ip assets and infringement claims: coverage...

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IP Assets and Infringement Claims:gInsurance Coverage ConsiderationsWhat IP Counsel Must Know to Protect Assets and Defend Against Claims

T d ’ f l f

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific

TUESDAY, JANUARY 10, 2012

Today’s faculty features:

Robert D. Chesler, Member, Lowenstein Sandler PC, Roseland, N.J.

Anthony “Sandy” Codding, Jr., Managing Director, Marsh USA Inc., Boston

Carl E. Metzger, Partner, Goodwin Procter, Boston

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DO I REALLY NEED IP/CYBER INSURANCE?

Robert D. Chesler Lowenstein Sandler PCLowenstein Sandler PC

973.597.2328rchesler@lowenstein.com

Cyber Risk? No, not me…

Why do I need cyber risk insurance?

Clients typically think only of web-related exposures and not in terms of their network and data files generallyin terms of their network and data files generally.

Clients often believe that firewalls and other loss mitigation tools are sufficient protection.

M t i ifi tl li t ft i t k l b li th t th iMost significantly, clients often mistakenly believe that their CGL, E&O and property policies protect them from common cyber risks.

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What are Cyber Risks?

• Cyber risks include both first party losses(i d t l d t b h tifi ti(i.e., data loss, data breach notification costs, business interruption) and third party l (i l it f i i f ilosses (i.e., lawsuits for invasion of privacy or IP infringement)

6

Show me the coverage…

• Over the years, insurers have chipped away t t diti l i li i i th tat traditional insurance policies in a way that

minimizes if not eliminates coverage for th t f lthese types of losses….

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IP Exposure

1976: ADVERTISING INJURY COVERAGE

“Infringement of copyright, title, slogan, trademark, service mark or trade name,” and “unfair competition or piracy.”“Advertisement” undefined; some courts interpreted it to apply to almost any marketinginterpreted it to apply to almost any marketing activity.

What is “unfair competition or piracy”What is unfair competition or piracy• Anti-Trust• Patent InfringementPatent Infringement

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IP Exposure (continued)

• Over the years, there was significant litigation over the terms in this coverage grant and it wasthe terms in this coverage grant and it was chipped away…

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IP Exposure (continued)

1986: ADVERTISING INJURYCOVERAGECOVERAGE

“Copyright, slogan or title infringement”“misappropriation of advertising ideas or

style of doing business.”y g“Advertising” remains undefinedWhat is “misappropriation ”What is misappropriation…

• TrademarkTrade dress• Trade dress

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IP Exposure (continued)

1998: ADVERTISING INJURY COVERAGE

“infringement of copyrighted advertising materials or infringement of trade marked ormaterials or infringement of trade-marked or service marked titles or slogans.”“Ad ti i ” d fi d“Advertising” undefined.

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IP Exposure (continued)

CURRENT ADVERTISING INJURY COVERAGE

The use of another’s advertising idea in your ‘advertisement,’ or infringing upon another’s copyright, trade dress or slogan in your ‘advertisement.’

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IP Exposure (continued)

‘Advertisement’ means a notice that isbroadcast or published to the general publicbroadcast or published to the general publicor specific market segments about yourgoods, products or services for the purposegoods, products or services for the purposeof attracting customers or supporters.

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IP Exposure (continued)

Th t ISO f t i l i fThe current ISO form contains an exclusion for: ‘Personal and advertising injury’ arising out of the infringement of copyright patent trademarkinfringement of copyright, patent, trademark, trade secret or other intellectual property rights.However this exclusion does not apply toHowever, this exclusion does not apply to infringement, in your advertisement, of copyright, trade dress or slogan.g

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IP Exposure (continued)

• The ISO form also contains absolute d ti i i j l iadvertising injury exclusions:

– for insureds in internet/media businesses ( d ti i b d ti bli hi(advertising, broadcasting or publishing; designing or determining content of websites for others; and ISPs;others; and ISPs;

– Injury arising out of chat rooms and bulletin boards hosted by the insuredboards hosted by the insured

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IP Exposure (continued)

• Many insurers are also adding their own customized cyber related IP exclusionscustomized cyber-related IP exclusions often eliminating any meaningful advertising injury coverage given the way mostinjury coverage given the way most companies do business

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FIRST PARTY LOSSES

• Loss of data (and attendant costs associated with breach notification lawsassociated with breach notification laws and crisis management)B i i t ti ( t k• Business interruption (network outages/power disruptions)

