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NVIDIA CORPORATION v. FEDERAL INSURANCE COMPANY

September 6, 2005.

NVIDIA CORPORATION, Plaintiff,
v.
FEDERAL INSURANCE COMPANY, Defendant.



The opinion of the court was delivered by: MARK FILIP, District Judge

MEMORANDUM OPINION AND ORDER

Nvidia Corporation ("Nvidia" or "Plaintiff") brings this action against Federal Insurance Company ("Federal" or "Defendant") in a two-count complaint. (D.E. 1.)*fn1 Count I alleges that Federal breached its duty to defend Nvidia in an underlying lawsuit in which Nvidia and one of its employees were defendants. (Id. ¶¶ 32, 35-36.) Count II seeks a declaration that, because Federal did not defend Nvidia nor initiate a declaratory judgment action seeking a determination of whether Federal owed a duty to defend, Federal is estopped from denying that it has a duty to indemnify Nvidia and/or its employee for any settlement or adverse judgment in the underlying litigation. (Id. ¶¶ 38-40 and Prayer for Relief.) Federal has moved to dismiss the complaint (D.E. 6), and Nvidia has filed a partial motion for summary judgment on issues of liability (D.E. 7), pursuant to Federal Rule of Civil Procedure 56. As explained below, Plaintiff's motion for partial summary judgment is granted with respect to Count I and denied with respect to Count II, and Defendant's motion to dismiss granted with respect to Count II and denied as to Count I. I. BACKGROUND FACTS*fn2

There are no disputed issues of material fact relating to the case. The facts that appear in the complaint are nearly identical to those in Plaintiff's Local Rule 56.1 statement, which is undisputed in its entirety, save for one sentence that is substantively irrelevant.*fn3

  A. The Insurance Policy

  On October 19, 2001, Federal*fn4 issued an insurance policy to Nvidia*fn5 effective from September 1, 2001 to September 1, 2002. (D.E. 1 ¶ 6; D.E. 9 ¶ 2.) Pursuant to the policy, Federal agreed to "pay damages the insured becomes legally obligated to pay by reason of liability imposed by law or assumed under an insured contract for . . . personal injury to which this insurance applies caused by an offense." (D.E. 1 ¶ 8 (emphases omitted).) Federal agreed that it "will have the right and duty to defend any insured against a suit seeking damages for . . . personal injury." (Id. ¶ 9 (emphases omitted).) Under the Federal policy, the term "personal injury" is defined to include "injury, other than bodily injury, arising out of one or more of the following offenses committed in the course of your business, other than advertising: . . . oral or written publication of material that slanders or libels a person or organization." (Id. ¶ 11 (emphases omitted).)

  B. The Underlying VisionTek Suit

  In November 2002, Michael Eber, Trustee for the benefit of the creditors of VisionTek, LLC, filed a lawsuit in the Circuit Court of Cook County, Illinois, against multiple defendants, including Nvidia and its employee, Hilton Sessel. (Id. ¶ 12; D.E. 9 ¶ 6.) (That suit was later was removed to the Northern District of Illinois, and has since been the subject of subsequent amendments. (See generally D.E. 1 ¶¶ 12-16.)) In VisionTek's Second Amended Complaint, it alleges that "Nvidia, through its director of sales, Sessel, . . . met and/or otherwise discussed with" various co-defendants "and agreed to cooperate in [a] plan" for some of the co-defendants to "create a new company," to "cripple" and ultimately "take over" VisionTek's business. (Id. ¶¶ 17-18.)*fn6 Consequently, "in furtherance of this plan, Nvidia, through Sessel, . . . advise[d] one or more individuals and/or entities with which . . . [VisionTek] was conducting, or had an expectation of conducting, business, that . . . [VisionTek] did not have the legal right to sell [its] inventory." (Id. ¶ 20.) VisionTek further alleged that the "defendants engaged in a campaign to publicly sabotage, disparage, and destroy [VisionTek]. . . . The publication of this information caused irreparable damage to the Debtor's reputation and ability to conduct business." (Id. ¶ 21.) Later in the complaint, VisionTek alleged that Nvidia either held or cancelled all open orders placed by VisionTek, which "caused irreparable damage to [VisionTek's] reputation." (Id. ¶ 22.) Apparently, all these actions occurred in August 2002. (Id. ¶ 23.)

