Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-cand-5_06-cv-00198/USCOURTS-cand-5_06-cv-00198-21/pdf.json

Nature of Suit Code: 110
Nature of Suit: Insurance
Cause of Action: 28:1332 Diversity-Insurance Contract

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United States District Court

For the Northern District of California

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United States District Court

For the Northern District of California

IN THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF CALIFORNIA

SAN JOSE DIVISION

Netscape Communications Corporation, et al.,

Plaintiffs,

 v.

Federal Insurance Company, et al.,

Defendants.

 /

NO. C 06-00198 JW 

ORDER DENYING PLAINTIFFS’

MOTION FOR PARTIAL SUMMARY

JUDGMENT; GRANTING ST. PAUL’S

MOTION FOR PARTIAL SUMMARY

JUDGMENT RE: DUTY TO DEFEND;

SETTING FURTHER CASE

MANAGEMENT CONFERENCE

I. INTRODUCTION

America Online, Incorporated ("AOL") and its subsidiary Netscape Communications

Corporation ("Netscape") (collectively, "Plaintiffs"), bring this diversity action against St. Paul

Mercury Insurance Company ("St. Paul"), Federal Insurance Company, Executive Risk Specialty

Insurance Company, and National Union Fire Insurance Company, alleging breach of contract,

breach of the covenant of good faith and fair dealing, and violations of California Business and

Professions Code Section 17200. Presently before the Court are Plaintiffs’ and St. Paul's crossmotions for partial summary judgment on the duty to defend. The Court conducted a hearing on

June 7, 2007. Based on the papers submitted to date and the arguments of counsel at the hearing, the

Court DENIES Plaintiffs’ motion and GRANTS St. Paul's motion. 

II. BACKGROUND

Plaintiffs contend that their policy with St. Paul obligated St. Paul to defend them against

personal injury suits such as those brought in four civil actions filed against Plaintiffs (the

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“Underlying Actions”) for alleged interceptions of private electronic communications. (Plaintiffs’

Notice of Motion and Cross Motion for Partial Summary Judgment Re: Duty to Defend and

Opposition to St. Paul Mercury’s Motion for Partial Summary Judgment at 2, hereafter, “Plaintiffs’

Motion,” Docket Item No. 85.)

A. The Underlying Actions

The Underlying Actions are as follows:

1. Specht v. Netscape Communications Corp. and America Online, Inc., No. 00 Civ.

4871, filed August 3, 2000, in the Southern District of New York. 

2. Weindorf v. Netscape Communications Corp and America Online, Inc., No. 00 Civ.

6219, filed August 18, 2000, in the Southern District of New York. 

3. Gruber v. Netscape Communications Corp. and America Online, Inc., No. 00 Civ.

6249, filed August 18, 2000, in the Southern District of New York. 

4. Mueller v. Netscape Communications Corp. and America Online, Inc., No. 00 Civ.

1723, filed July 21, 2000, in the District of Columbia. 

The above actions contain virtually identical allegations that do not differ materially as to the

issue of coverage. (Plaintiffs’ Motion at 5; Notice of Motion and Motion by Defendant St. Paul

Mercury Insurance Co. for Partial Summary Judgment Re Duty to Defend at 4, hereafter, “St. Paul’s

Motion,” Docket Item No. 74.) Each action concerns Netscape's SmartDownload product, a

software program designed to facilitate the ability of third party users to download large files over

the Internet by enabling them to resume interrupted downloads from the point of interruption. 

(Declaration of David Park in Support of Plaintiffs’ Cross-Motion for Partial Summary Judgment ¶

4, hereafter, “Park Decl.,” Docket Item No. 85; Declaration of Marc Patterson in Support of

Plaintiffs’ Cross-Motion for Partial Summary Judgment ¶ 3(a), hereafter, “Patterson Decl.,” Docket

Item No. 85.) 

The version of the program at issue contained a feature, "Smart Download Profiling," which

provided Netscape with information about users' internet activities. Netscape used this information

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1

 The parties jointly stipulated that the testimony of Nancy Perkins and Glenn Spencer shall

be considered the testimony of AOL. (Stipulation and Agreement for Purpose of Summary

Judgment Motion ¶ 12, Docket Item No. 80.)