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DATA LOSS

Courts originally debated whether data loss was “property damage” Someloss was property damage . Some

courts said it wasn’t:– State Auto Prop & Cas v Midwest Computers &State Auto Prop. & Cas. v. Midwest Computers &

More (W.D. Okl. 2001) – American Online v. St. Paul Mercury (4th Cir. 2003)

E bl t F d l I C C– Eyeblaster v. Federal Insurance Company, Case 07-cv-04379 (Oct. 7, 2008) Software is not tangible property and therefore doesn’t

lif “ d ” d GL liqualify as “property damage” under GL policy Insured intended to place spyware on Plaintiff’s computer

and therefore not an error/omission under E&O policy

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DATA LOSS (continued)

Other courts said it was:

– American Guarantee & Liability Ins. Co. v. Ingram Micro( )(D. Ariz. 2000) Loss of use and functionality held to be “physical

damage ”damage.– Computer Corner, Inc. v. Fireman’s Fund Ins. Co. (N.M.

Ct.App. 2002)

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DATA LOSS (continued)

• The current ISO CGL form ends the debate, specifically stating that electronic data is not covered tangiblestating that electronic data is not covered tangible property for purposes of the property damage coverage grant (physical damage or loss of use).

• Moreover, electronic data is broadly defined to include “information, facts or programs stored as or on, created or used on, or transmitted to or from computer software, used o , o t a s tted to o o co pute so t a e,including systems and applications software, hard or floppy disks, CD ROMS, tapes, drives, cells, data processing devices or any other media which are used withdevices, or any other media which are used with electronically controlled equipment”

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DATA LOSS (continued)

• The current ISO commercial property form offers limited coverage (a $2 500 sublimit per policylimited coverage (a $2,500 sublimit per policy year) to replace or restore electronic data destroyed by a virus or intrusion on the computer system.

• The policy excludes coverage for any other cause of loss to electronic dataof loss to electronic data

• The policy expressly excludes loss or damage resulting from manipulation of the computerresulting from manipulation of the computer system by an employee.

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DATA LOSS (continued)

Disgruntled Employee ofg p yArchitect’s Firm

Deleted 7 years worth of drawingsDeleted 7 years worth of drawings

Value - $2,500,000

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Business Interruption

• ISO's business income form provides limited f l f d t l t icoverage for loss of or damage to electronic

media and records due to direct physical l dloss or damage So the business interruption insurance most

companies carry only protects against interruptioncompanies carry only protects against interruption caused by a “physical” event and wouldn’t protect against a loss caused by a network disruption, hacker or software malfunction.

23

Business Interruption (continued)

W k f F d C Lib t M t l Fi I• Wakefern Food Corp. v. Liberty Mutual Fire Ins.Co., 406 N.J. Super. 524 (2009). Appellate Division reversed lower court’s grant of summaryDivision reversed lower court s grant of summary judgment to insurer and held that interruption of electrical power to supermarkets was caused by e ect ca po e to supe a ets as caused by“physical damage” to electrical equipment and property within meaning of all-risk policy.

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THIRD PARTY LOSSES

• Privacy – Blast faxes– Blast faxes– Data mining– Regulatory enforcement actions

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PRIVACY

How is privacy covered under the current CGLform?form?

• Oral or written publication of material that slandersor libels a person or organization or disparages aor libels a person or organization or disparages aperson or organization or disparages a person’s ororganization’s goods, products or services;o ga at o s goods, p oducts o se ces;

• Oral or written publication of material that violatesa person’s right of privacy.p g p y

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PRIVACY (continued)

• What constitutes “publication”?p• What is the “right to privacy”?

Secrecy v seclusion–Secrecy v. seclusion

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PRIVACY (continued)

BLAST FAXING

Is Blast Faxing a “publication of material that violates a person’s right of privacy” to constitute an Advertising Injury?Advertising Injury?

