Sentynl Therapeutics, Inc. v. U.S. Specialty Ins. Co.

Decision Date19 March 2021
Docket NumberCASE NO. 19cv1667-LAB-AHG
Citation527 F.Supp.3d 1203
Parties SENTYNL THERAPEUTICS, INC., Plaintiff, v. U.S. SPECIALTY INSURANCE CO., Defendants.
CourtU.S. District Court — Southern District of California

Amber Finch, Reed Smith LLP, Los Angeles, CA, Courtney C. T. Horrigan, Pro Hac Vice, Dominic Ian Rupprecht, Pro Hac Vice, Reed Smith LLP, Pittsburgh, PA, William Patrick Keith, Duckor Spradling Metzger & Wynne, San Diego, CA, for Plaintiff.

Douglas Martin Mangel, Pro Hac Vice, Gabriela Richeimer, Pro Hac Vice, Joseph A. Bailey, III, Pro Hac Vice, Elderidge Austin Nichols, Jr., Pro Hac Vice, Clyde & Co. US LLP, Washington, DC, Justin Levy, Pro Hac Vice, Clyde & Co. US LLP, Dallas, TX, William D. Hughes, Hughes & Nunn LLP, San Diego, CA, for Defendants.

ORDER:

1) GRANTING DEFENDANT'S MOTION FOR SUMMARY JUDGMENT [Dkt. 64];

2) DENYING PLAINTIFF'S CROSS-MOTION FOR SUMMARY JUDGMENT [Dkt. 73];

3) DENYING MOTION TO EXCLUDE AS MOOT [Dkt. 84]; and

4) DENYING MOTION FOR JUDGMENT ON THE PLEADINGS AS MOOT [Dkt. 41]

Larry A. Burns, United States District Judge

The question in this case is whether an insurance policy exclusion for claims "arising out of" a business's products is broad enough, under California law, to encompass not only claims for product liability, but also claims for business practices tied to those products. Sentynl Therapeutics, Inc. markets and sells two products, Levorphanol and Abstral, both prescription opioid medications. After receiving a subpoena from the Department of Justice's Opioid Task Force seeking information relating to the manner in which Sentynl promoted Levorphanol, it sought coverage from its insurer, Defendant U.S. Specialty Insurance Co., for the costs of defending the investigation. USSI declined coverage, citing (among other things) an exclusion in Sentynl's policy for claims "arising out of" its products. Sentynl filed this suit, asserting claims for breach of contract, tortious breach of the implied covenant of good faith and fair dealing, and declaratory judgment. Both parties moved for summary judgment.

"Arising out of" is a broad standard under California law, but it's not unbounded. It doesn't invoke any particular theory of causation, but instead "identifies a core factual nucleus ... and links that nucleus to the [harm] covered under the policy." Fibreboard Corp. v. Hartford Accident & Indemnity Co. , 16 Cal. App. 4th 492, 505, 20 Cal.Rptr.2d 376 (1993). Because the Opioid Task Force's investigation is sufficiently linked to Sentynl's opioid products, USSI's motion for summary judgment is GRANTED . (Dkt. 64.) Sentynl's cross-motion is DENIED . (Dkt. 73). The remaining pending motions—USSI's motion to exclude expert testimony and Sentynl's motion for judgment on the pleadings—are DENIED AS MOOT . (Dkt. 84; Dkt. 41.)

BACKGROUND1

Sentynl markets and sells prescription products. (See Joint Statement of Undisputed Facts, Dkt. 64-5 ¶¶ 16-17.) It marketed or sold only two products during the relevant time period here: Levorphanol tartrate tablets ("Levorphanol

") from 2015 forward and Abstral sublingual tablets ("Abstral") from November 2015 until October 2019. (Id. ¶ 19.) Both Levorphanol and Abstral are classified by the FDA as opioid analgesic products. (Id. ¶¶ 16-17.)

The Policy

USSI issued a Directors, Officers and Organization Liability Insurance Policy (the "Policy") to Sentynl covering the period from January 31, 2018 to January 31, 2019 (the "Policy Period"). (Id. ¶ 1.) The Policy generally insured Sentynl against "Loss[es] arising from Claims first made against it during the Policy Period ... for Wrongful Acts." (Id. ¶ 2.) A "Claim" means, among other things: "any ... written demand, including any demand for non-monetary relief;" "any administrative or regulatory proceeding commenced by the filing of a notice of charges, formal investigative order or similar document;" "any criminal proceeding commenced by the return of an indictment;" and "any written request or agreement to toll or waive any applicable statute of limitations." (Id. ¶ 3.) And "Wrongful Act" includes "any ... actual or alleged act, error, misstatement, misleading statement, omission or breach of duty ... by the Insured Organization." (Id. ¶ 4.) USSI disclaims any "duty under [the] Policy to defend any Claim." (Id. ¶ 5.) The Policy excludes Loss from "Claim[s] ... arising out of ... any goods or products manufactured, produced, processed, packaged, sold, marketed, distributed, advertised or developed by the Insured Organization" (the "Goods and Products Exclusion" or the "Exclusion"). (Id. ¶ 10.)

