Court Opinion

ID: 621085
Source: CourtListenerOpinion
Date Created: 2012-01-18 20:21:31+00
Date Added: 2024-06-11T17:50:55.027207
License: Public Domain

FILED
                                                                United States Court of Appeals
                                                                        Tenth Circuit

                                                                      January 18, 2012
                         UNITED STATES COURT OF APPEALSElisabeth A. Shumaker
                                                                        Clerk of Court
                                         TENTH CIRCUIT

 THE OHIO CASUALTY INSURANCE
 COMPANY,

           Plaintiff/Counter-Defendant/Cross-
           Defendant/Appellant,
                                                            No. 08-4003
 v.                                                 (D.C. No. 1:05-CV-00088-TC)
                                                              (D. Utah)
 UNIGARD INSURANCE COMPANY,

           Plaintiff/Intervenor/Cross-
           Claimant/Appellee,

 and

 WEST AMERICAN INSURANCE
 COMPANY,

           Plaintiff/Counter-Defendant/Cross-
           Defendant,
 v.
 CLOUD NINE, a Utah corporation;
 EASY SEAT, a Utah corporation;
 RODNEY FORD, a New York resident,
 individually; BLAINE FORD, a Utah
 resident, individually; and REX
 HADDOCK, a Utah resident,

           Defendants/Counter-Claimants.

                                 ORDER AND JUDGMENT*

       *
        This order and judgment is not binding precedent, except under the doctrines of
law of the case, res judicata, and collateral estoppel. It may be cited, however, for its
Before BRISCOE, Chief Judge, KELLY** and LUCERO, Circuit Judges.

       Ohio Casualty Insurance Company (Ohio Casualty), the plaintiff in this

declaratory judgment action, appeals from an order of the district court granting partial

summary judgment in favor of intervenor Unigard Insurance Company (Unigard) and

directing Ohio Casualty and Unigard to each pay fifty percent of the costs of defending

their insureds, defendants Blaine Ford, Rodney Ford, Cloud Nine, LLC (Cloud Nine) and

Easy Seat, LLC (Easy Seat), in an underlying patent and trademark infringement action.

Because the resolution of Ohio Casualty’s appeal turned on an important and previously

unsettled question of Utah law, we certified that question to the Utah Supreme Court.

Having now received the Utah Supreme Court’s answer, we exercise jurisdiction pursuant

to 28 U.S.C. § 1291, reverse the district court’s decision, and remand to the district court

for entry of judgment consistent with the Utah Supreme Court’s answer to our certified

question.

                                              I

                                    The Edizone lawsuit

       Edizone, LC (Edizone) is a Utah company engaged in product invention,

persuasive value consistent with Fed. R. App. P. 32.1 and 10th Cir. R. 32.1.
       **
         Former Chief Circuit Judge Robert H. Henry was originally a member of this
panel. He resigned his commission effective June 30, 2010, and has been replaced on this
panel by Circuit Judge Paul J. Kelly, Jr.

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development and licensing. Edizone’s predecessor-in-interest, a company called

TekSource, LC (TekSource), developed and patented a product called GellyComb, or

Intelli-Gel, that uses a patented polymer called Gelastic to create a cushion with unique

properties.

       Blaine Ford and Rodney Ford are Utah residents. In April 1998, the two men,

along with another individual named Rick Johnson, formed two limited liability entities

under Utah law: Cloud Nine and Easy Seat. Cloud Nine entered into a License

Agreement with TekSource for Gelastic and GellyComb Seat Overlays. Pursuant to that

agreement, Cloud Nine obtained a license to certain technology rights, patent rights,

trademark rights, and trade secrets owned by TekSource.

       By August of 1998, a dispute had developed between TekSource and Cloud Nine

regarding whether the License Agreement authorized Cloud Nine to utilize TekSource’s

cushioning technology for purposes of producing wheelchair cushions. Notwithstanding

this dispute, however, Cloud Nine purportedly proceeded to market wheelchair cushions

utilizing TekSource’s cushioning technology. Cloud Nine also purportedly allowed Easy

Seat to market similar products without paying appropriate royalties.

