that Watts wrote the September 6, 2001. letter claiming that
Zurich’s failure to defend was a breach of the deductible
agreements, which stated that Zurich “assimes responsibility for
the investigation, defense and settlement obligations under this
Agreement as respects the policies ’

In essence, Watts claims that Zurich sould have known sooner
that it would raise the deductible agreements as a defense.
However, little had happened in the litication as of August 2001.

The parties had attended a status confersnce and a settlement

conference, but Zurich had not even filed its answer to the

complaint. Watts argues that Zurich waited to raise the issue of
the deductible agreements until many ysars after Armenta and
Rothschild had been tendered to Zurich for a defense, but looking
at the totality of the circumstances, it was. still quite early in
the litigation.‘ Nor is it clear that simpiy raising the issue of
the deductible agreements alone would be enough to create an

arbitrable issue; as I discuss below, until the duties under the

deductible agreement were disputed in the September 6, 2001,

Watts cites an Illinois case for the proposition that an
insurer can waive arbitration by waiting to make a demand for
arbitration until two years after the claim was tendered and eight
and a half months after the lawsuit had commenced, see Yandell v.
Church Mut. Ins. Co., 654 N.E.2d 1388, 1390 (‘Tll. App. Ct. 1995),
but the arbitration clause in that casé was optional, and the court
there specifically clistinguished cases finiling that mandatory
itration could net be waived by mere celay or responsive
participation in litigation. Moreover, there was no question in
that case of when the arbitrable issue was injected into the
litigation.

13


actions before mentioning the deductible agcseements; and (4) that,
even if the deductiole agreements apply, ‘ucich is responsible for
defense costs in excess of the $500,000 deductible. See Giller Aff.
Ex, 25 at 2-3. Zurich responded on September 21, 2001, demanding
arbitration of the issues identified in Watts’ letter. See Giller
Aff. Ex, 28.

Watts rejected the demand for arbitration on October 2, 2001,
and Zurich filed this action on October 4, 2001. Watts filed a
motion for summary adjudication in the California court, which the
California court granted, in orders of October 30 and November 27,
2001, stating that Zurich had a duty to deferd Watts in the Armenta
action and that there was no arbitrable issue with respect to the
duty to defend in Airmenta.

In May, 2002, Zurich filed a mo

jon for a temporary
restraining order. The Superior Court of Ca.ifornia had determined,
in its orders of October 30 and November 2%, 2001, that Zurich has
a duty to defend Watts in the Armenta case, s>» I held that I lacked
jurisdiction over that claim under the Rooker-Feldman doctrine.
See Rooker v. Fidelity Trust Co., 263 U.S. 413, 44 S.Ct. 149, 68
L.Ed. 362 (1923); District of Columbia Court of Appeals v. Feldman,

460 U.S. 462, 103 S

1303, 75 L.Ed.2d 206 (1983). I concluded

that Zurich demonstrated some likelihood of success on the merits

ef its claim that Watts’ duty to defend in = Rothschild case was

subject to arbitration under the deductible agreements. I entered


to equitably estop ronsignatory, nonsignatory must directly benefit
from the contract containing the arbitration clause; indirect
benefit is insufficient).

Zurich also argues that the “link” between the duty to defend
under the policies and the deductible agreements made by Watts in
its September 6, 2001, letter is attributeb.e to James Jones as an
unambiguous intent to agree to the obligation to arbitrate. James
Jones was copied on the letter, but dic not sign it. The only
position taken on behalf of James Jones in the letter is that the
deductible agreements do not apply to James Jones. Zurich argues
that James Jones has not disclaimed the “link” argument made by
Watts, but that argument was not made on James Jones’ behalf, so
there was nothing tc disclaim. Even so, the failure to disclaim a
position taken by enother party fails shor: of an “unambiguous

intent to be bound by the arbitration clause.” See Proshred
Holdings Ltd. v. Conestoga Document and Proid. Destruction, Inc.,
No. 02 C 1551, 2002 WL 1067328, at *3 (N.c. Til. May 28, 2002)

