Citizens Ins. Co. of Am. v. Wynndalco Enters.

CITIZENS INSURANCE COMPANY OF AMERICA, Plaintiff, v. WYNNDALCO ENTERPRISES, LLC, DAVID ANDALCIO,JOSE FLORES, and MELISSA THORNLEY, DEBORAHBENJAMIN KOLLER, JOSUE HERRERA, MARIO CALDERON,and JENNIFER ROCIO, individually and on behalfof all others similarly situated, Defendants.

No. 20 C 3873

UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF ILLINOIS EASTERN DIVISION

January 27, 2021

Judge John Z. Lee

MEMORANDUM OPINION AND ORDER

In this insurance coverage dispute, Citizens Insurance Company of America ("Citizens") seeks a declaratory judgment that it has no duty to defend or indemnify Wynndalco Enterprises, LLC ("Wynndalco") in connection with two class action lawsuits pending in other courts. Wynndalco and two of its executives, David Andalcio (its founder and Chief Executive Officer) and Jose Flores (its Chief Operational Officer) (collectively "Defendants" for purposes of this motion), move to stay this case pending those courts' resolution of certain factual issues that Defendants say touch upon this action. For the reasons that follow, the motion is denied.

I. Background

Citizens filed this action for a declaratory judgment "that it has no duty to defend or indemnify under a Business Owners Policy. . . issued to Wynndalco" (the "Policy") in connection with two putative class actions suits pending in other courts. 1st Am. Compl. ¶ 1, ECF No. 20; see id. ¶¶ 35-47. The underlying cases are captioned Thornley v. CDW-Government, LLC, No. 20 CH 4346 (Cook Cty. Cir. Ct. filed May 27, 2020) (the "Thornley" lawsuit); and Calderon v. Clearview AI, Inc., No. 20 CV 1296 (S.D.N.Y. filed Feb. 13, 2020) (the "Calderon" lawsuit). Id. ¶¶ 1, 18, 28.

Effective from October 2, 2019, to October 2, 2020, the Policy provides liability coverage for Wynndalco's business, including duties to defend and indemnify. Id. ¶ 16; see 1st Am. Compl., Ex. A., Business Owners Policy No. OBC-H062078-00, ECF No. 20-1. But a provision of the Policy entitled "Distribution Of Materials In Violation Of Statutes" (the "Exclusion") excludes liability coverage for the following:

"Bodily injury", "property damage", or "personal and advertising injury" arising directly or indirectly out of any action or omission that violates or is alleged to violate:

(1) The Telephone Consumer Protection Act (TCPA), including any amendment of or addition to such law;

(2) The CAN-SPAM Act of 2003, including any amendment of or addition to such law;

(3) The Fair Credit Reporting Act (FCRA), and any amendment of or addition to such law, including the Fair and Accurate Credit Transactions Act (FACTA); or

(4) Any other laws, statutes, ordinances, or regulations, that address, prohibit, or limit the printing, dissemination, disposal, collecting,recording, sending, transmitting, communicating or distribution of material or information.

1st Am. Compl. ¶ 17. Citizens contends that the Exclusion applies to the underlying class action lawsuits for which Wynndalco seeks insurance coverage.

The underlying class actions allege that Wynndalco violated the Illinois Biometric Information Privacy Act ("BIPA"), id. ¶¶ 26, 33, which prohibits the collection, retention, and disclosure of "biometric identifiers," such as facial scans, or "biometric information," meaning as "any information . . . based on" a biometric identifier, see 740 Ill. Comp. Stat. 14/10-14/15. In particular, each case centers around a secretive technology created by a company called Clearview AI, Inc. ("Clearview") that combines a database of over three billion facial scans, amassed by "scraping" photographs from the internet, and a facial recognition application, so as to enable the end-user to identify unknown persons by comparing their facial scan to those included in Clearview's database. 1st Am. Compl. ¶¶ 19, 30; see 1st Am. Compl., Ex. B, Am. Class Action Complaint, Thornely v. CDW-Gov't, LLC, No. 2020 CH 4346 (Cook Cty. Cir. Ct. Aug. 5, 2020) ("Thornley Compl.") ¶¶ 9-11, ECF No. 20-2; 1st Am. Compl., Ex. C, 1st Am. Class Action Compl., Calderon v. Clearview AI, Inc., No. 20 CV 1296 (S.D.N.Y. July 22, 2020) ("Calderon Compl.") ¶ 5, ECF No. 20-3. As for Wynndalco, the cases each allege that it operated as Clearview's Illinois-based agent by purchasing Clearview's technology and then reselling or licensing it to law enforcement agencies, whether directly or through another intermediary called CDW-Government, LLC. See Thornley Compl. ¶¶ 26-30; Calderon Compl. ¶¶ 7, 15.