       In October of 2000, Cloud Nine failed to pay its minimum quarterly royalty

payment to Edizone. Thereafter, Cloud Nine failed to pay the next six minimum

quarterly royalty payments due under the License Agreement. On February 8, 2002,

Edizone terminated the license granted to Cloud Nine under the License Agreement, but

did not terminate the License Agreement itself. Although Edizone offered to negotiate a

                                             3
new arrangement with Cloud Nine, the parties were unable to come to an agreement.

Consequently, Edizone formally terminated the License Agreement on or about March

11, 2002.

       In July 2002, Edizone purportedly discovered that Cloud Nine was continuing to

make and sell GellyComb products. Edizone immediately demanded in writing that

Cloud Nine cease its infringing use of Edizone’s GellyComb products. In June 2003,

Edizone discovered that other entities were continuing to sell a variety of GellyComb

products made by Cloud Nine and Easy Seat. Edizone again sent written notice to Cloud

Nine asking it to cease its infringing activities. In May and July of 2004, Edizone

discovered that entities were continuing to sell infringing products produced by Cloud

Nine and Easy Seat.

       On August 26, 2004, Edizone filed suit in federal district court in Utah against

Cloud Nine, Easy Seat, the Fords, and several related individuals and entities (the

Edizone suit). Edizone’s complaint asserted claims for patent infringement, breach of

contract, constructive fraud, fraudulent non-disclosure, trademark infringement, common

law trade name infringement and unfair competition, deceptive trade practices,

misrepresentation and false designation of origin, and conspiracy.

                       Cloud Nine/Easy Seat’s insurance coverage

       From approximately June of 1998 to June of 2001, Cloud Nine and Easy Seat were

covered under general liability insurance policies issued by West American Insurance

Company (an entity related to Ohio Casualty). Effective June 10, 2001, Cloud Nine and

                                             4
Easy Seat obtained a commercial insurance policy issued by Ohio Casualty. That policy

was effective through June 10, 2002, and included general liability insurance coverage.

       Between June 10, 2002, and December 12, 2002, Cloud Nine and Easy Seat were

uninsured. Effective December 12, 2002, Cloud Nine and Easy Seat obtained a

commercial insurance policy issued by Unigard. Unigard proceeded to issue two

consecutive policies to Cloud Nine and Easy Seat. Collectively, the Unigard policies

provided general liability insurance coverage for the period from December 12, 2002,

through December 12, 2005.

                           The declaratory judgment proceedings

       Shortly after being served with Edizone’s complaint, Cloud Nine and Easy Seat

tendered their defense to West American, Ohio Casualty and Unigard. West American

and Ohio Casualty denied the tender and filed this diversity action against Cloud Nine,

Easy Seat, the Fords, an individual associated with the Fords named Rex Haddock, and

Edizone. The suit sought an order declaring that West American and Ohio Casualty had

no duty to defend or indemnify the named defendants for any claims asserted in the

Edizone suit. Unigard accepted the tender of defense under a reservation of rights and

then successfully intervened in this suit.

       Unigard subsequently filed a motion for partial summary judgment asking the

district court to determine as a matter of law whether Unigard and Ohio Casualty had a

duty to defend the Cloud Nine defendants in the Edizone suit, and, if so, how the costs of

                                             5
defense should be allocated between Unigard and Ohio Casualty.1 On November 14,

2006, the district court issued an order and memorandum decision granting Unigard’s

motion and concluding that “both Unigard and Ohio Casualty ha[d] a duty to defend the

Cloud Nine Defendants in the underlying action . . . .” Id. at 2075. Of particular

relevance here, the district court also held that “the defense costs in the Edizone [suit]

(incurred and to be incurred) [we]re to be shared by Ohio Casualty and Unigard on an

equal basis.” Id. at 2078. In reaching this conclusion, the district court noted that the

Unigard and Ohio Casualty policies had identical provisions for Other Insurance and

Method of Sharing, that provided, in pertinent part:

       Other Insurance

       If other valid and collectible insurance is available to the insured for a loss
       we cover under Coverages A or B of this Coverage Part, our obligations are
       limited as follows:

              a.     Primary Insurance

                     This insurance is primary except when b. below applies. If
                     this insurance is primary, our obligations are not affected
                     unless any of the other insurance is also primary. Then, we
                     will share with all that other insurance by the method
                     described in c. below.

