Iolab Corp. v. Seaboard Sur. Co.

• Decision Date: 28 January 1994
• Docket Number: No. 92-55642,92-55642
• Citation: 15 F.3d 1500
• Parties: IOLAB CORPORATION, Plaintiff-Appellant, v. SEABOARD SURETY COMPANY; Employers Reinsurance Corporation; Republic Insurance; Lexington Insurance Company; Employers Insurance of Wausau; Allstate Insurance Company; Granite State Insurance Company; National Union Fire Insurance Company of Pittsburgh, Pa.; North River Insurance Company et al.; American Motorists Insurance Company and Lumbermens Mutual Casualty Company; Stonewall Insurance Company; Insurance Company of North America; Hartford Casualty Insurance Company and Twin City Fire Insurance Company, Defendants-Appellees.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 1500

15 F.3d 1500

29 U.S.P.Q.2d 1610

IOLAB CORPORATION, Plaintiff-Appellant, v. SEABOARD SURETY COMPANY; Employers Reinsurance Corporation Republic Insurance; Lexington Insurance Company Employers Insurance of Wausau; Allstate Insurance Company Granite State Insurance Company; National Union Fire Insurance Company of Pittsburgh, Pa.; North River Insurance Company et al.; American Motorists Insurance Company and Lumbermens Mutual Casualty Company; Stonewall Insurance Company; Insurance Company of North America; Hartford Casualty Insurance Company and Twin City Fire Insurance Company, Defendants-Appellees.

No. 92-55642.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted October 4, 1993.

Decided Jan. 28, 1994.

Robert P. Lobue, Patterson, Belknap, Webb & Tyler, New York, New York and Michael J. O'Connor, Christensen, White, Miller, Fink & Jacobs, Los Angeles, California, for the plaintiff-appellant.

Robert A. Zeavin, Shane & Paolillo, Los Angeles, California, for defendant-appellee Seaboard Surety.

Scott T. Pratt, Keesal, Young & Logan, Long Beach, California, for defendant-appellee Employers Reinsurance.

Linda S. Dakin, Chadbourne & Parke, Los Angeles, California, for defendant-appellee Republic Insurance.

Brian F. Zimmerman, Zimmerman & Kahanowitch, Encino, California, for defendant-appellee Lexington Insurance.

Patricia Saint Peter, Zelle & Larson, Minneapolis, Minnesota, for defendant-appellee Employers Insurance of Wausau.

Susan J. Field, Musick, Peeler & Garrett, Los Angeles, California, for defendant-appellee Allstate Insurance.

Richard B. Wolf, Lauren John Udden and Cathey Stricker of Lewis, D'Amato, Brisbois & Bisgaard, Los Angeles, California, for defendants-appellees National Union Fire Insurance, Granite State Insurance.

Donald K. Fitzpatrick, Esq. and Estie R. Stoll, Esq., Mendes & Mount, Los Angeles, California, for defendant-appellee North River Insurance Co.

Lane J. Ashley, Sedgwick, Detert, Moran & Arnold, Los Angeles, California, for defendants-appellees American Motorists, Lumbermens Mutual Casualty.

Lauren John Udden & Cathey Stricker, Lewis, D'Amato, Brisbois & Bisgaard, Los Angeles, California, for defendant-appellee Stonewall Insurance.

Craig D. Aronson and Rita H. Issagholian, Hagenbaugh & Murphy, Glendale, California, for defendant-appellee Insurance Co. of North America.

Kelley K. Beck, Hawkins, Schnabel & Lindahl, Los Angeles, California, for defendants-appellees Hartford Casualty, Twin City Fire Insurance.

Appeal from the United States District Court for the Central District of California.

Before: FLETCHER and D. W. NELSON, Circuit Judges and WILL ^*, Senior District Judge.

OPINION

D.W. NELSON, Circuit Judge:

OVERVIEW

In this diversity action, plaintiff-appellant Iolab Corporation ("Iolab") seeks indemnification from its primary and excess insurers to satisfy a settlement entered into in a prior patent infringement action (the "Jensen loss"). Iolab appeals the district court's decision to dismiss the claims against, or grant summary judgment in favor of, the insurers. Iolab claims that the Jensen loss is covered by a provision in the insurance policies protecting Iolab against liability for acts of piracy arising out of or committed in advertising. Iolab also contends that it was not required to exhaust its primary coverage nor to establish that excess coverage was triggered by the Jensen loss before bringing suit against its excess insurers. Although the district court did not state the reasons for its conclusions, we affirm. We hold that the district court properly dismissed the claims against or granted summary judgment in favor of the primary insurers because the Jensen loss was not covered under the policies. In addition, we affirm the district court's decision with respect to the excess insurers on the separate and independent ground that under California law, Iolab was required to exhaust its primary coverage and to establish that the Jensen loss exceeded that coverage prior to bringing suit against the excess insurers.

