Opinion
No. C-01-00430 CRB
July 24, 2001
ORDER GRANTING DEFENDANT'S MOTION FOR SUMMARY JUDGMENT
Now before the Court is the defendant Federal Insurance Company's motion for summary judgment. Having carefully considered the parties' papers, and with the benefit of oral argument on July 13, 2001, the defendant's motion is hereby GRANTED.
BACKGROUND
A.G. Precision Machining ("AGPM") is a machine shop that makes parts for devices that are used in the semiconductor industry. The plaintiff worked for AGPM from about 1990 to 1998 in various sales-related and management capacities. In December 1998, AGPM terminated Murphy's employment, in 1999, Murphy sued AGPM and its sole proprietor Adam Gregorczuk to recover unpaid commissions on sales he had made as an AGPM employee.
The parties dispute the nature of the employment relationship. Murphy maintains that he was an independent contractor while AGPM asserts that he was an employee. However, Murphy tendered his defense to Federal on the basis that he was an AGPM employee, and presuming that Murphy was an employee actually improves his chance of obtaining coverage, so this Court will assume that Murphy was an employee for the purpose of this motion.
Gregorczuk filed a cross-complaint against Murphy and amended the cross-complaint three times. The third amended cross-complaint ("TACC"), which supercedes the previous cross-complaints, asserts thirteen causes of action that essentially arise from the same nucleus of operative facts. The TACC claims that while Murphy worked as a salesman for AGPM, he signed a confidentiality agreement agreeing not to disclose privileged commercial, financial, and business information that AGPM considered to be trade secrets. The TACC alleges, however, that Murphy had no intention of adhering to the confidentiality agreement. In addition, the TACC asserts that Murphy assumed the duties of a trustee to AGPM under false pretenses because he intended to use the trade secrets for his own benefit, misappropriated the trade secrets, and, following his termination, used them for the benefit of a competitor.
The TACC's causes of action include: (1) actual fraud and/or deceit; (2) intentional breach of fiduciary duties by failing to disclose material facts; (3) intentional breach of fiduciary/trust duties by misrepresenting material facts; (4) intentional breach of fiduciary/trust duties of loyalty, good faith, and refraining from unfair competition; (5) intentional breach of common law fiduciary duty of trust; (6) violation of California Civil Code § 1573(1); (7) violation of California Civil Code § 1573(2); (8) intentional violation of California Probate Code § 16002; (9) violation of California Probate Code § 16002; (10) intentional violation of California Probate Code § 16009; (11) violation of California Probate Code § 16009; (12) violation of the Uniform Trade Secrets Act; and (13) violation of California Business and Professions Code § 17200.
AGPM is insured by the defendant Federal Insurance Company ("Federal"). In Murphy's underlying action against AGPM to recover sales commissions, the plaintiff retained his own counsel. However, following Gregorczuk's filing of the cross-complaint. Murphy tendered the defense of the cross-complaint to Federal, arguing that as an employee, he was an insured party under AGPM's CGL insurance policy. Additionally, Murphy claimed that the injuries alleged in the TACC were covered by the policy. Federal advised Murphy that they would not accept his tender of defense for three reasons: (1) Murphy did not qualify as an insured under the policy; (2) there were no claims for bodily injury, property damage, personal injury, or advertising injury as required for coverage; and (3) the policy's intellectual property exclusion prevented coverage for the claims asserted against Murphy. Murphy subsequently filed the present suit against Federal for breach of contract and bad faith in refusing to tender his defense. Federal has now moved for summary judgment on the basis that it owes Murphy no duty to defend since there is no possibility of coverage for the claims asserted against Murphy.
AGPM has coverage with Federal under a series of policies — including an umbrella policy — but the policies other than the CGL policy are either inapplicable to this action or contain similar coverage language with respect to the issues identified in this Order, so the Court will simply refer to the CGL policy for the sake of simplicity.
LEGAL STANDARD
Summary judgment is appropriate when 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." Fed.R.Civ.P. 56(c). An issue is "genuine" only if there is sufficient evidence for a reasonable fact finder to find for the non-moving party. See Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248-49 (1986). A fact is "material" if the fact may affect the outcome of the case. See id. at 248. "In considering a motion for summary judgment, the court may not weigh the evidence or make credibility determinations, and is required to draw all inferences in a light most favorable to the non-moving party." Freeman v. Arpaio, 125 F.3d 732, 735 (9th Cir. 1997). A principal purpose of the summary judgment procedure is to identify and dispose of factually unsupported claims. See Celotex Corp. v. Cattrett, 477 U.S. 317, 323-24 (1986).
