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Ellicott City Cable, LLC v. Axis Insurance Co.

United States District Court, D. Maryland

July 22, 2016

ELLICOTT CITY CABLE, LLC, et al., Plaintiffs,
v.
AXIS INSURANCE COMPANY, Defendant.

          MEMORANDUM OPINION

          Richard D. Bennett United States District Judge

         Plaintiffs Ellicott City Cable, LLC (“ECC”) and Dr. Bruce Taylor (“Dr. Taylor”) (collectively, “Plaintiffs”) bring this action against Defendant Axis Insurance Company (“Axis” or “Defendant”), seeking a declaratory judgment pursuant to 28 U.S.C. § 2201. Plaintiffs claim that Axis breached its duties to defend and indemnify ECC in an action also before this Court, DirecTV, LLC v. Taylor, et al., Civ. A. No. RDB-15-01760 (the “Underlying Action”). While the present action was pending, the parties in the Underlying Action reached a settlement agreement. See DirecTV, LLC v. Taylor, et al., Civ. A. No. RDB-15-01760, ECF No. 95. This Court accordingly dismissed that action on November 9, 2015. DirecTV, LLC v. Taylor, et al., ECF No. 96.

         Presently pending are Plaintiffs’ Cross-Motion for Partial Summary Judgment (ECF No. 21) on Defendant’s duty to defend and Defendant’s Motion to Dismiss (ECF No. 15). The parties’ submissions have been reviewed and no hearing is necessary. See Local Rule 105.6 (D. Md. 2016). For the reasons that follow, Defendant’s Motion to Dismiss (ECF No. 15) is DENIED;[1] and Plaintiffs’ Cross-Motion for Partial Summary Judgment (ECF No. 21) is GRANTED. In sum, Axis had a duty to defend ECC in the Underlying Action.[2]

         BACKGROUND

         This Court is presented with dueling motions-the Defendant’s Motion to Dismiss (ECF No. 15) and the Plaintiffs’ Cross-Motion for Partial Summary Judgment (ECF No. 21). As this Court is granting the Plaintiffs’ Motion, this Court will review the facts and all reasonable inferences in the light most favorable to the nonmoving party. Scott v. Harris, 550 U.S. 372, 378 (2007); see also Hardwick ex rel. Hardwick v. Heyward, 711 F.3d 426, 433 (4th Cir. 2013). This action arises out of successive multimedia liability policies (the “Policies”) issued by Defendant Axis to Plaintiffs Dr. Taylor and ECC from May 1, 2009 to May 1, 2013.[3]Mem. in Support of Pls.’ Cross-Mot. for Partial Summ. J. at 9. Under the Policies, Axis agreed to defend ECC against any suit seeking damages for a specified media “occurrence . . . during the Policy Period[.]” Compl. Ex. 4 at 2. For purposes of the present action, the parties concede that the relevant terms and conditions of the Policies do not vary. Mem. in Support of Def.’s Mot. to Dismiss, 6, ECF No. 15-1; Mem. in Support of Pls.’ Cross-Mot. for Partial Summ. J., 9, ECF No. 21-1.

         In 2005, Dr. Taylor formed Ellicott City Cable, LLC (“ECC”) to provide television, internet, and telephone services to residents of the Taylor Village and Waverly Woods communities.[4] ECC contracted to obtain satellite television programming from DirecTV, LLC (“DirecTV”)[5] through DirecTV agents Sky Cable, LLC (“Sky Cable”) and North American Cable Equipment (“NACE”). Compl. Ex. 8, 43, ECF No. 1-9 (Taylor Decl. ¶ 6). Under the contracts, ECC distributed the DirecTV programming through equipment and credentials provided by Sky Cable and NACE. Id. ECC, in turn, made monthly payments to DirecTV for access to its programming. Underlying Action Amended Compl. ¶ 81. According to Dr. Taylor, this arrangement continued until 2014, when ECC terminated its relationship with DirecTV. Taylor Decl. ¶¶ 23-24. ECC never contracted with DirecTV to provide internet or telephone services. Taylor Aff. ¶¶ 8-9.

