Homedics v. Valley Forge Insurance Company

• Decision Date: 09 January 2003
• Docket Number: No. 00-55306.,00-55306.
• Citation: 315 F.3d 1135
• Parties: HOMEDICS, INC., a Michigan corporation, Plaintiff-Appellant, v. VALLEY FORGE INSURANCE COMPANY, A PENNSYLVANIA CORPORATION; Transcontinental Insurance Company, a New York corporation; Continental Insurance Company, a New Hampshire corporation; CIGNA Property and Casualty Insurance Company, a Connecticut corporation; Ace Fire Underwriters Insurance Company (fka CIGNA Fire Underwriters Insurance Company), a Pennsylvania corporation, Defendants-Appellees.
• Court: U.S. Court of Appeals — Ninth Circuit

315 F.3d 1135

HOMEDICS, INC., a Michigan corporation, Plaintiff-Appellant, v. VALLEY FORGE INSURANCE COMPANY, A PENNSYLVANIA CORPORATION; Transcontinental Insurance Company, a New York corporation; Continental Insurance Company, a New Hampshire corporation; CIGNA Property and Casualty Insurance Company, a Connecticut corporation; Ace Fire Underwriters Insurance Company (fka CIGNA Fire Underwriters Insurance Company), a Pennsylvania corporation, Defendants-Appellees.

No. 00-55306.

United States Court of Appeals, Ninth Circuit.

Submitted November 4, 2002.^*

Filed January 9, 2003.

David A. Gauntlett, Gauntlett & Associates, Irvine, CA, for the plaintiff-appellant.

Janelle F. Garchie, Correll, Garchie & Edwards, San Diego, CA, for the defendants-appellees.

Appeal from the United States District Court or the Central District of California; David O. Carter, District Judge, Presiding. D.C. No. CV-99-00928-DOC.

Before CYNTHIA HOLCOMB HALL, THOMPSON, and WARDLAW, Circuit Judges.

OPINION

CYNTHIA HOLCOMB HALL, Circuit Judge.

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.

FACTS

On November 4, 1998, Nikken, Inc. filed a complaint in the district court for the Central District of California alleging that Homedics had directly infringed, contributorily infringed and induced others to infringe its patent in a certain therapeutic magnetic device, apparently used in alternative medical procedures (Nikken I). On November 30, 1998, Nikken filed for a temporary restraining order and an order preliminarily enjoining Homedics from selling its allegedly infringing products. In its brief in support of its motion, Nikken appears to allege that Homedics directly infringed its patent by offering to sell infringing products through advertising.¹ To show irreparable injury, it alleged that Homedics' sale of its products was severely hurting its business. Nikken made similar allegations in several other documents in the patent infringement actions.

On August 4, 1999, Nikken filed a second action (Nikken II) against Homedics alleging infringement of a different but related patent. This action was based on similar activity as Nikken I.

On July 20, 1999, Homedics brought an action in the Central District of California against Valley Forge Insurance Company, Transcontinental Insurance Company, Continental Insurance Company and ACE Fire Underwriters Insurance Company. The complaint sought damages for breach of contract and a declaration that Homedics was entitled to a defense of the Nikken action by the insurance companies. The case was dismissed against all defendants except ACE on October 20, 1999. On October 29, 1999, the court preliminarily found that ACE was obligated under its insurance policy to pay for the defense of Nikken I.

On November 2, 1999, Homedics brought a second action against ACE seeking a declaration that ACE was obligated to defend Homedics in Nikken II. Homedics then moved to consolidate both its cases against ACE. ACE moved the court to reconsider its October 20, 1999, order declaring that ACE was obligated to defend Homedics in Nikken I, in light of three significant cases recently decided in the courts of California. In a January 21, 2000, minute order, the district court granted Homedics' motion to consolidate its two cases against ACE. It then reversed its October 20, 1999, order and dismissed both cases for failure to state a claim, under Rule 12(b)(6). Homedics took this appeal.

At all times relevant to the Nikken I and Nikken II actions, Homedics was covered by an ACE commercial general liability policy. Homedics claims that the Nikken I and Nikken II actions are covered by the commercial general liability policy as the actions allege both "advertising injuries" and "personal injuries" as understood in the policy. The relevant language is laid out below:

a. Insuring Agreement

We will pay those sums that the Insured becomes legally obligated to pay as damages because of "personal injury" or "advertising injury" to which this insurance applies. We will have the right and duty to defend the Insured against any "suit" seeking those damages.

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SECTION V — DEFINITIONS

"Advertising injury" means injury arising out of one or more of the following offenses committed in the course of advertising your goods, products or services:

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c. Misappropriation of advertising ideas or style of doing business;

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"Personal injury" means injury other than "bodily injury," arising out of one or more of the following offenses:

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d. Oral or written publication of material that ...

disparages an organization's goods, products or services[.]

STANDARD OF REVIEW

A dismissal under Rule 12(b)(6) is reviewed de novo. See Zimmerman v. City of Oakland, 255 F.3d 734, 737(9th Cir. 2001). Dismissal for failure to state a claim is appropriate if it "appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957).

CHOICE OF LAW

In a diversity case, a federal district court is to apply the law of the forum state for choice of law purposes. See Klaxon Co. v. Stentor Electric Mfg. Co., 313 U.S. 487, 496, 61 S.Ct. 1020, 85 L.Ed. 1477 (1941). As this is an appeal from a district court sitting in California, California choice of law rules apply.

The district court stated that both California and Michigan law applied to this controversy but then applied only California law as it found there was no conflict between Michigan law and California law on all material issues. Neither party argues that there is a conflict between California and Michigan law.² When neither party identifies a meaningful conflict between California law and the law of another state, California courts apply California law. See Shields v. Singleton, 15 Cal. App.4th 1611, 1621, 19 Cal.Rptr.2d 459 (1993). Cf. Consul, Ltd. v. Solide Enterprises, Inc., 802 F.2d 1143, 1146 n. 3 (9th Cir.1986) (when neither party disputes California law applies, court defers to parties); Glickman v. Collins, 13 Cal.3d 852, 857 n. 1, 120 Cal.Rptr. 76, 533 P.2d 204 (1975) (same). We accordingly apply California law as we predict the California Supreme Court would, taking guidance from intermediate California appellate decisions. See Arizona Elec. Power Coop., Inc. v. Berkeley, 59 F.3d 988, 991(9th Cir. 1995).

DISCUSSION

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, 17 Cal.Rptr.2d 210, 846 P.2d 792 (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, 54 Cal.Rptr. 104, 419 P.2d 168 (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."

Advertising Injury

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 O STRAGER, 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 the enumerated 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, 10 Cal.Rptr.2d 538, 833 P.2d 545 (1992); Mez Indust. Inc. v. Pacific Nat'l Ins. Co., 76 Cal.App.4th 856, 865, 90 Cal.Rptr.2d 721 (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....