[00:00:02] Speaker 02:
Good morning, Your Honors.

[00:00:03] Speaker 02:
May it please the Court, Kirk Pasich for Appellant Cachet.

[00:00:09] Speaker 02:
I'm going to try not to repeat what was in our briefs.

[00:00:11] Speaker 02:
I think both sets of briefs were very thorough on the issues.

[00:00:14] Speaker 02:
But what I would like to do, other than of course address any questions the Court may have, is focus on a couple of points.

[00:00:21] Speaker 02:
I'd like to start with the notion of why we're here.

[00:00:25] Speaker 02:
The policy that was issued by Berkeley, it's a standard form policy.

[00:00:29] Speaker 02:
It's pre-printed.

[00:00:31] Speaker 02:
The 2015 edition is shown on every page of the policy.

[00:00:36] Speaker 02:
They issued this policy to somebody who's not a bank, somebody that's not in the commercial paper business, somebody who's not subject to the UCC.

[00:00:47] Speaker 02:
I would submit that the policy in this context is ambiguous with respect to its coverage provisions.

[00:00:55] Speaker 02:
And there's a lot of back and forth.

[00:00:56] Speaker 02:
And there are cases about emails which we don't think are particularly relevant.

[00:01:00] Speaker 02:
There are cases in the UCC context which we don't think are particularly relevant.

[00:01:04] Speaker 02:
And there's a focus on words.

[00:01:07] Speaker 02:
And so if we start, if I may, with the forgery or alteration provision.

[00:01:12] Speaker 02:
And we're just going to follow California rules of insurance policy interpretation because they are different than the rules in some of the cases that were discussed.

[00:01:19] Speaker 02:
There are some similarities, but the law and ambiguity is pretty clear.

[00:01:23] Speaker 02:
And we start with that because if our interpretation is reasonable, as someone in our business sold a foreign policy, even if they have the most reasonable interpretation,

[00:01:34] Speaker 02:
then our interpretation should control, particularly when we're at the stage we're at in this case with the motion to dismiss, where all we have to do is have plausible allegations of a reasonable interpretation of the language.

[00:01:47] Speaker 02:
Now, I do think the district court was pretty thorough on analyzing the case law and addressing the issues and focusing on the key points.

[00:01:54] Speaker 02:
And some of what the district court said we actually don't disagree with, and I'll come to that in a minute.

[00:02:00] Speaker 02:
But if you look at what we're talking about here, one word that really doesn't get a lot of attention from the insurers is the word similar in the Forgery or Alteration Clause.

[00:02:09] Speaker 02:
Now we're dealing with the ACH world, where instead of paper checks, we have checks that are basically done electronically.

[00:02:16] Speaker 02:
Instead of handwriting a deposit slip and carrying a check to a bank to deposit, it's done electronically.

[00:02:23] Speaker 02:
And batch files are the vehicle that provide the instructions for how that works.

[00:02:27] Speaker 02:
And so we're dealing with an ACH system that basically focuses on e-checks.

[00:02:34] Speaker 02:
And so when you're in our business and these insurers willingly insure our business, which they're presumed to know, there's no dispute about that in the record.

[00:02:44] Speaker 02:
They're presumed to know our business.

[00:02:46] Speaker 02:
What exactly is the coverage they're providing to us if they're not covering ACH transactions and E-checks?

[00:02:53] Speaker 02:
And on what basis can they say that our understanding of similar, when used with similar written promises, orders, or directions to pay, doesn't make the ACH transaction similar to checks and drafts?

[00:03:08] Speaker 02:
These are called E-checks for a reason.

[00:03:11] Speaker 02:
Now, if the focus is on the alteration part, we acknowledge their point and what the district court focused on, which is alteration implies an existing document.

[00:03:22] Speaker 02:
That's what the court said.

[00:03:24] Speaker 02:
That's what these folks argue with us.

[00:03:26] Speaker 02:
But I don't think that's what alteration means.

[00:03:29] Speaker 02:
We gave the dictionary definitions.

[00:03:32] Speaker 02:
You have a change in what those batch files should have said.

[00:03:35] Speaker 02:
They were altered from what they're supposed to say.

[00:03:38] Speaker 02:
And when you deal with an electronic transaction like this, that's the mechanism to issue an alteration or to conduct an alteration.

[00:03:46] Speaker 05:
That just doesn't seem to meet just the ordinary understanding of the term alter or alteration.

[00:03:53] Speaker 05:
I mean, if you just look at this policy, it covers alteration of checks.

[00:03:57] Speaker 05:
So let's just use a check example instead of an ACH.

[00:04:00] Speaker 05:
And say, I go to a mom and pop store that sells cell phones and lie to them and say, I represent Apple.

[00:04:09] Speaker 05:
I'm going to sell you 10,000 iPhones.

[00:04:11] Speaker 05:
And the owner says, yes.

[00:04:13] Speaker 05:
And I tell the owner, please write a check to Apple LLC instead of Apple Incorporated.

[00:04:19] Speaker 05:
That's a fake LLC I founded.

