A company facing IP-related claims might not look to its CGL policy (or other policies) for coverage. However, a recent decision from a leading voice on intellectual property suggests taking a closer look at the allegations and the policy. Last week, U.S. District Court Judge Ronald M. Whyte of the Northern District of California ruled that an intellectual property exclusion in a CGL policy does not apply to claims of breach of a patent license or patent misuse, or to allegations of harm resulting from false accusations of patent infringement. Judge Whyte’s order finding a duty to defend is an initial victory for Tessera, a developer of semiconductor technologies, in an ongoing battle with its insurer over coverage for a lawsuit brought against Tessera by Powertech Technology (PTI) in 2011.

In the underlying lawsuit, PTI alleged that Tessera had breached a patent licensing contract between the parties by initiating an investigation by the U.S. International Trade Commission (ITC). In that ITC investigation, Tessera allegedly falsely accused PTI’s products of infringing on Tessera’s patents and thereby disrupted PTI’s relationships with its customers. PTI also alleged a damages claim for patent misuse, but that claim was dismissed. Tessera and PTI settled the suit in 2014.

Tessera sought defense and indemnity against PTI’s claims under the personal injury coverage in its CGL policy. According to Tessera, PTI’s allegations supported covered claims for defamation, disparagement, malicious prosecution, and abuse of process under the policy. In response, the insurer sought a declaratory judgment that it had no duty to defend Tessera. Initially, the court agreed with the insurer. The Court found that PTI would be barred from bringing a defamation or disparagement claim under California’s statutory litigation privilege and that PTI could not bring a malicious prosecution or abuse of process claim because it was not a named party in the ITC proceeding. The court did not reach the applicability of the intellectual property exclusion.

On appeal, however, the Ninth Circuit reversed, finding that PTI had alleged facts that would have supported a potential claim for product disparagement. This was sufficient to trigger the insurer’s duty to defend under the policy’s personal injury coverage. (We recently covered a similar decision in Illinois in which a potential disparagement claim triggered the duty to defend.) The panel disagreed with the district court on the significance of California’s litigation privilege, explaining that even a “slam-dunk” privilege or defense does not affect an insurer’s duty to defend. The Ninth Circuit remanded for the district court to consider the applicability of the intellectual property exclusion in the first instance.

The intellectual property exclusion in Tessera’s policy precluded coverage for “injury or damage or medical expenses that result from any actual or alleged infringement or violation of any” copyright, patent, trade dress, trade name, trade secret, trademark or “other intellectual property rights or laws.” The insurer argued that PTI’s claims for breach of patent license and patent misuse triggered the exclusion. The insurer also contended that PTI’s claims resulted from Tessera’s allegations of infringement in the ITC investigation, thus triggering the exclusion.

On a motion for summary judgment, Judge Whyte rejected the insurer’s arguments. The Court explained that PTI’s allegations that Tessera breached a patent license did not trigger the intellectual property exclusion because PTI’s claim for breach arose under state contact law rather than patent or other intellectual property law. A patent license is merely a promise that the patentee will not sue the licensee for infringement; it does not convey to the licensee any affirmative intellectual property right. Similarly, the Court found that PTI’s patent misuse claim did not trigger the exclusion because it was not a true intellectual property claim. Rather, patent misuse is an equitable defense designed to prevent the anticompetitive exercise of patent rights that is not in violation of the patent laws but nevertheless is contrary to public policy.

Finally, the Court disagreed that Tessera’s own allegations of patent infringement against PTI in the ITC investigation triggered the exclusion. Without reaching Tessera’s position that the exclusion applied only to infringement allegations by a third-party against Tessera rather than vice versa, the Court distinguished PTI’s alleged loss. PTI claimed it suffered loss due to the falsity of Tessera’s allegations that PTI infringed Tessera’s patents. While the exclusion reached loss that resulted from actual or alleged infringement, the Court determined that PTI’s claimed loss resulting from the false nature of an alleged infringement was too attenuated to trigger the exclusion. Finding that nothing in the underlying lawsuit triggered the intellectual property exclusion, the Court held that the insurer had the duty to defend Tessera.

Judge Whyte’s decision is a good example of how courts narrowly interpret exclusions in favor of policyholders. And while coverage may not be available for many patent and other IP claims, companies facing IP-related claims should not automatically assume that their CGL policies will not provide coverage.