Peter Policyholder leaves Acme Widgets to open his own competing business, Policyholder Inc. Soon after starting its business, Policyholder Inc. purchases a liability policy issued by Insurance Company that includes “advertising injury” coverage.
Later in the year, Acme files suit against Policyholder Inc., asserting causes of action for the misappropriation of trade secrets. In its complaint, Acme alleges that Policyholder Inc. stole Acme’s proprietary customer lists in order for Policyholder Inc. to start its own competing business. Policyholder Inc. is also alleged to have taken Acme’s secret schematics in developing its competing widget products. Policyholder Inc. tenders the Acme complaint to Insurance Company, seeking a defense in the Acme lawsuit …
Many liability insurance policies provide coverage for “advertising injury” or “personal and advertising injury,” terms generally defined to mean injury arising out of certain enumerated offenses. A question for the courts is often what type of wrongful conduct these enumerated offenses encompass, and it is a question that can arise in the context of trade secret misappropriation claims.
This article will introduce the reader to threshold considerations in evaluating whether a liability policy’s “advertising injury” or “personal and advertising injury” coverage potentially encompasses trade secret claims brought against the insured. Preliminarily, the article will provide an overview of the various types of intellectual properties that can constitute trade secrets. Next, the article will acquaint the reader with certain requirements that must be satisfied to involve a liability policy’s “advertising injury” and “personal and advertising injury” coverage. Thereafter, the article will discuss how courts have answered the question of “advertising injury” and “personal and advertising injury” coverage for trade secret claims and consider the rationale they employed in making those determinations. Last, this article will provide an overview of certain policy exclusions that may operate to preclude coverage for trade secret claims.
What Is A Trade Secret?
A trade secret encompasses a type of intellectual property, usually unknown to the general public, which affords its owner a competitive advantage in the marketplace. Section 757 of the Restatement of Torts defines trade secret to mean “any formula, pattern, device or compilation of information which is used in one’s business . . . . It may be a formula for a chemical compound, a process of manufacturing, treating or preserving materials, a pattern for a machine or other device, or a list of customers.” Restatement of Torts § 757 cmt. b (Am. Law Inst. 1939).
In preparing the Uniform Trade Secrets Act (UTSA), the National Conference of Commissioners on Uniform State Laws defined “trade secret” to mean information, “including a formula, pattern, compilation, program device, method, technique, or process, that: (i) derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use, and (ii) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.” Uniform Trade Secrets Act, § 1(4) (amended 1985), 14 U.L.A. 529 (Supp. 2010).
Many states have since adopted the UTSA, or developed their own statutes to define what information constitutes a “trade secret.” For example, the Illinois Trade Secrets Act (765 ILCS 1065) defines trade secret to mean:
[I]nformation, including but not limited to, technical or non-technical data, a formula, pattern, compilation, program, device, method, technique, drawing, process, financial data, or list of actual or potential customers or suppliers, that:
- is sufficiently secret to derive economic value, actual or potential, from not being generally known to other persons who can obtain economic value from its disclosure or use; and
- is the subject of efforts that are reasonable under the circumstances to maintain its secrecy or confidentiality.
765 ILCS 1065/2(d). See also La. Stat. Ann. § 51:1431(4) (Louisiana); Cal. Civ. Code § 3426.1(d) (California); and Fla. Stat. § 688.002(4) (Florida).
By way of comparison, the Alabama Trade Secrets Act defines “trade secret” as follows:
A “trade secret” is information that:
- Is used or intended for use in a trade or business;
- Is included or embodied in a formula, pattern, compilation, computer software, drawing, device, method, technique, or process;
- Is not publicly known and is not generally known in the trade or business of the person asserting that it is a trade secret;
- Cannot be readily ascertained or derived from publicly available information;
- Is the subject of efforts that are reasonable under the circumstances to maintain its secrecy; and
- Has significant economic value.
Ala. Code § 8-27-2(1).
Under these statutes, someone can misappropriate another’s trade secrets by: acquiring a trade secret by improper means; using a trade secret in breach of confidence; disclosing the trade secret despite a request to maintain its secrecy; or utilizing the trade secret with actual or constructive knowledge that the trade secret was acquired by accident or mistake.
“Advertising Injury” and “Personal and Advertising Injury” Coverage: A Primer
In seeking defense against or indemnity for trade secret misappropriation claims, some insureds have looked to the “advertising injury” or “personal and advertising injury” coverage of their liability policies.
