The Ninth Circuit recently ruled that a general liability insurer must defend its insured against a patent infringement lawsuit relating to a feature on the insured’s website. Hyundai Motor Am. v. Nat’l Union Fire Ins. Co. of Pittsburgh, PA, No. 08-56527 (9th Cir. Apr. 5, 2010).

The underlying suit concerned a feature on Hyundai’s website that allowed customers to input interests and needs and receive car recommendations and prices. Hyundai was sued by Orion IP, LLC. Orion alleged that Hyundai’s online system infringed upon its own patented system of generating customized product recommendations for customers. Hyundai’s insurer declined to defend it under its commercial general liability policy, arguing that no “advertising injury” was alleged. In the ensuing coverage suit, the U.S. District Court held that there was no coverage.

On appeal, however, the Ninth Circuit overturned the District Court’s decision. The backdrop of the case was a long line of California cases holding that patent infringement does not constitute “advertising injury” under general liability policies. These cases generally have held that infringement suits do not allege “advertising injury” merely because the insured advertised the infringing product. In order to constitute “advertising injury”, courts say, the advertising itself must cause the injury, not merely expose it.

The Ninth Circuit acknowledged these cases, but held that the Hyundai case presented a situation where advertising was alleged to have caused the injury. The court first found that the online system constituted “advertising” – defined by courts as “widespread promotional activities directed to the public at large” – and not mere individual “solicitation”. The court found that the online system “is widely distributed to the public at large, to millions of unknown web-browsing potential customers, even if the precise information conveyed to each user varies with user input.” Consequently, the court also found that the alleged infringement constituted “misappropriation of an advertising idea,” one of the enumerated offenses covered under “advertising injury”. The court noted that the allegedly infringing element was the advertising method itself – i.e., the online system – and not the product being advertised (i.e., the cars). For the same reason, the court held that the required “causal connection” existed between the insured’s advertising and the alleged injury.