[00:04:21] Speaker 05:
They write a check, big check for me, to Apple LLC I cash the check and then I use the money to buy whatever, a Taylor Swift ticket for my daughter.

[00:04:33] Speaker 00:
They're expensive.

[00:04:35] Speaker 05:
That's why I said 10,000 iPhones for that.

[00:04:40] Speaker 05:
I don't think anyone would say that's an altered check.

[00:04:43] Speaker 05:
I mean, you'd say it's a fraudulent check.

[00:04:46] Speaker 05:
I mean, if the check said Apple Incorporated and I scribbled it off and put Apple LLC, sure, that's an altered check.

[00:04:52] Speaker 05:
But if I just lied to them and said, write a check to me to Apple LLC, I just don't think anybody would call it an altered check.

[00:04:59] Speaker 05:
And it seems like that's kind of what happened here, albeit through ACH.

[00:05:04] Speaker 02:
Well, I actually don't disagree with your example and your conclusion from that example.

[00:05:08] Speaker 02:
But when we put it in the context of insurance, that its entire business is ACH transactions with electronic checks where you provide a batch file.

[00:05:17] Speaker 02:
The batch file that should have been provided was one that identified correct accounts.

[00:05:22] Speaker 02:
and correct recipients, both to receive money and to transfer funds from.

[00:05:27] Speaker 02:
So our position, I think, is pretty clear that we say the alteration is in that information that was provided.

[00:05:34] Speaker 02:
It is different than what should have been provided.

[00:05:37] Speaker 02:
That's the alteration because it changes the character or nature of the instruction that's given to our program.

[00:05:44] Speaker 02:
And so when we're talking about that, I agree with you.

[00:05:48] Speaker 02:
We're talking about, does it have to be an original document that is subsequently altered in time, or can the alteration be in an original document?

[00:05:56] Speaker 02:
We don't read this clause to say the alteration must be later in time from what it was an original document.

[00:06:02] Speaker 02:
Now, we did have batch files along the way that were correct, that were submitted.

[00:06:07] Speaker 02:
And then you have altered batch files.

[00:06:08] Speaker 02:
And by altered, I mean fraudulent account information entered into them.

[00:06:12] Speaker 02:
That was the alteration in our view.

[00:06:16] Speaker 05:
Now, if the courts can... We would just, you know, ask a normal person to say, that's a fraudulent batch file, not an altered batch file.

[00:06:22] Speaker 05:
And that's just a very weird way of describing it.

[00:06:25] Speaker 02:
It may be, Your Honor.

[00:06:26] Speaker 02:
I don't disagree with that either.

[00:06:27] Speaker 02:
But when you're dealing with the foreign policy that is not designed to deal with our business, it's like the square peg in the round hole.

[00:06:35] Speaker 02:
What does that coverage mean in our business, where we do things electronically and where a batch file comes in and where we're not talking about an employee altering the batch file.

[00:06:45] Speaker 02:
We're talking about the person we deal with alters the batch file so it is no longer accurately reflecting what it is supposed to be.

[00:06:53] Speaker 02:
Now, if that doesn't work in our setting, it's hard to figure out where this coverage would work.

[00:07:02] Speaker 05:
It's a legitimate ACH, and an employee of Cachet changes the batch file himself to send it to his bank account, and he alters the batch file with that?

[00:07:13] Speaker 02:
Well, then you have to work through some of the other coverages in the crime policy, like employee theft, and talk about whether there's collusion or not.

[00:07:19] Speaker 02:
And do you meet the other aspects of crime policy there?

[00:07:22] Speaker 05:
Or a hacker somewhere comes in and alters it.

[00:07:24] Speaker 02:
You could you certainly could have a situation where I suppose somebody breaches the system as long as you deal with the other exclusions and changes data once it's there but that's not the core of our business and that's not what this is about and if there was a desire to limit the coverage to hacks they could have said so and that's why I started with the notion that what's happened here is we have a foreign policy

[00:07:49] Speaker 02:
that was in existence for years before it was sold to us that isn't really tailored to our business.

[00:07:54] Speaker 02:
And so when you're looking at these provisions and you judge from the context of what is our business, how does this work with our business, our risk?

[00:08:03] Speaker 02:
Is there reasonable grounds for us to say when the batch file is not what it was supposed to be, it is different from what it was supposed to be?

[00:08:12] Speaker 02:
Is that an alteration or not?

[00:08:14] Speaker 02:
and we submit that that is an alteration now if the court disagrees and says no it has to be an original batch file that has changed in some way then we're going to lose this argument on that point and i concede that because our entire thrust is

[00:08:31] Speaker 02:
You don't have to have something change subsequent in time.

[00:08:33] Speaker 02:
The alteration can be in the original form.

[00:08:37] Speaker 02:
And that's what we say happened here.

[00:08:39] Speaker 02:
And that's, you know, we had this dialogue in the briefing about, well, isn't that a breach of contract?

[00:08:43] Speaker 02:
It might be a breach of contract that they did things they weren't supposed to do.

