American Cyanamid Co. v. American Home Assurance Co.

• Decision Date: 09 December 1994
• Docket Number: No. A062499,A062499
• Citation: 30 Cal.App.4th 969,35 Cal.Rptr.2d 920
• Court: California Court of Appeals Court of Appeals
• Parties: , 63 USLW 2416, 1994-2 Trade Cases P 70,822 AMERICAN CYANAMID COMPANY, Plaintiff and Appellant, v. AMERICAN HOME ASSURANCE COMPANY et al., Defendants and Respondents.

Page 920

35 Cal.Rptr.2d 920

30 Cal.App.4th 969, 63 USLW 2416, 1994-2 Trade Cases P 70,822

AMERICAN CYANAMID COMPANY, Plaintiff and Appellant, v. AMERICAN HOME ASSURANCE COMPANY et al., Defendants and Respondents.

No. A062499.

Court of Appeal, First District, Division 1, California.

Dec. 9, 1994.

As Modified on Denial of Rehearing Jan. 9, 1995.

Barry S. Levin, David B. Goodwin, Daniel J. Kroll, Heller, Ehrman, White & McAuliffe, San Francisco, for American Cyanamid Co.

Lewis D'Amato, Brisbois & Bisgaard, Sharon S. Chandler, Donald E. Brier, Roger S. Raphael, San Francisco, for American Home Assurance Co.

Long & Levit, Ronald E. Mallen, David W. Evans, San Francisco, for Ins. Co. of North America.

Bishop, Barry, Howe, Haney & Ryder, Nelson C. Barry, Sr., San Francisco, for Commercial Union Ins. Co.

DOSSEE, Associate Justice.

This is an action for declaratory relief brought by an insured, American Cyanamid Company, to determine the duty of its various insurers to defend and indemnify American Cyanamid in an underlying lawsuit for anticompetitive conduct. The action was brought against three primary insurers and numerous excess insurers, all of whose policies were in effect from 1966 to 1986.

The three primary insurers--Insurance Company of North America ("INA"), American Home Assurance Company ("AHA") and Commercial Union ("CU")--moved for summary adjudication of the duty to defend. The trial court granted the motion, finding no duty to defend. ¹ Plaintiff, American Cyanamid, appeals.

FACTS

The Underlying Lawsuit

American Cyanamid is a research-based biotechnology and chemical company which since 1967 has developed, manufactured and sold "chemical light products," e.g., chemical lightsticks, safety lights, light wands and other products used especially by the U.S. military.

Chemical Device Corp. ("CDC") is also in the business of manufacturing and selling chemical light products, but it has been in existence only since January 1986.

In 1989 CDC filed suit in federal court against American Cyanamid seeking damages for CDC's loss of business resulting from American Cyanamid's monopolistic and anticompetitive conduct. CDC's complaint alleged two broad courses of conduct by American Cyanamid--one from 1967 to 1986 and the second from 1986 to the present. The pivotal date, 1986, was the date CDC itself entered the market for chemical light products.

Because the insurance coverage action before us pertains only to insurance policies in effect before 1986, the allegations in the underlying lawsuit of most interest are those concerning American Cyanamid's pre-1986 conduct. In essence, the complaint alleges that American Cyanamid abused its patents in an effort to restrict competition and monopolize the market. Specifically, the complaint alleges that American Cyanamid developed certain chemical light products with funding from the U.S. Government pursuant to research and development contracts. These contracts required American Cyanamid to grant to the government a royalty-free license for its inventions and, further, to disclose in its patent applications and in any resulting patents that the patent was the result of a government-funded research and development contract. The purpose of this disclosure was to make competing suppliers aware of the government's royalty-free license and to enable the government to purchase chemical light products from those suppliers without being exposed to patent infringement claims.

The complaint further alleges that from 1972 to 1986 American Cyanamid failed to make the requisite disclosure on its patent applications and thus failed to provide the government with a royalty-free license for its inventions. As a result, the government and potential competitors were led to believe that potential competitors would infringe American Cyanamid's patents if they manufactured and sold chemical light products to the government. American Cyanamid thereby created a monopoly in the government market for chemical light products.

As to the post-1986 conduct, the complaint alleges that in February 1986 CDC submitted a bid to the U.S. Government's buying agent for the military services and thereby presented the first competition for the sale of chemical light products to the government. American Cyanamid thereupon engaged in a variety of activities designed to destroy the competition and perpetuate its monopoly over the market.

Although CDC's complaint raises several legal theories, rulings by the federal district court upon motions by the parties narrowed the claims of CDC to (1) a claim for monopolization in violation of section 2 of the Sherman Act and (2) state claims for theft of trade secrets, unfair competition and intentional interference with contractual relations.

