Appleton Papers, Inc. v. Home Indemnity Co.

• Decision Date: 04 April 2000
• Docket Number: No. 99-1567.,99-1567.
• Citation: 2000 WI App 104,235 Wis.2d 39,612 N.W.2d 760
• Parties: APPLETON PAPERS, INC., Plaintiff-Respondent, v. The HOME INDEMNITY COMPANY and The Home Insurance Company, Defendants-Appellants, AMERICAN MANUFACTURERS MUTUAL INSURANCE COMPANY, Royal Surplus Lines Insurance Company, Royal Indemnity Company, Agricultural Insurance Company, American National Fire Insurance Company, National Union Fire Insurance Company of Pittsburgh, Pennsylvania, TIG Insurance Company, CIGNA Specialty Insurance Company, Fireman's Fund Insurance Company, Inc., Reliance National Indemnity Company, International Insurance Company, The Insurance Company of North America, Philadelphia, Pennsylvania, The Hartford Casualty Insurance Company, Federal Insurance Company, The Insurance Company of the State of Pennsylvania, Agricultural Excess and Surplus Insurance Company, First State Insurance Company and Lexington Insurance Company, Defendants.
• Court: Wisconsin Court of Appeals

235 Wis.2d 39

2000 WI App 104

612 N.W.2d 760

APPLETON PAPERS, INC., Plaintiff-Respondent, v. The HOME INDEMNITY COMPANY and The Home Insurance Company, Defendants-Appellants, AMERICAN MANUFACTURERS MUTUAL INSURANCE COMPANY, Royal Surplus Lines Insurance Company, Royal Indemnity Company, Agricultural Insurance Company, American National Fire Insurance Company, National Union Fire Insurance Company of Pittsburgh, Pennsylvania, TIG Insurance Company, CIGNA Specialty Insurance Company, Fireman's Fund Insurance Company, Inc., Reliance National Indemnity Company, International Insurance Company, The Insurance Company of North America, Philadelphia, Pennsylvania, The Hartford Casualty Insurance Company, Federal Insurance Company, The Insurance Company of the State of Pennsylvania, Agricultural Excess and Surplus Insurance Company, First State Insurance Company and Lexington Insurance Company, Defendants.

No. 99-1567.

Court of Appeals of Wisconsin.

Oral argument February 10, 2000.

Decided April 4, 2000.

On behalf of the defendants-appellants, the cause was submitted on the briefs of Mark S. Nelson and Philip J. Tallmadge and Nelson, Dries, Connell & Kramer, S.C. of Brookfield, and Michael J. Duffy and Tressler, Soderstrom, Maloney & Priess of Chicago, Illinois.

On behalf of the plaintiff-respondent, the cause was submitted on the brief of Robert P. Thavis and Steven P. Zabel of Leonard, Street & Deinard Professional Association of Minneapolis, Minnesota, and Edwin F. Bush of Corporate Legal Services of Appleton.

Before Cane, C.J., Hoover, P.J., and Peterson, J.

¶ 1. HOOVER, P.J.

The Home Insurance Co. and the Home Indemnity Co. (Home) appeal an order enjoining Home from pursuing both its federal district court action to compel arbitration under the Federal Arbitration Act (FAA),¹ and the arbitration proceedings it initiated against Appleton Papers, Inc.² Home sought to arbitrate the number of deductibles and the amount of retrospective premiums it could charge Appleton under deductible and retrospective premium agreements. The agreements all contained mandatory arbitration clauses. The circuit court enjoined Home from pursuing remedies under the FAA. In doing so, it implicitly relied on the McCarran-Ferguson Act's³ grant of supremacy to state laws regulating the business of insurance to "reverse preempt" the FAA.

¶ 2. McCarran-Ferguson notwithstanding, Home contends that the circuit court's injunction is unconstitutional because a state court is without power to enjoin ongoing federal proceedings. It next argues that even if McCarran-Ferguson empowers a state court to enjoin a party from pursuing a federal court action, here the essential elements of reverse preemption are lacking. Further, Home asserts that Appleton is not entitled to an injunction because it has failed to show an inadequate remedy at law, irreparable harm or that it is likely to succeed on the merits. Finally, it contends that the circuit court exceeded its authority by making ultimate findings on the issue of arbitrability.

¶ 3. We hold that the circuit court may not enjoin Home from presenting to a federal court a question concerning the application of a federal remedy. Wisconsin courts have no power to limit, modify, or control the power of federal courts by enjoining a litigant from pursuing an in personam action seeking remedies in that court. Because we determine that the circuit court may not enjoin Home from pursuing a determination in federal court of the applicability of a federal remedy, the injunction should not have issued. Accordingly, the order is reversed.

¶ 4. Because of the potential application of McCarran-Ferguson to this case, the federal court will necessarily determine the application of Wisconsin laws regulating the business of insurance to the arbitration clause. We therefore determine the validity of the arbitration clauses under Wisconsin law. We reject Home's various contentions that the deductible and retrospective premium agreements are not governed by the insurance laws of this state. We conclude that WIS. STAT. § 631.85 applies to the agreements and invalidates the arbitration clauses.

