Insurance Coverage for Intellectual Property Claim
by Jordan S. Stanzler

Lawyers who fail to advise clients about insurance coverage or fail to provide notice of pending litigation to insurance companies may be committing malpractice. That is the lesson from two recent cases -- one in New York and one in California. Both cases involve intellectual property claims. And in both cases, the lawyers were not asked by the client to provide advice about insurance. It is, therefore, crystal clear that lawyers in general and intellectual property lawyers in particular must be careful not to prejudice their clients' rights to insurance coverage.

The potential availability of insurance coverage for intellectual property infringement matters has been known for years. Similarly, the obligation of intellectual property counsel, like all attorneys, to provide full and complete advice to clients is firmly established. Recently, in Darby & Darby v. VSI International, Inc., 678 N.Y. S.2d 482 (1998), these two doctrines were merged in a significant holding that the "failure to investigate" a client's insurance coverage or "alert them to the potential availability of insurance" to cover infringement claims may constitute legal malpractice.

The Darby decision unequivocally reaffirms the need for the intellectual property bar to advise clients, faced with infringement claims, about insurance. The Darby decision expanded upon the earlier case of Jordache Enterprises, Inc. v. Brobeck Phleger & Harrison, 18 Cal. 4th 739 (1998), in which the California Supreme Court, ruling on a statute of limitations question, assumed that failure to advise a client about potential coverage would constitute legal malpractice.

THE JORDACHE FACTS

In the Jordache case, the law firm of Brobeck, Phleger and Harrison was engaged to defend the client in a case alleging that Jordache was marketing "knockoffs" of a competitor's apparel. Jordache was told by its insurance broker that its liability policy did not cover the lawsuit. The client did not request the law firm to provide advice about insurance coverage and the law firm did not ask about insurance coverage. Some three years later Jordache replaced the Brobeck firm with a second law firm which advised that there was a potential for insurance coverage. Notice was then provided to the insurance company. Jordache later brought an action against its insurance company, alleging a breach of the duty to defend and indemnify the claims of trademark infringement. The insurer argued that because Jordache's notice was late, its insurance should be voided. Confronted with this defense, Jordache settled the insurance coverage action for millions of dollars less than the full claim was worth. That case settled, but Jordache argued that its position was compromised, because of the late notice defense asserted by the insurance company.

Jordache also filed a malpractice against the Brobeck firm. The court ruled that the statute of limitations began to run when Jordache realized that the law firm had not provided notice to the insurance companies. The court rejected Jordache's argument that it sustained a "continuous injury" during the period of time when Jordache sued its insurance carrier for reimbursement of defense costs. However, the Supreme Court assumed, without deciding, that the law firm's failure to provide notice to the insurance company of a potentially covered claim constituted legal malpractice. The court noted that "because of the attorney's alleged neglect, the client provided its own defense in the [infringement] action for several years. Consequently, the client not only lost a primary benefit of liability insurance [citation omitted], it also lost profitable alternative uses for the substantial sums it paid in defense costs." Id. at 744.

THE DARBY FACTS

In Darby, the client retained an intellectual property law firm to represent it in trademark and patent infringement lawsuits pending in Florida. After three years, the original law firm was replaced by another intellectual property firm. The new law firm immediately requested that VSI turn over its insurance policies for review. Shortly thereafter, the new law firm sent notice to VSI's general liability insurance companies. Insurance was obtained for the remainder of the defense costs incurred in the litigation. Notably, however, the insurance company refused to reimburse VSI for the defense costs incurred prior to receiving notice of the claim.

The original law firm later brought suit against the client seeking unpaid legal fees. VSI counterclaimed on the grounds that the law firm had committed legal malpractice by, among other things, failing to advise VSI of the possibility that its general liability insurance policies might cover the costs of defending the intellectual property lawsuits.

The law firm moved to dismiss VSI's malpractice counterclaim, arguing that its professional responsibilities only extended to the actual litigation, and that it was not a law firm's responsibility to provide advice about matters relating to the "financing"of litigation. It further argued that VSI, as the insurance policyholder, was solely responsible for evaluating the potential for insurance coverage and submitting a claim to its insurance company.

In opposition, VSI maintained that an attorney's obligations should not be so limited. In particular, VSI contended that an attorney hired to represent a client in litigation is not merely a legal technician whose responsibilities are limited to legal strategy, but also a counselor whose duties include advising a client about all matters pertaining to litigation so as to minimize a client's liability.