• Yes – Look to the manner of publication. “Publication is the communication of information

ll hi h d i th i i t’ i ht tgenerally which undermines the recipient’s right to be left alone.” The court embraced a broad construction of publication and privacy. Park p p yUniversity v. Am. Cas. Co. of Reading (10th Cir. 2006)

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PRIVACY (continued)

BLAST FAXING (continued)N L k t th t t i th bli ti N d• No – Look to the content in the publication. Need publication of secret informational content. American States Ins. Co. v. Capital (7th Cir. 2004);American States Ins. Co. v. Capital (7 Cir. 2004);

• Lawsuit alleged a violation of seclusion privacy whereas policy only protected secrecy privacy. Unsolicited faxes don’t contain private information harmful to a third party. Resource Bankshares Corp v St Paul Mercury Ins Co (4th Cir 2005)Corp. v. St. Paul Mercury Ins. Co. (4 Cir. 2005)

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PRIVACY (continued)

BLAST FAXING (continued)St P l Fi d M i I C B th I t C• St Paul Fire and Marine Ins. Co. v. Brothers Intern. Corp., 2009 WL 865077 (3d Cir. 2009)– General liability personal injury section provided coverage for y p j y p g

‘making known to any person or organization material that violates a person’s right to privacy’

– Court said the policy only covered secrecy (making material known) y y y ( g )and blast fax was invasion of seclusion so no coverage.

– Court stated that if policy provides coverage for ‘oral or written publication of material that violates a person’s right to privacy’ then both seclusion and secrecy are covered.

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Privacy (Continued)

• This is now a moot issue. Current general liability policies currently exclude blast-fax and related liabilities.

31

PRIVACY (continued)

DATA MINING:ZURICH AMERICAN INS CO vZURICH AMERICAN INS. CO. v. FIELDSTONE MORTGAGE CO.

(Dist.Ct.MD 2007)( )• Mortgage company improperly accessed and used

individuals’ credit information in violation of the FCRA to provide “pre-screened” offers to them.

• Zurich policy contained the “publication in any manner” language.

• Duty to defend – publication need not be to a third party, y p p y,and need not contain the protected information.

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PRIVACY (continued)

DATA MINING II:NETSCAPE COMMUNICATIONS CORP vNETSCAPE COMMUNICATIONS CORP. v.

FEDERAL INS. CO., (N.D.Cal., 2007)

• Information downloaded from users and transmitted to persons at Netscape and AOL

ti fi th l i j ff f “ kisatisfies the personal injury offense of “making known” information to any “person or organization”.organization .

• No need for widespread circulation

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PRIVACY (continued)

This too is a moot issue. The current CGL form eliminates coverage for personal andeliminates coverage for personal and advertising injury arising out of violation of a statute ordinance or regulation limiting thestatute, ordinance or regulation limiting the sending, transmitting, communicating or distribution of material or information.

Therefore, there is no coverage available for regulatory suits or expenses related to compliance with privacy breach notification laws – a cost that can be catastrophic for a company doing business in multiple statescompany doing business in multiple states

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Hence the Need for Cyber Policies!!

Cyber risk and IP policies can help bridge the gap left behindhelp bridge the gap left behind

by CGL, Property and E&O policies for first party andpolicies for first party and

third party cyber/IP losses but policy language varies tremendouslypolicy language varies tremendously

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One Last Thought

Sidenote for clients at risk due to a reduction in coverage:g

• Duty of Insurer to advise of reduction in coverage at renewalin coverage at renewal

• Duty of Broker to inform client of reduction in coveragereduction in coverage

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INSURANCE FOR IP EXPOSURESSpecialty ProductsJANUARY 10, 2012

Anthony "Sandy" Codding, Jr.Managing Director

Boston, MA

Specialty Insurance Products

Insurance for Copyright, Trademark, Trade Dress– Media Liability Policies

– Designed for Publishers & BroadcastersDesigned for Publishers & Broadcasters– Also available for digital content

– Corporate Expression PoliciesD i d f di i– Designed for non-media companies

– Limited market– Intellectual Property Policies

– Can include copyright and trademark in addition to patent– Technology E&O Policies

– Copyright infringement of softwareCopyright infringement of software

Insurance for Trade Secrets– Errors & Omissions Policies

MARSH 38January 9, 2012

– Limit trade secret exclusion to the insured’s misappropriation of another’s trade secret

Media Liability Policies: The Coverage

• infringement of copyright, title, slogan, trademark, trade name, trade dress, mark, service mark, service name, infringement of domain name, deep-linking or framing, including, without limitation, unfair competition in connection with such conduct;

plagiarism piracy or misappropriation or theft of ideas under implied contract or other misappropriation• plagiarism, piracy or misappropriation or theft of ideas under implied contract or other misappropriation or theft of ideas or information; including, without limitation, unfair competition in connection with such conduct;

