Insurer has a Duty to Defend Company in Internet Advertising
By Joe Forward, Legal Writer,
State Bar of Wisconsin
Jan. 4, 2013 – One company sued another company, alleging two
former employees took Internet marketing systems and strategies to start
a competing business. Recently, a state appeals court ruled the
defendant’s insurance company has a duty to defend.
Specifically, the District II Wisconsin Court of Appeals in Air
Engineering Inc. v. Industrial Air Power LLC, 2012AP103 (Jan.
3, 2012), ruled that Acuity Mutual Insurance Company must defend
Industrial Air Power against six counts related to advertising injury,
including trade secret misappropriation, breach of contract, and
intentional interference with contract.
Air Engineering, which buys and sells replacement parts and products
for air compressors, alleges that Christopher Klemz and Matthew Krause,
former employees, misappropriated confidential advertising strategies
and now uses them to run Industrial Air Power.
Among the complaints, Air Engineering says Industrial Air Power is
using the former’s “internet advertising system,”
which allows the company to identify potential customers based on Google
search terms and position ads and websites providing company information
Industrial Air Power has a commercial general liability policy with
Acuity, which intervened in the lawsuit and asked for a declaratory
judgment that it has no duty to defend. The circuit court sided with
Acuity. On appeal, the appeals court reversed in favor of Industrial Air
What is an Advertising Idea?
The appeals court ruled the complaint alleges an injury that, if
proven, is covered under an “advertising injury” provision
in the insurance policy. Specifically, the insurance policy covers
advertising injuries for the “use of another’s advertising
idea in your advertisement.”
The three-judge appeals panel explained that an “advertising
idea,” which is not defined in the Acuity policy, is “an
idea for calling public attention to a product or business, especially
by proclaiming desirable qualities so as to increase sales or
patronage,” citing Atlantic Insurance Co. v. Badger Medical
Supply Co., 191 Wis. 2d 229, 528 N.W.2d 486 (Ct. App. 1995).
Noting that Atlantic Insurance involved “customer
information,” which is not an advertising idea, the panel examined
a federal case from California for a relevant example. In Hyundai
Motor America v. National Union Fire Ins. Co. of Pittsburgh, 600
F.3d 1092 (9th Cir. 2010), a patent holding company
(Orion IP LLC), sued Hyundai for patent infringement, alleging
Hyundai was using a patented “build-your-own-car” feature on
The Ninth Circuit Court of Appeals ruled that Orion’s patent
infringement claim alleged misappropriation of an advertising idea that
was covered under Hyundai’s insurance policy. The appeals panel
applied Hyundai to rule that Industrial Air Power’s
actions are covered.
“As in Hyundai, the information is tailored to the
customer based on information furnished by the customer,” Judge
Lisa Neubauer wrote. “Industrial’s use of the Internet
Advertising System, as described in Air Engineering’s complaint,
is ‘use of another’s advertising idea.”
The panel also ruled that Air Engineering sufficiently alleged that
Industrial Air Power engaged in advertising activity, as well as a
causal connection between the activity and the injury.
The court also rejected Acuity’s argument that an exclusion
applied to bar coverage for an 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
“Air Engineering states potentially covered claims that do not
base liability on a showing of a knowing violation of another’s
rights and infliction of advertising injury,” Neubauer wrote.
“[T]here are claims set forth in the complaint that survive the
‘knowing violation’ exclusion.”