Among other defendants, the Calderon plaintiffs claim that Wynndalco violated the BIPA by capturing, collecting, receiving, storing, disclosing, and/or using biometric identifiers and biometric information, without complying with the statutory requirements, in the course of its agency relationship with Clearview. See Calderon Compl. ¶¶ 29-32. The Thornley plaintiffs also claim that Wynndalco violated the BIPA, based on its "selling, leasing, trading, or otherwise profiting from [their] biometric identifier[s] or biometric information." Thornley Compl. ¶ 69.

Additionally, the Thornley plaintiffs bring common law claims of unjust enrichment and invasion of privacy against Wynndalco. The unjust enrichment count asserts that Wynndalco "unjustly benefited . . . from its publication of Plaintiffs' and the Class's biometric identifiers and biometric information." Id. ¶ 76. Similarly, the invasion of privacy count declares that Wynndalco's "conduct in publishing and exploiting Plaintiffs' and the Class's biometric identifiers and biometric information . . . constituted an unauthorized intrusion into [their] seclusion" and "was offensive and objectionable." Id. ¶¶ 79-80.

Wynndalco reports that the underlying class actions are each in the pleading and early discovery stages. See Defs.' Wynndalco, Andalcio, and Flores's Am. Mot. Stay ("Mot.") at 5, ECF No. 51. In the meantime, Wynndalco and two of its executives, Andalcio and Flores, move to stay this case until certain "factual issues" whose determination they say "will impact this Court's coverage decision . . . . have been resolved" in those actions. Id. at 1-2, ECF No. 51.¹

II. Legal Standard

The Declaratory Judgment Act "provides the district court with the necessary discretion" to stay an action, including where there are "parallel proceedings" pending in difference courts. Med. Assur. Co. v. Hellman, 610 F.3d 371, 378 (7th Cir. 2010). When a stay is sought in this scenario, the district court should consider, among other things, "whether the declaratory suit presents a question distinct from the issues raised in the [parallel] proceeding" and "whether going forward with the declaratory action will serve a useful purpose in clarifying the legal obligations and relationships among the parties." See Nationwide Ins. v. Zavalis, 52 F.3d 689, 692 (7th Cir. 1995).

Here, Defendants move to stay under "the so-called Peppers doctrine" of Illinois law,² which "provides that 'it is generally inappropriate for a court considering a declaratory judgment action to decide issues of ultimate fact that could bind the parties to the underlying litigation.'" Twin City Fire Ins. Co. v. Law Office of John S. Xydakis, P.C., 407 F. Supp. 3d 771, 778 (N.D. Ill. Sept. 16, 2019) (quoting Allstate Ins. Co. v. Kovar, 842 N.E.2d 1268, 1275 (Ill. App. 2006) (citing Md. Cas. Co. v. Peppers, 355 N.E.2d 24, 30 (Ill. 1976))). "At the same time, the Peppers doctrine does allow declaratory judgments on issues that do not decide an ultimate fact in the underlying case." Twin City Fire Ins. Co., 407 F. Supp. at 778.

III. Analysis

Defendants raise several arguments in favor of a stay. First and foremost, they contend that resolving this coverage dispute would require the Court to determine two questions of ultimate fact on which the underlying actions hinge: (1) "whether Wynndalco was a government contractor, and therefore exempted under BIPA"; and (2) "whether Wynndalco 'possessed' biometric information." Mot. at 7.

This argument, however, suffers from several flaws. While the questions of fact that Defendants identify certainly go to the heart of Wynndalco's liability in the Thornley and Calderon lawsuits, the Court need not resolve either of them to determine whether those lawsuits trigger Citizens' duty to defend.³ As the Seventh Circuit has observed, an insurer's duty to defend "is most often determined primarily, if not exclusively, from the face of the underlying complaint against the insured." Nationwide Ins., 52 F.3d at 693. Under this analysis, "[a]s long as the complaint comprehends an injury which may be within the scope of the policy, the company must defend the insured until the insurer can confine the claim to a recovery that the policy does not cover," with any doubts on this score being resolved in favor of the insured. Id. at 693-94 (cleaned up). As a result, "a court ordinarily will have noreason to immerse itself in the facts surrounding the incident in question; it need only look to the allegations made against the insured and decide whether, if proven, those allegations would establish an injury that the policy would cover." Id. at 694.

That is precisely the case here. To determine whether Citizens has a duty to defend, the Court need only ask whether the allegations of the Thornely or Calderon complaints, "if proven, . . . would establish an injury" covered by the Policy—i.e., one that falls outside the scope of the Exclusion. See id. (emphases added). In other words, the Court need only consider whether the Thornley or Calderon complaints allege any injury other than "'[b]odily injury', 'property damage', or 'personal and advertising injury' arising directly or indirectly out of an act or omission that violates or is alleged to violate . . . . [a]ny . . . laws, statutes, ordinances, or regulations, that address, prohibit, or limit the printing, dissemination, disposal, collecting, recording, sending, transmitting, communicating or distribution of material or information," regardless of whether Wynndalco is...