Opposition Brief — Simply Fresh Fruit, Inc. v. Continental Insurance

ee

~ supreme Court, U.S.

(a) FEE 2 p

OCT % 1996

No. 96-333

| CLERK

In The

Supreme Court of the United States

October Term, 1996

°

SIMPLY FRESH FRUIT, INC. & P&C SERVICES, INC.,

Petitioners,

THE CONTINENTAL INSURANCE COMPANY,

Respondent.

+

On Petition For Writ Of Certiorari

To The Court Of Appeals

For The Ninth Circuit

°

BRIEF IN OPPOSITION TO

PETITION FOR WRIT OF CERTIORARI

+

_ James H. Wikins

McCormick, BARsTOW, SHEPPARD,

Wayte & CARRUTH

5 River Park Place East

Fresno, California 93729-8912

Telephone: (209) 433-1300

Attorneys for Respondent

COCKLE LAW BRIEF PRINTING CO., (800) 225-6964

OR CALL COLLECT (402) 342-2831

7

TABLE OF CONTENTS

Page

REASONS FOR DENYING THE PETITION FOR

po tm Be cg tT | errr rr rrr rr ores 1

PATIMTIENS SR GAGA Seed whan cen des easnebungeneae ges 1

1. The Decision Of The Ninth Circuit Does Not

Conflict With The Decision Of Any Other Cir-

cuit Court Of Appeals In Holding That Patent

Infringement Is Not Covered Under A Liability

8. SE Pr oe err ee eee 1

2. Even If Such A Conflict Existed, Which It Does

Not, Patent Infringement Does Not Occur “In

The Course Of” Advertising ................. 7

3. Petitioner’s Arguments Concerning Trade

Dress Infringement And Allegations Of Viola-

tions Of The Lanham Act Are Irrelevant To

RRR FURR 0 vec ccv us nepenets cbignsncaueeee 10

4. The Decision Of The Ninth Circuit Does Not

Conflict With State Or Federal Decisions Or

Statutory Law In Holding That Misappropria-

tion Of Trade Secrets Is Not Covered Under A

Liability Insurance Policy .................... 13

ae me ek, EA er er ere tan eet Ye 17

ii

TABLE OF AUTHORITIES

Page

Cases

Atlantic Mutual Ins. Co. v. Brotech Corp., 857

F.Supp. 423 (E.D. Pa. 1994), aff'd, 60 F.3d 813

(Sed Cis. 1996). . 0. css ieeucacee eee 8

Bank of the West v. Superior Court, 2 Cal.4th 1254

ty) BP re gen te me 2, 13, 14, 15

Bohannon v. Aetna Casualty and Surety Co., 166

Cal App.Sd 1172 (1908): 4<<:+ssaenenee eee eneaeens 10

Bradshaw v. Igloo Products Corp., 912 F.Supp. 1088

(ND. HL. 1996) .. 1... ceceunueek eae enue 4

Dogloo v. Northern Ins. Co. of New York, 907 F.Supp.

19G3 (C.D. Cal. 1995)... siascpaeasseeeeas oeeeeee 13, 14

Everest & Jennings v. American Motorists Ins. Co., 23

Pod 226 Oth Cie 2906)... cicscciwcsa these 9, 14

Hurley Construction Co. v. State Farm Fire & Casu-

alty Co., 10 Cal.App.4th 533 (1992)................ 10

I.C.D. Industries, Inc. v. Federal Insurance Co., 879

KSupp. 460 (B.D. Pa. 1905) ses sccsbadaistoesas tei 8

Intermedics, Inc. v. Ventritex, Inc., 775 F.Supp. 1269

(N.D. Cal. 1999) .. ovncssccadaeneeeeesesnann 3, 4,5

Intex Plastics Sales Co. v. United National Ins. Co., 23

Fd 234 (9th Cie. BORG ie cues caeiy eos 9

Iolab Corp. v. Seaboard Surety Co., 15 F.3d 1500 (9th

Cis, 1994) . .....55<9'¢5 5005s Dae Rea 8, 14

Kaz Manufacturing Co., Inc. v. Cheseborough-Ponds,

inc., 317 F.2d 679 (Qnd Cig, 1963). ccccscsawesscaces 3

Knapp-Monarch Co. v. Cass Co. Products Corp., 342

Baa 622 (7th Cin. HGS), cccccvanssees cea tieeien 7

ili

TABLE OF AUTHORITIES - Continued

Page

L.A. Gear, Inc. v. E.S. Originals, Inc., 859 F.Supp.