[00:08:47] Speaker 02:
But it doesn't mean that what we received wasn't altered.

[00:08:50] Speaker 02:
The example I would give you is, I contracted by, and I'm going back showing my age, I suppose, I contracted by Rolls-Royce and I'm delivered a Pinto.

[00:09:01] Speaker 02:
That is not the deal I was supposed to get.

[00:09:03] Speaker 02:
And if I unload and I see my Pinto there, I'm going to say, look, that's not the deal.

[00:09:08] Speaker 02:
That's a changed deal.

[00:09:10] Speaker 02:
You brought me a Pinto instead of a Rolls-Royce.

[00:09:13] Speaker 02:
That, to me, is an alteration.

[00:09:15] Speaker 02:
Now, it may be an alteration governed by what the original contract terms were, and there may be a breach count.

[00:09:20] Speaker 02:
But that's not what we're talking about here.

[00:09:22] Speaker 02:
We're entitled to make that insurance claim based on that alteration.

[00:09:26] Speaker 02:
So that is our starting point on the Forgeware Alteration Clause.

[00:09:31] Speaker 02:
I don't think there's a reasonable dispute about whether these things were directions to pay.

[00:09:35] Speaker 02:
That's what batch files do.

[00:09:36] Speaker 02:
They tell you to pay money and the money came out of or wasn't received in cache accounts.

[00:09:43] Speaker 02:
So for me, the issues are what does similar mean?

[00:09:46] Speaker 02:
What's an alteration?

[00:09:47] Speaker 02:
Was there a direction to pay?

[00:09:49] Speaker 02:
I think we should win the similar point.

[00:09:51] Speaker 02:
I think we should win the direction to pay point.

[00:09:54] Speaker 02:
And I think if you believe that we don't have an alteration because the original batch file that was submitted to us were fraudulent but wasn't changed, then we'll lose that point.

[00:10:03] Speaker 02:
As I said, I would concede that if that is what the court's conclusion is on alteration.

[00:10:09] Speaker 02:
But let me talk for a moment about the computer and funds transfer fraud.

[00:10:14] Speaker 02:
And this one, I think, is equally interesting.

[00:10:17] Speaker 02:
And there was a lot of attention paid.

[00:10:18] Speaker 02:
I mean, we can talk about pest masters.

[00:10:20] Speaker 02:
We can talk about Ernst and Haas.

[00:10:23] Speaker 02:
But the district court and the insurers primarily rely on the universal case.

[00:10:29] Speaker 02:
And that's where I would like to turn, because

[00:10:33] Speaker 02:
The district court said, it said, look, pest masters in Ernst and Haas, they're really not on point here.

[00:10:38] Speaker 02:
I'm following Universal.

[00:10:40] Speaker 02:
And they cite Universal.

[00:10:42] Speaker 02:
And I kept reading Universal when I read these arguments that they were making.

[00:10:46] Speaker 02:
And I considered what the district court said, both in oral argument and in its order.

[00:10:52] Speaker 02:
And I have to confess, I don't really understand why Universal American helps them, because I think it helps us.

[00:10:59] Speaker 02:
And I think if that's really what the district court said and what the insurers are arguing, that that's the case you ought to look at, even though it's obviously not controlling, here's why I think it helps us.

[00:11:11] Speaker 02:
I think the Universal American Court got one thing wrong, which was it focused the word fraudulent on entry.

[00:11:18] Speaker 02:
And I looked at our insuring clause, which is loss resulting directly from a fraudulent entry of electronic data.

[00:11:26] Speaker 02:
It doesn't stop at entry.

[00:11:28] Speaker 02:
It has to be a fraudulent entry of electronic data or a computer program.

[00:11:34] Speaker 02:
I think where Universal made a mistake was it stopped at entry.

[00:11:38] Speaker 02:
To me, that doesn't satisfy the insuring agreement.

[00:11:41] Speaker 02:
It has to be a fraudulent entry of electronic data or computer program.

[00:11:45] Speaker 03:
So let me understand your argument here.

[00:11:47] Speaker 03:
You're saying, well, this could easily be read to say, if it is fraudulent data, even though the statements made to get it in might have been truthful, the fact that the data being entered was fraudulent makes it a fraudulent entry.

[00:12:02] Speaker 02:
That is true.

[00:12:03] Speaker 03:
That strikes me as at least a plausible reading of the language.

[00:12:06] Speaker 02:
That is our view of that language.

[00:12:08] Speaker 03:
And then the other thing here... Now, I don't read the New York case as agreeing with you on that point, but the New York case is just an intermediate appellate court and a state court.

[00:12:16] Speaker 03:
I mean, that's what they thought.

[00:12:19] Speaker 02:
It is what they thought.

[00:12:19] Speaker 02:
But I thought what was interesting and universal, which the district court didn't talk about and the insurers don't talk about, is it went on in the decision.

[00:12:28] Speaker 02:
And it pointed to the fact that the writer which provided this coverage was captioned, Computer Systems.

