Posts tagged "Company"

The Gillette Company v. Provost, et al. (Lawyers Weekly No 12-040-17)

COMMONWEALTH OF MASSACHUSETTS
SUFFOLK, ss. SUPERIOR COURT.
1584CV00149-BLS2
____________________
THE GILLETTE COMPANY
v.
CRAIG PROVOST, JOHN GRIFFIN, WILLIAM TUCKER, DOUGLAS KOHRING, and SHAVELOGIC, INC.
____________________
MEMORANDUM AND ORDER ON CROSS-MOTIONS FOR SUMMARY JUDGMENT
The Gillette Company alleges that four former employees helped ShaveLogic, Inc., develop a new disposable cartridge shaving razor using Gillette’s confidential information. Gillette claims that in so doing Defendants violated G.L. c. 93A, the individual defendants breached non-disclosure agreements with Gillette, and all five Defendants engaged in a civil conspiracy. It also claims that ShaveLogic’s patents and patent applications should be subjected to a constructive trust in favor of Gillette. Gillette does not claim that any of the individual defendants breached a covenant not to compete with Gillette. The parties previously stipulated to the dismissal with prejudice of Gillette’s trade secret claims.1
ShaveLogic claims, in turn, that Gillette intentionally interfered with prospective business relations and violated c. 93A, by threatening to bring and then filing baseless legal claims in an attempt to keep ShaveLogic from entering the market for so-called wet-shaving products.
The parties have filed cross-motions for summary judgment on all remaining claims and counterclaims. The Court concludes that Defendants are entitled to summary judgment in their favor on Gillette’s remaining claims because Gillette cannot prove that Defendants misused any of Gillette’s confidential information or that the individual defendants breached any non-disclosure agreement. The Court
1 The Court (Salinger, J.) previously ordered the dismissal with prejudice of Gillette’s claims against three other defendants. It dismissed Gillette’s claims that ShaveLogic’s general counsel breached fiduciary duties that he owed as a former Gillette patent counsel and that ShaveLogic’s CEO, its president, and the other individual defendants aided and abetted that alleged breach of fiduciary duty and conspired to bring it about.
– 2 –
also concludes that Gillette is not entitled to summary judgment on ShaveLogic’s counterclaims because a reasonable fact finder could conclude that Gillette had deliberately brought baseless claims in an attempt to bully ShaveLogic out of the market. The Court will schedule a final pre-trial conference to discuss trial of ShaveLogic’s counterclaims.
1. Gillette’s Claims. Defendants are entitled to summary judgment in their favor on Gillette’s remaining claims because the undisputed material facts show that Gillette has “no reasonable expectation of proving” at least one element of each of its claims. See Boazava v. Safety Ins. Co., 462 Mass. 346, 350 (2012). “A nonmoving party’s failure to establish an essential element of her claim ‘renders all other facts immaterial’ and mandates summary judgment in favor of the moving party.” Roman v. Trustees of Tufts College, 461 Mass. 707, 711 (2012), quoting Kourouvacilis v. General Motors Corp., 410 Mass. 706, 711 (1991).
1.1. Unfair Competition—G.L. c. 93A. In Counts III and VIII of its amended complaint, Gillette claims that the remaining Defendants used confidential information belonging to Gillette to design competing products that ShaveLogic has patented or is seeking to patent, and that this constitutes an unfair trade practice in violation of G.L. c. 93A. The intentional misappropriation and use of trade secrets to compete against the owner of that confidential information can violate c. 93A. See Jillian’s Billiard Club of America, Inc. v. Beloff Billiards, Inc., 35 Mass. App. Ct. 372, 373-375 & 377 (1993).
Since Gillette has been unable to muster any evidence that Defendants used Gillette’s confidential information to develop razors for ShaveLogic, Defendants are entitled to summary judgment on these claims. See Kourouvacilis, supra, at 715 (“If the nonmoving party cannot muster sufficient evidence to make out its claim, a trial would be useless and the moving party is entitled to summary judgment as a matter of law.” (quoting Celotex Corp. v. Catret, 477 U.S. 317, 328 (1986) (White, J., concurring)).
1.1.1. Using Well Known Concepts. Gillette’s amended complaint alleges that Gillette owns, and that Defendants committed an unfair
– 3 –
trade practice by making use of, “magnetic attachment, elastomeric pivot, and front-loading engagement design concepts.”
Gillette describes these three design concepts as follows. The concept of a “front-loading engagement design” is the idea of attaching a razor handle to a disposable shaving cartridge that contains razor blades by bringing the handle down onto the top of the cartridge. The concept of a “magnetic attachment” is the idea of using a combination of a magnetic and a mechanical engagement to keep the cartridge attached to the handle. The concept of an “elastomeric pivot” is the idea of designing a razor cartridge that can pivot and that uses an elastomeric element (i.e., a loop-like structure at least part of which is a polymer with elastic properties) to make the cartridge return to its original position.
ShaveLogic has shown that these general concepts were already publicly known and readily understood by people outside of Gillette who design disposable cartridge razors before the individual defendants started working for ShaveLogic. Thus Gillette cannot prove that any of these concepts was confidential information. See generally J. T. Healy & Son v. James A. Murphy & Son, 357 Mass. 728, 736 (1970) (“The subject matter of a trade secret must be secret. Matters of public knowledge or of general knowledge in an industry cannot be appropriated by one as his secret.” (quoting Restatement of Torts, § 757, comment b)).
Although Gillette vigorously contested this point in its summary judgment papers, and expressly alleged in its complaint that these concepts belonged only to Gillette, at oral argument Gillette conceded that none of these general concepts is confidential. The summary judgment record confirms that these ideas were publicly known before the individual defendants went to work for ShaveLogic.
Gillette’s claims under c. 93A therefore fail as a matter of law. Using publicly available information to compete is not an unfair trade practice. Jillian’s Billiard Club, 35 Mass. App. Ct. at 375-376.
1.1.1.1. Front-loading engagements are not and were not secret. Gillette itself publicly disclosed the concept of front-loading engagements in 1985 when it began selling its Atra razors. In 1990 Gillette began selling a razor called the Sensor that also uses a front-loading engagement. Gillette’s Atra and
– 4 –
Sensor razors load from the same direction and roughly the same angle as the razor disclosed in ShaveLogic’s patent. In addition, Gillette’s competitor Schick has also been selling front-loading razors for years.
Gillette argued in its summary judgment papers that its Atra and Sensor razors are materially different from ShaveLogic’s designs because the Atra and Sensor cartridges attach to the razor handle at two points while the ShaveLogic cartridge attaches to its handle at a single point of contact.
But the idea that a stable razor system could be designed using cartridges that attach to a handle at a single point has also long been disclosed publicly. Gillette’s Mach 3 and Fusion products, both of which have been sold publicly for years, use single-point loading. It was therefore obvious to anyone skilled in the art that one could design a front-end loading razor that attaches to the cartridge at a single point. No confidential information from Gillette was needed to figure out that one could combine the idea of a front-loading engagement with the idea of using a single point of attachment.
Defendants committed no unfair trade practice by using well-known design principles or obvious combinations of them. See Dynamics Research Corp. v. Analytic Sciences Corp., 9 Mass. App. Ct. 254, 267 (1980) (concepts that would be obvious to an inertial guidance engineer were not protectable as trade secrets); Strategic Directions Grp., Inc. v. Bristol-Myers Squibb Co., 293 F.3d 1062, 1065 (8th Cir. 2002) (obvious combination of known elements not a trade secret); Julie Research Labs., Inc. v. Select Photographic Eng’g, Inc., 998 F.2d 65, 67 (2d Cir. 1993) (particular combination of design choices not a trade secret if “obvious, widely known, easy for others to discover legitimately, or disclosed” publicly by manufacturer ).
1.1.1.2. Magnetic Attachments. The idea of using a combination of magnetic and mechanical means to attach a razor cartridge to a handle is also not secret and does not belong to Gillette. A Chinese patent published in 2009 (no. CN 101612740, or the “Jian patent”) and a United States patent published in 2000 (U.S. Patent No. 6,035,535) both disclose razors that use a combination of magnetic and mechanical engagements. Gillette cannot claim as
– 5 –
confidential information that was publicly disclosed in a patent. See, e.g., Atlantic Research Mktg. Sys., Inc. v. Troy, 659 F.3d 1345, 1357 (Fed. Cir. 2011) (applying Massachusetts law).
Gillette has now conceded that the concept of using both a magnetic and a mechanical engagement is a publicly available idea or invention. It did so in a filing with the United States Patent and Trademark Office made by Gillette to challenge ShaveLogic’s patent for a razor using magnetic and mechanical engagements (U.S. Patent 8,789,282, or the “ ’282 patent”).2 Gillette made that filing in March 2016, just two months after Gillette filed its amended complaint in this case.
Whether the individual defendants knew of or relied upon the Jian patent in their work for ShaveLogic is immaterial. Gillette cannot prove that the concept of magnetic attachments was confidential if it had already been disclosed in a publicly available patent, whether or not Defendants had seen that prior patent. Gillette expressly argued to the Patent Office that the claims in ShaveLogic’s ’282 patent are not novel because the Jian patent had already made publicly available the idea that a shaving cartridge assembly can be mounted on a handled using a “magnetic and mechanical connection” between the two. Gillette’s statement to the Patent Office that this prior art was publicly available belies its unsupported claim to the contrary in this action. And Gillette’s Rule 30(b)(6) designee in this lawsuit confirmed under oath that the Jian patent discloses a means for a magnetic attachment and a mechanical attachment.
1.1.1.3. Elastomeric Pivots. Similarly, the idea of designing a shaving cartridge that pivots and is returned to its original position by
2 Gillette’s filing was a petition for Inter Partes review of ShaveLogic’s ’282 patent. An Inter Partes petition asks the Patent Office to reexamine the claims of a previously-issued patent and to determine whether any of them is invalid and should be cancelled because it is “unpatentable in light of prior art,” meaning either that the claimed invention is not novel because prior art shows that the invention was already known or used by others, or that the claimed invention is an obvious variation or combination of subject matter that was already known. Cuozzo Speed Technologies, LLC v. Lee, 136 S.Ct. 2131, 2136 (2016); see also 35 U.S.C. § 311(b) (scope of inter partes review), § 102 (requiring novelty to obtain patent), and § 103 (disqualifying patent claims that “would have been obvious … to a person having ordinary skill in the art to which the claimed invention pertains”).
– 6 –
a loop with an elastomeric element is also publicly known and therefore cannot be Gillette confidential information. A company called King of Shaves received a United State patent first published in May 2005 (U.S. Patent no. 7,100,284) that disclosed the possibility of using an elastomeric loop to return a pivoting shaving cartridge to its original position. In addition, Gillette itself publicly disclosed several other ways of designing a razor that uses an elastomeric loop to return a pivoting razor cartridge to its original position. It did so in a United States patent that was first published in January 2011 (U.S. Patent 8,273,205 B2).
1.1.1.4. Source of Public Information Irrelevant. Since the general design concepts of front-loading engagements, magnetic attachments, and elastomeric pivots were not secret and did not belong to Gillette, the individual defendants were free to use those ideas even if they learned about these concepts while working for Gillette.
Although Gillette may bar a former employee from using Gillette’s confidential information against it, it “may not prevent the employee from using the skill and general knowledge acquired or improved through his employment.” Abramson v. Blackman, 340 Mass. 714, 715-16 (1960); accord, e.g., Richmond Bros., Inc. v. Westinghouse Broadcasting Co., Inc., 357 Mass. 106, 111 (1970); Woolley’s Laundry v. Silva, 304 Mass. 383, 387 (1939). Employees are free to quit their job, start working for a competitor, and use their “general knowledge, experience, memory and skill” to compete against their former employer. Dynamics Research, 9 Mass. App. Ct. at 267, quoting J. T. Healy & Son, 357 Mass. at 740; accord Club Aluminum Co. v. Young, 263 Mass. 223, 226-227 (1928).
If the individual defendants took skills they developed and public information they learned while working for Gillette, and used them to help ShaveLogic design new products to compete with Gillette, that would not constitute an unfair trade practice in violation of G.L. c. 93A as a matter of law.
1.1.2. Gillette Sketches or Models. Gillette also alleges that Defendants used Gillette confidential information that was contained in sketches, samples, or models of possible razor designs that were created at Gillette and kept by Craig Provost, John Griffin, and William Tucker when they stopped working
– 7 –
there. Once again, however, the undisputed facts show that Gillette cannot prove that Defendants engaged in unfair competition by using those materials.
There is no evidence that any confidential information embodied in or discernable from those materials and items made its way into any ShaveLogic patent, patent application, or product design. Gillette concede this point at oral argument. Without evidence that any of the remaining Defendants actually used confidential Gillette information to design products for ShaveLogic, the mere fact that some of the individual defendants have Gillette materials in their possession cannot support a finding in Gillette’s favor on its claims under c. 93A.
Gillette argues that it need not show that Gillette confidential information reflected in these sketches, samples, or models became part of any ShaveLogic design, so long as it can prove that ShaveLogic could not have conceived of its patented inventions and other designs without using Gillette’s confidential information. At oral argument Gillette asserted that the expert opinion of Fred P. Smith, a mechanical engineer, provides evidence that Defendants could not possibly have come up with the razor design in ShaveLogic’s patent and patent applications without using confidential information regarding Gillette designs and prototypes found in the retained sketches, samples, and models.
This argument fails because it mischaracterizes Mr. Smith’s expert opinions. Mr. Smith states that he “was not asked to opine on what was confidential or a trade secret” but instead was told to assume that whatever information he was given by Gillette’s attorneys qualified as confidential information. He then explains his understanding that the general concepts of front-loading engagements, magnetic attachments, an elastomeric loop returns are confidential information that belong to Gillette. He also refers to some of the specific sketches or models retained by the individual defendants as examples of these general concepts. But Smith never opines that Defendants probably used confidential information contained in these sketches and models to design the ShaveLogic razors. Instead, Smith’s opinion is that Defendant could not have developed the ShaveLogic razors without using some part of all of the information he describes, including the three general concepts that were the focus of Gillette’s amended complaint.
– 8 –
Mr. Smith’s opinions do not create any triable issue of fact because they are based on the mistaken assumption that the general concepts of front-loading engagements, magnetic attachments, and elastomeric returns belonged to Gillette, when in fact they were all publicly available information. At no point in Mr. Smith’s expert report does he conclude or opine that Defendants could not have developed ShaveLogic’s razor designs without using truly confidential information obtained from the sketches and models kept by the individual defendants.
Nor can Gillette salvage its c. 93A claims with evidence that an initial ShaveLogic design looks very similar to a purportedly confidential Gillette design. Gillette asserts that the initial design sketched out by ShaveLogic’s founder Robert Wilson for a razor using a magnetic attachment is very similar in appearance and functionality to a prototype design that belongs to Gillette and is shown in a sketch kept by defendant Craig Provost. This evidence cannot support Gillette’s unfair competition claims for two reasons. First, as discussed above, the idea of using magnetic attachments is public information and does not belong to Gillette. Second, the undisputed evidence shows that Wilson independently created his design in 2009 before he ever met Provost and the other individual defendants.
In sum, the summary judgment record makes clear that no reasonable fact finder could conclude that Defendants made use of any confidential information obtained from Gillette without engaging in rank speculation or conjecture. Defendants are therefore entitled to summary judgment on these claims.
1.2. Breach of Confidentiality Agreements. Gillette claims in Count II that each of the individual defendants breached contractual duties not to use or disclose Gillette’s confidential information.
Defendants are entitled to summary judgment on this claim because Gillette has mustered no evidence that any of the defendants used or disclosed any Gillette confidential information after they left Gillette to work for ShaveLogic. As explained above, Gillette cannot point to any evidence that the individual defendants used Gillette confidential information to design any product for ShaveLogic. Nor is there any evidence that the individual defendants used Gillette
– 9 –
confidential information in any other way after leaving Gillette, or that they disclosed any such information to ShaveLogic.
The evidence on which Gillette relies cannot support a finding in Gillette’s favor on this contract claim. Mr. Griffin and Mr. Provost retained hard drives, documents, and razor models when they left Gillette, and Mr. Kohring retained backup copies of some old Gillette files. But no contract barred Defendants from retaining or looking at Gillette materials; their only obligation on this score was not to use or disclose Gillette confidential information. Merely possessing or even accessing arguably confidential information does not violate the parties’ contracts.
1.3. Civil Conspiracy. Gillette claims in Count IX that the remaining Defendants entered into a civil conspiracy “to misappropriate Gillette’s confidential information and trade secrets” and “to compete unfairly with Gillette.”3 This claim fails because, as explained above, there is no evidence that Defendants used any confidential information belonging to Gillette to benefit ShaveLogic.
To succeed on its claim for conspiracy, Gillette would have to prove at trial that Defendants acted together either (1) to exercise some power of coercion over the plaintiff that they would not have had if they had acted independently, or (2) pursuant to “a common plan to commit a tortious act.” Kurker v. Hill, 44 Mass. App. Ct. 184, 188-189 (1998); accord Aetna Cas. Sur. Co. v. P & B Autobody, 43 F.3d 1546, 1563-1564 (1st Cir. 1994) (applying Massachusetts law).
Gillette alleges the second kind of civil conspiracy, involving a purportedly tortious “common plan.”
There can be no civil conspiracy of this kind without “an underlying tortious act” carried out by two or more defendants acting together. Bartle v. Berry, 80 Mass. App. Ct. 372, 383-384 (2011). “Key to this cause of action is a defendant’s substantial assistance, with the knowledge that such assistance is contributing to a common tortious plan.” Kurker, supra, at 189.
3 As noted above, the Court previously dismissed the portion of Count IX alleging a civil conspiracy to cause ShaveLogic’s general counsel to breach his fiduciary duty to Gillette.
– 10 –
It is not clear that Gillette could prevail on its conspiracy claim even if it could prove its factual allegations, because neither the claimed unfair use of confidential information in violation of G.L. c. 93A nor the claimed breach of the nondisclosure agreements would constitute an underlying tortious act. See generally Kattar v. Demoulas, 433 Mass. 1, 12-13 (2000) (G.L. c. 93A creates substantive new rights by barring conduct that is neither a common law tort nor a breach of contract);4 Anderson v. Fox Hill Village Homeowners Corp., 424 Mass. 365, 368 (1997) (breach of contract “is not a tort”).
Defendants would be entitled to summary judgment on this claim even assuming that the alleged misconduct could, in theory and if proved, satisfy the element of an underlying tortious act.
Gillette has no evidence that Defendants misappropriated Gillette’s confidential information or used it to compete unfairly with Gillette, as discussed above. Defendants are therefore entitled to judgment as a matter of law on the conspiracy claim. See Bartle, supra (affirming summary judgment for defendants).
1.4. Constructive Trust Remedy. Gillette claims in Count IV that the individual defendants used or disclosed Gillette confidential information for the benefit of ShaveLogic, that ShaveLogic has been unjustly enriched as a result, and that ShaveLogic’s ’282 patent and pending patent applications should therefore be subject to a constructive trust for the benefit of Gillette.
A constructive trust “is imposed ‘in order to avoid the unjust enrichment of one party at the expense of the other where the legal title to the property was
4 The Supreme Judicial Court has “classified some G.L. c. 93A claims as contract-based, others as tort-based, and still others as ‘neither wholly tortious nor wholly contractual in nature.’ ” Kraft Power Corp. v. Merrill, 464 Mass. 145, 156 (2013) (citations and footnotes omitted), quoting Kattar, 433 Mass. at 12. For example, “tort actions ‘for fraud and deceit are within the contemplation of an ‘unfair act’ under [G.L. c. 93A].’ ” Kraft Power, supra at n.16, quoting Datacomm Interface, Inc. v. Computerworld, Inc., 396 Mass. 760, 778 (1986).
Gillette has not accused Defendants of committing an unfair trade practice by engaging in fraud or any other tortious act. Although Gillette previously claimed that Defendants committed the tort of misappropriating trade secrets, it has dismissed those claims with prejudice. The allegation that Defendants used Gillette’s confidential information to benefit ShaveLogic is the kind of c. 93A claim that is neither tort-based nor contractual in nature.
– 11 –
obtained by fraud or in violation of a fiduciary relation or arose where information confidentially given or acquired was used to the advantage of the recipient at the expense of the one who disclosed the information.’” Meskell v. Meskell, 355 Mass. 148, 151 (1969), quoting Barry v. Covich, 332 Mass. 338, 342 (1955).
ShaveLogic is entitled to summary judgment in its favor on this claim because Gillette has no evidence that any of its confidential information was used or disclosed for the benefit of ShaveLogic. See Northrup v. Brigham, 63 Mass. App. Ct. 362, 370 (2005) (affirming summary judgment for defendant on constructive trust claim because record showed no unjust enrichment). Gillette makes no claim that ShaveLogic obtained its patent or developed its patent applications by fraud or in violation of a fiduciary obligation.
2. ShaveLogic’s Counterclaims. Gillette is not entitled to summary judgment on ShaveLogic’s two counterclaims because a reasonable jury could conclude that Gillette deliberately asserted baseless claims against ShaveLogic in an attempt to scare off ShaveLogic’s investors and potential business partners, and thereby drive ShaveLogic out of the market for wet-shaving products.
A claim cannot be resolved on a motion for summary judgment where “a reasonable jury could return a verdict for the nonmoving party.” Dennis v. Kaskel, 79 Mass. App. Ct. 736, 741 (2011), quoting Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). For this reason, in evaluating the motion for summary judgment the Court “must … draw all reasonable inferences” from the evidence presented “in favor of the nonmoving party,” as a jury would be free to do at trial. Godfrey v. Globe Newspaper Co., Inc., 457 Mass. 113, 119 (2010). A request for summary judgment must be denied where a claim turns on disputed issues of fact or on disputed inferences from admitted facts. See Molly A. v. Commissioner of Dept. of Mental Retardation, 69 Mass. App. Ct. 267, 284 (2007) (“summary judgment cannot be granted if the evidence properly before the motion judge reveals a genuine issue of disputed material fact”); Flesner v. Technical Communications Corp., 410 Mass. 805, 811-812 (1991) (“Where a jury can draw opposite inferences from the evidence, summary judgment is improper.”).
– 12 –
2.1. Intentional Interference with Advantageous Relations. In its first counterclaim, ShaveLogic alleges that Gillette intentionally interfered with ShaveLogic’s relationships with investors and marketing and distribution companies for improper anti-competitive purposes and by improper means. Specifically, ShaveLogic claims that Gillette tortiously interfered with those relationships by threatening to bring and then filing a baseless lawsuit in an attempt to prevent ShaveLogic from entering the wet-shaving market.
To make out its claim for tortious interference with advantageous relations, ShaveLogic will have to prove that:
(1) [it] had an advantageous relationship with a third party (e.g., a present or prospective contract or employment relationship); (2) the defendant knowingly induced a breaking of the relationship; (3) the defendant’s interference with the relationship, in addition to being intentional, was improper in motive or means; and (4) the plaintiff was harmed by the defendant’s actions.
Blackstone v. Cashman, 448 Mass. 255, 260 (2007).
Gillette argues that ShaveLogic cannot establish that Gillette intentionally interfered with any advantageous relationship. Specifically, Gillette asserts that there is no evidence that it was aware of any particular relationship between ShaveLogic and some third party or that Gillette did anything that in fact interfered with that relationship. These arguments are without merit.
A reasonable jury could find that Gillette knew that a new entrant to the market would need to establish relationships with manufacturing and distribution partners, that Gillette intended to interfere with ShaveLogic’s ability to form those relationships by bringing a baseless lawsuit, that Gillette succeeded in scaring off potential manufacturing and distribution partners from working with ShaveLogic, and that ShaveLogic suffered economic harm as a result. It would certainly be a permissible inference that Gillette was unhappy with ShaveLogic’s plans to market a competing razor and wanted to find a way to prevent ShaveLogic from consummating relationships with companies that could manufacture or distribute products for ShaveLogic. Indeed, Gillette complains in its complaint that ShaveLogic “actively leveraged” its relationships with former Gillette employees “to develop relations” with potential business and manufacturing partners and that
– 13 –
Gillette was purportedly harmed by these attempts “to commercialize wet-shaving products for ShaveLogic.”
Gillette’s insistence that ShaveLogic must present direct evidence that Gillette knew that particular manufacturers or distributors were exploring business relationships with ShaveLogic is without merit. A party claiming tortious interference with prospective (rather than existing) business relationships is not required to prove that the defendant was aware of a potential relationship with a specific third party. It is enough that the defendant knowingly interfered with a prospective relationship between the plaintiff and an identifiable class or category of third persons. Dube v. Likins, 167 P.3d 93, 101 (Ariz. App. 2007); Downer’s Grove Volkswagen, Inc. v. Wigglesworth Imports, Inc., 546 N.E.2d 33, 37 (Ill. App. 1989); Jae Enterprises, Inc. v. Oxgord, Inc., no. 5:15-CV-228-TBR, 2016 WL 865328, *12 (W.D. Kentucky 2016) (applying Kentucky law); Lucas v. Monroe County, 203 F.3d 964, 979 (6th Cir. 2000) (applying Michigan law); McDonald Apiary, LLC v. Starrh Bees, Inc., no. 8:14-CV-351, 2015 WL 11108873, *3 (D.Neb. 2015) (applying Nebraska law); Hayes v. Northern Hills General Hosp., 590 N.W.2d 243, 249-250 (S.D. 1999); Trau-Med of America, Inc. v. Allstate Ins. Co., 71 S.W.3d 691, 701 (Tenn. 2002).
2.2. Violation of G.L. c. 93A. In its second counterclaim, ShaveLogic asserts that the same alleged misconduct by Gillette, in purportedly threatening to bring and then filing a baseless lawsuit in an attempt to prevent ShaveLogic from entering the wet shaving market, constitutes an unfair trade practice that violates G.L. c. 93A, §§ 2 and 11.
Gillette argues that this claim fails because ShaveLogic has no direct evidence that Gillette knew its claims were baseless when it filed suit. This argument is also without merit.
“There is no need to prove actual knowledge” through direct evidence; “it may be inferred from the circumstances.” Commonwealth v. Aponte, 71 Mass. App. Ct. 758, 762 (2008). And “the inferences drawn by a jury from the relevant evidence ‘need only be reasonable and possible and need not be necessary or inescapable.’ ”
– 14 –
Commonwealth v. Sullivan, 469 Mass. 621, 624 (2014), quoting Commonwealth v. Casale, 381 Mass. 167, 173 (1980).
A reasonable fact finder could infer that Gillette deliberately brought baseless claims against ShaveLogic in order to interfere with prospective business relationships. It could draw such an inference from the facts that Gillette: asserted but then dismissed trade secret claims; is unable to present any evidence that Defendants misused Gillette’s confidential information; claimed in this litigation that Gillette owns the concept of magnetic attachments, but argued to the United States Patent Office that this concept was publicly known; claimed that widely-known design concepts belong to Gillette but then conceded that was incorrect. As a result, Gillette is not entitled to summary judgment on ShaveLogic’s claim under c. 93A. See G.S. Enterprises, Inc. v. Falmouth Marine, Inc., 410 Mass. 262, 276 (1991) (reversing summary judgment for defendant on similar claim).
There is also no merit to Gillette’s further assertion that it cannot be held liable under c. 93A because it had no direct commercial relationship with ShaveLogic. A claimant can prove that a defendant’s alleged malfeasance took place in a business context, and thus implicates c. 93A, by showing either “that the defendant had a commercial relationship with the plaintiffs or that the defendant’s actions interfered with ‘trade or commerce’ ” in some other way. See First Enterprises, Ltd. v. Cooper, 425 Mass. 344, 347 (1997). “Parties need not be in privity for their actions to come within the reach of c. 93A.” Ciardi v. F. Hoffmann-La Roche, Ltd., 436 Mass. 53, 60 (2002), quoting Kattar, 433 Mass. at 14–15. For example, a lawyer can be sued under c. 93A for knowingly or recklessly conveying false information in order to help a client bring about a commercial transaction with a third party. See, e.g., Kirkland Const. Co. v. James, 39 Mass. App. Ct. 559, 563-564 (1995) (reversing dismissal of 93A claim against lawyers who conveyed alleged misrepresentation by client and thereby allegedly induced plaintiff to contract with client). It follows that knowingly conveying false information by bringing a baseless lawsuit to interfere with prospective commercial transactions also violates c. 93A.
– 15 –
It is true that the mere filing or a lawsuit or conduct of litigation does not, in and of itself, constitute trade or commerce within the meaning of c. 93A. See, e.g., Milliken & Co. v. Duro Textiles, LLC, 451 Mass. 547, 564 (2008); Morrison v. Toys “R” Us, Inc., 441 Mass. 451, 457 (2004); First Enterprises, 425 Mass. at 347.
But “each case requires examination of its own circumstances to determine whether it arose in a ‘business context.’ ” Linkage Corp. v. Trustees of Boston Univ., 425 Mass. 1, 24 (1997) (holding defendant’s status as charitable corporation not dispositive of whether c. 93A applies), quoting Planned Parenthood Fed’n of America, Inc. v. Problem Pregnancy of Worcester, Inc., 398 Mass. 480, 493 (1986).
A reasonable fact finder could conclude that Gillette was acting in a business context because it brought a baseless lawsuit in an attempt to keep ShaveLogic from entering the wet-shaving market. Such conduct, if proved at trial, would constitute an unfair trade practice in violation of c. 93A. See G.S. Enterprises, 410 Mass. at 273-274, 277 (bringing baseless lawsuit in order to block purchase of property would violate G.L. c. 93A, §§ 2(a) and 11; reversing grant of summary judgment in favor of defendant); Brooks Automation, Inc. v. Blueshift Technologies, Inc., Suffolk Sup. Ct. 05-3973-BLS2, 20 Mass. L. Rptr. 541, 2006 WL 307848 (2006) (Gants, J.) (filing frivolous complaint “becomes an act done in the conduct of trade or commerce when, as here, it is motivated by an intent to interfere with a competitor’s contractual relationship with a key and much coveted customer”), aff’d, 69 Mass. App. Ct. 1107 (2007) (unpublished).
2.3. Litigation Privilege. Gillette argues that the conduct giving rise to ShaveLogic’s counterclaims is absolutely protected by the common law privilege for statements made during a judicial proceeding or in connection with a contemplated lawsuit. Cf. Correllas v. Viveiros, 410 Mass. 314, 320 (1991); Sriberg v. Raymond, 370 Mass. 105, 108-109 (1976).
Gillette made the same litigation privilege argument when it moved to dismiss ShaveLogic’s counterclaims earlier in the case. The court (Sanders, J.) rejected that argument when it denied Gillette’s motion to dismiss the counterclaims. Judge Sanders held that the “conduct of filing (and threatening to file) a baseless lawsuit” is not protected by the litigation privilege. Gillette appealed.
– 16 –
The Appeals Court recently affirmed that ruling, holding that the litigation privilege does not require dismissal of ShaveLogic’s counterclaims because they are based on “Gillette’s purported acts of sending letters threatening a baseless lawsuit with the knowledge that ShaveLogic would have to disclose them to potential partners and investors, and then actually filing a baseless lawsuit[].”The Gillette Co. v. Provost, 91 Mass. App. Ct. 133, 141 (2017). It explained “that statements preliminary to litigation are only privileged if they ‘relat[e] to a proceeding [that] is contemplated in good faith[].” Id. at 142, quoting Sriberg, supra, at 109.
The Appeals Court’s decision disposes of Gillette’s invocation of the litigation privilege. For the reasons stated above, the summary judgment record demonstrates that ShaveLogic will be able to present evidence that would allow a reasonable jury to conclude that Gillette’s threats to sue ShaveLogic and its actual conduct in bringing and prosecuting this lawsuit were not made in good faith, because Gillette knew or should have known that it could not prove any of its claims. As a result, the litigation privilege does not bar ShaveLogic’s counterclaims.
2.4. Anti-SLAPP Arguments. Finally, Gillette also argues that ShaveLogic’s counterclaims must be dismissed under G.L. c. 231, § 59H, the so-called anti-SLAPP (strategic lawsuits against public participation) statute.
Once again, Judge Sanders already considered and rejected this argument when she denied Gillette’s motion to dismiss the counterclaims. And, once again, the Appeals Court affirmed that ruling. It held that Gillette was not entitled to dismissal under the anti-SLAPP statute because ShaveLogic “met its burden of showing that Gillette’s petitioning activity was ‘devoid of any reasonable factual support’ and caused ShaveLogic ‘actual injury.’ ” Gillette v. Provost, 91 Mass. App. Ct. at 134, quoting § 59H..
There is no reason to revisit this issue. The summary judgment record confirms the prior conclusions by Judge Sanders and the Appeals Court that Gillette’s claims are devoid of any factual support. As discussed above, the summary judgment record confirms that the general concepts of using magnetic attachments, front-loading engagements, and elastomeric pivots and returns in shaving razors have all been publicly known for a long time. Gillette has been unable to muster any
– 17 –
evidence that ShaveLogic used any Gillette confidential information in developing its product. And the summary judgment also confirms that ShaveLogic has evidence that if suffered actual injury as a result of Gillette’s actions in filing and pursuing this baseless lawsuit. The anti-SLAPP statute therefore does not apply.
The Court would exercise its discretion not to reconsider Judge Sander’s denial of the anti-SLAPP motion to dismiss even Judge Sanders and the Appeals Court had not already addressed the issue. A special motion to dismiss may be filed as of right under the anti-SLAPP statute within 60 days of the service of the challenged claims. See G.L. c. 231, § 59H. A court has discretion to allow such a motion to be filed “at any later time upon terms it deems proper,” but is not required to do so. Id. Thus, “[t]he anti-SLAPP statute contemplates that, ordinarily, a special motion to dismiss is to be brought within sixty days of the service of the complaint[.]” Burley v. Comets Cmty. Youth Ctr., Inc., 75 Mass. App. Ct. 818, 822 (2009). Gillette has no right to assert or reassert an anti-SLAPP defense in a motion for summary judgment brought after the close of discovery, and far more than sixty days after ShaveLogic asserted its counterclaims.
ORDER
Defendants’ motion for summary judgment as to Plaintiff’s claims against them is ALLOWED. Plaintiff’s cross-motion for summary judgment as to Defendants’ counterclaims is DENIED.
A final pre-trial conference will be held on May 23, 2017, at 2:00 p.m. to discuss resolution of ShaveLogic’s counterclaims against Gillette, which are the only claims that remain in the case.
April 18, 2017
___________________________
Kenneth W. Salinger
Justice of the Superior Court

