October 22, 1996
Plaintiff DecisionOne Corporation ("DecisionOne"), successor in interest to Bell Atlantic Business Systems Services, Inc. ("Bell Atlantic"), instituted this diversity action against its insurer, ITT Hartford Insurance Group ("Hartford"). DecisionOne seeks to recover some $ 3,000,000 in costs Bell Atlantic incurred in defending itself on a counterclaim in Bell Atlantic Business Systems Services, Inc. v. Storage Technology Corporation filed in the United States District Court for the Northern District of California. DecisionOne is also seeking punitive damages, attorney's fees, interest and costs pursuant to 42 Pa. Cons. Stat. Ann. § 8371, based upon Hartford's alleged bad faith in refusing to defend the action. Now before the court is Hartford's motion for judgment on the pleadings under Rule 12(c) of the Federal Rules of Civil Procedure on the ground that it had no duty to defend Bell Atlantic. According to Hartford, the claims against Bell Atlantic were not covered under the policy.
A judgment on the pleadings is only proper if "no set of facts could be adduced to support the plaintiff's claim for relief." Bryson v. Brand Insulations, Inc., 621 F.2d 556, 559 (3d Cir. 1980). Bell Atlantic's allegations must be assumed true and all reasonable inferences drawn in its favor. Id.
The material facts taken from the pleadings are not in genuine dispute. On January 21, 1994 Bell Atlantic filed suit against Storage Technology Corporation ("STK"), a company which designed and manufactured information storage and retrieval subsystems that operated inside computers. STK also "writes original computer software and microcode that is used to operate and service STK equipment." STK Counterclaim P 4. Bell Atlantic performed computer maintenance for STK. In the lawsuit, Bell Atlantic pleaded that STK violated the federal antitrust laws.
STK counterclaimed. STK alleged that in the course of servicing STK computer equipment, Bell Atlantic infringed STK's microcode and maintenance software copyrights. STK claimed that whenever Bell installed or maintained an STK automated cartridge system, it would load or "boot" the STK copyrighted microcode, creating a new copy and infringing its copyright. At times, STK also alleged, Bell Atlantic would copy STK software directly onto another floppy disk belonging to Bell Atlantic. STK maintained that Bell Atlantic was pursuing a campaign to misappropriate their trade secrets and "other valuable technical and business information." STK Counterclaim P 17. STK listed these trade secrets to include, without limitation,
functional microcode and maintenance software; design and performance specifications, tolerances, gaps, calibrations, and torque wrench settings for the installation relocation, and service of library equipment; procedures, processes, flow charts, logic and block diagrams, instructions, techniques, and check lists for the efficient installation, relocation, and service of library equipment; training processes, procedures, instructions, techniques, and check lists for the efficient installation, relocation, and service of STK library equipment; all manuals, training materials, and technical documentation for library equipment, ...; installation and maintenance tools and the design and specifications for such tools; and, installation and diagnostic test procedures and parameters.
STK Counterclaim P 19. According to the counterclaim, Bell Atlantic raided STK's customer service engineers for the purpose of acquiring these trade secrets and other valuable information. It accused Bell Atlantic of inducing customers and former STK employees to break their confidentiality agreements and share STK secrets. STK alleged that Bell Atlantic would then disclose these trade secrets to engineers it was training. STK also stated that Bell Atlantic misrepresented to its customers that it made its own maintenance software, which induced some of STK's former customers to switch to Bell Atlantic. The misrepresentation to customers involved "the source, nature, characteristics, and quality of its ability to maintain STK library equipment," and included representations that Bell Atlantic could service STK equipment as well as STK could do so. STK Counterclaim P 26.
After these general allegations, STK listed nine specific counterclaims: (1) copyright infringement; (2) contributory copyright infringement for aiding and abetting others to infringe STK's copyrights; (3) misappropriation of trade secrets; (4) unfair competition; (5) Lanham Act violations; (6) Colorado Consumer Protection Act violations; (7) intentional interference with customer contracts; (8) intentional interference with employee confidentiality contracts; and (9) intentional interference with licensing agreement contracts. These nine counts contained additional factual averments.
At the time when this counterclaim was filed, Bell Atlantic Corporation, the parent corporation of Bell Atlantic, possessed a commercial general liability ("CGL") policy issued by Hartford. Bell Atlantic claimed coverage under this policy, as a subsidiary of Bell Atlantic Corporation. The policy was in effect from April 1, 1993 to April 1, 1994. After Bell Atlantic tendered the counterclaim to Hartford, the latter denied coverage. As a result, Bell Atlantic defended itself in the action with STK. That case ultimately settled and this lawsuit followed.
Under Pennsylvania law, which all parties agree is applicable, an insurer owes a duty to defend its insured in a suit brought by a third party so long as it appears on the face of that party's pleading that the allegations "may potentially come within the coverage of the policy." Heffernan & Company, 418 Pa. Super. 326, 614 A.2d 295, 298 (Pa. Super. 1992); accord C.H. Heist Caribe Corp. v. American Home Assurance Co., 640 F.2d 479, 483 (3d Cir. 1981). If a single claim in a multi-claim lawsuit has potential for coverage, the insurer must defend all claims until it is obvious that no possibility of recovery exists as to claims within the policy provisions. American Contract Bridge League v. Nationwide Mut. Fire Ins. Co., 752 F.2d 71, 75 (3d Cir. 1985); Heffernan, 614 A.2d at 298. All ambiguities must be construed in favor of the insured, although a court should not strain to create any such ambiguity. Pacific Indem. Co. v. Linn, 766 F.2d 754, 760-61 (3d Cir. 1985).
Hartford first states that all of the claims arise out of "programming" and thus are precluded by the policy's programming exclusion which reads:
This insurance does not apply to "bodily injury," "property damage," "personal injury" or "advertising injury" arising out of or which would have not have occurred but for "programming." "Programming" means any of the following: 1. Statements or instructions, regardless of the form or method of their embodiment, that are used or intended to be used directly or indirectly in or with a computer or a computer system; or 2. Any and all information that is used or intended to be used in connection with or to explain such statements or instructions or their operation, such as specifications, flow diagrams or manuals.