[00:12:35] Speaker 02:
And the provision itself was entitled computer systems fraud.

[00:12:40] Speaker 02:
And then it said there was an exclusion for losses from fraudulent instruments used as source documentation and the preparation of electronic data.

[00:12:50] Speaker 02:
It pointed to those things to support its conclusion.

[00:12:54] Speaker 02:
None of those things are present here.

[00:12:57] Speaker 02:
If you look at what we have, we have a commercial crime policy, not a computer systems coverage that we're talking about.

[00:13:03] Speaker 02:
We have computer and fund transfers fraud, both of those things, not computer systems fraud.

[00:13:12] Speaker 02:
And then we don't have the exclusion that the New York court relied upon.

[00:13:15] Speaker 02:
So the New York court looked at three separate things to support its conclusion, none of which are present here, any of which they could have put here if they wanted them to be here.

[00:13:27] Speaker 02:
And under the California Supreme Court law, you cannot read into this policy things they omitted.

[00:13:33] Speaker 02:
And so if they meant to talk about those things that were fundamentally important to the universal American court, they should have incorporated them in their policy, and they didn't.

[00:13:43] Speaker 02:
And that universal American decision was in 2015.

[00:13:48] Speaker 02:
So we're looking at a policy forum, a standard forum for the same year,

[00:13:52] Speaker 02:
We're looking at a court decision that while they say it went against us and the district court relied on it as the decision on this issue, I think is first distinguishable, second wrong, and third, if you look at it, then look at what it used to interpret because those provisions are not here.

[00:14:11] Speaker 02:
And so in that circumstance, we think that this clause provides us with coverage.

[00:14:18] Speaker 02:
And that leads us with only, I think, one issue then, which is, do we have some sort of fraudulent instruction?

[00:14:26] Speaker 02:
I don't think there's any debate in the record about the instructions being fraudulent.

[00:14:30] Speaker 02:
We didn't consent to them.

[00:14:31] Speaker 02:
We didn't know they were fraudulent.

[00:14:33] Speaker 02:
And we lost millions of dollars because of it.

[00:14:36] Speaker 02:
With that said, I would like to reserve my remaining three minutes for rebuttal.

[00:14:40] Speaker 04:
actually 24 seconds and 20 now 20 seconds thank you good morning your honors may it please the court I'm just are you

[00:15:06] Speaker 00:
Are you Mr. Dandelos?

[00:15:08] Speaker 04:
Yeah, sorry, Stefan Dandelos on behalf of Berkeley.

[00:15:13] Speaker 04:
Just point of clarification, I think Council attempted to reserve time, but I didn't know that there was time left to reserve.

[00:15:19] Speaker 04:
That's up to you all, I suppose.

[00:15:22] Speaker 04:
I'm taking 12 minutes, and I'm deferring three minutes to- That's what I have down.

[00:15:28] Speaker 04:
... co-Council Mr. Burch.

[00:15:29] Speaker 04:
Okay, thank you.

[00:15:31] Speaker 04:
This is actually a fairly straightforward case.

[00:15:34] Speaker 04:
I want to pick up on a couple things that Mr. Passage mentioned a couple times, suggesting somehow that it's the insurer's obligation to tailor coverage to their business, rather than their corporate obligation to obtain insurance coverage that's tailored to their risk.

[00:15:52] Speaker 04:
As he said, this was a standard form.

[00:15:54] Speaker 04:
It's a standard form in the industry.

[00:15:56] Speaker 04:
There are endorsements on the policy, so it can be tailored as necessary based on the request of the policyholder who's a sophisticated insured, sophisticated policyholder with a sophisticated broker

[00:16:09] Speaker 04:
retained to procure this coverage.

[00:16:11] Speaker 04:
Again, it's not the insurer's obligation to tailor the policy to their risk.

[00:16:17] Speaker 04:
They know what their business is.

[00:16:18] Speaker 04:
They know what their risks are.

[00:16:20] Speaker 04:
The insurers, on the other hand, know what risks they're willing to assume.

[00:16:24] Speaker 04:
That's what this case is about.

[00:16:26] Speaker 04:
Any insurance coverage case is about risk transfer.

[00:16:29] Speaker 04:
This was a risk that our clients were not willing to assume.

[00:16:33] Speaker 04:
This was a risk that our clients could not possibly have underwritten to because what Cache did was gave the keys to the kingdom to its clients.

[00:16:43] Speaker 04:
They let the fox into the hen house.

[00:16:45] Speaker 04:
They allowed the remarketers access to and use of their computer system for purposes of entering batch files into the system to effectuate transfers.

[00:16:57] Speaker 04:
Now, some of their clients did so fraudulently.

[00:17:00] Speaker 04:
That's a bad thing.

[00:17:01] Speaker 04:
We don't dispute that there was a fraud.

[00:17:03] Speaker 04:
But number one, the batch files themselves are not a covered instrument under insuring agreement A2.

[00:17:09] Speaker 04:
They're not a check.

[00:17:10] Speaker 04:
They're not a draft.