read more

Posted by Stephen Sandberg - April 27, 2017 at 12:57 pm

Categories: News   Tags: , , , , ,

The Gillette Company v. Provost, et al. (Lawyers Weekly No. 12-040-17)

COMMONWEALTH OF MASSACHUSETTS
SUFFOLK, ss. SUPERIOR COURT.
1584CV00149-BLS2
____________________
THE GILLETTE COMPANY
v.
CRAIG PROVOST, JOHN GRIFFIN, WILLIAM TUCKER, DOUGLAS KOHRING, and SHAVELOGIC, INC.
____________________
MEMORANDUM AND ORDER ON CROSS-MOTIONS FOR SUMMARY JUDGMENT
The Gillette Company alleges that four former employees helped ShaveLogic, Inc., develop a new disposable cartridge shaving razor using Gillette’s confidential information. Gillette claims that in so doing Defendants violated G.L. c. 93A, the individual defendants breached non-disclosure agreements with Gillette, and all five Defendants engaged in a civil conspiracy. It also claims that ShaveLogic’s patents and patent applications should be subjected to a constructive trust in favor of Gillette. Gillette does not claim that any of the individual defendants breached a covenant not to compete with Gillette. The parties previously stipulated to the dismissal with prejudice of Gillette’s trade secret claims.1
ShaveLogic claims, in turn, that Gillette intentionally interfered with prospective business relations and violated c. 93A, by threatening to bring and then filing baseless legal claims in an attempt to keep ShaveLogic from entering the market for so-called wet-shaving products.
The parties have filed cross-motions for summary judgment on all remaining claims and counterclaims. The Court concludes that Defendants are entitled to summary judgment in their favor on Gillette’s remaining claims because Gillette cannot prove that Defendants misused any of Gillette’s confidential information or that the individual defendants breached any non-disclosure agreement. The Court
1 The Court (Salinger, J.) previously ordered the dismissal with prejudice of Gillette’s claims against three other defendants. It dismissed Gillette’s claims that ShaveLogic’s general counsel breached fiduciary duties that he owed as a former Gillette patent counsel and that ShaveLogic’s CEO, its president, and the other individual defendants aided and abetted that alleged breach of fiduciary duty and conspired to bring it about.
– 2 –
also concludes that Gillette is not entitled to summary judgment on ShaveLogic’s counterclaims because a reasonable fact finder could conclude that Gillette had deliberately brought baseless claims in an attempt to bully ShaveLogic out of the market. The Court will schedule a final pre-trial conference to discuss trial of ShaveLogic’s counterclaims.
1. Gillette’s Claims. Defendants are entitled to summary judgment in their favor on Gillette’s remaining claims because the undisputed material facts show that Gillette has “no reasonable expectation of proving” at least one element of each of its claims. See Boazava v. Safety Ins. Co., 462 Mass. 346, 350 (2012). “A nonmoving party’s failure to establish an essential element of her claim ‘renders all other facts immaterial’ and mandates summary judgment in favor of the moving party.” Roman v. Trustees of Tufts College, 461 Mass. 707, 711 (2012), quoting Kourouvacilis v. General Motors Corp., 410 Mass. 706, 711 (1991).
1.1. Unfair Competition—G.L. c. 93A. In Counts III and VIII of its amended complaint, Gillette claims that the remaining Defendants used confidential information belonging to Gillette to design competing products that ShaveLogic has patented or is seeking to patent, and that this constitutes an unfair trade practice in violation of G.L. c. 93A. The intentional misappropriation and use of trade secrets to compete against the owner of that confidential information can violate c. 93A. See Jillian’s Billiard Club of America, Inc. v. Beloff Billiards, Inc., 35 Mass. App. Ct. 372, 373-375 & 377 (1993).
Since Gillette has been unable to muster any evidence that Defendants used Gillette’s confidential information to develop razors for ShaveLogic, Defendants are entitled to summary judgment on these claims. See Kourouvacilis, supra, at 715 (“If the nonmoving party cannot muster sufficient evidence to make out its claim, a trial would be useless and the moving party is entitled to summary judgment as a matter of law.” (quoting Celotex Corp. v. Catret, 477 U.S. 317, 328 (1986) (White, J., concurring)).
1.1.1. Using Well Known Concepts. Gillette’s amended complaint alleges that Gillette owns, and that Defendants committed an unfair
– 3 –
trade practice by making use of, “magnetic attachment, elastomeric pivot, and front-loading engagement design concepts.”
Gillette describes these three design concepts as follows. The concept of a “front-loading engagement design” is the idea of attaching a razor handle to a disposable shaving cartridge that contains razor blades by bringing the handle down onto the top of the cartridge. The concept of a “magnetic attachment” is the idea of using a combination of a magnetic and a mechanical engagement to keep the cartridge attached to the handle. The concept of an “elastomeric pivot” is the idea of designing a razor cartridge that can pivot and that uses an elastomeric element (i.e., a loop-like structure at least part of which is a polymer with elastic properties) to make the cartridge return to its original position.
ShaveLogic has shown that these general concepts were already publicly known and readily understood by people outside of Gillette who design disposable cartridge razors before the individual defendants started working for ShaveLogic. Thus Gillette cannot prove that any of these concepts was confidential information. See generally J. T. Healy & Son v. James A. Murphy & Son, 357 Mass. 728, 736 (1970) (“The subject matter of a trade secret must be secret. Matters of public knowledge or of general knowledge in an industry cannot be appropriated by one as his secret.” (quoting Restatement of Torts, § 757, comment b)).
Although Gillette vigorously contested this point in its summary judgment papers, and expressly alleged in its complaint that these concepts belonged only to Gillette, at oral argument Gillette conceded that none of these general concepts is confidential. The summary judgment record confirms that these ideas were publicly known before the individual defendants went to work for ShaveLogic.
Gillette’s claims under c. 93A therefore fail as a matter of law. Using publicly available information to compete is not an unfair trade practice. Jillian’s Billiard Club, 35 Mass. App. Ct. at 375-376.
1.1.1.1. Front-loading engagements are not and were not secret. Gillette itself publicly disclosed the concept of front-loading engagements in 1985 when it began selling its Atra razors. In 1990 Gillette began selling a razor called the Sensor that also uses a front-loading engagement. Gillette’s Atra and
– 4 –
Sensor razors load from the same direction and roughly the same angle as the razor disclosed in ShaveLogic’s patent. In addition, Gillette’s competitor Schick has also been selling front-loading razors for years.
Gillette argued in its summary judgment papers that its Atra and Sensor razors are materially different from ShaveLogic’s designs because the Atra and Sensor cartridges attach to the razor handle at two points while the ShaveLogic cartridge attaches to its handle at a single point of contact.
But the idea that a stable razor system could be designed using cartridges that attach to a handle at a single point has also long been disclosed publicly. Gillette’s Mach 3 and Fusion products, both of which have been sold publicly for years, use single-point loading. It was therefore obvious to anyone skilled in the art that one could design a front-end loading razor that attaches to the cartridge at a single point. No confidential information from Gillette was needed to figure out that one could combine the idea of a front-loading engagement with the idea of using a single point of attachment.
Defendants committed no unfair trade practice by using well-known design principles or obvious combinations of them. See Dynamics Research Corp. v. Analytic Sciences Corp., 9 Mass. App. Ct. 254, 267 (1980) (concepts that would be obvious to an inertial guidance engineer were not protectable as trade secrets); Strategic Directions Grp., Inc. v. Bristol-Myers Squibb Co., 293 F.3d 1062, 1065 (8th Cir. 2002) (obvious combination of known elements not a trade secret); Julie Research Labs., Inc. v. Select Photographic Eng’g, Inc., 998 F.2d 65, 67 (2d Cir. 1993) (particular combination of design choices not a trade secret if “obvious, widely known, easy for others to discover legitimately, or disclosed” publicly by manufacturer ).
1.1.1.2. Magnetic Attachments. The idea of using a combination of magnetic and mechanical means to attach a razor cartridge to a handle is also not secret and does not belong to Gillette. A Chinese patent published in 2009 (no. CN 101612740, or the “Jian patent”) and a United States patent published in 2000 (U.S. Patent No. 6,035,535) both disclose razors that use a combination of magnetic and mechanical engagements. Gillette cannot claim as
– 5 –
confidential information that was publicly disclosed in a patent. See, e.g., Atlantic Research Mktg. Sys., Inc. v. Troy, 659 F.3d 1345, 1357 (Fed. Cir. 2011) (applying Massachusetts law).
Gillette has now conceded that the concept of using both a magnetic and a mechanical engagement is a publicly available idea or invention. It did so in a filing with the United States Patent and Trademark Office made by Gillette to challenge ShaveLogic’s patent for a razor using magnetic and mechanical engagements (U.S. Patent 8,789,282, or the “ ’282 patent”).2 Gillette made that filing in March 2016, just two months after Gillette filed its amended complaint in this case.
Whether the individual defendants knew of or relied upon the Jian patent in their work for ShaveLogic is immaterial. Gillette cannot prove that the concept of magnetic attachments was confidential if it had already been disclosed in a publicly available patent, whether or not Defendants had seen that prior patent. Gillette expressly argued to the Patent Office that the claims in ShaveLogic’s ’282 patent are not novel because the Jian patent had already made publicly available the idea that a shaving cartridge assembly can be mounted on a handled using a “magnetic and mechanical connection” between the two. Gillette’s statement to the Patent Office that this prior art was publicly available belies its unsupported claim to the contrary in this action. And Gillette’s Rule 30(b)(6) designee in this lawsuit confirmed under oath that the Jian patent discloses a means for a magnetic attachment and a mechanical attachment.
1.1.1.3. Elastomeric Pivots. Similarly, the idea of designing a shaving cartridge that pivots and is returned to its original position by
2 Gillette’s filing was a petition for Inter Partes review of ShaveLogic’s ’282 patent. An Inter Partes petition asks the Patent Office to reexamine the claims of a previously-issued patent and to determine whether any of them is invalid and should be cancelled because it is “unpatentable in light of prior art,” meaning either that the claimed invention is not novel because prior art shows that the invention was already known or used by others, or that the claimed invention is an obvious variation or combination of subject matter that was already known. Cuozzo Speed Technologies, LLC v. Lee, 136 S.Ct. 2131, 2136 (2016); see also 35 U.S.C. § 311(b) (scope of inter partes review), § 102 (requiring novelty to obtain patent), and § 103 (disqualifying patent claims that “would have been obvious … to a person having ordinary skill in the art to which the claimed invention pertains”).
– 6 –
a loop with an elastomeric element is also publicly known and therefore cannot be Gillette confidential information. A company called King of Shaves received a United State patent first published in May 2005 (U.S. Patent no. 7,100,284) that disclosed the possibility of using an elastomeric loop to return a pivoting shaving cartridge to its original position. In addition, Gillette itself publicly disclosed several other ways of designing a razor that uses an elastomeric loop to return a pivoting razor cartridge to its original position. It did so in a United States patent that was first published in January 2011 (U.S. Patent 8,273,205 B2).
1.1.1.4. Source of Public Information Irrelevant. Since the general design concepts of front-loading engagements, magnetic attachments, and elastomeric pivots were not secret and did not belong to Gillette, the individual defendants were free to use those ideas even if they learned about these concepts while working for Gillette.
Although Gillette may bar a former employee from using Gillette’s confidential information against it, it “may not prevent the employee from using the skill and general knowledge acquired or improved through his employment.” Abramson v. Blackman, 340 Mass. 714, 715-16 (1960); accord, e.g., Richmond Bros., Inc. v. Westinghouse Broadcasting Co., Inc., 357 Mass. 106, 111 (1970); Woolley’s Laundry v. Silva, 304 Mass. 383, 387 (1939). Employees are free to quit their job, start working for a competitor, and use their “general knowledge, experience, memory and skill” to compete against their former employer. Dynamics Research, 9 Mass. App. Ct. at 267, quoting J. T. Healy & Son, 357 Mass. at 740; accord Club Aluminum Co. v. Young, 263 Mass. 223, 226-227 (1928).
If the individual defendants took skills they developed and public information they learned while working for Gillette, and used them to help ShaveLogic design new products to compete with Gillette, that would not constitute an unfair trade practice in violation of G.L. c. 93A as a matter of law.
1.1.2. Gillette Sketches or Models. Gillette also alleges that Defendants used Gillette confidential information that was contained in sketches, samples, or models of possible razor designs that were created at Gillette and kept by Craig Provost, John Griffin, and William Tucker when they stopped working
– 7 –
there. Once again, however, the undisputed facts show that Gillette cannot prove that Defendants engaged in unfair competition by using those materials.
There is no evidence that any confidential information embodied in or discernable from those materials and items made its way into any ShaveLogic patent, patent application, or product design. Gillette concede this point at oral argument. Without evidence that any of the remaining Defendants actually used confidential Gillette information to design products for ShaveLogic, the mere fact that some of the individual defendants have Gillette materials in their possession cannot support a finding in Gillette’s favor on its claims under c. 93A.
Gillette argues that it need not show that Gillette confidential information reflected in these sketches, samples, or models became part of any ShaveLogic design, so long as it can prove that ShaveLogic could not have conceived of its patented inventions and other designs without using Gillette’s confidential information. At oral argument Gillette asserted that the expert opinion of Fred P. Smith, a mechanical engineer, provides evidence that Defendants could not possibly have come up with the razor design in ShaveLogic’s patent and patent applications without using confidential information regarding Gillette designs and prototypes found in the retained sketches, samples, and models.
This argument fails because it mischaracterizes Mr. Smith’s expert opinions. Mr. Smith states that he “was not asked to opine on what was confidential or a trade secret” but instead was told to assume that whatever information he was given by Gillette’s attorneys qualified as confidential information. He then explains his understanding that the general concepts of front-loading engagements, magnetic attachments, an elastomeric loop returns are confidential information that belong to Gillette. He also refers to some of the specific sketches or models retained by the individual defendants as examples of these general concepts. But Smith never opines that Defendants probably used confidential information contained in these sketches and models to design the ShaveLogic razors. Instead, Smith’s opinion is that Defendant could not have developed the ShaveLogic razors without using some part of all of the information he describes, including the three general concepts that were the focus of Gillette’s amended complaint.
– 8 –
Mr. Smith’s opinions do not create any triable issue of fact because they are based on the mistaken assumption that the general concepts of front-loading engagements, magnetic attachments, and elastomeric returns belonged to Gillette, when in fact they were all publicly available information. At no point in Mr. Smith’s expert report does he conclude or opine that Defendants could not have developed ShaveLogic’s razor designs without using truly confidential information obtained from the sketches and models kept by the individual defendants.
Nor can Gillette salvage its c. 93A claims with evidence that an initial ShaveLogic design looks very similar to a purportedly confidential Gillette design. Gillette asserts that the initial design sketched out by ShaveLogic’s founder Robert Wilson for a razor using a magnetic attachment is very similar in appearance and functionality to a prototype design that belongs to Gillette and is shown in a sketch kept by defendant Craig Provost. This evidence cannot support Gillette’s unfair competition claims for two reasons. First, as discussed above, the idea of using magnetic attachments is public information and does not belong to Gillette. Second, the undisputed evidence shows that Wilson independently created his design in 2009 before he ever met Provost and the other individual defendants.
In sum, the summary judgment record makes clear that no reasonable fact finder could conclude that Defendants made use of any confidential information obtained from Gillette without engaging in rank speculation or conjecture. Defendants are therefore entitled to summary judgment on these claims.
1.2. Breach of Confidentiality Agreements. Gillette claims in Count II that each of the individual defendants breached contractual duties not to use or disclose Gillette’s confidential information.
Defendants are entitled to summary judgment on this claim because Gillette has mustered no evidence that any of the defendants used or disclosed any Gillette confidential information after they left Gillette to work for ShaveLogic. As explained above, Gillette cannot point to any evidence that the individual defendants used Gillette confidential information to design any product for ShaveLogic. Nor is there any evidence that the individual defendants used Gillette
– 9 –
confidential information in any other way after leaving Gillette, or that they disclosed any such information to ShaveLogic.
The evidence on which Gillette relies cannot support a finding in Gillette’s favor on this contract claim. Mr. Griffin and Mr. Provost retained hard drives, documents, and razor models when they left Gillette, and Mr. Kohring retained backup copies of some old Gillette files. But no contract barred Defendants from retaining or looking at Gillette materials; their only obligation on this score was not to use or disclose Gillette confidential information. Merely possessing or even accessing arguably confidential information does not violate the parties’ contracts.
1.3. Civil Conspiracy. Gillette claims in Count IX that the remaining Defendants entered into a civil conspiracy “to misappropriate Gillette’s confidential information and trade secrets” and “to compete unfairly with Gillette.”3 This claim fails because, as explained above, there is no evidence that Defendants used any confidential information belonging to Gillette to benefit ShaveLogic.
To succeed on its claim for conspiracy, Gillette would have to prove at trial that Defendants acted together either (1) to exercise some power of coercion over the plaintiff that they would not have had if they had acted independently, or (2) pursuant to “a common plan to commit a tortious act.” Kurker v. Hill, 44 Mass. App. Ct. 184, 188-189 (1998); accord Aetna Cas. Sur. Co. v. P & B Autobody, 43 F.3d 1546, 1563-1564 (1st Cir. 1994) (applying Massachusetts law).
Gillette alleges the second kind of civil conspiracy, involving a purportedly tortious “common plan.”
There can be no civil conspiracy of this kind without “an underlying tortious act” carried out by two or more defendants acting together. Bartle v. Berry, 80 Mass. App. Ct. 372, 383-384 (2011). “Key to this cause of action is a defendant’s substantial assistance, with the knowledge that such assistance is contributing to a common tortious plan.” Kurker, supra, at 189.
3 As noted above, the Court previously dismissed the portion of Count IX alleging a civil conspiracy to cause ShaveLogic’s general counsel to breach his fiduciary duty to Gillette.
– 10 –
It is not clear that Gillette could prevail on its conspiracy claim even if it could prove its factual allegations, because neither the claimed unfair use of confidential information in violation of G.L. c. 93A nor the claimed breach of the nondisclosure agreements would constitute an underlying tortious act. See generally Kattar v. Demoulas, 433 Mass. 1, 12-13 (2000) (G.L. c. 93A creates substantive new rights by barring conduct that is neither a common law tort nor a breach of contract);4 Anderson v. Fox Hill Village Homeowners Corp., 424 Mass. 365, 368 (1997) (breach of contract “is not a tort”).
Defendants would be entitled to summary judgment on this claim even assuming that the alleged misconduct could, in theory and if proved, satisfy the element of an underlying tortious act.
Gillette has no evidence that Defendants misappropriated Gillette’s confidential information or used it to compete unfairly with Gillette, as discussed above. Defendants are therefore entitled to judgment as a matter of law on the conspiracy claim. See Bartle, supra (affirming summary judgment for defendants).
1.4. Constructive Trust Remedy. Gillette claims in Count IV that the individual defendants used or disclosed Gillette confidential information for the benefit of ShaveLogic, that ShaveLogic has been unjustly enriched as a result, and that ShaveLogic’s ’282 patent and pending patent applications should therefore be subject to a constructive trust for the benefit of Gillette.
A constructive trust “is imposed ‘in order to avoid the unjust enrichment of one party at the expense of the other where the legal title to the property was
4 The Supreme Judicial Court has “classified some G.L. c. 93A claims as contract-based, others as tort-based, and still others as ‘neither wholly tortious nor wholly contractual in nature.’ ” Kraft Power Corp. v. Merrill, 464 Mass. 145, 156 (2013) (citations and footnotes omitted), quoting Kattar, 433 Mass. at 12. For example, “tort actions ‘for fraud and deceit are within the contemplation of an ‘unfair act’ under [G.L. c. 93A].’ ” Kraft Power, supra at n.16, quoting Datacomm Interface, Inc. v. Computerworld, Inc., 396 Mass. 760, 778 (1986).
Gillette has not accused Defendants of committing an unfair trade practice by engaging in fraud or any other tortious act. Although Gillette previously claimed that Defendants committed the tort of misappropriating trade secrets, it has dismissed those claims with prejudice. The allegation that Defendants used Gillette’s confidential information to benefit ShaveLogic is the kind of c. 93A claim that is neither tort-based nor contractual in nature.
– 11 –
obtained by fraud or in violation of a fiduciary relation or arose where information confidentially given or acquired was used to the advantage of the recipient at the expense of the one who disclosed the information.’” Meskell v. Meskell, 355 Mass. 148, 151 (1969), quoting Barry v. Covich, 332 Mass. 338, 342 (1955).
ShaveLogic is entitled to summary judgment in its favor on this claim because Gillette has no evidence that any of its confidential information was used or disclosed for the benefit of ShaveLogic. See Northrup v. Brigham, 63 Mass. App. Ct. 362, 370 (2005) (affirming summary judgment for defendant on constructive trust claim because record showed no unjust enrichment). Gillette makes no claim that ShaveLogic obtained its patent or developed its patent applications by fraud or in violation of a fiduciary obligation.
2. ShaveLogic’s Counterclaims. Gillette is not entitled to summary judgment on ShaveLogic’s two counterclaims because a reasonable jury could conclude that Gillette deliberately asserted baseless claims against ShaveLogic in an attempt to scare off ShaveLogic’s investors and potential business partners, and thereby drive ShaveLogic out of the market for wet-shaving products.
A claim cannot be resolved on a motion for summary judgment where “a reasonable jury could return a verdict for the nonmoving party.” Dennis v. Kaskel, 79 Mass. App. Ct. 736, 741 (2011), quoting Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). For this reason, in evaluating the motion for summary judgment the Court “must … draw all reasonable inferences” from the evidence presented “in favor of the nonmoving party,” as a jury would be free to do at trial. Godfrey v. Globe Newspaper Co., Inc., 457 Mass. 113, 119 (2010). A request for summary judgment must be denied where a claim turns on disputed issues of fact or on disputed inferences from admitted facts. See Molly A. v. Commissioner of Dept. of Mental Retardation, 69 Mass. App. Ct. 267, 284 (2007) (“summary judgment cannot be granted if the evidence properly before the motion judge reveals a genuine issue of disputed material fact”); Flesner v. Technical Communications Corp., 410 Mass. 805, 811-812 (1991) (“Where a jury can draw opposite inferences from the evidence, summary judgment is improper.”).
– 12 –
2.1. Intentional Interference with Advantageous Relations. In its first counterclaim, ShaveLogic alleges that Gillette intentionally interfered with ShaveLogic’s relationships with investors and marketing and distribution companies for improper anti-competitive purposes and by improper means. Specifically, ShaveLogic claims that Gillette tortiously interfered with those relationships by threatening to bring and then filing a baseless lawsuit in an attempt to prevent ShaveLogic from entering the wet-shaving market.
To make out its claim for tortious interference with advantageous relations, ShaveLogic will have to prove that:
(1) [it] had an advantageous relationship with a third party (e.g., a present or prospective contract or employment relationship); (2) the defendant knowingly induced a breaking of the relationship; (3) the defendant’s interference with the relationship, in addition to being intentional, was improper in motive or means; and (4) the plaintiff was harmed by the defendant’s actions.
Blackstone v. Cashman, 448 Mass. 255, 260 (2007).
Gillette argues that ShaveLogic cannot establish that Gillette intentionally interfered with any advantageous relationship. Specifically, Gillette asserts that there is no evidence that it was aware of any particular relationship between ShaveLogic and some third party or that Gillette did anything that in fact interfered with that relationship. These arguments are without merit.
A reasonable jury could find that Gillette knew that a new entrant to the market would need to establish relationships with manufacturing and distribution partners, that Gillette intended to interfere with ShaveLogic’s ability to form those relationships by bringing a baseless lawsuit, that Gillette succeeded in scaring off potential manufacturing and distribution partners from working with ShaveLogic, and that ShaveLogic suffered economic harm as a result. It would certainly be a permissible inference that Gillette was unhappy with ShaveLogic’s plans to market a competing razor and wanted to find a way to prevent ShaveLogic from consummating relationships with companies that could manufacture or distribute products for ShaveLogic. Indeed, Gillette complains in its complaint that ShaveLogic “actively leveraged” its relationships with former Gillette employees “to develop relations” with potential business and manufacturing partners and that
– 13 –
Gillette was purportedly harmed by these attempts “to commercialize wet-shaving products for ShaveLogic.”
Gillette’s insistence that ShaveLogic must present direct evidence that Gillette knew that particular manufacturers or distributors were exploring business relationships with ShaveLogic is without merit. A party claiming tortious interference with prospective (rather than existing) business relationships is not required to prove that the defendant was aware of a potential relationship with a specific third party. It is enough that the defendant knowingly interfered with a prospective relationship between the plaintiff and an identifiable class or category of third persons. Dube v. Likins, 167 P.3d 93, 101 (Ariz. App. 2007); Downer’s Grove Volkswagen, Inc. v. Wigglesworth Imports, Inc., 546 N.E.2d 33, 37 (Ill. App. 1989); Jae Enterprises, Inc. v. Oxgord, Inc., no. 5:15-CV-228-TBR, 2016 WL 865328, *12 (W.D. Kentucky 2016) (applying Kentucky law); Lucas v. Monroe County, 203 F.3d 964, 979 (6th Cir. 2000) (applying Michigan law); McDonald Apiary, LLC v. Starrh Bees, Inc., no. 8:14-CV-351, 2015 WL 11108873, *3 (D.Neb. 2015) (applying Nebraska law); Hayes v. Northern Hills General Hosp., 590 N.W.2d 243, 249-250 (S.D. 1999); Trau-Med of America, Inc. v. Allstate Ins. Co., 71 S.W.3d 691, 701 (Tenn. 2002).
2.2. Violation of G.L. c. 93A. In its second counterclaim, ShaveLogic asserts that the same alleged misconduct by Gillette, in purportedly threatening to bring and then filing a baseless lawsuit in an attempt to prevent ShaveLogic from entering the wet shaving market, constitutes an unfair trade practice that violates G.L. c. 93A, §§ 2 and 11.
Gillette argues that this claim fails because ShaveLogic has no direct evidence that Gillette knew its claims were baseless when it filed suit. This argument is also without merit.
“There is no need to prove actual knowledge” through direct evidence; “it may be inferred from the circumstances.” Commonwealth v. Aponte, 71 Mass. App. Ct. 758, 762 (2008). And “the inferences drawn by a jury from the relevant evidence ‘need only be reasonable and possible and need not be necessary or inescapable.’ ”
– 14 –
Commonwealth v. Sullivan, 469 Mass. 621, 624 (2014), quoting Commonwealth v. Casale, 381 Mass. 167, 173 (1980).
A reasonable fact finder could infer that Gillette deliberately brought baseless claims against ShaveLogic in order to interfere with prospective business relationships. It could draw such an inference from the facts that Gillette: asserted but then dismissed trade secret claims; is unable to present any evidence that Defendants misused Gillette’s confidential information; claimed in this litigation that Gillette owns the concept of magnetic attachments, but argued to the United States Patent Office that this concept was publicly known; claimed that widely-known design concepts belong to Gillette but then conceded that was incorrect. As a result, Gillette is not entitled to summary judgment on ShaveLogic’s claim under c. 93A. See G.S. Enterprises, Inc. v. Falmouth Marine, Inc., 410 Mass. 262, 276 (1991) (reversing summary judgment for defendant on similar claim).
There is also no merit to Gillette’s further assertion that it cannot be held liable under c. 93A because it had no direct commercial relationship with ShaveLogic. A claimant can prove that a defendant’s alleged malfeasance took place in a business context, and thus implicates c. 93A, by showing either “that the defendant had a commercial relationship with the plaintiffs or that the defendant’s actions interfered with ‘trade or commerce’ ” in some other way. See First Enterprises, Ltd. v. Cooper, 425 Mass. 344, 347 (1997). “Parties need not be in privity for their actions to come within the reach of c. 93A.” Ciardi v. F. Hoffmann-La Roche, Ltd., 436 Mass. 53, 60 (2002), quoting Kattar, 433 Mass. at 14–15. For example, a lawyer can be sued under c. 93A for knowingly or recklessly conveying false information in order to help a client bring about a commercial transaction with a third party. See, e.g., Kirkland Const. Co. v. James, 39 Mass. App. Ct. 559, 563-564 (1995) (reversing dismissal of 93A claim against lawyers who conveyed alleged misrepresentation by client and thereby allegedly induced plaintiff to contract with client). It follows that knowingly conveying false information by bringing a baseless lawsuit to interfere with prospective commercial transactions also violates c. 93A.
– 15 –
It is true that the mere filing or a lawsuit or conduct of litigation does not, in and of itself, constitute trade or commerce within the meaning of c. 93A. See, e.g., Milliken & Co. v. Duro Textiles, LLC, 451 Mass. 547, 564 (2008); Morrison v. Toys “R” Us, Inc., 441 Mass. 451, 457 (2004); First Enterprises, 425 Mass. at 347.
But “each case requires examination of its own circumstances to determine whether it arose in a ‘business context.’ ” Linkage Corp. v. Trustees of Boston Univ., 425 Mass. 1, 24 (1997) (holding defendant’s status as charitable corporation not dispositive of whether c. 93A applies), quoting Planned Parenthood Fed’n of America, Inc. v. Problem Pregnancy of Worcester, Inc., 398 Mass. 480, 493 (1986).
A reasonable fact finder could conclude that Gillette was acting in a business context because it brought a baseless lawsuit in an attempt to keep ShaveLogic from entering the wet-shaving market. Such conduct, if proved at trial, would constitute an unfair trade practice in violation of c. 93A. See G.S. Enterprises, 410 Mass. at 273-274, 277 (bringing baseless lawsuit in order to block purchase of property would violate G.L. c. 93A, §§ 2(a) and 11; reversing grant of summary judgment in favor of defendant); Brooks Automation, Inc. v. Blueshift Technologies, Inc., Suffolk Sup. Ct. 05-3973-BLS2, 20 Mass. L. Rptr. 541, 2006 WL 307848 (2006) (Gants, J.) (filing frivolous complaint “becomes an act done in the conduct of trade or commerce when, as here, it is motivated by an intent to interfere with a competitor’s contractual relationship with a key and much coveted customer”), aff’d, 69 Mass. App. Ct. 1107 (2007) (unpublished).
2.3. Litigation Privilege. Gillette argues that the conduct giving rise to ShaveLogic’s counterclaims is absolutely protected by the common law privilege for statements made during a judicial proceeding or in connection with a contemplated lawsuit. Cf. Correllas v. Viveiros, 410 Mass. 314, 320 (1991); Sriberg v. Raymond, 370 Mass. 105, 108-109 (1976).
Gillette made the same litigation privilege argument when it moved to dismiss ShaveLogic’s counterclaims earlier in the case. The court (Sanders, J.) rejected that argument when it denied Gillette’s motion to dismiss the counterclaims. Judge Sanders held that the “conduct of filing (and threatening to file) a baseless lawsuit” is not protected by the litigation privilege. Gillette appealed.
– 16 –
The Appeals Court recently affirmed that ruling, holding that the litigation privilege does not require dismissal of ShaveLogic’s counterclaims because they are based on “Gillette’s purported acts of sending letters threatening a baseless lawsuit with the knowledge that ShaveLogic would have to disclose them to potential partners and investors, and then actually filing a baseless lawsuit[].”The Gillette Co. v. Provost, 91 Mass. App. Ct. 133, 141 (2017). It explained “that statements preliminary to litigation are only privileged if they ‘relat[e] to a proceeding [that] is contemplated in good faith[].” Id. at 142, quoting Sriberg, supra, at 109.
The Appeals Court’s decision disposes of Gillette’s invocation of the litigation privilege. For the reasons stated above, the summary judgment record demonstrates that ShaveLogic will be able to present evidence that would allow a reasonable jury to conclude that Gillette’s threats to sue ShaveLogic and its actual conduct in bringing and prosecuting this lawsuit were not made in good faith, because Gillette knew or should have known that it could not prove any of its claims. As a result, the litigation privilege does not bar ShaveLogic’s counterclaims.
2.4. Anti-SLAPP Arguments. Finally, Gillette also argues that ShaveLogic’s counterclaims must be dismissed under G.L. c. 231, § 59H, the so-called anti-SLAPP (strategic lawsuits against public participation) statute.
Once again, Judge Sanders already considered and rejected this argument when she denied Gillette’s motion to dismiss the counterclaims. And, once again, the Appeals Court affirmed that ruling. It held that Gillette was not entitled to dismissal under the anti-SLAPP statute because ShaveLogic “met its burden of showing that Gillette’s petitioning activity was ‘devoid of any reasonable factual support’ and caused ShaveLogic ‘actual injury.’ ” Gillette v. Provost, 91 Mass. App. Ct. at 134, quoting § 59H..
There is no reason to revisit this issue. The summary judgment record confirms the prior conclusions by Judge Sanders and the Appeals Court that Gillette’s claims are devoid of any factual support. As discussed above, the summary judgment record confirms that the general concepts of using magnetic attachments, front-loading engagements, and elastomeric pivots and returns in shaving razors have all been publicly known for a long time. Gillette has been unable to muster any
– 17 –
evidence that ShaveLogic used any Gillette confidential information in developing its product. And the summary judgment also confirms that ShaveLogic has evidence that if suffered actual injury as a result of Gillette’s actions in filing and pursuing this baseless lawsuit. The anti-SLAPP statute therefore does not apply.
The Court would exercise its discretion not to reconsider Judge Sander’s denial of the anti-SLAPP motion to dismiss even Judge Sanders and the Appeals Court had not already addressed the issue. A special motion to dismiss may be filed as of right under the anti-SLAPP statute within 60 days of the service of the challenged claims. See G.L. c. 231, § 59H. A court has discretion to allow such a motion to be filed “at any later time upon terms it deems proper,” but is not required to do so. Id. Thus, “[t]he anti-SLAPP statute contemplates that, ordinarily, a special motion to dismiss is to be brought within sixty days of the service of the complaint[.]” Burley v. Comets Cmty. Youth Ctr., Inc., 75 Mass. App. Ct. 818, 822 (2009). Gillette has no right to assert or reassert an anti-SLAPP defense in a motion for summary judgment brought after the close of discovery, and far more than sixty days after ShaveLogic asserted its counterclaims.
ORDER
Defendants’ motion for summary judgment as to Plaintiff’s claims against them is ALLOWED. Plaintiff’s cross-motion for summary judgment as to Defendants’ counterclaims is DENIED.
A final pre-trial conference will be held on May 23, 2017, at 2:00 p.m. to discuss resolution of ShaveLogic’s counterclaims against Gillette, which are the only claims that remain in the case.
April 18, 2017
___________________________
Kenneth W. Salinger
Justice of the Superior Court

read more

Posted by Stephen Sandberg - April 27, 2017 at 5:48 am

Categories: News   Tags: , , , , ,

Wright, et al. v. Balise Motor Sales Company, et al. (Lawyers Weekly No. 12-042-17)

