SENTYNL THERAPEUTICS, INC., Plаintiff, v. U.S. SPECIALTY INSURANCE CO., Defendants.
CASE NO. 19cv1667-LAB-AHG
UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF CALIFORNIA
March 19, 2021
Hon. Larry A. Burns
Document 110; PageID.4289
- GRANTING DEFENDANT‘S MOTION FOR SUMMARY JUDGMENT [Dkt. 64];
- DENYING PLAINTIFF‘S CROSS-MOTION FOR SUMMARY JUDGMENT [Dkt. 73];
- DENYING MOTION TO EXCLUDE AS MOOT [Dkt. 84]; and
- DENYING MOTION FOR JUDGMENT ON THE PLEADINGS AS MOOT [Dkt. 41]
The question in this case is whether an insurance policy exclusion for claims “arising out of” a business‘s products is broad enough, under California law, to encompass not only claims for product liability, but also claims for business practices tied to those products. Sentynl Therapeutics, Inс. markets and sells two products, Levorphanol and Abstral, both prescription opioid medications. After receiving a subpoena from the Department of Justice‘s Opioid Task Force seeking information relating to
“Arising out of” is a broad standard under California law, but it‘s not unbounded. It doesn‘t invoke any particular theory of causation, but instead “identifies a core factual nucleus . . . and links that nucleus to the [harm] covered under the policy.” Fibreboard Corp. v. Hartford Accident & Indemnity Co., 16 Cal. App. 4th 492, 505 (1993). Because the the Opioid Task Force‘s investigation is sufficiently linked to Sentynl‘s opioid products, USSI‘s motion for summary judgment is GRANTED. (Dkt. 64.) Sentynl‘s cross-motion is DENIED. (Dkt. 73). The remaining pending motions—USSI‘s motion to exclude expert testimony and Sentynl‘s motion for judgment on the pleadings—are DENIED AS MOOT. (Dkt. 84; Dkt. 41.)
BACKGROUND1
Sentynl markets and sells prescription products. (See Jоint Statement of Undisputed Facts, Dkt. 64-5 ¶¶ 16-17.) It marketed or sold only two products during the relevant time period here: Levorphanol tartrate tablets (“Levorphanol“) from 2015 forward and Abstral sublingual tablets (“Abstral“) from November 2015 until October 2019. (Id. ¶ 19.) Both Levorphanol and Abstral are classified by the FDA as opioid analgesiс products. (Id. ¶¶ 16-17.)
USSI issued a Directors, Officers and Organization Liability Insurance Policy (the “Policy“) to Sentynl covering the period from January 31, 2018 to January 31, 2019 (the “Policy Period“). (Id. ¶ 1.) The Policy generally insured Sentynl against “Loss[es] arising from Claims first made against it during the Policy Period . . . for Wrongful Acts.” (Id. ¶ 2.) A “Claim” means, among other things: “any . . . written demаnd, including any demand for non-monetary relief;” “any administrative or regulatory proceeding commenced by the filing of a notice of charges, formal investigative order or similar document;” “any criminal proceeding commenced by the return of an indictment;” and “any written request or agreement tо toll or waive any applicable statute of limitations.” (Id. ¶ 3.) And “Wrongful Act” includes “any . . . actual or alleged act, error, misstatement, misleading statement, omission or breach of duty . . . by the Insured Organization.” (Id. ¶ 4.) USSI disclaims any “duty under [the] Policy to defend any Claim.” (Id. ¶ 5.) The Policy excludes Loss from “Claim[s] . . . arising out of . . . any goods or рroducts manufactured, produced, processed, packaged, sold, marketed, distributed, advertised or developed by the Insured Organization” (the “Goods and Products Exclusion” or the “Exclusion“). (Id. ¶ 10.)
The Claim
On August 16, 2018 and within the Policy Period, the United States Attorney‘s Office for the District of New Jersey‘s Opioid Abuse Prevention and Enforсement Unit (“Opioid Task Force“) served Sentynl with a subpoena (the “First Sentynl Subpoena“). (Id. ¶ 20.) The Opioid Task Force is a unit within that Office‘s Criminal Division, tasked with targeting anyone who illegally profits from opioids. (Id. ¶ 21.) Its First Sentynl Subpoena included thirty document requests, grouped into the following categories:
“Documents Relating tо Prior Authorizations and Reimbursement;” - “Documents Relating to the Sale and Promotion of Levorphanol;”
- “Documents Relating to Relationships With and Payments To Health Care Professionals,” (with most document requests in this category relating to Levorphanol);
- “Documents Relating to Specific Health Care Professionals;”
- “Documents Relating to Pharmacies,” (including requests for communications regarding Levorphanol);
- “Documents Relating to Distributors and Wholesalers,” (including requests for documents relating to the setting of Schedule II threshold amounts for distribution of Levorphanol); and
- “Compliance, Investigations and Lawsuits.”
