Halyard Health, Inc. v. Kimberly-Clark Corp.

43 Cal.App.5th 1062

256 Cal.Rptr.3d 915

HALYARD HEALTH, INC., Plaintiff and Appellant,

v.KIMBERLY-CLARK CORPORATION, Defendant and Respondent.

B294567

Court of Appeal, Second District, Division 5, California.

Filed December 6, 2019

As Modified January 2, 2020

Munger, Tolles & Olson, George M. Garvey, Mark R. Yohalem, Jordan D. Segall, and Lauren C. Barnett, Los Angeles, for Plaintiff and Appellant.

Gibson, Dunn & Crutcher, Theodore J. Boutrous, Jr., Julian W. Poon, Theane Evangelis, and William F. Cole, Los Angeles, for Defendant and Respondent.

BAKER, J.

When Delaware corporation Kimberly-Clark (Kimberly-Clark) spun off its healthcare division to create a new Delaware company, Halyard Health (Halyard), the two companies agreed Halyard would indemnify Kimberly-Clark for any liability resulting from many litigation matters. Among the matters was a recently filed class action in the Central District of California concerning surgical gowns sold by Kimberly-Clark. Punitive damages were ultimately awarded against Kimberly-Clark in that class action, and Halyard later filed suit in Los Angeles Superior Court seeking a declaratory judgment that it (Halyard) did not have to provide indemnity for the punitive damages award. The merits of whether indemnity is required is not the question before us. Instead, we consider a logically prior question, namely, whether the indemnification dispute is sufficiently related to California for courts of this state to exercise personal jurisdiction over Kimberly-Clark.

I. BACKGROUND

A. Halyard and Kimberly-Clark's Dueling Complaints for Declaratory Relief

Kimberly-Clark is a Delaware corporation with its principal place of business in Texas. Approximately 350 of its 42,000 employees work in California, and approximately six percent of its global net sales in 2017 were in California. Its consumer brands include Kleenex, Scott, and Huggies diapers. Until October 2014, Kimberly-Clark also had a healthcare division that produced, among other things, surgical gowns.

In October 2014, Kimberly-Clark's healthcare division was spun off into Halyard, "a newly created, standalone, publicly traded entity."¹ Halyard is a Delaware corporation with its principal place of business in Georgia. The terms of the spinoff transaction were memorialized in a "Distribution Agreement" negotiated and executed in Texas. The Distribution Agreement contains a Delaware choice of law provision and further provides that both parties agreed to submit to the non-exclusive jurisdiction of state and federal courts in Delaware.

The Distribution Agreement requires Halyard to indemnify Kimberly-Clark for specified liabilities related to its former healthcare division. Section 6.11(a) of the Distribution Agreement provides, with certain exceptions we need not describe, that "[Halyard] shall assume and pay all Liabilities that may result from the Assumed Actions and all fees and costs relating to the defense of the Assumed Actions." An accompanying schedule of "Assumed Actions" lists 27 litigation matters, including a complaint filed by Dr. Hrayr Hrayr Shahinian against Kimberly-Clark in the Central District of California two days before Halyard and Kimberly-Clark executed the Distribution Agreement.²

Dr. Shahinian's class action complaint asserted claims against Kimberly-Clark for fraudulent concealment, fraud, negligent misrepresentation, unfair business practices ( Bus. & Prof. Code, § 17200 ), and false advertising ( Bus. & Prof. Code, § 17500 ) based on the company's misrepresentations regarding the protection afforded by its MicroCool Breathable High Performance Surgical Gowns. Halyard was subsequently added as a defendant based on its continued marketing of MicroCool gowns. The parties refer to this case as Bahamas after Bahamas Surgery Center, LLC, which ultimately took over as lead plaintiff.³

The Bahamas court certified damages/restitution and injunctive relief classes of "entities and natural persons in California who purchased the MicroCool Gowns from February 12, 2012 up to and including January 11, 2015 ...." Following a jury trial, the court entered a judgment for the plaintiffs, including punitive damages awards of $350 million against Kimberly-Clark and $100 million against Halyard.⁴ The district court denied various posttrial motions filed by Kimberly-Clark and Halyard (an appeal is now pending in the Ninth Circuit) but reduced the punitive damages awards to roughly $19 million against Kimberly-Clark and $1 million against Halyard.

