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Filed:  January 4, 2002

No. 2--00--1219

The instant controversy arose after the plaintiff, Konami(America) Inc., was sued by a business competitor for patentinfringement. The plaintiff tendered defense of the case to itsinsurer, defendant Hartford Insurance Company of Illinois, under aprovision of the insurance policy pertaining to "advertisinginjuries." Hartford denied coverage, and Konami brought a breachof contract action against Hartford. Both Hartford and Konamisubsequently filed cross-motions for summary judgment. The circuitcourt of Du Page County granted Konami's motion and deniedHartford's, finding that Hartford had a duty to defend Konami inthe underlying litigation. The trial court also subsequentlyawarded Konami certain attorney fees and costs it incurred in theproceedings but denied its request for additional attorney feespursuant to section 155 of the Illinois Insurance Code (Code) (215ILCS 5/155 (West 1996)). Both Hartford and Konami appeal from thetrial court's orders. We reverse.

The record reveals that Konami is in the business ofdesigning, advertising, and selling video games. Konami sellscoin-operated video games that are used in bars and arcades. Thecoin-operated video games have an advertising mode that repeatedlyshows portions of the video game to attract customers to play thegame. The video games are in advertising mode until a customerdeposits a coin to play the game.

Konami purchased two comprehensive general liability (CGL)policies from Hartford and one CGL policy from Hartford CasualtyInsurance Company (Hartford Casualty). The first policy issued byHartford was valid from December 17, 1986, to December 17, 1987. The second policy was valid from December 17, 1987, to December 17,1988. The third policy, issued by Hartford Casualty, was validfrom December 17, 1988, to December 17, 1989. Each of the policiescontained an endorsement that provided coverage for certaininjuries arising in the course of Konami's advertising. The threepolicies were similar, although only the first policy providedcoverage for piracy. None of the policies explicitly providedcoverage for injuries arising out of patent infringement.

On June 1, 1993, North American Philips Corporation andLockheed Sanders, Inc. (collectively referred to as North AmericanPhilips) filed a complaint in federal court against Konami. Thecomplaint sounded in direct and contributory patent infringementand also alleged that Konami had induced others to commit patentinfringement. The complaint alleged that Konami had infringed uponNorth American Philips's patents relating to a digital circuitryfor television gaming apparatuses. The complaint also alleged thatKonami had incorporated North American Philips's patented deviceinto the coin-operated video games that Konami manufactured, used,and sold to its distributors.

On July 9, 1993, Konami tendered its defense to its insurers,Hartford and Hartford Casualty. In making its tender, Konamiasserted that it was entitled to a defense and indemnificationunder the advertising injury provisions of the policies. OnDecember 8, 1993, Hartford and Hartford Casualty denied coverage,explaining that the patent infringement alleged in the underlyingcomplaint was not an advertising injury arising out of Konami'sadvertising activities.

On February 15, 1994, North American Philips and Konamireached a settlement as to the patent infringement lawsuit. Konamiagreed to pay North American Philips $495,000. This amountrepresented a 3% royalty for each game Konami sold between June1987 and April 1989 that incorporated the patented device.

On June 28, 1994, Konami filed a complaint for breach ofcontract against Hartford and Hartford Casualty. The complaintalleged that Hartford and Hartford Casualty had breached the termsof the insurance policies issued to Konami. Konami alleged thatHartford and Hartford Casualty were obligated to defend andindemnify Konami against any lawsuits arising from purported patentinfringement under the "advertising injury" provision of thepolicies.

On November 23, 1994, Konami filed a motion for summaryjudgment, arguing that the undisputed facts established that it hadviolated North American Philips's patent in the course of itsadvertising. On January 17, 1995, Hartford and Hartford Casualtyfiled cross-motions for summary judgment, arguing that there was nocausal connection between Konami's advertising and the allegedpatent infringement. The trial court denied Konami's motion forsummary judgment and granted Hartford and Hartford Casualty'smotion as to the second and third policy. The trial court,however, did not grant Hartford's motion for summary judgment as tothe first policy. Konami did not appeal from the orders grantingsummary judgment to Hartford on the second policy and HartfordCasualty on the third policy. Therefore, these policies are not atissue, and Hartford Casualty is not a party to the instant appeal.

On June 2, 1995, Konami filed a motion requesting the trialcourt to reconsider its denial of Konami's motion for summaryjudgment as to the first policy. In support of its motion, Konamirelied on Union Insurance Co. v. Land & Sky, Inc., 247 Neb. 696,529 N.W.2d 773 (1995), in which the Nebraska Supreme Court heldthat an insurer was obligated to defend and indemnify its insuredunder the "advertising injury" provision of its policy in a patentinfringement lawsuit. On February 20, 1996, relying on Land & Sky,the trial court granted the motion to reconsider and enteredsummary judgment on Konami's behalf.

On April 23, 1996, Konami filed a petition for damages seekingto recover its attorney fees and costs from Hartford as well as theamount it had paid to settle the underlying complaint. On May 6,1996, Konami filed an amended complaint for breach of insurancecontract requesting attorney fees against Hartford pursuant tosection 155 of the Code. Konami argued that it was entitled tosuch fees under section 155 because Hartford's delay and refusal topay its claims had been both vexatious and unreasonable. OnOctober 3, 1997, the trial court granted Hartford's motion forjudgment on the pleadings as to Konami's request for section 155attorney fees.

