Centillium Communications v. Atlantic Mut. Ins.

• Decision Date: 03 October 2007
• Docket Number: Docket No. 27.,Docket No. 30.,No. C 06-7824 SBA.,C 06-7824 SBA.
• Citation: 528 F.Supp.2d 940
• Parties: CENTILLIUM COMMUNICATIONS, INC., Plaintiff, v. ATLANTIC MUTUAL INSURANCE CO., Defendant.
• Court: U.S. District Court — Northern District of California

528 F.Supp.2d 940

CENTILLIUM COMMUNICATIONS, INC., Plaintiff, v. ATLANTIC MUTUAL INSURANCE CO., Defendant.

No. C 06-7824 SBA.

Docket No. 27.

Docket No. 30.

United States District Court, N.D. California, Oakland Division.

October 3, 2007.

COPYRIGHT MATERIAL OMITTED

Katina Ancar, Dennis M. Cusack, Farella Braun & Martel, San Francisco, CA, for Plaintiff.

Gary Robert Selvin, Joshua Stanley Leach, Selvin, Wraith, Halman, LLP, Oakland, CA, for Defendant.

ORDER

SAUNDRA BROWN ARMSTRONG, District Judge.

Before the Court is plaintiff Centillium Communications, (Centillium) Motion for Partial Summary Judgment [Docket No. 27], and request for additional discovery pursuant to Federal Rule of Civil Procedure 56(f). Also before the Court is defendant Atlantic Mutual Insurance Co.'s (Atlantic Mutual) Motion for Summary Judgment/Alternative Motion for Partial Summary Judgment [Docket No. 30]. After reading and considering the arguments presented by the parties, the. Court finds these matters appropriate for resolution without a hearing. See FED. R. Civ. P. 78. For the reasons that follow, the Court grants Centillium's motion with respect to the 2002-2004 Policy and denies Atlantic Mutual's motion with respect to the same. The Court declines granting summary judgment in favor of either party with respect to the 2005-2006 Policy due to the parties' stipulation to the filing of an amended complaint.¹ The Court also finds that the Rule 56(f) request is now moot in light of the parties' stipulation to the filing of an amended complaint and stipulation to continue the discovery deadlines. Finally, the Court denies Atlantic Mutual's motion for summary judgment on Centillium's claim that it breached the covenant of good faith and fair dealing.

BACKGROUND

This is an insurance coverage action brought by Centillium Communications, Inc. against Atlantic Mutual Insurance Company. The dispute over coverage. arises from a lawsuit filed against Centillium in December 2005 by its former customer, Action Technology Corporation (Action). Centillium is a developer of electronic semiconductor chips designed to provide high-speed internet access. Acetone, a Taiwanese corporation, is in the business of producing computer products, including modems for wireless internet access. From December 2002 to early 2003, Centillium sold semiconductor chips called the "Palladia P200 ASIC" (the Chipset) to Action. Action installed the Chipset into one of its computer products, the HR-10 wireless router (the Router). Action then sold the Routers, through Hitachi, to SHARP Corporation of Japan. SHARP, in turn, sold the Routers to Nippon. Telegraph and Telephone (NTT).

In January 2003, Action learned from SHARP that the Routers were not functioning properly—they would disconnect from the internet after about 20 minutes of use. On January 21, 2003, Action notified Centillium of the problem. Thereafter, Centillium informed Action and SHARP that it was aware of a problem with some Chipsets (Chipsets with a certain "date code"), that the clock specifications were inaccurate, and that a customer using the Chipset in a certain capacity would suffer a 5% failure rate. A 5% failure rate is considered an "epidemic" problem in the industry. Action witnesses later testified that, during operation, the Chipset would "lock up" and its temperature would rise. They further testified that this temperature increase overheated and damaged other component parts of the Router—the "Gloria capacitor" and the "L13 wire" or "L13 choke line." Action asserted that another router model (H-15) contained a Gloria capacitor and did not contain the Centillium Chipset. Leach Decl., Ex. C, 21. The H-15 routers did not fail.

On or around January 15, 2004, Accton's customers issued a public recall notice to end users who purchased the Routers. Leach Decl., Ex. C, at 4 (Accton's Response to Centillium's Supplemental Interrogatories). The notice advised the end user that they could return the Router "if they were experiencing internet connectivity problems." Id. at 6. When a Router was returned, a determination of whether the Chipset was potentially defective was made by checking the date code. Id. If it had a "bad" date code, it was shipped back to Action to be screened. Id. at 4-5. The screening involved placing the Routers in a thermal oven to simulate normal temperature running conditions. Id. at 5. If the units failed, they would be "reworked." Id. The "reworking" process included the removal and replacement of the Chipset and the Gloria capacitor. Id. at 5; Cusack Ex. 0. SHARP and Hitachi demanded that Action pay their respective costs of recalling, reworking, and/or replacing the failed Routers. Action also had to test the Routers in inventory and the unassembled Chipsets. Action alleged that it incurred over $4,500,000 in costs in retrieving and repairing the failed Routers.

