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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IN THE UNITED STATES DISTRICT COURT

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FOR THE NORTHERN DISTRICT OF CALIFORNIA

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AXIS REINSURANCE COMPANY,
Plaintiff,

For the Northern District of California

United States District Court

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v.

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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,

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Defendants.
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Case No. 12-2979 SC
ORDER GRANTING IN PART AND
DENYING IN PART MOTION FOR
PARTIAL SUMMARY JUDGMENT

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I.

INTRODUCTION
Axis Reinsurance Company ("Axis") brings this action against

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Telekenex, Inc. ("Telekenex"), Anthony Zabit, Karen Salazar,

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Brandon Chaney, Deanna Chaney, IXC Holdings, Inc. ("IXCH"),

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(collectively, the "Telekenex Defendants"), Straitshot

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Communications, Inc., and Straitshot RC, LLC (collectively,

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"Straitshot").

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insurance policy it issued to Telekenex (the "Policy") does not

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cover any amounts awarded in an underlying action captioned

Axis seeks a judicial declaration that the

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Straitshot Communications, Inc. v. Telekenex, Inc., et al., No.

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C10-268 TSZ (W.D. Wash) (the "Straitshot action").

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("Am. Compl.").

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against all defendants on three of its five causes of action

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pursuant to Federal Rule of Civil Procedure 56.1

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("MSJ").

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partial summary judgment, ECF No. 40 ("MSJ Opp'n"), but Straitshot

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has not.

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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

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appropriate for resolution without oral argument.

For the reasons

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set forth below, the motion is GRANTED in part and DENIED in part.

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II.

BACKGROUND

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A.

The Policy

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Sometime in 2008, Telekenex, a telecommunications provider,

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applied for insurance coverage with Axis.

Smith Decl. ¶ 3; Odalen

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Decl. Ex. 2 ("Ins. App.").2

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Telekenex operates out of San Francisco, California and that all of

The application indicates that

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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.
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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.").

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its 113 employees work in California.

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ultimately approved Telekenex's application and issued the Policy

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to Telekenex on May 27, 2008.

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According to Mr. Odalen, who handled Axis's claims, the Policy was

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issued in San Francisco, California.

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several endorsements which amend the policy in a number of ways.

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One of these endorsements, entitled "California Amendatory

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Endorsement," concerns the cancellation and nonrenewal of the

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Policy.

United States District Court

For the Northern District of California

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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

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officers (a.k.a., "D&O liability"), employment practices liability,

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fiduciary liability, and outside executive liability, among other

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things.

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including an "Unlawful Advantage Exclusion" for losses

Policy § I.

The Policy carves out a number of exclusions,

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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.

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Id. § IV.A.5.
The Policy covers "Insured Individual[s]," who are defined as

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"natural persons" who are "duly elected or appointed director[s],

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officer[s], trustee[s] of Manager[s] of the Policyholder," as well

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as "individuals compensated by the Policyholder through wages,

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salary, and/or commission."

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provides coverage for an insured's spouse where that spouse is sued

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solely by reason of his or her status as a spouse of the insured.

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Id. § II.A.

Id. § III.C.7.

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The Policy also

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B.

The Straitshot Action

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In 2008, one of Telekenex's Washington-based competitors,

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Straitshot, sued Telekenex and the other Telekenex Defendants in

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the Western District of Washington.

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5AC") ¶ 2.

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its trade secrets and confidential customer information and covered

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up this theft through the destruction of evidence.

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addition to Telekenex, Straitshot sued Mr. Zabit, Telekenex's

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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

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and Messrs. Prudell, Radford, and Summers, former Straitshot

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employees who allegedly funneled business opportunities to

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Telekenex before resigning from Straitshot.

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Straitshot 5AC.

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spouses, Mss. Chaney, Prudell, Radford, Salazar,3 and Summers, on

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the ground that the other individual defendants' unlawful acts were

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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.

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Id. ¶¶ 325-

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415.

Among other things, Straitshot asserted that Messrs. Prudell,

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Radford, and Summers breached their employment contracts with and

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their duty of loyalty to Straitshot by divulging Straitshot's

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confidential and proprietary information to Telekenex; that all

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defendants interfered with Straitshot's contractual relations with

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its customers; and that a number of the defendants violated the

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Lanham Act, the Consumer Protection Act, the Washington Criminal

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Profiteering Act, and the federal RICO statute.

Id.

Sometime after the Straitshot action was filed, Telekenex

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tendered a claim to Axis under the Policy.

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Ms. Salazar is Mr. Zabit's wife.
Doe Zabit.

