Understanding advertising injury insurance: application to protect against business torts: this coverage is invaluable for businesses, but policy forms change and courts render varied rulings, making it necessary for counsel to be alert.

• Author: Kardassakis, Jon P.

MOST businesses in the United States buy commercial general liability (CGL) insurance. From 1985 through at least 1998, the most commonly used forms for this insurance included coverage for "advertising injury" offenses committed in the course of "advertising your goods, products or services." In policies issued in and after 1998, the policies often provide coverage for "personal and advertising injury" liability, with a definition restricting the coverage for some of the offenses to those committed "in your advertisement." Unlike the more familiar coverage for bodily injury and property damage liability, this so-called "advertising injury" coverage is not triggered by the type of damage but instead applies to all damage caused by covered offenses.

This insurance can be of great benefit to a business sued for damages because of libel or slander, trademark, trade name or trade dress infringement, or suits alleging copyright infringement caused by the insured's advertising. There remains disagreement on certain key issues regarding the scope of the coverage, including intellectual property disputes, but recent cases seem to be establishing trends on some issues of broad significance.

WHAT IS "ADVERTISING"?

A fundamental question, which arose from the earliest form of the coverage, is: What is advertising? More particularly, does advertising include one-on-one solicitation of customers for--example, in person, by phone or mail? The strong trend is for courts to follow the common dictionary definition that "advertising" requires wide spread distribution to the public at large.

The California Supreme Court in 2003 held in Hameid v. National Fire Insurance of Hartford that "advertising injury" as used in the CGL policy "requires widespread promotion to the public such that one-on-one solicitation of a few customers does not give rise to the insurer's duty to defend" an underlying suit. (1) In Hameid, the insured opened a beauty salon and hired hairdressers who previously had worked for a competitor. On learning that its former employees were telephoning and sending mailers to its customers and that this was effective to cause them to switch to Hameid's salon, the competitor filed suit alleging, among other things, misappropriation of trade secrets, including use of the competitor's customer list. The insured's policy included coverage for "advertising injury" arising from "misappropriation of advertising ideas or style of doing business."

The insurer refused to defend, and the insured sued. The trial court granted summary judgment to the insurer, concluding that the underlying suit did not involve advertising. The California Court of Appeal reversed. (2) Relying on New Hampshire Insurance Co. v. Foxfire Inc., (3) it concluded that in the context of a "start-up beauty salon," the solicitation of customers through telephone calls and mailers was sufficient to trigger a duty to defend.

Recognizing that this was contrary to the weight of authority from other jurisdictions, the California Supreme Court reversed, rejected Foxfire and joined the growing majority of courts holding that one-on-one solicitation is not "advertising." This decision likely will prove to be very influential in American courts.

The Supreme Court of Vermont reached a similar conclusion in 1996 in Select Designs Ltd. v. Union Mutual Fire Insurance Co. (4) A competitor sued the insured and several of its officers and employees, alleging that one of the competitor's former employees took proprietary information, including a customer list, then joined the insured's business and tried to lure the competitor's customers to the new employer by using the proprietary information. The insured argued that the term "advertising" is broad enough to include soliciting customers and that there was a misappropriation of advertising ideas via use of its customer list.

The court reviewed cases from numerous jurisdictions that had defined "advertising" as "the widespread distribution of promotional material to the public at large," and it adopted this "majority view." The Vermont court considered three federal district court cases adopting a more liberal definition--Foxfire, Merchants Co. v. American Motorists Insurance Co. (5) and John Deere Insurance Co. v. Shamrock Industries Inc. (6)--but found them not persuasive. The court explained that "advertising injury," as defined in the offenses set out in the policy and as construed in an overwhelming majority of reported cases, "is injury to another that results from the content of statements about the products or services of the insured."

