Stryker Corporation et al v. National Union Fire Insurance Company of Pittsburgh, PA et al

Filing 195

OPINION ; signed by Judge Robert Holmes Bell (Judge Robert Holmes Bell, kcb)

UNITED STATES DISTRICT COURT F O R THE WESTERN DISTRICT OF MICHIGAN S O U T H E R N DIVISION

S T R Y K E R CORPORATION, et al., P l a i n t if f s , F ile No. 1:05-CV-51 v. H O N . ROBERT HOLMES BELL X L INSURANCE AMERICA INC., formerly k n o w n as WINTERTHUR INTERNATIONAL A M E R IC A INSURANCE COMPANY, et al., D e f e n d a n ts . / OPINION T h e motions before the Court arise under three related actions. Each of the three a c tio n s involves claims for indemnification by Stryker Corporation ("Stryker") and its s u b s id ia ry, Howmedica Osteonics Corporation ("Howmedica"), from their insurers for thirdp arty claims related to defective Duracon Uni-Knee products ("DUK Claims"). The insurers a re Defendants XL Insurance America, Inc. ("XLIA"), formerly known as Winterthur In te rn a tio n a l America Insurance Company, National Union Fire Insurance Company of P itts b u rg h ("National Union"), and TIG Insurance Company ("TIG"). The three actions are: (1) Stryker v. XLIA, No. 4:01-cv-157 (Stryker I), in which Stryker sought indemnification f ro m XLIA and National Union for DUK Claims brought against Stryker; S tr y k e r v. XLIA, No. 1:05-cv-51 (Stryker II), in which Stryker sought indemnification f ro m XLIA, National Union, and TIG for DUK Claims brought against Pfizer, Inc. (" P f iz e r" ). Stryker is contractually obligated to defend and indemnify these claims p u rsu a n t to an Asset Purchase Agreement, and Pfizer brought suit against Stryker to e n f o rc e these obligations in Pfizer v. Stryker, No. 02-cv-8613 (S.D.N.Y.); and,

(2)

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T I G v. Stryker, No. 1:09-cv-156 (Stryker III), in which TIG seeks a declaratory ju d g m e n t against Stryker and XLIA that: (i) it is not liable to Stryker until the u n d e rlyin g insurance obligations have been exhausted, and (ii) the underlying in s u ra n c e obligations have not been exhausted.

The Court heard oral arguments on pending motions in these actions on September 21, 2009. T h e motion before the Court in Stryker II is Defendant XLIA's motion for partial summary ju d g m e n t (Dkt. No. 1072). For the reasons that follow, the Court will grant this motion in p a rt and deny it in part. I. In Stryker II, Plaintiffs allege that Defendant XLIA breached the terms of an insurance p o lic y issued to Stryker by failing to defend and indemnify the DUK Claims brought against P f iz e r that are at issue in Pfizer v. Stryker. Stryker is contractually obligated to defend and in d e m n if y Pfizer pursuant to an Asset Purchase Agreement with Pfizer, and in that action P f ize r sought indemnification from Stryker pursuant to that agreement. After the court in P fiz e r v. Stryker issued an interlocutory judgment against Stryker in favor of Pfizer, Stryker s o u g h t indemnification from XLIA in this action. Stryker alleged that its liabilities to Pfizer a re covered by the "Insured Contract" portion of the XLIA policy. On January 8, 2009, this C o u rt issued an amended opinion and partial judgment granting Plaintiffs' motion for s u m m a r y judgment as to XLIA's liability for the judgment against Stryker in Pfizer v. S t r y k e r . (Dkt. Nos. 161, 162, 01/08/2009 Amended Op. & Partial J.) In that opinion, the C o u rt held that the DUK Claims against Pfizer are covered by the policy, that XLIA breached its duty to Stryker to defend these claims, and that XLIA is obligated by the policy to

