ZURICH AMERICAN INSURANCE COMPANY, Petitioner-Appellee/Cross-Appellant, v. WATTS INDUSTRIES, INC., Respondent-Appellant/Cross-Appellee, and James Jones Company, Respondent/Cross-Appellee.
Nos. 03-3851, 03-3853.
United States Court of Appeals, Seventh Circuit.
Argued May 3, 2005. Decided Aug. 2, 2005.
417 F.3d 682
Richard A. Fiore, Freeborn & Peters, Chicago, IL, David S. MacCuish (argued), Weston, Benshoof, Rochefort, Rubalcava & MacCuish, Los Angeles, CA, for Respondent-Appellant/Cross-Appellee.
Richard A. Fiore, Freeborn & Peters, Chicago, IL, Faustin A. Pipal, Jr., Keating, Keating & Pipal, Chicago, IL, Jordan S. Stanzler, Ruben Castellon (argued) Stanzler, Funderburk & Castellon, San Francisco, CA, for Respondent/Cross-Appellee.
Before FLAUM, Chief Judge, and KANNE and SYKES, Circuit Judges.
KANNE, Circuit Judge.
Zurich American Insurance Company insured Watts Industries, Inc., and James Jones Company under a program consisting of both primary liability policies and deductible agreements. Only the deductible agreements contained arbitration clauses. Watts and Jones successfully sued Zurich in California state court for defense costs in two lawsuits filed against them by other parties. Thereafter, the parties contested application of the deductible agreements, and Zurich petitioned the district court to compel arbitration. The district court granted the petition with respect to Watts, and denied it with respect to Jones. Both Watts and Zurich appeal; for the reasons stated herein, we affirm the order compelling arbitration as to Watts and exempting Jones from arbitration. We remand to the district court for clarification of precisely which deductible agreements give rise to an arbitrable dispute.
I. History
We begin with a brief introduction of the parties and a recap of the long and tortured history of this case. Zurich is an insurer incorporated under New York law, with its home office in New York city and its main administrative office in Schaumburg, Illinois. Watts is a manufacturer of valves and other waterworks parts that are used in municipal water systems. Watts is incorporated under Delaware law, with its principal place of business in Massachusetts. Jones is another manufacturer of valves used in public water systems, with both its incorporation and principal place of business in California. Jones was a wholly owned subsidiary of Watts from 1987 until it was sold in September 1996.
Zurich issued six primary liability insurance policies to Watts, in effect for successive one-year periods between June 30, 1991, and June 30, 1997. The policies provided coverage for both Watts and its subsidiary, Jones. The insurance contracts do not contain arbitration clauses. Watts entered into separate deductible agreements with Zurich during these same six years.1 Each deductible agreement contains a broad arbitration clause. For example, the 1991-92 agreement requires arbitration of “any dispute [that] arise[s] between the Company and the Insured with reference to the interpretation of [the] Agreement or their rights with respect to any transaction involved[.]” (Zurich‘s App. at 337.) Each agreement provides for arbitration in Schaumburg, Illinois. Jones did not sign any of the deductible agreements.
In February 2001, Watts filed suit against Zurich in the Los Angeles Superior Court seeking defense and indemnity for the Armenta and Rothschild actions under the primary liability policies. Watts asserted claims for breach of contract and bad faith. Jones filed a similar coverage suit against Zurich in June 2001, and the two actions were consolidated. The California court conducted a mandatory settlement conference in August 2001. Zurich raised the deductible agreements as a defense to entering a settlement agreement during this conference, claiming that even if Zurich were liable under the policies, Watts would be responsible for fully reimbursing Zurich under the deductible agreements. In an order issued August 3, 2001, the court gave the parties 60 days to attempt to resolve the issues discussed during settlement.
