National Insurance Law Forum : Insurance Litigation Lawyer & Attorney : National Insurance Law Forum : Insurance Coverage, Bad Faith Litigation

Do they qualify as “oral or written publication, in any manner, of material that violates a person’s right of privacy?”  One might harken back to the class action suits filed against companies for violation of the Telephone Consumer Protection Act (“TCPA”). Courts were been split on the issue of whether TCPA claims fell within the right of privacy offense. The privacy interest that was the impetus for the TCPA was the consumer’s interest to be left alone from the intrusion of unwanted and unsolicited facsimile advertisements.

In contrast, the Credit Card Act Act was designed to address “the misuse of personal identification information for marketing purposes”  and the Act’s overriding purpose was to “protect the personal privacy of consumers who pay for transactions with credit cards.”  In other words, the privacy interest at issue is one of secrecy – keeping confidential information that the consumer does not want disclosed.  That is the same interest that exists with respect to the  Fair and Accurate Transaction Act (“the FACTA”), 15 U.S.C. § 1681c(g), which prohibits a retailer from “print[ing] more than the last 5 digits of the card number or the expiration date upon any receipt provided to the cardholder at the point of the sale or transaction.”   

In a zip code suit, one might contest whether there was a “publication” of such material where liability is predicated solely on requesting and recording that information – as opposed to publishing it.   This argument has been rejected with respect to coverage for FACTA violations.   See, Creative Hospitality v. United States Liablity Ins. Co., 655 F. Supp. 2d 1316, 1329 (S.D. FL  2009). The issue could also be academic.  In Pineda, the opinion indicates that after the customer provided her credit card information and her zip code, the retailer recorded that information in its database and used customized computer software to perform reverse searches.  Those, in turn, provided the retailer with the customer’s previously undisclosed address, which it now maintains in its database.  Indeed, the  retailer uses its datebase to market products to customers and may  sell all the information it has compiled to other businesses.   Thus, in Pineda, there was a publication of the private information that the retailer obtained in violation of the Act.

Paragraph 3 of the “Distribution of Material” exclusion will likely be relied upon by insurers to deny a defense and indemnity obligations for zip code suits.  That exclusion precludes coverage for alleged violations of the TCPA and CAN-Spam Act of 2003.   It also states:  This insurance does not apply to  “personal and advertising injury” arising directly or indirectly out of any action or omission that violates or is alleged to violate:

(3) Any statute, ordinance or regulation, other than the TCPA or CAN-SPAM Act of 2003, that prohibits or limits the sending, transmittal, communication or distribution of material or information.

This exclusion was relied upon by the court in Creative Hospitality to preclude a defense and indemnity obligation for a suit alleging violation of the FACTA statute.  The court looked to the ordinary meaning of "communication” and “distribution." The court noted that while the definitions demonstrate that the more common usage of the word "distribution" involves dissemination to a group, the term, nonetheless, also includes the act of providing something to a single person. The court held that  "communicating" means, among other definitions, "shar[ing]," "... convey [ing] knowledge of or information about: mak[ing] known ..., and caus[ing] to pass from one to another ...." www. merriam-webster.com/dictionary/ communicating. Id.,  655 F.Supp. 2d at 1340.   

The court concluded that because the FACTA is a statute that limits the information that such an electronically printed receipt may include and prohibits the inclusion of certain information, the FACTA qualifies as a statute that "prohibits and limits the ... communicating or distribution of material or information," within the ordinary meaning of the terms of this exclusion.  So too does the Credit Card Act at issue in Pineda. Both the FACTA and the Credit Card Act seek to protect the secrecy privacy interest by preventing financial or personal identification information from becoming known to others.

Although Acuity agreed to defend under a reservation of rights, it refused to acknowledge coverage, with the result that the insured settled for $300,000 and sued Acuity. In reversing a lower court’s finding of coverage, District III of the Court of Appeals refused to find that the web site postings involved the offenses of “libel” or “disparagement” for purposes of Coverage B.

