Insurance coverage for "inducement claims"

Weiss, Bryan M

I.

INTRODUCTION The following factual situation is one that is becoming increasingly familiar to many CGL insurers. It assumes an insured is in the business of manufacturing widgets. The widgets themselves do not violate or infringe on any patent. However, the widgets by themselves serve no useful function. It is only when they are combined with another component or components, as instructed by the insured, that a useful end product is reached. However, that end product is one that infringes on another's patent. The patent holder not only sues the manufacturer of the end product on a theory of direct product infringement, but sues the insured as well, on the theory that the sale and promotion of the widgets "induced" the manufacturer of the end product to infringe on plaintiff's patent.

A renewed battle is currently being waged in the area of insurance coverage for these claims of inducement to commit patent infringement, i.e., when an insured's activities, while not themselves arising to the level of direct patent infringement, are alleged to have induced others to commit patent infringement. Insureds have historically tendered these claims to their CGL carriers with the expectation that they fall within the scope of the policy's "advertising injury" coverage. Although courts have traditionally held that there is no coverage for these claims, recent developments have caused insureds to renew their quest to find coverage for inducement claims. This article will discuss the history and substance of claims involving inducement, its current status and an outlook for the future.

II.

WHAT IS "INDUCEMENT" To COMMIT PATENT INFRINGEMENT?

Whoever invents or discovers any new or useful process, machine manufacture, or composition of matter, or any new and useful improvement thereof may obtain a patent therefor.1 Excluded from such patent protection are laws of nature, natural phenomena, and abstract ideas.2

The concept of direct patent infringement is a familiar one. Under the federal statutes, one who "without authority makes, uses, offers to sell, or sells any patented invention, within the United States or imports into the United States any patented invention during the term of the patent therefor, can be held liable for patent infringement."3 Thus, "[i]nfringement, as that term is used in patent laws, is a violation of the rights of one who, under a valid patent or assignment thereof or license thereunder, has, for a limited time, a monopoly to make, use or sell an invention."' "Three separate elements must be established before there can be a finding of infringement: (1) the invention be made, used or sold (2) during the term of the patent (3) by one without authority to do so."5 The resolution of an issue of patent infringement is a two-step process: first, the court must determine the scope of the claims; then, the court must determine whether the defendant's alleged infringing activity falls within the scope of those claims.6 The crux of a direct infringement claim "is whether the inventive idea of the original patentee has been appropriated, and whether the defendant's device contains material features of the patent involved in the suit."'

By contrast, one who "actively induces" the infringement of a patent may also be held liable as an infringer.8 A person infringes on another's patent by actively and knowingly aiding and abetting another's direct infringement.' Inducement actions are limited to situations in which the defendant itself has not directly infringed the patent by making, using, or selling the invention, under section 271 (a) of title 35 of the United States Code, but has induced someone else to infringe the patent.' For example, in Chisum v. Brewco Sales & Manufacturing, Inc.," the defendant manufactured and sold a vertical pull tower unit which, when mounted to the user's frame-straightening machine, resulted in an infringing device. The defendant's product was not usable in any manner other than in conjunction with a frame-straightening machine. Further, the defendant instructed the users how to attach and assemble its unit to that machine. The court held that defendant could be held liable for inducement - "[i]nsofar as there can be no other use but an infringing use, the reasonable inference may be drawn that actual infringement by the purchasers of the Add-a-Tower has occurred."12

Similarly, in E.I. DuPont De Nemours & Co. v. Monsanto Co.,13 the court imposed liability for inducement after finding that the defendant's products themselves did not directly infringe the patent in question. The court determined that Monsanto knew of the content of the patent claims in question and yet continued to supply its polymer to customers with full knowledge that the customers were using the polymer to manufacture infringing products. Thus, by continuing to supply customers with the polymer, Monsanto was held to have actively induced the patent infringement, and knew or should have known that its actions would induce such direct infringement."

An inducement of infringement requires proof of two elements: 1) an act by the alleged defendant knowingly intended to induce another to infringe; and 2) the actual infringement by the third party.' The existence of these elements is crucial to an understanding of the insurance coverage issues to be discussed subsequently and thus will be examined in greater detail.

A. Requirement of Direct Patent Infringement

There is no liability for inducement of infringement unless an actual infringement in violation of section 271(a) occurs. 16 Direct infringement is a prerequisite to finding induced infringement. 17 There can be no liability for inducement of infringement under section 271(b) unless an actual infringement in violation of section 271 (a) is induced. Under section 271 (b) there can be no violation unless and until there is a direct infringement." It is the direct infringement that ripens the cause of action of section 271 (b) and, without an act of direct infringement, there can be no liability for inducement of infringement. "The fundamental basis of patent law requires that a patent holder establish acts of direct infringement before liability for inducement or contributory infringement can be found.""9 In short, "[t]here must be a direct infringement for one to be liable as active inducer."zo

As will be seen subsequently, courts have uniformly held that there is no coverage for claims of direct patent infringement. The maxim that there must be direct patent infringement in order for there to be inducement liability would thus logically dictate that there should be no coverage for inducement claims as well.