[00:17:12] Speaker 04:
They're not a promissory note, nor are they a similar written document.

[00:17:17] Speaker 04:
What does similar mean?

[00:17:19] Speaker 04:
Under the phrase and the canon of policy construction, and I'm going to mispronounce it probably, is just I'm generous.

[00:17:27] Speaker 04:
That things that follow a line have to be of a similar form.

[00:17:32] Speaker 04:
It has to follow the characteristics of a check, a draft, or a promissory note.

[00:17:38] Speaker 04:
A batch file cannot be cashed, negotiated, deposited, securitized, collateralized.

[00:17:45] Speaker 04:
You can't take a batch file as a piece of paper and take it to the bank.

[00:17:50] Speaker 04:
and expect to get any return on it.

[00:17:51] Speaker 03:
You can't endorse it.

[00:17:54] Speaker 03:
I know you're on a roll.

[00:17:56] Speaker 03:
But the part of your case that troubles me is the part where we're talking about loss resulting from a fraudulent entry of electronic data.

[00:18:06] Speaker 03:
Now, you rely on the New York case for saying, well, fraudulent modifies entry.

[00:18:13] Speaker 03:
And therefore, because the entry was not fraudulent, it doesn't matter that the data was fraudulent.

[00:18:18] Speaker 03:
I'm not sure that's a necessary reading of that language.

[00:18:22] Speaker 03:
Fraudulent entry of electronic data.

[00:18:24] Speaker 03:
Well, I don't know why if I have data that's fraudulent and I enter it, why that isn't a fraudulent entry of electronic data, just an ordinary language.

[00:18:35] Speaker 03:
And if that's true, you lose on that point.

[00:18:38] Speaker 03:
So why am I wrong?

[00:18:40] Speaker 04:
Well, we're not only relying on universal.

[00:18:42] Speaker 03:
Well, I don't care what you're relying on.

[00:18:44] Speaker 03:
I'm just talking about the language now.

[00:18:46] Speaker 04:
Yeah, so the way Universal and other courts, including Pestmaster and the Ninth Circuit, have interpreted fraudulent entry to be an unauthorized entry.

[00:18:54] Speaker 03:
There's another section of... I'm now talking about fraudulent entry of electronic data.

[00:19:00] Speaker 03:
So if the data itself is fraudulent, why is that not fraudulent entry of electronic data?

[00:19:07] Speaker 03:
I'm just talking ordinary English.

[00:19:09] Speaker 04:
I understand that, but I think we have to, as Mr. Passage suggested, you read further than fraudulent entry.

[00:19:15] Speaker 04:
It's fraudulent entry of electronic data, but it goes on even further from there.

[00:19:19] Speaker 04:
Fraudulent entry of electronic data into a computer system, and courts have interpreted, and I agree, Your Honor, that the entry...

[00:19:28] Speaker 03:
into a computer system.

[00:19:32] Speaker 03:
So I get that.

[00:19:33] Speaker 03:
So why isn't it fraudulent entry of electronic data into a computer system, entry of fraudulent data?

[00:19:42] Speaker 03:
Why is that not ordinary reading of that language?

[00:19:47] Speaker 04:
Again, under Pestmaster, they interpreted that same back and forth dynamic, where is it the entry of fraudulent data or the fraudulent entry?

[00:19:55] Speaker 04:
And the Ninth Circuit interpreted

[00:19:56] Speaker 04:
fraudulent entry to be unauthorized access.

[00:19:59] Speaker 04:
Now, we have a belt and suspenders response to that argument as well, which the district court did not address.

[00:20:06] Speaker 04:
So this court can affirm on the ground set forth by the district court.

[00:20:11] Speaker 04:
It can also look at exclusion D1, which the district court did not address.

[00:20:18] Speaker 04:
And that's the authorized access exclusion, which uses the same prefatory language.

[00:20:23] Speaker 04:
So if what you're saying, Your Honor, is correct, and if what they want to proffer is correct, that this is a fraudulent entry of electronic data and that entry modifies the data rather than the entry, we disagree with that.

[00:20:34] Speaker 04:
But if that's the case, there's no dispute whatsoever.

[00:20:38] Speaker 04:
In fact, they acknowledge it.

[00:20:39] Speaker 04:
It's in their complaint that the remarketers who uploaded the batch files had access to the system to do so.

[00:20:46] Speaker 00:
So even if the- Can I slow you down for one minute?

[00:20:49] Speaker 00:
Sure.

[00:20:49] Speaker 00:
Because I'm actually struggling with the same ground that Judge Fletcher appears to be struggling with.

[00:20:56] Speaker 00:
Nobody talked about the exclusion of authorized access, right?

[00:21:02] Speaker 00:
The district court never addressed that, and that's not a part of the issue that was presented before us.

[00:21:08] Speaker 04:
It is, Your Honor.

[00:21:09] Speaker 04:
It is, Your Honor.

[00:21:10] Speaker 00:
Well, the district court never reached that.