“Advertising injury” coverage has been a component of many liability policies for decades. In its 1998 Commercial General Liability Form, the Insurance Services Office (“ISO”) introduced “personal and advertising injury” coverage, which replaced “advertising injury” and “personal injury” as separate coverage provisions.
Unlike “bodily injury” and “property damage” liability coverage, the existence of “advertising injury” and “personal and advertising injury” coverage is not based upon a predicate accidental “occurrence.” Instead, to potentially implicate the “advertising injury” or “personal and advertising injury” coverage in the first instance, the insured must be potentially liable for injury arising out of one of the wrongful offenses enumerated in the definition of “advertising injury” or “personal and advertising injury.” Typically, the insuring agreement in the “advertising injury” coverage additionally requires that the enumerated offense be committed in the course of advertising the named insured’s goods, products, and services.
In certain instances, some insureds have argued that trade secret claims implicate the “advertising injury” offenses of “misappropriation of advertising ideas or style of doing business” (the “misappropriation offense”) or “infringement of copyright, title or slogan” (the “infringement offense”) or the “personal and advertising injury” offense of “use of another’s advertising idea in [the named insured’s] advertisement.”
Many liability policies do not define the terms “advertising idea” or “style of doing business.” Construing the terms in accordance with their plain and ordinary meaning, some courts have viewed the misappropriation of advertising ideas to involve the “wrongful taking of another’s manner of advertising,” “the wrongful taking of an idea concerning the solicitation of business and customers,” or the “the wrongful taking of the manner by which another advertises its goods or services.” Amazon.com Int’l, Inc. v. Am. Dynasty Surplus Lines Ins. Co., 120 Wash.App. 610, 85 P.3d 974, 976 (Wash. Ct. App. 2004) (internal citations omitted).
Meanwhile, courts have understood “style of doing business” to pertain to the “comprehensive manner” in which a company operates its business. Poof Toy Prods., Inc. v. United States Fidelity and Guar. Co., 891 F. Supp. 1228, 1232 (E.D. Mich. 1995). Courts have viewed the phrase to be analogous to a company’s trade dress.
Evaluating Trade Secret Claims Under the “Advertising Injury”/“Personal and Advertising Injury” Coverage Lens
In assessing whether a trade secret claim potentially involves one of the enumerated “advertising injury” or “personal and advertising injury” offenses, a threshold consideration is the nature of the trade secret at issue. Generally, courts are unwilling to find “advertising injury” coverage where the trade secret at issue is technical in nature. For example, in Frog, Switch & Manufacturing. Co., Inc. v. Travelers Insurance Co., 193 F.3d 742 (3d Cir. 1999), the Third Circuit Court of Appeals concluded that the insured’s alleged misappropriation of trade secrets and confidential business information, including drawings and prints related to a dipper bucket product line, did not trigger the “advertising injury” coverage.
Rejecting arguments that the insured’s alleged misappropriation of trade secrets relating to the manufacture of a product-line involved a misappropriation of advertising ideas or style of doing business, the Third Circuit explained: “The complaint did not allege that the misappropriated dipper bucket design served as an indication of origin, or that [the claimant’s] identifying marks were misused. Nor did [the claimant] allege that [the insured] took an idea about advertising dipper buckets (the idea of claiming a revolutionary new design as an enticement to customers); it alleged that [the insured] took the dipper bucket design itself and lied about the design’s origin.” The Third Circuit therefore concluded the insurer had no duty to defend its insured against the trade secret claims. See also United Ohio Ins. Co. v. Durafloor Indus. Flooring and Coating, Inc., 2017 WL 961453 (Conn. Super. Ct. Jan. 24, 2017) (no duty under “personal and advertising injury” coverage to defend trade secret claims involving floor-coating systems and processes); Westfield Ins. Co. v. Factfinder Marketing Research, Inc., 168 Ohio App.3d 391, 860 N.E.2d 145 (2006) (insured’s alleged appropriation of trade secrets concerning proprietary methods of analyzing market research did not constitute a misappropriation of advertising ideas); Pennsylvania Pulp & Paper Co. v. Nationwide Mut. Ins. Co., 100 S.W.3d 566 (Tex. Ct. App. 2003) (because trade secrets at issue were technical in nature, complaint did not potentially seek damages for “misappropriation of advertising ideas or style of doing business”).
