Telxon Corporation, Plaintiff-appellant, v. Federal Insurance Company, Defendant-appellee, 309 F.3d 386 (6th Cir. 2002)

Drew A. Carson (argued and briefed), Goodman, Weiss, Miller, LLP, Cleveland, OH, for Plaintiff-Appellant.

Jonathan A. Constine (argued and briefed), Robert M. Blue (briefed), Hogan & Hartson, Washington, DC, for Defendant-Appellee.

Before SILER and CLAY, Circuit Judges; OBERDORFER, District Judge.^* 

OPINION

OBERDORFER, District Judge.

In this insurance coverage action the District Court, exercising diversity jurisdiction, granted to Federal Insurance Company ("Federal") a summary judgment that it was not obligated by an officers and directors liability policy to reimburse Telxon Corporation ("Telxon") for certain costs which it incurred in defending a stockholder class action brought against it and two of its officer/directors covered by that policy. Telxon appealed. We AFFIRM.

I. BACKGROUND

A. The D & O Policy

Telxon, a global designer and manufacturer of wireless and mobile information systems, purchased from Federal an Executive Liability Indemnification Policy, commonly known as a directors and officers policy (hereinafter, the "D & O policy"), covering claims made against its directors and officers during the period of May 1, 1992 to May 1, 1993. The D & O policy contained an "Insuring Clause" entitled "Executive Liability Coverage," which provided that Federal

shall pay on behalf of each of the Insured Persons all Loss for which the Insured Person is not indemnified by the Insured Organization and which the Insured Person becomes legally obligated to pay on account of any claim first made against him, individually or otherwise, during the Policy Period ... for a Wrongful Act committed, attempted, or allegedly committed or attempted, by the Insured Person(s) before or during the policy period.

Joint Appendix ("J.A.") at 41 (D & O Policy, ¶ 1.1).¹ 

The policy defined the "Insured Organization" as Telxon and its subsidiaries, and the "Insured Persons" as " [a]ny person who has been, now is, or shall become a duly elected director, or a duly elected or appointed officer of the Insured Organization." Id. at 40 (D & O Policy, Items 6, 7). The policy defined "Loss" as "the total amount which any Insured Person(s) becomes legally obligated to pay on account of each claim and for all claims in each Policy Year made against them for Wrongful Acts for which coverage applies, including, but not limited to, damages, judgments, settlements, costs and Defense Costs." Id. at 45 (D & O Policy, ¶ 9.1). The policy defined "Defense Costs" as "that part of Loss consisting of costs, charges and expenses ... incurred in defending, investigating or monitoring legal actions, claims, or proceedings and appeals therefrom and the cost of appeal, attachment or similar bonds." Id. In addition, the policy stated that Federal "shall not be liable for any settlements or Defense Costs to which it has not consented." Id. at 43 (D & O Policy, ¶ 6.1).

Thus, on its face, Telxon's D & O policy provides direct coverage to Telxon's directors and officers for any loss that they are "legally obligated to pay." The policy provides coverage to Telxon only to the extent that Telxon is "permitted or required by law" to indemnify its directors and officers for a covered loss that the directors and officers were "legally obligated to pay."

B. The Underlying Action

In December 1992, during the policy period, shareholders filed four class action securities lawsuits in the Northern District of Ohio against Telxon, its former President and incumbent Chief Executive Officer Raymond D. Meyo, and its incumbent President and Chief Operating Officer Daniel R. Wipff. The district court later consolidated the cases and styled them, collectively, as Stavroff v. Meyo. The consolidated complaint alleged, inter alia, that Telxon, through Meyo and Wipff, misrepresented Telxon's financial performance in order to raise the market price of its common stock. J.A. at 648-53 (Complaint ¶¶ 37-53). On September 14, 1995, the district court in the underlying action granted summary judgment to Telxon, Meyo, and Wipff. See Stavroff v. Meyo, 987 F. Supp. 987 (N.D. Ohio 1995), aff'd, 129 F.3d 1265 (6th Cir. 1997) (unpublished table decision).

Telxon initially engaged its general counsel, Goodman Weiss Miller ("Goodman") to defend it in the class action, with Skadden, Arps, Meagher & Flom ("Skadden") serving as co-counsel. Goodman and Skadden — in December 1992 and January 1993, respectively — entered appearances on behalf of Telxon and Wipff, but not Meyo. Id. at 90, 92. On February 12, 1993, Meyo retained Thompson Hine & Flory ("Thompson"), replacing his initial counsel, Chattman Sutrela Friedlander. Id. at 53 (Telxon Corporation Certification dated Oct. 25, 1993). Shortly thereafter, Wipff retained Howrey & Simon ("Howrey"). In March 1993, Howrey entered an appearance on behalf of Wipff "in place and stead of Goodman." Id. at 158.

