It should also hide under the action bar/toolbar. In AppCompatActivity, it's a ViewGroup:
http://cs/aosp-master/frameworks/support/v7/appcompat/src/android/support/v7/widget/Toolbar.java

In fact, I think WebView is already doing what EditText is doing.
https://cs.chromium.org/chromium/src/android_webview/java/src/org/chromium/android_webview/PopupTouchHandleDrawable.java?rcl=0&l=491

We set the PopupTouchHandleDrawables to be invisible when they are clipped.
You can see this by going to www.textarea.org inside WebView browser test shell apk. I have recorded a video.

The reason why it does not work on Inbox is because the height of WebView does not change when the user bring up the IME window. That is, IME window floats on top of the WebView.

Deleted: demo.mp4 4.8 MB

	demo.mp4 4.8 MB View Download

CL uploaded here. https://codereview.chromium.org/2410223003/

The following revision refers to this bug:
  https://chromium.googlesource.com/chromium/src.git/+/4a64446000115cca6deba65288de86741a40062e

commit 4a64446000115cca6deba65288de86741a40062e
Author: hush <hush@chromium.org>
Date: Wed Oct 12 22:58:46 2016

Hide the PopupTouchHandlerDrawable if it is occluded.

This CL follows Android Editor's logic to determine if the touch handler is
visible by going up the view hierarchy. If the touch handler is fully occluded
by any of its parent views, then it is considered not visible.

In this way, the touch handlers won't appear overlapped with the IME window, if
the app adjusts the window size based on IME window.

BUG= 639169 

Review-Url: https://codereview.chromium.org/2410223003
Cr-Commit-Position: refs/heads/master@{#424896}

[modify] https://crrev.com/4a64446000115cca6deba65288de86741a40062e/android_webview/java/src/org/chromium/android_webview/PopupTouchHandleDrawable.java

Your change meets the bar and is auto-approved for M55 (branch: 2883)

The following revision refers to this bug:
  https://chromium.googlesource.com/chromium/src.git/+/afe45453fc54d87bbec43ce683358d43fbb44ef0

commit afe45453fc54d87bbec43ce683358d43fbb44ef0
Author: Hui Shu <hush@google.com>
Date: Wed Oct 12 23:59:25 2016

Hide the PopupTouchHandlerDrawable if it is occluded.

This CL follows Android Editor's logic to determine if the touch handler is
visible by going up the view hierarchy. If the touch handler is fully occluded
by any of its parent views, then it is considered not visible.

In this way, the touch handlers won't appear overlapped with the IME window, if
the app adjusts the window size based on IME window.

BUG= 639169 

Review-Url: https://codereview.chromium.org/2410223003
Cr-Commit-Position: refs/heads/master@{#424896}
(cherry picked from commit 4a64446000115cca6deba65288de86741a40062e)

Review URL: https://codereview.chromium.org/2413113002 .

Cr-Commit-Position: refs/branch-heads/2883@{#78}
Cr-Branched-From: 614d31daee2f61b0180df403a8ad43f20b9f6dd7-refs/heads/master@{#423768}

[modify] https://crrev.com/afe45453fc54d87bbec43ce683358d43fbb44ef0/android_webview/java/src/org/chromium/android_webview/PopupTouchHandleDrawable.java

I forgot to add that my comment #5 was wrong. Inbox does change the height of its window when IME window shows up. If anyone is reading this, please don't be confused

Checked on Nexus 6 running NRD91N monochrome 55.0.2883.18.  The fix has some issues, which I've uploaded video to the folder: go/chrome-androidlogs1/6/639169

1) text handle is not hidden when it first gets behind the top bar where the attach and send functions are located

2) text handle does not appear right away if you scroll the handles into the ime area, then long press some other text in the view, it will appear once the page is scrolled.  This second behavior is new.

Looking..

1) The text handle will only be hidden if it is *fully* occluded by something else. This happens at around 50s in your video. So this one is working as I intended it. 
Why did I do that? Because sometimes, the left selection handler partially sticks out of WebView, when you select a word from the beginning. Not showing the left selection handler is very weird. So I made the decision to only hide a selection handler if it is fully occluded.

2) I can see sometimes the selection handlers do not show up, even without my fix. So I didn't give it too much thought.

Are you sure you can't reproduce the same problem without my fix?

Paul,
Do you want to take a look?
I don't think the problem in #15 is caused by this patch though

I can confirm that behavior 2 is new.  Before the text handles wouldn't hide under keyboard, but first long-clicked text above keyboard, the text handles would display.  Now the text handles are hidden under keyboard, and first long-clicked text above keyboard, the text handles would not display.

The following revision refers to this bug:
  https://chromium.googlesource.com/chromium/src.git/+/afe45453fc54d87bbec43ce683358d43fbb44ef0

commit afe45453fc54d87bbec43ce683358d43fbb44ef0
Author: Hui Shu <hush@google.com>
Date: Wed Oct 12 23:59:25 2016

Hide the PopupTouchHandlerDrawable if it is occluded.

This CL follows Android Editor's logic to determine if the touch handler is
visible by going up the view hierarchy. If the touch handler is fully occluded
by any of its parent views, then it is considered not visible.

In this way, the touch handlers won't appear overlapped with the IME window, if
the app adjusts the window size based on IME window.

BUG= 639169 

Review-Url: https://codereview.chromium.org/2410223003
Cr-Commit-Position: refs/heads/master@{#424896}
(cherry picked from commit 4a64446000115cca6deba65288de86741a40062e)

Review URL: https://codereview.chromium.org/2413113002 .

Cr-Commit-Position: refs/branch-heads/2883@{#78}
Cr-Branched-From: 614d31daee2f61b0180df403a8ad43f20b9f6dd7-refs/heads/master@{#423768}

[modify] https://crrev.com/afe45453fc54d87bbec43ce683358d43fbb44ef0/android_webview/java/src/org/chromium/android_webview/PopupTouchHandleDrawable.java

[Automated comment] removing mislabelled merge-merged-2840

removing release block on this one. Prio 2 should not be release-bloc.