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Costco Wholesale Corp. v. Liberty Mutual Insurance Co.

January 24, 2007


The opinion of the court was delivered by: Irma E. Gonzalez, Chief Judge United States District Court


Presently before the Court is Liberty Mutual's ("defendant") motion to transfer the case to the Eastern District of Pennsylvania, pursuant to 28 U.S.C. § 1404(a) [Doc. Nos. 8-9], and Costco Wholesale's ("plaintiff") motion for partial summary judgment on its claim for breach of the contractual duty to defend. [Doc. No. 10.]

A. Factual Background

1. CDS Agreement

Plaintiff, along with The Price Company ("Price"), owns and operates a nationwide warehouse merchandising business. (Compl. ¶ 9.) Vendors use plaintiff's warehouses for product demonstrations. (Id.) Club Demonstration Services ("CDS") is a corporation in the business of organizing and conducting product demonstrations. (Id. ¶ 10.) On September 4, 2000, plaintiff, Price, and CDS entered a one-year agreement allowing CDS to perform food product demonstrations at plaintiff's warehouses nationwide ("CDS Agreement"). (Id. ¶ 12 & Exhibit A.)

Under its "Insurance and Indemnification" section, the CDS Agreement obligated CDS to indemnify, defend and hold Costco Wholesale harmless from and against all liabilities, damages to person or property, death or injury, losses, claims (including claims against Costco Wholesale by CDS employees), and expenses (including attorney's fees) . . ., except to the extent such damage is caused by the sole negligence of Costco Wholesale. (Id., Exhibit A, ¶ 8(a).) Specifically, CDS would procure a liability insurance policy with "minimum primary limits of $2,000,000 combined single limit," along with an endorsement naming plaintiff and Price as additional named insureds. (Id., Exhibit A, ¶ 8(c).))

2. The Policy

Defendant issued a policy of commercial general liability insurance for the policy term of September 7, 2000 through September 7, 2001, with coverage limits of $1 million per occurrence and $2 million aggregate ("Policy"). (Benson Decla. ¶ 4.) The Policy*fn1 named CDS and its parent corporation, Daymon Associates ("Daymon"), as named insureds. (Policy, Commercial General Liability Declarations, and Named Insured Endorsement.) The Policy obligated defendant to "pay those sums that the insured becomes legally obligated to pay as damages because of 'bodily injury' or 'property damage' to which this insurance applies" and "to defend the insured against any 'suit' seeking those damages." (Amendment of Insuring Agreement--Known Injury or Damage.) The Policy named plaintiff and Price as additional insureds, "but only with respect to liability arising out of [CDS's] operations." (Additional Insured--Designated Person or Organization.)

The Policy contained an employer's liability exclusion for "bodily injury" to "[a]n 'employee' of the insured arising out of and in the course of:

(a) [e]mployment by the insured; or

(b) [p]erforming duties related to the conduct of the insured's business." (Commercial General Liability Coverage Form, § 1, ¶ 2(e).) The Policy also contains a severability clause, applying the insurance "[a]s if each Named Insured were the only Named Insured" and "[s]eparately to each insured against whom claim is made or 'suit' is brought." (Id. § 4, ¶ 7.)

3. Kuo Complaint

On August 24, 2001, during the term of both the CDS Agreement and the Policy, John Kuo, a CDS sales advisor, tripped on discarded packaging tape while pushing a cart out of plaintiff's warehouse in King of Prussia, Pennsylvania. (Kuo Compl. ¶ 4.) On August 22, 2003 Kuo filed a complaint against plaintiff in the Montgomery County Court of Common Pleas*fn2 for bodily injuries allegedly resulting from plaintiff's negligence. (Id. ¶ 16.)

On September 3, 2003, Jan Carpenter, senior examiner for Sedgwick CMS (plaintiff's third-party claims administrator) faxed a copy of the Kuo Complaint to Janice Walker, CDS risk manager, and tendered Kuo's claim to CDS "for future handling and to defend and indemnify Costco." (Compl., Exhibit D.) On September 9, 2003, Ms. Carpenter faxed a second letter to Ms. Walker reiterating the request for defense and indemnity. (Id., Exhibit E.) While awaiting a response, plaintiff retained an attorney to obtain a thirty-day extension to answer the complaint. (Id. ¶ 31 & Exhibit F.) On September 19, 2003, Ms. Carpenter faxed a third letter to Ms. Walker asking CDS to "advise [its] position as soon as possible." (Id., Exhibit F.)

