United States District Court United States District Court

Case5:99-cv-20207-JW Document653

Filed12/15/10 Page1 of 11

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IN THE UNITED STATES DISTRICT COURT

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FOR THE NORTHERN DISTRICT OF CALIFORNIA

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SAN JOSE DIVISION

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Hewlett Packard Co.,

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NO. C 99-20207 JW

Plaintiff,

ORDER GRANTING DEFENDANT’S MOTION FOR REIMBURSEMENT; DENYING PLAINTIFF’S MOTION FOR SUMMARY JUDGMENT

11 For the Northern District of California

United States District Court

v. ACE Property & Casualty Ins. Co., 12 Defendant. 13 / 14 15

I. INTRODUCTION

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Plaintiff Hewlett-Packard Company (“HP”) brings this diversity action against Defendant

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ACE Property and Casualty Insurance Company (“ACE”) for breach of the implied covenant of

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good faith and fair dealing. HP alleges that ACE failed to defend HP against third-party claims

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pursuant to their insurance contract. Presently before the Court are ACE’s Motion for Reimbursement1 and HP’s Motion for

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Summary Judgment on Defendant’s Claim for Reimbursement.2 The Court conducted a hearing on

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December 13, 2010. Based on the papers submitted to date and oral argument, the Court GRANTS

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ACE’s Motion for Reimbursement and DENIES HP’s Motion for Summary Judgment.

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(Plaintiff ACE’s Motion for Reimbursement, hereafter, “ACE Motion,” Docket Item No.

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(hereafter, “HP Motion,” Docket Item No. 641.)

630.)


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For the Northern District of California

II. BACKGROUND In September 1994, HP brought suit against Nu-kote International (“Nu-kote”) for patent

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infringement. (ACE Motion at 1; HP Motion at 5.) In November 1994, Nu-kote filed counterclaims

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against HP. (Id.)

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On June 13, 1998, HP tendered the defense of the Nu-kote counterclaims to ACE under a

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“Comprehensive General and Automobile Liability Policy: Foreign” (the “Policy”).3 ACE chose not

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to furnish HP with a defense on the Nu-kote claims, determining that the claims were not covered

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and that it did not have a duty to defend HP under the Policy. (ACE Motion at 1; Opp’n to ACE at

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7.) On February 18, 1999, HP brought this action against ACE for failure to defend. (Id.; Id.) In an

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August 24, 1999 Order, Judge Spencer Williams held that ACE did owe a duty to defend HP under

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the Policy. (See Docket Item No. 52.) Judge Williams then appointed a Special Master. (See

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Docket Item No. 196.) After ACE filed a Motion for Reconsideration, the case was reassigned to

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this Court. (See Docket Item No. 235.)

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In a March 3, 2003 Order, the Court denied ACE’s Motion for Summary Judgment,

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reaffirming that ACE had a duty to defend HP under the Policy. (hereafter, “March 3 Order,”

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Docket Item No. 335.) On October 14, 2003, ACE sent HP a check for $11,061,717.00,4 with an

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accompanying letter stating as follows:

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This payment is made under an express reservation of all ACE PCIC’s rights under the applicable policy and applicable law. ACE PCIC’s reservation of rights includes the right to seek and obtain reimbursement of any of all of this payment in the event that the trial court, or other court of superior jurisdiction, determines that there is no duty to defend . . . . (Bergman Decl., Ex. A at 2.)

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In an October 24, 2003 letter, HP acknowledged receipt of the October 14 payment and

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notified ACE that, contrary to the reservation of rights, it considered the payment as partial payment

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(ACE Motion at 1; Memorandum in Opposition to ACE Property and Casualty Insurance Co.’s Motion for Reimbursement at 5, hereafter, “Opp’n to ACE,” Docket Item No. 644.) 4

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(See ACE Motion, Ex. A, Declaration of Steven H. Bergman in Support of Defendant ACE Property & Casualty Insurance Company’s Motion for Reimbursement, hereafter, “Bergman Decl.,” Docket Item No. 630.)

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for damages suffered by HP due to ACE’s failure to defend the Nu-kote counterclaim.5 In its letter,

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HP reasoned that the payment was for damages, as “the duty to defend terminated at least three (3)

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years prior to tender of the [payment].” (Id.)

