Business Liability Insurance and Trade Secrets Claims - Are You Covered?

When a new employer gets sued for trade secret misappropriation and employee raiding the allegations of the complaint often recite that "Defendants targeted, solicited and sought the patronage of Plaintiff's customers while using competitively sensitive information misappropriated from the Plaintiff." If the new employer has a general liability policy covering its business, that same policy often has a provision covering "advertising injury" that the business may be accused of or responsible for.

Query then: if the new employer stands accused in civil litigation of "targeting, soliciting or seeking the patronage" of the former employer's customers, does their "advertising injury" clause kick in and entitle them to a defense and indemnity in the trade secrets misappropriation case?

That was the issue the United States District Court for the District of Minnesota considered on January 19, 2006 in its opinion captioned Imaging Alliance Group, LLC v. American Economy Insurance Company, 2006 WL 145428 (D. Minn.). Seems Imaging Alliance recruited twelve of IKON Office Solutions' employees and then went after IKON's customers after hiring the twelve. After that "employee raid," IKON sued Imaging Alliance and the twelve for, among other things, trade secret misappropriation. And IKON alleged, as the former employers usually do, that the effort included "targeting, soliciting and otherwise seeking the patronage of" IKON's customers. Although the insurance company originally "tendered a defense" to Imaging Alliance, about a month and a half into the IKON litigation the insurance company advised Imaging Alliance "we don't think there is coverage here" and denied further defense to Imaging Alliance. The new employer incurred about $175,000 in legal fees defending itself, settled the case with IKON, and then sued the insurance company for refusing to defend and indemnify them under the "advertising injury" clause of the policy.

Both Imaging Alliance and the insurance company moved for summary judgment. The Court, apparently not agreeing with Imaging Alliance that "soliciting" and "advertising" mean the same thing, granted summary judgment to the insurance company. We'd bet this one still smarts for Imaging Alliance - but you have to hand it to their attorneys, as this was a creative claim to get an insurance company on the hook for what was allegedly some competitively suspect misdeeds.