United States District Court, Northern District of California
May 26, 1999
EVERETT ASSOCIATES, INC., A CALIFORNIA CORPORATION, DBA LIVING EARTH CRAFTS, AND DONALD PAYNE, AN INDIVIDUAL, PLAINTIFFS,
TRANSCONTINENTAL INSURANCE COMPANY, A NEW YORK CORPORATION, AND AMERICAN NATIONAL FIRE INSURANCE COMPANY, A NEW YORK CORPORATION, DEFENDANTS.
The opinion of the court was delivered by: Conti, District Judge.
ORDER RE CROSS-MOTIONS FOR SUMMARY JUDGMENT
Plaintiffs Everett Associates, Inc. ("Everett") and Donald
Payne ("Payne") bring the above-captioned action against
Defendant insurance companies Transcontinental Insurance
Company ("Transcontinental") and American National Fire
Insurance Company ("American") for claims resulting from their
alleged unreasonable and bad faith refusals to provide a
defense and indemnity in an underlying patent infringement
The present matter comes before the Court on the
cross-motions of Defendant Transcontinental and Plaintiffs for
The underlying patent case, Clark v. Living Earth Crafts
("the Clark action"), involved a suit by Roland Clark against
Everett Associates, dba Living Earth Crafts, alleging that
Everett advertised, offered to sell, manufactured, and sold
portable massage tables that infringed a patent owned by Clark.
Everett tendered the defense of this action to Defendant
Transcontinental on May 14, 1997. On July 10, 1997, August 22,
1997, and September 9, 1997, Transcontinental denied a duty to
defend or indemnify.
Transcontinental and American are liability insurers for
Plaintiff Everett. Donald Payne ("Payne") is Everett's owner
and Chief Executive Officer. Everett filed this case against
Transcontinental for declaratory relief and damages stemming
from Transcontinental's alleged bad faith and unreasonable
refusal to defend or indemnify the Clark action pursuant to
Transcontinental policy no. 56819374, a General Commercial
Liability policy ("the GCL policy").*fn2
Now before the Court is Defendant Transcontinental's motion
for summary judgment pursuant to Rule 56 of the Federal Rules
of Civil Procedure, seeking a judicial declaration that
Transcontinental did not owe Plaintiffs the duty to defend or
indemnify the Clark action. In response, Plaintiffs move the
Court for summary judgment against Transcontinental to declare
that Transcontinental owed Everett a duty to defend, and
Transcontinental breached that duty. In addition, Plaintiffs
seek attorneys' fees, expenses, and prejudgment interest
incurred in defense of the Clark action.
III. LEGAL STANDARDS
A. Summary Judgment
Summary judgment is proper only when there is no genuine
issue of material fact and, when viewing the evidence in the
light most favorable to the non-moving party, the movant is
clearly entitled to prevail as a matter of law. Fed.R.Civ.P.
56(c); Cleary v. News Corp., 30 F.3d 1255, 1259 (9th Cir.
1994). Once a summary judgment motion is made and properly
supported, the adverse party may not rest on the mere
allegations of his pleadings, but must set forth specific facts
showing that there is a genuine issue for trial. Fed.R.Civ.P.
56(e); Celotex Corp. v. Catrett, 477 U.S. 317, 324, 106 S.Ct.
2548, 91 L.Ed.2d 265 (1986). In addition, to withstand a motion
for summary judgment, the non-moving party must show that there
are "genuine factual issues that properly can be resolved only
by a finder of fact because they may reasonably be in favor of
either party." Anderson v. Liberty Lobby, Inc., 477 U.S. 242,
250, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). If the factual
context makes the non-moving party's claim implausible, that
party must come forward with more persuasive evidence than
would otherwise be necessary to show that there is a genuine
issue for trial. Matsushita Elec. Indus. Co. v. Zenith Radio
Corp., 475 U.S. 574, 587, 106 S.Ct. 1348, 89 L.Ed.2d 538
(1986). Any disagreement about a material issue of fact
precludes the use of summary judgment. California Architectural
Building Products, Inc. v. Franciscan Ceramics, Inc.,
818 F.2d 1466, 1468 (9th Cir. 1987), cert. denied, 484 U.S. 1006, 108
S.Ct. 698, 98 L.Ed.2d 650 (1988).
