Insurance Coverage Opportunities for Trademark Dilution Claims

Insurance Coverage Opportunities for Trademark Dilution Claims

David A. Gauntlett

Introduction

A typical trademark suit will assert various causes of action with names familiar to the average person, including the well-known trademark infringement. Unfortunately for policyholders, these claims are typically excluded by a policy’s IP exclusion.^[1] Though less known, trademark dilution is also common and can often be leveraged to attain coverage for the entire suit. This path to coverage is rarely recognized by insurance claims handlers, leading to a quick denial. Luckily, experienced coverage counsel can explain that mistake and secure coverage despite an initial denial.

Dilution by Blurring Often Implicates Offense “f”

Blurring occurs when the public is confused through its identification with dissimilar goods. This creates the possibility that any association with the terminology used by the claimant, whether or not it qualifies as a trademark, leads to liability because of unfair competition. It is a distinct basis for liability apart from weakening of the trademark.^[2]

In a standard Commercial General Liability (“CGL”) policy, offense “f” of “personal and advertising injury” provides coverage for “the use of another’s advertising idea in your ‘advertisement’.” This policy language naturally extends to blurring claims. Most courts have adopted broad interpretations for the undefined term “advertising idea,”^[3] allowing it to capture most of the content that generates a blurring claim.^[4] Policyholders should note that coverage will be limited to blurring via trade dress or other non-trademark elements in jurisdictions that have concluded a trademark is not an “advertising idea.”^[5]

Dilution by Tarnishment Triggers Coverage under Offense “d”

CGL policies’ “personal and advertising injury” coverage also includes offense “d”: “oral or written publication, in any manner, of material that slanders or libels a person or organization or disparages a person's or organization's goods, products or services.”^[6] Though trademark suits rarely include a labeled cause of action for disparagement, that is of no moment.^[7] A typical trademark dilution claim includes sufficient factual allegations to implicate offense “d” coverage.

Even if the explicit claims for dilution do fall within an exclusion, it is not the label of the cause of action, but the facts. that control. A claim that is based on dilution by tarnishment may state grounds for potential coverage which falls within offense “d.” Those policies that narrowly only protect libel or slander as opposed to disparagement, such as that issued by the Chubb entities regarding the same conduct, might call into question the viability of the source of products, potentially tarnishing the reputation of the company as well as question the viability of its products, and thus trigger a defense.^[8]

One can infer from allegations of tarnishment that that the underlying plaintiff’s products have been diminished in value by association with the purportedly inferior products of the policyholder (and that the reputation of their seller is denigrated by the negative association of the seller with inferior products).

MTD pulled a “bait-and-switch” on its customers, however, by displaying in its showroom “cheap synthetic knock-offs” of Rosequist's products, running the risk that consumers would be confused and misled, as to the origin of the items on display. Rosequist claimed this conduct would “dilute and tarnish” her trade dress.^[9]

A later case citing Michael Taylor concluded that these facts were sufficient to implicate offense “d” coverage:

Plaintiff Glidewell has no control over the composition or quality of the goods sold under the confusingly similar trademark by Defendant Keating. As a result, to the extent Defendant's products are inferior to Plaintiff Glidewell's products, Plaintiff Glidewell's valuable goodwill, developed at great expense and effort by Plaintiff Glidewell, is being harmed by Defendant Keating's unauthorized use of the confusingly similar trademark, and is at risk of further damage.^[10] 

Trademark Dilution Claims Not Excluded by IP Exclusion

Blurring claims that implicate offense “f” bypass the standard Intellectual Property exclusion. This exclusion precludes coverage for infringement of specific intellectual property as well as “other intellectual property rights,” but that is followed by the statements that “[u]nder this exclusion, such other intellectual property rights do not include the use of another's advertising idea in your ‘advertisement’.”^[11]

Tarnishment claims also escape the exclusion’s scope because trademark dilution claims protect property right interests and are distinct in character from claims for trademark infringement. Protections against direct trademark infringement are based on society’s interest in protecting consumers from being misled about the source of the trademarked goods.^[12] A trademark holder’s right to sue for infringement is derived from the public’s right to ascertain product origin.^[13] In contrast, trademark anti-dilution statutes are designed to directly protect trademark holders’ property interest in their respective marks. They do not require consumer confusion. Indeed, prohibiting the disparagement of famous marks through wrongful association was one of Congress’s guiding concerns in enacting the 1996 Federal Anti-Dilution Act.^[14]

Professor Welkowitz further explained the distinctions in his treatise:

Dilution protection represents a different perspective about trademarks. Instead of protecting against confusion, the object of dilution is protected by the “distinctive quality” of the trademark. . . . Most important, this erosion of power is assumed to occur in the absence of any consumer confusion. . . . One might reasonably describe diluting uses of the mark as source distractors.” That is, they distract the viewer from the primary source — identifying content of the mark.^[15]             

Though some cases have applied the “Intellectual Property” exclusion in the context of dilution,[16] those decisions pre-date critical insurance cases such as My Choice,[17] which have recently clarified that insurers cannot use “arising out of” to achieve a broad construction for an exclusion.

Conclusion

Obtaining coverage for intellectual property lawsuits can be difficult. Insurers have recognized the costs of defending and indemnifying such actions, so standard policies exclude the major intellectual property offense (e.g., patent, trademark, and copyright infringement). Fortunately, supplemental claims (like trademark dilution) are often included with the primary causes of action. Experienced coverage counsel can often leverage these into coverage by carefully evaluating the factual allegations in the complaint.