Nautilus Ins. Co. v. Philips Med. Sys. Nederland B.V.
| Decision Date | 12 July 2021 |
| Docket Number | Case No.: 3:20-cv-00571-GCM |
| Citation | 549 F.Supp.3d 449 |
| Parties | NAUTILUS INSURANCE COMPANY, Plaintiff, v. PHILIPS MEDICAL SYSTEMS NEDERLAND B.V.; Philips North America LLC; Philips India Ltd.; TEC Holdings, Inc. f/k/a Transtate Equipment Company, Inc. f/k/a Transtate Holdings, Inc., and Robert A. ("Andy") Wheeler, Individually, and in His Capacity as Executor and Personal Representative of the Estate of Daniel Wheeler, Defendants. |
| Court | U.S. District Court — Western District of North Carolina |
Kevin Michael O'Brien, Phelps Dunbar LLP, Raleigh, NC, for Plaintiff.
Alan M. Ruley, Allison Buckner Parker, Bell, Davis & Pitt, P.A., Winston-Salem, NC, J. Christopher Jackson, John T. Kivus, Morningstar Law Group, Raleigh, NC, Harrison Mann Gates, Morningstar Law Group, Durham, NC, for Defendants TEC Holdings, Inc., Robert A. Wheeler.
Graham C. Mullen, United States District Judge This matter is before the Court upon Plaintiff Nautilus Insurance Company's (Nautilus) Motion for Summary Judgment (Doc. No. 22) and Defendants TEC Holdings, Inc. and Andy Wheeler's Motion for Summary Judgment on Duty to Defend (Doc. No. 20). Both summary judgment motions have been fully briefed and are ripe for disposition.
Nautilus filed this declaratory judgment action seeking a determination of the Parties’ rights and obligations under two commercial general liability policies (the "Policies") Nautilus issued to "Transtate Equipment Company, Inc.," now known as TEC Holdings, Inc. ("TEC"). TEC has been sued in an underlying lawsuit filed by various Philips entities (collectively, "Philips") against TEC and Robert A. ("Andy") Wheeler, individually and in his capacity as executor and personal representative of the Estate of Daniel Wheeler, captioned Philips Medical Systems Nederland B.V.; Philips North America LLC, and Philips India Ltd., v. TEC Holdings, Inc., F/K/A Transtate Equipment Company, Inc., Transtate Equipment Company, Inc., F/K/A Transtate Holdings, Inc.; and Robert A. ("Andy") Wheeler, Individually and in his capacity as executor and personal representative of the Estate of Daniel Wheeler (the "Underlying Lawsuit"). The Underlying Lawsuit is currently pending in the United States District Court for the Western District of North Carolina, 3:20-cv-21-MOC-DCK. The Parties herein disagree as to whether coverage is available for the Underlying Lawsuit under the Policies. If the Policies do not provide coverage for the allegations in the operative complaint filed in the Underlying Lawsuit, Nautilus does not have a duty to defend or indemnify any insureds or purported insureds in the Underlying Lawsuit.
Coverage A1 of the Policies at issue provides in pertinent part that Nautilus "will pay those sums that the insured becomes legally obligated to pay as damages because of ... ‘property damage’ ... caused by an ‘occurrence.’ " . "Property Damage" is defined in the Policies as follows:
(Id. ) (emphasis added). The Policies define an "occurrence" as an "accident." (Id. )
Coverage under Coverage A of the Policies is also subject to various exclusions, including the Expected or Intended Injury Exclusion. The Expected or Intended Injury Exclusion precludes coverage for " ‘property damage’ expected or intended from the standpoint of the insured." (Id. )
The Second Amended Complaint (the "Underlying Complaint"), the operative complaint in the Underlying Lawsuit, asserts multiple claims against various parties, including TEC Holdings, Inc. f/k/a Transtate Equipment Company, Inc. ("Transtate I"), Transtate Equipment Company, Inc., f/k/a Transtate Holdings, Inc. ("Transtate II"),2 and Robert A. Wheeler, individually and in his capacity as executor and personal representative of the Estate of Daniel Wheeler (collectively, "Defendants"). According to the Underlying Complaint, Philips "develops, sells, supports, maintains, and services medical imaging systems, such as X-ray systems, used at hospitals and medical centers, including the proprietary hardware and software used to operate, service, and repair such systems." (Doc. No. 1, Ex. C at ¶ 1.) Philips alleges that its medical systems include its (Id. at ¶ 3.) As for Transtate I and Transtate II, Philips alleges that "Transtate I provided and Transtate II provides maintenance and support services for certain of [Philips’] medical systems" and that "[s]everal prior employees of Philips North America LLC were previously employed by Transtate I and are currently employed by Transtate II as service specialists, service technicians, or similar positions." (Id. at ¶ 2.) Philips further alleges that:
Transtate I has used, and Transtate II continues to use, misappropriated trade secret information to circumvent the access controls on Philips’ medical imaging systems to gain unauthorized access to proprietary and copyrighted software [in addition to having] made unauthorized copies of Philips’ standalone service software, circumvented access controls on the standalone software, and made unauthorized use of such software. Transtate I and II have also decrypted and made unauthorized copies of Philips’ copyrighted service documentation. Transtate uses its unauthorized access to and copies of Philips’ proprietary software and copyrighted documents to unfairly compete against Philips.
