LUCY H. KOH, United States District Judge.
Plaintiff Great American E & S Insurance Company ("Great American") brings this insurance coverage action against Defendant and Counterclaimant Theos Medical Systems, Inc. ("Theos"), seeking a declaratory judgment that Great American had no duty to defend or indemnify Theos in connection with a contempt proceeding initiated in an underlying action entitled Malem Medical Limited, et al. v. Theos Medical Systems, et al., N.D. Cal., Case No. 3:13-CV-05236 EMC ("Malem Action"). ECF No. 1. Theos and Counterclaimant Saket Bhatia ("Bhatia") brought a counterclaim for breach of the implied covenant of good faith and fair dealing ("bad faith"). ECF No. 16. Both parties have cross-moved for summary judgment. Before the Court are Great American's motion for summary judgment in its favor on the following causes of action alleged by Great American in its complaint: (1) Count 1—Declaratory Relief—No Duty to Defend, and (2) Count 2—Declaratory Relief—No Duty to Indemnify; and (3) on the single counterclaim for bad faith alleged by Theos, see ECF No. 46, and Theos and Bhatia's cross-motion for partial summary judgment, ECF No. 48. Having considered the parties' briefing, the relevant law, and the record in this case, the Court GRANTS Great American's motion for summary judgment and DENIES Theos and Bhatia's cross-motion for partial summary judgment.
This case is a dispute between Great American and Theos regarding Great American's duty to defend and duty to indemnify in connection with a contempt proceeding ("Contempt Proceeding") initiated in the underlying Malem Action based on two insurance policies issued to Theos. ECF No. 1 ("Compl."). The Court first
Great American issued two general liability policies to Theos: policy number PL 3843140-00, effective July 16, 2015 to 2016 ("2015-16 Policy"), and policy number PL 3843140-01, effective July 16, 2016 to 2017 ("2016-17 Policy"). See ECF No. 46-3 ("Edmonds Decl.") ¶ 3; ECF No. 46-4, Ex. A ("Ex. A" or "2015-16 Policy") and Ex. B ("Ex. B" or "2016-17 Policy"). Both policies have identical coverage and exclusions, and there is no dispute that at least one of these policies applies to this dispute.
The Commercial General Liability Coverage Form, CG 00 01 (Ed. 04 13), under the heading "
This insurance does not apply to:
Exs. A and B, at 0011-12.
The Policies are amended by Endorsement Form ESG 3258 (Ed. 09/14), entitled "
Ex. A at 0046-47; Ex. B at 0050-51.
Finally, the policies contain the following relevant definitions:
Exs. A and B, at 0022-23.
On November 12, 2013, Malem Medical, Ltd. and Enuresis Associates, LLC dba the Bedwetting Store (collectively "Malem") initiated Malem Medical Limited, et al. v. Theos Medical Systems, et al., N.D. Cal., Case No. 3:13-CV-05236 EMC ("Malem Action"), in the United States District Court for the Northern District of California before United States District Judge Edward M. Chen, against Theos and Bhatia. See ECF No. 46-1 ("Great American RJN"),
In June 2015, Malem entered into a settlement agreement with Theos and Bhatia in which the Malem Action parties agreed to mutually resolve all claims. Id., Ex. K ("Settlement Agreement"). The Settlement Agreement was later reduced to a Consent Decree on July 9, 2015, and a court order on July 14, 2015. Id., Ex. L ("Consent Decree"). Paragraph 9 of the Settlement Agreement, duplicated in the Consent Decree, provided that Theos agreed not to disparage Malem. Settlement Agreement at 4. Paragraph 9 specifically provides:
Id.; see also Consent Decree ¶ 9.
Paragraph VII of the Settlement Agreement provided that the prevailing party or parties in any action to enforce the Settlement Agreement, or the related Consent Decree, would be entitled to recover their reasonable attorneys' fees and costs. Settlement Agreement at 8. In paragraph 19 of the Consent Decree, Judge Chen retained jurisdiction of the Malem Action for purposes of construction, modification, and
On April 28, 2016, Malem's counsel sent a cease and desist letter to Theos's counsel asserting that Theos had violated the Settlement Agreement and the Consent Decree by making disparaging statements about Malem and Malem's products. Great American RJN, Ex. M ("Cease and Desist letter").
