Hinkhouse Williams Walsh

Cook County Trial Court Enters Summary Judgment in Favor of Insurer on Advertising Injury Claim

In this insurance coverage action, McKlein Company, LLC (“McKlein”), an insured of Erie Insurance Exchange (“Erie”), sought defense and indemnity coverage relating to an underlying Complaint for Copyright Infringement and Vicarious and/or Contributory Copyright Infringement (“Complaint”) filed by United Fabrics International, Inc. (“UFI”) against McKlein and G-III Apparel Group, Ltd. d/b/a Wilsons Leather (“Wilsons”).  The Complaint alleged that McKlein and Wilsons stole a copyrighted design from UFI and used the stolen design to sell McKlein’s and Wilsons’ own products through a nationwide network of retail stores and on-line outlets.
McKlein sought coverage under the advertising injury coverage of a comprehensive general liability policy that Erie issued.  McKlein contended that the definition of “personal and advertising injury” in the policy specifically covered “infringement upon another’s copyright, trade dress or slogan in your ‘advertisement’” and that such copyright infringement was alleged in the Complaint.  Further, the intellectual property exclusion, which excluded coverage for copyright infringement, contained an exception for “infringement in your ‘advertisement’ of copyright, trade dress or slogan.”  McKlein maintained that Erie could not rely on the exclusion to avoid coverage for the copyright claim alleged in the Complaint on the grounds that the Complaint alleged that McKlein infringed upon UFI’s copyright by advertising McKlein’s own goods using the stolen design.  
Under Illinois law the court noted that the insured must prove that (1) the underlying complaint alleges that the insured engaged in some form of advertising activity; (2) the advertising activity raised a potential for liability under one of the offenses defined in the policy; and (3) a causal connection existed between the alleged injury and the advertising activity.
Erie defended its coverage denial on the grounds that the Complaint did not allege that McKlein advertised the stolen design.  Advertising must consist of the “widespread distribution of promotional material,” but the Complaint alleged that only Wilsons’, and not McKlein, engaged in any “marketing” of the stolen design.  The court concluded that although the Complaint did not expressly allege that McKlein itself engaged in any marketing or advertising, the advertising activity was implicit in the on-line sales alleged against McKlein.  Therefore, the insured met the first element of advertising injury.
As to whether a causal connection existed between McKlein’s alleged advertisement and UFI’s alleged injury and whether the advertising activity raised the potential for liability under one of the offenses defined in the policy, the court stated that McKlein could not satisfy these necessary elements of proof.  Following well-established Illinois law, the court held that “something more than merely advertising an infringing product must be alleged to trigger coverage for an advertising injury.”  In this case the Complaint did not allege that McKlein’s on-line advertisements displayed a design that infringed upon UFI’s copyright.  Therefore, the Complaint did not allege a covered advertising injury under the policy.  The court also rejected McKlein’s argument that extrinsic evidence established that McKlein advertised the stolen copyright design in the process of selling its own products.  The court reviewed the extrinsic evidence supplied by McKlein and concluded that, contrary to McKlein’s position, the photographs and other website materials did not, in fact, depict any examples of McKlein’s advertising of the infringing design on its website.
Notwithstanding the court’s conclusion that McKlein could not prove a causal connection between McKlein’s alleged advertisement and UFI’s alleged harm, it also rejected McKlein’s contention that the exception to the intellectual property exclusion granted coverage in McKlein’s favor.  McKlein contended that, because the Complaint alleged that McKlein was vicariously liable for the actions of Wilsons, the allegations of marketing against Wilsons should be charged against McKlein as proof of McKlein’s advertisement of the infringing copyright design.  The court agreed with Erie’s argument that the exception to the exclusion for copyright infringement must be based on an advertisement that the insured itself published, not just an advertisement for which the insured is legally liable.  Accordingly, because the Complaint did not allege that McKlein itself published the advertisement, the intellectual property exclusion barred coverage.