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to create profiles of its users, both to help with technical support, and additionally, to create

opportunities for targeted advertising. (Park Decl. ¶¶ 5-6.) The claimants in the Underlying Actions

alleged that Netscape’s use of the feature violated the Electronic Communications Privacy Act

("ECPA") and the Computer Fraud and Abuse Act ("CFAA").

B. Insurance Policy

In 1999, AOL formed a team to plan a strategy on how to efficiently cover its liability

exposure.1

 (St. Paul’s Motion, Ex. A, Spencer Deposition at 23:23-24:25, hereafter, “Spencer

Dep.”.) The team was formed, at least in part, to address cost control issues regarding the unique

risks associated with AOL’s online and internet businesses. (Joint Ex. 36, Docket Item Nos. 109-11;

Spencer Dep. at 22:10-23:22). When AOL eventually picked insurance, it chose, in addition to other

policies, General Liability Protection (the "Policy") from St. Paul. (Joint Exs. 1, 79.) The Policy

was effective April 1, 1999, through June 1, 2001, and was the less expensive option that St. Paul

offered. (Joint Exs. 1, 79.) It included a duty to defend with respect to each of its coverages. (Joint

Ex. 1 at SPM0142). Consistent with the lower price, the original quote for the policy excluded

coverage for advertising injury or personal injury, such as invasion of privacy claims. (Joint Ex.

79.) The parties later amended the exclusion with an endorsement that limited the advertising injury

and personal injury exclusion to those injuries arising from “online activities.” (Joint Ex. 69.) The

negotiations that led to the issuance of the Policy took place in New York and Washington, DC. 

(Joint Exs. 79, 81, 84, 85, 66, 100-101, 104, 225.) Netscape was automatically added to the Policy

as a subsidiary of AOL when it was acquired in 1999 and later was named as an insured. (Joint Exs.

85, 86). 

The Policy provides a number of distinct coverages and exclusions, only several of which are

at issue. The Policy's personal injury coverage provides:

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Personal injury liability. We'll pay amounts any protected person is legally required

to pay as damages for covered personal injury that: 

• results from your business activities, other than advertising, broadcasting, 

 publishing or telecasting done by or for you; and

• is caused by a personal injury offense committed while this agreement is in 

 effect. 

. . .

Personal injury means injury, other than bodily injury or advertising injury, that's

caused by a personal injury offense. 

Personal injury offense means any of the following offenses: 

. . .

Making known to any person or organization written or spoken material that violates

a person's right to privacy.

(Joint Ex. 1 at SPM0141.) 

The Policy excludes personal injury coverage for criminal acts, which are defined as follows:

Deliberately breaking the law. We won't cover personal injury that results from: 

• the protected person knowingly breaking any criminal law; or 

• any person or organization breaking any criminal law with the consent or 

knowledge of the protected person. 

(Joint Ex. 1 at SPM0154.) 

The Policy also specifically excludes personal injury coverage for "online activities." The

exclusion clause provides:

For the purposes of advertising injury and personal injury, all Online Activities are excluded

from these coverages.

“Online Activities” is defined as providing e-mail services, instant messaging

services, 3rd party advertising, supplying 3rd party content and providing internet

access to 3rd parties. However, it is understood that America Online's own

advertising is not considered "Online Activity" regardless of the medium or format in

which it is presented.

(Joint Ex. 1 at SPM0341.) 

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C. Procedural History

Shortly after service of the complaints in the Underlying Actions, Plaintiffs tendered them to

St. Paul. (Joint Exs. 129, 130.) Based on its assessment of the complaints and the Policy, St. Paul

denied coverage, finding it had no duty to defend. (Joint Ex. 131.) Plaintiffs proceeded to defend

themselves in the Underlying Actions, incurring substantial expenses, and eventually settled. 

(Plaintiffs’ Motion at 7.) On December 12, 2005, Plaintiffs filed this action in state court, alleging

breach of contract, breach of the covenant of good faith and fair dealing, and violations of California

Business and Professions Code Section 17200. (Notice of Removal, Docket Item No. 1.) 