On February 8, 2017, Malem's counsel sent a follow-up letter to Theos's counsel. ECF No. 48-1 ("Theos RJN"), Ex. A ("February 8, 2017 letter").
On March 8, 2017, Malem filed a "Motion for Order to Show Cause and to Hold Defendants [Theos and Bhatia] in Contempt" for violating the Settlement Agreement and the Consent Decree. Great American RJN, Ex. N ("Contempt Motion"). Specifically, Malem argued that Theos and Bhatia violated the Consent Decree by filing disparaging and false reports about Malem's products with regulatory authorities in the United States, United Kingdom, Australia, and Norway. Id. at 4-7.
In the Contempt Motion, Malem wrote the following questions under the heading "Statement of Issues to be Decided":
Id. at 3. After the fourth question, Malem included a footnote that stated: "After the initial stages of the contempt matter are resolved, Plaintiffs will file a motion to reopen the case to permit them to sue for damages under the Settlement Agreement." Id. at 3 n.2.
The Contempt Motion also stated under the "relief sought" section that Malem was seeking "[m]onetary damages arising from Defendants' violations of the Consent Order and for breach of the Settlement Agreement" and "[a]ll costs, including attorneys' fees incurred by [Malem] as the result of the contempt including the costs of seeking the instant relief and for breaching the Settlement Agreement." Id.
In Malem's argument section, Malem explained:
Id. at 8. Malem also explained that "[a] court may assess attorneys' fees or other sanctions under its inherent power for the willful disobedience of a court order." Id. at 7. Malem also wrote "the law generally recognizes that a successful moving party in a civil contempt proceeding is entitled to be reimbursed for its legal costs including attorneys' fees ... attorneys' fees were part of the damages caused by the contempt...." Id. at 8.
In Malem's reply, filed April 18, 2017, Malem clarified that it was not seeking damages, only attorneys' fees. Great American RJN, Ex. N ("Contempt Reply") at 4. Specifically, Malem wrote:
Id. (emphasis added).
Judge Chen held a hearing on the Malem Action Contempt Motion on April 27, 2017. Great American RJN, Ex. R. On April 28, 2017, Judge Chen issued an order granting the Contempt Motion, and scheduling a one-day contempt bench trial for July 31, 2017. Great American RJN, Ex. S.
On July 20, 2017, Malem filed its trial brief for the Contempt Proceeding. Theos RJN, Ex. B.
On July 31, 2017, Judge Chen held a one-day bench trial. See Great American RJN, Ex. T ("Contempt Order") at 1. On August 10, 2017, Judge Chen entered an order finding Theos violated "Paragraph 9 of the Consent Decree by making disparaging statements to various regulatory agencies regarding [Malem] and their products and did so knowingly and intentionally and without any legitimate business concern," and that the violations of the Consent Decree constitute civil contempt. Id. at 6. Judge Chen scheduled a case management conference and ordered the parties to file a joint statement by August 17, 2017. Id.
On August 17, 2017, the parties filed a joint case management statement. Great American RJN, Ex. U. Malem wrote in the joint statement that they "intend to file a motion for costs and other expenses including attorneys' fees and investigators' fees related to the contempt proceeding including the motion for sanctions." Id. at 1. Malem also wrote that they "intend to file a motion to amend their complaint to include a cause of action for trade libel and other unfair trade violations (State and Federal) and related damages." Id.