The party moving for summary judgment bears the initial burden of identifying those portions of the pleadings, discovery, and affidavits which demonstrate the absence of a genuine issue of material fact. See id. at 323. Where the moving party will have the burden of proof on an issue at trial, it must affirmatively demonstrate that no reasonable trier of fact could find other than for the moving party. See id. Once the moving party meets this initial burden, the non-moving party must go beyond the pleadings and by its own evidence "set forth specific facts showing that there is a genuine issue for trial." Fed.R.Civ.P. 56(e). The non-moving party must "identify with reasonable particularity the evidence that precludes summary judgment." Keenan v. Allan, 91 F.3d 1275, 1279 (9th Cir. 1996) (quoting Richards v. Combined Ins. Co., 55 F.3d 247, 251 (7th Cir. 1995), and noting that it is not a district court's task to "scour the record in search of a genuine issue of triable fact"). If the non-moving party fails to make this showing, the moving party is entitled to judgment as a matter of law. See Celotex, 477 U.S. at 323.
DISCUSSION
An insurer must defend any action which potentially seeks damages within the coverage of the policy. See Gray v. Zurich Ins. Co., 65 Cal.2d 263, 275 (1966). While the duty to defend is broad, it is not unlimited. See Lebas Fashion Imports of USA, Inc. v. ITT Hartford Ins. Group, 50 Cal.App.4th 548, 556 (1996). "This obligation can be excused only when the third party complaint can by no conceivable theory raise a single issue which could bring it within the policy coverage." Montrose Chem. Corp. v. Superior Court, 6 Cal.4th 287, 300 (1993). Federal contends that summary judgment is appropriate for three reasons: (1) Murphy is not a qualified insured party under the policy; (2) there is no injury that qualifies for coverage; and (3) any potential injury is excluded by the policy's intellectual policy exclusion since the TACC's allegations stem from trade secret violations. Any one of the defendant's arguments provides a sufficient ground to grant summary judgment, but the Court will first determine whether there is an injury that could be covered by the policy.
I. Whether the TACC Alleges Injuries Potentially Covered by the Policy
There must be a qualifying occurrence or offense that is arguably covered by the policy to give rise to Federal's duty to defend. The portion of the policy describing the policy's coverage reads:
[W]e will pay damages the insured becomes legally obligated to pay by reason of liability imposed by law or assumed under an insured contract for: bodily injury or property damage to which this insurance applies caused by an occurrence; or advertising injury or personal injury coverage to which this insurance applies caused by an offense.
Hitchen Decl., Ex. D (Primary Policy), Form 80-02-2000 (Ed. 4-94) ("Policy"), at 6. Thus, there are four types of injuries that are covered by the policy: (1) property damage; (2) bodily injury; (3) personal injury; and (4) advertising injury. There must be at least a possibility that the damages sought would be recoverable under the policy for Federal to have a duty to defend Murphy. See La Jolla Beach Tennis Club, Inc. v. Industrial Indem. Co., 9 Cal.4th 27, 40 (1994).
A. Property Damage
The policy defines property damage to mean "physical injury to tangible property including the resulting loss of use of that property [or] loss of use of tangible property that is not physically injured." Policy at 24. There are no allegations in the TACC regarding property damage. The only "property" that may be at issue here are AGPM's trade secrets. However, trade secrets are considered intangible property. See ITT Telecom Prod. Corp. v. Dooley, 214 Cal.App.3d 307, 318 (1989). Thus, as a matter of law, there is no possible coverage under the "property damage" section of the policy.
B. Bodily Injury
The policy defines bodily injury as "physical injury, sickness, or disease sustained by a person and, if arising out of the foregoing, mental anguish, mental injury, shock, humiliation or death at any time . . ." Policy at 19. Murphy argues that the TACC, which alleges that Gregorczuk has suffered mental anguish, emotional distress, and physical distress, raises claims for bodily injury. See TACC ¶ 43. However, the policy unambiguously states that any type of mental anguish or emotional distress must arise as a consequence of a physical injury, sickness, or disease in order to be covered. Since Gregorczuk did not suffer a physical injury, sickness, or disease that caused his alleged mental distress, Gregorczuk's damages do not qualify as covered damages. Additionally, the policy also indicates that "[n]o employee is an insured for bodily injury or personal injury to you [or] your partners . . . while in the course of his or her employment or while performing duties related to the conduct of your business." Policy at 3. There is therefore no potential coverage under the "bodily injury" section of the policy.
