Employers Ins. Wausau v. Fox Entertainment Group

• Decision Date: 27 March 2008
• Docket Number: Docket No. 06-4652-cv.
• Citation: 522 F.3d 271
• Parties: EMPLOYERS INSURANCE OF WAUSAU and National Casualty Company, Plaintiffs-Appellants, v. FOX ENTERTAINMENT GROUP, INC., Twentieth Century Fox Film Corporation, Twentieth Century Fox International Television, New World Entertainment, Ltd., New World Television Productions, Inc. and News Corporation, Defendants-Appellees.
• Court: U.S. Court of Appeals — Second Circuit

522 F.3d 271

EMPLOYERS INSURANCE OF WAUSAU and National Casualty Company, Plaintiffs-Appellants, v. FOX ENTERTAINMENT GROUP, INC., Twentieth Century Fox Film Corporation, Twentieth Century Fox International Television, New World Entertainment, Ltd., New World Television Productions, Inc. and News Corporation, Defendants-Appellees.

Docket No. 06-4652-cv.

United States Court of Appeals, Second Circuit.

Argued: March 7, 2008.

Decided: March 27, 2008.

David B. Smallman, Wollmuth Maher & Deutsch LLP, New York, NY, for Appellants.

Andrew N. Bourne, Dickstein, Shapiro, Morin & Oshinsky, LLP, New York, N.Y. (Randy Paar, Kirk A. Pasich, of counsel, on the brief), for Appellees.

Laura A. Foggan, Wiley Rein LLP, Washington, DC, for Amicus Curiae Complex Insurance Claims Litigation Association in Support of Appellants.

Before: McLAUGHLIN and WESLEY, Circuit Judges, and COGAN, District Judge.^*

WESLEY, Circuit Judge:

This appeal requires us to decide whether the "special circumstances" exception to the first-filed rule applies to a declaratory judgment action filed in the absence of a direct threat of litigation in a forum with at least some ties to the litigation. We hold that it does not, and reverse the judgment of the United States District Court for the Southern District of New York (Mukasey, C.J.) and remand for a determination of whether the balance of conveniences favors giving priority to the second-filed action.

BACKGROUND

Employers Insurance of WauSau, a company with its principal place of business in Wisconsin, and National Casualty Company, a Wisconsin corporation with its principal place of business in Arizona (collectively, the "Insurers") issued five "Media Special Perils" policies (the "Policies") to SCI Television, Inc., Andrews Group, Inc. ("Andrews"), and all of their subsidiaries, divisions, and affiliated companies "in a line of corporate progression now existing or hereafter created." Mafco Holdings, Inc. ("Mafco"), as well as "its predecessors and any and all of its subsidiaries, divisions, associated and/or affiliated companies," were listed as an additional named insured.

New World Television Productions, Inc., a California corporation, and New World Entertainment, Ltd., a Delaware corporation, with their principal places of business in California (collectively, the "New World Entities"), were listed as additional named insureds on one of the Policies. At the time the Policies were issued, Mafco was the ultimate parent of the New World Entities.¹ According to Appellees, the New World Entities are entitled to coverage under the Policies because they were subsidiaries of named insureds Mafco and Andrews.

In January 1997, Fox Acquisition Co., Inc, merged with New World Communications Group, Inc., purchasing all of its stock, including all stock in the New World Entities. Following the merger, Fox Entertainment Group, Inc. ("Fox Entertainment"), a Delaware Corporation with its. principal place of business in New York, listed the New World Entities, Twentieth Century Fox Film Corp. ("Fox Film"), and Twentieth Century Fox International Television ("Fox Television") as its subsidiaries. Fox Film is a Delaware corporation, Fox Television is a New York corporation, and both have their principal places of business in California with secondary offices in New York. News Corp., a Delaware corporation with its principal place of business in New York, is the ultimate parent corporation of these defendants.

On November 12, 2003, an attorney for musical composer Aeone Watson notified counsel for Fox Film, Fox Television, and New World Television Productions, Inc. of claims for copyright infringement arising out of the unlicensed use of Watson's compositions in the television program Santa Barbara. On July 6, 2004, a class action against Fox Film, Fox Television, and the New World Entities was filed in the United States District Court for the Central District of California. Captioned East et al. v. Twentieth Century Fox Film Corporation et al, No. CV 04-4920, 2008 WL 907947 (2008), the action was brought on behalf of all owners of copyrighted musical compositions and sound recordings used on Santa Barbara without the owners' permission. On March 9, 2005, counsel for several major record labels and music publishing companies informed Randall Render of Fox Legal Group that they were entitled to over $75 million in damages for willful copyright infringement on Santa Barbara

In May 2005, eighteen months after it first received the Watson letter, Fox Entertainment faxed copies of the Watson and Render letters and the East complaint to Media/Professional Insurance ("Media/Professional"), the Kansas-based claims manager for the Insurers. The letters were dated May 17, 2005, and printed on Fox Entertainment letterhead with a return address in Beverly Hills, California.

