Opinion
99 Civ. 3169 (RCC)
January 7, 2002
OPINION AND ORDER
Petitioner The Home Insurance Company ("Home"), individually and as the successor to the Home Indemnity Company, moves for an order pursuant to 9 U.S.C. § 1, et seq., compelling respondent Appleton Papers, Inc. ("Appleton") to arbitrate all disputes arising from a series of Deductible Reimbursement and Security Agreements (the "Deductible Agreements") and Retrospective Premium Agreements (the "Retrospective Premium Agreements"). Appleton argues in opposition that the arbitration provisions contained in the agreements are invalid pursuant to a decision of the Wisconsin Court of Appeals that is entitled to hill faith and credit in this Court by virtue of 28 U.S.C. § 1738. Appleton further argues that even if the Wisconsin decision lacks preclusive effect, the petition to compel arbitration nonetheless must be denied because the provisions at issue are unenforceable under Wisconsin and Kentucky law or, alternatively, because Home waived its right to arbitrate this dispute. For the reasons set forth below, Home's petition to compel arbitration is denied in part and granted in part.
I. BACKGROUND
Between 1989 and 1994, Home issued certain primary and excess general liability policies to Appleton. In connection therewith, the parties entered into the Deductible Agreements and the Retrospective Premium Agreements. See Petition ("Pet.") § 5. The Deductible Agreements require Home to assume Appleton's entire loss up front, subject to later reimbursement of certain deductibles. The Retrospective Premium Agreements obligate Appleton to pay additional premiums depending upon actual or estimated costs incurred by Home as a result of claims against Appleton. Both sets of agreements contain mandatory arbitration provisions. See Pet. Exs. A-B, Section 12; Pet. Exs. C-E, Section XII. The 1989 and 1990 Deductible Agreements and the 1993 Retrospective Premium Agreement also contain choice of law clauses requiring that those agreements be construed and interpreted in accordance with New York law.See Pet. Exs. A-B, Section 14; Pet. Ex. E, Section XIX.
The agreements are as follows: (1) Deductible Reimbursement and Security Agreement effective January 1, 1989; (2) Deductible Reimbursement and Security Agreement effective January 1, 1990; (3) Retrospective Premium Agreement effective January 1, 1991; (4) Retrospective Premium Agreement effective January 1, 1992; and (5) Retrospective Premium Agreement effective January 1, 1993. See Pet. Exs. A-E.
In September 1995, Minnesota Mining and Manufacturing Company ("3M") sued Appleton for alleged antitrust violations and various torts. Appleton's insurers, Home and Royal Insurance Company ("Royal"), disclaimed any duty to defend or indemnify Appleton for 3M's claims. Appleton then filed suit against its insurers in the Wisconsin Circuit Court, Outagamie County. On May 13, 1997, Home and Royal agreed to pay Appleton's defense costs in partial settlement of the dispute. See Pet. Ex. F (Transcript of May 13, 1997 Hearing). The settlement was reduced to writing and filed with the Circuit Court on July 29, 1997. See Pet. Ex. G (Stipulation and Order). Under the terms of the Stipulation and Order, Home reserved its right to recover from Appleton deductibles and other amounts due under the Retrospective Premium Agreements and the Deductible Agreements. The Stipulation and Order further provided that:
If Royal and Home disagree with Appleton as to the application or interpretation of any deductible, self-insured retention or retroactive loss provision, they shall first negotiate with Appleton in good faith to resolve those disagreements. If the parties are unable to resolve their disagreements, the same will be resolved by submission to the continuing jurisdiction of the Outgamie County Circuit Court, State of Wisconsin, except to the extent that arbitration is required by the policies or other written agreements.
Stipulation and Order § 3.
On March 29, 1999, Home billed Appleton $8,591,326 in additional retrospective premiums, reflecting the expenses incurred by Home in defending the 3M action. Appleton disputed the sum and contested whether and to what extent Home's defense cost payments were subject to deductibles or retrospective premiums. On April 23, 1999, Appleton moved for summary judgment in the coverage action seeking a determination that only one deductible (pursuant to a Royal policy) was applicable. One week thereafter, Home filed in this Court a petition to compel arbitration of the disputed issues. Appleton then returned to the Wisconsin Circuit Court and obtained an injunction that directed Home to withdraw the instant petition. In granting the requested injunctive relief, the Wisconsin Circuit Court held that Home, pursuant to the parties' settlement, had waived its right to arbitrate certain issues and that the arbitration provisions contained in the parties' Deductible and Retrospective Premium Agreements were invalid and unenforceable under Wisconsin and Kentucky law.
