Déjà Sue: Court Applies Prior Publication Exclusion to Bar Coverage for Similar Infringement Claims

The U.S. District Court for the Central District of California recently issued a decision in Aviator Nation, Inc., v. Fireman’s Fund Ins. Co. underscoring the interplay between intellectual property law and insurance coverage law by applying the prior publication exclusion to bar coverage for infringement claims.

As background, Adidas and Aviator Nation were ensconced in multiple lawsuits for more than a decade over claims that Aviator Nation sold apparel that infringed Adidas’ three-stripe trademark. Although those cases settled with an agreement by Aviator Nation to not sell apparel that was confusingly similar to the three-stripe trademark, Adidas contended that Aviator Nation violated that agreement and, as a result, sued Aviator Nation alleging trademark infringement, unfair competition, trademark dilution, unfair and deceptive trade practices, and breach of contract.

Aviator Nation, in turn, requested that its insurer, which issued two general liability policies to Aviator Nation, defend Aviator Nation against Adidas’ lawsuit. The insurer denied that request and, as result, Aviator Nation brought suit seeking a declaration that it was entitled to coverage with respect to the Adidas lawsuit.

In evaluating whether the insurer had a duty to defend the underlying lawsuit, the court first looked to the enumerated offenses contained in the policies to determine whether the underlying lawsuit alleged injury arising out of: (i) the use of another’s advertising idea in Aviator Nation’s advertisement; or (ii) infringing upon another’s trade dress in Aviator Nation’s advertisement.

With respect to the use of another’s advertising idea, the court held that Adidas’ three-stripe design was a trademark, not an advertising idea. However, the court did find that Aviator Nation’s use of its five-stripe design potentially infringed Adidas’ three-stripe trade dress (notwithstanding the fact that a trade dress infringement cause of action claim was not specifically pled) because the allegations of the complaint potentially gave rise to liability for trade dress infringement.

After determining that one of the enumerated offenses was satisfied, the court next turned its attention to the exclusions contained in the policies. The court examined the prior publication exclusion and determined that it precluded coverage. Specifically, the prior publication exclusion provides that there is no coverage for advertising injury arising out of the publication of material whose first publication took place before the policy period.

With respect to this exclusion, the court found that the alleged infringement began to occur before the inception of the first policy period. In denying Aviator Nation’s claim for coverage, the court rejected Aviator Nation’s argument that the alleged infringement which occurred after the inception of the policy (Aviator’s use of five stripes) was different than the alleged infringement which occurred before the inception of the policy (Aviator’s use of three stripes). Instead, the court held that the crux of the allegations of the underlying lawsuit is “the same exact wrongful act,” that is, “giving the appearance of having three stripes.”

In addition, the court relied upon its determination that the insurer did not have a duty to defend Aviator Nation in the underlying lawsuit to also dismiss Aviator Nation’s companion claims for breach of the duty to indemnify and breach of the implied covenant of good faith and fair dealing.

In closing, the court’s decision is a helpful reminder that it is the substance of the allegations that govern a coverage determination — not the labels assigned by counsel to the causes of action. This decision also highlights the fact that while policy exclusions are typically construed narrowly, under the appropriate circumstances, they can serve as a basis to disclaim coverage, even at the duty-to-defend phase.