A Georgia Appellate Court Holds that General Liability Insurer Owes No Defense Where Underlying Suit Fails to Allege Misappropriation of Advertising Ideas 

December, 2007 -

A Georgia intermediate appellate court has affirmed summary judgment in favor of an insurer, holding that there can be no “advertising injury” coverage under a commercial general liability insurance contract where an underlying lawsuit concerning division of profits from a joint copyright work fails to allege a misappropriation of advertising ideas. James C. Shafe, et al. v. American States Insurance Co., No. A07A0879, 2007 Ga. App. LEXIS 1193 (Ga. App., 4th Div. November 8, 2007).

The insureds produced and sold career guidance materials. A dispute arose between the insureds and a contractor over compensation owed to the contractor for her work on certain career assessment tools included in the insureds’ publications. The contractor sued the insureds in federal district court, asserting federal copyright claims and state common law claims for breach of contract, deceptive trade practices, unfair competition, fraud, and unjust enrichment. Finding that the contractor and the insureds were “co-owners” of the work in question, the federal district court ruled that the contractor could not sue for copyright infringement and granted summary judgment to the insureds on the contractor’s federal copyright infringement claims. Having found that the contractor could not state a claim under federal copyright laws, the federal district court declined jurisdiction over the contractor’s state law claims and dismissed them without prejudice.

The contractor then brought suit against the insureds in Georgia state court for unjust enrichment, breach of fiduciary duty, fraud, an accounting of profits and the imposition of a constructive trust upon the same. The insureds tendered the claim to their general liability insurer. The insurer denied coverage and filed a declaratory judgment action seeking a declaration of the parties’ rights and obligations under the insurance contract. Holding that the claims asserted in the underlying action were not covered under the policy, the trial court granted summary judgment in favor of the insurer. The insureds appealed.

The Decision of the Court of Appeals of Georgia
On appeal, the insureds argued that the insurer owed a defense under the insurance contract’s “advertising injury” coverage part. The insureds submitted an affidavit, and argued that the additional facts in this affidavit purportedly revealed that the underlying claims arose from “advertising injury.” The insureds’ affidavit alleged that the insureds derived no specific profit from the sale of the work but, instead, any benefits derived from the work resulted from the insureds’ use of the work in their advertising. From these alleged facts, the insureds argued that the contractor’s claims were based on the misappropriation of the contractor’s ideas and that such claims arose out of an “advertising injury.” The appellate court disagreed with the insureds’ conclusion. First, the insurance contract defined “advertising injury” as injury resulting from “[m]isappropriation of advertising ideas or style of doing business” or “arising out of … [t]he use of another’s advertising idea in your ‘advertisement.’” Applying this definition, the appellate court concluded that the contractor’s claims did not arise out of “advertising injury.” There was no allegation that the insureds misappropriated an advertising idea or style of business belonging to the contractor; rather, the contractor alleged that she and the insureds co-owned a publication and that the insureds owed her a portion of profits from their continued lawful use of it.

Second, the court observed that applicable Georgia law does not allow an insured to create coverage simply by “reinterpreting” the factual allegations in the underlying lawsuit. Examining the additional facts alleged in the insureds’ affidavit, the appellate court found them insufficient to transform the contractor’s claims into claims for “advertising injury.” The appellate court reasoned that, even assuming that benefits arose from the insureds’ use of the work in their marketing and advertising, such facts did not bring the claim within the policy’s definition of an “advertising injury.” The mere use of another’s work in advertising does not invoke coverage; rather there must be an allegation that the insureds misappropriated the work. Finally, because the federal district court in the original action held that the publication was a joint copyright work, the contractor could not assert a copyright infringement claim against the insureds. Estoppel precluded the contractor from asserting a claim for misappropriation, as one cannot misappropriate that which one owns.

This decision demonstrates that the mere use of a copyrighted work in advertising does not constitute “advertising injury” under a general liability insurance contract. Rather, there must be a claim against the policyholder that the policyholder engaged in “misappropriation of advertising ideas or style of doing business” as required by the insurance contract. This opinion also shows that, where allegations in the complaint fail to bring the claim within policy coverage, a Georgia court will not allow an insured to “reinterpret” the factual allegations in order to create coverage.



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