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PhotoMedex, Inc. v. St. Paul Fire & Marine Ins. Co.

July 28, 2009

PHOTOMEDEX, INC., PLAINTIFF,
v.
ST. PAUL FIRE & MARINE INS. CO., DEFENDANT.



The opinion of the court was delivered by: Yohn, J.

Memorandum

PhotoMedex, Inc., an insured, brings this action alleging breach of contract and asking for a declaratory judgment under 28 U.S.C. § 2201 against its insurer St. Paul Fire & Marine Insurance Co. ("St. Paul"). St. Paul filed a motion to dismiss or, alternatively, to stay both counts of PhotoMedex's complaint because St. Paul previously filed a declaratory judgment complaint in a California state court that raises an issue identical to the issue raised in count I of PhotoMedex's compalint.*fn1 In response, PhotoMedex filed a motion for partial summary judgment pursuant to Federal Rule of Civil Procedure 56, arguing for a declaratory judgment in PhotoMedex's favor based on the court's prior decision in PhotoMedex, Inc. v. St. Paul Fire & Marine Ins. Co. (PhotoMedex I), No. 07-0025, 2008 WL 324025 (E.D. Pa. Mar. 20, 2008). St. Paul, in turn, responded and asked the court to transfer this action to the Southern District of California. For the reasons that follow, I will deny St. Paul's motion to dismiss or stay PhotoMedex's declaratory judgment claim and deny its request to transfer, but I will grant the motion to stay PhotoMedex's breach of contract claim. I will also grant PhotoMedex's motion for partial summary judgment.

I. Facts and Procedural Background

The court is familiar with the parties to this action and the issues raised by the pending motions as both parties and many of the same legal issues were before the court in PhotoMedex I. As a result, the relevant background facts are largely undisputed. St. Paul provides casualty insurance. St. Paul issued PhotoMedex two insurance policies, a primary liability policy and an umbrella policy, both under the policy number TE06401644 (collectively, the "insurance policy"). The insurance policy covered the period of April 15, 2003 through April 15, 2004. Relevant to this case, the liability policy provided commercial general liability coverage to PhotoMedex in a section labeled "Technology Medical and Biotechnology Commercial General Liability." (Policy, Tech. Med. & Biotech Commercial Gen. Liab. Prot.-Claims-Made ("CGL") 4.) Under the CGL's "personal injury liability" coverage, St. Paul agreed to "pay amounts any protected person is legally required to pay as damages for covered personal injury that: results from your business activities; and is caused by a personal injury offense committed while this agreement is in effect." (Id.) "Personal injury offenses" included "[m]alicious prosecution." (Id.)*fn2 The umbrella policy applies after the policy limits in the liability policy are exhausted and also defines "personal injury offenses" to include "[m]alicious prosecution." (Umbrella Policy, Tech. Umbrella Excess Liab. Prot.-Claims-Made 4.)

On November 4, 2004, PhotoMedex was named a defendant in a malicious prosecution lawsuit ("RA Medical I") filed by Dean Stewart Irwin, a former employee, and RA Medical Systems, Inc., Irwin's new employer.*fn3 PhotoMedex turned to St. Paul for defense and indemnity in the RA Medical I matter pursuant to PhotoMedex's understanding of the terms of the insurance policy. Although St. Paul agreed to provide a defense, it did so under a full reservation of its rights. St. Paul also notified PhotoMedex that, under California law, it was not required to indemnify PhotoMedex with regard to the malicious prosecution action and that attorney fee rates were capped by California statute at the rate of $175 for counsel and $100 for paralegals. See Cal. Civ. Code § 2860(c). PhotoMedex disputed both issues.

In early 2007, the parties in RA Medical I discussed settlement. PhotoMedex notified St. Paul of the settlement discussions and sought St. Paul's participation. Eventually, the parties agreed to settle the malicious prosecution action for $1,200,000 in exchange for dismissal of all claims with prejudice. St. Paul consented to the settlement under another reservation of its rights. St. Paul later sought to avoid payment of a large percentage of the settlement figure. In response, PhotoMedex filed a complaint against St. Paul in the Eastern District of Pennsylvania on January 3, 2007, seeking a declaration as to the scope of coverage St. Paul was obligated to provide and alleging St. Paul materially breached the insurance policy. Later, the parties filed cross-motions for summary judgment raising two issues: (1) whether St. Paul had a duty to indemnify PhotoMedex for the malicious prosecution action under the personal liability section of the insurance policy; and (2) whether St. Paul had a duty to pay attorney fee rates greater than the amount it actually pays to attorneys in the ordinary course of business in the defense of similar actions. At the heart of both issues was whether Pennsylvania or California substantive law governed the insurance contract.

On February 6, 2008, following a choice of law analysis under Hammersmith v. TIG Ins. Co., 480 F.3d 220 (3d Cir. 2007), I concluded that: (1) Pennsylvania's substantive law governed the interpretation of the insurance policy; (2) St. Paul was obligated to indemnify PhotoMedex in the malicious prosecution action; and (3) Pennsylvania's "reasonable fee" standard controlled the attorney fee rates that St. Paul must pay under the insurance policy. Because St. Paul raised genuine issues of material fact as to whether it was in material breach of the insurance policy and as to whether the attorney fees PhotoMedex sought to recover from St. Paul were reasonable under Pennsylvania law, I denied those aspects of PhotoMedex's motion.