COMMONWEALTH OF MASSACHUSETTS
SUFFOLK, ss. SUPERIOR COURT.
1684CV03477-BLS2
____________________
DEREK WRIGHT and NATHANIEL TOWSE, on behalf of themselves and all others similarly situated
v.
BALISE MOTOR SALES COMPANY and Others1
____________________
MEMORANDUM AND ORDER ON DEFENDANTS’ PARTIAL MOTION TO DISMISS AND MOTION FOR A MORE DEFINITE STATEMENT
Derek Wright previously sold cars at Balise Hyundai in Hyannis, Massachusetts, for Cape Hy, Inc. Nathaniel Towse sold cars in West Springfield, Massachusetts for Balise Motor Sales Company. Wright and Towse claim that they are owed unpaid overtime, Sunday premium pay, and minimum wages. They assert a variety of statutory claims as well as common law claims for breach of contract and unjust enrichment or quantum meruit. They seek to assert the same claims on behalf of a putative class of similarly situated salespeople.
Defendants have moved to dismiss the four common law claims and to compel a more definite statement as to the scope of the putative class. The Court will allow the partial motion to dismiss but deny the motion for a more definite statement.
The Court concludes that Defendants are entitled to dismissal of the common law claims because the facts alleged in the complaint do not plausibly suggest that Defendants entered into an implied contract to pay hourly wages of any kind. Instead, the complaint indicates that the parties understood that all salespeople would be paid commissions only. The existence of an implied contract to pay commissions bars Plaintiffs’ claims for unjust enrichment or quantum meruit.
1. Motion to Dismiss. To survive a motion to dismiss under Mass. R. Civ. P. 12(b)(6), a complaint must allege facts that, if true, would “plausibly suggest[] … an entitlement to relief.” Lopez v. Commonwealth, 463 Mass. 696, 701 (2012), quoting Iannacchino v. Ford Motor Co., 451 Mass. 623, 636 (2008), and Bell Atl. Corp. v. Twombly, 550 U.S. 544, 557 (2007). For the purpose of deciding the pending motion
1 Cape Hy, Inc.; James E. Balise, Jr.; William Peffer; Steven M. Mitus; and Allen Thomalla.
– 2 –
to dismiss, the Court must assume that the factual allegations in the complaint and any reasonable inferences that may be drawn in Plaintiffs’ favor from the facts alleged are true. See Golchin v. Liberty Mut. Ins. Co., 460 Mass. 222, 223 (2011). In so doing, however, it must “look beyond the conclusory allegations in the complaint and focus on whether the factual allegations plausibly suggest an entitlement to relief.” Maling v. Finnegan, Henderson, Farabow, Garrett & Dunner, LLP, 473 Mass. 336, 339 (2015), quoting Curtis v. Herb Chambers I-95, Inc., 458 Mass. 674, 676 (2011).
1.1. Implied Contract Claim. In Count VI, Plaintiffs claim that Defendants breach an implied contract with Plaintiffs by failing to pay them an amount at least equal to Plaintiffs’ statutory entitlement to a lawful minimum wage for all the hours they worked plus time-and-a-half for any hours they worked on Sundays and for any overtime they worked in excess of forty hours per week.
“In the absence of an express agreement, a contract implied in fact may be found to exist from the conduct and relations of the parties.” Sullivan v. O’Connor, 81 Mass. App. Ct. 200, 212 (2012), quoting LiDonni, Inc. v. Hart, 355 Mass. 580, 583 (1969).
The facts alleged in the complaint would support a finding that Plaintiffs had an implied contract with the corporate defendants, but do not plausibly suggest that Defendants had impliedly agreed to pay amounts equal to the minimum hourly wage, overtime, and Sunday pay required by statute. To the contrary, the complaint alleges Defendants had a policy of paying salespeople “based solely on commissions that they earned from selling vehicles” and not paying any additional amounts if needed to compensate salespeople for overtime, Sunday pay, or a minimum hourly wage. According to the complaint, Defendants paid salespeople a weekly draw, with the understanding that any amounts paid through the draw would be deducted from future commissions earned on sales. The course of conduct alleged in the complaint may have violated statutory pay requirements, as Plaintiffs claim in Counts I through V. But a policy and practice of paying commissions only, and never compensating salespeople on an hourly basis, cannot give rise to an implied contract to hourly wages that meet certain standards.
– 3 –
Since the facts alleged do not plausibly suggest that Defendants had implicitly agreed through their conduct to pay Plaintiffs on an hourly basis, the implied contract claim must be dismissed.
1.2. Implied Covenant of Good Faith and Fair Dealing. In Count IX, Plaintiffs claim that Defendants breached the implied covenant of good faith and fair dealing. Under Massachusetts law, this covenant “is implied in every contract.” See Weifer v. PortfolioScope, Inc., 469 Mass. 75, 82 (2014), quoting Uno Restaurants, Inc. v. Boston Kenmore Realty Corp., 441 Mass. 376, 385 (2004).
This claim adds nothing to Plaintiffs’ other contract claim. The implied covenant “does not create rights or duties beyond those the parties agreed to when they entered into the contract.” Boston Med. Ctr. Corp. v. Secretary of Executive Office of Health & Human Servs., 463 Mass. 447, 460 (2012) (affirming dismissal of claim), quoting Curtis v. Herb Chambers I-95, Inc., 458 Mass. 674, 680 (2011). Instead, the implied covenant only governs “the manner in which existing contractual duties are performed.” Eigerman v. Putnam Investments, Inc., 450 Mass. 281, 289 (2007).
Since the implied contract alleged in the complaint was to pay sales commissions, not to pay any kind of hourly wages, nothing in the implied covenant would require Defendants to pay hourly wages for overtime, time worked on Sundays, or as a minimum hourly wage. See Boston Med. Ctr., supra, at 459-460 (where plaintiff hospitals agreed in their contract to accept certain rates of payment for serving Medicaid patients, “the Secretary cannot be found to have acted in bad faith or to have dealt unfairly by failing to provide reimbursement at higher rates”).
1.3. Unjust Enrichment and Quantum Meruit. There is no need to analyze Plaintiffs’ quantum meruit and unjust enrichment claims separately, as these claims are essentially indistinguishable. “The underlying basis for awarding quantum meruit damages in a quasi-contract case is unjust enrichment of one party and unjust detriment to the other party.” Liss v. Studeny, 450 Mass. 473, 479 (2008), quoting Salamon v. Terra, 394 Mass. 857, 859 (1985).
The facts alleged in the complaint establish that Plaintiffs cannot recover a minimum wage, overtime, or Sunday premium pay on a quantum meruit or unjust
– 4 –
enrichment theory because they were employed under an implied contract that governed their compensation and did not provide for such wages.
“A plaintiff is not entitled to recovery on a theory of quantum meruit [or unjust enrichment] where there is a valid contract that defines the obligations of the parties.” Boston Med. Ctr. Corp. v. Secretary of Executive Office of Health & Human Servs., 463 Mass. 447, 467 (2012) (affirming dismissal on this ground). “A valid contract defines the obligations of the parties as to matters within its scope, displacing to that extent any inquiry into unjust enrichment.” Id., quoting Restatement (Third) of Restitution and Unjust Enrichment § 2 (2011); see also Santagate v. Tower, 64 Mass. App. Ct. 324, 329 (2005) (“An equitable remedy for unjust enrichment is not available to a party with an adequate remedy at law.”).
2. Motion for a More Definite Statement. There is no need to order Plaintiffs to provide a more definite statement. The complaint makes clear that Plaintiffs are asserting claims in part on behalf of other salespeople who were paid commissions and not paid on an hourly basis. These allegations are detailed enough for Defendants to understand and respond to the complaint. More detail can wait until after Plaintiffs have had a chance to conduct discovery.
ORDER
Defendants’ motion to dismiss the contract and equitable claims in Counts VI through IX of the complaint is ALLOWED. Defendant’s motion for a more definite statement is DENIED.
April 18, 2017
___________________________
Kenneth W. Salinger
Justice of the Superior Court

read more

Posted by Stephen Sandberg - April 27, 2017 at 2:13 am

Categories: News   Tags: , , , , , , ,

Suffolk Construction Company, Inc. v. Benchmark Mechanical Systems, Inc., et al. (Lawyers Weekly No. 12-045-17)

COMMONWEALTH OF MASSACHUSETTS
SUFFOLK, ss. SUPERIOR COURT.
1384CV01463-BLS2
____________________
SUFFOLK CONSTRUCTION COMPANY, INC.
v.
BENCHMARK MECHANICAL SYSTEMS, INC. and READING CO-OPERATIVE BANK
____________________
MEMORANDUM AND ORDER ALLOWING PLAINTIFF’S MOTION FOR SUMMARY JUDGMENT
This case arises from Suffolk Construction Company’s mistaken payment of monies to Benchmark Mechanical Systems rather than to Benchmark’s lender, Reading Co-Operative Bank. Suffolk had hired Benchmark as a subcontractor on a large construction project. Benchmark secured a line of credit by assigning to the Bank all money that Benchmark stood to collect from Suffolk under its subcontract. Suffolk mistakenly made payments totaling $ 3,822,500.49 to Benchmark instead of to the Bank. Benchmark held and spent those monies, rather than forward them to the Bank. After Benchmark went out of business, the Bank sued Suffolk. The Supreme Judicial Court ordered Suffolk to pay the Bank the full amount it should have paid under Benchmark’s assignment. See Reading Co-Operative Bank v. Suffolk Constr. Co., 464 Mass. 543, 557 (2013). With statutory interest included, Suffolk paid the Bank a judgment totaling $ 7,640,907.45.
Suffolk brought this action seeking to recover the surplus held by the Bank that was left after the Bank deducted its reasonable costs of collection and the principal and interest owed by Benchmark from the amount paid by Suffolk. In addition, Suffolk asserted common law claims against Benchmark seeking to recover the $ 3,822,500.49 in subcontract payments that Suffolk was compelled to pay a second time to the Bank. The Supreme Judicial Court recently held that Suffolk had stated viable claims against the Bank, but that its claims against Benchmark are barred by the applicable statute of limitations. See Suffolk Constr. Co. v. Benchmark Mechanical Systems, Inc., 475 Mass. 150 (2016).
Suffolk now moves for summary judgment as to its right to collect the surplus of roughly $ 1.35 million being held by the Bank. The Court will ALLOW this motion.
– 2 –
This resolves all remaining claims. Suffolk and the Bank report that they have settled Suffolk’s claim that the Bank’s costs of collection were unreasonable, and that this settlement will take effect if the Court were to rule (as it does) that Suffolk is entitled to receive the full surplus amount that the Bank owes to Benchmark.
The SJC has held that under the circumstances of this case Suffolk is entitled to equitable subrogation as against Benchmark, meaning that it may “stand in Benchmark’s shoes as to the surplus” held by the Bank. Suffolk Constr., 475 Mass. at 156. This holding is the law of the case, is binding on all parties, and may not be reconsidered now that the case has been remanded to the Superior Court. See City Coal Co. of Springfield, Inc. v. Noonan, 434 Mass. 709, 712 (2001).1 It necessarily follows that Suffolk is therefore the “debtor” for purposes of G.L. c. 106, § 9-608(a)(4), and thus by law is entitled the full amount of the surplus held by the Bank. See Suffolk Constr., 475 Mass. at 155-156. Suffolk’s alternative theories as to why it is entitled to recover the surplus are therefore moot.
Benchmark’s claim that Suffolk owes it $ 964,642.51 for change orders that Benchmark carried out on the project, and that Benchmark should be able to recoup this amount from the surplus held by the Bank, is without merit. The summary judgment record demonstrates that the Bank, as Benchmark’s assignee, settled and resolved these claims against Suffolk. In exchange for a $ 35,000 payment by Suffolk, the Bank (acting as Benchmark’s assignee) executed a settlement agreement providing that this payment “constitutes full and final satisfaction, discharge and payment for any monies owed to Benchmark by Suffolk. The settlement agreement also expressly released “any rights Benchmark may have against Suffolk” arising out of or with respect to any work by Benchmark for Suffolk on this project. This release and settlement agreement did more than merely extinguish any right by Benchmark
1 The Court recognizes that an issue decided on appeal may be reopened by a trial judge after remand “if the evidence on a subsequent trial was substantially different, controlling authority has since made a contrary decision of the law applicable to such issues, or the decision was clearly erroneous and would work a manifest injustice.” Kitras v. Town of Aquinnah, 474 Mass. 132, 146 (2016), quoting King v. Driscoll, 424 Mass. 1, 8 (1996), quoting in turn United States v. Rivera-Martinez, 931 F.2d 148, 151 (1st Cir.), cert. denied, 502 U.S. 862 (1991). None of these circumstances is present here, however.
– 3 –
to assert a claim directly against Suffolk for further payment; it also extinguished any debt owed to Benchmark by Suffolk.
ORDER
Plaintiff’s motion for summary judgment on the remaining claims is ALLOWED. Final judgment shall enter: (1) in favor of Suffolk Construction Company, Inc., on Counts VII and XI of its amended complaint by (a) Declaring that Suffolk is the equitable subrogee of Benchmark Mechanical Systems, Inc., with respect to the surplus remaining after Reading Co-Operative Bank applied Suffolk’s judgment payment to Benchmark’s outstanding debt to the bank, Suffolk is therefore the “debtor” for purposes of G.L. c. 106, § 9-608(a)(4), and Suffolk is entitled to recover the full amount of that surplus held by the Bank, and (b) Ordering Reading Co-Operative Bank to pay the full amount of that surplus to Suffolk Construction Company, Inc., forthwith; and (2) Dismissing all other remaining claims, counterclaims, and cross-claims with prejudice.
25 April 2017
___________________________
Kenneth W. Salinger
Justice of the Superior Court

read more

Posted by Stephen Sandberg - April 26, 2017 at 7:04 pm

Categories: News   Tags: , , , , , , , , ,

Holyoke Mutual Insurance Company in Salem, et al. v. Vibram USA, Inc. (Lawyers Weekly No. 12-031-17)

