Unlawful copying and distribution by investment advisory publication of firm’s employees not covered by professional liability policy | Carlton Fields

A The California court recently held that the losses of an investment advisory firm arising from the alleged copying and distribution of Oil Dailyenergy industry publication, the firm’s advisers were not covered by professional liability policies for investment advice that the firm provided.

Energy Intelligence Group Inc. is a publisher of “bulletins and other publications for the highly specialized global energy industry,” including Oil Daily. Energy Intelligence alleges in the underlying complaint that employees of Kayne Anderson Capital Advisors “regularly send Oil Daily to twenty or more individuals in Kayne Anderson’s office, including a majority of Kayne Anderson’s senior executives. A jury in the leading case of Energy Intelligence v. Kayne Anderson found 39 separate copyright violations. After an appeal, the parties eventually settled for $15 million. Kayne Anderson is also said to have incurred about $7.3 million in defense costs in the matter.

Kayne Anderson subsequently sued its primary and additional insurers, seeking indemnity for the settlement and defense. The insurers had denied coverage, saying Kayne Anderson’s conduct giving rise to the claim did not constitute “investment advisory services” as that term is defined in the policies. The Policies define “investment advisory services” as “financial, economic or investment advice or investment management services (including the selection and supervision of investment advisers) provided to others for a fee and pursuant to a written contract.” The policies define “wrongful act” as “any actual or alleged breach of duty, neglect, mistake, misstatement, misleading statement, omission or act.”

Kayne Anderson presented evidence showing that his use of Oil Daily was important to his investment advisory business, including testimony from his managing partner that Oil Daily “was something I reviewed in my investment decision-making process.” The court noted, however, that “the central issue here is whether the copyright infringement alleged in the Underlying Action was an act “in performance or non-performance” of Investment Advisory Services .” The court determined that the wrongful act alleged in the underlying action was not related to the provision of investment advisory services as defined in the policies, but instead was the copying and distribution of copyrighted material without the permission of the copyright owner .

The fact that “a review of industry publications, incl Oil Daily, is necessary and a typical undertaking by … investment staff” did not result in coverage. “If Kane Anderson had purchased a season ticket for Oil Daily for all its investment advisors … no copyright infringement can be alleged.” The “wrongful act” giving rise to the underlying action is the unauthorized copying and distribution of the copyrighted work without using the content of this work in giving investment advice. Since the copyright infringement did not occur in the course of providing investment advice, it is not covered.

The court further stated that under California law, “claims arising out of an insured’s administrative or general business decisions are not covered by professional liability insurance.” Here, the court noted that Kayne Anderson’s liability “arising from a decision not to pay for an instrument important to his profession … not from the performance of providing financial or investment advice, no matter how important the copyrighted work was to the investment advisory services of Kayne Anderson.” As such, copyright infringement “is an administrative action that is part of the management of the business, not an action taken by Kayne Anderson in his professional capacity,” and therefore is not the type of conduct covered by a professional liability policy.

The policies also provide separate general liability insurance coverage for losses incurred by Kayne Anderson in the operation of its business, which may have provided coverage for its losses, but with an exception that expressly applies to claims alleged or arising out of violations of copyright.

Finally, because there was “no potential for coverage” of Kayne Anderson’s claims in this matter, the insurers had no duty to defend Kayne Anderson in the underlying matter. The court therefore granted summary judgment in favor of the insurers.

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