In Travelers Property Casualty Co. of America v. KLA-Tencor Corp. (No. H044890; filed 1/16/20, ord. pub. 2/13/20), a California appeals court ruled that commercial general liability insurance for personal and advertising injury, defined to include malicious prosecution, does not cover a Walker Process antitrust cause of action under the Sherman Act and the Clayton Act for using a fraudulently procured patent to attempt to monopolize the market.
Travelers insured KLA under commercial liability policies with coverage for personal and advertising injury liability, which was defined as “injury, other than ‘advertising injury’, caused by. . . (2) Malicious prosecution.”
KLA and Xitronix manufactured competing products and the two companies had a history of legal disputes. In 2014, Xitronix filed a federal antitrust action for damages against KLA in federal court in Texas alleging a single Walker Process cause of action for “Attempted Monopolization” in violation of the Sherman and Clayton Acts. The 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 and Clayton Acts for using a fraudulently procured patent to attempt to monopolize the market. 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 an earlier 2008 action and that KLA did so with the intent to “monopolize and destroy competition. . . .”
Referring to a specific patent that had been obtained by KLA, 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 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.
KLA asked Travelers to defend and indemnify the 2014 Xitronix action, but Travelers declined on the ground that there was no potential for coverage, and brought a declaratory relief action to resolve its duties to defend and/or indemnify. On cross-motions for summary judgment, the trial court granted summary judgment for Travelers, saying that “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 … covered by the policy as a ‘personal injury.’”
The appeals court affirmed, rejecting KLA’s claim that “malicious prosecution” is ambiguous based on the decision in Lunsford v. American Guar. & Liab. Ins. Co. (9th Cir. 1994) 18 F.3d 653. In Lunsford, the Ninth Circuit Court of Appeals found “malicious prosecution” ambiguous with regard to the difference between the torts of malicious prosecution and abuse of process. But the Travelers v. KLA court said that “[t]he 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.”
The court stated that: “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.”
The Travelers v. KLA court also rejected an argument that the 2014 Xitronix action grew out of the parties’ prior litigation, which was a legal proceeding, saying that “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.’” Likewise, the “implied threat” of litigation and “potential liability to suit” were deemed insufficient, with the court stating that “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.”
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