                     ***

              c.     Method of Sharing

       1
        Although West American was a plaintiff in the case, ultimately no one claimed
that West American had a duty to defend the Cloud Nine defendants in the Edizone suit
(probably because West American’s policies preceded the alleged wrongful conduct
committed by the Cloud Nine defendants). App. at 2063 n.1.

                                              6
                      If all of the other insurance permits contribution by equal
                      shares, we will follow this method also. Under this approach
                      each insurer contributes equal amounts until it has paid its
                      applicable limit of insurance or none of the loss remains,
                      whichever comes first.

                      If any other insurance does not permit contribution by equal
                      shares, we will contribute by limits. Under this method, each
                      insurer’s share is based on the ratio of its applicable limit of
                      insurance to the total applicable limits of insurance of all
                      insurers.

Id. at 2076-77 (emphasis added by district court). The district court agreed with Unigard

that these provisions “plainly provide[d] for allocation of equal shares, and [that] because

there [we]re two insurers, . . . an equal split of defense costs [wa]s the appropriate

allocation.” Id. at 2077. And the district court rejected Ohio Casualty’s assertion that the

“policies’ Other Insurance provisions only applie[d] to the circumstance in which there

[we]re two concurrent primary policies, [with] overlapping insurance policy periods.” Id.

       On November 28, 2006, Ohio Casualty moved for reconsideration of the portion of

the district court’s order “regarding the allocation of defense expenses . . . .” Id. at 2092.

In its motion, Ohio Casualty argued that the district court had erred in relying “upon the

insurance policies[’] ‘other insurance’ clauses to avoid the ‘time on the risk’ method of

apportionment of defense costs required by the Utah Supreme Court’s decision in Sharon

Steel Corp. v. Aetna Cas. and Surety Co., 931 P.2d 127, 141-142 (1997).” Id. at 2080.

       On January 4, 2007, the district court issued an order and memorandum decision

denying Ohio Casualty’s motion for reconsideration. In doing so, the district court

concluded that Ohio Casualty’s motion simply “repeat[ed] and re-emphasize[d]

                                               7
arguments it presented to the court during initial consideration of Unigard’s Motion for

Partial Summary Judgment.” Id. at 2134.

       On November 20, 2007, the parties filed a stipulated motion to dismiss. The

parties emphasized that, “[b]y stipulation to th[e] motion, Ohio [Casualty] expressly

reserve[d] the right to appeal th[e] Court’s ruling regarding the allocation of defense costs

and all attorneys’ fees incurred in the Underlying action issued on November 14, 2006

(motion for reconsideration denied on January 24, 2007) . . . .” Id. at 2137.

       On November 27, 2007, the district court granted the parties’ motion and

dismissed all remaining claims with prejudice.

       Ohio Casualty filed a notice of appeal from the district court’s order granting

Unigard’s motion for partial summary judgment “regarding the allocation of defense

costs and all attorneys’ fees incurred in defending” against the Edizone suit. Id. at 2148-

49.

       On appeal, we certified the following question to the Utah Supreme Court:

       Should the defense costs in the Edizone case be allocated between Ohio
       Casualty and Unigard under the “equal shares” method set forth in the
       “other insurance clause” of Ohio Casualty’s policy, or, in the alternative,
       because the policies were issued for successive periods, should those
       defense costs be allocated using the time-on-risk method described in
       Sharon Steel Corp. v. Aetna Casualty & Surety Co., 931 P.2d 127, 140
       (Utah 1997)?

