Intellectual Property Exclusion Bars Coverage for Right of Publicity Claims

In Alterra Excess and Surplus Insurance Company v. Jaime Snyder (2015) 234 Cal.App.4th 1390, Gordon & Rees Partner Arthur Schwartz and Senior Counsel Randall Berdan obtained affirmance of a trial court judgment in the California Court of Appeal, First Appellate District. The court held an exclusion for “Infringement of Copyright, Patent, Trademark or Trade Secret” applied to preclude coverage for claims based on the right of publicity. While the court’s ruling absolved Alterra of its alleged duty to defend or indemnify, the procedural wrangling behind the scenes provides a cautionary tale for insurers.

In 2009, Maxfield & Oberton Holdings, LLC began manufacturing and distributing a desk toy, “Buckyballs”, and similar products. They all incorporated the name “Bucky” which was based on the architectural engineer and inventor, R. Buckminster Fuller. Fuller died in 1983 and, in 1985, Fuller’s Estate registered its claim as Fuller’s successor with the California Secretary of State. The Estate licensed the right to use Fuller’s name and likeness on numerous occasions, including to Apple Computer which used Fuller’s image, and others, in its “Think Different” advertising campaign. In 2004, the U.S. Postal Service licensed the rights to Fuller’s image for a postage stamp.

The Estate sued Maxfield in federal district court in Northern California alleging Maxfield had been using the Bucky name without the Estate’s consent or paying royalties to the Estate. The Estate alleged claims for (1) Unfair Competition, (2) Invasion of Privacy (Misappropriation of Name and Likeness), (3) Unauthorized Use of Name and Likeness in Violation of § 3344.1, and (4) Violation of various Business and Professions Code statutes.

Alterra’s predecessor issued a CGL insurance policy to Maxfield in 2010. Alterra provided a defense to Maxfield in the federal action under a reservation of rights and filed a declaratory relief action in San Francisco Superior Court seeking a declaration of non-coverage. Alterra named the Estate in the coverage action but later stipulated to dismiss it in return for the Estate’s agreement to be bound by the outcome.

While the federal action was pending, Maxfield dissolved. This was precipitated by the United States Consumer Product Safety Commission’s filing of an administrative complaint due to safety concerns over Buckyballs. The dissolution created several issues.

First, as a dissolved entity, Maxfield could no longer defend itself in the federal infringement action and its retained defense counsel filed a motion to withdraw. Second, following the appointment of a Trustee to administer pending and future claims against Maxfield, the Fuller Estate entered into an agreement with the Trustee that released Maxfield from liability in the federal action. But, it also purported to allow the Estate to continue to pursue the infringement action so that the Estate could obtain a judgment against Maxfield for collection from Alterra. The Estate also obtained an assignment from the Trustee to allow the Estate to pursue Maxfield’s rights against Alterra.

So the stage was set. The Estate had made it clear that, despite its release of Maxfield in the federal action, it would pursue a judgment against Maxfield, an unrepresented party that could not defend itself, for eventual collection against Alterra. Although Alterra continued to believe no coverage existed, the stakes had now increased substantially by the possible exposure to Maxfield on an uncontested judgment.

To protect itself, Alterra intervened in the federal action and asserted defenses on the merits, including the very real defense the Estate had settled and released all claims against Maxfield and the infringement action had become a sham proceeding.

The Estate then sought to re-insert itself into the San Francisco coverage action despite its prior agreement to be dismissed. The court allowed the Estate to join after which the Estate attempted to prove Alterra owed coverage to Maxfield for the federal action. In the meantime, the federal action was stayed to allow the coverage issues to be resolved. Of course, if Alterra were to prevail on coverage, the Estate’s plan would collapse.

Alterra moved for judgment on the pleadings in the coverage action on three grounds: the policy’s Intellectual Property and First Publication Exclusions, and the Estate’s settlement with the Trustee. As to the latter, Alterra contended the Estate’s deal with Maxfield’s trustee, made without Alterra’s consent, violated the policy’s “no action clause” barring any coverage obligation. Alterra cited the fundamental principle, recognized by the California Supreme Court, that a claimant may not manufacture a payday by entering into an agreement with an insured to the defending insurer’s detriment or without its consent.

The trial court granted Alterra’s motion for judgment finding the Intellectual Property Exclusion barred all coverage as a matter of law. It did not reach Alterra’s other issues. The Court of Appeal subsequently affirmed on this ground.

On appeal, the Estate contended the exclusion could not reasonably be understood to apply to “intellectual property rights” because it is not conspicuous, plain and clear. Coverage exclusions and limitations must meet two separate tests, (1) “the limitation must be ‘conspicuous’ with regard to placement and visibility,” and (2) the language must be “plain and clear.” The court explained the Intellectual Property Exclusion is on an Insurance Services Office (ISO) industry form, appears under a bold-faced heading “Exclusions,” with each exclusion’s title also bold-faced. The court found these factors satisfy the first test.

The court also concluded the Intellectual Property Exclusion plainly and clearly applies to bar coverage. The Estate argued the exclusion entitled “Infringement of Copyright, Patent, Trademark or Trade Secret” shouldn’t even be called the Intellectual Property Exclusion. But the court noted that, not only have prior courts uniformly referred to this exclusion as the “Intellectual Property Exclusion,” the Estate repeatedly referred to it in just this manner in trial court filings.

Alterra’s exclusion encompasses not only copyright, patent, trademark and trade secrets but also “other intellectual property rights,” sufficient to extend to invasion of privacy and right of publicity claims. A similar exclusion was addressed by a 2011 California appellate ruling, Aroa Marketing, Inc. v. Hartford Ins. Co. of the Midwest (2011) 198 Cal.App.4th 781. In Aroa, the court held the exclusion there barred claims based on the unauthorized use of a model’s image and likeness.

The Alterra court found the “other intellectual property rights” language in Alterra’s policy is effectively identical to the Hartford policy’s “any intellectual property rights” in Aroa. These nonexclusive listings are broad enough to encompass invasion of privacy or right of publicity claims. Even if Aroa were not on the books, the Alterra court added, it would apply the exclusion to the Estate’s claims.

The tale is not yet over. The federal action must now be dismissed. Also, the Court of Appeal’s opinion is not final. It may be withdrawn from publication, modified on rehearing, or review may be granted by the California Supreme Court. But, as things stand, Alterra’s rights have been vindicated and the Estate’s plan to collect an uncontested judgment thwarted.