Mass. Bay Ins. Co. v. Walflor Indus., Inc.

383 F.Supp.3d 1148

MASSACHUSETTS BAY INSURANCE COMPANY, Plaintiff,

v.WALFLOR INDUSTRIES, INC., et al., Defendants.

CASE NO. C18-0791JLR

United States District Court, W.D. Washington, at Seattle.

Signed April 17, 2019

Margaret M. Van Valkenburg, Bullivant Houser Bailey PC, Portland, OR, Brendan Hanrahan, Jayme N. Mori, Matthew J. Sekits, Bullivant Houser Bailey, Seattle, WA, for Plaintiff.

Chase Christian Alvord, James M. Bulthuis, Tousley Brain Stephens, Seattle, WA, for Defendants.

ORDER ON CROSS MOTIONS FOR SUMMARY JUDGMENT

JAMES L. ROBART, United States District Judge

I. INTRODUCTION

Before the court are the parties' cross motions for summary judgment, including: (1) Plaintiff Massachusetts Bay Insurance Company's ("Massachusetts Bay") motion for summary judgment (Plf. MSJ (Dkt. # 33)), and (2) Defendants John Ural, Mike Czerwinski, Jim Hewitt (collectively, "Individual Defendants"), and Walflor Industries, Inc.'s ("Walflor") (collectively, "Defendants") motion for summary judgment (Def. MSJ (Dkt. # 31)). Massachusetts Bay seeks (1) a declaration that it has no duty to defend Defendants in the lawsuit presently pending in King County Superior Court, entitled Stuc-O-Flex International, Inc. v. Low and Bonar, Inc. , et al. , No. 17-2-30700-9 ("the Underlying Lawsuit"), and (2) a ruling that it is entitled to reimbursement of the monies it has already paid to defend Defendants in the Underlying Lawsuit. (Plf. MSJ at 1.) Defendants, on the other hand, seek a declaration that Massachusetts Bay owes them a duty to defend in the Underlying Lawsuit. (Def. MSJ at 1.) If, however, Massachusetts Bay does not owe them a duty to defend, Defendants seek an order that Massachusetts Bay is not entitled to reimbursement of the defense costs it has already incurred in the Underlying Lawsuit, or in the alternative, an order certifying that issue to the Washington Supreme Court. (See id. ) The court has considered the motions, the parties' submissions in support of and opposition to the motions, the relevant portions of the record, and the applicable law. Being fully advised,¹ the court GRANTS Massachusetts Bay's motion and DENIES Defendants' motion.

II. BACKGROUND

A. Insurance Policies

Massachusetts Bay issued a business owners policy to Walflor for the period December 8, 2015, to December 8, 2016. (Compl. (Dkt. # 1) ¶ 3.1 (identifying policy number OD2-A797754-00).) Walflor renewed the policy for the period December 8, 2016, to December 8, 2017. (Id. (identifying policy number OD2-A797754-01).)

The policies provide coverage, in pertinent part, as follows:

1. Business Liability

a. We will pay those sums that the insured becomes legally obligated to pay as damages because of "bodily injury", "property damages" 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 and advertising injury", to which this insurance does not apply....

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b. This insurance applies:

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(2) To "personal and advertising injury" caused by an offense arising out of your business....

(Colville Decl. (Dkt. # 35) ¶ 10, Ex. 8 (attaching policy number OD2-A797754-00) at 67-68; id. ¶ 11, Ex. 9 (attaching policy number OD2-A797754-01) at 90-91; 11/21/18 Alvord Decl. (Dkt. # 32) ¶ 3, Ex. 2 at 67.) The policies further provide:

15. "Personal and advertising injury" means injury, including consequential "bodily injury" arising out of one or more of the following offenses:

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d. Oral 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;

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f. The use of another's advertising idea in your "advertisement"; or g. Infringing upon another's copyright, trade dress or slogan in your "advertisement".

(Colville Decl. ¶ 10, Ex. 8 at 82-83; id. ¶ 11, Ex. 9 at 108; 11/21/18 Alvord Decl. ¶ 3, Ex. 2 at 81-82.) The policies define "advertisement" as "a notice that is broadcast or published to the general public or specific market segments about your goods, products or services for the purpose of attracting customers or supporters...." (Colville Decl. ¶ 10, Ex. 8 at 80; id. ¶ 11, Ex. 9 at 81; 11/21/18 Alvord Decl. ¶ 3, Ex. 2 at 80.)

In addition, the policies contain the following exclusion:

2. Additional Exclusions Applicable To "Personal and Advertising Injury"

This insurance does not apply to "Personal and advertising injury":

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m. Infringement of Copyright, Patent, Trademark or Trade Secret Arising out of the infringement of copyright, patent, trademark, and trade secret or other intellectual property rights. Under this exclusion, such other intellectual property rights do not include the use of another's advertising idea in your "advertisement."

However, this exclusion does not apply to infringement, in your "advertisement", of copyright, trade dress or slogan.

