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Liberty Corporate Capital Ltd. v. Security Safe Outlet, Inc.

United States District Court, E.D. Kentucky, Central Division

March 27, 2013

LIBERTY CORPORATE CAPITAL LIMITED, PLAINTIFF
v.
SECURITY SAFE OUTLET, INC., et al., DEFENDANTS

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[Copyrighted Material Omitted]

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For Liberty Corporate Capital Limited, Plaintiff: B. Scott Jones, Justin Nathaniel Rost, LEAD ATTORNEY, Danielle J. Ravencraft, Reminger Co., L.P.A. - LOUISVILLE, Louisville, KY; Gregory L. Mast, Kylie Holladay, Paul L. Fields, Jr., LEAD ATTORNEYS, PRO HAC VICE, Fields Howell, Atlanta, GA.

For Security Safe Outlet, Inc., doing business as Bud's Gun Shop, Matthew Denninghoff, Defendants: Carroll M. Redford, III, Don A. Pisacano, LEAD ATTORNEYS, Miller, Griffin & Marks, P.S.C., Lexington, KY.

For Budsgunshop.com, LLC, Marion E. Wells, Jr., Rex McClanahan, Defendants: William L. Montague, Jr., Montague Law PLLC, Lexington, KY.

OPINION

Karl S. Forester, United States Senior Judge.

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OPINION & ORDER

This matter is before the court on the motion of Plaintiff, Liberty Corporate Capital Limited (" Liberty" ), for summary judgment [DE #37]. The motion having been fully briefed, this matter is ripe for review. Although Liberty has requested oral argument on its motion, this request will be denied, as the Court sees no need for oral argument.

I. FACTUAL BACKGROUND

This case stems from an underlying case filed by Budsgunshop.com, LLC (" BGS" ) against Defendants Security Safe Outlet, Inc. d/b/a Bud's Gun Shop (" SSO" ) and Matthew Denninghoff, in which BGS alleges that SSO and Denninghoff misappropriated BGS's trade secrets by improperly accessing BGS's customer database and obtaining and using confidential customer information, including customer email addresses, for their commercial benefit [ Budsgunshop.com, LLC v. Security Safe Outlet, Inc., et al., Case # 5:10-cv-390, pending in the United States District Court, Eastern District of Kentucky]. Pursuant to insurance policies issued by Liberty to SSO, SSO seeks a defense and indemnity for itself and Denninghoff with respect to the claims alleged against them by BGS. Liberty has filed the instant declaratory judgment action, seeking a declaratory judgment that, under the policies at issue, Liberty is not obligated or required to indemnify and defend SSO or Denninghoff against the claims made against them by BGS in the underlying litigation and, further, that Liberty has no other obligation or duty to either BGS, Marion E. Wells, Jr., Rex McClanahan, or any other party, arising out of the claims made in the underlying litigation. Liberty has now filed a motion for summary judgment in its declaratory judgment action.

A. The Underlying Lawsuit

In order to consider Liberty's motion for summary judgment, a brief explanation of the claims made by BGS in the underlying litigation is required. According to BGS's second amended complaint, SSO was formed in June 2000 by Wells, with Wells as the sole shareholder [5:10-cv-390, DE #73].

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Under the name " Bud's Gun Shop," SSO operated a retail store in Paris, Kentucky, selling security safes, firearms and related accessories. Around February 2007, Wells and Earley M. Johnson, II entered into a Stock Purchase Agreement whereby Johnson purchased a minority interest in SSO. In May 2007, Wells and McClanahan formed BGS for the purpose of selling firearms and related goods over the internet.

In April 2009, pursuant to a Stock Redemption Agreement entered into by Wells and Johnson, Johnson gained control of SSO through a buy-out of Wells' interest in the company. As part of that transaction, SSO transferred its federal and state trademark rights in the tradename " Bud's Gun Shop," as well as variations of that name, to Wells. Pursuant to a Tradename License Agreement (the " Tradename License Agreement" ), Wells then licensed back those rights on a limited basis to SSO to be used solely for a retail firearms store physically located in Paris, Kentucky, and/or a shooting or firing range business. According to BGS, because the parties anticipated that BGS would maintain the exclusive use of these rights in connection with its online retail business, these rights were not licensed to SSO for use in connection with the online sale of firearms. Wells has since assigned this License to BGS, along with the unregistered " Bud's Gun Shop" trademark. Section 2 of the License provides that SSO's use of the tradename shall discontinue if, over any one calendar month period during the term of the License, SSO's over-the-counter sales of firearms from its retail store comprise less than 85% of SSO's total sales of firearms for that month. The License further provides that, should SSO breach or fail to comply with any of the terms of Section 2 of the License, the License shall immediately terminate and SSO shall cease using the tradename. BGS alleges that SSO's over-the-counter sales of firearms from its retail store have comprised less than 85% of SSO's total sales of firearms in one or more months since the License was executed, thereby causing a breach and immediate termination of the License. BGS further alleges that SSO has knowingly continued to use the " Bud's Gun Shop" mark in a variety of ways to promote its business with its suppliers and the consuming public, notwithstanding the termination of the license.

