In Bayer v. Watson, the panel throws out Bayer’s patent to its Staxyn erectile dysfunction drug as being obvious, noting that the district court focused too heavily on the commercial availability of the prior art. The panel also noted that potential drawbacks with the claimed formulation do not amount to “teaching away.” In Two-Way Media v. Comcast, the panel concedes that the specification may describe an innovative “scalable architecture,” but the claims use result-based functional language that do not describe how to achieve these results in a non-abstract way. Therefore, the district court’s determination of invalidity under § 101 is affirmed as to an early internet patent directed to a system for streaming audio/visual data. In MasterMine Software v. Microsoft, the Circuit reverses a ruling of indefiniteness as to software claims the district court held were invalid as attempting to cover both methods and systems. In the claims at issue, the functional language focuses on capabilities of the system rather than a specific action that must be performed (e.g., by a user) for infringement to occur, and therefore do not fail as being directed to both a method and a system.
Thanks to my colleague Mike Moore for his help with this week’s report.
The Circuit reverses a determination by the district court, ruling on appeal that Bayer’s patent covering an erectile dysfunction drug is invalid as being obvious. The effect of this is that Bayer’s patent coverage on its Staxyn drug will expire in 2018 instead of 2028, opening the door for the generics sooner than Bayer had hoped.
8. A drug formulation in the form of an uncoated tablet which disintegrates rapidly in the mouth and releases the drug in the mouth without swallowing the tablet comprising vardenafil hydrochloride trihydrate, and at least two sugar alcohols.
9. The drug formulation according to claim 8, wherein said sugar alcohols are a mixture of sorbitol and mannitol.
11. The drug formulation of claim 8, wherein at least one sugar alcohol is sorbitol.
In a bench trial, the district court ruled that Watson had not proven by clear and convincing evidence that a skilled artisan would not have been motivated to use the claimed elements. But according to the Circuit panel, the district court’s finding is contradicted by the references cited by Watson’s expert Dr. Jacobs that the court failed to consider. All six references identify ED drugs as ODT formulations. Several of these references indicate a person of ordinary skill in the art would have considered ODT formulations to be applicable to vardenafil, the active ingredient in Staxyn.
Bayer argued that Watson flooded the district court with references without adequately addressing them, but the panel disagrees. Watson produced these nine references to support a narrow point: they each disclosed formulating vardenafil and other approved ED drugs into ODTs. Watson addressed each of these nine references at trial through its expert and in its post-trial briefing. In light of these references, the district court clearly erred in determining that one of skill would not have been motivated to make ODT formulations of ED drugs.
The remainder of the district court’s findings underlying the motivation to formulate vardenafil ODT focused too heavily on the FDA approval and commercial availability of ODT formulations as of the priority date. Similarly, when considering the limitations in claim 9 as to sorbitol and mannitol, the district court’s analysis focused on the commercial availability, while failing to address the teachings that were available in the prior art.
The district court found that even if a skilled artisan would have been motivated to make an ODT formulation of vardenafil, the prior art taught away from formulating vardenafil ODT as immediate release. The district court found that a person of ordinary skill in the art would have expected vardenafil ODT to have a bitter taste, and that using an immediate-release formulation could increase vardenafil blood levels too quickly, which might be a problem for older men.
According to the opinion, a reference teaches away when it suggests that the line of development flowing from the reference’s disclosure is unlikely to be productive of the result sought by the applicant. The “teaching away” inquiry does not focus on whether a person of ordinary skill in the art would have merely favored one disclosed option over another disclosed option. The district court’s finding that a person of ordinary skill in the art would have first pursued a delayed-release formulation over an immediate-release formulation is insufficient to support a finding of teaching away.
With respect to the objective indicia, the district court found that Watson’s copying of the claimed invention and Staxyn’s unexpected increased duration of action compared to Levitra supported its conclusion of nonobviousness. The panel agrees with Bayer that these two objective indicia are probative of nonobviousness.
As to the final legal conclusion, weighing a showing of clear motivation, concerns but no teaching away as to bitter taste and bioavailability, and evidence of copying and unexpected results, the panel rules that claims 9 and 11 of the ’950 patent would have been obvious.
The panel affirms the grant of judgment on the pleadings as to claims directed to a system for streaming audio/visual data over the internet because, much like many early internet patents, the claims merely recite result-based functional language. The opinion notes that the claims use terms like “converting,” “routing,” “controlling,” “monitoring,” and “accumulating records,” instead of describing how to achieve these results in a non-abstract way.
In applying step one of Alice, the panel notes that claim 1 of the ’187 patent recites a method for routing information using result-based functional language, but does not sufficiently describe how to achieve these results in a non-abstract way. The claims are thus similar to those in the Circuit’s 2016 Electric Power Group case. In that case, the Circuit held that the challenged claims were directed to the abstract idea of “gathering and analyzing information of a specified content, then displaying the results, and not any inventive technology for performing those functions.” In the same way, claim 1 manipulates data but fails to do so in a non-abstract way.
In applying Alice step two, the district court acknowledged that the specification of the ’187 patent describes a system architecture as a technological innovation, but concluded that the claim does not recite this architecture, even taking into account Two-Way Media’s proposed constructions. The panel agrees. The main problem that Two-Way Media cannot overcome is that the claim—as opposed to something purportedly described in the specification—is missing an inventive concept. While the specification may describe a purported innovative “scalable architecture,” claim 1 of the ’187 patent does not. The panel thus concludes that claim 1 fails to transform the abstract idea into something more.