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Odalen Decl. ¶ 3.

Straitshot named her as Jane

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Telekenex indicated that it intended to assume the legal defense of

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the claim using its own independent counsel.

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4.

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and October 4, 2010, where it indicated that a number of claims

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asserted in the Straitshot action were not covered under the Policy

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and that Axis reserved its rights to deny coverage for the matter.

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See id. Ex. 3; Chaney Decl. Ex. B.

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of 2010, Telekenex informed Axis that its chosen defense counsel

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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

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interest.

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retained the law firm of Littler Mendelson to defend the Straitshot

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action.

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Id.

The Staitshot action ultimately went to trial.

The jury

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returned a $6.49 million verdict in favor of Straitshot, finding

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for Straitshot on its claims for: (1) breach of contract against

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Messrs. Prudell and Radford; (2) breach of the duty of loyalty

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against Messrs. Prudell and Summers; (3) interference with

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contractual relations against Telekenex and Messrs. Prudell,

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Radford, Summers, Zabit, and Chaney; and (4) violation of the

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Consumer Protection Act against Telekenex and Messrs. Zabit,

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Chaney, Prudell, and Radford.

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Verdict").

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misappropriation of trade secrets and false statements in violation

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of the Lanham Act.

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defendants.

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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

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Conclusions of Law that rejected the defendants' affirmative

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defenses of estoppel and unclean hands.

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Smith Decl. Ex. 8

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("FFCL").

As part of its findings, the Court concluded that

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"Straitshot expressly authorized Telekenex, Summers, and other

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Telekenex network engineers to 'access its systems' in order to

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provide assistance to Straitshot customers," but "the Telekenex

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Defendants' conduct went well beyond what was authorized by

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Straitshot, including using its access to Straitshot's systems to

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encourage Straitshot customers to move to Telekenex."

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The Court issued additional Findings of Fact and Conclusions of Law

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awarding Straitshot sanctions for Mr. Summers's spoliation of

Id. ¶ 14.

United States District Court

For the Northern District of California

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evidence and failure to produce documents during discovery.

Smith

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Decl. Ex. 10 ("Spoliation FFCL").

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findings, the Court concluded that Mr. Summers intentionally and

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wrongfully used a Straitshot laptop and, in bad faith, made

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substantial alterations and deletions to that laptop in violation

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of multiple temporary restraining orders.

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also found that Straitshot was entitled to sanctions from Telekenex

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for the spoliation under the doctrine of respondeat superior.

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¶ 31.

In connection with these

Id. ¶ 24.

The Court

Id.

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C.

The Instant Action

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On June 8, 2012, Axis filed the instant action against the

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Telekenex Defendants and Straitshot.

ECF No. 1.

In its Amended

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Complaint, Axis asserts eight causes of action, three of which are

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relevant to the instant motion.

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amounts awarded in the Straitshot action are not covered under the

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Policy because they fall under the Policy's Unlawful Advantage

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Exclusion.

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Code § 533 also bars recovery for the amounts awarded in the

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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

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entitled to coverage under the Policy.

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Axis now moves for summary

judgment on Counts I, II, and V.

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III. LEGAL STANDARD

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Entry of summary judgment is proper "if the movant shows that

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there is no genuine dispute as to any material fact and the movant

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is entitled to judgment as a matter of law."

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56(a).

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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

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Liberty Lobby, Inc., 477 U.S. 242, 251 (1986).

"A moving party

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without the ultimate burden of persuasion at trial -- usually, but

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not always, a defendant -- has both the initial burden of

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production and the ultimate burden of persuasion on a motion for

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summary judgment."

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Cos., Inc., 210 F.3d 1099, 1102 (9th Cir. 2000).

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carry its burden of production, the moving party must either

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produce evidence negating an essential element of the nonmoving

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party's claim or defense or show that the nonmoving party does not

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have enough evidence of an essential element to carry its ultimate

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burden of persuasion at trial."

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ultimate burden of persuasion on the motion, the moving party must

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persuade the court that there is no genuine issue of material

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fact."

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///

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///

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///

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///

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///

Nissan Fire & Marine Ins. Co., Ltd. v. Fritz

Id.

Id.

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"In order to

"In order to carry its

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IV.

DISCUSSION

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A.

Unlawful Advantage Exclusion

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Axis moves for summary judgment on Count I on the ground that

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the Policy's Unlawful Advantage Exclusion bars coverage for losses

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arising out of the Straitshot action, specifically, the $6.49

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million judgment and spoliation sanctions.