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and issued a Judgment in favor of HP for $28,418,671.72. (See Docket Item Nos. 476, 477.) On

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May 3, 2008, ACE appealed the Court’s Judgment. (See Docket Item No. 519.) On May 12, 2010,

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the Ninth Circuit reversed the Court’s March 3 Order, holding that ACE had no duty to defend

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against the Nu-Kote counterclaims. Hewlett-Packard Co. v. ACE Prop. & Ca. Ins. Co., No. 08-

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16342, 2010 WL 1896464, at *1 (9th Cir. May 12, 2010).


On August 22, 2007, the Court adopted the Special Master’s Report and Recommendation

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Presently before the Court are ACE’s Motion for Reimbursement and HP’s Motion for Summary Judgment.

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III. DISCUSSION ACE moves for reimbursement on the grounds that: (1) ACE’s payment was for defense

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costs and thus, it has a right to reimbursement under California law;6 and (2) alternatively, ACE’s

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payment was for damages pursuant to the Court’s March 3 Order and thus, as the Order was

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reversed, ACE is entitled to restitution under 22 U.S.C. § 2202.7 HP moves for summary judgment

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on ACE’s claim for reimbursement on the grounds that: (1) ACE’s Motion is improperly before the

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Court; (2) ACE has no right to reimbursement under California law; and (3) assuming arguendo that

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ACE does have a right to reimbursement under California law, then a conflict of law exists and

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Pennsylvania law applies, under which ACE has no right to reimbursement. (HP Motion at 3-4.) As

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it may be dispositive, the Court considers ACE’s Motion first.

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(Declaration for James A. Lowe in Support of Hewlett-Packard Company’s Motion for Summary Judgment on Defendant’s Claim for Reimbursement, Ex. L, hereafter, “Lowe Decl.,” Docket Item No. 643.)

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(ACE Motion at 1.)

(Reply in Support of Motion for Reimbursement and Opposition to Plaintiff HewlettPackard Company’s Motion for Summary Judgment at 10, hereafter, “ACE’s Reply,” Docket Item No. 648.) 3


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1.

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ACE contends that the $11,067,717 payment to HP was made pursuant to this Court’s later-

Reimbursement for Damages

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reversed March 3 Order finding that ACE had a duty to defend HP. (ACE’s Reply at 5.) HP

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responds that the payment does not constitute damages, which must be judicially compelled, as no

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judgment had been entered against ACE and the Court had not made any determination of damages

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prior to ACE’s payment. (HP Motion at 12.)

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ACE’s Motion for Reimbursement

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A.


“What has been given or paid under the compulsion of a judgment the court will restore when its judgment has been set aside and justice requires restitution.” United States v. Morgan, 307

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U.S. 183, 197 (1939). In such circumstances, the reversal of the court order entitles the

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disadvantaged party to restitution. Baltimore & Ohio R.R. v. United States, 279 U.S. 781, 785-86

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(1929). “And, while the subject of the controversy and the parties are before the court, it has

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jurisdiction to enforce restitution and so far as possible to correct what has wrongfully been done.”

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Id. The doctrine of “compelled payment” has been extended to apply equally when a transfer of

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money or property is made in consequence of a judgment, that is subsequently reversed, in order to

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avoid unjust enrichment. Broadcom Corp. v. Qualcomm Inc., 585 F. Supp. 2d 1187, 1190 (C.D.

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Cal. 2008).

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Here, the Court finds that while the March 3 Order held that ACE had a duty to defend HP,

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the Court did not issue any judgment nor make any determination as to damages. (See Docket Item

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No. 335.) It was not until August 22, 2007, when the Court adopted the Special Master’s Report and

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Recommendation, that the Court issued judgment in favor of HP for $28,418,671.72. (See Docket

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Item Nos. 467-477.) Thus, the Court finds that ACE’s payment to HP was not made pursuant to, or

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as a consequence of, any judgment and therefore is not damages under the compelled payment

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doctrine.

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2.

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Alternatively, ACE contends that, under California law, it is entitled to reimbursement for defense costs paid to HP under a reservation of rights, as the Ninth Circuit later found that ACE had

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no duty to defend. (ACE Motion at 1.) HP responds that ACE has no right to reimbursement under

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California law, as a reimbursement claim is only available to a carrier who first reserves its right to

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seek reimbursement and then furnishes a complete defense to all claims. (HP Motion at 11.)

