Travelers Property Casualty Co. of America v. KLA-Tencor Corp. ( 2020 )

Filed 1/16/20; Certified for Publication 2/13/20 (order attached)
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
SIXTH APPELLATE DISTRICT
TRAVELERS PROPERTY CASUALTY H044890
COMPANY OF AMERICA, (Santa Clara County
Super. Ct. No. CV288053)
Plaintiff, Cross-defendant and
Respondent,
v.
KLA-TENCOR CORPORATION,
Defendant, Cross-complainant and
Appellant.
Respondent Travelers Property Casualty Company of America (Travelers)
prevailed on its motion for summary judgment in this duty-to-defend insurance dispute
with its insured, appellant KLA-Tencor Corporation (KLA). The superior court
concluded that the language of the commercial liability insurance policies Travelers had
issued to KLA, which covered claims for “malicious prosecution,” could not have created
an objectively reasonable expectation that Travelers would defend a Walker Process
1
claim against KLA. The Walker Process claim that KLA tendered to Travelers alleged
1
This type of claim derives its name from Walker Process Equipment, Inc. v. Food
Machinery & Chemical Corp. (1965) 382 U.S. 172, in which the United States Supreme
Court recognized an antitrust cause of action under the Sherman Act and the Clayton Act
for using a fraudulently procured patent to attempt to monopolize the market. (Id. at
pp. 176-178.)
that KLA had fraudulently procured a patent from the Patent and Trademark Office
(PTO) and used that patent to attempt to monopolize the market for a product. Travelers
declined to defend KLA against that claim. KLA contends that it was objectively
reasonable for it to expect the “malicious prosecution” coverage in its policies to extend
to this Walker Process claim. We conclude otherwise and affirm the judgment.
I. Background
KLA was the insured and Travelers was the insurer under a series of commercial
liability policies issued to KLA covering the period from 2010 to 2015. One of the
coverages under these policies was for “personal and advertising injury liability,” which
2
was defined as “ ‘personal injury’ or ‘advertising injury.’ ” The dispute in this case
concerns only the “personal injury” coverage. “Personal injury” was defined as “injury,
other than ‘advertising injury’, caused by one or more of the following offenses: [¶] (1)
False arrest, detention or imprisonment; [¶] (2) Malicious prosecution; [¶] . . . [¶] (4)
Oral or written publication, including publication by electronic means, of material . . . .”
(Italics added.)
One of the exclusions from these policies was the “Intellectual Property”
exclusion. It excluded: “ ‘Personal injury’ or ‘advertising injury’ arising out of any
actual or alleged infringement or violation of any of the following rights or laws, or any
other ‘personal injury’ or ‘advertising injury’ alleged in any claim or ‘suit’ that also
alleges any such infringement or violation: . . . Patent . . . [¶] . . . [¶] . . . or [¶] . . . Other
intellectual property rights or laws.”
2
The policy’s definitions section defined “ ‘Personal and advertising injury,’ ” but an
endorsement “replace[d] the definition of ‘personal and advertising injury’ in the
Definitions Section” with the definition provided in the endorsement. The same was true
as to the intellectual property exclusion.
2
Xitronix and KLA manufacture competing products in the “active dopant
metrology market,” and the two companies have a history of legal disputes between
3
them. In 2008, Xitronix filed a federal action against KLA seeking to invalidate some of
the claims in KLA’s “‘441 patent.” KLA claimed in turn that Xitronix had infringed on
KLA’s ‘441 patent. Xitronix prevailed in the 2008 action. Several of KLA’s patent
claims in its ‘441 patent were invalidated for indefiniteness and obviousness, and KLA’s
infringement claim was rejected. In 2011, Xitronix brought a tort action against KLA in
Texas state court related to KLA’s disparagement of Xitronix’s product. KLA prevailed
on summary judgment, and that judgment was affirmed on appeal in 2014.
In 2014, Xitronix filed a federal antitrust action for damages against KLA in
4
federal court in Texas alleging a single Walker Process cause of action for “Attempted
Monopolization” in violation of the Sherman Act and the Clayton Act. The 2014
Xitronix action was based on allegations that, from 2011 to 2014, KLA had “fraudulently
prosecut[ed] through issuance certain patent claims” that KLA knew had been ruled to be
invalid in the 2008 action and that KLA did so with the intent to “monopolize and destroy
competition . . . .”
