First publication exclusion applies to trade dress infringement claim

In United National Insurance Company v Spectrum Worldwide Inc (Case CV-05-04610-SGL, February 2 2009), the US Court of Appeals for the Ninth Circuit has held that under California law, a 'first publication' exclusion in an insurance policy applies to trade dress infringement claims.

 

In December 1997 Sunset Health Products Inc hired Spectrum Worldwide Inc to advertise and distribute a drink called 'Hollywood 48-Hour Miracle Diet'. Shortly after Spectrum was retained, two Spectrum executives formed Celebrity Products Direct Inc and Celebrity Products Inc to market and sell a competing product, the 'Original Hollywood Celebrity Diet', whose package resembled that of Sunset’s product. Spectrum then terminated its contract with Sunset and began marketing the drink. Sunset twice demanded that Spectrum cease infringing its Miracle Diet trade dress. In October 2001 Sunset filed suit against Spectrum for trade dress infringement.

 

Also in 2001 United National Insurance Company issued Spectrum with a $1 million excess third-party liability policy, which became effective on April 26 2001. Under the policy, United was to indemnify Spectrum for damages resulting from "advertising injury" liability. The definition of 'advertising injury' included "infringement of copyright, title or slogan". The policy contained a 'first publication' exclusion, which specifically excluded from coverage any advertising injury arising out of the publication of material whose first publication took place before the effective date of the policy.

 

Spectrum and Sunset settled Sunset's trade dress infringement action. As part of the settlement, Spectrum paid $3.22 million to Sunset, $420,000 of which was paid by United. United then sued Spectrum, seeking reimbursement of its $420,000 settlement contribution. Relying on Spectrum’s successful argument in the Sunset Case that it had been using its trade dress since 1999 (ie, long before the insurance policy took effect), United argued that the insurance policy's 'first publication' exclusion relieved it of any obligation to indemnify Spectrum. On a motion for reconsideration, the district court granted United’s motion for summary judgment, finding that the substance of Sunset's advertising injury was the labelling of the Original Hollywood Celebrity Diet drink, which was introduced before the effective date of the insurance policy.

 

Before the Ninth Circuit, Spectrum argued that the insurance policy's 'first publication' exclusion did not apply to Sunset's infringement claim under California law. The court found that the language of the exclusion in United's policy was "clear and explicit" and that it was the mutual intent of United and Spectrum that the exclusion should apply to infringement claims. The Ninth Circuit rejected Spectrum's arguments that the plain language was ambiguous, stating that:

"[i]n order to find Spectrum's interpretation reasonable, we would have to conclude that it is reasonable to ignore [the drafter's] efforts ...carefully [to] define the term 'advertising injury'." 

 

Ultimately, the Ninth Circuit resolved a split in authority to find that 'first publication' exclusions in insurance policies may apply to trade dress infringement claims in California if such provisions are clear and explicit.

 

Spectrum attempted to avoid the exclusion by arguing that it introduced its infringing trade dress in 2001, after the insurance policy took effect. This position directly contradicted Spectrum’s argument to the court in the Sunset Case, where, in attempting to defeat Sunset’s preliminary injunction motion, Spectrum had told the court that it had used its trade dress since 1999 and the court had relied on that fact in finding that Sunset had delayed too long in seeking relief. Invoking the doctrine of judicial estoppel, the Ninth Circuit refused to allow Spectrum to rely on facts that contradicted its position in the Sunset Case. The court viewed Spectrum as attempting to “game” the courts to achieve a result that would be unfair to Sunset and United, which would call into question the integrity of the courts. 

 

Accordingly, the Ninth Circuit affirmed summary judgment in favour of United and required Spectrum to reimburse the $420,000 that United had contributed to the settlement of the Sunset Case on Spectrum’s behalf.

Susan Progoff and Christopher Wheatley, Ropes & Gray LLP, New York