Defendants removed on January 11, 2006. Id. On January 24, 2006, Plaintiffs filed their First

Amended Complaint. (See Docket Item No. 22.) All Defendants except for St. Paul have settled. 

(Joint Case Management Statement at 1, Docket Item No. 37.) Plaintiffs allege three causes of

action against St. Paul as follows: (1) Second Cause of Action for Breach of Contract; (2) Fifth

Cause of Action for Breach of the Covenant of Good Faith and Fair Dealing; and (3) Unfair

Competition in Violation of California Business and Professions Code Section 17200. (Second

Amended Complaint, Docket Item No. 22.)

Presently before the Court are Plaintiffs' and St. Paul's cross-motions for partial summary

judgment regarding the duty to defend. 

III. STANDARDS

 Although motions for partial summary judgment are common, Rule 56 of the Federal Rules

of Civil Procedure, which governs summary judgment, does not contain an explicit procedure

entitled “partial summary judgment.” As with a motion under Rule 56(c), partial summary judgment

is proper “if the pleadings, depositions, answers to interrogatories, and admissions on file, together

with the affidavits, if any, show that there is no genuine issue as to any material fact and that the

moving party is entitled to judgment as a matter of law.” Fed. R. Civ. P. 56(c). The purpose of

partial summary judgment “is to isolate and dispose of factually unsupported claims or defenses.” 

Celotex v. Catrett, 477 U.S. 317, 323-24 (1986). The moving party “always bears the initial

responsibility of informing the district court of the basis for its motion, and identifying the evidence

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which it believes demonstrates the absence of a genuine issue of material fact.” Id. at 323. The nonmoving party must then identify specific facts “that might affect the outcome of the suit under the

governing law,” thus establishing that there is a genuine issue for trial. Fed. R. Civ. P. 56(e). 

When evaluating a motion for partial or full summary judgment, the court views the evidence

through the prism of the evidentiary standard of proof that would pertain at trial. Anderson v.

Liberty Lobby Inc., 477 U.S. 242, 255 (1986). The court draws all reasonable inferences in favor of

the non-moving party, including questions of credibility and of the weight that particular evidence is

accorded. See, e.g. Masson v. New Yorker Magazine, Inc., 501 U.S. 496, 520 (1992). The court

determines whether the non-moving party’s “specific facts,” coupled with disputed background or

contextual facts, are such that a reasonable jury might return a verdict for the non-moving party. 

T.W. Elec. Serv., 809 F.2d at 631. In such a case, partial summary judgment is inappropriate. 

Anderson, 477 U.S. at 248. However, where a rational trier of fact could not find for the nonmoving party based on the record as a whole, there is no “genuine issue for trial.” Matsushita Elec.

Indus. Co. v. Zenith Radio, 475 U.S. 574, 587 (1986).

The filing of cross-motions for partial summary judgment or summary judgment does not

necessarily mean that the material facts are, indeed, undisputed. The denial of one motion does not

necessarily require the grant of another. See Atlantic Richfiled Co. v. Farm Credit Bank of Wichita,

226 F.3d 1138, 1147 (10th Cir. 2000). The motions must be evaluated in accordance with the claim

or defense that is the subject of the motion and in accordance with the burden of proof allocated to

each party. Whether an insurer has a duty to defend is a proper subject for summary judgment. 

Frank and Freedus v. Allstate Insurance Company, 45 Cal. App. 4th (1996). 

IV. DISCUSSION

A. Choice of Law

As a threshold matter, the parties dispute whether California or Virginia law applies for

purposes of interpreting the Policy. (St. Paul’s Motion at 11-14; Plaintiffs’ Motion at 8-12.) 

