Why it matters: Do hang tags on clothing forming the basis of a trademark and copyright infringement lawsuit constitute an advertising injury? A federal court in Florida answered in the affirmative, ruling in a coverage dispute that started when a policyholder was sued by a competitor over the use of a similar shield logo. E.S.Y., a clothing manufacturer and retailer, used "an identical or substantially similar mark" on its hang tags, Exist alleged in its complaint, asserting claims for copyright infringement, trademark infringement, unfair competition, and false designation of origin. But when E.S.Y. asked Scottsdale Insurance Company for defense of the suit, the insurer denied the request. The allegations in the underlying complaint did not fall under the commercial general liability policy's coverage for "advertising injury," the insurer argued. Noting the broad use of the term "your advertisement" in the policy, the court said it was unclear whether hang tags were covered by the definition. Because of the ambiguity of the policy, the court held the insurer had a duty to defend.

Detailed discussion: A clothing manufacturer and retailer, E.S.Y., Inc. purchased a commercial general liability (CGL) policy from Scottsdale Insurance Company that included coverage for advertising injury. The company was hit with a lawsuit from competitor Exist alleging that E.S.Y. used label and hang tags "in such a manner that its use causes and is causing actual confusion in the marketplace, or is likely to cause such customer confusion," displaying a "shield logo" similar to the one used by Exist.

The complaint included seven counts, including copyright infringement, trademark infringement, false designation of origin, and unfair competition, and requested injunctive relief, actual damages, and treble damages.

E.S.Y. turned to Scottsdale for a defense, but the insurer denied the request. The Exist complaint did not allege plaintiffs were liable for injury as defined under the policy, Scottsdale said, and even if it did, multiple exclusions applied.

The policyholder filed suit and then filed a motion for summary judgment. Taking a close look at the policy language, U.S. District Court Judge Cecelia M. Altonaga granted the motion.

She began with policy definitions. The policy defined "advertisement" as "a notice that is broadcast or published to the general public or specific market segments about your goods, products or services for the purpose of attracting customers or supporters." Advertising injury covered a list of offenses, including three subsections applicable to the case: "(d) Oral or written publication, in any manner, of material that slanders or libels a person or organization or disparages a person's or organization's goods, products or services"; "(f) The use of another's advertising idea in your 'advertisement'"; and "(g) Infringing upon another's copyright, trade dress or slogan in your 'advertisement.'"

As required by the policy, E.S.Y. proved an alleged violation gave rise to an advertising injury, that a causal connection between that injury and the advertising activity existed, and that Exist sought damages, the court said.

The court found the insured failed to trigger coverage under the "oral or written publication" subsection because it could not prove slander or disparagement was alleged in the underlying complaint. While the hang tags allegedly bear a resemblance, E.S.Y.'s "conduct was not alleged to make any express comparisons to Exist," the court said. "To the extent the visual similarity between the marks and tags can be construed as Plaintiffs' implicit reference to Exist, nothing about that reference was alleged to dishonor or denigrate Exist. Exist may not have liked that Plaintiffs allegedly copied them, but, at least under Exist's allegations, imitation is not disparagement as there was no comparison suggesting Exist's brand was inferior to Plaintiffs'."

E.S.Y. had better luck under the subsections for "use of another's advertising idea" and "infringing upon another's copyright." Judge Altonaga found that hang tags are a form of printed advertisement, rejecting Scottsdale's position that they were simply part of the garment. The hang tags "were attached to Plaintiffs' garments but were not part of the garments themselves—they hung off the garments," the court said. "And while the hang tags provided information—at a minimum, identifying [E.S.Y.'s brand]—the hang tags' special design presumably had the additional function of attracting consumers to the garments themselves and to the brand more generally. If the hang tags' only purpose was to provide information, they would not need such a particular aesthetic."

Certainly the issue was not as clear-cut as a billboard or magazine advertisement, "but the broad definition of 'advertisement' in the Policy governs," the judge wrote. "If the hang tags did not clearly fit within this category, the definition at least is ambiguous with respect to the question of the hang tags. Under Florida law, such ambiguities are resolved in favor of coverage. Thus, on a fair reading of the complaint and a liberal interpretation of this ambiguous Policy term, the hang tags were advertisements."

The "infringing upon another's copyright" subsection also triggered coverage, the court said, as no question existed that the complaint asserted a claim of copyright infringement.

After finding an "advertising injury," Judge Altonaga then determined that the Exist complaint alleged a causal connection between the injury and E.S.Y.'s advertising activity. "Exist claimed Plaintiffs' copying of Exist's hang tags caused harm to Exist by creating confusion among Exist's customers as to Exist's hang tags and Plaintiffs'," the court said. As for damages, the Exist complaint specifically requested damages in multiple counts.

The court then shifted the inquiry to the exclusions Scottsdale claimed precluded coverage.

The Infringement of Copyright, Patent, Trademark or Trade Secret exclusion barred coverage "arising out of the infringement of copyright, patent, trademark, trade secret or other intellectual property rights. Under this exclusion, such other intellectual property rights do not include the use of another's advertising idea in your 'advertisement.' However, this exclusion does not apply to infringement, in your 'advertisement,' of copyright, trade dress or slogan."

While the first sentence of the exclusion arguably barred coverage, the carve-out at the end of the provision brought the complaint back within range of coverage, the court said.

A second exclusion—the Knowing Violation of Rights of Another provision—prohibited from coverage personal and advertising injury "caused by or at the direction of the insured with knowledge that the act would violate the rights of another and would inflict personal and advertising injury."

The Exist complaint stated violations of the Lanham Act, Copyright Act, and related state law claims, alleging "intentional, malicious, willful and wanton misconduct" and seeking actual and treble damages. But Judge Altonaga said the exclusion did not apply because a showing of intent is not necessary under the Lanham Act or Copyright Act to recover actual damages.

Granting E.S.Y.'s motion for summary judgment, the court said Scottsdale had a duty to defend in the Exist suit.

To read the order in E.S.Y., Inc. v. Scottsdale Insurance Company, click here.