United States: Riddell, Inc. V. Superior Court

In Riddell, Inc. v. Superior Court, 14 Cal.App.5th 755 (August 22, 2017), the California Second District Court of Appeal granted a Petition for Writ of Mandate requiring the trial court to vacate its order on insurers' motions to compel responses to discovery requests related to factual information involving numerous underlying concussion personal injury lawsuits filed against Riddell in connection with its alleged defective manufacture of football helmets. The parties' dispute arose out of former professional football players and their representatives filing numerous lawsuits against Riddell alleging that the former players suffered long-term neurological damage from repeated head injuries as a result of wearing Riddell helmets while playing football.

On April 12, 2012, Riddell filed an action against its insurers seeking coverage of the underlying concussion lawsuits. The insurers filed answers alleging numerous affirmative defenses and served discovery on Riddell consisting of a set of four document requests seeking all documents relating to the defense of the concussion lawsuits, and all documents relating to the settlement of any such lawsuits. Riddell responded to these requests. Thereafter, the insurers propounded a second set of document requests and a second set of special interrogatories on Riddell. In the document requests, only numbers 73, 74 and 79 to 86 were placed at issue in connection with the insurers' motion to compel responses to such requests. These requests sought all documents relating to: the dates when each plaintiff in the underlying concussion lawsuits played football in the National Football League or certain other professional football leagues; the dates when each of those plaintiffs wore a Riddell helmet and the model worn; and every claim against Riddell for which Santa Ana Insurance Company ("Santa Ana") or certain other insurers provided a defense, for which the insurance provided by Santa Ana or certain other insurers was impaired or exhausted, and whether Riddell funded its own defense or whether Santa Ana or Riddell or certain other insurers paid part of the settlements of, or judgments in, the concussion lawsuits.

Only two interrogatories were considered by the Court of Appeal. These interrogatories requested Riddell to state all facts relating to the dates when each plaintiff in the underlying concussion lawsuits played football in the NFL or certain other professional football leagues and the dates when each of those plaintiffs wore a Riddell helmet and the model worn.

In response to these discovery requests, Riddell asserted various objections. On April 14, 2016, Riddell moved for a protective order in connection with responding to the subject document requests and special interrogatories. The trial court held that Riddell can respond to the discovery without confirming or admitting the truth of any allegations or information provided and the existing protective order in place for the coverage litigation was sufficient to prevent prejudice to Riddell in its defense of the underlying concussion lawsuits. The court also ordered Riddell to produce privilege logs, excluding only "communications with its counsel in this action after the date it filed this action, or any work product counsel created in anticipation of this action or in the course of this action." Riddell was ordered to list all other documents it withholds. Thereafter, Riddell filed an ex parte application seeking a stay of the trial court's order so that it could file a Petition for Writ of Mandate to the Court of Appeal.

In granting Riddell's Petition, the Court of Appeal held as follows:

 "Normally, the insurer must defend until the underlying action is resolved by settlement or judgment. However, circumstances may change such that there is no longer a potential for coverage by, for example, (1) the discovery of new or additional evidence, (2) a narrowing or partial resolution of claims in the underlying action, or (3) the exhaustion of the policy. [Citations.] When any such circumstances exist, an insurer may bring a declaratory relief action, in order to conclusively establish that there is no longer a duty to defend. [Citation.]" (Great American Ins. Co. v. Superior Court (2009) 178 Cal.App.4th 221, 234–235 [100 Cal. Rptr. 3d 258], fn. omitted (Great American).) Alternatively, if the insurer has refused to defend, then the insured may bring a declaratory relief action in order to resolve the issue and secure a defense. (See, e.g., Haskel, Inc. v. Superior Court (1995) 33 Cal.App.4th 963, 971 [39 Cal. Rptr. 2d 520] (Haskel).)

Litigation of the declaratory relief action when the underlying action is pending may, however, create a risk of prejudice to the insured. For example, "If the declaratory relief action is tried before the underlying litigation is concluded, the insured may be collaterally estopped from relitigating any adverse factual findings in the third party action, notwithstanding that any fact found in the insured's favor could not be used to its advantage." (Montrose Chemical Corp. v. Superior Court (Canadian Universal Ins. Co.) (1994) 25 Cal.App.4th 902, 910 (Montrose II).)

Consequently, "If the factual issues to be resolved in the declaratory relief action overlap with issues to be resolved in the underlying litigation, the trial court must stay the declaratory relief action." (Great American, supra, 178 Cal.App.4th at p. 235; see Montrose I, supra, 6 Cal.4th at p. 301; United Enterprises, Inc. v. Superior Court (2010) 183 Cal.App.4th 1004, 1012 [108 Cal. Rptr. 3d 25].) "If there is no such factual overlap and the declaratory relief action can be resolved on legal issues or factual issues unrelated to the issues in the underlying action, the question as to whether to stay the declaratory relief action is a matter entrusted to the trial court's discretion." (Great American, supra, 178 Cal.App.4th at pp. 235–236; see Montrose I, 6 Cal.4th at p. 302; United Enterprises, at p. 1012.)