B. The Duty to Defend
It is well-settled law that an insurer must defend any action
which potentially seeks damages within the coverage of the
policy. Gray v. Zurich Ins. Co., 65 Cal.2d 263, 275,
54 Cal.Rptr. 104, 419 P.2d 168 (1966). The insurer may only be excused
from this duty when the third party complaint "`can by no
conceivable theory raise a single issue which could bring it
within the policy coverage.'" Montrose
Chemical Corp. v. Superior Court, 6 Cal.4th 287, 300,
24 Cal.Rptr.2d 467, 861 P.2d 1153 (1993) (quoting Gray v. Zurich Ins.
Co., 65 Cal.2d at 276, n. 15, 54 Cal.Rptr. 104, 419 P.2d 168)
(italics added by Montrose Court). "To prevail, the insured
must prove the existence of a potential for coverage, while the
insurer must establish the absence of any such potential. In
other words, the insured need only show that the underlying
claim may fall within policy coverage; the insurer must
prove it cannot." Montrose, 6 Cal.4th at 300, 24 Cal.Rptr.2d 467,
861 P.2d 1153 (italics in original).
The determination of whether the duty to defend exists is
made initially by comparing the allegations in the third party
complaint with the terms of the policy, as well as considering
extrinsic facts which reveal a possibility that the claim may
be covered by the policy. Id. at 295, 24 Cal.Rptr.2d 467,
861 P.2d 1153 (citations omitted). For the insurer, the existence
of the duty turns upon all facts known at the inception of the
third party lawsuit. Id. (citations omitted).
While the duty to defend is broad, it is not unlimited. The
nature and kind of risk covered by the policy defines and
limits the duty to defend. Lebas Fashion Imports of USA, Inc.,
v. ITT Hartford Ins. Group, 50 Cal.App.4th 548, 556,
59 Cal.Rptr.2d 36 (1996) (citing Dyer v. North-brook Property &
Casualty Ins. Co., 210 Cal.App.3d 1540, 1547, 259 Cal.Rptr. 298
(1989)). In addition, "a potential for coverage cannot be
based on an unresolved legal dispute concerning policy
interpretation which is ultimately resolved in favor of the
insurer." Id. (citing A-Mark Financial Corp. v. CIGNA Property
& Casualty Cos., 34 Cal.App.4th 1179, 1192, 40 Cal.Rptr.2d 808
A. Whether the General Commercial Liability
Policy Covers Patent Infringement
Transcontinental contends that as a matter of law, the GCL
policy issued to Everett does not cover claims of patent
infringement, and therefore, Transcontinental has no duty to
defend or indemnify. Transcontinental claims that it properly
denied coverage on the following grounds: 1) patent
infringement is not an enumerated advertising activity giving
rise to coverage; 2) there is no causal connection between
Everett's advertising activities and the alleged patent
infringement; and 3) coverage of "offer to sell" patent
infringement is barred by the "as damages" clause of the
(1) Transcontinental's Argument that Patent
Infringement Is Not One of the Enumerated
Categories of Advertising Injury
The Transcontinental GCL policy provides, inter alia,
coverage for advertising injury caused by an offense committed
in the course of advertising the insured's goods, products, or
services. The GCL policy defines the term "advertising injury"
as an injury arising out of one or more of the following
a. Oral or written publication of material that
slanders or libels a person or organization or
disparages a person's or organization's goods,
products, or services;
b. Oral or written publication of material that
violates a person's right of privacy;
c. Misappropriation of advertising ideas or style
of doing business; or
d. Infringement of copyright, title, or slogan.
Transcontinental argues that this language unambiguously does
not cover patent infringement. Plaintiffs disagree, contending
that the duty to defend may arise from ambiguities in either
the clause providing coverage for "misappropriation of
advertising ideas or style of doing business," or "infringement
of copyright, title or slogan."
It is well-settled that ambiguities in policy language must
be construed in favor of the insured, so long as the insured's
offered meaning is not unreasonable. Producers Dairy Delivery
Co., Inc. v. Sentry Ins. Co., 41 Cal.3d 903, 912,
226 Cal.Rptr. 558, 718 P.2d 920 (1986) (citations omitted). "If the
insurer uses language which is uncertain, any reasonable doubt
will be resolved against it; if the doubt relates to the extent
or fact of coverage . . . the language will be understood in
its most inclusive sense, for the benefit of the insured." Holz
Rubber Co., Inc. v. American Star Ins. Co., 14 Cal.3d 45, 56,
59-60, 120 Cal.Rptr. 415, 533 P.2d 1055 (1975).
Whether the policy language can be interpreted to cover
patent infringement claims depends on a two-step analysis.
First, as the policy does not expressly provide for such
coverage, the Court must determine if the language in question
is ambiguous. Second, if the language is ambiguous, the Court
must look to the objectively reasonable expectations of the
insured to determine if the policy could be construed to cover
patent infringement claims.
(a) Whether the Policy Language is
The California Supreme Court set forth the steps for
analyzing claims of ambiguity in insurance policy language in
Bank of the West v. Superior Court, 2 Cal.4th 1254,
10 Cal.Rptr.2d 538
, 833 P.2d 545 (1992):
While insurance contracts have special features,
they are still contracts to which the ordinary
rules of contractual interpretation apply. . . .
