Aetna Casualty & Surety Co. v. Superior Court

• Decision Date: 21 September 1993
• Docket Number: G012226,Nos. G012222,s. G012222
• Court: California Court of Appeals Court of Appeals
• Parties: , 28 U.S.P.Q.2d 1424 AETNA CASUALTY AND SURETY COMPANY et al., Petitioners, v. The SUPERIOR COURT of Orange County, Respondent; WATERCLOUD BED CO., INC., et al., Real Parties in Interest.

Page 442

23 Cal.Rptr.2d 442

19 Cal.App.4th 320, 28 U.S.P.Q.2d 1424

AETNA CASUALTY AND SURETY COMPANY et al., Petitioners, v. The SUPERIOR COURT of Orange County, Respondent WATERCLOUD BED CO., INC., et al., Real Parties in Interest.

Nos. G012222, G012226.

Court of Appeal, Fourth District, Division 3, California.

Sept. 21, 1993.

Review Denied Jan. 13, 1994.

[19 Cal.App.4th 324] Sedgwick, Detert, Moran & Arnold, Alan J. Freisleben, Todd A. Picker, Alan B. Unterman, Mark C. Raskoff, Irvine, Lewis, D'Amato, Brisbois & Bisgaard, Joseph K. Hegedus, Lance A. Selfridge, Joseph D. Tuchmayer, Los Angeles, Crosby, Heafy, Roach & May, Raoul D. Kennedy and Paul D. Fogel, Oakland, for petitioners.

McCormick, Barstow, Sheppard, Wayte & Carruth, James P. Wagoner, Robert K. Landen, Fresno, Sonnenschein Nath & Rosenthal, Paul E. B. Glad, William C. Morison-Knox, Thomas Holden, Wright, Robinson,

McCammon, Osthimer & Tatum, James C. Nielsen, Charles H. Horn, Buchalter, Nemer, Fields & Younger, Richard de Saint Phalle and Timothy J. Barron, San Francisco, for amicus curiae in support of petitioners

No appearance for respondent.

Callahan & Gauntlett, David A. Gauntlett, Steven L. Dickinson and Jeffrey M. Thompson, Irvine, for real parties in interest.

Heller, Ehrman, White & McAuliffe, Barry S. Levin, David B. Goodwin and Paul G. Urla, San Francisco, for amicus curiae in support of real parties in interest.

OPINION

MOORE, Associate Justice.

The primary issue in this case is whether a standard comprehensive general liability policy (CGL) which includes coverage for "advertising injury" potentially affords coverage for inducing or contributing to patent infringement so as to trigger an insurer's duty to defend.

FACTS AND PROCEDURAL BACKGROUND

Aetna Casualty and Surety Company and Industrial Indemnity Company issued standard CGL policies to Watercloud Bed Co., Inc. and its President, Richard LaBianco (collectively Watercloud). ¹ The policies provide the insurers will pay "all sums which the insured shall become legally obligated to pay as damages because of ... advertising injury to which this policy applies ... and the company shall have the right and duty to defend any suit against the insured seeking damages on account of such injury." Advertising injury is defined as "injury arising out of an offense committed during the policy period occurring in the course of the named insured's advertising activities, if such injury arises out of libel, slander, defamation, violation of the right of privacy, piracy, unfair competition, or infringement of copyright title or slogan." ² In Bank of the West v. Superior Court (1992) 2 Cal.4th 1254, 10 Cal.Rptr.2d 538, 833 P.2d 545 (hereafter Bank of the West ), our Supreme Court interpreted this standard language to cover only injuries caused by an advertisement. (Id. at p. 1263, 10 Cal.Rptr.2d 538, 833 P.2d 545; see also Chatton v. National Union Fire Ins. Co. (1992) 10 Cal.App.4th 846, 863, 13 Cal.Rptr.2d 318; Standard Fire Ins. Co. v. Peoples Church of Fresno (9th Cir.1993) 985 F.2d 446, 449.)

In April 1987, Somma Mattress Company sued Watercloud in federal court. Somma contended it had patented a water mattress and that Watercloud had sought a license under the patent to manufacture and sell such mattresses. When Somma denied the request, "Watercloud began to manufacture, use, offer for sale and sell ..., in direct competition with Somma, copies of Somma's patented mattress...." Somma's complaint alleged Watercloud "infringed and ... actively induced ... others to infringe, and ... contributed to ... the infringement of [Somma's] patent ... by manufacturing, using and selling, without authority or license ..., products which infringe [the] patent...." The infringements were alleged to have been "willful and deliberate, and with full knowledge of [Somma's] patent...." The complaint alleged Watercloud's actions were in violation of the United States patent laws. (35 U.S.C. § 271.) ³ No cause of action or theory Watercloud tendered defense of the lawsuit to Aetna and Industrial Indemnity. Aetna sent Watercloud a letter agreeing to defend, but reserving its rights to deny coverage, to refuse to pay for the defense, and to seek reimbursement in the event it was determined that its policy did not cover Watercloud's liability. Initially, Industrial Indemnity denied coverage, but later it agreed to defend and indemnify Watercloud for any damages incurred for slander of title, but reserved all of its rights under the policy.

was asserted for unfair competition or under any state law theory of recovery.

