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Woodspring Hotels LLC v. National Union Fire Insurance Co. of Pittsburgh, PA

Superior Court of Delaware

May 2, 2018

WOODSPRING HOTELS LLC, Plaintiff,
v.
NATIONAL UNION FIRE INSURANCE CO. OF PITTSBURGH, PA, Defendant.

          Submitted: January 26, 2018

         Upon Plaintiff WoodSpring Hotels LLC's Motion for Partial Summary Judgment for a Declaratory Judgment on Counts I and III Regarding Defense Costs GRANTED

          Jennifer C. Wasson, Esq., Carla M. Jones, Esq., Potter Anderson & Corroon LLP, Wilmington, Delaware, Kenneth H. Frenchman, Esq., Denise N. Yasinow, Esq., McKool Smith, PC, New York, New York, Attorneys for Plaintiff WoodSpring Hotels LLC

          Seth Niederman, Esq., Fox Rothschild LLP, Wilmington, Delaware, Joseph Collins, Esq., Fox Rothschild LLP, Chicago, Illinois, Attorneys for Defendant National Union Fire Insurance Company of Pittsburgh, PA.

          Eric M. Davis, Judge

         I. INTRODUCTION

         Plaintiff WoodSpring Hotels LLC ("WoodSpring") is an extended stay hotel company. Defendant National Union Fire Insurance Co. of Pittsburgh, Pa. ("National Union") sells insurance policies. WoodSpring obtained a Directors & Officers Insurance Policy (the "Policy") from National Union.

          Burnadette Ruby previously worked for Extended Stay America, Inc. and ESA Management LLC (collectively "ESA"). Ms. Ruby left ESA and began working for WoodSpring. ESA sued WoodSpring, Ms. Ruby, and Michael Docteroff, alleging that Ms. Ruby and Mr. Docteroff appropriated ESA's electronic information, including a customer database, to WoodSpring (the "ESA Litigation"). WoodSpring demanded that National Union undertake its duty to defend the ESA Litigation under the Policy. National Union refused to cover any costs (defense or indemnification) incurred by WoodSpring in the ESA Litigation, contending that such costs fell the Policy's exceptions to coverage. National Union covered some litigation expenses for Ms. Ruby subject to a reservation of rights. The ESA Litigation settled after a mediation.

         WoodSpring filed the instant action, seeking a declaration as to the existence, scope and breach of National Union's purported failure to honor its obligations under the Policy. WoodSpring also seeks damages for National Union's alleged breach of contract regarding defense and indemnification obligations owed to WoodSpring under the Policy.

         WoodSpring filed a Motion for Partial Summary Judgment for a Declaratory Judgment on Counts I and III Regarding Defense Costs (the "Motion"). In addition, WoodSpring submitted the Affidavit of Kenneth H. Frenchman ("Frenchman Aff.") in support of the Motion. National Union filed their Opposition to Plaintiff's Motion for Partial Summary Judgment for a Declaratory Judgment on Counts I and III Regarding Defense Costs (the "Opposition"). WoodSpring filed their Reply Brief in Further Support of its Motion for Partial Summary Judgment for a Declaratory Judgment on Counts I and III Regarding Defense Costs (the "Reply").

          For the reasons set forth below, the Court finds that WoodSpring is entitled to summary judgment on Counts I and III because National Union had a duty to defend Ms. Ruby and WoodSpring in the ESA Litigation. Accordingly, the Court GRANTS the Motion.