(Castillo, J.). Fina.ly, in the answer filed hy James Jones on July

2, 2002, it asserts the following affirma:ive defense: “Jones

alleges that to the extent that any agreeme was reached between
Jones and Zurich, Zurich has breached such agreements and thus
Zurich may not enforce any such agreements.” This does not

explicitly invoke the deductible agreemen=, and even so, it is

simply an argument made in the alternative =o James Jones’ main


argues that the decuctible agreements bounc Watts and all entities
on whose behalf Watts obtained coverage, including James Jones

“Arbitration is contractual by nature-—-‘a party cannot be required
to submit to arbitration any dispute which ve has not agreed so to
submit.'” Phomson-CSF, S.A. v. American Arbitration Ass’n., 64 F.3d
773, 776 (2d Cir. 1995). Although federal courts have acknowledged

a broad “feceral policy favoring arbitration,” that policy “applies
to the scope of an arbitration agreement entered into consensually
by contracting parties; it does not serve to extend the reach of an
arbitration provision to parties who neve: agreed to arbitrate in
the first place.” Crundstad v. Ritt, 106 F.3d 201, 205 n.5 (7th
Cir. 1997).

It does not foilow that the obligation to arbitrate attaches

only to the persons who sign an arbitration agreement, however; “a
nonsignatory party nay be bound to an arbitration agreement if so
dictated by the ‘ordinary principles of cont.sact and agency.’” Id.
There are five ways to bind nonsignetcries to arbitration
agreements: “1l) incorooration by reference; 2) assumption; 3)
agency; 4) veil-piercing/alter ego; and 5) estoppel.” Thomson-CSF,
64 F.3d at 776; see aiso Fyrnetics (Hong Fong) Ltd. v. Quantum
Group, Inc., 293 F.3d 1023, 1029 (7th Cir. 2002) (“[Tjhere are
several ways that a non-signatory can be bourd by a contract, such
as through the doctrines of assumption, agency, equitable estoppel,

veil piercing, and incorporation by referencs.”).


a temporary restraining order, pending my ruling on the duty to
arbitrate, enjoining the courts and the parties from participating

in or pursuing further proceedings with i

pect to (1) Zurich’s
duty to defend Watts or with respect to ary other issues related to
the insurance contracts alleged to be at issue in Rothschild, and
(2) the scope and duties under deductibli2 agreements between the
parties in Armenta, apart from enforcing tne California court's
orders of October 3) and November 27, 2001. See Zurich Am. Ins. Co.
v. Superior Court fer the State of Cal., 200 F. Supp. 2d 929, 934
(N.D. Tll. 2002).

On June 10, 2002, I issued a prelissinary injunction as to
Watts along the lines of the TRO, but I held that Zuricn had not
demonstrated a reasonable likelihood of saccess on the merits of
its petition to compel arbitration against cames Jones, which had
not signed the deductible agreements conta.ning the arbitration
clauses. See Zurich Am. Ins. Co. v. Supericr Court for State of
Cal., 205 F. Supp. 24 964, 970 (N.D. Ill. 2032). I now consider
the merits of Zurich's petition to compel arbitration, which seeks
to compel both Watts and James Jones to arbitrate the issues raised
py Watts in a September 6, 2001, letter and the September 21, 2001,
response of Zurich.

Il.
James Jones did not sign the deductisle agreements that

contained the arbitration provisions at issie here, but Zurich


affiliated companies-~one signatory and cre non~signatory--are
based on the same facts and are inherently inseparable. See J.J.
Ryan & Sons, Inc. v. Rhone Poulenc Textile, S.A., 863 F.2d 315

320-21 (4th Cir. 1988). That case involved a nonsignatory who
wanted to compel a signatory to arbitrate, which is the “inverse”
of the situation here, where a signatory seeks to compel a non-
signatory. See Thomson-CSF, 64 F.3d act 779; see also Prosherd
Holdings Ltd. v. Conestoga Document & Product Destruction, Inc.,
No. 02 C 1551, 2002 WL 1067328, at *4 (N.3. Ill. May 28, 2002

(Castillo, J.).