Ree Ce MO BOOED oi icveccccvdvescvccs, sacs, & §

Lassen Canyon Nursery v. Royal Ins. Co. of America,

vam Was wee (My Cle, 1963)... cc ee ccc ccc kk 11

Ling-Temco-Vought, Inc. v. Kollsman Instrument

Corp., 372 F.2d 263 (2nd Cir. 1967)............ 7, 8,9

Merry Manufacturing Co. v. Burns Tool Company,

206 F.Supp. 53 (N.D. Ga. 1962), aff'd, 335 F.2d

TES ona Cac cide avs cabin ke ob dicunes 7

Microtec Research v. Nationwide Mutual Ins. Co., 40

ee Ue AOU a Saki ean eccedacaveccs %, 5

National Union Fire Ins. Co. v. Siliconix, Inc., 726

Poupp. 266 (N.D. Cal. 1989)..............c.c000. 12

National Union Fire Ins. Co. v. Siliconix Inc., 729

NE OF GEMM SM, BOM) 5 onc co cccscccnsancsvcnes 8

Neff Instrument Corp. v. Cohu Electronics, Inc., 269

vo Bed a Pree errors 4

New Hampshire Ins. Co. v. R.L. Chaides Constr. oe

847 F.Supp. 1452, (N.D. Cal. 1994) ............... 6, 9

Olympic Club v. Those Interested Underwriters at

Lloyds London, 991 F.2d 497 (9th Cir. 1993)........ 11

Owens-Brockway Glass Container, Inc. v. Interna-

tional Ins. Co., 884 F.Supp. 363 (E.D. Cal. 1995) ..... 9

Pitcarin v. United States, 547 F2d 1106 te ef

1976), cert. denied, 434 U.S. 1051 (1978)............. 5

Polaris Industries, L.P. v. Continental Ins. Co., 539

N.W.2d 619 (Minn. App. 1995), rev. denied,

TN PEGGY 6 500 o65 CaS hols be nive adh ce ek, 14

iv

TABLE OF AUTHORITIES - Continued

Page

Roche Products, Inc. v. Bolar Pharmaceutical Co., 733

F.2d 858 (Fed. Cir. 1984), cert. denied, 469 U.S.

DP LOWED 0 ios Sale G44 C4055 0 REECE Oe eee As 4

Rymal v. Woodcock, 896 F.Supp. 637 (W.D. La. 1995) .... 15

Select Design, LTD. v. Union Mutual Fire Ins. Co.,

CFS FG Tae CO RPO a voces as bec av enter ee kes 14

Sentex Systems, Inc. v. Hartford Accident & Indem-

nity Co., 882 F.Supp. 930 (C.D. Cal. 1995), aff'd,

eA Bg. Be Ae, | Ee Serer 15, 16

Simply Fresh Fruit, Inc. v. Continental Ins. Co., 84

Sa Rae Cn SO SN ee on vache ehikd Rome cee daa we u

Union Asbestos & Rubber Co. v. Evans Products Co.,

sae wae SED Cre CH. FOGG ss cccwidicensceaccen 5, 6

Walbrook Ins. Co. Ltd. v. Goshgarian and Goshgarian,

fae TODD. F717 Coa GA. TROP) ues enh civevesss 10

STATUTES

Se Urahs. e PUEE evecare kad vanck<hccde eeu bepkiae wis 3

8 USL 3 Wie oS eee 2, 4

REASONS FOR DENYING THE PETITION

FOR WRIT OF CERTIORARI

There are no compelling reasons to grant the present

writ. This case does not involve (1) a conflict of Appellate

decisions; (2) an important question of federal law; or (3)

an important question of law that conflicts with the deci-

sions of this Court. (Sup. Ct. R. 10) Therefore, the petition

should be denied.

The controversy in this matter involves the inter-

pretation of an insurance policy, under California law. The

Ninth Circuit’s decision does not conflict with any deci-

sion of this court, or any other circuit court of appeals.