Courts have reached different results in their coverage inquiry, however, when the trade secrets at issue are marketing techniques and customer lists. For example, in Merchants Co. v. American Motorists Insurance Co., 794 F. Supp. 611 (S.D. Miss. 1992), the district court concluded that the insured’s alleged misappropriation of another’s customer list, which the claimant maintained was a trade secret under Alabama law, implicated the “advertising injury” coverage on two bases. First, the Merchants court found that the allegations potentially involved an “infringement of title.” Because title was not defined in the policy, the court believed the term could pertain to an ownership interest. Second, the court concluded that the allegations also involved a “misappropriation of advertising ideas,” opining that, “in the ordinary or popular sense, a customer list may be fairly said to be an ‘advertising idea.’”
The insurer maintained that, even if the insured’s activities involved an “advertising injury” offense, there still was no coverage because the wrongdoing was not committed “in the course of advertising,” as required by the policies. But the court disagreed. Because the claimant alleged that the insured had used the allegedly appropriated customer lists to send flyers to customers, the Merchants court concluded that the advertising nexus was satisfied.
In Sentex Systems, Inc. v. Hartford Accident & Indemnity Co., 882 F. Supp. 930 (C.D. Cal. 1995) (applying California law), the district court was asked whether the insured’s alleged misappropriation of a competitor’s customer lists, methods of bidding jobs, methods and procedures for billing, marketing techniques, and other inside and confidential information to promote and advertise its product and solicit business triggered a duty to defend under the insurer’s “advertising injury” coverage. Id. at 935. Relying in part on the Merchants decision, the district court concluded that the insured had a reasonable expectation for coverage under the “misappropriation” and “infringement of title” offenses of its “advertising injury” coverage for its alleged use of the claimant’s customer lists and marketing information.
Finding it to be significant that the trade secrets at issue involved marketing and sales information, rather than information pertaining to the “manufacture and production” of a product, the Ninth Circuit Court of Appeal affirmed the district court’s determination. Sentex Systems, Inc. v. Hartford Acc. & Indem. Co., 93 F.3d 578 (9th Cir. 1996). But it did so with qualification. The Ninth Circuit cautioned, “we do not necessarily agree with the district court’s broader conclusion… that allegations of the misappropriation of a customer list, because it comes within common law concepts of unfair competition, can alone trigger coverage under the language of these policies pertaining to ‘misappropriation of advertising ideas.’” Id. at 581.
Since the Ninth Circuit’s affirmance, several courts have relied on Sentex as a basis to conclude that a liability policy’s “advertising injury” coverage encompasses claims of marketing-relating trade secrets. E.g., Tradesoft Technologies v. Franklin Mut. Ins., 329 N.J. Super. 137, 746 A.2d 1078 (2000) (holding misappropriation offense potentially encompassed alleged infringement of confidential business plans, customer surveys and marketing studies, thus triggering duty to defend); Kinko’s v. Shuler, 255 Wis. 2d 834, 646 N.W.2d 854 (Wis. Ct. App. 2002) (insured’s alleged misuse of claimant’s trade secrets, including sales, promotion and marketing strategies deemed to involve misappropriation offense).
Not all courts have embraced the Merchants and Sentex rationale, however. For example, the Eleventh Circuit Court of Appeals expressly disagreed with the Merchants decision’s view that the infringement offense’s reference to title could encompass an ownership interest in property. State Farm Fire & Cas. Co. v. Steinberg, 393 F.3d 1226, 1232 (11th Cir. 2004) (applying Florida law). Guided by other authority the court deemed to be more persuasive, the Eleventh Circuit opined that, when “title” was read in the context of the infringement offense (“infringement of copyright, title, or slogan”), the term more aptly referred to a name or appellation. With that understanding, the Eleventh Circuit concluded that the infringement offense did not encompass the insured’s alleged misappropriation of a competitor’s confidential customer list. The court held that the trade secret claim, likewise, did not involve a misappropriation of either an “advertising idea” or “style of doing business.”
In GAF Sales & Service, Inc. v. Hastings Mutual Insurance Co., 224 Mich. App. 259, 568 N.W.2d 165 (1997), the Michigan Court of Appeals rejected the Merchants decision and held that the misappropriation of customer lists did not involve a misappropriation of an advertising idea. Similarly, in Liberty Corporate Capital Ltd. v. Security Safe Outlet, 577 Fed. Appx. 399 (6th Cir. 2014) (Kentucky law), the Sixth Circuit Court of Appeals concluded that the insured’s alleged use of a competitor’s confidential customer database and mailing list did not involve the use of another’s advertising idea because there were no allegations that the trade secrets at issue involved advertising plans, strategies, schemes, or designs. See also We Do Graphics, Inc. v. Mercury Cas. Co., 124 Cal. App. 4th 131, 21 Cal. Rptr. 3d 9 (Cal. Ct. App. 2004) (insured’s alleged taking of another’s confidential customer information was not the misappropriation of an advertising idea and did not implicate “advertising injury” coverage).