B. Requirement of Intent

In addition to the requirement that there be actual, direct infringement as a predicate to inducement liability, courts have also imposed a willful, intentional requirement. Although section 271 (b) does not explicitly require knowledge, most courts and commentators have concluded that liability can be imposed only for knowing and intentional inducement of infringement." Liability under section 271(b) requires a state of mind at least as culpable as is required for liability under section 271(C).22 In order to establish that the defendants actively induced infringement of patent, the plaintiff must establish that the defendants purposely caused, urged or encouraged another individual to infringe the plaintiff's patent and their actions must be taken with knowledge of likely infringing result.21 A plaintiff must demonstrate that "the alleged infringer's actions induced infringing acts and that he knew or should have known his actions would induce actual infringements."24 Furthermore, "the accused infringer must be shown to have actual knowledge of the patent and the infringement and the actual intent to induce the infringement."25

By contrast, there is no liability for inducement when the defendant was not aware of the patent until after the infringement suit was filed and its subsequent infringing acts continued upon its good-faith belief, based on advice of counsel, that its product did not infringe.26 Similarly, in Sims v. Western

Steel Co.,27 the court refused to find the defendant liable for inducement based on the lack of intent:

There is a dearth of evidence to establish that there was an active inducement present in this case. The extent of Western's activity was the transfer of the drawings. This subsection contemplates that the inducer shall have been an active participant in the line of conduct of which the actual infringer was guilty. Thus he should be in the nature of an accessory before the fact. No such activity was here shown. Furthermore, the cases require that it should have been intentional, and here again, there is a dearth of evidence on this point. To the contrary, there was strong positive evidence that there was no intent whatsoever on the part of Western to induce an infringement.28

The dual principles that there must be direct infringement in order to find inducement liability and the requirement of an actual intent to induce infringement are the foundation for courts throughout the United States in holding that there is no coverage for inducement claims. The genesis of those decisions and current status are the focus of the remainder of this article.

III

COVERAGE ISSUES INVOLVING PATENT AND INDUCEMENT CLAIMS

A. Subject Policies

Although the range of liability policies available to the insured differs, the most common are those that are based on the form promulgated by the Insurance Services Office ("ISO").29 The policies typically contain coverage for both "personal injury" and "advertising injury," each of which are defined by certain enumerated offenses. However, because none of the offenses comprising "personal injury" are even conceptually related to claims of patent infringement, the analysis has been limited to the "advertising injury" coverage. This article will be similarly confined.

1. "Piracy" Policies and Claims Involving Direct Patent Infringement The earliest policies containing coverage for "advertising injury" defined it as: "[i]njury occurring in the course of the named insured's advertising activities, if such injury arises out of libel, slander, defamation, violation of right of privacy, piracy, unfair competition, or infringement of copyright, title or slogan."so

One of the leading cases interpreting this policy language is National Union Fire Insurance Co. v. Siliconix Inc.3" There, the insured (Siliconix) was sued for patent infringement by IRC and sought coverage from National Union. The National Union policy included "piracy" in its definition of advertising injury. Although the court concluded that a claim of patent infringement could fall within the definition of "piracy," it nevertheless concluded that there was no coverage under the policy and granted National Union's motion for summary judgment.

The analysis employed by the court was quite simple: the patent infringement must have occurred in the course of the insured's advertising activities, and the parties agreed that "mere advertising, without more, cannot constitute actionable patent infringement."32 The court looked to the then-existing definition of "patent infringement" in section 271 (making, using or selling a patented invention without authority) and concluded "the infringing act is the making, using, or selling of a patented invention, not the mere advertising of the invention."33 In other words, as a matter of law, one cannot be held liable for patent infringement for advertising a product, even if that product itself is an infringing product. Since the advertising must encompass an "enumerated offense," the court concluded that: "even if piracy is construed to encompass patent infringement, patent infringement does not occur in the course of advertising, and is not covered as a type of advertising injury.""

Perhaps the most important aspect of the court's decision was its response to the insured's argument that advertising a product is part and parcel of selling that product and therefore selling the product is an act which occurs in the course of advertising. The court noted that it was undisputed that the insured did advertise the product in question but nevertheless rejected the insured's argument, saying that it contained a fundamental flaw. Taken to its extreme, this would mean that any act that is not otherwise covered under the policy would become covered if it was advertised, a result which the court said would "[extend] advertising injury coverage far beyond the reasonable expectations of the insured."35

California courts without hesitation have followed Siliconix. In Gitano Group, Inc. v. Kemper Group,36 the insured, Gitano, was sued for direct patent infringement, as well as inducement and contributory infringement. It sought coverage under the "advertising injury" portions of its CGL policies, which contained the "piracy" definition. The court looked at a variety of other cases on this issue, including Siliconix, and noted that those cases "support[] a conclusion that advertising as an element of patent infringement does not produce a separate harm."' It agreed with Siliconix that "patent infringement is not covered as a type of advertising injury"3" and that the insurer had no duty to defend the insured against the allegations of the underlying action alleging patent infringement.

A similar result was reached in Aetna Casualty & Surety Co. v. Superior Court." There, the insured (Watercloud) was insured under a policy that included "piracy" as part of the "advertising injury" definition and sought coverage for an action alleging direct, inducing and contributory patent infringement. Citing Siliconix, the court held that: "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.""40

Going further, the court explained:

Patent infringement cannot be committed in the course of advertising activities. 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."

Many courts have been more emphatic in concluding that there is no coverage for patent infringement claims because the term "piracy" does not pertain to those claims when read in the context of the entire policy. In Herman Miller, Inc. v. Travelers Indemnity Co.,42 the court, in rejecting the insured's argument that patent infringement was covered under its policy, noted that "[v]iewed alone, we could not say that the terms `piracy,' `idea misappropriation,' or `unfair competition' could never constitute patent infringement. However, to draw such an inference when considering these terms within the policy as a whole construes them too broadly."43

Other courts have stated that "one must consider what 'piracy' in the course of advertising means in the context of the insurance policy, not just what the term itself means."' Thus, "piracy" has been held to mean "misappropriation or plagiarism found in the elements of the advertisement itself -- in its text form, logo, or pictures -- rather than in the product being advertised."4"

The overwhelming majority of cases conclude that "piracy" does not encompass claims for patent infringement.46 The reasoning of the Ninth Circuit Court of Appeals in Iolab appears to be the prevailing view: "[w]hile patent infringement can be piracy of the advertised product, generally it is not piracy of the elements of the advertisement itself."47

2. Modem Policies and Claims Involving Direct Patent Infringement The majority of claims occurring today that involve coverage for direct patent infringement allegations arise under the ISO policy forms adopted in the mid- 1980's. This form generally provides as follows:

This insurance applies to "advertising injury" only if caused by an offense committed:

(1) in the "coverage territory" during the policy period; and

(2) in the course of advertising your goods, products or services.