In a letter to Watts dated August 31, 2001, Zurich indicated that it would address the applicability of the deductible agreements “in due course, as required.” Watts responded with a letter on September 6, 2001, (“the September 6 letter“) stating that there was “no need for any further delay” in resolving the issues of the deductibles and setting out four points regarding the application of the deductible agreements. First, Watts stated that the deductible agreements do not apply to Jones. Second, Watts claimed that “[b]ecause [Zurich] repudiated [the insurance] policies and agreements by wrongfully refusing to fund the defense of its insureds, Zurich [was] foreclosed from relying upon the deductible agreements.” Third, Watts asserted that because Zurich failed to mention the deductible agreements until 3 1/2 years after Watts tendered the Armenta and Rothschild actions, it “waived any rights it may have had to seek to enforce those agreements.” Finally, Watts claimed that even if the deductible agreements could be invoked, “Zurich would remain liable for providing Jones with a full defense in the underlying cases and would remain liable to fund Watts’ defense once Watts satisfied the $500,000 deductible . . . set forth in each deductible agreement[.]” Watts then proposed a resolution whereby Zurich would pay the full amount of defense costs for Armenta and Rothschild.
On September 21, 2001, Zurich responded to the September 6 letter with a demand for arbitration against both Watts and Jones, which Watts and Jones rejected. On October 4, 2001, Zurich filed a petition to compel arbitration in federal court in Illinois and asked the California superior court to stay the California coverage action. The superior court refused to do so, and on November 27, 2001, granted Watts‘s motion for summary judgment. Zurich was held to have a duty to defend the Armenta action and any arbitrable disputes under the deductible agreements were deemed severable from the claims and issues in the California coverage action.
Back to the Illinois proceedings. Zurich initially asked for arbitration of everything—the duty to defend both Watts and Jones and application of the deductible agreements with respect to both companies—in its October 2001 motion to compel
- as to Armenta, whether Zurich‘s breach of the duty to defend found by the California court constituted a repudiation by Zurich of the deductible agreement;
- as to Rothschild, whether the provision of the 1991-1992 deductible agreement stating that Zurich “assumes responsibility for the investigation, defense and settlement obligations under this Agreement as respects the policies . . .” creates a duty to defend under the deductible agreement, and if so whether it was breached; and
- with respect to Rothschild, what the obligations of the parties are with respect to payment and reimbursement of defense costs above the $500,000 deductible.
Then, on September 30, 2002, this court reversed the injunction staying coverage litigation in the California courts. See Zurich Am. Ins. Co. v. Sup.Ct. for the State of Cal., 326 F.3d 816, 827-28 (7th Cir. 2002). The district court vacated its September 9, 2002, order pending the Seventh Circuit opinion concerning the injunction, which was issued on April 17, 2003. On September 25, 2003, the district court reinstated its September 9 order, “amended only to reflect the fact that the duty to defend in Armenta is arbitrable to the same extent [the court] previously found the duty to defend in Rothschild arbitrable under the deductible agreement.”
The parties agree that the second issue slated for arbitration by the district court, concerning a duty to defend the Rothschild case arising out of the deductible agreement, was erroneously ordered by the district court. Neither Watts nor Zurich has ever contended that any deductible agreement imposed a duty to defend on Zurich. Also, because the California Court of Appeal affirmed the superior court‘s summary judgment order finding that Zurich was bound to pay for Watts‘s and Jones‘s defense, and the California Supreme Court declined to review that decision, the issue of whether Zurich has a duty to defend is moot. See Watts Indus., Inc. v. Zurich Am. Ins. Co., 121 Cal.App.4th 1029, 1035, 18 Cal.Rptr.3d 61 (Cal.Ct.App.2004). We are left with an order exempting Jones from arbitration, and compelling arbitration of the following issues: (1) whether Zurich repudiated the deductible agreement by breaching the duty to defend Armenta, and (2) what obligations the par-
II. Analysis
Both Watts and Zurich appeal the revised order. Watts contends that there are no arbitrable disputes under the deductible agreements at all, claiming that there was (and is) no ripe dispute between the parties under the deductible agreements and that it did not anticipatorily repudiate the deductible agreements in the September 6 letter. Zurich, for its part, argues that Jones should be forced to arbitrate despite the fact that it was not a signatory to the deductible agreements.
Under the Federal Arbitration Act, arbitration may be compelled if the following three elements are shown: a written agreement to arbitrate, a dispute within the scope of the arbitration agreement, and a refusal to arbitrate. See
A. Zurich‘s Appeal
We address Zurich‘s appeal first, which deals with the relatively simple issue of whether Jones can be compelled to arbitrate under the deductible agreements. Jones did not sign the agreements containing arbitration clauses and states that it never agreed to arbitrate anything. Zurich argues that Jones is bound to arbitrate issues respecting the deductible agreements despite the fact that it did not sign them, asserting that (1) Watts, as Jones‘s parent company, bound Jones to the agreements, and (2) Jones has invoked the benefits of the insurance policies, and thus may not avoid the obligation of arbitration contained in the agreements associated with the insurance policies.
