Opinion
Case No. 01-CV-74113
March 5, 2002
OPINION AND ORDER DENYING PLAINTIFF'S MOTION FOR PARTIAL SUMMARY JUDGMENT
Plaintiff Military Simulations, Inc. (MSI), moves for partial summary judgment as to its claims against defendant FAAC, Inc. of breach of a contractual duty to defend MSI in a prior patent lawsuit filed by non-party Eidetics International, Inc., and contractual liability for costs and attorney fees incurred by MSI in this lawsuit. A hearing on the motion was held on February 27, 2002. For the reasons set forth below, plaintiffs motion will be DENIED.
I. Background
MSI contracted with FAAC under a September 1, 1994 Development Agreement for design and development work on an air combat simulation video game eventually named "Back to Baghdad". FAAC allegedly agreed to develop the simulation, and to deliver all software and source codes to MSI. FAAC also allegedly agreed to defend and indemnify MSI against any claims, costs or damages arising in connection with FAAC's work. On January 10, 1997, non-party Eidetics international, Inc. filed a patent infringement lawsuit against MSI in the United States District Court for the Central District of California relative to the "Back to Baghdad" game. FAAC allegedly refused to provide a defense or indemnification. The patent suit concluded with a confidential October 13, 1997 settlement. MSI allegedly incurred $181,886.53 in attorney fees in defending the Eidetics patent lawsuit. Count I alleges FAAC breached its contractual duty to defend MSI in the Eidetics lawsuit, and that FAAC is liable for the $181,886.53 in attorney fees. Count II alleges FAAC breached its duty to indemnify MSI as to the Eidetics lawsuit. Count III alleges FAAC is contractually liable for the costs and attorney fees incurred by MSI in this lawsuit. FAAC has filed counterclaims seeking past-due royalties and an accounting under a theory of breach of contract.
Procedurally, MSI, a Washington corporation, filed this diversity lawsuit on October 30, 2001. Defendant FAAC, a Michigan corporation, filed an amended counterclaim on December 18, 2001. MSI filed the instant motion for summary judgment on December 20, 2001. On January 8, 2002, the court held a scheduling conference setting discovery cutoff at May 15, 2002. At the scheduling conference and in its pleadings, FAAC raised the issue whether the corporate entity MSI still exists under California law and, if so, whether MSI has authorized this lawsuit. Former MSI principal Bob Carter is now deceased.
II. Motion for Partial Summary Judgment A. Argument
The September 1, 1994 Development Agreement executed by MSI and FAAC reads in pertinent part:
8. Infringement Indemnity
[FAAC] shall defend, indemnify and hold MSI, its officers, directors, agents, employees and customers harmless from any and all claims, liabilities, costs and damages (including attorneys' fees) arising from or in connection with any claims that the design, manufacture, sale or use of the System, any Deliverables, or portions thereof or the services provided by [FAAC] hereunder infringe any patent, copyright, trade secret or other proprietary right of any third party. MSI will promptly notify [FAAC] of the existence of any such claim. [FAAC's] indemnification obligation will survive termination of this Agreement.
* * *
12.2 Governing Law. This Agreement will be governed by the laws of the State of Washington, exclusive of choice of law rules.
12.3 Attorney Fees. The prevailing party in any legal action brought under or related to this Agreement shall be entitled to reimbursement for reasonable attorneys' fees and costs at trial, on appeal and in connection with any appellate review, in addition to any other relief to which the prevailing party may be entitled.
MSI argues that, under controlling Washington law, FAAC owed a duty to defend in the Eidetics litigation if Eidetics' patent infringement claim merely potentially fell within FAAC's contractual duty to defend as set forth in Section 8 of the September 1, 1994 Development Agreement. MSI asserts that the instant lawsuit itself representing a dispute as to the scope of FAAC's contractual duty to defend, establishes that FAAC is in fact potentially liable, and therefore MSI is entitled to summary judgment of its contractual duty to defend claim as a matter of law.