If contractual language is clear and explicit, it
governs. . . . On the other hand, "[i]f the terms
of a promise are in any respect ambiguous or
uncertain, it must be interpreted in the sense in
which the promisor believed, at the time of making
it, that the promisee understood it." . . . This
rule, as applied to a promise of coverage in an
insurance policy, protects not the subjective
beliefs of the insurer but, rather, "the
objectively reasonable expectations of the
insured." . . . Only if this rule does not resolve
the ambiguity do we then resolve it against the
insurer. . . .
In summary, a court that is faced with an
argument for coverage based on assertedly
ambiguous policy language must first attempt to
determine whether coverage is consistent with the
insured's objectively reasonable expectations. In
doing so, the court must interpret the language in
context, with regard to its intended function in
the policy. Id. at 1264-65, 10 Cal.Rptr.2d 538,
833 P.2d 545.
Using the Bank of the West criteria, California's Second
District Court of Appeal conducted an extensive and detailed
analysis of one of the precise phrases alleged to be ambiguous
by Plaintiffs — "misappropriation of advertising ideas or
style of doing business"*fn3
— in a similar GCL policy. Lebas
Fashion Imports of USA, Inc. v. ITT Hartford Ins. Group,
50 Cal.App.4th 548
, 59 Cal.Rptr.2d 36
(1996). This Court finds
the Lebas analysis instructive. Although the Lebas Court was
reviewing the misappropriation clause in terms of a claim for
trademark infringement, rather than patent infringement, the
initial determination pursuant to Bank of the West of whether
the language is ambiguous is identical.*fn4
Like patent infringement in the case at hand, trademark
infringement was not specifically enumerated as an "advertising
injury" in the language of the Lebas policy. Therefore the
Court had to determine whether the misappropriation clause was
ambiguous, and could reasonably be construed by the insured to
cover trademark infringement absent express use of the term.
The Lebas Court first noted that, when interpreting a policy,
the court is required to read the disputed terms from the point
of view of a layman, and not as they would be analyzed by an
attorney or an expert on insurance. Lebas, 50 Cal.App.4th at
559, 59 Cal.Rptr.2d 36 (citing Delgado v. Heritage Life Ins.
Co., 157 Cal.App.3d 262, 271, 203 Cal.Rptr. 672 (1984);
Lunsford v. American Guarantee & Liability Ins. Co.,
18 F.3d 653, 655 (9th Cir. 1994); American Star Ins. Co. v. Insurance
Co. of the West, 232 Cal.App.3d 1320, 1330-31, 284 Cal.Rptr. 45
(1991); and Cal-Farm Ins. Co. v. TAC Exterminators,
172 Cal.App.3d 564, 578, 218 Cal.Rptr. 407 (1985)). In
accordance with the California Supreme Court's instructions in
Bank of the West, the Lebas Court applied well-settled
principles of policy construction and concluded that the policy
terms "misappropriation," "advertising idea," and "style of
doing business" are indeed ambiguous.*fn5 Id. at 560,
59 Cal.Rptr.2d 36. In evaluating and applying the ordinary and popular
sense of the words in the context of their use in the policy,
the Lebas Court concluded that two or more reasonable
constructions may be placed on them "without engaging in a
strained interpretation." Id. at 561, 59 Cal.Rptr.2d 36.
Specifically, the Court noted that "it is equally reasonable .
. . to ascribe to the term misappropriation the more general
meaning of `to take wrongfully' as it is to limit it to its
technical common law sense." Id. at 562, 59 Cal.Rptr.2d 36
(citing Dogloo, Inc. v. Northern Ins. Co. of New York,
907 F. Supp. 1383, 1388-89 (C.D.Cal. 1995)). The Court concluded:
Given these multiple reasonable meanings and
connotations which may be given to the . . .
policy language defining one of the advertising
injury offenses, we conclude that an ambiguity
exists. . . . Applying the analytical approach
outlined in Bank of the West, we must next attempt
to resolve that ambiguity by . . . look[ing] to the
objectively reasonable expectations of [the
insured]. We do this by examining the language in
the context of its apparently intended function in
the policy and with due consideration to the
circumstances in this case.
Id. (citing Bank of the West, 2 Cal.4th at 1265,
10 Cal.Rptr.2d 538
, 833 P.2d 545).
This Court agrees with the Lebas Court that the language of
the misappropriation clause is ambiguous and subject to more
than one reasonable interpretation.
Therefore, the Court will now turn to the objectively
reasonable expectations of the insured.