The policies define "advertising injury" as consisting of the following enumerated offenses:

a. Oral or written publication of material that slanders or libels a person or organization or disparages a person's or organization's goods, products or services;

b. Oral or written publication of material that violates a person's right of privacy;

c. Misappropriation of advertising ideas or style of doing business; or

d. Infringement of copyright, title, or slogan.

For there to be coverage for advertising injury at least two elements must be met. The alleged conduct must fall within the scope of one of the above "enumerated offenses" comprising the definition of "advertising injury," and the enumerated offense must have been committed in the course of advertising [the insured's] goods, products or services. If either of these are lacking, there is no potential for coverage under the policy and hence no duty to defend.

Regardless of whether the insured's activities constitute "advertising activity," there is no potential for coverage if none of the four enumerated offenses described above are potentially implicated by the allegations of the underlying action. Thus, the analysis may begin and end with the question of whether an enumerated offense applies to the acts with which the insured is being charged. Of the four enumerated offenses listed above, the only two that have fostered any serious discussion of potential application to patent infringement claims are offenses (c) and (d): "misappropriation of advertising ideas or style of doing business" and "infringement of copyright, title, or slogan." There has been no concerted effort by insureds to claim that "patent infringement" constitutes some sort of disparagement or an invasion of privacy.' Thus, only the two enumerated offenses noted above will be discussed.

1. Misappropriation of Advertising Ideas or Style of Doing Business No court has found that patent infringement constitutes a "misappropriation of advertising ideas or style of doing business." As for the phrase "style of doing business," courts have determined that in the intellectual property context, it generally refers to the name under which an entity conducts its business, or the methods, processes and overall manner in which a business is conducted (as in a franchise system).49 It does not, however, include the patents one holds to its products and inventions. As such, courts have consistently decided that the enumerated offense of "misappropriation of advertising ideas or style of doing business" does not encompass patent infringement and inducement to commit patent infringement." Their rationale is as follows:

It is nonsense to suppose that if the parties had intended the insurance policy in question to cover patent infringement claims the policy would explicitly cover infringements of "copyright, title or slogan," but then include patent infringement, sub silentio, in a different provision, by reference to "[misappropriation of] [the] style of doing business.""

The court, in Advanced Interventional Systems, applying California law, determined that patent infringement does not fall within the enumerated offense for "misappropriation of advertising ideas or style of doing business." It noted the following definition of this enumerated offense:

The term "style of doing business," as it appears in the insurance policy, has been used by the courts to refer to a company's comprehensive manner of operating its business. "Style of doing business" expresses essentially the same concept as the more widely used term: "trade dress. 1151

In Owens-Brockway Glass Container, Inc. v. International Insurance Co.Ss the insured argued that "misappropriation of style of doing business" could refer to patent infringement. The court rejected that argument, holding that no reasonable insured could expect that that enumerated offense would include patent infringement. First, it reasoned:

there is the glaring absence of the word "patent" anywhere in the policy language defining advertising injury. The language defining "advertising injury" includes "slander," "libel," "right of privacy," "advertising ideas," "style of doing business," and "copyright." These are specific terms connected to well known legal categories, just as a claim of patent infringement is a distinct legal claim. But there is not a mention of "patent" anywhere in the definition or elsewhere in the policy. Surely if coverage for patent infringement were anticipated there would be some mention of the term itself just as "copyright" is explicitly listed.54

Second, the court noted:

neither the term "infringement of title" nor "misappropriation of style of doing business" suggests coverage of patent claims when these terms are viewed in the context of their use. One of the most significant parts of that context is that both terms are part of the definition of "advertising injury." There is nothing about the term "advertising injury" itself that remotely suggests coverage of patent infringement."ss

Courts have also rejected arguments that the offense is ambiguous as applied to patent infringement claims. Insureds have argued that because a California court of appeal held that the phrase "misappropriation of advertising ideas or style of doing business" was ambiguous in the context of a claim for trademark infringement,56 that ambiguity extends to patent infringement claims as well. However, it is clear from that decision itself that that same reasoning could not possibly to a claim for patent infringement and inducement to commit patent infringement. To begin with, the court stated that when contractual language is clear and explicit, it governs. The court readily admitted that claims of trademark infringement are vastly different from patent infringement insofar as whether they constitute a "style of doing business." As to trademarks, the court concluded that they could reasonably be considered to be part of an advertising idea or a style of doing business. The court then applied an "objectively reasonable" interpretation of the policy and concluded that claims of trademark infringement potentially fall within the scope of the enumerated offense of "misappropriation of style of doing business." An additional factor was that in an earlier policy, trademark infringement was specifically excluded from coverage, while in the policy at issue, that exclusion was deleted. Thus, the insured could reasonably have expected that trademark infringement claims were now covered.

Such is not the case with patent infringement. "Whatever ambiguity may inhere in the term `style of doing business,' it cannot fairly be stretched to cover patent infringement when the term 'patent' is never whispered and when `advertising injury' is at issue."" Another court has commented that misappropriation of advertising ideas or style of doing business is not ambiguous because it is defined by case law and common usage.58 A policyholder's "reasonable expectation" of coverage is only relevant when the policy is ambiguous.19 "When policy language is clear there is no coverage under the terms of the policy, it makes no difference whether a policyholder reasonably believed he or she had coverage. The language is dispositive."I

When a policy clearly excludes coverage, the court will not indulge in tortured constructions to divine some theoretical ambiguity in order to find coverage. "An insurer is entitled to limit its coverage to defined risks, and if it does so in clear language, we will not impose coverage where none was intended."" "Courts may not rewrite the insurance contract or force a conclusion to exact liability where none was contemplated."62

Thus, there is no support for the argument that the phrase "misappropriation of advertising ideas or style of doing business" is ambiguous when it comes to patent infringement. Courts have rejected coverage for these claims under this enumerated offense and have refused to find the phrase ambiguous as to patent infringement claims. What these authorities stand for is the fact that the policy's definition of "advertising injury" includes very specific offenses, yet is silent as to patent infringement. That silence, however, is deafening to insureds as there simply is no basis for concluding that the offense of "misappropriation of advertising ideas or style of doing business" can possibly encompass claims of patent infringement.

