Alticor Glob. Holdings v. Am. Int'l Specialty Lines Ins. Co.

• Docket Number: 22-1631,22-1641,22-1679
• Decision Date: 23 August 2024
• Citation: Alticor Glob. Holdings v. Am. Int'l Specialty Lines Ins. Co., 22-1631, 22-1641, 22-1679 (6th Cir. Aug 23, 2024)
• Parties: ALTICOR GLOBAL HOLDINGS INCORPORATED; ALTICOR, INC.; AMWAY CORPORATION; AMWAY INTERNATIONAL, INCORPORATED, Plaintiffs-Appellees Plaintiffs-Appellants/Cross-Appellees v. AMERICAN INTERNATIONAL SPECIALTY LINES INSURANCE CO., nka AIG Specialty Insurance Company, Defendant-Appellant NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA, Defendant-Appellee/Cross-Appellant
• Court: U.S. Court of Appeals — Sixth Circuit

1

ALTICOR GLOBAL HOLDINGS INCORPORATED; ALTICOR, INC.; AMWAY CORPORATION; AMWAY INTERNATIONAL, INCORPORATED, Plaintiffs-AppelleesPlaintiffs-Appellants/Cross-Appellees v. AMERICAN INTERNATIONAL SPECIALTY LINES INSURANCE CO., nka AIG Specialty Insurance Company, Defendant-Appellant

NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA, Defendant-Appellee/Cross-Appellant

Nos. 22-1631, 22-1641, 22-1679

United States Court of Appeals, Sixth Circuit

August 23, 2024

NOT RECOMMENDED FOR PUBLICATION

ON APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF MICHIGAN

Before: GRIFFIN, NALBANDIAN, and MATHIS, Circuit Judges.

OPINION

GRIFFIN, CIRCUIT JUDGE

In this insurance-coverage dispute, the district court concluded defendantAmerican International Specialty Lines Company breached its insurance agreement with plaintiff Amway^[1] when it declined to defend and indemnify Amway in underlying copyright-infringement litigation that Amway ultimately settled.The district court then entered judgment against American for $36,923,844.50, which represented Amway's costs along with prejudgment interest.American raises four issues on appeal, three related to the district court's liability holdings and one regarding its imposition of prejudgment interest.We affirm and dismiss as moot the conditional appeal and cross-appeal concerning defendantNational Union Fire Insurance Company of Pittsburgh, PA.

I.

A.

Amway is one of the largest direct-sales ventures in the world, selling numerous household products through independent contractors known as Independent Business Owners (IBOs).Defendants are insurance companies from whom Amway purchased insurance-American provided Amway with an Internet and network security insurance policy and National was Amway's umbrella carrier.Amway also purchased general liability insurance structured as "fronting insurance" from non-party ACE, which we detail later.

In 1996, twelve record companies sued Amway and many of its IBOs for copyright infringement in the Middle District of Florida.They accused Amway's IBOs of producing videotapes that utilized sound recordings without their consent, which were then used privately by IBOs "as motivational tools, as sales tools, to recruit new [IBOs,] and to promote upcoming Amway [IBO] conventions and conferences."The record companies sought to hold the IBOs liable for direct infringement and Amway liable under vicarious and contributory liability theories.This so-called VHS tape litigation settled in 1998.As part of the settlement terms, the parties agreed to an alternative-dispute-resolution process that set forth how they would address any future copyright violations.

Fast forward fourteen years to 2012.Several record companies once again accused Amway of engaging in copyright infringement; this time, however, the alleged infringing act was not that of producing VHS recordings to be used internally but uploading videos to the Internet for the entire world to see.Their letter identified "more than 365 infringing videos containing more than 220 different sound recordings" and asserted Amway's history showed its conduct was willful, highlighting that "approximately 25 of the videos (containing at least ten different sound recordings) incorporate sound recordings that also were at issue in the previous lawsuit."It also directly linked Amway to the videos in a manner distinct from the VHS tape litigation:

It also is clear that at the direction and instruction of Amway Corporation, the Internet has to a large extent significantly enhanced the marketing and advertising practices that were the subject of the previous lawsuit.Thus, instead of using our . . . music in videos that were only performed or distributed internally, these infringing videos are now made available to anyone in the world with access to a computer, tablet or smartphone as part of an ongoing video marketing program involving Amway and its distributors.