  C. The Denial of Coverage

  In October 2003, Nvidia notified Federal of VisionTek's lawsuit. (D.E. 9 ¶ 7.) Approximately one month later, Federal informed Nvidia that it was denying coverage for the underlying VisionTek suit and that Federal would neither defend nor indemnify Nvidia for the suit; Stephen L. Newton, counsel for Federal, reaffirmed the denial in September 2004. (Id. ¶¶ 8-9; see also D.E. 1 ¶ 32.) Thereafter, Plaintiff retained counsel at its expense to defend itself and Sessel.*fn7 (D.E. 1 ¶¶ 35-36.) From that time until the present, Federal never initiated a declaratory judgment action against Nvidia or Sessel to determine whether Federal owed Nvidia or Sessel a defense in the VisionTek suit. (Id. ¶ 40; D.E. 9 ¶ 11.)

  II. DISCUSSION

  As to Count I, Defendant maintains that under the applicable substantive law — which it asserts is the law of California — VisionTek's lawsuit against Nvidia was outside the terms of Defendant's insurance contract with Nvidia because the VisionTek lawsuit merely was for "trade libel" (or "product disparagement"). (E.g., D.E. 6 at 2.) In Defendant's view, allegations of trade libel, unlike those of defamation, do not trigger its duty to defend. (E.g., id.) Nvidia, meanwhile, argues that (1) no conflict exists between Illinois law and California law concerning an insurer's duty to defend an (2), in any event, under Illinois's definition of defamation (which Nvidia asserts should apply because the VisionTek litigation applies Illinois law), VisionTek's complaint potentially included a claim for defamation against Nvidia. (D.E. 12 at 4-12.) As to Count II, Federal contends that California law does not provide for the estoppel Nvidia seeks or, alternatively, estoppel would not be available in this case under Illinois law. (D.E. 6 at 14.) Nvidia posits that estoppel is appropriate in this case under Illinois law, based largely on the concept in Illinois law that an insurer that improperly refuses to defend an insured is thereafter estopped from denying coverage in connection with the underlying claim. (D.E. 12 at 14-15.)

  A. Choice of Law

  1. Determining Whether A Conflict Exists Between The Laws of Illinois And California

  The first step for the Court is to decide which state's law is to be applied in the instant case. Defendant asserts that California law should apply, while Plaintiff contends that Illinois law is most appropriate. Specifically, the parties disagree about the applicable law as it pertains to two issues: (1) whether the specific allegations contained in the VisionTek lawsuit give rise to coverage under the Federal policy, and (2) whether, as a result of its conduct in responding to Plaintiff's claim, Federal is estopped from denying any indemnity obligations to Plaintiff.

  When undertaking a choice of law analysis, the initial step the Court must perform is to determine whether there is, in fact, a conflict between California law and Illinois law. Int'l Admins., Inc. v. Life Ins. Co. of N. America, 753 F.2d 1373, 1376 n. 4 (7th Cir. 1985). Three potential areas exist for conflict in the instant case: (1) the terms under which an insurer is obligated to defend an insured; (2) whether allegations of trade libel and/or defamation give rise to a duty to defend and whether such a situation exists here; and (3) whether and insurer may be estopped from denying indemnification if it improperly fails to provide a defense to the insured.

  As to the first issue, the parties appear to agree that an insurer must cover an insured party in the same circumstances under both California and Illinois law. In California "[t]he defense duty arises upon tender of a potentially covered claim and lasts until the underlying lawsuit is concluded, or until it has been shown that there is no potential for coverage." Scottsdale Ins. Co. v. MV Transp., 115 P.3d 460, 464 (Cal. 2005); see also Montrose Chem. Corp. v. Superior Court, 861 P.2d 1153, 1157 (Cal. 1993) ("[T]he carrier must defend a suit which potentially seeks damages within the coverage of the policy.") (internal quotation omitted; emphasis in original); Ringler Assocs. Inc. v. Maryland Cas. Co., 96 Cal. Rptr. 2d 136, 156 n. 12 (Cal.Ct.App. 2000) ("A duty to defend does not exist only when the underlying complaint can by no conceivable theory raise a single issue which could bring it within the policy coverage") (internal punctuation and citation omitted). Similarly, Illinois law holds that "[i]f the underlying complaint alleges facts within or potentially within policy coverage, an insurer is obligated to defend its insured even if the allegations are groundless, false or fraudulent." Gen. Agents Ins. Co. of America, Inc. v. Midwest Sporting Goods Co., 828 N.E.2d 1092, 1098 (Ill. 2005). Therefore, there is no conflict with respect to this issue. As a general matter, the Court also notes that both California and Illinois law recognize the general principles that when a court assesses the duty to defend, the underlying complaints and insurance policies "must be liberally construed in favor of the insured," and "[a]ll doubts and ambiguities must be resolved in favor of the insured." U.S. Fid. & Guar. Co. v. Wilkin Insulation Co., 578 N.E.2d 926, 930 (Ill. 1993) (collecting cases). Accord, e.g., Ringler Assocs., 96 Cal. Rptr. 2d at 153 ("In general, where there is any doubt as to whether the duty to defend exists, the doubt must be resolved in favor of the insured and against the insurer.") (collecting cases).

