No Duty to Defend Patent Infringement Suit – IL 1st Dist

False “Patent Pending” Mark Does Not Implicitly Disparage Competitor’s Product Causing Advertising Injury.

An Illinois appellate court, applying Illinois law, upheld the circuit court’s ruling that State Farm Insurance Company (“State Farm”) did not have a duty to defend its insured, Green4All Energy Solutions, Inc. (“Green4All”), in a patent infringement suit.  The appellate court found that the underlying complaint failed to allege an advertising injury covered by the insurance policy because the “patent pending” marking was not disparagement.

Flow Dynamics, LLC (“Flow”) filed the underlying lawsuit against Green4All alleging patent infringement and false marking.  According to the underlying complaint, “[Green4All has] falsely marked the H2MinusO® as being ‘patent pending’ in [Green4All’s] commercial literature when, upon information and belief, no application has been filed in the name of [Green4All].”  State Farm insured Green4All for personal and advertising injury during the relevant time period.  The policy defined a “personal or advertising injury” as an injury “arising out of,” in pertinent part, an “[o]ral or written publication, in any manner, of material that … disparages a person’s or organization’s goods, products or services.”  Green4All tendered the defense of the underlying lawsuit to State Farm.  State Farm denied coverage.  Shortly thereafter, the underlying lawsuit settled.  Green4All filed the action against State Farm alleging breach of contract and violation of section 155 of the Illinois Insurance Code.  The circuit court found that the underlying complaint failed to allege an advertising injury covered by the insurance policy and granted State Farm’s cross-motion for summary judgment.  Green4All appealed.

On appeal, Green4All argued that State Farm had a duty to defend because the allegations of the underlying complaint contained facts that fell within the policy definition of a “personal and advertising injury.  The issue before the appellate court was whether the alleged contents of the commercial literature constituted disparagement.

Disparagement is not defined by the policy.  However, the appellate court stated that it has defined disparagement to mean “words which criticize the quality of one’s goods or services.”  According to the appellate court,  “[t]o qualify as disparagement, ‘the statement (1) must be about a competitor’s goods or services, (2) must be untrue or misleading, and (3) must have been made to influence or tend to influence the public not to buy those goods or services.’”   The appellate court found that Green4All’s marking of its product as “patent pending” was a neutral designation and without any comparative language about another product it simply cannot constitute disparagement.  The appellate court held that “[b]ecause the underlying complaint failed to allege that Green4All made any statements in its commercial literature comparing its own product to Flow’s, denigrating Flow’s product, or mentioning Flow’s product in any way, it did not allege that Green4All disparaged Flow or Flow’s product.”

The appellate court was not persuaded by Green4All’s argument that coverage existed because Flow alleged a “disparaging effect” from Green4All’s advertising.  The appellate court noted that the fact that Flow alleged harm because the “patent pending” marking on Green4All’s product tended to persuade potential customers that Green4All’s product was superior to Flow’s.  The appellate court concluded that, because the Flow complaint contained no allegations sufficient to constitute a claim of disparagement against Green4All, State Farm did not owe Green4All a duty to defend in the underlying action, State Farm did not breach its insurance contract with Green4All, and State Farm did not violate section 155 of the Insurance Code.  Green4All Energy Solutions, Inc. v. State Farm Insurance Company, 2016 IL App (1st) 162499-U (May 1, 2017).