(Underlying Antitrust Lawsuit Based on Fraudulent Procurement of Patent Did Not Constitute Potential Malicious Prosecution Triggering Duty to Defend Under Personal Injury Coverage Afforded by CGL Policy)

(May 2020) - In Travelers Prop. Cas. Co. of America v. KLA-Tencor Corp. 45 Cal.App.5th 156 (January 16, 2020), the California Sixth District Court of Appeal affirmed summary judgment entered in favor of Travelers Property Casualty Company of America ("Travelers") in connection with the tender of defense of an antitrust lawsuit by KLA-Tenor Corporation ("KLA") under the personal injury coverage afforded by a Travelers CGL policy.

The underlying antitrust lawsuit was filed by Xitronix against KLA wherein it alleged that KLA was using a fraudulently procured patent (the '260 patent) from the United States Patent and Trademark Office ("PTO") to market certain types of drug products. The antitrust complaint alleged that KLA had engaged in "fraudulent conduct before the PTO. Xitronix further 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." In addition, Xitronix contended that KLA's "entire prosecution of the '260 patent was without any reasonable basis." It asserted that KLA's "continued prosecution of patent claims created a potential litigation threat that deterred potential investors in Xitronix."

KLA tendered the defense of the Xitronix lawsuit and contended that it alleged potential "malicious prosecution" as set forth in the definition of "personal and advertising injury" in Coverage B provided by the Travelers CGL policies (issued to KLA for the period of 2010-2015). In response, Travelers denied the defense of KLA in the Xitronix action and asserted, in part, that such action did not allege facts implicating potential malicious prosecution as that phrase was used in the definition of "personal and advertising injury" in the Travelers policy. Thereafter, Travelers filed a declaratory relief action seeking a ruling that it was not obligated to defend KLA against the Xitronix action. In response, KLA filed a cross-complaint for declaratory relief and bad faith against Travelers. Subsequently, Travelers filed a motion for summary judgment arguing that the Xitronix lawsuit did not allege facts implicating potential malicious prosecution and, therefore, it was not obligated to defend KLA against the Xitronix lawsuit. The trial court agreed with Travelers and granted summary judgment in its favor. 

In affirming the trial court's decision, the Court of Appeal rejected KLA's argument that the procurement of a fraudulent patent before the PTO constituted potential malicious prosecution. (An antitrust lawsuit based on fraudulent conduct before the PTO is referred to as a "Walker Process claim.") The Court of Appeal reasoned as follows: 

Here, KLA argues that Walker Process claims are so similar to malicious prosecution and abuse of process claims that it would be objectively reasonable for an insured to expect "malicious prosecution" coverage to extend to Walker Process claims. We disagree. 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 content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.