2. Infringement of Copyright, Title or Slogan

The other enumerated offense that has been analyzed with respect to patent infringement claims is that pertaining to "infringement of copyright, title or slogan." As with the previously discussed enumerated offense, courts have uniformly rejected the notion that this enumerated offense applies to patent infringement claims. Largely, as noted above, this conclusion is the result of a logical reading of the offense. If the drafters of the policy had intended to cover "infringement of patent," the term "patent" could easily have been included in the series of intellectual property matters following the word "infringement" (copyright, title and slogan). Reading "patent" into this string of offenses is simply reading something into the policy that does not exist.

Recognizing that a patent is neither a copyright nor a slogan, courts have taken a look at whether the infringement of a patent could constitute the infringement of a "title." In so doing they address insureds' arguments that when one owns a patent to a product, it in effect owns the "title" to that product, and that the insured's act of patent infringement is thus an "infringement of title." Those arguments have met with little success. Courts have generally decided that in ordinary use, the word "title" ordinarily refers to the non-copyrightable title of a book, film, or other literary or artistic work.63 In ShoLodge, Inc. v. Travelers Indemnity Co.,64 the court noted that "[t]his reading of the ordinary meaning of the word 'title' also makes the most sense in the context of the rest of the phrase `infringement of copyright, title, or slogan. 11,61 The infringement of the title of an artistic work, which is generally too short to be copyrighted, is directly related to the infringement of copyright law, which protects the artistic work itself. To include infringement of "patent" generally within this phrase would be to improperly expand the subject matter of the clause.66

In Industrial Indemnity Co. v. Apple Computer, Inc.,67 a California court of appeal discussed the meaning of the word "title" in the context of a policy exclusion which precluded coverage for infringement of trademarks and trade names but excepted titles from the scope of the exclusion. It rejected the argument that an insured's use of another's business name constituted "infringement of title." In so doing, it reinforced the notion that the phrase "title" refers to literary and artistic works:

The only reasonable construction of the ZS policy exclusion is that infringement of registered trademarks, service marks, and trade names is not covered unless the mark or name in question is either a slogan or a "title" in the narrower and more ordinary sense of the designation given to a work of art or other publishable matter. This interpretation fits well with the policy's coverage provision, which groups infringement of title together with copyright infringement.61

In Julian v. Liberty Mutual Insurance Co.,by a Connecticut appellate court held that infringement of title does not constitute patent infringement. In that case the insured was sued for direct patent infringement and inducement, alleging that it had infringed and had induced others to infringe a United States patent that he owned "in connection with the manufacture, sale and use of decoder machines such as the machine known as 'Coilmate'. . . ."70 Its insurer refused to defend the suit, maintaining that a patent infringement suit is not included within the coverage afforded by its policy. The appellate court eventually affirmed that denial. It rejected the insured's argument that "title" means "the right to ownership of any kind of property, such as a patent, and, therefore, a complaint alleging infringement of a patent involves essentially a claim of trespass upon the 'title' or ownership rights created by the patent."" The court noted that although the dictionary definition of the word "title" may encompass a patent infringement claim, courts have concluded that "title" does not include the right of ownership of property embodied in a patent. It relied on the logic discussed by the courts in St. Paul Fire & Marine Insurance Co. v. Advanced Interventional Systems, Inc., Atlantic Mutual Insurance Co. v. Brotech Corp., Gencor Industries, Inc. v. Wausau Underwriters Insurance Co., and Owens-Brockway Glass Container, Inc. v. International Insurance Co. In so doing, it noted that "' [b]asic common sense dictates that if these policies covered any form of patent infringement, the word 'patent' would appear in the quoted 'infringement' clauses. "' Further, the court found it "significant that the plaintiffs do not refer to any case holding that such a phrase [infringement of title] creates a reasonable expectation on the part of the insured for liability coverage of patent infringement claims.1173 Ultimately, the court concluded:

We are not inclined to chart new pathways in the law with respect to an interpretation of a single word in an insurance policy that excludes coverage for one special category of claims, when that interpretation has been approved by every court that has considered the issue as far as we are aware. It is preferable that such matters should be regarded as settled. We conclude that, in the context of the policy before us, the inclusion of the phrase infringement of title in the definition of advertising injury does not create a reasonable expectation on the part of an insured for liability coverage of patent infringement claims even under the broad standard of potential liability followed in cases involving the duty to defend."

Thus, in the context of a standard "advertising injury" provision the term "title" refers to a distinctive name or designation used to identify a literary or artistic work and not to the legal concept of ownership of property. Attempts by insureds to argue otherwise and to manufacture ambiguity or a coverage grant into a policy that otherwise clearly rejects coverage for patent infringement have been universally rejected by the courts.

B. Claims Involving Inducement to Commit Patent Infringement

Having established that there is no potential for coverage under the standard ISO liability policy for claims of direct patent infringement, the question becomes whether courts have approached claims of inducement in any different manner. The short answer is that they have not, and no court has found there to be a potential of coverage for inducement claims. The analysis is not unlike that employed for the direct patent infringement claims. In fact, since the underlying lawsuit against the insured often alleges both direct patent infringement and inducement and both are tendered to the insurer for a defense, the same rationale is employed to reach the conclusion that there is no potential for coverage of either.

