In an interesting decision that explores the standard to be used in determining whether an earlier claim and a later claim are interrelated, the Delaware Supreme Court has affirmed a lower court ruling that a later filed opt-out action is related to a securities lawsuit earlier filed against First Solar, and therefore that the opt-out action is not covered under the D&O insurance program in place at the time the opt-out action was filed. Interestingly, the Supreme Court affirmed the lower court even though the appellate court held that the lower court had erroneously applied a “fundamentally identical” standard to the relatedness question rather than the relatedness standard defined by the policies. The Delaware Supreme Court’s March 16, 2022 opinion can be found here.
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 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. As discussed here, the Smilovits action ultimately settled in early 2020 for $350 million. First Solar’s 2011-2012 D&O Insurance program was exhausted by the defense costs and settlement of the Smilovits action.
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 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 in the 2011-2012 program i.e., the insurers whose policies were in force at the time the Smilovits action was first filed. When the Maverick action was filed, First Solar submitted the action to the insurers in the 2011-2012 program. After the limits of liability in the 2011-2012 program were exhausted, First Solar sought coverge for the Maverick action at the time the opt-out action was filed – that is, the 2014-2015 program. The insurers in the 2014-2015 program denied coverage for the Maverick action.
In October 2020, First Solar filed a lawsuit in Delaware Superior Court seeking a judicial declaration that the policies in the 2014-2015 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 parties filed cross-motions for partial summary judgment.
As discussed here, 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. Judge Johnston ruled that the Maverick action and the Smilovits action were related, and therefore that the Maverick action was deemed first made at the time the Smilovits action was filed. In reaching this conclusion found that the two actions had “substantial similarities” and were “fundamentally identical.” First Solar appealed.
The Relevant Policy Language
The primary policy in the 2014-2015 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 March 16, 2022 Opinion
In a unanimous March 16, 2022 Opinion written by Chief Justice Collins J. Seitz, Jr. the Delaware Supreme Court affirmed the lower court’s ruling. In reaching this decision, the Court said that “even though the court applied an incorrect standard to assess the relatedness of the two actions, we affirm nonetheless because under either the erroneous ‘fundamentally identical’ standard or the correct relatedness standard defined by the policies, the later-issued insurance policies did not cover the follow-on action.”
As an initial matter, in addressing the question of the correct standard to be applied to the relatedness issues, the appellate court agreed with the insurers that the use of the “fundamentally identical” standard “disregards the plain language of the policies” which the court traced to “a misunderstanding” of the relatedness language. The Supreme Court called the lower courts’ conversion of “fundamentally identical” test into a standard to assess relatedness an “error.” The Court said that whether a claim relates back to an earlier claim is to be “decided by the language of the policy,” not a “generic” fundamentally identical standard.
The Court then applied the standard it concluded that the policy required in order to determine relatedness – that is, whether the Maverick action raises claims that “arise out of, are based upon or attributable to any facts or Wrongful Acts that are the same as or related to” the Smilovitz action.
Based on a detailed comparison between the two actions, the Court concluded that the two actions were “based on the same alleged misconduct – First Solar’s misrepresentations about the cost-per-watt of its solar power.”
First Solar cited various purported differences between the two actions. The Court said that these “minor differences” are not “meaningful.” Both actions, the Court noted allege violations of the same federal securities laws and both actions allege that First Solar made material misrepresentations regarding its solar power capabilities as part of a fraudulent scheme to increase its stock prices. Although the two actions “are not identical in their claims or evidence, absolute identity is not required.”
The Court also noted arguments that First Solar had raised in connection with the underlying litigation. The Court noted that in seeking to have the opt-out action transferred to the court in which the class action was pending, First Solar had not the “substantial overlap in legal and factual issues and the substantial overlap in parties,” which, First Solar argued, weighed in favor of transferring the opt-out action.
As I noted at the time of the lower court’s decision, a judicial determination that a class action opt-out action is interrelated with the class action itself is hardly a surprising outcome. However, even if the ultimate outcome of the analysis is not surprising, the Supreme Court’s discussion of the relatedness standard is still important.
In particular, the Supreme Court’s discussion of the degree of similarity between two matters in order for them to the “related” is significant. The “fundamentally identical” standard not only arguably set the bar for the degree of relatedness too high, it also represented a judicial excrescence on an analysis that properly should be defined by the applicable policy language, not some extracontractual judicial standard. In that regard, I find it particularly noteworthy that (as the Supreme Court noted on page 11 of its Opinion) that even First Solar had to concede that the Delaware decisions regarding the “fundamentally identical” standard had “substituted” the standard for what is required in the language of the insurance policy. The Supreme Court’s rectification of what the Court itself called an “error” is therefore significant.
All of that said, as I have noted many times, relatedness issues are fundamentally and inherently case-specific. In this case, the Court found the supposed differences on which First Solar sought to rely “minor” and “not meaningful.” This still leaves the door open in other cases for courts to conclude based on differences that are not as minor or that are meaningful that two matters are not related.
There is one aspect of this decision that is important, and that the Court’s ruling in this case favors the insurers. I note this because as a result of several decisions from Delaware’s courts, I earlier had commented (for example, here and here) about the fact that Delaware’s courts seemed to 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.
Not only is the Delaware’s Supreme Court’s First Solar opinion, perhaps contrary to my observation about Delaware courts’ apparent policyholder inclination, a favorable decision for the insurers involved, but it is also the latest of several recent decision in which the Delaware courts have ruled favorably to the insurers (as noted, for example, here and here). While these more recent decisions undeniably are more insurer-friendly, there are a sufficient number of policyholder favorable decisions (noting in particular the Supreme Court’s March 2021 decision in the Dole Foods case, discussed here) that the insurers at least still may not be completely sold that they are not at a competitive disadvantage in Delaware’s courts. Just the same, the more recent decision may provide insurers a measure of assurance that their fate is not sealed just because they are in a Delaware court.
Many thanks to the several readers who sent me copies of the Delaware Supreme Court’s First Solar opinion.