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in d e m n if y Stryker for the final judgment in Pfizer v. Stryker. (Id. at 17, 24.) XLIA's motion for summary judgment in this action is essentially the same as its p a ra lle l motion for partial summary judgment filed in Stryker I. (Stryker I, Dkt. No. 1072.) X L IA contends that on February 2, 2009, it made a payment to Pfizer to settle Pfizer's claims a g a in s t Stryker and satisfy the judgment in Pfizer v. Stryker ("Pfizer Settlement"). It further c o n te n d s that at least $17 million of this payment is covered by the policy and exhausts the p o licy limit. XLIA seeks a declaration: (1) that the Pfizer Settlement satisfied the Court's p a rtia l judgment requiring XLIA to indemnify Stryker for the final judgment in Pfizer v. S tr y k er ; (2) that XLIA's policy has been exhausted by the Pfizer Settlement; and, (3) that as a result of exhaustion of the policy limit, XLIA has no further obligation to defend and in d e m n if y Stryker for any additional claims under the policy. A . Procedural Objections S tryk e r argues that XLIA's motion is procedurally defective because it is untimely, h a v in g been filed after the deadline for dispositive motions, and because it improperly seeks d e c la ra to ry relief by a motion.1 W ith respect to the timing of XLIA's motion, the Court set a deadline of August 12, 2 0 0 8 , for dispositive motions in its case management order. (Dkt. No. 52.) XLIA indicates that it could not have filed its motion any sooner than shortly after its settlement with Pfizer. T h e Court's case management order does not bar the Court from considering XLIA's motion.

Stryker also argues that the Court does not have jurisdiction to consider the motion b e c au s e of an appeal by TIG; however, TIG's appeal was dismissed on April 24, 2009. 3

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S e e Fed. R. Civ. P. 16(b)(4) (noting that the Court's schedule may be modified "for good c a u s e " ). XLIA has shown good cause for the timing of its filing, and Stryker has not shown th a t it suffers any prejudice. See Andretti v. Borla Performance Indus., Inc., 426 F.3d 824, 8 3 0 (6th Cir. 2005) (affirming district court's modification of scheduling order by late filing o f summary judgment motion where good cause was shown and where there was no in d ic a tio n of prejudice). To the extent that XLIA's motion seeks "declaratory relief," Plaintiffs argue that such re lie f may be considered only "upon the filing of an appropriate pleading." 28 U.S.C. § 2201(a). Generally, motions are not "pleadings." See Fed. R. Civ. P. 7(a) (listing p le a d in g s as complaints, answers, claims, and counterclaims). However, the Court agrees w ith XLIA that, in this action, a counterclaim for declaratory relief would be unnecessary b e c au s e a motion for summary judgment would accomplish the same purpose. Part of P la in tif f s' claim in this action is that XLIA is liable to Stryker for the final judgment in Pfizer v . Stryker. Defendant's motion seeks, in part, a judgment that its liability for the Pfizer v. S tr y k er judgment has been satisfied. Unlike Defendant's motion for summary judgment in S t ry k e r I, granting Defendant the relief it requests (i.e. that it has satisfied the judgment in P fiz e r v. Stryker) would not require the Court to vacate or amend any of its previous ju d g m e n ts . Granting this relief does not change XLIA's liability for the Pfizer v. Stryker ju d g m e n t, it merely changes the amount for which XLIA can be held liable. There is no g en u ine dispute that XLIA has satisfied this judgment. Thus, the Court will grant XLIA's m o t io n , in part, on this basis.

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B . Substantive Objections T o the extent that XLIA seeks a declaration that its policy has been exhausted and that it has no further obligation to indemnify and defend Stryker, notwithstanding any procedural d e f e c ts in seeking a declaration via a motion for summary judgment, XLIA has not shown th a t such relief is warranted because it has not shown that the Pfizer Settlement exhausts the lim its of its policy, for the reasons stated in Section I.B of the Court's opinion entered this d a te addressing XLIA's parallel motion in Stryker I. For the foregoing reasons (including the reasons stated in the Court's opinion in S t ry k e r I), XLIA's motion for partial summary judgment will be granted in part to the extent th a t it seeks summary judgment on the amount of damages to which Stryker is entitled with re sp e c t to the Pfizer v. Stryker judgment, and denied in part to the extent that it seeks relief o n the basis that its policy has been exhausted by its settlement of the Pfizer v. Stryker ju d g m e n t. II. H a v in g addressed XLIA's liability with respect to the Pfizer v. Stryker judgment, one e le m e n t of damages that remains to be resolved in Stryker II is the extent to which Stryker is entitled to its costs of defending the Pfizer v. Stryker action. The Court determined in its J a n u a ry 8, 2009, amended opinion that XLIA is liable for Stryker's costs of defending that a c tio n as damages for XLIA's breach of its policy, including breach of its duty to defend the

