Stryker Corp. v. XL Ins. Am.

• Decision Date: 05 July 2012
• Docket Number: Nos. 09–2332,10–2383.,s. 09–2332
• Citation: 735 F.3d 349
• Parties: STRYKER CORPORATION and Howmedica Osteonics Corporation, Plaintiffs–Appellees/Cross–Appellants, Stryker Sales Corporation, Plaintiff, v. XL INSURANCE AMERICA, fka Winterthur International America Insurance Company, Defendant–Appellant, Cross–Appellee, National Union Fire Insurance Co. of Pittsburgh, Pennsylvania, Defendant.
• Court: U.S. Court of Appeals — Sixth Circuit

735 F.3d 349

STRYKER CORPORATION and Howmedica Osteonics Corporation, Plaintiffs–Appellees/Cross–Appellants, Stryker Sales Corporation, Plaintiff,

v. XL INSURANCE AMERICA, fka Winterthur International America Insurance Company, Defendant–Appellant, Cross–Appellee,National Union Fire Insurance Co. of Pittsburgh, Pennsylvania, Defendant.

Nos. 09–2332, 10–2383.

United States Court of Appeals, Sixth Circuit.

Argued: April 10, 2012.

Decided and Filed: July 5, 2012.

ARGUED:Jonathan D. Hacker, O'Melveny & Myers LLP, Washington, D.C., for Appellant/Cross–Appellee. David J. Gass, Miller Johnson, Grand Rapids, Michigan, for Appellee/Cross–Appellant. ON BRIEF:Jonathan D. Hacker, O'Melveny & Myers LLP, Washington, D.C., Paul R. Koepff, Clyde & Co., New York, New York, Michael W. Betz, David J. Bloss, Bloss Betz, Grand Rapids, Michigan, for Appellant/Cross–Appellee. David J. Gass, D. Andrew Portinga, J. Michael Smith, Miller Johnson, Grand Rapids, Michigan, for Appellee/Cross–Appellant. Michael F. Smith, The Smith Appellate Law Firm, Washington, D.C., for Amicus Curiae.

Before GUY, COLE and ROGERS, Circuit Judges.

AMENDED OPINION

COLE, Circuit Judge.

Stryker Corporation (“Stryker”), a manufacturer of medical devices, brought an insurance coverage action against its umbrella insurer XL Insurance America, Inc. (“XL”), seeking coverage for claims stemming from the implantation of expired artificial knees. The district court held that XL was liable under the policy for the entirety of Stryker's losses on both direct claims brought against Stryker, as well as claims brought against Pfizer that Stryker was obligated to reimburse. On appeal, XL challenges the district court's ruling that the XL policy covers the claims at issue, the ruling that XL was liable for the full amount of Stryker's losses, and the ruling that the entire amount owed to Stryker was subject to pre-judgment interest. Stryker also cross-appeals the award of interest, arguing that it should run through the entry of the amended judgment, as opposed to terminating upon the entry of the first final judgment. For the reasons set out below, we AFFIRM the district court's judgment with regard to XL's liability for Stryker's claims and the interest calculations, REVERSE the district court's judgment with regard to all remaining issues, and REMAND to the district court for further proceedings consistent with this opinion.

I. BACKGROUND

A. The Claims

In 1997 and 1998, Howmedica, Inc., an Irish company which was a wholly-owned subsidiary of Pfizer, Inc. (“Pfizer”), manufactured and distributed an artificial knee joint known as Duracon Unicompartmental Knees (“Uni–Knees”). Stryker Corp. v. XL Ins. America, Inc., No. 4:01–cv–157, 2007 WL 1031641, at *1 (W.D.Mich. April 3, 2007) (“Stryker I Coverage Opinion ”). Key components of the Uni–Knees were made of ultra-high-molecular-weight-polyethylene (“UHMWPE”). Id. In the mid–1990s, it was discovered that the standard procedure to sterilize medical devices after manufacture—gamma irradiation—caused UHMWPE to degrade slowly when exposed to the air contained in the device packaging, potentially leading to device failure. Id. Howmedica and Pfizer determined that, because of this potential problem, Uni–Knees should have an expiration date of five years after manufacture. Id. To ensure that expired products did not ship to customers, Pfizer developed a computerized database program to monitor all of their products containing UHMWPE. Id. However, as became clear later, Uni–Knees were accidentally not entered into the database.

At the end of 1998, Stryker acquired Howmedica from Pfizer pursuant to a stock and asset purchase agreement (“the Agreement”). Id. Under the terms of the Agreement, Stryker was to indemnify Pfizer for any costs associated with claims brought against Pfizer relating to Howmedica products, such as Uni–Knees.

