Ninth Circuit Finds No Duty to Defend Patent Infringement Claim, Adding that Amendment to Assert a Disparagement Claim Was Too Speculative

February 16, 2016 | Insurance Coverage

The U.S. Court of Appeals for the Ninth Circuit, affirming a decision by the U.S. District Court for the Northern District of California, has ruled that an insurer was not obligated to defend its insured in a patent dispute – and that an amendment to the claims against the insured to assert a disparagement claim that would be covered was too speculative to be permitted.

The Case

A patent dispute arose between KFx Medical Corporation and Arthrex Inc. KFx sued Arthrex. Arthrex counterclaimed.

KFx sought defense and indemnity for the counterclaims from its insurance company, Travelers Property Casualty Company of America. Travelers disclaimed coverage and bought an action for declaratory relief.

The U.S. District Court for the Northern District of California ruled that Travelers had no duty to defend or indemnify KFx. KFx appealed.

The Ninth Circuit’s Decision

            The Ninth Circuit affirmed.

In its decision, the circuit court explained that Arthrex’s answer and counterclaims alleged only patent-related counterclaims for non-infringement, invalidity, and unenforceability and that none of those claims was covered under the policy.

It then explored whether the facts “reasonably inferable, or otherwise known” at the time of KFx’s tender of defense and indemnity to Travelers reasonably suggested that Arthrex’s counterclaims might “fairly be amended” to state a covered claim, thus giving rise to potential liability under the policy and a corresponding duty to defend.

The Ninth Circuit found that the possibility that Arthrex could amend its counterclaims to state claims for abuse of process or product disparagement (arguably giving rise to potential liability) was “too speculative to trigger a duty to defend or to indemnify.” It said that Arthrex’s “boilerplate request” for injunctive relief against interference with its business relationship could not reasonably be read as accusing KFx of making improper extrajudicial threats where there was no factual support for such an inference.

Moreover, the Ninth Circuit said, KFx had not identified any court process that Arthrex was supposedly accusing it of abusing, as would be required to support an abuse of process claim. The circuit court ruled, therefore, that KFx’s product disparagement theory failed because KFx had offered no evidence of any “disparaging publication.”

The circuit court added that there was no potential for coverage as a matter of law because Arthrex sought only injunctive and declaratory relief, whereas the policy covered only claims for “damages.” It decided that Arthrex’s “boilerplate request” for “other and further relief, at law or in equity” did not create a potential for damage liability where none of Arthrex’s enumerated claims provided a basis for a damage recovery.

Finally, the circuit court concluded that even if Arthrex’s counterclaims could be amended to state a covered claim, Travelers still would have no duty to defend or indemnify because the Travelers policy excluded from coverage any claim “arising out of any actual or alleged infringement or violation of . . . intellectual property rights or laws.” KFx’s claims arose out of the underlying patent litigation, and therefore, fell squarely within the exclusion.

The case is Travelers Property Cas. Co. of America v. KFx Medical Corp., No. 13-17301 (9th Cir. Jan. 8, 2016).

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  • Robert Tugander





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