After the Bahamas jury returned its verdict (and before the district court reduced the punitive damages awards), Halyard "notified Kimberly-Clark that [it was] reserv[ing] [its] rights to challenge any purported obligation to indemnify Kimberly-Clark for the punitive damages awarded against them."⁵ Kimberly-Clark responded that any such reservation of rights would constitute an actual or anticipatory breach of Halyard's obligations under the Distribution Agreement.

Halyard then commenced this action seeking a declaratory judgment that it has no obligation to indemnify Kimberly-Clark for punitive damages awarded in the Bahamas litigation or any "[e]xpenses or [l]osses ... associated with an award of punitive damages." Halyard alleges it is not obligated to pay such indemnification because "California law and public policy prohibit indemnification for punitive damages" and because "rules of contract construction under both California and Delaware law require particularly clear, explicit, and unmistakable language before imposing on one party an obligation to indemnify the other for the wrongful acts of the indemnitee."

The day after Halyard filed its California declaratory relief action, Kimberly-Clark filed a mirror-image complaint in Delaware seeking a declaration that Halyard must indemnify it for all damages, including punitive damages; that Halyard had anticipatorily breached the Distribution Agreement; and that Halyard should be estopped from asserting it is not required to indemnify Kimberly-Clark for all damages. Later, on May 8, 2017, Kimberly-Clark sent Halyard a letter demanding Halyard advance Kimberly-Clark's legal fees in the Bahamas litigation, in certain legal proceedings filed against Kimberly-Clark in other states, and in the dueling declaratory relief suits in California and Delaware. Kimberly-Clark also demanded, among other things, that Halyard confirm it would take no positions adverse to Kimberly-Clark in the assumed actions, that Halyard file no papers in these cases without Kimberly-Clark's written consent, and that Halyard provide Kimberly-Clark "with all files and work product" in these cases upon request.

Halyard amended its complaint to address the demands made by Kimberly-Clark in the May 8th letter. That is, in addition to seeking a declaration that it is not required to indemnify Kimberly-Clark for punitive damages, Halyard's operative complaint also seeks a declaration that it is not required to comply with any of the other demands presented in the May 8th letter.

B. Kimberly-Clark Contests Personal Jurisdiction in California

Halyard moved to stay or dismiss the declaratory relief action Kimberly-Clark filed in Delaware regarding the Distribution Agreement (the mirror-image of this case). The Delaware Court of Chancery granted the request for a stay of the Delaware declaratory relief action. The Delaware judge expressed "significant doubts that Kimberly-Clark will be able to prevail on a personal jurisdiction defense in the California indemnity action," but concluded "whether or not my doubts are justified, fundamental principles of comity suggest that the California court and not this court should make the determination whether it has personal jurisdiction over Kimberly-Clark in the first instance. [¶] If it turns out that my doubts were incorrect and the California court declines to exercise personal jurisdiction, no significant harm will be done because this case, which I am staying ... can be reactivated after the California court rules on that issue ...."

Soon after the Delaware Court of Chancery imposed its stay, the trial court in this case heard argument on a motion Kimberly-Clark filed to quash service of summons for lack of personal jurisdiction. Halyard conceded California courts do not have general jurisdiction over Kimberly-Clark, but the parties disagreed over whether there is a proper basis for specific jurisdiction.

The trial court (with a substitute judge presiding in place of the originally assigned judge) prepared a tentative order denying Kimberly-Clark's motion to quash. The court's tentative reasoned there was personal jurisdiction over Kimberly-Clark because, in the tentative's words, Halyard's declaratory judgment action "is related to [Kimberly-Clark's] in-state activity (i.e., its sale of surgical gowns). Such in-state activity is the basis for Bahamas and the ensuing punitive damages award, for which [Kimberly-Clark] has sought indemnification pursuant to the Distribution Agreement. [Halyard], in turn, now seeks a declaration of the parties’ rights and duties under the Distribution Agreement, which specifically lists Bahamas in the attached schedule of ‘Assumed Actions.’ " The trial court, however, did not immediately adopt its tentative order as its final ruling. Instead, it permitted the parties to submit supplemental briefing on whether specific jurisdiction is reasonable and whether narrowing the case to address indemnification only in the Bahamas litigation would violate the rule against claim-splitting.

When the parties returned for further argument after supplemental briefing, the trial court (with the originally assigned judge again presiding) viewed the matter differently. The trial court granted Kimberly-Clark's motion to quash because it believed "there is no connection between the forum and the specific claim at issue, and thus, it is irrelevant that [Kimberly-Clark] sold ‘millions’ of surgical gowns in California and...