On October 8, 2003, Rita Spalletti, defendant's claims case manager, wrote to Ms. Carpenter that defendant would not assume plaintiff's defense or indemnification. (Id., Exhibit H.) Ms. Spalletti first cited the employer's liability exclusion, which "[u]nder Pennsylvania law . . . negates coverage for all claims involving 'bodily injury' to an 'employee' of the named insured, even if the party seeking coverage is an additional insured rather than a named insured." (Id.) Because Mr. Kuo was employed by CDS (the named insured), the employer's liability exclusion denied coverage to plaintiff (the additional insured). The second basis for denying coverage was the indemnification clause in the CDS Agreement, which imposed no obligation on CDS to indemnify plaintiff for claims involving plaintiff's "sole negligence." (Id.) Because plaintiff was the only party alleged to be negligent, CDS (and, therefore, defendant) had no obligation to indemnify plaintiff. (Id.)

On October 14, 2003, Ms. Carpenter faxed a letter to Ms. Spalletti, disputing whether the allegations in the Kuo complaint arose from plaintiff's "sole negligence."*fn3 (Id., Exhibit I.) Furthermore, if forced to pay for its own defense in the Kuo litigation, plaintiff claimed it would seek reimbursement and indemnification from CDS and/or sue CDS for breach of contract. (Id.)

In a November 12, 2003 letter, Ms. Spalletti stated defendant would not defend and indemnify plaintiff on the basis of plaintiff's contention that Kuo was contributorily negligent. (Id., Exhibit J.) Regardless of the scope of the CDS Agreement's indemnification clause, defendant denied an obligation to indemnify plaintiff in its capacity as CDS's indemnitee. (Id.) Per defendant, the Policy obligated a defense of the named insured's indemnitee only when the named insured was a co-defendant in the litigation. (Id.)

On April 7, 2004, Ms. Carpenter faxed a final letter to Ms. Spalletti rejecting defendant's contention that plaintiff had to prove Kuo's contributory negligence before defendant's duties of defense and indemnification arose. (Id., Exhibit K.) Defendant never responded to this letter. (Id. ¶ 58.)

Because defendant would not defend plaintiff in the Kuo litigation, plaintiff retained its own defense counsel, incurring attorney's fees and costs. (Lufkin Decla. ¶ 24.) The Kuo litigation is ongoing. (Id.)

Prior to the incident giving rise to the Kuo Complaint, defendant indemnified or defended plaintiff against at least six lawsuits filed by CDS employees for bodily injuries. (Id. ¶ 17.) Defendant undertook these defenses pursuant either to the Policy or similar policies issued in each of the two preceding policy periods. (Id.) All six lawsuits arose from an incident in a state other than Pennsylvania. (Id. ¶¶ 17-20.)

B. Procedural Background

On October 26, 2006, plaintiff filed the complaint, alleging breaches of (1) the duty to defend, (2) the duty to indemnify, and (3) the implied covenant of good faith and fair dealing. (Compl.; Doc. No. 1.) The first cause of action alleged the Policy imposed a duty on defendant to defend plaintiff in the Kuo litigation. (Id. ¶ 60.) Defendant allegedly breached by its refusal to defend, despite plaintiff's repeated demand. (Id. ¶ 62.) As remedies, plaintiff seeks monetary damages, including attorney's fees and costs incurred in the Kuo litigation. (Id. ¶ 63.)

Defendant answered the complaint on November 20, 2006. (Doc. No. 5.)

On November 22, 2006, defendant filed its motion to transfer to the Eastern District of Pennsylvania, pursuant to 28 U.S.C. § 1404(a). (Doc. Nos. 8-9.)

On December 18, 2006, plaintiff filed its motion for partial summary judgment on the first cause of action for breach of the duty to defend. (Doc. No. 10.)

Defendant filed its opposition to plaintiff's motion for summary judgment on December 29, 2006. (Doc. No. 11.) Plaintiff filed its opposition to defendant's motion to change venue on January 2, 2007. (Doc. No. 12.)

