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

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:
...

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