FACTUAL AND PROCEDURAL BACKGROUND

Iolab is a wholly owned subsidiary of Johnson & Johnson. From 1980 to 1990, Iolab manufactured and sold an intraocular lens designed to replace the natural lens. In 1986 Dr. Ronald P. Jensen, who owned the patent for the optical device, brought suit against Iolab alleging that Iolab was infringing his patent. The trial was bifurcated between liability and damages. In August of 1990, the district court for the Central District of California found Iolab liable for patent infringement. See Jensen v. Iolab Corp., CV-86-4384 (C.D.Cal.1990). Although at that time the Jensen court did not determine the amount of the damages, it held that the measure of damages should be a reasonable royalty, estimated at 3.5%, of Iolab's net sales for the period from 1980 to the date of the judgment in 1990, and that, with the addition of a penalty, Iolab should pay a total of one and one-half times the sum of the royalties. According to Iolab, based on the district court's measure of damages, Iolab would have had to pay in excess of $33 million to Jensen.

Before reaching the damages portion of the trial, however, Iolab raised the defense that, under 35 U.S.C. Sec. 271(e)(1), Iolab was authorized to sell the patented product because its sales were "solely for uses reasonably related to the development and submission of information." 35 U.S.C. Sec. 271(e)(1) (1988). In response to Iolab's section 271(e)(1) defense, Jensen argued that Iolab was not entitled to a section 271(e)(1) exemption because Iolab sold the intraocular lens for economic gain rather than for research and to obtain FDA approval. Jensen pointed to the extensive marketing techniques, including advertising, employed by Iolab to maximize sales as evidence that Iolab's motive for selling the patented product was financial, and contended that the sales thus did not fall within the section 271(e)(1) exemption. Subsequently, the parties settled and Iolab agreed to pay $13.5 million to Dr. Jensen. In the present action, Iolab seeks indemnification from its insurers for $13.5 million together with costs estimated at $1 million, a total of $14.5 million. Iolab contends that the Jensen loss is covered by clauses in the insurance policies (the "policies") providing coverage for piracy arising out of or committed in advertising. ¹

Iolab brought suit against fifteen insurance companies (collectively the "insurers"), four of which are primary insurers and eleven of which are excess insurers. Specifically, the primary insurers are Seaboard Surety Company, American Motorists Insurance Company, Lumbermens Mutual Casualty Company, and Employers Reinsurance Corporation; the excess insurers are National Union Fire Insurance Company, Granite State Insurance Company, Stonewall Insurance Company, North River Insurance Company, Insurance Company of North America, Republic Insurance Company, Allstate Insurance Company, Hartford Casualty Insurance Company, Twin City Fire Insurance Company, Lexington Insurance Company, and Employers Insurance of Wausau. Iolab's aggregate primary coverage between 1980 and 1990 amounted to $36 million; Seaboard provided eight years of coverage at $1 million per year, Employers Reinsurance provided three years of coverage at $1 million per year, American provided four years of coverage at $5 million per year, and Lumbermens provided one year of coverage at $5 million per year. The excess policies specifically provide that their liability does not attach until the underlying insurers have paid or have been held liable to pay.

The district court dismissed on the pleadings the actions against four insurers, dismissed a fifth based on the complaint alone, and granted summary judgment dismissing the remaining ten. Iolab appealed.

STATEMENT OF JURISDICTION

The district court had jurisdiction in this case based on 28 U.S.C. Sec. 1391(a)(2) and (a)(3). The amount in controversy exceeded $50,000 with respect to each defendant and the complete diversity requirement was satisfied. We have jurisdiction pursuant to 28 U.S.C. Sec. 1291 and Fed.R.App.P. 4(a).

STANDARD OF REVIEW

A district court's grant of summary judgment is reviewed de novo. Jones v. Union Pacific R.R., 968 F.2d 937, 940 (9th Cir.1992). Pursuant to Federal Rule of Civil Procedure 56(c), the appellate court should affirm the district court's grant of summary judgment if, viewing the facts in the light most favorable to the nonmoving party, there are no issues of material fact and summary judgment is appropriate as a matter of law. Tzung v. State Farm Fire & Casualty Co., 873 F.2d 1338, 1339-40 (9th Cir.1989). The court of appeals may affirm on any ground supported by the record. United States v. Washington, 969 F.2d 752, 755 (9th Cir.1992), cert. denied, --- U.S. ----, 113 S.Ct. 1945, 123 L.Ed.2d 651 (1993).

A dismissal under Federal Rule of Civil Procedure 12(b)(6) for failure to state a claim for which relief can be granted is also reviewed de novo. Oscar v. University Students Co-Operative Ass'n, 965 F.2d 783, 785 (9th Cir.) (en banc), cert. denied, --- U.S. ----, 113 S.Ct. 655, 121 L.Ed.2d 581 (1992). All factual allegations made by the nonmoving party are taken as true and construed in the light most favorable to that party. Id. at 785. A motion to dismiss should be granted and upheld on appeal only if it appears beyond doubt that the plaintiff can prove no set of facts in support of his or her claim that would entitle him or her to relief. Id. at 789.

DISCUSSION

The insurers raise several defenses in response to Iolab's claim against them. We limit our discussion to the two grounds on which we affirm. This is not to suggest, however, that other defenses raised by defendants-appellees may also have merit.

A. THE EXCESS INSURERS

The excess insurers argue that the district court properly dismissed them from the case or granted summary judgment in their favor on the...