Homedics, Inc. v. Valley Forge Insurance Company et al.

The question we address here is to what extent, under California
law, patent infringement claims invoke an insurers’
duty to defend under a commercial general liability policy.
Homedics, Inc. (“Homedics”), appeals the dismissal of its
complaint against ACE Fire Underwriters Insurance Company
(formerly known as CIGNA Fire Underwriters Insurance
Company) (“ACE”) for failure to state a claim upon which
relief can be granted. See Fed. R. Civ. Pro. 12(b)(6). Homedics
was sued in federal district court for infringing the design
patents of its competitor Nikken, Inc. (“Nikken”). Homedics
claimed that Nikken’s claims of patent infringement triggered
ACE’s duty to defend, under Homedics’ commercial general
liability policy. The district court disagreed and found that the
policy at issue could not reasonably be read to include the
Nikken claims. The district court had jurisdiction under 28
U.S.C. § 1332. We have jurisdiction under 28 U.S.C. § 1291.
We agree that the underlying patent infringement suits do not
invoke ACE’s duty to defend and accordingly AFFIRM the
district court.

[1] The precise issue in the instant appeal is not whether
ACE would have to pay for any money damages levied
against Homedics as a result of the underlying patent infringement
actions. The issue here is whether ACE must pay for the
defense of these actions. It is well settled that, in insurance
contracts, “the duty to defend is broader than the duty to
indemnify”. Horace Mann Ins. Co. v. Barbara B., 4 Cal. 4th
1076, 1081 (1993). An insurer is under a duty to defend any
“suit which potentially seeks damages within the coverage of
the policy.” Gray v. Zurich Ins. Co., 65 Cal. 2d 263, 275
(1966) (italics in original).

Homedics points to two portions of its commercial general
liability policy with ACE to support its argument that Nikken
is seeking damages that are potentially within the coverage of
its policy. First, it claims that Nikken’s patent infringement
claims fall within the coverage for “advertising injury . . .
arising out of . . . misappropriation of advertising ideas or
style of doing business”. Second, it claims that Nikken’s
patent infringement claims fall within coverage for “personal
injury . . . arising out of . . . oral or written publication of
material that . . . disparages an organization’s goods, products
or services”.

[2] The question of to what extent, if any, language in commercial
general liability policies insuring against “advertising
injuries” covers patent infringement claims has been heavily
litigated in recent years. See generally OSTRAGER, BARRY R. &
THOMAS R. NEWMAN, HORNBOOK ON INSURANCE COVERAGE
DISPUTES § 7.04[b][4] (11th ed. 2002). For a court to find a
covered “advertising injury” it must find that: (1) there is a
causal connection between allegations in the third party complaint
and the insured’s advertising activities; and (2) the allegations
in the third party complaint fit into one of theenumerated offenses in the commercial general liability policy
that could be considered advertising injuries. See Bank of
the West v. Superior Court, 2 Cal. 4th 1254, 1273-1274
(1992); Mez Indust. Inc. v. Pacific Nat’l Ins. Co., 76 Cal. App.
4th 856, 865 (1999).

All of our previous opinions that have addressed this issue
reject that insurers have a duty to defend patent infringement
suits on the basis of advertising injury clauses in commercial
general liability policies. See, e.g., Simply Fresh Fruit, Inc. v.
P & C Services, Inc., 94 F.3d 1219, 1222-1223 (9th Cir.
1996) (“[A]s a matter of law, patent infringement cannot
occur in the course of an insured’s advertising activities.”);
Everest and Jennings, Inc. v. American Motorists Ins. Co., 23
F.3d 226, 229 (9th Cir. 1994). The foundational basis for the
holdings in these opinions—specifically that advertising cannot
give rise to a cause of action for direct patent infringement
—has been invalidated by recent changes in patent law.

In 1994, Congress amended the Patent Act to include “offers
to sell” as conduct which could constitute a direct patent
infringement, and this amendment became effective in 1996.
See 35 U.S.C. § 271(a) and accompanying Historical and Statutory
Notes re 1994 Amendments and Effective Date of 1994
Amendments. With the addition of “offers to sell” to the
patent statute, it is no longer clear that advertising can never
give rise to a direct patent infringement action. See, e.g., HollyAnne
Corp. v. TFT, Inc., 199 F.3d 1304, 1309 n.6 (Fed. Cir.
1999) (advertisements may be “offers to sell” and, thus, give
rise to direct patent infringement claim); Maxconn Inc. v.
Truck Ins. Co., 74 Cal. App. 4th 1267, 1274 (1999) (“[T]he
amendment of the [patent] statute has nullified the argument
that patent infringement could not arise out of the insured’s
advertising activities as a matter of law.”). ACE concedes that
Homedics’ allegations in its complaint are sufficient, at this
stage of the litigation, with regard to a causal connection. The
only issue before this court, with regards to advertising injury,
is whether Homedics can establish that Nikken’s complaintsmade allegations that fit into an enumerated offense. We hold
that it cannot.