1
COMMONWEALTH OF MASSACHUSETTS
SUFFOLK, ss. SUPERIOR COURT
CIVIL ACTION
NO. 15-2321 BLS1
HOLYOKE MUTUAL INSURANCE COMPANY IN SALEM and MARYLAND CASUALTY COMPANY
vs.
VIBRAM USA, INC.
MEMORANDUM OF DECISION AND ORDER
ON CROSS-MOTIONS FOR SUMMARY JUDGMENT ON RECOUPMENT AND RECOVERY OF DEFENSE COSTS
INTRODUCTION
This action arises out of a coverage dispute between the plaintiff insurance companies, Holyoke Mutual Insurance Company in Salem (Holyoke)1 and Maryland Casualty Company (Maryland) (individually an Insurer, and collectively the Insurers), and the defendant, Vibram USA, Inc. (Vibram). Each of the insurers issued commercial general liability policies to Vibram (or its affiliate) (the Policies).2 An action was filed against Vibram in the United States District Court for the Western District of Washington at Tacoma captioned: Tefere Abebe Bikila, and others, v. Vibram, case no. 3:15-cv-05082-RBL (the Underlying Action). Vibram asserted coverage under the Policies and tendered defense of the Underlying Action to the Insurers. The
1 Holyoke has been replaced as a plaintiff in this action by its successor, Country Mutual Insurance Company. For consistency, the court will continue to refer to it as Holyoke in this Memorandum of Decision and Order.
2 Holyoke issued policies to Vibram for several years, while Maryland issued policies to an affiliate of Vibram,Vibram Five Fingers, LLC. It is not necessary to distinguish between Vibram and its affiliate for the purposes of this motion, and the court will refer to them collectively as Vibram. Additionally, for purposes of this motion the relevant policy language in all of the policies is identical, and is it also unnecessary to distinguish among policy years. The court will therefore simply refer to the Holyoke and Maryland policies collectively as the Policies.
2
Insurers each sent a “reservation of rights” letter to Vibram in which they agreed to provide its defense to the claims asserted in the Underlying Action, but also maintained that coverage did not exist under the Policies and reserved their rights to bring a declaratory judgment action and seek reimbursement for defense costs advanced. The Insurers then filed this declaratory judgment action seeking a declaration that the claims asserted against Vibram in the Underlying Action are not covered under the Policies; Vibram counterclaimed for a declaration that they are. In a Memorandum of Decision and Order on Cross-Motions for Summary Judgment and Partial Summary Judgment originally issued on August 17, 2016 (the Decision), this court held that the Policies do not provide coverage for the claims asserted against Vibram in the Underlying Action and, accordingly, there is no duty to defend.
The case is now before the court on cross-motions for summary judgment addressing the issues of recoupment of defense costs advanced or, conversely, recovery of defense costs incurred before the court rendered the Decision but left unpaid—issues of first impression in Massachusetts. The Insurers contend that since the claims asserted in the Underlying Action were not insured under the Policies, they are entitled to recoup the defense costs that they previously paid Vibram. Vibram, in turn, maintains that it is entitled to recover defense costs already incurred, but still unpaid, as of the date the Decision issued. For the reasons that follow, each party’s motion is allowed, in part, and denied, in part.
ADDITIONAL BACKGROUND
None of the facts necessary to resolve these cross-motions are in dispute.
3
Because the Insurers sent reservation of rights letters to Vibram, Vibram exercised its right to control its defense of the Underlying Action and retained its own counsel.3 Vibram’s counsel kept the Insurers informed concerning the status of the Underlying Action and forwarded copies of pleadings to them. By August 17, 2016, the date the Decision issued, Vibram had sent the Insurers invoices for defense costs totaling $ 1,272,212.57 and the Insurers had collectively reimbursed Vibram $ 667,901.71—$ 472,216.80 from Holyoke and $ 195,684.91 from Maryland. Vibram last received a payment from the Insurers on July 18, 2016. Neither Insurer informed Vibram why it did not pay the full amount of the invoices.4
As relevant to the issues raised by the pending motions, the Policies provide that the Insurers “will pay those sums that the insured becomes legally obligated to pay as damages because of ‘personal and advertising injury’ to which this insurance applies. We have the right and duty to defend the insured against any ‘suit’ seeking those damages. However, we will have no duty to defend the insured against any ‘suit’ seeking damages for personal and advertising injury’ to which this insurance does not apply.” The Policies also state that the Insurers “will pay, with respect to any claim we investigate or settle, or any ‘suit’ against any insured we defend: . . . All expenses we incur . . . .”
DISCUSSION
Recoupment
In Metro. Life Ins. Co. v. Cotter, 464 Mass. 623 (2013) (Cotter), the Supreme Judicial Court (SJC) was called upon to decide if a disability insurer could recoup from its insured benefit
3 See, e.g., Northern Sec. Ins. Co. Inc. v. Another 1, 78 Mass. App. Ct. 691, 694-695 (2011).
4 At oral argument, counsel for the Insurers stated that invoices were still being processed for payment when the Decision issued, and the Insurers elected to withhold payment.
4
payments made under a reservation of rights after a court determined that the insured’s benefits claim was not covered. In considering that claim for recoupment, the SJC noted that, with respect to liability policies:
We have not addressed whether an insurer may seek reimbursement for the costs of a defense undertaken pursuant to a unilateral reservation of rights. We note that other jurisdictions are split as to the validity of such claims. See Perdue Farms, Inc. v. Travelers Cas. & Sur. Co., 448 F.3d 252, 258 (4th Cir.2006), and cases cited (“jurisdictions differ on the soundness of an insurer’s right to reimbursement of defense costs”).
Based on the theory that insurers are in the business of analyzing and allocating risk, and thus in a better position to do so, courts in some jurisdictions have declined to allow liability insurers to bring reimbursement claims for the costs of defense. See Texas Ass’n of Counties County Gov’t Risk Mgt. Pool v. Matagorda County, 52 S.W.3d 128, 135 (Tex.2000). See, e.g., Excess Underwriters at Lloyd’s, London v. Frank’s Casing Crew & Rental Tools, Inc., 246 S.W.3d 42, 45–47 (Tex.2008) ( “imposing an extra-contractual reimbursement obligation places the insured in a highly untenable position”); United States Fid. v.United States Sports Specialty, 270 P.3d 464, 470–471 (Utah 2012) (“The right of an insurer to recover reimbursement from its insured distorts the allocation of risk unless it has been specifically bargained for”).
Id. at 641 n.21. This question is squarely before this court in this case.
While acknowledging that there are divergent views on the right of recoupment in cases such as this, in which a court has entered a declaratory judgment that none of the claims alleged in the complaint are covered under the Policies, the Insurers maintain that the majority of jurisdictions permit recoupment. Perhaps, the most frequently cited case for the proposition that defense costs advanced under a reservation of rights may be recovered is Buss v. Superior Court, 16 Cal. 4th 35 (Cal.App. 1997). In a more recent decision, the California Supreme Court reaffirmed its holding in Buss with the following comments:
As Buss explained, the duty to defend, and the extent of that duty, are rooted in basic contract principles. The insured pays for, and can reasonably expect, a defense against third party claims that are potentially covered by its policy, but no more. Conversely, the insurer does not bargain to assume the cost of defense of claims that are not even potentially covered. To shift these costs to the insured does not upset the contractual
5
arrangement between the parties. Thus, where the insurer, acting under a reservation of rights, has prophylactically financed the defense of claims as to which it owed no duty of defense, it is entitled to restitution. Otherwise, the insured, who did not bargain for a defense of noncovered claims, would receive a windfall and would be unjustly enriched.
. . .
As Buss further noted, “[n]ot only is it good law that the insurer may seek reimbursement for defense costs as to the claims that are not even potentially covered, but it also makes good sense. Without a right of reimbursement, an insurer might be tempted to refuse to defend an action in any part — especially an action with many claims that are not even potentially covered and only a few that are — lest the insurer give, and the insured get, more than they agreed. With such a right, the insurer would not be so tempted, knowing that, if defense of the claims that are not even potentially covered should necessitate any additional costs, it would be able to seek reimbursement.”
Though these comments were made in the context of “mixed” actions [including covered and uncovered claims], they apply equally here. An insurer facing unsettled law concerning its policies’ potential coverage of the third party’s claims should not be forced either to deny a defense outright, and risk a bad faith suit by the insured, or to provide a defense where it owes none without any recourse against the insured for costs thus expended. The insurer should be free, in an abundance of caution, to afford the insured a defense under a reservation of rights, with the understanding that reimbursement is available if it is later established, as a matter of law, that no duty to defend ever arose.
Scottsdale Ins. Co. v. MV Transportation, 36 Cal. 4th 643, 655 (Cal.App. 2005) (Internal citations and quotations omitted). In this case, the Insurers make the same arguments that the California Supreme Court describes in Scottsdale.
Vibram, however, points the court to a recent, unreported decision of the United States District Court in Massachusetts that reaches an opposite conclusion: Welch Foods Inc. v. Nat’l Union Fire Ins. Co., No. 09-12087-RWZ 2011 WL 576600 (D. Mass. Feb. 9, 2011). In that case, like this one, the District Court found that claims in an underlying action were not covered by the liability policy and then addressed the insurer’s claim for recoupment of defense costs paid under a reservation of rights. The District Court acknowledged the holding and reasoning of Buss, but rejected the California Supreme Court’s opinion in favor of a more recent decision by the
6
Pennsylvania Supreme Court, American & Foreign Ins. Co. v. Jerry’s Sport Center, Inc., 2 A.3d 526 (2010) (Jerry’s), which appears to be the most frequently cited case by those courts that have recently held that under these circumstances there is no right to recoup.
In Jerry’s, the Pennsylvania Supreme Court began with an exhaustive review of the competing lines of cases permitting and rejecting claims for recoupment of defense costs by liability insurers. Id. at 536-537. It then reflected on the very broad duty to defend (broader than the duty to indemnify) that exists under Pennsylvania, a duty that it describes in very much the same way as Massachusetts appellate courts describe the duty that liability carriers owe their insureds under Massachusetts law. See Id. at 540-541, compare Decision at 5-6. The Court then found that the answer to the question before it: is the insurer entitled to recover defense costs advanced before it obtained a declaratory judgment of no coverage, lay in the language of the policy itself:
We agree with Insured that whether a complaint raises a claim against an insured that is potentially covered is a question to be answered by the insurer in the first instance, upon receiving notice of the complaint by the insured. Although the question of whether the claim is covered (and therefore triggers the insurer’s duty to defend) may be difficult, it is the insurer’s duty to make that decision. See Shoshone First Bank, 2 P.3d at 516 (holding that the insurer must make the decision about whether there is a duty to defend). Insurers are in the business of making this decision. The insurer’s duty to defend exists until the claim is confined to a recovery that the policy does not cover. . . .Where a claim potentially may become one which is within the scope of the policy, the insurance company’s refusal to defend at the outset of the controversy is a decision it makes at its own peril. . . .
In some circumstances, an insurance company may face a difficult decision as to whether a claim falls, or potentially falls, within the scope of the insurance policy. However, it is a decision the insurer must make. If it believes there is no possibility of coverage, then it should deny its insured a defense because the insurer will never be liable for any settlement or judgment. See Shoshone, 2 P.3d at 510 (stating that where an insurer believes there is no coverage, it should deny a defense at the beginning). This would allow the insured to control its own defense without breaching its contractual obligation to be defended by the insurer. If, on the other hand, the insurer is uncertain about coverage, then it should provide a defense and seek declaratory judgment about coverage. Id.
7
In a declaratory judgment action to determine whether a claim is covered, the court resolves the question of coverage. . . . The court’s role in the declaratory judgment action is to resolve the question of coverage to eliminate uncertainty. If the insurer is successful in the declaratory judgment action, it is relieved of the continuing obligation to defend. The court’s resolution of the question of coverage does not, however, retroactively eliminate the insurer’s duty to defend the insured during the period of uncertainty.
. . .
An examination of the insurance contract between the parties reveals that under the policy, [the Insurer] was obliged to pay damages because of bodily injury, and had the “right and duty to defend the insured against any ‘suit’ seeking those damages.” . . . . The policy further provided that it had no duty to defend the insured against any suit seeking damages for bodily injury to which the insurance does not apply. Pursuant to the contractual language, therefore, [the Insurer] had the right and the duty to defend covered claims for bodily injury against Insured, and no duty to defend non-covered claims.
It was not immediately apparent whether the claim against Insured for bodily injury was or was not covered. It was immediately apparent, however, that the claim might potentially be covered. . . . Facing uncertainty about coverage, [the Insurer] appropriately activated its right and met its duty to defend under the policy when it was presented with a claim that may or may not have been covered. At the same time, [the Insurer] appropriately exercised its right to seek a declaration that it had no duty to defend.
The trial court’s subsequent declaratory judgment determination that the claim was not covered relieved [the Insurer] of having to defend the case going forward, but did not somehow nullify its initial determination that the claim was potentially covered. . . .
We therefore reject [the Insurer’s] attempt to define its duty to defend based on the outcome of the declaratory judgment action. The broad duty to defend that exists in Pennsylvania encourages insurance companies to construe their insurance contract broadly and to defend all actions where there is any potential coverage. . . .
Where the insurance contract is silent about the insurer’s right to reimbursement of defense costs, permitting reimbursement for costs the insurer spent exercising its right and duty to defend potentially covered claims prior to a court’s determination of coverage would be inconsistent with Pennsylvania law. It would amount to a retroactive erosion of the broad duty to defend in Pennsylvania by making the right and duty to defend contingent upon a court’s determination that a complaint alleged covered claims, and would therefore narrow Pennsylvania’s long-standing view that the duty to defend is broader than the duty to indemnify.
. . .
8
Moreover, [the Insurer’s] contractual obligation to pay for the defense arose as a consequence of the rules of contract interpretation. It is undisputed that the policy did not contain a provision providing for reimbursement of defense costs under any circumstances. Thus, the right [the Insurer] attempts to assert in this case, the right to reimbursement, is not a right to which it is entitled based on the policy
Id. at 541-544.
This court, like the District Court in Welch, finds that the Pennsylvania Supreme Court’s decision in Jerry’s comports with Massachusetts law. In Massachusetts, the insurer’s duty to defend arises when the underlying complaint “show[s] only a possibility that the liability claim falls within the insurance coverage. There is no requirement that the facts alleged in the complaint specifically and unequivocally make out a claim within the coverage.” Sterilite Corp. v. Continental Cas. Co., 17 Mass.App.Ct. 316, 319 (1983). Even in cases in which the insurer may believe that coverage is unlikely under the terms of the policy, it has financial incentives to provide a defense. If it is determined in a separate action brought by the insured (or the insurer) that coverage existed, the insurer will be responsible for paying the insured’s costs of establishing a right to a defense, even if the denial of coverage was made in good faith. See Hanover Ins. Co. v. Golden, 436 Mass. 584, 588 (Mass. 2002). Of course, a bad faith refusal to provide a defense could constitute a violation of chapter 93A and expose the insurer to multiple damages. See Boston Symphony Orchestra, Inc. v. Commercial Union Ins. Co., 406 Mass. 7 (Mass. 1989) and Boyle v. Zurich American Ins. Co., 472 Mass. 649, 661 (2015). In consequence, when in doubt, an insurer has an economically sound and self-interested reason to provide a defense under a reservation of right until the coverage issue can be resolved.
With those basic tenets of Massachusetts law in mind, we turn to the language of the contracts that define the parties’ rights and obligations, in this case the Policies. See, e.g., Hakim v. Massachusetts Insurers’ Insolvency Fund, 424 Mass. 275, 280 (1997) (“The interpretation of
9
an insurance contract is no different from the interpretation of any other contract, and we must construe the words of the policy in their usual and ordinary sense.”) There is simply nothing in the Policies that provides a right to recoup defense costs that the Insurers have advanced because they concluded that it was in their economic interest to do so. The court rejects the argument relied upon in Buss and its progeny that to deny recovery of defense costs will give insureds more than they bargained for, i.e., partial payment for the cost of defending claims that were not covered by the policies that they purchased. The court finds the reasoning of Jerry’s more persuasive: “In some circumstances, an insurance company may face a difficult decision as to whether a claim falls, or potentially falls, within the scope of the insurance policy. However, it is a decision the insurer must make.” Jerry’s, 2 A.3d at 543.
In this case, if the Insurers had refused to provide a defense, they would have incurred no liability to Vibram because the claims in the Underlying Action were not within the coverage provided. However, they determined in the exercise of their considered judgment that it was better to provide a defense and file an action for declaratory judgment. “It is undisputed that the [the Policies] did not contain a provision providing for reimbursement of defense costs under any circumstances. Thus, the right [the Insurers] attempt[] to assert in this case, the right to reimbursement, is not a right to which [they are] entitled based on the [Policies].” Id. at 544. Knowing that there is a risk that they would decide to provide a defense in cases in which they were uncertain as to whether a claim was covered because the claim was novel or the law unclear, the Insurers could have addressed the right of recoupment in their Policies; they didn’t. The court ought not insert a policy provision that the parties did not agree upon.
In Jerry’s, the Pennsylvania Court addressed two other arguments advanced by the Insured in this case. First, a reservation of rights letter cannot create additional rights for the
10
Insurer not found in the contract. “[P]ermitting reimbursement by reservation of rights, absent an insurance policy provision authorizing the right in the first place, is tantamount to allowing the insurer to extract a unilateral amendment to the insurance contract.” Id. and cases there cited. The court finds this reasoning consistent with existing Massachusetts precedent.
In Joint Underwriting Ass’n v. Goldberg, 425 Mass. 46 (1997), the insurer defended its insured under a reservation of rights. After a jury returned an adverse verdict against the insured in the underlying action and while appeals were pending, the insurer settled the underlying action. It then sought reimbursement for the cost of the settlement. The SJC held that even if the claims asserted against its insured in the underlying action were not covered, the insurer had no right to recover. The reservation of rights letter did not provide a right of recovery, it only permitted the insurer to defend without waiving its right to deny an obligation to cover an adverse judgment. While the insured’s personal counsel had urged the insurer to settle, no agreement was ever reached that the insured would reimburse the insurer. The SJC noted that the insurer had settled the claims to protect its own interests, as it was concerned about liability under chapter 93A that could, in theory, treble damages, if its refusal to settle were found unreasonable. As the insurer had no contractual right to reimbursement, it had no basis to demand it.
The instant case obviously does not involve a claim to recover an amount paid by an insurer in settlement of a claim, but Goldberg does stand for the general proposition that when an insurer provides payments that benefit the insured, but also avoid a perceived risk of exposure to even greater loss to the insurer, the reservation of rights letter does not support a claim for reimbursement. A right to reimbursement must be found in a contract.
11
In Jerry’s, the Pennsylvania Supreme Court also rejected the insurer’s claim that it was entitled to recoupment under a theory of unjust enrichment. 2 A.2d at 545. In this case, the Insurers point to the SJC’s decision in Cotter and the careful consideration that the SJC gave to the disability insurer’s argument that it could recover benefit payments under an equitable claim for restitution. Although, in Cotter, the SJC rejected the disability insurer’s claim, the Insurers argue that liability policies are different and the Restatement (Third) of Restitution and Unjust Enrichment, § 35(1) supports their right of recovery.5
In Cotter, the SJC addressed the insurer’s equitable claim as follows:
“A quasi contract or a contract implied in law is an obligation created by law ‘for reasons of justice, without any expression of assent and sometimes even against a clear expression of dissent.’ ” Salamon v. Terra, 394 Mass. 857, 859 (1985), quoting 1 A. Corbin, Contracts § 19 (1963). “Restitution is an equitable remedy by which a person who has been unjustly enriched at the expense of another is required to repay the injured party.” Keller v. O’Brien, 425 Mass. 774, 778 (1997), citing Salamon v. Terra, supra. “The fact that a person has benefited from another ‘is not of itself sufficient to require the other to make restitution therefor.’ … Restitution is appropriate ‘only if the circumstances of its receipt or retention are such that, as between the two persons, it is unjust for [one] to retain it.’ ” Keller v. O’Brien, supra, quoting Restatement of Restitution § 1 comment c (1937), and citing National Shawmut Bank v. Fidelity Mut. Life Ins. Co., 318 Mass. 142, 146 (1945).
A determination of unjust enrichment is one in which “[c]onsiderations of equity and morality play a large part.” Salamon v. Terra, supra. A plaintiff asserting a claim for unjust enrichment must establish not only that the defendant received a benefit, but also that such a benefit was unjust, “a quality that turns on the reasonable expectations of the parties.” Global Investors Agent Corp. v. National Fire Ins. Co., 76 Mass.App.Ct. 812, 826 (2010), quoting Community Builders, Inc. v. Indian Motorcycle Assocs., Inc., 44 Mass.App.Ct. 537, 560 (1998). “The injustice of the enrichment or detriment in quasi-contract equates with the defeat of someone’s reasonable expectations.” Salamon v. Terra, supra. The party seeking restitution has the burden of proving its entitlement thereto. J.A. Sullivan Corp. v. Commonwealth, 397 Mass. 789, 796 (1986); Hayeck Bldg. & Realty Co. v. Turcotte, 361 Mass. 785, 789 (1972), citing Andre v. Maguire, 305 Mass. 515, 516 (1940).
5 In Cotter, the SJC appeared to adopt the principles set out in Restatement (Third) of Restitution and Unjust Enrichment, § 35(1) and found that Goldberg did not preclude the possibility that an insurer could recover payments made under a reservation of right, but as explained below held that the insurer must still prove that retention of the payments would be unjust.
12
We have allowed claims for restitution in circumstances involving fraud, bad faith, violation of a trust, or breach of a duty; in “business torts” such as unfair competition and claims for infringement of trademark or copyright; and in some circumstances, as here, in disputes arising from quasicontractual relations. See Keller v. O’Brien, supra at 778–779. In order to prevail on its claim for reimbursement of disability insurance benefits it paid to Cotter under a reservation of rights, MetLife must establish not only that Cotter received a benefit, which is not disputed, but also that such a benefit was unjust.
Cotter, 464 Mass. at 644. The court found that Cotter’s retention of the disability benefit payments was not unjust.
Clearly, the facts of Cotter, in which the insurer sought to recover benefit payments made to an individual, were more compelling for the insured than those of the present case, which involves a commercial dispute between an insurer and a large company. Nonetheless, liability policies are also sold to individuals (e.g., auto and homeowners policies) and small family businesses, as well as to manufacturing companies like Vibram. In order to prove that it is unjust for an insured to retain defense costs advanced in respect of a third-party claim under a reservation of rights, an insurer must do more than prove that a court ultimately held that the claims were uncovered. Otherwise, the insurer is, in effect, using equitable principles to insert a reimbursement provision into the liability policy that does not exist. If a policy holder demands coverage of a third-party claim that is clearly not covered under the policy, the insurer can reject it. If a policy holder engaged in misrepresentations or other wrongful conduct (for example, acting in concert with a third-party claimant to make an uncovered claim appear covered), retention of defense costs might well be “unjust.” However, a good faith demand for a defense under a liability policy, which the insurer decides is likely enough to be valid that it will tender a defense under a reservation of rights, does not make retention of those defense costs unjust. Claims of unjust enrichment ought not be used to imply rights that the parties have not included
13
in the written contract that defines their relationship and covers the subject matter in dispute. See Kennedy v. B.A. Gardetto, Inc. 306 Mass. 212 (1940).
Recovery of Unpaid Defense Costs
Vibram seeks to recover expenses for defense of the Underlying Action incurred up to the date that the court held that the claims asserted in the Underlying Action were not covered by the Policies. It argues that in all cases in which a defense is provided under a reservation of rights, the duty to defend continues “until a declaratory judgment of no coverage is entered and that it does not retroactively disappear, even if no coverage is found.” Vibram asserts that Metropolitan Property & Casualty Ins. Co. v. Morrison, 460 Mass.352 (2011) (Morrison) established this principle. The court disagrees. Rather, Morrison teaches that the duty to defend ends when there is no longer any chance that the facts alleged in an underlying action can support a covered claim. That will often, but certainly not always, be when a declaratory judgment resolves a coverage dispute.
Morrison involved claims allegedly covered by a homeowner’s insurance policy. Briefly stated, the policy holders’ son (covered under the policy) had injured a police officer while resisting arrest. The son pled guilty to various criminal charges, and the police officer filed suit against the son alleging negligent and reckless conduct. The insurer, Metropolitan, disclaimed any obligation to provide indemnity or a defense, but did bring a declaratory judgment action seeking to establish no coverage. The son did not answer the police officer’s complaint, and a default judgment entered against him in the underlying personal injury action. On appeal, the coverage issue turned on (1) an interpretation of a policy provision that excluded coverage for
14
bodily injury resulting from intentional and criminal acts and (2) whether the entry of a default judgment in the underlying personal injury action, before a judgment of no coverage entered in the declaratory judgment action, established that the police officer’s injury was the result of negligence, as alleged in the complaint, and therefore a covered claim.
The SJC began by restating the well-established principle that the “insurer’s duty to defend is independent from, and broader than, its duty to indemnify.” Id. at 351. It then went on to explain that “the duty to defend is determined based on the facts alleged in the complaint, and on facts known or readily knowable by the insurer . . . . However, when the allegations in the underlying complaint lie expressly outside the policy coverage and its purpose, the insurer is relieved of the duty to investigate or defend the claimant.” Id. (internal quotations and citations omitted). Or, stated somewhat differently, when the allegations of the complaint do not “roughly sketch a claim covered by a liability policy,” there is no duty to defend. Id.
In support of its position, Vibram quotes the following statement from Morrison: “‘a declaratory judgment of no coverage, either by summary judgment or after trial, does not retroactively relieve the primary insurer of the duty to defend; it only relieves the insurer of the obligation to continue to defend after the declaration.’ 14 G. Couch, Insurance, supra at s. 200: 48, at 200-65 to 200-66.” Id. at 352. Vibram, however, omits the very next sentence in the opinion: “Where material facts as to the duty to indemnify are in dispute, an insurer has a duty to defend until the insurer establishes that no potential for coverage exists. Id. at 200-21.” Id. In other words, where it can be established that there is no coverage under the policy because there are no material facts necessary to determine the coverage issue in dispute, or because, even assuming all of the allegations in the underlying complaint are true, no coverage exists, there is no duty to defend. Indeed, in Morrison, the SJC remanded the case to the Superior Court to
15
determine whether Metropolitan owed its insured “a duty to defend at the time of the default judgment.” The SJC instructed the trial judge to determine whether by that point the facts establishing no coverage were already known and undisputed. Clearly, the SJC was teaching that this was the time at which the duty to defend terminated, even if Metropolitan did not obtain its declaratory judgment until later.
Moreover, the rationale underlying the decision in Jerry’s, and other similar cases, would be impaired if a duty to defend arose whenever an insured asserted a disputed right to coverage. In those cases, the courts held that the insurer had no right to recoup defense costs when a declaratory judgment entered that established that a third-party complaint did not assert a covered claim, because it was initially up to the insurer to decide whether to, in effect, hedge its bets and provide a defense when it was unsure of coverage: “In some circumstances, an insurance company may face a difficult decision as to whether a claim falls, or potentially falls, within the scope of the insurance policy. However, it is a decision the insurer must make. If it believes there is no possibility of coverage, then it should deny its insured a defense because the insurer will never be liable for any settlement or judgment.” Jerry’s, 3 A.2d at 542. If an insurer is bound to provide a defense whenever there is any chance that a policy might be interpreted to provide coverage, because of a dispute about policy terms not alleged facts, the predicate for following the principle outlined in Jerry’s is missing.
The court has found a single case in which a court ruled that a dispute concerning a question of law, resolved in favor of the insured, could nonetheless give rise to a duty to defend. In Hugo Boss Fashions, Inc. v. Federal Ins. Co., 252 F.3d 608 (2001), the insurer rejected its insured’s claims of coverage for a trademark infringement case filed against it and declined to provide a defense. The insured brought a declaratory judgment action seeking to establish
16
coverage and, while it was pending, settled the underlying trademark suit. The coverage case preceded to trial before a jury, which returned a verdict for the insured, both as to coverage and a duty to defend, and judgment entered for the insured. On appeal, the Second Circuit Court of Appeals reversed the District Court’s judgment that the trademark suit was a covered claim. It held that the policy was unambiguous, as the term “trademarked slogans” had a specific meaning and, in consequence, the policy did not cover the underlying claim.
In a split decision the Court of Appeals, nonetheless, found a duty to defend. It held that “there are situations in which a legal uncertainty as to insurance coverage gives rise to (an at least temporary) duty to defend.” Id. at 622. (Emphasis in original) The majority explained that there was sufficient “legal uncertainty (what does “trademarked slogan” mean)” to require the insurer “to undertake a defense of Hugo Boss until the uncertainty surrounding the term was resolved.” Id. In other words, although it concluded that the term “trademarked slogan” had only one reasonable meaning, the possibility that a court might find it ambiguous gave rise to a duty to defend.
Justice Sotomayor (then an associate justice of the Second Circuit) dissented from this latter holding. She concluded that the majority’s discussion of the duty to defend “finds no basis in New York law.” Id. at 626. She went on to explain that:
The majority errs in confusing two types of uncertainty. The first is cognizable under New York law, the second is not. The first concerns the period during which the underlying action is pending when the insurer must defend the insured against any allegations that, if proven, would result in indemnification. This type of uncertainty is a well-established element of New York insurance law and is unquestioned here. The majority attempts to read a second category of “uncertainty” into New York law, however, concerning how a court might rule on the scope of policy terms. No such “uncertainty” is recognized under New York law apart from that arising from an “ambiguous” policy term.
17
Id. at 627. Anticipating to some extent the reasoning that the Pennsylvania Supreme Court adopted in Jerry’s, Justice Sotomayor’s dissent went on to point out:
In order to determine its duties under a policy, insurers are, as a matter of course, called upon to survey the relevant law and scrutinize the language of the policy to judge whether its terms are unambiguous. Insurers may err in their judgment concerning the unambiguity of a policy term but are given strong incentives to decide these questions correctly. If they do not, they can be forced to defend a costly coverage action or, if the finding of unambiguity was so far off the mark that “no reasonable [insurance] carrier would, under the given facts, be expected to assert it,” Sukup v. State, 227 N.E.2d 842, 844 (N.Y. 1967), insurers can face even greater liabilities for breaching their duty of good faith.
All of this assumes that we entrust insurers with the initial decision concerning whether policy terms are unambiguous. In the case of a policy that uses a legal term of art, this inquiry requires a determination of whether that term of art is unambiguous. . . . And yet, the majority wants to deny Federal the opportunity to reach the same conclusion we have reached. It is difficult to understand why we should discourage Federal or any other insurer from making such determinations that are, in any case, subject to review and even sanction if erroneous.
Id. at 628-629 (Emphasis supplied).
Turning to the present case, first, this court’s coverage Decision did not turn on whether some term of art used in the Policies was potentially ambiguous. The precise question before the court: would a liability policy providing coverage for an Advertising Injury cover a claim based on the unauthorized use of a famous person’s name to sell a product, in this case a shoe, had not previously been decided in Massachusetts, or very many other courts. However, this court’s Decision did not turn on whether any particular term of art used in the Policies was potentially ambiguous, but rather applied legal precedent to the interpretation of a series of policy provisions.
Additionally, the reasoning of Justice Sotomayer’s dissent appears far more compelling with respect to the issues raised here than the majority opinion. In the first instance, it is for the insurer to decide whether any of the allegations in the complaint, if proved, could support a claim
18
covered by the policy. If it declines to provide a defense, it faces potential liabilities that will likely exceed the cost of the defense. However, if it elects not to defend the third-party claim, and its decision was correct as a matter of law, how could there ever have been a duty to defend?
The case now before the court does provide an additional confounding fact. The Insurers initially did agree to advance defense costs, but had not paid all outstanding invoices when the Declaratory Judgment of no coverage issued. Whether the insurer stopped paying because it became more convinced of the validity of its coverage position or because it was just slow in processing invoices does not appear to raise a disputed issue of fact material to this case. The relevant question is whether having initially agreed to pay for Vibram’s defense, while prosecuting this declaratory judgment action, the Insurers are bound to continue to advance defense costs until this case is resolved. On the record before this court, it concludes that they are not.
While not perfectly analogous, the court notes that in Herbert A Sullivan, Inc. v. Utica Mutual Ins. Co., 439 Mass. 387, 395 (2003), the insurer initially provided a defense to its insured under a general liability policy because one count of a multicount complaint alleged negligence. However, after the plaintiff in the underlying action amended its complaint and eliminated the negligence count, the insurer no longer had a duty to defend. The court finds that there is nothing inherent in an insurer’s initial decision to provide a defense that precludes it from changing its mind, even while the declaratory judgment action is still pending.
The court can envision cases in which an insured may have relied on the insurer’s initial decision and adopted a course of action in responding to the third-party claim such that it would suffer damage if the insurer discontinued the defense before the declaratory judgment action was resolved. For example, this might arise in situations in which the insurer is not only advancing
19
defense costs but actively providing the defense. However, this is not such a case. Upon receipt of the reservation of rights letter, Vibram exercised its right to retain its counsel of choice and to control its own defense, which given the amount of fees generated in a rather brief time was robust. There are no facts in the summary judgment record suggesting that the Insurers should be equitably estopped from discontinuing the advancement of defense costs, if the Policies permit them to do so. The court finds that, on these facts, the Insurers were permitted to change their mind with respect to advancing defense costs, as they were under no contractual obligation to pay them. The insured has neither a contractual or equitable claim for payment of unpaid costs of defense incurred up to the date the Decision issued.6
ORDER
For the foregoing reasons, the Insurers’ motion for summary judgment is DENIED, to the extent that it seeks to establish a right to recoup defense costs previously advanced,and otherwise ALLOWED; and Vibram’s motion for summary judgment is DENIED, to the extent it seeks to establish a right to recover any additional defense costs from the Insurers, and otherwise ALLOWED. Final judgment shall enter dismissing the counterclaims and declaring that the plaintiff insurance companies do not have a duty to defend the defendant Vibram in the
6 Vibram argues that the provision in the Policies that states “[the Insurers] will pay, with respect to any claim we investigate or settle, or any ‘suit’ against any insured we defend: . . . All expenses we incur . . . .” requires payment of all defense costs through the date the Decision issued. Clearly, this policy term only provides that when the Insurers defend a claim they have to pay all costs that they incur. Presumably, when an insured receives a reservation of rights letter and elects to control its own defense, that provision requires reimbursement of all defense expenses incurred by the insured, at least all reasonable expenses. But, it does not create an independent duty to defend a claim, or pay for the defense of a claim, that the Insurers have decided not to defend. The duty to defend is determined under other policy provisions.
20
Underlying Action or indemnify it for any loss sustained in respect thereto. No party shall recover damages, and each party shall bear its own costs.
_______________________
Mitchell H. Kaplan
Justice of the Superior Court
Dated: March 20, 2017