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D U K Claims.2 (Dkt. No. 161, 01/08/2009 Amended Op. 24.) On January 16, 2009, the C o u rt requested additional briefing on whether Stryker is entitled to these costs, including its costs pursuing counterclaims in that action. (Dkt. No. 166, 01/16/2009 Order.) The Court s ta te d that it reserved the right to amend its previous opinion. (Id.) Stryker and XLIA filed b rie f s in response to that order. For the reasons that follow, the Court will affirm its previous o p in io n . U n d e r Michigan contract law, consequential damages "are those damages that arise n a tu ra lly from the breach, or which can reasonably be said to have been in contemplation of th e parties at the time the contract was made." Lawrence v. Will Darrah & Assocs., Inc., 516 N .W .2 d 43, 48 (Mich. 1994) (quoting Kewin v. Mass. Mut. Life Ins. Co., 295 N.W.2d 50, 55 (M ich . 1980)). Where an insurer breaches its duty to defend the insured, the insurer is liable f o r the insured's costs to defend an action covered by the policy. Schiebout v. Citizens Ins. C o . of Am., 366 N.W.2d 45, 49 (Mich. App. 1985) ("If the insurance company has breached [ its duty to defend], it then, like any other party to a contract who has failed to perform, b e c o m e s liable for all foreseeable damages flowing from the breach.") (citing City Poultry & Egg Co. v. Hawkeye Cas. Co., 298 N.W. 114 (Mich. 1941); Cooley v. Mid-Century Ins. C o ., 218 N.W.2d 103, 105 (Mich. App. 1974) ("An insurer who wrongfully refuses to defend a n action against the insured, on the ground that the action was not within the coverage of th e policy, is liable for reasonable attorney fees incurred by the insured in the defense of the

XLIA contends that it never had a duty to defend Pfizer, but this is contrary to the C o u rt's amended opinion. 6

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a c tio n brought against them.") (citing City Poultry, 298 N.W. at 114). S tryk e r's costs to defend the DUK Claims at issue in Stryker I are clearly co n seq u en tial damages under City Poultry and Cooley. Stryker contracted with XLIA to p ro v id e a defense of these claims. When XLIA failed to defend Stryker, Stryker incurred d e f en s e costs as a reasonably foreseeable consequence of XLIA's breach. The circumstances in Stryker II are different because the DUK Claims at issue in this action were brought a g a in s t Pfizer. The Court has determined that XLIA was contractually obligated to Stryker to defend these claims. (Dkt. No. 161, Amended Op. 24.) Ultimately, Pfizer defended these c la im s and sought indemnification for its defense and settlement costs from Stryker in the P fiz e r v. Stryker action. Thus, at issue is whether Stryker's costs in defending Pfizer's c o n tra c t enforcement action in Pfizer v. Stryker were a reasonably foreseeable consequence o f XLIA's breach of its duty to defend and indemnify the DUK Claims brought against P f iz e r. Stryker contends that its defense costs in Pfizer v. Stryker are recoverable as c o n se q u e n tial damages because Pfizer would not have sued Stryker if XLIA had fulfilled its o b lig a tio n to defend and indemnify the DUK Claims. XLIA responds that they were not foreseeable because Stryker could have honored its own obligations under the Asset Purchase A g re e m e n t to defend and indemnify Pfizer and XLIA had no control over that decision. M ic h ig an courts adhere to the general rule that attorney's fees and litigation costs are n o t recoverable absent statutory authority or court rule. State Farm Mut. Auto. Ins. Co. v. A l l e n , 212 N.W.2d 821, 823-24 (Mich. Ct. App. 1973). However, there is a recognized

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e x c e p tio n where such fees and costs arise in separate litigation with a third party as a c o n s e q u e n c e of the defendant's wrongful conduct. Id. at 825-26; see Birkenshaw v. City of D e tro it, 313 N.W.2d 334, 338 (Mich. Ct. App. 1981) ("Michigan courts have recognized that a tto rn e y fees incurred in prior litigation are recoverable as damages if proximately caused b y a defendant's wrongful conduct."). Such "wrongful conduct" can include breach of c o n tra c t. See Lansing Pavilion, LLC v. Eastwood, LLC, No. 265970, 2006 WL 2271348, at * 2 (Mich. Ct. App. Aug. 8, 2006) (unpublished) ("`Sometimes a breach of contract results in claims by third persons against the injured party. The party in breach is liable for the a m o u n t of any judgment against the injured party together with his reasonable expenditures in the litigation, if the party in breach had reason to foresee such expenditures as the probable re su lt of his breach at the time he made the contract.'") (quoting Restatement (Second) of C o n trac ts § 351 cmt. c (1981)). Stryker cites Warren v. McLouth Steel Corp., 314 N.W.2d 666 (Mich. Ct. App. 1981), a n d State Farm, 212 N.W.2d at 821, as authority in support of recovery of its defense costs in Pfizer v. Stryker. In State Farm, an insurer sued its insured seeking a declaration of rights a n d rescission of contract with respect to an automobile insurance policy. It also sued the in s u ra n c e agent and the dealership that issued the policy. A jury determined that the in s u ra n c e agent and dealership acted in concert to falsify and forge the insurance application. In a previous action, the insurer had defended the insured from a third-party claim covered b y the insurance policy. The insurer sought recovery of its fees for defending the insured in th e previous action. The court awarded the fees reasoning that "`where the present defendant

