Specialty Podcast: Executive Liability Hot Topics - Trademark Infringement & ESG

Intro (00:00):
You're listening to the Alliant Specialty Podcast, dedicated to insurance and risk management solutions and trends shaping the market today.

David Finz (00:09):
Well, hello everyone. And welcome to another edition of the Alliant Specialty Podcast. I'm David Finz. And with me today is my co-host, our financial lines product and thought leader, Matia Marks. Matia, thank you for joining me today.

Matia Marks (00:24):
A pleasure to be here with you, David.

David Finz (00:26):
So, we are going to be offering a roundup of some of the topics that are covered in this month's issue of our Executive Liability Insights Newsletter. We're going to be focusing on two particular topics right now. One of them has to do with a pretty interesting trademark infringement claim that has resulted in some insurance coverage litigation, and the other is with respect to environmental, social, and governance or ESG issues. And I know this has been a hot topic for a lot of businesses nowadays. And so, with that, I'm going to turn it over to my co-host, Matia.

Matia Marks (01:02):
Thanks, David. So I'd like to start by talking about the dispute in this lawsuit. Can you tell me a little bit about what this claim's all about?

David Finz (01:10):
Sure. So the underlying complaint here in this trademark infringement suit involves what's called a computer reseller. Now, they don't actually manufacture computer equipment, but they essentially function as a middleman. They resell this equipment to the retailers that homes and businesses will actually purchase the merchandise from. And so the allegation here is that the reseller had marketed counterfeit product bearing the manufacturer's logo over a period of like 15 years. Now, what's important about this from a coverage standpoint, is that this included alleged wrongful acts that took place both before and after what is known as the retroactive date on the reseller’s policy. What the retroactive date does, it sort of functions as a rearview mirror. So on a policy that is triggered by having a claim made in a given policy period and reported in that policy period, the insurers are only going to look back a certain amount of time in terms of the wrongful acts that are alleged in that claim in determining what's going to be covered. So think of the retroactive date as sort of the vanishing point in that rearview mirror.

Matia Marks (02:30):
Great. Thanks for that summary. So is there anything specific to trademark litigation that our listeners should know about this case?

David Finz (02:38):
Right. So what's interesting about trademark infringement litigation is that it's a strict liability tort that means that fault doesn't matter, intent doesn't matter, negligence doesn't matter. It's sort of like being charged with receipt of stolen property; the mere fact that you possess it could get you in trouble with the law. This is much the same. So, while the question of whether the reseller exercised due diligence before trading in these counterfeit products, that might figure into damages or what type of remedy the court may order, it doesn't get into liability. Just the mere fact, if it can be proven that they were trading in counterfeit products, is enough to establish liability.

Matia Marks (03:28):
That's interesting. So what is the basis for denying coverage here that the carriers raise?

David Finz (03:36):
So here, the insurer was asserting that all of the infringement alleged in the complaint formed what's known as a series of interrelated wrong. It's sort of, kind of like a daisy chain connecting one act to another by some common theme, common core fact, it may involve the same parties, the same MO. And so based upon that, if the insurer can show that the earliest act predated that vanishing point in the rearview mirror, predated that retroactive date, that if all of these are related, they all go back to that earliest date. And therefore the claim is not covered under the policy and that they have no duty to defend their insured. Now, in response to that, the policyholder, the insured contended that these infringements involved different products; they were purchased at different times from different sources, by different employees of the firm, and they were sold to different customers. And so that the idea that the insurer was asserting that all of these were interrelated was not accurate and therefore the insurer should step up and defend the claim.

Matia Marks (04:51):
So, is it fair to say that those are all factors that the carrier would be looking at to determine if the series of facts are interrelated for the purpose of coverage?

David Finz (05:01):
Right. So ideally what the insurer should be doing here is looking at this objectively and saying, if even one of these wrongful acts is not related to a series of others that might predate that retroactive date, then they have a duty to defend the entire claim. So if they're going to assert that they have no duty to defend, they need to be pretty confident that they can show that all of these pre- and post-retroactive date were in fact related. They were all part of some common form of conduct involving the same parties, the same modus operandi, basically it was all part of the same pattern.

Matia Marks (05:42):
I see. So in this particular case, what was the court's basis for denying the insurer's motion to dismiss at this stage of the litigation?

David Finz (05:50):
Right. So in ruling for the insured here, the court noted a couple of things. First of all, they said the duty to defend is very broad, right? On a duty to defend policy, even one wrongful act triggers coverage. The insurer has an obligation to defend the entire claim. And they felt that the court ruled that in this case, the record had not yet developed to a point that they could say definitively that all of these alleged infringements were or were not interrelated. So the court wasn't making a determination here that in fact, they were discreet, separate events. They were simply saying, it's too soon to tell. And therefore, we're not going to let the insurer walk away from that duty here, because it's not clear at this point, given what's been alleged by both sides, that the wronging question all were part of a series of interrelated actions.

Matia Marks (06:49):
I see. So in light of this decision, what are the takeaways for our listeners here?

