No Coverage Exists, Opinion Says, Because Action Under California’s False Claims Act, Which Resulted in $77.5 Million Settlement, Stemmed From Contracts, and Express Exclusion Applies
By a MetNews Staff Writer
The Ninth U.S. Circuit Court of Appeals has held that insurer AIG had no duty to defend or indemnify Office Depot in an action under California’s False Claims Act—which resulted in a $77.5 million settlement in 2014—because that lawsuit, though alleging tortious conduct including non-intentional wrongs, stemmed from contracts, triggering an exclusion clause.
Office Depot, which sued AIG in 2015, was alleged in the earlier litigation to have bilked more than 1,000 governmental entities throughout the state, principally the City of Los Angeles (which received $11.6 million under the court-approved settlement), by deviating from a pledge under contracts with the County of Los Angeles to extend its “lowest price” to such entities. Approving the settlement was Los Angeles Superior Court Judge (now Presiding Judge) Kevin Brazile.
A memorandum opinion, filed Friday, affirms a summary judgment granted on June 21, 2019, by District Court Judge Stephen V. Wilson of the Central District of California in favor of AIG Specialty Insurance Co. Wilson rejected Office Depot’s contention that the exclusion cause cannot reasonably be applied to the non-contractual theories that were advanced in the underlying litigation.
‘Arising Out of’
The insurance agreement precluded coverage as to any claim “arising out of or resulting, directly or indirectly, from any liability or obligation under any contract or agreement or out of any breach of contract,” but the exclusion did not apply to liabilities or obligations which “an insured would have in the absence of such contract or agreement.”
A three-judge Ninth Circuit panel held that because none of the causes of action would have existed had there not been a contractual relationship—although it was an indirect one as between Office Depot and the governmental agencies it was accused of over-charging—the exclusion pertained, in light of the wording of the contractual provision.
The panel was comprised of Ninth Circuit Judges Marsha S. Berzon and Kenneth Kiyul Lee, joined by Sixth Circuit Judge Eugene E. Siler, sitting by designation.
Friday’s decision was the second Ninth Circuit opinion in the case.
On Jan. 23, 2017, Wilson granted summary judgment to AIG on the basis of California Insurance Code §533 which precludes insurance coverage for intentional torts. On May 21, 2018, a differently constituted Ninth Circuit panel reversed and remanded, pointing out that the state’s False Claims Act, which bars meritless billings to governmental agencies, “requires only ‘reckless[ness]’ regarding the truth or falsity of the information in the claim,” not an intentional effort to cheat.
The panel deciding the appeal on Friday was unpersuaded by Office Depot’s contention that the 2018 opinion signaled that possible coverage existed, and that this possibility created a duty to defend. The present panel found that no coverage did exist, precluding ant duty to defend the insured,
Suit by ‘Whistleblower’
Office Depot, Inc. brought its action against AIG on April 2, 2015, seeking to force the insurer to pay up in connection with a lawsuit brought against it in Los Angeles Superior Court on March 20, 2009, by a former account manager, David Sherwin—a “whistleblower” who sued under the qui tam provision in the state’s False Claims Act.
Under that provision, a private plaintiff may (unless the Office of Attorney General opts to take over) pursue an action based on the defendant having allegedly presented “a false or fraudulent claim for payment” by a governmental entity in the state. The “qui tam plaintiff” (also referred to as a “relator”) is entitled to a percentage of the proceeds of a settlement, as set by the court, within statutory parameters.
Sherwin pointed to Office Depot’s contracts with the County of Los Angeles which permitted piggybacking by state and local governmental entities in California on the provision for preferential pricing, asserting that more than 1,000 of such entities (primarily schools) had been over-charged by Office Depot because it did not extend such price breaks to them. Related wrongful conduct was also alleged.
Under the settlement, Office Depot paid $68.5 million in damages and $9 million in attorney fees and costs, with the estate of Sherwin—who died of cancer before the settlement was reached—garnering $23 million.
District Court’s View
In denying summary judgment to Office Depot, and granting it in favor of AIG, Wilson said:
“[T]he exclusion here is much broader than a typical ‘breach of contract’ exclusion; it excludes not only claims arising out of a breach of contract but also claims alleging, arising out of, or resulting, even indirectly, from any liability or obligation under any contract or agreement. The distinction is crucial because the additional breadth excludes claims that are not strictly contractual. Under any fair reading of the exclusion, all of the Sherwin Lawsuit claims are excluded because they all arose out of, at least indirectly, Office Depot’s contractual obligations.”
“To put it more plainly, none of the claims—which ultimately all related to the core allegation that Office Depot overcharged on government contracts—could have been raised absent the underlying contracts.
Wilson said this was “true even” as to claims under the False Claims Act and for fraud, saying that “there could have been no fraudulent misrepresentations or omissions regarding the contracts, for example, without the contracts.”
At oral argument on Sept. 2, via teleconferencing, attorney Brent W. Brougher of the Atlanta firm of Kilpatrick Townsend & Stockton LLP, representing Office Depot, insisted that the clause excluding a duty to indemnify where a contract is involved “does not say that ‘This exclusion applies unless a contract is totally absent from the case.’ ”
He noted that Sherwin “did not sue for a breach of contract,” and asserted that the clause in question is not one “that excludes all claims where the parties, for example, come together by virtue of a contract.”
Viewing it differently, the Ninth Circuit panel said that under California case law, a claim is one “arising out of” a contract if it has merely a “minimal” connection with a contract. The judges observed that “the allegations of the Sherwin lawsuit, directly, and indirectly, arose out of Office Depot’s contractual obligations,” and declared:
“We conclude, noting the uncomfortable breadth of such contract exclusions, that the allegations in the Sherwin lawsuit are premised directly or indirectly on Office Depot’s contractual obligations and therefore the lawsuit is precluded from coverage under the contract exclusion.”
Duty to Defend
Brougher, who is licensed to practice in California, said at oral argument that under California law, if there is even “a remote, sliver of an allegation buried anywhere in the complaint that might potentially give rise to coverage,” a duty to defend exists. He reminded the judges that under the 2018 Ninth Circuit decision, decided by a differently constituted panel, the prospect of coverage was recognized.
“And here, AIG should have stepped up and defended Office Depot,” he maintained.
The panel responded:
“An insurer’s duty to indemnify arises when there is coverage of the claim determined in light of the facts…Based on the analysis of contract exclusion, the Sherwin lawsuit is not covered under Office Depot’s policy with AIG. Therefore, we conclude that AIG did not have a duty to indemnify Office Depot and affirm the district court.”
The case is Office Depot, Inc. v. AIG Specialty Insurance Co., 19-55819.
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