Opinion ID: 2998165
Heading Depth: 2
Heading Rank: 2

Heading: Watts’s Appeal

Text: 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 Federal Rule of Evidence 408. Watts also argues that there was not—and is not—a dispute ripe for arbitration under the deductible agreements. 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 statements made in compromise negotiations is likewise not admissible. Nos. 03-3851 & 03-3853 11 Fed. R. Evid. 408. The primary policy reason for excluding settlement communications is that the law favors out-ofcourt settlements, and allowing offers of compromise to be used as admissions of liability might chill voluntary efforts at dispute resolution. See, e.g., Perzinski v. Chevron Chem. Co., 503 F.2d 654, 658 (7th Cir. 1974). We assume for the purposes of this analysis that Watts’s September 6 letter is in fact a settlement communication subject to Rule 408.5 By its terms, the rule forbids admission of evidence only when it is offered to prove “liability for or invalidity of the claim or its amount.” See Advisory Committee’s Note, Fed. R. Evid. 408. The district court has broad discretion to admit evidence for a purpose other than proving liability; we review the district court’s decision to do so for abuse of discretion and reverse only if there is manifest error. See Belton v. Fibreboard Corp., 724 F.2d 500, 505 (5th Cir. 1984); see also Starter Corp. v. Converse, Inc., 170 F.3d 286, 293 (2d Cir. 1999). Evidence coming out of settlement negotiations is obviously admissible to show bias or prejudice of a witness. See Advisory Committee’s Note, Fed. R. Evid. 408. It has also been admitted by courts for additional purposes other than establishing liability, including for purposes of rebuttal, for purposes of impeachment, to show knowledge and intent, to show a continuing course of reckless conduct, and to prove estoppel. Bankcard Am., Inc. v. Universal Bancard Sys., Inc., 203 F.3d 477, 484 (7th Cir. 2000) (collecting authority). In deciding whether Rule 408 should be applied to exclude evidence, courts must consider the spirit and purpose of the rule and decide whether the need for the settlement 5 Zurich argues that because Watts demanded full payment for its defense in Rothschild and Armenta rather than proposing a “compromise,” the September 6 letter is not a settlement communication subject to Rule 408. 12 Nos. 03-3851 & 03-3853 evidence outweighs the potentially chilling effect on future settlement negotiations. Id.; Starter, 170 F.3d at 293. The balance is especially likely to tip in favor of admitting evidence when the settlement communications at issue arise out of a dispute distinct from the one for which the evidence is being offered. See Towerridge, Inc. v. T.A.O., Inc., 111 F.3d 758, 770 (10th Cir. 1997) (“Rule 408 does not require the exclusion of evidence regarding the settlement of a claim different from the one litigated, though admission of such evidence may nonetheless implicate the same concerns of prejudice and deterrence of settlements which underlie Rule 408[.]”) (citations omitted); Broadcort Capital Corp. v. Summa Med. Corp., 972 F.2d 1183, 1194 (10th Cir. 1992) (“Rule 408 did not bar this evidence because it related to settlement discussions that involved a different claim than the one at issue in the current trial.”); Vulcan Hart Corp. v. NLRB, 718 F.2d 269, 277 (8th Cir. 1983) (“Rule 408 excludes evidence of settlement offers only if such evidence is offered to prove liability for or invalidity of the claim under negotiation.”); cf. Starter, 170 F.3d at 294 (holding that evidence of agreement to settle trademark case was properly admitted in subsequent dispute between parties in which one asserted a claim for estoppel). 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 agreements as a defense to its duty to defend Watts in Armenta and Rothschild. Still, the California action—based on the primary liability insurance policies—is distinct from the Illinois petition to compel arbitration under the deductible agreements. Notwithstanding Watts’s protestation that “[h]ad [it] known that settlement efforts would be used by the court as proof of the need for an arbitration, [it] would not have engaged in settlement efforts[,]” we do not believe that the policy behind Rule 408 is Nos. 03-3851 & 03-3853 13 thwarted by admission of this evidence in the instant case. Watts could have negotiated settlement of the California coverage action without bringing the deductible agreements into the mix.6 The district court did not abuse its discretion by admitting the September 6 letter, related to settlement of the action in California state court, for the purpose of determining whether there was an arbitrable dispute under the deductible agreements. 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 6 Zurich’s letter dated August 31, 2001, stated that Zurich would address the applicability of the deductible agreements “in due course, as required.” Watts’s response in its September 6 letter was that “the time to resolve [the deductible agreement] issues is now.” 14 Nos. 03-3851 & 03-3853 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. SunTimes, 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 would not perform its deductible obligations—sufficient to show a “dispute”—and, considering the broad scope of the arbitration clauses at issue, this dispute is clearly within the scope of the deductible agreements. 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 7 Although Watts maintains in its brief that it “never refused to arbitrate a dispute under the applicable Deductible Agreements[,]” Watts’s conduct after Zurich’s request for arbitration and position taken in these proceedings clearly manifest a refusal to arbitrate. On October 2, 2001, Watts sent a letter to the California court presiding over the coverage action denying its duty to arbitrate. (Watts’s App. at 24.) 8 Zurich made a partial payment of $4 million immediately prior to the district court’s ruling, almost one year after filing the petition to compel arbitration. At this point, Zurich has paid more than $41 million in defense costs. Nos. 03-3851 & 03-3853 15 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 199495 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 (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 16 Nos. 03-3851 & 03-3853 agreements the parties’ dispute arises under, and thus under which agreements their obligations and rights may be arbitrated.