Home appealed the injunction order to the Wisconsin Court of Appeals. Proceedings in this Court were stayed pending the outcome of that appeal. On April 4, 2000, the Wisconsin Court of Appeals vacated the injunction on the ground that the Circuit Court lacked the authority to enjoin the federal lawsuit. Appleton Papers, Inc. v. The Home Indemnity Co., 235 Wis.2d 39, 47, 612 N.W.2d 760, 764 (Wis.Ct.App. 2000). The Court of Appeals, turning to the merits of the dispute, went on to determine that Wisconsin law governed the 1990 Deductible Agreement and the 1991-1993 Retrospective Premium Agreements, rather than New York law as urged by Home. The Court thus concluded that the arbitration provisions were invalid because Home had not obtained the prior approval of the state insurance commissioner as required by Wis. Stat. § 631.85. Id. at 62, 612 N.W.2d at 771. Following the dissolution of the injunction, Home renewed the instant motion to compel arbitration and the parties submitted supplemental briefing on the legal effect of the Wisconsin ruling.
The Court of Appeals declined to address the lower court's conclusion that the arbitration provision contained in the 1989 Deductible Agreement was invalid under Kentucky law. The Court stated that it was "in no better position than the federal court to authoritatively interpret Kentucky law." Id. at 45 n. 6, 612 N.W.2d at 763 n. 6.
II. DISCUSSION
Appleton argues that the decision of the Wisconsin Court of Appeals is entitled to full faith and credit in this Court, and therefore the petition to compel arbitration must be denied because the arbitration clauses have been ruled invalid. Furthermore, Appleton argues that even if the Wisconsin ruling lacks preclusive effect, this Court should determine on its own that the arbitration provisions are unenforceable under Wisconsin law and, with respect to the 1989 Deductible Agreement, under Kentucky law. Alternatively, Appleton contends that Home waived its right to arbitrate the issue of whether any deductibles apply to its settlement payments by consenting to the jurisdiction of the Wisconsin courts.
A. FULL FAITH AND CREDIT
Under the federal full faith and credit statute, state judicial proceedings "have the same full faith and credit in every court within the United States . . . as they have by law or usage in the courts of such State . . . from which they are taken." Johnson v. Arbitrum (Cayman Islands) Handels AG, 198 F.3d 342, 347 (2d Cir. 1999) (quoting 28 U.S.C. § 1738) (ellipses in original). Therefore, if the Court of Appeals' decision would be accorded preclusive effect by the Wisconsin courts, then this Court must do likewise.
Home contends that full faith and credit is inappropriate under these circumstances. Home argues that, pursuant to Erie R.R. v. Tompkins, 304 U.S. 64 (1938), this Court must apply the choice of law rules of the forum state, here New York, in order to determine which state's substantive law applies to the instant dispute. Therefore, according to Home, the Wisconsin decision becomes relevant only in the event that this Court, after undertaking a de novo choice of law analysis, concludes that Wisconsin substantive law governs. Pet. Rep. Mem. at 1-4.
This argument is based upon a misunderstanding of the full faith and credit doctrine. Home confuses the full faith and credit accorded to the statutory and decisional law of another state with the full faith and credit owed to a judgment in a particular case, which is at issue here.See Baker v. General Motors Corp., 522 U.S. 222, 232 (1998) ("Our precedent differentiates the credit owed to laws (legislative measures and common law) and to judgments."). The full faith and credit statute does not require a court to apply a sister state's decisional law if, after undertaking an Erie analysis, the court concludes that the forum state has an interest in applying its own line of cases. See Moore Fed. Prac.3d § 123.32. However, the court does not have same discretion with respect to judgments.
