In Travelers Prop. Cas. Co. of Am. v. KFx Med. Corp., 2016 WL 145996 (9th Cir. January 8, 2016), the U.S. Court of Appeals for the 9th Circuit affirmed the District Court’s order granting partial summary judgment in favor of Travelers as to its duties to defend and indemnify its insured, KFx, against a counterclaim filed in an underlying action in response to claims for patent infringement.
In KFx, the parties did not dispute that the counterclaim filed against the insured, which sought only injunctive and declaratory relief, did not assert a claims for “damages” for which coverage was afforded under the liability policy issued by Travelers. Rather, the court addressed whether, under Scottsdale Ins. Co. v. MV Transp., 115 P.3d 460, 466 (Cal. 2005), “the facts alleged, reasonably inferable, or otherwise known” to Travelers at the time of tender reasonably suggested that the counterclaim “might ‘fairly be amended’ to state a covered claim, thus giving rise to potential liability under the Policy and a corresponding duty to defend.” Specifically, KFx argued that, based on the facts alleged, the counterclaim could be amended to assert claims for abuse of process or product disparagement.
The court concluded that the counterclaim did not allege facts sufficient to support claims for abuse or process or product disparagement, and that the possibility that the counterclaim could be amended to assert such facts was “too speculative to trigger a duty to defend or to indemnify.” The court also confirmed that claims for prevailing party attorneys’ fees and “other and further relief at law or in equity,” did not trigger a defense obligation absent facts that would otherwise support a claim for damages.
Finally, the 9th Circuit held that even if the counterclaim could be amended to state a claim for damages based on the facts alleged, the policy’s exclusion barring coverage for any claim “arising out of any actual or alleged infringement or violation of… intellectual property rights or laws” would eliminate any defense or indemnity obligation. Because they would be responsive to KFx’s own claims for patent infringement, the court concluded that claims for abuse or process or product disparagement would necessarily “arise out of” the alleged infringement of patents, falling squarely within the exclusion.
Tressler Comments
The 9th Circuit’s decision in KFx is consistent with established California law confirming that an insurer’s defense obligation cannot be triggered by a pleading that does not assert a claim for damages potentially covered under the policy, or by the insured’s speculation that the pleading might be amended to assert facts to support such a claim. It also confirms that an exclusion barring coverage for liability “arising out of” intellectual property claims is not limited to claims against the insured for infringement. Rather, the exclusion encompasses claims responsive to the insured’s own claims for infringement, including claims for abuse of process or product disparagement.