Hartford Cas. Ins. Co. v. Jr Marketing, LLC

• Decision Date: 26 September 2007
• Docket Number: Civil Action No. 2:06cv626.
• Citation: 511 F.Supp.2d 644
• Parties: The HARTFORD CASUALTY INSURANCE COMPANY, Plaintiff, v. JR MARKETING, LLC, et al., Defendants.
• Court: U.S. District Court — Eastern District of Virginia

511 F.Supp.2d 644

The HARTFORD CASUALTY INSURANCE COMPANY, Plaintiff, v. JR MARKETING, LLC, et al., Defendants.

Civil Action No. 2:06cv626.

United States District Court, E.D. Virginia, Norfolk Division.

September 26, 2007.

Richard W. Driscoll, Esquire, Driscoll & Seltzer PLLC, Alexandria, VA, for The Hartford Insurance Company.

John A. Burlingame, Esquire, Squire Sanders & Dempsey LLP, Washington, DC, for JR Marketing, LLC, et al.

OPINION AND ORDER

WALTER D. KELLEY, JR., District Judge.

Plaintiff The Hartford Casualty Insurance Company ("Hartford") is defending JR Marketing, LLC ("JR Marketing"), Jane Ratto, Penelope Kane, and Germain DeMartinis (collectively, the "insureds") in a business dispute currently pending in this Court (the "Virginia Action"). Hartford is providing the defense pursuant to an insurance policy delivered to the insureds at their place of business in California. Because Hartford is defending the Virginia Action under a reservation of rights, the insureds have demanded that Hartford pay for independent counsel of their choice. California law apparently requires such independent representation; Virginia law does not.

Although this very issue is currently awaiting decision in a California coverage suit, Hartford asks this Court to step in and declare that the insureds have no right to independent counsel in the Virginia Action. However, the insureds' limited contacts with Virginia were not voluntary and thus are jurisdictionally insignificant. The Court therefore GRANTS the insureds' Motion to Dismiss for Lack of Personal Jurisdiction. (Docket No. 13.)

I. Factual and Procedural History

The individual insureds, Jane Ratto, Penelope Kane, and Germain DeMartinis, formerly worked for Noble Locks Enterprises, Inc. ("Noble"), the United States affiliate of an Israeli company. Noble sold computer locks manufactured pursuant to proprietary technology licensed from a company in Taiwan. Noble and the individual insureds operated out of Novato, California.

In 2005, the individual insureds resigned their employment to form JR Marketing. JR Marketing, which is also based in Novato, sells the same computer locks to the same customers previously serviced by Noble, including three customers in Virginia. The new locks are manufactured by MIZ Engineering, Ltd. ("MIZ Engineering"), which claims to have acquired the United States patent for the technology used to produce the computer locks at issue.

A. The California Action

JR Marketing soon took most of Noble's business. Noble struck back in September 2005 by filing suit against the insureds in the Superior Court of the State of California, Marin County, under the style Avganim v. Ratto, Case No. CV054204 (Cal.Super. Ct., Marin County filed Sept. 13, 2005) (the "California Action"). Though the Complaint asserts various causes of action, it essentially alleges that the insureds conspired with MIZ Engineering to steal Noble's customers and destroy its business.

The insureds tendered defense of the California Action to Hartford, the insurer from whom they recently had purchased Commercial General Liability Policy No. 84 SBA BX5709 DV (the "CGL Policy"). The CGL Policy was effective for one year beginning August 2005, and it covered qualifying claims asserted against the insureds anywhere in the United States.

Hartford initially refused to defend the California Action, claiming that the causes of action alleged in the Complaint were beyond the scope of the CGL Policy. The insureds thereafter filed a coverage action in California Superior Court under the style JR Marketing, LLC v. Hartford Casualty Ins. Co., Case No. CGC06449220 (Cal.Super. Ct., S.F. City and County filed Feb. 3, 2006). Among other things, the insureds asked the Superior Court to determine the extent of Hartford's duty to defend under the CGL Policy.

One month after the insureds filed their coverage suit, Hartford decided to provide a defense in the California Action. However, it continued to reserve its right to deny indemnity should the insureds be subject to an adverse judgment.

On July 26, 2006, the Superior Court held that the CGL Policy obligated Hartford to defend the insureds. It further held that Hartford's reservation of rights obligated it to pay for independent counsel. The Court based its latter holding on Section 2860 of the California Civil Code, which provides:

If the provisions of insurance impose a duty to defend upon an insurer and a conflict of interest arises which creates a duty on the part of the insurer to provide independent counsel to the insured, the insurer shall provide independent counsel to represent the insured .... For purposes of this section, .... when an insurer reserves its rights on a given issue and the outcome of that coverage issue can be controlled by counsel first retained by the insurer for the defense of a claim, a conflict of interest may exist.