         II. RELEVANT FACTS

         WoodSpring is a limited liability company incorporated in Delaware.[1] WoodSpring's principal place of business is Kansas.[2] WoodSpring operates nearly 250 extended stay hotels across the nation.[3]

         National Union is incorporated in Pennsylvania with its principal place of business in New York.[4] Nation Union conducts substantial business in Delaware, including the sale of insurance, the investigation of claims, and the issuance of policies that cover policyholders or activities in Delaware.[5]

         A. The Policy[6]

         WoodSpring Hotels Holdings LLC ("Holdings") purchased the Policy through National Union.[7] Holdings is WoodSpring's parent company.[8] Holdings is also incorporated in Delaware.[9] The Policy covered Holdings, and its wholly owned subsidiaries including WoodSpring, during the policy period.[10] The policy period provided coverage from March 15, 2016 until March 15, 2017.[11] The D&O coverage is subject to a $10 million limit.[12] Further, the policyholder is subject to a $50, 000 self-insured retention.[13]

         The Policy provides protections, including the defense costs, for directors and officers of the company. Defense costs are:

the reasonable and necessary fees, costs and expenses consented to by the Insurer (including premiums for any appeal bond, attachment bond or similar bond arising out of a covered judgment, but without any obligation to apply for or furnish any such bond), resulting solely from the investigation, adjustment, defense and appeal of a Claim against an Insured, but excluding compensation of any Individual Insured. Defense Costs shall not include any fees, costs or expenses incurred prior to the time that a Claim is first made against an Insured.[14]

         Section 2(b) of the Policy defines a "Claim" as:

(i) a written demand for monetary or non-monetary relief . . .
(ii) a civil, criminal, administrative, regulatory or arbitration proceeding for monetary or non-monetary relief which is commence by:
(1) service of a complaint or similar pleading;
(2) return of an indict, information or similar document (in the case of a criminal proceeding); or
(3) receipt or filing of a notice of charges; or
(iii) a civil, criminal, administrative or regulatory investigation of an individual Insured:
(1) once such Individual Insured is identified in writing by such investigating authority as a person against whom a proceeding described in Definition 2(b)(ii) may be commenced; or
(2) in the case of an investigation by the Securities Exchange Commission ("SEC") or a similar state or foreign government authority, after:
(a) the service of a subpoena upon such Individual Insured; or
(b) the Individual Insured is identified in a written "wells" or other notice from the SEC or a similar state or foreign government authority that describes actual or alleged violations of laws by such Individual Insured.

         The term "Claim" shall also include any Securities Claim and any Derivative Demand.[15]

         Section 2(t) defines "Insured" under the contract as "(i) an Individual Insured; or (ii) the Company."[16] An "Individual Insured" is an "(i) Executive of a Company; (ii) Employee of a Company; or (iii) Outside Entity Executive."[17]

         The Policy defines an "Employee" as "any past, present or future employee, other than an Executive of a Company, whether such employee is in a supervisory, co-worker or subordinate position or otherwise, including any part-time, volunteer, seasonal and temporary employee. . . ."[18]

         The Policy provides the Insured to recover Defense Costs from the Insurer. Specifically, Section 7 states:

The Insurer does not assume any duty to defend. The Insureds shall defend and contest any Claim made against them. Notwithstanding the foregoing, the Insureds shall have the right to tender the defense of the Claim to the Insurer, which right shall be exercised in writing by the Named Entity on behalf of the Insureds to the Insurer pursuant to the notice provisions . . . This right shall terminate if not exercised within thirty (30) days of the date the Claim is first made against an Insured. Further, from the date the Claim is first made against an Insured to the date when the Insurer accepts the tender of the defense of such claim, the Insureds shall take no action, or fail to take any required action, that prejudices the rights of any Insured or the Insurer with respect to such Claim. Provided that the Insureds have complied with the foregoing, the Insurer shall be obligated to assume the defense of the Claim, even if such Claim is groundless, false or fraudulent. The assumption of the defense of the Claim shall be effective upon written confirmation sent thereof by the Insurer to the Named Entity. Once the defense has been so tendered, the Insured shall have the right to effectively associate with the Insurer in the defense and the negotiation of any settlement of any Claim, subject to the provisions of this Clause 7; provided, however, the Insurer shall not be obligated to defend such Claim after the Policy Aggregate Limit of Liability or any applicable Separate Limit of Liability . . .
When the Insurer has not assumed the defense of a Claim pursuant to this Clause 7, the Insurer nevertheless shall advance, at the written request of the Insured, Defense Costs prior to the final disposition of a Claim. Such advanced payments by the Insurer shall be repaid to the Insurer by each and every Insured or the Company, severally according to their respective interests, in the event and to the extent that any such Insured or Company shall not be entitled under the terms and conditions of this D&O Coverage Section to payment of such Loss. . . .[19]

         The Policy also contains exclusions from coverage.

