On June 21, 2016, the Northern District of California found that an exclusion for infringement of intellectual property rights in a commercial insurance policy did not bar coverage for claims asserted against a patent holder under a patent licensing agreement. In St. Paul Mercury Ins. Co. v. Tessera, Inc., the court found that because the claims asserted under the agreement arose from contractual rights, rather than patent or intellectual property rights, the exclusion did not apply. The court also held that the exclusion was not triggered by "patent misuse" allegations or by patent infringement claims in the underlying International Trade Commission ("ITC") proceeding that gave rise to the lawsuit tendered to St. Paul.


Background

Powertech Technology Inc. ("PTI") and Tessera, Inc. entered into a licensing agreement granting PTI a license to make integrated circuit packages and sell them worldwide. PTI subsequently filed a complaint against Tessera in the Northern District of California (the "PTI Action"), alleging that Tessera had breached the license agreement when it initiated an ITC investigation accusing PTI’s customers of infringing Tessera’s patents. The complaint sought a declaration that PTI had the right to terminate the licensing agreement, and alleged claims for breach of contract and breach of the implied covenant of good faith and fair dealing.

Tessera tendered the defense of the PTI Action to its insurer, St. Paul. St. Paul initially agreed to defend Tessera under a reservation of rights, but eventually filed suit for declaratory relief, arguing there was no coverage under the St. Paul policies for the PTI Action and seeking reimbursement of all defense costs paid. Tessera counterclaimed for breach of contract, bad faith and declaratory relief.

On the parties’ cross-motions for summary judgment, the court held that St. Paul had no duty to defend Tessera because there was no potential for coverage under the policies as a matter of law. Tessera appealed, and the Ninth Circuit reversed, finding that the disparagement claims alleged in the PTI Action were potentially covered, and remanding the case to the district court to "consider in the first instance whether the intellectual property exclusion applies."

The District Court Decision

The "intellectual property" exclusion in the St. Paul policies barred coverage for "injury, damage or medical expenses that result from any actual or alleged infringement or violation of" various intellectual property "rights or laws," including patent. The exclusion also barred coverage for any other claims asserted in a lawsuit with claims alleging "such infringement or violation."

Following well-established California rules for interpretation of insurance policies, the court correctly ruled that the IP exclusion did not apply to any claims asserted in the PTI Action. It rejected St. Paul’s assertion that because the licensing agreement itself used terms such as "patent rights" or "intellectual property rights," the claims constituted "infringement or violation" of such rights. Instead, it found that an action for breach of a patent license agreement arises not under patent or other intellectual property law, but under contract law. A non-exclusive patent license agreement only makes a contractual promise that the licensee will not be sued for infringement; it does not confer independent intellectual property rights on the licensee. Therefore, because PTI’s claims against Tessera alleged only that PTI was harmed by Tessera’s false allegations of infringement, not by Tessera’s actual or alleged patent infringement, the IP exclusion did not apply.

The district court also rejected St. Paul’s argument that PTI’s claim for "patent misuse" triggered the IP exclusion. Citing to an unpublished Ninth Circuit opinion, the court explained that there is no intellectual property right to be free from patent misuse. Rather, patent misuse is an equitable defense to patent infringement intended to restrain anticompetitive practices, and is not itself an assertion of an intellectual property right.

Last, the district court also held that the allegations in the underlying ITC investigation did not trigger the IP exclusion. St. Paul argued that because the PTI action was based on the underlying ITC investigation, the PTI Action necessarily resulted from the infringement alleged by Tessera in the ITC investigation. The district court disagreed, explaining that the PTI Action did not allege any "injury or damage" from infringement or violation, but from Tessera’s alleged "false allegations of infringement." The court properly refused to extend the IP exclusion to claims that only "in some attenuated sense" resulted from an alleged infringement or violation.

Implications for Insurance Coverage

The Tessera decision is a reminder that policyholders need to carefully review both the legal and factual bases for claims asserted against them to determine whether a policy exclusion bars coverage. Exclusions purporting to apply to a broad range of activity—such as intellectual property rights—may not limit coverage if the claim does not fall squarely within the exclusionary language.