The 2014 action concerned KLA’s “‘260 patent,” which KLA had obtained in
2014 after the invalidation of portions of KLA’s ‘441 patent. Xitronix alleged that KLA
had purposely sought to include in the ‘260 patent claims that had been invalidated in the
litigation concerning the ‘441 patent. Xitronix alleged that KLA had engaged in
“fraudulent conduct before the United States Patent and Trademark Office (‘the PTO’)”
in KLA’s “prosecution of the ‘260 patent” before the PTO. Xitronix alleged that KLA’s
“fraudulent prosecution” “and procurement” of the ‘260 patent had been “undertaken in
3
KLA argues on appeal that this litigation history was extrinsic evidence of the
underlying basis for Xitronix’s allegations in the 2014 action.
4
Xitronix is located in Texas; KLA is located in Santa Clara County.
3
bad faith” to monopolize the market and preclude Xitronix from competing with KLA.
Xitronix contended that KLA’s “entire prosecution of the ‘260 patent was without any
objectively reasonable basis.” It asserted that KLA’s “continued prosecution of patent
claims” created a “potential litigation threat” that deterred potential investors in Xitronix.
Xitronix noted in its complaint that it previously had been “sidelined by KLA’s false
allegations of infringement during the 2008-2010 timeframe.”
KLA asked Travelers to defend and indemnify KLA in the 2014 Xitronix action.
Travelers declined on the ground that there was no potential for coverage. Travelers
brought a declaratory relief action in Santa Clara County seeking to resolve whether it
had a duty to defend and indemnify KLA in the 2014 Xitronix action under the
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commercial liability or CyberFirst policies it had issued to KLA. KLA responded with a
cross-complaint for breach of contract and declaratory relief. KLA alleged that it had
been damaged by Travelers’ refusal to defend KLA in the 2014 Xitronix action. It also
sought declaratory relief concerning Travelers’ duty to defend and indemnify KLA in the
2014 Xitronix action.
In June 2016, Travelers filed a motion for summary judgment. Travelers
contended that the allegations in the 2014 Xitronix action were not covered by the
commercial liability policies or were excluded under the intellectual property exclusion.
It relied solely on the policy language. KLA opposed Travelers’ motion, but it filed a
cross-motion for “partial summary judgment” seeking adjudication of the declaratory
relief causes of action in both Travelers’ action and KLA’s action. KLA too relied solely
5
Travelers also insured KLA under a CyberFirst policy. The CyberFirst policy
excluded “Advertising Injury Or Personal Injury,” “Malicious Wrongful Acts,” and
“Knowing Violations Of Rights Or Laws.” The CyberFirst policy defined “personal
injury” to include injury caused by “Malicious prosecution.” The CyberFirst policy is not
at issue in this appeal. KLA sought a defense and coverage under only the commercial
liability policies.
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on the policy language. It claimed that Xitronix’s allegations in the 2014 action fell
within the policy’s coverage for “malicious prosecution” and did not come within the
intellectual property exclusion. In KLA’s view, the dispute between the parties “boil[ed]
down to the proper interpretation of the ambiguous term ‘malicious prosecution,’ ” in the
policies. KLA asked the court to deny Travelers’ motion and grant KLA’s motion.
The superior court granted Travelers’ motion and denied KLA’s motion. It found:
“No one could reasonably construe that complaint’s allegations of a ‘Walker Process’
violation, fraudulent behavior in a nonjudicial proceeding before the Patent and
Trademark Office, as a claim for ‘malicious prosecution’ under California law (or Texas
law) covered by the policy as a ‘personal injury.’ ” The court found that the 2014
Xitronix action did not fall within the coverage of the commercial liability policies, and it
therefore did not address whether the intellectual property exclusion applied. The court
entered judgment for Travelers. KLA timely filed a notice of appeal.
II. Discussion
KLA contends that the coverage clause of the insurance contract between KLA
and Travelers providing coverage for “malicious prosecution” was ambiguous and could
be reasonably construed as potentially applying to the Walker Process allegations in the
2014 Xitronix action.
“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.” (Waller v. Truck Ins. Exchange,
Inc. (1995) 11 Cal. 4th 1, 18 (Waller).)
