Opinion
No. 5:02-cv-02849-JW
September 17, 2002
ORDER GRANTING PLAINTIFFS' MOTION FOR SUMMARY JUDGMENT AS TO FIRST CAUSE OF ACTION AND DENYING DEFENDANT'S CROSS-MOTION FOR SUMMARY JUDGMENT
I. INTRODUCTION
Plaintiffs Specific Impulse, Inc. and Richard Julius noticed a motion for summary judgment as to their first cause of action for declaratory relief and Defendant filed a cross-motion for summary judgment as to the same cause of action. The cross-motions were noticed for hearing on September 16, 2002. The Court finds these cross-motions appropriate for decision without oral argument pursuant to Local Rule 7-6. Based on all papers filed to date, the Court finds that Plaintiffs are entitled to judgment as to their first cause of action for declaratory relief. Therefore, the Court grants Plaintiffs' motion for summary judgment and denies Defendant's cross-motion, for the reasons set forth below.
II. BACKGROUND
Specific Impulse, Inc. ("SI") is a web design and development company that designs and develops custom intranet and extranet solutions for businesses. Richard Julius is the President of SI. SI purchased a commercial insurance policy from Defendant Hartford Casualty Insurance Company ("Hartford") for the year February 1, 2001 through February 1, 2002. The policy provides coverage for both property and business liability for SI's facilities located in San Jose and Oakland.
On February 13, 2002, SI was sued by a third party, Designworks ("DW"), a graphic design firm with which SI had jointly marketed its services. DW's complaint, filed in this Court and assigned to the Honorable Jeremy Fogel, alleges copyright infringement, misappropriation of trade secrets, false advertising, unfair competition and conspiracy. The complaint names four defendants, including both SI and its President, Richard Julius. The additional named defendants are not relevant to this controversy. Upon receipt of DW's complaint, SI tendered the defense of the lawsuit to Hartford under the terms of its policy.
Hartford reviewed the claim and denied coverage for the lawsuit on the bases that the underlying complaint does not seek "damages" from the insured as a result of bodily injury, property damage or the commission of a personal or advertising injury, as those terms are defined in the policy. Hartford also relied on exclusions contained in the policy to deny coverage to SI.
By these cross-motions, both parties seek an adjudication as to whether Hartford is required to provide a defense to SI in the underlying lawsuit. Plaintiffs argue that the policy language clearly affords coverage in this instance and requires that Hartford provide a defense to DW's claims. Hartford contends that no coverage is afforded in this instance and that, accordingly, it is not obligated to provide a defense to SI for the underlying litigation. Both parties agreed to an expedited briefing schedule to permit the Court to rule on these cross-motions.
III. STANDARDS
Summary judgment is proper "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." Fed.R.Civ.P. 56©). The purpose of summary judgment "is to isolate and dispose of factually unsupported claims or defenses." Celotex v. Catrett, 477 U.S. 317, 323-324 (1986).
The moving party "always bears the initial responsibility of informing the district court of the basis for its motion, and identifying those portions of 'the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any' which it believes demonstrate the absence of a genuine issue of material fact."Id. at 323. If he meets this burden, the moving party is then entitled to judgment as a matter of law when the non-moving party fails to make a sufficient showing on an essential element of his case with respect to which he bears the burden of proof at trial. Id. at 322-23.
The non-moving party "must set forth specific facts showing that there is a genuine issue for trial." Fed.R.Civ.P. 56(e). The non-moving party cannot defeat the moving party's properly supported motion for summary judgment simply by alleging some factual dispute between the parties. To preclude the entry of summary judgment, the non-moving party must bring forth material facts, i.e., "facts that might affect the outcome of the suit under the governing law. . . Factual disputes that are irrelevant or unnecessary will not be counted." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247-48 (1986). The opposing party "must do more than simply show that there is some metaphysical doubt as to the material facts."Matsushita Elec. Indus. Co. v. Zenith Radio, 475 U.S. 574, 588 (1986).