The Insurer shall not be liable to make any payment for Loss in connection with any Claim made against Insured:

. . .

(g) alleging, arising out of, based upon or attributable to any actual or alleged act or omission of an Individual Insured serving in any capacity, other than as an Executive or Employee of a Company, or as an Outside Entity Executive of an Outside Entity;

. . .

(t) with respect to Coverage B(i) only: (i) for any actual or alleged plagiarism, misappropriation, infringement or violation of copyright, patent, trademark, trade secret or any other intellectual property rights; (ii) for any actual or alleged violation of any law, whether statutory, regulatory or common law, respecting any of the following activities: anti-trust, business competition, unfair trade practices or tortious interference in another's business or contractual relationships; . . . .[20]

         Endorsement 10 deletes and makes some changes to Exclusion 4(t). The new Exclusion 4(t) states:

with respect to Coverage B(i) only:
(i) for any actual or alleged plagiarism, misappropriate, infringement or violation of copyright, patent, trademark, trade secret or any other intellectual property rights; provided, however, that this exclusion shall not apply to a Securities Claim;
(ii) for any actual or alleged violation of any law, whether statutory, regulatory or common law, respecting any of the following activities: anti-trust, business competition, unfair trade practices or tortious interference in another's business or contractual relationships, provided, however that this exclusion shall not apply to a Securities Claim;
(iii) for any actual or alleged contractual liability of the Company or any other Insured under any express contract or agreement; provided, however, this exclusion shall not apply to liability which would have attached in the absence of such express contract or agreement, or to a Securities Claim; or
(iv) seeking fines or penalties or non-monetary relief against the Company, provided, however, that this exclusion shall not apply to a Securities Claim.[21]

          It appears that the purpose of Endorsement 10 is to make clear that Securities Claims are not excluded from coverage under Exclusion 4(t). The ESA Litigation did not involve Securities Claims.

         B. The ESA Litigation[22]

         On October 31, 2016, ESA initiated the ESA Litigation against WoodSpring, Ms. Ruby, and Mr. Docteroff. Ms. Ruby worked for ESA before she began working for WoodSpring in July of 2015.[23] Ms. Ruby signed a Separation Agreement and Release that included non-compete and confidentiality provision before leaving ESA.[24]

         The complaint in the ESA Litigation ("ESA Complaint") is thirty-seven pages long. The Court finds that the ESA Complaint is extensive and appears to be competently and carefully drafted. ESA states that its cause of action "arises out of Defendants' theft and misuse of ESA's competitively sensitive trade secret information, concerning tens of thousands of ESA customer accounts" so that WoodSpring could unfairly compete with ESA.[25]

         The ESA Complaint asserted, among other things, that "Ruby, with the help of ESA's IT Consultant Docteroff, allegedly obtained and distributed confidential and competitively sensitive ESA electronically stored information, including an 'ESA Sales Spreadsheet, ' to WoodSpring's sales team."[26] The ESA Complaint defines "Trade Secrets" as ESA's "database of detailed information concerning its corporate customers."[27] The database is further described as including extensive customer and market-specific information.[28]

