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KLA-TENCOR CORP. v. TRAVELERS INDEMNITY CO. OF ILLINOIS

United States District Court, Northern District of California, San Jose Division


April 11, 2003

KLA-TENCOR CORPORATION, A DELAWARE CORPORATION, PLAINTIFF,
v.
TRAVELERS INDEMNITY COMPANY OF ILLINOIS, AN ILLINOIS CORPORATION, DEFENDANT.

The opinion of the court was delivered by: Ronald M. Whyte, District Judge

ORDER GRANTING PLAINTIFF'S MOTION FOR PARTIAL SUMMARY JUDGMENT [Re Docket Nos. 25, 35]
On March 7, 2003, plaintiff KLA-Tencor Corporation ("KLA-Tencor") filed the instant motion seeking partial summary judgment against defendant Travelers indemnity Company of Illinois ("Travelers"). Travelers filed a timely opposition on March 21, 2003*fn1 and plaintiff has replied. Argument on the motion was heard on April 11, 2003. For the reasons set forth below, the court grants plaintiffs motion.

I. BACKGROUND

This case involves causes of action related to general commercial liability policies issued by Travelers to KLA-Tencor. Plaintiffs instant motion seeks an order declaring that Travelers owed a duty to defend plaintiff in the second of two lawsuits between it and a third party, Therma-Wave, Inc. ("Therma-Wave"). The majority of relevant facts are not in dispute. A recitation of those facts follows.

A. The Therma-Wave Litigation

1. The First Therma-Wave Action

On September 3, 1998, plaintiff filed a patent infringement lawsuit against Therma-Wave in this judicial district ("Therma-Wave I"). See Johnston Decl., Ex. A. (complaint in KLA-Tencor Corp. v. Therma-Wave, Inc., Case No. C 98-03391 CAL); Khachatourian Decl. ¶ 2. In the Therma-Wave I, plaintiff alleged that Therma-Wave infringed its United States Patent Number 7,899,055 ("the `055 patent"). See id. On October 26, 1998, Therma-Wave filed an answer and counterclaims seeking a declaratory judgment that the `055 patent was invalid or not infringed and also alleging that plaintiff infringed on Therma-Wave's United States Patent Number 5,596,406. See Johnston Decl., Ex. B; Khachatourian Decl. ¶ 3.

2. The Second Therma-Wave Action

On July 22, 1999, plaintiff filed a second lawsuit against Therma-Wave, again in this judicial district ("Therma-Wave II"). See Johnston Decl., Ex. C (complaint in KLA-Tencor Corp. v. Therma-Wave, Inc., Case No. C 99-03564 JL); Khachatourian Decl. ¶ 4. In Therma-Wave II, plaintiff alleged that Therma-Wave infringed its United States Patent Number 5,910,842 ("the `842 patent"). See id. On October 25, 1999, Therma-Wave filed an answer and counterclaims. Therma-Wave's counterclaims included the following: (1) declaratory judgment that the `842 patent was invalid, unenforceable, and not infringed; (2) infringement of Therma-Wave's United States Patent Number 5,798,837; (3) infringement of Therma-Wave's United States Patent Number 5,900,939; (4) violation of Section 43(a) of the Lanham Act; (5) intentional interference with prospective economic advantage; (6) negligent interference with prospective economic advantage; (7) intentional interference with contractual relations; and (8) statutory unfair competition. See Johnston Decl., Ex. D; Khachatourian Decl. ¶ 5. Each of Therma-Wave's fourth through eighth causes of action rely in part on the following factual allegations:

28. Therma-Wave is informed and believes, and on that basis alleges, that KLA-Tencor has engaged in a campaign to disparage Therma-Wave and to damage improperly Therma-Wave's efforts to raise capital and to compete legitimately by the following:
(a) Making disparaging and untrue statements to actual and prospective customers of Therma-Wave about Therma-Wave's financial condition and future viability;
(b) Making disparaging and untrue statements to actual and prospective customers of Therma-Wave that Therma-Wave would not be able to sell or ship its Opti-Probe products due to KLA-Tencor's lawsuit alleging that Therma-Wave infringes the `055 Patent;
(c) Making disparaging and untrue statements to market analysts about Therma-Wave's financial condition and future viability; and
(d) Making disparaging and untrue statements to market analysts that Therma-Wave had lost large orders.
Id.

Apparently, both Therma-Wave I and Therma-Wave II ultimately settled. Complaint ¶ 20.

