1 2 3 4 UNITED STATES DISTRICT COURT 5 NORTHERN DISTRICT OF CALIFORNIA 6 7 ATAIN SPECIALTY INSURANCE Case No. 19-cv-05198-HSG COMPANY, 8 ORDER GRANTING MOTION TO Plaintiff, STAY 9 v. Re: Dkt. No. 34 10 ZENISCO, INC., et al., 11 Defendants. 12 13 Plaintiff Atain Insurance Company (“Atain”) brings this insurance coverage action against 14 Defendants Zenisco, Inc. (“Zenisco”), its officers, Shahrokh Riahinezhad and Shahrooz Taebi, and 15 3S Network, Inc. (“3S”). Atain seeks rescission of the insurance policy issued to Zenisco, and 16 declaratory judgments that it has no obligation to defend or indemnify Zenisco or its officers 17 against claims for damages asserted in state court actions filed by 3S. Pending before the Court is 18 Zenisco, Riahinezhad, and Taebi’s motion to stay Plaintiff’s first amended complaint. See Dkt. 19 No. 34 (“Mot.”), 37 (“Opp.”), 38 (“Reply”). The Court GRANTS the motion. 20 I. BACKGROUND 21 A. The Policy 22 On October 12, 2015, Defendant Riahinezhad completed an application for commercial 23 general liability insurance for Zenisco, Inc. See Compl., Ex. A. The application noted that 24 Zenisco sought coverage for contractor services classified as “Residential and Commercial 25 remodeling [and] room additions with service and repair work.” Id., Ex. A at 32. Atain issued the 26 liability policy to Zenisco, covering the period of October 23, 2015 through October 23, 2016. 27 See id., Ex. C. The Policy specifically noted Zenisco’s business description as “Remodeling 1 The Classification Limitation Endorsement states: Coverage under this policy is specifically limited to, and applies 2 only to those classifications as described under the applicable Coverage Part or Schedule designated in the Declarations Page of 3 this policy. 4 Id., Ex. C at 56. The Supplemental Declarations document provides that the location of all 5 premises is “PER SCHEDULE OF LOCATIONS,” and the classification is “REMODELER R/A: 6 LICENSED HANDYMAN CONTRACTOR.” Id., Ex. C at 48. Under the Schedule of Locations, 7 the Policy further provides that the designated premises for Zenisco, Inc. is in San Ramon, 8 California as a “Remodeling Contractor.” Id., Ex. C at 41. 9 B. The Underlying Action 10 On May 20, 2019, 3S filed its initial complaint in state court against Zenisco, Riahinezhad, 11 and Taebi, bringing the following claims: fraud, breach of contract, breach of good faith and fair 12 dealing, conversion, and tortious interference with contractual relationship. See id., Ex. D. As 13 alleged in its initial complaint, “3S is a company involved in the design, construction and 14 engineering service industry within the telecom industries.” Id., Ex. D at ¶ 8. 3S alleged that it 15 learned of the existence of Zenisco from a client in August 2016, after Riahinezhad had given his 16 two-week notice. Id., Ex. D at ¶ 12. Following an internal investigation, “3S reasonably 17 concluded that Riahinezhad had started a competing business while he was still an employee of 3S 18 Network.” Id., Ex. D at ¶ 13. “Specifically, 3S found Zenisco contracts and incorporation papers 19 which showed that Taebi and Riahinezhad were in fact partners in Zenisco. 3S also found 20 communications between both Riahinezhad and Taebi in which Taebi clearly and willfully share[d] 21 client contact information . . . while Taebi was still an employee of 3S Network.” Id. 3S alleged that 22 it “has been deprived of business from many of its now former clients” as a result of Zenisco, 23 Riahinezhad, and Taebi’s actions. Id., Ex. D at ¶ 20. 24 Zenisco sent notice to Atain of the lawsuit on June 25, 2019. Id., Ex. D at ¶ 42. After an 25 internal investigation, Atain declined coverage for the underlying action, and further indicated that 26 it was rescinding the policy. See id., Ex. E. Atain declined coverage because it found that the 27 claims alleged against Zenisco did not fall within the scope of coverage of the policy. Id., Ex. E at 1 nature of its business operations (telecommunications contractor instead of remodeling contractor 2 or handyman) and the location of the operations (San Ramon, California instead of the state of 3 Washington). Id., Ex. E at 135–36. Atain then filed this suit on August 20, 2019. See Dkt. No. 1. 4 On November 22, 2019, 3S dismissed its initial complaint, and it then filed a new lawsuit 5 in state court on December 21, 2019. Compl., Ex. G. The factual allegations remain largely the 6 same, but 3S amended the complaint to allege claims of fraud, breach of common law duties of 7 loyalty, good faith, and fair dealing, misappropriation of trade secrets, tortious interference, civil 8 conspiracy, conversion, unjust enrichment, violation of

