On March 16, 2022, the Delaware Supreme Court issued an important decision on the “relatedness” issue in the First Solar case, as I discussed in a prior post on this site, here. In the following guest post, Bryan W. Petrilla, Esq., a partner in the Stewart Smith law firm in Philadelphia, takes a look at the First Solar decision and considers its implication. I would like to thank Bryan for allowing me to publish his article as a guest post on this site. I welcome guest post submissions from responsible authors on topics of interest to this blog’s readers. Here is Bryan’s article.
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“Keep reminding yourself of the way things are connected, of their relatedness. All things are implicated in one another and in sympathy with each other. This event is the consequence of some other one.”
-Marcus Aurelius
It is doubtful that the meditations of a long-dead emperor assisted the Delaware Supreme Court in resolving the question raised in First Solar v. Nat’l Union Fire Ins. Co. of Pittsburgh, PA, but the topic of relatedness continues to be the subject of considerable debate.[i] The high court was recently asked to declare that claims can only be deemed “related” under D&O liability insurance policies if they are “fundamentally identical,” despite that language not appearing in the policies. That standard has been employed by trial courts in Delaware and hotly contested by insurers. Because there is no intermediate appellate court in Delaware, the issue has effectively been left an open question. Until now.
The dispute in First Solar arose from a securities class action brought by the company’s shareholders. First Solar, as its name might suggest, is a “supplier of solar energy systems.” Its business is broken down into two areas: designing, manufacturing, and selling modules that convert sunlight into power (its component business) and installing solar power systems (its systems business). In the class action, plaintiffs alleged that First Solar violated federal securities laws by making false and misleading statements about its component business. More specifically, they alleged First Solar misrepresented its ability to cheaply manufacture solar products and hid design and manufacturing defects in a scheme to inflate its stock price. National Union issued a primary claims-made D&O policy to First Solar for the period of 2011-2012, which provided coverage for the class action.
Some of the shareholders opted out of the class action and filed a separate suit three years later. In the opt-out action, the plaintiffs alleged that First Solar violated the same federal securities laws while adding alleged violations of state statutes and claims of fraud and negligent misrepresentation. Similar to the class action plaintiffs, they alleged that First Solar had misrepresented its ability to cheaply produce solar energy, concealed defects in the manufacturing process and inflated its stock price. Their allegations, however, were directed to First Solar’s systems business.
National Union determined the opt-out action was related to the initial class action and provided coverage for it under the 2011-2012 policy. After racking up over $80 million in defense costs, First Solar settled the class action for $350 million, which exhausted the entire tower of coverage for 2011-2012. It then reached a settlement of the opt-out action for which it sought coverage under the 2014-2015 National Union primary policy and first-layer excess policy issued by XL Specialty.
The primary policy, however, defined a related claim 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.” It further stated that a related claim will be deemed to have been made at the time of the initial claim and that “Claims actually first made or deemed first made prior to the inception date of this policy…are not covered under this policy.” Pretty standard fare for D&O policies. Pursuant to that language, the insurers denied coverage for the opt-out action since it was related to the class action and deemed to have been first made under the 2011-2012 policy.
First Solar sued. It argued that the opt-out action was not related to the prior class action because it involved different plaintiffs, causes of action and time periods. It stressed that the alleged misconduct in the opt-out action involved First Solar’s systems line of business, as opposed to the products line targeted in the initial class action. The trial court agreed with the insurers’ position, however, holding that one claim is related to another if it is “fundamentally identical,” which it believed was the applicable standard under Delaware law. The trial court decided the two claims satisfied the fundamental identity standard because the similarities outweighed the differences.
On appeal, First Solar argued that the trial court identified the correct relatedness standard, but mistakenly applied a balancing test. The insurers countered that the so-called standard was improperly applied in the first place because the policies said nothing about claims needing to be fundamentally identical to be related. First Solar further argued that the related claims provision was impermissibly broad, somehow resulting in illusory coverage. For example, it asserted that because the exclusion deemed one claim related to another if it alleged “any facts” that were the same or related, it could not be applied as written without swallowing coverage. It claimed the insurers had implicitly recognized that was the case by resorting to a “meaningful linkage” or some other standard when determining relatedness and not the actual plain language of the policy. The insurers insisted they were not advocating for any standard other than the plain language and stated during argument that the “any facts” reference needed to be reviewed in context, which indicated that only material facts would be considered when deciding if a claim was related.