As the Supreme Court explained in the Baker case, the full faith and credit obligation regarding judgments is "exacting." Id. at 233. InBaker, the Supreme Court held that the full faith and credit clause does not require states to adopt the practices of other states regarding the time, manner and mechanism for enforcing judgments. However, the Supreme Court noted that its decision "creates no general exception to the full faith and credit command, and surely does not permit a State to refuse to honor a sister state judgment based on the forum's choice of law or policy preferences." Id. at 239 (emphasis added). Therefore, this Court must honor the judgment of the Wisconsin Court of Appeals, irrespective of New York choice of law considerations, if that judgment would be aceorded preclusive effect by the Wisconsin courts. See Allen v. McCurry, 449 U.S. 90, 96 (1980) (holding that federal courts must accord preclusive effect to state court judgments "whenever the courts of the State from which the judgments emerged would do so").
Wisconsin courts employ the doctrine of issue preclusion in order to prevent parties from revisiting issues "actually litigated in a previous action." Paige K.B. v. Steven G.B., 226 Wis.2d 210. 219, 594 N.W.2d 370, 374 (Wis. 1999). The preclusive effect arises where "an issue is actually and necessarily determined by a court of competent jurisdiction." Id. Home argues that the portion of the opinion judging the arbitration clauses invalid is mere dictum and has no preclusive effect. According to Home, once the Court of Appeals decided that the lower court injunction was ultra vires, there was no remaining controversy before the court and thus its subsequent analysis is not binding.
However, as Appleton points out, under Wisconsin law "when a court of last resort intentionally takes up, discusses, and decides a question germane to, though not necessarily decisive of, the controversy, such decision is not a dictum but is a judicial act of the court which it will thereafter recognize as a binding decision." State v. Kruse, 101 Wis.2d 387, 392, 305 N.W.2d 85, 88 (Wis. 1981) (citation omitted);see also Malone v. Fons, 217 Wis.2d 746, 754, 580 N.W.2d 697, 701 (Wis.Ct.App. 1998) ("`Dicta' is language which is broader than necessary to determine an issue. However, when an appellate court intentionally takes up, discusses and decides a question germane to a controversy, such a decision is not a dictum . . . .") (citing State v. Taylor, 205 Wis.2d 664, 670, 556 N.W.2d 779, 782 (Wis.Ct.App. 1996)).
Here, the Court of Appeals intentionally took up and decided the issue, apparently in order to assist this Court in resolving Home's petition under the Federal Arbitration Act, 9 U.S.C. § 1 et seq. As the Court of Appeals explained:
The parties have extensively briefed these issues, and the federal court will necessarily address them in determining whether Home has an available federal remedy. That determination will involve interpreting Wisconsin statutes that have not yet been construed. . . . We therefore address the issues that concern the application of Wisconsin insurance law to the 1990 to 1993 policies and agreements.
We reject Home's various contentions that the deductible and retrospective premium agreements are not governed by the insurance laws of this state, and conclude that Wis. Stat. § 631.85 applies to invalidate the arbitration clauses.235 Wis.2d at 55, 612 N.W.2d at 768.
In making its determination, the Court of Appeals rejected Home's argument that the choice of law provisions in the agreements required the application of New York law:
Our statutes . . . evince Wisconsin's public policy that the insurance commissioner approve mandatory arbitration clauses in insurance policies. Thus, applying New York law violates Wisconsin's public policy concerning the arbitration clauses in insurance policies. We therefore decline to enforce the choice-of-law provision.Id. at 60-61, 612 N.W.2d at 770-71.
Although the Court of Appeals need not have reached these issues, its decision is no less binding. In addition, there are no fundamental fairness concerns present here that would militate against according preclusive effect to the determination. See e.g., Michelle T. v. Crozier, 173 Wis.2d 681, 698, 495 N.W.2d 327, 335 (Wis. 1993) (holding that courts should assess fundamental fairness concerns in the preclusion context). Home litigated the validity of the arbitration provisions both in the trial and appellate courts; indeed, Home itself raised the issue of the validity of the arbitration clauses on appeal, in the event that the Court of Appeals ruled against it on the injunction issue. Pet. Rep. Mem. at 5. Moreover, the Wisconsin Court of Appeals did not summarily address the issue but rather analyzed the applicable law in a lengthy, published opinion. Home did not seek further review. Given these circumstances, Home has had its day in court and cannot escape the consequences of the adverse decision against it. There are no differences between the facts or law presented to the Wisconsin courts and those presented here which would implicate fairness concerns. Accordingly, this Court will grant full faith and credit to the decision of the Wisconsin Court of Appeals holding the arbitration provisions contained in the 1990-1993 Agreements invalid. Therefore, Home's petition to compel arbitration under those agreements is denied.