(b) Whether the Ambiguous Language Could
Reasonably Be Construed By the Insured to
Cover Claims for Patent Infringement
In accordance with the Bank of the West case, this Court must
look to the objectively reasonable expectations of the insured
to determine whether the ambiguous policy language could be
construed to cover claims for patent infringement. The
Transcontinental policy expressly provides coverage for
advertising injury claims. The task now before the Court is to
determine if the Clark action could reasonably be construed to
allege an advertising injury.
In a related question, Transcontinental's second argument in
support of its denial of coverage is that there is no causal
connection between Plaintiff Everett's advertising activities
and the alleged patent infringement. This causal connection is
unquestionably required by law. See, e.g., Bank of the West,
2 Cal.4th 1254, 1275-77, 10 Cal.Rptr.2d 538, 833 P.2d 545; see
also section IV.A(1)(c) infra. The determination of whether
this causal connection exists dovetails with the determination
as to whether the Clark action could reasonably be construed to
involve an advertising injury claim. Therefore, the Court will
consider those questions together.
(c) Transcontinental's Argument That There
Is No Causal Connection Between Everett's
Advertising Activities and the Claim of Patent
As noted above, in order to determine that there is potential
policy coverage for a patent infringement claim, there must be
a causal connection between advertising by the insured and the
patent infringement claim. Bank of the West, 2 Cal.4th 1254,
1275-77, 10 Cal.Rptr.2d 538
, 833 P.2d 545. In fact, it is the
absence of this causal connection that has led courts in the
past to determine that a claim for patent infringement is not
directly enough related to the advertising injury provisions in
a GCL policy to invoke the duty to defend. See, e.g., Bank of
the West, 2 Cal.4th 1254, 1275-77, 10 Cal.Rptr.2d 538
833 P.2d 545; Iolab Corp. v. Seaboard Surety Co., 15 F.3d 1500
1506 (9th Cir. 1994); National Union Fire Ins. Co. v.
Siliconix, Inc., 729 F. Supp. 77, 79-80 (N.D.Cal. 1989).
Defendant Transcontinental argues that in the instant case, as
in the cases above, there is an insufficient nexus between
Everett's advertising and the patent infringement claims in the
Clark action to establish a causal connection and invoke the
duty to defend under the policy.
However, the patent infringement landscape has been altered
since the decisions cited by Transcontinental. In 1994,
Congress amended § 271 of the Patent Act to include, for the
first time, "offers to sell" infringing products:
[W]hoever without authority makes, uses,
offers to sell, or sells any patented invention
within the United States . . . during the time for
the patent therefore, infringes the patent.
35 U.S.C. § 271 (emphasis added). This amendment took effect on
January 1, 1996. It was effective at the time Everett allegedly
infringed Clark's patent and during the Transcontinental policy
In fact, language from the new amendment was used in the
complaint against Everett in the Clark action. The Clark
complaint alleged, inter alia,
Defendant [Everett] has advertised infringing
products throughout the United States . . . and has
offered to sell and has sold products infringing
[Clark's patent] in the Central District of
Complaint for Infringement of U.S. Letters Patent Number 5,009,
170, ¶ 2 (emphasis added).
Plaintiffs argue that the addition of the "offers to sell"
language in § 271,
along with claims against Everett in the Clark action based
upon Everett's advertising of the allegedly infringing
products, create a sufficient causal connection between the
patent infringement and the advertising injury to invoke
Defendant Transcontinental's duty to defend. In addition, the
"offers to sell" language creates an objectively reasonable
expectation on the part of the insured that the insured could
be prosecuted for advertising injury in a claim for patent
Transcontinental hotly disputes these contentions. However,
for two reasons, this Court must agree with Plaintiffs. First,
the cases cited by Transcontinental which determine there is no
duty to defend patent infringement claims indicate that the
very reason those courts found no duty was because the Patent
Act did not, at that time, include the "offer to sell"
provision that it now contains. Second, the court in the
underlying Clark action, based upon the new language in the
Patent Act, entertained the plaintiff's claims for patent
infringement based on Everett's advertising activity. This
alone is enough to demonstrate the required causal connection
between Everett's advertising activities and the patent
infringement claim. In addition, it indicates that the insured
could have an objectively reasonable expectation that it could
be prosecuted for advertising injury in a claim for patent
(i) The prior cases which deny a duty to defend patent
infringement claims indicate that the inclusion of
the "offer to sell" language in the Patent Act
could create the required causal connection
between the patent infringement claim and the
Apparently no binding, or even persuasive, case law yet
exists that interprets whether the inclusion of the "offer to
sell" language in the Patent Act can create the required causal
connection and invoke the duty to defend in a GCL policy.*fn6
However, close readings of the cases prior to the statutory
amendment point strongly to the idea that the inclusion of this
language is precisely what would make it possible.