The Court concluded that Hartford's appointed counsel inevitably would have a conflict of interest because Hartford hopes, on one hand, for a judgment on claims not covered by the policy, whereas the insureds' interests would be served by a judgment only on the covered claims.

After issuing its July 26, 2006 Order, the California Court stayed litigation of the insureds' remaining coverage claims, including their assertion that the CGL Policy obligates Hartford to indemnify them against any judgment rendered in the California Action. However, the Court granted the insureds leave to file a Second Amended Complaint. That pleading asks the Superior Court to declare that Hartford has a duty to pay for independent counsel in the Virginia Action, as well as in the California Action. The California Superior Court has not yet ruled on this claim.

B. The Virginia Action

A short time after Noble filed its Complaint in California, litigation between the parties erupted in Virginia. In December 2005, MIZ Engineering filed the Virginia Action to enforce its United States patent rights against Noble and related parties. MIZ Engineering, Ltd. v. Avganim, No. 2:05cv722 (E.D. Va. filed Dec. 8, 2005). These defendants in turn filed a Third Party Complaint against the insureds, alleging essentially the same business torts as those asserted in the California Action.

The insureds tendered defense of the Third Party Complaint to Hartford. The insurance company hired the Fairfax, Virginia law firm of Trichilo, Bancroft, McGavin, Horvath, and Judkins, P.C. (the "Horvath Firm") to represent the insureds, but again reserved its right to deny indemnity. The insureds objected to Hartford's selection of counsel and demanded that Hartford once again pay for independent counsel pursuant to Section 2860 of the California Civil Code. Despite their objections, the insureds have cooperated fully with the Horvath Firm. Failure to do so would constitute a breach of the CGL Policy.

Hartford filed this Complaint for Declaratory Judgment nearly five months after it retained the Horvath Firm to represent the insureds. Hartford asks this Court to declare that Virginia law governs any coverage dispute arising out of the Virginia Action. Hartford further asks this Court to enter a declaratory judgment absolving it of any duty to pay for independent counsel. As noted above, the same issue is being litigated by the same parties in California Superior Court.

II. Analysis

A. Standard of Review

When a defendant moves to dismiss an action for lack of personal jurisdiction pursuant to Rule 12(b)(2) of the Federal Rules of Civil Procedure, the burden ultimately rests on the plaintiff "to prove the existence of a ground for jurisdiction by a preponderance of the evidence." Combs v. Bakker, 886 F.2d 673, 676 (4th Cir.1989). However, a plaintiff need only make a prima facie showing of jurisdiction when, as here, the Court "rules on a Rule 12(b)(2) motion without conducting an evidentiary hearing or without deferring ruling pending receipt at trial of evidence relevant to the jurisdictional issue." In re Celotex Corp., 124 F.3d 619, 628 (4th Cir. 1997). In making its ruling, the Court "must construe all relevant pleading allegations in the light most favorable to the plaintiff, assume credibility, and draw the most favorable inferences for the existence of jurisdiction." Combs, 886 F.2d at 676.

B. Personal Jurisdiction

In evaluating whether it can exercise personal jurisdiction over a defendant, a court normally conducts a two-step inquiry. First, it must consider whether the forum state's long-arm statute authorizes jurisdiction. Mitrano v. Hawes, 377 F.3d 402, 406 (4th Cir.2004). Second, it must ask if its assertion of jurisdiction over the defendant comports with the Due Process Clause of the Fourteenth Amendment. Id.; DeSantis v. Creations, Inc., 949 F.Supp. 419, 422 (E.D.Va.1996).

The two questions identified above "may be interrelated." Peanut Corp. of Am. v. Hollywood Brands, Inc., 696 F.2d 311, 314 (4th Cir.1982). "Because Virginia's long-arm statute extends personal jurisdiction to the extent permitted by the Due Process Clause, `the statutory inquiry necessarily merges with the constitutional inquiry, and the two inquiries essentially become one.'" Young v. New Haven Advocate, 315 F.3d 256, 261 (4th Cir.2002) (quoting Stover v. O'Connell Assocs., 84 F.3d 132, 135-36 (4th Cir.1996)) (internal citation omitted); see also Lockwood Bros., Inc. v. Arnold Speditions GmbH, 453 F.Supp.2d 928, 933-34 (E.D.Va.2006) (Smith, J.) (conducting constitutional inquiry only); Carmichael v. Snyder, 209 Va. 451, 164 S.E.2d 703, 707 (1968) (acknowledging legislative intent). Therefore, this Court need only examine whether its exercise of personal jurisdiction over the insureds would offend due process.

The Supreme Court has recognized two types of personal jurisdiction — "general" and "specific." Helicopteros Nacionales de Colombia, S.A. v. Hall 466 U.S. 408, 411, 104 S.Ct. 1868, 80 L.Ed.2d 404 (1984). A court may exercise its "general...