The case involved a professional liability insurance policy issued to Uniscribe Professional Services, Inc., a records management and document imaging company. In 2002, Uniscribe was hired by the law firm of Jones Day to perform litigation management services in connection with a case against the firm’s client, DirecTV. Uniscribe assigned three employees to work on the project at Jones Day’s Los Angeles office. When they had trouble meeting Jones Day’s deadlines, however, a Uniscribe supervisor allegedly authorized one of the employees to have his nephew help them. The nephew was paid by his uncle, who submitted the hours as overtime. While working on the project, the nephew allegedly came across confidential information which the opinion says he posted on a website for the “hacker community.”
Jones Day allegedly was forced to write off a significant amount of legal fees incurred by DirecTV as a result of the incident. It then demanded reimbursement from Uniscribe. Uniscribe in turn notified its professional liability carrier of the claim. The carrier, however, denied coverage citing the intellectual property exclusion, which excluded from coverage “any claim arising out of any misappropriation of trade secret or infringement of patent, copyright, trademark, trade dress or any other intellectual property right.” Following that denial, Uniscribe settled with Jones Day and filed the instant declaratory action.
At issue on appeal was whether the intellectual property exclusion in the policy applied to the misappropriation of trade secrets by a third-party. Uniscribe’s argument was that the exclusion was ambiguous because it did not specifically say that it applied to misappropriation by a third-party. The insurer, on the other hand, argued that it was clear from the “arising out of” language that the exclusion applied to all claims of misappropriation, including those involving third parties.
The Massachusetts Supreme Judicial Court agreed with the insurer, ruling that “[t]he phrase ‘arising out of’ must be read expansively, incorporating a greater range of causation than that encompassed by proximate cause under tort law.” The Court then ruled that the term “arising out of” when read with the term “’any claim,’ unambiguously encompasses claims based on third-party conduct.” The Court explained that “[t]he expansiveness of the phrase ‘any claim arising out of’ obviates the need to specify that the exclusion applies ‘whether committed by or at the direction of the insured or third parties.’”
The Court also ruled that the specific damages allegedly suffered by Jones Day “arose out of” the nephew’s misappropriation of DirecTV’s trade secrets. Notably, the Court stated that in Massachusetts “’arising out of’ denotes ‘a causation more analogous to ‘but for’ causation, in which the court examining the exclusion inquires whether there would have been personal injuries, and a basis for the plaintiff’s suit, in the absence of objectionable underlying conduct.’”
Finally, the Court noted that because the exclusion unambiguously applied to the nephew’s misappropriation of trade secrets, Uniscribe’s reasonable expectations as to coverage were irrelevant. Based on the foregoing, the Court ruled that the intellectual property exclusion applied.
The insurer was represented before the trial court and the Supreme Judicial Court by lawyers from Edwards Angell Palmer & Dodge LLP.