Axis Reinsurance Company v. Telekenex, Inc. et al

Filing 68

Order by Hon. Samuel Conti granting in part and denying in part 37 Motion for Partial Summary Judgment.(sclc1, COURT STAFF) (Filed on 12/19/2012)

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1 2 3 4 5 6 IN THE UNITED STATES DISTRICT COURT 7 FOR THE NORTHERN DISTRICT OF CALIFORNIA 8 9 AXIS REINSURANCE COMPANY, Plaintiff, For the Northern District of California United States District Court 10 v. 11 12 13 14 15 16 TELEKENEX, INC.; ANTHONY ZABIT; KAREN SALAZAR; BRANDON CHANEY; DEANNA CHANEY; MARK PRUDELL; JOY PRUDELL; MARK RADFORD; NIKKI RADFORD; JOSHUA SUMMERS; JULIA SUMMERS; IXC HOLDINGS, INC.; STRAITSHOT COMMUNICATIONS, INC.; and STRAITSHOT RC, LLC, 17 Defendants. 18 ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) Case No. 12-2979 SC ORDER GRANTING IN PART AND DENYING IN PART MOTION FOR PARTIAL SUMMARY JUDGMENT 19 20 21 I. INTRODUCTION Axis Reinsurance Company ("Axis") brings this action against 22 Telekenex, Inc. ("Telekenex"), Anthony Zabit, Karen Salazar, 23 Brandon Chaney, Deanna Chaney, IXC Holdings, Inc. ("IXCH"), 24 (collectively, the "Telekenex Defendants"), Straitshot 25 Communications, Inc., and Straitshot RC, LLC (collectively, 26 "Straitshot"). 27 insurance policy it issued to Telekenex (the "Policy") does not 28 cover any amounts awarded in an underlying action captioned Axis seeks a judicial declaration that the 1 Straitshot Communications, Inc. v. Telekenex, Inc., et al., No. 2 C10-268 TSZ (W.D. Wash) (the "Straitshot action"). 3 ("Am. Compl."). 4 against all defendants on three of its five causes of action 5 pursuant to Federal Rule of Civil Procedure 56.1 6 ("MSJ"). 7 partial summary judgment, ECF No. 40 ("MSJ Opp'n"), but Straitshot 8 has not. 9 motion. ECF No. 15 Axis now moves for partial summary judgment ECF No. 37 The Telekenex Defendants have opposed Axis's motion for Axis has also filed a reply brief in support of its ECF No. 46 ("MSJ Reply"). The Court finds this matter United States District Court For the Northern District of California 10 appropriate for resolution without oral argument. For the reasons 11 set forth below, the motion is GRANTED in part and DENIED in part. 12 13 II. BACKGROUND 14 A. The Policy 15 Sometime in 2008, Telekenex, a telecommunications provider, 16 applied for insurance coverage with Axis. Smith Decl. ¶ 3; Odalen 17 Decl. Ex. 2 ("Ins. App.").2 18 Telekenex operates out of San Francisco, California and that all of The application indicates that 19 1 20 21 22 23 24 25 Axis has also sued Mark and Nikki Radford, Joshua and Julia Summers, and Mark and Joy Prudell. To the extent that Axis intends to move for summary judgment against these defendants, and it appears that it does, its motion is inappropriate. The Clerk has already entered default against the Summerses and the Radfords, ECF No. 26, and the Prudells were not served until well after Axis moved for summary judgment, see ECF Nos. 66, 67. If Axis wishes the Court to enter judgment against the Radfords and the Summerses, then it should move for default judgment. If it wishes for a judgment against the Prudells, then it should provide them with adequate time to respond. 2 26 27 28 Ross Smith, Axis's attorney, and Matthew Odelen, a senior claims specialist at Axis who handled Telekenex's claim, filed declarations in support of Axis's motion for partial summary judgment. ECF No. 38 ("Smith Decl."); ECF No. 39 ("Odelen Decl."). Mr. Chaney, one of the named Defendants, filed a declaration in opposition to Axis's motion for partial summary judgment. ECF No. 41 ("Chaney Decl."). 2 1 its 113 employees work in California. 2 ultimately approved Telekenex's application and issued the Policy 3 to Telekenex on May 27, 2008. 4 According to Mr. Odalen, who handled Axis's claims, the Policy was 5 issued in San Francisco, California. 6 several endorsements which amend the policy in a number of ways. 7 One of these endorsements, entitled "California Amendatory 8 Endorsement," concerns the cancellation and nonrenewal of the 9 Policy. United States District Court For the Northern District of California 10 Ins. App. at 2, 10. Axis Odalen Decl. Ex. 1 ("Policy"). Id. ¶ 2. The Policy includes Policy at 10. The Policy provides coverage for claims against directors and 11 officers (a.k.a., "D&O liability"), employment practices liability, 12 fiduciary liability, and outside executive liability, among other 13 things. 14 including an "Unlawful Advantage Exclusion" for losses Policy § I. The Policy carves out a number of exclusions, 15 16 17 18 based upon, arising out of, directly or indirectly resulting from, in consequence of or in any way involving: the gaining of any profit, remuneration, or advantage to which the Insured was not legally entitled . . . if evidenced by any judgment, final adjudication, alternate dispute resolution proceeding or a document or written statement by an Insured. 19 20 21 Id. § IV.A.5. The Policy covers "Insured Individual[s]," who are defined as 22 "natural persons" who are "duly elected or appointed director[s], 23 officer[s], trustee[s] of Manager[s] of the Policyholder," as well 24 as "individuals compensated by the Policyholder through wages, 25 salary, and/or commission." 26 provides coverage for an insured's spouse where that spouse is sued 27 solely by reason of his or her status as a spouse of the insured. 28 Id. § II.A. Id. § III.C.7. 3 The Policy also 1 B. The Straitshot Action 2 In 2008, one of Telekenex's Washington-based competitors, 3 Straitshot, sued Telekenex and the other Telekenex Defendants in 4 the Western District of Washington. 5 5AC") ¶ 2. 6 its trade secrets and confidential customer information and covered 7 up this theft through the destruction of evidence. 8 addition to Telekenex, Straitshot sued Mr. Zabit, Telekenex's 9 president, Mr. Chaney, Telekenex's Chief Executive Officer ("CEO"), Smith Decl. Ex. 3 ("Straitshot Straitshot alleged that the Telekenex Defendants stole Id. ¶ 1. In United States District Court For the Northern District of California 10 and Messrs. Prudell, Radford, and Summers, former Straitshot 11 employees who allegedly funneled business opportunities to 12 Telekenex before resigning from Straitshot. 