Manzarek v. St. Paul Fire & Marine Ins. Co., 06-55936.

Citation519 F.3d 1025
Decision Date25 March 2008
Docket NumberNo. 06-55936.,06-55936.
PartiesRaymond MANZAREK; Doors Touring, Inc., a California corporation, Plaintiffs-Appellants, v. ST. PAUL FIRE & MARINE INSURANCE COMPANY, a Minnesota corporation, Defendant-Appellee.
CourtUnited States Courts of Appeals. United States Court of Appeals (9th Circuit)

Kirk A. Pasich, Esq., Dickstein Shapiro LLP, Los Angeles, CA, for the plaintiffs-appellants.

Andrew R. McCloskey, Esq., Riedl, McCloskey & Waring LLP, San Diego, CA, for the defendant-appellee.

Appeal from the United States District Court for the Central District of California; Manuel L. Real, District Judge, Presiding. D.C. No. CV-06-02082-R.

Before ALFRED T. GOODWIN, BETTY B. FLETCHER, and N. RANDY SMITH, Circuit Judges.

OPINION

N.R. SMITH, Circuit Judge:

We hold that the district court erred by dismissing Raymond Manzarek's and Doors Touring, Inc.'s ("DTI") amended complaint because the underlying complaints raised at least the potential for coverage under the operative insurance policies. We further hold that the district court abused its discretion by not giving Manzarek and DTI an opportunity to amend their complaint. We have jurisdiction under 28 U.S.C. § 1291. We reverse and remand for further proceedings.

I. Background
A. Underlying Lawsuits

This insurance coverage and bad faith lawsuit arose out of two lawsuits ("Underlying Lawsuits") filed in California state court against Manzarek (a founding member of the classic rock group The Doors), DTI, and the other members of Manzarek's band at the time of the filing of the lawsuits. John Densmore (the former drummer for The Doors) filed one of the Underlying Lawsuits ("Densmore Lawsuit"). The parents of Jim Morrison (the former vocalist for The Doors) and the parents of Pamela Courson (Morrison's late wife) together filed the other underlying lawsuit ("Courson Lawsuit"). Both Underlying Lawsuits alleged that Manzarek and members of his band were liable for infringing on The Doors name, trademark, and logo in conjunction with their planned national and international tours. Both Underlying Lawsuits included allegations against Manzarek and DTI for the improper use of The Doors logo in conjunction with the marketing of products and merchandise. Additionally, the Densmore Lawsuit alleged that the breaches by Manzarek and his band caused Densmore to suffer economic damages as well as damage to his "reputation and stature by causing people to believe that he was not, and is not, an integral and respected part of The Doors band, or is one member who easily can be replaced by another drummer."

The state trial court consolidated the Underlying Lawsuits for trial but reserved some equitable claims for determination by the court. At trial, the jury found Manzarek and the other defendants liable on some claims but awarded no damages. The record before us is not clear what result the state trial court reached on the equitable claims that it removed from the jury's consideration. Manzarek's and DTI's defense fees and costs in the Underlying Lawsuits exceeded $3 million.

B. The Policies

From May 24, 2002 to May 24, 2003, St. Paul Fire & Marine Insurance Company ("St. Paul") insured Manzarek only under a commercial general liability policy ("Manzarek Policy"). The Manzarek Policy was effective beginning on May 24, 2002 but St. Paul did not issue it until October 3, 2002. From December 30, 2002 to December 30, 2003, St. Paul insured Manzarek, DTI, and Robert Krieger1 under another commercial general liability policy ("DTI Policy"). The DTI Policy was effective beginning on December 30, 2002, but St. Paul did not issue it until February 19, 2003. It is not clear from our review of the record when St. Paul actually delivered copies of the Manzarek Policy or the DTI Policy to its insureds, though the complaint in this action alleges that St. Paul did not deliver the DTI Policy until sometime after February 28, 2003.

Among other things, both of the commercial general liability policies ("Policies") insured against the occurrence of "bodily injury," "property damage," "personal injury," and "advertising injury." Manzarek and DTI argue, and St. Paul concedes, that some of the alleged conduct falls within the "advertising injury" portion of the Policies. That portion of the Policies contains the following provisions:

Advertising injury liability. We'll pay amounts any protected person is legally required to pay as damages for covered advertising injury that:

• results from the advertising of your products, your work, or your completed work; and

• is caused by an advertising injury offense committed while this agreement is in effect.