In Air Engineering, Inc. v. Industrial Air Power, LLC, 346 Wis.2d 9, 828 N.W.2d 565 (Wis. Ct. App. 2013) (Wisconsin law), the Court of Appeals of Wisconsin was asked to evaluate whether the insured’s alleged appropriation and use of a competitor’s website source code and internet advertising system obligated the insurer to defend the insured under the “personal and advertising injury” coverage. In assessing the underlying trade secret claims, the court noted that the trade secret at issue was the claimant’s proprietary internet advertising system. Despite the technical nature of the advertising system, the court observed that the claimant reportedly used the system to direct advertisements tailored to a particular customer. Because the Air Engineering court deemed the trade secret at issue to be an idea that called public attention to a product to increase sales, the court reasoned that the allegations involved the “use of another’s advertising idea,” which the insured was alleged to have used in its “advertisement.” Accordingly, the Air Engineering court held that the insurer had a duty to defend its insured in the dispute.
More recently, in Great American Insurance Co. v. Beyond Gravity Media, Inc., 560 F. Supp. 3d 1024 (S.D. Tex. 2021) (Texas law), a Texas federal court concluded that the insured’s alleged use of a franchiser’s confidential marketing information was sufficient to potentially implicate the “use of another’s advertising idea” offense of the insurer’s “personal and advertising injury” coverage.
In that case, the insured was a former franchisee of Code Ninjas LLC, an educational business that offered its child students a curriculum of computer programming, math, and teamwork skills. The insured ultimately parted ways with Code Ninjas, opening its own competing “Dojo Tech” or “CoDojo” education center.
Code Ninjas filed suit against the insured, alleging inter alia that the insured had acquired Code Ninjas’ confidential and proprietary information by participating in Code Ninjas’ training programs, franchise conferences, and communications, only to use that information to create and advertise its competing business. Code Ninjas asserted several causes of action against the insured, among them, claims for breach of the covenant of confidentiality in the parties’ franchise agreement, misappropriation of trade secrets in violation of Defend Trade Secrets Act and under Texas law, unjust enrichment, and knowing, malicious, willful, and intentional unfair competition.
Before the case ultimately settled, the insurer brought a declaratory judgment action against its insured, seeking a determination that it had no duty to either defend or indemnify the insured against Code Ninjas’ lawsuit.
The threshold consideration for the Beyond Gravity court was whether the lawsuit’s allegations triggered the insurer’s “personal and advertising injury” coverage, in the first instance. Noting that the parties had agreed the plain meaning of “advertising idea” referred to a “concept about the manner in which a product is promoted to the public,” id. at 1033, the Beyond Gravity court concluded that Code Ninjas’ allegations potentially implicated the “use of another’s advertising idea” offense of the insurer’s “personal and advertising injury” coverage.
In doing so, the Beyond Gravity court emphasized Code Ninjas had alleged that the insured had appropriated Code Ninjas’ branding and confidential marketing services and strategies—“including information about upcoming advertising campaigns”—to redirect students to the insured’s competing school. Id. As such, the court found that the trade secret allegations implicated the “personal and advertising injury” coverage.
Despite this determination, however, the Beyond Gravity court ultimately concluded that the insured had no defense or indemnity obligations owing the insured in connection with the Code Ninjas lawsuit—because, as discussed below, whether a claim triggers a liability policy’s insuring agreement is only one step in the coverage inquiry.
Do Any Policy Exclusions Apply?
Even if a trade secret claim potentially involves one of the enumerated “advertising injury” or “personal and advertising injury” offenses, certain exclusions may nevertheless operate to preclude coverage. For example, many recent liability forms include an exclusion titled “Infringement of Copyright, Patent, Trademark of Trade Secret,” which excludes coverage for “personal and advertising injury” arising out of the infringement of various intellectual properties, including trade secrets (the “Infringement exclusion”). Courts have found the Infringement exclusion to squarely preclude coverage for trade secret misappropriation claims. See, e.g., Scottsdale Ins. Co. v. PTB Sales, Inc., 2019 WL 1460617 (C.D. Cal. Feb. 11, 2019), aff’d, No. 19-55350, 2020 WL 4014162 (9th Cir. July 16, 2020) (California law); Evanston Ins. Co. v. Clartre, Inc., 158 F. Supp. 3d 1110 (W.D. Wash. 2016) (Washington law).
