Real Chutzpah

Submitted by patentadmin on Mon, 12/20/2010 - 15:23

Today we write about a company that truly knows no shame. Having defrauded a supplier and its own customers – and, incidentally, trampling on the intellectual property rights of both – it now compounds its shame. Rather than quietly pay the penalty – which it had negotiated with the offended supplier – it seeks to have the penalty paid by its insurance carrier. Hartford Casualty Insurance Company et al. v. SoftwareMedia.Com., Inc. et al.

SoftwareMedia distributed Microsoft software and related products on the Internet. In 2004, Microsoft sued SoftwareMedia for infringement of Microsoft’s copyrights and trademarks. The case was settled when SoftwareMedia consented to entry of a permanent injunction barring any further transgressions.

Apparently, once was not enough. In 2010, Microsoft again sued SoftwareMedia for copyright and trademark infringement. In this second suit, Microsoft added claims of fraud, breach of contract, intentional interference with economic relations, and unjust enrichment. As alleged in the Complaint, SoftwareMedia “actively engaged in a fraudulent bait-and-switch scheme in connection with their sale of Microsoft products. SoftwareMedia … switched … customer orders for Microsoft software licenses with less expensive Software Assurance [a SoftwareMedia product selling for half the price of the Microsoft software] which is not a license and creates no license rights … SoftwareMedia … engaged in this sales practice … to retain … the significant price difference between licenses and Software Assurance.”

Once again, SoftwareMedia settled the litigation by consenting to entry of a permanent injunction – as if they had honored the first permanent injunction. At any rate, this time Microsoft insisted on receiving some compensation. Initially, Microsoft demanded $2.9 million but, after some negotiation, agreed to accept a mere $1.8 million.

The tale, to this point, is sordid but not so very unusual. Here is where it becomes truly pathetic. While the negotiations with Microsoft were ongoing, SoftwareMedia wrote to its insurance carrier, Hartford Casualty, seeking payment of the proposed settlement amount and reimbursement of SoftwareMedia’s defense costs. Yes, indeed, SoftwareMedia expected its insurance company to pay the price of its dishonesty!

SoftwareMedia stated that the Microsoft complaint “could be read” to implicate coverage under the “advertising injury” coverage of the “commercial general liability” (CGL) insurance policy issued by Hartford Casualty. SoftwareMedia went on to tout the advantages of the settlement and to note that Microsoft’s claim had presented “an existential threat” to SoftwareMedia. Hartford Casualty denied coverage.

Generally speaking, insurance companies have an approval rating on a level with lawyers and congress but, in this case, Hartford Casualty was clearly justified in rejecting SoftwareMedia’s claim. Hartford Casualty has initiated suit against SoftwareMedia seeking a declaratory judgment that it is “not obligated to defend or indemnify SoftwareMedia … for any … claims arising out of the events that occurred in connection with the Microsoft [lawsuit] …” In its complaint, Hartford Casualty argues that Microsoft’s action was premised on SoftwareMedia’s “alleged unlawful sales practice” – the bait-and-switch scheme – “rather than a claim for injury resulting from advertising injury.” The complaint then goes on to enumerate six (yes, 6!) policy exclusions, any one of which would support disallowance of SoftwareMedia’s claim. Specifically, coverage is excluded for:
1. knowing violation of the rights of another;
2. material published with knowledge of its falsity;
3. material published prior to the policy period;
4. breach of contract;
5. infringement of intellectual property rights; or
6. website controlled by the insured.

Seemingly, ALL of these exclusions apply. SoftwareMedia has alleged that it will be driven out of existence if it is forced to pay the $1.8 million itself. We sincerely hope so!

THE LESSON TO BE LEARNED: There are limits to what is covered by a CGL policy; don’t expect an insurance company to pay for your intentional wrongdoing.

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