For example, the Bank of the West Court reasoned that patent
infringement was not an advertising injury for purposes of a
GCL policy because:
[A] claim for patent infringement does not
"occur in the course of . . . advertising
activities" within the meaning of the policy even
though the insured advertises the infringement
product, if the claim of infringement is based on
the sale or importation of the product rather than
Bank of the West, 2 Cal.4th at 1275, 10 Cal.Rptr.2d 538
833 P.2d 545 (citations omitted) (emphasis added). In the case at
hand, however, by virtue of the amendment to the Patent Act,
the claim is based, at least in part, on the advertisement of
the patented product.
Two years later, the Ninth Circuit applied the Bank of the
West causal connection requirement in determining whether a
claim for patent infringement was covered as "piracy" under the
advertising injury provisions of a GCL policy. Iolab Corp. v.
Seaboard Sur. Co., 15 F.3d 1500 (9th Cir. 1994). The Iolab
Court found that
Patent infringement cannot constitute an
advertising injury because, under 35 U.S.C. § 271,
a patent is infringed by making, using or selling a
patented invention, not by advertising it.
Had [the insured] merely advertised the [patented
invention] but not sold the
product, [the patentee] could not have accused
[the insured] of infringing his patent. Since [the
insured's] advertising of the [invention] was not
an element of the . . . claim, [the insured] could
not reasonably have expected insurance coverage for
Id. at 1506 (citations omitted, emphasis added). In the instant
case, in contrast, the insured was accused of patent
infringement by advertisement, and his advertising of the
allegedly infringing products was an element of the claim.
The Ninth Circuit went on to note that: [T]he
California Supreme Court appears to leave open the
possibility that in some cases, a patent
infringement claim may be "based on . . . the
advertisement." Bank of the West at 1275,
10 Cal.Rptr.2d 538, 833 P.2d 545.
Iolab at 1507.
The Ninth Circuit adopted this reasoning again in its
decision in Simply Fresh Fruit, Inc. v. Continental Ins. Co.,
94 F.3d 1219 (9th Cir. 1996) cert. denied, 519 U.S. 965, 117
S.Ct. 388, 136 L.Ed.2d 304 (1996). In refusing to recognize a
duty to defend in a patent infringement case, the Simply Fresh
Court noted that the patent infringement claims before it were
based on use of the patented device alone, not on its
advertisement. Id. at 1222-23. The Court expounded, "under the
policy, the advertising activities must cause the injury — not
merely expose it. . . ." Id.
In the Clark case, however, it was the advertising itself
that was alleged to have caused injury, at least in part. Thus,
these cases indicate that the adoption of the "offer to sell"
language in the Patent Act, which may permit claims of patent
infringement based on advertising alone, could create the
required causal connection permit coverage of patent
infringement claims under a GCL policy.*fn7
(ii) The Clark Court found that
the new "offer to sell" language in the Patent Act
made advertising of the patented product a
separate act of infringement.
Prior to the scheduled trial in the Clark action, counsel for
Everett brought a Motion in Limine seeking, inter alia, to
preclude Clark from introducing evidence or argument at trial
concerning whether Clark could seek to recover corrective
advertising damages based on Everett's allegedly infringing
advertising. In ruling that evidence on the issue was
admissible, the Clark Court observed the following:
Article 28, Section 271(a) of the United States
Code states, in pertinent part:
Whosoever without authority makes, uses, offers
to sell, or sells any patented invention, within
the United States or imports into the United
States any patented invention during the term of
the patent therefore, infringes the patent.
In 1996, Congress added the phrase "offers to
sell" to the statute thereby making advertising a
patented invention infringement of the patent.
Order Granting in Part and Denying in Part Defendants' Motion
in Limine on Six Issues (emphasis added). The Clark Court went
on to conclude that corrective advertising damages could be
appropriate and recoverable for the patent infringement claim,
and so, the Court would not
exclude evidence relevant to the issue. Therefore, under the
Clark Court's express ruling, Everett could have been held
liable at trial for damages for patent infringement solely by
virtue of its having advertised infringing products. In light
of this, it is difficult to say how Transcontinental could
prove the absence of any potential for advertising injury
See, e.g., Montrose, 6 Cal.4th at 300,
24 Cal.Rptr.2d 467, 861 P.2d 1153.
Based upon the above, the Court concludes that 1) there is
clearly a causal connection between Everett's advertising
activities and the patent infringement claim; and 2) Plaintiff
had an objectively reasonable expectation that the GCL policy
would cover patent infringement claims for advertising a
patented product. Therefore, the Court holds that the
advertising injury provisions in the GCL policy could
reasonably be construed to cover claims for patent
infringement.*fn9 Transcontinental thus breached its duty in
refusing to defend Everett in the Clark action.
