Beazley Insurance Company, Inc. v. Ace American Insurance Company et al
Filing
99
OPINION AND ORDER re: 60 MOTION for Summary Judgment . filed by Ace American Insurance Company, 61 MOTION for Partial Summary Judgment . filed by Beazley Insurance Company, Inc., 59 MOTION for Summary Judgment < i>. filed by Illinois National Insurance Company. for the foregoing reasons, the Court grants ACE summary judgment on Counts Two and Four, but denies ACE summary judgment on Count Five. The Court grants INIC's motion for summary judgment and directs the Clerk of the Court to terminate INIC from this action. Beazley's motion for summary judgment is denied. Beazley and ACE are directed to contact chambers jointly by no later than July 15 to schedule a trial date. The Clerk of the Court is directed to close the motions at document numbers 59, 60, and 61 of the docket of this case. ***Party Illinois National Insurance Company terminated. (Signed by Judge Jed S. Rakoff on 7/12/2016) (kgo) Modified on 7/12/2016 (kgo).
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
-----------------------------------------x
BEAZLEY INSURANCE COMPANY, INC.,
15-cv-5119 (JSR)
Plaintiff,
OPINION AND ORDER
-vf
ACE AMERICAN INSURANCE COMPANY, et al.,:l
Defendants.
) :
-
"
·- ....
--------------------------------------~--x
--- .....
-·-"':""',
JED S. RAKOFF, U.S.D.J.
This dispute between three
class action suit (the "Facebook Class Action")
that retail
investors in Facebook brought against NASDAQ in the aftermath of
Facebook's troubled initial public offering on the NASDAQ stock
exchange. While plaintiff Beazley Insurance Company,
("Beazley")
Inc.
agreed to contribute its full limit of liability to
NASDAQ's settlement of the Facebook Class Action, defendants ACE
American Insurance Company ("ACE")
and Illinois National Insurance
Company ("INIC") disclaimed coverage. Beazley now moves for partial
summary judgment against ACE on its second cause of action seeking a
declaratory judgment that ACE is obligated to provide indemnity
coverage to NASDAQ in connection with the Facebook Class Action.
Conversely, ACE moves for summary judgment on all remaining claims
against it
(Counts Two,
Four, and Five) primarily on the basis that
the Facebook Class Action falls within the "professional services"
exclusion of the relevant policy. INIC likewise moves for summary
1
judgment on all remaining claims against it
(~,
Counts One and
Two)
Because the Court finds that the J«acebook Class Action's claims
fall within the "professional services" exclusion, the Court denies
Beazley's motion for summary judgment, grants ACE's motion for
summary judgment on Counts Two and Four,
and grants INIC's motion
for summary judgment in its entirety. However,
the Court denies ACE
summary judgment on plaintiff's breach of contract claim (Count
Five),
since ACE breached its duty to advance defense costs to
NASDAQ and since Beazley (in its capacity as NASDAQ's assignee)
appears to have damages in the form of NASDAQ's unreimbursed
attorneys'
fees.
This litigation traces itself to a series of lawsuits filed
against NASDAQ entities and officers in 2012 in connection with
NASDAQ's alleged mishandling of the Facebook IPO. On October 4,
2012, the Judicial Panel on Multidistrict Litigation centralized 41
actions related to the Facebook IPO in the Southern District of New
York before Judge Sweet,
including eight actions brought against
NASDAQ entities and officers alleging federal securities law and
negligence claims. See In re Facebook,
Litig.,
899 F.
Supp. 2d 1374, 1377
Inc.,
IPO Sec.
& Derivative
(J.P.M.L. 2012). Judge Sweet
subsequently consolidated the NASDAQ actions separately for pretrial
proceedings. See In re Facebook,
288 F.R.D. 26,
29-30
(S.D.N.Y.
Inc.,
2012).
2
IPO Sec.
& Derivative Litig.,
On April 30, 2013, a consolidated amended class action
complaint
(the "CAC") was filed against NASDAQ OMX Group,
Inc.,
NASDAQ Stock Market, LLC, Robert Greifeld (NASDAQ's President and
CEO at the relevant time),
and Anna Ewing
Information Officer at the relevant time)
(NASDAQ's Chief
(collectively, the "NASDAQ
Parties"), on behalf of a putative class of all persons "that
entered pre-market and aftermarket orders to purchase and/or sell
the common stock of Facebook Inc.