In addition to the Infringement exclusion, some insurance companies have added by endorsement an “Access or Disclosure of Confidential Information” exclusion (the “Access/Disclosure exclusion”). The Access/Disclosure exclusion typically provides that the endorsed insurance policy does not apply to “personal and advertising injury” “arising out of any access to or disclosure of any person’s or organization’s confidential or personal information, including patents, trade secrets, processing methods, customer lists, financial information, credit card information, health information or any other type of nonpublic information.”
Turning again to the Beyond Gravity decision, for example, the court held that both the Infringement exclusion and the Access/Disclosure exclusion operated to preclude coverage for Code Ninjas’ misappropriation of trade secret claims. In making its determination, the court noted that Code Ninjas alleged throughout its complaint that the insured had infringed on Code Ninjas’ trade secrets and confidential information to promote its competing business in violation of the parties’ franchise agreements. The Beyond Gravity court found such allegations to fit squarely within the Infringement and Access/Disclosure exclusions’ scope. Beyond Gravity, 560 F. Supp. 3d at 1037, 1038. See also Lionbridge Technologies, LLC v. Valley Forge Ins. Co., 552 F. Supp. 3d 148, 158 (D. Mass. 2021), appeal filed, No. 21-1698 (1st Cir., Sep. 14, 2021) (Massachusetts law) (because claimant’s damages emanated from the insured’s alleged unlawful access to and misappropriation of the claimant’s trade secrets and confidential business information, Infringement and Access/Disclosure exclusions operated to preclude coverage). But see Sprint Lumber, Inc. v. Union Ins. Co., 627 S.W.3d 96, 112-13 (Mo. Ct. App. 2021) (Missouri law) (Infringement exclusion and Access/Disclosure exclusion did not apply to extinguish insurer’s duty to defend where underlying allegations also involved insured’s alleged disparagement of competitor’s goods, products, and services, outside of exclusions’ scope).
In addition, many liability forms include an exclusion titled “Breach of Contract,” which excludes coverage for “advertising injury” or “personal and advertising injury” arising out of breach of contract, other than misappropriation of advertising ideas under an implied contract. This exclusion can be particularly relevant where the trade secret claims against the insured are alleged to also violate employment, confidentiality, or licensing agreements with the claimants.
By way of example, in Pennsylvania Pulp & Paper Co., the court opined that, even if the underlying trade secret allegations involved an “advertising injury” offense, the insurer would still have no duty to defend because the claims arose from insured’s alleged breach of its license agreement with the claimant. 100 S.W.3d at 573. As such, the policy’s breach of contract exclusion precluded coverage for the trade secret claim. See also Beyond Gravity, 560 F. Supp. 3d at 1037 (breach of contract exclusion encompassed allegations that insured used competitor’s confidential information and branding in violation of the non-competition and confidentiality covenants of the parties’ franchise agreements, thereby relieving insurer of its duty to defend underlying claims).
Of course, there are other exclusions that pertain to “advertising injury” and “personal and advertising injury” coverage, including those that exclude coverage for “advertising injury” or “personal and advertising injury”: caused by or at the direction of the insured with the knowledge that the act would violate the rights of another and would inflict “personal and advertising injury” (the “Knowing Violation Of Rights Of Another” exclusion); arising out of oral or written publication, in any manner, of material, if done by or at the direction of the insured with knowledge of its falsity (the “Material Published With Knowledge Of Falsity” exclusion); arising out of oral or written publication, in any manner, of material whose first publication took place before the beginning of the policy period (the “Material Published Prior To Policy Period” exclusion); and arising out of a criminal act committed by or at the direct of the insured (the “Criminal Acts” exclusion). Practitioners may wish to consider the application of these exclusions, depending on the substance of the allegations made against the insured and the time periods during which the insured allegedly engaged in the misappropriation of trade secrets.
This article, which expresses the opinions of the author and does not necessarily reflect the views of Nicolaides Fink Thorpe Michaelides Sullivan LLP or its clients, demonstrates the different approaches courts can take in evaluating whether a liability policy’s “advertising injury” or “personal and advertising injury” coverage extends to misappropriation of trade secret claims. While the discussion above may be instructive, it is a general one. Whether a particular trade secret claim potentially implicates a liability policy’s “advertising injury” or “personal and advertising injury” coverage is necessarily a fact-specific inquiry, and one that should consider the substance of the trade secrets at issue, the nature of the allegations brought against the insured, and the terms, limitations, and exclusions contained in the insured’s liability policy.