         On December 6, 2013, DirecTV filed the Underlying Action against, inter alia, ECC, Dr. Taylor, and Sky Cable, in the United States District Court for the Western District of Virginia. See Underlying Action Amended Complaint. The Underlying Action was subsequently transferred to this Court. See Compl. Ex. 7, ECF No. 1-8; DirecTV, LLC v. Taylor, et al., Civ. A. No. RDB-15-01760. DirecTV alleged that the Underlying Action Defendants “fraudulently obtain[ed], and assist[ed] others in obtaining DIRECTV’s satellite television programming and distribut[ed] that programming over unauthorized cable television systems.” Underlying Action Amended Compl. ¶ 1. Specifically, DirecTV alleged that ECC, through Sky Cable, set up private cable systems to deliver DirecTV Satellite Master Antenna Television (“SMATV”) to more units in Taylor Village and Waverly Gardens than set forth in the contracts. Id. ¶¶ 58, 63, 72. ECC was also alleged to have created multiple dwelling unit (“MDU”)[6] accounts with DirecTV for both properties, but distributed the programming to occupants and residents outside of the scope of the agreements. Id. ¶¶ 60, 64. In so doing, ECC allegedly used wiring to traverse public rights of way. Id. ¶ 75.

         DirecTV asserted six claims against ECC and Dr. Taylor. In Count I, DirecTV alleged that the Underlying Action Defendants violated 47 U.S.C. § 605(a)[7] by (a) “creating and assisting in creating DIRECTV MDU and SMATV accounts with false information and for improper purposes[;]” (2) “installing and maintaining DIRECTV receiving equipment at locations or facilities not authorized by DIRECTV[;]” (3) “re-broadcasting and retransmitting DIRECTV programming to unauthorized locations[;]” and (4) “distributing and selling DIRECTV programming in a manner contrary to DIRECTV policy and federal law[.]” Id. ¶ 89. Count II, asserting a violation of 18 U.S.C. § 2511(1)(a), [8] levied similar allegations to those of Count I. Id. ¶ 94. In Count III, DirecTV alleged that ECC and Dr. Taylor (Sky Cable and its managing member, Robert Saylor) committed fraud by falsely representing material information upon which DirecTV relied “in authorizing the SMATV and MDU accounts, ” activating the equipment, and supplying its television programming. Id. ¶¶ 100-103. ECC and Dr. Taylor were allegedly unjustly enriched by their purported wrongful conduct (Count IV). Id. ¶¶ 107-109. Finally, DirecTV asserts that ECC and Dr. Taylor conspired with Sky Cable and Robert Saylor to defraud DirecTV in this manner, in violation of the common law and Virginia Code §§ 18.2-499, 18.2-500 (Counts V & VI). Id. ¶¶ 111-17. DirecTV sought, inter alia, compensatory damages for any injuries suffered.

         ECC notified Axis of the Underlying Action on May 28, 2015, requesting coverage under the applicable Policy. Compl. Ex. 6, ECF No. 1-7. On July 9, 2015, AXIS denied coverage on the grounds that the Underlying Action arose from ECC’s alleged intentional unauthorized use of DirecTV’s programming. Compl. Ex. 7, 2-3, ECF No. 1-8. ECC responded to dispute this conclusion, offering documentation to rebut the allegations of unauthorized access, intentional or otherwise. Compl. Ex. 8, 1-8, ECF No. 1-9.

         After Axis refused to change its original determination, ECC and Dr. Taylor filed the subject action in this Court. See generally Compl. Plaintiffs seek a declaratory judgment on the related issues of Axis’s duties to defend and indemnify the Plaintiffs in the Underlying Action. Id. ¶ 1. During the pendency of this action, DirecTV and the Plaintiffs reached a settlement agreement in the Underlying Action. Mem. in Support of Pls.’s Mot. for Partial Summ. J. at 16. Axis did not participate in the settlement. Id. This Court dismissed the Underlying Action on November 9, 2015. DirecTV, LLC v. Taylor, et al., Civ. A. No. RDB-15-01760, ECF No. 96. ECC and Dr. Taylor seek Partial Summary Judgment on the duty to defend of Axis, which contends that this action should be dismissed in its entirety. Axis contends that ECC’s alleged intentional unauthorized use of data precludes a duty to defend and is within the exclusions of the liability policies issued.