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substantive law on this issue, the Court first addresses the

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parties' arguments concerning what law to apply.4

Before turning to the

As Axis argues, California Civil Code section 1646 governs the

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United States District Court

For the Northern District of California

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choice-of-law analysis for disputes over contract interpretation

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such as this one.

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App. 4th 1436, 1454 (2007).

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section 1646 choice-of-law analysis where there is no material

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conflict between the laws of the states involved.

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Gitano Grp., Inc. v. Kemper Grp., 26 Cal. App. 4th 49, 57 (1994).

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Such is the case here.

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the [insurance] policy as a whole, and gives it a fair, reasonable,

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and sensible construction . . . .

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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

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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.

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modify it or create ambiguity where none exists."

Black v. Nat'l

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Merit Ins. Co., 154 Wash. App. 674, 679 (2010) (internal quotation

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marks omitted).

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insurance policy "[their] ordinary and popular sense, unless used

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by the parties in a technical sense" and construe terms as

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ambiguous "only if [they are] susceptible to two or more reasonable

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constructions despite the plain meaning of [the] terms within the

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context of the policy as a whole."

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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

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quotation marks omitted).

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California courts construe ambiguities against the insurer, id.;

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Quadrant Corp. v. Am. States Ins. Co., 154 Wash. 2d 165, 172

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(2005), and narrowly interpret exclusionary clauses, such as the

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one at issue here, Villa Los Alamos Homeowners Assn. v. State Farm

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Gen. Ins. Co., 198 Cal. App. 4th 522, 534 (2011); Phil Schroeder,

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Inc. v. Royal Globe Ins. Co., 99 Wash. 2d 65, 68 (1983).

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Accordingly, the Court need not and, therefore, does not reach the

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choice-of-law question here and applies California law.

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Additionally, both Washington and

The Court now turns to the substantive dispute concerning the

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Unlawful Advantage Exclusion.

The exclusion bars recovery for

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losses arising from claims "based upon, arising out of, directly or

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indirectly resulting from, in consequence of or in any way

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involving: the gaining of any profit, remuneration, or advantage to

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which the Insured was not legally entitled . . . if evidenced by

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any judgment [or] final adjudication . . . ."

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Axis argues that the exclusion applies here since the Telekenex

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Defendants' loss stems from their unlawful procurement of

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Straitshot's customers and confidential information.

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Policy § IV.A.5.

MSJ at 16.

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Axis responds that the exclusion only applies where there is an

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illegal profit evidenced by a judgment or final adjudication and

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that, here, neither the jury's verdict, the court's judgment, nor

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the court's spoliation award contains a determination that the

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Telekenex Defendants gained any profit or advantage.

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7.

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MSJ Opp'n at

Axis primarily relies on the Fifth Circuit's decision in

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Jarvis Christian College v. National Union Fire Insurance Co. of

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Pittsburgh, 197 F.3d 742 (5th Cir. 1999).

MSJ at 16-17.

That case

United States District Court

For the Northern District of California

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dealt with a similarly worded policy exclusion, which precluded

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insurance coverage for "any claim arising out of the gaining in

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fact of any personal profit or advantage to which the Insured is

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not legally entitled."

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The district court found that the exclusion applied where a member

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of Jarvis's board had transferred $2 million of Jarvis's endowment

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funds to a business that the board member owned.

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Jarvis argued that the board member did not gain "in fact" a

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personal profit or advantage from the transfer.

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disagreed, finding that, as the owner of a third-party business,

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the board member expected to personally make over $360,000 from the

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fund transfer.

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not gain a balance-sheet profit, "[he] did gain in fact a personal

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advantage."

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argues that the Policy's Unlawful Advantage Exclusion should apply

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here, reasoning that "the acts of the Telekenex [D]efendants

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created the ultimate advantage in giving Telekenex an opportunity

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to shift . . . Straitshot's entire customer base over to Telekenex

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. . . .

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

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defendants] all stood to personally gain and shared in the

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advantage gained by Telekenex."

MSJ at 17.

The Telekenex Defendants respond that, under another Fifth

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Circuit case, Tig Specialty Insurance Co. v. PinkMonkey.com, Inc.,

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375 F.3d 365 (5th Cir. 2004), the Unlawful Advantage Exclusion only

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applies where an illegal profit or advantage is evidenced by a

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judgment or final adjudication.

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policy exclusion practically identical to the one at issue in

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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

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371.

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triggered the exclusion because, in order to convict, the jury was

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required to find that the defendant "benefited from [a] false

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representation or promise" and "[b]enefit is synonymous with

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advantage or profit."