read more

Posted by Stephen Sandberg - April 6, 2017 at 5:20 am

Categories: News   Tags: , , , , , , , , ,

Turner Construction Company v. MJ Flaherty Company (Lawyers Weekly No. 12-028-17)

1
COMMONWEALTH OF MASSACHUSETTS
SUFFOLK, ss. SUPERIOR COURT
CIVIL ACTION
NO. 13-2308
TURNER CONSTRUCTION COMPANY
vs.
MJ FLAHERTY COMPANY
MEMORANDUM OF DECISION AND ORDER ON
PLAINTFF’S MOTION FOR SUMMARY JUDGMENT and PLAINTIFF’S MOTION TO STRIKE THE EXPERT REPORT OF JACK GRANT
INTRODUCTION
This case arises out of a subcontract between the plaintiff, Turner Construction Company (Turner), and the defendant MJ Flaherty Company (Flaherty). Turner was the general contractor on the construction of a 23 story commercial building at 157 Berkeley Street and certain related remodeling of an adjacent building for Liberty Mutual Insurance Company (the Project). Flaherty entered into a subcontract with Turner to perform the HVAC work on the Project (the Subcontract). The initial value of the Subcontract was $ 12,462,252. Turner brought this action against Flaherty to recover damages that it alleges that it suffered when Flaherty failed to complete its work on the Project and Turner had to hire another subcontractor to complete the HVAC work.1
Flaherty has asserted counterclaims against Turner. Some of these claims are based on Turner’s failure to pay Flaherty for all of the work that it performed. Here, the amount in dispute
1 Turner’s complaint also includes allegations concerning subcontracts that Turner entered into with Flaherty on two other projects, a new building at University of Massachusetts at Lowell and a Liberty Mutual Conference Center. Turner alleges that Flaherty also failed to complete these projects causing it damage; however, the focus of this litigation appears to be the 157 Berkeley Project. It seems that Flaherty is no longer in business.
2
is complicated by the fact that in early 2013 several sub-subcontractors and material suppliers to Flaherty were not being paid and began to file notices of contract in anticipation of asserting mechanics’ liens on the Project. In response, Turner entered into a series of agreements with Flaherty pursuant to which it issued checks to Flaherty for subcontracted work that were made jointly payable to Flaherty and the vendors to insure that they were being paid out of the sums Turner was disbursing to Flaherty.
Flaherty, however, also has alleged that as a result of the manner in which Turner ran the Project, Flaherty was so adversely affected that the value of Flaherty as a going concern was adversely impacted and this resulted in a $ 6.4 million reduction in Flaherty’s “new worth.” This is, of course, a paradigm claim for consequential damages. This claim is the subject of the motion now before the court.
It would be an extraordinary understatement to say that this case has a tortured procedural history. Turner has filed two previous motions for summary judgment that the court was unable to decide on their merits because they were premature or otherwise not properly before the court. It is treating this motion as a motion for partial summary judgment seeking dismissal of so much of the counterclaims as assert claims for consequential damages, and, to that extent, Turner’s motion for summary judgment is ALLOWED.
ADDITIONAL FACTS
There are only a few additional facts that need be recited in connection with Flaherty’s claim for consequential damages.
As is typical of subcontracts for large, commercial building projects, the Subcontract contained a clause eliminating Flaherty’s right to recover consequential damages.
3
Notwithstanding and term or provision herein to the contrary, Subcontractor expressly waives and releases all claims or rights to recover lost profit (except for profit on work actually performed), recovery of overhead (including home office overhead), and any other indirect damages, costs or expenses in any way arising out of or related to the Agreement, including the breach thereof by Contractor, delays, charges, acceleration, loss of efficiency or productivity disruptions and interference with the performance of the work.
A number of change orders were issued for the HVAC work which increased the project price by something in excess of 20%. Flaherty asserts, and for purposes of this motion it is accepted as true, that Turner’s project schedule was very aggressive. Additionally, changes to the schedule and project sequencing “negatively impacted . . . Flaherty’s manner and method of performance and this increased Flaherty’s costs” and made the project much more difficult for Flaherty to perform.
DISCUSSION
Summary Judgment
Flaherty contends that the project changes were cumulatively of such a scope and consequence that they caused “ a Cardinal Change or Abandonment of the [Subcontract].”
As will be seen, whether a question of fact exists concerning whether Turner caused a cardinal change in the Subcontract, or the Subcontract was abandoned, need not be decided to conclude that the limitation on consequential damages set out in the Subcontract continues to be binding on Flaherty.
At oral argument, the court noted that, before this case, it had never encountered the concept of cardinal change in a contract, and the few cases that Flaherty cited in support of this doctrine were federal government contracting cases. The court questioned whether the doctrine would be applied by Massachusetts courts to private contracts. In a post-hearing supplemental brief, Flaherty directed the court to Superior Court Judge Lloyd MacDonald’s (now retired)
4
excellent and comprehensive decision: Certified Power Systems, Inc. v. Dominion Energy Brayton Point, LLC, 2012 WL 384600 (Jan. 3, 2012). In that case, J. MacDonald described this doctrine as follows:
The Court was unable to find a Massachusetts case that referred directly to the cardinal change doctrine. However, it is referred to be commentators on Massachusetts law and the concept embodies familiar contract principals.
A cardinal change is a change outside the general scope of the contract which constitutes such a substantial deviation that it alters the nature of the bargain and constitutes a material breach. . . . (cardinal change is drastic and fundamental modification in the work which requires contractor to perform duties materially different from those originally bargained for.)
Although a cardinal change generally represents a large increase in one party’s contract burdens, there is no precise formula for determining whether a change is within the scope of the contract or a cardinal change. . . . Each case must be analyzed on its own facts and circumstances giving fair consideration to the magnitude and quality of the changes ordered and their cumulative effect on the project as a whole. . . . Numerous changes, none of which individually may be deemed cardinal, may create a cardinal change when considered as a whole.
(Internal citations and quotations omitted for simplicity). This court finds this reasoning persuasive and concludes that, under Massachusetts law, the cardinal change doctrine may be applied to a private construction contract when the facts warrant it. It is, however, worth noting that, in Certified Power Systems, Inc., Judge MacDonald concluded that change orders that increased the subcontract price by more than 50% did not constitute a cardinal change: “the enlarged work crew, the insistence on substantial overtime as a means to recover schedule and the winter conditions together presented a markedly different contract environment from what CPS reasonably anticipated. However, the essence of the work required by the Subcontract remained the same. Further, the change order procedure of the Subcontract provided a structure for the orderly accommodation of the altered conditions without undue disruption.”
It seems likely that Judge MacDonald’s conclusions will apply to the present case as
5
well, but the court’s decision on consequential damages does not rest on that factual conclusion. As Judge MacDonald notes, if a cardinal change were established that might constitute a material breach of the Subcontract. However, proof of a breach of contract on the part of Turner would not be a basis for the court to write a new subcontract for the parties that did not include any limitation on consequential damages. Proof of a cardinal change constituting a breach would permit recovery of direct damages occasioned by that breach.
Indeed, none of the cases that Flaherty has submitted that mention cardinal change or contract abandonment, touch on the issue of consequential damages or even suggest a theory that would support a contract based (or any other claim) for consequential damages.
Flaherty submitted to the court copies of several cases that address the concepts of cardinal change or contract abandonment without any analysis of how these cases apply to its version of the facts underlying its dispute with Turner. The cases that seem closest to the issue presented by the instant case are those in which the court concluded that the contracting parties had departed so significantly from the terms of their contract that the plaintiff was entitled to recover the fair value of its services instead of under the contract, i.e., a quantum meruit recovery.
For example, in J.J. Jones Const. Co. v. Lehrer McGovern Bovis, Inc., 83 P.3d 1009 (Nev. 2004), the court considered the claims of a subcontractor asserted under theories of abandonment and cardinal change, applying Nevada law. “Generally, contract abandonment occurs when both parties depart from the terms of the contract by mutual consent. The consent may be express, or it may be implied by the parties’ actions, such as when the acts of one party inconsistent with the contract’s existence are acquiesced in by the other.”2 Id. at 1019-1020
2 The court does not see any evidence of contract abandonment in this case, as it appears that Turner and Flaherty continued to make use of the change order process until Flaherty stopped working. However, the state of the
6
(internal citations and quotations omitted). The Nevada court then went on to consider the cardinal change doctrine. It commented that although this doctrine was generally applied only in government contracting cases, it would be recognized under state law. “[A] cardinal change occurs when the work is so drastically altered that the contractor effectively performs duties that are materially different from those for which the contractor originally bargained. The contractor must prove facts with specificity that support its allegations that a cardinal change occurred.” Id. (internal citations and quotations omitted). The court went on to note that “the evidence required to demonstrate the occurrence of cardinal change is similar to that required by the contract-abandonment theory.” Id. at 1021. It then concluded that, under either theory, the measure of recovery for the subcontractor was the true value of the services performed, i.e., quantum meruit. See also O’Brien & Gere Technical Services, Inc. v. Fru-Con/Fluor Daniel Joint Venture, 380 F.3d 447 (8th Cir. 2004) (applying a theory of abandonment under Missouri law and allowing recovery for the reasonable value of the services performed); C. Norman Peterson Co. v. Container Corp. of Am., 172 Cal. App. Ed 628 (1985) (finding evidence sufficient to establishment abandonment of contract under California law and permitting recovery of the reasonable value of services on a quantum meruit basis).
None of this group of cases provides support for a claim for indirect, consequential damages under a theory of cardinal change or contract abandonment.3 Rather, they apply traditional concepts of equitable relief to situations in which a contract should be set aside because the work performed was different than the work bargained for under the contract. In
summary judgment record is such that the court cannot reach that conclusion as a matter of law.
3 Many of the cardinal change cases to which Flaherty has directed the court are completed inapposite. These are cases in which the plaintiff is a disappointed bidder for a publicly bid contract and argues that, under the cardinal change doctrine, the contract was so amended after it was awarded that it is a different contract than that which was publicly bid and that the plaintiff was never given the opportunity to bid on it. See, e.g., Cardinal Maint. Serv. V. United States, 63 Fed.Cl. 98 (2004) (determining that a series of changes amounted to a cardinal change and therefore a violation of public bidding laws).
7
each case, the court concludes that the party performing the work should be given the opportunity to recover the fair value of its labors. The same concepts apply under Massachusetts law. See, e.g., Bosewell v. Zephyr Lines, Inc. 414 Mass. 241, 250 (1993).
To the contrary, under Massachusetts law, clauses in construction contracts limiting the right to recover consequential damages have long been recognized and enforced as an appropriate means to “limit the expense and unpredictability of construction contract litigation.” Costa v. Brait Builders Corp., 463 Mass. 65, 78 n. 22 (2004). Indeed, the SJC has reflected on the utility of such clauses as means to protect against claims just like those that Flaherty attempts to assert in this case: “Some of the consequential damages claimed by the plaintiff here, including his going out of business, . . . , may provide a case in point.” Id.
In consequence, Flaherty’s claims for indirect or consequential damage fail, as a matter of law, even if he there is evidence to support a theory of cardinal change or contract abandonment in the summary judgment record.
Motion to Strike Expert Testimony
Because the single issue actually before the court on the motion for summary judgment does not turn on whether there is evidence in the summary judgment record that would support claims of cardinal change, the court need not address Turner’s motion to strike the John Grant Report. However, a few comments on the report may prove useful as the parties prepare for trial.
In his report, Grant offers the opinion: “When all of the above Project Information, Circumstances, and Events are considered as a whole, it is JCCMI’s fair and reasonable professional conclusion that there was a Cardinal Change in Flaherty’s Scope of Work and accordingly an Abandonment of the Contract.” That is not an opinion that an expert may render
8
in this case. His opinion offers a conclusion on a mixed question of law and fact to be addressed by a court or, perhaps, a jury on proper instructions on the law. Grant may have expert testimony that would be useful for a fact finder in making that decision, but that will be determined by the trial judge on pretrial motions or during trial.
Moreover, at present, the court does not believe that the issue of cardinal change, much less contract abandonment, can be presented without testimony from witnesses who performed or observed the work being done by Flaherty and can provide competent evidence of the effect that Project changes had on Flaherty, if they had any at all. Having reviewed, as best it can, the Grant Report., the court finds many of the opinions expressed to be in the nature of a description of how the changes might have affected Flaherty. Perhaps, some of what Grant has to say might serve as corroboration of testimony from percipient witnesses concerning how the changes actually affected Flaherty’s work on the Project. Again, the admissibility of any of the opinions expressed in the Report, and whether the report is sufficient to prove cardinal change without a percipient witness, are matters for the trial judge to decide.
ORDER
For the foregoing reasons, Turner’s motion for Summary Judgment is ALLOWED to the following extent: Flaherty’s counterclaims for consequential or indirect damages are dismissed. The court makes no ruling on Turner’s Motion to Strike the Expert Report of Jack
9
Grant. This is without prejudice to Turner’s right to file pretrial motions concerning the admissibility of testimony based on the Report or to object to such testimony at trial.
_______________________
Mitchell H. Kaplan
Justice of the Superior Court
Dated: March 7, 2017

read more

Posted by Stephen Sandberg - April 4, 2017 at 9:08 pm

Categories: News   Tags: , , , , , ,

Turner Construction Company v. MJ Flaherty Company (Lawyers Weekly No. 12-028-17)