David Finz (06:54):
So, the takeaway really here is that policyholders, we call them insureds, and their brokers need to look at it very carefully. If an insurer tries to assert that all wrongful acts are interrelated, they shouldn't just roll over and accept that. There are some unique features here because the court noted that because of that strict liability in a trademark infringement claim, it was especially difficult at this stage for the insurer to walk away from their duty to defend, because it's not really clear at this point, whether these actions were all interrelated, but the key takeaway here is if an insured finds themselves accused of a series of actions that may or may not form some pattern of misconduct where they all get related back to before that vanishing point in the rearview mirror, to be very careful to make sure that the case is made, if there's one to be made, that they are in fact discreet actions, and they're not interrelated, you should not just accept the carrier's determination at face value.

Matia Marks (08:01):
Thanks for that summary.

David Finz (08:03):
Great. So now we're going to turn our attention to this issue of ESG. So why don't we start Matia by you helping our listeners understand what exactly is ESG?

Matia Marks (08:14):
That's a great question, David. And the problem with this question is that ESG encompasses a wide range of topics, which although many are not new for public companies to date, there's really been a lack of consistency as to what the topic encompasses. And what has changed really is the attempt to organize these topics and issues into a type of framework, which can be harnessed by not only investors, but also regulators, media and the public at large, in order to accelerate these goals. So I'll try to quantify this for you and for our listeners. The E in ESG stands for environmental and generally refers to a company's role as a steward of the planet. These concerns could include a company's energy use, waste management practices, handling of air and water pollution, conservation of natural resources, raw material sourcing, and deforestation. The S stands for social and refers to a company's internal and external relationships, and are often represented by DE&I or diversity equity and inclusion principles. These include, but aren't limited to racial and gender equality, employee safety and engagement, human rights, and often social justice issues. And lastly, the G refers to governance criteria, and this is really intended to be a broad catchall, which typically involves the organization's leadership executive pay audits, internal controls and shareholder rights.

David Finz (09:44):
Well, that covers a lot of ground. What exactly is the security exchange commission doing right now in this area?

Matia Marks (09:51):
Well, this is a topic, as you said before, that we've covered extensively in our Executive Liability Insights Newsletter. In fact, in March of this year, the SEC announced proposed rules requiring public companies to disclose extensive climate related information in their SEC filings. And the proposed rules, if finalized include a phase-in period for compliance by SEC registrants with the compliance state dependent on the company's filing status. And then in May of this year, the SEC proposed two form and rule amendments seeking to enhance and standardize disclosures related to ESG factors considered by funds and investment advisors, and also to expand the regulation of the naming of funds, which have an ESG focus. These proposals trail a recent settled enforcement action against a mutual fund advisor regarding misleading ESG disclosures, as well as a complaint filed against an issuer for misleading investors in its ESG disclosure.

So taken together with the recent formation of the SEC's climate and ESG task force within the division of enforcement, it's clear that the SEC staff is increasingly focused on reviewing disclosures with respect to ESG issues. And lastly, in addition to the SEC, there's also been a growing divide in the state regulatory landscape relative to ESG; for example, more than a dozen states have recently introduced initiatives either to divest state pension funds from gun and ammunition, oil and gas or coal companies, or conversely to require state pension fund divestment from companies that boycott fossil fuel companies. So this is definitely a topic with a lot of moving parts. And all I can say is stay tuned.

David Finz (11:36):
Well, it definitely sounds like something worth watching. So, tell us how do these issues affect the underwriting of DNO, or directors and officers liability coverage?

Matia Marks (11:46):
Yeah, this is definitely an area of focus for D&O underwriters. David, there are two principle ways in which ESG may result in a D&O lawsuit. The first one being following an ESG event, a company may end up being involved in event-driven litigation. And there's also the possibility that a company may be involved in disclosure-related litigation concerning an ESG topic. This type of litigation tends to follow from a headline that may reveal adverse facts or allegations about a company's business practices or about their products. And we're finding that these types of pieces are becoming more and more prevalent. These days, the result of these events can either be a securities class action - if shareholders are harmed, a shareholder derivative action; if the company's harmed or suffers losses, or even both, for example, we've seen shareholders bringing a number of lawsuits challenging public disclosures regarding diversity equity and inclusion, board diversity and issues arising out of the Me Too movement. If the adverse event concerns a critical aspect of the company's business, the directors and officers will likely face a difficult hurdle trying to get early dismissal of these types of litigation and could potentially put the personal assets of a company's directors and officers at risk.

David Finz (13:00):
Oh, that's pretty serious. So what is the takeaway here for our listeners?

Matia Marks (13:04):
Yeah, clearly the landscape of ESG risks is evolving. So I would say that it's critical for boards to identify and prioritize their goals relative to ESG concerns, as well as to be sure not to over promise when it comes to disclosures in this area. And also it's more important than ever for companies to be sure that they have a robust D&O insurance program in place.

David Finz (13:25):
Great. Thank you for that summary. So these are just two of the topics that are covered in our current issue of our Executive Liability Insights Newsletter. Here at Alliant, we are all about helping our clients find the more rewarding way to manage risk, and if you're interested in topics like these, I would encourage you to check out our newsletter, which you can access on our website at www.alliant.com/financial. So that's all for now until next time. Thank you for joining us and take care.