Advertising injury offense means any of the following offenses:

• Libel, or slander, in or with covered material.

• Making known to any person or organization covered material that disparages the business, premises, products, services, work, or completed work of others.

• Making known to any person or organization covered material that violates a person's right of privacy.

• Unauthorized use of any advertising idea or advertising material, or any slogan or title, of others in your advertising.

Advertising means attracting the attention of others by any means for the purpose of:

• seeking customers or supporters; or

• increasing sales or business.

Advertising idea means a manner or style of advertising that others use and intend to attract attention in their advertising.

But we won't consider information used to identify or record customers or supporters, such as a list of customers or supporters, to be an advertising idea.

Advertising material means any covered material that:

• is subject to copyright law; and

• others use and intend to attract attention in their advertising.

Both Policies also contain a Field of Entertainment Limitation Endorsement ("FELE") which "changes [the insured's] Commercial General Liability Protection" and "reduces coverage." In relevant part, the FELE "reduces coverage" as follows:

Field of Entertainment. We won't cover personal injury or advertising injury that results from the content of, or the advertising or publicizing for, any Properties or Programs which are within your Field of Entertainment Business.

Properties or Programs means any of your properties, products, programs, materials or other matter.

Field of Entertainment Business includes the following;

• The creation, production, publication, distribution, exploitation, exhibition, advertising and publicizing of product or material in any and all media such as motion pictures of any kind and character, television programs, commercials or industrial or educational or training films, phonograph records, audio or video tapes, CDs or CD ROMs, computer on-line services or internet or Web site pages, cassettes or discs, electrical transcriptions, music in sheet or other form, live performance, books or other publications.

• The ownership, operation, maintenance or use of radio and television broadcasting stations. CATV systems, cinemas, stage productions with living actors, and any similar exhibition or broadcast media.

• The ownership, operation maintenance or use of merchandising programs, advertising or publicity material, characters or ideas: whether or not on your premises or in your possession at the time of the alleged offense.

As referenced above, both Policies also insured against the occurrence of "bodily injury." The Policies define "bodily injury" to mean "any physical harm, including sickness or disease, to the physical health of other persons." The Policies include mental anguish, injury, or illness, and emotional distress in the definition of covered "bodily injuries."

C. The Instant Action

On February 5, 2003, Manzarek and DTI notified St. Paul of the Densmore Lawsuit. St. Paul responded by letter on February 18, 2003. That letter notified Manzarek and DTI that, although St. Paul was still investigating coverage issues, its preliminarily determination was that the Policies did not cover the Densmore Lawsuit. According to the complaint, St. Paul delivered this letter before it issued the DTI Policy or delivered a copy of it to its insureds. St. Paul did not issue the DTI Policy until February 19, 2003—nearly two weeks after Manzarek and DTI tendered a copy of the Densmore Lawsuit to St. Paul. The complaint also alleges that St. Paul preliminarily denied coverage before it considered the language contained in either of the Policies.

On March 5, 2003, St. Paul notified Manzarek and DTI that both Policies contained the FELE. St. Paul denied coverage and refused to defend the Densmore Lawsuit on that basis. On March 19, 2003, St. Paul reiterated the applicability of the FELE and notified Manzarek and DTI that the Policies did not obligate it to defend or indemnify the Densmore Lawsuit.

Thereafter, Manzarek and DTI tendered the Courson Lawsuit to St. Paul. On May 6, 2003, St. Paul advised its insureds that the Policies did not provide coverage for the Courson Lawsuit. St. Paul therefore denied coverage and declined to defend the Courson Lawsuit based on its interpretation of the FELE. In the months that followed, Manzarek and DTI continued to demand a defense under the Policies and St. Paul persisted in its refusal to defend or indemnify its insureds.

Manzarek and DTI filed this coverage and bad faith lawsuit against St. Paul in Los Angeles Superior Court approximately two years later. On April 5, 2006, Manzarek and DTI voluntarily amended their complaint. The amended complaint contained claims against St. Paul for (1) breach of contract; (2) breach of the implied covenant of good faith and fair dealing; and (3) declaratory relief.

St. Paul removed the action to the United States District Court on April 6, 2006. On April 11, 2006, St. Paul filed a motion to dismiss the first amended complaint pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure. The district court heard argument on St....

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