Letter to Insured Asserting Right to Patent Applications Constitutes a Claim Made Prior to D&O Policy Period

In a win for Wiley Rein’s client, a California state court has held that an insurer correctly denied coverage under a D&O policy on the basis that the operative “claim” was made before the policy period.  CNEX Labs, Inc. v. Allied World Assurance Co. (U.S.), Inc., Case No. 18-CV-334461 (Cal. Super. Ct., Santa Clara Cty. Jul. 17, 2019).  The court found that a letter the insured received before the policy period “clearly suggested a lawsuit” against the insured and, in any event, the insured had also signed a standstill agreement before the policy’s inception, which separately constituted a “claim.”

The insured, an officer of an electronics manufacturer, received a letter from his former employer alleging that the former employer was entitled to certain patent applications the officer filed while working for the electronics manufacturer.  The letter advised the insured to return the patent applications or the company would “have no choice but to pursue all available legal remedies.”  A few months later, the insured and former employer entered into the first of several standstill agreements.  A year later, the parties filed simultaneous lawsuits against one another based on the dispute.

The insured’s D&O carrier denied coverage for the lawsuit on the basis that the “claim” – the letter the insured received from his former employer – was first made before the policy period, and in any event, the claim was barred by the policy’s intellectual property exclusion.  The policy defined a “claim” to mean a “written demand for monetary, non-monetary or injunctive relief.”  The insured argued that the lawsuit was much broader than the letter and standstill agreement, and included claims asserted for the first time during the policy period.

In the resulting coverage litigation, the trial court held on summary judgment that the “claim” was first made at the time the insured received notice of the letter from his former employer.  The court explained that the former employer’s “demand that patents [the insured] had applied for and assigned to [the new company] . . . was clearly a demand for non-monetary relief stemming from a purported wrongful act by [the insured][.]”  And, the court held that the standstill agreement executed before the policy period also constituted a “claim” because it met the policy’s definition of a “claim” as a “written request to toll or waive the applicable statute of limitations[.]”  The court concluded that the lawsuit filed against the insured was “related” to the letter and therefore both constituted a single claim made before the policy’s inception.

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