Mill's Pride, Inc. v. Continental Ins. Co.

• Decision Date: 13 August 2002
• Docket Number: No. 00-2511.,00-2511.
• Citation: 300 F.3d 701
• Parties: MILL'S PRIDE, INC., a Connecticut Corporation, and Mill's Pride Limited Partnership, Plaintiffs-Appellees, v. CONTINENTAL INSURANCE COMPANY, Defendant-Appellant.
• Court: U.S. Court of Appeals — Sixth Circuit

300 F.3d 701

MILL'S PRIDE, INC., a Connecticut Corporation, and Mill's Pride Limited Partnership, Plaintiffs-Appellees, v. CONTINENTAL INSURANCE COMPANY, Defendant-Appellant.

No. 00-2511.

United States Court of Appeals, Sixth Circuit.

Argued: June 13, 2002.

Decided and Filed: August 13, 2002.

Robert L. DeJong (argued and briefed), Miller, Canfield, Paddock & Stone, Grand Rapids, MI, George W. House, Brooks, Pierce, McLendon, Humphrey & Leonard, Greensboro, NC, for Plaintiffs-Appellees.

Thomas Joe Keener (argued and briefed), Keener, Doucher, Curley, Patterson, Columbus, OH, Michael D. Wade, Grand Rapids, MI, for Defendant-Appellant.

Before SILER and MOORE, Circuit Judges; STAFFORD, District Judge.^*

OPINION

STAFFORD, District Judge.

Appellant appeals the district court's ruling that Michigan law governs this diversity contract action. We reverse.

I. BACKGROUND

Mill's Pride, Inc., and Mill's Pride Limited Partnership are involved in the purchase, manufacture, and wholesale selling of furniture throughout the continental United States. Mill's Pride, Inc., is a Connecticut corporation with its principal place of business in West Palm Beach, Florida. Mill's Pride Limited Partnership is an Ohio limited partnership in which Mill's Pride, Inc., is a general partner. Like Mill's Pride, Inc., the partnership maintains its administrative offices in West Palm Beach. The partnership also owns and operates a manufacturing facility — its only manufacturing facility — in Waverly Ohio, where it manufactures furniture that is distributed nationally. Mill's Pride, Inc., does not manufacture furniture but is involved in the distribution of the furniture manufactured by the partnership.

On September 1, 1995, Continental Insurance Company ("Continental") — whose home office is located in Chicago, Illinois — issued Mill's Pride, Inc., a commercial general liability policy ("CGL Policy") covering the period between September 1, 1995, and August 31, 1996. Mill's Pride Limited Partnership was a named insured under the CGL Policy. The policy did not include a choice of law clause.

The negotiations leading to issuance of the CGL Policy were conducted by James F. Arpe, treasurer for Mill's Pride, Inc.; Bill Failor, Senior Account Representative for Johnson & Higgins, an insurance agency in Cleveland, Ohio, that placed the coverage; and Sandra Billow, a broker for Johnson & Higgins. While some of the negotiations were conducted in West Palm Beach where Arpe had his offices, most of the meetings were conducted in Waverly, Ohio, at the partnership's manufacturing facility. The parties apparently understood that any claims arising under the policy were to be reported to the insurance agency in Cleveland, Ohio, then transferred to Continental's claims office in Columbus, Ohio, for investigation and handling. Joint Appendix ("J.A.") at 40-41, 132.

The underlying lawsuit that gave rise to the dispute in this litigation was brought by Ameriwood Industries International Corporation ("Ameriwood") against Mill's Pride, Inc., and Mill's Pride Limited Partnership in the United States District Court for the Western District of Michigan. As alleged in its complaint, Ameriwood was the owner of the trademark KIDS `N' KOLOR, a line of ready-to-assemble children's furniture sold with a distinctive, non-functional trade dress. In late 1995, Ameriwood discovered that furniture identical in appearance to its KIDS `N' KOLOR line was being sold in Michigan and Illinois under the trademark KIDZ COLORZ. KIDZ COLORZ was manufactured by Mill's Pride Limited Partnership and sold by Mill's Pride, Inc., in a trade dress substantially identical to Ameriwood's distinctive trade dress. Ameriwood sought damages from Mill's Pride, Inc., and Mill's Pride Limited Partnership for false designation of origin, trademark infringement, trade dress infringement, unfair competition, and dilution of trademark and trade dress. The parties ultimately settled the suit at an April 30, 1996, facilitative mediation scheduled by the Michigan district court.

