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LMA North America, Inc. v. National Union Fire Ins. Co. of Pittsburgh, PA

United States District Court, S.D. California

February 15, 2013

LMA NORTH AMERICA, INC., Plaintiff,
v.
NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA, Defendant.

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Gary Thompson, Jan A. Larson, Reed Smith LLP, Washington, DC, Melissa Meth, Reed Smith LLP, Los Angeles, CA, for Plaintiff.

Christopher R. Wagner, David L. Jones, Peter Schwartz, Gordon & Rees LLP, Los Angeles, CA, for Defendant.

ORDER

HAYES, District Judge:

The matter before the Court is the Motion for Summary Judgment or, Alternatively, Partial Summary Judgment (" Motion for Summary Judgment" ), filed by Defendant National Union Fire Insurance Company of Pittsburgh, PA (" National Union" ). (ECF No. 24).

I. Background

On June 10, 2011, Plaintiff LMA North America, Inc. (" LMA" ) initiated this action by filing a Complaint in this Court against National Union. (ECF No. 1). In connection with National Union's refusal pay $3.75 million toward the settlement of an underlying litigation pursuant to an umbrella insurance policy, LMA asserts two claims for relief: (1) breach of contract, and (2) breach of the implied covenant of good faith and fair dealing (" bad faith claim" ). Plaintiff seeks punitive damages as to the bad faith claim, and has demanded a jury trial.

On September 12, 2012, National Union filed the Motion for Summary Judgment, accompanied by evidence. (ECF No. 24). National Union moves the Court for summary judgment as to the entire Complaint or, alternatively, partial summary judgment as to LMA's bad faith claim and request for punitive damages.

On October 1, 2012, LMA filed an opposition to the motion, accompanied by evidence. (ECF No. 26). On October 5, 2012, National Union filed a reply. (ECF No. 27). On February 8, 2012, the Court conducted oral argument on the Motion for Summary Judgment. (ECF No. 36).

II. Facts

A. Ambu Litigation

Plaintiff LMA and LMA's main competitor, Ambu A/S (" Ambu" ), distribute competing laryngeal mask airway products.[1] (Def. Ex. 8 at 59, ECF No. 24-3 at 60).

On October 15, 2007, LMA brought a patent infringement suit against Ambu related

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to certain laryngeal mask airway products, captioned The Laryngeal Mask Company Ltd., et al. v. AMBU A/S, et al. (S.D.Cal. Case No. 3:07-cv-01988-DMS-NLS) (the " Ambu Litigation" ). (Def. Ex. 1 at 10, ECF No. 24-3 at 5).

On August 25, 2008, Ambu filed five product disparagement counterclaims against LMA in the Ambu Litigation. (Def. Ex. 4 at 16, ECF No. 24-3 at 17). These counterclaims were premised on allegedly false and disparaging statements in LMA advertising regarding Ambu's laryngeal mask airway products. Specifically, Ambu alleged that from 2004 to 2009, LMA made certain claims in its advertising and marketing that implied Ambu's products were unsafe or inferior to LMA's products, and Ambu thereby claimed entitlement to resulting monetary damages (the " Counterclaims" ).

On September 25, 2009, the district court in the Ambu Litigation granted summary judgment in favor of Ambu for invalidity of the LMA patent, effectively dismissing all of LMA's affirmative claims for patent infringement. (Def. Ex. 7 at 53-57, ECF No. 24-3 at 54-58). On September 25, 2009, the district court denied LMA's motion for summary judgment as to Ambu's Counterclaims and denied LMA's motion to exclude Ambu's damages expert pursuant to Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579, 113 S.Ct. 2786, 125 L.Ed.2d 469 (1993). (Pl. Ex. 1 at 1-2, ECF No. 26-1 at 4-5). On October 6, 2009, the district court stayed all further proceedings pending LMA's appeal of the summary judgment order as to LMA's patent infringement claim. (Pl. Ex. 2 at 1-4, ECF No. 26-1 at 6-10).

On September 21, 2010, the Court of Appeals for the Federal Circuit reversed the dismissal of the LMA patent claims. (Def. Ex. 8 at 63, ECF No. 24-3 at 64). The action was remanded to the district court for adjudication of LMA's patent infringement claims in conjunction with Ambu's Counterclaims. Id.

