James River Ins. Co. v. Medolac Labs.

• Decision Date: 22 February 2018
• Docket Number: Case No. CV 16–7443–MWF(ASx)
• Parties: JAMES RIVER INSURANCE COMPANY v. MEDOLAC LABORATORIES, a Public Benefit Corporation, et al.
• Court: U.S. District Court — Central District of California

290 F.Supp.3d 956

JAMES RIVER INSURANCE COMPANY

v.MEDOLAC LABORATORIES, a Public Benefit Corporation, et al.

Case No. CV 16–7443–MWF(ASx)

United States District Court, C.D. California.

Signed February 22, 2018

Matthew J. Hafey, Esq., D. Victoria LaBrie, Esq., Stacy R. Goldscher, Esq. (Matthew J. Hafey argued the motion and is lead counsel), all of Nemecek & Cole, P.C., for plaintiff James River Insurance Company.

Jeffrey S. Frasier, Esq. of Chenoweth Law Group, for defendants Medolac Laboratories, a Public Benefit Corporation fka Neolac, Inc.; Elena Taggart Medo; Adrienne Weir.

Proceedings (In Chambers): ORDER RE: PLAINTIFF'S MOTION FOR PARTIAL SUMMARY JUDGMENT [52]

Present: The Honorable MICHAEL W. FITZGERALD, U.S. District Judge

Before the Court is Plaintiff James River Insurance Company's ("James River") Motion for Partial Summary Judgment (the "Motion"), filed on January 6, 2018. (Docket No. 52). On January 22, 2018, Defendants Medolac Laboratories a Public Benefit Corporation fka Neolac, Inc. dba Medolac ("Medolac"), Elena Taggart Medo ("Medo"), and Adrienne Weir ("Weir") (collectively, the "Medo Defendants") filed an Opposition. (Docket No. 62). On January 29, 2018, James River filed a Reply. (Docket No. 69). The Court has considered the papers filed on the Motion, and held a hearing on February 12, 2018 .

For the reasons discussed below, the Motion is GRANTED . The claims in the underlying Prolacta Action all arise out of the same conduct alleged to constitute a breach of contract, and therefore they are excluded from coverage under the Policy by the Breach of Contract Exclusion. The claims also all arise out of conduct excluded by the Business Conduct Exclusion. James River is entitled to reimbursement of defense costs and fees incurred from October 25, 2016, onward.

I. BACKGROUND

James River commenced this action arising out of an insurance coverage dispute on October 4, 2016. (Complaint (Docket No. 1) ). The operative Second Amended Complaint ("SAC") was filed on August 8, 2017. (Docket No. 46).

The following facts are based on the evidence, as viewed in the light most favorable to the Medo Defendants, the non-moving parties. Anderson v. Liberty Lobby, Inc. , 477 U.S. 242, 255, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986) (On a motion for summary judgment, "[t]he evidence of the non-movant is to be believed, and all justifiable inferences are to be drawn in his [or her] favor.").

A. Prolacta Action

On January 20, 2015, Prolacta Bioscience, Inc. ("Prolacta"), a competitor of Medolac, filed an action against Medolac's owner, Elana Medo, in Orange County Superior Court, titled Prolacta Bioscience, Inc. v. Elena Taggart Medo, et al. , Case No. 30–2015–00767116–CU–NP–CJC (the "Prolacta Action"). (Response to Statement of Genuine Issues of Fact ("RSGIF") No. 1 (Docket No. 73) ). Elena Medo is the CEO of the Delaware corporation, Medolac Laboratories a Public Benefit Corporation, formerly known as Neolac, which did business as Medolac. (Id. No. 64). In that action, Prolacta filed First, Second, Third, and Fourth Amended Complaints, with the Fourth Amended Complaint filed on November 14, 2017. (Id. Nos. 2–5).

On June 8, 2015, Medo tendered her defense to the Prolacta Action to James River. Her tender included the Complaint and First Amended Complaint in the Prolacta Action, as well as a copy of a cease-and-desist letter dated December 19, 2014 and a Termination and Release Agreement dated February 26, 2009. (RSGIF Nos. 6–7). At the time of the tender, the First Amended Complaint was the operative Complaint in the Prolacta Action. It alleged seven causes of action: (1) Conversion; (2) Intentional Interference with Prospective Economic Advantage; (3) Unfair Competition ( Bus. & Prof. Code §§ 17200, et seq. ); (4) Breach of Fiduciary Duty; (5) Breach of Contract—Nondisclosure Agreement; (6) Breach of Contract—Termination Agreement; and (7) Violation of Uniform Trade Secrets Act. (Id. Nos. 8–9). The Fourth Amended Complaint in the Prolacta Action, which is the operative complaint as of the date of this Motion, alleges nine claims for relief, adding claims for Civil Conspiracy and Vicarious Liability. (Id. Nos. 12–13).

