Opinion
01 Civ. 8847 (GEL)
August 14, 2002
Joel S. Weiss, New York, New York, Esanu Katsky Korins Siger, LLP for plaintiff American Century Services Corporation.
Stephen F. Willig, New York, New York, D'Amato Lynch, for defendant American International Specialty Lines Insurance Company.
OPINION AND ORDER
On December 20, 1998, defendant American International Specialty Lines Insurance Company ("AISLIC") issued a two-year investment management insurance policy (the "Policy") to plaintiff American Century Services Corporation ("American Century"). For a premium of $414,800, AISLIC offered up to $10,000,000 liability coverage, less a $350,000 retention, for various enumerated risks. In this action, American Century seeks a declaratory judgment, pursuant to 28 U.S.C. § 2201, that the Policy requires AISLIC to pay the costs and settlement amounts of certain patent infringement claims raised by third parties against American Century during the policy period. The plaintiff now moves for summary judgment. After full briefing, and oral argument before this Court on February 8, 2002, the motion will be denied, for the reasons that follow.
This action was filed on February 13, 2001, in the District of New Jersey. Originally, plaintiff sued both AISLIC and Select Insurance Company, but the claims against Select Insurance were dismissed pursuant to a stipulation and order signed by the parties on April 10, 2001, and filed on May 3, 2001. The case was transferred here on September 12, 2001, for the convenience of the parties and in the interests of justice, since the defendant had moved its principal place of business from New Jersey to New York. American Century Services Corp. v. American International Specialty Lines Ins. Co., Dkt. No. 01-0731 (AJL) at 4, 7, 33-34 (D.N.J. Sept. 7, 2001) (unpublished letter-opinion granting transfer to S.D.N.Y.) (Willig Aff. Ex. D) ("Transfer Op.").
BACKGROUND
This dispute concerns coverage for patent infringement claims raised by non-party patent owners Leon Stambler ("Stambler"), whose patents relate to internet security technology, and Ronald A. Katz ("Katz"), whose patents relate to automated telephone technology. American Century, a Missouri corporation with its principal place of business in Kansas City, Missouri, used allegedly infringing internet and telephone technology in providing investment management and related services to a group of mutual funds (the "Funds"). (Amended Compl. at ¶ 7.) These internet and telephone systems allow American Century customers to obtain account and market information, make transfers between the Funds, and contact American Century representatives. (Id. at ¶¶ 13, 21.) American Century has since settled with Katz. Stambler is not actively pursuing his claim. Plaintiff seeks a declaratory judgment as to coverage for both alleged infringements under its Policy with AISLIC, an Alaskan corporation with its principal place of business in New York.
At some point between the start of the Policy and early 2000, the defendant moved its principal place of business to New York from Jersey City, New Jersey. See footnote 1 above.
The first patent infringement claim arrived on March 27, 2000, when Stambler notified American Century that its use of certain secure internet services software infringed his patents. (Pl. Non-Confidential Ex. 3.) Plaintiff relayed this information to AISLIC on July 3, 2000. (Id. Ex. 5.) In a letter dated September 1, 2000, AISLIC responded that. "It appears that coverage, if any, would fall under Coverage B as the allegation is based upon the insured's use of secure internet services software in the operation of their mutual fund business." (Id. Ex. 6 at 2 (emphasis added).) Coverage B reaches "all sums which the Insured shall become legally obligated to pay as damages resulting from any claim or claims first made against the Insured . . . for any Wrongful Act of the Insured . . . but only if the Wrongful Act occurs prior to the end of the Policy Period and solely in the course of the management and/or operations of the Fund(s)." (Pl. Non-Confidential Ex. 1 at 1.) AISLIC also concluded that, "[i]f, in fact, [Stambler] has a patent . . . which the insured has used in the management of their mutual fund business without payment of royalties due, then this would be a gaining of profit or advantage to which they are not legally entitled." (Id.) Defendant concluded that such "royalties owed" fall under Exclusion 4(I)(2), which denies coverage for "any actual or alleged gaining of any profit or advantage to which the Insured is not legally entitled." (Id.) AISLIC later agreed to advance reasonable defense costs once the $350,000 retention had been exhausted. (Id. Ex. 7.) No settlement has been reached with Stambler, who apparently has not pursued his claim since a letter to plaintiff dated September 29, 2000. (Id. Ex. 8 at 3.)