B. National Union Policy

Defendant National Union issued Policy No. BE 3205963 (the " Policy" ) to LMA, with per occurrence excess limits of $14 million.[2] (Def. Ex. 9 at 79-126, ECF No. 24-3 at 80-127). The National Union Policy is excess to CNA Policy No. A1081632676 issued to LMA by nonparty CNA, with per occurrence primary limits of $1 million. National Union is obligated under its Policy to " pay on behalf of the Insured those sums in excess of the Retained Limit [$1 million] that the Insured becomes legally obligated to pay by reason of liability imposed by law or assumed by the Insured under an Insured Contract because of ... Personal Injury, or Advertising Injury that takes place during the Policy Period and is caused by an Occurrence happening anywhere in the world." Id. at 81, 102-03, ECF No. 24-3 at 82, 103-04. The parties agree that Ambu's product disparagement Counterclaims against LMA are covered " Advertising Injury" or " Personal Injury" under the CNA and National Union Policies. (ECF No. 24-1 at 7; ECF No. 26 at 9).

Prior to exhaustion of CNA's primary coverage, National Union has " the right and shall be given the opportunity to participate in the defense and trial of any claims, suits or proceedings relative to any Occurrence which, in [its] opinion, may create liability on [its] part...." (Def. Ex. 9 at 82, ECF No. 24-3 at 83). Following exhaustion of the CNA policy, National Union has " the right and duty to defend any claim or suit seeking damages covered by the terms and conditions of this policy when ... [t]he applicable Limits of Insurance

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of the underlying policies ... have been exhausted by payment of claims to which this policy applies." Id. at 81, ECF No. 24-3 at 82.

The Policy contains the following " no voluntary payments" provision: " No insureds will, except at their own cost, voluntarily make a payment, assume any obligation, or incur any expense, other than for first aid, without [National Union's] consent." Id. at 93, ECF No. 24-3 at 94. The Policy also contains the following " no action" clause: " There will be no right of action against us under this insurance unless: ... 2. The amount you owe has been determined with our consent or by actual trial and final judgment." Id.

C. LMA's Notification to National Union

On March 13, 2009, LMA notified National Union of Ambu's Counterclaims. (Manger Decl. ¶ 6, ECF No. 24-4 at 3).

On July 14, 2009, CNA agreed to defend LMA under the primary policy in the Ambu Litigation with respect to the Counterclaims. Id. ¶ 10, ECF No. 24-4 at 3.

On September 14, 2009, LMA forwarded to National Union a September 11, 2009 letter from Ambu, whereby Ambu's counsel stated that " LMA's potential exposure [as to Ambu's Counterclaims] is ... well in excess of $30 million." (Manger Dep. 61-62, 65, ECF No. 26-3 at 73-74; Pl. Ex. D, ECF No. 26-3 at 121).

On September 30, 2009, National Union sent a coverage letter to LMA, whereby National Union stated " there is potential coverage under the National Union Polic[y], subject to a reservation of rights." (Manger Decl. ¶ 11, ECF No. 24-4 at 4; Def. Ex. 16 at 114, ECF No. 24-4 at 115).

On October 9, 2009, LMA defense counsel informed a National Union claims handler that the Ambu Litigation would most likely be stayed pending LMA's appeal to the Federal Circuit. (Def. Ex. 11 at 60, ECF No. 24-4 at 61). LMA gave National Union access to a " database of the docket sheet and all entries on the docket" of the Ambu Litigation. (Pl. Ex. D at 119, ECF No. 26-3 at 124). National Union " typically follows PACER [a database allowing access to all public filings in a federal court case] to keep track of filings in [a] case" such as the Ambu Litigation. (Manger Dep. at 74-75, ECF No. 26-3 at 77).

On August 30, 2010, LMA's counsel, Stephen Marzen, forwarded to National Union's claims handler, Louis Manger, a detailed case report concerning the Ambu Litigation. (Pl. Ex. D at 119, ECF No. 26-3 at 124).

On November 15, 2010, LMA's counsel Marzen spoke with claims handler Manger. The claim notes written by Manger state:

On 11/15/10, I spoke with defense counsel Stephen Marzen regarding the remaining claims. According to defense counsel, the cross claim for false advertising is a [‘ ]bargaining chip’ that has no support based upon the evidence adduced thus far. Therefore defense counsel does not recommend any payment to settle the cross claim at this point. The parties are attempting to schedule a mediation to resolve the outstanding claims. Defense counsel thinks that it is likely, given everyone's schedule, that this mediation will take place in January.

(Def. Ex. 11 at 45, ECF No. 24-4 at 46).

