Northern District of California Rules Intellectual Property Exclusion Does Not Bar Insurance Coverage for Patent License Dispute

On June 21, 2016, the Northern District of California issued a pivotal decision in St. Paul Mercury Ins. Co. v. Tessera, Inc., addressing the applicability of an intellectual property (IP) exclusion in a commercial insurance policy. The court ruled that the IP exclusion did not bar coverage for claims asserted against Tessera, a patent holder, under a patent licensing agreement with Powertech Technology Inc. (PTI).

PTI and Tessera had entered into a licensing agreement granting PTI rights to manufacture and sell integrated circuit packages globally. Subsequently, PTI filed a lawsuit in the Northern District of California alleging that Tessera breached the licensing agreement by initiating an International Trade Commission (ITC) investigation accusing PTI’s customers of infringing Tessera’s patents. PTI’s complaint sought a declaration affirming its right to terminate the license and asserted claims for breach of contract and breach of the implied covenant of good faith and fair dealing.

Tessera tendered the defense of this lawsuit to its insurer, St. Paul Mercury Insurance Company. While St. Paul initially agreed to defend Tessera under a reservation of rights, it later filed a declaratory relief action, contending that the insurance policies did not provide coverage for the PTI lawsuit and seeking reimbursement of defense costs. Tessera counterclaimed for breach of contract, bad faith, and declaratory relief.

The district court initially granted summary judgment in favor of St. Paul, holding that there was no potential for coverage as a matter of law. However, the Ninth Circuit reversed this ruling on appeal, finding that certain disparagement claims alleged by PTI could potentially be covered. The appellate court remanded the case for the district court to determine whether the intellectual property exclusion applied.

The intellectual property exclusion in the St. Paul policies barred coverage for any injury, damage, or expenses resulting from actual or alleged infringement or violation of intellectual property rights, including patents. It also excluded coverage for any claims asserted in lawsuits containing such infringement allegations.

Applying established California insurance law principles, the district court concluded that the IP exclusion did not apply to the claims in the PTI lawsuit. The court rejected St. Paul’s argument that the use of terms like "patent rights" and "intellectual property rights" in the licensing agreement meant the claims constituted infringement or violation of those rights. Instead, the court emphasized that claims for breach of a patent license agreement arise under contract law, not intellectual property law.

The court explained that a non-exclusive patent license agreement is a contractual promise that the licensee will not be sued for infringement; it does not grant independent intellectual property rights to the licensee. Because PTI’s claims centered on harm caused by Tessera’s allegedly false infringement allegations—not on Tessera’s actual or alleged patent infringement—the IP exclusion was inapplicable.

Additionally, the court dismissed St. Paul’s contention that PTI’s claim of "patent misuse" triggered the exclusion. Citing an unpublished Ninth Circuit opinion, the court noted that patent misuse is an equitable defense to patent infringement designed to prevent anticompetitive conduct and does not constitute an intellectual property right itself.

Finally, the court addressed whether the underlying ITC investigation’s patent infringement allegations activated the IP exclusion. St. Paul argued that because the PTI lawsuit stemmed from the ITC investigation, the exclusion should apply. The court disagreed, finding that the PTI lawsuit did not allege injury from infringement but from Tessera’s purportedly false infringement claims. The court declined to extend the exclusion to claims only "in some attenuated sense" related to alleged infringement.

The Tessera decision underscores the importance for policyholders to carefully analyze the legal and factual bases of claims against them when evaluating insurance coverage and exclusions. Broad intellectual property exclusions may not preclude coverage where claims arise primarily from contractual disputes rather than direct infringement or violation of IP rights.

Brian D. McDonald, Partner at Jones Day in San Francisco, contributed to the analysis of this case. He can be reached at +1.415.875.5762 or bdmcdonald@jonesday.com.