The Ninth Circuit’s decision does not raise an important

federal question in a manner conflicting with a decision

of another state court of last resort or of the United States

Court of Appeal. The decision does not conflict with prior

Supreme Court decisions or federal constitutional or stat-

utory provisions relating to patent infringement or the

Lanham Act.

ARGUMENT

1. The Decision Of The Ninth Circuit Does Not Con-

flict With The Decision Of Any Other Circuit Court

Of Appeals In Holding That Patent Infringement Is

Not Covered Under A Liability Insurance Policy.

The present matter involves the interpretation of gen-

eral liability insurance policies, issued to a California

insured by respondent Continental Insurance Company.

It is undisputed that this interpretation is governed by

California law. In order for coverage to apply under the

Continental policies, the allegations in the complaint

must concern an injury arising out of an offense occur-

ring “in the course of” the insured’s advertising activ-

ities. (See App. A attached to Petition for Writ of

Certiorari, p. A-3) The California Supreme Court has

interpreted this language as limiting coverage to situa-

tions where the alleged covered injury is causally con-

nected to the insureds’ actual advertising activities. (Bank

of the West v. Superior Court, 2 Cal.4th 1254 (1992))

Petitioners assert that allegations of patent infringe-

ment under 35 U.S.C. § 271(a) satisfy the “in the course

of” requirement because “use” can be broadly defined to

include advertising.! The Ninth Circuit rejected Peti-

tioner’s argument and held that as a matter of California

insurance coverage law, patent infringement cannot occur

in the course of advertising activities. (See App. A.

attached to Petition for Writ of Certiorari, p. A-10) Peti-

tioners argue that this holding is in direct conflict with

prior Supreme Court and Federal Circuit decisions con-

cerning what constitutes “use” under the patent statute,

as well as the intent of the statute itself. However, peti-

tioners misconstrue such authorities.

1 The applicable patent infringement statute, 35 U.S.C.

§ 271(a) for the purposes of this case provides:

[W]hoever without authority makes, uses or sells any

patent invention, within the United States during the

term of the patent therefore, infringes the patent.

Although this statute has subsequently been amended effective

January 1, 1996, the amendment is irrelevant for the purposes of

construing coverage under the Continental policies as those

policies were in effect prior to January 1, 1996.

As one court has stated, “the use of a patented prod-

uct for the purpose of advertising defendant’s product is

not a(n] . . . act of infringement.” Intermedics, Inc. v.

Ventritex, Inc., 775 F.Supp. 1269, 1285 (N.D. Cal. 1991),

citing Kaz Manufacturing Co., Inc. v. Cheseborough-Ponds,

Inc., 317 F.2d 679 (2nd Cir. 1963). In Intermedics, plaintiffs

sought to establish that the defendant’s demonstrations

of a patented implanted defibrillator at scientific trade

shows would constitute acts of infringement. The court

noted that many cases which found such activity to con-

stitute infringement did so for the purpose of establishing

proper venue under 28 U.S.C. Section 1400(b), which

carries a necessarily lower standard of proof. Intermedics,

775 F.Supp at 1285. Moreover, in order to show infringe-

ment arising out of a demonstration of a patented prod-

uct, the aggrieved party must also show “some other

activity culminating in a sale of that device.” Id.; emphasis

in original. In Intermedics, the court found no evidence

that the defendant sold any units of the infringing device;

in fact, the defendant erected signs indicating that the

device was not available for general commercial sale. Nor

was there any evidence that the defendant solicited sales

agreements arising out of its demonstrations. The court

concluded: “The mere demonstration or display of an

accused product, even in an obviously commercial atmos-

phere, does not constitute an infringing use under Section

271(a).” Id. at 1286.

Similarly, the court in L.A. Gear, Inc. v. E.S. Originals,

Inc., 859 F.Supp. 1294, 1298 (C.D. Cal. 1994) held that the

defendant’s observation, handling and inspection of

allegedly infringing shoes in retail stores did not consti-

tute patent infringement. The court held that “[a]s a

matter of law, merely observing an allegedly infringing

device, demonstrating that device, or observing a demon-

stration of that device does not constitute a ‘use’ of that

device.” Id.