B. The Travelers Policies

Defendant Travelers issued two insurance policies to KLA-Tencor: (1) policy no. YJ-EMC-109D3609-TIL-97 for the period of April 30, 1997 to April 30, 1998; and (2) policy no. Y-660-109D3609-TIL-98 for the period of April 30, 1998 to April 30, 1999. Both policies provide general commercial liability coverage and contain the following insuring agreement: "We will pay those sums that the insured becomes legally obligated to pay as damages because of "personal injury' or "advertising injury' to which this insurance applies. We will have the right and duty to defend any `suit' seeking those damages." Johnston Exs. E, G. Both policies define "advertising injury" to include "injury arising out of . . . [o]ral or written publication of material that slanders or libels a person or organization or disparages a persons or organization's goods, products or services." Id. Both policies define "personal injury" to include "injury, other than `bodily injury,' arising out of . . . [o]ral 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." Id.

Although the two Travelers policies share the above similarities, they differ in one important respect. While apparently absent for the policy spanning 1997-98, plaintiffs 1998-99 Travelers policy contained the following exclusionary provision (the "Intellectual Property Exclusion"):

This insurance does not apply to "bodily injury," "property damage," personal injury" or "advertising injury' arising out of or directly or indirectly related to the actual or alleged publication or utterances of oral or written statements, whether made in advertising or otherwise, which is claimed as an infringement, violation or defense of any of the following rights or laws:
1. Copyright, other than infringement of copyrighted advertising materials;
2. Patent;

3. "Trade dress";

4. Trade secrets; or

5. Trademark or service mark or certification mark or collective mark or trade name, other than trademarked or service marked titles or slogans.
"Trade dress" is the total appearance and image of a product, including features such as size, texture, shape, color or color combinations, graphics and particular advertising and/or marketing techniques used to promote its sale.
Johnston Decl., Ex. G; see also id., Ex. M. (letter from Travelers quoting from the Intellectual Property Exclusion). This Intellectual Property Exclusion is central to plaintiffs instant motion for partial summary judgment.

C. Tender of Defense and Travelers' Refusal to Defend

Plaintiff tendered Therma-Wave I and Therma Wave II to Travelers on October 29, 1999. See Johnston Decl., Ex. I; see also Whitley Decl. ¶ 4. By letter dated November 2, 1999, Travelers acknowledged plaintiffs tender of the Therma-Wave litigation and stated that it was in the process of obtaining copies plaintiffs policy and determining whether there was any potential for coverage. Johnston Decl., Ex. J; see also Campagna Supp. Decl. ¶ 4.

Having completed its review of plaintiffs policy,*fn2 Travelers stated by letter dated January 4, 2000 that it would neither defend nor indemnify plaintiff for the Therma-Wave litigation. Johnston Decl., Ex. M. Although Travelers acknowledged that Therma-Wave's allegations regarding "disparaging and untrue statements made by KLA-Tencor" qualified as "offense d." under "personal injury" in the policy, Travelers denied coverage on the basis that the allegations fell within the Intellectual Property Exclusion. Id. at 4. Travelers stated that the "exclusion applies because the alleged statements made by KLA-Tencor were made in connection with their efforts to defend their right under patent laws for their `842 patent." Id. at 5.

By letter dated January 31, 2002, counsel for plaintiff wrote defendant in an apparent effort to persuade defendant that it had a duty to defend KLA-Tencor in Therma-Wave II. See Johnston Decl., Ex. R. Plaintiffs counsel asserted its position that, assuming the Intellectual Property Exclusion applied to KLA-Tencor's tendered claim, at least three of the four alleged disparaging statements in Therma-Wave II fell without the exclusion, as they "do not relate to the enforcement of KLA's patent rights. . . ." Id. at 3. Despite plaintiffs efforts, Travelers apparently did not agree.

Furthermore, in April 2002, plaintiff informed Travelers that it did not receive proper written notice that the Intellectual Property Exclusion had been included in its 1998-99 policy. After plaintiff again contacted Travelers in May 2002 regarding the alleged absence of notice, Travelers stated that it had forwarded the issue to the underwriter assigned to plaintiffs account. See id., Ex. P. To date, Travelers has yet to conclude an internal investigation to determine whether or not it sent plaintiff proper written notice of the reduction in coverage.*fn3 The present lawsuit was filed on October 24, 2002. Plaintiff now seeks an order declaring that Travelers had a duty to defend it with respect to Therma-Wave II.