In his April 27, 2012 deposition in this case, Marzen stated: " [W]e characterized [the Ambu Counterclaims as] a bargaining chip. At the same time, it plainly was not merely a bargaining chip, because the claim, having survived summary judgment motions, was more than a chip at that point [because it was going to go to trial]." (Marzen Dep. at 53-54, ECF No. 26-3 at 19-20). Marzen stated:

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Well, I'm an advocate for LMA and on the product disparagement claims for the insurance companies, too. So I actually thought that we had good arguments, very good arguments. By the same token, for every argument we had, Ambu had counterarguments, and as discussed with [Manger], the unfortunate fact was all of our arguments were put in summary Judgment motions, and the judge denied them all. So we were then faced with trying them in front of a jury.

Id. at 38-39, ECF No. 26-3 at 16.

On November 16, 2010, National Union claims adjuster Manger reported in his claim notes that he was called by " the underlying CNA adjuster." (Def. Ex. 11 at 45, ECF No. 24-4 at 46). Manger states: " While [the CNA adjuster] is still reviewing deposition transcripts, preliminarily, [CNA] does not intend to pay [ ] on the claim at this point and do[es] not think they will attend the mediation [in the Ambu Litigation]. Nevertheless, it was agreed that [CNA] would provide us with the mediation date when it is scheduled." Id.

On November 17, 2010, Marzen emailed Manger with information about the upcoming mediation, including proposed dates, and asked, " Are you available to attend ... ?" (Pl. Ex. F at 167, ECF No. 26-3 at 172).

On November 29, 2010, Manger responded that " National Union did not plan on attending the upcoming mediation unless the primary carrier (CNA) planned on contributing its $1,000,000 primary limits to settle Ambu's counterclaim." (Manger Decl. ¶ 13, ECF No. 24-4 at 4). Marzen " voiced no objection to National Union's position regarding the upcoming mediation." Id.

On December 2, 2010, Manger spoke to the CNA claims adjuster. In his claim notes, Manger stated as follows: " [CNA has] not been given a demand and [CNA was] not considering, at this time, ... put[ing] up [its] policy limits. Accordingly, I informed [the CNA claims adjuster] that [National Union] will not be attending the upcoming mediation. It was agreed that CNA would keep us up to date on the happenings at the mediation." (Def. Ex. 11 at 41, ECF No. 24-4 at 42).

On December 16, 2010, LMA forwarded to National Union a copy of Ambu's December 10, 2010 pre-mediation settlement demand for its Counterclaims, which was then $28 million, including 14 pages of factual and legal analysis and voluminous attachments. (Manger Dep at 105-110, ECF No. 26-3 at 84-85; Pl. Exs. G & H, ECF Nos. 26-3 at 197-205, 26-4 at 1-78). Ambu's December 10, 2010 pre-mediation letter states that Ambu's expert economist " estimates that Ambu has sustained actual damages of at least $9,862,847, and alternatively at least $12,376,090 under an unjust enrichment theory." (Pl. Ex. G at 196, ECF No. 26-3 at 201). The letter states that " Ambu will establish additional facts at trial" that " will expose LMA to enhanced damages (up to three times the amount of actual damages)." Id.

On January 5, 2011, Manger stated in his claim notes:

The Federal Circuit denied Ambu's rehearing petitions.... Accordingly, the appeal is over and the case is remanded to the San Diego federal court with LMA's patent claims restored. Ambu's product disparagement counter claim will also be tried. LMA's counsel also indicates that the chairman of Ambu's board of directors is planning to attend Monday's mediation. As we have not received any indication that the underlying carrier is considering any settlement amount, much less offering up its policy limits, we do not intend to appear at the mediation. Nevertheless, I have asked

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LMA's counsel to keep me updated as the mediation proceeds.

(Def. Ex. 11 at 40, ECF No. 24-4 at 41).

D. Mediation

On January 10-11, 2011, the mediation proceeded without National Union present. (Marzen Dep. at 174-75, ECF No. 26-3 at 50).

On the afternoon of January 10, 2011, Manger sent Marzen an email asking if there were " [a]ny significant developments." (Pl. Ex. R at 345, ECF No. 26-5 at 50). Marzen responded on January 10, 2011 with an email stating that " [t]he parties have not yet exchanged demands and offers." Id. Marzen continued: " As you know, CNA is represented here by its coverage counsel. If CNA is willing to tender its policy limits, is [National Union] willing to participate?" Id.

