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8 UNITED STATES DISTRICT COURT 9 SOUTHERN DISTRICT OF CALIFORNIA 10 SENTYNL THERAPEUTICS, INC., CASE NO. 19cv1667-LAB-AHG 11 Plaintiff, ORDER: 12 v. 1) GRANTING DEFENDANT’S 13 MOTION FOR SUMMARY

U.S. SPECIALTY INSURANCE CO.,

JUDGMENT [Dkt. 64]; 14

15 Defendants. 2) DENYING PLAINTIFF’S CROSS-

MOTION FOR SUMMARY

16 JUDGMENT [Dkt. 73];

17 3) DENYING MOTION TO 18 EXCLUDE AS MOOT [Dkt. 84]; and 19 4) DENYING MOTION FOR 20 JUDGMENT ON THE PLEADINGS AS MOOT [Dkt. 41] 21

22 The question in this case is whether an insurance policy exclusion for 23 claims “arising out of” a business’s products is broad enough, under 24 California law, to encompass not only claims for product liability, but also 25 claims for business practices tied to those products. Sentynl Therapeutics, 26 Inc. markets and sells two products, Levorphanol and Abstral, both 27 prescription opioid medications. After receiving a subpoena from the 1 the manner in which Sentynl promoted Levorphanol, it sought coverage from 2 its insurer, Defendant U.S. Specialty Insurance Co., for the costs of 3 defending the investigation. USSI declined coverage, citing (among other 4 things) an exclusion in Sentynl’s policy for claims “arising out of” its products. 5 Sentynl filed this suit, asserting claims for breach of contract, tortious breach 6 of the implied covenant of good faith and fair dealing, and declaratory 7 judgment. Both parties moved for summary judgment. 8 “Arising out of” is a broad standard under California law, but it’s not 9 unbounded. It doesn’t invoke any particular theory of causation, but instead 10 “identifies a core factual nucleus . . . and links that nucleus to the [harm] 11 covered under the policy.” Fibreboard Corp. v. Hartford Accident & Indemnity 12 Co., 16 Cal. App. 4th 492, 505 (1993). Because the the Opioid Task Force’s 13 investigation is sufficiently linked to Sentynl’s opioid products, USSI’s motion 14 for summary judgment is GRANTED. (Dkt. 64.) Sentynl’s cross-motion is 15 DENIED. (Dkt. 73). The remaining pending motions—USSI’s motion to 16 exclude expert testimony and Sentynl’s motion for judgment on the 17 pleadings—are DENIED AS MOOT. (Dkt. 84; Dkt. 41.) 18 BACKGROUND1 19 Sentynl markets and sells prescription products. (See Joint Statement 20 of Undisputed Facts, Dkt. 64-5 ¶¶ 16-17.) It marketed or sold only two 21 products during the relevant time period here: Levorphanol tartrate tablets 22 (“Levorphanol”) from 2015 forward and Abstral sublingual tablets (“Abstral”) 23 from November 2015 until October 2019. (Id. ¶ 19.) Both Levorphanol and 24 Abstral are classified by the FDA as opioid analgesic products. (Id. ¶¶ 16-17.) 25 1 The Court relies where possible on the facts in the parties’ Joint Statement 26 of Undisputed Facts. (Dkt. 64-5.) Both parties reserved the right to assert 27 that additional facts are not reasonably in dispute, (Id. at 3 n.1), and both lodged numerous documents along with their briefing. To the extent such 1 The Policy 2 USSI issued a Directors, Officers and Organization Liability Insurance 3 Policy (the “Policy”) to Sentynl covering the period from January 31, 2018 to 4 January 31, 2019 (the “Policy Period”). (Id. ¶ 1.) The Policy generally insured 5 Sentynl against “Loss[es] arising from Claims first made against it during the 6 Policy Period . . . for Wrongful Acts.” (Id. ¶ 2.) A “Claim” means, among other 7 things: “any . . . written demand, including any demand for non-monetary 8 relief;” “any administrative or regulatory proceeding commenced by the filing 9 of a notice of charges, formal investigative order or similar document;” “any 10 criminal proceeding commenced by the return of an indictment;” and “any 11 written request or agreement to toll or waive any applicable statute of 12 limitations.” (Id. ¶ 3.) And “Wrongful Act” includes “any . . . actual or alleged 13 act, error, misstatement, misleading statement, omission or breach of duty 14 . . . by the Insured Organization.” (Id. ¶ 4.) USSI disclaims any “duty under 15 [the] Policy to defend any Claim.” (Id. ¶ 5.) The Policy excludes Loss from 16 “Claim[s] . . . arising out of . . . any goods or products manufactured, 17 produced, processed, packaged, sold, marketed, distributed, advertised or 18 developed by the Insured Organization” (the “Goods and Products 19 Exclusion” or the “Exclusion”). (Id. ¶ 10.) 