13 Straitshot 5AC. 14 spouses, Mss. Chaney, Prudell, Radford, Salazar,3 and Summers, on 15 the ground that the other individual defendants' unlawful acts were 16 taken on behalf of the marital community. Am. Compl. ¶¶ 4-8; Straitshot also sued the individual defendants' Straitshot 5AC. Straitshot asserted fourteen causes of action. 17 Id. ¶¶ 325- 18 415. Among other things, Straitshot asserted that Messrs. Prudell, 19 Radford, and Summers breached their employment contracts with and 20 their duty of loyalty to Straitshot by divulging Straitshot's 21 confidential and proprietary information to Telekenex; that all 22 defendants interfered with Straitshot's contractual relations with 23 its customers; and that a number of the defendants violated the 24 Lanham Act, the Consumer Protection Act, the Washington Criminal 25 Profiteering Act, and the federal RICO statute. Id. Sometime after the Straitshot action was filed, Telekenex 26 27 tendered a claim to Axis under the Policy. 28 3 Ms. Salazar is Mr. Zabit's wife. Doe Zabit. 4 Odalen Decl. ¶ 3. Straitshot named her as Jane 1 Telekenex indicated that it intended to assume the legal defense of 2 the claim using its own independent counsel. 3 4. 4 and October 4, 2010, where it indicated that a number of claims 5 asserted in the Straitshot action were not covered under the Policy 6 and that Axis reserved its rights to deny coverage for the matter. 7 See id. Ex. 3; Chaney Decl. Ex. B. 8 of 2010, Telekenex informed Axis that its chosen defense counsel 9 had withdrawn pursuant to a court order because of a conflict of Odalen Decl. ¶ 3, Ex. Axis responded to the claim in letters dated September 28, 2010 Id. Ex. 4. Sometime in or around the fall Axis agreed to accept the duty to defend and United States District Court For the Northern District of California 10 interest. 11 retained the law firm of Littler Mendelson to defend the Straitshot 12 action. 13 Id. The Staitshot action ultimately went to trial. The jury 14 returned a $6.49 million verdict in favor of Straitshot, finding 15 for Straitshot on its claims for: (1) breach of contract against 16 Messrs. Prudell and Radford; (2) breach of the duty of loyalty 17 against Messrs. Prudell and Summers; (3) interference with 18 contractual relations against Telekenex and Messrs. Prudell, 19 Radford, Summers, Zabit, and Chaney; and (4) violation of the 20 Consumer Protection Act against Telekenex and Messrs. Zabit, 21 Chaney, Prudell, and Radford. 22 Verdict"). 23 misappropriation of trade secrets and false statements in violation 24 of the Lanham Act. 25 defendants. 26 Smith Decl. Ex. 7 ("Straitshot The jury found against Straitshot on its claims for Id. The Court entered a judgment against all Smith Decl. Ex. 9 ("Straitshot Judgment"). Following the trial, the court issued Findings of Fact and 27 Conclusions of Law that rejected the defendants' affirmative 28 defenses of estoppel and unclean hands. 5 Smith Decl. Ex. 8 1 ("FFCL"). As part of its findings, the Court concluded that 2 "Straitshot expressly authorized Telekenex, Summers, and other 3 Telekenex network engineers to 'access its systems' in order to 4 provide assistance to Straitshot customers," but "the Telekenex 5 Defendants' conduct went well beyond what was authorized by 6 Straitshot, including using its access to Straitshot's systems to 7 encourage Straitshot customers to move to Telekenex." 8 The Court issued additional Findings of Fact and Conclusions of Law 9 awarding Straitshot sanctions for Mr. Summers's spoliation of Id. ¶ 14. United States District Court For the Northern District of California 10 evidence and failure to produce documents during discovery. Smith 11 Decl. Ex. 10 ("Spoliation FFCL"). 12 findings, the Court concluded that Mr. Summers intentionally and 13 wrongfully used a Straitshot laptop and, in bad faith, made 14 substantial alterations and deletions to that laptop in violation 15 of multiple temporary restraining orders. 16 also found that Straitshot was entitled to sanctions from Telekenex 17 for the spoliation under the doctrine of respondeat superior. 18 ¶ 31. In connection with these Id. ¶ 24. The Court Id. 19 C. The Instant Action 20 On June 8, 2012, Axis filed the instant action against the 21 Telekenex Defendants and Straitshot. ECF No. 1. In its Amended 22 Complaint, Axis asserts eight causes of action, three of which are 23 relevant to the instant motion. 24 amounts awarded in the Straitshot action are not covered under the 25 Policy because they fall under the Policy's Unlawful Advantage 26 Exclusion. 27 Code § 533 also bars recovery for the amounts awarded in the 28 Straitshot action. In Count I, Axis asserts that the In Count II, Axis asserts that California Insurance In Count V, Axis asserts that IXCH is not 6 1 entitled to coverage under the Policy. 2 Axis now moves for summary judgment on Counts I, II, and V. 3 4 III. LEGAL STANDARD 5 Entry of summary judgment is proper "if the movant shows that 6 there is no genuine dispute as to any material fact and the movant 7 is entitled to judgment as a matter of law." 8 56(a). 9 require a directed verdict for the moving party. Fed. R. Civ. P. Summary judgment should be granted if the evidence would Anderson v. United States District Court For the Northern District of California 10 Liberty Lobby, Inc., 477 U.S. 242, 251 (1986). "A moving party 11 without the ultimate burden of persuasion at trial -- usually, but 12 not always, a defendant -- has both the initial burden of 13 production and the ultimate burden of persuasion on a motion for 14 summary judgment." 15 Cos., Inc., 210 F.3d 1099, 1102 (9th Cir. 2000). 16 carry its burden of production, the moving party must either 17 produce evidence negating an essential element of the nonmoving 18 party's claim or defense or show that the nonmoving party does not 19 have enough evidence of an essential element to carry its ultimate 20 burden of persuasion at trial." 