To further support its position, MSI proffers the August 29, 1997 deposition transcript of MSI consultant George Keverian to demonstrate that FAAC, and not non-party Digital Workshops, developed the Extended Field of View ("EFOV") gaming feature that was the subject of the Eidetics lawsuit, a feature which allowed game-players to look behind their forward field of view. Keverian attests that he instructed FAAC's Mark Drajeske not to copy this "Hawkeye Feature" from Eidetics or any other company. MSI also proffers a copy of a fax transmission sent from FAAC's Drajeske to Keverian and MSI's Bob Carter stating that the "Back to Baghdad" game's EFOV feature was "based heavily on Eidetics EFOV feature presented in video tape." MSI further proffers a document that appears to be Drajeske's October 19, 1995 written proposal for the EFOV feature, with Drajeske stating that he "dreamed up a new name, HAWKEYE SIGHT, to keep out of trouble with Eidetics."
In response, FAAC proffers FAAC President and Chief Engineer Alan Jordan's January 14, 2002 affidavit attesting that: (1) FAAC provides software to the military for F-16 simulators; (2) Keverian contacted FAAC in 1994 to develop source code for the "Back to Baghdad" game; (3) FAAC developed 30% of the software relative to military specifications whereas Digital Workshops developed 70% of the software relative to screen displays and use of the game; (4) F-16s do not have rearview capability; (5) FAAC voluntarily supplied some "support" to MSI's defense in the Eidetics patent case, and; (6) Drajeske did not act under the parties' September 1, 1994 Development Agreement. FAAC directs the court's attention to Exhibit A of the September 1, 1994 Development Agreement arguing that Exhibit A does not expressly reference developing an EFOV. FAAC also argues that, at minimum, it should be given an opportunity to conduct discovery relative to George Keverian and Mark Drajeske in that the documentary evidence proffered by MSI was generated in the Eidetics lawsuit in which FAAC was not a party. FAAC further argues that, to date, a dispute remains whether MSI, as a corporate entity, has authorized this lawsuit.
B. Standard of Review
Federal Rule of Civil Procedure 56(c) empowers the court to render summary judgment "forthwith if the pleadings, depositions, answers to interrogatories and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law. See FDIC v. Alexander, 78 F.3d 1103, 1106 (6th Cir. 1996). The Supreme Court has affirmed the court's use of summary judgment as an integral part of the fair and efficient administration of justice. The procedure is not a disfavored procedural shortcut. Celotex Corp. v. Catrett, 477 U.S. 317, 327 (1986); see also Kutrom Corp. v. City of Center Line, 979 F.2d 1171, 1174 (6th Cir. 1992). The standard for determining whether summary judgment is appropriate is "`whether the evidence 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.'" Winningham v. North Am. Resources Corp., 42 F.3d 981, 984 (6th Cir. 1994) (citingBooker v. Brown Williamson Tobacco Co., 879 F.2d 1304, 1310 (6th Cir. 1989)). The evidence and all inferences drawn therefrom must be construed in a light most favorable to the non-moving party. Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986);Enertech Elec., Inc. v. Mahoning County Comm'r, 85 F.3d 257, 259 (6th Cir. 1996); Wilson v. Stroh Co., Inc., 952 F.2d 942, 945 (6th Cir. 1992). If the movant establishes by use of the material specified in Rule 56(c) that there is no genuine issue of material fact and that it is entitled to judgment as a matter of law, the opposing party must come forward with "specific facts showing that there is a genuine issue for trial." First Nat'l Bank v. Cities Serv. Co., 391 U.S. 253, 270 (1968);see also Adams v. Philip Morris, Inc., 67 F.3d 580, 583 (6th Cir. 1995). The nonmoving party cannot rest on its pleadings to avoid summary judgment, but must support its claims with probative evidence. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247-48 (1986); Kraft v. United States, 991 F.2d 292, 296 (6th Cir.), cert. denied, 510 U.S. 976 (1993). "[S]ummary judgment is improper if the non-movant is not afforded a sufficient opportunity for discovery." Vance v. United States, 90 F.3d 1145, 1148 (6th Cir. 1996).