The ’622 and ’686 patents suffer from the same Aliceinfirmities. Two-Way Media admits that the representative claims are broader in several respects than claim 1 of the ’187 patent. The panel agrees with the district court that the claims here—directed to monitoring the delivery of real-time information to user(s) or measuring such delivery for commercial purposes—are similar to other concepts found to be abstract in the Circuit’s Bascom, Electric Power Grid andUltramercial cases. For these reasons, the panel concludes that the representative claims of the ’622 patent and ’686 patent are directed to abstract ideas.
The district court found that the claims of the ’622 patent and ’686 patent did not contain an inventive concept under Alicestep two. Two-Way Media argued that the district court erred by failing to account for a central aspect of Two-Way Media’s invention, the system architecture, and failing to credit Two-Way Media’s nonconventional arrangement of components. But the panel disagrees, noting that nothing in these claims requires anything other than conventional computer and network components operating according to their ordinary functions. The claims thus fail to describe a “specific, discrete implementation of the abstract idea” sufficient to qualify for eligibility under § 101.
Comment: The panel’s refusal to consider evidence relating to “the purported technological innovations of its invention” is somewhat surprising because the opinion notes the district court’s acknowledgement of “the system architecture as a technological innovation.” The opinion then states that that technological innovation was not recited in the claims. So wouldn’t evidence relating to the novelty of what is claimed be relevant? The opinion notes that this argument was previously rejected by the Circuit in 2016'S Affinity Labs case.
The Circuit affirms a ruling that Microsoft’s software does not infringe two patents of MasterMine that are directed to exporting data to spreadsheets. However, the panel reverses a lower court ruling that the patents are invalid as being indefinite. The indefiniteness part of the case was the most interesting, so that is the focus of our discussion.
The panel explains the criteria for indefiniteness based on mixed claim forms. Specifically, the opinion notes that the use of functional language in a system claim does not necessarily create a mixed-class type claim that is invalid under 35 U.S.C. § 112.
In defending itself before the district court, Microsoft argued that the claim language was invalid under § 112, para. 2. Microsoft asserted that because the claim language defined a system module using functional terms, the claim was improperly claiming two different subject-matter classes and was therefore indefinite.
The Circuit distinguishes the claim at issue from previous cases that resulted in findings of indefiniteness. For example, the panel notes that in its previous cases such as IPXL Holdings, decided in 2005, the Circuit found indefiniteness based on large part on the claim reciting: “the user uses the input means.” Such language resulted in indefiniteness because it caused lack of clarity regarding whether the claim was infringed by the system itself, or whether infringement required user action. The panel also discusses the Circuit’s 2011 Rembrandt Data case, which includes a claim that recites a system generally using means plus function language. However, the last element of the claim recites: “transmitting the trellis encoded frames.” The claim in Rembrandt was indefinite because the initial elements are properly recited apparatus elements, but the final “transmitting” element is a method element, thereby resulting in an indefinite mixed-class claim.
In the present case, the functional language italicized in the claim above focuses on capabilities of the system rather than a specific action that must be performed (e.g., by a user) for infringement to occur. In other words, the functional language relates to things that a properly recited apparatus element may perform, rather than the undertaking of a specific action. Based on this logic, the panel rules that the claim language at issue is not indefinite.
The panel affirms the district court’s construction of the term “pivot table” and under that construction, MasterMine had conceded there was no infringement.


text:
CIVIL ACTION commenced in the Superior Court Department on August 26, 1988.
Motions for summary judgment were heard by Elizabeth B. Donovan, J., and Wendie I. Gershengorn, J. Entry of final judgment was ordered by Charles J. Hely, J.
James E. McGuire for the plaintiff.
John A. Nadas (Mark D. Cahill with him) for The Travelers Indemnity Company.
Sheldon Karasik of New York (Marc LaCasse with him) for American Home Assurance Company & others.
Peter G. Hermes (Molly H. Sherden with him) for Commercial Union Insurance Company.
Gary D. Centola of New York (Lisa D. Campolo with him) for Fireman's Fund Insurance Company.
Paul R. Koepff & Rosemary B. Boller of New York, & David B. Chaffin, for Insurance Company of North America, submitted a brief.
Barry L. Malter, Peri N. Mahaley & Warren Anthony Fitch, of the District of Columbia, & Walter H. Mayo, III, for Emhart Corporation & another.
Rosanna Sattler, Jeffrey W. Armstrong & Valerie C. Samuels for Insurance Environmental Litigation Association.
James L. Ackerman & Carol F. Liebman for Aetna Casualty & Surety Company.
David M. Jones, John M. Edwards & M. Katherine Willard for Bose Corporation & others.
Ralph T. Lepore, III, for Liberty Mutual Insurance Company.