(Dkt. 64-2 at 103-09).
Eighteen of the thirty requests referenced Levorphanol specifically, with at least one such request appearing in all of the above categories except the fourth. (Id.) Sentynl, several of its former employees, and one of its third-party vendors subsequently received numerous subpoenas (collectively with the First Sentynl Subpoena, the “Subpoenas“) from the Opioid Task Force seеking documents and information relating to Sentynl‘s marketing practices in connection with Levorphanol. (Dkt. 64-5 ¶¶ 30-59.) The second subpoena directed to Sentynl sought similar categories of documents as those sought by the First Sentynl Subpoena, but in relation to Abstral, rather than Levorphanol. (Dkt. 64-4 at 215-19.)
In subsequent communications, Sentynl was informed and it acknowledged that the potential health care offenses under investigation arose out of its opioid products. (Dkt. 105-4 at 96; Dkt. 73-12 at 154 (stating that Sentynl has only two products).) Sentynl concedes that it can‘t have
Sentynl first contacted USSI regarding insurance coverage for the Investigation on October 29, 2018. (Dkt. 64-5 ¶ 60; Dkt. 107-7 at 71-76.) USSI declined coverage. (Dkt. 64-2 at 110-112.) Among other things, USSI argued that, if the Opioid Investigation constituted a Claim (a point USSI contests), it “ar[ose] out of” Levorphаnol and Abstral, “goods or products manufactured, produced, processed, packaged, sold, marketed, distributed, advertised or developed by” Sentynl, and so it fell within the Exclusion. (Dkt. 107-10 at 105.)
USSI and Sentynl each moved for summary judgment.
STANDARD OF REVIEW
Summary judgment is appropriate where “there is no genuine issue as to any material fact and . . . the moving party is entitled to judgment as a matter of law.”
The Court does not make credibility determinations or weigh conflicting evidence. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255 (1986). Rather, the Court determines whether the record “presents a sufficient disagreement to require submission to a jury or whether it is so one-sided that one party must prevail as a matter of law.” Id. at 251–52.
To succeed on its motion, then, USSI must demonstrate that it is entitled to judgment based on undisputed facts, and all factual disputes must be resolved in favor of Sentynl in evaluating USSI‘s motion. Clare v. Clare, 982 F.3d 1199, 1203 (9th Cir. 2020). This standard is mirrored by the
The law of California, the forum statе, applies to this diversity action. Bell v. Lavalin, Inc. v. Simcoe and Erie Gen. Ins. Co., 61 F.3d 742, 745 (9th Cir. 1995). Accordingly, the Court treats the interpretation of the insurance policy as a question of law subject to the general rules of contract interpretation. MacKinnon v. Truck Ins. Exchange, 31 Cal. 4th 635, 647 (2003).
DISCUSSION
I. The Exclusion for Claims “Arising Out of” Sentynl‘s Products Must Be Construed Broadly
The Policy‘s Goods and Products Exclusion reads, in relevant part:
“[T]he Insurer will not be liable to make any payment of Loss in connection with a Claim arising out of, based upon or attributable to any goods or products manufactured, produced, processed, packaged, sold, marketed, distributed, advertised, or developed by the Insured Organizаtion.”
(Dkt. 64-5 ¶ 10.) While the parties dispute whether Sentynl has submitted a Claim and whether other exclusions may apply, those disputes are moot if the Exclusion applies to Sentynl‘s asserted Claim.
In urging the Court to construe “arising out of” narrowly, Sentynl mistakes breadth for ambiguity. The Ninth Circuit Court of Appeals, interpreting California law, construed that phrase in the context of an exclusionary clause as susceptible “to only one reasonable meaning“: “originating from[,] having its origin in, growing out of or flowing from or in short, incident to оr having connection with.” Continental Cas. Co. v. City of Richmond, 763 F.2d 1076, 1080 (9th Cir. 1985).2 Subsequent California decisions confirm this conclusion: “arising out of” is a broad standard, “generally equated . . . with origination, growth or flow from the event.” Southgate Recreation & Park Dist. v. California Assn. for Park & Recreation Ins., 106 Cal. App. 4th 293, 301 (2003).
