Gen. Star Indem. Co. v. Driven Sports, Inc.

80 F.Supp.3d 442

GENERAL STAR INDEMNITY COMPANY, Plaintiff

v.DRIVEN SPORTS, INC., Defendant.

No. 14–CV–3579 JFBARL.

United States District Court, E.D. New York.

Signed Jan. 23, 2015.

Cara T. Duffield, John Howell, Wiley Rein LLP, Washington, DC, Vincent Proto, Budd Larner, Short Hills, NJ, for Plaintiff.

David A. Gauntlett, James A. Lowe, Gauntlett & Associates, Irvine, CA, Eugene Killian, Jr., Killian & Salisbury, P.C., Iselin, NJ, for Defendant.

MEMORANDUM AND ORDER

JOSEPH F. BIANCO, District Judge:

Plaintiff is an insurer who issued a liability and litigation insurance policy (“the Policy”) to defendant, a producer and seller of a pre-workout energy supplement called “Craze.” In 2013, defendant was sued in three separate actions (“the Craze Actions”) alleging that Craze contains an illegal and potentially dangerous methamphetamine analog, and defendant sought coverage under the Policy. Both parties have moved for summary judgment, asking the Court to declare the extent of plaintiff's obligation to defend the underlying lawsuits.

The Court concludes that the underlying lawsuits are excluded from coverage by a provision in the Policy (“the Failure to Conform Exclusion”) which states that the Policy does not apply to “ ‘[p]ersonal and advertising injury’ arising out of the failure of goods, products or services to conform with any statement of quality or performance made in [defendant's] ‘advertisement.’ ” According to the complaints in the underlying lawsuits, defendant's advertisements allegedly (1) made a statement of quality about Craze, namely, that it contained only natural ingredients, and (2) Craze failed to conform with those statements, because it actually contained an illegal and potentially dangerous methamphetamine analog. It is abundantly clear that all the injuries alleged in these underlying lawsuits “aris[e] out of” Craze's failure to conform with Driven Sports' statements, and thus, the Failure to Conform Exclusion bars coverage.

Plaintiff also seeks to recoup its expenses in defending the underlying lawsuits, but the Court declines to award recoupment as a remedy, finding that the New York Court of Appeals would find recoupment to be inappropriate under these circumstances. Plaintiff's theory for recoupment is that defendant has been unjustly enriched because plaintiff has incurred the costs in representing defendant in the underlying litigation, even though the Court has now concluded that the underlying claims are excluded from coverage. However, unjust enrichment claims are generally precluded under New York law where the contract addresses the particular subject matter at issue. Here, the Policy provides that plaintiff will pay “all expenses” with respect to the underlying lawsuits, and plaintiff did not include a recoupment provision in the Policy. In addition, plaintiff sought to reach a recoupment agreement with defendant, but defendant refused. The Court will not, in essence, create that recoupment agreement and re-write the Policy by relying on a quasi-contract theory, when plaintiff could have addressed recoupment in the Policy, but chose not to. Recent decisions in other jurisdictions have reached the same result, and the Court concludes that those case are persuasive, and that the New York Court of Appeals would reach the same conclusion under New York law.

However, the Court agrees with plaintiff that its expenses in defending the underlying lawsuits do reduce the Policy's limits of coverage.

I. Background

A. Factual Background

The Court takes the following facts from the parties' Rule 56.1 Statements of Fact, declarations, and the exhibits attached thereto, construing the facts in the light most favorable to the nonmoving party. See Capobianco v. City of New York, 422 F.3d 47, 50 (2d Cir.2005). Where, as here, both parties move for summary judgment, “each party's motion must be examined on its own merits, and in each case all reasonable inferences must be drawn against the party whose motion is under consideration.” Lumbermens Mut. Cas. Co. v. RGIS Inventory Specialists, LLC, 628 F.3d 46, 51 (2d Cir.2010) (internal quotation marks and citation omitted).