“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.
5
‘Under statutory rules of contract interpretation, the mutual intention of the parties at the
time the contract is formed governs interpretation. (Civ. Code, § 1636.) Such intent is to
be inferred, if possible, solely from the written provisions of the contract. (Id., § 1639.)
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 by usage” (id., § 1644), controls judicial interpretation. (Id., § 1638.)’
[Citations.] A policy provision will be considered ambiguous when it is capable of two
or more constructions, both of which are reasonable. [Citation.] But language in a
contract must be interpreted as a whole, and in the circumstances of the case, and cannot
be found to be ambiguous in the abstract. [Citation.] Courts will not strain to create an
ambiguity where none exists. [Citation.]” (Waller, supra, 11 Cal.4th at pp. 18-19.)
“ ‘[A]mbiguities are generally construed against the party who caused the
uncertainty to exist (i.e., the insurer) in order to protect the insured’s reasonable
expectation of coverage.’ ” (Palmer v. Truck Ins. Exchange (1999) 21 Cal. 4th 1109,
1115.) “Whether policy language is ambiguous is a question of law that we review de
novo. [Citations.] Any ambiguity must be resolved in a manner consistent with the
objectively reasonable expectations of the insured in light of the nature and kind of risks
covered by the policy. [Citation.] The interpretation of a contract, including the
resolution of any ambiguity, is solely a judicial function, unless the interpretation turns
on the credibility of extrinsic evidence.” (State Farm General Ins. Co. v.
Mintarsih (2009) 175 Cal. App. 4th 274, 283.) Coverage clauses in insurance contracts are
construed broadly, and ambiguities are generally resolved in favor of coverage.
(Montrose Chemical Corp. v. Admiral Ins. Co. (1995) 10 Cal. 4th 645, 667.)
“[T]he determination whether the insurer owes a duty to defend usually is made in
the first instance by comparing the allegations of the complaint with the terms of the
policy. Facts extrinsic to the complaint give rise to a duty to defend when they reveal a
possibility that the claim may be covered by the policy.” (Waller, supra, 11 Cal.4th at
6
p. 19.) “If any facts stated or fairly inferable in the complaint, or otherwise known or
discovered by the insurer, suggest a claim potentially covered by the policy, the insurer’s
duty to defend arises and is not extinguished until the insurer negates all facts suggesting
potential coverage. On the other hand, if, as a matter of law, neither the complaint nor
the known extrinsic facts indicate any basis for potential coverage, the duty to defend
does not arise in the first instance.” (Scottsdale Ins. Co. v. MV Transportation (2005) 36
Cal. 4th 643, 655.)
KLA’s claim that “malicious prosecution” is ambiguous is primarily based on the
Ninth Circuit Court of Appeal’s decision in Lunsford v. American Guar. & Liab. Ins.
6
Co. (9th Cir. 1994) 18 F.3d 653 (Lunsford). In Lunsford, the insurance policy covered
“ ‘malicious prosecution,’ ” and the insured was sued for “abuse of process.” (Lunsford, at
p. 654.) The Ninth Circuit held that there was a duty to defend because there was a
potential for coverage: “ ‘Malicious prosecution’ as used in the policy is ambiguous
because it is not defined in the policy and because a layperson’s understanding would
differ from the legal definition of the term.” (Ibid.) “A layperson could believe
reasonably that the words ‘malicious prosecution’ only required a lawsuit or other legal
proceeding to be brought maliciously or spitefully for an improper purpose. A layperson
also could believe reasonably that a counterclaim for abuse of process satisfied that
requirement. . . . [¶] Although the elements of the two torts technically are different, the
distinction is not as clear as [the insurer] insists.” (Lunsford, at p. 655.) “There is no
reason, given the overlap between malicious prosecution and abuse of process
(particularly in the eyes of those untrained in the law), why persons who purchase
insurance covering the cost of defending against the one claim would not also expect the
6
KLA faults the superior court for focusing on “the technical legal definition of
malicious prosecution under California law.” Since we exercise de novo review, the
superior court’s reasoning is irrelevant.
7
contract to cover the cost of defending against the other. The term as used in the policy is
ambiguous. Therefore, we resolve the issue in favor of coverage.” (Lunsford, at p. 656.)
