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Pfizer Inc. v. Arch Insurance Co.

Superior Court of Delaware

July 23, 2019

PFIZER INC., Plaintiff,
v.
ARCH INSURANCE COMPANY AND U.S. SPECIALTY INSURANCE COMPANY, Defendants.

          Submitted: April 1, 2019

          John P. Ditomo, Esquire, Kenneth J. Nachbar, Esquire, Barnaby Grzaslewicz, Esquire, Morris, Nichols, Arst & Tunnell LLP, Wilmington, Delaware, Adam S. Ziffer, Esquire (argued) (pro hac vice), McKool Smith, P.C., New York, New York, Attorneys for Plaintiff.

          Marc S, Casarino, Esquire, White & Williams, Wilmington, Delaware, Erica J. Kerstein, Esquire (argued) (pro hac vice), White & Williams, New York, New York, Carmella P. Keener, Esquire, Rosenthal, Monhait & Goddess, P.A., Wilmington, Delaware, Matthew J. Dendinger, Esquire (pro hac vice), Loss, Judge & Ward, LLP, Washington, District of Columbia, Attorneys for Defendants.

          MEMORANDUM OPINION AND ORDER

          Paul R. Wallace, Judge.

         I. INTRODUCTION

         This is an insurance coverage dispute in which Pfizer Inc. ("Pfizer") brings a cause of action for declaratory relief and damages against Arch Insurance Company ("Arch") and U.S. Specialty Insurance Company ("U.S. Specialty," and together with Arch, the "Defendant Insurers"), asserting claims for breach of contract and/or anticipatory breach and repudiation of contract against Defendant Insurers in connection with certain excess directors' and officers' insurance policies (the "D&O Policies") the Defendant Insurers sold to Pfizer.[1] Pfizer asserts that the D&O Policies obligate the Defendant Insurers to pay for the costs incurred by Pfizer in connection with the defense and settlement of the action captioned Philip Morabito, et. al v. Pfizer, Inc., and Henry A. McKinnel [sic], No. 1:04-civ-9967 (LTS) (HBP) (S.D.N.Y.) (the "Morabito Action").[2]

         Both sides have moved for summary judgment, [3] asking the Court to decide whether coverage for the Morabito Action is expressly precluded by the terms of the D&O Policies. Arch and U.S. Specialty argue that the Morabito Action is either: (a) a Claim[4] "arising out of, based upon or attributable to," Robert L. Garber v. Pharmacia Corp., et. al., No.03-1519 (AET) (D.N.J.)[5] (the "Garber Action," and together with the Morabito Action, the "Underlying Actions"); or (b) a Claim that shares "as a common nexus any fact, circumstance, situation, event, transaction [or] cause" with the Garber Action such that the D&O Policies' exclusions preclude coverage.[6] Pfizer contends that while the two Underlying Actions involve securities claims concerning the drug Celebrex, they are unrelated for purposes of the D&O Policies because they implicate "different plaintiffs, different defendants, different alleged harms, and different alleged wrongful conduct committed by different people."[7]

          II. FACTUAL BACKGROUND [8]

         A. The Parties and the D&O Policies.

         Pfizer is a Delaware corporation with its principal place of business in New York and is one of the world's largest pharmaceutical companies.[9] Arch is a Missouri corporation with its principal place of business in New Jersey.[10] U.S. Specialty is a Texas corporation with its principal place of business in Texas.[11] Each of the Defendant Insurers has conducted substantial business in Delaware, including the business of selling insurance, investigating claims and/or issuing policies that cover policyholders or activities in Delaware.[12]

         As part of its business, Pfizer annually purchased D&O insurance to insure against third-party claims alleging wrongful conduct on the part of Pfizer's directors and officers.[13] For the period in effect from April 16, 2004, to April 16, 2005 (the "Relevant Period"), Pfizer had thirteen layers of D&O insurance providing $225 million in coverage, all in excess of a $10 million self-insured retention.[14] With certain exceptions, the thirteen excess policies in effect during the Relevant Period "follow form" to the policy issued by Pfizer's primary carrier, National Union Fire Insurance Co. of Pittsburgh, Pa. (the "National Union Policy").[15] National Union and each of the insurers who sold the various layers of excess policies to Pfizer (other than the Defendant Insurers) either paid Pfizer the limits of their policies or entered into settlement agreements with Pfizer for their Morabito Action coverage obligations.[16] Defendant Insurers have refused to pay or have disputed their obligations to pay any amounts under the D&O Policies in connection with the Morabito Action.[17]

