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EVERETT ASSOC. v. TRANSCONTINENTAL INS.

May 26, 1999

EVERETT ASSOCIATES, INC., A CALIFORNIA CORPORATION, DBA LIVING EARTH CRAFTS, AND DONALD PAYNE, AN INDIVIDUAL, PLAINTIFFS,
v.
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

I. INTRODUCTION

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 lawsuit.

The present matter comes before the Court on the cross-motions of Defendant Transcontinental and Plaintiffs for summary judgment.*fn1

II. BACKGROUND

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
 (1995)).

IV. DISCUSSION

  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 policy.

  (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 offenses:

  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
                Ambiguous

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 ...

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