20 The Claim 21 On August 16, 2018 and within the Policy Period, the United States 22 Attorney’s Office for the District of New Jersey’s Opioid Abuse Prevention 23 and Enforcement Unit (“Opioid Task Force”) served Sentynl with a subpoena 24 (the “First Sentynl Subpoena”). (Id. ¶ 20.) The Opioid Task Force is a unit 25 within that Office’s Criminal Division, tasked with targeting anyone who 26 illegally profits from opioids. (Id. ¶ 21.) Its First Sentynl Subpoena included 27 thirty document requests, grouped into the following categories: 1 1) “Documents Relating to Prior Authorizations and Reimbursement;” 2 2) “Documents Relating to the Sale and Promotion of Levorphanol;” 3 3) “Documents Relating to Relationships With and Payments To 4 Health Care Professionals,” (with most document requests in this 5 category relating to Levorphanol); 6 4) “Documents Relating to Specific Health Care Professionals;” 7 5) “Documents Relating to Pharmacies,” (including requests for 8 communications regarding Levorphanol); 9 6) “Documents Relating to Distributors and Wholesalers,” (including 10 requests for documents relating to the setting of Schedule II 11 threshold amounts for distribution of Levorphanol); and 12 7) “Compliance, Investigations and Lawsuits.” 13 (Dkt. 64-2 at 103-09). 14 Eighteen of the thirty requests referenced Levorphanol specifically, 15 with at least one such request appearing in all of the above categories except 16 the fourth. (Id.) Sentynl, several of its former employees, and one of its third- 17 party vendors subsequently received numerous subpoenas (collectively with 18 the First Sentynl Subpoena, the “Subpoenas”) from the Opioid Task Force 19 seeking documents and information relating to Sentynl’s marketing practices 20 in connection with Levorphanol. (Dkt. 64-5 ¶¶ 30-59.) The second subpoena 21 directed to Sentynl sought similar categories of documents as those sought 22 by the First Sentynl Subpoena, but in relation to Abstral, rather than 23 Levorphanol. (Dkt. 64-4 at 215-19.) 24 In subsequent communications, Sentynl was informed and it 25 acknowledged that the potential health care offenses under investigation 26 arose out of its opioid products. (Dkt. 105-4 at 96; Dkt. 73-12 at 154 (stating 27 that Sentynl has only two products).) Sentynl concedes that it can’t have 1 engaged in conduct relevant to the Investigation prior to acquiring rights to 2 its first opioid product, Levorphanol. (Dkt. 105 at 5.) 3 Sentynl first contacted USSI regarding insurance coverage for the 4 Investigation on October 29, 2018. (Dkt. 64-5 ¶ 60; Dkt. 107-7 at 71-76.) 5 USSI declined coverage. (Dkt. 64-2 at 110-112.) Among other things, USSI 6 argued that, if the Opioid Investigation constituted a Claim (a point USSI 7 contests), it “ar[ose] out of” Levorphanol and Abstral, “goods or products 8 manufactured, produced, processed, packaged, sold, marketed, distributed, 9 advertised or developed by” Sentynl, and so it fell within the Exclusion. 10 (Dkt. 107-10 at 105.) 11 USSI and Sentynl each moved for summary judgment. 12 STANDARD OF REVIEW 13 Summary judgment is appropriate where “there is no genuine issue as 14 to any material fact and . . . the moving party is entitled to judgment as a 15 matter of law.” Fed. R. Civ. P. 56(a). The moving party bears the burden of 16 showing the absence of a factual issue for trial. Celotex Corp. v. Catrett, 17 477 U.S. 317, 323 (1986). If the moving party meets this requirement, the 18 burden shifts to the non-moving party to show there is a genuine factual issue 19 for trial. Id. at 324. 