 As to the claim of libel, the Court pointed out that the representations on the web site were not false but merely incomplete as they failed to note that the work of the employees in question had been during the term of their employment with Hoffman, not Community. Nor did the representations harm Hoffman’s reputation as they did not even mention Hoffman. Under the circumstances, the Court found that the web site postings failed to satisfy the common law elements for a cause of action for libel or slander under Wisconsin law.

For similar reasons, the Court found that the claims could not be construed as setting forth a claim for disparagement. As with the discussion of libel, the Court pointed out that the web site did not say anything about Hoffman directly and merely gave the insured’s employees credit for jobs done by another party without specifically attributing those jobs to Hoffman. Under the circumstances, the Court found that it is “difficult to see how the web site could have diminished Hoffman’s esteem, reputation or respect by including information that did not reference Hoffman in any way.”

More significantly, in contrast to the Seventh Circuit’s recent ruling in Santa’s Best, the Court held that the issue of Acuity’s indemnity obligations was not based on mere allegations in the complaint but whether any evidence had been adduced in the course of the case to support a claim for coverage. Accordingly, despite the fact that the underlying complaint had also made reference to various oral statements by Community employees, the Court found that no evidence had been presented to support such claims and therefore limited the scope of its analysis to the web site postings. Notwithstanding the insured’s invitation to the Court to adopt a standard of whether it settled covered claims in “reasonable anticipation of liability” for such claims, the Court held instead that it would constrain its analysis to whether actual facts existed to support a claim of indemnity.
 

Section 292 of the Act provides:
 

Whoever, without the consent of the patentee, marks upon, or affixes to, or uses in advertising in connection with anything made, used, offered for sale, or sold by such person within the United States, or imported by the person into the United States, the name or any imitation of the name of the patentee, the patent number, or the words "patent," "patentee," or the like, with the intent of counterfeiting or imitating the mark of the patentee, or of deceiving the public and inducing them to believe that the thing was made, offered for sale, sold, or imported into the United States by or with the consent of the patentee; or Whoever marks upon, or affixes to, or uses in advertising in connection with any unpatented article the word "patent" or any word or number importing the same is patented, for the purpose of deceiving the public; or Whoever marks upon, or affixes to, or uses in advertising in connection with any article the words "patent applied for," "patent pending," or any word importing that an application for patent has been made, when no application for patent has been made, or if made, is not pending, for the purpose of deceiving the public - Shall be fined not more than $500 for every such offense.

A whistleblower who brings such a claim is entitled to split the proceeds from the case with the United States government. Such claims were relatively uncommon, however, since recoveries were seemingly capped at $500. However, in The Forest Group v Bon Tool Co., 2009-1044 (Fed. Cir. December 28, 2009), the U.S. Court of Appeals for the Federal Circuit ruled that the $500 penalty must be imposed on a “per article” basis as the plain meaning of the statute did not support the District Court’s penalty of $500 for a decision to mark multiple articles.

Since this ruling, dozens of suits have been filed claiming that defendants falsely claimed that their products were protected by patents that had either expired or were inapplicable. This surge in litigation has prompted proposals in Congress roll back Section 292 remedies. The Chair of the U.S. Senate Judiciary Committee, Patrick Leahy, has introduced an amendment to the Patent Reform Act of 2009 that would limit recoveries to individuals who have “suffered a competitive injury.” Additionally, two new cases are pending in the Federal Circuit Court of Appeal that raise the issue of whether remedies are limited to those actually harmed by a defendant’s false marking and whether and under what circumstances an intent to deceive should be found.

Such claims may prove problematic for liability insurers. Since the claims are not for patent infringement, the Coverage B defenses that liability insurers have typically raised in opposition to patent infringement claims have a different focus. Moreover, such claims typically arise as part of a defendant’s advertising. On the other hand, such claims may be excluded from coverage since, in order to prevail in a Section 292 false marking claim, a plaintiff must show the marking of an unpatented article with an intent to deceive the public. Clontech Labs, Inc. v. Invitrogen Corp., 406 F.3d 1347, 1352 (Fed. Cir. 2005).
 