Although the parties' Rule 56.1 statements contain specific citations to the record, the Court cites to the statements rather than to the underlying citations. Unless otherwise noted, where a Rule 56.1 statement is cited, that fact is undisputed or the opposing party has not pointed to any contradictory evidence in the record. The Court also cites the complaints in the underlying actions, which have been attached as exhibits and the contents of which are not disputed by either party.¹

1. Policy Language

Plaintiff issued a “Commercial Lines Policy” (“the Policy”) providing litigation and liability insurance to defendant covering the period from November 1, 2012 to November 1, 2013. (Pl. 56.1 ¶ 1.) The Policy has a $3 million aggregate limit of liability, and a $2 million limit for a personal and advertising injury for any one person. (Id. ¶ 2.) The Policy explains plaintiff's duty to both defend and indemnify defendant as follows:

We will pay those sums that the insured becomes legally obligated to pay as damages because of ‘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 ‘personal and advertising injury’ to which this insurance does not apply. We may, at our discretion, investigate any offense and settle any claim or ‘suit’ that may result. But ... [t]he amount we will pay for damages and Supplementary Payments is limited as described [elsewhere] ... and ... [o]ur right and duty to defend ends when we have used up the applicable limit of insurance in the payment of judgments, settlements, or Supplementary Payments.

(Id. ¶ 3.)

The “Supplementary Payments” referred to above are defined as including specific types of investigative expenses, such as an insured's time off from work, and also costs such as bail bonds and interest. (Id. ¶ 6.) The Policy also defines “Supplementary Payments” more generally, however:

We will pay, with respect to any claim we investigate or settle or any ‘suit’ against an insured we defend: ... [a]ll expenses we incur.

(Id. )

The Policy contemplates these expenses in defense of a “personal and advertising injury,” which it defines as follows:

“Personal and advertising injury” means injury, including consequential ‘bodily injury,’ arising out of [inter alia ] ... [o]ral or written publication, in any manner, of material that slanders or libels a person or organization or disparages a person's or organization's goods, products or services.

(Id. ¶ 4.) However, certain personal and advertising injuries are expressly excluded from coverage by the Failure to Conform Exclusion. In particular:

This insurance will not apply to ...

Quality or Performance of Goods—Failure to Conform to Statements

“Personal and advertising injury” arising out of the failure of goods, products or services to conform with any statement of quality or performance made in your “advertisement.”

(Id. ¶ 5.)

2. Underlying Craze Actions

On August 22, 2013, Nutrition Distribution LLC (“Nutrition”) filed a complaint against defendant in the United States District Court for the Central District of California (id. ¶ 8), describing the suit as “a civil action arising from Defendants' false advertising and blatant misrepresentations regarding its Craze pre-workout nutritional supplement which is marketed as containing a natural extract as its active ingredient, when, in fact, it contains illegal analogs to methamphetamine.” (Ex. 2 to Duffield Decl. ¶ 1.)

In October and November of 2013,² Shantell Olvera and Marcus Wagner filed putative class actions against defendant in the United States District Court for the Northern District of California, which were ultimately consolidated into one action. (Pl. 56.1 ¶¶ 9–13.) The consolidated complaint alleges that defendant markets Craze as containing “only natural ingredients” (Ex. 7 to Duffield Decl. ¶ 42), when in fact it contains ETH, a synthetic and potentially dangerous methamphetamine analog. (Id. ¶¶ 51, 81.)

On December 10, 2013, Andrew Stewart filed a putative class action complaint against defendant in the United States District Court for the Northern District of Illinois, alleging that defendant “fail[ed] to disclose the presence of an illegal methamphetamine analog in its ‘Craze’ ... pre-workout supplement in any of its representations regarding the Product.” (Ex. 8 to Duffield Decl. ¶ 1.) The complaint further describes the “illegal methamphetamine analog” as “similar to the highly addictive psychoactive drug methamphetamine” (id. ¶ 10), with an alleged potency “somewhere between methamphetamine and ephedrine, both of which are banned substances.” (Id. ¶ 16.)

3. Coverage for the Underlying Actions

Plaintiff agreed to provide a litigation defense in all three underlying actions, subject to a complete reservation of its rights, including the right to recoup any amounts paid in the defense of the actions, if it were determined that the Policy did not require coverage. (Pl. 56.1 ¶¶ 15–17.) However, the text of the Policy does not address whether plaintiff could seek recoupment.

Instead, as noted above, it simply says that plaintiff “will pay, with respect to any claim we investigate or settle or any ‘suit’ against an insured we defend: ... [a]ll expenses we incur.” (Id. ¶ 6.)

When originally negotiating the provision of coverage, plaintiff had proposed that defendant sign a “non-waiver and defense funding agreement,” which “provided that defense expenses would erode the Policy's limit of liability and that Driven Sports would agree to repay any defense expenses in the event that it is finally determined that such amounts are not covered under the Policy.” (Ex. 114 to Lowe Decl. at 1.) Defendant rejected plaintiff's offer, and thus...