Zurich cites one case in which a ccuirt has held that a
signatory may bind a nonsignatory to an arlbitration provision, but
in that case, the nensignatory was a third party beneficiary of a
contract which contained an arbitration clause, and the
nonsignatory had sought the benefits of rigats under the agreement.
See Gerig v. Kahn, 769 N.E.2d 381, 384-85 (Oh. 2002). Here the
arbitration clause is in a separate contract from the insurance
policy of which James Jones is a beneficiary. Zurich argues that
the insurance policy is part of a “program” that necessarily
includes the deductible agreements, but i: has not demonstrated
that James Jones is a third party beneficiasy of the deductible
agreement, or that James Jones is attempting to enforce any rights
under the deductible agreements, as oppcséecd) to the insurance

policies. See Thomson-CSF, 65 F.3d at 779 (holding that, in order


Mingte (rer Form (06/9°}

ob ALenivea States District Court, Northern District of Mlinois

Name of AYsigned Judge
or Mag\stage Judge

———

Elaine E. Bucklo

CASE NUMBER Ol C 7673 DATE 9/9/2002
CASE Zurich American Insurance vs. Watts Industries, et al.
TITLE
JIn the Zollowing box (a) indicate the party filing the motion, ¢.g,. plaim iff. Je(endant, 3rd party plaintif?. and (b) state briefly the nature
MOTION: of the motion being presented]

DOCKET ENTRY:

(9)

ee _|

This case is dismissed [with/without] prejudice and without costs, b
CO FRCP4(n)

[Other docket entry]
plaintiff's petition to compel arbitration. Watts’ motion for suraniary adjudication is denied. Plaintiff's
motion to strike motion for summary adjudication is denied as moot. Any pending motion in this case is
terminated as moot.

a oO Filed motion of [ use listing in “Motion” box above.]
(2) oO Brief in support of motion due
@) ci Answer brief to motion due. . Reply to answer brief due
(4) Oo Ruling/Hearingon set for at.
(5) a Status hearing[held/continued to] {set for/re-set for]on at.
(6) D Pretrial conference{held/continued to] [set for/re-set forlon set for ats
(7) o Trial[set for/re-set for} on att
(8) G [Bench/Jury trial] [Hearing] held/continuedto at
0

reement/pursuant to}

+1 (a)(2).

CG Loca! Rule 41.1. CPFRCP41 (a1) CFR

Inter Memorandum Opinion and Order granting in part and denying in part

MPJ

ay (For further detail see order attached to the original minute order. |

No notices required. advised in open court. if Document

‘ Number

No notices required. utnber of notices

v | Notices maited by judge's stati. 2002
str Lu

Notified counsel by telephone, | de dockoted

Doeketing to mail notices | | —
JS | Mail AO 450 form. aa > aockettoh deour Knits : S

Copy lo judge/magistrate judge.

svorao2

_—___tlale mated paticg

courtroom
deputy’s MPs
initials

Date/time received in

central Clerk's Office ‘mailing deputy inivials



wm,

To this end, a court may not deny a party’s request to arbitrate
an issue ‘unless it may be said with posivive assurance that the
arbitration clause is not susceptible of an interpretation that
covers the asserted dispute.’” Kiefer Specialty Flooring, Inc. v.
Tarkett, Inc., 174 F.3d 907, 909 (7th Cir. 1999).

As a preliminary matter, Watts argues in a separate motion for
summary adjudication* that Zurich has waivea the right to insist on

c

arbitration by waiting too long--until Ssp:ember 2001--to demand

arbitration. Watts first tendered the Avmenta and Rothschild
actions to Zurich ir 1998, but Zurich denied coverage several times
before Watts filed suit in February 2001. The California litigation
was seven months old before Zurich demandec arbitration, and Zurich
had participated in the California proceedings, including some
discovery. Watts argues that this behavio: constitutes a waiver.
Because of the policy in favor of arbitration, doubts about waiver
are to be resolved in favor of arbitration, Moses H. Cone, 460 U.S.
at 24-25, and although the party resisting arbitration need not
demonstrate prejudice from waiver, see Cabinet ree of Wisc., Inc. v.
Kraftmaid Cabinetry, Inc., 50 F.3d 388, 399 (7th Cir. 1995), waiver
should not be lightly inferred, St. Mary's Med. Center of
Evansville, Inc. v. Disco Aluminum Prods. Cs., Inc., 969 F.2d 585,

590 (7th Cir. 1992).