Theos did not report the Malem Action to Great American until on or about April 3, 2017, after Theos entered into the June 2015 Settlement Agreement and after Malem had filed the Contempt Motion on March 8, 2017 asserting that Theos had breached the Settlement Agreement and Consent Decree. Edmonds Decl. ¶ 4, Ex. C. On April 4, 2017, Great American sent Theos a letter acknowledging the Contempt Proceeding Claim. Id. ¶ 5, Ex. D. Great American sent a second letter to Theos on April 13, 2017. Id. ¶ 6, Ex. E. In this second letter, Great American requested that Theos provide Great American "with all pleadings, files, correspondence, and other documents or information relevant to the Contempt Motion." Id.
On September 27, 2017, Great American filed the instant suit against Theos, seeking declaratory relief that Great American had no duty to defend or indemnify Theos in connection with the Contempt Proceeding in the underlying Malem Action. ECF No. 1. Theos answered on December 26, 2017. ECF No. 16. In the same document, Theos and Bhatia brought a counterclaim for bad faith. Id. Great American answered the counterclaim on January 16, 2018. ECF No. 17.
On September 27, 2018, Great American filed one of the instant motions for summary judgment, or in the alternative, partial summary judgment. ECF No. 46 ("Great American Mot."). Theos and Bhatia opposed and filed a cross-motion for partial summary judgment in the same document on October 11, 2018. ECF No. 48 ("Theos Mot."). Great American filed its reply on October 18, 2018. ECF No. 49 ("Great American Reply"). On October 25, 2018, Great American filed an opposition to Theos's motion. ECF No. 55 ("Great American Opp'n"). Theos did not file a reply.
Summary judgment is proper where the pleadings, discovery and affidavits demonstrate that there is "no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(c). Material facts are those which may affect the outcome of the case. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). A dispute as to a material fact is genuine if there is sufficient evidence for a reasonable jury to return a verdict for the nonmoving party. Id.
The party moving for summary judgment bears the initial burden of identifying those portions of the pleadings, discovery and affidavits which demonstrate the absence of a genuine issue of material fact. Celotex Corp. v. Catrett, 477 U.S. 317, 323, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). Where the moving party will have the burden of proof on an issue at trial, it must affirmatively demonstrate that no reasonable trier of fact could find other than for the moving party. However, on an issue for which the opposing party will have the burden of proof at trial, the moving party
Once the moving party meets its initial burden, the nonmoving party must go beyond the pleadings and, by its own affidavits or discovery, "set forth specific facts showing that there is a genuine issue for trial." Fed. R. Civ. P. 56(e). The court is only concerned with disputes over material facts and "factual disputes that are irrelevant or unnecessary will not be counted." Anderson, 477 U.S. at 248, 106 S.Ct. 2505. It is not the task of the court to scour the record in search of a genuine issue of triable fact. Keenan v. Allan, 91 F.3d 1275, 1279 (9th Cir. 1996). The nonmoving party has the burden of identifying, with reasonable particularity, the evidence that precludes summary judgment. Id. If the nonmoving party fails to make this showing, "the moving party is entitled to judgment as a matter of law." Celotex Corp., 477 U.S. at 323, 106 S.Ct. 2548.
At the summary judgment stage, the court must view the evidence in the light most favorable to the nonmoving party: if evidence produced by the moving party conflicts with evidence produced by the nonmoving party, the judge must assume the truth of the evidence set forth by the nonmoving party with respect to that fact. See Leslie v. Grupo ICA, 198 F.3d 1152, 1158 (9th Cir. 1999).
"In determining the law of the state for purposes of diversity, a federal court is bound by the decisions of the highest state court." Albano v. Shea Homes Ltd. P'ship, 634 F.3d 524, 530 (9th Cir. 2011). If the state's highest court has not decided an issue, it is the responsibility of the federal courts sitting in diversity to predict "how the state high court would resolve it." Id.; Air-Sea Forwarders, Inc. v. Air Asia Co., Ltd., 880 F.2d 176, 186 (9th Cir. 1989) (internal quotation marks omitted). In the absence of clear authority, the Court looks for guidance from decisions of the state appellate courts and other persuasive authorities, such as decisions from courts in other jurisdictions and treatises. Strother v. S. Cal. Permanente Med. Grp., 79 F.3d 859, 865 (9th Cir. 1996).