The language of the 1994-95, 1995-96, and 1996-97 deductible agreements indicates that “[Watts] and each named insured stated in the Policy(ies) shall be jointly and severally responsible for the obligations under [the agreements].” (Watts‘s App. at 150, 176, 189.) Jones was, of course, a “named insured” in the primary liability policies. But “[a]rbitration is contractual by nature—‘a party cannot be required to submit to arbitration any dispute which he has not agreed so to submit.‘” Thomson-CSF, S.A. v. Am. Arbitration Ass‘n, 64 F.3d 773, 776 (2d Cir. 1995) (quoting United Steelworkers of Am. v. Warrior & Gulf Navigation Co., 363 U.S. 574, 582, 80 S.Ct. 1347, 4 L.Ed.2d 1409 (1960)). That said, there are five doctrines through which a non-signatory can be bound by arbitration agreements entered into by others: (1) assumption; (2) agency; (3) estoppel; (4) veil piercing; and (5) incorporation by reference. Fyrnetics (H.K.) Ltd. v. Quantum Group, Inc., 293 F.3d 1023, 1029 (7th Cir.2002); accord Am. Bureau of Shipping v. Tencara Shipyard S.P.A., 170 F.3d 349, 352 (2d Cir.1999).
Zurich does not argue that Jones has shown an intent to assume obligations under the deductible agreements or that the agreements are incorporated by reference to the insurance policies. Rather than explicitly arguing that principles of agency or veil piercing are applicable, Zurich alludes vaguely to the fact that Jones was a wholly owned subsidiary of Watts,4
Zurich‘s remaining argument, that Jones “cannot take policy benefits without being bound . . . to the associated deductible agreements and the duty to arbitrate issues respecting those agreements[,]” is based on an estoppel theory. A nonsignatory party is estopped from avoiding arbitration if it knowingly seeks the benefits of the contract containing the arbitration clause. See Thomson-CSF, 64 F.3d at 778; see also Indus. Elecs. Corp. of Wis. v. iPower Distribution Group, 215 F.3d 677, 680 (7th Cir.2000) (stating in dicta that a third-party beneficiary of a contract would be bound by its arbitration provision).
But caselaw consistently requires a direct benefit under the contract containing an arbitration clause before a reluctant party can be forced into arbitration. See Thomson-CSF, 64 F.3d at 779 (holding that although the unwilling party received a benefit, the benefit did not derive directly from the agreement containing the arbitration clause and thus arbitration could not be compelled); accord Am. Bureau of Shipping, 170 F.3d at 353 (ordering arbitration because the nonsignatory received the direct benefits of a lower insurance rate and the ability to sail under the French flag as a result of an agreement containing an arbitration provision). Jones has not sought to enforce any rights it has under the deductible agreements, and in fact there would be no benefits to Jones under those agreements. Even assuming that Jones has benefitted from the deductible agreements by paying lower insurance premiums based on the deductibles, this benefit is too attenuated and indirect to force arbitration under an estoppel theory. We conclude that there are no grounds for compelling Jones to arbitrate, and we will affirm the district court‘s decision with respect to this issue.
B. Watts‘s Appeal
We now turn to Watts‘s appeal. The district court‘s decision compelling arbitration was based solely on the September 6 letter which, in the court‘s view, showed a dispute within the scope of the deductible agreements because Watts had “anticipatorily repudiated” the agreements. Watts contends that this letter was a settlement communication, and that the court‘s consideration of it to Watts‘s disadvantage was a violation of
The rules of evidence provide:
Evidence of (1) furnishing or offering or promising to furnish, or (2) accepting or offering or promising to accept, a valuable consideration in compromising or attempting to compromise a claim which was disputed as to either validity or amount, is not admissible to prove liability for or invalidity of the claim or its amount. Evidence of conduct or state-
ments made in compromise negotiations is likewise not admissible.