The L.A. Gear court directly addressed the fact that

the term “use” has never been taken “to its utmost possi-

ble scope.” Id., quoting Roche Products, Inc. v. Bolar Phar-

maceutical Co., 733 F.2d 858, 861 (Fed. Cir. 1984), cert.

denied, 469 U.S. 856 (1984). Citing the Intermedics case

with approval, the court held that if demonstration or

observation of the demonstration were held to be patent

infringement, “[a] patentee could bring a patent infringe-

ment action based on ‘use’ against every individual who

visited or happened to observe a demonstration or

exhibit in a museum, store, or any other public place

where an allegedly infringing product or process was

displayed.” Id. at 1298-1299.

In Bradshaw v. Igloo Products Corp., 912 F.Supp. 1088,

1101 (N.D. Ill. 1996), the alleged infringer showed the

patented cooler live or as a photograph in a large number

of marketing presentations. The defendant actually sold

non-infringing models, however. In finding no infringe-

ment of the patent, the court held: “[sJince use of a

patented product for promotional purposes is not itself a

“use” violating § 271(a) and since there was no “sale” of

the potentially infringing product, there is no violation of

§ 271(a).”

Petitioner’s citation of Neff Instrument Corp. v. Cohu

Electronics, Inc., 269 F.2d 668, 674 (9th Cir. 1959) as an

example of a broad interpretation of the term “use” is

inapposite. The court took note of the alleged infringer’s

solicitations for sales at product conventions as a per-

ceived threat to “ ‘manufacture’ and ‘sell’ infringing

machines.” Id.; emphasis added. Indeed, rather than

“use,” courts regard demonstrations using patented

products as a possible “sale” of the product. See Union

Asbestos & Rubber Co. v. Evans Products Co., 328 F.2d 949,

952 (7th Cir. 1964) [” .. . demonstrations are proper proof

of ‘sale’ and not proper proof of ‘use’ because in them the

accused article was not used for the purpose for which it

was intended. Its intended use was . . . not for demon-

stration to intended customers.” ]

Moreover, the L.A. Gear court quoted the Intermedics

court’s citation of Union Asbestos & Rubber Co., supra, for

the proposition that the demonstration of a device to

prove the occurrence of a “sale” is to be distinguished

from using demonstration to prove a “use.” As the Inter-

medics court stated, “[c]lommon sense suggests that dem-

onstration activity should be considered as evidence of an

infringing ‘sale’ and not as evidence of an infringing

‘use.’ ” Intermedics, 775 F.Supp. at 1286 n.5, quoted by L.A.

Gear, 859 F.Supp. at 1298, n.2.

Petitioner’s citation of Pitcarin v. United States, 547

F.2d 1106, 1125 (Ct. Cl. 1976), cert. denied, 434 U.S. 1051

(1978), does not advance petitioner’s argument. That case

does not stand for the proposition that a “demonstration”

is necessarily an infringing use. Pitcarin involved the

alleged infringement of patents by the U.S. government

relating to helicopter rotor structures and control sys-

tems. A phrase Petitioner omitted from its quotation clar-

ifies that the “[t]ests, demonstrations, and experiments”

are “intended uses of the infringing aircraft...” Pitcarin,

547 F.2d 1125; emphasis added.

In this case, the allegedly infringed product's

intended use was to process fruit, not to demonstrate the

product. See Union Asbestos & Rubber Co., 328 F.2d at 952.

Nor was there any commercial sales opportunity sought

or taken with respect to the allegedly infringing product.

Therefore, no patent infringement occurred. Thus, the

demonstration of a patented product, without commercial

sale of the product occurring as a result of the demonstra-

tion, does not constitute patent infringement.

Petitioner's plea to this Court to allow advertising to

serve as a new basis for patent infringement is without

legal foundation. “Only the unauthorized making, using

or selling of a patented invention constitutes infringe-

ment.” New Hampshire Ins. Co. v. R.L. Chaides Constr. Co.,

847 F.Supp. 1452, 1456 (N.D. Cal. 1994), citing 35 U.S.C.

§ 271(a). As demonstrated above, advertising does not

constitute any of these offenses.

There is no disagreement among the circuits of the

federal courts to which this Court need apply its power

to resolve conflicts. Although the term “use” for purposes

of patent infringement is undefined by statute, demon-

strations by an alleged infringer making use of a patented

product, which do not seek or result in sales of the

product, do not constitute “use” under the patent

infringement statute. Furthermore, if such a demonstra-

tion were to constitute patent infringement, the infringe-

ment would be the “sale” of the product, not its “use.”

