My Choice Software, LLC v. Travelers Casualty Ins. Co. ( 2020 )

FILED
NOT FOR PUBLICATION
AUG 19 2020
UNITED STATES COURT OF APPEALS MOLLY C. DWYER, CLERK
U.S. COURT OF APPEALS
FOR THE NINTH CIRCUIT
MY CHOICE SOFTWARE, LLC, a No. 19-56030
California limited liability company;
NATHAN DAVID MUMME, an D.C. No.
individual, 8:19-cv-00680-AG-KES
Plaintiffs-Appellants,
MEMORANDUM*
v.
TRAVELERS CASUALTY INSURANCE
COMPANY OF AMERICA, a
Connecticut corporation,
Defendant-Appellee.
Appeal from the United States District Court
for the Central District of California
Andrew J. Guilford, District Judge, Presiding
Argued and Submitted August 10, 2020
Pasadena, California
*
This disposition is not appropriate for publication and is not precedent
except as provided by Ninth Circuit Rule 36-3.
Before: WARDLAW and CLIFTON, Circuit Judges, and HILLMAN,** District
Judge.
MyChoice Software, LLC and its CEO, Nathan David Mumme (collectively
“MyChoice”) appeal the district court’s order granting summary judgment in favor
of Travelers Casualty Insurance Company of America (“Travelers”), denying
MyChoice’s motion for partial summary judgment, and holding that Travelers had
no duty to defend MyChoice against the allegations in the cross-complaint filed by
Trusted Tech Team, Inc. (“Trusted Tech”) based on the language of the IP
exclusion contained within the insurance policy that Travelers issued to MyChoice.
We reverse the district court’s grant of summary judgment in favor of Travelers
and remand for further proceedings consistent with this memorandum.
The relevant provision of the IP exclusion stated that coverage under the
policy does not apply to “‘Personal injury’ or ‘advertising injury’ arising out of
any actual or alleged infringement or violation of any of the following rights or
laws, or any other ‘personal injury’ or ‘advertising injury’ alleged in any claim or
‘suit’ that also alleges any such infringement or violation.” The cases relied upon
by the district court, and those cited by Travelers in this appeal, do not address the
question of whether the language of the IP exclusion unambiguously bars coverage
**
The Honorable Timothy Hillman, United States District Judge for the
District of Massachusetts, sitting by designation.
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for IP-related allegations brought solely by the insured itself, as opposed to
allegations asserted against the insured. The district court stated that “My Choice’s
First Amended Complaint against Trusted Tech asserted a trade secrets claim,
which falls squarely within the IP Exception,” and that “Trusted Tech’s
counterclaims are thus in a ‘claim or “suit” that also alleges’ IP claims.”
The district court erred in concluding that the IP exclusion unambiguously
barred coverage solely based on the allegations that MyChoice, as the insured
under the policy, asserted against Trusted Tech. An exclusionary clause must be
“stated precisely and understandably, in words that are part of the working
vocabulary of the average layperson.” Haynes v. Farmers Ins. Exch., 32 Cal. 4th
1198, 1204 (2004). While a lawyer might interpret the term “suit” to pertain to the
entirety of claims contained within a proceeding, irrespective of the party asserting
such claims, that is not necessarily the understanding of the term from the
perspective of a layperson. Moreover, “exclusionary language must be construed in
the context of the policy as a whole,” S.B.C.C., Inc. v. St. Paul Fire & Marine Ins.
Co., 186 Cal. App. 4th 383, 397 (2010), and the purpose of liability insurance is to
provide protection from claims brought against the insured. It is therefore
reasonable for an insured under the policy to interpret the exclusionary provision
as applying only to allegations asserted against it in the absence of explicit
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language stating otherwise. As an example, the relevant exclusionary clause in
Spandex House, Inc. v. Hartford Fire Insurance Company, 407 F. Supp. 3d 242(S.D.N.Y. 2019), contained additional language that explicitly contemplated the
scenario raised in this appeal. See id. at 247 (“Any injury or damage alleged in any
claim or ‘suit’ that also alleges an infringement or violation of any intellectual
property right, whether such allegation of infringement or violation is made by you
or by any other party involved in the claim or ‘suit’ . . .”) (emphasis added). As the
exclusionary clause in that case demonstrates, Travelers could have added
additional language that would have clearly and unambiguously applied to
allegations brought solely by the insured, but it failed to do so. In the face of this
omission, we apply the California contract law principle that “ambiguities are
generally construed against the party who caused the uncertainty to exist (i.e., the
insurer) in order to protect the insured’s reasonable expectation of coverage.” La
Jolla Beach & Tennis Club, Inc. v. Indus. Indem. Co., 9 Cal. 4th 27, 37 (1994).
Nor are we persuaded by the district court’s alternative holding that Trusted
Tech’s allegations against MyChoice arose out of actual or alleged infringements
or violations of IP rights and that the first part of the IP exclusion therefore
provided an independent basis to bar coverage for the Trusted Tech action.
Applying the “arising out of” exclusionary language to the allegations asserted in
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the Trusted Tech cross-complaint runs counter to the principle that “insurance
coverage is interpreted broadly so as to afford the greatest possible protection to
the insured, [whereas] . . . exclusionary clauses are interpreted narrowly against the
insurer.” MacKinnon v. Truck Ins. Exch., 31 Cal. 4th 635, 648 (2003) (quotations
omitted); see also Tower Ins. Co. of N.Y. v. Capurro Enters. Inc., No. C 11-03806,
2012 WL 1109998, at *9-10 (N.D. Cal. Apr. 2, 2012) (rejecting argument that
“arising out of” is always construed broadly, even in exclusionary clauses, and
noting that the “broad coverage-narrow exclusion principle is well illustrated with
respect to the phrase ‘arising out of.’”). Travelers’ reliance on Southgate
Recreation & Park District v. California Association for Park & Recreation
Insurance.,106 Cal. App. 4th 293 (2003), is misplaced. In that case, the
subcontractors’ claims against the insured were based on negligent or improper
administration of a construction contract, and therefore “fit comfortably within the
construction contract exclusion.” Id. at 302. But the allegations in the Trusted Tech
complaint do not unambiguously, plainly and clearly fall within the “arising out
of” language of the IP exclusion. See Haynes, 32 Cal. 4th at 1204.
REVERSED AND REMANDED.
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