On September 26, 2000, American Century received notice of the second patent infringement claim. This claim came from Katz, who informed American Century that he believed its interactive automated telephone system infringed one or more of his patents. (Amended Compl. at ¶ 14.) American Century notified AISLIC of Katz's claim on October 17, 2000. (Pl. Non-Confidential Ex. 11.) AISLIC again denied coverage. (Id. Ex. 13.) This time, however, AISLIC concluded that on the facts presented neither Coverage A, B, C, D, nor the Policy's amendment for Employment Practices Liability Insurance applied to Katz's claim, and accordingly, did not consider the applicability of any of the Policy's exclusions. (Id. at 3.) American Century settled with Katz for $3,403,321 on February 28, 2001. (Id. Ex. 17; Amended Compl. at ¶ 49.)
In addition to seeking a declaration that the Policy covers Stambler's and Katz's claims, plaintiff demands damages for breach of contract and wrongful denials of coverage, including the costs of bringing this action, compensatory damages for $3,053,321 (the settlement with Katz less the retention), and pre- and post-judgment interest.
DISCUSSION
I. Choice of Law
Before analyzing the claims asserted by American Century, we must determine what law governs the Policy. The contract does not have a choice of law provision. In a diversity action, federal courts apply the choice of law rules of the original forum state, here, New Jersey. Van Dusen v. Barrack, 376 U.S. 612, 639 (1964). In the course of its opinion transferring the case here, the New Jersey district court considered the choice of law issues, observing that "New Jersey has rejected the traditional rule that the law of the state where a contract was entered into determines the rights of the parties. Gilbert Spruance Co. v. Pennsylvania Manufactures' Assoc. Ins. Co., 134 N.J. 96, 102 (1993). Instead, New Jersey focuses on the state that has the most significant connections with the parties and the transaction and that has the greatest interest in resolving the matter. Id.; Gantes v. Kason Corp., 145 N.J. 478, 484 (1996)." Transfer Op. at 30. The court noted that under the significant connections test, as the Policy was issued by a New Jersey insurer to a Missouri insured, and negotiated in both states (Pl. Mem. at 9), neither American Century nor AISLIC was favored, Transfer Op. at 30. presumably meaning that neither home state was clearly established as the correct choice.
The plaintiff, claiming no material differences in New Jersey and Missouri law, except as to prejudgment interest and attorneys fees, relies on the laws of both states. The defendant does not consider choice of law in its brief, but cites New Jersey law in its argument. Neither party considers New York as a possible candidate, even though the New Jersey district court noted that "[a]lthough the contract was entered in New Jersey, the actual coverage decisions under the Policy were made in New York" id. at 29, suggesting that New York might rival New Jersey as the state with "the most significant connections with the parties and the transaction and that has the greatest interest in resolving the matter." Moreover, AISLIC demonstrated that since it moved its principal place of business, all relevant witnesses and documents are located in New York. Id. at 24-25.
Nevertheless, despite the inadequate attention given to the matter in their briefs, the parties appear to agree on the application of New Jersey law to the issues disputed here. Although American Century cites Missouri law as well as New Jersey law, it indicates no point relevant to this motion on which those states differ. AISLIC's argument implicitly agrees that New Jersey law applies. In general, implied consent to use a forum's law is sufficient to establish choice of law. See e.g., Tehran-Berkeley Civil Environmental Engineers v. Tippetts-Abbett-McCarthy-Stratton, 888 F.2d 239, 242 (2d Cir. 1989). Accordingly, we will apply the law of New Jersey.