In California, two different courts, one state and one federal, have addressed the issue of coverage for inducement claims. In Aetna Casualty & Surety Co. v. Superior Court,75 it was determined that there was no potential for coverage for inducement claims against the insured. There, the insured (Watercloud) was insured under a policy that included "piracy" as part of the "advertising injury" definition and sought coverage for an action alleging direct, inducing and contributory patent infringement. The trial court held that although the claims of direct infringement were not covered under the policies, there was a potential for coverage as to the claim for inducing infringement.

The appellate court reversed the trial court's ruling as to the inducement claims, holding that "[a] direct infringer -- one who makes, uses or sells another's patent invention -- cannot be liable for inducing or contributing to patent infringement."76 Since there is no coverage for direct infringement, there can be no coverage for inducement - thus, "[i]nasmuch 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."77

The court rejected the insured's arguments that since its advertising was the activity inducing the direct infringement by others, there must be coverage under the "advertising injury" coverage." It nevertheless decided that there was no duty to defend under this theory since by statute, a claim of inducement requires the specific intent to cause another to infringe a patent. The court held:

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.'9

The court's ultimate holding was that:

[t]he allegations of inducing infringement are by their very nature intentional and would require such a finding before there could be inducement liability .... Here ... because the gravamen of Somma's action is that Watercloud either directly infringed the patent or intentionally induced infringement, there can be no potential for coverage and therefore no duty to defend.10

The reasoning of Aetna Casualty was followed by the Ninth Circuit Court of appeals in Intex Plastics Sales Co. v. United National Insurance Co." There, as in Aetna Casualty, the insured argued that the products it sold and advertised did not themselves constitute a patent infringement but that they were component parts of other products which did infringe on another's patent. Although the insured argued that this imposed a duty to defend upon the insurer, the court held that "[t]his possibility has since been foreclosed, however, by the recent decision in Aetna ....82

California is not alone in concluding that there is no coverage for claims of inducement. In Heil Co. v. Hartford Accident & Indemnity Co.,83 the court found there was no coverage for inducement under a "piracy" policy for the same reasons that no such coverage exists for claims of direct patent infringement. In Herman Miller, Inc. v. Travelers Indemnity Co.,84 the court rejected claims of coverage for inducement on the theory that "[b]ecause the policy does not contain mention of such liability yet does expressly incorporate other forms of infringement liability, it cannot be reasonably construed to include coverage for patent infringement liability."85 In Gencor Industries, Inc. v. Wausau Underwriters Insurance Co.,86 the court held that "inducement to infringe [does] not constitute `misappropriation of advertising ideas or style of doing business. "' The Gencor court, after addressing the fact that logic dictates against reading "infringement of patent" into a policy that limited the infringement offenses to "copyright, title or slogan," noted that "[t]his logic applies equally to the inducement claim."88 The courts in both Advance International Systems and Julian, discussed previously, included inducement claims in their discussions as to why there is no coverage for patent infringement in general.

Thus, it is clear that courts do not take a different approach when it comes to analyzing claims of inducement to commit patent infringement as opposed to claims of direct infringement. The primary reason for this is that neither type of conduct reasonably falls within the scope of any of the "advertising injury" enumerated offenses. We have seen that inducement requires direct infringement, and that direct infringement claims are not potentially covered. It would therefore strain logic to conclude that inducement claims are covered, while direct infringement claims are not. When an insured instructs its customers to assemble its component parts in such a way that the completed product infringes on another's patent, the insured has not misappropriated the plaintiff's "advertising idea."89 The insured has not misappropriated the plaintiff's "style of doing business." Neither has it infringed on a copyright, title or slogan. Despite the fact that the insured may have in fact engaged in advertising activities, the simple, unavoidable conclusion remains that the conduct itself does not fall within any of the enumerated offenses.

Inducement claims add a separate element from direct patent infringement claims to the extent that a finding of inducement necessarily requires a finding of willful and purposeful conduct; the insured must have acted in such a way so as to knowingly cause others to commit patent infringement. There is no such offense as "negligent" or "good faith" inducement. The necessity of finding harmful intent as a predicate to liability runs counter to the coverage afforded by CGL policies and to public policy which abhors passing on the consequences of an insured's willful act to its insurers. The willful nature of this offense is yet another reason for concluding that there is no potential for coverage for inducement claims.

IV

CONCLUSION

It is virtually undisputed that there is no potential for coverage under the typical CGL policy of claims for direct patent infringement. Those claims simply do not fall within any of the enumerated offenses comprising "advertising injury" coverage under any of the modern policies. There is no reason to treat inducement claims any differently, and in fact, courts have employed the same analysis. When an insured induces others to commit patent infringement and when such infringement in fact occurs, this purposeful act not only falls outside the scope of the coverage provided in the typical liability policy, it also runs afoul of the nature of the type of insurance purchased by the insured.'

Whoever invents or discovers any new and useful process, machine manufacture, or composition of matter, or any new and useful improvement thereof may obtain a patent therefor.' Excluded from such patent protection are laws

2See Parker v. Flook, 437 U.S. 584 (1978); Gottschalk v. Benson, 409 U.S. 63 (1972); Funk Bros. Seed Co. v. Kalo Inoculant Co., 333 U.S. 127, 130 (1948); Rubber-Tip Pencil Co. v. Howard, 87 U.S. (20 Wall.) 498, 507 (1874) ("An idea of itself is not patentable ..... ) Le Roy v. Tatham, 55 U.S. (14 How.) 156, 175 (1852) ("A principle, in the abstract, is a fundamental truth; an original cause; a motive; these cannot be patented, as no one can claim in either of them an exclusive right.").

335 U.S.C. section 271 (a) (1999). The "offer for sale" language was added in 1994 and has prompted insureds to argue that one who advertises a patented product can now be held liable for patent infringement, and that this advertising provides the necessary causal connection to advertising activity to trigger coverage for direct patent infringement claims. These arguments are beyond the scope of this article as the focus of this article is on whether inducement claims constitute an "enumerated offense" and whether any exclusions apply.

