X2 BIOSYSTEMS, INC, a Washington corporation v. Federal Insurance Company, an Indiana insurance company

NOT FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
X2 BIOSYSTEMS, INC, a Washington
corporation,
Plaintiff-Appellant,
v.
FEDERAL INSURANCE COMPANY, an
Indiana insurance company,
Defendant-Appellee.
No. 14-35125
D.C. 2:13-cv-01653-MJP
MEMORANDUM*
Appeal from the United States District Court
for the Western District of Washington
Marsha J. Pechman, District Judge, Presiding
Argued and Submitted July 6, 2016
Seattle, Washington
Before: TASHIMA, McKEOWN, and M. SMITH, Circuit Judges.
X2 Biosystems, Inc. (“X2”) appeals the district court’s order granting
Federal Insurance Co.’s (“Federal”) motion to dismiss. We have jurisdiction under
28 U.S.C. § 1291, and we affirm.
FILED
AUG 03 2016
MOLLY C. DWYER, CLERK
U.S. COURT OF APPEALS
* This disposition is not appropriate for publication and is not precedent
except as provided by Ninth Circuit Rule 36-3.

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X2 manufactures products that detect sports-related brain injuries. In 2011,
X2 entered into a Technology License Agreement (“TLA”) with Bite Tech, Inc.,
granting Bite Tech licenses to certain X2 technology. As partial consideration, the
TLA required Bite Tech to pay X2 $2 million in advance royalties. After receiving
the $2 million in royalties, X2 terminated the TLA. X2 never sold any products
that would generate revenues for Bite Tech.
Bite Tech alleged seven causes of action against X2, two of which (breach of
special relationship and conversion) are relevant to this appeal. X2 tendered
defense of the action to Federal, its insurer. Federal refused to defend, asserting
that Bite Tech’s claims fell within an exclusion in the insurance policy pertaining
to claims based on, arising from, or resulting from X2’s liability under any
contract. According to Federal, Bite Tech’s claims were based on X2’s contractual
liability under the TLA.
X2 brought a declaratory judgment action against Federal under Washington
law, claiming that Federal had breached its duty to defend X2 in bad faith. Federal
moved to dismiss, and X2 moved for partial summary judgment. The district court
granted Federal’s motion, denied X2’s motion, and dismissed X2’s complaint with
prejudice. The court reasoned that X2’s alleged breach of the TLA gave rise to
both contested causes of action; thus, that the claims fell under the contractual
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liability exclusion of the policy. X2 appeals, contending that (1) Federal was not
excused from defending X2 under the exclusion, and (2) Federal’s refusal to
defend was in bad faith.
1. We review a district court’s ruling on a motion to dismiss de novo.
Autotel v. Nev. Bell Tel. Co., 697 F.3d 846, 850 (9th Cir. 2012) (citing W. Radio
Servs. Co. v. Qwest Corp., 678 F.3d 970, 975–76 (9th Cir. 2012)). We “accept as
true all well-pleaded factual allegations and construe them in the light most
favorable to the plaintiff.” Id.
We also review a district court’s ruling on a cross-motion for summary
judgment de novo. See Trunk v. City of San Diego, 629 F.3d 1099, 1105 (9th Cir.
2011). We “‘must determine, viewing the evidence in the light most favorable to
. . . the nonmoving party, whether there are any genuine issues of material fact and
whether the district court correctly applied the [relevant] substantive law.’” Id.
(quoting Olsen v. Idaho State Bd. of Med., 363 F.3d 916, 922 (9th Cir. 2004)
(alteration in original)).
When interpreting an insurance policy under Washington law, we must
“consider [it] as a whole, and . . . give it a ‘fair, reasonable, and sensible
construction as would be given to the contract by the average person purchasing
insurance.’” Quadrant Corp. v. Am. States Ins. Co., 110 P.3d 733, 737 (Wash.
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2005) (en banc) (quoting Weyerhaeuser Co. v. Commercial Union Ins. Co., 15 P.3d
115, 122 (Wash. 2000) (en banc)). “[I]f the policy language is clear and
unambiguous, we must enforce it as written; we may not modify it or create
ambiguity where none exists.” Id. A provision in an insurance policy is
ambiguous if, “on its face, it is fairly susceptible to two different interpretations,
both of which are reasonable.” Id. (quoting Weyerhaeuser Co., 15 P.3d at 122).
2. An insurance company’s “duty to defend ‘arises when a complaint
against the insured, construed liberally, alleges facts which could, if proven,
impose liability upon the insured within the policy’s coverage.’” Truck Ins. Exch.
v. Vanport Homes, Inc., 58 P.3d 276, 281–82 (Wash. 2002) (en banc) (quoting
Unigard Ins. Co. v. Leven, 983 P.2d 1155, 1160 (Wash. Ct. App. 1999)). If an
insurer breaches his duty to defend, and the breach is “unreasonable, frivolous, or
unfounded,” the insurer has acted in bad faith. Am. Best Food, Inc. v. Alea
London, Ltd., 229 P.3d 693, 700 (Wash. 2010) (en banc).
The contractual liability exclusion in X2’s insurance policy reads in relevant
part as follows:
No coverage will be available under Insuring Clause (C) for any
Insured Organization Claim:
. . .
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(2) based upon, arising from, or in consequence of any actual or
alleged liability of an Insured Organization under any written or oral
contract or agreement, provided that this Exclusion (C)(2) shall not
apply to the extent that an Insured Organization would have been
liable in the absence of the contract or agreement.
In its complaint, Bite Tech alleged that, “[b]y entering the [TLA],” Bite
Tech developed a special relationship with X2, which in turn gave rise to X2’s
purported duty to disclose that it intended to terminate the TLA. Thus, according
to Bite Tech’s allegations, the duty that X2 breached was not independent from its
contractual liability. Rather, the duty to disclose arose from or was a consequence
of X2’s contractual liability under the TLA. In other words, X2’s alleged breach of
the TLA gave rise to the breach of special relationship claim because the claim is
based on X2’s failure to disclose its intent to terminate the TLA while continuing
to collect advance royalty payments from Bite Tech. Further, X2 would not have
been liable in the absence of the contract because X2’s purported duty to disclose
stemmed from X2’s special relationship with Bite Tech, which, itself, arose out of
the TLA.
Similarly, in its conversion claim, Bite Tech alleged that X2 wrongfully
received and retained the advance royalty payments under the TLA. The TLA
required these royalty payments to X2 as partial consideration for X2’s licenses.
Bite Tech alleged that X2’s acceptance of the payments was wrongful because X2
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intended to terminate the TLA before it could generate revenues for Bite Tech.
The claim is thus closely tied to X2’s performance under, and subsequent
termination of, the TLA. It was X2’s premature termination of the TLA that gave
rise to the conversion allegation. Accordingly, the conversion claim cannot fairly
be said to be independent from X2’s contractual liability.
Because Bite Tech’s claims against X2 depended on X2’s rights and
obligations under the TLA, the claims fell squarely within the insurance policy’s
contractual liability exclusion; thus, Federal did not have a duty to defend the Bite
Tech action. Finally, because Federal did not have a duty to defend, it did not
breach this duty in bad faith. See Am. Best Food, Inc., 229 P.3d at 700.
AFFIRMED.
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