Industrial Indem. Co. v. Apple Computer

• Decision Date: 16 April 1999
• Docket Number: No. A074119.,A074119.
• Citation: 79 Cal.App.4th 817,95 Cal.Rptr.2d 528
• Court: California Court of Appeals Court of Appeals
• Parties: INDUSTRIAL INDEMNITY COMPANY et al., Plaintiffs, Cross-defendants and Appellants, v. APPLE COMPUTER, INC., Defendant, Cross-complainant and Appellant, Insurance Company of the State of Pennsylvania, Cross-defendant and Appellant.

95 Cal.Rptr.2d 528

79 Cal.App.4th 817

INDUSTRIAL INDEMNITY COMPANY et al., Plaintiffs, Cross-defendants and Appellants, v. APPLE COMPUTER, INC., Defendant, Cross-complainant and Appellant, Insurance Company of the State of Pennsylvania, Cross-defendant and Appellant.

No. A074119.

Court of Appeal, First District, Division 3.

April 16, 1999.

As Modified on Denial of Rehearing May 17, 1999.

Richard de Saint Phalle, Mark C. Goodman, Randolph G. McCalla, Buchalter, Nemer, Fields & Younger, Steven L. Roycraft, San Francisco, Counsel for Industrial Indemnity Company et al. (Plaintiffs, Cross-defendants and Appellants)

C. Randall Bain, Jack E. Brown, Craig W. Soland, Antonio T. Viera, Richard M. Harvey, Brown & Bain, P.A., Counsel for Apple Computer, Inc. (Defendant, Cross-complainant and Appellant):

Peter Abrahams, Lisa Perrochet, S. Thomas Todd, Horvitz & Levy LLP, Poway, H. Paul Breslin, Robert G. Seeds, Archer, McComas, Breslin, McMahon & Chritton, Walnut Creek, Counsel for Insurance Company of The State of Pennsylvania (ICSOP), (Cross-defendant and Appellant)

PARRILLI, J.

Two insurers and the insured appeal from a judgment entered after a jury trial on whether the insurers breached their duty to defend against an English lawsuit, and if so whether they acted in bad faith. The jury returned a substantial verdict in favor of the insured. The litigation was complex and produced an extraordinarily voluminous record. We conclude the policy terms at issue, given their ordinary meaning and considered in the contexts of the policies and the underlying circumstances, clearly exclude coverage. Accordingly, we reverse the judgment.

BACKGROUND

Apple Corps, Ltd. and Apple Corps, S.A. (collectively, Apple Corps), the business arms of the English band The Beatles, sued Apple Computer, Inc. (Apple) in London in 1989, alleging breach of a written trademark coexistence agreement that Apple Corps and Apple had negotiated in 1981. The agreement recognized the "similarity between their respective Trade Marks" and the parties' desire "to avoid confusion between their respective business activities and to preserve their respective Trade Mark rights." Apple agreed not to use its name and logo in connection with computer products "specifically adapted for use in the recording or reproduction of music or of performing artist works," or in connection with any "apparatus specifically designed and intended for synthesizing music." Apple Corps agreed not to oppose or try to cancel Apple's trademark registrations for computer equipment, and Apple agreed not to oppose or try to cancel Apple Corps' trademark registrations in the fields of recording and musical entertainment.

In its lawsuit, Apple Corps alleged that Apple had breached the agreement by (1) applying to cancel certain Apple Corps trademarks; (2) applying for trademarks in fields reserved for Apple Corps by the agreement; (3) using its computer trademarks in marketing a "Musical Instrument Digital Interface" for connecting musical instruments with computers; (4) using its trademarks in marketing a compact disc player and various computers with the capacity to synthesize music; and (5) licensing the use of its trademarks in connection with various music software products.

Apple tendered defense of the suit to its insurers, including appellants Industrial Indemnity Company and related entities (Industrial), and Insurance Company of the State of Pennsylvania (ICSOP). ISOP provided Apple with comprehensive general liability (CGL) insurance; Industrial provided both CGL policies and excess/umbrella policies. Both insurers declined coverage. Apple retained counsel and defended itself.

Trial began in October 1990. In June 1991, Apple invited its insurers to participate in settlement negotiations, informing them it intended to seek indemnity for the settlement and reimbursement for its expenses in defending the lawsuit. The insurers again told Apple its claim was not covered by their policies. In October 1991, Apple agreed to pay Apple Corps $26.4 million to settle their dispute. In November 1991, Industrial filed a declaratory relief action against Apple; Apple in turn filed cross-complaints against Industrial and ICSOP. The ensuing litigation is the subject of this appeal.