'Papazian v. American Steel & Wire Co., 155 F. Supp. 111, 116 (N.D. Ohio 1957). 'Systematic Tool & Mach. Co. v. Walter Kidde & Co., Inc., 390 F. Supp. 178,197-98 (E.D. Pa. 1975) adhered to 409 F. Supp. 511 (E.D. Pa. 1976), rev'd 555 F.2d 342 (3rd Cir.) , cert. denied, 434 U.S. 857 (1977).

"See E.I. DuPont De Nemours & Co. v. Monsanto Co., 903 F. Supp. 680 (D. Del.1995), aff'd, 92 F.3d 1208 (Fed. Cir. 1996); Medical Designs, Inc. v. Donjoy, 812 F. Supp. 1076 (S.D. Cal. 1991); DataCard Corp. v. Kunz KG, 778 F. Supp. 544 (D. D.C. 1991), aff' d, 975 F.2d 870 (Fed. Cir. 1992); Minnesota Mining & Mfg. Co. v. Johnson & Johnson Orthopaedics, Inc., 976 F.2d 1559 (Fed. Cir. 1992); Jurgens v. McKasy, 927 F.2d 1552 (Fed. Cir.), reh'g denied, reh'g in banc declined, cert. denied 502 U.S. 902 (1991).

'Warner & Swasey Co. v. Universal Marion Corp., 237 F. Supp. 719, 742 (D.C. Colo. 1964), aff d. 354 F.2d 541 (10th Cir. 1965), cent. denied, 384 U.S. 927 (1966).

8 35 U.S.C. 271(b) (1999) - "Whoever actively induces infringement of a patent shall be liable as an infringer."

9Weyerhaeuser Timber Co. v. Bostitch, Inc., 178 F. Supp. 757 (D.R.I. 1959) - the notion of imposing liability for inducement was designed to protect a patentee against one who aids and abets the direct infringer.

"Gould-National Batteries, Inc. v. Sonotone Corp., 130 U.S.P.Q. 26, 29 (N.D. 111. 1961). 11726 F. Supp. 1499 (W.D. Ky. 1989), affd, 915 F.2d 1583 (Fed. Cir. 1990).

12 Id. at 1512.

13 903 F. Supp. 680 (D. Del. 1995), aff'd, 92 F.3d 1208 (Fed. Cir. 1996).

"In addition, Monsanto provided technical support to its customer in connection with the customer's production of the infringing fiber from the supplied polymer.

15H.B. Fuller Co. v. National Starch & Chem. Corp., 689 F. Supp. 923, 943 (D. Minn. 1988).

"Zenith Labs., Inc. v. Bristol-Myers Squibb Co., 19 F.3d 1418, 1423 n.5 (Fed. Cir. 1994); Joy Technologies v. Flakt, Inc., 6 F.3d 770, 774 (Fed. Cir. 1993); Procter & Gamble Co. v. Nabisco Brands, Inc., 604 F. Supp. 1485, 1487 (D. Del. 1985).

17 Met-Coil Sys. Corp. v. Korners Unlimited, Inc., 803 F.2d 684, 687 (Fed. Cir. 1986). "Stukenborg v. Teledyne, Inc., 441 F.2d 1069, 1071-72 (9th Cir. 1971); Warner & Swasey Co. v. Held, 256 F. Supp. 303 (E.D. Wis. 1966).

"Plastering Development Ctr., Inc. v. Perma Glas-Mesh Corp., 371 F. Supp. 939,949 (N.D. Ohio 1973).

'Digital Equipment Corp. v. Electronic Memories & Magnetics Corp., 452 F. Supp. 1262, 1265 (D. Mass. 1978). "[A] patent holder must establish acts of direct infringement before liability for inducement or contributory infringement can be found." Laminex, Inc. v. Fritz, 389 F. Supp. 369, 374 (N.D. 111. 1974),

21 Sims v. Western Steel Co., 551 F.2d 811, 817 (10th Cir. 1977); Knapp-Monarch Co. v. Casco Products Corp., 342 F.2d 622, 626-27 (7th Cir. 1965); Electronized Chemicals Corp. v, Rad-Mat, Inc., 288 F. Supp. 781, 784 (D. Md. 1968); Nordberg Mfg. Co. v. Jackson Vibrators, Inc., 153 U.S.P.Q. 777,784 (N.D. HIll. 1967); DONALD S. CHISUM, CHISUM ON PATENTS 17.04[1] at 17-69 (1998); Charles E. Miller, Some Views on the Law of Patent Infringement by Inducement, 53 J. PAT. OFF. Soc. 86, 119 (1971); Hauni Werke Koerber & Co., KG. v. Molins Ltd., 183 U.S.P.Q. 168, 171 (E.D. Va. 1974).

22Nordberg, 153 U.S.P.Q. at 784; Electronized Chemicals, 288 F. Supp. at 784; Electronized Chemicals, 288 F. Supp. at 784; CHISUM, supra note 21, 17.04 at 17-69; see also, Sims, 551 F.2d at 817 (inducer must be in the nature of an accessory before the fact to the infringement).

23See Sing v. Culture Products, Inc., 469 F. Supp. 1249 (E.D. Mo. 1979); Maxwell v. K Mart Corp., 880 F. Supp. 682,685 (D. Minn. 1995) (Proof of actual intent to cause or encourage acts which constitute patent infringement is necessary prerequisite to active inducement of infringement); Manville Sales Corp. v. Paramount Sys., Inc., 917 F.2d 544 (Fed. Cir. 1990). "Manville Sales Corp., 917 F.2d at 553.

25 Dynamis, Inc. v. Leepoxy Plastics, 831 F. Supp. 651, 657 (N.D. Ind. 1993). 26 Id.

27551 F.2d 811 (10th Cir. 1977). "Id. at 817.

29"ISO" is "the industry trade group that drafts form policies used in the American liability insurance market." Aetna Cas. & Sur. Co. v. Dow Chemical Co., 28 F. Supp.2d 440 (E.D. Mich. 1998). It is an independent agency that procures approval of insurance-policy language from the various states and provides pre-approved, copyrighted endorsements to its member insurance companies through distribution of a circular.

