Advertising Dangers

In Dr. Johnson’s time, a publisher intending to expose a wrongdoer carefully weighed the legal responsibility of answering any allegations of libel that might be brought against them. In the age of the Internet, however, publishing a defamatory statement can be as simple as logging onto a website and posting comments with a web browser. In seconds, the post can potentially be read by millions of people around the world.

Using the same high-speed technology, enormous amounts of proprietary information or intellectual property can be downloaded in a matter of seconds, or taken off premises by a disgruntled former employee in the form of a CD Rom. Generally speaking, “advertising injury” consists of a statement made in the course of advertising activities that causes loss to another because of libel, slander, defamation, violation of a right of privacy, piracy or misappropriation of ideas, infringement of copyright, trademark and title or slogan. The key concept here is “in the course of advertising activities”. It is not a license to defame or commit copyright infringement with impunity.

Libel, slander and defamation also potentially fall under the “personal injury” coverage of a commercial liability policy. If this coverage is provided, it ordinarily excludes statements made in the course of advertising, publishing or broadcasting. The clear intention is that advertising liability must be added to the policy in return for additional premium. Some Umbrella policies add this coverage as well, and there are specific advertising liability policies.

ADVERTISING ACTIVITIES

An insured is more likely to be accused of defamation than found liable for damages. Many actions for libel and slander are brought by lawyers on behalf of individuals who feel wronged or hurt, without a clear understanding of what defamation means.

A defamatory statement is one that tends to lower a person in the estimation of “right-thinking” members of society. It is a statement or publication which reflects badly on a person’s reputation.

When considering advertising injury, the courts have recognized that the duty to defend is always broader than, and independent of, the duty to indemnify. It arises where a claim alleges acts or omissions that potentially fall within the policy coverage, while the duty to indemnify arises only where such allegations are proven at trial.

The distinction between “personal injury” and “advertising injury” coverage was considered in the historic B.C. Court of Appeal decision in Reform Party of Canada vs. Western Union Insurance Co. In 1998, Liberal Senator E.M. Lawson sued the Reform Party for defamation arising out of an article on the provocatively named “scandals.html” page located on the “senate_reform.org” website. It linked to a website called “Senate Scandals” where allegedly defamatory comments about different Liberal senators were posted. The Reform party acknowledged having created the senate_reform website and the Senate Scandals page. The website was, in fact, designed to promote the party’s policy favoring the appointment of elected senators.

The issue before the courts in B.C. was whether the Western Union Insurance Co. commercial general liability (CGL) policy contained a duty to defend the Reform Party for these allegations. Pursuant to the insuring agreement, the insurer agreed to defend any civil action which might be brought against the insured on account of both “personal injury” and “advertising injury”.

The judge hearing the initial application ruled that the posting of the website article was not intended to promote the Reform Party’s goods, products or services, but was more in the nature of a publication of its public policy on the senate. Accordingly, he found that the activity could not clearly be held to be advertising and the claim was denied. The B.C. Court of Appeal agreed that the statements would fall outside the personal injury coverage if they were made “in the course of or related to advertising activities.” Accordingly, the real issue on the appeal was whether the web page constituted part of the Reform Party’s “advertising activities” in a sense that would bring it within the advertising injury coverage.

The Court of Appeal noted, however, that an insured would reasonably expect that if it bought specific coverage for its advertising activities, that a minor difference in wording should not result in a gap in coverage. The court was persuaded that the “Senate Scandals” web page was part of a promotional website actively seeking public support for an elected senate. The Senate Scandals page reinforced the positive comments about an elected senate policy by denigrating individual senators who benefited from its existing policy. This lead the court to believe that it possibly fell within the ambit of an advertising activity. Because there was a “reasonable possibility” that the alleged defamation fell within the coverage for advertising injury, the duty to defend had been established.

INJURY INTENT

A second interesting decision involving defamation on an Internet website is the recent decision of the Court of Appeal of Ontario in Hodgkinson vs. Economical Mutual Insurance Co. In this case, the defendant was sued for damages for defamation as a result of posting messages to an Internet message board dedicated to the activities of an online investment bank.

The allegedly defamatory postings commented on the bank’s trading activities, investigations by regulatory authorities and pending litigation. The defendant admitted that he had posted the messages but pleaded in his defense that they were true. He brought an application for a declaration that his homeowner’s insurer, the Economical Mutual, had a duty to defend the action. The application judge dismissed the motion on the basis of the policy exclusion for harm caused by an “intentional act” of the insured. The defendant appealed.