• invasion, infringement or interference with rights of privacy or publicity, false light, public disclosure of private facts, intrusion and commercial appropriation of name, persona or likeness; including, without limitation emotional distress or mental ang ish in connection ith s ch cond ctlimitation, emotional distress or mental anguish in connection with such conduct;

• defamation, libel, slander, product disparagement or trade libel or other tort related to disparagement or harm to character or reputation); including, without limitation, unfair competition, emotional distress or mental anguish in connection with such conduct;

• wrongful entry or eviction trespass eavesdropping or other invasion of the right to private occupancy• wrongful entry or eviction, trespass, eavesdropping or other invasion of the right to private occupancy, or false arrest, detention or imprisonment or malicious prosecution; including, without limitation, any emotional distress or mental anguish in connection with such conduct;

• negligent or intentional infliction of emotional distress, outrage or prima facie tort in connection with Material;

• breach of agreement, implied or otherwise, arising from the failure to maintain the confidentiality of an external source that supplies information or Material to an Insured in confidence; and

• Loss because a third party, which has no ownership relationship with the Insured, acts upon or makes a decision or decisions based on the content of the material disseminated by the Insured or with the Insured’s permission.

MARSH 39January 9, 2012

Insured s permission.

(Based on the Chartis SRP Form 101019 (2/09). Terms and conditions vary by insurer and for each applicant.)

Media Liability Policies: Standard Exclusions

• Fraud , dishonesty & criminal

• Bodily injury & property damageBodily injury & property damage

• Unfair or deceptive business practices

• Recall and reproductionRecall and reproduction

• False advertising

• ASCAP SESAC BMI RIAA or other music licensing organizationsASCAP, SESAC, BMI, RIAA or other music licensing organizations

• Disputes with a related party over the ownership of material

• Trade secret & patentTrade secret & patent

• Software copyright

MARSH 40January 9, 2012

(Not a complete list. Terms and conditions vary with each insurer and for each applicant.)

Media Liability Policies: General Conditions

• Usually available on either a claims made or an occurrence form

• Covers defense costs compensatory damages judgments &Covers defense costs, compensatory damages, judgments & settlements

• The limit is per claim and in the aggregate

• Usually a duty to defend (insurer must assume control of claim, including selection of defense counsel) rather than a duty to indemnify (insurer must reimburse insured for funds expended to defend claim) ( p )policy form – choice of counsel option may be available

• Usually available with worldwide scope

(T d diti ith h i d f h li t)

MARSH 41January 9, 2012

(Terms and conditions vary with each insurer and for each applicant)

Sandy CoddingMarsh99 High St.Boston, MA 02110

Sandy.Codding@marsh.com617-385-0277

Patent Infringement Insurance CCoverage

Carl E MetzgerCarl E. Metzger

Goodwin Procter LLP

©2011 Goodwin Procter LLP

January 10, 2012

The History of the Patent Infringement Insurance Landscape

Clients ask, “What history? What coverage?”

g p

Patent litigation risks have always been present, but the landscape has become substantially more treacherous in recent decades

The insurance industry’s relationship with providing coverage for such risks has been mixed• Typical companies have had limited IP coverage through policies

principally designed for other risks

The Commercial General Liability (CGL) insurance coverage battleground for IP claims

Goodwin Procter LLP 44

A Checkered Landscape

In contrast to other insurance coverage areas, the patent infringement coverage options for business insureds have historically been limited

What makes this risk different from other major risks that insurers What makes this risk different from other major risks that insurers routinely cover? A landscape of danger and opportunity

In the past, insurers who have tried to take advantage of this opportunity in the patent infringement context have encountered difficulties and losses

A cycle of advances and retreats

Goodwin Procter LLP 45

A New Coverage Landscape is Evolving (Slowly)

Although coverage has been restricted under some traditional coverages, the options for specialized coverages have improvedg , p p g p

For business transactions where IP reps and warranties are at issue, R&W coverage for the IP rep may be available

P t t i f i t th l i f ti Patent infringement coverage – the evolving frontier

Goodwin Procter LLP 46

Why Buy Patent Infringement Liability Insurance?