On January 8, 2007, each party filed its reply to the respective motions. (Doc. Nos. 13-14.) The Court held oral argument on the motions on January 16, 2007 and then took the matter under submission.


A. Legal Standard

Under 28 U.S.C. § 1404(a), "[f]or the convenience of parties and witnesses, in the interest of justice, a district court may transfer any civil action to any other district or division where it might have been brought." Here, defendant seeks to transfer this action to the Eastern District of Pennsylvania ("EDPA").

Defendant, as the moving party, carries the burden of showing transfer is appropriate. Commodity Futures Trading Comm'n v. Savage, 611 F.2d 270, 279 (9th Cir. 1979); DeFazio v. Hollister Employee Share Ownership Trust, 406 F. Supp. 2d 1085, 1088 (E.D. Cal. 2005). To satisfy its burden, defendant must show (1) venue is proper in this district,*fn4 (2) plaintiff could have brought this action in EDPA,*fn5 and (3) transfer "will serve the convenience of the parties and witnesses and will promote the interest of justice." Goodyear Tire & Rubber Co. v. McDonnell Douglas Corp., 820 F. Supp. 503, 506 (C.D. Cal. 1992).

The Ninth Circuit employs a multi-factor test for analyzing a motion to transfer:*fn6

(1) the location where the relevant agreements were negotiated and executed, (2) the state that is most familiar with the governing law, (3) the plaintiff's choice of forum, (4) the respective parties' contacts with the forum, (5) the contacts relating to the plaintiff's cause of action in the chosen forum, (6) the differences in the costs of litigation in the two forums, (7) the availability of compulsory process to compel the attendance of unwilling non-party witnesses, and (8) the ease of access to sources of proof.

Jones v. GNC Franchising, Inc., 211 F.3d 495, 498-99 (9th Cir. 2000); Television Events & Mktg., Inc. v. Amcon Distrib. Co., 416 F. Supp. 2d 948, 970 (D. Haw. 2006).

B. Analysis

1. Location of Relevant Agreements

The negotiation and execution of the Policy does not support transfer. Daymon accepted the Policy on CDS's behalf in Connecticut through a Connecticut broker. (Pl. Memo. ISO MSJ, at 10.) Plaintiff assumes (and defendant does not dispute) defendant signed the Policy in Massachusetts (defendant's domicile). (Id.) None of these events took place in Pennsylvania.

While the Policy is by far the most relevant agreement, the trier of fact may consider the CDS Agreement to determine the reasonable expectations of the contracting parties. CDS included plaintiff as an additional insured on the Policy because of CDS's obligations under the CDS Agreement. (Compl., Exhibit A, ¶ 8(C).) CDS, plaintiff, and Price*fn7 negotiated and executed the CDS Agreement in San Diego. (Pl. Opp to Transfer, at 2.) None of these events took place in Pennsylvania.

Therefore, this factor weighs against transfer because the relevant agreements were neither negotiated nor executed in Pennsylvania, but one potentially relevant agreement was negotiated and executed in California.

2. Governing Law

A diversity case should be litigated "in a forum that is at home with the law that must govern the action[.]" Decker Coal Co. v. Commonwealth Edison Co., 805 F.2d 834, 843 (9th Cir. 1986); DIRECTV, Inc. v. EQ Stuff, Inc., 207 F. Supp. 2d 1077, 1083 (C.D. Cal. 2002). According to defendant, transfer is appropriate here because EDPA is more familiar with Pennsylvania law on the scope of employer's liability exclusions.

Defendant's argument proceeds from the faulty premise that Pennsylvania's substantive law definitely applies. As explained in the Court's discussion infra of plaintiff's summary judgment motion, Pennsylvania law does not automatically govern this coverage dispute simply because the underlying tort happened there.

Instead, the only law that definitely applies here is California's choice-of-law rules. Those rules apply if the Court keeps the case here. See Arno v. Club Med, Inc., 22 F.3d 1464, 1467 (9th Cir. 1994) (federal court sitting in diversity applies the choice-of-law rules of the forum state). And, these rules would still apply if the Court transferred the case to EDPA.*fn8 See Muldoon v. Tropitone Furniture Co., 1 F.3d 964, 965 (9th Cir. 1993) (citing Van Dusen v. Barrack, 376 U.S. 612 (1964)) (ยง1404(a) transferee court applies choice-of-law rules of ...

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