In the Fourth Amended Complaint, as in the First Amended Complaint, Prolacta alleges that it is a research-driven private company dedicated to advancing the science of human milk for critically ill premature infants. (RSGIF No. 14). It further alleges Medo was one of its founding members, with access to confidential and proprietary information. (Id. No. 15). Prolacta alleges that on February 16, 2006, Medo signed on a Non–Disclosure Agreement by which Medo agreed not to solicit Prolacta employees to leave the company for twelve months following Medo's separation from Prolacta and not to divulge confidential information owned by Prolacta. (Id. Nos. 16–18). Prolacta also alleges that Medo signed a Termination Agreement effective February 26, 2009, by which she agreed not to use confidential information or disparage Prolacta. (Id. Nos. 19, 21).

Prolacta further alleges in the Prolacta Action that after leaving Prolacta, Medo started a new company that competes with Prolacta. In promoting her new business, Medo is alleged to have "disparaged" Prolacta to Prolacta employees and customers by "expressing that [Prolacta] products are inferior to [Medo's] products, that [Prolacta] was unethical, poorly managed, did not promote women, and would fail because it was ran by greed and because it did not follow her advice." (RSGIF Nos. 23–24. 27–28).

Prolacta alleges that in December 2014, it discovered that Medo was "utilizing proprietary and confidential [Prolacta] data", and "was disparaging [Prolacta] to its customers and potential customers in an attempt to solicit customers and/or [Prolacta] employees." (RSGIF Nos. 25–26). Prolacta alleged that it demanded Medo to stop, but that she refused to do so. (Id. No. 29–30). Prolacta alleges this conduct to be in breach of the Termination Agreement. (Id. Nos. 33–34, 45–46).

B. James River Insurance Policy

James River issued Commercial General Liability Insurance Policy No. 00063565–0 to Neolac dba Medolac, effective August 23, 2014 to August 23, 2015, with Personal and Advertising Injury Liability limits of $1,000,000 (the "Policy"). The Policy was received and accepted at Medolac's offices in Lake Oswego, Oregon. (RSGIF Nos. 47, 65, 67). The Policy was amended to add Medolac Laboratories, with a retroactive date of December 23, 2014. (Id. No. 48).

With respect to Coverage B under the Policy, James River promised as follows:

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....

(RGS No. 49). The Policy defines "Personal and advertising injury" in relevant part as follows:

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 ...

(Id. No. 50).

Coverage B contains a Breach of Contract Exclusion, reading: "This insurance does not apply to ... ‘Personal and advertising injury’ arising out of a breach of contract, except an implied contract to use another's advertising idea in your ‘advertisement’." (RSGIF No. 51). The Policy also contains the following Business Conduct Exclusion:

This insurance does not apply to any claim or ‘suit’ arising out of

...

(b) any actual or alleged infringement of copyright, patent, trademark, service mark, right of publicity, slogan, trade dress, trade secret or other intellectual property rights; whether or not in your ‘advertisement’;

(c) any actual or alleged false advertising, false designation of origin, product disparagement, trade libel, or other claims arising out of unfair competition, whether or not in your ‘advertisement’

(Id. No. 52).

The plaintiff in the Prolacta Action has never alleged facts asserting claims for bodily injury or property damage that would potentially be covered under Coverage A of the Policy, and the Medo Defendants do not contend that James River has or ever had a duty to defend the Medo Defendants under Coverage A. (RSGIF Nos. 53–54).

C. Defense of the Prolacta Action

On August 31, 2015, James River agreed to provide Medo with a defense to the Prolacta Action subject to a written reservation of rights. (RSGIF No. 55). The written reservation of rights stated that James River was reserving the right to "deny coverage for all or part of the claims" against Medo, and withdraw from the defense upon notice affording Medo a reasonable opportunity to protect her interests. (Id. No. 97). On October 25, 2016, James River issued a Supplemental Reservation of Rights in which it sought to reserve the right to defend Medo in the Prolacta Action while simultaneously seeking declaratory relief, including reimbursement of defense fees and costs going forward from the date of the Complaint in this action. (Id. No. 56). At the time that James River filed this action on October 4, 2016, James River's appointed attorney had been representing Medo in the Prolacta Action for about a year. (Id. No. 106).

On February 27, 2017 and May 8, 2017, James River issued additional Supplemental Reservations of Rights in which it agreed to provide a defense to Medolac and Weir on the same basis as it was providing a defense to Medo. (RSGIF No. 57).

Medo has been defended in the Prolacta Action by a lawyer appointed by James River since September 2015. (RSGIF No. 81). In answering Prolacta's complaints, Medo has consistently denied liability for breach of contract, and has asserted an...