The Court of Appeals for the Ninth Circuit reversed the Central District Court of California's granting of summary judgment for defendant insurers, where the insurers refused to defend the insured against allegations of patent infringement on the grounds the claims did not constitute an "advertising injury" triggering the duty to defend. The court held the patent infringement claims, as alleged in the underlying complaint, did constitute an "advertising injury" as defined in the policy, and remanded the case.
Plaintiff Hyundai Motor America ("Hyundai") maintained a website with a "build your own vehicle" ("BYO") feature, which allowed users to navigate through a series of questions on a menu, and in response, the BYO feature would display customized vehicle images and pricing information. Orion IP, LLC ("Orion"), a patent-holding company, sued Hyundai for patent infringement, alleging Hyundai's BYO feature infringed one of its patents. Hyundai sought a defense from its insurers.
The policy issued to Hyundai provided a duty to defend against any suit seeking damages for advertising injury. "Advertising injury" was defined (in part) as a "misappropriation of advertising ideas or style of doing business." Hyundai asserted National Union had a duty to defend because Orion's claims of patent infringement constituted a misappropriation of advertising ideas or style of doing business. Hyundai's insurers disputed this interpretation and declined to defend. Hyundai defended itself and the jury awarded a judgment against it. Hyundai subsequently filed suit against its insurers, seeking reasonable defense costs, but not indemnification.
The district court granted summary judgment to the defendant insurers. It held patent infringement was not an "advertising injury." The court also held, alternatively, Hyundai was unable to demonstrate a causal connection between its advertising method and Orion's alleged injury, but the court did not reach the question of whether the BYO feature constituted "advertising." Hyundai appealed.
On de novo review, the court applied California law to address whether the Orion action constituted a suit alleging an "advertising injury." The California Supreme Court has specified three required elements to establish a duty to defend for an "advertising injury": (1) the insured was engaged in "advertising" during the policy period when the alleged "advertising injury" occurred; (2) the allegations in the complaint created a potential for liability under one of the covered offenses (i.e., misappropriation of advertising ideas); and (3) a causal connection existed between the alleged injury and the "advertising."
The Ninth Circuit and California follow the majority rule of defining "advertising" as "widespread promotional activities usually directed to the public at large," other than "solicitation." Although the court recognized the customized proposals made possible by Hyundai's BYO feature seemed to be solicitation, it concluded the BYO feature was "widely distributed" because all potential users were using the same BYO feature. Thus, the BYO feature was "advertising."
The court further concluded Orion's patent infringement claim constituted a "misappropriation of advertising ideas." The court applied a "contextual reasonableness" analysis, which asks whether the patents at issue "involve any process or invention which could reasonably be considered an 'advertising idea'." While earlier case law had rejected claims that a patent infringement constituted an advertising injury, both the Ninth Circuit and California courts use a contextual analysis for such claims, and have held infringement of a patented advertising method could constitute misappropriation of advertising ideas. Here, because the patent infringement was the use of an advertising technique that was itself patented (not the product being sold by the technique), it constituted a misappropriation of advertising ideas.
Finally, the court found a causal connection between the advertisement and the advertising injury. The court explained that when the infringement occurs independent of the actual advertisement of the underlying product, because the patent concerns the underlying product, there is no causal connection. When the patent infringement occurs in the course of the advertising, however, a causal connection is established. Here, it was the use of the BYO feature that violated the patent (not anything related to the car that Hyundai is trying to sell) and caused the injuries alleged by Orion. Thus, a direct causal connection had been established.
The court concluded that, under the specific facts alleged in the underlying complaint, the patent infringement claims constituted allegations of "misappropriation of advertising ideas," triggering the insurers' duty to defend. The court remanded with instructions to grant summary judgment to Hyundai.
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