21 ultimate burden of persuasion on the motion, the moving party must 22 persuade the court that there is no genuine issue of material 23 fact." 24 /// 25 /// 26 /// 27 /// 28 /// Nissan Fire & Marine Ins. Co., Ltd. v. Fritz Id. Id. 7 "In order to "In order to carry its 1 IV. DISCUSSION 2 A. Unlawful Advantage Exclusion 3 Axis moves for summary judgment on Count I on the ground that 4 the Policy's Unlawful Advantage Exclusion bars coverage for losses 5 arising out of the Straitshot action, specifically, the $6.49 6 million judgment and spoliation sanctions. 7 substantive law on this issue, the Court first addresses the 8 parties' arguments concerning what law to apply.4 Before turning to the As Axis argues, California Civil Code section 1646 governs the 9 United States District Court For the Northern District of California 10 choice-of-law analysis for disputes over contract interpretation 11 such as this one. 12 App. 4th 1436, 1454 (2007). 13 section 1646 choice-of-law analysis where there is no material 14 conflict between the laws of the states involved. 15 Gitano Grp., Inc. v. Kemper Grp., 26 Cal. App. 4th 49, 57 (1994). 16 Such is the case here. 17 the [insurance] policy as a whole, and gives it a fair, reasonable, 18 and sensible construction . . . . 19 and unambiguous, the court must enforce it as written and may not See Frontier Oil Corp. v. RLI Ins. Co., 153 Cal. However, courts need not engage in a See id. at 1453; Under Washington law, "[a] court considers If the policy language is clear 20 4 21 22 23 24 25 26 27 28 The parties rely, in part, on choice-of-law arguments raised in earlier briefing. On September 5, 2012, the Telekenex Defendants moved to dismiss this action in favor of a parallel action pending in a Washington court. ECF No. 21 ("MTD"). They argued that a Washington venue was more appropriate because, among other things, Washington law applied to the coverage dispute at issue. Id. at 7. After Axis moved for partial summary judgment, the Telekenex Defendants requested that the Court defer consideration because the issues of venue, jurisdiction, and applicable law had not yet been resolved. ECF No. 45. On November 27, 2012, the Court denied both motions. ECF No. 63. The motion to dismiss was denied on the ground that the Washington action had since been dismissed in deference to the case pending before this Court. Id. at 3. The motion to defer was denied on the ground that courts "frequently settle[] choice-of-law issues during summary judgment proceedings, and the parties have briefed those issues here." Id. 8 1 modify it or create ambiguity where none exists." Black v. Nat'l 2 Merit Ins. Co., 154 Wash. App. 674, 679 (2010) (internal quotation 3 marks omitted). 4 insurance policy "[their] ordinary and popular sense, unless used 5 by the parties in a technical sense" and construe terms as 6 ambiguous "only if [they are] susceptible to two or more reasonable 7 constructions despite the plain meaning of [the] terms within the 8 context of the policy as a whole." 9 Cal. 4th 1109, 1115 (1999) (emphasis in original) (internal Likewise, California courts give the terms of an Palmer v. Truck Ins. Exch., 21 United States District Court For the Northern District of California 10 quotation marks omitted). 11 California courts construe ambiguities against the insurer, id.; 12 Quadrant Corp. v. Am. States Ins. Co., 154 Wash. 2d 165, 172 13 (2005), and narrowly interpret exclusionary clauses, such as the 14 one at issue here, Villa Los Alamos Homeowners Assn. v. State Farm 15 Gen. Ins. Co., 198 Cal. App. 4th 522, 534 (2011); Phil Schroeder, 16 Inc. v. Royal Globe Ins. Co., 99 Wash. 2d 65, 68 (1983). 17 Accordingly, the Court need not and, therefore, does not reach the 18 choice-of-law question here and applies California law. 19 Additionally, both Washington and The Court now turns to the substantive dispute concerning the 20 Unlawful Advantage Exclusion. The exclusion bars recovery for 21 losses arising from claims "based upon, arising out of, directly or 22 indirectly resulting from, in consequence of or in any way 23 involving: the gaining of any profit, remuneration, or advantage to 24 which the Insured was not legally entitled . . . if evidenced by 25 any judgment [or] final adjudication . . . ." 26 Axis argues that the exclusion applies here since the Telekenex 27 Defendants' loss stems from their unlawful procurement of 28 Straitshot's customers and confidential information. 9 Policy § IV.A.5. MSJ at 16. 1 Axis responds that the exclusion only applies where there is an 2 illegal profit evidenced by a judgment or final adjudication and 3 that, here, neither the jury's verdict, the court's judgment, nor 4 the court's spoliation award contains a determination that the 5 Telekenex Defendants gained any profit or advantage. 6 7. 7 MSJ Opp'n at Axis primarily relies on the Fifth Circuit's decision in 8 Jarvis Christian College v. National Union Fire Insurance Co. of 9 Pittsburgh, 197 F.3d 742 (5th Cir. 1999). MSJ at 16-17. That case United States District Court For the Northern District of California 10 dealt with a similarly worded policy exclusion, which precluded 11 insurance coverage for "any claim arising out of the gaining in 12 fact of any personal profit or advantage to which the Insured is 13 not legally entitled." 14 The district court found that the exclusion applied where a member 15 of Jarvis's board had transferred $2 million of Jarvis's endowment 16 funds to a business that the board member owned. 17 Jarvis argued that the board member did not gain "in fact" a 18 personal profit or advantage from the transfer. 19 disagreed, finding that, as the owner of a third-party business, 20 the board member expected to personally make over $360,000 from the 21 fund transfer. 22 not gain a balance-sheet profit, "[he] did gain in fact a personal 23 advantage." 