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Pet Food Express, Ltd. v. Applied Underwriters, Inc.

United States District Court, E.D. California

September 11, 2019

PET FOOD EXPRESS, LTD., Plaintiff,
v.
APPLIED UNDERWRITERS, INC., APPLIED UNDERWRITERS CAPTIVE RISK ASSURANCE COMPANY, INC., CALIFORNIA INSURANCE COMPANY, and APPLIED RISK SERVICES, Defendant.

          MEMORANDUM AND ORDER RE: CROSS MOTIONS FOR SUMMARY JUDGMENT

          WILLIAM B. SHUBB UNITED STATES DISTRICT JUDGE

         Plaintiff Pet Food Express, Ltd. (“Pet Food”) filed this lawsuit against defendant Applied Underwriters, Inc. (“Applied Underwriters”), Applied Underwriters Captive Risk Assurance Company, Inc. (“Captive Risk Assurance”), and California Insurance Company (“California Insurance”) (collectively, “Applied”), alleging that defendants unlawfully marketed and sold workers' compensation insurance to California employers in violation of California's Unfair Competition Law.

         Before the court is Defendants' Motion for Summary Judgment, (Defs.' Mot. for Summ. J. (“DMSJ”) (Docket No. 139)), and plaintiff's Motion for Partial Summary Judgment, (Pl.'s Mot. for Partial Summ. J. (“PMSJ”) (Docket No. 138-1)).

         I. Factual and Procedural Background

         California requires that all employers purchase workers' compensation insurance to cover employees' work-related injuries. Cal. Lab. Code § 3700. The state also requires that all workers' compensation insurance policy forms, rates, and rating plans be filed for approval with the California Workers Compensation Insurance Rating Bureau (“the Bureau”) and approved by the California Department of Insurance (“CDI”). (Pl.'s First Am. Compl. (“PFAC”) ¶ 3 (Docket No. 54); see also Cal. Ins. Code §§ 11658, 11735.)

         Defendants filed a workers' compensation insurance program known as EquityComp (“Program”) with the Bureau and received approval from the Department of Insurance. (PFAC ¶ 31.) Defendants thereafter marketed and sold the Program to plaintiff. (PFAC ¶ 30.) After the Program's policies took effect for the plaintiff, defendants required the plaintiff to enter a Reinsurance Participation Agreement (“RPA”). (PFAC ¶¶ 29, 44; DMSJ at 4.) Importantly, the parties agree that the RPA is “not a filed retrospective rating plan.” (Pl.'s Reply in Opp. to Defs.' Mot. for Summ. J. (“PRSJ”) at 4, ¶ 17.)

         Captive Risk Assurance is structured as a segregated cell reinsurance facility. (PRSJ at 3, ¶7.) Under this structure, instead of pooling its risk, each Program participant has a separate underwriting account (or “cell”). (PRSJ at 3, ¶ 7.) Under the RPA, the employer agrees to maintain a capital account in its segregated cell. (PRSJ at 3, ¶8.) Each Program participant also agrees to maintain reserves in its cell after the RPA's three-year active term expires. (PRSJ at 4, ¶11.) The reserve amount is adjusted periodically as claims develop. (DMSJ at 4.) Because the ultimate claims costs cannot be known in advance, “loss development factors” or “LDF's” (i.e., multipliers) are applied to claims to estimate their final cost. (PRSJ at 3, ¶ 9.) LDFs reduce over time until their effect on the cost (and therefore the amount in the cell) reaches zero and the cell is closed. (DMSJ at 4.) When the segregated cell is closed, the employer's ultimate cost is calculated using the RPA's formulas and, depending on the claims experience, the employer could receive a profit sharing distribution under the RPA, also called a “rebate.” (PRSJ at 4, ¶ 14.) Under the RPA, Applied may, “in its sole discretion, ” hold the money in the cell account up to “7 years after the expiration of the policies.” (PMSJ at 14.)

