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Patents can’t void insurance policies

Source: Grill IP patents news

IP-insurance-policy-exclusionTech companies owning patents have been given a boost thanks to a ruling by a US court that should stop insurance companies from dodging their obligations to provide liability insurance. The Ninth Circuit rejected a lawsuit filed by St. Paul Mercury Insurance Company against a company it insured, Tessera Inc., which argued that it should not have to provide liability insurance because its policy specifically excluded liabilities arising from intellectual property claims. The court decided that insurers must not scrutinize underlying claims of liability to deny defending any claim that is not meritorious.

St. Paul’s refusal to insure Tessera followed an Underlying Action by Powertech Technology Inc. (PTI) against the defendant. Tessera was charged with breaching a contractual agreement with PTI, after having launched an ITC investigation alleging that PTI had infringed its patents. St. Paul initially defended Tessera, but later commenced a coverage action against its insured due to the nature of PTI’s accusations. PTI purported that its license agreement with Tessera conveyed intellectual property rights to PTI. The insurer cited these allegations in defense of a decision to refrain from covering Tessera’s liability costs. Due to an intellectual property exemption, St. Paul’s argued that its policy relieves the duty to defend Tessera.

While a district court found in favor of the insurance company, a panel at the Ninth Circuit reversed the decision, determining that Tessera’s breach of a patent license agreement falls under contract, rather than intellectual property, law. As such, PTI’s claims had no bearing on St. Paul’s duty to its insured. St. Paul’s argument relied on the Action’s assertions that Tessera misused patents. This was also rejected, as patent misuse allegations are not equivalent to actual violations of intellectual property law. The insurer further maintained that the IP exclusion applied because of its client’s patent infringement claims. Despite Tessera’s involvement with the ITC concerning its patents, the court saw no link between claims of infringement and the coverage being sought for PTI’s dispute. Since PTI’s Action did not seek damages for an intellectual property infringement, Tessera’s right to defense was justified.

According to the Ninth Circuit, the lower court was wrong to look at the merits of the underlying claims against Tessera, stating, “The existence of a slam-dunk defense, immunity or privilege with respect to the underlying claim against the insured does not affect an insurance company’s duty to defend.” The panel’s narrow interpretation of policy exclusion aided those receiving liability payments in this case, forcing the insurer to pay up and steer clear of analysis aimed at the substance of the accusation against its insured. Now insured, the defendant will enjoy liability coverage throughout any infringement action.  

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