WILKINS, J. Polaroid Corporation brought this action against its comprehensive general liability insurers seeking recovery of defense and settlement costs that Polaroid incurred in the defense and settlement of claims against it arising from the discharge of pollutants by Cannons Engineering Corporation (Cannons), Polaroid's former waste processor. Claims against Polaroid were asserted in 1986 by the Massachusetts Department of Environmental Quality Engineering, the New Hampshire Environmental Protection Bureau, and the United States Environmental Protection Agency (EPA) (under the Comprehensive Environmental Response, Compensation, and Liability Act, 42 U.S.C. Section 9601 et seq.  [CERCLA]), with respect to sites operated by Cannons in Bridgewater and Plymouth, Massachusetts, and in Nashua and Londonderry, New Hampshire. [Note 2] Polaroid's general liability carriers declined to defend or to indemnify Polaroid for the Cannons claims. In response to the Cannons claims, Polaroid and others agreed to undertake certain removal actions, and on July 6, 1988, Polaroid entered into a partial consent decree with the EPA. [Note 3] On August 26, 1988, Polaroid commenced this action. Polaroid asserted that its insurers had a duty to defend and to indemnify it as to the Cannons claims and that the carriers' conduct violated G. L. c. 93A (1990 ed.) and G. L. c. 176D (1990 ed.).
Numerous questions of law were considered in the Superior Court on motions for partial summary judgment. Ultimately, in April, 1992, a final judgment was entered declaring that Polaroid's primary carriers had a duty to defend Polaroid with respect to the Cannons claims. [Note 4] That obligation to defend was limited to the period prior to September 28, 1990, the date on which a partial summary judgment had been allowed, in favor of the insurers, determining that the insurers had no duty to indemnify Polaroid with respect to any aspect of the Cannons claims. The final judgment declared that Polaroid's primary insurers had no additional obligation to Polaroid concerning the Cannons claims; that there was no violation of G. L. c. 93A and G. L. c. 176D; and that none of Polaroid's umbrella and excess insurers had any duty to indemnify it with respect to the Cannons claims. That final judgment, pursuant to an earlier partial summary judgment, also allowed Lexington Insurance Company to reform four policies that it had issued to Polaroid so as "to contain `sudden and accidental' pollution exclusions." We granted an application for direct appellate review of Polaroid's appeal.
Polaroid appeals asserting that the final judgment is in error. It claims that (1) the determination that its insurers have no duty to indemnify Polaroid is based on an erroneous interpretation of the pollution exclusion and on an erroneous interpretation of the summary judgment record; (2) the dismissal of its G. L. c. 93A and G. L. c. 176D claims was error; (3) the Lexington Insurance Company policies should not have been reformed to include pollution exclusions; and (4) the insurers who had a duty to defend the Cannons claims and violated that duty are liable for Polaroid's settlement costs even if the Cannons claims are not within the coverage of the policies issued to Polaroid. Additional facts bearing on the various issues will be presented where appropriate. We affirm the judgment.
1. The pollution exclusion. Polaroid challenges the summary judgment determination that property damage caused by the releases at the Cannons sites is not covered under the various comprehensive general liability policies. That determination was based on the language of the pollution exclusion which, with one exception, eliminates coverage of claims for "property damage arising out of the discharge, dispersal, release or escape of smoke, vapors, soot, fumes, acids, alkalis, toxic chemicals, liquids or gases, waste materials or other irritants, contaminants or pollutants into or upon land, the atmosphere or any watercourse, or body of water." The one exception provides that the "exclusion does not apply if any such discharge, dispersal, release or escape is sudden and accidental."
This court considered the "sudden and accidental" language in the pollution exclusion in Goodman v. Aetna Casualty & Sur. Co., 412 Mass. 807 (1992); Liberty Mut. Ins. Co. v. SCA Servs., Inc., 412 Mass. 330 (1992); Lumbermens Mut. Casualty Co. v. Belleville Indus., Inc., 407 Mass. 675 (1990); and Hazen Paper Co. v. United States Fidelity & Guar. Co., 407 Mass. 689 (1990). We adhere to what we said in those cases. Polaroid argues that, on the summary judgment record, there is a dispute of material fact on the question whether the discharges at the Cannons sites were sudden and accidental. We disagree.
2. General Laws c. 93A and c. 176D. We reject Polaroid's challenge to the dismissal of its claims against its primary carriers under G. L. c. 93A and G. L. c. 176D. The claims are based on the primary insurers' refusals promptly to defend Polaroid against the Cannons claims.
reimburse Polaroid for its defense costs and did so. On September 28, 1990, a motion judge concluded that, because of the pollution exclusion, there was no coverage of the Cannons claims, thereby terminating any further duty to defend those claims.
Polaroid's claim that G. L. c. 93A, Section 11, was violated by its primary insurers' violations of certain provisions of G. L. c. 176D, Section 3, cl. 9, is of significance only to the extent that the alleged wrongful conduct was a violation of G. L. c. 93A, Section 2 ("unfair or deceptive acts or practices"). A consumer asserting a claim under G. L. c. 93A, Section 9, may recover for violations of G. L. c. 176D, Section 3, cl. 9, without regard to whether the violation was unlawful under G. L. c. 93A, Section 2, because of the explicit statement to that effect in Section 9. Polaroid, however, asserts rights under G. L. c. 93A, Section 11, as one engaged in trade or commerce, and Section 11 does not grant an independent right to recover for violations of G. L. c. 176D, Section 3, cl. 9. See Jet Line Servs., Inc. v. American Employers Ins. Co., 404 Mass. 706, 717 n.11 (1989).
Polaroid makes no attempt in its brief to demonstrate, insurer by insurer, that by one or more unfair acts or practices an insurer caused Polaroid a loss of money or property, beyond its assertions that insurers refused to defend the Cannons claims (a point we have disposed of). Polaroid's senior corporate counsel testified on deposition that all three primary insurers gave specific detailed reasons with respect to their denial of coverage. Any particular omission of a primary insurer in the handling and investigation of the Cannons claims caused no loss to Polaroid because the insurers ultimately assumed Polaroid's defense costs.
and obtained umbrella coverage from Royal Indemnity Co. That successor policy did have a pollution exclusion.