The parties' cross-motions for summary judgment address two main issues: (1) Great American's claims for a declaration that Great American had no duty to defend or duty to indemnify Theos in the Contempt Proceeding in the underlying Malem Action; and (2) Theos and Bhatia's counterclaim for bad faith. The Court addresses each issue in turn.
Great American seeks a declaratory judgment that Great American had no duty to defend or duty to indemnify Theos in connection with the Contempt Proceeding in the underlying Malem Action. Because the duty to defend is broader than the duty to indemnify, the Court addresses Great American's duty to defend and duty to indemnify claims together. The Court first explains the law on duty to defend before turning to Great American's arguments.
Under California law, "[a] liability insurer owes a broad duty to defend its insured against claims that create a potential for indemnity" under the policy. Montrose Chem. Corp. v. Superior Court, 6 Cal.4th 287, 295, 24 Cal.Rptr.2d 467, 861 P.2d 1153 (1993) ("Montrose I") (quoting Horace Mann Ins. Co. v. Barbara B., 4 Cal.4th 1076, 1081, 17 Cal.Rptr.2d 210, 846 P.2d 792 (1993)). The duty to defend is
While the duty to defend is broad, it "is not unlimited." Waller v. Truck Ins. Exch., Inc., 11 Cal.4th 1, 19, 44 Cal.Rptr.2d 370, 900 P.2d 619 (1995). In determining whether there is a duty to defend, courts must look to the complaint in the underlying action and "all facts known to the insurer from any source." Montrose I, 6 Cal. 4th at 300, 24 Cal.Rptr.2d 467, 861 P.2d 1153. The ultimate question is whether the facts known to the insurer at the time it refused to defend the underlying action created the potential for coverage under the policy. Gunderson v. Fire Ins. Exch., 37 Cal.App.4th 1106, 1114, 44 Cal.Rptr.2d 272 (1995) ("[T]he issues here are what facts respondent knew at the time appellants tendered the defense of the Ferrando lawsuit, both from the allegations on the face of the third party complaint, and from extrinsic information available to it at the time; and whether these known facts created a potential for coverage under the terms of the Policy."). If there was no potential for coverage under the insurance policy based on the complaint in the underlying action and extrinsic facts made known to the insurer, then the insurer has not breached the insurance contract by refusing to defend. Montrose I, 6 Cal. 4th at 295, 24 Cal.Rptr.2d 467, 861 P.2d 1153 (holding that duty to defend ends when it is apparent there is "no potential for coverage"). "The insured has the burden of showing that there was an `occurrence'" covered by the policy. Blue Ridge Ins. Co. v. Stanewich, 142 F.3d 1145, 1148 (9th Cir. 1998).
In interpreting an insurance policy, the Court first looks to the language of the policy itself. "Where no dispute surrounds material facts, interpretation of an insurance policy presents solely a question of law." Jauregui v. Mid-Century Ins. Co., 1 Cal.App.4th 1544, 1548, 3 Cal.Rptr.2d 21 (1991). The "clear and explicit meaning" of the provisions, "interpreted in their `ordinary and popular sense' controls judicial interpretation unless [the disputed terms are] `used by the parties in a technical sense, or unless a special meaning is given to them by usage.'" Montrose Chem. Corp. v. Admiral Ins. Co., 10 Cal.4th 645, 666, 42 Cal.Rptr.2d 324, 913 P.2d 878 (1995) ("Montrose II").
Additionally, "any provision that takes away or limits coverage reasonably expected by an insured must be conspicuous, plain and clear." Haynes v. Farmers Ins. Exch., 32 Cal.4th 1198, 1204, 13 Cal.Rptr.3d 68, 89 P.3d 381 (2004) (internal quotation marks and citations omitted). California courts do not apply coverage limitations if the insured has an objectively reasonable expectation of coverage under the policy, and the limitation on that reasonably expected coverage is either (1) not conspicuous, or (2) not plain and clear. Travelers Prop. Cas. Co. of Am. v. Superior Court, 215 Cal.App.4th 561, 578, 155 Cal.Rptr.3d 459 (2013) ("Travelers"). The insurer has the burden of showing that a limitation on coverage reasonably expected under the policy is conspicuous, plain, and clear. Haynes, 32 Cal. 4th at 1204, 13 Cal.Rptr.3d 68, 89 P.3d 381 ("The burden of making coverage exceptions and limitations conspicuous, plain and clear rests with the insurer." (citations omitted)).