         The National Union Policy provides coverage to Pfizer for both: (1) Pfizer's own Loss arising from a Securities Claim made against Pfizer for any Wrongful Act of Pfizer; and (2) Pfizer's Loss arising from indemnifying an Insured Person, including a director, officer or employee of Pfizer, for a Claim made against the Insured Person for any Wrongful Act of such Insured Person.[18] Under the National Union Policy, "Claim" includes, among other things, a civil proceeding for monetary relief and "Securities Claim" includes a lawsuit alleging violation of any federal statute regulating securities.[19] The National Union Policy further defines "Loss" to include "damages, settlements, judgments .. . [and] Defense Costs," and "Wrongful Act" to mean "any actual or alleged breach of duty, neglect, error, misstatement misleading statement, omission or act[.]"[20]

         The National Union Policy also contains two exclusions that Defendant Insurers have raised in this dispute as bases for failing to pay under the D&O Policies.[21] Exclusion 4(d) excludes Loss in connection with Claims made against an Insured "alleging, arising out of, based upon or attributable to the facts alleged, or to the same or related Wrongful Acts alleged or contained in any Claim which has been reported, or any circumstances of which notice has been given, under any policy of which this policy is a renewal or replacement or which it may succeed in time" (the "Related Wrongful Acts Exclusion").[22] In addition, the National Union Policy's Endorsement No. 18 provides that the insurer will not be liable for any "Loss in connection with any Claim(s) alleging, arising out of, based upon, attributable to or in any way related directly or indirectly ... to a related Breach of Fiduciary Duty or a related Wrongful Action alleged" in a lawsuit entitled "Robert L. Garber v. Pharmacia" (the "Specific Litigation Exclusion").[23] Each of the Defendant Insurers' D&O Policies contains exclusions that are similar to the Related Wrongful Acts Exclusion and the Specific Litigation Exclusion.[24] But neither of the D&O Policies appear to have an effective choice-of-law provision.

         B. The Morabito Action.

         The Morabito Action was initiated on or about December 17, 2004, by lead plaintiff Philip Morabito against Pfizer and Henry A. McKinnell, then Pfizer's Chairman of the Board and CEO, on behalf of those who purchased Pfizer's common stock between November 1, 2000, and December 16, 2004 (the "Class Period").[25]The Morabito Action alleged two claims under the Securities and Exchange Act of 1934 (the "1934 Act"): violations of Section 10(b) and Section 20(a) of the 1934 Act and the rules promulgated thereunder.[26] On or about March 27, 2012, an amended complaint was filed in the Morabito Action that revised the causes of action, named four additional individual defendants (who were directors, officers, and employees of Pfizer), and amended the Class Period to October 31, 2000, through October 19, 2005.[27] The amended complaint in the Morabito Action alleged that Pfizer and the individual defendants made false representations and omissions regarding the cardiovascular risks associated with two of Pfizer's drugs-Celebrex and Bextra.[28]

         On December 21, 2016, the federal district court granted final approval of a settlement of the Morabito Action in which Pfizer agreed to pay $486 million on behalf of itself and the individual defendants.[29] In addition to the settlement award, Pfizer, on behalf of all defendants, incurred more than $82 million in defense costs from the Morabito Action.[30]