The court must draw all reasonable inferences in favor of the non-moving party, including questions of credibility and of the weight to be accorded particular evidence. Masson v. New Yorker Magazine, Inc., 501 U.S. 496, 520 (1991) (citing Anderson, 477 U.S. at 255)); Matsushita Elec. Indus. Co. v. Zenith Radio, 475 U.S. 574, 588 (1986); T.W. Elec. Service v. Pacific Elec. Contractors, 809 F.2d 626, 630 (9th Cir. 1987). It is the court's responsibility "to determine whether the 'specific facts' set forth by the nonmoving party, coupled with undisputed background or contextual facts, are such that a rational or reasonable jury might return a verdict in its favor based on that evidence." T.W. Elec. Service, 808 F.2d at 631. "[S]ummary judgment will not lie if the dispute about a material fact is 'genuine,' that is if the evidence is such that a reasonable jury could return a verdict for the nonmoving party." Anderson, 477 U.S. at 248. However, "[w]here the record taken as a whole could not lead a rational trier of fact to find for the non-moving party, there is no 'genuine issue for trial.'" Matsushita, 475 U.S. at 587.
IV. DISCUSSION
A. Business Liability Coverage
The Court initially notes that an insurer has a very broad duty to defend its insured under California law. The California Supreme Court has held that "the insured is entitled to a defense if the underlying complaint alleges the insured's liability for damages potentially covered under the policy, or if the complaint might be amended to give rise to a liability that would be covered under the policy." See Montrose Chem. Corp. v. Superior Court, 6 Cal.4th 287, 299 (1993) (emphasis in original). "[O]nce the insured has established potential liability by reference to the factual allegations of the complaint, the terms of the policy, and any extrinsic evidence upon which the insured intends to rely, the insurer must assume its duty to defend unless and until it can conclusively refute that potential." Id. Any doubt as to whether the facts establish the existence of the defense duty must be resolved in the insured's favor. Id.
The determination whether an insurer owes a duty to defend is made in the first instance by comparing the allegations of the complaint with the terms of the policy. See id. at 295. The duty to defend may also arise from facts extrinsic to the complaint when they reveal a possibility that the claim may be covered by the policy. Id. With these standards in mind, the Court must first determine the nature of the claims that have been asserted against SI in the underlying litigation in order to assess Hartford's duty to defend SI.
The underlying complaint against SI alleges that SI stole DW's proprietary Application Software and Client Database and is currently using such information in SI's newly created division or product line.See Complaint at p. 2, lines 7-12, Exh. A to Lara Hodgson Declaration ("Complaint"). As a result, of SI's conduct, DW alleges that SI has infringed DW's copyright, misappropriated DW's trade secrets, and engaged in false advertising and unfair competition.
With respect to DW's claim for copyright infringement, DW alleges that SI has infringed DW's copyright in and relating to DW's Application Software and Client Database. DW also alleges, in its claim for misappropriation of trade secret, that such proprietary information constitutes a trade secret, which has also been misappropriated by SI. With respect to DW's claim for false advertising, DW alleges that since December of 2001, SI has been conducting an advertising campaign in its company website and has used DW's works as a sample of SI's own product. As a result of SI's conduct, DW alleges that it has sustained irreparable injury. Finally, DW alleges that such acts by SI constitute unfair competition, as defined by California Business and Professions Code § 17200.
The allegations set forth in DW's complaint state that SI has been "reproducing, altering, distributing, and placing upon the public market in interstate commerce products or programs, which are identical or substantially similar, in whole or in substantial part, to Plaintiffs Application Software." See Complaint at p. 5, lines 23-25. The Complaint further alleges that SI also placed DW's Client Database on the public market and that SI has managed and hosted "[D]efendant BAE's website containing [DW's] Application Software and Client Database." Id. at pp. 5-6, lines 26-7. DW also alleges that SI conducted an advertising campaign through its website to promote SI's product of client management database and used DW's works as a sample of its own product. Id. at p. 10, lines 11-14.