C. Personal Injury
The policy defines "personal injury" in pertinent part as "injury, other than bodily injury, arising out of one or more of the following offenses committed in the course of your business, other than your advertising: . . . oral or written publication of material that slanders or libels a person or organization; oral or written publication of material that violates a person's right of privacy." Id. at 23. Murphy urges that the TACC alleges types of personal injury but cites no portion of the TACC to support that claim, and this Court's review of the TACC reveals no claims that would fall under the policy's definition of a "personal injury." Even assuming that such claims existed, the policy precludes coverage for Murphy for any personal injuries he inflicts upon Gregorczuk. See id. at 3 (quoted supra).
In a last effort to obtain coverage under the personal injury provision, Murphy contends that Federal might owe coverage since an original version of Gregorczuk's cross-complaint included allegations of libel and slander. However, the original cross-complaint is no longer operative, so even if Federal might have had a duty to defend against the original cross-complaint, it no longer has such an obligation. In addition, the allegations of defamation in the original cross-complaint involved events occurring long after Murphy had left his employment at AGPM. Finally, the exclusion of personal injury caused to the named insured by employees acting in the course of their employment quoted supra would still bar coverage for Murphy's alleged defamation of Gregorczuk.
D. Advertising Injury
The policy expressly defines "advertising injury" as:
[I]njury, other than bodily injury or personal injury, arising solely out of one or more of the following offenses committed in the course of advertising of your goods, products or services: oral or written publication of advertising material that slanders or libels a person or organization; oral or written publication of advertising material that violates a person's right of privacy; or infringement of copyrighted advertising materials or infringement of trademarked or service marked titles or slogans.
Policy at 19. The policy defines "advertising" as "any" advertisement, publicity article, broadcast or telecast." Id. The California Supreme Court has suggested that there are two requirements for an injury to qualify as advertising injury. "First, the promotion of the product or service at issue must constitute "advertising' within the meaning of the policy language; and second, the `advertising activities' must have in some sense caused the `advertising injury.'" Peerless Lighting Corp. v. American Motorist Ins. Co., 82 Cal.App.4th 995, 1009 (2000) (citing Bank of the West v. Superior Court, 2 Cal.4th 1254, 1276-77 (1992)).
The TACC against Murphy fails to allege injuries falling within the term "advertising injury" for two reasons. First, Murphy's conduct cannot be considered advertising within the meaning of the policy language. The majority of the case law is consistent in holding that advertising as that term is used in CGL policies means "widespread promotional activities directed to the public at large." Peerless, 82 Cal.App.4th at 1009-10; see Bank of the West, 2 Cal.4th at 1276 n. 9 (noting that courts have disagreed on the issue but that "most of the published opinions" concur with that definition). The TACC does not allege that Murphy engaged in any such activities.
Murphy' contends, however, that his one-on-one sales solicitations with customers should be considered advertising. A few courts have viewed personal solicitations as advertising for insurance purposes in certain limited circumstances. See Sentex Sys., Inc. v. Hartford Accident Indem. Co., 882 F. Supp. 930, 939 (C.D. Cal. 1995), aff'd, 93 F.3d 578 (9th Cir. 1996); Merchants Co. v. American Motorists Ins. Co., 794 F. Supp. 611, 619 (S.D. Miss. 1992): John Deere Ins. Co. v. Shamrock Indus., Inc., 696 F. Supp. 434, 440 (D. Minn. 1988), aff'd, 929 F.3d 413 (8th Cir. 1991).
Sentex was subsequently abrogated by Simply Fresh Fruit, Inc. v. Continental Insurance Co., 84 F.3d 1105 (9th Cir. 1996) ("Simply Fresh Fruit I"), but the initial decision in Simply Fresh Fruit I was then amended and superseded, see 94 F.3d 1219 (9th Cir. 1996) ("Simply Fresh Fruit II"), and Simply Fresh Fruit II did not cite Sentex. Thus, while Sentex is probably no longer viable in terms of its failure to consider the causation requirement outlined in Bank of the West, 2 Cal.4th at 1275, see Simply Fresh Fruit I, 84 F.3d at 1108 n. 2, its suggestion that personal solicitations might qualify as advertising activity where the policy does not otherwise define the term "advertising" was not necessarily abrogated.