Sentynl seeks to avoid this conclusion by arguing that construing the Exclusion to carve out this Claim would “eliminate practically all meaningful insuranсe” because “[e]verything [Sentynl] did . . . had some relationship to” Levorphanol and Abstral. (Dkt. 102-1 at 17.) Instead, it urges the Court to “read [the Exclusion] as related to the subject of products liability.” (Id.,
Electronic Purification doesn‘t discuss “products exclusion[s]” generally, as Sentynl claims, but a particular exclusion that had to be interpreted according to its language. In its fuller context, the language Sentynl quotes (itself a quote from another case) is used to support the proposition that, where an exclusion calls itself a “Products Hazard” exclusion, a subsection of that same exсlusion referring to operations must be read as limited by the “Products Hazard” caption. Electronic Purification, 67 Cal. 2d at 685-86. “If [the operations] subdivision . . . eliminated coverage for completed general operations, not related to products, . . . it would involve a subject utterly unrelated to products which no ordinary insured would expect to find under the heading, ‘Products Hazard.‘” Id. at 687. To read that exclusiоn otherwise would “eliminate practically all meaningful insurance” only because it would exclude both products hazards and all completed operations without limitation. See id. at 690. “The language of the policy compels such a reading.” Id. at 687.
Different language compels a different reading. The Policy‘s language still doesn‘t exclude operations “utterly unrelated to products,” id., but its limitation isn‘t the phrase “Products Hazard.” The limitation is instead the broader caption of “Goods and Products Exclusion” and the unambiguous phrase “arising out of” that connects matters to Sentynl‘s goods and products. Continental Cas. Co. v. City of Richmond, 763 F.2d at 1080
While that may make for a broader exclusion, it doesn‘t eliminate practically all meaningful insurance because there‘s a difference between Claims “arising out of” products and those that merely have “some relationship” to them. (Dkt. 102-1 at 17.) To use Sentynl‘s examples, its hiring and firing of employees and its financial reporting, to the extent they‘re only connected to its products by the fact that Sentynl must conduct those activities to do business, don‘t “arise out of” Levorphanol and Abstral. See, e.g., Fireman‘s Fund Ins. Companies v. Atlantic Richfield Co., 94 Cal. App. 4th 842, 849 (2001) (“‘[A]rising out of’ requires more than ‘but for’ causation.“).
II. The Undisputed Facts Demonstrate that the Investigation, If a Claim, Would Fall Within the Exclusion
Having determined that the Exclusion can be read to cover theories beyond products liability, all that remains is to determine whether Sentynl‘s Claim “originat[es] from, ha[s] its origin in, grow[s] out of or flow[s] from” its products. Continental Cas. Co. 763 F.2d at 1080. The undisputed facts answer with an unequivocal “yes.”
Cаlifornia courts have determined that legal claims for marketing practices tied to the known dangers of opioids, on the other hand, “arise out of” opioids, despite the lack of a product-centric liability theory. In Travelers v. Actavis, the insured pharmaceutical company had an insurance policy covering “damages because of bodily injury” but excluding “bodily injury . . . arising out of . . . any goods or products manufactured, sold, handled, distributed or disposed of by” the insured. Id. at
Sentynl acknowledges that the Investigation forming the basis for its Claim is being conducted by a criminal enforcement unit “tasked with . . . target[ing] anyone who illegally profits from opioids.” (Dkt. 64-5 at 13 (emphasis added).) It states that it couldn‘t have engaged in any act relevant to the Investigation until after it acquired the rights to Levorphanol. (Dkt. 105-5 at 89:2-9.) And, most directly, it concedes that the potential health care offenses that the Opioid Task Force is investigating arise out of Sentynl‘s manufacturing, marketing, sale, and distribution of its opioid products. (Dkt. 105-4 at 96.)3 The Opioid Task Force‘s Investigation is targeting Sentynl on suspicion that it “illegally profits from opioids” through health care offenses that arise out of its opioid products. Thе unavoidable conclusion is that the Claim based on that Investigation “originat[es] from, ha[s] its origin in, grow[s] out of or flow[s] from” products that Sentynl marketed or sold. Continental Cas. Co. 763 F.2d at 1080.
Just as litigation for fraudulent practices in marketing opioids constituted claims for “bodily injuries” “arising out of” the opioids in Actavis, the Opioid Task Force‘s Investigation of Sentynl‘s potential health care offenses, including inquiry into Senynl‘s marketing practices, fits comfortably in the broader category of “Claims” “arising out of” those products (to the extent it‘s a Claim at all). Sentynl‘s Losses from the Investigation are excluded from the Policy. Its claims for breach of the Policy, tortious bad faith, and declaratory judgment, all based on the theory that the Investigation is a Claim covered by the Policy, all fail as a matter of law.
The Court GRANTS USSI‘s Motion for Summary Judgment. (Dkt. 64.) It DENIES Sentynl‘s Cross-Motion for Summary Judgment. (Dkt. 73.) And it DENIES AS MOOT Sentynl‘s Motion for Judgment on the Pleadings, (Dkt. 41), and USSI‘s Motion to Exclude Expert Testimony. (Dkt. 84.)
The Clerk is directed to enter judgment in favor of USSI and clоse the case.
IT IS SO ORDERED.
DATED: March 19, 2021
Hon. Larry A. Burns
United States District Judge