In St. Paul Mercury Insurance Company v. Tessera, Inc., Case No. 12-cv-01827-RMW (N.D. Cal. Jun. 21, 2016), the federal court held that a lawsuit against an insured alleging a breach of a license agreement did not constitute a violation of an intellectual property right, and that an investigation related to claims of alleged patent infringement against the insured were too attenuated, to trigger an intellectual property exclusion in its liability insurance policy.

In St. Paul, St. Paul Mercury Insurance Company filed an action against its insured, Tessera, Inc., contesting its duty to defend, after Tessera had initiated an ITC investigation accusing several companies of infringing Tessera’s patents, which caused Powertech Technology Inc. (“PTI”), another company, to sue Tessera, asserting breach of contract claims (the “Underlying Action”). Tessera tendered the Underlying Action to St. Paul for defense and indemnity, and St. Paul defended Tessera under its policy subject to a reservation of rights, and commenced a coverage action against its insured.

In the coverage action, St. Paul argued that the intellectual property exclusion applied based on allegations in the Underlying Action, that Tessera had conveyed intellectual property rights to PTI through a license agreement between Tessera and PTI, and that PTI’s allegations of breach constituted a claim for damages resulting from infringement or violation of such rights.

Reasoning that breach of a patent license agreement arises under contract law, rather than any intellectual property law, the court rejected St. Paul’s arguments and held that PTI’s claims did not trigger the intellectual property exclusion. St. Paul also relied on allegations in the Underlying Action that Tessera misused its patents. The argument was rejected because patent misuse allegations did not constitute allegations of violations of intellectual property rights or laws.

St. Paul also argued that the intellectual property exclusion applied because of Tessera’s allegations of patent infringement in the ITC action. This argument was also rejected because Tessera had not been charged with any allegations of infringement or violation of any intellectual property laws. Furthermore, although Tessera had asserted in the ITC action claims relating to its patents, in St. Paul, Tessera was seeking coverage for the Underlying Action in which PTI did not seek damages for infringement or violation of any intellectual property law. As a result, the court found that St. Paul had a duty to defend Tessera in the Underlying Action and the intellectual property exclusion did not apply bar defense coverage.

The Tessera decision is an example, in the context of a dispute involving allegations of violations of license agreements and concerning intellectual property, where the court narrowly read the policy’s exclusion in determining an insurer’s challenge of its duty to defend before the Underlying Action had been resolved.