C. Analysis
With respect to an insurer's contractual duty to defend, evidence and facts eventually proven to exclude coverage "are irrelevant to the issue of whether the complaint alleged facts sufficient for potential liability." Baugh Construction Co. v. Mission Ins. Co., 836 F.2d 1164, 1168 (9th Cir. 1988).
An insurer must defend the insured if a claim is potentially covered by a policy. The insurer's duty to defend is broader than its potential duty to indemnify. It however, the allegations assert a claim that is not covered by the policy or bring the claim clearly within a policy exclusion, there is no duty to defend.Id. In construing a contract under Washington law:
It is the duty of the court to declare the meaning of what is written, and not what was intended to be written." Berg v. Hudesman, 115 Wn.2d 657, 669, 801 P.2d 222 (1990) (quoting J.W. Seavey Hop Corp. v. Pollock, 20 Wn.2d 337, 348-49, 147 P.2d 310 (1944)). As an aid in elucidating the meaning of the words employed, extrinsic evidence is admissible to ascertain the parties' intent. Berg, 115 Wn.2d at 669, 801 P.2d 222 (citing Pollock, 20 Wn.2d at 348-49, 147 P.2d 310). Extrinsic evidence for this purpose includes (1) the situation of the parties at the time the instrument was executed, (2) the circumstances under which the instrument was executed, and (3) the subsequent conduct of the contracting parties. See Berg, 115 Wn.2d at 668-69, 801 P.2d 222. The reasonableness of the parties' respective interpretations may also be a factor in interpreting a contract. Berg, 115 Wn.2d at 668, 801 P.2d 222. However, unilateral and subjective beliefs about the impact of a written contract do not constitute evidence of the parties' intent. Olympia Police Guild v. Olympia, 60 Wn. App. 556, 559, 805 P.2d 245 (1991) (citing Dwelley v. Chesterfield, 88 Wn.2d 331, 335, 560 P.2d 353 (1977)).Watkins v. Restorative Care Center, Inc., 66 Wn. App. 178, 191, 831 P.2d 1085 (1992).
Construing the pleadings and evidence in a light most favorable to non-movant FAAC, it remains possible for defendant FAAC to develop a factual record during discovery demonstrating that, consistent with extrinsic evidence admissible to ascertain the parties' intent in executing the September 1, 1994 Development Agreement, Eidetics' patent infringement claims were not covered under Section 8 of the Development Agreement. FAAC should be given an opportunity to conduct discovery for the purpose of developing the intent of the Development Agreement, including Section 8 of the Agreement, before this court decides whether Eidetics' patent infringement claims potentially fall within the scope of that contract. Vance, 90 F.3d at 1148. If the Eidetics' patent infringement claims are not covered by the Development Agreement, an agreement that remains subject to interpretation consistent with the situation of the parties on September 1, 1994, the circumstances under which the instrument was executed, and the subsequent conduct of MSI and FAAC, FAAC owed no duty to defend. Watkins, 66 Wn. App. at 191; Baugh, 836 F.2d at 1168.
Discovery is also warranted with respect to the issue of whether MSI has authorized this lawsuit. Documents first proffered by MSI at the February 27, 2002 hearing tend to show that MSI was incorporated on September 14, 1994, was administratively dissolved on December 20, 1999, and was administratively reinstated on February 15, 2002. A June 4, 2001 document titled "ACTION BY MAJORITY SHAREHOLDER WITHOUT A MEETING" indicates that one George E. Mack was appointed to a vacant position on MSI's Board of Directors. Mr. Mack is also the Director that signed MSI's application for reinstatement. Further legal and factual development is warranted as to whether MSI has authorized and/or ratified the filing of this October 30, 2001 lawsuit.
With respect to Count III, the "prevailing party" is entitled to reimbursement for reasonable costs and fees. September 1, 1994 Development Agreement, § 12.3. It remains to be determined whether MSI or FAAC is the prevailing party. Accordingly,
Plaintiff MSI's motion for partial summary judgment is hereby DENIED in deference to giving defendant FAAC an opportunity to conduct discovery consistent with the analysis herein.
SO ORDERED.