2. Even If Such A Conflict Existed, Which It Does Not,

Patent Infringement Does Not Occur “In The Course

Of” Advertising.

Numerous federal courts have addressed the issue of

whether patent infringement occurs “in the course of” an

insured’s “advertising activities” for the purpose of

determining the existence of coverage under general lia-

bility insurance policies. It is well settled that patent

infringement, by definition, cannot occur in the course of

advertising activities.

In 1965, the Seventh Circuit Court of Appeals held

that the display of allegedly infringing irons in the

alleged infringer’s offices did not constitute an illegal

“use” of the products. Knapp-Monarch Co. v. Cass Co.

Products Corp., 342 F.2d 622, 626 (7th Cir. 1965).

Similarly, the Second Circuit Court of Appeals, in a

case in which the alleged infringer demonstrated his

data-plotting device to government representatives of the

Bureau of Ships, held that “mere advertising of a pat-

ented device is not itself an infringement.” Ling-Temco-

Vought, Inc. v. Kollsman Instrument Corp., 372 F.2d 263,

269-270 (2nd Cir. 1967).

Another court has held that, although the alleged

infringer apparently advertised for sale an infringing

plow device, no sales were ever made. Accordingly, the

court stated, “infringement involves either manufacture

or use or sale and does not encompass advertising.”

Merry Manufacturing Co. v. Burns Tool Company, 206

F.Supp. 53, 62 (N.D. Ga. 1962), aff'd, 335 F.2d 239 (5th Cir.

1964).

More recently, the United States District Court for the

Eastern District of Pennsylvania ruled on the appli-

cability of advertising injury liability insurance to patent

infringement. Noting that there must be a causal connec-

tion between the alleged injury and the insured’s adver-

tising activity, the court held that “[s]ince the gravamen

of patent infringement is the unauthorized production,

use or sale of a patented product and not its advertising,

it could not arise out of or occur in the course of advertis-

ing activities.” Atlantic Mutual Ins. Co. v. Brotech Corp.,

857 F.Supp. 423, 429 (E.D. Pa. 1994), aff'd, 60 F.3d 813 (3rd

Cir. 1994). See also, I.C.D. Industries, Inc. v. Federal Insur-

ance Co., 879 F.Supp. 480, 485-486 (E.D. Pa. 1995).

The district courts and courts of appeal of the Ninth

Circuit have, on numerous occasions, addressed the issue

of whether patent infringement can occur in the course of

advertising. In National Union Fire Ins. Co. v. Siliconix Inc.,

729 FSupp. 77 (N.D. Cal. 1989), the court examined

whether patent infringement, arguably covered by the

enumerated offense of “piracy” of the advertising injury

portion of the insurance policy, occurred in the course of

advertising activities. The court noted that “the infring-

ing act is the making, using, or selling of a patented

invention, not the mere advertising of the invention.”

Siliconix, 729 F.Supp. at 80. Furthermore, the court cited

Ling-Temco-Vought and Merry Manufacturing Co. for the

proposition that “mere advertising, without more, cannot

constitute actionable patent infringement.” Siliconix, 729

F.Supp. at 79.

Similarly, Iolab Corp. v. Seaboard Surety Co., 15 F.3d

1500, 1506 (9th Cir. 1994) [“. . . patent infringement can-

not reasonably be considered an act of piracy arising out

or committed in advertising” ], Everest & Jennings v. Amer-

ican Motorists Ins. Co., 23 F.3d 226, 229 (9th Cir. 1994)

[facts alleging patent infringement “simply do not estab-

lish the necessary causal connection between the alleged

infringement and E & J’s advertising”, and Intex Plastics

Sales Co. v. United National Ins. Co., 23 F.3d 254, 256 (9th

Cir. 1994) [“[b]ecause direct infringement involves a mak-

ing, using, or selling of the patented invention, the

infringement does not occur in the course of the insured’s

advertising activities”] all followed Siliconix in finding

that patent infringement does not occur in the course of

an insured’s advertising activities. See also, Microtec

Research v. Nationwide Mutual Ins. Co., 40 F.3d 968, 971

(9th Cir. 1994); Qwens-Brockway Glass Container, Inc. v.