If the language of a written instrument does not reflect the true intent of both parties, the mutual mistake is reformable. Mickelson v. Barnet, 390 Mass. 786, 791 (1984). Fireman's Fund Ins. Co. v. Shapiro, 286 Mass. 577, 582 (1934). The mistake must either be mutual (Mickelson v. Barnet, supra) or be made by one party and known to the other party (see Century Plastic Corp. v. Tupper Corp., 333 Mass. 531, 535 ; Torrao v. Cox, 26 Mass. App. Ct. 247, 250 ). To be entitled to reformation, a party must present full, clear, and decisive proof of mistake. See Mickelson v. Barnet, supra at 792, and cases cited. The parol evidence rule does not bar extrinsic proof of intent in these circumstances. Id. Insurance policies may be reformed on the same principles. See Mates v. Penn Mutual Life Ins. Co., 316 Mass. 303, 306 (1944); Fireman's Fund Ins. Co. v. Shapiro, supra.
In order to prevail on its motion for summary judgment, Lexington had the burden of establishing that there was no dispute of material fact on all the relevant issues, particularly concerning Polaroid's intent and Lexington's intent as to the inclusion of a pollution exclusion in the policies. Community Nat'l Bank v. Dawes, 369 Mass. 550, 554 (1976). Moreover, as we have said, Lexington had to establish that the undisputed material facts fully, clearly, and decisively showed a mutual mistake. In our discussion, we are concerned with whether there was an adequate showing of no dispute of material fact concerning a mistake shared by both parties as to the inclusion of a pollution exclusion in the four policies. Century Plastic Corp. v. Tupper Corp., supra at 534.
it. [Note 13] The argument is that we should draw the inference that Lexington would not have made the changes that it did without also adding a pollution exclusion endorsement if Lexington had really intended that there be a pollution exclusion in the policies. In other words, Polaroid relies on the fact of the repetition of the alleged mistake to argue that one must infer that there was no mistake. Such an inference is not warranted as a basis for concluding that there is a dispute of material fact as to Lexington's intention. Without any other supporting evidence, it would be unreasonable to draw an inference of Lexington's intention to omit the pollution exclusion in the face of the uncontroverted statements of company policy to include a pollution exclusion endorsement in each umbrella policy issued during the relevant period. [Note 14] The absence of the pollution exclusion from the policies does not raise a genuine issue of material fact concerning Lexington's intention. See Federal Deposit Ins. Corp. v. Csongor, 391 Mass. 737, 742-743 (1984).
party so unreasonably delayed in bringing the claim that it caused some injury or prejudice to the defendant. See Yetman v. Cambridge, 7 Mass. App. Ct. 700, 707 (1979). Polaroid was given time to respond to Lexington's motion for summary judgment on the reformation issue. On this summary judgment record it appears that Polaroid was not prejudiced by Lexington's delay because no material fact is in dispute on this issue. Lexington is not barred by laches from seeking reformation.
We consider the issue in the circumstances of this case where the insurers have demonstrated conclusively that the Cannons claims were not covered under the policies issued to Polaroid. We conclude that, in this case, no insurer is liable for the amount that Polaroid paid in settlement of the Cannons claims.
n.6 & n.7) and concluded that this court's opinion in Berke Moore Co. v. Lumbermens Mut. Casualty Co., 345 Mass. 66, 70-71 (1962) (Berke Moore), supported the view that an insurer improperly declining defense of a claim is "liable for the reasonable costs of both defense and settlement." Camp Dresser, supra at 326.
Polaroid presents its argument in terms of its right to damages arising from its insurers' breaches of their contractual duties to defend the Cannons claims. Polaroid rightly does not argue that it is automatically entitled to indemnity under various policies because of the breach of the duty to defend. [Note 19] A failure to defend does not bar an insurer from contesting its indemnity obligation. We are concerned, therefore, not with a claim for automatic indemnity because of a breach of a duty to defend but rather with a claim for contract damages because of such a breach. Certainly the insurers are liable in contract to Polaroid for its defense costs (up to the time that it was determined that the Cannons claims were not covered by the various policies). The insurers agree, and that point is not in issue.
The question is whether contract damages should include the amounts Polaroid paid in settlement of the Cannons claims. Contract damages are "those that cannot be reasonably prevented and arise naturally from the breach, or which are reasonably contemplated by the parties." Delano Growers' Coop. Winery v. Supreme Wine Co., 393 Mass. 666, 680 (1985). Polaroid makes no claim that it was forced to settle the Cannons claims because its insurers had declined to defend those claims.
