Why it matters: The U.S. Court of Appeals for the Fifth Circuit, in a per curiam, unpublished decision, ruled that an insurer must cover the defense of a copyright infringement suit. The lawsuit involved allegations by an architecture firm that a builder copied the architecture firm’s proprietary building design in building hundreds of houses without paying licensing fees. The architecture firm’s business was to design homes and then license the designs to builders. Here, the builder paid for licenses for 11 different house designs, but then built hundreds of additional copies, each of which required payment for a further license. The architecture firm obtained a judgment of more than $3.2 million against the builder. 

The builder’s insurer filed a declaratory judgment for a finding that the judgment was not covered. The policies at issue excluded copyright infringement, but carved out from that exclusion “an ‘advertising injury’ arising out of infringement in [the builder’s] “advertisement.’ ” The Court of Appeals, affirming the district court’s award of summary judgment in the policyholder’s favor, ruled that the homes, in and of themselves, were advertisements of their design and the judgment therefore arose out of an advertising injury, requiring indemnification. 

This case shows how important the framing of the underlying pleadings is to a coverage determination. Here, the architecture firm framed its allegations specifically to complain about the builder’s advertisements, including the inclusion of infringing materials in such advertisements. 

Detailed discussion: Hallmark Design Homes purchased 11 house designs from Kipp Flores Architects (KFA). Pursuant to the contract, Hallmark was authorized to build one house per design unless it paid for additional licenses. 

Nevertheless, after building the first licensed copy of each of the 11 house plans, Hallmark built several hundreds more houses without paying KFA any further license fees. KFA sued Hallmark, alleging that Hallmark had “created, published and used non-pictorial depictions of structures based on KFA’s Copyrighted Works in promotional and advertising materials.” Although Hallmark went bankrupt, the case went to trial because Hallmark was potentially covered under policies issued by Mid-Continent Casualty Company. 

The jury returned a verdict in favor of KFA for approximately $3.2 million, and KFA demanded indemnification from Hallmark’s insurer, Mid-Continent, because the policies provided that the holder of a judgment against Hallmark could sue the insurer directly. 

The applicable policies provided coverage to Hallmark for “advertising injury,” defined as “injury … arising out of one or more of the following offenses: … infringing upon another’s copyright, trade dress or slogan in your ‘advertisement.’ ” “Advertisement” was defined 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.” 

The policies also contained a copyright infringement exclusion, which contained the following carve-out: “ ‘Personal and advertising injury’ arising out of the infringement of copyright, patent, trademark, trade secret or other intellectual property rights. However, this exclusion does not apply to infringement, in your ‘advertisement,’ of copyright, trade dress or slogan.” 

Mid-Continent—which had paid for Hallmark’s defense (unlike the previous case, the insurer apparently did not seek recoupment)—filed a declaratory judgment arguing that the jury verdict was excluded because it was for copyright infringement and not an “advertising injury.” It argued that because the “judgment said nothing of ‘advertising injury,’ the jury never had to decide whether there was an advertising injury[,]” and thus the claim did not fall within the exclusion’s carve-out. 

KFA responded that its complaint against Hallmark specifically asserted that Hallmark infringed KFA’s designs “in promotional and advertising materials” and that the construction company “used the structures themselves to advertise their infringing structures.” Buyers don’t buy a house unseen, the architecture firm added, and Hallmark conceded its only marketing efforts were promoting the houses themselves. 

A panel of the Fifth Circuit, applying Texas law, agreed with KFA, declaring Mid-Continent’s interpretation of the policies and the judgment “too narrow,” even though the district court had applied the wrong test (one applicable to the broad duty to defend, rather than the duty to indemnify). The Court of Appeals rejected Mid-Continent’s effort to limit the evidence to what was in the trial record, recognizing that coverage cases regularly require additional evidence in view of the fact that coverage determinations may involve different issues, and require different facts, than an underlying liability claim. And here, “advertising injury” was irrelevant in the action below. 

The jury determined that the houses themselves infringed KFA’s copyright. As such, “the determinative question for coverage under the policies is whether the houses themselves were ‘advertisements.’ ” 

Under both the policy terms and the facts of the case, the answer was yes, the Fifth Circuit concluded. “KFA has always contended that Hallmark infringed KFA’s copyright in its advertisements and that the structures themselves constituted advertisements,” the court said. “KFA presented evidence that the houses themselves were used to attract customers, in addition to evidence of website and print promotional materials.” 

The court disagreed with Mid-Continent that a house could not be a “notice” or “broadcast or published” for policy purposes. “Mid-Continent cites no controlling authority that might require the narrow reading proposed,” the panel said. “It is important to note that the policies never specify that ‘notice’ must take any particular form (e.g., a writing or a website) and never excluded from the definition a physical object, nor do they define ‘broadcast’ or ‘published.’ ” 

Dictionary definitions of such terms include the “act of imparting information” for “notice” and “to make public or generally known” for “publish.” Advertising does not need to be distinct from the product being advertised. 

“In this case, it is undisputed that Hallmark’s primary means of marketing its construction business was through the use of the homes themselves, both through model homes and yard signs on the property of infringing homes it had built, all of which were marketed to the general public,” the court explained. “Under the undisputed facts, Hallmark’s use of the infringing houses satisfies not only the policies’ expansive definition of ‘advertisement’ and Texas law’s similarly broad construction of the term but also common sense. We therefore conclude that the infringing houses in this case, as used by Hallmark, all qualify as ‘advertisements’ under the policies.” 

Finding that KFA claimed Hallmark infringed its copyright in a number of ways that gave rise to a single recovery, the panel held the architecture firm was not required to segregate damages from the underlying verdict, ordering Mid-Continent to pay the full award. 

To read the opinion in Mid-Continent Casualty Company v. Kipp Flores Architects, click here.