, et seq. (Fraud and 9 Related Activity in Connection with Computers), violation of Revised Code of Washington 19.96 10 (Washington Consumer Protection Act), a claim for accounting, and a claim for injunctive relief. 11

Ex. G at ¶¶ 30–77. 12 II. LEGAL STANDARD 13 The parties initially disagree as to the standard under which the Court should evaluate 14 Defendants’ motion to stay. Defendants suggest the Court should apply the legal standard 15 articulated in Brillhart v. Excess Ins. Co. of Am.,

(1942), because Plaintiffs bring a 16 declaratory judgment claim under the Declaratory Judgment Act. Mot. at 6–7. Plaintiff argues 17 that the Court should apply California law and the standard articulated in Montrose Chem. Corp. 18 v. Superior Court,

(Cal. 1993). Opp. at 1. 19 Here, the Amended Complaint includes a claim for rescission of the policy. Because the 20 rescission claim would be viable without the declaratory relief claim, the rescission claim is 21 “independent,” and thus invokes this Court’s mandatory jurisdiction. See Gov’t Employees Ins. 22 Co. v. Dizol,

(9th Cir. 1998) (finding that “when other claims are joined with 23 an action for declaratory relief (e.g., bad faith, breach of contract, breach of fiduciary duty, 24 rescission, or claims for other monetary relief), the district court should not, as a general rule, 25 remand or decline to entertain the claim for declaratory relief”); cf. United Nat. Ins. Co. v. R&D 26 Latex Corp.,

, 1114 (9th Cir. 2001) (holding that insurer’s “request for reimbursement 27 is independent of the request for declaratory relief”). Accordingly, Brillhart does not apply. 1 assess whether the California standard under Montrose should apply.1 Generally, federal courts 2 sitting in diversity apply federal procedural law and state substantive law. See Erie Railroad Co. 3 v. Tompkins,

(1938). Here, Atain brings this action under diversity jurisdiction. See 4 Dkt. No. 32 (“Compl.”) ¶ 1. “[B]ecause a stay of an action is procedural, not substantive, the 5 Court applies federal law to determine whether to grant a stay.” Zurich Am. Ins. Co. v. Omnicell, 6 Inc., No. 18-cv-05345-LHK,

, at *4 (N.D. Cal. Feb. 12, 2019). Thus, Montrose, 7 which is state law, does not govern the instant motion. 8 However, the Court’s “power to stay proceedings is incidental to the power inherent in 9 every court to control the disposition of the causes on its docket with economy of time and effort 10 for itself, for counsel, and for litigants.” Landis v. N. Am. Co.,

(1936). Landis 11 sets out a federal procedural standard that governs motions to stay in diversity cases. Under 12 Landis, courts must weigh competing interests in deciding whether to grant a stay: (1) “possible 13 damage which may result from granting a stay, (2) the hardship or inequity which a party may 14 suffer in being required to go forward, and (3) the orderly course of justice measured in terms of 15 the simplifying or complicating of issues, proof, and questions of law which could be expected to 16 result from a stay.” CMAX, Inc. v. Hall,

(9th Cir. 1962) (citing Landis, 299 17 U.S. at 254-55); see also Lockyer v. Mirant Corp.,

(9th Cir. 2005) (holding 18 that the balance of hardships between the parties, or the prospect of narrowing the factual and 19 legal issues in the other proceeding may justify a stay). A stay may be the most efficient and 20 fairest course when there are “independent proceedings which bear upon the case.” Leyva v. 21 Certified Grocers of Cal., Ltd.,

(9th Cir. 1979). A district court’s decision to 22 grant or deny a Landis stay is a matter of discretion. 23 III. ANALYSIS 24 Having balanced the competing interests in this case, the Court finds that a stay is 25 warranted. Under the first Landis factor, Atain does not point to any possibility of damage that 26 may result from granting a stay. See generally Opp. Atain has already denied coverage to 27 1 Defendants based on its coverage determination, has rescinded the Policy, and will not incur 2 expenses defending the underlying action until this case is resolved (if ever). See Compl., Exs. E 3 & F. Thus, the only identifiable damage to Atain is some delay in resolving this action. The 4 Ninth Circuit has found similar reasons to deny a stay unpersuasive. See CMAX, Inc.,

269 (holding that a delay “is not the kind of prejudice which should move a court to deny a 6 requested postponement”). 7 Under the second Landis factor, Defendants repeatedly contend that they will have to 8 simultaneously fight the underlying litigation and this action if this action is permitted to proceed. 9 Reply at 3. The Ninth Circuit has rejected this argument as well: “defending a suit without more 10 does not constitute a clear case of hardship or inequity within the meaning of Landis.” Lockyer, 11