However, the cases holding that personal solicitations may qualify as advertising are distinguishable for a variety of reasons. In Sentex, the policy at issue did not specifically define advertising. See Sentex, 882 F. Supp. at 939. Moreover, the court was not compelled to decide whether personal solicitations alone are sufficient to constitute advertising, as the relevant employee had engaged in far broader activity. See id. at 940. In Merchants, the court found that in the absence of a definition of the term "advertising" in the policy, the use of a customer list to solicit customers via direct mail flyers might constitute advertising. See Merchants, 794 F. Supp. at 619. Here, since AGPM's policy with Federal specifically defines the term "advertising," the Court is not required to construct a definition. Moreover, unlike personal phone solicitations, mail flyers may be more readily characterized as advertising due to their more widespread, public nature. Finally, in John Deere, the court found that the absence of the words "broadcasting" and "telecasting" in the policy's definition of advertising — words that are present in AGPM's policy — indicated that the insurance company had no intention of limiting advertising activity to the widespread promotion of material. See John Deere, 696 F. Supp. at 440. Thus, the cases determining that one-on-one solicitations can constitute advertising are not apposite to a policy where the term "advertising" is expressly defined and includes words such as "broadcast" or "telecast." An insurer with such a policy owes no duty to defend against a claim involving only personal solicitations because such solicitations cannot conceivably be considered advertising under the policy.
Second, even if Murphy's personal sales solicitations could arguably be considered advertising such that Federal would have a duty to defend on that basis, the policy specifically states that an advertising injury must arise as a result of one of three applicable offenses, including: (1) oral or written publication of advertising material that slanders or libels a person or organization; (2) oral or written publication of advertising material that violates a person's right of privacy; or (3) infringement of copyrighted advertising materials or infringement of trademarked or service marked titles or slogans. See Policy at 19. Since the TACC does not allege that Murphy committed any one of these offenses, Murphy's conduct cannot arguably constitute advertising injury, and Federal owes no duty to defend.
The TACC does contain several allegations that Murphy "was planning to disrupt the operations of [AGPM] and take over the business by defaming" Gregorczuk, e.g., TACC ¶¶ 25(k), 47(k), but it never alleges that Murphy actually committed defamation by publishing defamatory statements while acting as an employee of AGPM.
Several cases within the Ninth Circuit have suggested that the misappropriation of trade secrets might arguably fall within the advertising injury coverage of certain CGL policies. See Simply Fresh Fruit II, 94 F.3d at 1222 (declining to decide whether the misappropriation of trade secrets qualified as the misappropriation of advertising ideas or style of doing business"); Arnette Optic Illusions, Inc. v. ITT Hartford Group, Inc., 43 F. Supp.2d 1088, 1101 (C.D. Cal. 1998) ("Thus, whether claims relating to misappropriation of trade secrets provide the potential for coverage is a function of whether the allegations in the underlying trade secret action arose in the course of the insured's advertising activities or its production and manufacturing activities."), disagreed with by Maxtech Holding, Inc. v. Federal Ins. Co., 202 F.3d 278 (9th Cir. 1999) (unpublished opinion); Sentex, 882 F. Supp. at 943-44 (holding that the misappropriation of trade secrets qualified as advertising injury).
However, the policies in those cases contained language that specifically covered advertising injury arising out of the "misappropriation of advertising ideas or style of doing business." Simply Fresh Fruit, 94 F.3d at 1220; Arnette, 43 F. Supp.2d at 1091; Sentex, 882 F. Supp. at 934. AGPM's policy with Federal does not list the misappropriation of advertising ideas" as a covered offense. Indeed, the lack of such language in the policy suggests that AGPM and Federal deliberately excluded such coverage. Thus, there can be no possibility of coverage for the TACC's allegations of trade secret misappropriation. Since there is no allegation of an injury that could be covered by the policy, there is no potential for coverage and Federal has no duty to defend Murphy against the TACC. See Montrose Chem. Corp., 6 Cal.4th at 300. Accordingly, the defendant's motion for summary judgment is hereby GRANTED.
II. Whether Murphy is Insured Under AGPM's Policy
Because the Court has concluded that there is no possibility for coverage of the injuries alleged in the TACC, the Court need not decide whether Murphy could arguably qualify as an insured employee under AGPM's policy.
III. Whether the Intellectual Property Exclusion Precludes Coverage
Because the Court has concluded that there is no possibility for coverage of the injuries alleged in the TACC, the Court need not decide whether the intellectual property exclusion would preclude coverage.
CONCLUSION
For the foregoing reasons, Federal's motion for summary judgment is GRANTED on the ground that the TACC does not allege any qualified injury potentially covered by the policy.
IT IS SO ORDERED.