24 argues that the Policy's Unlawful Advantage Exclusion should apply 25 here, reasoning that "the acts of the Telekenex [D]efendants 26 created the ultimate advantage in giving Telekenex an opportunity 27 to shift . . . Straitshot's entire customer base over to Telekenex 28 . . . . Jarvis, 197 F.3d at 747 (emphasis added). Id. at 748. Id. On appeal, The Fifth Circuit Further, even if the board member did Id. (emphasis in original). Based on Jarvis, Axis And as owners, officers and/or employees, [the individual 10 1 defendants] all stood to personally gain and shared in the 2 advantage gained by Telekenex." MSJ at 17. The Telekenex Defendants respond that, under another Fifth 3 4 Circuit case, Tig Specialty Insurance Co. v., Inc., 5 375 F.3d 365 (5th Cir. 2004), the Unlawful Advantage Exclusion only 6 applies where an illegal profit or advantage is evidenced by a 7 judgment or final adjudication. 8 policy exclusion practically identical to the one at issue in 9 Jarvis, requiring a profit or advantage in fact. MSJ Opp'n at 7-8. Tig involved a Tig, 375 F.3d at United States District Court For the Northern District of California 10 371. 11 triggered the exclusion because, in order to convict, the jury was 12 required to find that the defendant "benefited from [a] false 13 representation or promise" and "[b]enefit is synonymous with 14 advantage or profit." 15 Defendants argue, the jury in the Straitshot action only found 16 against Telekenex and its officers on two causes of action, 17 interference with contractual relations and violation of 18 Washington's Consumer Protection Act, neither of which require a 19 finding of profit or advantage. 20 The Court found that a statutory stock fraud conviction Id. at 370. In contrast, the Telekenex MSJ Opp'n at 9. The Telekenex Defendants also cite to this Court's opinion in 21 PMI Mortgage Insurance Co. v. American International Specialty 22 Lines Insurance Co., No. C. 02-1774 PJH, 2006 WL 825266 (N.D. Cal. 23 Mar. 29, 2006), for the same proposition. 24 in PMI, like the exclusions in Jarvis and Tig, required a showing 25 of profit or advantage "in fact." 26 court declined to apply the exclusion on the basis of the 27 allegations in the underlying complaint alone. 28 Instead, the Court held that, in order for the exclusion to apply, 11 The exclusion at issue PMI, 2006 WL 825266, at *2. The Id. at *6. 1 the insurer must demonstrate, "through proof of either evidentiary 2 facts or a final adjudication, that the underlying . . . complaint 3 arose out of an unlawful profit or advantage to which [the insured] 4 was not legally entitled." 5 "requir[ing] an actual adjudication or determination of fact prior 6 to application of the profit or advantage exclusion[] more 7 appropriately effectuate[s] the goal of giving the phrase 'in fact' 8 its ordinary and popular meaning." 9 Id. at *7. The Court reasoned that Id. at *5. The dispute between Axis and the Telekenex Defendants boils United States District Court For the Northern District of California 10 down to whether the Court may look to the allegations and evidence 11 presented in the Straitshot action to determine whether the 12 Policy's Unlawful Advantage Exclusion applies. 13 allegations and evidence are relevant to the inquiry. 14 Telekenex Defendants argue that the Court may look only to the 15 verdict, the judgment, and the elements of the claims on which the 16 jury found for Straitshot. 17 course is somewhere in between. 18 Axis argues that The The Court finds that the appropriate Unlike the exclusions in Jarvis, Tig, and PMI, the Policy's 19 Unlawful Advantage Exclusion does not refer to a profit or 20 advantage "in fact." 21 "evidenced by [a] judgment [or] final adjudication." 22 the verdict, judgment, and findings of fact in the Straitshot 23 action are of primary importance in determining whether the 24 Unlawful Advantage Exclusion applies. 25 Straitshot's allegations and evidence alone without doing injustice 26 to the plain meaning of the exclusion. 27 to look at the judgment and the Washington court's findings in a 28 vacuum. Instead, it refers to a profit or advantage Accordingly, The Court could not look at However, the Court declines This approach would lead to absurd results, especially 12 1 where the allegations and the judgment, taken together, clearly 2 indicate that an insured gained a profit or an advantage from its 3 wrongful acts, even though a finding of profit or advantage was not 4 a necessary element of the claims asserted. 5 finds that the better approach is to look at the judgment in the 6 context of the plaintiff's allegations and evidence. 7 is consistent with the approaches set forth in Jarvis, Tig, and 8 PMI. 9 underlying facts or allegations to some extent. United States District Court For the Northern District of California 10 11 Accordingly, the Court This approach In all three of these cases, the courts considered the Jarvis, 197 F.3d at 748; Tig, 375 F.3d at 370; PMI, 2006 WL 25266, at *6. In this case, the plaintiffs in the Straitshot action alleged 12 that the Telekenex Defendants misappropriated Straitshot's 13 customers and confidential information and presented evidence to 14 that effect. 15 Transcripts"). 16 Defendants on Straitshot's claims for interference with contractual 17 relations and violation of the Washington Consumer Protection Act. 18 In doing so, the jury necessarily found, among other things, that: 19 Straitshot had a valid business relationship with a third party 20 that had the probability of future economic benefit; Telekenex 21 intentionally induced a breach of that relationship; Telekenex used 22 wrongful means to compete; and Telekenex engaged in an unfair or 23 deceptive act or practice by making false statements about 24 Straitshot and its customers in the conduct of its trade or 25 commerce. 26 part of its findings of fact, the Court concluded that Telekenex 27 improperly "us[ed] its access to Straitshot's systems to encourage 28 Straitshot customers to move to Telekenex." See Straitshot 5AC, Smith Decl. Exs. 11-20 ("Trial The jury ultimately found against the Telekenex Smith Decl. Ex. 6 ("Jury Instructions"). 13 Further, as FFCL ¶ 14. Taken 1 together, these findings constitute clear evidence that Telekenex 2 misappropriated Straitshot's confidential information and customers 3 in an effort to improve its own business. 