1
COMMONWEALTH OF MASSACHUSETTS
SUFFOLK, ss. SUPERIOR COURT
CIVIL ACTION
NO. 13-2308
TURNER CONSTRUCTION COMPANY
vs.
MJ FLAHERTY COMPANY
MEMORANDUM OF DECISION AND ORDER ON
PLAINTFF’S MOTION FOR SUMMARY JUDGMENT and PLAINTIFF’S MOTION TO STRIKE THE EXPERT REPORT OF JACK GRANT
INTRODUCTION
This case arises out of a subcontract between the plaintiff, Turner Construction Company (Turner), and the defendant MJ Flaherty Company (Flaherty). Turner was the general contractor on the construction of a 23 story commercial building at 157 Berkeley Street and certain related remodeling of an adjacent building for Liberty Mutual Insurance Company (the Project). Flaherty entered into a subcontract with Turner to perform the HVAC work on the Project (the Subcontract). The initial value of the Subcontract was $ 12,462,252. Turner brought this action against Flaherty to recover damages that it alleges that it suffered when Flaherty failed to complete its work on the Project and Turner had to hire another subcontractor to complete the HVAC work.1
Flaherty has asserted counterclaims against Turner. Some of these claims are based on Turner’s failure to pay Flaherty for all of the work that it performed. Here, the amount in dispute
1 Turner’s complaint also includes allegations concerning subcontracts that Turner entered into with Flaherty on two other projects, a new building at University of Massachusetts at Lowell and a Liberty Mutual Conference Center. Turner alleges that Flaherty also failed to complete these projects causing it damage; however, the focus of this litigation appears to be the 157 Berkeley Project. It seems that Flaherty is no longer in business.
2
is complicated by the fact that in early 2013 several sub-subcontractors and material suppliers to Flaherty were not being paid and began to file notices of contract in anticipation of asserting mechanics’ liens on the Project. In response, Turner entered into a series of agreements with Flaherty pursuant to which it issued checks to Flaherty for subcontracted work that were made jointly payable to Flaherty and the vendors to insure that they were being paid out of the sums Turner was disbursing to Flaherty.
Flaherty, however, also has alleged that as a result of the manner in which Turner ran the Project, Flaherty was so adversely affected that the value of Flaherty as a going concern was adversely impacted and this resulted in a $ 6.4 million reduction in Flaherty’s “new worth.” This is, of course, a paradigm claim for consequential damages. This claim is the subject of the motion now before the court.
It would be an extraordinary understatement to say that this case has a tortured procedural history. Turner has filed two previous motions for summary judgment that the court was unable to decide on their merits because they were premature or otherwise not properly before the court. It is treating this motion as a motion for partial summary judgment seeking dismissal of so much of the counterclaims as assert claims for consequential damages, and, to that extent, Turner’s motion for summary judgment is ALLOWED.
ADDITIONAL FACTS
There are only a few additional facts that need be recited in connection with Flaherty’s claim for consequential damages.
As is typical of subcontracts for large, commercial building projects, the Subcontract contained a clause eliminating Flaherty’s right to recover consequential damages.
3
Notwithstanding and term or provision herein to the contrary, Subcontractor expressly waives and releases all claims or rights to recover lost profit (except for profit on work actually performed), recovery of overhead (including home office overhead), and any other indirect damages, costs or expenses in any way arising out of or related to the Agreement, including the breach thereof by Contractor, delays, charges, acceleration, loss of efficiency or productivity disruptions and interference with the performance of the work.
A number of change orders were issued for the HVAC work which increased the project price by something in excess of 20%. Flaherty asserts, and for purposes of this motion it is accepted as true, that Turner’s project schedule was very aggressive. Additionally, changes to the schedule and project sequencing “negatively impacted . . . Flaherty’s manner and method of performance and this increased Flaherty’s costs” and made the project much more difficult for Flaherty to perform.
DISCUSSION
Summary Judgment
Flaherty contends that the project changes were cumulatively of such a scope and consequence that they caused “ a Cardinal Change or Abandonment of the [Subcontract].”
As will be seen, whether a question of fact exists concerning whether Turner caused a cardinal change in the Subcontract, or the Subcontract was abandoned, need not be decided to conclude that the limitation on consequential damages set out in the Subcontract continues to be binding on Flaherty.
At oral argument, the court noted that, before this case, it had never encountered the concept of cardinal change in a contract, and the few cases that Flaherty cited in support of this doctrine were federal government contracting cases. The court questioned whether the doctrine would be applied by Massachusetts courts to private contracts. In a post-hearing supplemental brief, Flaherty directed the court to Superior Court Judge Lloyd MacDonald’s (now retired)
4
excellent and comprehensive decision: Certified Power Systems, Inc. v. Dominion Energy Brayton Point, LLC, 2012 WL 384600 (Jan. 3, 2012). In that case, J. MacDonald described this doctrine as follows:
The Court was unable to find a Massachusetts case that referred directly to the cardinal change doctrine. However, it is referred to be commentators on Massachusetts law and the concept embodies familiar contract principals.
A cardinal change is a change outside the general scope of the contract which constitutes such a substantial deviation that it alters the nature of the bargain and constitutes a material breach. . . . (cardinal change is drastic and fundamental modification in the work which requires contractor to perform duties materially different from those originally bargained for.)
Although a cardinal change generally represents a large increase in one party’s contract burdens, there is no precise formula for determining whether a change is within the scope of the contract or a cardinal change. . . . Each case must be analyzed on its own facts and circumstances giving fair consideration to the magnitude and quality of the changes ordered and their cumulative effect on the project as a whole. . . . Numerous changes, none of which individually may be deemed cardinal, may create a cardinal change when considered as a whole.
(Internal citations and quotations omitted for simplicity). This court finds this reasoning persuasive and concludes that, under Massachusetts law, the cardinal change doctrine may be applied to a private construction contract when the facts warrant it. It is, however, worth noting that, in Certified Power Systems, Inc., Judge MacDonald concluded that change orders that increased the subcontract price by more than 50% did not constitute a cardinal change: “the enlarged work crew, the insistence on substantial overtime as a means to recover schedule and the winter conditions together presented a markedly different contract environment from what CPS reasonably anticipated. However, the essence of the work required by the Subcontract remained the same. Further, the change order procedure of the Subcontract provided a structure for the orderly accommodation of the altered conditions without undue disruption.”
It seems likely that Judge MacDonald’s conclusions will apply to the present case as
5
well, but the court’s decision on consequential damages does not rest on that factual conclusion. As Judge MacDonald notes, if a cardinal change were established that might constitute a material breach of the Subcontract. However, proof of a breach of contract on the part of Turner would not be a basis for the court to write a new subcontract for the parties that did not include any limitation on consequential damages. Proof of a cardinal change constituting a breach would permit recovery of direct damages occasioned by that breach.
Indeed, none of the cases that Flaherty has submitted that mention cardinal change or contract abandonment, touch on the issue of consequential damages or even suggest a theory that would support a contract based (or any other claim) for consequential damages.
Flaherty submitted to the court copies of several cases that address the concepts of cardinal change or contract abandonment without any analysis of how these cases apply to its version of the facts underlying its dispute with Turner. The cases that seem closest to the issue presented by the instant case are those in which the court concluded that the contracting parties had departed so significantly from the terms of their contract that the plaintiff was entitled to recover the fair value of its services instead of under the contract, i.e., a quantum meruit recovery.
For example, in J.J. Jones Const. Co. v. Lehrer McGovern Bovis, Inc., 83 P.3d 1009 (Nev. 2004), the court considered the claims of a subcontractor asserted under theories of abandonment and cardinal change, applying Nevada law. “Generally, contract abandonment occurs when both parties depart from the terms of the contract by mutual consent. The consent may be express, or it may be implied by the parties’ actions, such as when the acts of one party inconsistent with the contract’s existence are acquiesced in by the other.”2 Id. at 1019-1020
2 The court does not see any evidence of contract abandonment in this case, as it appears that Turner and Flaherty continued to make use of the change order process until Flaherty stopped working. However, the state of the
6
(internal citations and quotations omitted). The Nevada court then went on to consider the cardinal change doctrine. It commented that although this doctrine was generally applied only in government contracting cases, it would be recognized under state law. “[A] cardinal change occurs when the work is so drastically altered that the contractor effectively performs duties that are materially different from those for which the contractor originally bargained. The contractor must prove facts with specificity that support its allegations that a cardinal change occurred.” Id. (internal citations and quotations omitted). The court went on to note that “the evidence required to demonstrate the occurrence of cardinal change is similar to that required by the contract-abandonment theory.” Id. at 1021. It then concluded that, under either theory, the measure of recovery for the subcontractor was the true value of the services performed, i.e., quantum meruit. See also O’Brien & Gere Technical Services, Inc. v. Fru-Con/Fluor Daniel Joint Venture, 380 F.3d 447 (8th Cir. 2004) (applying a theory of abandonment under Missouri law and allowing recovery for the reasonable value of the services performed); C. Norman Peterson Co. v. Container Corp. of Am., 172 Cal. App. Ed 628 (1985) (finding evidence sufficient to establishment abandonment of contract under California law and permitting recovery of the reasonable value of services on a quantum meruit basis).
None of this group of cases provides support for a claim for indirect, consequential damages under a theory of cardinal change or contract abandonment.3 Rather, they apply traditional concepts of equitable relief to situations in which a contract should be set aside because the work performed was different than the work bargained for under the contract. In
summary judgment record is such that the court cannot reach that conclusion as a matter of law.
3 Many of the cardinal change cases to which Flaherty has directed the court are completed inapposite. These are cases in which the plaintiff is a disappointed bidder for a publicly bid contract and argues that, under the cardinal change doctrine, the contract was so amended after it was awarded that it is a different contract than that which was publicly bid and that the plaintiff was never given the opportunity to bid on it. See, e.g., Cardinal Maint. Serv. V. United States, 63 Fed.Cl. 98 (2004) (determining that a series of changes amounted to a cardinal change and therefore a violation of public bidding laws).
7
each case, the court concludes that the party performing the work should be given the opportunity to recover the fair value of its labors. The same concepts apply under Massachusetts law. See, e.g., Bosewell v. Zephyr Lines, Inc. 414 Mass. 241, 250 (1993).
To the contrary, under Massachusetts law, clauses in construction contracts limiting the right to recover consequential damages have long been recognized and enforced as an appropriate means to “limit the expense and unpredictability of construction contract litigation.” Costa v. Brait Builders Corp., 463 Mass. 65, 78 n. 22 (2004). Indeed, the SJC has reflected on the utility of such clauses as means to protect against claims just like those that Flaherty attempts to assert in this case: “Some of the consequential damages claimed by the plaintiff here, including his going out of business, . . . , may provide a case in point.” Id.
In consequence, Flaherty’s claims for indirect or consequential damage fail, as a matter of law, even if he there is evidence to support a theory of cardinal change or contract abandonment in the summary judgment record.
Motion to Strike Expert Testimony
Because the single issue actually before the court on the motion for summary judgment does not turn on whether there is evidence in the summary judgment record that would support claims of cardinal change, the court need not address Turner’s motion to strike the John Grant Report. However, a few comments on the report may prove useful as the parties prepare for trial.
In his report, Grant offers the opinion: “When all of the above Project Information, Circumstances, and Events are considered as a whole, it is JCCMI’s fair and reasonable professional conclusion that there was a Cardinal Change in Flaherty’s Scope of Work and accordingly an Abandonment of the Contract.” That is not an opinion that an expert may render
8
in this case. His opinion offers a conclusion on a mixed question of law and fact to be addressed by a court or, perhaps, a jury on proper instructions on the law. Grant may have expert testimony that would be useful for a fact finder in making that decision, but that will be determined by the trial judge on pretrial motions or during trial.
Moreover, at present, the court does not believe that the issue of cardinal change, much less contract abandonment, can be presented without testimony from witnesses who performed or observed the work being done by Flaherty and can provide competent evidence of the effect that Project changes had on Flaherty, if they had any at all. Having reviewed, as best it can, the Grant Report., the court finds many of the opinions expressed to be in the nature of a description of how the changes might have affected Flaherty. Perhaps, some of what Grant has to say might serve as corroboration of testimony from percipient witnesses concerning how the changes actually affected Flaherty’s work on the Project. Again, the admissibility of any of the opinions expressed in the Report, and whether the report is sufficient to prove cardinal change without a percipient witness, are matters for the trial judge to decide.
ORDER
For the foregoing reasons, Turner’s motion for Summary Judgment is ALLOWED to the following extent: Flaherty’s counterclaims for consequential or indirect damages are dismissed. The court makes no ruling on Turner’s Motion to Strike the Expert Report of Jack
9
Grant. This is without prejudice to Turner’s right to file pretrial motions concerning the admissibility of testimony based on the Report or to object to such testimony at trial.
_______________________
Mitchell H. Kaplan
Justice of the Superior Court
Dated: March 7, 2017

read more

Posted by Stephen Sandberg - April 4, 2017 at 5:33 pm

Categories: News   Tags: , , , , , ,

Holyoke Mutual Insurance Company in Sale,, et al. v. Vibram USA, Inc. (Lawyers Weekly No. 12-031-17)