B. The "First Publication" Exclusion
(1) Duty to Defend
The Transcontinental Policy provides, inter alia,
This insurance does not apply to . . .
`advertising injury' (2) arising out of oral or
written publication of material whose first
publication took place before the beginning of the
(Emphasis added). Transcontinental argues that, because Everett
first began to advertise a massage table featuring the patented
design in 1992 (prior to the beginning of the policy period),
this exclusion applies, and Transcontinental therefore had no
duty to defend or indemnify.
Transcontinental, however, relies solely upon information it
obtained through the course of discovery in this action to
support its application of the "first publication"
exclusion.*fn10 Prior to its denial of coverage,
Transcontinental had apparently conducted no investigation as
to when Everett commenced its advertising activities, and
indeed, does not claim to have had any knowledge of the
potential applicability of the "first publication" exclusion at
the time the defense was tendered.
Transcontinental is conflating the question of whether it
owed Everett a duty to defend with the question of whether it
owes Everett a duty to indemnify. The California Supreme Court
has noted, "`[f]or an insurer, the existence of a duty to
defend turns not upon the ultimate adjudication of coverage
under its policy of insurance, but upon those facts known by
the insurer at the inception of a third party lawsuit. . . .
Hence, the duty may exist even where coverage is in doubt and
ultimately does not develop.'" Montrose, 6 Cal.4th at 295,
24 Cal.Rptr.2d 467, 861 P.2d 1153 (quoting Saylin v. California
Ins. Guarantee Assn., 179 Cal.App.3d 256, 263, 224 Cal.Rptr. 493
(1986)) (emphasis added).
This Court finds the holding of California's First District
Court of Appeal in CNA Casualty of California v. Seaboard
Surety Co., 176 Cal.App.3d 598, 605, 222
885 Cal.Rptr. 276 (1986) instructive in this matter:
The duty to defend is much broader than the duty
to indemnify. An insurer's duty to defend must be
analyzed and determined on the basis of any
potential liability arising from facts available
to the insurer from the complaint or other sources
available to it at the time of the tender of
defense. If the insurer is obliged to take up the
defense of its insured, it must do so as soon as
possible, both to protect the interests of the
insured, and to limit its own exposure to loss.
Unlike the duty to indemnify, which is only
determined after liability is finally established,
the duty to defend must be assessed at the outset
of the case. Thus, we are not dealing with the
question of whether the insurers were actually
liable to indemnify [the insured] for the wrongs
alleged in the [underlying] lawsuit, but rather
with their duty to defend [the insured] against
[the] claims as of the time that lawsuit was filed.
This distinction is critical.
CNA Casualty of California v. Seaboard Surety Co., 176 Cal.App. 3
d at 605, 222 Cal.Rptr. 276 (citations omitted, emphasis
Thus, while the first publication doctrine may apply to the
question of whether Transcontinental must indemnify Everett in
the patent action, it does not excuse Transcontinental for its
failure to defend.
(2) Duty to Indemnify
Transcontinental may, of course, rely on information
discovered during the course of the present action in
determining whether it must indemnify Everett in the underlying
action. As noted above, Transcontinental points to uncontested
testimony and documentary evidence showing that Everett first
advertised allegedly infringing massage tables prior to the
beginning of the policy period. Thus, Transcontinental
contends, it has no duty to indemnify Everett in the underlying
patent infringement case.
During the course of its advertising, Everett published many
different advertisements in different publications for
different models of massage tables. Transcontinental's argument
is only meritorious with regard to those particular
advertisements which were first published prior to commencement
of the policy period. Under the Patent Act, Plaintiff could be
charged with patent infringement for each infringing "offer to
sell." Therefore, each advertisement should be considered
separately. Those advertisements which were first published
prior to the commencement of the policy period would be
excluded from coverage under the policy, while those which were
first published after commencement of the policy period may be
covered. Precisely which advertisements fall under which
category is, of course, a question of fact not appropriate for
the Court to decide in this summary judgment motion.
C. "Willful Act" Exclusion
(1) Duty to Defend
California Insurance Code § 533 provides in pertinent part:
"An insurer is not liable for a loss caused by the willful act
of the insured . . ." Defendant Transcontinental argues that
Everett's patent violation in the Clark case was willful, and
therefore, Transcontinental has no duty to defend or indemnify.