Between July 31, 1998, and April 16, 1999, the trial courtconducted a hearing on the petition for damages. On September 14,2000, the trial court entered judgment in favor of Konami for$984,943.15. This amount included the sum Konami paid to settlethe underlying patent infringement suit, attorney fees, andprejudgment interest. Hartford thereafter filed this timely noticeof appeal. Konami has filed a cross-appeal, arguing that the trialcourt erred in not awarding it additional attorney fees pursuant tosection 155 of the Code.

Hartford's first contention on appeal is that the trial courterred in denying its motion for summary judgment and grantingKonami summary judgment as to Hartford's duty to defend andindemnify. Specifically, Hartford argues that it had no duty todefend or indemnify Konami pursuant to the advertising injuryprovision of the policy. Hartford contends that patentinfringement is not a covered offense under the policy. Hartfordfurther contends that the underlying complaint did not allege thatany offense occurred in the course of Konami's advertising.

Our review of the trial court's entry of summary judgment isde novo. Clausen v. Carroll, 291 Ill. App. 3d 530, 536 (1997). The construction of an insurance policy and a determination of therights and obligations thereunder are questions of law for thecourt and appropriate subjects for disposition by summary judgment. Pekin Insurance Co. v. L.J. Shaw & Co., 291 Ill. App. 3d 888, 891(1997).

To determine an insurer's duty to defend its insured, thecourt must look to the allegations of the underlying complaint. Northbrook Property & Casualty Co. v. Transportation JointAgreement, 194 Ill. 2d 96, 98 (2000). If the underlying complaintalleges facts within or potentially within policy coverage, theinsurer is obligated to defend its insured even if the allegationsare groundless, false, or fraudulent. United States Fidelity &Guaranty Co. v. Wilkin Insulation Co., 144 Ill. 2d 64, 73 (1991). An insurer may not justifiably refuse to defend an action againstits insured unless it is clear from the face of the underlyingcomplaint that the allegations fail to state facts that bring thecase within, or potentially within, the policy's coverage. Northbrook Property, 194 Ill. 2d at 98.

In the instant case, the underlying complaint alleged thatKonami infringed, induced infringement, and committed acts ofcontributory patent infringement through its manufacture, use, andsale of a patented device. Konami asserts that these allegationsfall within the scope of its policy providing coverage foradvertising injuries. The CGL policy at issue explicitly providedcoverage for advertising injuries, stating:

"The company will pay on behalf of the insured all sums whichthe insured shall become legally obligated to pay as damagesbecause of personal injury or advertising injury to which thisinsurance applies."

The CGL policy defined advertising injury as follows:

"Advertising injury means injury arising out of an offensecommitted during the policy period occurring in the course ofthe named insured's advertising activities, if such injuryarises out of libel, slander, defamation, violation of rightof privacy, piracy, unfair competition, or infringement ofcopyright title or slogan."

Konami asserts that patent infringement is a form of piracy,a specifically enumerated offense under the policy. Konami furtherargues that, as it committed patent infringement in the course ofits advertising, Hartford was obligated to defend and indemnify it. Conversely, Hartford argues that patent infringement is notencompassed in any of the enumerated provisions of the policy. Wenote that Konami argues that none of the other enumerated offenseunder the advertising injury provision of the policy are applicableto the case at bar.

Our research reveals that whether a CGL policy providingcoverage for advertising injury resulting from piracy should beconstrued to cover patent infringement occurring in themanufacture, sale, and use of a patented device is an issue offirst impression in Illinois. Therefore, in order to discern themeaning of this provision, we must turn to well-settled rules ofcontract interpretation.

The construction of an insurance policy's provisions is aquestion of law. Outboard Marine Corp. v. Liberty Mutual InsuranceCo., 154 Ill. 2d 90, 108 (1992). In construing an insurancepolicy, the court must ascertain the intent of the parties to thecontract. International Minerals & Chemical Corp. v. LibertyMutual Insurance Co., 168 Ill. App. 3d 361, 370 (1988). Toascertain the meaning of the policy's words and the intent of theparties, the court must construe the policy as a whole with dueregard to the risk undertaken, the subject matter that is insured,and the purposes of the entire contract. Outboard Marine, 154 Ill.2d at 108. If the words in the policy are unambiguous, a courtmust afford them their plain, ordinary, and popular meaning. Wilkin, 144 Ill. 2d at 74. However, if the words in the policy aresusceptible to more than one reasonable interpretation, they areambiguous and will be construed in favor of the insured and againstthe insurer who drafted the policy. Outboard Marine, 154 Ill. 2dat 108-09.

Based on these foregoing principles, we do not believe thatthe provision at issue provided coverage for patent infringementoccurring in the course of the insured's manufacture, use, and saleof a patented device. As Konami correctly notes, some dictionariesdefine "piracy" to encompass patent infringement. See Black's LawDictionary 1148 (6th ed. 1990). However, the issue is not what"piracy" means in isolation but what it means in the context of theinsurance policy at issue. See Outboard Marine, 154 Ill. 2d at108. The insurance policy at issue uses the term "piracy" withinthe definition of advertising injury. Coverage under thisprovision is explicitly limited to occurrences in the course of thenamed insured's advertising activities.

Here, North American Philips did not allege in its underlyingcomplaint that it was injured in any manner by Konami'sadvertising. Moreover, as a matter of law, North AmericanPhilips's allegations of direct and contributory infringement arenot offenses that occur in the course of one's advertising. Directpatent infringement refers to the making, using, or selling of apatented invention. 35 U.S.C.A.