         STANDARD OF REVIEW

         The resolution of the pending Motions requires this Court to confront only legal, and not factual, issues. As such, this Court will examine the parties’ respective arguments for or against coverage through the lens of Rule 56 of the Federal Rules of Civil Procedure, and not Rule 12(b)(6).

         Rule 56 of the Federal Rules of Civil Procedure provides that a court “shall grant summary judgment if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” Fed.R.Civ.P. 56(c). A material fact is one that “might affect the outcome of the suit under the governing law.” Libertarian Party of Va. v. Judd, 718 F.3d 308, 313 (4th Cir. 2013) (quoting Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986)). A genuine issue over a material fact exists “if the evidence is such that a reasonable jury could return a verdict for the nonmoving party.” Anderson, 477 U.S. at 248. When considering a motion for summary judgment, a judge’s function is limited to determining whether sufficient evidence exists on a claimed factual dispute to warrant submission of the matter to a jury for resolution at trial. Id. at 249. In undertaking this inquiry, this Court must consider the facts and all reasonable inferences in the light most favorable to the nonmoving party. Libertarian Party of Va., 718 F.3d at 312; see also Scott v. Harris, 550 U.S. 372, 378 (2007).

         If both parties have filed motions for summary judgment, then this Court “must consider each motion separately on its own merits to determine whether either of the parties deserves judgment as a matter of law.” Bacon v. City of Richmond, 475 F.3d 633, 637-38 (4th Cir. 2007) (internal quotation marks omitted). Similarly, this separate analysis must apply to the competing Motion for Partial Summary Judgment and the Motion to Dismiss this case. Regardless, this Court “must not weigh evidence or make credibility determinations.” Foster v. University of Md.-Eastern Shore, 787 F.3d 243, 248 (4th Cir. 2015) (citing Mercantile Peninsula Bank v. French, 499 F.3d 345, 352 (4th Cir. 2007)); see also Jacobs v. N.C. Administrative Office of the Courts, 780 F.3d 562, 569 (4th Cir. 2015) (explaining that the trial court may not make credibility determinations at the summary judgment stage). However, this Court must also abide by its affirmative obligation to prevent factually unsupported claims and defenses from going to trial. Drewitt v. Pratt, 999 F.2d 774, 778-79 (4th Cir. 1993). If the evidence presented by the nonmoving party is merely colorable, or is not significantly probative, summary judgment must be granted. Anderson, 477 U.S. at 249-50.

         ANALYSIS

         As noted supra, Axis refused to defend ECC in the Underlying Action due to ECC’s alleged intentional unauthorized use of DirecTV’s programming. In Maryland, the duty of an insurer to defend the insured is “determined by the allegations in the tort actions.” Brohawn v. Transamerica Ins. Co., 347 A.2d 842, 850 (Md. 1975). If the underlying claims are clearly covered by the insurance policy, then the insurer is obligated to defend the insured. Id. Yet, under the “potentiality rule, ” the insurer has a duty to defend the insured “[e]ven if the [underlying] plaintiff does not allege facts which clearly bring the claim within or without the policy coverage.” Id. (internal citations omitted). The “potentiality rule” thus broadens the insurer’s duty to defend beyond the scope of the duty to indemnify. Id. As a result, the allegations in the underlying complaint may trigger the duty to defend where it is unclear whether the insurer is ultimately obligated to indemnify the insured. Id.; see also St. Paul Fire & Mar. Ins. v. Pryseki, 438 A.2d 282, 285 (Md. 1981). Where the duty to defend is contested, an insurer may not look outside the underlying pleadings to deny its obligations. Aetna Cas. & Sur. Co. v. Cochran, 651 A.2d 859, 863 (Md. 1995). An insured, however, may use extrinsic evidence to establish the potentiality of coverage. Id. at 866; see also Walk v. Hartford Cas. Ins. Co., 852 A.2d 98, 110 (Md. 2004) (“[p]otentiality of coverage may be shown through the use of extrinsic evidence so long as the insured shows that there is a reasonable potential that the issue triggering coverage will be generated at trial.”).

         The Policies at issue in the present action provide coverage to ECC for certain forms of media liability.[9]See Compl. Ex. 3 at 2-3. Specifically, under Section I.A (“Media ...


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