Insurance Coverage in Patent Infringement & Antitrust Lawsuits
March 26, 2004
Northern California ABTL REPORT, Spring 2004
by Dennis M. Cusack
Insurance companies have moved aggressively in the past decade to limit liability coverage for intellectual property claims. They have scored some victories in court, successfully challenging coverage under general liability policies for patent infringement. The California Supreme Court also handed carriers a win last year in Hameid v. National Union Fire Ins., 31 Cal.4th 16 (2003), interpreting “advertising” to mean only widespread dissemination to the public at large.
Changes to standard form policies in 1997 and again in 2001 have also limited coverage to narrow intellectual property offenses. Not all carriers have adopted these forms, however, so insureds must continue to review their policies in each instance for possible coverages.
This article focuses on an additional source of coverage in patent infringement litigation: shotgun counterclaims, often including antitrust, Lanham Act and common law causes of action, brought in response to the insured’s patent infringement lawsuit. The factual allegations of such counterclaims may trigger coverage under a general liability policy’s personal injury and advertising injury coverages. Once the carrier begins defending the counterclaims, moreover, the carrier may find that it cannot distinguish between the work needed to defend the counterclaims and to prosecute the insured’s claim. This may result not just in a defense for the counterclaims, but also in substantial funding for the insured’s patent infringement suit.
“Sham” Litigation
General liability policies typically extend personal injury coverage to "malicious prosecution" claims. Counterclaims in patent litigation rarely state a cause of action for malicious prosecution as such, but often contain allegations that the insured’s efforts to protect its patent rights, in that suit or in other suits, amount to “sham” litigation intended to monopolize the market. A sub‑species of this claim, a so‑called “Walker Process” claim, alleges that the insured has attempted to enforce a patent procured through fraud on the Patent Office. These allegations can appear in claims for monopolization under federal and state antitrust laws, interference with prospective economic advantage, and abuse of process. Under California law, such allegations trigger a duty to defend.
In CNA Casualty v. Seaboard Surety Co., 176 Cal. App. 3d 598 (1986), Seaboard and other carriers refused to participate with CNA in the defense of an antitrust lawsuit brought by Salveson. Salveson alleged as factual bases for his antitrust cause of action that the insured, among other things, filed “false, frivolous and sham counterclaims in this action.” Id. at 608 n.3. The court of appeal held that these allegations “raised at least the possibility of liability under the malicious prosecution coverage contained in the insurance policies.” Id. at 608-09.
Is there coverage without a cause of action as such for malicious prosecution? The answer is yes. California law has long prevented an insurer from “hiding behind the pleadings.” As the Supreme Court said in Gray v. Zurich Ins. Co, 65 Cal. 2d 263, 276 (1966): “In light of the likely overstatement of the complaint and of the plasticity of modern pleading, we should hardly designate the third party as the arbiter of the policy’s coverage.” This is equally true with respect to the “personal injury” and “advertising injury” coverages in the policy. See e.g., CNA v. Seaboard, supra; Atlantic Mutual Ins. Co. v. J. Lamb, Inc., 100 Cal. App. 4th 1017, 1034 (2002) (“scope of the duty [to defend] allegations of defamation does not depend on the labels given to the causes of action in the third party complaint”).
Must the counterclaimant allege that the “sham” litigation was already resolved against the insured (strictly satisfying the elements of a claim for malicious prosecution)? CNA v. Seaboard rejected this argument, finding the potential existed because the insured’s suit (the allegedly “sham litigation”) could potentially be resolved against it. In addition, California law on malicious prosecution does not necessarily require a judgment against the insured to meet the “finality” element. A voluntary dismissal of a suit or of causes of action could satisfy the requirement if it evidences a resolution on the merits. See e.g., Kennedy v Byrum, 201 Cal. App. 2d 474, 480 (1962) (finding voluntary dismissal sufficient for purposes of asserting malicious prosecution claim). In addition, the Ninth Circuit has held that allegations amounting to abuse of process (which does not require a final determination) trigger coverage under the malicious prosecution offense. Lunsford v. American Guar. & Liab., 18 F.3d 653, 654-56 (9th Cir. 1994); see also Pacific Telesis Group v. National Union Fire Ins. Co., 1999 U.S. Dist. LEXIS 3170 (N.D. Cal. March 17, 1999) (Breyer, J.).
Defamation and Disparagement
Counterclaims often include allegations that the insured made false statements in the trade press or in the course of soliciting customers that the counterclaimant has infringed on the insured’s patents or has stolen trade secrets, or that its product does not work. The allegations may appear within antitrust or Lanham Act claims, or common law causes of action with labels such as defamation, disparagement, trade libel or injurious falsehood. Such allegations also may trigger a duty to defend.
Policy language is important here. Some policies expressly cover both defamation and disparagement claims. Other carriers have attempted to draft policies in such a way as to cover “libel, slander or defamation,” but not “disparagement” or “trade libel.” Carriers often use this language to argue that in this commercial context, the counterclaims sound in “disparagement,” not “defamation,” and deny coverage.
The distinctions between “defamation” and “disparagement,” or between “libel” and “trade libel,” may not be obvious to a lawyer, much less the layperson who provides the standard for interpreting policy language. California courts are now split as to whether a policy providing coverage for “libel, slander or defamation” also extends to disparagement claims. See CNA v. Seaboard, 176 Cal. App. 3d at 611‑12 and n. 7 (allegations that the insured made statements "misrepresenting the business, property and rights possessed by plaintiffs" potentially covered by policy provisions for "libel, slander, or other defamatory or disparaging material") and Truck Ins. Exchange v. Bennett, 53 Cal. App. 4th 75, 83 (1997) (allegations of disparagement of title to radio stations not covered by policy provision for "a libel or slander or other defamatory or disparaging material").
