     Case: 09-41123 Document: 00511428814 Page: 1 Date Filed: 03/30/2011




           IN THE UNITED STATES COURT OF APPEALS
                    FOR THE FIFTH CIRCUIT  United States Court of Appeals
                                                    Fifth Circuit

                                                 FILED
                                                                           March 30, 2011

                                       No. 09-41123                         Lyle W. Cayce
                                                                                 Clerk

RON SIMMONS, CHARLES SCOTT SYKES, JR.; RANDY HAUGEN:
VALORIE HAUGEN; ORRIN WOODWARD; LAURIE WOODWARD;
CHRIS BRADY; TERRY BRADY; WILLIAM FLORENCE;
PEGGY FLORENCE; DONALD WILSON; NANCY WILSON;
TIMOTHY MARKS; AMY MARKS; NANCY CULLEN; KIRK BIRTLES;
CASSANDRA BIRTLES; JIM MARTIN; DOLORES MARTIN; ARON
RADOSA; MARY RADOSA; CHUCK GOETSCHEL; DAVID BRANDY;
BRUCE GILBANK; JESSILYN GILBANK; MIKE MARTENSEN;
BENJAMIN DICKIE; CHUCK CULLEN

                                                   Plaintiffs - Appellants
v.

LIBERTY MUTUAL FIRE INSURANCE COMPANY

                                                   Defendant - Appellee




                   Appeals from the United States District Court
                         for the Eastern District of Texas
                              USDC No. 4:08-CV-159


Before REAVLEY, JOLLY, and STEWART, Circuit Judges.
PER CURIAM:*




       *
         Pursuant to 5TH CIR . R. 47.5, the court has determined that this opinion should not
be published and is not precedent except under the limited circumstances set forth in 5TH CIR .
R. 47.5.4.
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                                      No. 09-41123

      Appellants appeal the district court’s judgment that Appellee Liberty
Mutual Fire Insurance Co. (“Liberty”) had no duty to defend the Appellants, its
insureds, in two separate arbitration proceedings. We affirm.
                                      Background
      The Appellants are individuals who were Independent Business Owners,
commonly known as IBO’s, in a multi-level marketing operation owned and run
by Quixtar.1 Quixtar’s multi-level marketing operation recruits IBO’s who sell
Quixtar’s health and beauty products online.              IBO’s also earn money by
recruiting other new IBO’s (“Downstream IBO’s”) and receiving a bonus based
on the sales of their Downstream IBO’s. All IBO’s pay an annual fee and sign
an annual contract with Quixtar. Among other things, the contract contains an
arbitration provision, a code of conduct, a confidentiality provision, and a
non-compete clause.
      The relationship between the Appellants and Quixtar became strained.
According to Quixtar, the Appellants began soliciting Downstream IBO’s to leave
Quixtar and join other multi-level marketing operations, in part by disparaging
the Quixtar opportunity. In 2007, three of the Appellants, Ron Simmons, Lisa
Simmons, and Charles Scott (the “Simmons Appellants”) demanded arbitration
(the “Simmons Arbitration”) against Quixtar to challenge the enforceablity of the
non-compete agreement. Quixtar counterclaimed, asserting causes of action for
(1) breach of contract, (2) tortious interference with existing contract, (3) tortious
interference with advantageous business relationships, (4) misappropriation of
trade secrets, and (5) violations of the Lanham Act. At about the same time,
Quixtar initiated separate arbitration proceedings (the “Woodward Arbitraion”)
against the remaining Appellants (the “Woodward Appellants”) alleging the
same causes of action, minus the Lanham Act claim. Both groups of Appellants



      1
          Quixtar is the successor company to Amway in the United States.

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                                  No. 09-41123

claim that Liberty Mutual owed them a defense in their respective arbitrations
per the terms of the policy. Liberty Mutual disagreed.
        Liberty Mutual issued a General Commercial Liability Policy for the
Independent Business Owners Benefits Association (“IBOBA”)—consisting of
authorized IBO’s. The policy covered, in addition to the Association,
      Each authorized [IBO] who elects coverage in accordance with
      IBOBA procedures, but only with respect to the operation of their
      Independent Business as described in the Independent Business
      Ownership Plan for North America. Coverage is excluded for any
      other business or personal activities not related to Insured’s IBO
      activities under the Independent Business Ownership Plan.
The Independent Business Ownership Plan defines an IBO as “a person
authorized to sell products and service Members and Clients; register others as
IBOs, Members, and Clients; and upon qualification can receive bonuses and
participate in business incentive programs.” IBO’s are covered under the policy
for injury arising from “personal and advertising injury,” which covers “[o]ral or
written publication, in any manner, of material that slanders or libels a person
or organization or disparages a person’s or organization’s goods, products or
services[.]”
      In May 2008, all Appellants jointly filed this declaratory judgment action
seeking a judgment that Liberty Mutual had a duty to defend them in their
respective underlying arbitrations. The parties filed cross-motions for summary
judgment. The Magistrate Judge determined that Liberty Mutual had no duty
to defend Appellants in either arbitration because Appellants did not qualify as
“Named Insureds” under the policy and entered final judgment for the Appellee.
Appellants moved for reconsideration and new trial, which the Magistrate Judge
denied. Appellants timely appealed.