We assume for the purposes of this analysis that Watts‘s September 6 letter is in fact a settlement communication subject to
Evidence coming out of settlement negotiations is obviously admissible to show bias or prejudice of a witness. See
In this case, the September 6 letter was written, by Watts‘s own admission, in an effort to settle the California coverage action out of court. Of course the two actions are not totally unrelated. Zurich did, after all, raise the deductible agree-
Having found that the September 6 letter was properly admitted in evidence, we return to a de novo analysis of whether arbitration was properly compelled. In the letter, Watts asserted its position that Zurich could not enforce the deductible agreements against Watts because Zurich had breached its duty to defend Watts under the primary liability policies. Watts also claimed that Zurich had waived its right to enforce the agreements. Finally, Watts wrote that even if the deductible agreements were applicable, Watts could be liable for no more than $500,000 for its own defense. Contrary to the district court‘s finding, Watts argues, this language did not constitute anticipatory repudiation, because Watts did not definitively state that unless its demand was met, it would not perform under the deductible agreement. See 9 Corbin on Contracts, Ch. 54, § 973 (2005).
Watts could be right. But Zurich need not show that Watts anticipatorily repudiated the deductible agreements to compel arbitration; it need only show a written agreement to arbitrate, a dispute within the scope of the agreement, and a refusal by Watts to arbitrate. See Kiefer, 174 F.3d at 909. As the first and third elements are uncontested,7 all that remains is for Zurich to prove “any dispute . . . between [Zurich] and [Watts] with reference to the interpretation of [the] Agreement[.]” (1991-92 Deductible Agreement, Zurich‘s App. at 337.) The district court correctly noted that to show a “dispute,” Zurich “must show that [Watts] has acted, or has threatened to act, in a manner inconsistent with [Zurich‘s] interpretation of the contract.” Chi. Typographical Union No. 16 v. Chi. Sun-Times, Inc., 860 F.2d 1420, 1426 (7th Cir.1988). Watts‘s view of the deductible agreements and their applicability as set forth in its September 6 letter were inconsistent with Zurich‘s interpretation as set forth in its September 21, 2001, letter. (Watts‘s App. at 18-22 (stating that Zurich disagreed with each of Watts‘s four contentions with respect to the deductible agreements and demanding arbitration).) Watts‘s statements were a sufficient threat that it
There is some discussion in the briefs about the amount of money Zurich had paid Watts at the time the petition for arbitration was filed (none)8 and how this affects the ripeness of the petition. As Watts points out, it could hardly have been obligated to reimburse Zurich under the deductible agreement when it had not received the money for its defense in the underlying actions in the first place. But, because of the broad arbitration clause and the fact that the agreement does not require actual breach as a precondition for arbitration, the issue is irrelevant. Watts‘s threat of nonperformance under the deductible agreements in the September 6 letter made the dispute ripe. We will therefore affirm the district court‘s order to arbitrate.
Not surprisingly, the parties also dispute the scope of the compelled arbitration. Watts says that, assuming any issues are arbitrable, that arbitration should be limited to (1) whether Zurich has repudiated the deductible agreements by failing to pay for Watts‘s defense under the 1994-95 and 1995-96 primary liability policies, and (2) the parties’ respective rights and obligations under the deductible agreements from those two years—the only two corresponding to the policy periods under which payments have been made. The California court determined that defense costs were only payable under the policies covering 1994-1996, not under all six policies as Zurich desired. For its part, Zurich says that arbitration should occur under all six deductible agreements.
“Whether or not [a] company [is] bound to arbitrate, as well as what issues it must arbitrate, is a matter to be determined by the Court on the basis of the contract entered into by the parties.” AT & T Techs., Inc. v. Communications Workers of Am., 475 U.S. 643, 649, 106 S.Ct. 1415, 89 L.Ed.2d 648 (1986) (internal quotation and citation omitted). We have already discussed the fact that Watts is bound to arbitrate any dispute that amounts to a differing interpretation than Zurich‘s of a given deductible agreement. The district court did not make a finding regarding which deductible agreements the parties dispute. Noting that the court is not to rule on the potential merits of the underlying claims, see id., we will remand to the district court to identify precisely which agreements the parties’ dispute arises under, and thus under which agreements their obligations and rights may be arbitrated.
III. Conclusion
For the foregoing reasons, we AFFIRM the district court‘s order compelling arbitration between Zurich and Watts and exempting Jones from arbitration. We REMAND for clarification as to which deductible agreements are subject to the arbitration between Zurich and Watts.