Technical Security Integration, Inc. v. Philadelphia Indemnity Insurance Company

Filing 75

Opinion and Order - The Court ADOPTS Judge Beckerman's Findings and Recommendation (ECF 70 ). Plaintiff's Motion for partial summary judgment (ECF 60 ) is GRANTED, and Defendant's motion for summary judgment (ECF 50 ) is DENIED. Signed on 3/18/2019 by Judge Michael H. Simon. (mja)

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF OREGON

TECHNICAL SECURITY
INTEGRATION, INC.,

Case No. 3:14-cv-1895-SB
OPINION AND ORDER

Plaintiff,
v.
PHILADELPHIA INDEMNITY
INSURANCE COMPANY,
Defendant.

Jonathan M. Radmacher, MCEWEN GISVOLD LLP, 1100 SW Sixth Avenue, Suite 1600, Portland,
OR 97204. Of Attorneys for Plaintiff.
Guy Keating, SCHULTE, ANDERSON, DOWNES ARONSON & BITTNER, P.C., 811 SW Naito
Parkway, Suite 500, Portland, Oregon 97204, and Thomas H. Nienow, NELSON, HALEY &
ABBOTT LLP, 100 Smith Ranch Road, Suite 350, San Rafael, California, 94903. Of Attorneys for
Defendant.

Michael H. Simon, District Judge.
United States Magistrate Judge Stacie F. Beckerman issued Findings and
Recommendation in this case on January 10, 2019. ECF 70. Judge Beckerman recommended that
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the Court (1) grant Plaintiff’s motion for partial summary judgment, to the extent it argues that
Defendant breached its duty to defend Plaintiff against Tharp’s second and fifth counterclaims
for defamation; and (2) deny Defendant’s motion for summary judgment.
STANDARDS
Under the Federal Magistrates Act (“Act”), the Court may “accept, reject, or modify, in
whole or in part, the findings or recommendations made by the magistrate.” 28 U.S.C.
§ 636(b)(1). If a party files objections to a magistrate judge’s findings and recommendations,
“the court shall make a de novo determination of those portions of the report or specified
proposed findings or recommendations to which objection is made.” Id.; Fed. R. Civ. P. 72(b)(3).
For those portions of a magistrate judge’s findings and recommendations to which neither
party has objected, the Act does not prescribe any standard of review. See Thomas v. Arn, 474
U.S. 140, 152 (1985) (“There is no indication that Congress, in enacting [the Act], intended to
require a district judge to review a magistrate’s report to which no objections are filed.”); United
States. v. Reyna-Tapia, 328 F.3d 1114, 1121 (9th Cir. 2003) (en banc) (holding that the court
must review de novo magistrate judge’s findings and recommendations if objection is made, “but
not otherwise”). Although in the absence of objections no review is required, the Act “does not
preclude further review by the district judge[] sua sponte . . . under a de novo or any other
standard.” Thomas, 474 U.S. at 154. Indeed, the Advisory Committee Notes to Fed. R. Civ.
P. 72(b) recommend that “[w]hen no timely objection is filed,” the Court review the magistrate
judge’s recommendations for “clear error on the face of the record.”
Defendant timely filed an objection (ECF 73), to which Plaintiff responded. ECF 74.
Defendant objects to the portion of Judge Beckerman’s recommendation finding that
Swankosky’s defamatory statements did not clearly arise out of Tharp’s employment.

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BACKGROUND
Judge Beckerman’s Findings and Recommendation comprehensively details the factual
background in this case. This dispute stems from Defendant’s refusal to defend and indemnify
Plaintiff for defamatory statements made by Plaintiff’s employee Craig Swankosky, regarding a
former employee, Tharp. On November 20, 2012, Plaintiff terminated the employment of Corey
Tharp, and both Tharp and Plaintiff signed a severance agreement that included non-compete and
non-disparagement clauses. Within a month of Tharp’s termination, rumors started that Plaintiff
was going out of business—rumors that Swankosky imputed to Tharp. Tharp began working for
S&S, one of Plaintiff’s competitors, on January 7, 2013. In early January 2013, two of Plaintiff’s
customers decided without prior notice not to renew their contracts with Plaintiff, which Plaintiff
believed was due to interference by Tharp and S&S. Tharp began working on quotes for
contracts with several of Plaintiff’s customers. At a trade show in February 2013, Swankosky
made defamatory statements about Tharp to employees of one of the customers who failed to
renew its contract with Plaintiff. Also at that same trade show, Swankosky made defamatory
statements about Tharp to an individual in their industry.1
Plaintiff sued Tharp for breach of contract and intentional interference with contractual
advantage. Tharp counterclaimed for, among other things, defamation. Tharp’s second and fifth
counterclaims for defamation alleged that:
On or about February 25, 2013, Mr. Swankosky published false
statements to [Plaintiff’s former clients] that Mr. Tharp was let go
[by Plaintiff] for time management issues, project management
issues, and for falsifying time sheets. Mr. Swankosky also stated
that Mr. Tharp was being investigated by the Florence Police
Department for grand theft, and would probably do jail time.
Mr. Swankosky further stated that Mr. Tharp stole equipment from
1