In late 1999, a Stryker sales representative prepared an incident report disclosing that an expired Uni–Knee had been implanted in a patient. Id. at *11. After an investigation, Stryker believed that the error was “at the hospital end,” i.e., that hospitals had been using inventory that had been sitting on their shelves past the five-year expiration date. Id. On December 30, 1999, Elizabeth Staub, Stryker's Vice President for Quality Assurance, Regulatory Affairs, and Clinical Research, distributed a memorandum to Stryker sales personnel, reminding them of the five-year expiration date and instructing them to reinforce the rule with their customers (“the Staub Memo”). Id. at *11–12. By 2000, however, it became clear that the error was on Stryker's end—expired Uni–Knees were being kept in Stryker warehouses and from there sold to hospitals and implanted in patients. Id. at *13. This fact was memorialized in a July 28, 2000, letter to Stryker personnel. Beginning in 2000, Stryker was the subject of lawsuits from patients who received expired Uni–Knees and had those devices fail after implantation. In total, seventy-seven suits were brought against Stryker, and many of those cases also contained claims against Pfizer.

B. The XL Insurance Policy

For the policy year 2000, Stryker purchased a Commercial General Liability umbrella policy from Winterthur International America Insurance Company, now known as XL. The policy provided for $15 million in coverage for each occurrence, and $15 million in aggregate coverage, over a $2 million self-insured retention (“SIL”). The policy (“the XL policy”) imposes a duty on the part of the insurer to defend suits that would be covered under the policy, and that any defense costs would be in addition to the policy limits. The XL policy also required indemnification for “[a]ny [ ] organization ... to whom [Stryker is] obligated by a written insured Contract to provide insurance such as is afforded by this policy but only with respect to [ ] liability arising out of operations conducted by [Stryker] or on [Stryker's] behalf.” Finally, the XL policy contained an endorsement related to medical devices (“the Medical Product Endorsement”), which grouped all medical products with the “same known or suspected defect or deficiency which is identified by the same advisory memorandum” into one “batch” or occurrence for coverage purposes. The endorsement provided that the advisory memorandum set the date at which the batch “occurred” for coverage purposes. However, the endorsement provided that “[b]atch coverage shall not apply to any loss which arises out of a defect or deficiency that is known or suspected prior to 1–1–[20]00.”

Stryker tendered notice of claims to XL in August 2000, seeking defense and indemnification under the XL policy. On October 11, 2001, XL notified Stryker that it was denying coverage under the XL policy, arguing that the claims arise out of a “defect ... that [was] known or suspected prior to 1–1–[20]00,” and thus not covered pursuant to the Medical Product Endorsement.

Stryker filed suit against XL in the Western District of Michigan on October 4, 2001, seeking defense and indemnification for claims against Stryker related to expired Uni–Knees under the XL policy (“ Stryker I ”). Soon after, Pfizer brought suit against Stryker in the Southern District of New York, alleging that Stryker was obligated to indemnify Pfizer against claims brought against Pfizer related to the Uni–Knees. That court eventually granted summary judgment in favor of Pfizer, holding that Stryker was required to indemnify Pfizer under the Agreement. See Pfizer Inc., v. Stryker Corp., 348 F.Supp.2d 131, 159 (S.D.N.Y.2004). Stryker tendered the judgment in the Pfizer case, $17.7 million plus interest, to XL for indemnification. XL denied that claim as well, and so Stryker filed a second action against XL, as well as against the excess insurer, TIG. Stryker Corp. et al. v. XL Insurance America, Inc. et al., No. 1:05–cv–051–RHB (“ Stryker II ”).

C. District Court Proceedings

Over the course of the ten-year history of this case, the district court issued six rulings that are relevant on appeal. On April 3, 2007, the district court issued the Stryker I Coverage Opinion, stemming from a five day bench trial. In that opinion, the district court held that the XL policy does cover direct claims against Stryker. In a separate order in Stryker II, the district court held that XL was liable for Stryker's obligations to Pfizer under the Agreement.

On December 15, 2008, the district court ruled on Stryker's motion for summary judgment, holding that Stryker's settlements with the underlying plaintiffs, as well as most of Stryker's proffered defense costs, were reasonable. 2008 WL 5235886 (W.D.Mich. Dec. 15, 2008) (“Stryker I Damages Opinion ”). The opinion also established that Stryker was entitled to pre-judgment interest on these sums, without establishing the amount of that interest. On February 9, 2009, XL entered into a settlement with Pfizer, under which it would pay $26 million to settle all of Stryker's liability to Pfizer (“the Pfizer settlement”). XL thereafter filed a motion for summary judgment, arguing that the Pfizer settlement exhausted the XL policy, and thus XL was no longer liable for the sums outlined in the Stryker I Damages Opinion. On October 7, 2009, the district court denied the motion, holding that XL's breach of the duty to defend Stryker voided any limits of liability in the XL policy. 2009 WL 3256179 (W.D.Mich. Oct. 7, 2009) (“Final Judgment Opinion ”). Accordingly, XL was responsible for all of Stryker's losses associated with Uni–Knees claims. In addition, the district court entered a final judgment on the same day, directing the parties to file a motion to amend the judgment to add the final interest calculation.

XL appealed that final judgment. XL also filed a cross-motion for relief from judgment, arguing that it was not subject to pre-judgment interest in light of a recent Michigan Court of Appeals case which, XL argued, changed the governing law. The...