  Second, the Court must consider the relevant law as it pertains to whether trade libel — like defamation — may give rise to a duty to defend. Under California law, it appears that insurance policies, like the one here, with duties to defend against personal injuries, in which the definition of personal injury includes "a publication or utterance of a libel or slander or other defamatory or disparaging material," create a duty to defend against allegations of defamation but not against trade libel/product disparagement. See Truck Ins. Exch. v. Bennett, 61 Cal. Rptr. 2d 497, 502, 504 (Cal.Ct.App. 1997); see also Title Homedics, Inc. v. Valley Forge Ins. Co., No. SA CV 99-928 DOC, 1999 WL 33301457, at *2 n. 4 (C.D. Cal. Oct. 29, 1999). Illinois law is less clear; there has been no definitive holding from the Illinois state courts one way or the other on this point. See Walbrook Ins. Co., Ltd. v. Unarco Indus., Inc., No. 90 C 5111, 1993 WL 42232, at *4 (N.D. Ill. Feb. 17, 1993). However, at least two federal courts considering the issue have concluded that trade libel may, in fact, give rise to a duty to defend. See id., 1993 WL 42232 at *4-5 (concluding that the insurance policy's use of "defamation" and "unfair competition" was enough also to encompass "product disparagement," such that the insurer had a duty to defend the insured); Zurich Ins. Co. v. Sunclipse, Inc., 85 F. Supp. 2d 845, 855-56 (N.D. Ill. 2000) (holding that the action in that case did not involve product disparagement/trade libel and thus did not create a duty to defend, but implying that if it had, it would have raised such a duty). Combined with the well-held rule of insurance law that a court must construe insurance contracts in doubtful cases in favor of the insured, see Great West Cas. Co. v. Mayorga, 342 F.3d 816, 818 (7th Cir. 2003), the Court will presume that Illinois law demands a duty to defend for allegations of trade libel.

  Ultimately, however, this issue is of relatively limited significance because, as explained below, the relevant allegations of the underlying complaint at issue in this case are fairly read to allege defamation under both California or Illinois law. So, while the Court finds, as explained further below, that the relevant choice of law principles of Illinois law direct application of California law, even if Illinois law were properly applied on this point, Nvidia nonetheless would prevail on its breach of the duty to defend claim in Count I.

  Third, the Court considers the possibility of a conflict on the issue of whether an insured's breach of the duty to defend thereafter estops the insurer from asserting defenses to any indemnification obligation in connection with the underlying litigation. Both parties agree that Illinois law generally provides that an insurer may be estopped from denying indemnification, with a few exceptions, if it fails to provide a defense and also fails to file a declaratory judgment action to address whether it has a duty to defend. (D.E. 12 at 14; D.E. 15 at 7.) They disagree, however, on California's treatment of the issue. Federal maintains that California law does not recognize the estoppel doctrine because, according to its research, "no California court has ever fashioned such a rule." (D.E. 15 at 13.) Plaintiff, meanwhile, does not so much argue that California law does recognize the estoppel doctrine as argue that because Federal cited no authority, Federal's argument is a skeletal one that the Court need not consider. (D.E. 12 at 14.) As explained further below, although the parties have collectively identified no cases on the point (instead, with all respect, they both unhelpfully argue about who has waived the point by failing to produce supporting authority), there is substantial authority in this area within California jurisprudence. That authority reflects a substantially different approach to the ...


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