Ninth Circuit Finds Trade Dress Infringement to be a form of Advertising Injury Covered by Insurance

However, the Insured’s Arguments Estopped it from Denying Reimbursement to the Insurer for Damages Stemming from the Advertising Injury

In United National Insurance Co. v. Spectrum Worldwide, Inc., 555 F3d 772; 89 USPQ2d 1618 (9th Cir. 2009), Spectrum was hired by Sunset Health Products, Inc. in December 1997 to advertise and distribute Sunset’s “Hollywood 48-Hour Miracle Diet” drink (“Miracle Diet”). Soon after in 1998, the CEO and CFO of Spectrum formed Celebrity Products Direct, Inc., which began to market and sell a comparable product, “The Original Hollywood Celebrity Diet” drink (“Celebrity Diet”). Spectrum then terminated its contract with Sunset and began marketing Celebrity Diet.

Sunset’s label had a blue/purple background and featured the word “Hollywood,” the phrase “Lose Up To 10 lbs. in 48 Hours!,” and pictures of palm trees, gold stars, and Hollywood-style searchlights. Spectrum’s original label in 1998 featured similar phrasing on a black background with a gold star. Then, Spectrum changed Celebrity Diet’s label such that by 2001, the label was a purple/blue background with Hollywood-style searchlights, and the font and style of the word “Hollywood” looked more like the Hollywood Hills sign.

After demanding twice that Spectrum cease infringing on its Miracle Diet trademark, Sunset filed a trade dress infringement claim against Spectrum in October 2001. Sunset alleged that Spectrum deliberately packaged and labeled Celebrity Diet so similarly to Miracle Diet that it confused consumers and damaged Sunset’s reputation. Sunset applied for a temporary restraining order, and it asked the District Judge to compare Sunset’s 1998 label to Spectrum’s 1998 and 2001 labels to determine whether Spectrum’s 2001 label constituted an immediate harm to Sunset.

The District Judge granted the temporary restraining order. In the subsequent preliminary injunction hearing, however, Spectrum’s argument was that it had changed its 1998 label in 1999 and Sunset was aware of the change at the time.  Moreover, its 1999 label was so similar to its 2001 label that Sunset was not in danger of experiencing immediate harm since Sunset had delayed three years in bringing the action in the first place. Accepting Spectrum’s position, the judge denied Sunset’s preliminary injunction action. Spectrum and Sunset eventually settled on the trade-dress infringement claim.

In 2001, United issued Spectrum a one million dollar excess third party liability policy that, in part, indemnified Spectrum for damages resulting from an advertising injury. The policy defined an advertising injury to be an injury arising out of “[i]nfringement of copyright, title or slogan.”  The policy however did not apply to an “advertising injury…arising out of oral or written publication of material whose first publication took place before the beginning of the policy period.”

Spectrum’s insurance provider, United, contributed $420,000 to the settlement amount under this policy.  In 2005, United filed a complaint seeking reimbursement of its settlement contribution then moved for summary judgment arguing that its first publication exclusion eliminated its indemnification obligations. Upon a request for reconsideration of an initial denial, the district court granted United’s motion for summary judgment, holding that Spectrum’s 1999 label formed the substance of Sunset’s advertising injury and that, therefore, the first publication exclusion eliminated United’s liability. The district court entered a judgment against Spectrum Worldwide and its officers for the amount that United had contributed to the settlement. The district court denied Spectrum’s motion for reconsideration.

On appeal, Spectrum argued that the United Policy’s first publication exclusion did not apply to Sunset’s infringement claim because (1) first publication exclusions do not apply to infringement actions inCaliforniaand (2) even if the clause applied to infringement actions, summary judgment was not proper to determine whether Spectrum first published infringing material before the United Policy took effect.

In interpreting insurance policy language underCalifornialaw, the Ninth Circuit noted that one must first look to the language itself to ascertain its plain meaning.  From this reading, one should be able to infer the parties’ mutual intention at the time of contract formation.

Applying this standard, the Ninth Circuit did not agree with Spectrum’s argument that the language was ambiguous. It instead found that the United Policy’s first publication clause was clear and explicit.  Specifically, the plain reading of the first publication exclusion and the relevant advertising injury definition together indicated that the parties intended to exclude from coverage any infringement injury that arose from an oral or written publication or material first published before the policy became effective.

After finding that United’s first publication exclusion clearly applied to trade dress infringement claims, the court then considered whether the exclusion applied to Sunset’s infringement claim. Specifically, the Ninth Circuit looked to whether judicial estoppel applied in the instant case.

Judicial estoppel bars inconsistent positions taken in the same litigation and bars litigants from making incompatible statements in different cases. The purpose of the doctrine is to prevent litigants from taking one position, gaining advantage from that position, then seeking a second advantage by seeking an incompatible position. The Ninth Circuit looked to New Hampshire v. Maine to determine whether judicial estoppel applied. 532U.S. 742 (2001). Following the test, the Ninth Circuit held that Spectrum’s current position was clearly inconsistent with its earlier position.

In the 2001 preliminary injunction hearing, Spectrum’s response to Sunset’s allegations about its recent label change was that Spectrum had been using the label elements of which Sunset complained since 1999.  Moreover, any change thereafter was simply shifting the 1999 label elements, thereby establishing that there was no immediate harm for purposes of a preliminary injunction. Spectrum’s argument in this case, however, was that it was the 2001 label, not the 1999 version that resulted in the Sunset action.

Also, Spectrum succeeded in persuading the district court to accept the earlier position, so accepting Spectrum’s current argument would create “the perception that either the first or the second court was misled.” Spectrum’s 2001 arguments helped convince the District Judge that Sunset did not experience new or immediate harm and that an injunction was inappropriate. Therefore, if the Ninth Circuit were to accept Spectrum’s new argument that the 2001 label was the basis for Sunset’s infringement claim, it could create the perception that Spectrum misled either the Ninth Circuit or the District Judge.

Last, if not estopped, Spectrum would derive an unfair advantage. Spectrum benefited from its 2001 arguments by establishing that the harm had arisen prior to the 2001 label.  So if Spectrum were allowed to now change its arguments, it would be possible for Spectrum to prevail on the same position it discredited when attempting to avoid preliminary injunction. The result would be unfair to both Sunset and United.

On this basis, the Ninth Circuit affirmed the district court’s determination that United’s Policy applied to trade dress infringement actions. Also, the Ninth Circuit held that summary judgment was proper to determine the date of first publication in this case because Spectrum was judicially estopped from presenting and prevailing on inconsistent arguments before the district courts. Lastly, the Ninth Circuit held that the district court did not abuse its discretion when it held Spectrum’s officers jointly and severally liable for repayment of United’s contribution.

Significance to Accused Infringers

While advertising injury coverage is often included in commercial general liability insurance, what constitutes a coverable injury depends on the specific language of the policy.  Given the costs associated with defending against charges of trademark infringement, it is well worth reviewing such coverage to determine whether those costs can be reimbursed as an advertising injury.  However, as was the case in United National Insurance Co. v. Spectrum Worldwide, Inc., any claims for reimbursement must also be consistent with the defenses asserted in order to prevent the effects of judicial estoppel from preventing coverage.

 

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