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Adobe Systems, Inc. v. St. Paul Fire and Marine Insurance Company

No. C 07-00385 JSW (N.D. Ca., November 5, 2007)

Court allows plaintiff Adobe Systems Inc. (“Adobe”) to proceed with action to recover from its insurer St. Paul Fire and Marine Insurance Company (“St. Paul”) defense and indemnity costs incurred in connection with a series of legal actions between Adobe, Agfa Monotype Corporation (“Agfa”) and International Typeface Corporation (“International”).  These actions arose out of Adobe’s decision, without Agfa and International’s consent, to incorporate into its Adobe Acrobat software “technology designed to circumvent embedding bits in [typeface] fonts” in which Agfa and International held copyrights, which technology permitted users to embed those fonts into PDF documents the Adobe software allowed users to edit. 

The Court held that Errors and Omissions (“E&O”) policies issued by St. Paul potentially covered claims asserted in these lawsuits, as they provided coverage for losses resulting from Adobe products that are caused by a wrongful act – here the distribution of Adobe software which contained circumvention technology.  The Court reached this result notwithstanding the fact that the policy excluded coverage for intentional wrongful acts, because, while the decision to include this technology was intentional, Adobe believed it was permitted to do so.

The Court nonetheless denied Adobe’s motion for summary judgment, because there were questions of fact as to when Adobe first had notice of these claims.  As this was a claims made policy, if Adobe could reasonably foresee that a claim would be made before the policy period began, it would not have coverage under the policy.

Finally, the Court granted so much of St. Paul’s summary judgment motion that sought  dismissal of plaintiff’s bad faith claim arising out of St. Paul’s denial of coverage, as well as its claim for punitive damages, because such denial was based on a legitimate dispute as to St. Paul’s obligations to provide coverage under the policies at issue.

Adobe had licensed typeface fonts from Agfa and International for use in its products.  At some point, Adobe advised Agfa and International that it intended to include technology in its Adobe Acrobat products that would permit users to circumvent copyright protection technology embedded in Agfa and International’s fonts so that users could embed those fonts in PDF files they could edit with Adobe Acrobat.  Agfa and International objected, afraid this would allow third parties to infringe their copyrights.  The parties were unable to negotiate an acceptable resolution. As a result, the parties commenced a series of lawsuits, seeking determination, inter alia, as to whether Adobe’s inclusion of such circumvention technology violated the license agreements between the parties, as well as the Digital Millennium Copyright Act.  These actions were commenced, in the main, during the policy period.

Approximately one year after these actions were commenced, Adobe filed notice with St. Paul, seeking coverage for its defense costs, as well as indemnification for any loss it sustained therein.  When St. Paul disclaimed coverage, Adobe commenced this action.

St. Paul moved for summary judgment, holding it had no obligation to cover under the claims made Error and Omissions policy it issued.  The Court held that the language of the policy was broad enough to encompass the claims at issue, because it provided coverage for injury resulting from Adobe products that is caused by a wrongful act.  Such would apply here, as the injury to Agfa and International was caused by the release of Adobe’s product with circumvention technology, a wrongful act should the same not be permitted under the parties’ agreements.

The Court rejected St. Paul’s claims that coverage was excluded either by the policies’ intentional act, or intellectual property, exclusions.  The former only excluded intentional wrongful acts.  This, the Court held, required something more than the intentional decision by Adobe to include the circumvention technology in its product.  Rather, it required knowledge that such an act was not permitted by the parties’ agreements, which St. Paul could not establish.  Similarly, its claim that the intellectual property exclusion mandated dismissal of Adobe’s claim failed, because the claims encompassed a contract claim – namely breach of the parties’ license agreement.

The Court nonetheless denied Adobe’s motion for summary judgment, holding that issues of fact existed as to whether the lawsuits at issue constituted a claim first made in the policy period.  The policies at issue were claims made policies.  While the lawsuits in question were commenced during the policy period, for the purpose of the policy, a claim is first made when Adobe ‘could reasonably forsee that such claim or suit would be made or brought.’  Issues of fact existed on this score, with Adobe claiming it did not learn that a claim would be advanced prior to the policy period, and St. Paul countering that Adobe knew well before the policy period of Agfa’ and International’s objection to Adobe’s plans.

The Court did dismiss plaintiff’s claims for bad faith and punitive damages.  Under California law, an insurer may be held liable for additional damages, besides the coverage due under its policy, if its denial of coverage is unreasonable or without proper cause.  An insurer can also be held liable for punitive damages if it is guilty of fraud, malice or oppression in denying coverage.

Such was not the case here, held the Court.  Rather, the Court held there was a legitimate dispute as to the legal application of the policies’ coverage and exclusion provisions which mandated dismissal of these claims.  “[M]istaken or erroneous withholding of policy benefits, if reasonable or based on a legitimate dispute as to the insurer’s liability under California law, does not expose the insurer to bad faith liability.”

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