[3] Homedics contends that the allegations in the Nikken
complaints can reasonably be read to include the advertising
injury of “misappropriation of advertising idea or style of
doing business.”3 When interpreting insurance contracts,
courts must first determine if a proposed construction is consistent
with the insured’s “objectively reasonable expectations.”
Bank of the West, 2 Cal. 4th at 1265. If defense of the
suit is consistent with the insured’s objectively reasonable
expectations then the language will be construed against the
insurer and it will be required to defend the suit. Id.

[4] We must determine whether Homedics’ contention that
the Nikken patent infringement claims fit under the offense of
“misappropriation of advertising ideas or style of doing business”
is consistent with Homedics’ objectively reasonable
expectations. This language was interpreted by the California
Court of Appeal in Mez Indus. Inc. v. Pacific Nat’l Ins. Co.,
76 Cal. App. 4th 856 (1999). In Mez, the plaintiff was being
sued for inducement of patent infringement4 based upon allegations
that Mez’s sale of certain components used for the
connection of joints in airflow conduction systems caused
others to use those component parts in a manner that infringed
a competitor’s patents. See id. at 861-862. Mez sought a
declaratory judgment that its insurer was obligated to defend
it in the federal patent action. See id. at 863. The court firstfound that Mez’s inducement of patent infringement may
have occurred during the course of its advertising activities.
See id. at 866-867. The court then addressed whether allegations
of inducement of patent infringement can fit under the
enumerated offense of “misappropriation of an advertising
idea or style of doing business.” See id. at 869-873. Mez
argued that the misappropriation offense was ambiguous and
should be interpreted against the insurer to include a claim of
inducement of patent infringement. See id. 868. To determine
whether there was an ambiguity, the court examined whether
the claim that inducement of patent infringement was covered
by the language “is consistent with the insured’s objectively
reasonable expectations.” Id. (italics in original). The court
found that it was not. “[T]he policy terms ‘misappropriation
of an advertising idea or style of doing business’ . . . simply
could not be reasonably read by a layperson to include either
patent infringement or the inducement thereof.” Id. at 872.
The court noted that the patents at issue “did not involve any
process or invention which could reasonably be considered an
‘advertising idea’ or ‘a style of doing business.’ ” Id.

[5] Similar to Mez, the underlying Nikken actions at issue
here do not allege violation of a method patent involving
advertising ideas or a style of doing business. Like the allegations
that Mez was inducing infringement of a design patent
in airflow conduction systems, the Nikken actions allege violation
of a design patent for certain therapeutic magnetic
devices. Homedics attempts to distinguish Mez on the ground
that the Court of Appeal was dealing with an inducement of
patent infringement action, not a direct infringement action.
This is true but Homedics does not offer any reasons for why
this should make a difference. Inducement of patent infringement
is merely the offense of aiding others to directly
infringe. The same analysis should apply to whether direct
infringement can be cognizable as a “misappropriation of an
advertising idea or style of doing business.” Furthermore, the
Mez court did not see any meaningful difference between
direct infringement and inducement as it relied principally onfederal district court cases construing the misappropriation
language in the context of direct patent infringement. See id.
at 871-872. Finally, as noted above, the court said that the
misappropriation language could not “be reasonably read by
a layperson to include either patent infringement or the
inducement thereof.” Id. (emphasis added). Clearly, the language
referring to direct patent infringement is dicta but
Homedics offers no reasoned argument for this court to depart
from it and we can think of none. Furthermore, in diversity
cases, we are generally bound by the dicta of state courts. See
Rocky Mountain Fire & Casualty Co. v. Dairyland Ins. Co.,
452 F.2d 603, 603-604 (9th Cir. 1971).