30Aetna Cas. & Sur. Co. v. Centennial Ins. Co., 838 F.2d 346 (9th Cir. 1988).

31 729 F. Supp. 77 (n.D. Cal. 1989).

32Id. at 79.

33Id.

34Id. at 80.

35Id.

1631 Cal. Rptr.2d 271 (Ct. App. 1994). 17M. at 276.

381d.

39 23 Cal. Rptr.2d 442 (Ct. App. 1993). 401d. at 445.

"Id. at 446 (citations omitted). 42 162 F.3d 454 (6th Cir. 1998).

43 Id. at 455.

Frog, Switch & Mfg. Co., Inc. v. Travelers Ins. Co., 20 F. Supp.2d 798 (M.D. Pa. 1998) (citing Atlantic Mut. Ins. Co. v. Brotech Corp., 857 F. Supp 423 (E.D. Pa. 1994)).

45 Atlantic Mut. Ins. Co. v. Brotech Corp., 857 F. Supp. 423, 428 (E.D.Pa.1994) (quoting Iolab Corp. v. Seaboard Sur. Co., 15 F.3d 1500, 1506 (9th Cir.1994), affd, 60 F.3d 813 (3d Cir. 1995)).

46See, e.g., Heil Co. v. Hartford Accid. & Indem. Co., 937 F. Supp. 1355 (E.D. Wis. 1996) ("Piracy" and "unfair competition" does not constitute patent infringement); Fluoroware, Inc. v. Chubb Group of Ins. Cos., 545 NW.2d 678 (Minn. Ct. App. 1996); Iolab Corp. v. Seaboard Sur. Co., 15 F.3d 1500 (9th Cir. 1994) (Piracy does not constitute patent infringement); Gencor Industries, Inc. v. Wausau Underwriters Ins. Co., 857 F. Supp. 1560 (M.D. Fla. 1994); Atlantic Mut. Ins. Co., 857 F. Supp. 423 (Piracy, unfair competition and infringement of copyright, title or slogan do not encompass patent infringement); Intex Plastics Sales Co. v. United Nat'l Ins. Co., 23 F.3d 254 (9th Cir. 1994) (Piracy held not to constitute patent infringement); Everest & Jennings, Inc. v. American Motorists Ins. Co., 23 F.3d 226 (9th Cir. 1994) (Piracy held to not include patent infringement); Davila v. Arlasky, 857 F. Supp. 1258 (N.D.III 1994) (Piracy does not constitute patent infringement); A. Meyers & Sons Corp. v. Zurich Am. Ins. Group, 545 N.E.2d 1206 (N.Y. 1989) (Piracy does not constitute patent infringement).

47Iolab Corp., 15 F.3d at 1506. Mention should be made of the decision reached by a Nebraska court in Union Ins. Co. v. Land & Sky, Inc., 529 N.W.2d 773 (Neb. 1995). In Land & Sky,, the Supreme Court of Nebraska was faced with determining whether the enumerated offenses of piracy, unfair competition, or infringement of copyright, title or slogan afford coverage for patent infringement. After carefully analyzing the policies, the court concluded that because the insurer specifically provided an exclusion for patent infringement in its excess insurance policy but did not in its primary policy the primary policy must be read to include patent infringement. There was no indication, however, that absent the conflicting policy language, the Court would have found patent infringement to constitute an enumerated offense. "I

'At least one insured has argued to a trial court that patent infringement constitutes an "invasion of privacy" on the theory that a person or company has a privacy interest in protecting its intellectual property. No appellate court has addressed this argument, nor does it appear that such an argument would be met with a great deal of enthusiasm by the courts.

"See, e.g., Medd v. Boyd Wagner, Inc., 132 F. Supp. 399, 409 (N.D. Ohio 1955) ("The trade name `Dairy Queen' connotes ... a style and method of doing business, a uniform plan of retailing the ice milk product . . . ."); Shakey's Inc. v. Martin, 430 P.2d 504, 507 (Idaho 1967) (describing method and style of pizza franchise business as "use of long beer handles, exposed cooking, a type of furniture, music, limited menus, etc."); Two Pesos, Inc. v. Taco Cabana, Inc., 112 S. Ct. 2753, 2755 n. 1 (1992) (the district court instructed the jury that "trade dress" is the total image of the business, including the shape and general appearance of the exterior of the restaurant, the identifying sign, the interior kitchen floor plan, the decor, the menu, the equipment used to serve food, the servers' uniforms and other features reflecting on the total image of the restaurant.); J.A. Brundage Plumbing & Roto-Rooter, Inc. v. Mass. Bay Ins. Co., 818 F. Supp. 553, 557 (W.D.N.Y. 1993), vacated on other grounds, 15 F.R.D. 36 (W.D.N.Y 1993) (stating that "one's mark and name is an integral part of an entity's `style of doing business."').

See Gencor Indus., Inc. v. Wausau Underwriters Ins. Co., 857 F. Supp. 1560, 1565-66 (M.D. Fla. 1994); St. Paul Fire & Marine Ins. Co. v. Advanced Interventional Sys., Inc., 824 F. Supp. 583, 585 (E.D. Va. 1993) (applying California substantive law to conclude that a patent infringement did not amount to the misappropriation of a "style of doing business").

51Gencor Ind. Inc., 857 F. Supp. at 1564.

52Advanced Interventional Sys. Inc., 824 F. Supp. at 585.

53 884 F. Supp. 363 (E.D. Cal. 1995).

54Id. at 367.

55Id.

56Lebas Fashion Imports of USA. Inc. v. ITT Hartford Ins. Group 59 Cal. Reptr 2nd 36 (ct. App. 1996)

"Owens-Brockaway, 884 F. Supp. at 369.

