For Real: The Second Circuit Says No Coverage for Purveyors of Fake Goods

By Timothy D. Kevane, Sedgwick New York

The U.S. Court of Appeals for the Second Circuit recently held that there is no “advertising injury” coverage for claims against insureds caught selling counterfeit goods.  United States Fidelity and Guaranty Co. v. Fendi Adele S.R.L., — F.3d. —, 2016 WL 2865578 (Second Circuit, May 17, 2016).

Claims arising from the sale of counterfeit products, typically fakes of high-end brands, have at times triggered coverage under the advertising injury provisions of a general liability policy, citing provisions that extend coverage for copyright and/or trade dress infringement in the insured’s advertising.  But the scope of this coverage has its limits, and the insured in Fendi pushed the envelope (or the handbag, as it were) too far in this instance.  It sold counterfeit products that displayed Fendi trademarks and otherwise mimicked the appearance of genuine Fendi products.  That did not sit well with the Italian luxury fashion giant, which sued the insured for trademark counterfeiting, false designation of origin, trademark dilution and unfair competition.  The policy’s advertising injury coverage extended to the use of another’s advertising idea in advertising, as well as infringement of another’s copyright, trade dress or slogan “in your advertising.”  Critically, the Court found that the insured did not engage in any advertising of the counterfeit goods nor did Fendi allege any such advertising.  The Court stressed that Fendi was awarded $35 million in damages based on the sales – not advertising – of the fake goods.

The court rejected the insured’s argument that the use of the Fendi mark constituted “advertising,” which the policy defined as attracting the attention of others for the purpose of seeking customers.  Under no reasonable reading of the policy would coverage have been expected for the mere sale of counterfeit goods.  The Court opined that “common sense” draws a difference between using a counterfeit mark on the fake product versus soliciting customers through printed advertisements or other media.  Thus, the insured’s use of the Fendi logo was merely to identify the product, not an advertisement in and of itself.  Furthermore, having profited from the sale of knock-offs, the insured could not have reasonably expected any insurance for the return of its ill-gotten gains pursuant to well-settled New York law prohibiting such coverage.

The case is an important reminder that the courts will enforce a basic requirement for advertising injury coverage – that the infringing conduct must occur in the course of “advertising.”  Thus, the bare allegation of a copyright or trade dress infringement, especially in lawsuits centering on the sale of fake goods, will not suffice to trigger coverage.

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