Wisconsin courts may consider some or all of the following factors when deciding whether to invoke issue preclusion: (1) whether the party against whom preclusion is sought could, as a matter of law, have obtained review of the judgment; (2) whether the question is one of law that involves two distinct claims or intervening contextual shifts in the law; (3) whether significant differences in the quality or extensiveness of proceedings between the two courts warrant relitigation of the issue; (4) whether the burdens of persuasion shifted such that the party seeking preclusion had a lower burden of persuasion in the first trial than in the second; and (5) whether the matters of public policy and individual circumstances involved would render the application of collateral estoppel to be fundamentally unfair, including inadequate opportunity or incentive to obtain a full and fair adjudication in the initial action.Precision Erecting, Inc. v. M I Bank, 224 Wis.2d 288, 305, 592 N.W.2d 5, 12 (Wis.Ct.App. 1998) (citing Crozier, 173 Wis.2d at 689, 495 N.W.2d at 330-31).
B. VALIDITY OF ARBITRATION UNDER THE 1989 AGREEMENT
The Wisconsin Court of Appeals declined to address the validity of the arbitration clause contained in the 1989 Deductible Agreement, leaving this Court to make that determination. 235 Wis.2d at 45 n. 6, 612 N.W.2d at 763 n. 6. Appleton contends that, because the agreement was issued to Appleton's former parent company in Kentucky, this Court should apply Kentucky law to invalidate the clause. According to Appleton, Kentucky law flatly prohibits all arbitration agreements in insurance contracts.See, e.g., Ky. Rev. Stat. Ann. § 417.050.
The 1989 Deductible Agreement, however, contains a choice of law provision mandating the application of New York, rather than Kentucky, law. See Pet. Ex. A, Section 14. Courts in this Circuit generally enforce contractual choice of law provisions "as long as the jurisdiction chosen has a substantial relationship to the parties or their performance and fundamental policies of New York law are not violated." Hamilton v. Accu-tek, 47 F. Supp.2d 330, 343 (S.D.N.Y. 1999); see also Finnish Fur Sales Co. v. Juliette Shulof Furs, Inc., 770 F. Supp. 139, 144 (S.D.N.Y. 1991) ("Choice of law clauses are routinely enforced by the courts of this Circuit, if there is a reasonable basis for the choice.") (citations omitted). Appleton does not suggest that the parties lack a connection to New York or that arbitration of insurance disputes would be contrary to New York public policy, but instead argues that a choice of law provision should not be enforced if it would violate the public policy of the jurisdiction in which the contract was made.
Appleton also appears to suggest that the Wisconsin Court of Appeals conclusively resolved this issue by announcing a general rule that "[a] provision that a contract of insurance shall be governed by the law of a given state is void where such an express provision violates a statute of the state of the contract or would, if given force, evade statutory provisions declaring a rule of public policy with reference to contracts made within the jurisdiction, or where the contract stipulation would violate the interests and public policy of the state, since these cannot be changed by the contract of the parties." 235 Wis.2d at 60, 612 N.W.2d at 770. However, it is clear that the Court of Appeals was discussing this rule in the context of Wisconsin law and, as discussedsupra, did not intend its decision to apply to the 1989 Deductible Agreement. See id. at 55, 612 N.W.2d at 768 ("We therefore address the issues that concern the application of Wisconsin insurance law to the1990 to 1993 policies and agreements.") (emphasis added).