In pre-trial proceedings, the trial court ruled (1) neither insurer owed Apple a duty of indemnity because the settlement was for a contractual liability; (2) ICSOP owed Apple a duty to defend the Apple Corps suit, due to potential tort claims within ICSOP's advertising liability coverage; (3) Industrial did not owe Apple a duty to defend under certain policies covering only torts committed in North America; but (4) Industrial did owe a duty to defend under earlier policies covering advertising liability, which had a differently phrased territorial limitation; and (5) Industrial owed a duty to defend under the "following form excess components" of certain policies and under one of its umbrella policies (the ZS policy), but did not act in bad faith by refusing to provide Apple with a defense under those policies.¹ When the trial court ruled that the insurers had a duty to defend, both insurers unsuccessfully sought writ relief in this court.

The case went to a jury trial on the insurers' affirmative defenses, Apple's damages for the insurers' breach of the duty to defend, and Apple's claim that the insurers had acted in bad faith. The jury returned a verdict awarding Apple $9,009,655 for attorneys' fees and costs in the Apple Corps lawsuit, and $5,291,140 in damages for the insurers' bad faith. The trial court denied the insurers' motions for new trial and judgment notwithstanding the verdict. After calculating prejudgment interest, the court entered judgment against ICSOP for $17,166,212, and against Industrial for $17,786,539; the two insurers were held jointly liable for the bulk of the judgment. Apple and both insurers have appealed.

Apple contends the trial court erred by (1) directing a verdict for the insurers on Apple's punitive damages claim; (2) denying indemnity for Apple's settlement with Apple Corps; (3) ruling there was no bad faith in Industrial's refusal to defend under the ZS policy; and (4) determining that Apple Corps' potential tort claims were beyond the territorial limitations of Industrial's later policies.

ICSOP contends (1) the trial court should have granted it summary adjudication or judgment notwithstanding the verdict on the duty to defend; (2) the verdict improperly includes certain defense costs, both on the contract claim and on the bad faith claim; (3) the bad faith verdict is not supported by substantial evidence; and (4) the trial court committed errors in the admission of evidence and in instructing the jury on Apple's bad faith claim.

Industrial contends (1) the territorial limitations in its primary policies barred coverage; (2) any potential tort liability was also excluded under other provisions of its primary and ZS policies;² (3) Apple presented insufficient facts to establish coverage; (4) the trial court permitted excessive damages both on the contract and the bad faith claims; and (5) the court should have instructed the jury regarding Apple's withholding of evidence during discovery.

We hold that ICSOP owed Apple no duty to defend, because its policies clearly excluded coverage for claims of trademark infringement and "unfair competition based upon infringement of trade mark, service mark or trade name." The potential tort liability demonstrated by the evidence is squarely based on infringement of Apple Corps' trade mark and trade name. We further hold that Industrial owed Apple no duty to defend under its primary comprehensive general liability policies, because they covered advertising injury only in North America. Regarding the duty to provide a defense under Industrial's ZS policy, which excluded claims of "infringement on a registered trade mark, service mark, or trade name" except for "titles or slogans," we apply the same analysis that supports ICSOP's trademark exclusion, with the additional observation that Apple faced no potential claims for infringement on an unregistered trademark in the English lawsuit. We also hold that the term "title" cannot be interpreted to include a business name in the context of the ZS policy. These conclusions make it unnecessary to address the parties' other claims on appeal.

DISCUSSION

1. Insurance Contract Interpretation

The guidelines for determining whether an insurance policy requires the insurer to defend the insured against a third party's claim are well settled.

Our Supreme Court has summarized them as follows: "When determining whether a particular policy provides a potential for coverage and a duty to defend, we are guided by the principle that interpretation of an insurance policy is a question of law. [Citation.] The rules governing policy interpretation require us to look first to the language of the contract in order to ascertain its plain meaning or the meaning a layperson would ordinarily attach to it. [Citations.] Thus, in determining whether allegations in a particular complaint give rise to coverage under a CGL policy, courts must consider both the occurrence language in the policy, and the endorsements broadening coverage, if any, included in the policy terms. [Citation.]

"The fundamental rules of contract interpretation are based on the premise that the interpretation of a contract must give effect to the `mutual intention' of the parties. `Under statutory rules of contract interpretation, the mutual intention of the parties at the time the contract is formed governs interpretation. [Citation.] Such intent is to be inferred, if possible, solely from the written provisions of the contract. [Citation.] The "clear and explicit" meaning of these provisions, interpreted in their "ordinary and popular sense," unless "used by the parties in a technical sense or a special meaning is given to them...