The New York Supreme Court rejected the law firm's arguments and held that "the failure to investigate [a client's] insurance coverage or alert them to the potential availability of insurance to cover their litigation expenses may have constituted legal malpractice." The Court found "particularly noteworthy" the fact that counsel who succeeded the original law firm had "promptly pursued the insurance issue to [the client's] substantial benefit."

THE LONG-STANDING DUTIES OWED BY ATTORNEYS TO CLIENTS

These two decisions comport with the fundamental notion that, as counselors with specialized expertise, attorneys owe their clients ethical and fiduciary obligations to act competently and to render the highest level of care and service. For example, the Lawyer's Code of Professional Responsibility, Ethical Consideration 6-1 expressly provides that "Because of the lawyer's vital role in the legal process, the lawyer should act with competence and proper care in representing clients. The lawyer should strive to become and remain proficient in his or her practice and should accept employment only in matters which he or she is or intends to become competent to handle."

The proficiency contemplated by the Code of Professional Responsibility requires that attorneys familiarize themselves with new developments of the law affecting their practice. In relevant part, Ethical Consideration 6-2 counsels that "A lawyer is aided in attaining and maintaining competence by keeping abreast of current legal literature and developments, participating in continuing legal education programs, concentrating in particular areas of the law, and by utilizing other available means..." Disciplinary Rule 6-101 provides that an attorney who fails either to represent a client in a competent manner or to keep abreast of new developments in the law may be subject to disciplinary action.

Additionally, attorneys are fiduciaries to their clients. An attorney is, therefore, obligated to represent a client with unmitigated loyalty, care, and trust. The New York Court of Appeals, for instance, in In re: Cooperman (NY 1994), described the attorney/client relationship as the "highest trust between people". Among other things, fiduciary status imposes upon an attorney the duty to provide the best advice that is compatible with the needs and desires of the client. The unique relationship between attorneys and clients imposes upon an attorney an ethical and fiduciary obligation to advise a client about the possibility of insurance for defending against intellectual property lawsuits.

INTELLECTUAL PROPERTY INFRINGEMENT INSURANCE

Insurance coverage for intellectual property infringement actions generally arises under the "advertising injury" clause of either the 1973 or 1986 standard-form comprehensive general liability ("CGL") insurance policy. In relevant part, the 1973 Broad Form Liability Endorsement reads as follows:

The company will pay on behalf of the insured all sums which the insured shall become legally obligated to pay as damages because of personal injury or advertising injury to which this insurance applies . . . arising out of the conduct of the named insured's business . . .

"Advertising injury", was defined as "injury arising out of an offense committed during the policy period occurring in the course of the named insured's advertising activities, if such injury arises out of libel, slander, defamation, violation of right of privacy, piracy, unfair competition, or infringement of copyright, title or slogan."

In 1986, the definition of "Advertising Injury" was changed to mean an injury arising out of one or more of the following offenses:

A. Oral or written publication of material that slanders or libels a person or organization or disparages a person's or organization's goods, products or services;

B. Oral or written publication of material that violates a person's right of privacy;

  1. Misappropriation of advertising ideas or style of doing business; or
  2. Infringement of copyright, title or slogan.

Although the Insurance Service Office's Introduction and Overview for the 1986 CGL Policy Revision indicated that no change in scope was intended with regard to the personal and advertising injury coverage within the policy, a policyholder nevertheless should check its liability insurance policies to verify the exact language of the advertising injury coverage provision. Other insurance policies, such as directors and officers policies, professional malpractice policies, and employment professional liability policies, should likewise be consulted.

TIPS TO AVOID MALPRACTICE
  • Review insurance policies at the beginning of any litigation.
  • Alert clients facing infringement claims in writing of the possibility of insurance coverage.
  • Do not assume that any client knows about the possibility of insurance coverage.
  • Make sure that notice is sent to all potentially involved insurance companies as soon as possible.
  • Use, but do not rely exclusively on, insurance brokers for determining relevant insurance coverage and giving notice.
  • Do not accept boilerplate denials of insurance coverage.
  • Consider hiring experienced insurance coverage counsel.

The lesson to be learned is always think insurance. An ounce of prevention at the outset of a litigation matter can avoid unnecessary problems.

 

All materials copyright 1999-2003 by Stanzler Funderburk & Castellon LLP. All rights reserved.


Disclaimer: These materials have been prepared by Stanzler Funderburk & Castellon LLP for informational purposes only and are not legal advice. This information is not intended to create, and receipt of it does not constitute, a lawyer-client relationship. Internet subscribers and online readers should not act upon this information without seeking professional counsel.