         Defendant Insurers have denied coverage for the Morabito Action, claiming that coverage is barred by the National Union Policy's Related Wrongful Acts Exclusion, the Specific Litigation Exclusion and similar endorsements in the Arch and U.S. Specialty D&O Policies because the Morabito Action is allegedly related to four prior lawsuits: (i) the Garber Action; (ii) Cain v. Merck & Co., et. al., No. 1:01-CV-03441 (E.D.N.Y.filed May 29, 2000) ("Cain"); (iii) Leonard v. Pharmacia Corp. et. al., No. 3:01-CV-04104 (D.N.J, filed Aug. 27, 2001) ("Leonard'); and (iv) Astin v. Pharmacia Corp. et. al., No. L-1322-01 ( N.J.Super. Ct. LawDiv. filed Aug. 27, 2001) ("Astin")[31]

         Garber was a securities fraud class action lawsuit brought by shareholders of Pharmacia Corporation ("Pharmacia") who purportedly incurred financial losses as a result of false and misleading statements contained in a study commissioned by Pharmacia regarding Celebrex's gastrointestinal health risks.[32] Pfizer acquired Pharmacia in April 2003.[33] Cain, Leonard and Astin were consumer class action lawsuits brought on behalf of individuals who allegedly suffered physical injuries from consuming Celebrex and/or Vioxx.[34] Although Pfizer cites each of Cain, Leonard and Astin in its Amended Complaint, Defendant Insurers identify Garber only as a trigger of the Specific Litigation Exclusion.

         By way of high level comparison, both the Morabito Action and the Garber action are securities fraud class actions alleging violations of Sections 10(b) and 20(a) of the 1934 Act (and the rules promulgated thereunder). The Morabito Action was brought by the stockholders of Pfizer, whereas the Garber Action was brought by the stockholders of Pharmacia (prior to being acquired by Pfizer). The Morabito Action alleged that Pfizer and the individual defendants made false representations and omissions regarding the cardiovascular risks associated with Celebrex and Bextra, whereas the Garber Action alleged that Pharmacia and its co-marketer Pfizer made false and misleading statements regarding the gastrointestinal health risks of Celebrex. Notably, the amended complaint in the Garber Action is 37 pages, whereas the amended complaint in the Morabito Action is 218 pages.

         III. LEGAL STANDARD

         The Court may grant a motion for summary judgment when: "(1) the record establishes that, viewing the facts in the light most favorable to the nonmoving party, there is no genuine issue of material fact, and (2) in light of the relevant law and those facts, the moving party is legally entitled to judgment."[35] The Court may not grant a motion for summary judgment "[i]f. . . 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 . . . ."[36] "However, a matter should be disposed of by summary judgment whenever an issue of law is involved and a trial is unnecessary."[37]

         The well-established standards and rules for summary judgment apply in full when the parties have filed cross-motions for summary judgment. But, where cross-motions for summary judgment are filed and neither party argues the existence of a genuine issue of material fact, "the Court shall deem the motions to be the equivalent of a stipulation for decision on the merits based on the record submitted with the motions."[38] So, "the questions before this Court are questions of law not of fact, and the parties by filing cross motions for summary judgement have in effect stipulated that the issue[] raised by the motions [is] ripe for a decision on the merits."[39]

         Pfizer, Arch, and U.S. Specialty all agree that their motions present a purely legal question for the Court to decide: do the D&O Policies' exclusions preclude coverage for the Morabito Action?[40] Each party agrees too that the Court can determine whether the D&O Policies' exclusions apply as a matter of law based solely on the parties' motions, declarations, and the exhibits attached thereto.[41]

         IV. DISCUSSION

         A. The Parties' Contentions.

         Defendant Insurers posit that since the Underlying Actions contain overlapping and common allegations regarding Pfizer's and Pharmacia's fraudulent misrepresentations and omissions concerning the safety of Celebrex, the two actions are unquestionably related.[42] And, Defendant Insurers highlight seven main similarities when comparing the Underlying Actions' complaints; they say both:

(1) are predicated upon allegations that Pfizer and Pharmacia made material misrepresentations and omissions with respect to the safety and efficacy of COX-2 inhibitors, including Celebrex;
(2) allege that Pfizer and Pharmacia made material misstatements and omissions to the public regarding the results of the CLASS Study in order to create the false impression that Pharmacia's and Pfizer's COX-2 inhibitors were safer and more effective than other NSAIDs;
(3) refer to the same articles and publications in support of their allegations regarding the misrepresentations;
(4) allege that the material misrepresentations and omissions were made over a common time period;
(5) allege that, in June 2002, articles were published that ultimately revealed the actual results of the CLASS study, and disclosed that Pfizer's and Pharmacia's COX-2 inhibitors had no safety advantage whatsoever over other NSAIDs;
(6) allege that the stock price of the respective companies dropped once the truth was revealed; and
(7) are securities fraud class actions, alleging counts for (a) violations of Section 10(b) of the 1934 Act and Rule 10b-5 promulgated thereunder, and (b) violation of Section 20(a) of the 1934 Act.[43]

         Thus, the Defendant Insurers contend that coverage is precluded by the D&O Polices' express terms.

         But Pfizer says that the Underlying Actions are unrelated for purposes of the D&O Policies because they "involved different shareholder plaintiffs, different alleged wrongful conduct, committed by different corporate and individual defendants, and different alleged harm to different company stock initiated by different revelations to the market at different times of different health risks of different drugs."[44]

         B. Relevant Policy Provisions.

         At issue is the applicability of the Specific Litigation Exclusion, The Arch D&O Policy provides:

(1) The Excess Insurer shall not be liable to make any payment in connection with a Claim arising out of, based upon or attributable to: a. the following: Garber v. Pharmacia; or b. any Wrongful Act alleged in such litigation or proceeding, or any other Wrongful Act whenever occurring, which, together with any Wrongful Act alleged in such litigation or proceeding, constitute Interrelated Wrongful Acts.
(2) "Wrongful Act" means any actual or alleged breach of duty, neglect, error, misstatement, misleading statement, omission or act.
(3) "Interrelated Wrongful Acts" means Wrongful Acts that have as a common nexus any fact, circumstance, situation, event, transaction, cause or series of causally connected facts, circumstances, situations, events, transactions or causes.[45]
Similarly, the National Union Policy provides:
In consideration of the premium charged, it is hereby understood and agreed that the Insurer shall not be liable for any Loss in connection with: (i) any Claim(s), notices, events, investigations or actions referred to in any of items (1) through (--) below; (hereinafter "Events"); (ii) the prosecution, adjudication, settlement, disposition, resolution or defense of: (a) any Event(s); or (b) any Claim(s) arising from any Event(s); or (iii) any Breach of Fiduciary Duty, Wrongful Act, underlying facts, circumstances, acts or omissions in any way related, directly or indirectly, to any Event(s):
(1) Robert L. Garber v. Pharmacia (hereinafter the "Events")
It is further understood and agreed that the Insurer shall not be liable for any Loss in connection with any Claim(s) alleging, arising out of, based upon, attributable to or in any way related directly or indirectly, in part or in whole, to a related Breach of Fiduciary Duty or related Wrongful Act alleged in any of the items (1) - () above, regardless of whether or not such Claim involved the same or different Insureds, the same or different legal causes of action, or the same or different claimants, or is brought in the same or different venue, or resolved in the same or different forum.[46]

         C. Choice of Law.

         There are three steps to take when engaging Delaware's choice-of-law analysis: first, determine if the parties made an effective choice of law through their contract; second, if not, determine if there is an actual conflict between the laws of the different states each party believes should apply; and, third, if there is an actual conflict, employ the "most significant relationship test" to determine which state's law applies.[47]

         Since none of the D&O Policies contain an express choice-of-law provision, [48]the Court must first consider whether an actual conflict exists. "Delaware courts recognize that, where possible, a court should avoid a choice-of-law analysis altogether if the result would be the same under the law of either of the competing jurisdictions."[49] Although the parties suggest that the outcome of the motions should be the same regardless of which law applies, [50] there seems to be a significant difference between the laws of Delaware and New York with respect to the reasonable interpretation of the Specific Litigation Exclusion in this coverage dispute.

         Both states place the burden on an insurer to prove that a policy exclusion applies.[51] And each adopts a "plain reading approach to examine unambiguous policy language."[52] But the two differ with respect to the reasonable interpretation of the type of "related" ...


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