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(Article from Insurance Law Alert, May 2016)

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The Second Circuit ruled that an insurer had no duty to defend or indemnify trademark infringement claims arising out of the policyholder’s sale of counterfeit products, finding that the allegations did not constitute covered advertising injury.  United States Fidelity & Guaranty Co. v. Fendi Adele S.R.L., 2016 WL 2865578 (2d Cir. May 17, 2016).

The coverage dispute arose out of trademark infringement suits in which Ashely Reed was found liable for its role in transactions involving counterfeit Fendi products.   During the relevant time frame, Ashley Reed was insured under liability policies issued by USF&G.  The policies covered damages caused by “advertising injury,” defined to include injury resulting from the “use of another’s advertising idea in your ‘advertising.’”  USF&G sought a declaration that its policies did not cover the underlying suits because the claims were based on the sale, not the advertising, of counterfeit products.  A New York federal district court agreed and granted USF&G’s summary judgment motion.  The Second Circuit affirmed.

The Second Circuit ruled that there was no coverage under the advertising injury provision because Ashley Reed did not engage in any advertising of the counterfeit products, and in the underlying suits, Fendi did not allege any injuries based on advertising activities.  The court rejected an argument frequently asserted by policyholders in this context – namely, that the use of another company’s trademark constitutes “advertising” because it “attract[s] the attention of others by any means for the purpose of seeking customers or supporters or increasing sales or business.”  The court explained that reasonable parties would not expect advertising injury coverage to extend to the sale of infringing goods where the insured engaged in no advertising.  Emphasizing the difference between the “placement of a counterfeit brand label” on a product and the “act of soliciting customers through printed advertisements or other media,” the court held that mere product identification (or misidentification) is not equivalent to advertising activity.