* I construe this as a motion for part:
under Fed. R. Civ. P. 56.

1. summary judgment

ii


contention~-that it is not bound by the deductible agreements
James Jones is not estopped by an affirmative defense made in the
alternative to its central argument thar it is not bound by the
deductible agreements.
IIt.
To prevail on a petition to compel Watts to arbitrate under §

4 of the Federal Arbitration Act, 9 U.S.: § 4, Zurich must show

that there is a written instrument indicating a mutual intent to
arbitrate, that there is a dispute wittir the scope of the
arbitration agreement, and that there hes been a refusal to
arbitrate. Watts, as a signatory of the deductible agreements with
Zurich, is clearly bound to arbitrate disputes within the scope of
the arbitration provision, and it rejectecl Zurich’s demand for
arbitration of the four issues raised in the September 6 letter.
See Giller Aff. Ex. 29, The only question is whether those issues
are within the scope of the arbitration agreement. I have already
determined that the issue with respect to James Jones is not
arbitrable.

“The Arbitration Act establishes that, as a matter of federal

law, any doubts concerning the scope of arbitrable issues should be

resolved in favor of arbitration, whether =he problem at hand is

the construction of the contract language itself or an allegation

of waiver, delay, or a like defense to arhbi-crability.” Moses H.

Cone Mem. Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24~25 (1983).

10


Zurich does net argue that the insurance policies that cover
James Jones incorporate the deductible agreements by reference or
that James Jones has manifested an intent to assume the obligation
to arbitrate. See Thomson-CSF, 64 F.3d at 776. It does not
explicitly invoke a theory of agency or alter ego, but it argues
that Watts acted for James Jones when it entered into the
deductible agreement because of the parent~subsidiary relationship.
However, a mere parent-subsidiary relationsh..p “does not create the
relation of principal and agent or alter evo between the two.” See
Caligiuri v. First Colony Life Ins. Co., 742 N.£.2d 750, 756 (T1l.
App. Ct. 2000). Moreover, Watts did not enter into the 1992-1993
and 1996-1997*% agreements until 1997, after it sold James Jones to
a third party in September 1996, so not eve a parent~subsidiary
relationship existed at that time.

Finally, Zurich argues that James Jcnes should be estopped
from avoiding the arbitration provision of the deductible
agreement. Estoppel applies where a nonsignztory knowingly seeks
benefits under the contract that contains the :roitration provision
but nevertheless seeks to avoid the obligatio1 of arbitration. See
Thomson-CSF, 65 F.3d at 778. Zurich argues that a nonsignatory may

be bound by an arkitration clause where claims against two

A provision of the 1996-1997 deductible agreement states
that “[Watts] and each named insured statec in the Policy(ies)
shall be jointly ana severally responsible far the obligations
under this Agreement.” Rohan Aff. Ex. 9 at ZURC 04067 (under heading
“Payments Due”).


in California state court for coverage undsr the policies, and in
June 2001, James Jones filed a similar suit, which was consolidated
with Watts’ action, In August 2001, Zurich raised the deductible
agreements as a detense to the coverage cleim, stating that, even
if it was liable, Watts was obligated under the deductible
agreements to reimburse Zurich for the full sost of the defense. In
September 2001, in sesponse to the California court’s instructions
to the parties to attempt to work out a detense agreement, Watts
sent a letter to Zurich.

In its letter of September 6, 2001, Watts made three arguments
in response to Zurich’s “settlement defense” under the deductible
agreements: (i) that. James Jones is not a perty to the deductible
agreements between Zurich and Watts, so they do not apply to James
Jones, and as a result, that Zurich is obliyated to defend James
Jones and to reimburse Watts for amounts that Watts has spent on
James Jones’ defense; (2) that by wrongfully denying coverage in
the underlying actions, Zurich repudiated both the policies issued
to Watts and James Jones and the deductible agreements between
Zurich and Watts because under the deductible agreements, Zurich
“assume[d] responsibility for the investigation, defense and
settlement obligaticns under this Agreeneit as respects the
policies .. .” See Ifft. Aff. Ex. 5 at MARSHOD064; (3) that Zurich
waived any defense based on the deductible ayreements by waiting

three and a half years from notice of the 4ruenta and Rothschild


letter, there was 19 dispute under the deductible agreements. Once
that dispure arose, Zurich waited less than a month before filing
a petition to compel arbitration and sought a stay in the
California action pending arbitration. Zucich did not wait too long
to demand arbitration, so I will not infer a Waiver from its
actions.” The motion for summary adjudicetion on this issue is
denied.

