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California Court Rules that FTC’s Civil Investigative Demand is Not a Covered Claim Under Technology Errors and Omissions Policy

On May 9, 2024, Judge Theodore C. Zayner of the California Superior Court for the County of Santa Clara issued a decision in Zoom Video Communications, Inc. v. Underwriters at Lloyd’s London, Case No. 22-CV-398878, holding that a civil investigative demand (“CID”) from the Federal Trade Commission (“FTC”) did not constitute a covered “Claim” under an errors and omissions policy issued to Zoom.

Responding to a government investigation can be a costly proposition.  The attorneys’ fees and other expenses incurred to comply with a grand jury subpoena or a civil investigative demand may be covered by the company’s D&O or E&O insurance.  Some policies expressly provide coverage for investigations in certain circumstances, often subject to a separate sublimit.  The caselaw is divided on whether standard policy language that defines a “Claim” to include a “demand for nonmonetary relief” provides coverage for expenses incurred responding to a subpoena or other demand for documents or information from a prosecutor or regulatory authority.

In this case, Zoom sought coverage for costs arising from a CID issued by the FTC in connection with an investigation concerning potential violations of “the FTC Act, § 45, and whether [FTC] action to obtain monetary relief would be in the public interest.”  The Policy defined Claim to include a “written demand against [Zoom] for monetary damages or non-monetary or injunctive relief.”   

The Court granted the insurer’s motion for summary judgment, holding that the CID did not constitute a “Claim” as defined by the policy:

[T]he FTC CID did not demand nonmonetary relief (e.g., injunctive relief). Instead, it is merely mechanism for requesting various forms of information. . . .

The court is persuaded by the cases cited by Underwriters providing that a CID essentially an administrative subpoena (FTC v. Invention Submission Corp. (1992) 965 F.2d 1086, 1087-1089 [CID issued by FTC in connection with investigation of possible violations of section 5 of the Federal Trade Commission Act, 15 U.S.C. § 45(a)(1) is an administrative subpoena]; NWHW [Holdings, Inc. v. Nat'l Union Fire Ins. Co. of Pittsburgh, P.A.] (C.D.Cal. Dec. 22, 2023, No. SACV 22-01030-CJC (KESx)) 2023 U.S. Dist. LEXIS 228688, at *19; United States v. Markwood (6th Cir. 1995) 48 F.3d 969, 975- 976) and such investigative subpoenas are not demands for nonmonetary relief (see e.g., NWHW, supra, (C.D.Cal. Dec. 22, 2023, No. SACV 22-01030-CJC (KESx)) 2023 U.S. Dist. LEXIS 228688, at *18-22 [holding that a CID requesting documents and testimony issued by the United States Attorney’s Office related to a False Claims Act investigation was not a demand for nonmonetary relief]; Diamond Glass Cos. v. Twin City Fire Ins. Co. (S.D.N.Y. Aug. 18, 2008, No. 06-CV-13105 (BSJ) (AJP)) 2008 U.S. Dist. LEXIS 86752, at *9-13 [holding that grand jury subpoenas and a search warrant were not a demand for nonmonetary relief]; BioChemics, Inc. v. AXIS Reinsurance Co. (1st Cir. 2019) 924 F.3d 633, 640 [holding that subpoenas demanding the production of documents issued by the Securities and Exchange Commission in connection with its investigation against the company and its officers were requests made of a party for information, and were not requests made for equitable redress or benefit (such as specific performance)].)

This court does not agree with the conclusion reached in the cases cited by Zoom (e.g., Minuteman Int'l, Inc. v. Great Am. Ins. Co. (N.D.Ill. Mar. 18, 2004, No. 03 C 6067) 2004 U.S. Dist. LEXIS 4660). For example, the court in Minuteman held that “[a] demand for ‘relief’” is a broad enough term to include a demand for something due, including a demand to produce documents or appear to testify. (Minuteman, supra, (N.D.Ill. Mar. 18, 2004, No. 03 C 6067) 2004 U.S. Dist. LEXIS 4660, at *7.) But the ordinary and accepted meaning of the word “relief” and the context in which is it used in the policies make it clear that investigative subpoenas, like the FTC CID, are not demands for nonmonetary relief. (See Diamond, supra, (S.D.N.Y. Aug.18, 2008, No. 06-CV-13105 (BSJ) (AJP)) 2008 U.S.Dist.LEXIS 86752, at *11-12 [“Black’s Law Dictionary defines ‘relief’ as ‘[t]he redress or benefit, esp. equitable in nature (such as injunction or specific performance), that a party asks of a court. Also termed remedy.’ Black’s Law Dictionary at 1317 (8th ed. 2004); see also Foster v. Summit Medical Systems, Inc., 610 N.W.2d 350, 354 (Minn. Ct. App. 2000)(quoting Black’s Law Dictionary at 1293 (7th ed.1999) (‘In a legal context, the term “relief” refers to redress or benefit, especially equitable redress such as an injunction or specific performance.’). Similarly, ‘remedy’ means ‘[t]he means of enforcing a right or preventing or redressing a wrong; legal or equitable relief.’ Id. at 1320. Grand jury subpoenas and search warrants do not fit within this meaning of the term ‘relief.’”].)

As the decision in Zoom Video Communications acknowledges, other Courts have reached different results on this issue.  Judge Zayner cites with approval a decision by Judge Jones of the SDNY in Diamond Glass Cos. v. Twin City Fire Ins. Co., holding that a grand jury subpoena was not a “demand for nonmonetary relief.”  But in Patriarch Partners, LLC v. Axis Insurance Company, 2017 WL 4233078 (S.D.N.Y. Sept. 22, 2017), Judge Caproni declined to follow Diamond Glass, and construed “the term ‘non-monetary relief’ . . . (and the definition of a “Claim”) broadly so as to favor coverage under the Policy.”  Id., at *5 n.4.  (Ironically, the Court’s broader interpretation of Claim in Patriarch Partners had the effect of denying the insured’s coverage claim.  The SEC subpoena at issue in that case pre-dated the policy period, so the Court’s conclusion that the subpoena constituted a “Claim” had the effect of triggering the policy’s exclusion for “prior or pending” claims.)

Judge Zayner’s construction of “nonmonetary relief” strikes us as unduly narrow.  The FTC’s CID did seek a form a relief—the production of documents and information.  It seems fair to say that a motion to compel compliance with a document subpoena, for example, seeks “relief” from the Court.  Judge Zayner appears to equate “nonmonetary relief” with “injunctive relief” when he concludes: “the FTC CID did not demand nonmonetary relief (e.g., injunctive relief).”  But the policy’s definition of “Claim” refers to “monetary damages or nonmonetary or injunctive relief”—making clear that these are in fact separate categories.

Insureds faced with a grand jury subpoena or investigatory demand should consult with coverage counsel—and the earlier the better.  You can’t get coverage if you don’t ask for it, and delaying notice to the insurer can sometimes undermine an otherwise valid claim.

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