On October 23, 1998, Mill's Pride, Inc., and Mill's Pride Limited Partnership (collectively "Plaintiffs") brought this diversity suit alleging that Continental breached the CGL Policy by refusing to pay defense and indemnification costs associated with the Ameriwood lawsuit. Plaintiffs sought both a declaration as to their right to recover the cost of attorneys' fees and litigation expenses incurred in defending the Ameriwood lawsuit as well as a declaration regarding their right to obtain reimbursement of the sum they paid in settlement of the underlying suit. Continental argued that it was not obligated to pay Plaintiffs' defense and indemnification costs because Plaintiffs failed to comply with the terms and conditions of the CGL Policy — namely, the provision requiring Plaintiffs to cooperate with and to get consent to settle from Continental. According to Continental, Plaintiffs not only failed to notify Continental about, and permit Continental to participate in, the mediation scheduled by the Ameriwood trial court, but they also ultimately settled the case without Continental's consent or approval.

It became apparent during the course of this litigation in the district court that a decision as to which state's law should be applied would be outcome determinative. As explained by counsel for Mill's Pride, Inc., at a hearing before the district court:

[T]here is authority under Ohio law that if you fail to make the notification, you're just out. Too bad, you get no claim. They treat it as a condition precedent to coverage.... The Michigan law, on the other hand, ... says, well, we're going to consider that as a factor, but really it's going to be up to the insurance company to show that they were prejudiced by the lack of timely notice.

J.A. at 112.

Applying Michigan's choice of law rules and relying on International Insurance Co. v. Stonewall Insurance Co., 86 F.3d 601 (6th Cir.1996), the district court ruled that the substantive law of Michigan governed the parties' dispute. The parties thereafter entered into a "Partial Settlement Agreement" that resolved all factual and legal disputes except for the single legal issue regarding the appropriate choice of law. The district court soon after entered a "Stipulated Final Order" preserving the choice of law issue for appeal and stating that the order "constitutes a final order adjudicating the rights and obligations of the parties." J.A. at 43. Plaintiffs' timely appeal of the choice of law issue is now before this court.

II. STANDARD OF REVIEW

The district court's ruling on the choice of law issue is reviewed de novo. Salve Regina College v. Russell, 499 U.S. 225, 231, 111 S.Ct. 1217, 1218-1221, 113 L.Ed.2d 190 (1991); Charash v. Oberlin College, 14 F.3d 291, 296 (6th Cir.1994).

III. CHOICE OF LAW RULES

It is well-established that, in a diversity case such as this one, a federal court must apply the substantive law of the state in which the court sits. Erie R.R. Co. v. Tompkins, 304 U.S. 64, 78, 58 S.Ct. 817, 822, 82 L.Ed. 1188 (1938). This rule extends to the forum state's law regarding choice of laws. Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487, 496, 61 S.Ct. 1020, 1021, 85 L.Ed. 1477 (1941). Because this action was brought in federal court in Michigan, Michigan's choice of law rules apply.

The Michigan Supreme Court most recently addressed the state's choice of law rules in contract disputes in Chrysler Corporation v. Skyline Industrial Services, Inc., 448 Mich. 113, 528 N.W.2d 698 (1995). In that case, Chrysler Corporation, a Delaware corporation with its principal place of business in Michigan, and Skyline Industrial Services, Inc. ("Skyline"), a Michigan corporation, entered into a contract for construction services to be performed by Skyline in Illinois. Negotiated mainly in Michigan, the contract provided that Skyline would indemnify and hold Chrysler harmless from Chrysler's negligence. Such an indemnification provision in a construction contract was void under Illinois law but was valid under Michigan law unless the indemnitee was solely negligent.

After a Skyline employee was injured while working at an Illinois construction site, Chrysler commenced an action in Michigan seeking a declaratory judgment that Skyline was liable under the indemnification clause. The trial court found that applying Michigan law would best give effect to the parties' intentions at the time of contracting. Analyzing the choice of law issue under the Restatement (Second) of Conflict of Laws ("Second Restatement"), an appellate court reversed, concluding that the law of Illinois should apply because Illinois was both the place of performance and the location of the subject matter of the contract. While rejecting the conclusion of the appellate court, finding instead that Michigan law applied, the supreme court endorsed the appellate court's reliance on the Second Restatement, stating:

The trend in this Court has been to move away from traditional choice-of-law conceptions toward a more policy-centered approach....

....

... [Sections] 187 and 188 of the Second Restatement, with their emphasis on examining the relevant contacts and policies of the interested states, provide a sound basis for moving beyond formalism to an approach more in line with modern-day contracting realities....

... As the comments to § 187 of the Second Restatement state: "Prime objectives of contract law are to protect the justified expectations of the parties and to make it possible for them to foretell with accuracy what will be their rights and liabilities under the contract." But, "[f]ulfillment of the parties' expectations is not the only value in contract law; regard must also be had for state interests and for state regulation."

Chrysler, 528 N.W.2d at 702-703 (footnotes omitted). Guided by the concerns for certainty and public policy expressed in the Second Restatement, the...