However, at the time Everett tendered the defense of the Clark
action to Transcontinental, Transcontinental had no knowledge
regarding the willfulness of Everett's infringement. Therefore,
for the same reasons noted above, Transcontinental is not
excused from the duty to defend by California Insurance Code §
(2) Duty to Indemnify
It is true, however, that in accordance with California
Insurance Code § 533, Transcontinental cannot be held liable
for coverage for actions by Everett that were willful and
intentional. See, e.g.,
Aetna Casualty & Surety Co. v. Superior Court, 19 Cal.App.4th 320,
325, 23 Cal.Rptr.2d 442 (1993). In the underlying action,
the Clark court held that there was undisputed evidence that
Everett's infringement was willful, and granted partial summary
judgment to Plaintiff Clark on that issue. See Order Granting
Plaintiff's Motion for Partial Summary Judgment, July 20, 1998.
Transcontinental argues that the doctrine of collateral
estoppel precludes Everett from now claiming that its
infringement was not willful. Collateral estoppel prevents the
re-litigation of issues which were actually litigated and were
essential to the judgment in the first action. Trujillo v.
County of Santa Clara, 775 F.2d 1359 (9th Cir. 1985). Because
the issue of Everett's willfulness was litigated in the Clark
action, and was essential to the judgment, Transcontinental
argues that this Court should find as a matter of law that
Transcontinental had no duty to indemnify.
However, Transcontinental fails to "recognize the clear line
of authority in this state to the effect that even an act which
is `intentional' or `willful' within the meaning of traditional
tort principles will not exonerate the insurer from liability
under Insurance Code section 533 unless it is done with a
`preconceived design to inflict injury.'" Clemmer v. Hartford
Ins., Co., 22 Cal.3d 865, 887, 151 Cal.Rptr. 285,
587 P.2d 1098 (1978) (citing Walters v. American Ins. Co.,
185 Cal.App.2d 776, 783, 8 Cal.Rptr. 665 (1960); Meyer v. Pacific
Employers Ins. Co., 233 Cal.App.2d 321, 327, 43 Cal.Rptr. 542
(1965); Gray v. Zurich Insurance Co., 65 Cal.2d 263, 273-274,
n. 12, 54 Cal.Rptr. 104, 419 P.2d 168 (1966) and cases there
cited). A "willful act" for purposes of section 533 is an act
committed with a preconceived design to injure, an inherently
harmful act, or an act deliberately done for the express
purpose of causing damage or intentionally performed with
knowledge that damage is highly probable or substantially
certain to result. Id. It is "`an act done with malevolence' or
with `malice in fact.'" Zurich Ins. Co. v. Killer Music,
Inc., 998 F.2d 674, 678 (9th Cir. 1993) (quoting Capachi v.
Glens Falls Ins. Co., 30 Cal.Rptr. 323, 215 Cal.App.2d Supp.
843, 849 (1963) and City Products Corp. v. Globe Indemnity Co.,
88 Cal.App.3d 31, 36 n. 3, 151 Cal.Rptr. 494 (1979)). It
"`appears to be something more than the intentional violation
of a statute.'" Id. (quoting B & E Convalescent Center v. State
Compensation Ins. Fund, 8 Cal.App.4th 78, 94, 9 Cal.Rptr.2d 894
In contrast, the standard for "willful" patent infringement
is much lower. The Clark court noted that "`[t]he test [for
establishing willful infringement] is whether, under all the
circumstances, a reasonable person would prudently conduct
himself with any confidence that a court might hold the patent
invalid or not infringed.'" Order Granting Plaintiff's Motion
for Partial Summary Judgment (brackets in original) (citing
Ryco, Inc. v. Ag-Bag Corp., 857 F.2d 1418 (Fed. Cir. 1988)).
The Clark Court based its finding of willful infringement on
the fact that, after Everett received notice of the existence
of Clark's patent, Everett failed to seek advice of legal
counsel regarding potential infringement. The Federal Circuit
has noted that the duty to seek advice of counsel is an
affirmative duty placed upon a potential infringer once he or
she has actual notice of the existing patent. Avia Group
Intern., Inc. v. L.A. Gear California, Inc., 853 F.2d 1557,
1566 (Fed. Cir. 1988). Thus, mere negligence or recklessness in
failing to seek advice of counsel could constitute a finding of
"willful" patent infringement; however, this would not meet the
standard for "willful" conduct under § 533. See Shell Oil Co.
v. Winterthur Swiss Ins. Co., 12 Cal.App.4th 715, 740,
15 Cal.Rptr.2d 815 (1993).
Everett's failure to exercise his affirmative duty under the
Patent Act does not necessarily constitute a "willful" act
Insurance Code § 533. They are entirely different standards.
