In a June 23, 2021 opinion (here), a Delaware Superior Court Judge held that a subsequent opt-out action is interrelated with the prior securities class action lawsuit; that the opt-out action claim is deemed made at the time of class action suit’s filing; and therefore that the D&O insurers whose policies were in force at the time the opt-out action was filed do not have coverage for the opt-out action. The court’s conclusion that an opt-out action is interrelated with the underlying class action lawsuit arguably is unremarkable, but, as discussed below, there are features of this dispute and of the court’s ruling that make the court’s decision noteworthy.
Background: The Underlying Litigation
As discussed here, First Solar was first sued in a securities class action lawsuit in March 2012 (The securities class action is known as the Smilotvits Action). The Smilovits action was filed on behalf of investors who purchased First Solar securities during the period April 30, 2008 to February 28, 2012. The Smilovits action complaint named as defendants the company itself and certain of its directors and officers. The complaint as amended alleged that the defendants had made a number of misrepresentations or omissions, including that the company was reducing manufacturing costs to make its products more competitive with fossil fuels; the extent to which its products were subject to manufacturing defects; and with respect to the financial condition and performance and expenses of the company and its performance with respect to cost-per-watt metrics. The Smilotvits action plaintiffs alleged that the defendants had violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. The Smilovits action ultimately settled in early 2020 for $350 million.
In March 2014, several shareholders opted out of the Smilovits action, and in June 2015 the opt-out plaintiffs filed a separate action (known as the Maverick Action). The Maverick Action was filed on behalf of a group of investors who purchased First Solar securities between May 2011 and December 2011. The opt-out plaintiffs alleged in the Maverick action that the defendants misrepresented how close their products were to becoming cost competitive with conventional electricity production; concealed manufacturing defects; manipulated cost-per watt metrics; misrepresented the company’s performance with respect to financial targets and issued false financials that violated GAAP. The Maverick action ultimately settled for $19 million.
The Insurance Coverage Dispute
First Solar submitted the Smilovits action to the insurers whose policies were in force at the time the Smilovits action was first filed. The court’s opinion in the subsequent coverage lawsuit noted that the primary policy in this insurance program was exhausted by payment of loss. (Given the size of the ultimate settlement of the lawsuit, it seems likely that the rest of the program was exhausted by payment as well.)
First Solar also separately submitted the Maverick action to the insurers on the subsequent insurance program whose policies were in force when the Maverick action was filed two years after the underlying securities class action lawsuit had been commenced. These insurers ultimately denied coverage for the Maverick action.
In October 2020, First Solar filed a lawsuit in Delaware Superior Court seeking a judicial declaration that the primary insurer’ and first layer excess insurer’s policies in the subsequent insurance program provided coverage for the Maverick action. The defendant insurers filed motions to dismiss, arguing among other things that the subsequent Maverick action was interrelated with the prior Smilovits action, and therefore that the Maverick action was deemed made at the time the Smilovits action was first filed – that is, prior to the time the subsequent insurance program went into force. First Solar filed a motion for partial summary judgment.
The Relevant Policy Language
The primary policy on this subsequent program provides, among other things that “Solely for the purpose of establishing whether any subsequent Related Claim was first made … during the Policy Period or Discovery Period (if applicable), if during such period: A Claim was first made and reported in accordance [with the Policy’s notice provisions], then any Related Claim that is subsequently made against an Insured and that is reported to the Insurer shall be deemed to have been first made at the time that such previously reported Claim was first made …. Claims actually first made or deemed first made prior to the inception date of this policy… are not covered under this policy.”
A Related Claim is defined as a “Claim alleging, arising out of, based upon or attributable to any facts or Wrongful Acts that are the same as or related to those that were … alleged in a Claim made against an Insured.”
The June 23, 2021 Opinion
In a June 23, 2021 opinion, Delaware Superior Court Judge Mary M. Johnston granted the defendant insurers’ motion for summary judgment and denied First Solar’s motion for partial summary judgment.
In analyzing the relatedness issue, Judge Johnston considered a number of recent Delaware court decision on the issue. Among other things, she referred to the Pfizer, Inc. v. Arch Insurance Company decision (discussed here), in which the court in that action noted that in prior Delaware cases involving the ‘arising out of’ language, the courts had found “coverage to be precluded only where the two underlying claims are ‘fundamentally identical.’” In the Pfizer case, the court concluded that the two actions were not “fundamentally identical” because, while they share “thematic similarities,” the actions were different in various respects. Judge Johnston also reviewed several other cases in which the “fundamentally identical” standards were applied.