In diversity cases, courts apply the choice of law rules of the forum state, in this case

California. Klaxon Co. v. Stentor Elec. Manufacturing Co., 313 U.S. 487, 496 (1941). When

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neither party identifies a meaningful conflict between California law and that of and another state,

California courts apply California law. Homedics, Inc. v. Valley Forge Ins. Co., 315 F.3d 1135,

1138 (9th Cir. 2003). Only when a conflict exists do California courts inquire into the

“governmental interest” of each respective state. Strassberg v. New England Mut. Life Ins. Co., 575

F.2d 1262, 1263-64 (9th Cir. 1978). Even where there is a conflict, if the application of a foreign

law does not significantly advance the interests of the foreign state, California courts apply

California law. Id. In this case, for conflicts of laws purposes, St. Paul bears the burden of

establishing a meaningful conflict between the laws of California and Virginia. Homedics, 315 F.3d

at 1138. 

With respect to contract interpretation, St. Paul contends that Virginia law should apply to

the extent there is a conflict with California law on the issues presented before the Court. (St. Paul’s

at 11.) However, St. Paul then admits that California and Virginia law are consistent with regard to

the rules governing contract interpretation, a key issue in this case. (St. Paul’s Motion at 13.) Since

St. Paul concedes that there is no conflict between the two states on this issue, the Court applies

California law for contract interpretation purposes. Homedics, 315 F.3d at 1138. 

With respect to the duty to defend, St. Paul contends that California law and Virginia law

differ. (St. Paul’s Motion at 13.) However, St. Paul then admits that the difference will not affect

the outcome of this case. (St. Paul’s Motion at 13.) 

In California, analysis of whether a duty to defend exists starts “by comparing the allegation

of the complaint with the terms of the policy.” Waller v. Truck Ins. Exchange, Inc., 11 Cal.4th 1, 18

(1995). Similarly, in Virginia, the obligation to defend “depends on comparison of the policy

language with the underlying compliant.” Resource Bankshares Corp. v. St. Paul Mercury Ins. Co.,

407 F.3d 631, 636 (4th Cir. 2005). A second tier of analysis in California requires an insurer to take

into consideration facts known or readily available to it. Waller, 11 Cal. 4th at 18. While this may

differ from Virginia law, the Court does not consider any such facts in a way that materially

prejudices St. Paul. This means applying Virginia law would not significantly advance an interest of

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Virginia. Strassberg, 575 F.2d at 1264. The Court finds that St. Paul has failed to establish that a

different outcome would be reached if Virginia law were applied. 

Accordingly, the Court applies California law as to the issue of whether St. Paul had a duty

to defend Plaintiffs. 

B. Duty to Defend

Plaintiffs contend that St. Paul had a duty to defend them in the Underlying Actions. 

(Plaintiffs Motion at 12.) St. Paul contends that the Underlying Actions did not allege a covered

offense. (St. Paul’s Motion at 15.) 

Under California law, a liability insurer has a broad duty to defend. Montrose Chem. Corp.

v. Sup. Ct., 6 Cal. 4th 287, 295 (1993). In analyzing whether a claim is covered by an insurance

policy, the court first examines the coverage provisions to determine whether the claim falls within

the policy terms. Waller, 11 Cal. 4th at 16. Second, the court examines the exclusion clauses

because they remove coverage for risks that would otherwise fall within the insuring clauses. Id.

Whether a duty arose depends on the language of the insurance policy, and interpretation of an

insurance policy is a question of law. Id. at 18. 

In interpreting an insurance policy, the court looks at the plain meaning of the language in

dispute. Id. The court views the plain meaning according to the mutual intent of the parties, as

evidenced from the writing itself. Id. Only when terms are ambiguous, does the court look to

extrinsic evidence, while straining not to find ambiguity where none exists. Id. at 19. In this case,

the Policy contains an express duty to defend. (Joint Ex. 1 at SPM0141.) Therefore, the Court

proceeds to consider whether there was a qualifying occurrence.

1. Making Known to Any Person or Organization

Plaintiffs contend that the personal injury offense of “making known to any person or

organization written or spoken material that violates a person’s right to privacy” was implicated by

the Underlying Actions, giving rise to the duty to defend. (Plaintiffs’ Motion at 12-22.) St. Paul

contends that the complaints in the Underlying Actions did not allege Plaintiffs were “making

known” information to “any person or organization” because only Netscape and AOL learned of the

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2

 St. Paul submitted additional authority on this issue. (See, e.g., Motion for Leave to File

Additional Authority, Docket Item No. 148.) However, the Court finds the authority submitted by

St. Paul distinguishable as it relates to intrusion upon seclusion privacy claims, which are unlike the

disclosure of private facts claims at issue here.