(Colville Decl. ¶ 10, Ex. 8 at 75-76; id. ¶ 11, Ex. 9 at 100-01.)

Finally, each policy contains an endorsement entitled, "WASHINGTON CHANGES – DEFENSE COSTS ," which provides:

The following applies to any provision in this Policy, or in any endorsement attached to this Policy that sets forth a duty to defend:

If we initially defend an insured or pay for an insured's defense but later determine that none of the claims, for which we provided a defense or defense costs, are covered under this insurance, we have the right to reimbursement for the defense costs we have incurred.

The right to reimbursement under this provision will only apply to the costs we have incurred after we notify you in writing that there may not be coverage and that we are reserving our rights to terminate the defense or payment of defense costs and to seek reimbursement for defense costs.

(Id. ¶ 10, Ex. 8 at 137; id. ¶ 11, Ex. 9 at 157.)

B. Underlying Lawsuit

In 2013, Stuc-O-Flex and Waterway Rainscreen entered into a Distributorship Agreement, under which Waterway Rainscreen agreed to produce certain products for Stuc-O-Flex's exclusive distribution in the United States and Canada. (Colville Decl. ¶ 3, Ex. 1 ("Underlying Lawsuit Compl."),² Ex. B ("Distributorship Agreement").)³ In early 2016, Individual Defendants created Walflor, which acquired all of Waterway Rainscreen's assets and began supplying certain products to Stuc-O-Flex for distribution. (Underlying Lawsuit Compl. ¶ 23.) According to the Underlying Lawsuit complaint, "in 2016 and 2017, Stuc-O-Flex ... uncovered evidence that Walflor and [Waterway Rainscreen] sold ... Stuc-O-Flex [t]rade-[n]ame-marked [p]roducts to multiple parties in the United States and Canada for years in violation of the [Distributorship Agreement] and without Stuc-O-Flex's consent, resulting in millions of dollars of lost profit." (Id. ¶ 26.)

As a result, Stuc-O-Flex sued Defendants, Waterway Rainscreen, and Low and Bonar, Inc. (the current owner of Walflor), alleging breach of the Distributorship Agreement, tortious interference with a business expectancy, trade name infringement, and a violation of Washington's Consumer Protection Act ("CPA"), RCW § 19.86.020, et seq. (Underlying Lawsuit Compl. ¶¶ 35-59.) In its claim for tortious interference with a business expectancy, Stuc-O-Flex asserts "[s]pecifically" that "Defendants engaged in the [alleged] ... wrongful conduct by conspiring to wrongfully sell and acquire [Waterway Rainscreen and Walflor] so as to side-step the obligations of the [Distributorship Agreement] and/or without complying with the same in the transitions...." (Id. ¶ 49.) In its claim for violation of the CPA, Stuc-O-Flex alleges that Defendants' "unfair business practices include ... the conduct that constitutes a breach of the [Distributorship Agreement]...." (Id. ¶ 56.)

Stuc-O-Flex later amended the complaint to replace its cause of action for trade name infringement with a cause of action for trademark violation and to add a cause of action for alter ego or piercing the corporate veil. (Colville Decl. ¶ 4, Ex. 2 ("Underlying Lawsuit Am. Compl.").)⁴ In its amended complaint, Stuc-O-Flex alleges in its tortious interference claim that "Defendants intentionally interfered with ... Stuc-O-Flex's binding [Distributorship Agreement] ... and sought to deny ... Stuc-O-Flex the benefit of its bargain under the [Distributorship Agreement]." (Id. ¶ 5.4; see also id. ¶ 5.5.) Stuc-Flex also alleges that it "has been and will continue to be damaged as a result of Defendants' tortious interference with rights and privileges afforded to ... Stuc-O-Flex pursuant to the [Distributorship Agreement], in an amount to be proven at trial." (Id. ¶ 5.8.)

C. Defendants' Insurance Claims

On January 16, 2018, Individual Defendants tendered the Underlying Lawsuit's original complaint to Massachusetts Bay under Walflor's insurance policy. (Colville Decl. ¶ 5, Ex. 3.) Massachusetts Bay initially concluded that the allegations in the complaint did not fall within the policy's coverage for damages for "bodily injury," "property damage," or "personal or advertising injury," and accordingly, denied the claim. (Id. ¶ 6, Ex. 4.) On April 5, 2018, Individual Defendants responded by asserting that Massachusetts Bay's duty to defend was triggered under the policy's coverage for "personal and advertising injury." (Id. ¶ 7, Ex. 5.) Following this communication, on April 13, 2018, Massachusetts Bay agreed to defend Defendants under a full reservation of rights. (Id. ¶ 8, Ex. 6.) In this reservation of rights letter, Massachusetts Bay specifically informed Defendants that it reserved the right "to seek reimbursement of any defense costs paid if it is later determined that none of the claims or damages sought are covered under the policies," and Massachusetts Bay quoted from the policies' "WASHINGTON CHANGES – DEFENSE COSTS...