. on May 18, 2012
connection with Facebook's initial public offering .
thereby suffered monetary losses as a result of the
in
. and who
[NASDAQ
Parties'] wrongdoing." See Deel. of Kevin Kieffer in Support of Pl.
Beazley Ins. Co.,
Inc.'s Mot. for Partial Summ. J. dated Jan. 15,
2016 ("Kieffer Deel. dated Jan. 15, 2016"), Ex.
2 at 1, ECF No.
74-
2.
More specifically, the CAC was brought on behalf of both a
"Securities Class" alleging violations of§ lO(b)
and§ 20(a) of the
Securities Exchange Act of 1934 and a "Negligence Class" alleging
claims for common law negligence. See id. Among other things, the
CAC alleged that "the wholesale breakdown in NASDAQ's trading
platforms" on the day of the IPO "caused Class Members substantial
damages by,
inter alia:
executions;
(ii)
(i)
causing erroneous and failed trade
blinding Class Members for hours -
if not days -
as
to their then-current positions in Facebook stock due to late and/or
missing trade confirmations;
(iii) preventing Class Members from
executing orders at the National Best Bid/Offer [] prices for
3
Facebook stock as required by SEC Reg. NMS; and (iv)
exposing Class
Members to related failures of the NASDAQ trading platform,
resulting in, among other things, an artificial downward pressure on
the price of Facebook's stock." Id.
15.
~
During the relevant time period, NASDAQ OMX Group,
maintained both an errors and omissions
a directors and officers
("D&O")
("E&O")
Inc.
insurance policy and
insurance policy - both of which
were potentially implicated by the CAC. Non-party Chartis Specialty
Insurance Company ("Chartis") was NASDAQ's primary E&O liability
insurer at the relevant time, having issued NASDAQ OMX Group,
Inc. a
policy for the policy period of January 31, 2012 through January 31,
2013
(the "Chart is E&O Policy"). See Defs.'
Undisputed Material Facts
71.
1
("Defs.'
Joint Statement of
Rule 56.1 Stmt.")
~
8, ECF No.
Beazley was NASDAQ's first-layer excess E&O insurer, having
issued a policy to NASDAQ OMX Group,
(the "Beazley E&O Policy"). See id.
Inc.
~
for the same policy period
12. The Beazley E&O Policy
follows the form of the Chartis E&O Policy - meaning that it
generally insures the same risks under the same set of terms and
conditions as the Chartis E&O Policy -
and sits in excess of the
Chartis E&O Policy's $15 million limit of liability. As a "firstlayer excess" insurer, Beazley's $15 million limit of liability was
1
All citations to facts set forth in a party's Local Rule 56.l
Statement are citations to facts that were admitted in relevant part
by the opposing party, unless otherwise noted.
4
implicated once Chartis's $15 million limit of liability was
exhausted. See id.
ACE,
~
13.
for its part, was NASDAQ's primary D&O liability insurer
at the relevant time, having issued a policy to NASDAQ OMX Group,
Inc. for the policy period of January 31, 2013 to January 31, 2014
(the "ACE D&O Policy") . 2 See id.
excess D&O insurer,
~
16. INIC was NASDAQ' s first-layer
having issued a policy to NASDAQ OMX Group,
Inc.
for the same policy period with a $15 million limit of liability
(the "INIC D&O Pol icy") . See id.
~~
19-2 0. The INIC D&O Policy
follows the form of the ACE D&O Policy and sits in excess of the ACE
D&O Policy's $15 million limit of liability. See id.
The E&O policies provided NASDAQ with coverage,
part,
Act .
for "Damages resulting from any Claim
~~
17, 21-22.
in relevant
for any Wrongful
solely in rendering or failing to render Professional
Services." Compl., Ex. C,
§
l.I, ECF No. 2-3. Upon receiving notice
of various of the underlying actions brought against NASDAQ, Chartis
issued a reservation of rights letter and agreed to advance defense
costs to NASDAQ under the Chartis E&O Policy. See Aff. in Support of
De f . ' s Mot . for S umm . J .
( "London Aff. " ) , Ex . L , EC F No . 6 6- 8 .