claim (or to satisfy a judgment based on that claim). [Note 20] See Afcan v. Mutual Fire, Marine & Inland Ins. Co., 595 P.2d 638, 647 (Alaska 1979); Hirst v. St. Paul Fire & Marine Ins. Co., 106 Idaho 792, 798-799 (Ct. App. 1984); Fireman's Fund Ins. Co. v. Rairigh, 59 Md. App. 305, 316-320 (1984); St. Paul Ins. Co. v. Bischoff, 150 Mich. App. 609, 612-613 (1986); Servidone Constr. Corp. v. Security Ins. Co. of Hartford, 64 N.Y.2d 419, 423-424 (1985); Timberline Equip. Co. v. St. Paul Fire & Marine Ins. Co., 281 Or. 639, 646 (1978); R. Keeton & A. Widiss, Insurance Law Section 9.5(b)(1)(i), at 1046 (1988) ("the insurer is liable for any good faith settlement within the policy limits -- subject, of course, to the insurer's right to an adjudication that the coverage applied to the loss"); A. Windt, Insurance Claims and Disputes Section 4.35, at 213 (1988) ("When a contract is breached, the injured party is entitled to receive what would have been obtained if there had been no breach; the injured party is not entitled to receive more"). Contra, e.g., Wint v. Fidelity & Casualty Co. of New York, 9 Cal. 3d 257, 261 (1973); Missionaries of the Co. of Mary, Inc. v. Aetna Casualty & Sur. Co., 155 Conn. 104, 113-114 (1967); Clemmons v. Travelers Ins. Co., 88 Ill. 2d 469, 479 (1981); Nixon v. Liberty Mut. Ins. Co., 255 N.C. 106, 112-113 (1961); Conanicut Marine Servs., Inc. v. Insurance Co. of N. Am., 511 A.2d 967, 971 (R.I. 1986).
cause of any loss it sustained. See International Fidelity Ins. Co. v. Wilson, 387 Mass. 841, 850 (1983). Courts that have not applied these principles have not explained in any detail why they have chosen to abandon contract damage principles and thereby award the amount of any reasonable settlement (at least up to policy limits) as damages. The statement made by some courts that the insurer is estopped to deny liability is simply a conclusion and fails to recognize that no estoppel is involved in any traditional sense because, in refusing to defend a claim, an insurer makes no misrepresentation on which the insured relies to its detriment. See Merrimack Mut. Fire Ins. Co. v. Nonaka, 414 Mass. 187, 189 (1993).
was no coverage of the Cannons claims, and thus the insurers have met that burden.
Polaroid argues that, if a defense-defaulting insurer may raise a coverage question as to a settled claim, the insurer runs no substantial risk in declining to defend the claim. The insurer's only risk, so the argument goes, is that, if it loses its claim that it has no defense obligation, the insurer will have to pay defense costs, amounts it would have to pay anyway if it assumed the defense immediately. This argument ignores the benefit of controlling the defense, and the risk of a settlement at an amount that is reasonable but higher than that for which the insurer could have settled the case. This argument also assumes that an insurer will choose to do the wrong thing, a course of conduct that may adversely affect its reputation in a competitive commercial insurance underwriting market. Even more significant is the likely impact in such a case of G. L. c. 93A with its provisions for damages and attorneys' fees where an insurer's acts are unfair or deceptive. The rule we adopt does not provide a safe harbor for an insurer that improperly declines to defend a claim.
[Note 1] In addition to Travelers Indemnity Co. (Travelers), Polaroid's primary comprehensive general liability insurance carrier from January 1, 1971, to January 1, 1978, the defendants are: (a) Fireman's Fund Insurance Company (Fireman's Fund), Polaroid's primary general liability carrier from January 1, 1978, to November 1, 1980, and also an umbrella and excess insurer, and Commercial Union Insurance Company, Polaroid's primary general liability carrier from November 1, 1980, to January 1, 1985; (b) Polaroid's umbrella general liability insurance carriers, American Home Assurance Company, National Union Fire Insurance Company of Pittsburgh, Pa., Lexington Insurance Company, First State Insurance Company, and Royal Indemnity Company; (c) and Insurance Company of North America which provided excess coverage to Polaroid.
[Note 2] We shall refer to the locations as the Cannons sites and to the claims as the Cannons claims.
[Note 3] The settlement in which Polaroid joined was unsuccessfully challenged in United States v. Cannons Eng'g Corp., 720 F. Supp. 1027 (D. Mass. 1989), aff'd, 899 F.2d 79 (1st Cir. 1990).
[Note 4] Except that Travelers had no such duty as to the New Hampshire sites. No appeal has been taken as to this aspect of the final judgment.
[Note 5] In its reply brief, Polaroid states it made "the so-called concession" in oral argument in order "to illustrate that point of view is critical in determining `sudden and accidental.'"
[Note 6] The expert made specific statements about each of the four locations. At the Bridgewater site, the discharge of pollutants was "gradual, routine and systematic." At Plymouth there were routine leaks from storage tanks and the distribution of contaminants in the soil was indicative of minor, gradual and routine releases. At the Nashua, New Hampshire, site, an unlicensed and illegal hazardous waste landfill, liquid hazardous wastes were dumped continuously for many years in bulk and in drums, while hazardous sludge was routinely and intentionally deposited over a period of years. At the Londonderry, New Hampshire, location, also an unlicensed and illegal hazardous waste site, hazardous waste was illegally and intentionally dumped from tanker trucks.
[Note 7] Because there is no dispute of material fact concerning the nature of the discharges and because we consider the question on summary judgment, we need not decide whether the insurer or the insured has the burden of proof on the question of the sudden and accidental nature of any discharge.