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information, and they are related entities. (St. Paul’s Motion at 15-19.) It is undisputed the

complaints allege that SmartDownload gathered information from users, that this information was

transmitted to Netscape and AOL, and that persons at Netscape and AOL knew of this information. 

(Specht Complaint ¶¶ 22-38.) Thus, the Court must interpret the phrases “making known” and “any

person or organization.” 

The Court looks first to the plain meaning of the terms at issue to determine the mutual intent

of the parties. Waller, 11 Cal. 4th at 18. “Making known” literally means the act of making others

aware.2

 For sake of this analysis, the others are “any person or organization,” which includes

individual employees of Netscape and AOL, as well as the entities themselves. By using the word

“any,” the Policy does not place restrictions on coverage based on the relatedness of the persons or

entities. Therefore, when Netscape received information from SmartDownload, it was making it

known to AOL by transmitting it to its parent company. (Specht Complaint ¶¶ 22-38.) Similarly,

individual Netscape employees made the information known to each other by circulating files among

themselves with the information gained from SmartDownload. Id. The evidence does not materially

contradict this reading of events in light of the Court’s interpretation of the Policy, so the Court does

not need to reach whether Netscape circulated information gained from SmartDownload to another

non-affiliated person or organization. 

Accordingly, in the absence of an exclusion, the Underlying Actions would have qualified as

an occurrence giving rise to St. Paul’s duty to defend. Thus, the Court proceeds to examine the

exclusions at issue to determine their applicability.

2. Criminal Activity Exclusion

St. Paul contends that it did not have a duty to defend because the Underlying Actions

alleged criminal activity, which was excluded from coverage under the “deliberately breaking the

law” clause. (St. Paul’s Motion at 19-20.) 

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3

 The Court does not consider whether the parties mutually understood this list to be

exhaustive.

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The duty to defend arises upon the insured’s tender of defense and continues until the

underlying lawsuit is concluded or until it has become clear that there is no potential for coverage. 

Montrose, 6 Cal. 4th at 295. 

In this case, Plaintiffs’ were not found to have committed a “breaking” of a criminal law as

required by the “deliberately breaking the law” exclusion. (Joint Ex. 1 at SPM0154.) Therefore,

the exclusion was never triggered. Id. The mere allegation that Plaintiffs’ broke a criminal law in

the Underlying Actions is not enough to support the assertion that Plaintiffs knowingly broke or

consented to the breaking of a criminal law. This is especially true because the Underlying Actions

were civil in nature and settled without a court finding on liability, or for that matter, guilt. 

Accordingly, the Court finds the “deliberately breaking the law” exclusion inapplicable.

3. Online Activity Exclusion

St. Paul contends that the Policy excludes coverage for “online activities” and that the

allegations regarding Netscape’s SmartDownload in the Underlying Actions referred to such

activities. (St. Paul’s Motion at 20-23.) Plaintiffs contend that the exclusion does not apply because

SmartDownload did not involve “providing access to 3rd parties.” (Plaintiffs’ Motion at 27-29.) 

The Court finds that the plain meaning of the term “online activities” includes those products

and services that provide, allow for, and facilitate access to the Internet and its content. The

definition of online activities in the endorsement that amended the Policy confirms this

interpretation. It includes, “[p]roviding e-mail services, instant messaging services, 3rd party

advertising, supplying 3rd party content and providing internet access to 3rd parties.”3

 (Joint Ex. 1

at SPM0341.) 

In determining the mutual intent of the parties from the writing itself, the Court focuses its

analysis on the definition phrase, “providing internet access to 3rd parties.” The Court does not read

this phrase to be limited to merely providing a connection to the Internet because the definition of

“internet access” is broader than “internet connection.” “Access” includes not only the permission

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4

 The Court does not consider whether AOL drafted the clause in response to litigation even

though the first Underlying Action was filed on August 3, 2000, and the endorsement was submitted

on September 13, 2000. (Specht Complaint; Joint Ex. 69.)