D. Plaintiff's Motion for Partial Summary Judgment

KLA-Tencor offers three arguments in support of its contention that Travelers owed a duty to defend it with respect to Therma-Wave II.*fn4 First, KLA-Tencor argues that since its 1997-98 policy does not contain the Intellectual Property Exclusion, and because Travelers cannot conclusively establish that the alleged disparaging statements occurred solely during the 1998-99 policy period, there is a potential for liability under the 1997-98 policy which Travelers owes a duty to defend. Second, KLA-Tencor argues that the Intellectual Property Exclusion is void because Travelers did not notify it in writing that its 1998-99 renewal policy included the reduction in coverage (i.e., the Intellectual Property Exclusion). Finally, KLA-Tencor contends that even if the Intellectual Property Exclusion were applied to the allegations in Therma-Wave II, defendant would still owe a duty to defend plaintiff because the allegations set forth conduct not described by the exclusion.

As the court agrees with plaintiffs final contention, it grants the instant motion for partial summary judgment.

II. ANALYSIS

A. The Duty to Defend

Under California law, it is a settled principal that a liability insurer owes a broad duty to defend its insured against claims that create a potential for indemnity. Horace Mann Ins. Co. v. Barbara B., 846 P.2d 792, 795 (Cal. 1993). This broad duty encompasses claims that are "merely potentially covered" in light of the facts alleged and "entails the rendering of a service, viz., the mounting and funding of a defense in order to avoid or at least minimize liability." Buss v. Superior Court, 939 P.2d 766, 773 (Cal. 1997) (citations omitted); see also Horace Mann, 846 P.2d at 795 (stating that an insurer is obligated to defend a suit "which potentially seeks damages within the coverage of the policy") (emphasis in original). "Implicit in this rule is the principle that the duty to defend is broader than the duty to indemnify; an insurer may owe a duty to defend its insured in an action in which no damages ultimately are awarded." Id. (citation omitted); see also, e.g., Aerojet-General Corp. v. Transport Indem. Co., 948 P.2d 909, 921 (Cal. 1997) ("It is plain that the insurer's duty to defend is broader than its duty to indemnify.").

Indeed, an insurer's duty to defend extends even to "mixed" actions against the insured. Buss, 939 P.2d at 774-75. In other words, where some claims in a lawsuit are at least potentially covered and the others are not, the insurer nevertheless "has a duty to defend the action in its entirety." Id. at 775; see also Horace Mann, 846 P.2d at 797-98 (noting that "an insurer has a duty to defend the entire third party action if any claim encompassed within it potentially may be covered"). The rationale underlying this rule has been stated as follows: "To defend meaningfully, the insurer must defend immediately. To defend immediately, it must defend entirely." Buss, 939 P.2d at 775.

B. Travelers had a duty to defend plaintiff in Therma-Wave II

Although KLA-Tencor has offered multiple arguments to support its contention that the Therma-Wave litigation triggered Travelers' duty to defend, the court finds plaintiffs final argument convincing in and of itself. Even assuming that defendant provided plaintiff with proper notice of the Intellectual Property Exclusion, not all of the allegations in the counterclaims in Therma-Wave II fall within the ambit of the Exclusion. Thus, as plaintiff was potentially liable for an injury covered under its policies with defendant, defendant had a duty to defend plaintiff in Therma-Wave II.

"The determination whether the insurer owes a duty to defend is usually made in the first instance by comparing the allegations of the complaint with the terms of the policy." Horace Mann, 846 P.2d at 795. The insurer's duty is excused only where "`the third party complaint can by no conceivable theory raise a single issue which could bring it within the policy coverage.'" Montrose Chem. Corp. v. Superior Court, 861 P.2d 1153, 1160 (Cal. 1993) (quoting Gray v. Zurich Ins. Co., 65 Cal.2d 263, 276 n. 15 (1966)) (emphasis in original); see also Atlantic Mut. Ins. Co. v. J. Lamb, Inc., 100 Cal.App.4th 1017, 1038 (2002). "In other words, the insured need only show that the underlying claim may fall within policy coverage; the insurer must prove it cannot." Montrose, 861 P.2d at 1161 (emphasis in original). Thus, where an insurer seeks to rely on an exclusion to deny coverage, it has the burden of proving "that the exclusion applies in all possible worlds." Atlantic Mut., 100 Cal.App.4th at 1039.

Comparison of the Therma-Wave II allegations and the exclusion

Since the parties do not dispute that Therma-Wave's allegations of disparaging and untrue statements by KLA-Tencor qualify as "personal injury" under plaintiffs policy, the relevant question is whether all of Therma-Wave's allegations and counterclaims fall within Intellectual Property Exclusion such that there exists no potential for covered liability. They do not.