1
COMMONWEALTH OF MASSACHUSETTS
SUFFOLK, ss. SUPERIOR COURT
CIVIL ACTION
NO. 15-2321 BLS1
HOLYOKE MUTUAL INSURANCE COMPANY IN SALEM and MARYLAND CASUALTY COMPANY
vs.
VIBRAM USA, INC.
MEMORANDUM OF DECISION AND ORDER
ON CROSS-MOTIONS FOR SUMMARY JUDGMENT ON RECOUPMENT AND RECOVERY OF DEFENSE COSTS
INTRODUCTION
This action arises out of a coverage dispute between the plaintiff insurance companies, Holyoke Mutual Insurance Company in Salem (Holyoke)1 and Maryland Casualty Company (Maryland) (individually an Insurer, and collectively the Insurers), and the defendant, Vibram USA, Inc. (Vibram). Each of the insurers issued commercial general liability policies to Vibram (or its affiliate) (the Policies).2 An action was filed against Vibram in the United States District Court for the Western District of Washington at Tacoma captioned: Tefere Abebe Bikila, and others, v. Vibram, case no. 3:15-cv-05082-RBL (the Underlying Action). Vibram asserted coverage under the Policies and tendered defense of the Underlying Action to the Insurers. The
1 Holyoke has been replaced as a plaintiff in this action by its successor, Country Mutual Insurance Company. For consistency, the court will continue to refer to it as Holyoke in this Memorandum of Decision and Order.
2 Holyoke issued policies to Vibram for several years, while Maryland issued policies to an affiliate of Vibram,Vibram Five Fingers, LLC. It is not necessary to distinguish between Vibram and its affiliate for the purposes of this motion, and the court will refer to them collectively as Vibram. Additionally, for purposes of this motion the relevant policy language in all of the policies is identical, and is it also unnecessary to distinguish among policy years. The court will therefore simply refer to the Holyoke and Maryland policies collectively as the Policies.
2
Insurers each sent a “reservation of rights” letter to Vibram in which they agreed to provide its defense to the claims asserted in the Underlying Action, but also maintained that coverage did not exist under the Policies and reserved their rights to bring a declaratory judgment action and seek reimbursement for defense costs advanced. The Insurers then filed this declaratory judgment action seeking a declaration that the claims asserted against Vibram in the Underlying Action are not covered under the Policies; Vibram counterclaimed for a declaration that they are. In a Memorandum of Decision and Order on Cross-Motions for Summary Judgment and Partial Summary Judgment originally issued on August 17, 2016 (the Decision), this court held that the Policies do not provide coverage for the claims asserted against Vibram in the Underlying Action and, accordingly, there is no duty to defend.
The case is now before the court on cross-motions for summary judgment addressing the issues of recoupment of defense costs advanced or, conversely, recovery of defense costs incurred before the court rendered the Decision but left unpaid—issues of first impression in Massachusetts. The Insurers contend that since the claims asserted in the Underlying Action were not insured under the Policies, they are entitled to recoup the defense costs that they previously paid Vibram. Vibram, in turn, maintains that it is entitled to recover defense costs already incurred, but still unpaid, as of the date the Decision issued. For the reasons that follow, each party’s motion is allowed, in part, and denied, in part.
ADDITIONAL BACKGROUND
None of the facts necessary to resolve these cross-motions are in dispute.
3
Because the Insurers sent reservation of rights letters to Vibram, Vibram exercised its right to control its defense of the Underlying Action and retained its own counsel.3 Vibram’s counsel kept the Insurers informed concerning the status of the Underlying Action and forwarded copies of pleadings to them. By August 17, 2016, the date the Decision issued, Vibram had sent the Insurers invoices for defense costs totaling $ 1,272,212.57 and the Insurers had collectively reimbursed Vibram $ 667,901.71—$ 472,216.80 from Holyoke and $ 195,684.91 from Maryland. Vibram last received a payment from the Insurers on July 18, 2016. Neither Insurer informed Vibram why it did not pay the full amount of the invoices.4
As relevant to the issues raised by the pending motions, the Policies provide that the Insurers “will pay those sums that the insured becomes legally obligated to pay as damages because of ‘personal and advertising injury’ to which this insurance applies. We have the right and duty to defend the insured against any ‘suit’ seeking those damages. However, we will have no duty to defend the insured against any ‘suit’ seeking damages for personal and advertising injury’ to which this insurance does not apply.” The Policies also state that the Insurers “will pay, with respect to any claim we investigate or settle, or any ‘suit’ against any insured we defend: . . . All expenses we incur . . . .”
DISCUSSION
Recoupment
In Metro. Life Ins. Co. v. Cotter, 464 Mass. 623 (2013) (Cotter), the Supreme Judicial Court (SJC) was called upon to decide if a disability insurer could recoup from its insured benefit
3 See, e.g., Northern Sec. Ins. Co. Inc. v. Another 1, 78 Mass. App. Ct. 691, 694-695 (2011).
4 At oral argument, counsel for the Insurers stated that invoices were still being processed for payment when the Decision issued, and the Insurers elected to withhold payment.
4
payments made under a reservation of rights after a court determined that the insured’s benefits claim was not covered. In considering that claim for recoupment, the SJC noted that, with respect to liability policies:
We have not addressed whether an insurer may seek reimbursement for the costs of a defense undertaken pursuant to a unilateral reservation of rights. We note that other jurisdictions are split as to the validity of such claims. See Perdue Farms, Inc. v. Travelers Cas. & Sur. Co., 448 F.3d 252, 258 (4th Cir.2006), and cases cited (“jurisdictions differ on the soundness of an insurer’s right to reimbursement of defense costs”).
Based on the theory that insurers are in the business of analyzing and allocating risk, and thus in a better position to do so, courts in some jurisdictions have declined to allow liability insurers to bring reimbursement claims for the costs of defense. See Texas Ass’n of Counties County Gov’t Risk Mgt. Pool v. Matagorda County, 52 S.W.3d 128, 135 (Tex.2000). See, e.g., Excess Underwriters at Lloyd’s, London v. Frank’s Casing Crew & Rental Tools, Inc., 246 S.W.3d 42, 45–47 (Tex.2008) ( “imposing an extra-contractual reimbursement obligation places the insured in a highly untenable position”); United States Fid. v.United States Sports Specialty, 270 P.3d 464, 470–471 (Utah 2012) (“The right of an insurer to recover reimbursement from its insured distorts the allocation of risk unless it has been specifically bargained for”).
Id. at 641 n.21. This question is squarely before this court in this case.
While acknowledging that there are divergent views on the right of recoupment in cases such as this, in which a court has entered a declaratory judgment that none of the claims alleged in the complaint are covered under the Policies, the Insurers maintain that the majority of jurisdictions permit recoupment. Perhaps, the most frequently cited case for the proposition that defense costs advanced under a reservation of rights may be recovered is Buss v. Superior Court, 16 Cal. 4th 35 (Cal.App. 1997). In a more recent decision, the California Supreme Court reaffirmed its holding in Buss with the following comments:
As Buss explained, the duty to defend, and the extent of that duty, are rooted in basic contract principles. The insured pays for, and can reasonably expect, a defense against third party claims that are potentially covered by its policy, but no more. Conversely, the insurer does not bargain to assume the cost of defense of claims that are not even potentially covered. To shift these costs to the insured does not upset the contractual
5
arrangement between the parties. Thus, where the insurer, acting under a reservation of rights, has prophylactically financed the defense of claims as to which it owed no duty of defense, it is entitled to restitution. Otherwise, the insured, who did not bargain for a defense of noncovered claims, would receive a windfall and would be unjustly enriched.
. . .
As Buss further noted, “[n]ot only is it good law that the insurer may seek reimbursement for defense costs as to the claims that are not even potentially covered, but it also makes good sense. Without a right of reimbursement, an insurer might be tempted to refuse to defend an action in any part — especially an action with many claims that are not even potentially covered and only a few that are — lest the insurer give, and the insured get, more than they agreed. With such a right, the insurer would not be so tempted, knowing that, if defense of the claims that are not even potentially covered should necessitate any additional costs, it would be able to seek reimbursement.”
Though these comments were made in the context of “mixed” actions [including covered and uncovered claims], they apply equally here. An insurer facing unsettled law concerning its policies’ potential coverage of the third party’s claims should not be forced either to deny a defense outright, and risk a bad faith suit by the insured, or to provide a defense where it owes none without any recourse against the insured for costs thus expended. The insurer should be free, in an abundance of caution, to afford the insured a defense under a reservation of rights, with the understanding that reimbursement is available if it is later established, as a matter of law, that no duty to defend ever arose.
Scottsdale Ins. Co. v. MV Transportation, 36 Cal. 4th 643, 655 (Cal.App. 2005) (Internal citations and quotations omitted). In this case, the Insurers make the same arguments that the California Supreme Court describes in Scottsdale.
Vibram, however, points the court to a recent, unreported decision of the United States District Court in Massachusetts that reaches an opposite conclusion: Welch Foods Inc. v. Nat’l Union Fire Ins. Co., No. 09-12087-RWZ 2011 WL 576600 (D. Mass. Feb. 9, 2011). In that case, like this one, the District Court found that claims in an underlying action were not covered by the liability policy and then addressed the insurer’s claim for recoupment of defense costs paid under a reservation of rights. The District Court acknowledged the holding and reasoning of Buss, but rejected the California Supreme Court’s opinion in favor of a more recent decision by the
6
Pennsylvania Supreme Court, American & Foreign Ins. Co. v. Jerry’s Sport Center, Inc., 2 A.3d 526 (2010) (Jerry’s), which appears to be the most frequently cited case by those courts that have recently held that under these circumstances there is no right to recoup.
In Jerry’s, the Pennsylvania Supreme Court began with an exhaustive review of the competing lines of cases permitting and rejecting claims for recoupment of defense costs by liability insurers. Id. at 536-537. It then reflected on the very broad duty to defend (broader than the duty to indemnify) that exists under Pennsylvania, a duty that it describes in very much the same way as Massachusetts appellate courts describe the duty that liability carriers owe their insureds under Massachusetts law. See Id. at 540-541, compare Decision at 5-6. The Court then found that the answer to the question before it: is the insurer entitled to recover defense costs advanced before it obtained a declaratory judgment of no coverage, lay in the language of the policy itself:
We agree with Insured that whether a complaint raises a claim against an insured that is potentially covered is a question to be answered by the insurer in the first instance, upon receiving notice of the complaint by the insured. Although the question of whether the claim is covered (and therefore triggers the insurer’s duty to defend) may be difficult, it is the insurer’s duty to make that decision. See Shoshone First Bank, 2 P.3d at 516 (holding that the insurer must make the decision about whether there is a duty to defend). Insurers are in the business of making this decision. The insurer’s duty to defend exists until the claim is confined to a recovery that the policy does not cover. . . .Where a claim potentially may become one which is within the scope of the policy, the insurance company’s refusal to defend at the outset of the controversy is a decision it makes at its own peril. . . .
In some circumstances, an insurance company may face a difficult decision as to whether a claim falls, or potentially falls, within the scope of the insurance policy. However, it is a decision the insurer must make. If it believes there is no possibility of coverage, then it should deny its insured a defense because the insurer will never be liable for any settlement or judgment. See Shoshone, 2 P.3d at 510 (stating that where an insurer believes there is no coverage, it should deny a defense at the beginning). This would allow the insured to control its own defense without breaching its contractual obligation to be defended by the insurer. If, on the other hand, the insurer is uncertain about coverage, then it should provide a defense and seek declaratory judgment about coverage. Id.
7
In a declaratory judgment action to determine whether a claim is covered, the court resolves the question of coverage. . . . The court’s role in the declaratory judgment action is to resolve the question of coverage to eliminate uncertainty. If the insurer is successful in the declaratory judgment action, it is relieved of the continuing obligation to defend. The court’s resolution of the question of coverage does not, however, retroactively eliminate the insurer’s duty to defend the insured during the period of uncertainty.
. . .
An examination of the insurance contract between the parties reveals that under the policy, [the Insurer] was obliged to pay damages because of bodily injury, and had the “right and duty to defend the insured against any ‘suit’ seeking those damages.” . . . . The policy further provided that it had no duty to defend the insured against any suit seeking damages for bodily injury to which the insurance does not apply. Pursuant to the contractual language, therefore, [the Insurer] had the right and the duty to defend covered claims for bodily injury against Insured, and no duty to defend non-covered claims.
It was not immediately apparent whether the claim against Insured for bodily injury was or was not covered. It was immediately apparent, however, that the claim might potentially be covered. . . . Facing uncertainty about coverage, [the Insurer] appropriately activated its right and met its duty to defend under the policy when it was presented with a claim that may or may not have been covered. At the same time, [the Insurer] appropriately exercised its right to seek a declaration that it had no duty to defend.
The trial court’s subsequent declaratory judgment determination that the claim was not covered relieved [the Insurer] of having to defend the case going forward, but did not somehow nullify its initial determination that the claim was potentially covered. . . .
We therefore reject [the Insurer’s] attempt to define its duty to defend based on the outcome of the declaratory judgment action. The broad duty to defend that exists in Pennsylvania encourages insurance companies to construe their insurance contract broadly and to defend all actions where there is any potential coverage. . . .
Where the insurance contract is silent about the insurer’s right to reimbursement of defense costs, permitting reimbursement for costs the insurer spent exercising its right and duty to defend potentially covered claims prior to a court’s determination of coverage would be inconsistent with Pennsylvania law. It would amount to a retroactive erosion of the broad duty to defend in Pennsylvania by making the right and duty to defend contingent upon a court’s determination that a complaint alleged covered claims, and would therefore narrow Pennsylvania’s long-standing view that the duty to defend is broader than the duty to indemnify.
. . .
8
Moreover, [the Insurer’s] contractual obligation to pay for the defense arose as a consequence of the rules of contract interpretation. It is undisputed that the policy did not contain a provision providing for reimbursement of defense costs under any circumstances. Thus, the right [the Insurer] attempts to assert in this case, the right to reimbursement, is not a right to which it is entitled based on the policy
Id. at 541-544.
This court, like the District Court in Welch, finds that the Pennsylvania Supreme Court’s decision in Jerry’s comports with Massachusetts law. In Massachusetts, the insurer’s duty to defend arises when the underlying complaint “show[s] only a possibility that the liability claim falls within the insurance coverage. There is no requirement that the facts alleged in the complaint specifically and unequivocally make out a claim within the coverage.” Sterilite Corp. v. Continental Cas. Co., 17 Mass.App.Ct. 316, 319 (1983). Even in cases in which the insurer may believe that coverage is unlikely under the terms of the policy, it has financial incentives to provide a defense. If it is determined in a separate action brought by the insured (or the insurer) that coverage existed, the insurer will be responsible for paying the insured’s costs of establishing a right to a defense, even if the denial of coverage was made in good faith. See Hanover Ins. Co. v. Golden, 436 Mass. 584, 588 (Mass. 2002). Of course, a bad faith refusal to provide a defense could constitute a violation of chapter 93A and expose the insurer to multiple damages. See Boston Symphony Orchestra, Inc. v. Commercial Union Ins. Co., 406 Mass. 7 (Mass. 1989) and Boyle v. Zurich American Ins. Co., 472 Mass. 649, 661 (2015). In consequence, when in doubt, an insurer has an economically sound and self-interested reason to provide a defense under a reservation of right until the coverage issue can be resolved.
With those basic tenets of Massachusetts law in mind, we turn to the language of the contracts that define the parties’ rights and obligations, in this case the Policies. See, e.g., Hakim v. Massachusetts Insurers’ Insolvency Fund, 424 Mass. 275, 280 (1997) (“The interpretation of
9
an insurance contract is no different from the interpretation of any other contract, and we must construe the words of the policy in their usual and ordinary sense.”) There is simply nothing in the Policies that provides a right to recoup defense costs that the Insurers have advanced because they concluded that it was in their economic interest to do so. The court rejects the argument relied upon in Buss and its progeny that to deny recovery of defense costs will give insureds more than they bargained for, i.e., partial payment for the cost of defending claims that were not covered by the policies that they purchased. The court finds the reasoning of Jerry’s more persuasive: “In some circumstances, an insurance company may face a difficult decision as to whether a claim falls, or potentially falls, within the scope of the insurance policy. However, it is a decision the insurer must make.” Jerry’s, 2 A.3d at 543.
In this case, if the Insurers had refused to provide a defense, they would have incurred no liability to Vibram because the claims in the Underlying Action were not within the coverage provided. However, they determined in the exercise of their considered judgment that it was better to provide a defense and file an action for declaratory judgment. “It is undisputed that the [the Policies] did not contain a provision providing for reimbursement of defense costs under any circumstances. Thus, the right [the Insurers] attempt[] to assert in this case, the right to reimbursement, is not a right to which [they are] entitled based on the [Policies].” Id. at 544. Knowing that there is a risk that they would decide to provide a defense in cases in which they were uncertain as to whether a claim was covered because the claim was novel or the law unclear, the Insurers could have addressed the right of recoupment in their Policies; they didn’t. The court ought not insert a policy provision that the parties did not agree upon.
In Jerry’s, the Pennsylvania Court addressed two other arguments advanced by the Insured in this case. First, a reservation of rights letter cannot create additional rights for the
10
Insurer not found in the contract. “[P]ermitting reimbursement by reservation of rights, absent an insurance policy provision authorizing the right in the first place, is tantamount to allowing the insurer to extract a unilateral amendment to the insurance contract.” Id. and cases there cited. The court finds this reasoning consistent with existing Massachusetts precedent.
In Joint Underwriting Ass’n v. Goldberg, 425 Mass. 46 (1997), the insurer defended its insured under a reservation of rights. After a jury returned an adverse verdict against the insured in the underlying action and while appeals were pending, the insurer settled the underlying action. It then sought reimbursement for the cost of the settlement. The SJC held that even if the claims asserted against its insured in the underlying action were not covered, the insurer had no right to recover. The reservation of rights letter did not provide a right of recovery, it only permitted the insurer to defend without waiving its right to deny an obligation to cover an adverse judgment. While the insured’s personal counsel had urged the insurer to settle, no agreement was ever reached that the insured would reimburse the insurer. The SJC noted that the insurer had settled the claims to protect its own interests, as it was concerned about liability under chapter 93A that could, in theory, treble damages, if its refusal to settle were found unreasonable. As the insurer had no contractual right to reimbursement, it had no basis to demand it.
The instant case obviously does not involve a claim to recover an amount paid by an insurer in settlement of a claim, but Goldberg does stand for the general proposition that when an insurer provides payments that benefit the insured, but also avoid a perceived risk of exposure to even greater loss to the insurer, the reservation of rights letter does not support a claim for reimbursement. A right to reimbursement must be found in a contract.
11
