In First Solar Inc. v. National Union Fire Insurance Company of Pittsburgh, the Delaware Superior Court held there was no coverage for a class action brought by the individuals who opted out of a prior class action that had been filed before the subject policies’ inception where both actions involved fundamentally identical allegations of wrongdoing.
First Solar sought coverage for a class action lawsuit filed on June 23, 2015 (Maverick action) under primary and excess policies issued by National Union Fire Insurance Company of Pittsburgh and XL Specialty Insurance Co., respectively, effective from November 16, 2013, to November 16, 2015. Both insurers denied coverage, arguing in part that the Maverick action constituted a “related claim” with respect to a securities class action filed against the same defendants before the policies’ inception on March 15, 2012 (Smilovits action). First Solar brought a coverage action against both insurers, asserting claims for breach of contract and declaratory judgment.
In its decision, the court noted that the 2012 Smilovits action was brought in federal court in Arizona by a group of shareholders against First Solar, its directors, and its officers, alleging violations of federal securities laws under sections 10b-5 and 20 of the Securities Exchange Act of 1934. The shareholders alleged, among other things, that the defendants misrepresented that First Solar “had a winning formula for reducing manufacturing costs so rapidly and dramatically as to make solar power competitive with fossil fuels”; concealed and misrepresented major manufacturing and design defects in its solar modules; misrepresented its financials; and artificially inflated its stock price. The class period of the Smilovits action was April 30, 2008, to February 28, 2012.
The court noted that a number of shareholders opted out of the Smilovits action and filed the Maverick action on June 23, 2015, against the same defendants. The Maverick action asserted claims for violations of sections 10b-5 and 20, fraud, negligent misrepresentation, and violations of Arizona statutes. As the court summarized, the shareholders alleged that the defendants misrepresented how close First Solar was to achieving grid parity — i.e., “the point at which solar electricity became cost competitive with conventional methods of producing electricity without government subsidies”; concealed defects in the solar panels and the manufacturing process; concealed problems with its solar modules; manipulated and falsely represented financial and accounting metrics; and artificially inflated its stock price. The class period of the Maverick action was May 2011 to December 2011.
The claims-made and reported policies provided that claims “alleging, arising out of, based upon or attributable to any facts or Wrongful Acts that are the same as or related to” an earlier filed claim (i.e., “related claims”) would be deemed filed at the time of the earlier filed claim. Thus, First Solar’s claim for coverage of the Maverick action, filed during the subject policy period, turned on whether the Maverick action was “a Claim alleging, arising out of, based upon or attributable to any facts or Wrongful Acts that are the same as or related to” those that were alleged in the Smilovits action, which predated the policies’ effective date.
The court noted that under Delaware law, courts typically construe such “related claims” language to preclude coverage only where the claims are “fundamentally identical” and summarized Delaware law on “related claims” determinations as follows:
Delaware courts look to the “subject” of the claims to see if they are “the exact same” and do not merely share “thematic similarities.” When doing so, the underlying claimant’s “unilateral characterizations” of the claims need not be credited. Instead, the Court will draw reasonable inferences from the complaint as a whole.
The court then compared the Maverick action to the Smilovits action, noting that the two have “substantial similarities.” The court noted that the Maverick plaintiffs were originally part of the Smilovits action before opting out; the plaintiffs in each action sued the same defendants; the class periods overlapped; and both actions asserted violations of federal securities law based on the same disclosures. The court also noted that both cases involved the same fraudulent scheme — artificially inflating First Solar’s stock price by misrepresenting its ability to produce solar power at costs comparable to conventional energy production — as well as the same manipulation and misrepresentation of financial information. Based on this analysis, the court found:
[T]he similarities between the Smilovits and Maverick cases outweigh any differences and go beyond mere “thematic similarities.” Both actions are based on the same subject, have a causal connection, and primarily rely on the same facts or occurrences. Therefore, the Court finds that the Smilovits Action and the Maverick Action are fundamentally identical.
As a result, the court concluded that under the policies, the Maverick action was deemed a claim first made at the time of the Smilovits action in 2012, before the policies’ effective date. The court thus found that the Maverick action was not covered and granted the insurers’ motion to dismiss.
