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Greenwich Insurance Co. v. Media Breakaway

July 22, 2009

GREENWICH INSURANCE COMPANY, PLAINTIFF,
v.
MEDIA BREAKAWAY, LLC ET AL. DEFENDANTS.



The opinion of the court was delivered by: Christina A. Snyder United States District Judge

I. INTRODUCTION

ORDER GRANTING GREENWICH INSURANCE COMPANY AND INDIAN HARBOR INSURANCE COMPANY'S MOTIONS FOR SUMMARY JUDGMENT

On February 11, 2008, plaintiff Greenwich Insurance Company ("Greenwich") filed the instant action pursuant to 28 U.S.C §§ 2201 et seq. against defendants and counterclaimants Media Breakaway, LLC ("Media Breakaway") and its CEO Scott Richter ("Richter") (collectively, "defendants") seeking a declaratory judgment regarding its rights and obligations under Policy No. ELU-094382-06 issued by Greenwich to defendant Media Breakaway.

On December 9, 2008, defendants filed an answer and counterclaim against Greenwich and third party defendant Indian Harbor Insurance Company ("Indian Harbor") alleging claims for: (1) breach of the duty to defend; (2) breach of the duty to indemnify; and (3) breach of the implied covenant of good faith and fair dealing.

On January 21, 2009, Indian Harbor filed a counterclaim against defendants. On February 20, 2009, Indian Harbor filed a "corrected counterclaim" against defendants seeking (1) declaratory judgment as to the application of certain exclusions in a policy that they issued to defendants; (2) reimbursement for defense expenses paid under a reservation of rights; and (3) declaratory judgment as to the application of the policy's definition of damages.

On June 11, 2009, Greenwich and Indian Harbor each filed a separate motion for summary judgment as to their claims and defendants' counterclaims. On July 6, 2009, defendants filed separate oppositions to Greenwich and Indian Harbor's respective motions. On July 13, 2009, Greenwich and Indian Harbor filed separate replies. A hearing was held on July 22, 2009. After carefully considering the parties' arguments, the Court finds and concludes as follows.

II. BACKGROUND

A. The MySpace Action

Media Breakaway is an online marketing company that operates a network of independent contractors or "affiliates," who are compensated for directing internet traffic to websites affiliated with Media Breakaway. Steve Richter is the current CEO and president of Media Breakaway, but was general counsel at the time the MySpace litigation was ordered to Arbitration. Richter Decl.¶ 1.

On January 19, 2007, MySpace, Inc. ("MySpace") filed a complaint against defendants in the Central District of California, MySpace, Inc. v. Optinrealbig.com, LLC, et al., Case No. CV 07-496 GHK (RCx) (C.D. Cal), alleging multiple claims for violations of state and federal law.*fn1 GSUF ¶ 6; DSGI ¶ 6. The complaint alleges that defendants sent spam mail through MySpace users' accounts without their knowledge, by either misappropriating users' login names and passwords -- a process called "phishing" -- or by acquiring "phished" names and passwords from other parties. GSUF ¶ 7; DSGI ¶ 7. On August 13, 2007, the Honorable George H. King granted defendants' motion to compel arbitration. Arbitration proceedings occurred in March and April of 2008. GSUF ¶ 16, DSGI ¶ 16.

The arbitrator issued a final arbitration award (the "Arbitration Award") on June 12, 2008.*fn2 The arbitrator found Media Breakaway and Richter liable for damages, and expressly determined that they, "permitted, encouraged, supported and benefitted from spamming, illegal spamming on the MySpace network." GSUF ¶ 31; DSGI ¶ 29; Declaration of Jeffrey Ward ("Ward Decl."), Ex. 3 at 11 ("Arbitration Award"). According to the arbitrator, "some if not many of [the affiliate managers] knew that their affiliates were sending unlawful, unsolicited commercial advertisements and bulletins throughout the MySpace network." Id., Ex. 3 at 8. With regard to a particularly large spam attack in August of 2006, the arbitrator declared that "[i]t is clear that Media Breakaway condoned, encouraged, knew about and benefitted from the unlawful spam attacks on Myspace in August 2006." Id., Ex. 3 at 10.