Homedics further attempts to distinguish Mez by pointing
out that it involved claims that arose before the 1996 amendment
to the patent statute adding the term “offers to sell.”5
This is not relevant. As noted above, the language adding “offers
to sell” significantly changes the analysis of whether
there is a causal connection between advertising activities and
direct infringement. There is no reason why it should change
the analysis of whether infringement can be cognizable as a
“misappropriation of an advertising idea or style of doing
business.”

[6] We therefore hold that the terms “misappropriation of
an advertising idea or style of doing business” cannot be readin an objectively reasonable manner to include the underlying
Nikken actions.

Homedics’ next argument is that ACE has a duty to defend
because Nikken’s patent infringement claims potentially fall
under the clause in the commercial general liability policy for
“personal injuries . . . arising out of . . . oral or written publication
of material that . . . disparages an organization’s goods,
products or services”. The issue here is also whether such a
construction would be consistent with Homedics’ objectively
reasonable expectations. See Bank of the West, 2 Cal. 4th at
1265.

[7] One cannot read Nikken’s complaints and reasonably
conclude that there are allegations that Homedics was disparaging
its goods. Essentially, Nikken’s complaints only allege
that Homedics imitated its product, thereby infringing its
patent. It does not follow that because an entity imitated the
design of a product, it is, therefore, disparaging it. In point of
fact, it’s quite the opposite—as has been oft said: imitation is
the highest form of flattery.

[8] We furthermore find the opinion in U.S. Test, Inc. v.
NDE Environmental Corp., 196 F.3d 1376 (Fed. Cir. 1999) to
be especially persuasive. U.S. Test was sued by a competitor
for patent infringement. U.S. Test then made its insurance
company, UCIC, a third party defendant, claiming that UCIC
had an obligation to defend the suit. See id. at 1377-1378.
U.S. Test claimed that the “personal injury” language in its
policy with UCIC obligated UCIC to defend it. The language
was exactly the same as the language at issue in this case. See
id. at 1378. Similar to the claims of Homedics here, U.S. Test
argued that since its competitor was alleging that U.S. Test
had claimed that its patents did not infringe its competitor’s
patents, the competitor’s patent infringement claim could be
cognizable as a claim disparaging another’s “goods.” See id.[8] We furthermore find the opinion in U.S. Test, Inc. v.
NDE Environmental Corp., 196 F.3d 1376 (Fed. Cir. 1999) to
be especially persuasive. U.S. Test was sued by a competitor
for patent infringement. U.S. Test then made its insurance
company, UCIC, a third party defendant, claiming that UCIC
had an obligation to defend the suit. See id. at 1377-1378.
U.S. Test claimed that the “personal injury” language in its
policy with UCIC obligated UCIC to defend it. The language
was exactly the same as the language at issue in this case. See
id. at 1378. Similar to the claims of Homedics here, U.S. Test
argued that since its competitor was alleging that U.S. Test
had claimed that its patents did not infringe its competitor’s
patents, the competitor’s patent infringement claim could be
cognizable as a claim disparaging another’s “goods.” See id.

[9] Finally, we are cognizant of the following statement by
the California Court of Appeal:

Basic common sense dictates that if these policies
covered any form of patent infringement, the word
patent would appear in the quoted infringement
clauses . . . . A claim of patent infringement is also
a distinct legal claim governed by a vast body of
statutory and case law. Yet, there is no mention of
patent infringement anywhere in the [commercial
general liability] policy. The absence of any express
reference to patent infringement in the policy would
lead a reasonable layperson to the conclusion that
patent infringement is not covered.

Maxconn, Inc. v. Truck Ins. Exchange, 74 Cal. App. 4th,
1267, 1275-1276 (1999) (internal citations and quotations
omitted). This broad language is dicta but it was made after
an exhaustive review of a similar commercial general liability
policy and a claim by an insured that a patent infringement
suit was covered by that policy. As previously noted, a “federal
court exercising diversity jurisdiction is bound to follow
the considered dicta as well as the holdings of state courtdecisions.” Rocky Mountain Fire & Casualty Co., 452 F.2d
603 at 603-604.

[10] We conclude that the patent infringement at issue in
the Nikken actions cannot be understood as a disparagement
of “an organization’s goods, products or services”.

[11] Homedics can prove no set of facts to support its claim
that the insurance contract at issue can be reasonably read to
require ACE to defend Homedics against Nikken’s claims of
patent infringement. Therefore, Homedics has failed to state
a claim upon which relief can be granted. See Fed R. Civ. Pro.
12(b)(6).

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