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h a s by his wrongful conduct, be it tort or breach of contract, caused the present plaintiff to d e f en d or prosecute [p]revious legal proceedings, the law . . . allows the plaintiff to recover all the expense, including counsel fees, reasonably incurred by him in the prior litigation.'" Id . at 825-26 (quoting McCormick, Damages § 66 at 246). The court reasoned that, but for th e wrongful conduct of the dealership and insurance agent in falsifying the application, the in s u re r would not have been forced to defend the suit between its insured and the other a u to m o b ile driver because the policy would not have issued. Id. at 826. In Warren, defendant McLouth contracted with third-party defendant Valley to make c e rta in repairs. 314 N.W.2d at 668. During the course of the repairs, an employee of Valley w a s injured and that employee sued McLouth for the injuries. McLouth defended the e m p lo ye e suit and sought indemnification from Valley. The court noted the exception to the ru le barring recovery of attorney's fees that has been "sparingly allowed" where a party has b e e n "forced to expend money to defend because of the wrongful acts of another." Id. at 6 7 1 . The court held that McLouth could recover its expenses defending the employee's c la im because McLouth was forced to defend the claim as a result of injuries caused by V a lle y's wrongful conduct. Id. at 672. N eith er Warren nor State Farm involved precisely the situation at issue in Stryker II, in which the plaintiff contends that the defendant's breach of its contract with the plaintiff re su lte d in the plaintiff's defense of a separate breach of contract action with a third party. X L IA argues that Stryker's defense costs in Pfizer v. Stryker were not foreseeable because S tryk e r was not compelled to dispute its agreement with XLIA; it could have acceded to

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P f iz e r's claims by paying for Pfizer's defense and settlement costs under its own contractual o b lig a tio n s and then sought indemnification from XLIA. However, XLIA's argument does n o t meaningfully distinguish cases like Warren and State Farm. In State Farm, the insurer c o u ld have avoided defense costs by acceding to claims against its insured by the other d riv e r. In Warren, McLouth could have avoided defense costs by settling the injury claim w ith Valley's employee. The Court is aware of no authority indicating that a non-breaching p a rty is not entitled to assert a reasonable defense to a third-party claim arising from the b re a ch rather than accept a default judgment. Moreover, XLIA's argument that Stryker was n o t compelled to dispute and defend Pfizer's claim appears to confuse causation and a failure to mitigate. See Lawrence, 516 N.W.2d at 49 (distinguishing foreseeability of contract d a m a g e s from mitigation). The latter is XLIA's burden to plead and prove. Id. N e v e rth e les s, Stryker must show that its defense costs were a reasonably foreseeable c o n s e q u e n c e of, or arose naturally from, the particular breach asserted by Stryker. See id. at 48. To the extent that Stryker claims that its defense costs were a consequence of XLIA's f a ilu re to defend the DUK Claims brought against Pfizer, there is no dispute that XLIA knew o r should have known about the Asset Purchase Agreement and Stryker's obligation to Pfizer to defend the DUK Claims. Thus, it was reasonably foreseeable that XLIA's failure to p ro v id e a defense of the DUK Claims to Pfizer would result in costs incurred by Pfizer to d e f en d the DUK Claims and a claim by Pfizer for reimbursement of these costs under the ter m s of the Asset Purchase Agreement. To the extent that Stryker can show that its costs in Pfizer v. Stryker are defensive of this claim by Pfizer, it may be entitled to recovery of