Although Media Breakaway's affiliates were responsible for some of the illegal spamming, the arbitrator found that "where Media Breakaway benefitted from the wrongful activity, or chose to give second and third chances to an affiliate who still failed to comply, or directed rogue affiliates on how to evade detection -- all of which Media Breakaway did after August 2006 -- Media Breakaway should be responsible for the consequences." Id. The arbitrator further concluded that Richter's "penchant for bragging," particularly his "admission that he would be willing to pay one million in litigation to make eight million," informed the need for a substantial damage award in order to "prevent Media Breakaway from profiting for its wrongful and illegal past behavior." Id., Ex. 3 at 11.

On July 8, 2008, Judge King entered a stipulated judgment against defendants in accordance with the arbitrator's award, which awarded MySpace $6,079,751.04 in damages, attorneys fees and costs. GSUF ¶ 42; DSGI ¶ 42.

B. Greenwich Insurance Policy

Prior to the MySpace action, defendants submitted an application on September 29, 2006, for directors and liability insurance from Greenwich, policy No. ELU094382-06 (the "Greenwich Policy"). Compl. ¶ 11. The "General Questions" section of the application inquires of the applicant:

[i]s the applicant aware of any facts, circumstances, or situations which exist at this time that might lead to a claim OR does the applicant have knowledge of incidents or potential claims for antitrust, copyright, patent infringement, representative actions, class actions, shareholder derivative actions or violations of federal or state securities or employment benefit law?

Id., Ex. A. Defendants' response to this question was "no," and Richter, in his capacity as Media Breakaway's CEO, signed the application. Id.

Based on defendants' application, Greenwich issued the subject policy to defendants for the policy period October 1, 2006, to October 1, 2007. Greenwich's Statement of Uncontroverted Facts ("GSUF") ¶ 1; Media Breakaway and Richter's Statement of Genuine Issue to Greenwich's MSJ ("DSGI") ¶ 1. The Greenwich Policy has a $1 million liability limit for all claims under the Management Liability and Company Reimbursement Coverage section. GSUF ¶ 2; DSGI ¶ 2. However, Section III(A) of the Policy's Management Liability and Company Reimbursement Coverage part ("Exclusion III(A)") provides:

The Insurer shall not be liable to make any payment for Loss, and shall have no duty to defend or pay Defense Expenses, in connection with any Claim made against an Insured:

(A) brought about or contributed to in fact by any:

(1) intentionally dishonest, fraudulent or criminal act or omission or any willful violation of any statute, rule or law; or

(2) profit or remuneration gained by any Insured to which such Insured is not legally entitled; as determined by a final adjudication in the underlying action or in a separate action or proceeding. Each Insured agrees that, if the Insurer has no liability to an Insured for Loss as a result of a Claim by reason of this EXCLUSION (A), such Insured will repay the Insurer upon demand all Defense Expenses paid on behalf of such Insured in connection with such Claim.

GSUF ¶ 4; DSGI-G ¶ 4; see also Compl., Ex. A.

Prior to the final Arbitration Award in the MySpace action, Greenwich agreed to provide defendants with a defense subject to a complete reservation of Greenwich's rights under the Greenwich Policy and applicable law. GSUF ¶ 44, Ex. 7 ( July 25, 2007 letter from Greenwich's Counsel); DSGI ¶ 44.*fn3 Pursuant to Cal. Civ. Code § 2860, defendants asserted the right to independent counsel and supplied Greenwich with defense counsels' invoices. In response, Greenwich sent a check for $45,522.89 to Media Breakaway on December 21, 2007. GSUF ¶¶ 45-57; DSGI ¶¶ 45-47. Defendants did not send any other invoices to Greenwich until after the Arbitration Award. GSUF ¶ 48; DSGI ¶ 48.

After receiving the Arbitration Award, Greenwich advised defendants on August 8, 2008, that the Greenwich Policy did not provide coverage for the MySpace action, and demanded that defendants reimburse Greenwich for the defense expenses provided in December 2007. GSUF ¶ 48; DSGI-G ¶ 48. According to Greenwich, the arbitrator's findings in the final Arbitration Award triggered Exclusion III(A), and thus, on ...


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