The Insurance Policies

American Cyanamid was insured under eight separate primary policies during the period from 1966 to 1986. Although the liability policies are all worded differently, all provide coverage for damages the insured must pay for "advertising injury," which is defined to include damage resulting from, among other things, unfair competition. The dispute here concerns timing: whether the pre-1986 policies provide coverage even though the injury to CDC did not occur (and indeed could not have occurred as CDC did not even exist) until after the policies had expired.

The Insurance Coverage Action

In its action for declaratory relief American Cyanamid alleged that the pre-1986 insurance policies provided coverage for the CDC lawsuit because that lawsuit was based on "acts or offenses occurring throughout the [policy] periods." It was American Cyanam- In their motion for summary adjudication, the primary insurers did not directly raise the issue of when the insurance coverage was triggered. Instead, the insurers asserted that the "offense" of unfair competition could not have been committed before 1986 as CDC did not exist as a competitor.

id's position that coverage was triggered by the alleged anticompetitive conduct during the policy periods.

For purposes of the motion, American Cyanamid and the primary insurers stipulated to certain facts, including the following: "CDC was incorporated on or about January 28, 1986. CDC makes no claim in the Underlying Litigation that it was either in business or otherwise in competition with plaintiff Cyanamid prior to January of 1986." The parties also stipulated that the sole issue to be adjudicated was the following: "Does the fact that CDC did not exist as a competitor of American Cyanamid prior to January 28, 1986 preclude a duty to defend American Cyanamid in the underlying litigation under the advertising injury liability provisions of each of the primary policies at issue?"

The trial court concluded as follows: "The Court finds that the fact that CDC did not exist as a competitor of American Cyanamid prior to January 28, 1986 precludes a duty on the part of the Primary Insurers to defend American Cyanamid in the underlying litigation under the advertising liability provision of the primary policies at issue. Absent the existence of a competitor there is no duty to defend an allegation of unfair competition."

DISCUSSION

There is no question that an insurer is not required to defend an action where undisputed facts conclusively show that the underlying conduct is not within the coverage of the policy. (Montrose Chemical Corp. v. Superior Court (1993) 6 Cal.4th 287, 298, 24 Cal.Rptr.2d 467, 861 P.2d 1153.) In Montrose, the court reiterated that on a motion for summary judgment seeking a declaration of the non-existence of a duty to defend, the insurer must establish the absence of any potential for coverage. (6 Cal.4th at p. 300, 24 Cal.Rptr.2d 467, 861 P.2d 1153.) If the parties dispute whether the insured's alleged misconduct is potentially within the policy coverage and if the evidence submitted does not permit the court to eliminate either party's view, then factual issues exist precluding summary judgment in the insurer's favor. Indeed, "the duty to defend is then established, absent additional evidence bearing on the issue." (Horace Mann Ins. Co. v. Barbara B. (1993) 4 Cal.4th 1076, 1085, 17 Cal.Rptr.2d 210, 846 P.2d 792; accord, Montrose, supra, 6 Cal.4th at p. 301, 24 Cal.Rptr.2d 467, 861 P.2d 1153.)

A. Nature of Underlying Claim

At the outset, a brief discussion seems necessary on the nature of CDC's claim. As noted, CDC's complaint asserts, among other things, that American Cyanamid monopolized the market in violation of section 2 of the Sherman Act and that American Cyanamid's course of conduct "constitutes unfair competition within the meaning of Section 17200 et seq. of California's Business and Professions Code...."

In Bank of the West v. Superior Court (1992) 2 Cal.4th 1254, 10 Cal.Rptr.2d 538, 833 P.2d 545, the Supreme Court construed the term "unfair competition" within a liability insurance policy and held that it does not refer to conduct prohibited by the Unfair Business Practices Act (Bus. & Prof.Code, § 17200 et seq.). The court drew a distinction between the common law tort of unfair competition and the statutory definition. (2 Cal.4th at pp. 1263-1264, 10 Cal.Rptr.2d 538, 833 P.2d 545.) The court reasoned that the liability policy covers damages caused by unfair competition but damages are not available under the Unfair Business Practices Act. (2 Cal.4th at pp. 1265-1266, 10 Cal.Rptr.2d 538, 833 P.2d 545.)

It is clear, then, that CDC's claim for unfair competition, as pleaded, is not covered. CDC's complaint alleges a violation of the Unfair Business Practices Act. However, it is by now a familiar principle that a liability insurer owes a broad duty to defend its insured against claims that create a potential for indemnity. (Horace Mann Ins. Co. v. Barbara B., supra, 4 Cal.4th 1076, 1081, 17 Cal.Rptr.2d 210, 846 P.2d 792; Gray v. Zurich Insurance Co. (1966) 65 Cal.2d 263, 54 Cal.Rptr. 104, 419 P.2d 168.) The insurer's duty...