Opinion
Civil Action No. 04-5797.
June 3, 2005
MEMORANDUM
Plaintiff i-Frontier, Inc. ("i-Frontier") brings this diversity action against its insurer, defendant Gulf Underwriters Insurance Company ("Gulf"), for breach of contract and common law duty of good faith, intentional misrepresentation, and negligent misrepresentation arising out of Gulf's refusal to pay i-Frontier's claim expense as well as indemnity in connection with an underlying lawsuit, Medical Broadcasting Co. v. Flaiz, et al., Civ. A. No. 02-8554, which was resolved after trial.
Before the court is the motion of defendant Gulf to dismiss the complaint under Rule 12(b)(6) of the Federal Rules of Civil Procedure for failure to state a claim upon which relief can be granted. A complaint should be dismissed only where "it appears beyond doubt that plaintiff can prove no set of facts in support of [its] claim which would entitle [it] to relief." In re Rockefeller Ctr. Props., Inc. Sec. Litig., 311 F.3d 198, 215 (3d Cir. 2002). All well-pleaded allegations in the complaint must be accepted as true, and all reasonable inferences are drawn in favor of the non-moving party. Id. We may consider "the allegations contained in the complaint, exhibits attached thereto, and matters of public record." Beverly Enters., Inc. v. Trump, 182 F.3d 183, 190 n. 3 (3d Cir. 1999); Pension Benefit Guar. Corp. v. White Consol. Indus. Inc., 998 F.2d 1192, 1196 (3d Cir. 1993).
I.
i-Frontier was insured under three successive and essentially identical insurance policies issued by Gulf. They required Gulf to pay "claim expense" and also damages for which i-Frontier "becomes legally obligated to pay because of liability as a result of" any "claim" arising out of:
The complaint asserts that each of the three policies is similar in all material respects and contains essentially identical provisions, terms, and conditions relevant to the present dispute. Compl. ¶ 7. Coverage was sought and denied during the 2002-2003 Policy period.
"Claim expense" is defined in the policies and includes, among other things, attorneys' fees and all other litigation fees and costs associated with defending a "claim," whether or not the claim is meritorious. E.g., 2002-2003 Policy §§ IV.B, IV.C.
"Claim" is defined as "a demand or assertion of a legal right made against any Insured, even if any of the allegations of the Claim are groundless, false or fraudulent." E.g., 2002-2003 Policy § IV.B (emphasis in original).
D. infringement of copyright, plagiarism or misappropriation of ideas under implied contract;
E. misuse of intellectual property right in Content, but only when alleged in conjunction with the types of Claims named in [C. and] D. above; . . .
I. errors, omissions, and negligent acts; committed by the Insured during the Policy Period in performing Cyberspace Activities as stated in Item 6. of the Declarations, including obtaining, processing, uttering, or disseminating Content in or for the Cyberspace Activities, regardless of when Claim is made or suit is brought.
See, e.g., 2002-2003 Policy § I (emphasis in original). "Insured" included "the Named Insured's partners, officers, directors and employees, but only with respect to their activities within the scope of their duties in the capacity of the Named Insured's partner, officer, director or employee in the performance of Cyberspace Activities by the Named Insured." E.g., id. at § IV.I.3. The term "cyberspace activities" was defined in the policies as "creation of internet advertising content for others." E.g., 2000-2001 Policy § IV.E; Declarations, Item 6.
The policies contained several exclusions, which, if applicable, released Gulf from any obligation to pay damages or claim expense. The relevant exclusions read:
The Company will not be obligated to pay Damages or Claim Expense for Claims for or arising out of:
1. any act, error or omission intentionally committed while knowing it was wrongful; or
2. an act, error or omission that a jury, court or arbitrator finds dishonest, fraudulent, criminal or malicious. . . .E.g., 2002-2003 Policy § II.B (emphasis in original).
