Auto-Owners Ins. Co. v. Websolv Computing, Inc.

• Decision Date: 01 September 2009
• Docket Number: No. 07-3286.,07-3286.
• Citation: 580 F.3d 543
• Parties: AUTO-OWNERS INSURANCE COMPANY, Plaintiff-Appellant, v. WEBSOLV COMPUTING, INCORPORATED, doing business as ECFirst. com, Uday Om Ali Pabrai, and Gortho, Limited, Defendants-Appellees.
• Court: U.S. Court of Appeals — Seventh Circuit

580 F.3d 543

AUTO-OWNERS INSURANCE COMPANY, Plaintiff-Appellant, v. WEBSOLV COMPUTING, INCORPORATED, doing business as ECFirst. com, Uday Om Ali Pabrai, and Gortho, Limited, Defendants-Appellees.

No. 07-3286.

United States Court of Appeals, Seventh Circuit.

Argued September 3, 2008.

Decided September 1, 2009.

Rehearing and Rehearing En Banc Denied October 1, 2009.

Robert M. Chemers, Attorney, David S. Osborne, Attorney (argued), Pretzel & Stouffer, Chicago, IL, for Plaintiff-Appellant.

James K. Borcia, Attorney, Tressler, Soderstrom, Maloney & Priess, Daniel A. Edelman, Attorney (argued), Edelman, Combs & Latturner, Chicago, IL, for Defendants-Appellees.

Before EASTERBROOK, Chief Judge, and CUDAHY and SYKES, Circuit Judges.

SYKES, Circuit Judge.

This insurance-coverage dispute involves the interpretation of an "advertising injury" clause in a commercial general liability policy. Websolv Computing, Inc., was sued in Illinois state court for sending an unsolicited fax advertisement to a dental office. Websolv tendered the defense of this suit to its insurer, Auto-Owners Insurance Company, which accepted it under a reservation of rights. Auto-Owners then filed this action in federal court seeking a declaratory judgment that it had no duty to defend Websolv in the underlying Illinois suit. The district court applied Illinois law and held that Websolv's policy with Auto-Owners covered the claim. We reverse. Iowa law—not Illinois law—applies here. Under Iowa law the insurance policy does not require Auto-Owners to defend Websolv in the underlying suit.

I. Background

In September 2003 Guy Bibbs sued Websolv in Illinois state court for sending an unsolicited one-page fax advertisement to his dental office. Bibbs claimed, among other things, that Websolv violated the Telephone Consumer Protection Act ("TCPA"), 47 U.S.C. § 227.¹ The fax at issue was an advertisement for seminars to train health-care professionals how to comply with the terms of the Health Insurance Portability and Accountability Act. The parties later agreed to substitute Gortho, Ltd., Bibbs's dental practice, as the plaintiff, and the state court dismissed with prejudice all claims related to Bibbs. Websolv was insured by Auto-Owners under a commercial general liability ("CGL") policy and tendered its defense to the insurer. Auto-Owners accepted the tender, appointed counsel, and reserved its right to argue that it had no duty to defend Websolv under the terms of the policy.

Auto-Owners then filed this action in federal court seeking a declaration that it had no duty to defend Websolv. The parties agreed that Iowa law should control and filed cross-motions for summary judgment. Despite the parties' stipulation to Iowa law, the district court concluded that Illinois law governed. It granted Websolv's motion for summary judgment, holding that under Illinois law the insurance contract required Auto-Owners to defend the type of claims at issue here. It based its decision on the Illinois Supreme Court's opinion in Valley Forge Insurance Co. v. Swiderski Electronics, Inc., 223 Ill.2d 352, 307 Ill.Dec. 653, 860 N.E.2d 307 (2006), which held that "advertising injury" policy language like that at issue here covered TCPA claims. Auto-Owners appealed, arguing that (1) the district court erred by applying Illinois law rather than Iowa law; and (2) Auto-Owners is entitled to summary judgment under Iowa law.

II. Discussion

A. Choice of Law

We begin by addressing the district court's decision to apply Illinois law rather than Iowa law to this dispute. We review a district court's choice-of-law decision de novo. Gramercy Mills, Inc. v. Wolens, 63 F.3d 569, 572 (7th Cir.1995). The parties expressly agreed in the district court that Iowa law applied, but the district court applied Illinois law for two reasons. First, the judge believed he was required to apply the substantive law of the forum state. This was incorrect. Second, the judge believed he could ignore the stipulation of the parties because neither party had briefed the court on the substance of Iowa law. This, too, was incorrect.

