April 30, 2010 

Over the past 10 years, there has been a surge in the number of intellectual property lawsuits filed in the United States. Absent specialized intellectual property insurance policies, companies often turn to their CGL carriers for coverage for these lawsuits because the alleged damages are frequently in the millions of dollars and the cases are very costly to litigate. In turn, insurers find themselves embroiled in high stakes litigation over the scope of insurance coverage for those suits. Nelson Levine de Luca & Hamilton has been at the forefront of this litigation trend.

NLdH's National Insurance Coverage Group recently secured a victory for its client in the North Carolina Supreme Court, resolving longstanding uncertainty on whether certain false advertising claims under the Lanham Act are covered under a CGL policy's advertising injury liability coverage. In Harleysville Mutual Insurance Co. v. Buzz Off Insect Shield, LLC, Erie Insurance Exchange, et al., -- S.E.2d --, 2010 WL 1492136 (N.C., April 15, 2010), the Supreme Court held that the "Quality or Performance of Goods" exclusion in a CGL policy precluded coverage for claims arising out of alleged false statements about a company's own product.

Buzz Off Insect Shield, LLC and International Garment Technologies, LLC (collectively "Buzz Off") manufacture and distribute insect repellent clothing. S.C. Johnson & Son, Inc., which makes bug sprays such as Deep Woods Off, sued Buzz Off alleging trademark infringement, false advertising and unfair competition and trade practices. Buzz Off incurred close to $10 million in litigation costs. Erie and Harleysville issued CGL policies to Buzz Off. The insurers asserted that they owed no duty to defend or indemnify Buzz Off in the S.C. Johnson action. After rulings in the insured's favor in the trial court and Court of Appeals, the matter was appealed to the North Carolina Supreme Court.

At issue was whether S.C. Johnson's false advertising claims fell within the scope of coverage afforded by the Erie and Harleysville policies. In false advertising litigation, the plaintiff typically sues a competitor under the Lanham Act, 15 U.S.C. §1125, which allows damages for false statements about a company's own product or a competitor's products. Here, S.C. Johnson's specific false advertising claims challenged Buzz Off's statements that its clothing provided protection equivalent to bug spray, remained effective after repeated washings and avoided the need for "messy" insect sprays and creams.

The carriers' policies contained an exclusion for "[a]dvertising injury arising out of the failure of goods, products or services to conform with any statement of quality or performance made in your advertisement." After examining the underlying complaint, the Supreme Court found that S.C. Johnson intended to "put [Buzz Off's] products on trial," by alleging that Buzz Off's advertisements falsely touted characteristics of its own products. The court held that "[t]he only falsity allegedly found in defendants' advertisements was that (Buzz Off's) apparel was not of advertised quality and did not work as well as defendants claimed." Therefore, the "failure to conform" exclusion barred coverage for the claim.

The Court recognized an important distinction in advertising injury coverage: while a defendant's alleged misrepresentations or false comparisons about a competitor's product could give rise to a product disparagement claim, which may be covered under a CGL policy, a defendant's false statements concerning the efficacy of its own products that gave rise to a false advertising claim would be barred under a "failure to conform" exclusion. This distinction can have immense coverage implications, thus insurers must closely scrutinize the underlying complaint to determine the true nature of the plaintiff's advertising claims. As intellectual property litigation continues to proliferate, insurance professionals in turn must be increasingly aware of the Lanham Act's scope, and the type of claims that fall within the policy's advertising injury coverage.

For further information concerning insurance coverage for intellectual property or e-commerce claims, please contact Michael A. Hamilton, Chair of NLdH's National Insurance Coverage Group. NLdH is an internationally recognized leader in representing the insurance industry with respect to coverage issues.