Based on these allegations, SI contends that the Hartford policy affords coverage to it for the DW lawsuit. Hartford argues that no coverage is afforded to SI under its policy.
The scope of basic coverage provided by the Hartford policy in its insuring agreement for business liability coverage provides in pertinent part:
We will pay on behalf of the insured those sums that the insured becomes legally obligated to pay as damages because of "bodily injury", "property damage" or "personal and advertising injury" to which this insurance applies. We will have the right and duty to defend the insured against any "suit" seeking those damages. However, we will have no duty to defend the insured against any "suit" seeking damages for "bodily injury", "property damage" or "personal or advertising injury" to which this insurance does not apply.
The policy provides the following relevant definitions:
1. "Advertisement" means a dissemination of the information or images that has the purpose of inducing the sale of goods, products or services through:
a. (1) Radio; (2) Television; (3) Billboard; (4) Magazine; (5) Newspaper; or
b. Any other publication that is given widespread public distribution.
However, "advertisement" does not include the design, printed material, information or images contained in, on or upon the packaging or labeling of any goods or products.
15. "Personal and advertising injury" means injury, including consequential "bodily injury", arising out of one or more of the following offenses: . . . .
(d) Oral or written publication of material that slanders or libels a person or organization or disparages a person's or organization's goods, products or services; . . .;
(f) Copying, in your "advertisement", a person's or organization's "advertising idea" or style of "advertisement";
(g) Infringement of copyright, slogan or title of any literary or artistic work, in your advertisement; . . . .
SI argues that, based on the recited language, there is a covered copyright claim alleged in the DW Complaint. Hartford denied coverage to SI based on this language because Hartford contends that the DW Complaint does not seek the recovery of damages due to the commission of a "personal and advertising injury arising out of infringement of copyright in an advertisement." In other words, Hartford argues that the alleged copyright infringement did not occur in the advertisement of SI's goods, products or services. This argument, however, is not supported by the plain language of the policy, nor the allegations cited in the DW Complaint nor relevant caselaw.
The policy defines an "advertisement" to include a publication that is given widespread public distribution. The Complaint alleges that SI advertised its product on its internet site. DW also alleges, at ¶¶ 22 and 23, that SI improperly reproduced, altered, distributed, and placed upon the public market in interstate commerce, products which were identical to DW's proprietary product. In addition, ¶ 52 of the Complaint alleges that SI advertised DW's works as a sample of its own product on SI's website. When all the allegations of the Complaint are read together, it is clear that the Complaint alleges that SI advertised on its website DW's proprietary works.
California courts have held that at least three distinct requirements must be satisfied in order to trigger the "advertising injury" provisions of an insurance policy. See Peerless Lighting Corp. v. American Motorist Ins. Co., 82 Cal.App.4th 995 (2000). First, it must be alleged that the insured committed one of the enumerated offenses covered by the policy. Second, there must be "advertising" of the insured's goods, products or services. Third, there must be a direct causal relationship between the insured's advertising and the alleged injury. See also, Lindsey v. Admiral Insurance Company, 804 F. Supp. 47, 52 (N.D. Cal. 1992). Applying this test to the instance case, the Court finds that these three requirements have been met.
First, the Court finds that the DW Complaint alleges that the insured committed copyright infringement, an enumerated offense covered by the policy. See Complaint at ¶¶ 29-40. Second, the Court also finds that Complaint alleges that the insured advertised its product on its website. Id. at p. 10. Third, the Court finds that the Complaint alleges that the advertising of the insured's product directly injured DW. Id.
Hartford argues that, although the Complaint clearly contends that the product that was advertised by SI is, in fact, DW's proprietary product and not the insured's product, there is no causal relationship alleged between the copyright infringement and the advertisement. In other words, although the Complaint alleges that SI committed copyright infringement and also alleges that SI advertised a product that was not its own, Hartford contends that there is no allegation anywhere in the Complaint that SI advertised DW's copyrighted works. This contention, however, ignores the allegations set forth in ¶¶ 52-54 of the Complaint, which allege that SI advertised DW's "works" on SW's website. Although the Complaint does not specifically define "works", the Court finds that the clear import of DW's allegations throughout the Complaint make clear that DW is alleging that SI stole its proprietary, copyrighted works and advertised DW's copyrighted works as its own.