Beazley similarly accepted potential coverage under its E&O policy,
subject to a reservation of rights. See Deel. of Carrie Parikh in
Although the actions that ultimately formed the consolidated
Facebook Class Action were first brought prior to the beginning of
the policy period, ACE acknowledged in an October 8, 2013 letter to
NASDAQ that the Facebook Class Action qualified as a "Prior Covered
Claim" under the ACE D&O Policy. See Compl., Ex. Fat 2, ECF No. 2-
2
6.
5
Support of Pl. Beazley Ins. Co.,
Inc.'s Mot. for Partial Summ. J.
dated Jan. 15, 2016 ("Parikh Deel. dated Jan. 15, 2016")
No.
75. ACE, however,
~
2, ECF
disclaimed coverage, relying primarily on the
"professional services" exclusion. See Def.'s Rule 56.1 Stmt.
In April 2015,
~
46.
the NASDAQ Parties agreed to settle the Facebook
Class Action for $26.5 million. See Parikh Deel. dated Jan. 15, 2016
~
5. In connection with that settlement and in exchange for a mutual
release of claims, Beazley entered into an agreement with the NASDAQ
Parties dated June 15, 2015, by which Beazley agreed to contribute
its full $15 million limit of liability toward the settlement and by
which the NASDAQ Parties "assign[ed] to Beazley any and all
contractual rights or extra-contractual rights they have or that
they may acquire .
. against ACE and/or Illinois National in
connection with the [Facebook Class Action] up to the amount of [$15
million]." Kieffer Deel. dated Jan. 15, 2016
Carrie Parikh in Opp. to ACE Am.
on June 30,
20; see also Deel. of
Ins. Co.'s and Ill. Nat'l Ins.
Co.'s Mots. for Summ. J. dated Jan. 29, 2016
Shortly thereafter,
~
~
6, ECF No. 86.
2015, Beazley initiated this action
against ACE and INIC.
Beazley subsequently moved for partial summary judgment on
Count One,
seeking a declaratory judgment that ACE was obligated
under the ACE D&O Policy to cover NASDAQ's defense costs in
connection with the Facebook Class Action. Simultaneously, ACE and
INIC both moved to dismiss the complaint in its entirety. On October
21, 2015, the Court granted Beazley partial summary judgment on
6
Count One and granted in part and denied in part defendants' motions
to dismiss. Specifically, the Court dismissed Count Three
indemnification)
as against both defendants with prejudice;
dismissed Count Four (for contribution)
of contract)
(for
and Count Five
(for breach
as against INIC without prejudice; and otherwise denied
defendants' motions to dismiss. See Beazley Ins. Co. v. Ace Am.
Co.,
2015 WL 6442224, at *1-2
Ins.
(S.D.N.Y. Oct. 21, 2015). The Court
explained these rulings in an opinion issued on December 20, 2015,
in which it found,
based on the arguments then before it, that ACE
had not yet met its heavy burden of demonstrating that the
"professional services" exclusion unambiguously applied to the CAC's
claims such that ACE could avoid its duty to advance defense costs
to NASDAQ. See Beazley Ins. Co. v. Ace Am.
9267199, at *5
(S.D.N.Y.
Dec. 20,
Ins. Co., 2015 WL
2015).
Turning to the parties' pending motions for summary judgment,
the critical issue remains the applicability of the "professional
services" exclusion found in the ACE D&O Policy to the claims in the
Facebook Class Action. That exclusion provides as follows:
The Insurer shall not be liable for that portion of Loss
on account of any Claim:
. by or on behalf of a
customer or client of the Company [~, NASDAQ],
alleging, based upon, arising out of, or attributable to
the rendering or failure to render professional services.
7
London Aff., Ex.
ECF No.
F §III
(as amended by Endorsement Nos. 10 and 19),
66-2.3
Neither "customer or client" nor "professional services" is
defined in the ACE D&O Policy. Beazley's argument that defendants
have wrongfully invoked this policy exclusion is two-pronged. First,
Beazley argues that the class of retail investors who brought and
settled the Facebook Class Action are not "customer[s] or client[s]"
of NASDAQ,
as is required to trigger the exclusion.
Beazley, NASDAQ's customers are its members -
4
Rather, argues
that is, the market
makers through which retail investors may buy and sell stock listed
on the NASDAQ stock exchange (~,
and the listing companies themselves
Facebook) . Second, Beazley argues that the settled claims in
the CAC are not "alleging, based upon,
arising out of, or
attributable to the rendering or failure to render professional
services." ACE,
conversely, submits that retail investors are
"customer[s] or client[s]" of NASDAQ and that the settled claims
3 Though many capitalized terms in the relevant policies appear in
boldface, the Court has not replicated that formatting in this
Opinion and Order, as it is immaterial to the contractual analysis.