4 million judgment against the Telekenex Defendants amounts to "a 5 loss . . . arising out of . . . the gaining of a[] profit . . . or 6 advantage to which [the Telekenex Defendants] w[ere] not legally 7 entitled." 8 profit or gain an advantage from the misappropriation of a 9 competitor's customers is simply not plausible. United States District Court For the Northern District of California 10 Accordingly, the $6.49 The Telekenex Defendants' contention that they did not The Court reaches a different conclusion with respect to the 11 spoliation sanctions. The court in the Straitshot action awarded 12 these sanctions after it found that Mr. Summers had intentionally 13 and wrongfully used a Straitshot laptop and then destroyed 14 information on that laptop. 15 The Court found that Straitshot was entitled to sanctions from both 16 Telekenex and Mr. and Ms. Summers because Mr. Summers was a 17 Telekenex employee during the relevant period and his actions were 18 within the scope of his employment. 19 Advantage Exclusion does not apply here because there is no 20 indication Telekenex or any of the other Telekenex Defendants 21 profited or otherwise gained a business advantage from Mr. 22 Summers's destruction of evidence. 23 unlawful appropriation of the confidential information on the 24 laptop, but that was not the basis for the sanctions. 25 Telekenex Defendants may have also gained a potential litigation 26 advantage from the destruction of evidence, but the language of the 27 exclusion, which refers to "profit, remuneration, or advantage," 28 does not appear to encompass such an advantage, and the Court is See Spoliation FFCLL ¶¶ 24, 30-31. 14 Id. ¶ 31. The Unlawful They may have profited from The 1 obliged to construe the exclusion narrowly. 2 See Villa Los Alamos, 198 Cal. App. 4th at 534. 3 B. Estoppel 4 The Telekenex Defendants argue that summary judgment should be 5 denied on Count I for the independent reason that Axis is estopped 6 from denying coverage because it failed to inform the Telekenex 7 Defendants of their right to independent counsel in the Straitshot 8 action. 9 section 2860, which provides: "if . . . a conflict of interest This argument is predicated on California Civil Code United States District Court For the Northern District of California 10 arises which creates a duty on the part of the insurer to provide 11 independent counsel . . . , the insurer shall provide independent 12 counsel . . . unless" the insured is informed of the conflict and 13 then "expressly waives, in writing, the right to independent 14 counsel." 15 "when an insurer reserves its rights on a given issue and the 16 outcome of that coverage issue can be controlled by counsel first 17 retained by the insurer for the defense of the claim, a conflict 18 may exist." 19 Cal. Civ. Code § 2860(a). Section 2860 also provides: Id. § 2860(b). Pursuant to section 2860, an insurer must pay the reasonable 20 cost for hiring independent counsel by the insured where there are 21 divergent interests of the insured and the insurer brought about by 22 the insurer's reservation of rights. 23 Housing Group, No. C 94-3864 TEH, 1995 U.S. Dist. LEXIS 8791, at 24 *5-6 (N.D. Cal. June 21, 1995). 25 creates a conflict of interest requiring appointment of independent 26 counsel." 27 345, 350 (1991). 28 independent of the issues in the underlying case, [independent] Scottsdale Ins. Co. v. "[N]ot every reservation of rights Blanchard v. State Farm Fire & Cas. Co., 2 Cal. App. 4th "If the issue on which coverage turns is 15 1 counsel is not required. A conflict of interest does not arise 2 unless the outcome of the coverage issue can be controlled by 3 counsel first retained by the insurer for the defense of the 4 underlying claim." 5 the insurer's asserted nonliability has a purely legal basis which 6 is unaffected by the factual determinations made at the liability 7 stage, counsel retained by the insurer faces no conflict of 8 interest in defending the underlying action . . . ." 9 Ins., 1995 U.S. Dist. LEXIS 8791, at *19. Id. (internal citations omitted). Thus, "where Scottsdale The reason is that "none United States District Court For the Northern District of California 10 of the developments in the underlying action 'matter' for purposes 11 of the coverage defenses the insurer plans to assert later." 12 Id. The Telekenex Defendants argue that Axis's appointed counsel 13 had the ability to control the development of various factual 14 matters central to the instant coverage dispute. 15 For example, the Telekenex Defendants argue that "Axis plainly had 16 an interest in establishing liability based on a claim involving 17 willful acts or profit" since Straitshot's success on such claims 18 could trigger the policy's Unlawful Advantage Exclusion and 19 California Insurance Code section 533, which bars insurance claims 20 for losses caused by the willful acts of the insured. MSJ Opp'n at 13. Id. 21 The Telekenex Defendants contend that Axis ran afoul of 22 section 2860 since it agreed to defend the Straitshot action 23 subject to a reservation of rights and then appointed its own 24 counsel to represent the Telekenex Defendants without informing 25 them of a potential conflict or obtaining their consent. 26 13-14. 27 Telekenex Defendants of their right to independent counsel, Axis is 28 estopped from denying coverage. Id. at They further argue that because Axis failed to inform the Id. at 14 (citing Clarendon Nat'l 16 1 Ins. Co. v. Ins. Co. of the W., 442 F. Supp. 2d 914, 941-43 (E.D. 2 Cal. 2006)). 3 The Court finds that Axis is not estopped from denying insured of detrimental reliance, as well as proof of a reasonable 6 belief that the insurer would provide coverage." 7 Supp. 2d at 942 (internal citations omitted). 8 have found detrimental reliance where there is a conflict of 9 interest and the insurer deprives the insured of separate counsel 10 United States District Court coverage. 5 For the Northern District of California 4 or an opportunity to request such counsel until it was too late, 11 e.g., on the eve of trial. 12 City of Palos Verdes Estates, 46 Cal. App. 4th 1810, 1838-39 13 (1996)). 