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Moreover, HP contends that, assuming arguendo ACE is entitled to reimbursement under California

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law, then Pennsylvania law with its stricter reimbursement standard would apply under the conflict

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of laws analysis. (HP Motion at 14-15.)


Reimbursement for Defense Costs

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a.

Whether the Motion is Properly Before the Court

As a threshold matter, the Court must first determine whether ACE’s Motion for

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Reimbursement is properly before the Court. ACE contends that the reimbursement of defense costs

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paid to HP qualifies as proper relief under 28 U.S.C. § 2202. (ACE’s Reply at 7-8.) HP contends

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that to properly move for reimbursement, first ACE must assert a claim for restitution and then file

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for summary judgment on that claim. (HP Motion at 21.)

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Under 28 U.S.C. § 2202, a court retains jurisdiction over the parties to enter such further

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orders as it deems necessary to provide the requisite and proper relief consistent with its declaratory

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judgment. Rincon Band of Mission Indians v. Harris, 618 F.2d 569, 575 (9th Cir. 1980).

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Reimbursement of defense costs pursuant to a motion for reimbursement qualifies as “proper relief”

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following a court order that a carrier had no duty to defend. Omaha Indemn. Ins. Co. v. Cardon Oil

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Co., 687 F. Supp. 502, 503 (N.D. Cal. 1998); Progressive Cas. Ins. Co. v. Peerless Ins. Co., No. 06-

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1113, 2007 WL 1655790, at *2 (E.D. Cal. June 7, 2007).

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Here, the Court has found that ACE’s Motion is one for reimbursement for defense costs, not

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equitable restitution for damages. Similar to Progressive, the Court finds that ACE’s 2003 payment

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to HP for defense costs entitles ACE to reimbursement upon subsequent determination by the Ninth

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Circuit that ACE had no duty to defend HP. Thus, the Court finds that ACE’s Motion for

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Reimbursement qualifies as proper relief under § 2202.

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HP relies on American Motorists Ins. Co. v. Superior Court for the proposition that ACE is

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required to submit a claim for equitable restitution in order to obtain reimbursement. 68 Cal. App.

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4th 864, 880 (Cal. Ct. App. 1998). However, the Court finds that American Motorists is inapposite.

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In that case, the trial court had not merely granted summary judgment on the carrier’s duty to defend

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the underlying action, but had additionally issued an “enforcement order” directing the carrier to

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make immediate payment to the policyholder. Id. at 868. Unlike American Motorists, ACE

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tendered the 2003 payment to HP of its own volition following the Court’s determination of ACE’s

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duty to defend. The Court did not issue any subsequent orders compelling ACE to tender payment.

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Thus, the Court finds that ACE’s Motion for Reimbursement is properly before the Court.

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b.

Reimbursement for Defense Costs

ACE moves for reimbursement under California law on the ground that the Ninth Circuit

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later determined that ACE had no duty to defend. (ACE Motion at 1.) HP responds that under the

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Buss doctrine,8 a reimbursement claim is only available to a carrier who first reserves its right to

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seek reimbursement and then furnishes a complete defense to all claims. (HP Motion at 11.)

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It is a well-established principle under California law that a carrier has a right to

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reimbursement of defense costs paid under a reservation of rights for claims that are “not even

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potentially covered” under the policy. Buss, 16 Cal. 4th at 50 (citing Omaha Indemn. Ins., 687 F.

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Supp. at 584). A carrier may unilaterally make an effective reservation of rights by giving notice to

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of the reservation to the policyholder. American Motorists, 19 Cal. App. 4th at 1356. However, in a

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“mixed action,” in which a carrier determines that at least some of the claims are “potentially

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covered” by the policy, the carrier may only seek reimbursement where it defends the action

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completely, without parsing claims. Buss, 16 Cal. 4th at 47-58.