In November, 2002, MBC brought the underlying action in this court against i-Frontier and its employee William Flaiz. Med. Broad. Co. v. Flaiz, Civ.A. No. 02-8554. MBC alleged that Flaiz wrongfully downloaded MBC's "IDI" ("Inform, Design, Implement") Manual from MBC's computer system and uploaded it onto i-Frontier's system when he left the employ of MBC to go to work for its competitor i-Frontier. At trial, the jury found in favor of i-Frontier on all claims still remaining against it at that stage but found that its employee Flaiz had violated the Digital Millennium Copyright Act ("DMCA") and assessed damages of $17,500. After trial, the court ordered Flaiz to pay MBC $50,522.74 in attorneys' fees and costs. After separate counsel was retained for Flaiz, more than $73,000 was expended for additional attorneys' fees and costs, $65,000 of which was loaned to him by i-Frontier. While MBC's appeal was pending, MBC and Flaiz reached a settlement in which Flaiz agreed to pay MBC a total of $65,000 over several years.
Each of the counts of MBC's amended complaint centered on the taking, altering, and/or using of MBC's IDI Manual. Count I of MBC's amended complaint alleged breach of confidentiality agreement by Flaiz, and i-Frontier does not seek coverage for this part of the underlying action because breach of contract is specifically excluded from coverage. E.g., 2002-2003 Policy § II.A.9. Count II averred that Flaiz violated the Federal Computer Fraud and Abuse Act by his fraudulent and unauthorized use of an MBC computer to copy, divert and/or misappropriate MBC's trade secret and proprietary and confidential business information. This claim required a showing of knowing or intentional conduct.See 18 U.S.C. § 1030(5). In Count III, MBC claimed that Flaiz and i-Frontier misappropriated trade secrets and business information and that their actions were "intentional, willful, outrageous and malicious." MBC Am. Compl. ¶ 32. Count IV alleged Flaiz and i-Frontier infringed MBC's copyright on its IDI Manual by "knowingly and willfully copying" parts of it and making it an integral part of i-Frontier's business methodology. Id. ¶ 38. Counts V and VI asserted violations by Flaiz and i-Frontier of the Digital Millennium Copyright Act, which required a showing of knowing or intentional conduct. 17 U.S.C. § 1202(a). Count VII alleged conversion against Flaiz and i-Frontier. It alleged that their actions were "intentional, willful, outrageous and malicious." MBC Am. Compl. ¶ 57. MBC contended in Count VIII that Flaiz and i-Frontier were unjustly enriched by taking, possessing, and using MBC's proprietary trade secret and confidential business information. Because the alleged knowingly wrongful actions were the basis of the unjust enrichment claim, MBC would not have been able to recover for this claim without making out at least one of the other claims. Count IX averred unfair competition against Flaiz and i-Frontier, stating their actions were "intentional, willful, outrageous and malicious." MBC Am. Compl. ¶ 62. Finally, in Count X there was an allegation of tortious interference with contract against i-Frontier, in which MBC contended their actions were "intentional, willful, outrageous and malicious." MBC Am. Compl. ¶ 65.
At the time of trial, the claims remaining against i-Frontier were misappropriation of trade secrets, violation of the DMCA, and tortious interference with contractual relations.
Further, the jury awarded $20,000 to MBC for Flaiz's breach of his confidentiality agreement. i-Frontier concedes that Gulf has no indemnification duty as to this award. See, e.g., 2002-2003 Policy § II.A.9.
i-Frontier notified Gulf, its insurer, of the underlying action at the time it was filed in November, 2002. Gulf denied coverage in a letter dated December 18, 2002. Gulf denied coverage in a letter dated December 18, 2002. Gulf stated that MBC's claims did not:
arise out of i-Frontier's creation of internet advertising content. Rather, the allegations are that i-Frontier wrongly accessed and used what is, essentially [MBC's] business plan. . . . Because this claim does not arise out of i-Frontier's performance of covered cyberspace activities, it is not covered by the policy and the carrier will not defend i-Frontier and will not indemnify i-Frontier for any judgment or settlement.
Gulf's letter also cited a number of policy exclusions. i-Frontier responded by letter on January 29, 2003 that the IDI "is not a business plan" but "a methodology for how MBC creates websites for the internet" used to determine the content, appearance, and operation of a website. i-Frontier's letter did not address the exclusions. Gulf was not persuaded and reaffirmed its denial of coverage.