After the April 2009 transaction, BGS and SSO continued to maintain a business relationship, pursuant to which BGS would use SSO as one of its suppliers to fulfill online orders. In order to obtain customer and order information necessary to fill specific orders, SSO was provided with limited access and limited authorization to BGS's computer network system. SSO disputes whether its access and authorization to BGS's computer network system was as " limited" as alleged by BGS.

Prior to January 2010, Denninghoff was an employee of BGS, working on information technology matters and in the coding, design, and implementation of BGS's website. In January 2010, Denninghoff quit his job with BGS and began working with SSO. SSO's Vice-President is Denninghoff's sister, Jennifer Arnett. BGS alleges that, before quitting his job at BGS, Denninghoff erased the entire contents of the hard drive of the computer that BGS had provided to him and informed BGS that he would return only the hardware and software initially provided by BGS. Despite hiring a third party computer forensics expert to attempt to retrieve the deleted contents of Denninghoff's work computer, BGS alleges that it has been unable to recover the contents of the hard drive. BGS also asked Denninghoff to provide the source code and other work product he created while a BGS employee. However, BGS alleges that Denninghoff indicated that the work product belonged

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to him, his source code was stored on his own personal server and he provided only a marginally useful computer code to BGS. BGS alleges that it was required to hire another third party contractor to reconstruct the incomplete computer code into a workable program.

In April 2010, BGS learned that SSO was launching an online presence for the purpose of selling firearms and related goods over the internet, thereby placing the two companies in direct competition. Upon learning this information, BGS terminated all access by SSO to BGS's computer network system. However, beginning in September 2010, SSO began sending mass emails to BGS's customers regarding its new competing firearms business. BGS alleges that, in order to do so, SSO and Denninghoff improperly obtained BGS's customer's email addresses from BGS's customer database. Specifically, BGS alleges that it has discovered that, despite erasing the contents of his work computer, Denninghoff secretly kept much of the data from his work computer, as well as numerous backup copies of BGS's customer database from various backup dates, in his possession. According to BGS, SSO and Denninghoff used this information to obtain BGS's customer's email addressees. [1]

Based on these allegations, BGS alleges the following counts: (1) Count I - misappropriation of trade secrets in violation of K.R.S. § § 365.880, et seq. ; (2) Count II - violation of the Lanham Act, 15 U.S.C. § 1125; (3) Count III - breach of contract - Tradename License; (4) Count IV - breach of fiduciary duty (against Denninghoff); (5) Count V - aiding and abetting breach of fiduciary duty (against SSO); (6) Count VI - breach of contract - non-compete agreement (against Denninghoff); (7) Count VII - tortious interference with contract (against SSO); (8) Count VIII - violation of 18 U.S.C. § 1030(a)(2)(the " Computer Fraud and Abuse Act" ); (9) Count IX - violation of 18 U.S.C. § 1030(a)(4); (10) Count X - violation of K.R.S. § 434.845 (unlawful access of computer); and (11) Count XI - violation of K.R.S. § 434.855 (misuse of computer information) [5:10-cv-390, DE #73]. The underlying litigation between BGS, SSO and others is currently pending in this Court.

B. Liberty's Declaratory Judgment Action

From approximately 2008 through 2012, SSO purchased a series of commercial general liability coverage policies from Liberty. [2] Each of these policies provided certain commercial general liability coverage to SSO, pursuant to specified terms, conditions and exclusions. On October 21, 2011, SSO made a claim for coverage under one or more of these policies seeking a defense and indemnity for both SSO and Denninghoff with regard to the claims made against them by BGS in the underlying lawsuit. [3] On June 1, 2012, Liberty filed its

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complaint in the instant case, seeking a declaratory judgment that no coverage exists under the Policy for SSO's insurance claim. Liberty has now filed a motion for summary judgment in its declaratory judgment action.

II. STANDARD OF REVIEW

Under Rule 56(a) of the Federal Rules of Civil Procedure, summary judgment is proper " if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." See Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). In reviewing a motion for summary judgment, " this Court must determine whether 'the evidence 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.'" Patton v. Bearden, 8 F.3d 343, 346 (6th Cir. 1993) (quoting Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 251-52, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986)). The evidence, all facts, and any inferences that may permissibly be drawn from the facts must be viewed in the light most favorable to the nonmoving party. Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 587, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986).

Once the moving party shows that there is an absence of evidence to support the nonmoving party's case, the nonmoving party must present " significant probative evidence" to demonstrate that " there is [more than] some metaphysical doubt as to the material facts." Moore v. Phillip Morris Companies, Inc., 8 F.3d 335, 340 (6th Cir. 1993). Conclusory allegations are not enough to allow a nonmoving party to withstand a motion for summary judgment. Id. at 343. " The mere existence of a scintilla of evidence in support of the [nonmoving party's] position will be insufficient; there must be evidence on which the jury could reasonably find for the [nonmoving party]." Anderson v. Liberty Lobby, Inc., 477 U.S. at 252. " If the evidence is merely colorable, or is not significantly probative, summary judgment may be granted." Id. at 249-50 (citations omitted).