II. Standard for Summary Judgment
The standard for summary judgment is frequently recited and well established. Summary judgment "shall be rendered forthwith if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(c). To defeat a motion for summary judgment, "an adverse party may not rest upon the mere allegations or denials of [his] pleading, but . . . must set forth specific facts showing that there is a genuine issue for trial." Fed.R.Civ.P. 56(e). The non-moving party "must do more than simply show that there is some metaphysical doubt as to the material facts." Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586 (1986) (citing DeLuca v. Atlantic Refining Co., 176 F.2d 421, 423 (2d Cir. 1949), cert. denied. 338 U.S. 943 (1950)). "[I]f the evidence is merely colorable, or is not significantly probative, summary judgment may be granted." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249-50 (1986) (citations omitted). The non-moving party cannot defeat summary judgment by offering merely speculative arguments in opposition. See Dister v. Continental Group, Inc., 859 F.2d 1108, 1116-17 (2d Cir. 1988). Accordingly, to defeat summary judgment, the opposing party must set forth "`concrete particulars'" showing the need for a trial. R.G. Group, Inc. v. Horn Hardart Co., 751 F.2d 69, 77 (2d Cir. 1984) (quoting SEC v. Research Automation Corp., 585 F.2d 31, 33 (2d Cir. 1978)).
In opposing this summary judgment motion, AISLIC makes frequent references to the need for discovery. In its reply brief, American Century characterizes AISLIC's opposition as seeking denial of summary judgment on the grounds that discovery is needed. Accordingly, the plaintiff argues that AISLIC's failure to submit an affidavit explaining why discovery is warranted is fatal to the defendant's arguments, citing Gurary v. Winehouse, 190 F.3d 37, 43 (2d Cir. 1999) and similar Second Circuit cases. See, e.g., Paddington Partners v. Bouchard, 34 F.2d 1132, 1137-39 (2d Cir. 1994). (Pl. Reply Mem. at 3-4.) In those cases, the parties opposing the summary judgment motions claimed that without discovery they are unable to respond to the motion, and sought a stay or denial of the motion in order to conduct discovery to enable them to respond. Here, although defendant refers to the need for discovery (Def. Mem. at 1, 9, 10), AISLIC does not claim that it lacks adequate information to oppose the motion. The defendant's references to the need for discovery merely illustrate the areas in which AISLIC sees questions of fact that bar summary judgment.
III. Interpretation of the Policy
Whether an investment management insurance policy of the type issued by AISLIC to American Century covers patent infringement claims is a novel question. Neither plaintiff nor defendant has produced cases on this issue (Def. Opp. at 2), and the Court's own research suggests that none exist.
Insurance coverage for patent infringement claims, however, is not a new issue and has been frequently debated. The majority of the cases, as well as the academic scholarship on the topic, focus on whether insurers have a duty to defend insureds against infringement claims under the advertising injury provisions of commercial general liability insurance policies. See, e.g., Tradesoft Technologies, Inc. v. Franklin Mutual Ins. Co., Inc., 329 N.J. Super. 137, 149-51, 746 A.2d 1078, 1085-86 (App. Div. 2000); FileNet Corp. v. Chubb Corp., 324 N.J. Super. 476, 500, 735 A.2d 1203, 1216 (Law Div. 1997), aff'd, 324 N.J. Super. 419, 735 A.2d 1170 (App.Div. 1999); David A. Gauntlett, Patents and Insurance: Who will Pay for Reimbursement?, 4 B.U.J. Sci. Tech. L. 6, Spring 1998. Such policies generally include provisions providing coverage for injuries such as libel, infringement of copyright, or unfair competition, caused in the course of the insured's advertising activities. The New Jersey courts have refused coverage of patent infringement under such policies, concluding that the claims are not within the commonly understood meanings of the covered terms and that to extend the policies to include patent claims, when they are silent on such coverage, would be "nonsense." See, e.g., Tradesoft Technologies, 329 N.J. Super. at 150-51; FileNet, 324 N.J. Super. at 500. Such denials of coverage accord with the general trend in other courts throughout the United States, which have usually ruled against insureds seeking to recover from their insurers for patent infringement. See, e.g., Gauntless, Patents and Insurance, 4 B.U.J. Sci. Tech. L. at 6.
Moreover, separate insurance for patent infringement claims is available in the market. "[I]nsisting that the comprehensive policies weren't designed for patent disputes," insurers like American International Group Inc. ("AIG"), which processes claims for AISLIC, and AISLIC itself, have introduced patent-specific plans with higher deductibles and premiums to reflect the greater risks in assessing possible liability. Edward Felsenthal, Business of AIG Will Offer Insurance Policy for Defendants in Patent Cases, Wall St. J., Jan. 7, 1994, at B9; see Koehler Aff. ¶ 5, Ex. B (copy of AISLIC's patent infringement policy). Introduction of such policies "reflects the growing importance of patent protection." Felsenthal, AIG, Wall St. J., Jan. 7, 1994, at B9. Without coverage, insureds face potentially large judgments on their own. On the other hand, "some patent specialists worry that the availability of insurance" will generate more litigation and make insured companies potential targets. Id.