         On June 20, 2016, in an administrative action challenging Applied's RPA, the California Insurance Commissioner (“Commissioner”) issued a Decision and Order, holding that the RPA must be filed and approved by the Commissioner pursuant to Insurance Code § 11735. See Shasta Linen Supply, Inc. v. Applied Underwriters, Inc., 2:16-158 WBS AC, 2016 WL 6094446, at *5 (E.D. Cal. Oct. 17, 2016). Because defendants did not file the RPA before it took effect, the Commissioner found that the “RPA is void as a matter of law.” Id. at *2.

         In the wake of that administrative proceeding, defendants developed an agreement that could be sold and marketed with the CDI's approval. (DMSJ at 5.) While there are differences between the unfiled and the filed RPAs, “none of them changes the structure, material terms, or financial results to the participant.” (Fein Decl., Defs.' Mot. for Summ. J., Medlong Decl. Ex. 5 (Docket No. 139-6).)

         Pet Food filed a class action complaint against defendants asserting claims for unfair competition, rescission, declaratory relief, and fraud. On June 21, 2017, plaintiff filed an amended complaint asserting additional claims under the federal Racketeer Influenced and Corrupt Organizations (“RICO”) Act, 18 U.S.C. § 1962; under the California Unfair Competition Law (“UCL”), Cal. Bus. & Prof. Code § 17200, and for quasi-contract. Defendants in turn filed a counterclaim to plaintiff's amended complaint alleging breach of contract. (Defs.' Answer, Countercl., at 30, ¶ 24 (Docket No. 76).)

         Defendants subsequently moved to dismiss the amended complaint. (Docket No. 61.) The court dismissed the RICO claims and denied the motion to dismiss in all other respects. (Mem. and Order Re: Defs.' Mot. to Dismiss at 24 (Docket No. 65).) With respect to plaintiff's UCL claim based on Insurance Code § 11735, the court found that an unfiled rate is not unlawful per se and determined that the Commissioner did not conduct the requisite formal rate disapproval hearing. (Id. at 20-22.) Plaintiff then moved to certify the class. (Docket No. 116.) This court subsequently denied the motion to certify on superiority grounds. (Id.)

         The claims remaining are Pet Food's UCL claims for unfair competition and unjust enrichment, and defendant's counterclaim for breach of contract. Plaintiff relies on the Commissioner's administrative decision and two subsequent California Courts of Appeal cases to argue that the RPA is an illegal program. (PMSJ at 5.) According to plaintiff, defendant's sale of this allegedly illegal program violates UCL Section 17200. (PMSJ at 3.) Pet Food seeks restitution in “the amount of money left in its segregated cell” account. (Mem. in Supp. of Mot. Partial Summ. J. at 2 (Docket No. 138-1).) This money consists of funds that Pet Food “has paid Defendants for the EquityComp plans.” (Witriol Decl., Decl. of Terri Witriol Lim in Opp. to Defs.' Mot. for Summ. J., at 2 (Docket No. 141-1).) Plaintiff also seeks a return on investment of these funds. Id. In contrast, defendants seek to enforce California Insurance's contract with Pet Food and allege that Pet Food remains liable for premiums, taxes, and assessments under the purchased policies. (Defs.' Answer, Countercl., at 30, ¶ 24 (Docket No. 76).)

         Defendants now seek summary judgment under Federal Rule of Civil Procedure 56, on the grounds that plaintiff lacks standing to sue under the UCL. (DMSJ at 16.) Plaintiff seeks partial summary judgment on the grounds that (1) the unfair competition claim is valid as a matter of law because the RPA is illegal; (2) defendants are collaterally estopped from litigating that illegality; (3) plaintiff is entitled to restitution as a matter of law; (4) the restitution must include a return on investment on those funds; and (5) no contract exists between California Insurance and Pet Food. (PMSJ at 1-2.)

         II. Legal Standard

         Summary judgment is proper “if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” Fed.R.Civ.P. 56(a). A material fact is one that could affect the outcome of the suit, and a genuine issue is one that could permit a reasonable jury to enter a verdict ...


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