Later in the afternoon of January 10, 2011, the CNA claims adjuster sent Manger an email relaying a report she had received from CNA's coverage counsel at the mediation. CNA's claims adjuster stated:

LMA is putting a substantial price on the counterclaim and would like to get [CNA]'s $1M limit. [LMA's coverage counsel] noted that the parties will talk in terms of a net settlement to LMA (i.e., $20M for the patent, and $10M for disparagement, netting LMA $10M). [CNA's coverage counsel] discussed the fact that he didn't want LMA to over value the disparagement claim....
A little later, [LMA's coverage counsel] advised that he thought [LMA]'s opening offer would be to have [Ambu] pay it $16M on the patent claims and agree to pay [Ambu] $1M on the disparagement claims, subject to [CNA]'s approval. (We have not offered anything. Please call me should you want to discuss this.)
[CNA] asked [LMA to] prepare a liability and damages analysis of the disparagement portion of the case.

(Pl. Ex. P at 341, ECF No. 26-5 at 46).

On the morning of January 11, 2010, Marzen called Manger with a detailed update of the first day of the mediation. (Marzen Dep. at 60-61, ECF No. 26-3 at 21). During the call, Marzen told Manger that " further exchange of numbers on the second day of the mediation ... would necessarily be in the excess insurer's layer." Id. at 62, ECF No. 26-3 at 22. Manger " accurately played back to [Marzen] all of the arguments in [LMA's] summary judgment motions." Id. Marzen responded that, " as good as we ... thought our argument was, the judge without a written opinion has denied our summary judgment motion. So those arguments ... aren't going to stop this product disparagement counterclaim from getting to a jury." Id. at 63, ECF No. 26-3 at 22. At the end of the call, Manger told Marzen that LMA did not have authority to settle from National Union. See id. Marzen also did not have authority to settle from CNA. See id.

During the second day of the mediation, " offers and counter-offers went back and forth throughout the course of the ... day," and, " at midnight, there was a tentative term sheet" agreed to by the parties. Id. at 64, ECF No. 26-3 at 22.

On January 13, 2011, Manger stated in the claim notes:

Mediation was conducted and ended without a resolution on January 11, [2011]. CNA did [not] make an offer much less agree to offer up its policy limits. However, according to LMA's counsel, CNA was considering doing so when faced with a potentially expensive trial. I spoke with LMA's counsel and asked him to prepare a budget for legal services going forward and including trial.

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(Def. Ex. 11 at 39, ECF No. 24-4 at 40). Manger understood that " the mediation ended without any settlement," and " the primary insurer, CNA, did not make any settlement offer at the mediation." (Manger Decl. ¶ 16, ECF No. 24-4 at 4-5).

E. Settlement

On February 1, 2011, LMA's coverage counsel sent an e-mail to Manger. According to Manger:

This e-mail advised that, contrary to my prior understanding, LMA and Ambu had indeed reached a tentative settlement on January 11, 2011. [LMA's] e-mail attached a settlement ‘ terms sheet’ which indicated that Ambu tentatively agreed to pay $8.75 million to LMA in connection with LMA's patent claims. The ‘ terms sheet’ further indicated that LMA had tentatively agreed to pay $4.75 million to Ambu in connection with Ambu's counterclaim for false advertising and product disparagement. [LMA's coverage counsel] gave no explanation for the three week delay in advising National Union of the tentative settlement.

(Manger Decl. ¶ 17, ECF No. 24-4 at 5). LMA's coverage counsel asked Manger to review the attached " Agreement in Principle" and then contact LMA's coverage counsel. (Def. Ex. 17 at 134, ECF No. 24-4 at 135).

The " Agreement in Principle" signed by LMA and Ambu on January 11, 2011, stated that the settlement payments (payment by Ambu to LMA of $8.75 million, and payment by LMA to Ambu of $4.75 million) were expressly conditioned on LMA's ability to obtain " a written unconditional commitment ... by LMA['s] primary and umbrella insurance carriers ... to reimburse LMA [ ] for the amount paid to Ambu.... If LMA does not certify the fulfillment of the Condition by February 18, 2011 ... or otherwise waive the Condition ... then this Agreement in Principle becomes null and void." (Def. Ex. 17 at 136, ECF No. 24-4 at 137).

On February 2, 2011, LMA sent Manger LMA's and Ambu's mediation presentations. (Manger Dep at 134-135, ECF No. 26-3 at 92). On February 3, 2011, LMA sent Manger " a memo and [budget] estimate that [LMA] sent to the trial team to organize [LMA's] preparation for trial." (Pl. Ex. K at 287, ECF No. 26-4 at 87). The budget from LMA estimated that the defense fees and costs through the end of trial would be a total of $2,759,968.75 (including $2,008,025 in fees related to Ambu's Counterclaims). (Manger Dep. at 124-25, 214-15, ECF No. 26-3 at 89, 107; Pl. Ex. I at 285, ECF No. 26-4 at 85). On February 3, 2011, ...


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