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                                   No. 09-41123

                              Standard of Review
      Summary judgment is appropriate “if the movant shows that there is no
genuine dispute as to any material fact and the movant is entitled to judgment
as a matter of law.” F ED. R. C IV. P. 56(a). “The district court’s interpretation of
an insurance contract and its exclusions is a question of law and is subject to de
novo review.” Delta Seaboard Well Servs., Inc. v. Am. Int’l Specialty Lines Ins.
Co., 602 F.3d 340, 342–43 (5th Cir. 2010). Where, as here, the court sits in
diversity, the choice of law rules of the forum state apply. Id. at 343. The Texas
Insurance Code dictates that Texas law applies to insurance contracts. See T EX.
I NS. C ODE A NN. art. 21.42. The parties do not dispute that Texas law applies.
                                     Analysis
      The Magistrate Judge held that Liberty had no duty to defend Appellants
because inter alia Appellants were not insured under the policy for the claims
against them in the underlying arbitrations. Specifically, the Magistrate Judge
held that the actions alleged by Quixtar in the arbitrations did not fall into the
scope of coverage under the policy because those actions were in direct
competition with Quixtar and, thus, were not based on the operation of the IBO’s
Independent Businesses. On appeal, Appellants argue that the Magistrate
Judge erred because the acts alleged in the arbitration cannot be separated from
the operation of their Independent Businesses and those acts fall within the
policy’s coverage for personal and advertising injuries. We do not reach the
question of whether the allegations in the underlying complaints would be
considered personal and advertising injuries because we agree with the
Magistrate Judge that the acts alleged were not part of the operation of the
Independent Businesses and thus, not within the scope of coverage of the policy.
      Texas courts interpret insurance policies using general rules of contract
construction to discern the parties’ intent.        Gilbert Tex. Constr., L.P. v.
Underwriters at Lloyd’s London, 327 S.W.3d 118, 126 (Tex. 2010). We give policy

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                                  No. 09-41123

terms their plain meaning, construing the policy as a whole. Don’s Bldg. Supply
Inc. v. OneBeacon Ins. Co., 267 S.W.3d 20, 23 (Tex. 2008). “If an insurance
contract uses unambiguous language, we must enforce it as written.”           Id.
However, we must resolve any ambiguities in favor of coverage. Id.
      Under Texas’s eight corners rule, “[a]n insurer’s duty to defend is
determined solely by the allegations in the pleadings and the language of the
insurance policy.” King v. Dallas Fire Ins. Co., 85 S.W.3d 185, 187 (Tex. 2002).
“If the factual allegations against the insured, fairly and reasonably construed,
state a cause of action potentially covered by the policy, the duty to defend
arises.”      Republic-Vanguard Ins. Co. v. Mize, 292 S.W.3d 214, 219
(Tex.App.–Amarillo 2009, no pet.). It is the factual allegations rather than the
labels on the causes of action that determine whether there is a duty to defend.
Gilbert, 327 S.W.3d at 135.
      The policy provides coverage for authorized IBO’s “but only with respect
to the operation of their Independent Business as described in the Independent
Business Ownership Plan for North America” (the “Plan”). Appellants argue
that because the accusations that form the basis of Quixtar’s complaint were
that Quixtar was operating an illegal business, the actions were “with respect
to the operation of” their businesses within the meaning of the policy. Further,
they contend that the word “operation” is at least ambiguous and that under
Texas law it must be construed in their favor. However, Appellants read the
phrase “with respect to the operation of” their business without reference to the
rest of the policy, violating a basic canon of contract construction. Instead, we
read the phrase in harmony with the policy as a whole to give effect to all of its
provisions.    Gilbert, 327 S.W. 3d at 126.   The policy makes clear that the
business activities must be as described in the Plan. Texas law allows us to look
at the Plan because it is incorporated by reference. Phillips Petroleum Co. v. St.
Paul Fire & Marine Ins. Co., 113 S.W.3d 37, 40 (Tex.App.–Houston [1st Dist.]

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                                  No. 09-41123

2003, pet. denied). Unsurprisingly, disparaging Quixtar while trying to recruit
Downstream IBO’s away from Quixtar is not any part of the Plan.
      Even if the policy did not reference the Plan, we would still hold that the
IBO’s alleged activities do not fall within the scope of the policy. The policy
expressly excludes coverage for “any other business or personal activities.” All
of the actions alleged by Quixtar stem from the IBO’s efforts to start their own
competing businesses. They sought release from the non-compete obligations in
their contract.    Quixtar contended that they actively recruited other
Downstream IBO’s to leave Quixtar and join a new multi-level marketing
operation. These actions fall under the category of other business activities.
And, they cannot be considered activities “with respect to the operation of” their
Quixtar IBO’s because these actions are actually inconsistent with or
antithetical to the operation of a Quixtar IBO. Therefore, the Magistrate Judge
did not err in finding that there was no coverage under the policy for the acts
alleged in the underlying arbitrations.
      The judgment is AFFIRMED.




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