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Buss v. Superior Court, 16 Cal. 4th 35 (1998). 6


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Here, upon HP’s tender of the Nu-kote counterclaims to ACE, ACE determined that the

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claims were not even potentially covered under the Policy and declined to defend HP entirely. In

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fact, any defense payments made by ACE to HP only occurred following the Court’s finding that the

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claims were indeed covered under the Policy and, thus, that ACE had a duty to defend. (Bergman

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Decl., Ex. A.) Once ACE finally tendered the 2003 payment to HP, it tendered the payment under a

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full reservation of rights, should the Court’s March 3 Order be reversed on appeal. (Id.)

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HP’s reliance on Buss for the proposition that ACE is not entitled to reimbursement as it

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failed to defend the claims completely is misplaced. In Buss, the California Supreme Court

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provided reimbursement to a carrier who defended its policyholder for twenty-seven claims in the

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underlying action, only one of which the carrier determined was “potentially covered” by the policy.

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16 Cal. 4th at 41-42. In allowing reimbursement, the Court held that in a “mixed” action, where

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some claims are potentially covered and others not, a carrier may only seek reimbursement when it

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defends all claims entirely. Id.

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Contrary to HP’s contention that the Buss doctrine applies to all claims for reimbursement,

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Buss only involved “mixed” actions. 16 Cal. 4th at 47-58. In this case, the underlying action

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consisted solely of claims that ACE consistently maintained were not even potentially covered by

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the Policy. As the underlying action was not “mixed,” the Buss doctrine is inapplicable to ACE’s

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claim for reimbursement. Thus, the Court finds that ACE has a right to reimbursement under

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California law.

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c.

Conflict of Laws

Alternatively, HP contends that should ACE have a right to reimbursement under California

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law, then a conflict of law exists with Pennsylvania law, which has a more restrictive reimbursement

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standard. (HP Motion at 14-15.) HP contends that Pennsylvania law applies: (1) as it requires that a

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carrier provide any reservation of rights in the policy itself, and thus would result in a materially

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different outcome than California law, which allows a carrier to reserve rights any time prior to

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tendering defense payment; and (2) Pennsylvania has an interest in the action as the contract was

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“made” there and ACE is headquartered there. (HP Motion at 14-21.) ACE responds that it holds a

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similar right to reimbursement under Pennsylvania law and, thus, no material difference exists

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between Pennsylvania and California law. (ACE’s Reply at 11-13.)


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In diversity cases, courts apply the conflict of law rules of the forum state, in this case

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California. Klaxon Co. v. Stentor Elec. Manufacturing Co., 313 U.S. 487, 496 (1941). “California

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follows a three-step ‘government interest analysis’ to address conflict of laws claims and ascertain

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the most appropriate law applicable to the issues where there is no effective choice-of-law

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agreement.” Washington Mutual Bank, FA v. Superior Court, 24 Cal. 4th 906, 916 (2001); Reich v.

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Purcell, 67 Cal. 2d 551, 555 (1967). “The party arguing that foreign law governs has the burden to

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identify the applicable foreign law, show that it materially differs from California law, and show that

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the foreign law furthers an interest of the foreign state.” Frontier Oil Corp. v. RLL Ins. Co., 153

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Cal. App. 4th 1436, 1465 (Cal. Ct. App. 2007) (citing Washington Mutual, 24 Cal 4th at 919). Only

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when a material difference exists do California courts inquire into the “governmental interest” of

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each respective state. Strassberg v. New England Mut. Life Ins. Co., 575 F.2d 1262, 1263-64 (9th

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Cir. 1978). Even where there is a conflict, if the application of a foreign law does not significantly

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advance the interests of the foreign state, California courts apply California law. Id.

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Here, HP relies on American and Foreign Ins. Co. v. Jerry’s Sport Center, Inc. for the

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proposition that Pennsylvania law has a more stringent reservation of rights standard that would

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render ACE without recourse for reimbursement. 2 A.3d 526 (Pa. 2010). In Jerry’s Sport Center,

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the Pennsylvania Supreme Court held that a carrier was not entitled to reimbursement where the

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carrier had determined that some claims might potentially be covered by the policy and tendered a

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reservation of rights with the payment, but where the insurance contract included no such

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reservation of rights. Id. at 544. The Court reasoned in Jerry’s Sport Center that allowing

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reimbursement based on a reservation of rights letter, when no such reservation existed in the

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contract, was “tantamount to allowing the [carrier] to extract a unilateral amendment to the

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insurance contract.” Id. The reservation of rights letter would amend the original contract, the

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Court held, where the carrier “was obligated, in the first instance, to provide such a defense.” Id.