In Haskel, the Court of Appeal held that the foregoing principles apply not only to a request for a stay of the declaratory relief action but also to a request for "a stay of all discovery in the declaratory relief action which is logically related to issues affecting [the insured's] liability in the underlying action." (Haskel, supra, 33 Cal.App.4th at p. 980.) Justice Croskey explained that although narrower than a request for a stay of the declaratory relief action itself, the request for a discovery stay in that action presents "essentially ... the same basic question." (Ibid.) Accordingly, discovery in the declaratory relief action that is logically related to issues affecting the insured's liability in the underlying action "should be stayed pending resolution of the ... underlying action unless ... a confidentiality order will be sufficient to protect [the insured's] interests." (Ibid.)

. . .

We agree with Justice Croskey's reasoning in Haskel that a request for a stay of discovery in the declaratory relief action presents "essentially ... the same basic question" as a request for a stay of the action itself. (Haskel, supra, 33 Cal.App.4th at p. 980.) Under the Montrose I line of cases, if the factual issues to be resolved in the declaratory relief action overlap with unresolved issues in the underlying action, then the declaratory relief action must be stayed because of the risk of prejudice to the insured, including the risk of collateral estoppel. Discovery in the declaratory relief action that is logically related to issues affecting liability in the underlying action poses a similar risk of prejudice. Moreover, the insured will inevitably be prejudiced by having to pay the costs of discovery in the declaratory relief action that would, if it had taken place in the underlying action, have been paid for by any insurers with a duty to defend.

The upshot of these legal principles is that an insurer cannot, over the insured's objection, use a declaratory relief action as a forum to litigate factual issues affecting the insured's liability in the underlying action. Rather, such issues must be litigated in the underlying action. If the allegations in that action, together with the facts known to the insurer, show a potential for coverage, then the insurer must provide a defense in that action. If, in the course of defending that action, the insurer learns of additional, undisputed facts that conclusively eliminate the potential for coverage and thus negate the duty to defend, then the insurer may seek declaratory relief on that basis. But the insurer cannot use the discovery process in the declaratory relief action to investigate or develop those facts if they are logically related to issues affecting the insured's liability. Rather, that factual investigation and development must take place in the underlying litigation, where any insurer with a duty to defend should be paying for the insured's defense, including discovery costs. (See generally Haskel, supra, 33 Cal.App.4th at pp. 975–980.)

The Court of Appeal reasoned as follows in connection with the discovery served on Riddell:

Riddell argues that the discovery at issue in the coverage action is logically related to issues affecting Riddell's liability in the third party actions. We agree.

The document requests seek all documents relating to various prior claims against Riddell, the defense or settlement of certain claims, or the dates when the MDL plaintiffs played professional football and wore Riddell helmets, and the models worn. The interrogatories similarly concern the dates when the MDL plaintiffs played professional football and wore Riddell helmets, and the models worn. All of that discovery is straightforwardly related to issues affecting Riddell's liability in the third party actions. As the trial court acknowledged, the MDL plaintiffs bear the burden of proving that they played, when they played, that they wore Riddell helmets, and which models they wore. In addition, the discovery concerning prior claims against Riddell will yield evidence of what Riddell knew about the risks of playing football wearing Riddell helmets, and when Riddell knew it. The extent and timing of Riddell's knowledge of those risks are, of course, facts at issue in the third party actions—the MDL plaintiffs allege that Riddell "'knew or should have known of the substantial dangers involved in the reasonably foreseeable use of the helmets.'" Consequently, all of the discovery at issue is logically related to issues affecting Riddell's liability in the third party actions.

Riddell's request for a stay of that discovery should therefore have been granted unless a confidentiality order would have been sufficient to protect Riddell's interests. Riddell argues that the existing confidentiality order does not provide adequate protection and no revision of the order would remedy that defect. Again, we agree.

For the reasons already explained, all of the discovery at issue is intimately related to factual issues affecting Riddell's liability in the third party actions. If the Insurers use evidence obtained through this discovery to litigate those factual issues in the coverage action, then Riddell will suffer prejudice by being collaterally estopped from relitigating any adverse findings in the third party actions while being unable to use any favorable findings to its advantage. (Montrose II, supra, 25 Cal.App.4th at p. 910.) Moreover, if Riddell is compelled to respond to this discovery in the coverage action rather than in the third party actions, then Riddell rather than any insurers with a duty to defend will be forced to bear the costs of collecting and producing all of this evidence. No confidentiality order can solve either of these problems. Moreover, the federal district court hearing the MDL is not bound by a state court confidentiality order in the coverage action. (See Baker v. General Motors Corp. (1998) 522 U.S. 222, 225, 238 [118 S.Ct. 657, 139 L.Ed.2d 580].) It might show deference to such an order, but it might not. Riddell's reply brief summarizes the situation well: "[N]o confidentiality order, no matter how broad, can protect Riddell from the prejudice caused by having to build the underlying plaintiffs' case for them, bear investigation and discovery costs that should be borne by the Insurers ... , and risk collateral estoppel."

Because the discovery at issue is logically related to issues affecting Riddell's liability in the third party actions and no confidentiality order would adequately protect Riddell's interests, the trial court should have granted Riddell's request for a stay.

The Court of Appeal also required Riddell to prepare and serve a privilege log with respect to withheld documents.

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