Why it matters: An Illinois appeals court ruled that an insurer must defend its insured in a trademark infringement suit, finding that in-store retail displays for the product were “advertisements” that gave rise to the claims in the underlying suit. Relying on an exclusion for personal and advertising injury arising out of trademark infringement, the insurer denied coverage. Affirming the trial court, the appellate panel sided with the policyholder finding that the suit fell under a different provision that provided coverage for infringement in “advertisements.” The court found that the retailers’ displays were advertisements because they prominently showed the unique shape of the product which underlying plaintiff claimed infringed on a trademark it owns but also affirmatively served to attract customers. Further, because the underlying suit alleged that the retailers’ display of the product contributed to consumer confusion regarding the manufacturer of the product, the court concluded that the suit alleged a causal connection between the display and the alleged underlying injuries.

Detailed discussion: In April 2012, Too Marker filed a complaint against Creation Supply in Oregon federal court. Too Marker alleged trademark infringement, violation of trade dress, and unfair competition. Specifically, Too Marker claimed that its double-ended, square-bodied “COPIC” markers were being infringed by Creation Supply’s “MEPXY” markers. The suit sought a permanent nationwide injunction as well as corrective advertising.

Too Marker brought a claim under Section 43 of the Lanham Act, alleging that Creation Supply’s unauthorized advertisement and sale of its markers was likely to cause confusion and mistake, and to deceive consumers as to the source or origin of Too Marker’s products. The complaint specifically referenced Creation Supply’s “retail store displays in Oregon and the rest of the United States,” as well as websites and other online retailers, “causing confusion among potential purchasers of [Too Marker’s] products.”

Having purchased a business owners’ policy from Selective Insurance Company, Creation Supply requested a defense in the Too Marker suit. Selective denied coverage and filed a declaratory judgment contending that the underlying case did not claim a “personal and advertising injury” as defined in the policy and that two exclusions—the “trademark exclusion” and the “prior publication” exclusion—operated to bar coverage.

A trial court judge granted summary judgment for Creation Supply. Selective appealed, and a panel of the Illinois Appeals Court affirmed.

The Selective policy defined an 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.”

Three elements needed to be met to trigger coverage for an advertising injury, the court stated: “(1) the insured must have been engaged in advertising activity during the policy period when the alleged injury occurred; (2) the allegations in the underlying complaint must raise a potential for liability under one of the offenses listed in the policy; and (3) there must be a causal connection between the alleged injury and the advertising activity.”

Analyzing the in-store displays, which appeared at retail locations across the country, the panel said the placards “serve as an announcement disseminating the product to the public, which fits within the definition of ‘advertisement’ under the Selective policy.”

“The placards are more than the mere display of the product itself and affirmatively serve to attract customers,” the court explained. “The shape and design of the marker is prominently displayed in the placard, which is the source of the underlying trade dress claim. If, for example, the retail product display merely included a large bin containing the markers and nothing more, then Selective would have a valid argument that the retail product display did not constitute advertising as contemplated under the policy. That is not the case here.”

Not all retail product displays will constitute advertising activity for purposes of triggering the duty to defend, the court noted, limiting its finding to the facts of the case and the “particular display configuration” at issue.

For the second requirement, the court stated that the underlying complaint’s claim under the Lanham Act specifically alleged trade dress infringement in Creation Supply’s advertisement of MEPXY markers.

Finally, the panel found that Too Marker’s complaint alleged a causal connection between the alleged injury and Creation Supply’s advertising activity.

“The underlying plaintiffs alleged that Creation Supply advertised MEPXY markers, which misled and confused the public as to the source or origin of those markers,” the court held. “In other words, the underlying plaintiffs complained the injury, trade dress infringement, is alleged to have been caused by advertising. As we have found that the retail product display constitutes an ‘advertisement’ under the definition of the policy, it is reasonable to infer that Creation Supply’s advertising activity contributed to the alleged injury of consumer confusion, thereby meeting the causal connection requirement.”

The panel also rejected application of the policy’s intellectual property exclusion, which excludes “personal and advertising injury” “[a]rising out of the infringement of copyright, patent, trademark, trade secret or other intellectual property rights,” followed by a statement that “this exclusion does not apply to infringement, in your ‘advertisement,’ of copyright, trade dress or slogan.”

Because the court previously found that the underlying complaint alleged trade dress infringement in Creation Supply’s advertisements, the exception to the exclusion applied, the court held, affirming an order that Selective had a duty to defend.

To read the decision in Selective Insurance Co. of the Southeast v. Creation Supply, Inc., click here.