The dispute in Sarsfield v. Great American Ins. Co. of New York, No. 07-11026 (D. Mass. June 2, 2008) arose out a 1986 rape in Marlborough, Massachusetts.  Eric Sarsfield was convicted of the rape in 1987 and sentenced to prison.  In 1999, he was released after DNA testing excluded him as a possible suspect. 

Sarsfield sued the Town of Marlborough for gross violations of his civil rights in the manner in which it investigated and prosecuted him.   In 2006,  a U.S. District Court judge (Zobel, J) awarded him $13.6 million in damages.  Sarsfield subsequently took an assignment of the Town's rights and pursued the judgment against its liability insurer, Great American.  Great American argued that the claims could not trigger its Law Enforcement Liability coverage since the claimed wrongful acts of the Town pre-dated the policy.

On June 1, 2007, Judge Zobel entered judgment for Great American.  She held that the continued incarceration of the plaintiff as a consequence of  investigative prosecutorial misconduct pre-dating Great American’s policies failed to seek recovery on account of a covered  “wrongful act” during the GA policy period.  The court emphasized that the plaintiff's claims were based on acts that occurred earlier, not his incarceration.

Further, the court held that the police and prosecutorial misconduct had not resulted in any personal or bodily injury to the plaintiff. The court rejected the plaintiff’s argument that the defendants’ concealment of their misconduct constituted a “continuing injury” noting that the “continuous trigger” case law that it has evolved in the context of latent injuries such as asbestos “is not well-suited to a situation where, as here, any injury was evident from the outset and first occurred prior to the institution of insurance coverage.” Rather, as with the malicious prosecution cases, the court held that any injury for insurance purposes occurred when the underlying charges were brought against Sarsfield in 1987.

We expect that the First Circuit appeal will be briefed this fall.  If any insurer has interest in the case or wishes to participate as an amicus, contact us.

In Guaranty Bank v. Chubb Corp., No. 07-3367 (7th Cir. July 17, 2008), the Midwest Guaranty Bank sued “Guaranty Bank” for alleged violation’s of Michigan’s unfair competition law and for infringing the plaintiff’s trademark by announcing its intent to enter the same geographic market with such a similar name. Guaranty Bank sought coverage from Chubb under a Great Northern CGL policy that covered injury “caused by an offense of infringing, in that particular part of your advertisement about your goods, products or services upon their registered collective mark, registered service mark or other registered trademarked name, slogan, symbol or title.” Since the plaintiff’s claim was for the infringement of an unregistered trademark and as Midwest Guaranty Bank was not claiming such an infringement, the Seventh Circuit ruled that Great Northern would not have had a duty to defend.

While this aspect of the court’s ruling might be subject to reconsideration in light of the Wisconsin Supreme Court recent Acuity opinion, the ruling may yet stand in light of the Seventh Circuit’s independent declaration that coverage was barred by the insured’s failure to provide timely notice to Chubb. In this case, Guaranty Bank did not give notice for over a year, during which time a preliminary injunction had entered against the insured.

The District Court had granted summary judgment to Great Northern based upon the Wisconsin statute that places the burden of disproving prejudice on a policyholder where notice is delayed by more than a year. The Seventh Circuit noted, moreover, that even if this burden shifting had not occurred, prejudice likely existed in this case owing to the momentum that the plaintiff’s claims had received as the result of the injunctive remedy as well as the inability of Great Northern to engage the case earlier and undertake a defense or otherwise attempt to resolve it. In dicta, the Seventh Circuit also noted that the “lenity” that the Wisconsin legislature and courts might exhibit to policyholders was for the benefit of individual insureds. The court observed that businesses and other sophisticated insureds would have well aware of the requirement of timely notice and should not be permitted to avoid the insurer taking control of the defense by “spending generously for counsel on the insurer’s dime even though the insurer might be able to defend the suit more cheaply.”

It should come as no surprise to those who follow the Seventh Circuit that the author of Guaranty Bank is Judge Posner.