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9th Circuit Ruling Might Be End for Zip Code Coverage Suits

Law360 | December 21, 2015
By: Joshua A. Mooney

The United States Court of Appeals for the Ninth Circuit affirmed Big 5 Sporting Goods Corp., a case in which the trial court had held that variations of the statutory violation exclusion in general liability policies barred “personal and advertising injury” coverage for violation of California’s Song-Beverly Act. Big 5 Sporting Goods Corp. v. Zurich American Insurance Co., 957 F. Supp. 2d 1135 (C.D. Cal. 2013), aff’d, No. 13-6249, (9th Cir. Dec. 7, 2015). The Ninth Circuit held that the exclusion precluded the duty to defend even where an underlying action alleges common law violations of invasion of privacy.
In Big 5, the insured was sued in multiple underlying class action lawsuits alleging violation of the Song-Beverly Act, which prohibits a corporation that accepts credit cards in sales transactions from requesting that the cardholder provide “personal identification information,” including addresses and telephone numbers. Cal. Civ. Code §1747.08(a)-(b). The insured was accused of unlawfully collecting ZIP code information during credit card transactions in violation of the act. Big 5 Sporting Goods, 957 F. Supp. 2d at 1138. In 2011, the California Supreme Court had held that ZIP codes were included in proscribed “personal identification information.” Pineda v. Williams-Sonoma Stores Inc., 246 P.3d 613 (Cal. 2011).
The insured tendered its defense under general liability policies that defined “personal and advertising injury” as either injury arising out of “[o]ral or written publication, in any manner, of material that violates a person's right of privacy” or injury arising out of “[o]ral, written or electronic publication of material that violates a person’s right of privacy.” Big 5, 957 F. Supp. at 1140-41. The policies, however, also contained statutory violation exclusions. Some barred coverage for “personal and advertising injury” “arising directly or indirectly out of” any act or omission that violates or is alleged to violate:

Any federal, state or local statute, ordinance or regulation, other than the Telephone Consumer Protection Act, CAN–SPAM Act of 2003 or Fair Credit Reporting Act, that relates to, prohibits or limits the accessing, collection, recording, printing, dissemination, disposal, sending, transmitting, communicating or distribution of material or information. Id. at 1149.

The other policies barred “personal and advertising injury” coverage arising out of “the violation of a person’s right of privacy created by any state or federal act” and for “personal and advertising injury” “arising directly or indirectly out of” any act or omission that violates or is alleged to violate:

(3) Any statute, ordinance or regulation, other than TCPA or CAN–SPAM Act of 2003, that prohibits or limits the sending, transmitting, communicating or distribution of material or information ... Id. at 1150.

Some of the class actions alleged violation of the Song-Beverly Act only; however, others also alleged common law claims of invasion of privacy. Big 5, 957 F. Supp. at 1139. Big 5 contended that the statutory violations exclusions did not apply because the underlying allegations alleged common law claims that “were not based on any statute but are ingrained in California’s Constitution.” Id. at 1150. The trial court disagreed and held that the exclusions barred the duty to defend. The Ninth Circuit affirmed.
Perhaps the most significant component of the Ninth Circuit’s decision was that common law claims, which were not accounted for in the statutory violation exclusions, did not preclude application of the exclusions because the factual allegations did not assert actionable causes of action. Specifically, rejecting Big 5’s argument that the underlying actions implicated defense coverage because they alleged common law claims for the right of privacy separate and apart from any Song–Beverly Act violation, the Ninth Circuit concluded that “in garden variety ZIP Code cases like these, such extra Song–Beverly Act privacy claims simply do not exist.” Big 5. Holding that because “California does not recognize any common law or constitutional privacy causes of action for requesting, sending, transmitting, communicating, distributing or commercially using ZIP codes,” the court concluded that the only possible claim for recovery was for penalties, not damages, under the Song-Beverly Act. Id. at 45.
To support its conclusion the Ninth Circuit cited the legislative history of the Song-Beverly Act, which stated that then-existing law did not prohibit the collection of personal identification information during credit card transactions. Id. The court also relied on Fogelstrom v. Lamps Plus Inc., 195 Cal. App. 4th 986, 992 (2d Dist. 2011), in which the California Court of Appeal held that requesting ZIP codes during credit card transactions does not assert an actionable common law claim for invasion of privacy. The Fogelstrom court concluded that the action of “obtaining plaintiff’s address without his knowledge or permission and using it to mail him coupons and other advertisements ... is not an egregious breach of social norms [to support a claim invasion of privacy], but routine commercial behavior.” Id. at 992.
The Ninth Circuit also rejected Big 5’s argument that the invasion of privacy and negligence claims were merely frivolous, and thus could not be discounted for purposes of the duty to defend because an insurance carrier has the duty to defend both meritorious and frivolous claims. Instead, the Ninth Circuit distinguished frivolous claims from those that are not actionable or recognized under the law, explaining that the privacy claims relied upon by Big 5 did not merely lack merit, they did not exist:

Under settled California law, they [the privacy claims] are not even recognized as cognizable causes of action, a status one step below “unmeritorious.” Allowing Big 5’s fact pattern to rise to the level of a claim would require an insurance company to insure and defend against non-existent risks. Id. at 6.

This, the court would not force the insurers to do.
Paraphrasing Shakespeare, the court similarly dispensed with underlying negligence theories as mere “artful” pleading that could not circumvent an unambiguous policy exclusion:

Big 5’s negligence theory fares no better. Just as a rose by another name is still a rose, so a ZIP code case under any other label remains a ZIP code case. See Swain v. California Casualty Insurance Co., 99 Cal. App. 4th 1, 8-9 (2002) (“A general boilerplate pleading of ‘negligence’ adds nothing to a complaint otherwise devoid of facts giving rise to a potential for covered liability.”) As the district court recognized, the California Court of Appeal has discouraged the “artful drafting” of alleging superfluous negligence claims, saying to allow such a practice would inappropriately “erase exclusions in any policy.” Fire Insurance Exchange v. Jimenez, 184 Cal. App. 3d 437, 443 n.2 (1986). Id.

Like the Third Circuit three months earlier in OneBeacon America Insurance Co. v. Urban Outfitters Inc., No. 14-2976 (3d Cir. Sept. 15, 2015), a second United States Court of Appeals now has held that “personal and advertising injury” does not exist for underlying allegations of unlawful ZIP code collection. Is the window shut for coverage for ZIP code lawsuits? Maybe. Both appellate courts affirmed a trial court’s grant of summary judgment motions, but reached the determination that no duty to defend existed on different grounds. Whereas the Urban Outfitters court based its decision largely on the meaning of “privacy” and “publication” within the definition for “personal and advertising injury”; here, Big 5 concluded that a nonactionable cause of action is not merely a frivolous claim, but a nonexistent one incapable of implicating an insurer’s duties under a policy. The reasoning makes perfect sense, and now the Ninth Circuit has followed it.

For additional information on this matter, contact Josh Mooney ( | 215.864.6345).

This correspondence should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult a lawyer concerning your own situation and legal questions.
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