We decline to consider the argument that insurers intended that the pollution exclusion not apply to insureds who were not at fault for the pollution. Even if we were to assume that the drafting and regulatory history of a policy provision could be instructive in resolving an ambiguity concerning the meaning of the provision (see Lumbermens Mut. Casualty Co. v. Belleville Indus., Inc., 407 Mass. 675, 682-683 ), here there is no ambiguity. "Because the word `sudden' in the pollution exclusion clause is not ambiguous, we have no need to consider the drafting history of that clause or any statements made by insurance company representatives concerning the intention of its drafters." Id. at 682. The same is true as to the word "accidental." Accordingly, we do not consider information involving the drafting history and other matters involving the pollution exclusion. To clear the record before the court, we strike briefs submitted as amici curiae offered solely on this issue.
[Note 8] Because Polaroid moved for summary judgment on its G. L. c. 93A claims before the Hazen opinion was released, and did not thereafter raise any question concerning post-Hazen G. L. c. 93A violations, we need not consider whether the primary carriers violated G. L. c. 93A by their post-Hazen conduct.
[Note 9] Fireman's Fund, American International Underwriters Insurance Co. (AIU), and Central National Insurance Co. of Omaha (Central National) also were successful on motions for summary judgment for reformation on the same basis. These companies had issued excess insurance policies "following form" to one or more of the Lexington policies at issue and, therefore, each excess policy also lacked the pollution exclusion claimed to have been omitted from the Lexington policies by mistake. We shall discuss the insurers' arguments by reference to Lexington alone. AIU and Central National, not parties to this action, are parties in a companion case to which the order reforming Lexington's Polaroid policies also applied.
[Note 10] As we have said, Polaroid's umbrella coverage immediately prior to Lexington's coverage had a pollution exclusion.
[Note 11] The successor umbrella insurer to Lexington, Royal Indemnity Company, issued to Polaroid a policy with a pollution exclusion at the same annual premium rate that Lexington had last charged. It is doubtful, all other things being equal, that Polaroid would have canceled its coverage with Lexington to take the Royal Indemnity Company coverage at the same premium rate if Polaroid had believed that the Lexington policy contained no pollution exclusion.
[Note 12] We give little weight to other documentary material, presented to show Lexington's intention to include a pollution exclusion endorsement, indicating what Lexington instructed its personnel to do on dates after most or all the Polaroid policies had been issued. On the other hand, Polaroid is in error in saying that these documents must be irrelevant because they were not addressed to Polaroid.
We reject Lexington's argument that the premiums that it charged to Polaroid show conclusively that Lexington intended to include a pollution exclusion in its Polaroid umbrella policies. For the same coverage that Lexington asserts that it provided, National Union Fire Insurance Co. had charged premiums to Polaroid from January, 1978, through November, 1, 1979, at an annual rate of $95,000. Lexington issued its first umbrella policy to Polaroid at an annual rate of $85,000. Lexington claims that, if it had intended to issue a policy without a pollution exclusion, its annual premium would have been higher than it was. Although these facts are relevant on the issue of Lexington's intent, they do not establish that intent uncontrovertibly on this record. There was evidence that the market in umbrella insurance was "soft" during the relevant times. In fact, the annual premiums that Lexington charged to Polaroid for the same dollar amount of umbrella coverage decreased for each successive policy ($79,500, to $54,500, to $43,600). There is, therefore, a factual dispute as to whether the annual premium charges demonstrate Lexington's intention to provide coverage that included a pollution exclusion.
[Note 13] The 1980-1982 policy differed from its predecessor by eliminating a leased property endorsement and by adding excess coverage for workers' compensation and for non-ownership watercraft liability. The 1982-1983 policy dropped exclusions for pension trust liability and certain pharmaceutical claims, as well as certain personal injury "following form" liability; added new endorsements amending the cancellation period and making the policy "no less broad" than underlying coverage; and amended the notice of accident provision. The 1983 policy eliminated a punitive damages amendatory endorsement that appeared in the three previous policies.
[Note 14] There has been extensive discovery in this case. The record appendix has 3,915 pages. When, by late filed counterclaim in August, 1990, Lexington asserted that its policies should be reformed to include a pollution exclusion, Polaroid did not seek additional time for discovery before action on Lexington's counterclaim. A review of Lexington's files to see whether it omitted a pollution exclusion endorsement from a number of policies issued during the relevant period might have been instructive.
[Note 15] This issue was raised below at best in generalities that never were made specific. No motion judge considered the point nor was she asked to. This fully briefed issue is of importance beyond this case, as the number of amicus curiae briefs discussing it indicates. In fact, the most comprehensive and instructive argument on behalf of Polaroid's position on this issue is made in the Emhart Corporation brief filed as amicus curiae. No material factual dispute, not raised below, bears on our resolution of this issue. We think it appropriate to discuss the question.
[Note 16] The defendant insurer, Home Insurance Co., filed an application for further appellate review in that case (FAR-5694), but the parties settled the case before this court acted on the application. The application for further appellate review particularly focused on this issue.
[Note 17] Other opinions of this court cited in the Camp Dresser opinion after the citation to the Berke Moore opinion (Camp Dresser & McKee, Inc. v. Home Ins. Co., 30 Mass. App. Ct. 318, 326 ) do not deal with the issue before us.
[Note 18] We have considered the trial judge's findings and rulings, Berke Moore's request for rulings, and the briefs in that case. The insurer made no claim that, if Berke Moore was liable in the underlying action, the loss did not fall within the coverage of the policy. We obtain no guidance in resolving the issue before us from the court's comment that, if the trial judge intended to rule that the underlying plaintiff's claim against Berke Moore was not within the policy coverage, the question would have to be answered in a trial. Berke Moore Co. v. Lumbermens Mut. Casualty Co., 345 Mass. 66, 72 (1962). The opinion does not say that the question could not have been raised in the trial of the Berke Moore case. We know, in any event, that the insurer did not raise it.