. 12 Under the third Landis factor, the Court concludes that the orderly administration of justice 13 warrants a stay. Atain argues that the rescission and declaratory judgment claims do not overlap 14 with the issues in the underlying litigation. Opp. at 5–6. Specifically, Atain argues that the issue 15 before this court “is not whether, at the time it submitted its application to Atain, Zenisco was 16 intending to compete with 3S by stealing its employees, clients, and trade secrets or diverting 17 business opportunities away from 3S, as alleged in the Underlying Action, but whether Zenisco 18 failed to truthfully disclose the type of business it was operating (telecommunications contractor 19 vs. remodeling contractor) and where those operations were taking place (western United States 20 vs. California).” Opp. at 2. 21 Defendants respond by noting that Atain must prove that Zenisco was doing work as a 22 telecommunications contractor or that it was doing business in Washington, which “necessarily 23 involve[s] identifying the businesses and clients to whom Zenisco provided these alleged services, 24 including where they were provided.” Reply at 5. Defendants argue that “proof of these 25 allegations not only involves common facts to the underlying action but will directly benefit and 26 aid 3S given that 3S also seeks to prove that the Zenisco Defendants operated a competing 27 telecommunications-contracting business while Riahin[ez]had worked for 3S, and while doing so, 1 raised in the rescission claim do not overlap with the underlying action,2 many of the Policy 2 provisions at issue in the declaratory judgment claims do involve such overlapping facts. 3 Although in its opposition Atain cites only the Classification Limitation Endorsement 4 exclusion as the grounds for the declaratory judgment claims, the Amended Complaint includes 5 numerous other Policy provisions that Atain alleges negate any duty to defend or indemnify the 6 underlying action. For example, Atain alleges that both the “Infringement, Misappropriation and 7 Unfair Competition” exclusion and the “Access or Disclosure of Confidential or Personal 8 Information and Data Related Liability” exclusion relieve its duty to defend or indemnify 9 Defendants. See Compl. at ¶¶ 101, 113. Both provisions implicate factual issues that are in 10 dispute in the underlying action. The first exclusion allegedly removes coverage for any violation 11 of the Washington Consumer Protection Act, while the latter allegedly excludes coverage arising 12 out of any access to or disclosure of an organization’s confidential or personal information, 13 including trade secrets. See id. at ¶¶ 20, 27. These allegations in Atain’s Amended Complaint 14 implicate 3S’s core claims in the underlying action. 3 Thus, both the underlying litigation and this 15 declaratory judgment action will require overlapping factual and legal determinations, such that if 16 the cases were to proceed simultaneously, there would be a risk of inconsistent results on these 17 disputed questions. See Leyva,

(“A trial court may . . . find it is efficient for its 18

19 2 The underlying action is based on Defendants’ actions relative to 3S. For instance, many of the 20 claims, including misappropriation of trade secrets, tortious interference, and civil conspiracy, concern Defendants’ alleged inappropriate use of 3S’s business relationships, strategies, and 21 technology. But Atain’s rescission claim concerns only whether Defendants concealed the true nature of the business and the location of the operations. While this may require some proof 22 regarding Defendants’ operations (such as the location of customers and the type of service 23 provided), these facts are not central to 3S’s claims. Proof of location and the nature of operations need not include any detail about how Zenisco obtained its clients or any information regarding its 24 relationship with 3S. Atain only needs to show that Zenisco was operating in Washington and/or that it was not engaged in remodeling work as represented in Zenisco’s application for commercial 25 general liability insurance. Thus, the factual issues in the rescission claim do not overlap with the factual issues in the underlying action. 26 3 For this reason, Atain’s argument that “Federal courts applying California law routinely decline to stay coverage actions involving analogous discrete coverage exclusions,” Opp. at 7, is 27 inapposite. While the insurers in the cases cited by Atain relied only on exclusions that did not 1 own docket and the fairest course for the parties to enter a stay of an action before it, pending 2 || resolution of independent proceedings which bear upon the case.”). In light of the overlapping 3 factual and legal issues, coupled with the risk of inconsistent results, the Court finds that a stay of 4 || the declaratory judgment claim warranted. 5 The Court further finds, in its discretion, that a stay of the rescission claim is also 6 || appropriate. While the factual issues implicated in the rescission claim do not overlap with those 7 at issue in the underlying action, they overlap in part with the declaratory judgment claims 8 || (namely the allegations regarding the Classification Limitation Endorsement Exclusion). Given 9 || the partially-overlapping legal bases of the rescission and declaratory judgment claims, the Court 10 || finds the most efficient course of action would be to make all determinations together. 11 || Iv. CONCLUSION 12 For the reasons noted above, this action is hereby STAYED pending resolution of the 5 13 underlying action. The parties are directed to jointly notify the Court within 48 hours of the 14 || conclusion of the underlying action. The clerk is directed to administratively close the case. 3 15 IT IS SO ORDERED. 16 |) Dated: 7/6/2020 Apparel 3 Mbt) 8 HAYWOOD S. GILLIAM, JR. United States District Judge 19 20 21 22 23 24 25 26 27 28