BACKGROUND

¶ 5. 3M sued Appleton in 1995 for patent infringement, antitrust violations, and state law tort claims. Home and Royal Indemnity Company provided primary liability coverage to Appleton; Home from 1989 through 1993, and Royal in 1995 and 1996.⁴ In 1996, Appleton initiated this litigation against its liability insurers, including Home and Royal. Appleton alleged that the insurers failed to defend it in 3M's lawsuit and sought, inter alia, a declaration that it was entitled to coverage for losses incurred in defending, settling or adjudicating the 3M claims.

¶ 6. In 1989, Home issued a general liability policy to Batus, Appleton's then parent corporation. The policy provided coverage for Appleton and included a deductible endorsement. Home and Batus also had an agreement entitled "Deductible Reimbursement and Security Agreement" that "establish[ed] procedures in accordance with and to reflect their agreement" that Home would pay the entire loss and seek reimbursement of the deductible later. That agreement called for mandatory arbitration and the application of New York law.

¶ 7. In 1990, Home issued a general liability policy with a deductible endorsement directly to Appleton. Home and Appleton had a deductible reimbursement agreement similar to the one between Batus and Home, with identical choice of law and arbitration provisions.

¶ 8. In 1991, 1992, and 1993, Home again issued policies to Appleton. Home and Appleton had agreements concerning each of these policies entitled "Paid Loss Retrospective Plan Premium Agreement."⁵ The agreements all contained mandatory arbitration provisions. According to the agreements, a Retrospective Premium endorsement attached to each policy was also incorporated into and made part of the agreement. Only the 1993 agreement contained a choice of law clause.

¶ 9. In 1997, Appleton moved for summary judgment on the issue of the insurers' duty to defend. Home, Royal, and Appleton resolved the motion by entering into a stipulation that was later incorporated into a court order. Home and Royal agreed to pay Appleton's defense costs in the 3M action. The stipulation required the parties to first negotiate any issues regarding the application or interpretation of any deductible or "retroactive loss pay" provision. If unable to resolve their differences, they were to submit the dispute to the circuit court.

¶ 10. Ultimately, the parties were unable to resolve their dispute over the deductibles and retrospective premiums. In March 1999, Home billed Appleton for $8,591,326 under the deductible and retrospective premium agreements for defense expenses incurred in the 3M litigation. In April, Appleton moved the circuit court for partial summary judgment on the issue of how many deductibles or retrospective premiums were to apply to the 3M lawsuit under the Home and Royal policies. Home responded by petitioning for arbitration of the issue and commencing an action in the United States District Court for the Southern District of New York under the FAA to compel arbitration.

¶ 11. Appleton appeared in the federal action, while moving the Outagamie County Circuit Court to enjoin Home from pursuing both the arbitration and the federal action. Appleton argued before both courts that the arbitration provisions were invalid under Wisconsin insurance law that preempts the FAA.⁶ It further contended that Home had agreed to litigate in the circuit court the issue it now sought to arbitrate. ¶ 12. At the conclusion of the injunction hearing, the circuit court ordered Home to dismiss without prejudice both the arbitration proceeding and the federal court action. The circuit court determined that Appleton would sustain irreparable harm if forced to appear in the federal action or at arbitration. It concluded that the parties had earlier agreed that the issues Home sought to arbitrate would be decided in Outagamie County Circuit Court⁷ and, in any event, the agreements' arbitration provisions were invalid under Wisconsin law governing arbitration provisions in insurance contracts. The court implicitly determined that it had the power to enjoin Home from pursuing remedies under the FAA. It relied on the McCarran-Ferguson Act's grant of supremacy to state laws regulating the business of insurance to "reverse preempt" the FAA. Home appeals that order.⁸

ANALYSIS

¶ 13. We first examine whether the circuit court is empowered to enjoin Home from pursuing its action in federal court to compel arbitration under the FAA. Home contends that the circuit court did not have the authority to issue the injunction because it unconstitutionally impairs federal court jurisdiction. Home claims that state courts are without the power to restrain federal courts in in personam actions. It asserts that directing the injunction to Home, rather than the federal court, is of no legal consequence.

¶ 14. Appleton does not dispute that state courts ordinarily may not enjoin federal court proceedings. It contends, however, that McCarran-Ferguson created an exception to this rule by authorizing state insurance law to "reverse preempt" other federal law. It claims that WIS. STAT. § 631.85 is a state law regulating insurance that invalidates the agreements' arbitration clauses. According to Appleton, § 631.85 reverse preempts the FAA and empowers a state court to enjoin a federal court because there is no federal remedy available.

[1]

¶ 15. Donovan v. Dallas, 377 U.S. 408 (1964), and General Atomic Co. v. Felter, 434 U.S. 12 (1977), set out the general rule that a state court may enjoin neither federal court proceedings nor a party from pursuing federal remedies in federal court. In Donovan, a plaintiff class sought a state court injunction against construction of an airport runway and issuance of municipal bonds for that...