International Ins. Co., 884 F.Supp. 363, 368 (E.D. Cal. 1995);

New Hampshire Ins. Co v. R.L. Chaides Constr. Co., Inc.,

supra, 847 F.Supp. 1452, 1456, citing Ling-Temco-Vought,

372 F.2d 263.

In sum, therefore, there is clear, demonstrable agree-

ment among the federal circuits that patent infringement

cannot occur “in the course of” an insured’s “advertising

activities” for insurance coverage purposes. As such, the

holding of the Ninth Circuit Court of Appeals in the

present case that, “as a matter of law, patent infringement

cannot occur in the course of an insured’s advertising

activities” (Simply Fresh Fruit, Inc. v. Continental Ins. Co.,

84 F.3d 1105, 1108 (9th Cir. 1996)), falls squarely within

this well established rule.

10

3. Petitioner’s Arguments Concerning Trade Dress

Infringement And Allegations Of Violations Of The

Lanham Act Are Irrelevant To This Action.

Petitioners argue that the Ninth Circuit’s decision

that there is no coverage for allegations of misappropria-

tion of trade secrets is in direct contravention of prior

supreme court and the mainstream trademark law as it

applies to section 43(a) of the Lanham Act. However,

because no allegations of violations of the Lanham Act

are present in the underlying actions, petitioners argu-

ments are irrelevant.?

California courts have consistently held that an

insurer’s duty to defend is not triggered by insured’s

creative far-fetched, speculative arguments. (Bohannon v.

Aetna Casualty and Surety Co., 166 Cal.App.3d 1172, 1177

(1985); Walbrook Ins. Co. Ltd. v. Goshgarian and Goshgarian,

726 FSupp. 777, 780 (C.D. Cal. 1989).) For example, in

Hurley Construction Co. v. State Farm Fire & Casualty Co.,

10 Cal.App.4th 533 (1992), the insured argued that cover-

age applied to an insurance fraud complaint filed against

it since the action could potentially become one for prop-

erty damage or bodily injury. In rejecting this speculative

argument, the court reasoned:

“The Fireman’s Fund complaint, on its face,

alleged no facts showing a potential for cover-

age. The extraneous ‘facts’ regarding potential

liability came from Hurley's counsel who speculated

? Furthermore, the issue of coverage for allegations of

misappropriation of trade secrets in this case is a matter of

California law. For this additional reason, the petition should be

denied.

11

about how Fireman’s Fund might amend its com-

plaint at some future date. Hurley, however, mis-

construed the concept of potential liability’ as

defined by the policy. ‘We look to the nature and

kind of risk covered by the policy as a limitation

upon the duty to defend . . . ’ (Citations.)”

Our Supreme Court, anticipating imaginative

counsel and the likelihood of artful drafting, has

indicated that a third party is not the arbiter of

the policy’s coverage. (Citations.) A corollary to

this rule is that the insured may not speculate

about unpled third party claims to manufacture

coverage.” (10 Cal.App.4th at 538; emphasis

added.)

Similarly, in Olympic Club v. Those Interested Underwri-

ters at Lloyds London, 991 F.2d 497 (9th Cir. 1993), the

plaintiff had restricted its membership which resulted in

a lawsuit being filed against it by the City of San Fran-

cisco for injunctive and declaratory relief. The club ten-

dered its defense of these actions to its directors and

officers’ liability carrier, which denied the claim. Since

the lawsuits did not allege wrongful acts of directors or

officers, and because the policy only applied to such

liability, the court held that coverage did not exist. In

response to the Club’s argument that the city could easily

amend its complaint to allege wrongful acts by officers

and directors, the court held that “mere speculation that

the City will allege new facts in its suit against the Club

cannot satisfy the Club’s burden of proof in this case.

(Citations.)” Id. at 503.

Likewise, in Lassen Canyon Nursery v. Royal Ins. Co. of

America, 720 F.2d 1016, 1018 (9th Cir. 1983), the court held

12

that there was no duty to defend the insured in an anti-

trust action under a policy insuring against “property

damage” where both the underlying complaint and dis-

covery indicated the underlying plaintiff sought purely

economic losses which were not covered under the policy.

