Infringement of Adult Images Ex(xx)ed Out of Coverage

July 19, 2016 | Insurance Coverage | Intellectual Property

The U.S. District Court for the Western District of Texas recently rejected an attempt by two online content providers to secure coverage in connection with a copyright infringement action commenced against them by an adult entertainment company.[1]

Perfect 10, Inc. (“Perfect 10”) filed an action against Giganews, Inc. (“Giganews”) and Livewire Services, Inc. (“Livewire”) for copyright infringement, trademark infringement, trademark dilution, unfair competition, and violation of publicity rights.  Perfect 10 later amended its complaint to assert only claims for copyright infringement.

Both Giganews and Livewire are USENET service providers.  USENET is a global network of online discussion groups that allows users to post media for group discussion purposes.  Giganews actually owns and operates certain USENET servers that store media uploaded by USENET users.  For a monthly subscription charge, Giganews allows users to access that medium through websites owned by Giganews.  Livewire operates much like Giganews, but does not own or operate its own servers.  Livewire purchases content from Giganews and, thereafter, allows its users to access that content for a monthly subscription fee.

Perfect 10 is a service provider of a different ilk.  Perfect 10 produces, markets, and sells adult products which include, among other things, thousands of copyrighted images.  According to Perfect 10, it derives substantial revenue from allowing its subscribers to access Perfect 10’s copyrighted content through its website, which is otherwise not available through USENET servers.

Perfect 10 claimed that Giganews alone has at least 10 million users all of which are given access to trillions of bytes of stolen content, including, popular movies, music, software, and images, due to the placement of that stolen content on USENET servers.  Perfect 10 further claimed that Giganews and Livewire users are provided with log-in credentials to access the USENET servers and, through the use of a search function, can download and view troves of Perfect 10’s copyrighted content.  Specifically, Perfect 10 alleges that users can access not only all of the content published on Perfect 10’s website, but also the entirety of Perfect 10’s magazines.[2]

Giganews and Livewire provided timely notice of the Perfect 10 action to St. Paul Fire and Marine Insurance Company (“St. Paul”).  St. Paul, however, denied any duty to defend Giganews and Livewire.  Looking to the advertising injury provisions of its policy, St. Paul denied coverage on the basis that the Perfect 10 action did not allege that either Giganews, or Livewire, used Perfect 10’s copyrighted materials in their advertisements.  It is worth noting that approximately $8,000,000 has been spent in defending Giganews and Livewire in the Perfect 10 action.

St. Paul issued a commercial general liability policy that contained a $2 million aggregate policy limit, and an umbrella component that provided a $5 million limit, to its named insureds, Giganews and Livewire.  St. Paul commenced a declaratory judgment action seeking a declaration that St. Paul had no obligation to defend or indemnify Giganews and Livewire for the Perfect 10 action.  In turn, Giganews and Livewire filed a counterclaim against St. Paul for: (i) breach of contract in failing to defend the underlying action; (ii) breach of the duty of good faith and fair dealing; (iii) violations of the Texas Insurance Code; and (iv) attorneys’ fees.

In response to the parties’ motions for summary judgment, the court held that Perfect 10’s amended complaint did not contain any allegations that Giganews or Livewire used Perfect 10’s copyrighted advertising materials, slogans, or titles in their own advertising.  Specifically, the court concluded that the underlying pleadings did not contain any accusations relating to Giganews’ and Livewire’s advertising, let alone allege that their advertisements contained Perfect 10’s copyrighted material.

The court noted that the St. Paul policy contained an “intellectual property” exclusion baring coverage for damages arising from copyright infringement claims.  However, the “intellectual property” exclusion contained an exception for “advertising injury that results from the unauthorized use of any: copyrighted advertising material; trademarked slogan; or trademarked title; of [Perfect 10’s] in [Giganews’ and Livewire’s] advertising.”[3]

The court stated that there were no allegations that Giganews or Livewire promoted, marketed, or publicized its business through unauthorized reproductions of Perfect 10’s copyrighted materials.  Rather, the allegations in the Perfect 10 action are that Giganews and Livewire reproduced Perfect 10’s copyrighted images on its users’ computers after the user already purchased a subscription, entered a username and password, downloaded a reader application, and performed a search for Perfect 10 content.  There were no allegations that Giganews or Livewire promoted, marketed, or publicized their businesses through unauthorized reproductions of Perfect 10’s copyrighted materials.  The court concluded that such allegations do not fall within the exception to the “intellectual property” exclusion, that is, they do not state a claim for advertising injury as defined in the St. Paul policy.

Giganews and Livewire also argued that the allegations in the Perfect 10 action constituted “advertising” under the St. Paul policy because Perfect 10’s copyrighted content was used to attract prospective customers to purchase new monthly subscriptions and to induce current customers to upgrade their subscriptions.  “Advertising,” under the policy, was defined as “attracting the attention of others by any means for the purpose of: seeking customers or supporters; or increasing sales or business.”  The court rejected this argument as the images were only offered to customers after the customers had paid for the subscription and after the customer affirmatively chose to search for the offending images.  Thus, by the time the images were displayed or offered to the customer, the customer had already been attracted to Giganews’ and Livewire’s services, and such images were not a tool to induce prospective customers.

In that connection, the court held that there were also no allegations that the images caused current customers to purchase enhanced subscription services.  The court refused to find that an alleged display of Perfect 10’s content could be considered advertising, as such a finding would “transform goods and services a customer purchases into ‘advertising’ for future purchases . . . .”  As a result, an excluded copyright infringement claim would be converted into a covered advertising injury, which is beyond the intent of the parties to the insurance contracts.

Accordingly, the court concluded that the Perfect 10 action “does not even potentially state a covered ‘advertising injury’ claim,” granted summary judgment to St. Paul and dismissed the counterclaims asserted by Giganews and Livewire.

[1] See St. Paul Fire and Marine Insurance Company v. Giganews, Inc. and Livewire Services, Inc., 2016 U.S. Dist. Lexis 79535 (W.D. Tex. June 17, 2016).

[2] In the Perfect 10 action, Giganews and Livewire were granted summary judgment on Perfect 10’s copyright infringement claims.  The grant of summary judgment is presently on appeal to the Ninth Circuit.

[3] The exception to the “intellectual property” exclusion tracks the definition of advertising injury contained in the St. Paul policy.

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