But while this context may highlight the issues at stake in this case, its resolution depends not upon broad issues of patent policy or trends in the insurance business, but upon the meaning of the particular Policy at issue here (specifically, the scope of Coverage B and of the Policy's exclusion for illegally obtained gains). In interpreting the Policy under New Jersey law, we "`are bound to protect the insured to the full extent that any fair interpretation will allow.'" Coopers Laboratories, Inc. v. International Surplus Lines Ins. Co., 802 F.2d 667, 672 (3d Cir. 1986) (quoting Mazzilli v. Accident Casualty Ins. Co. of Wintherthur, 35 N.J. 1, 7, 170 A.2d 800, 803 (1961)). If the language supports two meanings, the one resulting in coverage must be applied. Id.
A. Waiver and Estoppel
American Century argues that AISLIC's defenses should be limited to those cited in its denial letters. (Pl. Mem. at 12, 18 (describing the "sole ground" — Coverage B for Katz and Exclusion 4(I)(2) for Stambler — asserted by AISLIC in denying each patent claim); Pl. Reply Mem. at 9-10; 2/8/02 Tr. at 33-34.) In advocating such a limitation, the plaintiff seems to rely on theories of waiver and/or estoppel. Neither prevents the defendant from asserting the defenses raised in its brief.
While there are some cases suggesting that waiver can never expand coverage beyond what was bargained for, see, e.g., Albert J. Schiff Associates, Inc. v. Flack, 51 N.Y.2d 692, 435 N.Y.S.2d 972, 975 (1980) ("where the issue is the existence or nonexistence of coverage . . . the doctrine of waiver is simply inapplicable"); Greenberg Covitz v. National Union Fire Ins. Co., 312 N.J. Super. 251, 264-65, 711 A.2d 909, 915-16 (App.Div. 1998) (although insurer may be estopped if insured detrimentally relies, waiver cannot be used to broaden coverage), we need not go so far in order to reject plaintiff's argument.
Plaintiff cites no case holding that under New Jersey law the mere failure to cite a ground of denial in a coverage letter operates as waiver. Instead, it points to cases where the insurer was estopped from relying on grounds not timely presented, because the insured acted in detrimental reliance on the position taken by the insurer in its letter disclaiming coverage. See Pasha v. Rosemount Memorial Park, Inc., 344 N.J. Super. 350, 359-60, 781 A.2d 1119, 1125 (App.Div. 2001) ("reasonable, detrimental reliance by the insured serves to estop [insurer] from changing its position concerning the basis for its denial of coverage"); Greenberg, 312 N.J. Super. at 265 ("detrimental reliance by the insured is a prerequisite to finding that coverage has been expanded by estoppel"); Griggs v. Bertram, 88 N.J. 347, 363-64, 443 A.2d 163, 171 (1982) (where "insurance carrier fails for an unreasonable time to inform the insured of a potential disclaimer, it is estopped from later denying coverage under the insurance policy").
The District of New Jersey recently certified for immediate appeal the issue of whether waiver "can be invoked to bar an insurer's reliance on an exclusion." Elizabethtown Water Co., 18 F. Supp.2d 464, 466 (D.N.J. 1998). In that case, the district court listed failure to include an exclusion in the disclaimer letters as one factor that supported waiver by not timely raising a defense, 15 F. Supp.2d 561, 566 (D.N.J. 1998), but soon after acknowledged that "substantial ground for difference of opinion" existed and warranted immediate appeal from the order on that issue, 18 F. Supp.2d at 465-66. Elizabethtown however, is sharply distinguishable from this case. There, the insurer had not merely failed to refer to the exclusion in its letters denying coverage, but had failed to refer to that exclusion even during the subsequent litigation, until after the deadline for filing dispositive motions. Indeed, the court specifically noted that the failure to raise the exclusions in the disclaimer letters was "not dispositive," and that it was finding a waiver "because [the insurer] raised [the exclusion in question] after the deadline for dispositive motions and less than a month before the trial date." 15 F. Supp.2d at 566. This holding, about which the court was sufficiently doubtful to certify an appeal, 18 F. Supp.2d at 465-66, is just an ordinary examples of a litigant being barred from raising arguments foregone at the appropriate stage of litigation. AISLIC, in contrast, has raised its Coverage B argument and the illegal gains exclusion from the very outset of the litigation.