While it is true that the Ninth Circuit held in Lunsford that “malicious
prosecution” was “ambiguous” in that case, “language in a contract must be interpreted as
a whole, and in the circumstances of the case, and cannot be found to be ambiguous in
the abstract.” (Waller, supra, 11 Cal.4th at pp. 18-19.) The mere fact that “malicious
prosecution” was deemed ambiguous in Lunsford does not mean that it is ambiguous in
this case. Our inquiry is whether it is objectively reasonable for an insured to understand
“malicious prosecution” to include Walker Process claims. KLA argues that it is because
an insured could believe that “malicious prosecution” includes conduct before the PTO.
KLA argues: “Just as a layperson could reasonably understand the term ‘malicious
prosecution’ to encompass abuse-of-process claims, a layperson could also reasonably
understand ‘malicious prosecution’ to cover Walker Process claims. Malicious
prosecution, abuse-of-process, and Walker Process claims all require affirmative abuse of
legal processes and procedures with an ulterior motive or purpose. [Fn. omitted.] A
layperson would therefore reasonably understand all three types of claims to fall under
the Commercial Policies’ coverage for ‘malicious prosecution.’ At a minimum, whether
a lay person could reasonably understand the term ‘malicious prosecution’ to encompass
Walker Process claims creates a doubt regarding whether Travelers has a duty to defend.”
Coverage language is “considered ambiguous when it is capable of two or more
constructions, both of which are reasonable” (Waller, supra, 11 Cal.4th at pp. 18-19), but
an insured’s proposed construction must be “consistent with the objectively reasonable
expectations of the insured in light of the nature and kind of risks covered by the policy.”
(State Farm General Ins. Co. v. Mintarsih, supra, 175 Cal. App. 4th 274, 283, italics
added.) Here, KLA argues that Walker Process claims are so similar to malicious
prosecution and abuse of process claims that it would be objectively reasonable for an
insured to expect “malicious prosecution” coverage to extend to Walker Process claims.
8
We disagree. Unlike a malicious prosecution claim or an abuse of process claim, both of
which are commonly understood to be premised on actions in legal proceedings, a
Walker Process claim does not necessarily involve any legal proceedings. A Walker
Process claim arises from fraud on the PTO, not any court, and the use of a fraudulently
procured patent to attempt to monopolize the market. Neither the fraud element nor the
use element necessarily involves any legal proceedings. Since “malicious prosecution” is
commonly understood to refer to legal proceedings, an objectively reasonable insured
could not expect “malicious prosecution” coverage to extend to claims that, unlike
malicious prosecution and abuse of process claims, do not necessarily involve any legal
proceedings.
KLA’s reliance on CNA Casualty of California v. Seaboard Surety Co. (1986) 176
Cal. App. 3d 598 (CNA) is misplaced. In CNA, the specific allegations in the complaint
were “arguably within” the policy’s coverage language despite the fact that the cause of
action was labelled “antitrust.” (CNA, at pp. 607-609.) Unlike Xitronix’s allegations
here, the allegations in CNA that potentially fell within the policy’s malicious prosecution
coverage were based on “ ‘counterclaims’ ” in a court action. (CNA, at p. 608.)
KLA argues that it is irrelevant whether “malicious prosecution” coverage would
extend to “a generic Walker Process claim.” In its view, the coverage question turns on
“the ‘enforcement’ element of [a Walker Process] claim and the ‘unique’ facts supporting
that [enforcement] element here.” (Fn. omitted.) KLA claims that Xitronix’s Walker
Process claim “meets the legal elements of malicious prosecution and/or abuse of
process.” KLA reasons that the fact that a Walker Process claim requires “enforcement”
of the fraudulently obtained patent means that a court action or something akin thereto is
necessarily required, thus making the claim essentially one for malicious prosecution or
abuse of process. To support this claim, KLA essentially imports into Xitronix’s 2014
action the claims that Xitronix made in its 2011 Texas state court action. KLA argues
that “the ‘enforcement’ element of the underlying [2014 Xitronix Walker Process] claim
9
is based on allegations that KLA maliciously prosecuted a prior patent-infringement
claim against Xitronix for purposes of quashing competition. A layperson would
reasonably understand these facts to fall within the scope of the ‘malicious prosecution’
offenses covered by the Policies.” (Italics added.) KLA claims that Xitronix’s 2014
complaint was based on allegations that KLA “competitively harmed Xitronix by
enforcing that patent, including in court through prior litigation . . . .” (Italics added.)