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Defendants argue, the jury in the Straitshot action only found

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against Telekenex and its officers on two causes of action,

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interference with contractual relations and violation of

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Washington's Consumer Protection Act, neither of which require a

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finding of profit or advantage.

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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

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PMI Mortgage Insurance Co. v. American International Specialty

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Lines Insurance Co., No. C. 02-1774 PJH, 2006 WL 825266 (N.D. Cal.

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Mar. 29, 2006), for the same proposition.

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in PMI, like the exclusions in Jarvis and Tig, required a showing

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of profit or advantage "in fact."

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court declined to apply the exclusion on the basis of the

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allegations in the underlying complaint alone.

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Instead, the Court held that, in order for the exclusion to apply,

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The exclusion at issue

PMI, 2006 WL 825266, at *2.

The

Id. at *6.

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the insurer must demonstrate, "through proof of either evidentiary

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facts or a final adjudication, that the underlying . . . complaint

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arose out of an unlawful profit or advantage to which [the insured]

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was not legally entitled."

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"requir[ing] an actual adjudication or determination of fact prior

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to application of the profit or advantage exclusion[] more

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appropriately effectuate[s] the goal of giving the phrase 'in fact'

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its ordinary and popular meaning."

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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

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down to whether the Court may look to the allegations and evidence

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presented in the Straitshot action to determine whether the

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Policy's Unlawful Advantage Exclusion applies.

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allegations and evidence are relevant to the inquiry.

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Telekenex Defendants argue that the Court may look only to the

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verdict, the judgment, and the elements of the claims on which the

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jury found for Straitshot.

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course is somewhere in between.

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Axis argues that
The

The Court finds that the appropriate

Unlike the exclusions in Jarvis, Tig, and PMI, the Policy's

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Unlawful Advantage Exclusion does not refer to a profit or

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advantage "in fact."

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"evidenced by [a] judgment [or] final adjudication."

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the verdict, judgment, and findings of fact in the Straitshot

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action are of primary importance in determining whether the

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Unlawful Advantage Exclusion applies.

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Straitshot's allegations and evidence alone without doing injustice

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to the plain meaning of the exclusion.

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to look at the judgment and the Washington court's findings in a

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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

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where the allegations and the judgment, taken together, clearly

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indicate that an insured gained a profit or an advantage from its

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wrongful acts, even though a finding of profit or advantage was not

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a necessary element of the claims asserted.

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finds that the better approach is to look at the judgment in the

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context of the plaintiff's allegations and evidence.

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is consistent with the approaches set forth in Jarvis, Tig, and

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PMI.

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underlying facts or allegations to some extent.

United States District Court

For the Northern District of California

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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

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that the Telekenex Defendants misappropriated Straitshot's

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customers and confidential information and presented evidence to

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that effect.

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Transcripts").

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Defendants on Straitshot's claims for interference with contractual

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relations and violation of the Washington Consumer Protection Act.

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In doing so, the jury necessarily found, among other things, that:

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Straitshot had a valid business relationship with a third party

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that had the probability of future economic benefit; Telekenex

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intentionally induced a breach of that relationship; Telekenex used

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wrongful means to compete; and Telekenex engaged in an unfair or

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deceptive act or practice by making false statements about

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Straitshot and its customers in the conduct of its trade or

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commerce.

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part of its findings of fact, the Court concluded that Telekenex

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improperly "us[ed] its access to Straitshot's systems to encourage

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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").

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Further, as

FFCL ¶ 14.

Taken

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together, these findings constitute clear evidence that Telekenex

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misappropriated Straitshot's confidential information and customers

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in an effort to improve its own business.

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million judgment against the Telekenex Defendants amounts to "a

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loss . . . arising out of . . . the gaining of a[] profit . . . or

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advantage to which [the Telekenex Defendants] w[ere] not legally

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entitled."

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profit or gain an advantage from the misappropriation of a

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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

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spoliation sanctions.

The court in the Straitshot action awarded

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these sanctions after it found that Mr. Summers had intentionally

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and wrongfully used a Straitshot laptop and then destroyed

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information on that laptop.

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The Court found that Straitshot was entitled to sanctions from both

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Telekenex and Mr. and Ms. Summers because Mr. Summers was a

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Telekenex employee during the relevant period and his actions were

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within the scope of his employment.

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Advantage Exclusion does not apply here because there is no

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indication Telekenex or any of the other Telekenex Defendants

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profited or otherwise gained a business advantage from Mr.

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Summers's destruction of evidence.

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unlawful appropriation of the confidential information on the

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laptop, but that was not the basis for the sanctions.

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Telekenex Defendants may have also gained a potential litigation

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advantage from the destruction of evidence, but the language of the

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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