American Century here can make no such showing of reasonable, detrimental reliance. This is not a case in which the defendant misrepresented that a kind of claim was covered and then turned around in litigation and said it was not covered, or one in which "an insurer, though in fact not obligated to provide coverage, without asserting policy defenses or reserving the privilege to do so, undertakes the defense of the case, in reliance on which the insured suffers the detriment of losing the right to control its own defense." Schiff Associates, 51 N.Y.2d at 699.
The closest case arguably supporting plaintiff is Pasha, in which the court found that an insured may have detrimentally relied by entering a settlement. since the decision to settle "could reasonably have been based on [the insured's] belief that the reasons given by the insurer for declining coverage were without merit and would ultimately be rejected in the ensuing litigation." 344 N.J. Super. at 360. Here, however, American Century could make no parallel claim that it settled with Katz in reasonable reliance on the belief that the only potential coverage problem was AISLIC's dubious interpretation of Coverage B. By the time that settlement was entered, indeed before Katz's claim had even been made, American Century was already on notice from AISLIC's earlier response to Stambler's similar claim that AISLIC regarded patent infringement claims as excluded from coverage by Exclusion 4(I)(2). Thus, it would have been unreasonable for American Century to act on the assumption that AISLIC would or could only rely on its interpretation of Coverage B in denying coverage of the Katz claim.
The argument that AISLIC is estopped from relying on its interpretation of Coverage B in denying coverage of the Stambler claim is even weaker. American Century has done nothing that could remotely be construed as acting in reasonable and detrimental reliance on AISLIC's position, and in any event AISLIC's denial letter expressed clear doubt about the applicability of Coverage B. (Pl. Non-Confidential Ex. 6 at 2 ("coverage, if any, would fall under Coverage B").
Accordingly, AISLIC can argue as to both claims that Coverage B does not include patent infringement and, even if it did, liability is excluded under Exclusion 4(I)(2).
B. Coverage B
Under Coverage B, the defendant must pay on behalf of the plaintiff "all sums which the Insured shall become legally obligated to pay as damages resulting from any claim" for a "Wrongful Act" occurring during the Policy period and "solely in the course of the management and/or operation of the Fund(s)." (Pl. Non-Confidential Ex. 1. at 1 (emphasis added).) As amended, "`Wrongful Act' means any breach of duty, neglect, error, misstatement, misleading statement, omission or other act wrongfully done or attempted by the Insured or so alleged by any claimant." (Id. Ex. 1, "Endorsement # 7" (emphasis added).)
Katz and Stambler charged that American Century infringed their patents. Since allegations of wrongdoing are sufficient to trigger coverage under the Policy, it is clear that American Century's use of the allegedly infringing telephone and internet systems was a Wrongful Act for the purpose of coverage. The parties, however, disagree about whether the patented technologies were used in the "management and/or operation" of the Funds. "Under New Jersey law, the words of an insurance contract should be given their everyday and common meaning." Newport Associates Development Co. v. The Travelers Indemnity Co. of Illinois, 162 F.3d 789, 791 (3d Cir. 1998) (citing Longobardi v. Chubb Ins. Co., 121 N.J. 530, 582 A.2d 1257, 1260 (N.J. 1990)). The defendant argues that the common meanings of "management" and "operation" do not cover the plaintiff's use of the disputed systems. (Def. Mem. at 14-17.) Specifically, AISLIC claims that "management" and "operation" requires the "application of judgment, skill or education . . . as opposed to a mere technical operation," and that the systems were used merely in the "process of managing the funds." (Id. at 16.)