14 detrimental reliance here. 15 with the right to select independent counsel, regardless of 16 concerns about conflicts of interest. 17 Endorsement No. 1 ("[T]he Insureds shall have the right to assume 18 the defense of any claim."). 19 exercised that right by selecting independent counsel to defend the 20 Straitshot action. 21 withdrew pursuant to a court order because of a conflict of 22 interest and, sometime thereafter, Axis agreed to accept the duty 23 to defend and appoint other counsel. 24 that the Telekenex Defendants objected to the appointment of new 25 counsel, even though, at the time the counsel was appointed, 26 Telekenex was fully aware that Axis had reserved its rights under 27 the Policy. 28 In this context, "[e]stoppel requires proof by the Clarendon, 442 F. California courts See id. (citing Stonewall Ins. Co. v. The Telekenex Defendants have failed to show such The Policy expressly provided Telekenex Policy § V.C, as amended by The Telekenex Defendants initially Odalen Decl. Ex. 4. Id. That counsel later There is no indication See Odalen Decl. Ex. 3, Chaney Decl. Ex. B. In sum, the Telekenex Defendants should have been aware of any 17 1 conflicts associated with Axis's appointed counsel and they had 2 ample opportunity to appoint their own counsel. 3 is no evidence that the Telekenex Defendants detrimentally relied 4 on Axis's counsel and, thus, no ground for finding that Axis is 5 estopped from denying coverage. 6 reasons set forth in Section IV.A supra, Axis's motion for summary 7 judgment on Count I is GRANTED in part and DENIED in part. 8 Court finds that the Unlawful Advantage Exclusion applies to the 9 $6.49 million judgment against the Telekenex Defendants but not to United States District Court For the Northern District of California 10 Accordingly, there For these reasons, as well as the The the spoliation sanctions. 11 C. California Insurance Code Section 533 12 Axis also moves for summary judgment on Count II on the ground 13 that California Insurance Code section 533 precludes coverage. 14 at 18. 15 California law, applies here, and, even if California law did 16 apply, section 533 does not bar coverage. MSJ The Telekenex Defendants respond that Washington law, not MSJ Opp'n at 15-16. The Court first addresses the threshold question of choice of 17 18 law. In cases such as this, California courts employ the so-called 19 governmental-interest approach to determine which law governs. 20 Frontier, Cal. App. 4th at 1442-43. 21 must first determine whether the applicable law of California and 22 Washington materially differ. 23 to agree that there is nothing comparable to California Insurance 24 Code section 533 in Washington law. 25 proceeds to the next step of the analysis to determine whether both 26 California and Washington have an interest in applying their own 27 law. 28 action was adjudicated in Washington under Washington law, Under this approach, the Court See id. at 1454. The parties appear Accordingly, the Court The Court concludes that they do. 18 See The underlying Straitshot 1 Telekenex is based out of California, and the other Telekenex 2 Defendants reside in both California and Washington. 3 the Court turns to the final and most complex step of the 4 governmental interest analysis to determine which state's interest 5 would be more impaired if its law were not applied. 6 1454-55. Accordingly, See id. at In evaluating the respective interests of the parties and the 7 8 states in this context, California courts often consider the 9 language of the insurance policy. See Stonewall Surplus Lines Ins. United States District Court For the Northern District of California 10 Co. v. Johnson Controls, Inc., 14 Cal. App. 4th 637, 645 (1993). 11 For example, choice-of-law provisions are generally enforced. 12 Where, as here, the policy contains no such choice-of-law 13 provision, California courts will consider the place of 14 contracting, the place of negotiation of the contract, the place of 15 performance, the location of the subject matter of the contract, 16 and the residence or location of the parties. 17 "[P]articular importance is placed on the location of the subject 18 matter of the contract, i.e. the location of the insured risk." 19 Id. 20 states, e.g., where the policy contains amendatory endorsements for 21 multiple states, courts will often apply the law of the state of 22 the principal location of the particular risk involved. 23 646-47. 24 endorsements or other references to multiple states, courts have 25 declined to find that the laws of multiple states govern a policy. 26 See Costco Wholesale Corp. v. Liberty Mut. Ins. Co., 472 F. Supp. 27 2d 1183, 1206 (S.D. Cal. 2007). 28 Id. Id. at 646. Where a policy insures against risks located in several Id. at However, in the absence of multiple state-specific In this case, the facts suggest that the parties contemplated 19 1 California as the location of the insured risk when they executed 2 the Policy. 3 that 100 percent of its 113 employees were located in California. 4 Application at A-4. 5 Francisco, California as Telekenex's address. 6 Policy includes only one state-specific amendatory endorsement, and 7 that endorsement refers to California. 8 Telekenex Defendant's argument, MTD Reply at 2, there is no 9 indication that the parties intended for the Policy to be treated When it applied for the Policy, Telekenex represented Further, the Policy itself identifies San Policy at 1. Id. at 10. The Contrary to the United States District Court For the Northern District of California 10 as multiple, separate policies, each insuring an individual risk in 11 a different state. 12 [California] (and no other state) supports the application of 13 [California] law." 14 respective residences of the individual defendants also support the 15 application of California law. 16 Telekenex's former president and CEO, respectively, are residents 17 of California. 18 and Summers are residents of Washington, they were not employed by 19 Telekenex when it executed the Policy. 