Companies typically protect against significant liability risks through insurance and other risk management protocolsg p

Patent infringement risks stand out for many companies as substantial threats to the company’s well-being and future success

For technology or life sciences companies it can often be “bet the For technology or life sciences companies, it can often be bet the company” litigation

If good insurance coverage options exist at a bearable cost, then this type of insurance makes sense

Goodwin Procter LLP 47

IP Infringement Liability Risk

Specialty Line, Stand-alone

Insurance Will Insurance Will Cover:

Defense Costs

Settlement or Damages Costs

For PastI f i t

Some Contractual Liabilities

Infringement

Goodwin Procter LLP 485

Patent Infringement LiabilityInsurance Is Useful When . . .

Company is negotiating a contract where infringement liability indemnification is an issue:

▪ License▪ Distributor agreement▪ Supplier or vendor agreement▪ OEM agreement▪ Joint development agreement

In an M&A Transaction:In an M&A Transaction:▪ Company is purchaser looking for protection from potential patent

exposures

▪ Company is seller looking for relief from burdensome reps &▪ Company is seller looking for relief from burdensome reps & warranties, escrow, indemnification, delay

Goodwin Procter LLP 49

How to Explore PurchasingPatent Insurance Coverage

Begin the process with a knowledgeable insurance brokerage

g

Not all insurance brokers are equal when it comes to knowledge of IP insurance products

The insurance applicant should:

› select an insurance broker with specific experience in this area, or

› suggest the retail broker use a knowledgeable wholesale broker

Keep counsel involved in the process

Goodwin Procter LLP 50

Submission Process

• Submits application • Offers terms and Applicant

pp

• Provides indication

Insurer conditions

Insurer of interest

• Detailed submissionUnderwriting fee

Insurer & Applicant

• Negotiate

• Accepts terms and

Applicant• Underwriting fee• Legal opinion or patent

search

• Conducts

Applicant

Accepts terms and conditions and pays premium

Insurer

• Conducts underwriting analysis Insurer

• Places the coverage

Goodwin Procter LLP 51

• Varies by carrier and by risk(s) being covered

Underwriting Process

Varies by carrier and risk being covered

Expect detailed questions about:› Products/services to be insured against infringement liability risk› IP covering products/services to be insured› IP covering products/services to be insured› Financials› IP risk management policies and practices› IP dispute history, including costp y, g

Pricing› Based on risk profileBased on risk profile

› Ranges anywhere from 1-10% rate-on-line (for example, 5% premium rate on line for $1M limit of indemnity policy = $50,000)

▪ Price deflators/inflators = deductible co-insurance percentage

Goodwin Procter LLP 52

Price deflators/inflators deductible, co insurance percentage, industry, claims history, market dynamics, strength of IP

Conditions and Exclusions

Terms and conditions vary with the carrier and with each applicant, but be aware of the following . . .pp , g

› The policy form

▪ Typically claims-made, rather than occurrence▪ Typically written as an aggregate limit of indemnityyp y gg g y▪ Typically a duty to indemnify (insurer must reimburse insured

for funds expended to defend claim) rather than duty to defend (insurer must assume control of claim, including selection of defense counsel) policy formselection of defense counsel) policy form

Goodwin Procter LLP 53

Conditions and Exclusions (cont’d)

Terms and conditions vary with the carrier and with each applicant, but be aware of the following . . .pp , g

› Conditions

▪ Geographic scope▪ Scheduled products, IP, contracts ▪ Choice of counsel: varies by carrier▪ Prior Acts” definition▪ “Claim” definition▪ Claim definition▪ “Litigation Costs” or “Defense Costs” definition▪ SIR and co-insurance

Goodwin Procter LLP 54

Conditions and Exclusions (cont’d)

Terms and conditions vary with the carrier and with each applicant, but be aware of the following . . .pp , g

› Exclusions

Willfulness Consequential damages Certain counterclaims and declaratory judgment actions Specific exclusions (i.e., claims brought by certain entities)

Goodwin Procter LLP 55

Additional Litigation Considerations

Analyze all insurance coverages that could be applicable

Litigations and claims evolve over time, and your insurance coverage may as well, so continue to consider possible coverage

IP litigation buy-out coverage -- specialty coverage options may i texist

If you are intending to be a plaintiff in an IP litigation consider the If you are intending to be a plaintiff in an IP litigation, consider the defendant’s possible insurance coverages -- to trigger or not to trigger?

Goodwin Procter LLP 56

Carl E. Metzger, Esq.Goodwin Procter LLPGoodwin Procter LLPExchange Place53 State Street53 State StreetBoston, MA 02110Tel: (617) 570-1770cmetzger@goodwinprocter.comwww.goodwinprocter.com