AISLIC's argument is unpersuasive. Defendant attempts to limit "management" and "operation" to a class of activities far narrower than those understood by those terms. Under New Jersey law, we must "construe words granting coverage liberally." Coopers Laboratories, 802 F.2d at 673. But even without this encouragement to liberal construction, it is difficult to conceive of language broader, in relation to the activities of a business, than the "management and/or operation" of the business. The first listed definition of "management" in Webster's New Collegiate Dictionary (9th ed. 1985) ("Webster's") is "the act or art of managing: the conducting or supervising of something (as a business)." The more elaborate definition in the current online Oxford English Dictionary ("OED") begins with "the action or manner of managing, in senses of the v[er]b," and the leading definitions of "manage" thus incorporated (following a specialized meaning in the equestrian world) are at least as general: "2. . . . To handle, wield, make use of, . . . 3.a. To conduct or carry on (a war, a business, an undertaking, an operation." "Operation" is equally general in meaning: Webster's first definition is "performance of a practical work or of something involving the practical application of principles or processes." The OED's first non-obsolete meaning is "Working; exertion of force, energy, or influence; actions, activity, agency; manner of working, the way in which anything works."
Black's Law Dictionary (6th ed. 1990) ("Black's"), the only source relied on by AISLIC (D. Mem. at 15-16), is not to the contrary. Far from limiting the definition of "management" to exclude technical processes or apply only to the application of investment skills, Black's defines management" as "[g]overnment, control, superintendence, physical or manual handling or guidance; act of managing by direction or regulation, or administration, as management of family, or of household . . . or of great enterprises." Black's at 960. AISLIC attempts to import the concept of "skill and judgment" into this definition from Black's definition of "manage" as "[t]o control and direct, to administer, to take charge of. To conduct; to carry on the concerns of a business or establishment. Generally applied to affairs that are somewhat complicated and that involve skill and judgment." in. Even if this highly selective reading is accepted, it does not disqualify plaintiff's claim. Selecting and installing high technology equipment is surely a part of the "somewhat complicated" business of "conduct[ing]" or "carry[ing] on the concerns of" any modern "business or establishment," and is surely one that involves "skill and judgment."
Black's definition of "operation" as "[e]xertion of power; the process of operating or mode of action; an effect brought about in accordance with a definite plan; action; activity," id. at 1092, is at least as broad as Webster's or the OED's. Even if we allow AISLIC's arbitrary decision to ignore the breadth of the definition and to focus solely on the phrase "in accordance with a definite plan," there is no reason to adopt its peculiar conclusion that the adoption of modern communications technology was not part of American Century's "plan . . . to achieve gains for its customers through application of the skill of its employees." (Def. Mem. at 16.)
These definitions would certainly cover anything done in connection with carrying on a business. Surely, the installation of telephone or internet technology by an investment fund to enable its customers to contact the fund, review accounts, and engage in transactions with the fund is an act undertaken in the "conduct" of the fund's business — indeed, in the modern world, the use of such systems in a normal and nearly indispensable aspect of the operation of such a business. It is difficult to imagine what the installation and use of such technology could be called other than a part of the "management and/or operation" of the fund.
Moreover, AISLIC has not offered a reasonable alternative reading of the contract raising a question of fact whose meaning can only be resolved at trial. See e.g., Newport Associates, 162 F.3d at 792 (citing Tigg Corp. v. Dow Corning Corp., 822 F.2d 358, 361 (3d Cir. 1987) and Landtect Corp. v. State Mut. Life Assurance Co., 605 F.2d 75, 80 (3d Cir. 1979). Whether a contract is ambiguous is a question of law. Id. In determining whether a contract is ambiguous, we look to "`words of the agreement, alternative meanings suggested by counsel, and extrinsic evidence offered in support of those meanings.'" Id. (quoting Pennbarr Corp. v. Insurance Co. of N. Am., 976 F.2d 145, 151 (3d Cir. 1992) (citation omitted)). The contract language is not ambiguous. As noted by the plaintiff in oral argument, the Policy was designed "to cover the broad range of risks that mutual fund companies are subject to" and "involves very hefty premiums and also involves a high deductible . . . [T]his is big problem insurance." (Feb. 8, 2002, Tr. at 12-13.) Coverage B sweeps exceedingly broadly, to cover any allegedly wrongful act undertaken in connection with the conduct of the Funds managed by American Century. Patent infringement is a wrongful act, and the infringements alleged by Katz and Stambler were committed (if they occurred at all) in the ordinary course of conducting — that is, managing and operating — American Century's investment funds.