The court found that the facts before it were not sufficient

to conclude that there was a potential claim for the dimi-

nution in the value of fixed assets, even though the

insured’s counsel argued that such losses could be recov-

ered in an antitrust action.

Finally, in National Union Fire Ins. Co. v. Siliconix, Inc.,

726 F.Supp. 264 (N.D. Cal. 1989), the court found that

neither the underlying complaints nor the insured’s dec-

larations indicated that potentially covered claims would

be adjudicated in the underlying patent action. The court

held that:

[A]lthough Siliconix’s counsel in the patent suit

may assert that potentially covered claims are

suggested by the damages asserted in [the] com-

plaint, his self-serving legal opinion hardly con-

stitutes a “fact” known to National Union

which, under Gray, gives rise to a duty to

defend.

. . The mere possibility that [the plaintiff]

might assert claims against Siliconix which are

covered by Siliconix’ insurance policies, at least

where such a possibility is extremely remote

and not suggested by either the complaint in the

underlying action not by facts known to the

insurer and the insured, is not a sufficient

ground upon which to deny National Union's

motion for summary judgment. (726 F.Supp. at

272.)

13

In addition, the court noted that since the trial of the

underlying patent action was to have begun in less than a

week, the underlying plaintiff was unlikely to amend its

complaint to include covered claims.

Here, based on the allegations in the underlying com-

plaints, it is apparent that petitioner’s arguments for

coverage are premised on the type of far-fetched and

speculative arguments which California courts have con-

sistently held are insufficient to create a duty to defend.

There are no causes of action for trade dress or trademark

infringement in the underlying complaints. Further, peti-

tioners have presented no evidence tending to show that

such underlying complaints could have been amended to

assert such causes of action. Rather, petitioners were

allegedly liable for misappropriation of trade secrets, for

which California courts have consistently held that no

coverage is provided.

4. The Decision Of The Ninth Circuit Does Not Con-

flict With State Or Federal Decisions Or Statutory

Law In Holding That Misappropriation Of Trade

Secrets Is Not Covered Under A Liability Insurance

Policy.

In Bank of the West v. Superior Court, supra, 2 Cal.4th

1254, the California Supreme Court held that in order to

satisfy the “in the course of” requirement, the alleged

injury must have a causal connection with the insured’s

advertising activities. Further, in Dogloo v. Northern Ins.

Co. of New York, 907 F.Supp. 1383 (C.D. Cal. 1995), the

court stated that in order for advertising injury coverage

to apply, the “advertising itself’ must have actually

14

caused the injury. (See also, Jolab Corp. v. Seaboard Surety

Co. 15 F3d 1500 (9th Cir. 1994); Everest & Jennings, Inc. v.

American Motorist Ins. Co. 23 F.3d 226, 229 (9th Cir. 1994))4

° Although the Dogloo court did find a duty to defend a case

in which misappropriation of trade secrets was alleged, the

court’s decision that such a duty existed was based on the fact

that the insured was allegedly liable for unfair competition

under the Lanham Act. Thus, the Dogloo decision does not

conflict with other cases construing California law which hold

that there is no coverage for misappropriation of trade secrets.

* Although not decided under California law, several out-

of-state cases have cited California decisions in holding that no

coverage exists for allegations of trade secrets. Following the

reasoning of Bank of the West, in the recent Minnesota case of

Polaris Industries, L.P. v. Continental Ins. Co., 539 N.W.2d 619,

621-22 (Minn. App. 1995), rev. denied, (1996) the insured sought

coverage for allegations that it misappropriated trade secrets

after it publicly announced that it had developed and produced

the first electronic fuel-injected snowmobiles. The court

observed that the advertising must directly or proximately

cause the injury, not merely result from some other activities

that were coincidentally advertised. Thus, the court held that

the advertisement of previously misappropriated information,

by itself, does not trigger advertising injury coverage.

The Supreme Court of Vermont also followed Bank of the

West in Select Design, LTD. v. Union Mutual Fire Ins. Co., 674 A.2d

798 (Vt. 1996), by requiring a causal nexus in a claim of

misappropriation of trade secrets. The insured was sued

because it hired an ex-employee of the plaintiff who had

allegedly misappropriated proprietary information such as a

customer list, existing orders and other customer information.