20 "The Policy's explicit reference to Costco, 472 F. Supp. 2d at 1206. The Messrs. Zabit and Chaney, Am. Compl. ¶¶ 4-5. While Messrs. Prudell, Radford, See id. ¶¶ 6-7. Further, the Court finds that the impairment analysis 21 otherwise favors the application of California law. 22 Defendants argue that Washington has the greatest interest in this 23 dispute because it arises out of the Straitshot action, which was 24 litigated in Washington, based on acts and omissions by Washington 25 residents in Washington state, and concerned harm to Straitshot, 26 which is based out of Washington. 27 law will not materially impair [Washington]'s interest because the 28 parties are disputing coverage, rather than compensation." 20 The Telekenex However, "applying [California] Costco, 1 472 F. Supp. 2d at 1206. Washington's primary concern is 2 compensation for Straitshot, a Washington corporation. 3 Who cuts the check, the Telekenex Defendants or Axis, is 4 considerably less important. 5 California has a considerable interest in the Policy because it was 6 executed in this state and the facts suggest that the parties 7 intended for California law to govern its application. See id. See id. On the other hand, See id. 8 Accordingly, the Court finds that California law governs. The 9 next step is to determine whether California Insurance Code section United States District Court For the Northern District of California 10 533 is applicable. Section 533 provides: "An insurer is not liable 11 for a loss caused by the wilful act of the insured; but he is not 12 exonerated by the negligence of the insured, or of the insured's 13 agents or others." 14 fundamental public policy of denying coverage for willful wrongs 15 and discouraging willful torts." 16 Ins. Co., 12 Cal. App. 4th 715, 739 (1993). 17 section 533, a willful act includes "an act deliberately done for 18 the express purpose of causing damage or intentionally performed 19 with knowledge that damage is highly probable or substantially 20 certain to result." 21 and wrongful act "in which the harm is inherent in the act 22 itself."5 23 856, 875-76 (1999) (internal quotations omitted). Cal. Ins. Code § 533. Id. at 742. "The statute reflects a Shell Oil Co. v. Winterthur Swiss For the purposes of It also includes an intentional Mez Indus., Inc. v. Pac. Nat. Ins. Co., 76 Cal. App. 4th Section 533 does 24 5 25 26 27 28 The Telekenex Defendants cite authority indicating that section 533 also requires a "preconceived design to inflict injury." MSJ Opp'n at 2 (citing Clemmer v. Hartford Ins. Co., 22 Cal. 3d 865, 887 (1978)). However, since that authority was decided, the California Supreme Court has held that a showing of specific intent is unnecessary "if the harm was inherent in the act itself." Trailer Marine Transp. Corp. v. Chicago Ins. Co., 791 F. Supp. 809, 811 (N.D. Cal. 1992) (citing J.C. Penney Casualty Ins. Co. v. M.K., 52 Cal. 3d 1009 (1991)). 21 1 not bar indemnification for a principal where it is held 2 vicariously liable for the willful acts of its agent. 3 Fireman's Fund Ins. Co. v. City of Turlock, 170 Cal. App. 3d 988, 4 1001 (1985). See 5 In this case, the Telekenex Defendants' actions come within 6 the scope of "wilful acts," as that term has been defined in the 7 context of section 533. 8 Defendant liable for interference with contractual relations. 9 set forth by the court in the Straitshot action, the elements of The jury found each and every Telekenex As United States District Court For the Northern District of California 10 interference are: (1) a valid contractual or business relationship, 11 (2) the defendant knew of the existence of that relationship, (3) 12 the defendant intentionally caused the termination of that 13 relationship, (4) the defendant's conduct was for an improper 14 purpose or by improper means, and (5) the defendant's conduct was a 15 proximate cause of plaintiff's damages. 16 Accordingly, in finding the Telekenex Defendants liable, the jury 17 necessarily found that they acted intentionally with an improper 18 purpose or by improper means and that their actions caused 19 Straitshot harm. 20 misappropriating Straitshot's customers, Straitshot's damages were 21 highly probable or substantially certain. Jury Instructions at 27. As the Telekenex Defendants' conduct involved The Telekenex Defendants argue that the jury expressly found 22 23 that the Telekenex Defendants did not act willfully. MSJ Opp'n at 24 19. 25 of the verdict dealing with Straitshot's claim for misappropriation 26 of trade secrets (rather than the contractual interference claim). 27 The special verdict form in the Straitshot action asked the jury to 28 decide whether the defendants were liable for misappropriation of This argument is unavailing because it relies on the portion 22 1 trade secrets and, if so, whether that misappropriation was "wilful 2 and malicious." 3 ultimately found that defendants were not liable for 4 misappropriation for trade secrets, so it never reached the 5 question of willfulness. 6 Defendants' argument, this does not suggest that the jury found 7 that the defendants' interference with Straitshot's contractual 8 relations was not willful. Straitshot Verdict Questions 5, 5a. See id. The jury Contrary to the Telekenex United States District Court The Telekenex Defendants also argue that section 533 is 10 For the Northern District of California 9 inapplicable because the named insured, Telekenex, did not commit 11 any willful acts -- it was found liable because of the acts of its 12 employees. 13 Verdict, id., which establishes that the jury held each defendant 14 liable for interference with contractual relations "solely on the 15 basis that he or it acted in concert with one or more other 16 defendants." 17 Defendants reason that "[s]ince all Axis's insureds are only 18 vicariously liable according to the special verdict form," section 19 533 does not preclude coverage. 20 170 Cal. App. 3d at 1001). 21 to coverage for damages flowing from Straitshot's claim for 22 interference with contractual relations. 23 verdict suggests that the jury found Telekenex liable under some 24 theory of vicarious liability. 