### In the 

# United States Court of Appeals For the Seventh Circuit

____________________ No. 16

- 3418
D ANIEL J. R ATAJCZAK , J R ., et al

. , Plaintiffs

- Appellants ,

v.

B EAZLEY S OLUTIONS L IMITED , Defendant

- Appellee

.

____________________ Nos. 16

- 3490 & 16

- 3920
L AND O’L AKES , I NC

. , Plaintiff

- Appellant , and

F IRST M ERCURY I NSURANCE C OMPANY , et al. , Intervening Plaintiffs, Cross

- Appellees ,

v.

D ANIEL J. R ATAJCZAK , J R ., et al. , Defendants

- Appellees, Cross

- Appellants

.

____________________ Appeal s from the Unit ed States District Court for the Eastern District of Wisconsin

. No s

. 13

- C

- 45 & 14

- C

- 13 88

— William C. Griesbach
, Chief Judge

.

____________________2 Nos. 16

- 3418 et al

.

A RGUED M AY 23, 2017

— D ECIDED A UGUST 31, 2017

____________________

Before B AUER , E ASTERBROOK , and R IPPLE , Circuit Judges

. E ASTERBROOK , Circuit Judge

. Between 2006 and 2012 Packerland Whey Products, Inc., deceived at least one of its customers about the protein content of a product called Whey Protein Concentrate. Whey, the watery part of milk that remains after the removal of curds, is rich in p rotein. Removing whey’s non protein components generates a co ncentrate that can be used in other products. Land O’Lakes, Inc., purchased Packerland’s protein concentrate for use in making foods for calves and other young animals. Buyers pay for protei n . They infer protein levels from measuring nitrogen using the Kjeldahl method. This indirect

measure invites adulteration: a seller could add another n itrogen

- rich substance and so pro duce higher scores . Adu lteration add s to profits as long as the substitute source of n itrogen i s cheaper than whey. Urea, nor mally used to make fertilizer , is such a substance. Daniel J. Ratajczak , Jr., Scott A. Ratajczak , and Angela Ratajczak , who collect ively owned and controlled Packerland, started adding urea to its protein concentrate in 2006. Land O’Lakes suspected that the co ncen trate was high in non protein nitrogen but could not learn why , in part because the Ratajczak s cooked up excuses tha t Land O ’Lakes accepted

. Land O’Lakes kept buying Packe rland’s protein concentrate, and none of i ts own customers complained . (In the levels Packerland added to the conce ntrate, animal

- grade urea is safe to eat .)
The Ratajczak s sold Packerland in May 2012 to Packe rland Whey Intermediary Holding Co., which kept them onNos. 16

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as employees

— and they kept on adding urea. In November or December 2012 the buyer learned what was going on. The Ratajczak s were soon out of jobs, and litigation began. The buyer threatened suit again st the Ratajczak s. They settled for about $ 10 million in December 2012, before the buyer filed a complaint . Land O’Lakes stopped buying Packerland’s product and asserted three claims in federal court: breach of contract, fraud, and violation of the Racketeer Influence d and Corrupt Organizations Act . Each of these claims has bred ancillary insurance litigation. Packerland’s insurers r efused to defend or indemnify it or the Ratajczaks in the Land O’Lakes suit; the Ratajczak s’ personal insurer refused t o i ndemnif y them for their settlement with Packerland’s buyer.
The district court dismissed Land O’Lakes’ s suit and ruled in favor of the insurers. Ratajczak v. Beaz ley Solutions Ltd ., 2016 U.S. Dist. L EXIS 189240 (E.D. Wis. Aug. 17, 2016 ); Land O’Lakes, I nc. v. Ratajczak , 2016 U.S. Dist. L EXIS 186706 (E.D. Wis. Aug. 24, 2016). We have three appeals: (1) Land O’Lakes contends that it is entitled to treble damages under RICO and a state

- law counterpart (which we do not mention again) ; (2) the Ratajczaks cont end that Packerland’s insurers had to defend and indemnify them in Land O’Lakes’s suit; (3) the Ratajczak s maintain that their own insurer must i ndemnify them for much of what they paid to Packerland’s buyer in settlement. We tackle the subjects in that or der.