Appleton misreads the law. New York courts consider only New York public policy when making choice of law decisions, not the public policies of other jurisdictions. See e.g., Barkanic v. General Admin. of CAAC, 923 F.2d 957, 964 n. 7 (2d Cir. 1991) ("[W]e do not believe that New York courts would consider the public policies of jurisdictions other than New York in choice of law decisions."); Woodling v. Garrett Corp., 813 F.2d 543, 551 (2d Cir. 1987) ("New York law requires the court to honor the parties' choice insofar as matters of substance are concerned, so long as fundamental policies of New York law are not thereby violated."); Sun Forest Corp. v. Shvili, 152 F. Supp.2d 367. 388 (S.D.N.Y. 2001) (noting that reference to the public policies of other jurisdictions "appears to be at variance with the Second Circuit case law stating that a choice-of-law clause will only be invalidated if it conflicts with the public policy of New York") (emphasis in original);see also Eastern Artificial Insemination Coop. v. La Bare, 210 A.D.2d 609, 610, 619 N.Y.S.2d 858, 859 (3d Dep't 1994) ("[C]hoice of law provisions generally are given effect by the courts of this State unless the jurisdiction whose law is to be applied has no reasonable relation to the agreement at issue or enforcement of the subject provision would violate a fundamental public policy of this State.") (emphasis added). There is no basis here to conclude that New York public policy would be violated by requiring Appleton to arbitrate the instant dispute; in fact, New York has a "long and strong public policy favoring arbitration." Smith Barney Shearson, Inc. v. Sacharow, 91 N.Y.2d 39, 49, 666 N.Y.S.2d 990, 689 N.E.2d 884 (1997). Indeed, the Wisconsin Court of Appeals assumed that the arbitration provisions at issue were enforceable under New York law. 235 Wis.2d at 60, 612 N.W.2d at 770.
C. WAIVER
Appleton argues, however, that even if the arbitration provision in the 1989 Agreement is enforceable under New York law, Home waived its right to arbitrate the issue of whether any deductibles apply to Home's settlement payments. In order to resolve their dispute regarding whether Home breached its duty to defend Appleton in the 3M action, the parties agreed to settlement terms in open court on May 13, 1997, which were later memorialized in a Stipulation and Order filed July 29, 1997. Home consented, inter alia, to pay Appleton's defense costs as a compromise of the disputed claims but reserved for further negotiation issues relating to the Deductible Agreements and Retrospective Premium Agreements. Stipulation and Order §§ 1-3. If those negotiations were unsuccessful, the parties agreed to submit disputes concerning the application or interpretation of any deductible, self-insured retention or retroactive loss provision "to the continuing jurisdiction of the Outgamie County Circuit Court, State of Wisconsin, except to the extent that arbitration is required by the policies or other written agreements." Id. § 3.
The parties' understanding as to the meaning of that provision previously had been discussed at the May 1997 hearing:
Mr. Dries [for Home]: In the policies, in the retro portion of the policies, there is language that refers to arbitration, and we are preserving our rights to arbitrate those items, although the arbitration language, as I understand it, does not include the types of matters that we contemplated when we agreed to this, such as how many deductibles can you apply, how many retros, et cetera.
Mr. Thavis [for Appleton]: Yes, your Honor, I think that correctly states our understanding. We would be coming back to the Court for any issues relating to the interplay of multiple deductibles or multiple retroactive premiums, but if there were terms and conditions in dispute with respect to a particular formula for applying a retroactive premium and the policy or its related documents provided for that to be arbitrated, we understand that Home is not waiving its right to arbitration under those agreements.
Transcript of May 13, 1997 Hearing, at 17. Appleton therefore argues that even if Home had a right to arbitrate the issue of the number of applicable deductibles, it waived that right as part of the parties' settlement.
Although any doubts regarding waiver should be resolved in favor of arbitration, courts may find that a waiver has occurred when a party engages in conduct during litigation that is inconsistent with arbitration and thereby prejudices its opponent. See e.g., Doctor's Assocs., Inc. v. Distajo, 66 F.3d 438, 455 (2d Cir. 1995), cert. denied, 517 U.S. 1120 (1996); Kramer v. Hammond, 943 F.2d 176, 178 (2d Cir. 1991); S R Co. of Kingston v. Latona Trucking, Inc., 984 F. Supp. 95, 102 (N.D.N.Y. 1997). For example, in Caribbean Ins. Servs., Inc. v. American Bankers Life Assurance Co. of Fla., 715 F.2d 17 (1st Cir. 1983), the First Circuit found that the defendant implicitly waived arbitration by entering into a stipulation with the plaintiff providing for a speedy trial to resolve the parties' dispute. The First Circuit concluded that, by agreeing to a speedy trial, the defendant acted inconsistently regarding its right to arbitrate. Moreover, the Court noted that the plaintiff "expressly bargained for a speedy trial and gave up its claim to additional provisional remedies in exchange for such a trial. [Plaintiffs] surrender of these remedies, with prejudice, constitutes adequate consideration under traditional contract principles to bind [defendant] to its agreement to proceed to trial." 715 F.2d at 19.