In Jerry’s, the Pennsylvania Supreme Court also rejected the insurer’s claim that it was entitled to recoupment under a theory of unjust enrichment. 2 A.2d at 545. In this case, the Insurers point to the SJC’s decision in Cotter and the careful consideration that the SJC gave to the disability insurer’s argument that it could recover benefit payments under an equitable claim for restitution. Although, in Cotter, the SJC rejected the disability insurer’s claim, the Insurers argue that liability policies are different and the Restatement (Third) of Restitution and Unjust Enrichment, § 35(1) supports their right of recovery.5
In Cotter, the SJC addressed the insurer’s equitable claim as follows:
“A quasi contract or a contract implied in law is an obligation created by law ‘for reasons of justice, without any expression of assent and sometimes even against a clear expression of dissent.’ ” Salamon v. Terra, 394 Mass. 857, 859 (1985), quoting 1 A. Corbin, Contracts § 19 (1963). “Restitution is an equitable remedy by which a person who has been unjustly enriched at the expense of another is required to repay the injured party.” Keller v. O’Brien, 425 Mass. 774, 778 (1997), citing Salamon v. Terra, supra. “The fact that a person has benefited from another ‘is not of itself sufficient to require the other to make restitution therefor.’ … Restitution is appropriate ‘only if the circumstances of its receipt or retention are such that, as between the two persons, it is unjust for [one] to retain it.’ ” Keller v. O’Brien, supra, quoting Restatement of Restitution § 1 comment c (1937), and citing National Shawmut Bank v. Fidelity Mut. Life Ins. Co., 318 Mass. 142, 146 (1945).
A determination of unjust enrichment is one in which “[c]onsiderations of equity and morality play a large part.” Salamon v. Terra, supra. A plaintiff asserting a claim for unjust enrichment must establish not only that the defendant received a benefit, but also that such a benefit was unjust, “a quality that turns on the reasonable expectations of the parties.” Global Investors Agent Corp. v. National Fire Ins. Co., 76 Mass.App.Ct. 812, 826 (2010), quoting Community Builders, Inc. v. Indian Motorcycle Assocs., Inc., 44 Mass.App.Ct. 537, 560 (1998). “The injustice of the enrichment or detriment in quasi-contract equates with the defeat of someone’s reasonable expectations.” Salamon v. Terra, supra. The party seeking restitution has the burden of proving its entitlement thereto. J.A. Sullivan Corp. v. Commonwealth, 397 Mass. 789, 796 (1986); Hayeck Bldg. & Realty Co. v. Turcotte, 361 Mass. 785, 789 (1972), citing Andre v. Maguire, 305 Mass. 515, 516 (1940).
5 In Cotter, the SJC appeared to adopt the principles set out in Restatement (Third) of Restitution and Unjust Enrichment, § 35(1) and found that Goldberg did not preclude the possibility that an insurer could recover payments made under a reservation of right, but as explained below held that the insurer must still prove that retention of the payments would be unjust.
12
We have allowed claims for restitution in circumstances involving fraud, bad faith, violation of a trust, or breach of a duty; in “business torts” such as unfair competition and claims for infringement of trademark or copyright; and in some circumstances, as here, in disputes arising from quasicontractual relations. See Keller v. O’Brien, supra at 778–779. In order to prevail on its claim for reimbursement of disability insurance benefits it paid to Cotter under a reservation of rights, MetLife must establish not only that Cotter received a benefit, which is not disputed, but also that such a benefit was unjust.
Cotter, 464 Mass. at 644. The court found that Cotter’s retention of the disability benefit payments was not unjust.
Clearly, the facts of Cotter, in which the insurer sought to recover benefit payments made to an individual, were more compelling for the insured than those of the present case, which involves a commercial dispute between an insurer and a large company. Nonetheless, liability policies are also sold to individuals (e.g., auto and homeowners policies) and small family businesses, as well as to manufacturing companies like Vibram. In order to prove that it is unjust for an insured to retain defense costs advanced in respect of a third-party claim under a reservation of rights, an insurer must do more than prove that a court ultimately held that the claims were uncovered. Otherwise, the insurer is, in effect, using equitable principles to insert a reimbursement provision into the liability policy that does not exist. If a policy holder demands coverage of a third-party claim that is clearly not covered under the policy, the insurer can reject it. If a policy holder engaged in misrepresentations or other wrongful conduct (for example, acting in concert with a third-party claimant to make an uncovered claim appear covered), retention of defense costs might well be “unjust.” However, a good faith demand for a defense under a liability policy, which the insurer decides is likely enough to be valid that it will tender a defense under a reservation of rights, does not make retention of those defense costs unjust. Claims of unjust enrichment ought not be used to imply rights that the parties have not included
13
in the written contract that defines their relationship and covers the subject matter in dispute. See Kennedy v. B.A. Gardetto, Inc. 306 Mass. 212 (1940).
Recovery of Unpaid Defense Costs
Vibram seeks to recover expenses for defense of the Underlying Action incurred up to the date that the court held that the claims asserted in the Underlying Action were not covered by the Policies. It argues that in all cases in which a defense is provided under a reservation of rights, the duty to defend continues “until a declaratory judgment of no coverage is entered and that it does not retroactively disappear, even if no coverage is found.” Vibram asserts that Metropolitan Property & Casualty Ins. Co. v. Morrison, 460 Mass.352 (2011) (Morrison) established this principle. The court disagrees. Rather, Morrison teaches that the duty to defend ends when there is no longer any chance that the facts alleged in an underlying action can support a covered claim. That will often, but certainly not always, be when a declaratory judgment resolves a coverage dispute.
Morrison involved claims allegedly covered by a homeowner’s insurance policy. Briefly stated, the policy holders’ son (covered under the policy) had injured a police officer while resisting arrest. The son pled guilty to various criminal charges, and the police officer filed suit against the son alleging negligent and reckless conduct. The insurer, Metropolitan, disclaimed any obligation to provide indemnity or a defense, but did bring a declaratory judgment action seeking to establish no coverage. The son did not answer the police officer’s complaint, and a default judgment entered against him in the underlying personal injury action. On appeal, the coverage issue turned on (1) an interpretation of a policy provision that excluded coverage for
14
bodily injury resulting from intentional and criminal acts and (2) whether the entry of a default judgment in the underlying personal injury action, before a judgment of no coverage entered in the declaratory judgment action, established that the police officer’s injury was the result of negligence, as alleged in the complaint, and therefore a covered claim.
The SJC began by restating the well-established principle that the “insurer’s duty to defend is independent from, and broader than, its duty to indemnify.” Id. at 351. It then went on to explain that “the duty to defend is determined based on the facts alleged in the complaint, and on facts known or readily knowable by the insurer . . . . However, when the allegations in the underlying complaint lie expressly outside the policy coverage and its purpose, the insurer is relieved of the duty to investigate or defend the claimant.” Id. (internal quotations and citations omitted). Or, stated somewhat differently, when the allegations of the complaint do not “roughly sketch a claim covered by a liability policy,” there is no duty to defend. Id.
In support of its position, Vibram quotes the following statement from Morrison: “‘a declaratory judgment of no coverage, either by summary judgment or after trial, does not retroactively relieve the primary insurer of the duty to defend; it only relieves the insurer of the obligation to continue to defend after the declaration.’ 14 G. Couch, Insurance, supra at s. 200: 48, at 200-65 to 200-66.” Id. at 352. Vibram, however, omits the very next sentence in the opinion: “Where material facts as to the duty to indemnify are in dispute, an insurer has a duty to defend until the insurer establishes that no potential for coverage exists. Id. at 200-21.” Id. In other words, where it can be established that there is no coverage under the policy because there are no material facts necessary to determine the coverage issue in dispute, or because, even assuming all of the allegations in the underlying complaint are true, no coverage exists, there is no duty to defend. Indeed, in Morrison, the SJC remanded the case to the Superior Court to
15
determine whether Metropolitan owed its insured “a duty to defend at the time of the default judgment.” The SJC instructed the trial judge to determine whether by that point the facts establishing no coverage were already known and undisputed. Clearly, the SJC was teaching that this was the time at which the duty to defend terminated, even if Metropolitan did not obtain its declaratory judgment until later.
Moreover, the rationale underlying the decision in Jerry’s, and other similar cases, would be impaired if a duty to defend arose whenever an insured asserted a disputed right to coverage. In those cases, the courts held that the insurer had no right to recoup defense costs when a declaratory judgment entered that established that a third-party complaint did not assert a covered claim, because it was initially up to the insurer to decide whether to, in effect, hedge its bets and provide a defense when it was unsure of coverage: “In some circumstances, an insurance company may face a difficult decision as to whether a claim falls, or potentially falls, within the scope of the insurance policy. However, it is a decision the insurer must make. If it believes there is no possibility of coverage, then it should deny its insured a defense because the insurer will never be liable for any settlement or judgment.” Jerry’s, 3 A.2d at 542. If an insurer is bound to provide a defense whenever there is any chance that a policy might be interpreted to provide coverage, because of a dispute about policy terms not alleged facts, the predicate for following the principle outlined in Jerry’s is missing.
The court has found a single case in which a court ruled that a dispute concerning a question of law, resolved in favor of the insured, could nonetheless give rise to a duty to defend. In Hugo Boss Fashions, Inc. v. Federal Ins. Co., 252 F.3d 608 (2001), the insurer rejected its insured’s claims of coverage for a trademark infringement case filed against it and declined to provide a defense. The insured brought a declaratory judgment action seeking to establish
16
coverage and, while it was pending, settled the underlying trademark suit. The coverage case preceded to trial before a jury, which returned a verdict for the insured, both as to coverage and a duty to defend, and judgment entered for the insured. On appeal, the Second Circuit Court of Appeals reversed the District Court’s judgment that the trademark suit was a covered claim. It held that the policy was unambiguous, as the term “trademarked slogans” had a specific meaning and, in consequence, the policy did not cover the underlying claim.
In a split decision the Court of Appeals, nonetheless, found a duty to defend. It held that “there are situations in which a legal uncertainty as to insurance coverage gives rise to (an at least temporary) duty to defend.” Id. at 622. (Emphasis in original) The majority explained that there was sufficient “legal uncertainty (what does “trademarked slogan” mean)” to require the insurer “to undertake a defense of Hugo Boss until the uncertainty surrounding the term was resolved.” Id. In other words, although it concluded that the term “trademarked slogan” had only one reasonable meaning, the possibility that a court might find it ambiguous gave rise to a duty to defend.
Justice Sotomayor (then an associate justice of the Second Circuit) dissented from this latter holding. She concluded that the majority’s discussion of the duty to defend “finds no basis in New York law.” Id. at 626. She went on to explain that:
The majority errs in confusing two types of uncertainty. The first is cognizable under New York law, the second is not. The first concerns the period during which the underlying action is pending when the insurer must defend the insured against any allegations that, if proven, would result in indemnification. This type of uncertainty is a well-established element of New York insurance law and is unquestioned here. The majority attempts to read a second category of “uncertainty” into New York law, however, concerning how a court might rule on the scope of policy terms. No such “uncertainty” is recognized under New York law apart from that arising from an “ambiguous” policy term.
17
Id. at 627. Anticipating to some extent the reasoning that the Pennsylvania Supreme Court adopted in Jerry’s, Justice Sotomayor’s dissent went on to point out:
In order to determine its duties under a policy, insurers are, as a matter of course, called upon to survey the relevant law and scrutinize the language of the policy to judge whether its terms are unambiguous. Insurers may err in their judgment concerning the unambiguity of a policy term but are given strong incentives to decide these questions correctly. If they do not, they can be forced to defend a costly coverage action or, if the finding of unambiguity was so far off the mark that “no reasonable [insurance] carrier would, under the given facts, be expected to assert it,” Sukup v. State, 227 N.E.2d 842, 844 (N.Y. 1967), insurers can face even greater liabilities for breaching their duty of good faith.
All of this assumes that we entrust insurers with the initial decision concerning whether policy terms are unambiguous. In the case of a policy that uses a legal term of art, this inquiry requires a determination of whether that term of art is unambiguous. . . . And yet, the majority wants to deny Federal the opportunity to reach the same conclusion we have reached. It is difficult to understand why we should discourage Federal or any other insurer from making such determinations that are, in any case, subject to review and even sanction if erroneous.
Id. at 628-629 (Emphasis supplied).
Turning to the present case, first, this court’s coverage Decision did not turn on whether some term of art used in the Policies was potentially ambiguous. The precise question before the court: would a liability policy providing coverage for an Advertising Injury cover a claim based on the unauthorized use of a famous person’s name to sell a product, in this case a shoe, had not previously been decided in Massachusetts, or very many other courts. However, this court’s Decision did not turn on whether any particular term of art used in the Policies was potentially ambiguous, but rather applied legal precedent to the interpretation of a series of policy provisions.
Additionally, the reasoning of Justice Sotomayer’s dissent appears far more compelling with respect to the issues raised here than the majority opinion. In the first instance, it is for the insurer to decide whether any of the allegations in the complaint, if proved, could support a claim
18
covered by the policy. If it declines to provide a defense, it faces potential liabilities that will likely exceed the cost of the defense. However, if it elects not to defend the third-party claim, and its decision was correct as a matter of law, how could there ever have been a duty to defend?
The case now before the court does provide an additional confounding fact. The Insurers initially did agree to advance defense costs, but had not paid all outstanding invoices when the Declaratory Judgment of no coverage issued. Whether the insurer stopped paying because it became more convinced of the validity of its coverage position or because it was just slow in processing invoices does not appear to raise a disputed issue of fact material to this case. The relevant question is whether having initially agreed to pay for Vibram’s defense, while prosecuting this declaratory judgment action, the Insurers are bound to continue to advance defense costs until this case is resolved. On the record before this court, it concludes that they are not.
While not perfectly analogous, the court notes that in Herbert A Sullivan, Inc. v. Utica Mutual Ins. Co., 439 Mass. 387, 395 (2003), the insurer initially provided a defense to its insured under a general liability policy because one count of a multicount complaint alleged negligence. However, after the plaintiff in the underlying action amended its complaint and eliminated the negligence count, the insurer no longer had a duty to defend. The court finds that there is nothing inherent in an insurer’s initial decision to provide a defense that precludes it from changing its mind, even while the declaratory judgment action is still pending.
The court can envision cases in which an insured may have relied on the insurer’s initial decision and adopted a course of action in responding to the third-party claim such that it would suffer damage if the insurer discontinued the defense before the declaratory judgment action was resolved. For example, this might arise in situations in which the insurer is not only advancing
19
defense costs but actively providing the defense. However, this is not such a case. Upon receipt of the reservation of rights letter, Vibram exercised its right to retain its counsel of choice and to control its own defense, which given the amount of fees generated in a rather brief time was robust. There are no facts in the summary judgment record suggesting that the Insurers should be equitably estopped from discontinuing the advancement of defense costs, if the Policies permit them to do so. The court finds that, on these facts, the Insurers were permitted to change their mind with respect to advancing defense costs, as they were under no contractual obligation to pay them. The insured has neither a contractual or equitable claim for payment of unpaid costs of defense incurred up to the date the Decision issued.6
ORDER
For the foregoing reasons, the Insurers’ motion for summary judgment is DENIED, to the extent that it seeks to establish a right to recoup defense costs previously advanced,and otherwise ALLOWED; and Vibram’s motion for summary judgment is DENIED, to the extent it seeks to establish a right to recover any additional defense costs from the Insurers, and otherwise ALLOWED. Final judgment shall enter dismissing the counterclaims and declaring that the plaintiff insurance companies do not have a duty to defend the defendant Vibram in the
6 Vibram argues that the provision in the Policies that states “[the Insurers] will pay, with respect to any claim we investigate or settle, or any ‘suit’ against any insured we defend: . . . All expenses we incur . . . .” requires payment of all defense costs through the date the Decision issued. Clearly, this policy term only provides that when the Insurers defend a claim they have to pay all costs that they incur. Presumably, when an insured receives a reservation of rights letter and elects to control its own defense, that provision requires reimbursement of all defense expenses incurred by the insured, at least all reasonable expenses. But, it does not create an independent duty to defend a claim, or pay for the defense of a claim, that the Insurers have decided not to defend. The duty to defend is determined under other policy provisions.
20
Underlying Action or indemnify it for any loss sustained in respect thereto. No party shall recover damages, and each party shall bear its own costs.
_______________________
Mitchell H. Kaplan
Justice of the Superior Court
Dated: March 20, 2017

read more

Posted by Stephen Sandberg - April 3, 2017 at 4:31 pm

Categories: News   Tags: , , , , , , , , ,

CMJ Management Company v. Wilkerson (Lawyers Weekly No. 11-038-17)

NOTICE:  All slip opinions and orders are subject to formal revision and are superseded by the advance sheets and bound volumes of the Official Reports.  If you find a typographical error or other formal error, please notify the Reporter of Decisions, Supreme Judicial Court, John Adams Courthouse, 1 Pemberton Square, Suite 2500, Boston, MA, 02108-1750; (617) 557-1030; SJCReporter@sjc.state.ma.us

16-P-426                                        Appeals Court

CMJ MANAGEMENT COMPANY[1]  vs.  PATRICIA WILKERSON.

No. 16-P-426.

Suffolk.     December 1, 2016. – March 31, 2017.

 

Present:  Cypher, Maldonado, & Blake, JJ.

HousingLandlord and Tenant, Termination of lease.  Summary ProcessPractice, Civil, Summary process, Jury trial.

Summary process.  Complaint filed in the Boston Division of the Housing Court Department on September 15, 2014.

read more

Posted by Stephen Sandberg - March 31, 2017 at 4:57 pm

Categories: News   Tags: , , , , ,

Liberty Mutual Fire Insurance Company v. Casey, et al. (Lawyers Weekly No. 11-034-17)

NOTICE:  All slip opinions and orders are subject to formal revision and are superseded by the advance sheets and bound volumes of the Official Reports.  If you find a typographical error or other formal error, please notify the Reporter of Decisions, Supreme Judicial Court, John Adams Courthouse, 1 Pemberton Square, Suite 2500, Boston, MA, 02108-1750; (617) 557-1030; SJCReporter@sjc.state.ma.us

16-P-32                                         Appeals Court

LIBERTY MUTUAL FIRE INSURANCE COMPANY  vs.  RYAN CASEY & another.[1]

No. 16-P-32.

Essex.     November 7, 2016. – March 29, 2017.

Present:  Cypher, Massing, & Sacks, JJ.

Insurance, Homeowner’s insurance, Insurer’s obligation to defend.  Intentional Conduct.

Civil action commenced in the Superior Court Department on May 22, 2014.

The case was heard by Robert A. Cornetta, J., on motions for summary judgment.

read more

Posted by Stephen Sandberg - March 29, 2017 at 10:02 pm

Categories: News   Tags: , , , , , , , ,

Next Page »