These letters were attached as exhibits to the complaint and thus can be considered in deciding a motion to dismiss under Rule 12(b)(6).
II.
We address the question of whether Gulf had a duty to pay the claim expense of and indemnify i-Frontier in connection with the underlying action. This question depends on whether the claims set forth in the underlying complaint are covered under the policy. We note that the policies in issue do not contain the more common duty to defend clause but instead obligate Gulf to pay i-Frontier for its legal fees and expenses in defending against covered claims. See, e.g., Britamco Underwriters, Inc. v. C.J. H., Inc., 845 F. Supp. 1090, 1093 (E.D. Pa. 1994) (citing Pacific Indem. Co. v. Linn, 766 F.2d 754, 760 (3d Cir. 1985)).The duties to pay claim expense and to indemnify are contractual in nature. Pacific Indem., 766 F.2d at 769. In the context of an insurance contract dispute, the court may grant a motion to dismiss where the insurance contract unambiguously reveals the insured is not entitled to coverage. Frog Switch Mfg. Co., Inc. v. Travelers Insur. Co., 193 F.3d 742, 745 n. 1 (3d Cir. 1999). Although an insurance policy is construed against the insurer, it is necessary for the insured to show that a claim alleged in a lawsuit is within the coverage provided. Erie Insur. Exch. v. Transamerica Insur. Co., 533 A.2d 1363, 1366 (Pa. 1987) (citing Warner v. Employers' L. Assur. Corp., 133 A.2d 231 (1957)). Thus we must compare the terms of the policies with the language of the underlying complaint.
Gulf maintains i-Frontier is not entitled to payment of its defense costs and attorneys' fees or indemnification because the claims alleged in MBC's complaint did not arise out of acts committed in performing "cyberspace activities." As stated, the term cyberspace activities is defined as "creation of internet content for others." E.g., 2000-2001 Policy § IV.E; Declarations, Item 6. Essentially, Gulf contends that the underlying action did not allege acts committed during the creation of internet advertising content for others but rather alleged misappropriation of MBC's business methodology.
Gulf also invokes the provisions set forth in § II.B of the policies, which exclude: "any act, error or omission intentionally committed while knowing it was wrongful" and any "act, error or omission that a jury, court or arbitrator finds dishonest, fraudulent, criminal or malicious." Gulf contends that each count of MBC's complaint averred that i-Frontier and its employee Flaiz engaged in knowingly wrongful conduct and that the policies' exclusion therefore applied to the entire action brought by MBC, even if the conduct otherwise qualified as cyberspace activities.
We need not delve into the interpretation of the term "cyberspace activities" because it is clear that the policy exclusions bar insurance coverage. See, e.g., 2000-2001 Policy § II.B. Gulf is correct that intentional wrongful conduct was alleged and was a necessary element of each and every one of the ten counts of the underlying complaint. For example, MBC's claim under the DMCA may only be established by showing either: (1) the defendant provided or distributed copyright management that is knowingly false with intent to induce, enable, facilitate, or conceal infringement of MBC's copyright; or (2) the defendant intentionally removed or altered any copyright management information while knowing or having reasonable grounds to know that doing so would induce, enable, facilitate, or conceal an infringement of MBC's copyright. See 17 U.S.C. § 1202. Thus, Gulf is not required to pay defense costs or indemnify for any of the claims in the underlying action since the intentional conduct alleged is outside the insurance coverage provided under the terms of the policies.
Defendant includes as part of its breach of contract claim a breach of "common law duty of good faith." In Pennsylvania a claim for breach of the duty of good faith and fair dealing is simply a basis for a breach of contract claim and not an independent action. See Somers v. Somers, 613 A.2d 1211, 1215 (Pa. 1992). Defendant however does not allege any basis for such a contract claim. The terms of the insurance contract clearly exclude coverage. There is nothing alleged that forms the basis of lack of good faith in performance of any contractual duties.Id. at 1213. Indeed, the correspondence between i-Frontier and Gulf, which is attached to the complaint, leads to the opposite conclusion.
Accordingly, we will dismiss the claim alleging breach of contract and common law duty of good faith.