First, and most importantly, the parties agreed that Iowa law should control their dispute. We honor reasonable choice-of-law stipulations in contract cases regardless of whether such stipulations were made formally or informally, in writing or orally. Lloyd v. Loeffler, 694 F.2d 489, 495 (7th Cir.1982). "Courts do not worry about conflict of laws unless the parties disagree on which state's law applies." Wood v. Mid-Valley Inc., 942 F.2d 425, 427 (7th Cir. 1991). "[I]t is the exceptional circumstance that a federal court, or any court for that matter, will not honor a choice of law stipulation." Mass. Bay Ins. Co. v. Vic Koenig Leasing, Inc., 136 F.3d 1116, 1120 (7th Cir.1998). Here, Auto-Owners filed its motion for summary judgment without explicitly making a choice-of-law argument. Websolv immediately moved to certify questions of state law to the Iowa Supreme Court, arguing that "the present matter [calls] for application of Iowa law." In its response Auto-Owners agreed that Iowa law should apply and also noted that the parties had "explicitly agreed in open court ... that Iowa substantive law applies in this case." This plainly amounts to a stipulation by the parties that Iowa law controls their dispute.

Indeed, Websolv has never objected to the application of Iowa law—either in the district court or on appeal. In its brief on appeal, Websolv explicitly stated it "does not disagree that Iowa law governs." Rather, Websolv has argued that Iowa courts would adopt the same interpretation of the policy language as the Illinois Supreme Court did in Valley Forge. This is an argument over the content, not the applicability, of Iowa law. Because the parties agreed that Iowa law should govern and because the choice of Iowa law is entirely reasonable, the district court should not have applied Illinois law.

The district court also was mistaken in its belief that it had to apply the substantive law of the forum state. When a federal court hears a case in diversity, it does not necessarily apply the substantive law of the forum state; rather, it applies the choice-of-law rules of the forum state to determine which state's substantive law applies. Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487, 496, 61 S.Ct. 1020, 85 L.Ed. 1477 (1941). Illinois, the forum state, applies the "most significant contacts" test to choice-of-law disputes. Westchester Fire Ins. Co. v. G. Heileman Brewing Co., 321 Ill.App.3d 622, 254 Ill. Dec. 543, 747 N.E.2d 955, 961 (2001). In insurance-coverage cases, Illinois considers a variety of factors to determine which state's substantive law should apply, including the domicile of the insured, the place of delivery of the policy, and the place of performance. Id. Illinois places the most importance on the location of the insured risk. Mass. Bay Ins. Co., 136 F.3d at 1122. All of these factors point to Iowa in this case: The insurance policy was delivered to Websolv, an Iowa corporation, at its Iowa headquarters through an Iowa agency, and the risk is located in that state. Under Illinois choice-of-law principles, Iowa substantive law clearly applies.

Finally, the district court believed it could apply Illinois law because neither party had briefed the court on the substance of Iowa law. The court cited Employers Mutual Casualty Co. v. Skoutaris, 453 F.3d 915 (7th Cir.2006), to support this determination. That case, however, simply notes that the default rule that the law of the forum state applies when neither party suggests otherwise. Id. at 923 ("[W]e apply the law of the forum state ... since neither party has challenged the district court's choice of law."). Here, by contrast, the parties specifically agreed that Iowa law, not Illinois law, should apply.

In any event, the parties did brief the court on the substance of Iowa law. After agreeing that Iowa law applied, Auto-Owners specifically requested permission to file a supplemental memorandum in support of its motion for summary judgment addressing the substance of Iowa law. Instead of granting Auto-Owners' motion, the district court instructed the briefing to continue as scheduled. In its response to Auto-Owners' summary-judgment motion, Websolv explained that there was no controlling Iowa law but argued that Iowa shared the same basic contract principles as Illinois, which had a decision—Valley Forge—directly on point. Auto-Owners then filed a reply discussing why Iowa contract-law principles would lead Iowa to a different result from that reached in Illinois.²

B. Does the Insurance Policy Cover Gortho's Claims?

Our next question is whether, under Iowa law, the terms of the CGL policy require Auto-Owners to defend Websolv against Gortho's claims. Gortho's primary claim against Websolv is that it violated the TCPA by faxing an unsolicited, one-page advertisement to Gortho. The TCPA prohibits the use of "any telephone facsimile machine, computer, or other device to send, to a telephone facsimile machine, an unsolicited advertisement." 47 U.S.C. § 227(b)(1)(C). It also permits persons or entities to sue in state court for violations of the TCPA and to recover between $500 and $1,500 in damages for each violation. Id. Websolv argues that Auto-Owners is required to defend it from Gortho's claims under two separate provisions in the policy—the "advertising injury" provision and the "property damage" provision.

1. "Advertising Injury" Coverage

The insurance policy specifically requires Auto-Owners to defend against suits alleging "`advertising injury' caused by an offense committed in the course of advertising [the insured's] goods, products or services." The contract then defines "advertising injury" as follows:

"Advertising injury" means injury arising out of one or more of the following offenses:

a. Oral or written publication of material that slanders or libels a person or organization...