Court: Zurich not liable for agents accused of misappropriating trade info

A software company’s attempt to recoup its losses from an insurance company due to trade secret theft has been rebuffed by an appeals court that ruled the policy covered negligent acts but not intentional ones.

The complicated case involves Compulife Software Inc.,  a Kentucky-based firm whose software generates life insurance quotes using a proprietary database of insurance rates. The company sells customers access to the database to create cost estimates based on premium comparisons.

Although the raw data is publicly available, Compulife uses a proprietary formula to aggregate the data and sell it in various formats: a license that allows users to install a “quoter” on their personal computers, and a more expensive version that can integrate the database into a company’s own computer system. The company also offers a free service on its website for individual quotes.

Compulife accused a competitor of using false representations to obtain and copy some of its proprietary code for revenue-generating services and hiring a hacker to develop a bot to “scrape” data from Compulife’s free platform in order to replicate its database. Although the hacker’s bot accessed information available to anyone, Compulife said it gathered more than 43 million quotes in just four days, which would have taken a person thousands of hours to accomplish.

A magistrate judge, however, ruled that the defendants had not misappropriated Compulife's trade secrets since the information was public and not entitled to copyright protection. That decision was overturned by the Eleventh Circuit Court of Appeals, which found that while individual quotes were not entitled to protection, Compulife’s database as a whole could be considered proprietary.

The case then hinged on whether the defendants had acquired the trade secrets through improper means. The hacker did not steal any passwords or directly access source code. Rather, a computer program was used to gather database information in a way that a human could not.

While the court said “independent invention, accidental disclosure, or reverse engineering" would not constitute improper means, the use of technology that surpasses human capabilities could indicate the defendants knowingly and improperly acquired the database.

No negligence

In an effort to recover damages, Compulife sought to garnish the defendant’s liability insurance policy with Zurich American Insurance Co. The court though found that Zurich’s policy only covered negligent acts, while the defendants were liable for intentional wrongdoing.

Since Compulife had argued that the competitor defendants had acted willfully, maliciously, and intentionally in its theft of trade secrets, it could not turn around and then claim negligence in order to obtain an insurance settlement.

The court determined that Compulife was “judicially estopped” from arguing that the defendant’s actions were negligent. This legal doctrine prevents parties from contradicting previous positions to gain an advantage.

“Only by advancing inconsistent positions can Compulife have its cake and eat it too—holding [defendants] liable for an intentional tort and collecting on their negligence-only liability policy.” The court ruled. “This unfairness is the very consequence that the doctrine of judicial estoppel seeks to avoid.”

The court's decision emphasizes the importance of understanding the specific terms of an insurance policy. While insurance can provide a financial safety net in many cases, it may not cover intentional acts of wrongdoing.

Doug Bailey is a journalist and freelance writer who lives outside of Boston. He can be reached at doug.bailey@innfeedback.com.