Is it or isn't it? Recent court cases are exploring the definition of advertising on the uncharted terrain of the Internet.

What exactly is advertising? Not too long ago, it seemed a relatively simple question. The Marlboro Man on the back cover of Time magazine? Advertising. Choosy moms choosing Jif peanut butter on Saturday morning television? Clearly advertising. However, the definition of advertising as it appears in commercial liability insurance has proven to be elusive as applied to the Internet.

Disputes about the meaning of advertising and advertising injury in the insurance context have haunted the country's courthouses well before words such as "cyberspace" and "dot com" became part of our national consciousness. Many of these decisions have focused upon whether an "enumerated offense" in the policy (libel, slander, invasion of privacy or copyright infringement, for example) occurred "... in the course of advertising ..." Otherwise stated, these decisions focused upon the nexus, or lack thereof, between the offense and the alleged advertising activity. Perhaps the most widely cited decision in this line of cases is Bunk of the West vs. The Superior Court of Contra Costa County, where the Court observed:

"Virtually every business that sells a product or service advertises, if only in the sense of making representations to potential customers. If no causal relationship were required between 'advertising activities' and 'advertising injuries,' then 'advertising injury' coverage, alone, would encompass most claims related to the insured's business. However, insureds generally expect to obtain such broad coverage, if at all, only by purchasing several forms of insurance, including coverage for 'errors and omissions liability,' 'directors and officers liability,' 'completed operations and products liability,' and/or other coverages available as part of a CGL policy."

The California Supreme Court in Bank of the West, however, did not tackle the more basic question of what constitutes advertising. While noting that courts have disagreed on this question, the Bank of the West court merely stated that most published opinions hold that advertising means "widespread promotional activities directed to the public at large." Following Bank of the West, the California Supreme Court adopted this definition.

The majority of courts considering this question have come to the same conclusion.

A minority of courts have taken a tar more expansive view of what constitutes advertising. These courts have refused to confine advertising to widespread promotional materials and have instead suggested that advertising also could include one-on-one solicitation. In John Deere Insur Co. vs. Shamrock Industries, Inc., for example, the court said, "While activity directed at one customer seems to stretch the meaning of advertising, Black's Law Dictionary's definition of 'advertise' encompasses any form of solicitation, presumably including solicitation of one person."

The Teletronics Case

Recently, albeit in a different context, Judge Sidney Thomas of the U.S. Court of Appeals for the 9th Circuit wrote eloquently in AT&T Corp. vs. City of Portland concerning the law's ability (or rather lack thereof) to keep pace with the explosive growth of the Internet:

"The history of the Internet is a chronicle of innovation by improvisation, from its genesis as a national defense research network, to a medium of academic exchange, to a hacker cyber-subculture, to the commercial engine for the so-called 'New Economy.' Like Heraclitus at the river, we address the Internet aware that courts are ill-suited to fix its flow; instead, we draw our bearings from the legal landscape, and chart a course by the law's words." Heraclitus, a pre-Socratic Greek philosopher, is attributed with saying that "No man ever steps in the same river twice, for it's not the same river and he's not the same man." Heraclitus believed that everything is in flux and that an explanation of change is foundational to any theory of nature.

In relation to the span of our collective jurisprudence, the Internet has been around for less than a blink of an eye. It is natural that lawmakers, judges and lawyers will struggle for some time to apply ancient legal theories to the uncharted terrain of cyberspace. In the world of insurance coverage, however, the 4th Circuit recently offered a tentative guidepost in Teletronics Int'l vs. CNA Insur. Co.

The Teletronics case appears to be the first of its kind to address the intriguing question of whether posting arguably non-promotional information on a Web site is advertising for purposes of insurance coverage. This case is worthy of note because it doesn't deal with the traditional kinds of advertisements on the Internet, such as a Web site highlighting the benefits or advantages of a particular product or service, pop-ups, unsolicited spam e-mails or banners, all of which would likely constitute advertising as that term has been defined by the majority of courts around the country.

Rather, Teletronics deals with the posting of arguably non-promotional information of the kind that might be found on the Web site of any Fortune 500 corporation or major law firm. The universe of information potentially impacted by this decision is immense, because many businesses view their Web site as not only a means to advertise their products, but also as way to invite attention to current events, provide helpful information to the community, update their stockholders, and so on. Given the inconceivably massive amounts of information posted on the Internet, Teletronics will no doubt stir heated debate in insurance circles.

The facts of Teletronics are straightforward. Teletronics, a manufacturer of high-tech wireless communications products, approached a competitor, Young Design, about a possible private labeling arrangement. Under the proposed agreement, Teletronics would purchase Young's wireless amplifiers and resell them under its own name, bundled together with other Teletronics products. In evaluating whether to enter into this agreement, Teletronics purchased several amplifiers from Young. Additionally, Young provided Teletronics with an electronic, editable copy of a user and installation manual for its amplifier in order to facilitate the private label sales.