Media/Professional's response came in October 2005, when its claims counsel requested information relating to Fox Entertainment's relationship to the New World Entities. In the interim, both sides retained coverage counsel and the parties exchanged lengthy correspondence. This back-and-forth culminated on February 10, 2006, when Fox Entertainment provided the agreement and plan of merger between Fox and New World.

Eighteen days later, on February 28, 2006, the Insurers commenced the instant action by filing a complaint in the United States District Court for the Southern District of New York, naming Fox Entertainment, Fox Film, and Fox Television, but not the New World Entities, as defendants. The Insurers sought a declaratory judgment that they had no obligations to the three named Defendants relating to the East action because they had breached provisions of the Policies requiring prompt notice and cooperation. On March 1, the day after filing suit, Defendants sent a letter to claims counsel for the Insurers inquiring as to the "status" of the Insurers' coverage investigation. The following day, the Insurers denied coverage and informed Defendants of their New York action.

On March 24, 2006, Fox Film, Fox Television, and the New World Entities filed a complaint of their own in the Superior Court of California, seeking damages for breach of contract and tortious breach of the implied duty of good faith and fair dealing, and a declaration that the Insurers were obligated to provide coverage for the East action. That action was subsequently removed to the United States District Court for the Central District of California on April 21, 2006. On May 30, 2006, the Insurers filed an amended complaint in the first-filed New York declaratory judgment action, adding the New World Entities and News Corp. as defendants.

The Insurers suffered a string of setbacks in the summer of 2006. First, on July 27, the district court in the New York action granted Defendants' motion to dismiss. See Employers Ins. of Wausau v. News Corp., 439 F.Supp.2d 328 (S.D.N.Y. 2006). The court noted that "[w]here `essentially the same lawsuit involving the same parties and the same issues' is pending in two different federal courts, the `first-filed rule' creates a presumption that the case filed earliest will take priority." Id. at 333 (quoting Factors Etc., Inc. v. Pro Arts, Inc., 579 F.2d 215, 218 (2d Cir. 1978), abrogated on other grounds by Pirone v. MacMillan, Inc., 894 F.2d 579 (2d Cir.1990)). The later of the two cases will only take priority where there is a showing of "balance of convenience" or "special circumstances." Id. Without balancing the conveniences, the court concluded that special circumstances existed, in large measure based on two operative facts. First, the Insurers filed suit before Appellees requested coverage and before coverage was denied to them. Second, the Insurers "selectively excluded the New World Entities — the most logical parties against which to bring a coverage action," and entities with strong ties to California. Id. at 334. According to the district court, the Insurers desired a New York forum to enjoy the advantage of New York law, which, unlike California law, allows an insurer to disclaim coverage based on late notice without requiring a showing of prejudice.² Id.

The Insurers were handed a second defeat on August 16, when the district court in Appellees' California action denied the Insurers' motion to transfer venue to the Southern District of New York. See New World Television Prods.; Inc. v. Nat'l Cos. Co., No. CV 06-02489 (C.D.Cal. Aug. 16, 2006). Finally, on September 5, Judge Mukasey denied the Insurers' motion for reconsideration. See Employers Ins. of Wausau v. News Corp. 439 F.Supp.2d 328 (2006). The Insurers appeal, arguing that the district court erred in not applying the first-filed rule and dismissing their complaint.

DISCUSSION

I

This Court reviews a district court's decision to apply or depart from the first-filed rule for an abuse of discretion. See Adam v. Jacobs, 950 F.2d 89, 92 (2d Cir.1991). As a general rule, "[w]here there are two competing lawsuits, the first suit should have priority." First City Nat'l Bank & Trust Co. v. Simmons, 878 F.2d 76, 79 (2d Cir.1989) (quoting Motion Picture Lab. Technicians Loc. 780 v. McGregor & Werner, Inc., 804 F.2d 16, 19 (2d Cir.1986)) (alteration in original). This rule "embodies considerations of judicial administration and conservation of resources" by avoiding duplicative litigation and honoring the plaintiff's choice of forum. Id. at 80., We have recognized only two exceptions to the first-filed rule: (1) where the "balance of convenience" favors the second-filed action, see, e.g., Motion Picture Lab. Technicians Loc. 780, 804 F.2d at 19; Remington Prods. Corp. v. Am. Aerovap, Inc., 192 F.2d 872, 873 (2d Cir.1951), and (2) where "special circumstances" warrant giving priority to the second suit, see, e.g., First City Nat'l Bank, 878 F.2d at 79. Although these basic principles are "well-settled," id., their application has yielded dramatically inconsistent...