The customers who terminated their contracts with Plaintiff eventually signed contracts
with S&S, Tharp’s new employer.
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[Plaintiff’s] office including a handful of cameras and a small
digital recording system. Mr. Swankosky described how Mr. Tharp
removed cameras from boxes ad replaced them with cans of soup,
then left the boxes on the shelf. Mr. Swankosky stated, ‘I know he
did it and he’s being investigated.’
On or about February 25, 2013, Mr. Swankosky published false
statements to Mr. Katnic [an individual in the industry], telling Mr.
Katnic to watch out for Corey Tharp, because he (Mr. Tharp) was
about to be in some very big trouble. Mr. Swankosky warned Mr.
Katnic to stay clear of Mr. Tharp because Mr. Tharp had stolen
some equipment, was being investigated for theft, and he would
never work in the state again.
ECF 54-8 at 7-9. Plaintiff timely tendered to defendant the defense of Tharp’s counterclaims.
Defendant refused, however, to defend or indemnify Plaintiff in the Tharp lawsuit.
Plaintiff’s insurance policy with Defendant includes defamation within the definition of
“personal and advertising injury” covered by the policy. Plaintiff’s policy, however, also
provides:
This insurance does not apply to:
“Personal and advertising injury” to:
(1) A person arising out of any:
(a) Refusal to employ that person;
(b) Termination of that person’s employment; or
(c) Employment-related practices, policies, acts or omissions, such as coercion,
demotion, evaluation, reassignment, discipline, defamation, harassment,
humiliation, discrimination or malicious prosecution directed at that person. . . .
This exclusion applies:
(1) Whether the injury-causing event described in Paragraphs (a), (b), or (c) above occurs
before employment, during employment or after employment of that person.
ECF 53-1 at 4.
DISCUSSION
The parties agree that Washington law applies in interpreting the insurance policy. No
Washington court has interpreted an employment-related practices exclusion in an insurance
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policy. Judge Beckerman conducted a thorough survey of the law on employment-related
practices exclusions in the Ninth Circuit (interpreting California law), Florida, Texas, Louisiana,
South Carolina, New Hampshire, and Iowa. Judge Beckerman concluded that the survey of outof-state law suggested that courts: (1) apply a context-based evaluation to determine whether an
employment-related practices exclusion bars coverage of a former employee’s defamation claim;
and (2) draw a distinction between employment-related defamation allegations and competitionor business-related defamation allegations. The Court finds Judge Beckerman’s survey, analysis,
and synthesis of the law to be persuasive and agrees that Judge Beckerman formulated the
correct test.
In HS Services, Inc. v. Nationwide Mutual Insurance Co., the only published Ninth
Circuit opinion to address this issue, the Ninth Circuit held that “to ‘arise out of’ a termination of
employment, the defamatory remark at issue must have been a part of or directly and
proximately resulted from the termination.” 109 F.3d 642, 647 (9th Cir. 1997). Although HS
Services involved California law, the facts of that case are nearly identical to the facts here and
compel a similar conclusion.
In HS Services, the defamatory remarks were directed at a former employee, but were
caused by that ex-employee’s own comments and actions as a competitor in the marketplace.
“The remarks related directly to competition between [the employer and the former employee] in
the marketplace and the latter’s attempt to protect itself against a remark made by [the former
employee], not as an ex-employee, but as a present competitor; that was their context.”
Id. at 646. “Thus, the chain of causation between the termination and the remarks was broken.”
Id. at 647. As in HS Services, the defamatory remarks at issue in the pending case were made in
response to the ex-employee’s competitive forays into the marketplace in an apparent attempt to

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protect Plaintiff from Tharp’s competition with potential customers or clients whose business he
was soliciting. Although some of the defamatory statements involved allegations of Tharp’s
misconduct during the time period he worked for Plaintiff, like in HS Services, the statements
likely never would have been made had Tharp not been communicating with Plaintiff’s former
customers in an attempt to solicit business. Some of Mr. Swankosky’s allegedly defamatory
statements, including his statement that the Florence Police Department was investigating Tharp,
bear little, if any, connection to Tharp’s earlier employment with Plaintiff.
Defendant also argues that Washington courts’ interpretation of the phrase “arising out
of” in the insurance context mandates a conclusion that the defamatory statements are excluded
from the policy. Washington courts have defined “arising out of” as “‘originating from[,’]
‘having its origin in[,’] growing out of[,’] or ‘flowing from[.’]” Toll Bridge Auth. v. Aetna Ins.
Co., 54 Wash. App. 400, 404-05 (1989) (quoting Avemco Ins. Co. v. Mock, 44 Wash. App. 327,
329 (1986)). In American Best Food, Inc. v. Alea London, Ltd., however, the Washington
Supreme Court explained that “arising out of” exclusions are not always so broadly construed in
instances where there were “intervening, allegedly negligent acts by the insured.” 168 Wash. 2d
398, 410 (2010) (en banc). The Washington Supreme Court distinguished the cases interpreting
“arising out of” that Defendant relies on from cases where intervening acts broke the chain of
causation. Id. at 409-411.
In American Best, the Washington Supreme Court concluded that an insurance policy that
excluded coverage for injuries “arising out of” assault and battery did not exclude coverage for
the plaintiff’s injuries that were caused by the insured’s negligence in responding to an assault
and battery committed by another bar patron, even though the patron’s assault and battery was
the “but-for” cause of the injuries. Id. at 411. Thus, it is reasonable to believe that the

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Washington Supreme Court, if faced with a situation where, as here, intervening circumstances
broke the chain of causation, would not construe “arising out of” so literally or narrowly. The
chain of causation was broken by Tharp’s actions and statements as a competitor in the
marketplace, and it is these actions and statements that caused the defamation, even though his
employment with Plaintiff was the “but-for” cause of the defamation. Defendant’s arguments
that Washington law would interpret “arising out of” so literally and narrowly were fairly
considered and soundly rejected by Magistrate Judge Beckerman.
CONCLUSION
The Court ADOPTS Judge Beckerman’s Findings and Recommendation (ECF 70).
Plaintiff’s Motion for partial summary judgment (ECF 60) is GRANTED, and Defendant’s
motion for summary judgment (ECF 50) is DENIED.
IT IS SO ORDERED.
DATED this 18th day of March, 2019.

/s/ Michael H. Simon
Michael H. Simon
United States District Judge

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