20 The Court does not make credibility determinations or weigh conflicting 21 evidence. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255 (1986). Rather, 22 the Court determines whether the record “presents a sufficient disagreement 23 to require submission to a jury or whether it is so one-sided that one party 24 must prevail as a matter of law.” Id. at 251–52. 25 To succeed on its motion, then, USSI must demonstrate that it is 26 entitled to judgment based on undisputed facts, and all factual disputes must 27 be resolved in favor of Sentynl in evaluating USSI’s motion. Clare v. Clare, 1 standard specific to insurance policies, which requires USSI to provide 2 “undisputed facts which conclusively eliminate a potential for liability,” with 3 “[a]ny doubt as to whether the facts establish or defeat the existence of a 4 defense duty . . . resolved in the insured’s favor.” Atlantic Mutual Ins. v. J. 5 Lamb, Inc., 100 Cal. App. 4th 1017, 1033 (2002); see also State Farm 6 General Ins. Co. v. Mintarsih, 175 Cal. App. 4th 274, 284 n.6 (Cal. App. 2009) 7 (“There is no ‘potential for coverage’ and no duty to defend . . . if the 8 existence of coverage depends solely on the resolution of a legal question 9 (e.g., the interpretation or application of policy terms).”). 10 The law of California, the forum state, applies to this diversity action. 11 Bell v. Lavalin, Inc. v. Simcoe and Erie Gen. Ins. Co., 61 F.3d 742, 745 (9th 12 Cir. 1995). Accordingly, the Court treats the interpretation of the insurance 13 policy as a question of law subject to the general rules of contract 14 interpretation. MacKinnon v. Truck Ins. Exchange, 31 Cal. 4th 635, 647 15 (2003). 16 DISCUSSION 17 I. The Exclusion for Claims “Arising Out of” Sentynl’s 18 Products Must Be Construed Broadly 19 The Policy’s Goods and Products Exclusion reads, in relevant part: 20 “[T]he Insurer will not be liable to make any payment of 21 Loss in connection with a Claim arising out of, based 22 upon or attributable to any goods or products 23 manufactured, produced, processed, packaged, sold, 24 marketed distributed, advertised, or developed by the 25 Insured Organization.” 26 (Dkt. 64-5 ¶ 10.) While the parties dispute whether Sentynl has submitted a 27 Claim and whether other exclusions may apply, those disputes are moot if 1 Insurance coverage exclusions are generally construed narrowly 2 against the insurer. MacKinnon, 31 Cal. 4th at 648 (2003). But this rule is an 3 offshoot of the general rule that “[a]ny ambiguity or uncertainty in an 4 insurance policy is to be resolved against the insurer.” White v. Western Title 5 Ins. Co., 40 Cal. 3d 870, 881 (1985) (in bank) (emphasis added). A court 6 can’t modify an unambiguous provision under the guise of “construction” to 7 extend or restrict coverage in ways contrary to the policy’s unambiguous 8 terms. See Cal. Civ. Code § 1639. 9 In urging the Court to construe “arising out of” narrowly, Sentynl 10 mistakes breadth for ambiguity. The Ninth Circuit Court of Appeals, 11 interpreting California law, construed that phrase in the context of an 12 exclusionary clause as susceptible “to only one reasonable meaning”: 13 “originating from[,] having its origin in, growing out of or flowing from or in 14 short, incident to or having connection with.” Continental Cas. Co. v. City of 15 Richmond, 763 F.2d 1076, 1080 (9th Cir. 1985).2 Subsequent California 16 decisions confirm this conclusion: “arising out of” is a broad standard, 17 “generally equated . . . with origination, growth or flow from the event.” 18 Southgate Recreation & Park Dist. v. California Assn. for Park & Recreation 19 Ins., 106 Cal. App. 4th 293, 301 (2003). 