Is Insurance Coverage Available for Trade Secret Litigation?

An accomplished employee leaves to start her own business, and rapidly succeeds in attracting customers.  Although California favors employee mobility, she and her new company are sued by her former employee for trade secret misappropriation.  As the employee and her company face the immediate threat of a motion for preliminary injunction and temporary restraining order, the potential of insurance coverage to defend against the action may be overlooked. 

The existence of coverage for matters involving trade secret violations rests on the express language of the particular insurer’s policy form.  Coverage for trade secret litigation has developed over the last twenty years through interpretation of the “advertising injury” coverage found in a comprehensive general liability policy.  Traditionally, such policies have defined “advertising injury” as injury other than property damage or bodily injury that arises out of several enumerated offenses.  Amongst these offenses is “misappropriation of advertising ideas or style of doing business.”  Such policies also require that the misappropriation occur “in the course of advertising activities.”  As the terms “advertising ideas” and “style of doing business” were usually not defined in the policy, over the years, the courts have interpreted these terms with varying results in examining the availability of coverage for trade secret misappropriation claims. 

In Syntex Systems, Inc. v. Hartford Accident & Indemnity Co., 93 F.3d 578 (9th Cir. 1996), the Ninth Circuit held that allegations that Syntex’s key sales representative used its trade secrets (customer lists, marketing techniques and billing methods) to solicit Syntex’s former customers while working for a competitor fell within the scope of“misappropriation of advertising ideas.”  While the insurer argued that the term “advertising ideas” had to involve the theft of the actual words or form of an advertisement, the court disagreed, concluding that “advertising cannot be limited to written sales materials, and the concept of marketing includes a wide variety of direct and indirect advertising strategies.”  (93 F.3d at 580.)

In the case of Hameid v. National Fire Insurance, 31 Cal. 4th 16 (2003), the California Supreme Court was faced with the issue of advertising injury coverage for a case also involving use of a competitor’s customer list to solicit customers.  Again, the term “advertising” was undefined.  Here, the Court seized on the term “advertising” and held that there had to be “widespread promotion to the public such that one on one solicitation of a few customers does not give rise to the insurer’s duty to defend the underlying lawsuit.”  Since there were only one-on-one solicitations of customers involved in the alleged misappropriation, the Court concluded that there was no duty to defend.

Photo by guvendemir/iStock / Getty Images
Photo by guvendemir/iStock / Getty Images

In We Do Graphics, Inc. v. Mercury Casualty Company, 124 Cal. App. 4th 131 (2004), another case involving undefined terms, the court similarly concluded that the use of stolen customer information to solicit a former employer’s customers did not constitute “advertising injury.”  It further concluded that the stolen customer information did not qualify as “advertising ideas.”

In recent years, some insurers have modified their policy forms to define the term “advertisement” more explicitly to encompass both traditional and developing means of advertising communications.  Others also now define the terms “advertising injury,” and “advertising ideas”, which has had the effect of narrowing the scope of coverage for trade secret and related claims. 

At issue in The Oglio Entertainment Group, Inc. v. Hartford Casualty Insurance Company, 200 Cal. App. 4th 573 (2012) was a newer policy form that defined “advertising injury” as injury arising out of “[c]opying, in your ‘advertisement’ a person’s or organization’s ‘advertising idea’ or style of ‘advertisement.’”  Borrowing language from the Hameid decision, the term “advertisement” was defined to mean “the widespread public dissemination of information or images that has the purpose of inducing the sale of goods, products or services through radio, television, billboard, magazine, or newspaper, as well as “[t]he internet, but only that part of a web site that is about goods, products or services for the purpose of inducing the sale of goods, products, or services” and “[a]ny other publication that is given widespread public distribution.”  The policy also defined “[a]dvertising idea” as any idea for an advertisement.  (200 Cal. App. 4th at 582-583.)

The underlying case in Oglio involved a recording artist’s complaint that his former record label sought out other recording artists to record “lounge-style” versions of popular music and released competitive versions which diverted sales away from the plaintiff’s own album.  The plaintiff sued for breach of contract, violation of his right of publicity, and intentional interference with prospective economic advantage.  Although no trade secrets were at issue in this case, the case is instructive for its application of the newer version advertising injury coverage language.  In Oglio, the court concluded that no advertising coverage was available insofar as there was no allegation that Oglio had copied, in an advertisement, the plaintiff’s advertisement or style of advertisement, only that Oglio had solicited other artists to copy the plaintiff’s product, and later sold a competing product.  Notably, the court observed that there would have been a better argument in favor of coverage under the earlier Hartford policies, which did not define “advertising,” on the grounds that infringement of trade dress qualified as “misappropriation of advertising ideas or style of doing business.  (200 Cal. App. 4th at 585, fn. 7.)

In the case of S.B.C.C, Inc. v. St. Paul Fire & Marine Insurance Company, 186 Cal. App. 4th 383 (2010), not only was “advertising” defined, but also “advertising injury” and “advertising idea.”  Moreover, the policy had what the court termed a “controversial” exclusion that precluded coverage for injury or damage that result from any actual or alleged violation of trade secret laws, amongst other intellectual property violations, and precluded coverage for “any other injury or damage that’s alleged in any claim or suit which also alleges any such infringement or violation.” The underlying suit alleged that a project manager had taken confidential information about his construction company employer’s existing customers to a competitor, including details about ongoing “design build” contracts, and had used the information to solicit customers.  At issue were claims for misappropriation of trade secrets, intentional interference with prospective economic advantage and unfair competition. (186 Cal. App. 4th 383, at 386.)

The definition of “advertising” required the insured to have been “attracting the attention of others” with a purpose of “seeking customers or supporters” or “increasing sales or business.”  In finding that there was no coverage, the court observed that because the customers were already doing business with the project manager at his former employer, there was no need to be “attracting the attention of others,” and his solicitation of them did not constitute “advertising.”  (186 Cal. App. 4th at 393.)  The court also concluded that there was no information that the customer information and project details were being used in any advertising.  Moreover, the court concluded that no “[u]nauthorized use of any advertising idea” was implicated under this policy where the advertising idea consists of “information used to identify or record customers or supporters, such as a list of customers or supporters.”  Because the project manager was personally soliciting customers through use of lists and project details that the company had developed with developers and subcontractors, the project manager was not using his former employer’s advertising ideas or its advertising material.  (Id. at 394.)  Finally, the court upheld the intellectual property exclusion as clear and explicit, and precluding coverage for all claims asserted in the litigation.  (Id. at 396-397.)

These recent cases illustrate the means by which insurers have sought to narrow availability of insurance coverage for trade secret litigation.  Nonetheless, these cases also underscore the importance of examining the insurance policy in question for the specific language pertaining to “advertising injury” at the outset of the litigation, and promptly tendering the defense of the matter to the carrier.  If the carrier initially denies a defense for the litigation, extrinsic evidence may yet develop that shows that the misappropriation in question falls within the scope of the policy’s “advertising injury.”  Because the potential for coverage can arise out of the facts that develop after the complaint is filed, an understanding of the coverage issues will assist in better positioning the case for potential coverage down the line.