Posted: February 25, 2020

CGL Policy’s IP Exclusion Bars Defense Coverage Despite Absence of “Direct Claims for IP Relief” in Complaint

Posted by Bradley J. Nash, Litigation Partner

On February 7, 2020, the Second Circuit issued a decision in Lepore v. Hartford Fire Ins. Co., Case No. 19‐778‐cv, holding that a CGL policy exclusion for any suit alleging “an infringement or violation of any intellectual property right” was triggered even though the underlying complaint did not contain a direct IP-infringement claim.

The Second Circuit affirmed the trial court’s decision granting summary judgment to the insurer, explaining:

Plaintiffs argue that because no violation of IP rights was asserted in the NL suit, the IP exclusion must be read narrowly, and the IP exclusion does not extend to the claims in the NL suit. We disagree.

First, although there are no direct claims for IP relief in the NL suit, the NL complaint alleges at several points that plaintiffs violated the licensorʹs IP rights, most directly in the unfair competition claim. In analyzing whether an exclusion applies to a claim, our focus is on the complaintʹs factual allegations rather than its legal assertions.  The unfair competition claim, which alleges that plaintiffs ʺrepeatedly used, displayed and otherwise exploited the Purchased IP . . . without authorization . . . to further their own competing business interests,ʺ is premised entirely on alleged trademark infringement.  Thus, we conclude that the complaint in the NL suit alleges an IP violation.

Second, these allegations trigger the IP exclusion. The IP exclusion bars coverage for ʺinjury or damageʺ alleged in a ʺsuitʺ that ʺalso allegesʺ ʺan infringement or violation of any intellectual property right.ʺ  We interpret this unambiguous provision in its ordinary sense.  The IP exclusion thus bars coverage for the entire NL suit.  Accordingly, we conclude that the district court did not err when it granted Hartfordʹs motion for summary judgment and denied plaintiffsʹ motion for partial summary judgment.

(Citations omitted).

A couple of takeaways here:

–The IP exclusion at issue in this case (which narrowed the policy’s “personal and advertising injury” coverage) was very broad in that it applied to any “suit” for a covered claim that “also alleges” an IP infringement.  As discussed at length in a recent decision by District Judge Valerie Caproni covered on this blog, this effectively circumvents New York’s “entire action rule,” under which a liability carrier is generally obligated to defend the entire action if there is a possibly of coverage for any claim.

–The Second Circuit’s decision extends this a step further by applying the exclusion to a lawsuit that contained allegations of IP infringement, but no IP-infringement claim per se.  Given the general rule of construction that policy exclusions are read narrowly, this may have been a step too far.  It seems to me that it is at least arguable that the clause was intended to capture IP infringement claims, and any ambiguity ought to resolved in favor of the insured.

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