20 Sentynl seeks to avoid this conclusion by arguing that construing the 21 Exclusion to carve out this Claim would “eliminate practically all meaningful 22 insurance” because “[e]verything [Sentynl] did . . . had some relationship to” 23 Levorphanol and Abstral. (Dkt. 102-1 at 17.) Instead, it urges the Court to 24 “read [the Exclusion] as related to the subject of products liability.” (Id., 25 2 USSI’s Claims Handler testified that the Exclusion is “ambigu[ous].” (See 26 Dkt. 73-8 at 56:21-57:3) But “[w]hether a contract is ambiguous is a question 27 of law to be determined by the court from the contract itself.” Edgar Rice Burroughs, Inc. v. Metro-Goldwyn-Mayer, Inc., 205 Cal. App. 2d 441, 448 1 quoting Ins. Co. of N. Am. v. Electronic Purification, 67 Cal. 2d 679, 690 2 (1967).) Quoting that case in snippets, it writes, “‘the average businessman’ 3 would reasonably read a products exclusion as ‘related to the subject of 4 products liability’ . . . [and so] it would be improper for a court to interpret the 5 exclusion[] to ‘eliminate practically all meaningful insurance’ where ‘all of [the 6 insured’s] business is connected in a broad sense with [the product].” 7 (Dkt. 102-1 at 17.) 8 Electronic Purification doesn’t discuss “products exclusion[s]” 9 generally, as Sentynl claims, but a particular exclusion that had to be 10 interpreted according to its language. In its fuller context, the language 11 Sentynl quotes (itself a quote from another case) is used to support the 12 proposition that, where an exclusion calls itself a “Products Hazard” 13 exclusion, a subsection of that same exclusion referring to operations must 14 be read as limited by the “Products Hazard” caption. Electronic Purification, 15 67 Cal. 2d at 685-86. “If [the operations] subdivision . . . eliminated coverage 16 for completed general operations, not related to products, . . . it would involve 17 a subject utterly unrelated to products which no ordinary insured would 18 expect to find under the heading, ‘Products Hazard.’” Id. at 687. To read that 19 exclusion otherwise would “eliminate practically all meaningful insurance” 20 only because it would exclude both products hazards and all completed 21 operations without limitation. See id. at 690. “The language of the policy 22 compels such a reading.” Id. at 687. 23 Different language compels a different reading. The Policy’s language 24 still doesn’t exclude operations “utterly unrelated to products,” id., but its 25 limitation isn’t the phrase “Products Hazard.” The limitation is instead the 26 broader caption of “Goods and Products Exclusion” and the unambiguous 27 phrase “arising out of” that connects matters to Sentynl’s goods and 1 (“arising out of” is unambiguous). And the latter phrase doesn’t restrict the 2 Exclusion’s application to products liability because it “does not import any 3 particular . . . theory of liability into an insurance policy.” Travelers Property 4 Casualty Co. of America v. Actavis, Inc., 16 Cal. App. 5th 1026, 1045 (2017). 5 While that may make for a broader exclusion, it doesn’t eliminate 6 practically all meaningful insurance because there’s a difference between 7 Claims “arising out of” products and those that merely have “some 8 relationship” to them. (Dkt. 102-1 at 17.) To use Sentynl’s examples, its hiring 9 and firing of employees and its financial reporting, to the extent they’re only 10 connected to its products by the fact that Sentynl must conduct those 11 activities to do business, don’t “arise out of” Levorphanol and Abstral. See, 12 e.g., Fireman’s Fund Ins. Companies v. Atlantic Richfield Co., 94 Cal. App. 13 4th 842, 849 (2001) (“‘[A]rising out of’ requires more than ‘but for’ 14 causation.”). 