Sony Computer Entertainment v. American Home

• Decision Date: 15 July 2008
• Docket Number: No. 05-17425.,05-17425.
• Citation: 532 F.3d 1007
• Parties: SONY COMPUTER ENTERTAINMENT AMERICA, INC., Plaintiff-Appellant, v. AMERICAN HOME ASSURANCE COMPANY and American International Specialty Lines Insurance Company, Defendants-Appellees.
• Court: U.S. Court of Appeals — Ninth Circuit

532 F.3d 1007

SONY COMPUTER ENTERTAINMENT AMERICA, INC., Plaintiff-Appellant, v. AMERICAN HOME ASSURANCE COMPANY and American International Specialty Lines Insurance Company, Defendants-Appellees.

No. 05-17425.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted November 5, 2007.

Filed July 15, 2008.

Martin H. Myers, Heller Ehrman, San Francisco, CA, for the plaintiff-appellant.

Thomas H. Sloan, Jr. and Michael D. Lisi, Krieg, Keller, Sloan, Reilley & Roman LLP, San Francisco, CA, for defendant-appellee American International Specialty Lines Insurance Company.

Lane J. Ashley and Rebecca R. Weinreich, Lewis, Brisbois, Bisgaard & Smith, Los Angeles, CA, for defendant-appellee American Home Assurance Company.

Appeal from the United States District Court for the Northern District of California; Phyllis J. Hamilton, District Judge, Presiding. D.C. No. CV-04-00492-PJH.

Before: MARY M. SCHROEDER, CYNTHIA HOLCOMB HALL and JAY S. BYBEE, Circuit Judges.

Opinion by Judge HALL; Partial Concurrence and Partial Dissent by Judge BYBEE

HALL, Circuit Judge:

Sony Computer Entertainment America, Inc. appeals the district court's summary judgment in favor of defendants American International Specialty Lines Insurance Company and American Home Assurance Company. Sony sued the sister insurance companies for failing to indemnify and defend it in a class action suit alleging product defects in a video game system known as the Sony PlayStation 2. The district court found that neither insurance company had a duty to indemnify or defend Sony in the lawsuit. We affirm.

I. FACTS AND PROCEDURAL HISTORY

A. Sony and the PlayStation 2

Sony markets, distributes, and supports the PlayStation family of products. The PlayStation 2 is the successor to the original PlayStation, an advanced computer console. The PlayStation 2 plays video games designed for the system on either CD discs or DVD discs, as well as games designed for the original PlayStation. Unlike the original PlayStation, however, the PlayStation 2 was marketed as a home entertainment system, able to play audio and video CDs and DVDs as well as video games.

B. The Insurance Policies

1. American International Specialty Lines Insurance Company Policy

Sony purchased a $10 million media liability insurance policy from American International Specialty Lines Company (AISLIC) for the period of July 1, 2001 to July 1, 2002. The policy, entitled "Multimedia Professional Liability Policy," provided that AISLIC would indemnify Sony in certain lawsuits. AISLIC promised to "pay on [Sony's] behalf those amounts ... that [Sony] is legally obligated to pay as damages ... resulting from any claim ... during the policy period for [Sony's] wrongful act in the business of the insured." The term "wrongful act" was defined to include (a) defamation, (b) invasion of privacy or publicity, (c) infringement of copyright, title, slogan, trademark, or trade dress, (d) unfair competition (but only in conjunction with wrongful acts described in section (c)), (e) unauthorized use of name or likeness, (f) unintentional failure to credit on a matter, and (g) defective advice, incitement, or "negligent publication."¹ The policy had a $100,000 deductible "for each wrongful act or series of wrongful act(s)."

The AISLIC policy did not obligate AISLIC to defend Sony in every lawsuit alleging a covered wrongful act. Rather, it stated that AISLIC had "the right but not the duty to defend any claim first made against [Sony] during the policy period and reported to [AISLIC] in writing for [Sony's] wrongful act." However, the policy provided that AISLIC would be responsible for at least part of Sony's defense costs. If Sony chose its own counsel in a suit alleging a covered wrongful act, it would pay for its own defense until its deductible was exhausted, and then for a portion of it after the deductible was exhausted. If Sony was defended by AISLIC's chosen counsel, AISLIC would be responsible for all defense costs after Sony paid its deductible.

The AISLIC policy excluded a number of claims from policy coverage. For example, AISLIC was not obligated to pay damages arising from "unfair or deceptive business practices including, but not limited to, violations of any local, state or federal consumer protection laws" (Exclusion C), "alleging or arising out of a breach of any express warranties, representations or guarantees" (Exclusion J), or "arising out of false advertising or misrepresentation in advertising" (Exclusion P). This last exclusion had an exception, whereby AISLIC promised to "defend suits alleging [false advertising or misrepresentation in advertising] until there is a judgment, final adjudication, adverse admission or finding of fact against [Sony] at which time [Sony] shall reimburse [AISLIC] for claim expense."