[00:21:12] Speaker 04:
The district court never reached it because the district court didn't get to exclusion because they determined that cache doesn't get through the front door because there was no fraudulent entry.

[00:21:20] Speaker 04:
But absolutely, it's part of our, it's part of our, it's another grounds.

[00:21:25] Speaker 00:
Let me, let me, I didn't say it right.

[00:21:27] Speaker 00:
Okay.

[00:21:28] Speaker 00:
The district court did not reach the exclusion ground.

[00:21:31] Speaker 04:
Correct.

[00:21:32] Speaker 00:
If we disagree with you on the fraudulent entry analysis, do we send it back for the district court to analyze the exclusion in the first instance?

[00:21:41] Speaker 04:
No, because this court can determine that there's no plausible basis for them to make a claim anyway, that even if you get through the front door, I'll use the front door analogy, that you satisfy the terms and conditions of the insuring agreement, A6A1, the fraudulent entry of electronic data, you still must determine that if that's the case, that exclusion D1 applies because it's fraudulent.

[00:22:05] Speaker 04:
authorized access.

[00:22:07] Speaker 04:
So you have a, where you have a fraudulent entry of electronic data into a computer system by someone who is authorized to access that very system.

[00:22:16] Speaker 03:
That goes back to my... I'm following on with, from Judge Wynn's question.

[00:22:21] Speaker 03:
But it sounds as though if we were to rule as I'm suggesting you say well, but there's another ground and District judge hasn't addressed that ground correct correct well Then the question is do we do it without letting the district judge have a crack at it?

[00:22:36] Speaker 03:
I think that's the question to me Do we send it back to the district judge to allow the district judge to safe in the first instance rather for us to address it?

[00:22:44] Speaker 03:
No, Your Honor, this is de novo review and you can determine that any- Well, we can, but typically if it's an interesting question, we let the district judge have a crack at it and then we decide.

[00:22:56] Speaker 00:
Well, I don't think there's a- And the reason I ask that is more than just we usually do send it back to the district court.

[00:23:02] Speaker 00:
I recall that when you were before the district court arguing the language of fraudulent entry and alteration and the like, the district court did raise the point, hey, I've got an exclusion issue.

[00:23:13] Speaker 00:
Is that an affirmative defense?

[00:23:14] Speaker 00:
Is it appropriate to consider it at this time?

[00:23:19] Speaker 00:
now actually ready a while ago now I can't remember how that was resolved but I don't know if that was part of the district court's thinking to say well I don't know that at this stage I want to really delve into the exclusions issue if that falls with then more of an affirmative defense that should appropriately be litigated the later stage so I don't recall exactly how that played out or what the district court was thinking but but that's another reason why

[00:23:43] Speaker 00:
I think in this case, it may be more appropriate to send it back to the district court because obviously she had looked at the exclusion issue, considered it, but didn't reach it in the first instance.

[00:23:55] Speaker 04:
You're right.

[00:23:55] Speaker 04:
She raised it in oral argument.

[00:23:57] Speaker 04:
We responded to it.

[00:23:58] Speaker 04:
She ultimately didn't get there because she determined that the insuring agreement wasn't satisfied.

[00:24:03] Speaker 04:
So you don't get to an exclusion.

[00:24:04] Speaker 04:
But this court

[00:24:06] Speaker 04:
can affirm on any grounds.

[00:24:08] Speaker 05:
We can.

[00:24:08] Speaker 05:
But I mean, is it better to have the district court take a crack at it?

[00:24:12] Speaker 05:
I mean, the opinion was very well written, very methodical.

[00:24:14] Speaker 05:
And presumably, if we send it back, we'll also get an opinion that's very well written, well reasoned.

[00:24:19] Speaker 05:
So it might be the more prudent course.

[00:24:21] Speaker 05:
But going back to the fraudulent entry, so you agree if we think it's ambiguous, you would lose on this point, right?

[00:24:28] Speaker 05:
Like under the standard, in interpreting insurance contracts, if it's ambiguous, if we say fraudulent entry of electronic data over computer program is ambiguous, it could have potentially another plausible meaning.

[00:24:42] Speaker 04:
No, I would say no.

[00:24:43] Speaker 04:
I would suggest the doctrine of contraproferendum should not apply here.

[00:24:47] Speaker 04:
You have a sophisticated policyholder.

[00:24:49] Speaker 04:
There was arm's length.

[00:24:50] Speaker 04:
They had a sophisticated broker.

[00:24:53] Speaker 04:
They presumably went out into the marketplace and had access to any form they wanted.

[00:24:57] Speaker 04:
They could have gone to the Loews market, who readily manuscripts policies.

[00:25:00] Speaker 04:
So my point, Judge Lee, is no.

[00:25:05] Speaker 04:
First of all, we don't think there's an ambiguity.

[00:25:06] Speaker 05:
Then if it's ambiguous, though, then they would win, though, if we say fraudulent entry is ambiguous.

[00:25:10] Speaker 04:
Well, then it would have to be interpreted against the insurers, which if the doctrine of contraproferendum weren't applied, which it shouldn't here because you have equal bargaining power and a sophisticated insured on the other end, it shouldn't be construed.

