Aetna Casualty & Surety Co. v. Superior Court

March 1992, the insurers filed petitions for writs of mandate which were denied by this court. Thereafter, the Supreme Court granted the insurers’ petitions for review, then transferred the matter to this court with directions to hear them. Accordingly, this court issued an alternative writ of mandate. ■\Ve now consider the matter in light of Bank of the West.

Discussion

In Bank of the West, the Supreme Court considered the scope of coverage afforded by standard CGL policy language and held that a CGL does not cover claims for advertising injury arising under the Unfair Business Practices Act. (Bus. & Prof. Code, § 17200 et seq.) The court noted that CGL policies generally include coverage for “ ‘advertising injury’ which applies to ‘damages’ the insured must pay for injury arising out of ‘unfair competition’ occurring in the course of the insured’s ‘advertising activities.’ ” (Bank of the West, supra, 2 Cal.4th at p. 1258.)

The duty to defend is of course much broader than the duty to indemnify, and an insurer must defend a case which potentially seeks damages within the coverage of the policy. (Gray v. Zurich Insurance Co. (1966) 65 Cal.2d 263 , 275 [ 54 Cal.Rptr. 104 , 419 P.2d 168 ].) However, if there is no potential liability for covered damages as a matter of law, there cannot be the potential for indemnification, nor can there be a duty to defend. (See, e.g., Royal Globe Ins. Co. v. Whitaker (1986) 181 Cal.App.3d 532 , 537 [ 226 Cal.Rptr. 435 ]; see also Safeco Ins. Co. of America v. Andrews (9th Cir. 1990) 915 F.2d 500 , 502; Allstate Ins. Co. v. Miller (N.D.Cal. 1990) 743 F.Supp. 723 , 729.) Here, the patent infringement allegations against Watercloud create no potential recovery of covered damages because the alleged infringement could not occur “in the course of the named insured’s advertising activities.” (National Union Fire Ins. Co. v. Siliconix, Inc. (N.D.Cal. 1989) 729 F.Supp. 77 , 79; see also Bank of the West, supra, 2 Cal.4th at p. 1275.)

The trial court held that unfair competition could include inducing patent infringement. That holding was before Bank of the West, supra, 2 Cal.4th 1254 , in which the Supreme Court held that the language used in the policies referred to the common law tort of unfair competition. That tort refers to the passing off of one’s goods as those of another. (Id. at p. 1263; see also Chatton v. National Union Fire Ins. Co., supra, 10 Cal.App.4th at p. 863; Standard Fire Ins. Co. v. People’s Church of Fresno, supra, 985 F.2d at p. 449.)

Watercloud argues there is evidence that it was passing off its goods as being those of Somma. Not so. The sole example of such “evidence” is a

brief passage from the deposition testimony of Somma’s president, who testified a Somma customer told him another retailer had sold a mattress and wrote “Somma mattress” on a sale’s receipt. Even if that were true, it would not provide a basis for coverage. The CGL’s cover only unfair competition occurring in connection with Watercloud’s advertising activity, not that of another retailer. Moreover, in connection with its own advertising activity, the evidence indicated that far from passing off its goods as those of Somma, Watercloud touted itself as “the flotation industry’s pioneer in the engineering of soft-sided waterbeds” and stated it had created “a new way of sleeping” and “we are proud to put the Watercloud name upon it.” Thus, there was no basis for coverage under the unfair competition clause.

Patent infringement is a separate and distinct area of the law. The grant of a patent is the grant of a statutory monopoly and is an express exception to laws prohibiting monopolies. (Sears, Roebuck & Co. v. Stiffel Co. (1964) 376 U.S. 225 , 229 [ 11 L.Ed.2d 661 , 665, 84 S.Ct. 784 ].) Patent infringement therefore concerns the unauthorized manufacture, use or sale of a device or process containing an invention reserved exclusively to the patent holder. ( 35 U.S.C.S. § 271 (a); see also 4 Chisum, Patents (1991) § 1.04 (6), § 10.1 et seq.)

One who makes, uses or sells a product incorporating a patented invention is guilty of direct patent infringement. ( 35 U.S.C. § 271 (a).) One who aids or abets infringement of a patent by intentionally inducing infringement is as liable as a direct infringer. ( 35 U.S.C. § 271 (b); see also 4 Chisum, Patents, supra, § 17.04(1).)

Patent infringement cannot be committed in the course of advertising activities. (Bank of the West, supra, 2 Cal.4th at p. 1277; see also National Union Fire Ins. Co. v. Siliconix, Inc., supra, 729 F.Supp. at p. 80.) The patentee is not injured because a product incorporating its invention is advertised, but because the infringer, without consent, used or sold a product utilizing a protected invention. Accordingly, patent infringement cannot be covered under the subject policies.