         The ESA Complaint asserts eleven separate cause of action-Counts I through Count XI. Specifically, the ESA Complaint alleges: (i) violation of the Federal defend trade secrets act (Count I); (ii) violation of the North Carolina trade secrets protection act and Kansas uniform trade secrets act (Count II); (iii) breach of contract - against Ms. Ruby (Count III); (iv) breach of fiduciary duty - against Ms. Ruby (Count IV); (v) violation of the federal computer fraud and abuse act (Count V); (vi) violation of the North Carolina Computer Trespass Statute - against Mr. Docteroff (Count VI); (vii) unfair trade practices (Count VII); (viii) tortious interference with contract - against Ms. Ruby and WoodSpring (Count VIII); (ix) tortious interference with contract - against WoodSpring (Count IX); (x) tortious interference with business expectancy - against Ms. Ruby and WoodSpring (Count X); and (xi) civil conspiracy (Count XI).[29]

          All of the Counts in the ESA Complaint specifically reference the term Trade Secrets except Count V.[30] Count V is a cause of action based on the Federal Computer Fraud and Abuse Act ("CFAA"), 18 U.S.C. § 1030(a).[31] In Count V, ESA contends that Mr. Docteroff, in violation of the CFAA, accessed ESA's computers, and copied and communicated ESA's information to third parties without ESA's permission.[32] ESA also contends that WoodSpring and Ms. Ruby conspired with Mr. Docteroff to violate the CFAA.[33]

         WoodSpring notified National Union of the ESA Litigation as a claim under the Policy.[34]WoodSpring requested that National Union advance Defense Costs to WoodSpring and Ms. Ruby under the Policy.[35] AIG Claims, Inc. ("AIG") denied WoodSpring's claim on behalf of National Union.[36] National Union, through AIG, decided that all eight counts against WoodSpring were excluded from coverage under Exclusion 4(t)(i) and 4(t)(ii). Accordingly, National Union refused to advance WoodSpring's defense costs under Exclusion 4(t).[37] National Union did agree, however, to advance Ms. Ruby's defense costs subject to a reservation of rights.[38]

         On March 6, 2017, WoodSpring responded to National Union's denial.[39] WoodSpring argued that the Policy covered the claims against Ruby and WoodSpring. Additionally, WoodSpring told National Union that all defense costs should be advanced and then allocation could be determined at a later time.[40] On March 27, 2017, AIG responded to WoodSpring, reiterating that National Union would not change its positions on defense costs.[41]

         On April 4, 2017, a mediation was held for the ESA Litigation. In May 2017, WoodSpring and Ms. Ruby settled the ESA litigation (the "Settlement"). Under the terms of the Settlement: (i) WoodSpring would pay ESA $1, 160, 000; and (ii) Ms. Ruby would pay ESA $40, 000 "from her own assets and Ruby shall not seek or accept reimbursement for such payments from any other Party or from any insurance coverage which may be available to her."[42]

         C. The Current Litigation

         On September 27, 2017, WoodSpring filed the Complaint. In the Complaint, WoodSpring seeks: (i) declaratory relief - duty to pay defense costs for claims against Ms. Ruby; (ii) breach of contract - duty to pay defense costs for claims against Ms. Ruby; (iii) declaratory relief - duty to pay defense costs for claims against WoodSpring; (iv) breach of contract - duty to pay defense costs for claims against WoodSpring; (v) declaratory relief - duty to pay indemnity for claims against Ms. Ruby; (vi) breach of contract - duty to pay indemnity for claims against Ms. Ruby; (vii) declaratory relief - duty to pay indemnity for claims against WoodSpring; and (viii) breach of contract - duty to pay indemnity for claims against WoodSpring.

         On October 25, 2017, WoodSpring filed the Motion. On December 8, 2017, National Union filed the Opposition. On January 5, 2018, WoodSpring filed the Reply.

         On January 26, 2018, the Court held a hearing on the Motion, Response, and Reply (the "Hearing"). At the Hearing, National Union noted that the reservation of rights only related to the indemnity claims of Ms. Ruby. Regarding Ms. Ruby's defense costs, National Union contends that it already paid Ms. Ruby's counsel directly. Further, National Union argues that it did not authorize any payments made to WoodSpring's counsel on behalf of Ms. Ruby. Any policy coverage of counsel for WoodSpring's expenses on behalf of Ms. Ruby, therefore, is an indemnification issue rather than duty to defend issue.