Watts also arques that the petition te compel arbitration is
too early. It argues that the demand fo+ arbitration under the
deductible agreements is premature because the duty to reimburse
under the deductible is triggered by Zurica’s Payment, and Watts
Says that Zurich has not “paid a dime in Policy benefits.” Watt’s
Mem. in Opposition at 3. In the first place, however, that is no
longer true. By letter of September 6, 2092, to which Photocopies
of checks are attached, Zurich informs me that it has now paid
S1€, 426,580.32 in defense costs {some of which are to Jones but
include payments to Watts) in the Armenta action, Furthermore, in
my order of June 10, 2002, I hela that Zurich had demonstrated a

reasonable likelihood of Proving that wWat-:s had conditionally

Watts also argues that Zurich’s actions since filing the
petition to compel arbitration constitute weiver; in essence, it
argues that Zurich has not pursued arbitration vigorously enough.
Although Zurich waited until May 2002, sa months after the
California court's order regarding the arbitr. lity of the duty to
defend in Armenta, to seek 4 TRO, Watts provides no Support, nor
does my research uncever any, for the propos =on that a Party can
Waive arbitration despite having filed a petition to compel it
under the FAA,

14



a sufficient threat that Watts would not perform its reimbursement
obligations even if Zurich paid.

I therefore Grant the petition to cs

gel arbitration in part
with respect to the following questions on which Zurich has
demanded arbitration: (1) as to Armenta, whether Zurich’s breach of
the duty to defend found by the California court constituted a
repudiation by Zusich of the deductible agreement; (2) 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 if so whether that constitutes a repudiation of the deductible
agreement; and (3) with respect to Rothschila, what the obligations
of the parties are with respect to payment and reimbursement of

defense costs above the $500,000 deductible. fi Deny it in part with
respect to the question of James Jones’ obligations and the
question of whether Zurich waived arbitrabili:y. Watts’ motion for

summary adjudication is Denizp, and the motion to strike it is Den1ep

as moot.
ENTER ORDER:
Lo. 5 eee
Elaine E. Bucklo
United States District Judge
bated: September 9, 2002

16


9 J.S.C. § 1 et sez. I deny the petition with respect to James
Jones and grant the petition in part and deny it in part with
respect to Watts.

I.

Watts entered into a series of six one-ysar commercial general
liability insuzance policies from June 30, 1391, to June 30, 1997,
James Jones was an insured under the policies until it was sold by
Watts in September 1996. It is undisputed that the policies
themselves contain no arbitration provisior. Zurich Stmt. of Facts
g 16. Watts also signed deductible agreements with Zurich in
connection with those policies for three years: 1991-1992, 1992-
1993, and 1996-1997, The deductible agreenents contained broad
arbitration provisions, requiring, for example, arbitration of “any
dispute . . . between the Company and the Insured’ with reference
to the interpretation of this agreement or their rights with
respect to any transaction involved, whether such dispute arises

before or after the termination of the Agreement See,
e.g., Tfft. Aff. Ex. 5 at MARSHOO067 (1991-1992 Agreement). James
Jones did not sign the deductible agreements.

Watts and James Jones have been involved in a coverage dispute

with Zurich since early 2001. In February 2001, Watts sued Zurich

' The deductible agreements define Zurich as the “Company” and
Watts as the “Insured.” See Ifft. Aff. Ex. 5 at MARSHOOO6O (1991-
1992 Agreement); Rohan Aff. Ex. 1 at ZUROOO789 (1992-1993
Agreement). See also Rohan Aff. Ex. 9 at “%UROO4062 (1996-1997
Agreement, defining “you” as Watts and “we” as Zurich).