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su c h costs. However, it is premature for the Court to determine which costs are recoverable b e c a u se Stryker has not moved for specific costs from that action and has not attempted to tie any particular costs to defense of this claim. T o the extent that Stryker claims that its defense costs in Pfizer v. Stryker were a re a so n a b ly foreseeable consequence of XLIA's failure to indemnify Stryker, the basis for this c la im is unclear. Unlike the failure to defend, there is no indication that Pfizer incurred a d d itio n a l costs as a result of XLIA's failure to indemnify Stryker. In other words, there is n o indication that XLIA's breach of the duty to indemnify Stryker gave rise to a claim by P f iz e r that Stryker would not have been forced to defend in the absence of XLIA's breach. X L IA 's duty to indemnify is separate and distinct from its duty to defend. See Mich. Educ. E m p lo y e es Mut. Ins. Co. v. Turow, 617 N.W.2d 725, 728 (Mich. Ct. App. 2000) ("The duty to defend and the duty to indemnify are distinct and separable duties. . . . An insurer's duty to defend `arises solely from the language of the insurance contract.'") (quoting Stockdale v . Jamison, 416 Mich. 217, 224 (1982)). XLIA indicates that its policy provides that it is obligated to indemnify Stryker only f o r amounts that Stryker "becomes legally obligated to pay[.]" (Dkt. No. 70, Third Amended C o m p l., Ex. A, XLIA Policy § I.) The policy also provides that the insured has "no right of a c tio n " against XLIA "unless" the amount owed by the insured "has been determined by [ X L IA 's ] consent or by actual trial and final judgment." (XLIA Policy, Conditions § H.2.) T h u s , XLIA argues that any breach of its duty to indemnify Stryker was not the cause of P f iz e r's claims, or of Stryker's costs of defense, in the Pfizer v. Stryker action because that

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b re a c h occurred, if at all, after Stryker defended that action and was found to be "legally o b lig a te d to pay" Pfizer by the court's judgment in Pfizer v. Stryker. Stryker does not a d d re ss these arguments or these provisions of the policy in its brief. Therefore, to the extent th a t Stryker's claim for defense costs is based on XLIA's breach of the duty to indemnify S tryk e r, it has not shown that it is entitled to such costs. With respect to Stryker's costs pursuing counterclaims in Pfizer v. Stryker, Stryker c o n te n d s that these costs are also recoverable as consequential damages because the c o u n te rc la im s are "defensive in nature" and "prosecuted to limit or defeat" liability, citing O s c a r W. Larson Co. v. United Capitol Insurance Co., 845 F. Supp. 458, 461 (W.D. Mich. 1 9 9 3 ). The Court notes that, while Stryker has provided some evidence of the claims and c o u n te rc la im s in Pfizer v. Stryker, it has not moved for a ruling on any specific costs of d e f en s e from that action, nor has it argued, much less established, that there is a connection b e tw e e n any of its allegedly defensive counterclaims and XLIA's breach of the duty to d e f en d , as distinct from a breach of the duty to indemnify.3 Thus, it is premature for the C o u r t to determine that Stryker is entitled to costs pursuing defensive counterclaims because it has not shown that it is entitled to them and because the evidence regarding such costs is n o t before the Court. Stryker also argues that it would not have pursued its counterclaims for indemnification from Pfizer if XLIA had defended and indemnified Stryker for the DUK Claims brought against Stryker that were at issue in Stryker I. However, Stryker offers no authority for the notion that breach of an indemnity obligation requires the breaching party to fund any effort by the other party to seek indemnification from another source, including the pursuit of disputed claims against a third party. There is no basis for the Court to conclude that Stryker's attempt to seek indemnification from Pfizer for the DUK Claims at issue in Stryker I was a reasonably foreseeable consequence of XLIA's breach of its duty to defend and indemnify Stryker for these claims. 12
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T h e Court's amended opinion holds that Stryker is entitled to its costs of defense in P fiz e r v. Stryker as damages for XLIA's breach. (Dkt. No. 161, 01/08/2009 Amended O p . 21.) That holding is correct, but only to the extent that Stryker can establish that such c o s ts were expended in defense of Pfizer's claim for reimbursement of Pfizer's defense costs. T h e Court notes that Stryker has not established that it is entitled to all of its defense costs f ro m the Pfizer v. Stryker action, nor has it established that it is entitled to any specific a m o u n t of such costs. For the foregoing reasons, the Court will affirm its prior opinion. A n order and partial judgment will be entered that are consistent with this opinion.

Dated: October 7, 2009

/s/ Robert Holmes Bell ROBERT HOLMES BELL UNITED STATES DISTRICT JUDGE

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