Great American argues that Great American has no duty to defend or indemnify Theos in the Contempt Proceeding initiated in the underlying Malem Action because: (1) the Contempt Proceeding did not seek covered "damages" under the policies
Great American argues first that the Contempt Proceeding does not fall within the basic scope of coverage in the policies because Malem did not assert a claim for "damages" in the Contempt Proceeding. The Court agrees. The Court first identifies the relevant language in the Great American policies. Second, the Court addresses whether the Contempt Proceeding sought damages covered by the policies. Theos, as the insured, "has the burden of showing that there was an `occurrence'" covered by the policy. Blue Ridge Ins. Co., 142 F.3d at 1148.
The relevant language of Great American's insurance policies provides that Great American "will pay those sums that the insured becomes legally obligated to pay as damages because of `personal and advertising injury' to which this insurance applies." 2015-16 Policy and 2016-17 Policy at 0011-12 (emphasis added). Both parties agree that the polices' insuring clause therefore requires that the Contempt Proceeding assert a claim for "damages"; otherwise, there is no coverage. See Great American Reply at 2; Theos Mot. at 9. The parties also appear to agree that the applicability of the "damages" coverage provision presents pure questions of law, on which no further factual development is necessary. State Farm Fire & Cas. Co. v. Yukiyo, Ltd., 870 F.Supp. 292, 294 (N.D. Cal. 1994) ("Where the terms and conditions of an insurance policy constitute the entire agreement between the parties, its interpretation is essentially a question of law, particularly well-suited for summary judgment.").
The crux of the parties' disagreement is over whether the Contempt Proceeding did or did not seek potentially covered "damages" under the policies. The determination of whether Great American had a duty to defend is made by "comparing the allegations of the [underlying] complaint with the terms of the policy." Ray v. Valley Forge Ins. Co., 77 Cal.App.4th 1039, 1044, 92 Cal.Rptr.2d 473 (2000) (quoting Horace Mann Ins. Co., 4 Cal. 4th at 1081, 17 Cal.Rptr.2d 210, 846 P.2d 792); Kazi v. State Farm Fire & Cas. Co., 24 Cal.4th 871, 889, 103 Cal.Rptr.2d 1, 15 P.3d 223 (2001) ("Courts first determine whether insurers have a duty to defend by `comparing the allegations of the complaint with the terms of the policy.'" (quoting Waller, 11 Cal. 4th at 19, 44 Cal.Rptr.2d 370,
As an initial matter, the parties agree that, at minimum, Malem sought to recover attorneys' fees and sanctions in the Contempt Motion. See Great American Mot. at 14-15; Theos Mot. at 9-10. Theos does not appear to dispute that attorneys' fees and sanctions are not covered as "damages" under the Great American policies. See Theos Mot. at 8-12. The Court finds that under California law, attorneys' fees do not constitute covered "damages." Travelers Property Cas. Co. of America v. KFx Medical Corp., 637 F. App'x 989, 992 (9th Cir. 2016) ("Attorneys' fees are not `damages' under California law.'" (citing Cutler-Orosi Unified Sch. Dist. v. Tulare Cnty. Sch. Dist. Liab./Prop. Self-Ins. Auth., 31 Cal.App.4th 617, 37 Cal.Rptr.2d 106 (1994))); Combs v. State Farm Fire & Casualty Co., 143 Cal.App.4th 1338, 1345, 49 Cal.Rptr.3d 917 (2006) ("Attorney fee awards may not normally be considered as `damages' in that they do not compensate claimants for the injury for which they brought suit."); San Diego Housing Com'n v. Indus. Indem. Co., 95 Cal.App.4th 669, 689-90, 116 Cal.Rptr.2d 103 (2002) ("Attorney fee awards are not `damages' under a CGL policy."). Sanctions also do not constitute "damages." See, e.g., Ulta Salon, Cosmetics, & Fragrance, Inc. v. Travelers Property Casualty Co. of Am., 197 Cal.App.4th 424, 432, 127 Cal.Rptr.3d 444 (2011) (finding no coverage for civil penalties); Bullock v. Maryland Casualty Co., 85 Cal.App.4th 1435, 1448, 102 Cal.Rptr.2d 804 (2001) (same). Therefore, the Court agrees with Great American that to the extent Malem only sought attorneys' fees and sanctions, those claims do not constitute a claim for "damages" that is covered by the policies.