However, the court found no coverage existed because the only

relationship between the injury and advertising was that the ex-

employee had to somehow contact plaintiffs’ customers in order

to steal them from the insured. The court found that this contact

did not constitute advertising and thus, there was no causal

relationship between the injury and advertising.

15

In Microtec Research, Inc. v. Nationwide Mutual Ins. Co.

40 F.3d 968 (9th Cir. 1994), the insured stole a competi-

tor’s computer compiler code and passed it off as its own

in advertisements. The competitor sued Microtec for mis-

appropriation of trade secrets, but carefully and conspic-

uously avoided suing for damages arising out the

advertisements. The trial court determined on summary

judgement that the insurer had no duty to defend the

competitor’s suit. The Ninth Circuit relied on Bank of the

West and affirmed, finding no advertising injury coverage

because the alleged misappropriation of the stolen code

did not occur “in the course of” advertisements. The

court noted that Microtec did not use the code in adver-

tising activities in the same way that one might use a

copyrighted piece of music. Rather, the court noted, the

misappropriation caused the harm, not the advertise-

ment. (Id. at 971.)

The few recent cases finding coverage for misap-

propriation of trade secrets have done so by ignoring or

misapplying the “in the course of” advertising require-

ment.° For example, in Sentex Systems, Inc. v. Hartford

Accident & Indemnity Co., 882 F.Supp. 930 (C.D. Cal. 1995),

aff'd, 93 F.3d 578 (9th Cir. 1996), an insured employed a

former employee of a competitor in violation of a non-

competition agreement and allegedly used confidential

trade secrets to promote and advertise its products and

5 See e.g., Rymal v. Woodcock, 896 F.Supp. 637 (W.D. La. 1995)

(holding, without considering the causation issue, that the

insurer had a duty to defend a claim for misappropriation of

trade secrets under an advertising injury endorsement because

the policy ambiguously defined “advertising injury”. However,

this case was decided under Louisiana and not California law.)

16

solicit business from the competitor’s customers. Sentex

moved for summary judgement on its carrier’s duty to

defend under the advertising injury coverage. The district

court held that advertising need not be the only cause of

the injuries and that the insured need not prove causation

at the duty to defend stage. Id. at 945. The court stated

that in determining whether a causal connection exists,

courts apply the “potential for liability” standard, which

requires only that the cause of action arguably fall within

the scope of coverage to create a duty to defend. The

district court’s decision in Sentex appears to have com-

pletely ignored the “causal connection” requirement.

The Ninth Circuit affirmed the district court’s judg-

ment based solely on the fact that the allegations of

misappropriation of trade secrets at issue in Sentex could

constitute a “misappropriation of advertising ideas”. The

court specifically stated that it was affirming on “nar-

rower grounds” than those relied upon by the district

court. Further, the court noted that the issue of whether

the alleged advertising injury occurred “in the course of”

advertising was not challenged on appeal. For this rea-

son, the Sentex decision provides no controlling authority

for the “in the course of” analysis. Further, contrary to

petitioner’s arguments, because the Sentex decision did

not discuss the “in the course of” requirement, that deci-

sion does not contradict the Ninth Circuit’s prior holding

in Simply Fresh, which was based on a finding that misap-

propriation of trade secrets does not occur “in the course

of” advertising.

Thus, there is no duty to defend allegations of misap-

propriation of trade secrets under the Continental poli-

cies. Such allegations of misappropriation do not concern

17

an offense occurring “in the course of” advertising. The

Ninth Circuit held that it was the misappropriation of

Reddi-Made’s technology that caused Reddi-Made’s

alleged injuries, rather than any advertising activities

conducted by petitioners. Petitioners can point to no rele-

vant cases or statutes holding to the contrary.

Finally, this is an issue involving California law. Even

if the Ninth Circuit’s holding conflicted with decisions

from other jurisdictions, such decisions would not be

binding on California courts in determining whether cov-

erage exists for misappropriation of trade secrets. For this

additional reason, the petition should be denied.

+

CONCLUSION

For the foregoing reasons, the petition for writ of

certiorari should be denied.

Dated: October 7, 1996

Respectfully submitted,

McCormick, BARsTOW, SHEPPARD,

Wayte & CarrutH LLP

James H. WILkINs

Attorneys for Respondent,

Continental Insurance Company