"Atlantic Mut. Ins. Co. v. Badger Medical Supply Co., 528 NW.2d 486, 489 (Wis. Ct. App. 1995).

"See Morris v. Atlas Assurance Co., 204 Cal. Rptr. 95 (Ct. App. 1984); Wolf Machinery Co. v. Insurance Co. of N. Am., 183 Cal. Rptr. 695, 697 (Ct. App. 1982).

6American Star Ins. Co. v. Insurance Co. of the West, 284 Cal. Rptr. 45, 52 (Ct. App. 1991).

6'Titan Corp. v. Aetna Cas. & Sur. Co., 27 Cal. Rptr.2d 476, 482 (Ct. App. 1994). 62 Legarra v. Federated Mut. Ins. Co., 42 Cal. Rptr.2d 101, 105 (Ct. App. 1995) (citations omitted).

63 Atlantic Mut. Ins. Co. v. Brotech Corp., 857 F. Supp. 423, 429 (E.D. Pa. 1994), affd, 60 F.3d 813 (3d Cir. 1995) ("[T]he term 'title' refers to a distinctive name or designation used to identify a literary or artistic work. .".).

168 F.3d 256 (6th Cir. 1999). esld. at 259.

6Id. See also Travelers Ins. Co. v. Weatherford, 520 SM.2d 726,728 (Tenn. 1975) (citing American Auto. Ins. Co. v. Jones, 45 S.W.2d 52 (Tenn. 1932)) ("lA]n insurer has a right to assume that the risk undertaken shall not be enlarged.").

188 Cal. Rptr.2d 886 (Ct. App. 1999).

"Id. at 882. See also note 10 of the decision, in which "title" is discussed in the context of titles of artistic works.

682 A.2d 611 (Conn. Ct. App. 1996). 7Id. at 612.

"Id. at 613.

72Id. at 614 (quoting Gencor Indus., v. Wausau Underwriters ins. Co., 857 F. Supp. 1560, 1564 (M.D. Fla. 1994)).

73Liberty Mut. Ins. Co., 692 A. 2d at 614.

74Id. at 615.

1123 Cal. Rptr.2d 442 (Ct. App. 1993). 76Id. at 446.

77 Id. at 447.

"Plaintiff argued that without instructions or advertisements directing the use of tube bladders, sale of the Watercloud mattress would not infringe Somma's patent. Therefore, Watercloud's advertising and instructions are claimed to be the operative fact that induced these retailers and consumers to infringe Somma's patent. Id.

"Id. at 448. CAL. INS. CODE 533, entitled "Wilful act of insured; negligence" provides: "An insurer is not liable for a loss caused by the wilful act of the insured; but he is not exonerated by the negligence of the insured, or of the insured's agents or others." CAL. Ctv. CODE 1668 provides: "All contracts which have for their object, directly or indirectly, to exempt anyone from responsibility for his own fraud, or willful injury to the person or property of another, or violation of law, whether willful or negligent, are against the policy of the law."

"Aetna Cas. & Sur. Co., 23 Cal. Rptr.2d at 449. 1123 F.3d 254 (9th Cir. 1994).

82Id. at 256-57.

11937 F. Supp. 1355 (E.D. Wis. 1996).

84 162 F. 3d 454 (6th Cir. 1998).

85Id. at 454-55.

86 857 F. Supp. 1560 (M.D.Fla. 1994).

87Id. at 1564.

88Id.

89In fact, "ideas" cannot be the subject of patent infringement, and thus the misappropriation of advertising "ideas" cannot logically extend to include patent infrigement.

90Just prior to the publication of this article, the California Supreme Court denied review of the decision reached by the California Court of Appeal in Mez Indus. v. Pacific Nat'l Ins. Co., 90 Cal. Rptr.2d 721 (Ct. App. 1999). That case, argued to the court by the author of this article, presented the issue of coverage for inducement claims, involving many of the same issues and arguments discussed in the foregoing article. In that case, the insured had been sued for inducement, tendered the claim to its insurer, which declined to provide a defense. The insured settled the underlying action and sued the insurer for breach of contract. The insurer's demurrer to that action was sustained without leave to amend and the insured appealed. The appellate court affirmed the trial court's ruling. The court initially rejected the argument that inducement claims are an enumerated offense under either the "style of doing business/advertising ideas" offense or the "infringement of copyright, title or slogan" offense. It followed the precedent discussed in this article to the effect that an insured could not have formed a reasonable expectation of coverage for patent infringement claims when the policy fails to list "patent infringement" as one of the specifically-enumerated offenses. It further rejected the claim that an infringement of a patent is tantamount to an "infringement of a title" based on the patent-holder claiming "title" rights to the product in question. The court rejected the argument that "title" refers to the ownership of property rights. Instead, it found that the offense, with the word "title" being found between the words "copyright" and "slogan", refers to "(1) those matters that are protected by copyright statutes and decisions, and (2) those literary, musical, artistic or commercial titles, marks or slogans which are protected by common law principles of unfair competition. The phrase simply cannot reasonably be interpreted to encompass claims involving patent infringement." Id. at 734. Finally, the court concluded that because a finding of inducement requires a finding of willful conduct, i.e., the intent to induce others to commit patent infringement, public policy precludes insurance coverage for such claims.

Bryan M. Weiss is an associate attorney with the firm of Murchison & Cumming in Los Angeles. He received his B.A. from Tulane University in 1982 and his law degree, with honors, from Whittier College School of Law. Mr. Weiss served as Editorin-Chief and Comments Editor of the WHITMER LAW REVIEW, He specializes in insurance coverage matters, particularly issues concerning advertising injury and personal injury claims, and has authored materials and given lectures on these subjects. He is admitted to practice in all courts in the state of California and is a member of the Association of Southern California Defense Counsel and the Defense Research Institute.

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