Young later alleged that Teletronics was producing knock-off versions of its amplifier and that Teletronics was distributing a user manual that was nearly identical to Young's copyrighted manual. While maintaining that it had designed its own amplifier, Teletronics admitted that its manual included portions copied directly from Young's installation manual. Importantly, at least for purposes of the ensuing coverage dispute, Teletronics posted a copy of the manual on its Web site. Young filed suit against Teletronics claiming, inter alia, copyright infringement and misappropriation of trade secrets.

Advertising and the Internet

Teletronics tendered the Young suit to its insurer, Transportation Insurance, under its commercial general liability policy in effect from 1999 to 2000. The policy contained an advertising injury provision whereby Transportation agreed to defend and indemnify Teletronics against third-party claims for damages caused by Teletronics "in the course of advertising [its] goods, products or services." Transportation denied coverage on the grounds that the injury caused by Teletronics did not occur "in the course of advertising." Teletronics initiated a breach of contract action against Transportation in Maryland state court that was later removed to the U.S. District Court for the District of Maryland.

The District Court ruled in favor of Transportation on the issue of whether the injury occurred "in the course of advertising." (Teletronics Int'l, Inc. vs. CNA Insur. Co./Transportation Insur. Co.) Specifically, the court ruled that posting the installation manual on a Web site did not make it advertising as that term is generally understood. The court reasoned as follows:

"The manual was not prominently displayed on the Web site ... and its mere presence on the Web site is not sufficient to convert it into 'advertising.' To find otherwise would require this Court to term 'advertising' anything that is posted on a company's Web site. While advertising and promoting a product may be one of a Web site's purposes, Web sites also provide useful information to current customers."

The court relied, at least in part, on a 1st Circuit decision (EKCO Group, Inc. vs. The Travelers Indem. Co. of Illinois), where the court cautioned against an overly broad definition of advertising that would invite "outlandish results" and would make the task of calculating risks and arriving at premiums an exercise in sheer speculation.

In an unpublished opinion, the 4th Circuit reversed the District Court and agreed with Teletronics that the posting of the installation manual was advertising under the policy. After examining a number of cases defining advertising, the court found it "unnecessary" to speculate whether Maryland would follow the majority view (the widespread distribution of promotional material to the public at large) or the minority view (advertising broadly encompasses personal or one-on-one solicitation). According to the court, tinder either view, the posting constituted advertising.

Unfortunately, the 4th Circuit offered little analysis to support its conclusion that the posting of the installation manual was advertising. With respect to the minority view on the definition of advertising, the court held that Teletronics engaged in personal solicitation because, after receiving inquiries from potential customers, it referred these individuals to the manual on its Web site. As for the majority view, the court's decision is somewhat conclusory.

While noting that the manual contained some promotional information, the promotional nature of the manual is dubious. According to the court, the manual promoted the sale of Teletronics' amplifiers because it contained information concerning "... the product's basic specifications, advantages over other types of wireless amplifiers, compatibility with other kinds of technology, as well as installation and warranty information." At least with respect to the product specifications and information on compatibility, installation and warranty, it is difficult to see how these types of information could be consumed as promotional.

The ramifications of the Teletronics decision aren't clear. In the first place, the decision is unpublished and therefore its value as precedent is arguably limited. Moreover, the court stressed that "... information does not become 'advertising' simply by virtue of its dissemination via the Internet." On the other hand, the Teletronics decision clearly represents an expansive view of advertising which should not prove persuasive to other courts around the country. What remains clear is that the stakes are high given the countless corporate documents posted on the Internet.

Policy Definitions

Interestingly, some tech-savvy insurers have already taken steps to redefine the scope of advertising injury under their policies in response to the uncertainty of what constitutes advertising on the Internet. For example, one major carrier has introduced specific Internet-related coverage provisions into its standard CGL policy with respect to "personal and advertising injury." In this policy, the carrier defines an advertisement as follows:

"'Advertisement' means the widespread public dissemination of information or images that has the purpose of inducing the sale of goods, products or services through: ... The Internet, but only that part of a Web site that is about goods, products or services for the purpose of inducing the sale of goods, products or services."

The policy likewise contains exclusions relating to "personal and advertising injury" dealing specifically with the Internet. For example, the policy excludes personal and advertising injury "Arising out of: (a) an advertisement for others on your Web site; (b) placing a link to a Web site of others on your Web site; or (c) content from a Web site of others displayed within a frame or border on your Web site. Content includes information, code, sounds, text, graphics or images."

The Teletronics case will, by no means, be the final word on advertising coverage and the Internet. If history serves as any guide, other courts will weigh in on this issue and the law will eventually chart its own course. Underwriters and risk managers alike will continue to become more sensitive to advertising-related liabilities arising out of the Internet and protect themselves accordingly.

Key Points

* U.S. courts will struggle to specify what constitutes advertising on the Internet.

* Content on a company's Web site may be construed as advertising.

* Some commercial writers are including specific Internet-related provisions with respect to advertising injury in their general liability policies.

Contributor Ira Bergman is an attorney with Williams & White LLP, Philadelphia.