Moreover, the Clark Court's ruling of willful infringement
applied to some, but not all of the massage tables that were
accused of infringement. Therefore, this Court cannot find as a
matter of law that Transcontinental had no duty to indemnify
Plaintiffs in the Clark action under California Insurance Code
D. "Purely Legal" Question
Transcontinental argues that it had no duty to defend, since
the question of coverage involved a purely legal issue of
interpreting the amendment to the Patent Act, 35 U.S.C. § 271(a),
redefining "infringement" to include "offers to sell."
According to Transcontinental, if the question of coverage
hinges on a purely legal question, the insurer is excused from
the duty to defend, "unless and until" a court rules that the
duty exists. However, Transcontinental mischaracterizes the
case law in this area. In reality, the cases hold that "a
potential for coverage cannot be based on an unresolved legal
dispute concerning policy interpretation which is ultimately
resolved in favor of the insurer." Lebas Fashion Imports of
USA, Inc. v. ITT Hartford Ins. Group, 50 Cal.App.4th 548, 556,
59 Cal.Rptr.2d 36 (1996) (citing A-Mark Financial Corp. v.
CIGNA Property & Casualty Cos., 34 Cal.App.4th 1179, 1192,
40 Cal.Rptr.2d 808 (1995)). In other words, if the Court finds,
based on a formerly unresolved legal issue, that no coverage
exists under the policy, the insured cannot argue that a duty
to defend is nevertheless owed.
This is not the case here. This Court has found that, under
the amendment to the Patent Act, the potential for coverage
does exist under the policy. Therefore, Transcontinental is not
excused from the duty to defend.
E. Conclusion as to Duties to Defend and
(1) Duty to Indemnify
Based upon the above, there are genuine issues of material
fact as to whether Transcontinental breached its duty to
indemnify Everett in the underlying Clark action. Therefore the
Court will not grant Transcontinental's motion for summary
judgment on that issue.
(2) Duty to Defend
This Court does find as a matter of law that Transcontinental
breached its duty to defend Everett. In anticipation of this
finding, Everett has moved this Court for damages, including
attorneys' fees, costs, and prejudgment interest incurred in
defense of the Clark action. In response, Transcontinental has
requested that this Court either deny or continue Everett's
counter motion for summary adjudication on the issue of the
amount of damages, as premature.
(a) Rule 56(f) of the Federal Rules of Civil
Under Rule 56(f) of the Federal Rules of Civil Procedure, if
it appears that a party opposing a summary judgment motion
cannot present facts essential to the opposition of such
motion, the Court may deny the motion or order a continuance.
"[D]enial of a Rule 56(f) application is generally disfavored
where the party opposing summary judgment makes a) a timely
application which b) specifically identifies c) relevant
information, d) where there is some basis for believing that
the information sought actually exists. Summary denial is
especially inappropriate where the material
sought is also the subject of outstanding discovery requests."
VISA Intern. Service v. Bankcard Holders, 784 F.2d 1472
(9th Cir. 1986).
Transcontinental has made an adequate showing that discovery
disputes regarding documents relevant to this issue hampered
its efforts to ascertain the reasonableness of Everett's
damages claims. This Court will therefore deny this portion of
Plaintiffs' motion. Plaintiffs have leave to refile this
motion, once all outstanding discovery disputes regarding this
issue are resolved.
F. Plaintiffs' Claims for Breach of
Contract. Bad Faith, Negligence, Intentional
Infliction of Emotional Distress, and
Negligent Infliction of Emotional
Transcontinental points out that, if there is no duty to
defend and no potential for indemnity, Plaintiffs cannot
maintain claims for breach of contract, bad faith, negligence,
intentional infliction of emotional distress, and negligent
infliction of emotional distress. However, this Court has held
that Transcontinental did have a duty to defend. Therefore,
these claims will stand.
In accordance with the above, the Court ORDERS the following:
1) Defendant Transcontinental's Motion for Summary Judgment for
the Court to declare as a matter of law that Transcontinental
did not owe Everett a duty to defend or indemnify in the
underlying action of Clark v. Living Earth Crafts under
Transcontinental policy No. 56819374 is hereby DENIED;
2) Plaintiffs' Motion for Summary Adjudication of
Transcontinental's duty to defend and breach of duty to defend
is GRANTED insofar as the Court finds that Transcontinental did
have a duty to defend and did breach that duty;
3) Plaintiffs' Motion for Summary Adjudication of
Transcontinental's duty to defend and breach of duty to defend
is DENIED AT THIS TIME as to amount of damages, including
attorney's fees, costs of defense, and prejudgment interest
claimed; however, Plaintiffs have leave to refile this motion
following resolution of discovery disputes regarding this
4) A status conference is scheduled in this case for JULY 9,
1999, at 10:00 A.M., in COURTROOM 1. Parties are to file a
JOINT status conference statement with the Court ten days prior
to that date.
IT IS SO ORDERED.