Great Am. E&S Ins. Co. v. Theos Med. Sys., Inc.

• Decision Date: 07 February 2019
• Docket Number: Case No. 17-CV-05660-LHK
• Citation: 357 F.Supp.3d 953
• Court: U.S. District Court — Northern District of California
• Parties: GREAT AMERICAN E & S INSURANCE COMPANY, Plaintiff, v. THEOS MEDICAL SYSTEMS, INC., Defendant.

357 F.Supp.3d 953

GREAT AMERICAN E & S INSURANCE COMPANY, Plaintiff,

v.THEOS MEDICAL SYSTEMS, INC., Defendant.

Case No. 17-CV-05660-LHK

United States District Court, N.D. California, San Jose Division.

Signed February 7, 2019

David Marshall Morrow, David Simantob, Wilson Elser Moskowitz Edelman and Dicker LLP, Los Angeles, CA, for Plaintiff.

Anthony Boskovich, Law Offices of Anthony Boskovich, Williamstown, MA, for Defendant.

ORDER GRANTING PLAINTIFF'S MOTION FOR SUMMARY JUDGMENT AND DENYING DEFENDANT'S PARTIAL MOTION FOR SUMMARY JUDGMENT

Re: Dkt. Nos. 46, 48

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.

I. BACKGROUND

A. Factual Background

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 discusses the policies, then the Court discusses the underlying Malem Action and Contempt Proceeding. Finally, the Court turns to Theos's tender of the Contempt Proceeding to Great American.

1. The Great American Policies

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 "Coverage B – Personal and Advertising Injury Liability ," provides:

1. Insuring Agreement

a. We 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. We will have the right and duty to defend the insured against any "suit" seeking those damages. However, we will have no duty to defend the insured against any "suit" seeking damages for "personal and advertising injury" to which this insurance does not apply. We may, at our discretion, investigate any offense and settle any claim or "suit" that may result.

...

2. Exclusions

This insurance does not apply to:

...

e. Contractual Liability

"Personal and advertising injury" for which the insured has assumed liability in a contract or agreement. This exclusion does not apply to liability for damages that the insured would have in the absence of the contract or agreement.

f. Breach of Contract

"Personal and advertising injury" arising out of a breach of contract, except an implied contract to use another's advertising ideas in your "advertisement."

...

i. Infringement of Copyright, Patent, Trademark or Trade Secret

"Personal and advertising injury" arising out of the infringement of copyright, patent, trademark, trade secret or other intellectual property rights. Under this exclusion, such other intellectual property rights do not include the use of another's advertising idea in your "advertisement."

However, this exclusion does not apply to infringement, in your "advertisement," of copyright, trade dress or slogan.

Exs. A and B, at 0011–12.

The Policies are amended by Endorsement Form ESG 3258 (Ed. 09/14), entitled "EXCLUSION – CLAIMS AND SUITS ALLEGING INFRINGEMENT OF INTELLECTUAL PROPERTY OR UNFAIR COMPETITION ," which provides:

This endorsement modifies insurance provided under the following:

COMMERCIAL GENERAL LIABILITY COVERAGE FORM

A. COMMERCIAL GENERAL LIABILITY COVERAGE FORM, Coverage B – Personal and Advertising Injury Liability, 2. Exclusions, i. infringement of Copyright, Patent, Trademark or Trade Secret, is deleted and replaced by the following:

i. Claim or "Suit" Alleging Infringement of Intellectual Property

(1) Any claim or "suit" that alleges "personal and advertising injury" arising out of any actual, alleged, or threatened misappropriation, infringement, or violation of any intellectual property or intellectual property right or law of any description, including but not limited to the following:

(a) copyright;

(b) patent;

(c) trademark;

(d) trade name;

(e) trade secret;

(f) trade dress;

(g) service mark;

(h) slogan;

(i) service name;

(j) description of origin, source, authorship, authenticity, or quality;

(k) other right to or law recognizing an interest in any expression, idea, likeness, name, style of doing business, symbol, or title; or

(l) any other intellectual property right or law.

This exclusion applies to:

a. our duty to defend; and

b. our duty to pay damages

whether such misappropriation, infringement, or violation is committed in your "advertisement" or otherwise.

B. The following exclusion is added to COMMERCIAL GENERAL LIABILITY COVERAGE FORM, SECTION I – COVERAGES, Coverage B – Personal and Advertising Injury Liability, 2. Exclusions:

Claim or "Suit" Alleging violation of laws concerning Unfair Competition or Similar Laws

Any claim or "suit" that alleges "personal and advertising injury" arising out of any actual, alleged, or threatened violation of any statutes, common law, of other laws or regulations concerning unfair competition, antitrust, restraint of trade, piracy, unfair trade practices, or any similar laws or regulations.

This exclusion applies to:

a. our duty to defend; and

b. our duty to pay damages

whether such violation is committed in your "advertisement" or otherwise.

Ex. A at 0046–47; Ex. B at 0050–51.

Finally, the policies contain the following relevant definitions:

14. "Personal and advertising injury" means injury, including consequential "bodily injury," arising out of one or more of the following offenses:

...

d. oral or written publication, in any manner, of material that slanders or libels a person or organization or disparages a person's or organization's goods, products or services[.]

...

18. "Suit" means a civil proceeding in which damages because of "bodily injury," "property damage," or "personal and advertising injury" to which this insurance applies are alleged....

Exs. A and B, at 0022–23.

2. The Underlying Malem Action

a. The Complaint in the Malem Action

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"),¹ Ex. H. Malem filed an amended complaint on April 10, 2014, and a second amended complaint on February 9, 2015. Id. , Exs. I and J. In the Malem Action, Malem alleged six 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. Id. , Ex. J.

b. The Settlement Agreement and Consent Decree in the Malem Action

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:

DEFENDANTS will not disparage PLAINTIFFS or any of their products, services, officers, directors, or employees. For purposes of this agreement, disparage means to take any action which could reasonably be expected to adversely affect the reputation of PLAINTIFFS or-any of their products, services, officers, directors, or employees. This paragraph does not apply to legitimate business concerns raised by DEFENDANTS or to allegations that PLAINTIFFS have violated this Agreement or this Consent Decree.

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...