NJ Flea Market Owners Entitled to Insurance Defense Against RIAA CD Piracy Claims
Judge Simandle of the New Jersey federal court has ruled that the providers of “advertising injury” insurance to the owners of the Columbus Farmers Market in Burlington County, NJ, one of the largest flea markets on the east coast, must defend the insureds in a counterfeiting suit brought against them by Arista Records and other members of the RIAA. The flea market owners face potentially millions of dollars in damages for contributory copyright infringement and vicarious liability related to the sale of counterfeit and contraband compact discs by third-party vendors at the market. As of the judge’s December 21, 2006 decision in Columbus Farmers Market, LLC v. Farm Family Casualty Insurance Co., Civil Action No. 05-2087, the flea market owners had incurred more than $1 million in attorney’s fees defending themselves in the lawsuit.
On March 31, 2006, the same court held that the flea market owners were liable for contributory copyright infringement and were vicariously liable for copyright infringement in large part because of their advertising efforts to attract customers to purchase sound recordings, including the counterfeit items, in violation of the Copyright Act. It found that the owners contributorily infringed because they had at least constructive knowledge of the sale of infringing music CDs at the flea market and “materially contributed” to the direct infringement of the copyrights by “provid[ing] extensive advertising for the Market (including maintaining a web site and organizing holiday-themed events) and work[ing] to attract customers to the Market....” In addition, the court found the owners vicariously liable for copyright infringement at the flea market because they had the right and ability to control the flea market and that they obtained a financial benefit because the sale of counterfeit and pirated CDs was a “draw” to the market.
The issue before the court in the insurance case was whether the “advertising injury” provisions in the owners’ insurance policies provide coverage for these contributory and vicarious liability claims. The “advertising injury” provisions in the policies provide that the insurer “will pay those sums that the insured becomes legally obligated to pay as damages because of ... ‘advertising injury’” and that the insurer “will have the right and duty to defend any ‘suit’ seeking those damages.” Although the policies defined the phrase “advertising injury” to include “injury arising out of ... infringement of copyright, title or slogan,” none of them contained a definition of “advertising.” This failure to define "advertising" was central to the dispute at issue in the insurance litigation.
The insurers asserted that the focus of the “advertising injury” analysis should be on whether copyright infringement occurred in an actual advertisement, not on whether a copyright infringement occurred in the underlying sale of a product. They argued that their insurance policies do not provide blanket liability coverage for any copyright infringement, but only cover instances where copyright infringement occurs in the course of advertising. Based on this interpretation of the policies, they asserted that there was no “advertising injury” at issue in the Arista litigation because the RIAA did not allege that the copyright infringement was contained in actual advertisements for the flea market.
The court rejected the carriers' analysis, holding that the issue of “advertising injury” was more complex than they asserted. The court held that the determinative issue is whether the relationship between the advertising activity and the copyright holders’ injury is "causal or incidental," not whether the infringement occurred in an actual advertisement. It concluded that the relationship between the flea market's advertising and the RIAA members’ injury as alleged in the Arista litigation is causal and that the carrier defendants must, therefore, provide a defense to the flea market owners:
In the present case, the RIAA alleged that Plaintiffs are liable for contributory infringement. An essential element of contributory infringement is that Plaintiffs “materially contributed” to direct infringement (the sale of counterfeit and pirated CDs). According to the complaint in the Arista Litigation, Plaintiffs “materially contributed” by, among other things, advertising and promoting the Market. (Pl.'s Br. at Ex. 16, 33) (Plaintiffs “advertis[ed] on their web site the availability of sound recordings on the premises”). Moreover, in this Court's March 31, 2006 Opinion and Order in the Arista Litigation, the Court held that the Corporate Plaintiffs materially contributed to copyright infringement by, in part, “provid[ing] extensive advertising for the Market (including maintaining a web site and organizing holiday-themed events) and work[ing] to attract customers to the Market....” Id. at *52. Because the RIAA specifically claims that Plaintiffs contributed to infringement by advertising, Plaintiffs have shown the requisite causal link between the advertising activity and the offense (copyright infringement).