For this reason, the Court finds that DW's Complaint seeks damages as the result of an "advertising injury," as that term is defined in the Hartford policy. Therefore, Hartford's duty to defend SI is triggered by the business liability coverage language contained in the policy.
However, the Court's finding does not end its inquiry. Hartford also relied on the application of exclusions to deny coverage to SI. Therefore, the Court must now examine each of the exclusions relied upon by Hartford to determine whether an exclusion applies in this instance.
B. Exclusions
1. Professional Services Exclusion
The Hartford policy states that the insurance does not apply to injury "due to the rendering or failure to render any professional service. This includes but is not limited to:
(11) Computer consulting design or programming services including website design." Hartford relied on this exclusion, entitled the Professional Services Exclusion, to deny coverage to SI for the underlying Complaint filed by DW. Hartford contends that the "rendering of professional services is the root of the relationship between Designworks and the insureds." Hartford further contends that, absent the professional relationship between SI and DW, SI would not have been able to gain access to DW's proprietary information.
As a preliminary matter, the Court notes that exclusions in an insurance policy are "strictly construed against the insurer and liberally interpreted in favor of the insured." See Delgado v. Heritage Life Ins. Co., 157 Cal.App.3d 262, 271 (1984). In addition, exclusions "are to be interpreted by their plain meaning and will not be stretched to cover areas not intended by the clause." See Oliver Machinery Co. v. United States Fidelity and Guaranty Co., 187 Cal.App.3d 1510, 1514 (1986). Based on the language set forth in the professional services exclusion, Hartford must establish that the injury alleged in the underlying Complaint was the result of the "rendering or failure to render any professional service" by SI to DW. Contrary to Hartford's argument, however, the underlying Complaint does not allege that DW sustained injury as a result of SI's rendering or failure to render any professional service. In fact, the Complaint alleges that SI stole DW's proprietary information. See Complaint at ¶ 3. DW contends that SI "gained unauthorized accesses to Plaintiffs company database through the internet or telephone lines and systematically downloaded and copied Plaintiffs entire Application Software and Client Database." Id. at ¶ 21. The Complaint is void of any mention of injury to DW as a result of the "rendering or failure to render any professional service" by SI.
Moreover, the Complaint specifically alleges that a third party, Jeanne Sadler, was an employee of DW and secretly copied and downloaded DW's proprietary information. Although not specifically alleged, the Complaint infers that it was Sadler who then provided DW's proprietary information to SI, either directly or through another third party, Bay Area Exhibits, Inc. Although the Complaint alleges that SI "stole" DW's proprietary information, no details are provided as to how SI allegedly stole such information. There are no allegations anywhere in the Complaint, however, that SI gained such information through its "rendering of or failure to render professional services" to DW.
Nevertheless, Hartford contends that California caselaw broadly applies the "professional services" exclusion in situations where all of the claims at issue flow from the rendering of or failure to render professional services. See Tradewinds Escrow, Inc. v. Truck Insurance Exchange, 97 Cal.App.4th 704 (2002); Northern Insurance Company v. Superior Court, 91 Cal.App.3d 541, 543 (1979); Hollingsworth v. Commercial Union Insurance Company, 208 Cal.App.3d 800, 810 (1989);Antles v. Aetna Casualty Surety Company, 221 Cal.App.2d 438, 442-443 (1963). The Court acknowledges that these cases have found that the professional services exclusion applies based on the facts involved in such cases. However, the Court finds that such cases are factually distinguishable from the instant case since they involved only two parties and the courts focused on whether the actions taken by one party towards the other fell within the policy definition of "professional services." None of the cases cited involved a third party, as is present in the underlying DW Complaint.