III.
i-Frontier also alleges in its complaint against Gulf that it had reasonable expectations of coverage due to the representations of Gulf's agent. See UPMC Health Sys. v. Metropolitan Life Ins. Co., 391 F.3d 497, 502 (3d Cir. 2004) (citing Collister v. Nationwide Life Ins. Co., 388 A.2d 1346, 1353 (Pa. 1978)). As described in UPMC Health System, the doctrine "is intended to protect against the inherent danger, created by the nature of the insurance industry, that an insurer will agree to certain coverage when receiving the insured's application, and then unilaterally change those terms when it later issues a policy." Id. The doctrine may be applied even where the insured's reasonable expectations are directly in conflict with the unambiguous terms of the policy. Id.
Count II avers intentional misrepresentation and Count III alleges negligent misrepresentation. i-Frontier's complaint states in both counts that Gulf made false and material misrepresentations to i-Frontier that it would provide coverage for claims related to i-Frontier's advertising activities not covered by i-Frontier's other insurer. These misrepresentations were allegedly made "with the intent to mislead i-FRONTIER into relying on [them] when it decided to purchase the Policies." Compl. ¶¶ 47, 53. i-Frontier maintains in effect that it had reasonable expectations that claims such as those alleged in the underlying action would be covered.
Within the last few days, our Court of Appeals has handed downTran v. Metropolitan Life Insurance Company, No. 04-2539, 2005 WL 1229696, *3 (3d Cir. May 25, 2005). Tran involved a Vietnamese immigrant who maintained he did not read or speak English well. In 1993, the plaintiff was sold a MetLife life insurance policy with "vanishing premiums," which he maintained the MetLife agent falsely stated that he would no longer have to pay after 10 years. He filed a complaint against MetLife for negligence, common law fraud and deceit, violations of Pennsylvania's Unfair Trade Practice and Consumer Protection Law ("UTPCPL"), breach of the implied covenant of good faith and fair dealing, bad faith, breach of fiduciary duty, and negligent supervision. The District Court dismissed the claims for breach of the implied covenant of good faith and fair dealing, bad faith, and breach of fiduciary duty pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure. The District Court then granted summary judgment on the fraud, negligent misrepresentation, and UTPCPL claims, on the ground that the requisite reasonable reliance could not be established. The Court of Appeals reversed the summary judgment decision. It held that the District Court had erred in determining as a matter of law that Pennsylvania law imposed on the plaintiff a duty to read the insurance policy or have it read to him.
The Court of Appeals explained that Pennsylvania law under certain circumstances recognizes a cause of action by an insured against its insurer based on the insured's reasonable expectations if the insurer's agent made fraudulent misrepresentations or negligent misrepresentations concerning the coverage being provided in an insurance policy. Whether such recovery under either or both theories may be had under the varying Pennsylvania precedents on the subject is at the very least a fact-intensive inquiry.
We are only at the pleading stage. On the record before us, it would be premature to dismiss the claims for intentional and negligent misrepresentation. At this juncture, the allegations in the complaint regarding those claims state enough to survive Gulf's motion to dismiss. We cannot say that under no set of facts will i-Frontier be able to demonstrate that it is entitled to relief. See In re Rockefeller Ctr. Props., 311 F.3d at 215.
Gulf further asserts that Counts II and III should be dismissed under the "gist of the action" doctrine. It contends that these counts are essentially a recasting of the tort claims the plaintiff brought under the breach of contract theory. See Bohler-Uddeholm Am., Inc. v. Ellwood Group, Inc., 247 F.3d 79, 103 (3d Cir. 2001). We disagree. The claims for intentional misrepresentation and negligent misrepresentation are claims separate and apart from the claim for breach of contract and duty of good faith.
We will deny the motion to dismiss the claims for intentional misrepresentation and negligent misrepresentation.
ORDER
AND NOW, this 3rd day of June, 2005, for the reasons set forth in the accompanying Memorandum, it is hereby ORDERED that:(1) the motion of defendant Gulf Underwriters Insurance Company to dismiss under Rule 12(b)(6) of the Federal Rules of Civil Procedure the claim of plaintiff i-Frontier, Inc. for breach of contract and common law duty of good faith is GRANTED; and
(2) the motion is otherwise DENIED.