2


IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION

00 ChE Fe

ZURICH AMERICAN INSURANCE CO., ) SEp de>
) “ 2007
Plaintiff, )
)
v. )
)
SUPERIOR COURT FOR THE STATE OF )
CALIFORNIA, COUNTY CF LOS )
ANGELES, ) No. 02 © 7673
)
Respendent,
WATTS INDUSTRIES, INC. and )
JAMES JONES COMPANY
Real Parties. }
MEMORANDUM OPINION AND CRDER
Zurich American Insurance Co. (“Zurich”) extended insurance
coverage to Watts Industries, Inc. (“Watts”). The policies included
coverage for Watts’ subsidiary, James Jones Cc. (“James Jones”).

Watts also entered into separate deductible agreements with Zurich,
which James Jones did not sign. Watts and James Jones were sued by
third parties in the California state courts and Zurich refused to
pay defense costs in Rothschild v. Tyco International, No. 726930
(Cal. Super. Ct. San Diego, filed May 7, 1639), and Armenta v.
James Jones Co., No. BC 173487 (Cal. Super. Ct. Los Angeles, filed
June 25, 1997). Watts and James Jones sued Zurich in the California
state courts, and Zurich petitioned in the horthern District of

Illinois to compel arbitration under the Federal Arbitration Act,

YS”


Watts bases its claim of waiver on Zurich’s participation in
the California coverage action, including requesting adjudication
of the duty to defend in the Rothschild case, participation in a
hearing and status conference, a representation that it “was not
aware of any arbitration clauses which might apply” in a Joint
Initial Status Conference Report, and participation in a settlement
conference and discovery. However, Watts was the party that
commenced the action, and Zurich's participation was essentially
defensive in character, not offensive. Cf. Knorr Brake Corp. v.
Harbil, Inc., 556 F. Supp. 489, 492 (N.D. Ill. 1983) (Shadur, J.)
(filing of counterciaim, unlike filing answer and participating in
discovery, was “offensive rather than defensive in character.”).

Watts argues that Zurich succeeded in heving the coverage case
assigned to the complex litigation program ir the California court,
and that this constitutes a forum choice tat is an election to
proceed before a nonarbitral tribunal. See Cabinetree, 50 F.3d at
390 i“[A]n election to proceed before a nonarbitral tribunal for
the resolution of a sontractual dispute is a presumptive waiver of
the right to arditrate.”). But the transfer qiestion arose in April
2001, when the dispute in the California cocrt: revolved only around
coverage, and the specter of the deductible aareements had not yet
been raised. The applicability of the deductikbie agreements did not
arise until August 2001, when Zurich raised them as a potential

defense to coverage. It was in response to this claim by Zurich

12


anticipatorily repudiated the deductible acreement in its letter of
September 6, 2001, because it had demarnsei, under the deductible
agreement, a defense from Zurich. I held that this was a
conditional anticipatory repudiation becaise Watts did not actually
offer an interpretation of a contested provision that Zurich
supposedly breachec, and because Watts made clear that it would not
perform under the deductible agreement unless Zurich paid for
defense costs incurred by Watts and James cones.
Watts explains now that it did not offexr an interpretation of
a contractual provision because its position on the duty to defend
was made clear elsewhere. Nonetheless, Zarich need not actually
demonstrate that Watts breached or repuciated the deductible
agreement; it need only demonstrate the existence of “any dispute
between [Zurich] and [Watts] with reference to the
interpretation of this agreement or their rights with respect to
any transacticn involved . . . .” (1991-1992 Agreement). To

demonstrate a “dispute,” Zurich “must show «rat [Watts] has acted,

or has threatened to act, in a manner inconsistent with [Zurich]'s
interpretation of the contract.” Chicago Typovwraphical Union No. 16
v. Chicago Sun-Times, Inc., 860 F.2d 1420, 1426 (7th Cir. 1988).
Watts’ statements that Zurich had repudiated the deductible
agreement by denying a defense, Watts’ proposed terms required

Zurich to pay defense costs, and its statement that Zurich was

obligated to pay for any defense above the $59(,000 deductible were

15