25 Telekenex was acting "in concert" with the other defendants to 26 carry out the scheme to misappropriate Straitshot's customers. 27 finding that the defendants acted in concert, the jury necessarily 28 found that they "consciously act[ed] together in an unlawful MSJ Opp'n at 18. They again point to the Straitshot Straitshot Verdict Question No. 4a. The Telekenex MSJ Opp'n at 19 (citing Fireman's, This argument lacks merit as it applies Nothing in the Straitshot Rather, the verdict indicates that 23 In 1 manner." Kottler v. State, 136 Wash. 2d 437, 448 (1998). However, the Telekenex Defendants' argument regarding 2 3 vicarious liability does have merit with respect to the spoliation 4 sanctions issued against Mr. Summers and Telekenex. 5 Summers' actions in destroying evidence may have been willful, 6 there is no indication that he qualified as an insured under the 7 Policy. 8 an insured under the Policy. 9 insured under the Policy, but it was only held liable under the While Mr. Indeed, Axis appears to suggest that Mr. Summers was not See MSJ Reply at 12. United States District Court 10 For the Northern District of California Spoliation FFCL Telekenex is an doctrine of respondeat superior. 11 Accordingly, section 533 does not preclude coverage. 12 Fireman's, 170 Cal. App. 3d at 1001. 13 the conduct underlying the spoliation of evidence adjudication is 14 intertwined with the unlawful schemes underlying the judgment for 15 which Telekenex was held directly liable, . . . the Willful Acts 16 exclusion applies." 17 evidence showing how the two schemes were intertwined. 18 the Spoliation Findings of Fact and Conclusions of Law suggests 19 that Telekenex or any of its principals directed or expected Mr. 20 Summers to destroy evidence as part of the scheme to interfere with 21 Straitshot's contractual relations. MSJ Reply at 12. ¶ 31. See Axis argues that, "[b]ecause However, Axis has offered no Nothing in For these reasons, Axis's motion for summary judgment on Count 22 23 II is GRANTED in part and DENIED in part. 24 section 533 bars coverage for damages flowing from Straitshot's 25 claim for interference with contractual relations but not for the 26 spoliation sanctions. 27 /// 28 /// 24 The Court finds that 1 D. Coverage for IXCH 2 Axis also moves for summary judgment on Count III, arguing 3 that IXCH is not entitled to coverage under the Policy. 4 Telekenex executed an asset purchase agreement in August 2010, 5 through which IXCH agreed to purchase Telekenex's assets and assume 6 its liabilities. 7 not an insured under the Policy's terms; that, under the Policy's 8 terms, Telekenex could not unilaterally assign its rights under the 9 Policy; and that Axis never agreed to allow Telekenex to assign its Chaney Decl. ¶ 4. IXCH and It is undisputed that IXCH is United States District Court For the Northern District of California 10 rights under the Policy to IXCH. 11 argue that, regardless of the Policy language, the right to 12 coverage, defense, and indemnity, transferred to IXCH by operation 13 of law when it purchased Telekenex's assets and agreed to assume 14 its liabilities. 15 However, the Telekenex Defendants MSJ Opp'n at at 21. The Telekenex Defendants rely on the Ninth Circuit's decision 16 in Northern Insurance Co. of New York v. Allied Mutual Insurance 17 Co., 955 F.2d 1353 (9th Cir. 1992). 18 question presented was whether the right to indemnity under an 19 insurance policy transferred to a successor that had assumed its 20 predecessor's liabilities, even though the insurance policy 21 contained a no-assignment clause. 22 Circuit concluded that the policy benefits were transferred by 23 operation of California law, reasoning that "the rationale for 24 honoring 'no assignment' clauses vanishes when liability arises 25 from presale activity." 26 In Northern, as here, the 955 F.2d at 1357. The Ninth Id. at 1357-58. While Northern clearly favors the Telekenex Defendants on 27 Count V, it appears that Northern is no longer good law. 28 case was decided, a number of California courts, including the 25 After the of successor liability entitles a successor, by operation of law, 3 to the insurance coverage of its predecessor. 4 Hartford Accident & Indem. Co., 29 Cal. 4th 934, 943 (2003) 5 ("Whether or not [predecessor] assigned any benefits under the 6 liability policies to [successor], any such assignment would be 7 invalid because it lacked the insurer's consent."); Gen. Accident 8 Ins. Co. v. Super. Ct., 55 Cal. App. 4th 1444, 1454 (1997) 9 ("finding of successor liability in tort does not entitle the 10 United States District Court California Supreme Court, rejected the principle that the finding 2 For the Northern District of California 1 successor corporation, by operation of law, to the insurance 11 coverage of its corporate predecessor"). See Henkel Corp. v. As IXCH is not an insured under the Policy and there is no 12 13 indication that Axis consented to an assignment of the Policy 14 benefits to IXCH, the Court GRANTS Axis's motion for summary 15 judgment with respect to Count III. 16 /// 17 /// 18 /// 19 /// 20 /// 21 /// 22 /// 23 /// 24 /// 25 /// 26 /// 27 /// 28 /// 26 1 V. CONCLUSION Company's motion for partial summary judgment is GRANTED in part 4 and DENIED in part. 5 the Policy's Unlawful Advantage Exclusion Code bars coverage for 6 the $6.49 million judgment against the Telekenex Defendants but not 7 coverage for the spoliation sanctions. 8 the Court finds that California Insurance Code section 533 9 precludes coverage for damages flowing from Straitshot's claims for 10 United States District Court For the foregoing reasons, Plaintiff Axis Reinsurance 3 For the Northern District of California 2 interference with contractual relations but not for damages flowing 11 from the spoliation sanctions. 12 finds that IXC Holdings, Inc. is not an insured under the Policy as 13 a matter of law. With respect to Count I, the Court finds that With respect to Count II, With respect to Count V, the Court 14 15 IT IS SO ORDERED. 16 17 18 Dated: December 19, 2012 UNITED STATES DISTRICT JUDGE 19 20 21 22 23 24 25 26 27 28 27

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