Appeals court rules ‘the’ in IP exclusion may allow coverage

The placement of the definite article in an intellectual property exclusion could allow liability coverage, a federal appeals court ruled, partially overturning a lower court.

In Paloma Resources LLC; Paloma Operating Co. Inc. v. Axis Insurance Co., the Houston-based energy company sought coverage from Axis for a settlement in a dispute it had with a competitor over a Paloma employee’s alleged theft of confidential information.

Axis denied the claim, citing a policy exclusion that says: “The Insurer shall not be liable under Insuring Agreement C. Company Liability for Loss on account of any Claim . . . based upon, arising out of, directly or indirectly resulting from, in consequence of, or in any way involving any actual or alleged infringement of copyright, patent, trademark, trade name, trade dress, or service mark or the misappropriation of ideas or trade secrets, or the unauthorized disclosure of or access to confidential information.”

A district court granted Axis summary judgment on the issue, but the 5th U.S. Circuit Court of Appeals in New Orleans agreed with Paloma that construction of the exclusion allowed for a different interpretation.

The placement of “the” before “misappropriation of ideas or trade secrets” suggests there is no carryover modification of “actual or alleged” to the second part of the sentence, the court said in a ruling Monday.

“The result being actual, as opposed to alleged, misappropriation of trade secrets are required to trigger application of the exclusion,” the ruling says.

Paloma’s argument that “actual or alleged” expressly modifies “infringement” is reasonable, the appeals court ruled, sending the case back to the lower court for further consideration.

Axis did not respond to a request for comment.