[Note 19] An obligation to indemnify does not automatically follow from the existence of a duty to defend. See Newell-Blais Post No. 443, Veterans of Foreign Wars of the United States, Inc. v. Shelby Mut. Ins. Co., 396 Mass. 633, 638 (1986); Magoun v. Liberty Mut. Ins. Co., 346 Mass. 677, 681-682 (1964).
[Note 20] If an underlying case went to judgment, the insurer would be bound by the result of the trial, as to all material matters decided in that action that bear on the coverage issue. Miller v. United States Fidelity & Guar. Co., 291 Mass. 445, 448-449 (1935). See Magoun v. Liberty Mut. Ins. Co., supra at 681-682. When the underlying claim is settled, the circumstances of the underlying claim are not aired in an adversary proceeding, and, therefore, a different approach may be required.
[Note 21] Certainly an insured should not be disadvantaged in relation to its defense-defaulting insurer because the underlying claim was settled for a reasonable amount. This is particularly true as to governmental claims of pollution where the consequences of not settling a valid claim are considerably disadvantageous to the non-settler. See 42 U.S.C. Section 9607 (c) (3) (1988) (treble damages); G. L. c. 21E, Section 5 (a) (1990 ed.), as amended by St. 1991, c. 476, Section 9 (joint and several liability).
[Note 22] We have not decided which party has the burden of proof as to the existence or nonexistence of a sudden and accidental discharge. See n.7 above. Here, even if we were to assume that the burden would normally be on the insured, we place it on the insurer when the insurer is in breach of its duty to defend.
[Note 23] We acknowledge that we have not resolved all the problems that may arise when an insured settles a claim that its insurer improperly declined to defend. We have not dealt with the case of a bad faith refusal to defend and the insured's rights to damages that may then exist under G. L. c. 93A, as well as under the common law. We have left unanswered the case of a collusive settlement between the insured and the plaintiff in the underlying action, where each would normally hope to place the claim within the coverage of the policy. Finally, we have not indicated what should happen if the settlement involved a claim or claims partly within and partly not within the policy coverage.

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Obtained denial of opponent’s claims exceeding $20 million in damages and punitive damages. Nordell International Resources Ltd. v. Triton Indonesia, Inc., et al., No. 72-199-0204-90, American Arbitration Association, forum in Singapore. Related opinions: Nordell Int’l Resources v. Triton Indonesia, Inc., 1998 U.S. App. LEXIS 11463 (9th Cir. 1998); Nordell Int’l Resources v. Triton Oil, 1996 U.S. App. LEXIS 11594 (9th Cir. 1996), table case format, 97 F.3d 1460.
Obtained for co-defendant, Gulf South Pipeline, an order dismissing alleged class action on motion by Gulf South and other defendants. Relief requested included injunctive relief and judicial oversight of 8,000 miles of interstate pipeline. No. 9:01CV132; P.D. Hamilton v. Koch Industries, Inc., et al.; United States District Court, Eastern District of Texas, Lufkin Division.
Obtained jury verdict and take-nothing judgment for defendant pipeline company against claims of take or pay and breach of contract. Affirmed on appeal. No. 87-41636; Mandell v. Hamman Oil & Refining, Tennessee Gas Pipeline, et al.; 281st District Court, Harris County, Texas.
Obtained denial of temporary injunction, decertification of class, and dismissal of all claims in favor of defendants in action involving claims for RICO, fraud, breach of contract, class action (certified and decertified), NGPA, and business torts. The claims involved mineral rights in Texas. $80 million in damages claimed. No. 7746; Spacek v. Williams; 335th District Court, Lee County, Texas.
Represented plaintiff in claims involving oil field equipment for use in Equador. Favorable settlement for plaintiff prior to trial. Antitrust, conspiracy, defamation, tortuous interference and civil conspiracy. No. H-96-3921; Oil Well Hydraulics, Inc. v. Trico Industries, Inc.; United States District Court for the Southern District of Texas, Houston Division.
Various litigations involving Merit Drilling Company. Represented defendant owners of various drilling barges. No. 83-4197; U S Steel Corp v. Merit Drilling Corp; 58th District Court, Denton County Texas. Agreed judgment. No. 83-2764; Seattle-First Nat’l Bank v. Drilling Barge Merit 5; United States District Court for the Western District of Louisiana, Lafayette Division. Represented defendant. Favorable settlement. No. 83-5622; First City Nat’l Bank of Houston v. Drilling Barge Merit 2; United States District Court, Eastern District of Louisiana. Represented defendant. Favorable settlement. No. 83-5875; United States v. Drilling Barge Merit 3; United States District Court for the Eastern District of Louisiana. Represented defendant. Financial disputes involving barge construction and finance.
Represented plaintiff in claims involving working interest owners. Settled after obtaining temporary injunction and order that funds be placed in court registry. Breach of contract, temporary injunction. No. 89-5642; Triton Oil & Gas Corp. v. Republic Natural Gas Corp, et al.; 193rd District Court, Dallas County, Texas.