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Further, the Court held that there were no equitable bases on which to grant reimbursement, as the

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carrier had the duty to defend under the contract and, thus, was not unjustly enriched. Id. at 545.


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The Court finds Jerry’s Sport Center inapposite. Unlike the carrier in Jerry’s Sport Center

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who initially determined that the claims could potentially be covered and furnished coverage,9 ACE

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never made the determination that some claims might potentially be covered by the policy and

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consistently refused to defend HP. Further, ACE only tendered payment of defense costs to HP once

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the Court issued an Order finding that the claims were covered under the policy. Finally, ACE was

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not contractually obligated to provide a defense for claims it had determined to be not even

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potentially covered by the policy. Thus, the heightened reservation of rights standard in Jerry’s

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Sport Center does not apply in the present action which is not a “mixed” action or an action where

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the carrier made the determination that at least one claim was potentially covered by the policy. As

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ACE would not be subject to the heightened reservation of rights requirement of Jerry’s Sport

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Center, the Court finds that HP has not made a sufficient showing to demonstrate a material

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difference between Pennsylvania and California law.

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Accordingly, the Court finds that California law applies and, thus, GRANTS ACE’s Motion for Reimbursement.

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3.

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As the Court has found that ACE is entitled to reimbursement of the 2003 payment for

Prejudgment Interest

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$11,061,717.00, ACE moves for an award of prejudgment interest at the default statutory rate of

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10% per annum under Cal. Civ. Code § 3289(b). (ACE Motion at 4.) HP responds that the

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prejudgment interest rate should be set at the California Constitution’s default rate of 7% per annum,

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as this action is not for breach of contract. (HP Motion at 22.)

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Under California Law, breach of contract actions are set to the default prejudgment interest rate of 10% per annum in the absence of any stipulation to the contrary. Cal. Civ. Code § 3289. For

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Jerry’s Sport Center, 2 A.3d at 531-32. 9


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non-breach of contract actions that do not stipulate to a prejudgment interest rate, the California

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Constitution sets the default prejudgment interest rate at 7% per annum. Cal. Const. Art. XV.

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Here, the present action for reimbursement does not involve a claim made by ACE against

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HP for breach of contract. The 2003 payment from ACE to HP was made following the Court’s

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finding of a duty to defend. Thus, the Court finds that, as the present judgment is not based on an

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action for breach of contract, the California Constitution’s default prejudgment interest rate of 7%

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per annum applies.

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Accordingly, the Court awards ACE prejudgment interest at 7% per annum. B.

HP’s Motion for Summary Judgment HP moves for summary judgment on ACE’s claim for reimbursement on the grounds that:

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(1) the Motion is improperly before the Court; (2) ACE has no right to reimbursement under

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California law; and (3) assuming arguendo that ACE does have a right to reimbursement under

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California law, then a conflict of laws exist and Pennsylvania law applies, under which ACE has no

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right to reimbursement. (HP Motion at 3-4.)

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For the reasons stated above in granting ACE’s Motion for Reimbursement, the Court DENIES HP’s Motion for Summary Judgment.

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IV. CONCLUSION The Court GRANTS ACE’s Motion for Reimbursement. The Court awards ACE

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prejudgment interest at the rate of 7% per annum. Judgment shall be entered for ACE in the amount

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of $11,067,717 and prejudgment interest at the rate of 7% per annum.

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The Court DENIES HP’s Motion for Summary Judgment.

22 23 Dated: December 15, 2010 24

JAMES WARE United States District Judge

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THIS IS TO CERTIFY THAT COPIES OF THIS ORDER HAVE BEEN DELIVERED TO:

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Bradley Marc Zamczyk [email protected] David A. Gauntlett [email protected] Ernest Slome [email protected] James A. Lowe [email protected] John Frederic Daum [email protected] Mark C. Wood [email protected] Martin Samuel Checov [email protected] Merle Jane Panick [email protected] Ralph Angelo Zappala [email protected] Robert John Romero [email protected] Steven H. Bergman [email protected]

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Dated: December 15, 2010

Richard W. Wieking, Clerk

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By:

/s/ JW Chambers Elizabeth Garcia Courtroom Deputy