(Emphasis Added).The letter additionally asserted Amway's conduct violated the permanent injunction and final judgment agreed to in the VHS tape litigation, and it expressly put Amway on notice of the record companies' intent to invoke the alternative dispute resolution provision set forth in the settlement agreement.Amway tendered the letter to American, National, and ACE, triggering each carrier's evaluation of whether coverage would lie under their respective policies.

The American policy provided insurance coverage and indemnity up to $25 million for claims alleging wrongful acts-including copyright infringement-on Internet media.American eventually denied coverage under this policy.Although it noted three reasons for doing so, two exclusion provisions-which both relate to the VHS tape litigation-are relevant here.Exclusions J and P generally preclude coverage for prior litigation or those claims with prior notice, respectively.American generally claimed that it was not obligated to defend against this "Internet video litigation" because, in its view, those claims were just repackaged violations flowing from the VHS tape litigation.

The two other policies merit brief mention.Amway's policy with National provided $50 million in umbrella coverage for personal and advertising injury per occurrence, which applied "only in the excess of . . . Underlying Insurance and any applicable Other Insurance whether or not such limits are collectible."National issued several reservation-of-rights letters to Amway, and it takes the position that its policy does not provide coverage.

The ACE policies are more complicated.Amway annually purchased commercial general liability coverage from ACE between 2006 and 2016, which provided up to $2 million in coverage per occurrence for "personal and advertising injury liability"(which includes copyright infringement), up to $4 million in the aggregate.What is peculiar about the ACE policies is that the deductible matches the policy limits; as all parties agree, this means that they are "fronting" policies.This structuring is important-one of American's main arguments on appeal is that these policies constitute "other valid and collectible insurance available to [Amway]" under its policy, which must be satisfied first.ACE admits the letter's allegations "trigger[ed] coverage," but, like National, issued a reservation of rights.

Amway's dispute with the record companies eventually made its way to federal court when Amway sued the record companies in 2014 in the Middle District of Florida for breach of the settlement agreement, tortious interference with contractual rights, and civil conspiracy.The defendants and other record companies counterclaimed with their own copyright-infringement (and similar tort) claims in 2015.

Three of the record companies-UMG, Capitol, and Sony, each a party to the VHS tape litigation-also asserted their own breach-of-settlement-agreement counterclaim.That counterclaim has some import, for Count IX of the record companies' counterclaim alleged that Amway breached the alternative-dispute-resolution provision of the settlement agreement that resolved the VHS tape litigation.The parties eventually settled the Internet video litigation with Amway paying $7,562,500 to the record companies.

B.

Having incurred millions of dollars in defense and settlement costs in its dispute with the record companies in the Internet video litigation, Amway commenced this breach-of-contract litigation against American and National.The district court issued three orders-on cross-motions for summary judgment-that are relevant to this appeal.

First, the district court's "Phase One Order" concluded that the record companies' 2015 counterclaim triggered American's duty to defend, and that Exclusions J and P did not permit American to deny coverage.Second, the district court's "Phase Two Order" held that Amway's "fronting insurance" policies through ACE did not constitute "other valid and collectible insurance available to [Amway]" that must be exhausted before American's obligations are triggered.It further held that American was obligated to pay the actual defense and indemnity costs (including the settlement value)-totaling $23,576,382.41-Amway incurred defending against the record companies' claims because American waived its right to challenge the reasonableness of the actual defense costs.And third, the district court concluded in one of its final orders that Amway was entitled to recover $13,347,462.18 in prejudgment interest.As for National, the district court declined to determine the scope of National's coverage because American, as the primary insurer, was liable for an amount less than the policy limit, and therefore, the question of National's excess umbrella-coverage obligations was moot.

The district court ultimately entered judgment against American for $36,923,844.50 in Amway's favor as follows: (1) $16,013,882.41 to reimburse Amway's defense costs; (2) interest under Mich. Comp. Laws § 600.6013and§ 500.2006 on the defense cost award, amounting to $9,066,051.13; (3) $7,562,500 to indemnify Amway for the amounts it paid to resolve its disputes with the Record Companies; and (4) interest under § 600.6013and§ 500.2006 on the indemnity award, amounting to $4,281,410.96.Given its liability findings against American, the district court dismissed Amway's claims against National with prejudice.American appeals in No. 221631, Amway contingently appeals in No. 22-1641, and National conditionally cross-appeals in No. 22-1679.

II.

A.

The first three issues on appeal relate to American's liability and arise from the district court's grant of summary judgment in Amway's favor.We review de novo a district court's resolution of cross-motions for...