Wisconsin Insurance Case Provides Guidance to IP Owners in Preparing Infringement Complaints

Trademark and other IP owners who file lawsuits against infringers are the masters of the complaints that start the litigation. One consideration often overlooked is insurance coverage; many defendants have commercial general liability insurance policies that might provide coverage on the claims.

Sometimes having a defendant with coverage is desirable; insurance can be a source of funds to pay a settlement. Other times, coverage will make the litigation more protracted.

A recent decision of the Wisconsin Supreme Court, West Bend Mutual Insurance Co. v. Ixthus Medical Supply, Inc. (Wis. 2019) found coverage for an insured that had been sued for trademark infringement.

The decision provides guidance to IP owners in points to include (or exclude) in an infringement complaint that would implicate insurance coverage for the target defendant.

Ixthus Medical Supply was sued in New York federal court by Abbott Laboratories for trademark infringement and other claims, based on its sale of grey goods. Specifically, Ixthus was accused of selling the “international” version of Abbott’s FreeStyle brand diabetes test strips in the United States. Although the test strips sold worldwide are identical, the international version has different packaging, rendering the entire product “materially different” and hence infringing on Abbott’s trademarks. Abbott also brought trademark dilution, fraud and RICO claims.

Ixthus filed a claim in Wisconsin against its insurance carrier for coverage, including for defense costs. It prevailed at the trial court, lost on appeal, and then sought review by the Wisconsin Supreme Court, which reinstated coverage, at least with regard to the insurer’s duty to defend.

Under Wisconsin law (and that of most states), coverage is determined by the allegations of the complaint against the insured.

Ixthus sought coverage under the “advertising injury” clause of its policy. Three questions control this inquiry: (1) Does the complaint allege a covered offense under the advertising injury provision? (2) Does the complaint allege that the insured engaged in advertising activity? and (3) Does the complaint allege a causal connection between the plaintiff's alleged injury and the insured's advertising activity?

The insurance company did not contest that questions (1) and (2) applied; its only argument concerned whether there was a “causal connection” between Abbott’s injury and Ixthus’ advertising activity.

On that question, Abbott’s complaint did allege that Ixthus had advertised the infringing products using Abbott’s trademarks. Although the insurer argued that the focus of the complaint was on the sale and distribution of the product, not the advertising, that did not matter.

Relying on a Second Circuit decision, R.C. Bigelow, Inc. v. Liberty Mut. Ins. Co., 287 F.3d 242, 248 (2d Cir. 2002), the court held that the focus is “not on whether the injury could have taken place without the advertising, but whether the allegations sufficiently assert that the advertising did in fact contribute materially to the injury.” Read liberally, Abbott’s complaint so alleged. The harm to Abbott did not have to flow solely, or even primarily, from Ixthus’s advertising. It was enough that the advertising contributed to it.

This standard will often be easily met, since advertising is generally almost always used to enhance sales and distribution of product (including infringing product) by a business. And, as the court held in West Bend, advertising also adds to consumer confusion, which is the heart of a Lanham Act claim.

The West Bend court also dealt with policy exclusions for knowing violations of the rights of other and for criminal activity, finding they did not apply. Critically, so long as any one claim in the complaint could be sustained without either knowing or criminal conduct, the insurer had a duty to defend.

While Abbott had alleged that the infringement was willful (and also added RICO and fraud claims), its Lanham Act claims did not require a finding of willful conduct. The Lanham Act is a strict liability statute; willful conduct is relevant only to enhanced damages and attorney’s fees. Abbott could prevail on its core trademark infringement and dilution claims without any finding of willful or criminal conduct. Hence, the exclusions did not apply, at least at the stage of requiring the insurer to pay for the defense.

The lessons for IP owners are clear. If you desire the defendant to have insurance coverage, you should include allegations (assuming there is a basis for that, which there often is) that it advertised the infringing product, and that the advertisement assisted in some way in the infringement and the injury to the plaintiff. If you do not desire the defendant to have coverage, omit these allegations.