On November 9, 2015, Judge Sweet issued an Order and Final Judgment
approving the settlement of the Facebook Class Action. See Kieffer
Deel. dated Jan. 15, 2016, Ex. 20, ECF No. 74-20. The Order and
Final Judgment certified a settlement class of "all persons and
entities that entered retail pre-market and aftermarket orders to
purchase and/or sell the common stock of Facebook, Inc. on May 18,
2012, and who suffered monetary losses as a result of the conduct
alleged in the CAC," and expressly excluded "any person or entity
that was on May 18, 2012 a member of the Exchange." Id. ~ 3. In
other words, the settlement class was composed exclusively of retail
investors in Facebook.
4
8
arose out of "professional services" as a matter of law.
prevail,
For ACE to
it must be right on both counts.
As the parties agree, the insurance contracts here in issue are
governed by New York state law.
5
Under well-settled New York law,
"[w]henever an insurer wishes to exclude certain coverage from its
policy obligations,
it must do so in clear and unmistakable
language." Pioneer Tower Owners Ass'n v. State Farm Fire & Cas. Co.,
12 N. Y. 3d 302, 307
Co.,
(2009)
64 N.Y.2d 304, 311
(quoting Seaboard Sur. Co. v. Gillette
(1984))
(internal quotation mark omitted)
Policy exclusions "are not to be extended by interpretation or
implication, but are to be accorded a strict and narrow
construction." Id. To avoid coverage on the basis of a policy
exclusion, an insurer thus bears the burden of establishing that the
exclusion is "subject to no other reasonable interpretation." Id.
This rule "is merely a specific, heightened application of contra
proferentem," the principle by which ambiguities in an insurance
contract are construed against the insurer. Sea Ins. Co. v.
Westchester Fire Ins. Co.,
51 F.3d 22, 26 n.
4 (2d Cir. 1995). And
"contra proferentem does not come into play unless this court first
determines that the contract is,
Fashions,
Inc. v.
in fact,
ambiguous." Hugo Boss
Fed. Ins. Co., 252 F.3d 608,
616
(2d Cir. 2001).
"[W]here the parties agree that New York law controls," as is the
case in this diversity action, "this is sufficient to establish
choice of law." Fed. Ins. Co. v. Am. Home Assurance Co., 639 F.3d
557, 566 (2d Cir. 2011).
5
9
Whether a contract term is ambiguous is assessed from the
perspective of a "reasonably intelligent person
. who is
cognizant of the customs, practices, usages and terminology as
generally understood in the particular trade or business." Int'l
Multifoods Corp. v. Commercial Union Ins. Co.,
(2d Cir. 2002)
309 F.3d 76, 87 n.4
(internal quotation marks omitted)
(holding that
district court "erred in declining to consider the custom and usage
evidence that was offered by the parties as part of its assessment
of whether an ambiguity existed"); see also Sompo Japan Ins. Co. of
Am. v. Norfolk S. Ry. Co.,
762 F.3d 165, 180
(2d Cir. 2014)
("Evidence of trade practice and custom may assist a court in
determining whether a contract provision is ambiguous in the first
instance."). Thus, evidence of custom and usage is properly
considered prior to the evaluation of extrinsic evidence. In
addition, "contracting parties operate against the backdrop not only
of state law, but of federal law as well. And when federal law
concepts
. are employed, the parties may be read as having
incorporated established meanings and definitions forged in the
relevant federal cases." Hugo Boss, 252 F.3d at 618
(finding that
undefined term in a policy exclusion was sufficiently established in
the federal case law such that the exclusion unambiguously applied)
Against the backdrop of these governing principles, the first
issue for the Court is whether retail investors in a company (here,
Facebook)
listed on a stock exchange
10
(here, NASDAQ)
are
unambiguously "customer[s] or client[s]" of the exchange.
6
Custom and
usage - particularly usage in the context of federal securities case
law -
establishes that they are.
Most significantly, in Lank v. New York Stock Exch.,
61
548 F.2d
(2d Cir. 1977), the Second Circuit observed that "[t]he primary
purpose of the Exchange Act was to protect customers of the stock
exchanges that is, public investors" and explained that this purpose
was effectuated through,
inter alia, the imposition of a statutory
duty on exchanges to regulate their members.