1. At its outset Land O’Lakes’s suit had three claims: breach of contract, fraud, and treble damages under 18 U.S.C. §1964
, RICO’s civil remedies provision

. The strongest of these was breach of contract. Land O’Lakes would have been entitled to the difference between the price it paid and the market value of the product Packerland delivered. But4 Nos. 16

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.

the breac h

- of

- contract claim was settled and the fraud claim has been abandoned on appeal , leaving only the RICO claim. The district court granted summary judgment to the Ratajczaks because Land O’Lakes failed to produce evidence of injury

. RICO gives plaintiffs the benefit of the doubt in showing loss, see, e.g., Carte r v. Berger , 777 F.2d 1173 (7th Cir. 1985), but the district court thought that there is no doubt that could be resolved in Land O’Lakes’s favor.
Consider how a firm in Land O’Lakes’s position might show loss. (For this purpose we disregard the contract th e ory mentioned above, which Land O’Lakes does not invoke with respect to the RICO claim .) Land O’Lakes might co ntend, for example, that its own customers paid less for an inferior product made using the adulterated concentrate. It might contend that its cu stomers paid the same per pound but bought less. It might contend that its business rivals raised their own prices between 2006 and 2012, but that Land O’Lakes could not do so be cause its custom ers thought its baby

- animal feed inferior to that of the rival s. It might contend that it has been sued by its customers for selling adulterated animal feed and has incurred costs as a result. It might contend that some customers have threatened suit and that it is likely to incur future costs of defense. It might

co ntend that, although none of its customers has threatened suit, one or more of them is likely to sue unless it offers some (expensive) inducement not to do so. It mig ht contend that it recalled batches of animal feed that contained Packerland’s adulterated protein concentrate and replaced them with good product at its own expense. It might contend that it i ncurred extra costs of testing Packerland’s product in an effort to detect the source of the suspiciously high nonprotein n i-Nos. 16

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trogen. From this extensive m enu, Land O’ Lakes chose: none of the above.
Land O’Lakes tells us that it did incur some extra testing costs but concedes that they cannot be quantified. It also notes that the statute of limitations in Wisconsin is still open on potential claims by the cu stomers of animal feed that i ncluded Packerland’s adulterated protein concentrate. That’s true enough, but without any way to estimate the likelihood of such a claim, or the cost if one should be made , damages would be speculative.
There is a market in ret roactive insurance. Once a casua lty has occurred, people can buy policies that cover the cost of defending (and if necessary settling or paying) any future claims arising from that casualty . Retroactive insurance spreads the risk of outcomes ’ variability s hould claims be made. Land O’Lakes might have bought such a policy but did not, nor did it ask for a price quote

. The price of a retr oactive policy might help quantify potential loss. But a ll Land O’Lakes offered to the district court, or us, is lawyers’ talk, which is not an adequate way to estimate the existence, let alone the size , of injury. And since treble zero is still zero, Land O’Lakes was doomed to lose its RICO claim.

2. Packerland had several i nsurance policies, under which the Ratajczaks were additional insureds. The insurers all refused to defend or indemnify them . Their request for a declaratory judgment gave several reasons, two of which the district court accepted, but we need mention only one. All of the policies base coverage on an “occurrence,” and each d efines that word this way: “an accident, including continuous or repeated exposure to substantially the same general ha rmful conditions.” A dulteration of a prod uct is deliberate ,6 Nos. 16

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.

not acci dental . The Ratajczak s observe that the fraud claim in the Land O’Lakes complaint says that some of Packe rland’s statements (those designed to lull Land O’Lakes into continuing to buy) may have been reckless if they were not deliberately false , but this do es not move any of the underl ying conduct (or its effects) into the “accident” category

. Wisconsin recognizes that deliberate conduct can have a ccidental effects that are covered by policies usin g the defin ition we have quoted

. See Liebovich v. Minnesota I nsurance Co. , 2008 WI 75 ¶ 52

. Think of speeding: the driver intends to go 80 miles an hour but does not intend to plow into another car, and so a collision still may be called an “accident.” But adulteration of a commercial product is not in that category. Packerland set out to fool Land O’Lakes into paying for more protein than its product contained. It achieved exactly that. Neither the behavior nor the consequence can be called an accident

. See, e.g., Stuart v. Weisflog’s Showroom Gallery, Inc ., 2008 WI 86 ; Everson v. Lorenz , 2005 WI 51

. 3. Before selling Packerland, the Ratajczaks purchased a policy of insurance promising to indemnify them for loss caused by breach of warranties made to the buyer. The pol icy, issued by Beazley Solutions, does not cover fraud but does cover damages for breach of contract

. The contract of sale provided that a breach of warranty could come in two forms. One was a false statement in a Fundamental Repr esentation

— a list of specific representations made by Packe rland on which t he buyer relied. The other was a false stat ement not included among the Fundamental Representations. The contract set a cap of $1.5 million in damages for a false statement in the latter category. Beazley’s policy had a limit of $10 million with a $1.5 mil lion deductible (called a self

-Nos. 16

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insured retention). Beazley contended, and the district court f ound, that , if there was a non fraudulent breach of warranty, the false statement was not among the Fundamental Repr esentations, so contractual damages were capped at $1.5 mi llion. As that matched the deductible, Beazley had no need to indemnify the Ratajczaks. Insurance coverage usually depends on the nature of the victims’ claims, and the draft complaint that the buyer showed to the Rataj czaks did not specify a fa lsehood in one of the Fundamental Representations. Instead it accused Packerland and the Ratajczaks of fraudulently concealing the adulteration and the fact that Packerland’s profits had been artificially inflated, which could not continue because the
trut h was bound to emerge. The Ratajczaks insist that the buyer’s complaint implies accusations that c ould have come under a Fundamental Representation , such as warranty 3.3 about the accuracy of Packerland’s books and records