As discussed above, the Intellectual Property Exclusion provides in relevant part:

This insurance does not apply to "bodily injury," "property damage," personal injury" or "advertising injury" arising out of or directly or indirectly related to the actual or alleged publication or utterances of oral or written statements, whether made in advertising or otherwise, which is claimed as an infringement, violation or defense of any of the following rights or laws:
2. Patent;

Johnston Decl., Ex. G. Defendant argues that this exclusion applies to all four categories of plaintiffs disparaging and untrue statements alleged in the Therma-Wave answer and counterclaims. Defendant apparently reasons as follows: The exclusion covers statements made in defense of patent rights; the exclusion even covers statements related "directly or indirectly" to statements about patent rights; since all of KLA-Tencor's allegedly disparaging statements were made in connection with its patent litigation against Therma-Wave, those statements are at least indirectly related to plaintiffs defense of its patent rights; therefore, the allegations fall within the exclusion. See Opp'n at 6-7. Defendant's reading of the subject exclusion is too broad.

The interpretation of an insurance policy is a question of law. Waller v. Truck Ins. Exchange, Inc., 11 Cal.4th 1, 18 (1995). "While insurance contracts have special features, they are still contracts to which the ordinary rules of contractual interpretation apply. The fundamental goal of contractual interpretation is to give effect to the mutual intention of the parties." Bank of the West v. Superior Court, 2 Cal.4th 1254, 1264 (1992) (citations omitted). Therefore, the interpretation of a policy requires the court to look first to the langnage of the contract in order to ascertain its plain meaning or the meaning a layperson would ordinarily attach to it. See Waller, 11 Cal.4th at 18 (citing Cal. Civ. Code § 1638). Indeed, "[i]f contractual language is clear and explicit, it governs." Bank of the West, 2 Cal.4th at 1264; see also Waller, 11 Cal.4th at 18 ("The `clear and explicit' meaning of these provisions, interpreted in their ordinary and popular sense,' . . . controls judicial interpretation."). "Courts will not strain to create an ambiguity where none exists." Waller, 11 Cal.4th at 18-19.

A careful reading of the instant exclusion reveals that it does not apply to all of the Therma-Wave II allegations and counterclaims. Reading out its conditional language, the Intellectual Property Exclusion plainly states that plaintiffs "[i]nsurance policy does not apply to . . . injury . . . related to the . . . publication or utterances of . . . statements, . . . which is claimed as an infringement, violation or defense of' any of the listed rights or laws. In other words, if a third-party's injury is related to the insured's statements, and those statements are claimed to be an infringement, violation or defense of a given right or law, they are excluded. Contrary to defendant's assertion, the words "directly or indirectly related to" refer to the third party's injury — not to whether the insured's disparaging statements were "related to" its violation or defense of a given right or law. Thus, although defendant is correct that the exclusion acts to bar coverage for any injury Therma-Wave suffered by way of plaintiffs "disparaging and untrue statements to actual and prospective customers of Therma-Wave that Therma-Wave would not be able to sell or ship its Opti-Probe products due to KLA-Tencor's lawsuit alleging that Therma-Wave infringes the `055 Patent," the same cannot be said of Therma-Wave's other factual allegations.

Indeed, aside from the statement regarding infringement of the `055 patent, Therma-Wave alleged that plaintiff made untrue statements regarding its financial condition, future viability, and its having lost large orders. On their face, these disparaging statements make no mention of any of plaintiffs patents. Further, Therma-Wave did not allege that these untrue statements were made in an attempt to influence the patent litigation in some respect. In essence, Travelers asks the court to infer — by virtue of plaintiffs ongoing patent infringement litigation against Therma-Wave — that plaintiff could only have made these statements in defense of its patent rights. The court will make no such inferential leap. To do so would read allegations into the pleading that do not exist. Such an inference would also ignore the fact that — standing alone — plaintiffs allegedly untrue and disparaging statements about Therma-Wave's financial condition, future viability, and lost orders could conceivably form the basis of Therma Wave's claims for interference with contractual relations and prospective economic advantage. As such, the statements gave rise to a potential liability covered under the policy.

Defendant has failed to conclusively establish that the Intellectual Property Exclusion applies to all of the claims against plaintiff in Therma Wave II. Defendant, therefore, owed a duty to mount and fund plaintiffs defense immediately and entirely. Buss, 939 P.2d at 775. Accordingly, plaintiffs motion for partial summary judgment is granted.*fn5

III. ORDER

For the foregoing reasons, the court grants plaintiffs motion for partial summary judgment. Defendant owed a duty to defend plaintiff in Therma-Wave II.


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