On December 8, 2005, Action filed a complaint against Centillium in the Superior Court of the State of California for the County of Alameda. Action stated causes of action for: (1) Breach of Contract; (2) Breach of Implied Warranty of Merchantability (3) Breach of Implied Warranty of Fitness for a Particular Purpose; (4) Breach of Express Warranty; (5) Strict Products Liability; (6) Fraud and Concealment; (7) Negligent Misrepresentation; and (8) Declaratory Relief for Indemnity. Each cause of action alleged that Centilliurn represented that the Chipsets had certain timing properties, Action relied on those representations in designing the Routers, and the Chipsets did not perform to Centillium's stated specifications.

On January 4, 2006, Centillium tendered the Action suit to Atlantic Mutual, through OneBeacon Insurance, for defense and indemnity under two separate policies. First, Centillium sought coverage under the general commercial liability provisions of a 2002-2004 Policy (2002-04 Policy) issued by Atlantic Mutual. Second, Centillium sought coverage under the "act, error, or omission" provisions of a 2005-2006 Policy (2005-06 Policy) issued by Atlantic Speciality Insurance Company (Atlantic Specialty). Atlantic Mutual owned Atlantic Specialty until early 2004. Atlantic Mutual Motion for Summary Judgment (Atlantic Mutual MSJ), 6, n. 7. At that time, OneBeacon Insurance purchased Atlantic Specialty and, in so doing, purchased the right to all policy renewals from Atlantic Mutual. Id. Accordingly, when Centilliurn renewed its prior policy, it purchased coverage from OneBeacon, through its newly-acquired subsidiary, Atlantic Specialty. Id.

From January 2006 to October 2006, Centillium attempted to contact Atlantic Mutual several times to obtain a determination of whether Atlantic Mutual would accept or deny the claim for defense and indemnity. Cusack Dec., Exs, E-I. In October 2006, Centillium provided Atlantic Mutual with additional facts regarding the Chipset failure and its impact on the Router. Cusack Dec., Ex. I. Atlantic Mutual formally denied coverage on November 14, 2006, over ten months after the suit was tendered.

On December 21, 2006, Centillium filed a complaint against Atlantic Mutual claiming breach of contract for its failure to accept its duty to defend. Centillium also claims that Atlantic Mutual breached the implied covenant of good faith and fair dealing because it denied coverage pursuant to a policy to avoid its defense and indemnity obligations. Atlantic Mutual did not disclaim responsibility for the 2005-06 Policy in its answer to Centillium's complaint. Centillium Opp'n., 6. Instead, it stated that it had not had the "opportunity to determine the accuracy or authenticity" of the policy. Id. On August 14, 2007, one month after Centillium filed its Motion for Summary Judgment and over a year and a half since Centillium first tendered the suit, Atlantic Mutual first disclosed that Atlantic Specialty was no longer its subsidiary. Centillium's Reply to Atlantic Mutual's MSJ (Centillium Reply), 1.

LEGAL STANDARD

A. Summary Judgment

Summary judgment is appropriate if no genuine issue of material fact exists and the moving party is entitled to judgment as a matter of law. See FED. R. CIV. P. 56(c); Celotex Corp. v. Catrett, 477 U.S. 317, 322-23, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). The party moving for summary judgment must demonstrate that there are no genuine issues of material fact. See Horphag Research Ltd. v. Garcia, 475 F.3d 1029, 1035 (9th Cir.2007). An issue is "genuine" if the evidence is such that a reasonable jury could return a verdict for the non-moving party. See Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986); Rivera v. Philip Morris, Inc., 395 F.3d 1142, 1146 (9th Cir.2005). An issue is "material" if its resolution could affect the outcome of the action. Anderson, 477 U.S. at 248, 106 S.Ct. 2505; Rivera, 395 F.3d at 1146.

In responding to, a properly supported summary judgment motion, the non-movant cannot merely rely on the pleadings, but must present specific and supported material facts, of significant probative value, to preclude summary judgment. See Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 586 n. 11, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986); Leisek v. Brightwood Corp, 278 F.3d 895, 898 (9th Cir.2002); Federal Trade Comm'n v. Gill 265 F.3d 944, 954 (9th Cir.2001). In determining whether a genuine issue of material fact exists, the court views the evidence and draws inferences in the light most favorable to the non-moving party. See Anderson, 477 U.S. at 255, 106 S.Ct. 2505; Sullivan v. U.S. Dep't of the Navy, 365 F.3d 827, 832 (9th Cir.2004); Hernandez v. Hughes Missile Sys. Co., 362 F.3d 564, 568 (9th Cir.2004).

B. Insurer's Duty to Defend

Insurance companies must defend insureds for actions that give rise to a potential for indemnity. Kazi v. State Farm Fire & Cas. Co., 24 Cal.4th 871, 879, 103 Cal.Rptr.2d 1, 15 P.3d 223 (2001). The duty to defend arises whenever the third party...