Theos argues in its opposition and partial motion for summary judgment that Malem also sought compensatory damages in the Contempt Proceeding. Theos Mot. at 8-10. Theos's argument is based on the fact that Malem stated in the Contempt Motion that it was seeking "[m]onetary damages arising from [Theos and Bhatia's] violations of the Consent Order and for breach of the Settlement Agreement." See Contempt Motion at 3 (emphasis added); see also Theos Mot. at 9-10. Theos focuses on the fact that breach of the Consent Decree was based on Theos's disparagement of Malem. Theos Mot. at 9-11 (arguing that "it is crystal clear that it is clear that Malem sought compensatory damages for disparagement in their moving papers"). Theos also relies on the February 8, 2017 letter from Malem's counsel to Theos's counsel and Malem's July 20, 2017 trial brief to support its argument that Malem was seeking compensatory damages in the underlying Contempt Proceeding. Theos Mot. at 9-10.
The Court finds Theos's arguments unconvincing. First, despite the fact that Malem stated it was seeking "monetary damages" in the relief section of the Contempt Motion, Malem's argument section makes clear that Malem was actually seeking attorneys' fees and legal costs. Malem explained that it believed that Theos had breached Paragraph 9 of the Consent Order by making disparaging comments and that Malem believed it was entitled to recover reasonable attorneys' fees and costs for that breach pursuant to Paragraph VII of the Settlement Agreement. See Contempt Mot. at 4-8. Malem never stated it was seeking compensatory damages for disparagement. See id.
Contempt Reply at 4 (emphasis added). Theos's opposition agrees that "Malem's Reply papers do state that they were not seeking damages." Theos Mot. at 4. Under California law, Malem's concession that it was not seeking damages for disparagement confirms there is not duty for Great American to defend. See, e.g., Hudson Ins. Co. v. Colony Ins. Co., 624 F.3d 1264, 1270 (9th Cir. 2010) ("Indeed, in cases where a complaint alleges facts that support a duty to defend, California courts have concluded that there is no duty to defend only when the third-party complaint unambiguously disclaims or concedes an element."); Low v. Golden Eagle Ins. Co., 99 Cal.App.4th 109, 114, 120 Cal.Rptr.2d 827 (2002) (concluding there was no duty to defend because "although there is an allegation to the effect the third party plaintiff, Ms. Perez, sustained personal injuries as a result of ingesting claimant's product, no claim for recovery of damages for those alleged injuries is asserted in the complaint. Instead, the following statement appears in paragraph 9: `Plaintiff expressly disclaims seeking recovery for personal injuries attributable to [consuming the product]'"); see also, e.g., San Miguel Comm. Assn. v. State Farm Gen. Ins. Co., 220 Cal.App.4th 798, 800-01, 163 Cal.Rptr.3d 358 (2013) ("The third party's failure to seek compensatory damages against the insured means the dispute is not a claim for damages under the policy. The insurer's defense obligation requires it to provide the insured with a defense against a claim seeking damages potentially payable under the policy, not to defend the insured's honor."). Moreover, the fact that Malem's reply indicated that Malem may seek damages in the future after reopening the underlying Malem Action only confirms that Malem was not seeking damages in the Contempt Proceeding.