Obtained temporary restraining order for joint venture operator against co-joint venturer regarding enforcement of farm-out agreement involving 72,000 acres for oil and gas production in Indonesia. No. 3-88-2705; Triton Energy Corp. v. Nordell International Resources, et al.; United States District Court, Northern District of Texas, Dallas Division.
Represented Exxon in breach of chemical supply contract. Obtained mandatory TRO to enforce contract terms. Settled. No. H-83-7368; Exxon Corp. v. Olin Corp.; United States District Court for the Southern District of Texas, Houston Division.
Co-counsel for plaintiff in off-shore moorings industry claims involving trade secrets, fraud, and negligence. Settled after temporary injunction hearing. No. 78 51589; Single Buoy Moorings, Inc. v. Van Heijst; 55th District Court, Harris County Texas.

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Present law allows a donor who desires to make a gift the ability to transfer up to $13,000 per donee, per calendar year, free of the gift tax and without the requirement of filing a gift tax return. See IRC § 2503(b). In order to qualify for this annual exclusion, however, the gift must be of a “present interest” in property. Obviously an outright gift of cash would qualify for the exclusion, but many times a donor desires to transfer illiquid assets, or desires to place some restrictions on the use of the property transferred due to the age or maturity level of the donee. In these cases, the availability of the annual exclusion becomes less clear.
The initial annual exclusion battleground between taxpayers and IRS was set when taxpayers asserted that gifts in trust could qualify for the annual exclusion. Despite vigorous opposition by IRS, the courts generally approved such gifts in trust for the exclusion when donees were given an immediate (but temporary) right to withdraw in full the gift which was made in trust. See Crummey v. Comm’r, 397 F.2d 82 (9th Cir. 1968).
More recently, however, IRS has argued that gifts of interests in an entity, such as limited liability companies or limited partnerships, do not qualify for the annual exclusion. In Hackl v. Comm’r, 118 T.C. 279 (2002), the United States Tax Court agreed with IRS and held that transfers of interests in an LLC which operated a tree farm did not qualify for the annual exclusion.1 The Tax Court found that the donee recipients of the interests did not enjoy a “substantial present economic benefit” from the interests because they had no right to withdraw their capital accounts without the approval of the manager of the LLC, and because they further had no right to sell their interests without the approval of the manager. Thus, the court concluded that the donees did not have a present interest in the property received.
It is important to note that the court’s decision in Hackl did not completely foreclose the possibility that gifts of interests in an LLC could qualify for the annual exclusion. Rather, the court held that gifts of LLC interests would not qualify for the annual exclusion if the provisions of the operating agreement governing a member’s ability to alienate or liquidate his or her interest were too restrictive.
The recent decision of the U.S. District Court for the Southern District of Indiana in Fisher v. U.S., 105 AFTR 2010-1347, expands the decision of Hackl and creates uncertainty in the area of annual exclusion giving. The facts of Fisher are similar to Hackl in that a donor transferred real estate to an LLC and then made gifts of interests in the LLC to his children, intending that the gifts qualify for the annual exclusion. Like the court in Hackl, the court in Fisher sided with IRS in finding that the gifts were not gifts of a present interest. Several reasons were recited, all of which related to the perceived overrestrictiveness of the operating agreement of the LLC.
First, the court found that the operating agreement allowed the donees to withdraw their capital accounts only with the approval of the manager of the LLC (which approval could be withheld in the manager’s sole discretion). This holding was similar to the Hackl court’s holding.
Second, the court dismissed Fisher’s arguments that the right to enjoy the real estate (it consisted of beachfront property) meant that the donees had a present interest in the transferred interests. The court found that the test for present interest was that a “substantial present economic benefit” be conferred on the donees. Non-pecuniary benefits attendant to the ownership of an LLC interest were thus regarded as irrelevant in determining whether the exclusion under IRC § 2503 applied.
Finally, and perhaps most importantly, the court held that the donees had an insufficient ability to alienate their interests in the LLC. The operating agreement in Fisher, unlike in Hackl, provided that a member could transfer his or her interest to a third party and management approval was not required. However, the LLC would have a right of first refusal to purchase the interest for the price offered by the intended third party purchaser. The purchase price could be paid by means of a promissory note payable over a period of 15 years. Also, the right of first refusal would be waived if the interest was sold to a family member. The court found that this right of first refusal made it “impossible for the Fisher Children to presently realize a substantial economic benefit” from the gifts of LLC interests they received. The court therefore found that the gifts of LLC interests did not qualify for the annual exclusion.
The Fisher decision creates uncertainty in many current tax planning methods because most operating agreements for family-owned LLCs include a right of first refusal. The reason the right exists is to keep ownership of the LLC within the family to the extent possible, a goal which is beneficial to the family members of the LLC for obvious reasons. Unfortunately, the Fisher court did not explain in any particular detail why the right of first refusal at issue was considered excessive. Perhaps the payment terms (i.e., the 15 year deferred payment by promissory note) were considered to be too lengthy to equate with a “present interest.” Or perhaps any right of first refusal at all would be considered too restrictive by the court in the context of family entities, and planners will need to incorporate a right of withdrawal similar to the right approved in the Crummey case into operating agreements going forward.
In any case, the decision in Fisher is the opinion only of a federal district court and thus is not binding in other circuits, although it may be utilized as persuasive authority in future challenges by IRS. It remains to be seen how the case law will develop in this area of tax planning.
1. This decision was affirmed by the Seventh Circuit. Hackl v. Comm’r, 335 F.3d 664 (7th Cir. 2003).