Ohio Cas. Ins. Co. v. Unigard Ins. Co., 564 F.3d 1192, 1194 (10th Cir. 2009).

       The Utah Supreme Court accepted our question and, on January 6, 2012, issued an

opinion answering it.

                                              8
                                               II

                                      Standard of review

         “Because this is a diversity case, we apply the substantive law of the forum state,

Utah,” in addressing Ohio Casualty’s arguments. MediaNews Group, Inc. v. McCarthey,

494 F.3d 1254, 1260 (10th Cir. 2007). Further, because this appeal arises out of the

district court’s summary judgment ruling, we review that decision de novo, “applying the

same legal standard employed by the district court.” Id. “When,” as here, “the relevant

facts are undisputed, this Court reviews de novo the district court’s interpretation of [the]

insurance polic[ies] [at issue] as well as its other legal conclusions made on summary

judgment.” Milburn v. Life Investors Ins. Co. of Am., 511 F.3d 1285, 1288-89 (10th Cir.

2008).

                                  The Sharon Steel decision

         In Sharon Steel, 931 P.2d 127 (Utah 1997), the Utah Supreme Court addressed the

question of “[w]hether an insurer can compel contribution from a coinsurer who is

equally obligated to defend . . . .” 931 P.2d at 137. At the outset, the Utah Supreme

Court noted that “[s]ome jurisdictions ha[d] held that because the duty to defend is

personal to each insurer, the obligation is several and where many carriers are obligated

to defend, each separate carrier is neither entitled to divide the duty nor require

contribution from another absent a specific contractual right,” while “the trend in other

jurisdictions ha[d] been to allow an insurer, under the doctrines of contribution or

equitable subrogation, to recover costs of defense from other insurers who were equally

                                               9
obligated to defend yet failed to do so.” Id. The Utah Supreme Court ultimately adopted

the latter position, “agree[ing] with those jurisdictions that have allowed contribution . . .

.” Id. In turn, the Utah Supreme Court “remand[ed] the case to the trial court” to first

“determine which defense expenditures were reasonable,” and then to apportion those

costs between the two insurers at issue. Id. at 140.

       In remanding the case, the Utah Supreme Court “offer[ed] [the following]

guidance to the trial court in apportioning th[e] defense costs.” Id. The Utah Supreme

Court first noted that, “[i]n general, when apportioning defense costs among insurers,

courts apply equitable principles . . . unless express policy language decrees the method

of apportionment.” Id. (internal quotation marks omitted). The Utah Supreme Court in

turn concluded that the most equitable approach “in continuing injury cases . . . where

multiple policies are triggered for consecutive injuries” was a modified “time on the risk”

method “that not only look[ed] at the years that each insurer was on the risk, but also

t[ook] into account the respective policy limits.” Id. at 140. Under this approach, the

Court held, defense costs are to be apportioned by “multiplying th[e] policy limits by the

years of coverage . . . .” Id.

       The Court also noted that “[f]or many of the years that the insured in the” case

before it “was disposing of hazardous waste [the action that gave rise to the underlying

suit], it was either self-insured, uninsured, or for some other reason had no outside

coverage.” Id. at 141. After surveying decisions from other courts addressing similar

circumstances, the Court adopted “the view . . . that the property owner must be prepared

                                              10
to pay their ‘fair share’ of defense costs for those years that they were without insurance

coverage.” Id. (quoting Ins. Co. of North Am. v. Forty-Eight Insulations, Inc., 633 F.2d
1212, 1224-25 (6th Cir. 1980)). “Thus,” the Court “remand[ed] the case with instructions

to the trial court to fashion an equitable allocation scheme that t[ook] into account the

years when the insured was uninsured and to allocate that share to the insured.” Id. at

141-42.