After having reviewed the various prior cases decisions and compared the allegations in the Smilovits and the Maverick Actions, Judge Johnston concluded that that the two actions have “substantial similarities.”
Among other things, she noted that the plaintiffs in the Maverick action were “originally part of the Smilovitz Action before they opted-out and filed a new suit.” The plaintiffs in both actions “sued identical defendants.” While the class periods in the two actions differed, “they clearly overlap and cover the same 10 months in 2011.” Even though the two actions “do not have identical legal bases,” both suits “clearly overlap by alleging violations” of the same legal provisions.” Finally, she noted, “the disclosures overlap.” With respect to the alleged wrongful conduct, “both cases involve the same fraudulent scheme — allegedly raising stock prices by misrepresenting First Solar’s ability to produce solar electricity at costs comparable to the costs of conventional energy production.”
Based on these considerations, Judge Johnston concluded that the “similarities” between the two actions “outweigh any differences and go beyond mere ‘thematic similarities.’ Both actions are based on the same subject, have a causal connection, and primarily rely on the same facts or occurrences.” Therefore, she concluded, the two actions are “fundamentally identical.”
The terms of the policies are, she said, “clear and unambiguous,” and accordingly the Maverick Action relates back to the Smilovits Action and is a claim first made at the time of the Smilovits Action. Under the “unambiguous terms” of the primary policy, there is no coverage for the Maverick Action.
As I noted above, there arguably is nothing particularly remarkable about the fact that a court concluded that a class action opt-out lawsuit is interrelated with the original class action lawsuit from which the opt-out plaintiffs had opted out. It is frankly a tough argument to make that an opt-out action is unrelated to the underlying class action lawsuit. That said, however, there are still at least a couple of features that make this decision noteworthy.
The first is that the court that ruled here solidly in favor of the defendant insurers was a Delaware court. Readers of this blog know that I have regularly been commenting in recent months (most recently here and here) about the fact that Delaware’s courts have become a favorable forum for insurance policyholders seeking to establish coverage under their insurance policies, along the way gaining a growing reputation (and perhaps becoming notorious among insurers) as a policyholder-favorable jurisdiction.
While the outcome of this insurance dispute arguably represents nothing more than common sense, it still is noteworthy that, perhaps by contrast to other recent Delaware court decisions, the court here did not strain in order to rule in favor of the policyholder but instead proceeded in rather straightforward fashion to apply the policy to the facts presented.
There is another way that I think Judge Johnston’s opinion is noteworthy, and that has to do with the legal standard she applied. That is, she concluded that the Smilovits Action and the Maverick Action are “fundamentally identical,” as required under the Delaware court case laws developed in interpreting interrelatedness issues. The “fundamentally identical” standard itself illustrates the lengths to which Delaware’s courts previously have gone in order to rule in policyholder’s favor. However, Judge Johnston’s opinion shows that while the “fundamentally identical” standard represents a high bar for interrelatedness, it is not an impossibly high bar, and can be met, at least in certain circumstances.
In thinking about this decision, it is worth stepping back and thinking about what is really going on here. It seems to me that the most important thing to know is that the massive settlement of the underlying securities class action lawsuit exhausted the entire amount of insurance in the insurance program that was in force at the time the Smilovits Action was filed. In other words, there was no insurance remaining to provide insurance under that prior insurance programs for the settlement of the Maverick action.
It is certainly understandable that First Solar might seek insurance to cover the separate Maverick Action settlement, but the fact is that, as the Court found, the Maverick Action and the Smilovits action were essentially the same Claim, not separate claims; if there were to be insurance for the Maverick Action settlement, it would have to be under the insurance program that the Smilovits Action triggered. The fact that the Smilovits Action exhausted the applicable insurance program is unfortunate for First Solar, but the fact of the prior program’s exhaustion does not create coverage where none exists under a subsequent insurance program.
One final note. As I have noted many time (for example here), interrelatedness questions can be the most vexing issues that can arise in insurance coverage disputes. The disputes can be highly fact-specific, and the decisions often are hard to reconcile. The decisions can be also be very unsatisfying for at least one side in the insurance dispute. In the end, like many other policy provisions, the interrelatedness provisions in a D&O insurance policy are there to keep claims in their proper lanes.
The fact is that it is in the interest of all participants in the D&O insurance industry as a general matter that claims stay where they belong and don’t start spilling over into other coverages, other policies, or other places. These principles mean that in any specific dispute, there will be winners and losers, but for the insurance mechanism to work well over the long run, the underlying principles need to be observed and applied.