[00:25:22] Speaker 03:
Wait a minute.

[00:25:22] Speaker 03:
Is there an exception to the general rule that ambiguities are interpreted against the insurer when you have a sophisticated insured?

[00:25:30] Speaker 04:
There is.

[00:25:32] Speaker 03:
I'm not sure I understand that that's the right rule.

[00:25:35] Speaker 03:
I'm not sure I agree with you.

[00:25:37] Speaker 03:
I mean, I understand that a sophisticated insured is treated differently from an unsophisticated insured, but if the language is genuinely ambiguous to someone who reads this in a sophisticated way, I don't think that helps you.

[00:25:50] Speaker 04:
Well, Your Honor, the genesis of interpreting against a drafter is typically where the drafter has unequal bargaining power in an insurance context.

[00:25:59] Speaker 03:
I don't think you can convince me that the rule is whenever you've got a sophisticated insured, the ambiguity rule doesn't apply at all.

[00:26:08] Speaker 03:
Is that what you're saying?

[00:26:10] Speaker 04:
I'm suggesting that the rule construing against the drafter or considering the insurer to be the drafter in this situation shouldn't apply.

[00:26:20] Speaker 04:
I understand that.

[00:26:21] Speaker 05:
Well, at the very least, if it's ambiguous, it shouldn't be dismissed.

[00:26:26] Speaker 05:
And maybe there's a factual question, and this court then can, you know, there could be summary judgment or, you know, a trial on it.

[00:26:33] Speaker 05:
Because, you know, looking at it further,

[00:26:36] Speaker 05:
fraudulent entry.

[00:26:37] Speaker 05:
I mean, it does seem ambiguous because, you know, suppose, you know, suppose you had a computer, high-end, you know, Dell XPS computer worth thousands of dollars, and, you know, I work for the Geek Squad at Best Buy.

[00:26:53] Speaker 05:
You know, hard to believe, but so I go in, I tell you, I'm here with Geek Squad, I'm going to fix your computer.

[00:26:59] Speaker 05:
And you say, sure, come on in.

[00:27:00] Speaker 05:
I come in, actually just take the computer, go out the window and leave.

[00:27:05] Speaker 05:
That was an authorized entry into the house because I told you I'm here to fix your computer, but I just stole it.

[00:27:10] Speaker 05:
I mean, is that a fraudulent entry?

[00:27:13] Speaker 05:
Maybe.

[00:27:14] Speaker 05:
He was authorized, but maybe.

[00:27:17] Speaker 04:
Well, again, I'll go back to Pestmaster and the Ninth Circuit, which interpreted a fraudulent entry to be a hacker, someone who does not have authorized access.

[00:27:25] Speaker 04:
And if we get past the insuring agreement, or even if there is an ambiguity,

[00:27:28] Speaker 04:
It's abundantly clear from the record, and I understand, yes, you can, and you've acknowledged, yes, you can, affirm on other grounds.

[00:27:35] Speaker 04:
There would be no reason to send it back to the district court, only for the district court to say, okay, fine, but exclusion D1 applies because it's so abundantly clear that there was offline access.

[00:27:44] Speaker 04:
Pestmaster's an unpublished memorandum of disposition, right?

[00:27:47] Speaker 03:
It is indeed, it is indeed, but it should have been- And it didn't decide precisely the question in front of us.

[00:27:54] Speaker 04:
There was different language.

[00:27:56] Speaker 04:
The principle is spot on, though, I would submit.

[00:27:58] Speaker 03:
But it didn't decide the question in front of us.

[00:28:00] Speaker 03:
It decided it one way, but it didn't exclude the meaning for which argument is now being made.

[00:28:05] Speaker 03:
It said this is one meaning, which is true.

[00:28:08] Speaker 03:
It could also include the other.

[00:28:11] Speaker 04:
Well, I think the principle there is where you have an authorized user, a user of a system with authorized access, there can't be a fraudulent entry.

[00:28:20] Speaker 04:
And that's what we have here.

[00:28:21] Speaker 04:
We have authorized users.

[00:28:22] Speaker 04:
So even if you get past the issue.

[00:28:23] Speaker 03:
I understand that that's your argument.

[00:28:25] Speaker 03:
But the wording can be read to include both, someone who enters by means of fraud and someone who enters something that is fraudulent.

[00:28:35] Speaker 03:
That is to say, I think that language could include both.

[00:28:39] Speaker 03:
And the fact that one court says, well, it includes the one, doesn't mean that it excludes the other.

[00:28:45] Speaker 04:
I accept the position you're taking there, and I would submit that even if that's the case, you've then satisfied the prefatory language of the exclusion, so then the only question before either this court or the lower court would be whether there was authorized access.

[00:29:01] Speaker 04:
That's what it comes down to, and it's so abundantly clear, because as Mr. Passage said, as the complaint said, as all the briefing says, they gave the keys to the kingdom to their remarketers, and then they committed fraud.