                The Utah Supreme Court’s answer to our certified question

        In answering our certified question in this case, the Utah Supreme Court concluded

at the outset “that the ‘other insurance’ clauses [in the Unigard and Ohio Casualty

policies] do not apply to successive insurers and therefore do not control the

apportionment of costs in this case.” Ohio Cas. Ins. Co. v. Unigard Ins. Co., No.

20090340, Slip Op. at 5 (Utah Jan. 6, 2012). The Utah Supreme Court explained:

        Ohio Casualty’s coverage of Cloud Nine was expressly limited to losses
        that arose out of offenses “committed . . . during the policy period,” which
        terminated on June 10, 2002. Similarly, Unigard’s policy did not cover
        losses that occurred before its effective date, December 12, 2002. As Ohio
        Casualty’s coverage and Unigard’s coverage did not overlap, Unigard did
        not provide valid and collectible insurance for a loss that Ohio Casualty
        covered or vice-versa. As a result, the “other insurance” clause with its
        “equal shares” provision is inapplicable.

Id. at 6. The Utah Supreme Court also rejected Unigard’s argument that the “other

insurance” clauses demonstrated a general intent to apportion indemnity loss equally. Id.

at 7.

        The Utah Supreme Court then “turn[ed] to equitable principles to determine how

                                             11
to apportion [the] defense costs between Ohio Casualty and Unigard,” id., and it

concluded there was “no reason to drastically deviate from [its] holding in Sharon Steel,”

id. at 9. More specifically, the Utah Supreme Court chose to “apportion defense costs in

this case” based upon “the time-on-the-risk formula adopted in Sharon Steel.” Id. The

Utah Supreme Court declined, however, “to follow that portion of Sharon Steel that

apportioned defense costs to the insured for those periods of time when the insured was

without coverage.” Id. at 9-10. The Utah Supreme Court explained that, “[i]n light of

th[e] practice” of insurers to “reserve the exclusive right to control any litigation and

make important decisions regarding the course of the litigation,” “it would be inequitable

to hold the insured responsible for the share of defense costs attributable to the time

period during which it was uninsured.” Id. at 10. The Utah Supreme Court also noted

that “[w]here, as in this case, there are multiple insurers, the broad duty to defend also

prevents the insurers from recovering defense costs from the insured for any periods of

non-coverage.” Id.

       Finally, the Utah Supreme Court summarized how the modified Sharon Steel

formula should be applied in this case:

       This formula begins by apportioning the defense costs between successive
       insurers according to their time on the risk and the amount of their policy
       limits. It then divides the portion of defense costs attributable to any
       periods during which the insured lacked coverage in the same proportions.

Id.

                                              12
                               The district court’s decision

       In light of the Utah Supreme Court’s answer to our certified question, we conclude

that the district court erred in granting partial summary judgment in favor of Unigard.

More specifically, we conclude that the district court erred in holding that the “Other

Insurance” provisions in the Unigard and Ohio Casualty policies mandated equal sharing

of the costs of defense for the Edizone suit. As the Utah Supreme Court has now made

clear, the costs of defense for the Edizone suit are to be apportioned between Unigard and

Ohio Casualty under the modified Sharon Steel formula.

                                             III

       The decision of the district court granting partial summary judgment in favor of

Unigard on the issue of defense cost sharing is REVERSED and the case REMANDED to

the district court with directions to enter judgment consistent with the Utah Supreme

Court’s answer to our certified question.2

                                                   Entered for the Court

                                                   Mary Beck Briscoe
                                                   Chief Judge

       2
        Although Ohio Casualty did not file its own motion for partial summary
judgment on the issue of defense cost sharing, it did argue, in response to Unigard’s
motion for partial summary judgment, that in the event the district court concluded that
Ohio Casualty had a duty to defend in the Edizone suit, the method for sharing defense
costs should be determined under the Sharon Steel formula. In light of this argument, we
conclude it is appropriate to direct the entry of judgment consistent with the Utah
Supreme Court’s answer to our certified question, rather than requiring the parties to file
any further pleadings in the district court on remand.

                                             13