Id. at 64
(emphasis
added). Along the same lines, district courts across the country
have repeatedly identified retail investors as "customers" of stock
exchanges, clearly distinguishing between members of the exchange
and customers of the exchange. See Matter of Lake States
Commodities,
Inc.,
Second Circuit
936 F. Supp. 1461, 1469
(N.D.
Ill. 1996)
("[T]he
[has] construed the NYSE constitution and rules as
intending to provide customers of the exchange with the right to
On first glance, it might seem as though this issue was already
resolved by the Court's December 20 Opinion, in which the Court
found that because "interpreting 'customer[s] or client[s]' to
exclude retail investors in a public company listed on NASDAQ is at
least one reasonable interpretation of the ACE D&O Policy," ACE had
a duty to advance defense costs to NASDAQ under its D&O Policy.
Beazley Ins. Co., 2015 WL 9267199, at *5. But, as the Court also
made clear in its December 20 Opinion, "[d]efendants [would be]
free, with the benefit of discovery, to renew their arguments as to
the meaning of 'customers or clients' on summary judgment." Id. at
*5 n.9. Taking advantage of the framework provided by discovery and
by the rules of summary judgment practice, ACE has now done so raising more compelling arguments this time around - and so the
issue of whether "customer or client" is ambiguous warrants a fresh
look in this new context.
6
11
force members into arbitration over disputes."
(emphasis added)),
abrogated on other grounds by Damato v. Hermanson,
Cir. 1998); Carr v. New York Stock Exch.,
1298
(N.D. Cal. 1976)
Inc.,
153 F.3d 464
(7th
414 F. Supp. 1292,
("In enforcing its rules and in making complex
decisions on the suspension or forced liquidation of members, the
Exchange must consider the often conflicting interests of the member
firm,
its partners, and investors, and the corporations whose
securities are handled by the firm,
customers."
as well as the Exchange's public
(emphasis added)); Moses v. Burgin,
(D. Mass. 1970)
316 F. Supp. 31, 57
("[A]n anti-rebate rule is the type of stock
exchange rule which has the force of law and is binding alike upon
members and customers of the exchange."
part on other grounds,
Exch.,
(emphasis added)),
rev'd in
445 F.2d 369 (1st Cir. 1971); New York Stock
Inc. v. Sloan, 1980 WL 1431, at *3
("[The New York Stock Exchange's]
(S.D.N.Y. Aug. 15, 1980)
right to relief is predicated upon
its subrogation to the rights of its customers."). In fact, with the
benefit of summary judgment briefing, it now appears that this usage
is uniform and consistent. 7
7
Beazley argues that the district court in Sloan was using
"customers" to refer to customers of member firms, rather than the
exchange itself. While that is true of some of the references to
"customers" in Sloan, the district court also clearly referred to
public investors as "customers" of the New York Stock Exchange, as
in the parenthetically quoted language above. Beazley is correct,
however, that ACE's reliance on Lehman Bros. Inc. v. Certified
Reporting Co., 939 F. Supp. 1333 (N.D. Ill. 1996), is misplaced. The
court there was analyzing whether the plaintiffs were "customers" of
the exchange's members, not the stock exchange to which the members
belonged. See id. at 1340-41.
12
Beazley tries to dismiss this case law as merely using the term
"customer" in passing, such that the Court should give it little
weight.
~he
Second Circuit's reterence to public investors as
"customers" of a stock exchange, Beazley asserts, "was no more than
an offhand remark." Beazley Ins. Co.,
ACE Am.
82.
Ins. Co.'s Mot. for Summ. J.
In fact,
Inc.'s Opp. Br. in Response to
("Beazley Opp.")
at 9, ECF No.
however, the Lank Court's observation that the Exchange
Act was designed to protect public customers of stock exchanges was,
far from being an "offhand remark," critical to the court's holding
that members of stock exchanges cannot sue exchanges under
§
6 of
the Exchange Act because members of stock exchanges are not "within
the class the statute is intended to protect." Lank,
see also Carr,
414 F. Supp. at 1297-98
. Congress intended [§ 6]
548 F.2d at 65;
("Defendants contend that
to protect only the public customers
of the Exchange and not private investors in the brokerage houses
themselves.