Watercloud contends, however, that aiding and abetting a third party’s patent infringement can be covered. We disagree. A direct infringer—one who makes, uses or sells another’s patent invention—cannot be liable for inducing or contributing to patent infringement. (See Self v. Fisher Controls Co., Inc. (9th Cir. 1977) 566 F.2d 62 , 64, hereafter Self.) In Aro Mfg. Co. v. Convertible Top Co. (1961) 365 U.S. 336 [ 5 L.Ed.2d 592 ,' 81 S.Ct. 599 ], the United States Supreme Court held that under 35 United States Code section 271(c) there could be no contributory infringement in the

absence of direct infringement. (365 U.S. at pp. 341-342 [5 L.Ed.2d at pp. 596-597].)

With the enactment of the Patent Act of 1952, the concept of contributory infringement was divided between “active inducement” and “contributory inducement.” ( 35 U.S.C. § 271 (b), (c); see also Hewlett-Packard Co. v. Bausch & Lomb Inc. (Fed.Cir. 1990) 909 F.2d 1464 at p. 1469.) However, the legislative history indicates no change in the scope of what constituted “contributory infringement” was intended by the enactment of the Act. (Aro Mfg. Co. v. Convertible Top Co. (1964) 377 U.S. 476 , 485-486 [ 12 L.Ed.2d 457 , 467-468, 84 S.Ct. 1526 ].) Thus, contributory infringement will not lie against one who is a direct infringer.

As stated in Self supra, 566 F.2d at page 64, the doctrine of contributory infringement is “limited to situations where defendant itself has not directly infringed the patent by making, using, or selling the invention, . . . but has induced someone else to infringe the patent.” (Italics added; see also Magi-corp v. Kinetic Presentations, Inc. (D.N.J. 1989) 718 F.Supp. 334 , 346, fn. 8; Picker Intern., Inc. v. Varian Associates, Inc. (N.D.Ohio 1987) 661 F.Supp. 347 , 350.) Thus, a patent infringement plaintiff can recover from a direct infringer for all damages caused by the infringing product, including damages caused by a purchaser’s use of the product, but the defendant may not be required to pay additional sums as a result of allegedly inducing others to infringe. (Aro Mfg. Co. v. Convertible Top Co., supra, 377 U.S. 476 , 508 [ 12 L.Ed.2d 457 , 481].)

Here, it is undisputed that Watercloud made and sold the products it is accused of infringing. Its alleged inducement to infringe or contributory infringement is, therefore, merely a part of the direct infringement for which it would be liable because of its manufacturing and sale of the product. As a result, if it is found liable at all, Watercloud would be liable for direct infringement, not for inducing infringement or contributory infringement. (Self supra, 566 F.2d at p. 64; Aro Mfg. Co. v. Convertible Top Co., supra, 365 U.S. 336 , 341-342 [ 5 L.Ed.2d 592 , 596-597].) Inasmuch as there is no potential liability on the allegation of inducement of infringement or contributory infringement, there is no potential recovery of covered damages and therefore no duty to defend. (See B & E Convalescent Center v. State Compensation Ins. Fund (1992) 8 Cal.App.4th 78 , 100 [ 9 Cal.Rptr.2d 894 ]; Safeco Ins. Co. of America v. Andrews (9th Cir. 1990) 915 F.2d 500 , 501-502.)

Watercloud contends it could be found to have induced infringement because it “also separately sold water mattresses without any bladder, but

included instructions and advertisements on how to insert any of the available bladders into the mattress for proper use including the tube or cylinder bladders to which Somma claimed a patent. These materials taught a retailer or consumer how to set up a Watercloud soft-sided mattress with a tube-style bladder. . . . Only when Watercloud’s mattress was combined with tube bladders did Somma contend that it was infringing. Thus, without instructions or advertisements directing the use of tube bladders, sale of the Watercloud mattress would not infringe Somma’s patent. Therefore, Water-cloud’s advertising and instructions are claimed to be the operative fact that induced these retailers and consumers to infringe Somma’s patent.” There is no citation to the record to support this assertion. Small wonder, since there were no facts or evidence adduced below to substantiate this contention. Furthermore, the Somma complaint alleges it was a codefendant, American National Watermattress Corp., not Watercloud, that sold the individual water cylinders.