The Claim

On August 16, 2018 and within the Policy Period, the United States Attorney's Office for the District of New Jersey's Opioid Abuse Prevention and Enforcement Unit ("Opioid Task Force") served Sentynl with a subpoena (the "First Sentynl Subpoena"). (Id. ¶ 20.) The Opioid Task Force is a unit within that Office's Criminal Division, tasked with targeting anyone who illegally profits from opioids. (Id. ¶ 21.) Its First Sentynl Subpoena included thirty document requests, grouped into the following categories:

1) "Documents Relating to Prior Authorizations and Reimbursement;"
2) "Documents Relating to the Sale and Promotion of Levorphanol;"
3) "Documents Relating to Relationships With and Payments To Health Care Professionals," (with most document requests in this category relating to Levorphanol);
4) "Documents Relating to Specific Health Care Professionals;"
5) "Documents Relating to Pharmacies," (including requests for communications regarding Levorphanol);
6) "Documents Relating to Distributors and Wholesalers," (including requests for documents relating to the setting of Schedule II threshold amounts for distribution of Levorphanol); and
7) "Compliance, Investigations and Lawsuits."

(Dkt. 64-2 at 103-09).

Eighteen of the thirty requests referenced Levorphanol specifically, with at least one such request appearing in all of the above categories except the fourth. (Id. ) Sentynl, several of its former employees, and one of its third-party vendors subsequently received numerous subpoenas (collectively with the First Sentynl Subpoena, the "Subpoenas") from the Opioid Task Force seeking documents and information relating to Sentynl's marketing practices in connection with Levorphanol. (Dkt. 64-5 ¶¶ 30-59.) The second subpoena directed to Sentynl sought similar categories of documents as those sought by the First Sentynl Subpoena, but in relation to Abstral, rather than Levorphanol. (Dkt. 64-4 at 215-19.)

In subsequent communications, Sentynl was informed and it acknowledged that the potential health care offenses under investigation arose out of its opioid products. (Dkt. 105-4 at 96; Dkt. 73-12 at 154 (stating that Sentynl has only two products).) Sentynl concedes that it can't have engaged in conduct relevant to the Investigation prior to acquiring rights to its first opioid product, Levorphanol. (Dkt. 105 at 5.)

Sentynl first contacted USSI regarding insurance coverage for the Investigation on October 29, 2018. (Dkt. 64-5 ¶ 60; Dkt. 107-7 at 71-76.) USSI declined coverage. (Dkt. 64-2 at 110-112.) Among other things, USSI argued that, if the Opioid Investigation constituted a Claim (a point USSI contests), it "ar[ose] out of" Levorphanol and Abstral, "goods or products manufactured, produced, processed, packaged, sold, marketed, distributed, advertised or developed by" Sentynl, and so it fell within the Exclusion. (Dkt. 107-10 at 105.)

USSI and Sentynl each moved for summary judgment.

STANDARD OF REVIEW

Summary judgment is appropriate where "there is no genuine issue as to any material fact and ... the moving party is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(a). The moving party bears the burden of showing the absence of a factual issue for trial. Celotex Corp. v. Catrett , 477 U.S. 317, 323, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). If the moving party meets this requirement, the burden shifts to the non-moving party to show there is a genuine factual issue for trial. Id. at 324, 106 S.Ct. 2548.

The Court does not make credibility determinations or weigh conflicting evidence. Anderson v. Liberty Lobby, Inc. , 477 U.S. 242, 255, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). Rather, the Court determines whether the record "presents a sufficient disagreement to require submission to a jury or whether it is so one-sided that one party must prevail as a matter of law." Id. at 251–52, 106 S.Ct. 2505.

To succeed on its motion, then, USSI must demonstrate that it is entitled to judgment based on undisputed facts, and all factual disputes must be resolved in favor of Sentynl in evaluating USSI's motion. Clare v. Clare , 982 F.3d 1199, 1203 (9th Cir. 2020). This standard is mirrored by the standard specific to insurance policies, which requires USSI to provide "undisputed facts which conclusively eliminate a potential for liability," with "[a]ny doubt as to whether the facts establish or defeat the existence of a defense duty ... resolved in the insured's favor." Atlantic Mutual Ins. v. J. Lamb, Inc. , 100 Cal. App. 4th 1017, 1033, 123 Cal.Rptr.2d 256 (2002) ; see also State Farm General Ins. Co. v. Mintarsih , 175 Cal. App. 4th 274, 284 n.6, 95 Cal.Rptr.3d 845 (Cal. App. 2009) ("There is no ‘potential for coverage’ and no duty to defend ... if the existence of coverage depends solely on the resolution of a legal question (e.g., the interpretation or application of policy terms).").

The law of California, the forum state, applies to this diversity action. Bell v. Lavalin, Inc. v. Simcoe and Erie Gen. Ins. Co. , 61 F.3d 742, 745 (9th Cir. 1995). Accordingly, the Court treats the interpretation of the insurance policy as a question of law subject to the general rules of contract interpretation. MacKinnon v. Truck Ins. Exchange , 31 Cal. 4th 635, 647, 3 Cal.Rptr.3d 228, 73 P.3d 1205 (2003).

DISCUSSION
I. The Exclusion for Claims "Arising Out of" Sentynl's Products Must Be Construed Broadly

The Policy's Goods and Products Exclusion reads,...

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