Further, Malem's disavowal cannot be defeated by Theos's reference to the February 8, 2017 letter from Malem's counsel to Theos's counsel or Malem's July 20, 2017 trial brief, which both mentioned "damages." See Theos Mot. at 9-10. First, the February 8, 2017 letter is not controlling as to coverage because coverage is determined by the pleadings against an insured. See, e.g., Bullock, 85 Cal. App. 4th at 1445, 102 Cal.Rptr.2d 804 ("We seriously doubt that correspondence outside the pleadings which merely hints at a possible litigation strategy ... is sufficient to establish a duty to defend an otherwise noncovered lawsuit."); Gunderson, 37 Cal. App. 4th at 1116, 44 Cal.Rptr.2d 272 ("Second, none of the allegations concerning damage to the fence, as found in the several letters of Ferrando's attorney and in her responses to discovery requests, were ever
The trial brief is also not controlling as to coverage because first, as discussed above, Malem had already disavowed that it was seeking damages. Second, Theos never tendered the July 20, 2017 trial brief to Great American, even after Great American explained on May 15, 2017 that it would decline coverage and requested additional information or documents that Theos may possess relevant to coverage. Simantob Decl. ¶¶ 5-7. Because the trial brief was not tendered to Great American, it cannot establish coverage. See, e.g., Upper Deck Co., 358 F.3d at 613 ("If new extrinsic evidence raises a potential covered claim, the insured should submit a new tender of defense. In the absence of a new tender, the insurer is not charged with knowledge of new extrinsic facts; nor is it under an independent obligation to investigate the potential for coverage."); Travelers Cas. & Sur. Co. v. Employers Ins. of Wausau, 130 Cal.App.4th 99, 110, 29 Cal.Rptr.3d 609 (2005) ("Even if the additional allegations would have triggered Wausau's duty to defend, Mydrin never tendered the later complaint to Wausau. An insurer has no duty to continue to investigate the potential for coverage after it makes an informed decision on coverage at the time of tender."); Gunderson, 37 Cal. App. 4th at 1114, 44 Cal.Rptr.2d 272 ("[A]n insurer does not have a continuing duty to investigate whether there is a potential for coverage. If it has made an informed decision on the basis of the third party complaint and the extrinsic facts known to it at the time of tender that there is no potential for coverage, the insurer may refuse to defend the lawsuit.").
Therefore, having found that Malem did not assert a claim for covered "damages" in the Contempt Proceeding in the underlying Malem Action, the Court finds that the Contempt Proceeding is not covered under the policies. Thus, with respect to Great American's claims seeking a declaration that Great American does not owe a duty to defend or a duty to indemnify, the Court GRANTS Great American's motion for summary judgment and DENIES Theos and Bhatia's motion for partial summary judgment.
Even if the Court were to assume the coverage provision applied, Great American argues that the policies' Intellectual Property and Unfair Competition Exclusions preclude coverage of the entire underlying Malem Action. Great American Mot. at 23-23; Great American Reply at 9-12. The Court first identifies the relevant exclusion language in the policies. Second, the Court addresses whether the Intellectual Property and Unfair Competition Exclusions bar coverage. Great American, as the insurer, has the burden of showing that a limitation on coverage reasonably expected under the policy is conspicuous, plain, and clear. Haynes, 32 Cal. 4th at 1204, 13 Cal.Rptr.3d 68, 89 P.3d 381.
Great American's Intellectual Property and Unfair Competition Exclusions provide that coverage is excluded for:
Ex. A at 0046-47; Ex. B at 0050-51.