Ultimately, both Aetna and Industrial Indemnity concluded no defense was owed under their policies. In March 1988, Industrial Indemnity withdrew its defense.

The Somma action was settled without payment of money or a judgment being entered. Nevertheless, Watercloud brought the present action in state court against Aetna and Industrial Indemnity, asserting causes of action for breach of the implied covenant of good faith and fair dealing, breach of contract, intentional and negligent infliction of emotional distress, and breach of fiduciary duty, and seeking a declaration that Aetna and Industrial Indemnity were liable to indemnify Watercloud for the total amount of the fees billed by Watercloud's attorneys.

Watercloud filed motions for summary adjudication against the insurers on the duty to defend. When the motions were ultimately heard, the trial court held that direct infringement of a patent was not covered under the subject policies and any other basis for liability against Watercloud would require proof that it knowingly and intentionally induced the infringement. Nevertheless, the court found there was the potential for coverage and therefore a duty to defend triggered by Somma's claim for inducing infringement and for contributory infringement because "the allegations in the Somma action trigger the possibility or potential for liability...."

In March 1992, the insurers filed petitions for writs of mandate which were denied by this court. Thereafter, the Supreme Court granted the insurers' petitions for review, then transferred the matter to this court with directions to hear them. Accordingly, this court issued an alternative writ of mandate. We now consider the matter in light of Bank of the West.

DISCUSSION

In Bank of the West, the Supreme Court considered the scope of coverage afforded by standard CGL policy language and held that a CGL does not cover claims for advertising injury arising under the Unfair Business Practices Act. (Bus. & Prof.Code, § 17200 et seq.) The court noted that CGL policies generally include coverage for " 'advertising injury' which applies to 'damages' the insured must pay for injury arising out of 'unfair competition' occurring in the course of the insured's 'advertising activities.' " (Bank of the West, supra, 2 Cal.4th at p. 1258, 10 Cal.Rptr.2d 538, 833 P.2d 545.)

The duty to defend is of course much broader than the duty to indemnify, and an insurer must defend a case which potentially seeks damages within the coverage of the policy. (Gray v. Zurich Ins. Co. (1966) 65 Cal.2d 263, 275, 54 Cal.Rptr. 104, 419 P.2d 168.) However, if there is no potential liability for covered damages as a matter of law, there cannot be the potential for indemnification, nor can there be a duty to defend. (See, e.g., Royal Globe Ins. Co. v. Whitaker (1986) 181 Cal.App.3d 532, 537, 226 Cal.Rptr. 435; see also Safeco Ins. Co. of America v. Andrews (9th Cir.1990) 915 F.2d 500, 502; Allstate Ins. Co. v. Miller (N.D.Cal.1990) 743 F.Supp. 723, 729.) Here, the patent infringement allegations against Watercloud create no potential recovery of covered damages because the alleged infringement could not occur "in the course of the named insured's advertising activities." (National Union Fire Ins. Co. v. Siliconix, Inc. (N.D.Cal.1989) 729 The trial court held that unfair competition could include inducing patent infringement. That holding was before Bank of the West, supra, 2 Cal.4th 1254, 10 Cal.Rptr.2d 538, 833 P.2d 545, in which the Supreme Court held that the language used in the policies referred to the common law tort of unfair competition. That tort refers to the passing off of one's goods as those of another. (Id. at p. 1263, 10 Cal.Rptr.2d 538, 833 P.2d 545; see also Chatton v. National Union Fire Ins. Co., supra, 10 Cal.App.4th at p. 863, 13 Cal.Rptr.2d 318; Standard Fire Ins. Co. v. Peoples Church of Fresno, supra, 985 F.2d at p. 449.)

F.Supp. 77, 79; see also Bank of the West, supra, 2 Cal.4th at p. 1275, 10 Cal.Rptr.2d 538, 833 P.2d 545.)

Watercloud argues there is evidence that it was passing off its goods as being those of Somma. Not so. The sole example of such "evidence" is a brief passage from the deposition testimony of Somma's president, who testified a Somma customer told him another retailer had sold a mattress and wrote "Somma mattress" on a sale's receipt. Even if that were true, it would not provide a basis for coverage. The CGLs cover only unfair competition occurring in connection with Watercloud's advertising activity, not that of another retailer. Moreover, in connection with its own advertising activity, the evidence indicated that far from passing off its goods as those of Somma, Watercloud touted itself as "the flotation industry's pioneer in the engineering of soft-sided waterbeds" and stated it had created "a new way of sleeping" and "we are proud to put the Watercloud name upon it." Thus, there was no basis for coverage under the unfair competition clause.

Patent infringement is a separate and distinct area of the law. The grant of a patent is the grant of a statutory monopoly and is an express exception to laws prohibiting monopolies. (Sears, Roebuck & Co. v. Stiffel Co. (1964) 376 U.S. 225, 229, 84 S.Ct. 784, 788-789, 11 L.Ed.2d 661.) Patent infringement therefore concerns the unauthorized manufacture, use or sale of a device...