Subsequent cases have extended the scope of the
implied right of action beyond the public customers of an
exchange.") .
The Second Circuit's reasoning in Hugo Boss also undermines
Beazley's argument. There, the Second Circuit held that the meaning
of the undefined term "trademarked slogan" in a policy exclusion was
sufficiently clear in the federal case law so as to render the term
unambiguous as used in the policy exclusion. Hugo Boss, 252 F.3d at
618-20. In particular, the Second Circuit found that the federal
case law establishes that a "trademarked slogan" is a "phrase[] used
13
to promote or advertise a house mark or product mark,
in
contradistinction to the house or product mark itself." Id. at 618
(emphasis in original). Notably, in reaching this conclusion, the
Second Circuit relied primarily on cases in which the meaning of
"trademarked slogan" was not squarely at issue. See, e.g., Blau
Plumbing,
Inc. v. S.O.S. Fix-It,
Cir. 1986)
Inc., 781 F.2d 604,
(7th
(holding that a "location box" in an advertisement was
descriptive and lacked secondary meaning); Nike,
Enters.,
609-11
6 F.3d 1225, 1233
(7th Cir. 1993)
Inc. v. Just Did It
(reversing grant of
summary judgment because whether parody of Nike's trademarks created
a likelihood of confusion was genuinely disputed) . Indeed, the
Second Circuit found significant that most federal courts had taken
the meaning of "trademarked slogan" "as a given." Hugo Boss, 252
F.3d at 619. So too here, numerous courts have taken it "as a given"
that retail investors are "customers" of stock exchanges.
8
Finally, Beazley's argument that there is no indication that
the parties intended to incorporate the usage of federal law misses
the point. As noted, because "contracting parties operate against
the backdrop .
of federal law," and because concepts of federal
securities law are inherently employed when contracting parties make
reference to a national stock exchange's "customers" in an insurance
Beazley also tries to distinguish these cases by pointing out that
none of them concerned NASDAQ - which operates differently from a
traditional, brick-and-mortar exchange - but fails to explain why
that distinction is relevant.
8
14
policy that covers "Securities Claims,"9 the parties are presumed to
have incorporated the "established meanings and definitions forged
in the relevant federal cases." Id. at 618
(emphasis omitted). This
presumption governs the interpretation of the contract "unless
parties]
expressly indicate otherwise." Id. at 620.
[the
The parties did
not "expressly indicate otherwise," and the federal case law
establishes that "customers," as that term is used in the policy
exclusion,
unambiguously encompasses retail investors.
This conclusion is sufficient to end the inquiry into the
meaning of "customers" as that term is used in the policy exclusion.
But even if it were not,
compelling evidence of industry usage -
before the Court as part of the summary judgment record -
now
reinforces
and confirms the Court's conclusion. As ACE recounts,
on May 10,
2012, NASDAQ's Chief Information Officer
a named
(Anna Ewing,
defendant in the Facebook Class Action) made the following statement
to analysts:
"We process billions of transactions in a day at sub-
microsecond speeds to millions of customers." Defs.'
~
6 (emphasis added).
Rule 56.l Stmt.
In referring to "millions of customers," Ewing
was plainly referring to retail investors.
10
In the same vein, when
9 The ACE D&O Policy defines "Securities Claim" as, inter alia, "any
Claim .
alleging a violation of any federal
rule or
statute .
regulating securities." London Aff., Ex. F, § II.0.2
(as amended by Endorsement No. 12)
io Beazley's suggestion that Ewing was not necessarily referring to
NASDAQ's customers is unpersuasive. The fact that Ewing also used
the term "customers" to refer to non-investors on the same call is
irrelevant, as defendants have never contended that public investors
are the only customers or clients that NASDAQ has. In addition,
contrary to Beazley's assertion, Ewing's statement is not hearsay
15
the Chicago Mercantile Exchange launched its S&P Dow Jones Indices
in 2012, its Executive Chairman and President Terry Duffy noted that
"this new [joint venture]
will create new risk management
index products and trading opportunities for both our institutional
and retail customers around the world." Id.
~
94_11
Moreover, there are numerous allegations in the CAC itself in
which the class members
(~,
retail investors in Facebook) are
referred to as NASDAQ's "customers" or "customer base." See, e.g.,
Kieffer Deel. dated Jan. 15, 2016, Ex. 2,
~
8 ("NASDAQ's trading
platforms and system failures directly prevented the majority of
NASDAQ's customer base from knowing their true positions in Facebook
"
(emphasis added)); id.
