The Role of Insurance in Indemnification in Intellectual Property Disputes

Corporations that depend upon manufacturing outside the United States, with little recourse to pursue either indemnification or insurance benefits, are well-advised to have extensive insurance coverage to protect their operations against intellectual property claims.  It is hard to envision the myriad ways in which manufacturers may produce products that could lead to infringement.  While exclusion orders in International Trade Court (“ITC”) proceedings may bar new shipments from reaching the borders, a retailer who receives product alleged to be infringing may sue a distributor who is in the chain of distribution, linking back to a manufacturer that cannot be pursued.  Securing an “additional insured” status for such manufacturer can solve many of these problems.

Pursuit of Indemnification Is Based on Contract Construction Principles Analogous to Those Applicable to Insurance Litigation

In Owens-Illinois, Inc. v. BTR plc, No. 05 Civ. 2873(LLS), 2010 WL 2607146 (S.D.N.Y. June 29, 2010), intellectual property representations and warranties in § 3.14(a) of a Sales and Distribution Agreement were narrowly construed.  That provision’s “as currently conducted” language barred indemnity even though the product was “a part of the business spectrum” and “ready to go.”  As Owens would control the extent of future sales and receive profits from those sales, it was sensible to have Owens take on the risk of future sales under the indemnity agreement.  The indemnification provisions of BTR’s policy were not triggered where the indemnifiable claims did not exceed the $35 million deductible.

The “Contractual Liability” Exclusion May Be Avoided Under an Exception for “Damages that the Insured Would Have Had in the Absence of the Contract”

In CGS Industries, Inc. v. Charter Oak Fire Insurance Co., ___ F. Supp. 2d ___, 2011 WL 1449618 (E.D.N.Y. April 15, 2011), Judge Weinstein found the exception to the contractual liability exclusion for “advertising injury” implicated, requiring the full amount of the reasonable settlement incurred to be reimbursed pursuant to N.Y. U.C.C. § 2-312(3).  The Supplier Agreement was not “another agreement” between CGS (the seller) and Walmart (the buyer) which negates CGS’s independent legal duty to indemnify Walmart under section 2-312(3) (id. at *7) because that statute (like other analogous state UCC provisions nationwide) conferred upon Walmart an independent legal right to indemnification from CGS.

The duty of indemnification exists “in the absence of the [supplier agreement].”  It is “a mere decorative counterpane over the blanket protection of the law.”  Charter Oak was obligated to pay damages for “injury,” that arises “out of … [i]nfringement of copyright, title or slogan,” which the court had found arose in an earlier ruling [CGS Indus., Inc. v. Charter Oak Fire Ins. Co., ___ F. Supp. 2d ___, 2010 WL 4720320 (E.D.N.Y. 2010)].  Id. at *8.

Where a Retailer Is an Additional Insured Under a Policy of Insurance with Full Rights to Coverage Thereunder, Defense Reimbursement Under a Manufacturer’s Insurance Policy Is Available

In State Farm Fire & Casualty Insurance Co. v. Target Corporation, No. 08-765-FJP-DLD, 2011 WL 1114243, at *7 (M.D. La. March 24, 2011), a suit was brought by a plaintiff injured when a Christmas tree’s lights caught fire.  The court found the retailer, Target, entitled to a defense from the manufacturer (Inliten’s) carrier, Hartford, under Part 2 of the Supplemental Payments provision.  Hartford stated that if Hartford defended its insured and an indemnitee was also named as party to the suit, it would defend the indemnitee if conditions (which Target satisfied) were met.