2. American Home Assurance Company Policy

Sony purchased a $2 million general commercial insurance policy from American Home Assurance Company (American Home) for the period of April 1, 2000 to April 1, 2001. The policy, entitled "Commercial General Liability Coverage," provided that American Home would "pay those sums that the insured becomes legally obligated to pay as damages because of `bodily injury' or `property damage,'" as well as "defend the insured against any `suit' seeking those damages." Property damage was defined to include both "physical injury to tangible property, including all resulting loss of use of that property" and "loss of use of tangible property that is not injured."

As with the AISLIC policy, a number of exclusions in the American Home policy limited American Home's duties. In particular, under Exclusion (m), the policy did not cover "`property damage' to `impaired property' or property that has not been physically injured, arising out of ... a defect, deficiency, inadequacy, or dangerous condition in `[Sony's] product.'" Exclusion (m) had an exception for the loss of use of property "arising out of sudden and accidental physical injury to `[Sony's] product' or `[Sony's] work' after it has been put to its intended use."

C. Kim/Kaen Lawsuits

In July 2002, PlayStation users sued Sony in two separate class actions in California state court, later consolidated as the Kim/Kaen case in San Mateo County. The Kim/Kaen plaintiffs alleged that the PlayStation 2s suffered from an "inherent" or "fundamental" design defect that rendered them unable to play DVDs and certain game discs. The complaints set forth causes of action for breach of express and implied warranties, fraud, negligent misrepresentation, bad faith, violations of the Consumer Legal Remedies Act (Cal. Civ. Code § 1750 et seq.), false advertising (Cal. Bus. & Prof.Code § 17500 et seq.), and unfair business practices (Cal. Bus. & Prof.Code § 17200 et seq.). The assertions in the false advertising and negligent misrepresentation claims primarily revolved around Sony's statements in press releases, advertising, product packaging, and instruction manuals that the PlayStation 2 would function as a DVD player as well as a game player.

D. This Action

Sony tendered the Kim/Kaen claims to AISLIC and American Home, both of which eventually denied coverage. Sony filed this action in February 2004, claiming that AISLIC and American Home had breached their contractual duty to defend and indemnify Sony, and breached the implied covenant of good faith and fair dealing.

American Home moved for summary judgment on all counts, and Sony moved for partial summary judgment on the duty to defend claim. The district court granted summary judgment in favor of American Home. It found that American Home had no duty to defend Sony in the suit, and that, accordingly, the indemnification and bad faith claims failed as well. Sony Comp. Entm't Am., Inc. v. Am. Home Ins. Co., No. CV 04-00492-PJH, 2005 WL 2137772 (N.D.Cal. Aug. 30, 2005).

Later that year, AISLIC moved for summary judgment on all claims and Sony cross-motioned with respect to the duty to defend claim. The district court granted summary judgment in favor of AISLIC, finding that AISLIC had no duty to indemnify or defend Sony in the Kim/Kaen suits, and that AISLIC had not engaged in any bad faith. Sony Comp. Entm't Am., Inc. v. Am. Home Assur. Co. and Am. Int'l Specialty Lines Ins. Co., No. 04-00492 PJH, 2005 WL 3260483, 2005 U.S. Dist. LEXIS 30424 (N.D.Cal. Dec. 1, 2005). Sony timely appealed.

II. DISCUSSION

A. Standard of Review

A district court's grant of summary judgment is reviewed de novo. Suzuki Motor Corp. v. Consumers Union of United States, Inc., 330 F.3d 1110, 1131 (9th Cir.2003). "We must therefore determine, viewing the evidence in the light most favorable to the nonmoving party, whether there are any genuine issues of material fact and whether the district court correctly applied the relevant substantive law." Id. at 1131-32 (citing Devereaux v. Abbey, 263 F.3d 1070, 1074 (9th Cir.2001) (en banc)).

B. Principles of Insurance Policy Interpretation

Though insurance contracts have special features, the general rules of contract interpretation still apply in California. Bank of the W. v. Superior Court, 2 Cal.4th 1254, 1264, 10 Cal.Rptr.2d 538, 833 P.2d 545 (1992); MacKinnon v. Truck Ins. Exch., 31 Cal.4th 635, 647, 3 Cal.Rptr.3d 228, 73 P.3d 1205 (2003). The interpretation of a contract must "give effect to the `mutual intention' of the parties ... at the time the contract was formed." Id. (citing Cal. Civ.Code § 1636). Such intent is to be inferred, if possible, from the written provisions of the contract based on their "ordinary and popular sense," unless a "technical sense or special meaning is given to them by their usage." Id. at 647-48, 3 Cal.Rptr.3d 228, 73 P.3d 1205 (citing Cal. Civ.Code §§ 1639, 1644, 1638). If the contractual language is clear and explicit, it governs. AIU Ins. Co. v. Superior Court, 51 Cal.3d 807, 822, 274 Cal.Rptr. 820, 799 P.2d 1253 (1990).

The terms in an insurance policy must be read in context...