In reaching its decision, the Court of Appeal considered the landmark decision of the Supreme Court of Canada in Non-Marine Underwriters, Lloyd’s of London vs. Scalera. In Scalera, the defendant, who was insured under a homeowner’s policy, was sued in an action seeking damages for sexual abuse. The Supreme Court of Canada held that the plaintiff’s claim could not trigger coverage under the policy because it involved an “intent to injure”.

The Court of Appeal held that the insured’s defense eliminated the possibility that the Internet posting was “accidental” in the sense of not being intended. While the insured’s intention was to warn others of the plaintiff’s unethical behavior, and lack of financial viability, he definitely intended to lower the reputation of the plaintiffs in the community. Accordingly, coverage was denied on the basis of the intentional acts exclusion.

It is important to remember, however, that this was a homeowner’s form and not a commercial policy where advertising liability or expanded personal injury coverage had been added in return for additional premiums. It is also worth noting that not all advertising liability claims involve allegations of defamation. A case in point is the recent decision of the Ontario Court of Appeal in prairieFyre Software Inc. vs. St. Paul Fire and Marine Insurance Co.

PrairieFyre Software Inc. was a developer and vendor of call center management software products. Between 1998 and 2000, St. Paul Fire and Marine Insurance Co. issued commercial general liability insurance policies to prairieFyre. The policies included coverage for advertising injury, extending to the officers and directors of the insured corporation. The insuring agreement provided that the insurance applied to advertising injury “only if caused by an offence during the ‘policy period'”. In addition, the coverage clause restricted coverage for advertising injury to “injury…caused by an offence…committed in the course of advertising the insured’s goods, products or services”.

Taske Technology Inc. claimed compensatory damages against prairie Fyre and its owner, Clarke LaPrairie, for copyright infringement, breach of contract, breach of fiduciary duty, unjust enrichment, and misappropriation of business opportunities. Taske alleged that LaPrairie had previously worked with Taske, developing a call-center management software product known as the “Taske ACD Toolbox”. Taske claimed that, following the sale of his interest in the company and the execution of a release agreement, LaPrairie and prairieFyre began developing and distributing competing call-center management software that incorporated Taske’s proprietary technology.

St. Paul Fire denied coverage for the claims. PrairieFyre and LaPrairie then applied for a declaration that the insurer had a duty to defend under the advertising injury coverage. The application judge dismissed this application. The judge hearing the application noted that “advertising” was not a defined term in the policy. Further, he found that there was sufficient connection between the allegations of copyright infringement and the allegations of advertising activity to trigger the insurer’s duty to defend.

Having potentially brought the claim within coverage, the judge held that the insurer did not have a duty to defend. He found that the essence of the allegations arose from LaPrairie’s alleged breach of the original release agreement. He accordingly applied the policy exclusion for claims arising out of “breach of contract”.

The Ontario Court of Appeal concluded that the application judge erred in holding that there was a sufficient connection between Taske’s allegations of advertising activity and copyright infringement to trigger St. Paul’s duty to defend. The Court disagreed that it was unnecessary to find a “direct nexus” between the allegations of advertising activity and its alleged injuries in order to trigger a duty to defend. The policy stipulated that advertising injury coverage applied only to “injury caused by an offence, committed in the course of advertising”. Accordingly, it specifically required a direct casual link between advertising activity and an offence as a condition of coverage.

Taske’s pleading that the defendants “exhibited in public by way of trade, unauthorized copies of the “Taske ACD Toolbox software” fell short of alleging that the product had actually been displayed as a form of advertising. The statement of claim also failed to make any allegation of copyright infringement committed in the course of advertising.

While the Court of Appeal concluded that the application judge had erred in finding that the statement of claim included allegations capable of triggering advertising injury coverage, it agreed with his dismissal of the application. Accordingly, the court did not go further in dealing with the case on its merits.

PERSONAL & ADVERTISING

Allegations of defamation may potentially fall under either the personal injury or advertising liability coverage in a CGL policy. They may be excluded altogether. For this reason, it is always important to check the individual policy wordings to determine whether this coverage has been expanded or restricted.

With the spread of the Internet, every household and business in Canada has the potential to function as a publisher or a broadcaster. Advertising injury is no longer a risk restricted to large corporations with marketing budgets and access to publishing resources. While the appeal courts have taken a conservative view of advertising injury to date, with the rapid expansion of Internet based newsgroups, publishing and advertising, it is unlikely that this potential for liability will diminish. We can safely assume that insureds will continue to get themselves in trouble in interesting new ways that will challenges lawyers and claims professionals for years to come.