133
~
("Defendants .
put their
own business interests ahead of the interests of NASDAQ's customers
and members
"
(emphasis added)); id.
~
216
("[T]he majority
of NASDAQ's customers were forced to carry significant positions in
Facebook over the weekend
"
(emphasis added)). While the fact
that the CAC alleges that the class members are "customers" of
because it is not being offered for the truth of the matter
asserted.
11
Beazley submits that Duffy's reference to "retail customers" could
"easily mean customers that provide services to retail investors,
rather than the retail investors themselves." Beazley Opp. at 12.
But, as with Beazley's proposed reading of Ewing's comment, this
interpretation unreasonably strains the statement without any basis
for doing so. And, as with Ewing's statement, Duffy's remark is not
hearsay because it is not being offered for the truth of the matter
asserted.
16
NASDAQ does not make it so, the class members' self-identification
as "customers" of NASDAQ is notable.12
Beazley,
for its part, relies heavily, as it did in earlier
motion practice, on the rule change proposal NASDAQ submitted to the
SEC in July 2012.
In that proposal,
known as the "Accommodation
Plan," NASDAQ sought to modify Nasdaq Rule 4626 to allow its members
to submit claims for losses resulting from the error-ridden Facebook
IPO that the members in turn could use to compensate retail
investors. See Kieffer Deel. dated Jan.
15, 2016, Ex. 10, ECF No.
74-10. Absent the modification, NASDAQ explained,
its members would
be limited to a $500,000 recovery, as opposed to the $62 million
available under the rule change,
leaving retail investors without
meaningful recompense from NASDAQ. See id. at 45707.
In its
proposal, NASDAQ also stated that "Nasdaq's business and legal
relationships are with its members, not its members'
customers.
Nasdaq has no contractual or other relationships with its members'
customers, and generally does not possess information about
interactions between a member and its customer that may underlie
members'
trading activity." Id. at 45712. 13
12 Beazley's contention that the CAC uses the terms "customers" and
"customer base" to refer to NASDAQ's member firms and not retail
investors is belied by the CAC's allegation that "Defendants .
put their own business interests ahead of the interests of NASDAQ's
customers and members." Kieffer Deel. dated Jan. 15, 2016, Ex. 2,
~ 133.
Such an allegation would be inexplicably redundant if
Beazley's reading were correct.
13 NASDAQ made similar statements in its briefing in the Facebook
Class Action asserting, for example, that it has "no direct
relationship at all with non-member investors," in seeking to avoid
17
In Beazley's view, these statements demonstrate that NASDAQ
does not view retail investors as "customers" of the exchange, or at
least create an ambiguity as to the meaning of "customer" in the
"professional services" exclusion. The fact that retail investors
are "customers" of NASDAQ's members, however,
as is undisputed, does
not preclude retail investors from also being "customers" of NASDAQ.
To be sure, NASDAQ's disclaiming any "relationship" with its
members'
customers is arguably in tension with the aforementioned
evidence of industry usage. But positions taken by NASDAQ against
the backdrop of litigation are not nearly as probative of meaning
and usage as statements made free of such considerations. Cf. House
of Clean,
Inc. v. St. Paul Fire & Marine Ins. Co.,
302, 316 (D. Mass. 2011)
775 F. Supp. 2d
("[W]hen statements are made for the
purposes of litigation, the potential motivation of the
[speaker]
undermines the statements' trustworthiness.") . 1 4
Taking all the foregoing evidence of usage together, the Court
concludes that a "reasonably intelligent person
. who is
liability to retail investors. Kieffer Deel. dated Jan. 15, 2016,
Ex. 18 at 22, ECF No. 74-18.
In its discussion of extrinsic evidence, Beazley also points to
two successive "Computer Crime" insurance policies issued by ACE to
NASDAQ in which "customer" and "client" are defined to cover
specific entities with specific types of "written agreements" with
NASDAQ. See Deel. of Kevin Kieffer in Opp. to Ace Am. Ins. Co.'s and
Ill. Nat'l Ins. Co.'s Mots. for Summ J. dated Jan. 29, 2016, Exs. V,
W (filed under seal). The narrow definitions of these terms in
policies insuring against such entirely different risks are simply
not relevant to the interpretation of "customer or client" in the
"professional services" exclusion.
