How coverage for “idea misappropriation” landed this insurer in court

Commercial coverage for advertising liability could be a little broader than some underwriters may think.

In a decision rendered on a coverage dispute, British Columbia’s appeal court ruled on June 28 that Lloyd’s Underwriters has a duty to defend Blue Mountain Log Sales Ltd. and parent firm Clark Group from a lawsuit in Washington state.

The plaintiff in the underlying lawsuit is Global Building Products, which years ago acquired Chemco Inc., a Washington state firm that developed a chemical to treat wood roofing products.

In a lawsuit filed with Washington Superior Court in 2013, Global Building Products accused Blue Mountain of misappropriating trade secrets over which Global Building claims ownership. Allegations against Clark Group and Blue Mountain have not been proven in court.

Clark Group bought a Lloyd’s policy in 2012 that included coverage for advertising liability. Initially, in 2014, Lloyd’s agreed to defend Clark Group.

But in 2017, Global Building amended its lawsuit. The amended pleading only alleges a cause of action of misappropriation of trade secrets under Washington state’s Uniform Trade Secrets Act. Global Building removed an allegation of false product labelling.

Included in the Lloyd’s policy definition of advertising liability is “piracy or unfair competition or idea misappropriation under an implied contract.” An “occurrence” under the Lloyd’s policy is when the infraction is done in an advertisement, publicity article, broadcast or telecast. It has to arise out of the named insured’s advertising activities.

As a result of the change to the underlying lawsuit in 2017, Lloyd’s said it would no longer defend Clark Group. So the client took the insurer to court. In Blue Mountain Log Sales Ltd. v. Lloyd’s Underwriters, released in 2017, Justice Paul Walker of the B.C. Supreme Court ruled in favour of Blue Mountain and Clark Group. This was upheld on appeal.

The saga underlying the lawsuit against Blue Mountain and Clark it has its roots in the mid-1990s, when Chemco had an agreement to use its own product to treat wood roofing products made by Blue Mountain. There is a multitude of accusations among various firms that the B.C. court is not adjudicating.

The main issue before the B.C. court was the true nature of the amendment made in 2017 to the lawsuit in Washington against Clark Group. The true nature, Lloyd’s argued, was a misappropriation of trade secrets that happened “upstream” of any advertising.  An expert witness for Lloyd’s told the B.C. court that while misappropriation of trade secrets is a cause of action under the Washington state Uniform Trade Secrets Act, unfair competition is not.

Lloyd’s agreed that any accusations of using false labelling would fall into the category of advertising liability for the purposes of the policy. But Lloyd’s said false labelling is not the same thing as making a statement to regulators in order to get permission to sell a product.

In ruling against Lloyd’s, Justice Walker found that if the Washington court were to rule that Clarke Group profited from advertising intellectual property obtained through misappropriation, the Washington court could award damages.

Although Global Building amended its statement of claim in 2017, the plaintiff is still alleging that Clarke Group is using misappropriated information to market and sell its own products, the B.C. courts noted. Global Building alleges that getting approval to sell its own products would allow Clarke to market and sell its own fire-retardant-treated wood roofing products in competition with those of the plaintiff; therefore, a result of misappropriating ideas belong to Global Building’s, Clark Group was able to sell millions of dollars worth of products.

The allegations “placed the misappropriated information directly into the advertising, thus meeting the definitions of ‘advertising liability’ and ‘advertising injury’ regardless of whether it was an independent wrong such as false or misleading advertising,” Justice Dickson wrote for the B.C. Court of Appeal in its unanimous ruling.

“The advertising activities were part and parcel of the injuries alleged in the underlying action and potentially covered by the policies.  In consequence, Lloyd’s has a duty to defend.”

Justice Dickson explained that the use or absence of any particular wording in the underlying lawsuit does not determine whether a liability insurer has a duty to defend. Instead, in a coverage dispute, the court must look beyond the terminology used by the plaintiff to determine the true nature or substance of the claim.

Global Building claims that in 2007, it acquired all rights in the product and method of manufacture Thermex, the fire retardent originally developed by Chemco. Global Building alleges that Blue Mountain Log Sales Ltd., The Clark Group, Shake Division Inc. and Scott Clark acted “in concert” with a former Chemco officer to misappropriate Thermex so that a firm related to Clark Group could market and sell Thermex under a different name. Global Building further alleged that The Clark Group and associated firms misled Washington state regulators so that they could obtain approval to sell their own products, known as CPX, in competition with Global Building.

In addition to unfair competition, the Lloyd’s advertising liability also covers:

• libel, slander or defamation;
• infringement of copyright or of title or of slogan;
• invasion of right of privacy; or
• any of the above alleged by any other name