The Delaware Supreme Court agreed with the insurers, rejecting the “fundamentally identical” standard because it “disregards the plain language of the policy.” It called the use of the “generic” standard an “error” which it studiously traced back to the 2011 trial court opinion in United Westlabs, Inc. v. Greenwich Ins. Co. In that case the court compared two lawsuits to determine if they were related and concluded they were – you guessed it – fundamentally identical. The Delaware Supreme Court noted that “later cases picked up the court’s ‘fundamentally identical’ observation about the claims in that case and converted it into a standard to assess relatedness under an insurance policy’s related claims provision.” Simply put, however, there was no basis for doing so, with the court affirming that the scope of coverage under every insurance policy “is prescribed by the language of the policy,” which absent an ambiguity is given its plain and ordinary meaning. While First Solar suggested at argument that the ambiguity label might also be slapped on the provision, it did not press the issue and the court effectively ignored it.
The Delaware Supreme Court did agree that the scope of the related claims provision was broad but applied it without commenting on First Solar’s illusory coverage contention. Conducting the sort of nitty-gritty analysis parties often engage in when arguing whether claims are related, the court provided a chart comparing the allegations in the class action with those in the opt-out action. It identified the time period, defendants, overall theory, claimed damages and sampling of relevant statements and evidence as categories worth comparing.
The conclusion was that while the two actions did focus on different businesses of First Solar, with alleged misrepresentations regarding “historical performance” in one action versus “forward-looking statements” in the other, the differences were not “meaningful” and “absolute identity” was not required. It also disregarded First Solar’s argument that because the two actions sought different damages they were not related, holding instead that “the thrust” of the alleged wrongful acts was the same. At the end of the day, both suits focused on misrepresentations about the cost of solar power and alleged violations of securities laws as part of a fraudulent scheme to increase stock prices. That was enough.
The court distinguished cases rejecting relatedness because, it observed, they involved claims alleging “substantially different” wrongful acts that had only thematic similarities and failed to “share any other operative facts, legal theories, or similarities.” Perhaps a bit ironically, the court then stated that the class action and the opt-out suits were “substantially similar and fundamentally identical,” despite having just rejected the latter standard.
Interestingly, the court also relied upon seemingly inconsistent arguments First Solar had made during prior motion practice, which sometimes seem to be excused during litigation as merely a product of compartmentalized maneuvering. “Finally, if there is any remaining doubt about relatedness…we can rely on what First Solar said about the two Actions when insurance coverage was not at issue.” The court noted that in moving to have both cases heard by the same judge, First Solar had argued there was “substantial overlap in legal and factual issues” between them.
The court also entertained an argument that distinct wrongful acts were alleged in each of the actions so that “non-excluded separate claims” should be carved out and covered under the later policies. The court rejected an invitation to perform a detailed review of each alleged act, however, choosing a holistic approach instead by agreeing with the trial court that that the wrongful act at issue was the fraudulent scheme by First Solar to inflate its stock price. The distinct acts alleged in each action amounted to different “evidence” to support the claims but not different wrongful acts. In its final breath, the Delaware Supreme Court stated the obvious, that because the opt-out action was related to the class-action, the related claim provision applied so that it was deemed to have been made at the time of the class action and was therefore excluded from coverage.
First Solar is surely a milestone decision on the issue of related claims under Delaware law. After more than a decade of uncertainty the “fundamentally identical” standard has been flatly rejected. The decision does not establish an alternative standard, simply referring the courts and parties to the task of evaluating relatedness under the language of each insurance policy. And so the centuries-old meditation continues.
About the Author: Bryan Petrilla is a partner with Stewart Smith, an insurance coverage law firm headquartered in Pennsylvania. The firm practices throughout the country with an experienced team of insurance coverage attorneys who draft opinion letters for insurers and handle complex insurance coverage and commercial litigation.
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[i] The full cite is First Solar, Inc. v. Nat’l Union Fire Ins. Co. of Pittsburgh, PA, No. 217, 2021 (Del. Mar. 16, 2022), as modified (Mar. 22, 2022).