Great American argues these exclusions bar coverage for the entire underlying Malem Action because the Malem Action included claims for infringement of intellectual property rights and unfair competition. See Great American Reply at 9-10. Specifically, the Malem Action contained causes of action against Theos and Bhatia for: (1) unfair competition under federal law (15 U.S.C. § 1125(a)); (2) unfair competition under Cal. Bus. & Prof. Code sections 17200, et seq.; (3) false advertising under Cal. Bus. & Prof. Code sections 17500, et seq.; (4) conversion under California law; (5) common law misappropriation; and (6) copyright violations. See Great American RJN, Ex. J. Theos does not contest that the Malem Action included these claims. See Theos Mot. at 13-14. Instead, Theos argues in opposition that the Intellectual Property and Unfair Competition Exclusions do not apply because a claim for disparagement is independent from these other claims. Theos Mot. at 13-14.
The Court agrees with Great American that these exclusions bar coverage of the entire Malem Action, including the Contempt Proceeding. Importantly, the exclusions apply not just to "any claim," but also to any "suit" that includes intellectual property or unfair competition claims. See Ex. A at 0046-47; Ex. B at 0050-51. The Malem Action constitutes a suit because it was a civil proceeding in which damages were sought, and the Malem Action included intellectual property and unfair competition claims because Malem brought claims for, among other things, unfair competition under state and federal law, and common law misappropriation. See Great American RJN, Ex. J. Moreover, the Contempt Proceeding was a part of the Malem Action, that is, part of the same "suit." Both the Malem Action and the Contempt Proceeding were before the same court and had the same case number and caption. Further, Judge Chen specifically retained jurisdiction over the Malem Action to hear the Contempt Proceeding. See Consent Decree ¶ 9. Therefore, as the Malem Action was a suit that contained allegations of intellectual property infringement and unfair competition claims, and as the Contempt Proceeding was a part of that "suit," the Court finds that coverage of the Contempt Proceeding is also barred by the Intellectual Property and Unfair Competition Exclusions.
Theos's arguments to the contrary are unavailing. First, Theos's citation to Western Intern. Corp. Syndication Corp. v. Gulf Ins. Co., 222 F. App'x 589, 592-93 (9th Cir. 2007), is unpersuasive because that case concerned policy language differing from the language at issue here. See Theos Mot. at 13-14. Specifically, Western International Corp. narrowly concerned an exclusion of coverage for "personal injuries regarding `[i]nfringement of copyright trade." 222 F. App'x at 592-93. By contrast, the Intellectual Property and Unfair Competition Exclusions at issue here exclude coverage not only for claims, but also
Thus, with respect to Great American's claims seeking a declaration that Great American does not owe a duty to defend or a duty to indemnify, the Court finds that the Intellectual Property and Unfair Competition Exclusions provide a second basis to grant Great American's motion. Therefore, the Court also GRANTS Great American's motion for summary judgment and DENIES Theos and Bhatia's motion for partial summary judgment on this ground.
Finally, Great American seeks summary judgment on Theos's bad faith claim. See Great American Mot. at 24-25. Great American specifically argues that in the absence of a breach of the insurance contract, there can be no bad faith. See, e.g., Manzarek v. St. Paul Fire & Marine Ins. Co., 519 F.3d 1025, 1034 (9th Cir. 2008) ("California law is clear, that without a breach of the insurance contract, there can be no breach of the implied covenant of good faith and fair dealing."); Waller, 11 Cal. 4th at 19, 44 Cal.Rptr.2d 370, 900 P.2d 619 ("It is clear that if there is no potential for coverage and, hence, no duty to defend under the terms of the policy, there can be no action for breach of the implied covenant of good faith and fair dealing because the covenant is based on the contractual relationship between the insured and the insurer." (emphasis omitted)).
Theos does not contest the fact that if there is no coverage, then Great American cannot be liable for bad faith. Indeed, Theos's only argument is that there was a duty to defend and that as a result, there remains a factual question as to the reasonableness of Great American's refusal to defend. Theos Mot. at 14-15.
However, because the Court already found that coverage was not due and granted summary judgment on Great American's duty to defend and indemnify claims, as a matter of law, Theos's bad faith claim fails. Therefore, the Court GRANTS Great American's motion for summary judgment on Theos's bad faith claim.
For the foregoing reasons, the Court GRANTS Great American's motion for