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or ability to enter as “connection” does, but also the freedom or ability to make use of something. 

WEBSTER’S NINTH NEW COLLEGIATE DICTIONARY 49 (1991). Plaintiffs do not dispute that

SmartDownload facilitated the ability of third party users to download large files over the Internet. 

(Patterson Decl. ¶ 3(a).) Read in terms of the definition of access above, SmartDownload allowed

third parties “to make use of” the Internet by allowing users to download large files successfully. 

Thus, by providing software that facilitated the ability of users to make use of the Internet, Plaintiffs

provided internet access to those third party users. 

Even assuming, arguendo, that the terms “online activities” or “providing internet access”

are ambiguous, they are interpreted as the insurer believed the insured understood them at the time

of formation. Allstate, 45 Cal. App. 4th at 471; see also Montrose Chemical Corp. v. Admiral Ins.

Co., 10 Cal. 4th 645, 667 (1995). If the ambiguities persist, they are construed against the party who

caused them to exist. Allstate, 45 Cal. App. 4th at 471. This helps to preserve the reasonable

expectations of the parties. Id. Only if the language is still ambiguous after taking these steps, is it

resolved against the insurer. Id.

Exhibits and deposition testimony suggest both parties attached broad meaning to the online

activities exclusion at the time it was drafted, although the parties now dispute the meaning of the

clause. (Joint Exs. 21, 22, 23, 26, 36, 37; Spencer Dep. 107:17-108:16.) Nonetheless, it was AOL

who drafted the clause, so the Court interprets any ambiguity against Plaintiffs.4

 Admiral, 10 Cal.

4th at 667. Accordingly, the Court finds the scope of the online activity exclusion sufficiently broad

to encompass Plaintiffs’ activities with regard to Netscape’s SmartDownload product as alleged in

the Underlying Actions. Since the exclusion applies, St. Paul did not have a duty to defend

Plaintiffs’ in the Underlying Actions.

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4. Plaintiffs’ Other Claims

The Court raises, sua sponte, the issue of whether, in light of the Court’s finding on the duty

to defend, Plaintiffs can maintain a claim for breach of the covenant of good faith and fair dealing,

and a claim under Section 17200. When a policy does not provide coverage on its terms, there can

be no action for breach of the covenant of good faith and fair dealing as to the policy contract. 

Waller, 11 Cal. 4th at 35-36. Here, the Policy does not provide coverage due to the online activity

exclusion. 

Accordingly, the Court, sua sponte, DISMISSES Plaintiffs’ claim for breach of the covenant

of good faith and fair dealing. 

V. CONCLUSION

The Court DENIES Plaintiffs’ motion for partial summary judgment and GRANTS St. Paul's

motion for partial summary judgment regarding the duty to defend.

In light of this Order, the Court invites the parties to a Further Case Management Conference

on October 29, 2007 at 10 a.m. Pursuant to Civil Local Rule 16-9, the parties are to file a Joint

Status Statement by October 19, 2007. The statement shall advise the Court on the impact of this

Order and claims remaining in the action.

Dated: October 10, 2007 

JAMES WARE

United States District Judge

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THIS IS TO CERTIFY THAT COPIES OF THIS ORDER HAVE BEEN DELIVERED TO:

Daniel J. Bergeson dbergeson@be-law.com

David Christopher Kerby ckerby@gordonrees.com

Hway-Ling Hsu hhsu@be-law.com

Leslie Ann Pereira lpereira@abelsonherron.com

Marc George VanNiekerk mvanniekerk@be-law.com

Michael Bruce Abelson mabelson@abelsonherron.com

Sara Mary Thorpe sthorpe@gordonrees.com

Dated: October 10, 2007 Richard W. Wieking, Clerk

By: /s/ JW Chambers 

Elizabeth Garcia

Courtroom Deputy

kk

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