Philips alleges that Daniel Wheeler "was the President of Transtate I until near the time of his passing [in March 2019] and was the President of Transtate II until sometime in 2018." (Id. at ¶ 15.) According to the Underlying Complaint, in his capacity as president of both Transtate entities, "Daniel Wheeler oversaw Transtate's actions addressed in [that] complaint, including its use of an exploit method [used] to gain unauthorized access to Philips Proprietary Service Materials." (Id. ) As for Robert Wheeler, Philips alleges that he "is the Vice-President of Transtate I and took over as the President of Transtate II from Daniel Wheeler sometime in 2018" and, in these capacities, he "oversaw Transtate's actions addressed in this complaint." (Id. at ¶¶ 17-18.)
As for Defendants’ specific actions giving rise to the claims asserted in the Underlying Complaint, Philips generally alleges that Transtate I offered and Transtate II currently offers post-warranty maintenance and servicing for certain Philips systems, "at least in part, by hiring or employing former Philips employees and by improperly and knowingly using Philips’ confidential and proprietary information that those employees learned during the course of their employment with Philips and which was provided to those employees on a confidential basis and as a condition of their employment." (Id. at ¶¶ 49-51.) Specifically, Philips alleges that "Transtate has developed multiple mechanisms (the "Exploit Mechanisms") for exploiting Philips’ proprietary service tools, Philips’ Proprietary Service Materials, Philips’ Field Service Framework, and Philips’ copyrighted documents, software, and log files," including exploit software that "modifies files within Philips Systems thereby circumventing access controls, effectively disabling such access controls, and allowing Transtate employees and others to gain access to Philips’ trade secrets and copyrighted materials." (Id. at ¶¶ 48-49.) According to the Underlying Complaint, Transtate "instructs [its] employees ... to make use of the software exploit" and "has also distributed, ... and ... continues to distribute, its software exploit to other third parties, and has trained such third parties in use of the software exploit." (Id. at ¶¶ 62-63.) Furthermore, Philips alleges that "[Robert] Wheeler developed, and Daniel Wheeler encouraged [Robert] Wheeler's development of, the software exploit," which allegedly required Robert Wheeler to make "unauthorized use of Philips’ trade secrets obtained from Former Philips Employees." (Id. at ¶ 65.)
Philips asserts claims in the Underlying Lawsuit for violations of the Computer Fraud and Abuse Act, 18 U.S.C. § 1030 ; the Digital Millennium Copyright Act, 17 U.S.C. § 1201 ; the Defend Trade Secrets Act, 18 U.S.C. § 1836 ; misappropriation of trade secrets and violations of the Georgia Trade Secrets Act, O.C.G.A. § 10-1-760, et seq. ; and copyright infringement, 17 U.S.C. § 101, et seq.
Nautilus seeks a judgment declaring that the allegations of the Underlying Lawsuit are excluded from coverage under Coverage A of the Policies, and, therefore, Nautilus has no duty to defend or indemnify any Defendants. Defendants, conversely, seek a judgment declaring that Nautilus has a duty to defend the Defendants (or some of them) in the Underlying Lawsuit under Coverage A of the Policies.
Under North Carolina law,...
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