Here again, however, the specific factual allegations may be critical. As a general matter, false statements criticizing a business or its goods are defamatory if they explicitly or implicitly call into question the company’s honesty, integrity or competence. Polygram Records, Inc. v. Superior Court, 170 Cal. App. 3d 543, 550 (1985). For example, several courts have held that accusations of patent infringement are defamatory. See e.g., Amerisure Ins. Co. v. Laserage Technology Corp., 2 F. Supp. 2d 296, 304 (W.D.N.Y. 1998); OMI Holdings, Inc. v. Federal Ins. Co. of Canada, 1997 WL 30861 (D. Kan. 1997). See also Atlantic Mutual Ins. Co. v. J. Lamb, Inc., 100 Cal. App. 4th 1017, 1035 n.13 (2002) (acknowledging that accusations of patent infringement might constitute both “disparagement” and “defamation”). An accusation of “willful” patent infringement should certainly be deemed defamatory. Counterclaims alleging false accusations of theft of trade secrets would also call into question a company’s honesty and integrity and may also amount to a covered defamation. Actionable comments criticizing the quality of a company’s products, on the other hand, are probably not by themselves defamatory.
Defense Cost Issues
Faced with such allegations in the counterclaims, carriers generally agree to defend under a reservation of rights. This only sets the stage, however, for a ferocious battle over defense costs. Because patent and antitrust litigation of this kind often “bets the company” and sweeps through a wide range of corporate conduct over long periods of time, defense costs will be high. Most carriers will therefore employ a combination of tactics to limit their defense costs. These include: limitations to “panel counsel” rates under Civil Code section 2860; allocation of attorneys’ fees and costs between defense of the counterclaims and prosecution of the insured’s patent infringement claims; and imposition of “billing guidelines.” All of these carrier objections to paying for defense costs are subject to challenge, and should be contested as early and often as possible.
Where the insured is being defended by independent counsel, section 2860 allows a carrier to pay only the rates “actually paid by the insurer to attorneys retained by it in the ordinary course of business in the defense of similar actions in the community where the claim arose or is being defended.” The language fits easily with ordinary personal injury or construction defect litigation. But because carriers do not ordinarily defend patent infringement or antitrust lawsuits by themselves, and virtually never do so without a reservation of rights entitling the insured to independent counsel, they may not be able to show that they retain attorneys for these kinds of suits “in the ordinary course of business.” The insured, therefore, should insist that the carrier pay the actual rates being charged by defense counsel unless the carrier can prove, through evidence of specific cases and attorneys, that it has actually paid “panel counsel” for this kind of litigation.
Buss v. Superior Court, 16 Cal.4th 35 (1997), requires a carrier to defend both covered and uncovered claims subject to a right, at the end of the case, to seek reimbursement as to defense costs related solely to the defense of uncovered claims. If the carrier must defend some of the counterclaims, it must defend all of them. Carriers, nonetheless, will usually claim a right to allocate as to the prosecution of the insured’s patent claims, because Buss on its face does not address this issue. They may then ask the insured to have counsel create separate invoices, or hire an auditor to make an allocation, or simply deduct a flat percentage they feel ought to be attributable to work on the insured’s “affirmative” claims.
Suppose, though, that the insured has filed a suit for patent infringement, and the counterclaims allege that this and other infringement lawsuits are “sham” litigation. The main defense to the sham litigation claim is for the insured to prove its claim for patent infringement, i.e., that the statements were true. Thus, there is no practical distinction between the work on the insured’s infringement claim, and the defense of the counterclaims. (One exception would be work on the insured’s damages claim, although even here expert analysis of the particular market in which the parties compete could overlap.) It will be impracticable to segregate the work in invoices, and a carrier’s effort to do so after the fact will almost always result in arbitrary reductions in the amounts it reimburses.
The rationale, if not the letter, of Buss certainly applies here. Efforts to try to allocate while the case is pending will be difficult at best and risk undermining the insured’s defense. From a more practical point of view, too, allocation as to the insured’s affirmative claims will often be mooted by an ordinary Buss analysis. This is because the counterclaims against the insured will typically include a cause of action for declaratory relief challenging the insured’s patents. Under Buss, the carrier must defend this claim, along with the covered malicious prosecution and defamation allegations, until the case is concluded.
The insured should challenge the carrier’s allocation efforts early and aggressively. Otherwise, the accumulation of allocated and unreimbursed fees and costs will give the carrier excessive and unfair leverage when it comes time to discuss settlement of the litigation and resolution of the coverage disputes.
Finally, billing guidelines can peck an insured to death. These may seek to: limit staffing; avoid payment for certain tasks such as meetings among attorneys; require task billing; and deem certain work by paralegals and other non-attorney staff unreimbursable “overhead.” These are often presented as mandatory by the carrier; however, they are not part of the policy and so not within the contractual obligations of the insured to the insurer. The issue is: what is reasonable? Insureds should review such guidelines carefully at the outset, and then negotiate a three-way arrangement with the carrier and defense counsel, so that defense counsel’s practices match what the carrier has agreed to pay.
Conclusion
Counterclaims in patent infringement suits, even though often framed in antitrust causes of action, can contain potentially covered allegations triggering a duty to defend. It behooves the insured, who filed the patent infringement suit initially, to study the allegations carefully and seek advice about tendering the defense. In many cases, the carrier’s defense obligations may result in the insured obtaining not only a defense to the counterclaims, but also funding for prosecution of the patent infringement suit. On the other side of the coin, a defendant in a patent infringement suit may want to consider carefully the facts it intends to allege in counterclaims, and make an informed choice about whether it wants to trigger coverage for its opponent.