C. Exclusion 4(I)(2)
Finding that the claims fall into Coverage B, however, does not end the inquiry. The Policy includes an exclusion for illegal profit and advantage, which AISLIC claims applies to patent infringement damages. This exclusion, in keeping with favoring the insured in construction of policies, must be strictly interpreted. Coopers Laboratories, 802 F.2d at 672.
The Policy does not cover "any actual or alleged gaining of profit or advantage to which any Insured is not legally entitled." (Pl. Non-Confidential Ex. 1 at 5, Exclusion 4(I)(2).) In a patent infringement action, the patent owner can recover damages for reasonable royalties, lost profits, and other compensatory damages. See, e.g., Eric J. Lobenfeld, Overview of Damages in Patent Infringement Actions, 669 Practice Law Institute/Patent Litigation 767, 771 (October 2001). AISLIC argues that the exclusion precludes coverage of the patent infringement claims here, since those claims seek damages not for actual harms done to Katz and Stambler by American Century, but rather for royalties and profits that they would have received had American Century properly negotiated for licensing the use of their allegedly patented technology. In other words, the infringer must compensate the patentee for the gains and advantages it had while using the patented inventions illegally.
Citing cases from jurisdictions other than New Jersey, American Century argues that the illegal profit or advantage exclusion applies only to claims seeking the disgorgement of gains, and not to the type of claims advanced here. (Pl. Mem. at 13-17.) Even interpreting the exclusion strictly, nothing in its language suggests such a limitation. Katz and Stambler alleged that American Century enjoyed the use of their telephone and internet systems without payment. If American Century had identified Katz as the holder of a valid patent before using the telephone system and had agreed to purchase a license to use it, American Century would have paid Katz for the privilege of using the phone system. It would not have been entitled to coverage under the Policy for that license fee, as the Policy only covers Wrongful Acts and not the ordinary costs of doing business, such as payments for the use of desired technologies. If an employee of American Century had stolen tangible goods to be used in the course of its business, and the company then settled a lawsuit by agreeing to pay for the stolen materials, AISLIC would not be required to fund that settlement, because the settlement would simply require American Century to pay for an "actual or alleged gaining of profit or advantage to which the Insured is not legally entitled." To the extent that American Century has agreed with Katz to pay license fees for past and future use of Katz's intellectual property in connection with its business, the same rule applies. Such license fees are simply normal expenses of doing business, against which AISLIC has not contracted to insure the plaintiff, whether they are agreed to and paid with or without a threatened lawsuit.
For these reasons, American Century has not established that it is entitled to a judgment of coverage. AISLIC, on the other hand, has not moved for summary judgment, and may not be entitled to it. Material issues of fact may still exist as to the precise nature of the settlement with Katz or of the claims that Stambler has asserted against American Century.
To the extent that the settlement reflects expenses that plaintiff was required to pay for the past or future use of a valuable technology in the course of its business, such royalties or fees are within the exclusion and are not covered by the Policy. American Century cannot shift to its insurer the cost of patented technology it would like to use by failing to license the technology and waiting to be sued for damages for infringement by the patent holder. American Century has argued, however, that some portion of the settlement extends beyond simple royalties or fees, and represents some additional component of damages beyond what is necessary for Katz to recoup the royalties he would have received if plaintiff had simply negotiated up front for the use of his technology. (2/8/02 Tr. at 8-9.) The Court expresses no opinion, based on the limited record before it, as to whether any portion of the Katz settlement, or any aspect of potential further claims by Stambler, might go beyond recovery of the fair market value of intellectual property American Century used without payment in the course of its business, which it should have to disgorge as an illegal benefit or advantage it gained by appropriation. To the extent, however, that at least some portions of those claims sought restitution for precisely such misappropriation, the claims are to that degree within the exclusion from coverage cited by AISLIC.
Accordingly, plaintiff's motion for summary judgment must be denied.
CONCLUSION
For the reasons stated above, plaintiff's motion for summary judgment is denied.
SO ORDERED.