The Ninth Circuit Court of Appeals, applying California law, has held that a liability policy’s “first publication” exclusion barred coverage for infringement claims where the insured first published allegedly infringing material before the policy period. ( United Nat. Ins. Co. v. Spectrum Worldwide, Inc. — F.3d —, 2009 WL 224520)
Facts
In December 1997, Sunset Health Products, Inc. hired Spectrum Worldwide, Inc. to advertise and distribute Sunset’s “Hollywood 48-Hour Miracle Diet” drink (“Miracle Diet”). Soon thereafter, Spectrum developed plans to market and sell a similar product called “The Original Hollywood Celebrity Diet” drink (“Celebrity Diet”). Spectrum then terminated its contract with Sunset and began marketing the Celebrity Diet. Starting in 1999 and continuing through 2001, Spectrum’s Celebrity Diet utilized labeling and packaging that bore similarities to the labeling and packaging of Sunset’s Miracle Diet.
In April 2001, Spectrum obtained a $1 million excess policy from United National Insurance Company. The United National policy covered damages that Spectrum became obligated to pay because of specified “advertising injury” offenses, including “misappropriation of advertising ideas or style of doing business” and “infringement of copyright, title or slogan.” However, the United National policy also contained a “first publication” exclusion which barred coverage for advertising injury “arising out of oral or written publication of material whose first publication took place before the beginning of the policy period.”
In October 2001, Sunset filed a trade dress infringement claim against Spectrum, alleging that the labeling and packaging of Spectrum’s Celebrity Diet was confusingly similar to the labeling and packaging of Sunset’s Hollywood Diet. Sunset eventually settled its claims against Spectrum for $3,220,000, which was funded by Spectrum’s insurers. United National contributed $420,000 to the settlement.
Following the settlement, United National filed an action for declaratory relief / reimbursement against Spectrum in federal district court. United National sought a ruling that the “first publication” exclusion in its policy barred coverage for Spectrum’s alleged liability to Sunset in the underlying infringement action, and that Spectrum was thus obligated to reimburse United National for the $420,000 it had contributed to the underlying settlement. The district court ruled that United National’s “first publication” exclusion barred coverage for Spectrum’s liability, and ordered Spectrum to reimburse United National $420,000 plus interest. Spectrum appealed.
Holding
The Ninth Circuit Court of Appeals, applying California law, affirmed. The court began by holding that the “first publication” exclusion applies not only to advertising injury offenses involving defamation and invasion of privacy, but also can apply to advertising injury offenses involving infringement. The court then held that the evidence showed that Spectrum first began publishing infringing material in 1999, before the United National policy took effect in April 2001. Under such circumstances, the “first publication” exclusion relieved United National of any duty to indemnify Spectrum in connection with the underlying settlement, and Spectrum was thus obligated to reimburse United National for the $420,000 it had contributed to the underlying settlement.
Comment
The Ninth Circuit’s decision in this case effectively overrules Arnette Optic Illusions, Inc. v. ITT Hartford Group, Inc. (C.D.Cal.1998) 43 F.Supp.2d 1088, in which a California federal district court had suggested that the “first publication” exclusion might only apply to advertising injury offenses involving defamation and invasion of privacy. According to the Ninth Circuit, the “first publication” exclusion applies to all enumerated advertising injury offenses, including those involving infringement.