[00:29:11] Speaker 04:
So the whole point is, it's belt and suspenders

[00:29:14] Speaker 04:
with the interpretation of what fraudulent entry is, which is different.

[00:29:17] Speaker 00:
We've got your argument.

[00:29:18] Speaker 00:
Actually, our questioning took you over time.

[00:29:20] Speaker 04:
It did.

[00:29:22] Speaker 04:
It did.

[00:29:22] Speaker 04:
I will yield the balance of my time to Mr. Burch.

[00:29:26] Speaker 00:
Let's give Mr. Burch a chance.

[00:29:27] Speaker 04:
Thank you.

[00:29:40] Speaker 01:
Thank you, may I please the court.

[00:29:42] Speaker 01:
My name is Carlton Burch appearing on behalf of Great American.

[00:29:45] Speaker 01:
As we have briefed, our form, Great American's form, is an excess follow form.

[00:29:53] Speaker 01:
And it actually, for purposes of this case, means what it says, that our form incorporates the language of Berkeley's primary policy.

[00:30:02] Speaker 01:
And so I'm joining in the arguments raised by Mr. Dandelos.

[00:30:09] Speaker 01:
I'd like to point out a couple of things by emphasis that the court, Judge Fletcher and Judge, actually, I love you, asked questions about why the entry of fraudulent data

[00:30:31] Speaker 01:
would always be, should be covered under the censure agreement.

[00:30:35] Speaker 01:
Do I have that right?

[00:30:37] Speaker 01:
And the counterpoint is that, is that the cases that have looked at that, like Pestmaster and- Well, we don't have any presidential decision that binds our hands in any way, right?

[00:30:51] Speaker 00:
The cases from New York, that's okay for what it's worth.

[00:30:55] Speaker 00:
It says what it says.

[00:30:57] Speaker 00:
And the two cases.

[00:30:59] Speaker 00:
that the other two cases, one from our circuit, it's just dealt with a different factual situation.

[00:31:06] Speaker 00:
So I think we're going with just the plain language.

[00:31:08] Speaker 00:
On the one hand, it says, we will pay for loss resulting directly from a fraudulent entry of electronic data.

[00:31:15] Speaker 00:
I'm just going with the plain language here.

[00:31:17] Speaker 00:
And especially when you read the exclusion, we won't cover it if access is authorized.

[00:31:22] Speaker 00:
I think that strongly suggests that at least for

[00:31:26] Speaker 00:
the interpretation of what it means to be entry of electronic data that it covers is fraudulent batch.

[00:31:33] Speaker 01:
And I understand that, Your Honor.

[00:31:35] Speaker 01:
And I think that if you look at the Ernst and Haas case, that situation is where the fraudster induces the entry of the data.

[00:31:46] Speaker 01:
And that policy apparently didn't have that exclusion that we're talking about.

[00:31:51] Speaker 01:
So where the fraudster is controlling

[00:31:53] Speaker 01:
the the uh... the the entry that's not that that's not a fraudulent entry that's an authorized entry by someone who who who had full access to the the uh... the process in the in the universal case what that case was about was the uh...

[00:32:15] Speaker 01:
The crooks were submitting fake workers comp claims.

[00:32:21] Speaker 01:
And the Universal eventually figured that out and made a claim on its policy with National Union, or AIG.

[00:32:32] Speaker 01:
And that resulted in the claim.

[00:32:36] Speaker 01:
That was another example of an authorized user having access.

[00:32:41] Speaker 01:
And thus, the entry itself was not deemed to be

[00:32:45] Speaker 01:
There was not did not fall within the insuring agreement much less any exclusion that there might have been All right.

[00:32:51] Speaker 00:
Thank you counsel.

[00:32:52] Speaker 01:
Thank you

[00:32:59] Speaker 02:
Two points on the sophisticated notion.

[00:33:01] Speaker 02:
Nothing Mr. Dandella said is in the record about who is sophisticated or not.

[00:33:06] Speaker 02:
And number two, there is a case directly on point.

[00:33:08] Speaker 02:
We cited it.

[00:33:09] Speaker 02:
It's AIU Insurance Company.

[00:33:11] Speaker 02:
It's a 51 Cal 3rd.

[00:33:14] Speaker 02:
It's footnote seven rate.

[00:33:15] Speaker 02:
It's been a long time since I did that case.

[00:33:17] Speaker 02:
But it expressly says, in a situation like this, even where an insurer negotiated and drafted policy language, the rule of interpreting ambiguity in favor of the insured still applies.

[00:33:28] Speaker 02:
All right.

[00:33:29] Speaker 00:
Thank you very much for your very helpful arguments today.

[00:33:31] Speaker 00:
That concludes the calendar.

[00:33:33] Speaker 00:
This last case is submitted and a decision will be issued in due course.

[00:33:38] Speaker 00:
We are in recess until tomorrow morning.

[00:33:43] Speaker 02:
All rise.

[00:33:52] Speaker 02:
This court stands in recess until tomorrow morning.