         III. PARTIES' CONTENTIONS

         A. WoodSpring

         In the Motion, WoodSpring argues that it is entitled to summary judgment on Counts I and III of the Complaint. WoodSpring contends that, under either Kansas or Delaware law, National Union had a duty to defend, claiming that an insurer owes this duty to an insured under an insurance policy if the claims "may potentially be covered" by the policy on the face of the complaint.[43] WoodSpring argues that this duty to defend applies even if the possibility of the insurer having to defend the insured is remote. WoodSpring also claims that the Court should resolve any doubt of coverage in favor of the insured.

         WoodSpring argues that the Policy's exclusions did not apply to all claims asserted in the ESA Litigation. WoodSpring contends that, under applicable law, the Policy should be narrowly with respect to coverage exclusions. Exclusions must be clear and unambiguous in the Policy.

         As to the duty to defend Ms. Ruby, WoodSpring notes that Ms. Ruby was an employee of WoodSpring at all times relevant to the ESA Complaint. Because Ms. Ruby was a WoodSpring employee, WoodSpring claims that Exclusion 4(g) does not apply to the ESA Litigation. Next, WoodSpring claims that National Union also had a duty to provide a defense for WoodSpring in the ESA Litigation. WoodSpring contends that National Union improperly denied coverage of WoodSpring under exclusions 4(t)(i) and 4(t)(ii). WoodSpring relies upon the fact that at least two claims in the ESA Complaint, Count V and Count XI, can be interpreted as exposing WoodSpring to potential liability that would not expressly excluded under the Policy. An insurer cannot avoid a duty to defend unless every allegation in a complaint falls into an exception under the policy. Here, not every claim fell under Exclusion 4(g), 4(t)(i), and 4(t)(ii). Therefore, National Union is responsible for defense costs under the Policy.

         B. National Union

         National Union argues that Kansas law applies to this case. The named insured is WoodSpring's parent company, which is a Delaware corporation with its principle place of business in Kansas.[44] Further, National Union argues that Kansas courts have not addressed certain issues raised by WoodSpring regarding the duty to advance defense costs and apportionment of defense costs.[45]

         National Union contents that it paid for all attorneys' fees and expenses incurred in Ruby's defense above the Policy's $50, 000 retention, totaling $87, 703.04 incurred by Fleeson Gooing. However, National Union argues that the $2.3 million in defense costs incurred by Weil Gotschall and Foulston Siefkin on behalf of Ms. Ruby is unreasonable.

         Regarding WoodSpring's costs, National Union argues that Exclusion 4(t) applies to all claims of the ESA Complaint. If the exclusion applies to all claims, then National Union is not responsible for any duty to defend WoodSpring.

          V. STANDARD OF REVIEW

         The standard of review on a motion for summary judgment is well-settled. The Court's principal function when considering a motion for summary judgment is to examine the record to determine whether genuine issues of material fact exist, "but not to decide such issues."[46]Summary judgment will be granted if, after viewing the record in a light most favorable to a nonmoving party, no genuine issues of material fact exist and the moving party is entitled to judgment as a matter of law.[47] If, however, the record reveals that material facts are in dispute, or if the factual record has not been developed thoroughly enough to allow the Court to apply the law to the factual record, then summary judgment will not be granted.[48] The moving party bears the initial burden of demonstrating that the undisputed facts support his claims or defenses.[49] If the motion is properly supported, then the burden shifts to the non-moving party to demonstrate that there are material issues of fact for the resolution by the ultimate fact-finder.[50]

         VI. DISCUSSION

         A. Applicable Law

          i. Conflict of Law

         The first step in a conflict-of-law analysis is to decide whether a conflict truly exists. The Court "must compare the competing jurisdictions to determine whether the laws actually conflict on a relevant point."[51] "In determining whether there is an actual conflict, Delaware state courts . . . answer a single and simple inquiry: does application of the competing laws yield the same result?"[52] If the ...


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