The cases cited by Hartford do not address the factual situation herein, namely, while it is undisputed that SI rendered professional services to DW, there is no allegation in the underlying Complaint that DW suffered injury as a result of such services. In fact, it is not clear from the Complaint whether SI's professional services were ongoing at the time that SI allegedly stole DW's proprietary works. The Complaint is devoid of any factual link between the rendering of services by SI and the alleged taking by SI of DW's works. For this reason, the Court finds that the professional services exclusion does not bar coverage to SI in the underlying DW Complaint based on the facts alleged to date.
2. Personal and Advertising Injury
Hartford also relied on an additional exclusion to deny coverage to SI in the underlying DW litigation. The Hartford policy provides that its insurance does not apply to personal and advertising injury arising "out of the infringement of trademark, trade name, service mark or other designation of origin or authenticity." While it is undisputed that the DW Complaint does not allege trademark infringement, Hartford apparently argues that the language "other designation of origin or authenticity" might refer to DW's claim for copyright infringement. SI contends that copyright infringement is a completely independent claim from trademark infringement and that, logically speaking, it would not make sense to conclude that a copyright infringement claim would be included in a provision which excludes from coverage trademark and trade name offenses.
Hartford does not address this exclusion, either in its opposition papers to SI's motion for summary judgment or in its own moving papers for summary judgment. No authority is cited to the Court for the proposition that the language "other designation of origin or authenticity" includes a claim for copyright infringement. In light of the fact that exclusions in an insurance policy are strictly construed against the insurer and are not to be stretched to cover areas not intended by the clause see Delgado v. Heritage Life Ins. Co., 157 Cal.App.3d 262, 271 (1984); Oliver Machinery Co. v. United States Fidelity and Guaranty Co., 187 Cal.App.3d 1510, 1514 (1986), the Court finds that this exclusion does not bar coverage to SI in the DW underlying litigation.
3. Programming Services
Finally, Hartford relied on a third exclusion to deny coverage to SI. The exclusion is entitled, "Programming Services" and excludes from coverage any injury "arising out of or which would not have occurred but for 'programming'." Programming is defined as follows:
1. Statement or instructions, regardless of the form or method of their embodiment, that are used or intended to be used directly or indirectly in or with a computer or computer system. This includes but is not limited to computer software, electronic processing programs, or designs; or
2. Any and all information that is used or intended to be used in connection with or to explain such statements or instructions or their operation, such as specifications, flow diagrams, or manuals.
A. Arising out of the rendering of or failure to render any service by you or on your behalf in connection with the selling, licensing, franchising, furnishing or design of your computer software or "programming" to others including electronic data programs, designs, specifications, manuals and instructions. Services means all services provided to a customer or vendor including but not limited to consultation or advice on purchasing or design decisions and post-purchase technical support.
Hartford apparently relies on this exclusion based on the fact that SI was commissioned by DW to write Cold Fusion code for DW's Application Software, as alleged in DW's Complaint. See Complaint at ¶ 17. Hartford contends that, had SI not been hired by DW to write such code, SI would not have had access to DW's proprietary works and could not have misappropriated such materials. This argument ignores the fact that DW has alleged that one of its former employees, Jeanne Sadler, was the person who improperly and secretly copied DW's works onto her computer disks or laptop and removed such information from DW's premises. See Complaint at ¶ 20.
There is no allegation in the complaint that DW would not have sustained injury but for the "programming" activities of SI. In fact, contrary facts are pled which indicate that DW suffered injury as a result of a third party, namely, Sadler. The complaint fails to allege that DW sustained injury as a result of any "programming" activities, as that term is defined in the policy, performed by SI. Therefore, the Court finds that the programming exclusion does not preclude coverage to SI in the underlying DW litigation.
V. CONCLUSION
For the reasons set forth herein, the Court finds that Plaintiffs are entitled to judgment as to their first cause of action for declaratory relief. Therefore, the Court grants Plaintiffs' motion for summary judgment as to the first cause of action and denies Defendant's cross-motion for summary judgment.