. The draft complaint does not men tion that representation, but
t he Ratajczaks remind us that in federal civil procedure complaints are liberally interpreted, so that to the extent the document is ambiguous resolution is handled through m otions for more definite statements, motions for sum mary judgment, and briefs. So far, so good. Their problem is that there was no complaint, and Fed. R. Civ. P. 8 never came i nto play. The buyer threatened litigation but did not file a suit ; the Ratajczaks settled to avoid suit. There was nothing that coul d be liberally con strued in their f avor vis

- à

- vis Beazley

. What the draft complaint did harp on is fraud, including fraudulent statements and omissions of material facts (such as the adulteration) necessary to make the statements not misleading. Fraudulent statements are outside Beazley’s po l-8 Nos. 16

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. icy altogether. True enough, some of the draft complaint’s language might be understood to specify negligent mi sstatements, such as some of the lulling statements the Ratajczaks used to prevent Land O’Lakes from looking too clo sely for the source of nonprotei n nitrogen, but even if this gets past the policy’s fraud exclusion it does not get past the contract’s $1.5 million damages cap for breach of any wa rranty other than a Fundamental Representation. The Ratajczaks ask rhetorically why they would settle for $10 million if their contractual liability was capped at $1.5 million, but there is a ready answer: there was no contractual cap on liability for fraud. And t he fact of settlement is itself a problem for the Rata jczaks . Beazley’s policy provides that it is not bound by settlements that it did not approve. Beazley not only didn’t approve the settlement but also was not not ified of the claim until the settlement talks were almost done

. The Ratajczaks insist that Beazley can’t prove prejudice from the delay

— how could one prove that a different sequence of
events , or more t ime to think things over, investigate, and mak e suggestions, would have produced a different ou tcome?

— but the poli cy does not de mand that B eazley prove prejudice. The approval requirement is abso lute. This situation shows why. Beazley received notice of the claim less than a week befor e the settlement was concluded. To be precise, the Ratajczaks notified Beazley after the close of business on December 24, 2012, and signed the settlement on December 28. That was two business days’ notice. It may take an insurer longer just to find the policy and send it to adjusters or analyst s to begin an evaluation. It would require time after that to study a proposed settlement and make suggestions , time that the Ratajczaks did not allow. After r e-Nos. 16

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ceiving notice, Beazley swiftly asked the Ratajczaks for more information about the adulteration and the proposed settl ement; they closed on t he settlement before re plying

. That haste prevented Beazley from trying to allocate potential loss among three categories: loss attributable to fraud (not co vere d), loss attributable to nonfraudulent breach of a non sp ecific warranty (capped at $1.5 million), and loss attributabl e to non fraudulent breach of a Fundamental Representation (covered to the policy limit). By cutting Beazley out of the negotiations, the Ratajczaks prevented it from taking steps vital for self

- protection. The Ratajczaks’ ripo ste is that Wisconsin law appl ies a prejudice requirement even if the policy does not. Gerrard Realty Corp. v. American States Insurance Co. , 89 Wis. 2d 130, 146

– 47 (1979)

. Prejudice might be presumed (which would make sense here), but the Ratajczaks maintain that a pr esumption is not enough. Indeed, the Ratajczaks maintain that Wisconsin law forbids clauses that give insurers autho rity to reject settlements , if they have received notice of the negotiations

. They rely on International Flavors & Fragrances v. Valley Forge Insurance Co. , 2007 WI App 187

. That may or may not be a correct statement of Wisconsin law, but the co ntrolling law is New York’s . The policy pr ovides for the application of New York law. This was a mult ijurisdictional business transaction. Beazley is based in the Unite d Kingdom. Its adjuster for U.S. claims is located in New York. It is understandable that Beazley prefers to de signate one state’s law for all of its business in this nation; it can become familiar with New York law more easily than it can master (and price) the intricacies of many states’ insu rance laws. The Ratajczaks are sophisticated business people10 Nos. 16

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. and entered this transaction with eyes open; they cannot e scape the choice

- of

- law clause in this policy. New York pe rmits insurers to insist on having c ontrol of settlements. Vig ilant Insurance Co. v. Bear Stearns Cos. , 10 N.Y.3d 170, 177

– 78 (2008)

. So the Ratajczaks lose for two reasons: the deductible offsets the maximum damages for breach of a general wa rranty, and they settled without Beazley’s consen t. Other arguments have been considered but do not r equire discussion.
A FFIRMED