Prior to trial in PhotoMedex I, the parties settled their dispute and entered into a settlement agreement (the "Settlement Agreement") on March 28, 2008. Under the terms of the Settlement Agreement, St. Paul agreed to pay to PhotoMedex a portion of the settlement figure and attorney fees from RA Medical I. In exchange, PhotoMedex agreed to release several claims against St. Paul, including claims "related in any way to" the "[u]nderlying action," (Def.'s Mot. Dis. Ex. B, Settlement Agreement, ¶ 2.2.), which is defined as "Dean Stewart Irwin and RA Medical Systems, Inc. v. PhotoMedex, Inc., State of California, San Diego Superior Court Case No. GIC 839208," (id. at Recitals ¶ D). In addition, the Settlement Agreement includes both choice of law and choice of venue provisions, which provide that the:

Settlement Agreement shall be construed in accordance with the laws of the State of California. In the event [the] Settlement Agreement must be enforced or interpreted by an arbitrator or a court of law, [St. Paul and PhotoMedex] agree that the action shall take place in the State of California. (Id. ¶ 3.8.) In the Settlement Agreement, St. Paul did not preserve its right to appeal my decision that Pennsylvania law applied to the interpretation of the insurance policy and that, applying Pennsylvania law, the insurance policy required that St. Paul provide coverage for the malicious prosecution claims in RA Medical I.

On October 29, 2008, Irwin and RA Medical Systems, Inc. filed another malicious prosecution action against PhotoMedex in California state court ("RA Medical II").*fn4 (See Pl.'s Mot. Summ. J. Ex. E). PhotoMedex, through its broker, tendered the RA Medical II claim to St. Paul on or about November 21, 2008. St. Paul responded by letter on January 27, 2009. (See Compl. Ex. E, Letter from Mark D. Peterson to Davis Woodward.) In the letter, St. Paul asserted that based on the Settlement Agreement it was not required to provide coverage for RA Medical II because RA Medical II fell within the set of claims that PhotoMedex released in the Settlement Agreement. (Id. at 2-4.) Despite this assertion, St. Paul concluded the letter by assuring PhotoMedex that the letter did "not constitute a denial of the tender" and by seeking PhotoMedex's "point of view before St. Paul decide[d] how to proceed." (Id. at 5.) On January 29, 2009, just two days after sending this letter to PhotoMedex, St. Paul filed a state court complaint in California seeking the following declaratory relief: (1) that, under the terms of the Settlement Agreement, "St. Paul is not obligated to defend or to indemnify PhotoMedex in connection with the newly tendered second malicious prosecution action"; and (2) that the scope and performance of the insurance policy are issues governed by California law, and, under California law, St. Paul has "no duty to indemnify PhotoMedex for liability stemming from the malicious prosecution action." (Def.'s Mot. Dis. Ex. A at 10-11.) This second issue raised in St. Paul's California state court complaint is the identical choice of law issue I addressed in PhotoMedex I.

St. Paul did not immediately serve, or otherwise notify, PhotoMedex of the state court complaint. PhotoMedex did, however, independently learn of St. Paul's state court filing before being served and, in response, filed this action on March 3, 2009. On March 6, 2009, Photomedex removed the still-unserved California state action to the United States District Court for the Southern District of California (the "California Action"). St. Paul finally served PhotoMedex with the California state court complaint on March 18, 2009. On March 19, 2009, in another letter to PhotoMedex, St. Paul stated that it would defend PhotoMedex in RA Medical II under a reservation of St. Paul's rights. (See Pl.'s Mot. Summ. J. Ex. H at 2.)

On March 24, 2009, St. Paul filed a motion to dismiss or, in the alternative, to stay this action. On April 7, 2009, PhotoMedex filed a motion for partial summary judgment pursuant to Federal Rule of Civil Procedure 56 as to its declaratory judgment claim. In its response, St. Paul asked the court to transfer this action to the Southern District of California. The parties have fully briefed each motion.

II. St. Paul's Motion to Dismiss or Stay

A. Count I: Declaratory Judgment

The Declaratory Judgment Act ("DJA") provides that: "[i]n a case of actual controversy within its jurisdiction,... any court of the United States, upon the filing of an appropriate pleading, may declare the rights and other legal relations of any interested party seeking such declaration...." 28 U.S.C. § 2201(a) (emphasis added). Despite the "virtually unflagging obligation of the federal courts to exercise the jurisdiction given them," Colo. River Water Conservation Dist. v. United States, 424 U.S. 800, 817 (1976), the discretionary language of the DJA means federal courts have "no compulsion to exercise [the] jurisdiction" the statute grants, Brillhart v. Excess Ins. Co. of Am., 316 U.S. 491, 494 (1942). In other words, the statute "confers a discretion on the courts rather than an absolute right upon the litigant." Wilton v. Seven Falls Co., 515 U.S. 277, 287 (1995) (citations and internal quotations omitted). Consequently, "[i]n the declaratory judgment context, the normal principle that federal courts should adjudicate claims within their jurisdiction yields to considerations of practicality and wise judicial administration." Id. at 288.

St. Paul argues that the first filed rule precludes the court from exercising jurisdiction over PhotoMedex's declaratory judgment claim. Additionally, St. Paul contends that because the California action involves the threshold issue of whether the Settlement Agreement precludes coverage for RA Medical II, this court should decline to address the second (and ...


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