The Select Designs court, pointed out that one type of advertising injury is that which results in libel or slander--for example, an advertisement that disparages a product. A second specie is invasion of privacy, which might, for example, relate to an advertisement that includes a photograph or statement of a person who has not authorized publication of the likeness or the implied endorsement of the product. A third variety speaks to advertisements that appropriate the trademark of a competitor and thus trade on its reputation and advertising efforts.

In Select Designs, the plaintiff's theory sought coverage because advertising occurred, rather than the content of that advertising. It cited the fifth edition of Black's Law Dictionary, which defined "advertised" as: "To advise, announce, apprise, command, give notice of, inform, make known, publish. Or call to the public attention by any means whatsoever. Any oral, written or graphic statement made by the seller in any manner in connection with the solicitation of business.... " The insured argued that under that definition "solicitation" constituted "advertising."

The Select Designs court disagreed, finding that it is the statement made in connection with solicitation that is the advertisement. The court reasoned, "If the act of contacting potential customers is advertising for purposes of the policy, then any dispute related to economic competition among businesses is covered by the policy provision for advertising injury." The court found that proposition untenable and adopted the majority view that advertising requires distribution of promotional material to the public at large.

In another case decided in 2003, the Supreme Court of Wisconsin stated that generally speaking, "advertising refers to calling the public's attention to a product or business by proclaiming its qualities or advantages in order to increase sales or arouse a desire to buy or patronize." (7) The court did not find it necessary to adopt either the narrow or broad interpretations of advertising referred to in earlier decisions, concluding, "Creating brochures and displaying products at a trade show clearly involve the widespread announcement or distribution of promotional materials and calling the attention of the public to the emergency shower systems by proclaiming their qualities in order to increase sales or arouse a desire to buy." (8)

Monumental Life Insurance Co. v. United States Fidelity & Guaranty Co., (9) a 1993 Maryland case, was one of the earlier decisions holding that advertising and solicitation are mutually exclusive. The insured was accused of stealing employees from its competitor, disparaging the competitor's services, misappropriating its proprietary information and courting its customers. The customer contact was by personal solicitation, which resulted in the defection of more than 10,000 customers.

The Maryland Court of Special Appeals stated that while Monumental's replacement of 10,000 policies might be "widespread, it is neither 'public' nor 'advertising.'" It went on to hold:

The lower court clearly viewed advertising and solicitation as mutually exclusive, the difference being that advertising must be of a public nature.... In the present case, we agree with the lower court that there is no bona fide ambiguity in the language of the policies at issue, nor is there any legitimate doubt as to its application under the circumstances. "Advertising" means advertising, i.e., "widespread distribution or announcements to the public at large." Consequently, Monumental's individual, one-to-one solicitations were clearly not "advertising" within the normal meaning of the word and, accordingly, the lower court acted properly. (10) This decision is significant in that it draws a bright line between "solicitation" and "advertising" and rejects the argument that a large number of solicitations can blend over into "advertising." It is not the number of persons contacted that is significant, but rather whether the communication is directed to the public (advertising) or only to a select group (solicitation).

An often-cited pre-Hameid case, decided on California law by a federal court, adopted a more relaxed view of what is advertising. Sentex Systems Inc. v. Hartford Accident and Indemnity Co. (11) noted disagreement as to the meaning of the phrase "in the course of advertising" and concluded that the "better view, however, is that the term 'advertising' encompasses the kind of personal, one-on-one and group solicitations" that occurred in the case before the court. Sentex traces back to John Deere, cited above at footnote 6, in which the federal district court cited Black's Law Dictionary's definition of advertising activity as "any oral, written or graphic statement made by the seller in any manner in connection with the solicitation of business." The John Deere court found that an insured's letter to a single customer soliciting the sale of a new machine together with a demonstration of the machine was "advertising activity." Virtually all courts now reject this view.

One offspring of John Deere, advocating a more flexible "context based" rule is Foxfire, (12) in which an employee planned to leave his employer and open his own business. He sent a letter on his employer's letterhead to all of the employer's clients announcing the...