Here, Appleton settled its dispute with Home regarding the payment of defense costs and surrendered certain of its claims. See Stipulation and Order §§ 6-8. As part of that settlement, Home clearly and explicitly agreed that the issue of "how many deductibles can you apply, how many retros, et cetera" was to be resolved by the Wisconsin courts. Transcript of May 13, 1997 Hearing, at 17. Home now argues that this Court should focus only on the reservation of arbitration contained in the Stipulation and Order and suggests that its attorney's statement on the record was merely a "doubtful and equivocal expression of his own personal, mistaken understanding of the scope of coverage of the arbitration clauses in the Agreements." Pet. Rep. Mem. at. 14. However, the parties agreed that in the event of any inconsistency between the Stipulation and Order and the May 13, 1997 record, the record would control. Stipulation and Order § 14. Moreover, Home's belated attempt to distance itself from its attorney's remarks is of no avail. If Mr. Dries' statement was incorrect, Home should have sought to clarify it at that time. Appleton was entitled to rely on that statement as part of its settlement bargain with Home. Therefore, this Court will enforce Home's clear waiver of arbitration regarding the number of applicable deductibles.
Although the its decision did not turn on the issue of waiver, the Wisconsin Court of Appeals came to the same conclusion:
We take exception to and disapprove of Home's misrepresentation that it did not agree to litigate the issue of the number of deductibles and retrospective premiums applicable to the 3M litigation. The record is clear that Home agreed to litigate before the Outagamie County Circuit Court the very issues it now seeks to arbitrate.235 Wis.2d at 54 n. 12, 612 N.W.2d at 768 n. 12.
Home contends that, even assuming that it waived its right to arbitrate the number of applicable deductibles, there may be additional disputes between the parties regarding the 1989 Agreement that are subject to arbitration. Pet. Rep. Mem. at 17-18. Under the parties' settlement agreement, Home reserved its right to arbitrate at least certain issues. Appleton suggests, however, that all remaining substantive disputes already have been resolved by the Wisconsin Circuit Court during the proceedings on remand. See Letter from Robert P. Thavis dated December 6, 2001, at 1-2. Whether, and to what extent, the Wisconsin proceedings merit any type of deference is a question properly reserved for the arbitrators. See North River Insurance Co. v. Allstate Insurance Co., 866 F. Supp. 123, 129 (S.D.N.Y. 1994) ("This question of whether to apply collateral estoppel to the defenses of a party in arbitration is no different from an adjudication by the arbitrators of any other matter in dispute between the parties."); see also Chicago Typographical Union No. 16 v. Chicago Sun-Times Inc., 860 F.2d 1420, 1424 (7th Cir. 1988) (holding that questions of procedural arbitrability such as standing, res judicata and timeliness are issues for arbitrator to decide); Local Union 370 v. Morrison-Knudsen Co., 786 F.2d 1356, 1358 (9th Cir. 1986) (holding that collateral estoppel and equitable estoppel are procedural issues for arbitrator). Therefore, if Home so wishes, it may proceed with the arbitration of any additional disputes, other than the issue as to the number of applicable deductibles, arising under the 1989 Agreement.
Appleton's counsel conceded, for example, that "if there were terms and conditions in dispute with respect to a particular formula for applying a retroactive premium and the policy or its related documents provided for that to be arbitrated, we understand that Home is not waiving its right to arbitration under those agreements." Transcript of May 13, 1997 Hearing, at 17.
Appleton also argues that, in the event that the arbitration goes forward, the Court must strike the portion of the arbitration clause which permits the arbitrators to settle disputes under the 1989 Agreement "according to an equitable rather than a strictly legal interpretation of its terms." Pet. Ex. A., Section 12. Appleton suggests that this language is contrary to public policy because it may conflict with the fundamental rule that ambiguities in insurance contracts are to be construed against the insurer. See Kronfeld v. Fidelity Cas. Co. of N.Y., 365 N.Y.S.2d 416, 420 (N.Y.Sup.Ct. 1975), aff'd, 53 A.D.2d 190, 385 N.Y.S.2d 552 (1st Dep't 1976). However, the meaning of this provision, and whether it indeed conflicts with the contra insurer rule, is unclear and should be interpreted by the arbitrators in the first instance.