APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE MIDDLE DISTRICT OF PENNSYLVANIA. (D.C. Civil No. 06-cv-00363). District Judge: Honorable A. Richard Caputo.
The opinion of the court was delivered by: Barry, Circuit Judge
Submitted Under Third Circuit LAR 34.1(a) March 3, 2009
Before: BARRY, WEIS, and ROTH, Circuit Judges
CPB International ("CPB") appeals the District Court's grant of Nationwide Mutual Insurance Company's ("Nationwide") motion for summary judgment in this declaratory judgment action that Nationwide filed to determine its obligations under a commercial general liability ("CGL") policy it had issued to CPB (the "policy"). The central issue is whether the policy required Nationwide to defend and indemnify CPB against an action brought by Rexall Sundown, Inc. and a related corporation, NBTY, Inc. (collectively "Rexall"). The action alleged that CPB breached a contract for the delivery of goods by providing a defective product and sought consequential damages for that breach. The District Court held that because the underlying claim was "contractual in nature," it was not covered by the terms of the policy. We will affirm, predicting, as we do so, that the Supreme Court of Pennsylvania would hold that an action arising out of a contract between the parties is not covered by a CGL policy in Pennsylvania.
CPB is an importer and wholesaler of chondroitin, a nutritional supplement made from animal cartilage. CPB imports chondroitin manufactured in China and sells it to companies in the United States which combine chondroitin and glucosamine, a nutritional supplement made from crab, lobster and shrimp shells, with other ingredients to manufacture nutritional tablets. The tablets are beneficial to people who suffer from osteoarthritis. Nationwide issued a CGL policy to CPB, which the parties agree was in effect at the time of the alleged breach. Under the policy, Nationwide agreed to "pay those sums that [CPB] be[came] legally obligated to pay as damages because of . . . 'property damage' to which this insurance applies." (Appendix at 134.)
Although the present action is between Nationwide and CPB, the underlying dispute is between Rexall and CPB. Our focus is whether that dispute triggers Nationwide's duties under the policy.
A. The Underlying State Court Litigation
CPB has been a Rexall vendor since at least 1997, and agreed, as recently as June 11, 2003, to Rexall's vendor compliance regulations. Pursuant to that agreement, CPB promised to deliver products of the highest industry standards, and Rexall was entitled to reject imperfect goods and all goods not conforming to purchase order requirements.
On October 1, 2004, Rexall ordered 10,000 kilograms of chondroitin at seventy-six dollars per kilogram from CPB. On October 27, 2004, Rexall ordered an additional 10,000 kilograms of chondroitin at the same price. In December 2004, CPB filled the first order, and billed Rexall $760,000 by invoice. Rexall paid the invoice in January 2005. Thereafter, CPB partially filled Rexall's second order by sending it 9,500 kilograms of chondroitin, and billing it $722,000. Rexall did not pay for the second shipment.
In April 2005, CPB filed suit against Rexall for breach of contract and demanded payment for the second shipment. Rexall filed an answer and counterclaim (the "underlying claim"), alleging that the chondroitin that was shipped to it was deficient, of improper composition, and unusable for its intended purpose, and that the delivery of the material constituted a material breach of contract. Rexall thus sought return of its initial $760,000 payment and consequential damages in an amount exceeding $1,195,465 for the shipment of the allegedly defective chondroitin. Rexall did not discover that the chondroitin was of improper composition until after it had already combined it with glucosamine and other ingredients to form the nutritional tablets. The tablets, which were mixed with ingredients valued at more than $991,015, are now allegedly useless and without value.
CPB tendered the underlying claim to Nationwide pursuant to the policy. Nationwide assumed defense of the action, but did ...