15 II. The Undisputed Facts Demonstrate that the Investigation, If 16 a Claim, Would Fall Within the Exclusion 17 Having determined that the Exclusion can be read to cover theories 18 beyond products liability, all that remains is to determine whether Sentynl’s 19 Claim “originat[es] from, ha[s] its origin in, grow[s] out of or flow[s] from” its 20 products. Continental Cas. Co. 763 F.2d at 1080. The undisputed facts 21 answer with an unequivocal “yes.” 22 California courts have determined that legal claims for marketing 23 practices tied to the known dangers of opioids, on the other hand, “arise out 24 of” opioids, despite the lack of a product-centric liability theory. In 25 Travelers v. Actavis, the insured pharmaceutical company had an insurance 26 policy covering “damages because of bodily injury” but excluding “bodily 27 injury . . . arising out of . . . any goods or products manufactured, sold, 1 1031-32. Two lawsuits were filed against the insured—they didn’t allege that 2 the products were defective, but that the insured “engaged in a fraudulent 3 scheme to promote the use of opioids for long-term pain in order to increase 4 corporate profits.” Id. at 1032. The insurer denied coverage based, in part, 5 on the products exclusion, and the California Court of Appeal rejected the 6 theory that the phrase “any product” in the products exclusion was limited to 7 defective products. Id. at 1050. Instead, it found that harm from the insured’s 8 marketing practices arose out of the products themselves because those 9 practices were allegedly tied to the products’ addictive properties. Id. at 1046. 10 Sentynl acknowledges that the Investigation forming the basis for its 11 Claim is being conducted by a criminal enforcement unit “tasked with . . . 12 target[ing] anyone who illegally profits from opioids.” (Dkt. 64-5 at 13 13 (emphasis added).) It states that it couldn’t have engaged in any act relevant 14 to the Investigation until after it acquired the rights to Levorphanol. 15 (Dkt. 105-5 at 89:2-9.) And, most directly, it concedes that the potential 16 health care offenses that the Opioid Task Force is investigating arise out of 17 Sentynl’s manufacturing, marketing, sale, and distribution of its opioid 18 products. (Dkt. 105-4 at 96.)3 The Opioid Task Force’s Investigation is 19 targeting Sentynl on suspicion that it “illegally profits from opioids” through 20 health care offenses that arise out of its opioid products. The unavoidable 21 conclusion is that the Claim based on that Investigation “originat[es] from, 22 ha[s] its origin in, grow[s] out of or flow[s] from” products that Sentynl 23 marketed or sold. Continental Cas. Co. 763 F.2d at 1080. 24 / / / 25 / / / 26

27 3 Although this document post-dates the Subpoenas, Sentynl argues that it should inform the Court’s understanding of the Investigation as a whole. (See 1 CONCLUSION 2 Just as litigation for fraudulent practices in marketing opioids 3|| constituted claims for “bodily injuries” “arising out of’ the opioids in Actavis, the Opioid Task Force’s Investigation of Sentynl’s potential health care 5|| offenses, including inquiry into Senynl’s marketing practices, fits comfortably 6|| in the broader category of “Claims” “arising out of’ those products (to the 7\| extent its a Claim at all). Sentynl’s Losses from the Investigation are 8|| excluded from the Policy. Its claims for breach of the Policy, tortious bad 9|| faith, and declaratory judgment, all based on the theory that the Investigation is a Claim covered by the Policy, all fail as a matter of law. 11 The Court GRANTS USSI’s Motion for Summary Judgment. (Dkt. 64.) 12|| It DENIES Sentynl’s Cross-Motion for Summary Judgment. (Dkt. 73.) And it 13] DENIES AS MOOT Sentynl’s Motion for Judgment on the Pleadings, (Dkt. 41), and USSI’s Motion to Exclude Expert Testimony. (Dkt. 84.) 15 The Clerk is directed to enter judgment in favor of USSI and close the 16]| case. 17 IT IS SO ORDERED. DATED: March 19, 2021 (dn Ae Syl 19 Hon. Larry A. Burns 20 United States District Judge 21 22 23 24 25 26 27 28