14
18
cognizant of the customs, practices, usages and terminology as
generally understood in the
[industry]" would understand
"customers," as that term is used in the "professional services"
exclusion, to unambiguously encompass retail investors. Int'l
Multifoods Corp.,
309 F.3d at 87 n.4. Accordingly, the first prong
of the exclusion is satisfied.
15
Because the Court finds no genuine ambiguity, it need not
evaluate the parties' extrinsic evidence of the contracting parties'
intent. However, the Court notes that Beazley misapprehends the law
in suggesting that if the Court were to find an ambiguity,
then the
Court could enter summary judgment in Beazley's favor without resort
to extrinsic evidence. To the contrary, the Second Circuit has "made
clear that under New York law, courts should not resort to con[t]ra
proferentum until after consideration of extrinsic evidence,"
including in the context of interpreting a policy exclusion. See,
~'
id. at 88 n.7; see also Hastings Dev., LLC v. Evanston Ins.
Co., 141 F. Supp. 3d 203, 216-17
(E.D.N.Y. 2015)
(evaluating
parties' extrinsic evidence after finding policy exclusion to be
ambiguous) .
For the "professional services" exclusion to apply, ACE must
also demonstrate that the CAC's claims were "alleging, based upon,
arising out of, or attributable to the rendering or failure to
is Given its conclusion, the Court need not reach ACE's secondary
argument that retail investors are also "clients" of NASDAQ within
the meaning of the "professional services" exclusion.
19
render professional services" as a matter of law. London Aff., Ex.
§
III
F
(as amended by Endorsement No. 10). Under New York law,
whether a given claim "arises out of" or is "based upon" excluded
conduct in a policy exclusion (here, the rendering of or failure to
render professional services)
turns on whether the claim could
succeed but for the excluded conduct. See Mount Vernon Fire Ins. Co.
v. Creative Hous. Ltd.,
88 N.Y.2d 347,
350
(1996)
("[I]f no cause of
action would exist but for the [excluded conduct], the claim is
based on [the excluded conduct] and the exclusion applies"); Mount
Vernon Fire Ins. Co. v. Creative Haus. Ltd.,
1996)
(per curiam)
("Because
93 F.3d 63,
66
(2d Cir.
[the plaintiff in the underlying suit]
would be unable to maintain claims for negligent supervision,
maintenance, and control 'but for'
the assault upon her, under New
York law her claims are
assault and battery and therefore
'based on'
excluded from coverage under the insurance policy."); Hugo Boss,
F.3d at 623 n.15
(applying "but for" test to breach of contract
policy exclusion); Scottsdale Indem. Co. v. Beckerman,
117, 121
252
(2d Dep't 2014)
992 N.Y.S.2d
(holding that a "'but-for' test applies to
determine the applicability of an 'arising out of' exclusion," such
that if "none of the causes of action that
[the underlying
plaintiff] asserts could exist but for the existence of the excluded
activity or state of affairs, the insurer is under no obligation to
defend the action"); Lowy v. Travelers Prop. and Cas. Co.,
526702, at *4
(S.D.N.Y. May 2, 2000)
20
2000 WL
("In insurance policy exclusion
clauses, the phrases
'arising under' and 'based on' mean 'but
for.'").
In construing an exclusion for "professional services," courts
"[look] to the nature of the conduct under scrutiny rather than the
title or position of those involved, as well as to the underlying
complaint." David Lerner Assocs. v.
F. Supp. 2d 533,
541
(E.D.N.Y. 2013)
Phila.
Indem.
Ins. Co.,
934
(internal quotation mark and
citation omitted). "[T]he question of whether one is engaged in a
professional service depends on whether those individuals
'acted
with the special acumen and training of professionals when they
engaged in the acts
. '" Id.
(citation omitted).
As a threshold matter, Beazley does not dispute that the design
and operation of NASDAQ's systems require the "special acumen and
training of professionals," such that these activities constitute
professional services.
Id. By the same token, Beazley does not
contend that the negligence claims brought in the CAC do not arise
out of the rendering or failure to render professional services.
That is for good reason, as those claims were explicitly premised
on, inter alia, NASDAQ's "fail[ure] to use reasonable care in the
design, testing,
and implementation" of its systems in connection
with the Facebook IPO. Kieffer Deel. dated Jan. 15, 2016, Ex. 2,
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