomery stole Nanogen’s technology and brought it to Combimatrix. Accordingly, Combimatrix and Montgomery present a single and joint defense to the Nanogen suit. Because the wrongful acts alleged in the underlying action all involved the alleged wrongful acts of Montgomery, no allocation of defense costs between Combimatrix and Montgomery is needed.”
Thus, the court held that because the trade secrets lawsuit brought by Nanogen was covered the D&O policy, National Union was obligated to reimburse Combimatrix for all of its attorneys fees incurred in defending that lawsuit (approximately $2 million) and for the full value of the settlement paid by Combimatrix to resolve the case (approximately $20 million).
The principle that D&O policies will respond to IP claims was also upheld in American Century Services Corp. vs. American International Specialty Lines Insurance Co., 2002 WL 1879947 (S.D.N.Y. 2002). In that case an investment management company (American Century) was sued by third parties (Stambler and Katz) for patent infringement.
American Century was insured under an investment management insurance policy which provided coverage similar to that contained in a D&O policy. Thus, that policy obligated the insurer to pay on behalf of its insured “all sums which the Insured shall become legally obligated to pay as damages resulting from any claim” for a wrongful act occurring during the Policy period and “solely in the course of the management and/or operation of the [investment] Fund(s).”
The underlying patent infringement lawsuit alleged that American Century had used telephone and internet systems covered by the patents owned by Stambler and Katz. The court found that those allegations were sufficient to trigger coverage under the American International policy because those allegations set forth a wrongful act. ‘
“Katz and Stambler charged that American Century infringed their patents. Since allegations of wrongdoing are sufficient to trigger coverage under the Policy, it is clear that American Century’s use of the allegedly infringing telephone and internet systems was a Wrongful Act for the purpose of coverage.”
Finally, in Medassets, Inc. vs. Federal Insurance Company, 705 F.Supp.2d 1368 (N.D. Ga. 2010) the Court addressed whether a D&O policy would provide coverage for a complaint which asserted claims for tortious interference and trade secret misappropriation. In that case, the insured was sued by a third party (Guidant) based on claims that the insured had induced Guidant’s customers to breach their confidentiality agreements with Guidant by revealing confidential pricing information to the insured.
In response to Medassets’ tender under the D&O policy, the carrier denied coverage, citing a policy exclusion for trade secrets claims, even though Guidant in its complaint “pled in the alternative that the pricing information was confidential information and/or that it was a trade secret.” Since, as the court noted, information that is confidential may be subject to legal protection even if it does not constitute a trade secret, the court held that the trade secrets exclusion was not a bar to coverage.
While the Combimatrix, American Century and MedAssets cases dealt with trade secrets and patent infringement, coverage under a D&O policy may also be afforded for other kinds of tort claims — such as trade libel or false advertising. Thus, one commentator has noted that “[m]ost false advertising lawsuits make allegations about the defendant’s erroneous and suggestive advertising and marketing and thus would be covered under this broad coverage grant of these [i.e., D&O] policies. The policy exclusions for these policies, however, present the greatest impediment to coverage for false advertising suits, and they need to be carefully examined to determine if coverage is available for false advertising claims.” Milone and Ahamd, Insurance Coverage for Lanham Act False Advertising Claims, Intellectual Property & Technology Law Journal (March 2012); emphasis added.
The application of D&O Insurance to IP disputes may seem at first glance to be unexpected and counter-intuitive. But this form of insurance could serve as an unanticipated asset in helping to fund both the defense and settlement costs in IP disputes.
Peter Selvin is a partner at Los Angeles-based TroyGould PC where he practices civil litigation and insurance coverage. The views expressed in this article are his own and not necessarily those of any of the firm’s clients.