The Sixth Circuit Court of Appeals recently ruled that Liberty Corporate Capital did not have to defend a firearms retailer in a lawsuit alleging that the retailer improperly obtained and used its competitor’s customer list to send e-mail blasts about its own products. The customer list did not qualify as a misappropriated “advertising idea,” according to the court, and thus did not bring the suit within the advertising liability coverage of the Liberty CGL policy issued to the retailer. The decision is unremarkable in the sense that most courts have held that a customer list is not an “advertising idea.” But it is less about riding a wave toward consensus, or a meaningful victory for carriers, than a decision, in our opinion, that will have limited significance given it arises out of a type of dispute that will likely become rare. Successful businesses do not rely exclusively on customer lists and email blasts to reach customers. They’ve adopted sophisticated marketing strategies that have been, and should be, regarded as “advertising ideas” triggering advertising injury coverage under a CGL policy.
The dispute in Liberty Corporate Capital Ltd. v. Security Safe Outlet, Inc., et al. arose when a former employee of Bud’s Gun Shop purportedly used stolen backup copies of the gun shop’s customer database to help his new employer, Security Safe Outlet, Inc., open a competing online firearms business. Bud’s Gun Shop sued Security Safe for misappropriation of trade secrets and violation of the Lanham Act.
Security Safe sought coverage from Liberty for advertising injury liability under a CGL policy that defined “advertising injury,” in part, as the “use of another’s advertising idea in your ‘advertisement.’” Security Safe argued that the lawsuit against it implicated the stolen customer database as its competitor’s “advertising idea” that was used to send advertisements, mass e-mails, to customers. Liberty refused to provide coverage and filed suit for a declaratory judgment that it owed no duty to defend or indemnify Security Safe.
The Sixth Circuit Court of Appeals affirmed judgment in favor of Liberty, concluding that the underlying complaint did not allege an advertising injury. The court found that the term “advertising idea,” which was undefined in the policy, unambiguously meant “a company’s plan, scheme or design for calling its products or services to the attention of the public.” A list containing only customer names and addresses did not fit within this definition.
Most courts have reached the same conclusion, including the Eleventh Circuit (State Farm Fire & Cas. Co. v. Steinberg, 393 F.3d 1226 (11th Cir. 2004)). The Ninth Circuit has also expressed skepticism on this point (Sentex Systems, Inc. v. Hartford Accident & Indemnity Company, 93 F.3d 578 (9th Cir. 1996)). But these decisions are unlikely to be particularly problematic for policyholders, or a boon to carriers.
Untargeted e-mail blasts are simply not effective today, if they ever were, as our “in-boxes” have become increasingly choked with unsolicited offers. Customer lists remain valuable intellectual property, but their greater value lies in how they fit into a broader marketing strategy. Successful businesses segment their customer database based on, for example, demographics, personal interests and how recently the customer purchased a product or service from the company. They personalize their communications with customers and tailor marketing schemes, such as “rewards” programs, to each segment and sub-segment. A customer database is just one facet of a multidimensional marketing approach. Even the smallest companies must adopt these sophisticated strategies to survive, or, at a minimum, avoid seeing their marketing budgets circle the drain.
This means we are likely to see few, if any, advertising injury disputes centered upon static customer lists and clumsy, indiscriminate e-mail blasts. Dynamic marketing strategies are the norm and should qualify as “advertising ideas” that trigger coverage for advertising injury liability. The Ninth Circuit has already concluded as much in Sentex.
Unlike the complaint at issue in Liberty, complaints brought against policyholders going forward are more likely to contain the elements necessary to trigger advertising injury liability coverage. Policyholders should carefully look for them in order to maximize their insurance benefits.