These contentions lack merit. First, our construction of the coverage language
based on the insured’s objectively reasonable expectations is not properly premised on
the allegations in the specific complaint at issue. Coverage language is construed as of
the time of issuance of the policy, so construction of that language cannot depend on the
precise allegations made in Xitronix’s subsequent complaint. It is only after the coverage
language has been properly construed that we proceed to the next step and examine the
complaint to determine whether there was a potential for coverage that triggered the duty
to defend. Second, KLA’s argument that Xitronix’s 2014 action was based on KLA’s
prior infringement claim against Xitronix is simply inaccurate. Xitronix’s complaint
plainly did not allege that KLA had enforced the ‘260 patent, which was the one that
Xitronix alleged had been obtained through fraud on the PTO, through the prior litigation
between KLA and Xitronix because it was undisputed that the ‘260 patent was not issued
until 2014, after the resolution of that litigation. Furthermore, that prior litigation
concerned the ‘441 patent, not the ‘260 patent, and Xitronix did not contend in its 2014
action that the ‘441 patent had been procured through fraud on the PTO. Consequently,
the ‘441 patent could not have been the basis for Xitronix’s 2014 Walker Process claim.
Although KLA argues that there was a potential for coverage due to the prior
litigation, that argument ignores the actual basis for Xitronix’s 2014 action. The mere
fact of prior litigation between two parties does not mean that all subsequent actions
necessarily or even potentially will come within coverage for “malicious prosecution.”
That determination depends on the nature of the allegations in the action. Here,
10
Xitronix’s 2014 action was necessarily limited to KLA’s procurement and use of the ‘260
patent, which KLA obtained in 2014. The history of prior litigation did not change the
basis for this claim into one for malicious prosecution because there were no allegations
of any legal proceedings involving the ‘260 patent.
Xitronix’s 2014 action alleged that KLA had enforced the ‘260 patent through the
implied threat of litigation. Xitronix alleged that KLA had used the ‘260 patent to create
“a potential liability to suit” for any Xitronix customers. Such an allegation does not
have the potential to fall within the policy’s “malicious prosecution” coverage because it
is not premised on any actual legal proceedings. Under these circumstances, there was no
potential for coverage under the “malicious prosecution” coverage in the policy. Hence,
the superior court correctly ruled that Travelers had met its burden of demonstrating that
it had no duty to defend KLA in the 2014 Xitronix action.
III. Disposition
The judgment is affirmed.
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_______________________________
Mihara, J.
WE CONCUR:
_____________________________
Elia, Acting P. J.
_____________________________
Bamattre-Manoukian, J.
Travelers v. KLA-Tencor
H044890
12
Filed 2/13/20
CERTIFIED FOR PUBLICATION
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
SIXTH APPELLATE DISTRICT
TRAVELERS PROPERTY CASUALTY H044890
COMPANY OF AMERICA, (Santa Clara County
Super. Ct. No. CV288053)
Plaintiff, Cross-defendant and
Respondent, ORDER GRANTING REQUEST
FOR PUBLICATION
v.
KLA-TENCOR CORPORATION,
Defendant, Cross-complainant and
Appellant.
BY THE COURT:
Pursuant to California Rules of Court, rule 8.1105(b), the request for publication is
hereby granted. It is ordered that the opinion in this matter, filed on January 16, 2020,
shall be certified for publication.
Date: _____________________________
Mihara, J.
_____________________________
Elia, Acting P. J.
_____________________________
Bamattre-Manoukian, J.
Trial Court: Santa Clara County Superior Court
Trial Judge: Honorable James L. Stoelker
Attorneys for Plaintiff, Cross-defendant,
and Respondent: Bruce D. Celebrezze
Dean Joseph McElroy
Douglas Joseph Collodel
Clyde & Co US LLP
Attorneys for Defendant, Cross-complainant,
and Appellant: Jack C. Praetzellis
Dwight Craig Donovan
Jeffrey Bouslog
Fox Rothschild LLP
Travelers v. KLA-Tencor
H044890
2