III. ANALYSIS

A. Applicable Law

In exercising diversity jurisdiction in this case, the court must apply state law in accordance with controlling decisions of the highest state court. Bailey Farms, Inc. v. NOR-AM Chem. Co., 27 F.3d 188, 191 (6th Cir. 1994). Under Kentucky law, interpretation and construction of an insurance contract is a matter of law for the court. Kemper v. Heaven Hill Distilleries, 82 S.W.3d 869, 871 (Ky. 2002). According to the Kentucky Supreme Court:

[A]s to the manner of construction of insurance policies, Kentucky law is crystal clear that exclusions are to be narrowly interpreted and all questions resolved in favor of the insured. Exceptions and exclusions are to be strictly construed so as to render the insurance effective. Any doubt as to the coverage or terms of a policy should be resolved in favor of the insured. And since the policy is drafted in all details

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by the insurance company, it must be held strictly accountable for the language used.

Eyler v. Nationwide Mut. Fire Ins. Co., 824 S.W.2d 855, 859-60 (Ky. 1992)(citations omitted). However, such canons are applicable only " when the language of the insurance contract is ambiguous or self-contradictory. Otherwise, the contract is to be read according to its plain meaning, its true character and purpose, and the intent of the policies." Peoples Bank & Trust Co. v. Aetna Casualty & Surety Co., 113 F.3d 629, 636 (6th Cir. 1997). Indeed, as noted by the Kentucky Supreme Court:

The rule of strict construction against an insurance company certainly does not mean that every doubt must be resolved against it and does not interfere with the rule that the policy must receive a reasonable interpretation consistent with the parties' object and intent or narrowly expressed in the plain meaning and/or language of the contract. Neither should a nonexistent ambiguity be utilized to resolve a policy against the company. We consider that courts should not rewrite an insurance contract to enlarge the risk to the insurer. U.S. Fidelity & Guar. Co. v. Star Fire Coals, Inc., 856 F.2d 31 (6th Cir.1988).

St. Paul Fire & Marine Ins. Co. v. Powell-Walton-Milward, Inc., 870 S.W.2d 223, 226-227 (Ky. 1994). Thus, " [w]hen the terms of an insurance contract are unambiguous and not unreasonable, they will be enforced." Kentucky Ass'n of Counties All Lines Funds Trust v. McClendon, 157 S.W.3d 626, 630 (Ky. 2005).

As noted above, exceptions and exclusions in insurance policies are to be narrowly construed to effectuate insurance coverage. However, this strict construction should not overcome " plain clear language resulting in a strained or forced construction." Kemper, 82 S.W.3d at 873-874 (quoting Diamaco, Inc. v. Aetna Casualty & Surety Co., 97 Wash.App. 335, 983 P.2d 707 (1999)). " Reasonable conditions, restrictions and limitations on insurance coverage are not deemed per se to be contrary to public policy." Snow v. West American Ins. Co. 161 S.W.3d 338, 341 (Ky. App. 2004).

In Kentucky, an insurer's duty to defend is broader than the duty to indemnify. James Graham Brown Foundation, Inc. v. St. Paul Fire & Marine Ins., 814 S.W.2d 273, 280 (Ky. 1991). [4] " Under Kentucky law, a court should determine at the outset of litigation whether an insurance company has a duty to defend its insured by comparing the allegations in the underlying complaint with the terms of the insurance policy." Westfield Ins. Co. v. Tech Dry, Inc., 336 F.3d 503, 507 (6th Cir. 2003). See also Lenning v. Commercial Union Ins. Co., 260 F.3d 574, 581 (6th Cir. 2001). " An insurance company has a duty to defend its insured if the language of an underlying complaint against the insured brings the action within the scope of the insurance contract." Westfield Ins. Co., 336 F.3d at 507. See also Dibeneditto v. Medical Protective Co., 3 Fed.Appx. 483, 485 (6th Cir. 2001)(unpublished)(" Kentucky courts have made it clear that allegations in a complaint are not by themselves sufficient to trigger the duty to defend, but rather, the obligation to defend arises out of the language of the insurance contract." )(citing Thompson v. West American Ins. Co., 839 S.W.2d 579, 581 (Ky.Ct.App.1992))(other citations omitted)); James Graham Brown Foundation, Inc., 814 S.W.2d at 279-280 (Ky. 1991)(" The insurer has a duty to defend if there

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is any allegation which potentially, possibly or might come within the coverage of the policy. The insurance company must defend any suit in which the language of the complaint would bring it within the policy coverage regardless of the merit of the action." ) (citations omitted). Thus, the Court must closely examine both the language of BGS's ...


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