In addition, even if Watercloud could be liable for inducement of the patent infringement, there would still be no duty to defend. It is against public policy for an insurer to provide coverage for willful conduct. (See Tomerlin v. Canadian Indemnity Co. (1964) 61 Cal.2d 638 , 648 [ 39 Cal.Rptr. 731 , 394 P.2d 571 ]; see also Civ. Code, § 1668.) California Insurance Code section 533 provides, in pertinent part: “An insurer is not liable for a loss caused by the willful act of the insured . . . .” The purpose of these statutory proscriptions is to discourage the commission of willful conduct by withholding insurance coverage for the conduct. (See J.C. Penney Casualty Ins. Co. v. M.K. (1991) 52 Cal.3d 1009 , 1021 [ 278 Cal.Rptr. 64 , 804 P.2d 689 ]; Tomerlin v. Canadian Indemnity Co., supra, at p. 648.)

To be liable for inducing infringement, a party must have the specific intent to induce another to infringe. (Manville Sales Corp. v. Paramount Systems, Inc. (Fed.Cir. 1990) 917 F.2d 544 , 553.) Accordingly, it must be shown “the defendant possessed specific intent to encourage another’s infringement and not merely that the defendant had knowledge of the acts alleged to constitute inducement.” (Id. at p. 553, italics added.)

In Clemmer v. Hartford Ins. Co. (1978) 22 Cal.3d 865 [ 151 Cal.Rptr. 285 , 587 P.2d 1098 ], the Supreme Court addressed what constitutes a “willful act” under Insurance Code section 533, and held that “. . . even an act which is ‘intentional’ or ‘willful’ within the meaning of traditional tort principles will not exonerate the insurer from liability under Insurance Code section 533 unless it is done with a ‘preconceived design to inflict injury.’ ” (22 Cal.3d at p. 887.) Recently, in J.C. Penney Casualty Ins. Co. v. M.K., supra, 52 Cal.3d 1009 , the court clarified that “Clemmer does

not require a showing by the insurer of its insured’s ‘preconceived design to inflict harm’ when the insured seeks coverage for an intentional and wrongful act if the harm is inherent in the act itself.” (Id. at p. 1025, italics added.) After being denied a license to manufacture and sell the patented water mattresses, Watercloud began to manufacture, use, and sell copies of Somma’s mattresses. Such acts are inherently harmful.

It is not necessary to analyze the subjective intent of the insured where the act itself is wrongful. (State Farm Fire & Cas. Co. v. Ezrin (N.D.Cal. 1991) 764 F.Supp. 153 , 156.) Rather, the insured’s motive “is relevant only to the issue of whether his conduct was wrongful in the first instance.” (Fire Ins. Exchange v. Altieri (1991) 235 Cal.App.3d 1352 , 1359 [ 1 Cal.Rptr.2d 360 ]; accord, B & E Convalescent Center v. State Compensation Ins. Fund, supra, 8 Cal.App.4th at p. 96.) Thus, the question is not whether the insured subjectively intended to cause harm, but whether the conduct was intentional and inherently harmful.

Case law is clear that an act that is not inherently harmful in the abstract may nevertheless be so if the insured is aware of the potential harm. So, in Aetna Cas. & Sur. Co. v. Sheft (C.D.Cal. 1990) 756 F.Supp. 449 , the plaintiff alleged the insured had engaged in high-risk sex while intentionally concealing the fact that he had AIDS. (Id. at p. 451.) The court focused on the wrongfulness of the act rather than the intent to harm, and held the insured’s acts were willful under Insurance Code section 533. (756 F.Supp. at p. 451.) By contrast, in State Farm Fire & Casualty Co. v. Eddy (1990) 218 Cal.App.3d 958 [ 267 Cal.Rptr. 379 ], the court held that transmission of herpes was not willful because the insured believed he did not have the disease. (Id. at pp. 969-972.) In both cases there was intentional sexual activity which led to the transmission of a disease. The only difference was that in Sheft the insured knew he had the disease, while in Eddy the insured did not know. The act itself was intentional in both cases, but Insurance Code section 533 applied only in Sheft, where the insured was aware of the harm inherent in the act.

Liability for inducing patent infringement can only be imposed where the defendant “knowingly” induced the infringement. As a result, any acts by Watercloud for which inducement liability could be imposed would have to be intentionally performed with knowledge of their harmful nature. Coverage for such damages is barred by Insurance Code section 533 and Civil Code section 1668. Because as a matter of law there is no potential for recovery of covered damages for inducement of infringement in the absence of a showing that the insured acted with specific intent to induce the infringement, there is no potential for coverage in this case and therefore no duty to defend.