On February 16, 1993, Federal sent Goodman a reservation of rights letter setting forth its coverage analysis with respect to the underlying litigation. The letter stated in relevant part, "Defense Costs coverage is afforded ... to defendants Raymond Meyo and Daniel Wipff... solely in their capacity as Directors and/or Officers of Telxon Corporation. Telxon Corporation is Insured under the policy solely for its liability to indemnify any or all of the Insured Persons for Loss (including Defense Costs) sustained in the litigation." Id. at 763 (letter from Donna Kurzawski to Steven Miller dated Feb. 16, 1993) (emphasis in original).

By letter dated April 20, 1994, Federal, at Telxon's request, described to Telxon's insurance agent its "proposal for the allocation of attorney fees incurred" in the underlying action. Id. at 772 (letter from Donna Kurzawski to Anthony Gruppo dated Apr. 20, 1994). Federal stated that it would reimburse 100% of the fees charged by Thompson and Howrey on behalf of Meyo and Wipff, respectively. Id. The proposal further stated, however, that it would cover none of Skadden's fees, and only 66% of the fees charged by Goodman between December 1992 to May 1993. Id. It explained, "It is our position that Meyo & Wipff retained separate counsel early in the litigation and that Federal should not reimburse any fees incurred [by Goodman] after the retention of separate counsel by Meyo & Wipff." Id. Federal undertook partial reimbursement of fees charged by Goodman because "some work was expended" by Goodman on behalf of Meyo and Wipff "in the drafting and filing" of a motion to dismiss the underlying action, which the district court ruled on in early June of 1993. Id. at 773.

Ultimately, Federal reimbursed Telxon for a total of $1,821,795 in defense costs incurred in the underlying litigation. Id. at 38 (Declaration of Margaret Klimczyk dated Apr. 28, 1999). Of that amount, $138,374 represented fees charged by Goodman prior to Wipff's retention of Howrey and reasonable follow-up during the ensuing transition. Id. In response to a show cause order in the coverage action, Federal later paid an additional $77,019 attributable to fees charged by Goodman prior to May 1993, though without conceding that it was obligated to do so. The remainder of the $1,821,795 represented fees and costs charged by Thompson and Howrey for services they rendered to Meyo and Wipff. Id.

C. Coverage Action

On May 28, 1998, Telxon filed this lawsuit, seeking a declaration that all of the fees charged by Goodman and Skadden were covered by the D & O policy. Telxon and Federal filed cross-motions for summary judgment. In its motion, as on this appeal, Telxon invoked the "reasonably related rule" as authority for its entitlement to reimbursement of these fees. The Maryland Court of Appeals had pioneered the concept that defense costs not expressly covered by a D & O policy may nonetheless be reimbursed if they are "reasonably related" to the defense of a claim that is covered by the policy. Continental Casualty Co. v. Board of Educ. of Charles County, 302 Md. 516, 489 A.2d 536, 545 (1985). Telxon also cited the "larger settlement rule," a variation of the reasonably related rule, which "allows allocation of the costs of a settlement `only where that settlement is larger because of the activities of uninsured persons who were sued or persons who were not sued but whose actions may have contributed to the suit.'" Owens Corning v. National Union Fire Ins. Co. of Pittsburgh, Pa., 257 F.3d 484, 491 (6th Cir. 2001) (quoting Caterpillar, Inc. v. Great Am. Ins. Co., 62 F.3d 955, 960 (7th Cir. 1995)).

The district court below concluded that the reasonably related rule was "simply inapplicable" to the facts of this case. J.A. at 802 (Order at 15). The court observed that such allocation rules are "designed to solve allocation disputes; that is, when a corporation and its officers and directors share legal representation and it is, therefore, difficult to determine who is responsible for the costs of the representation." Id. The court then stated the corollary principle that such rules "cannot apply when no need exists to determine who is responsible for the costs of the joint legal representation." Id. The district court further found that in this case, "there is nothing to allocate" because each of the three defendants in the underlying action had retained separate, and not joint, legal representation. Id. The court stated "that no reasonable jury could find" that Goodman and Skadden "actually represented Meyo and Wipff as additional counsel or that Federal consented to such representation." Id. 798 (Order at 11). As the court put it, "Telxon, Meyo and Wipff chose the counsel structure they wished to employ in this case and chose how those counsel would interact. Whatever the basis for that choice, it resulted in each defendant acting through separate counsel." Id. at 803 (Order at 16) (emphasis in original). The court continued, "The fact that co-defendants took the not-so-unusual step of dividing up the responsibilities of their respective counsel does not transform this action into one to which allocation principles should be applied." Id. at 803-04 (Order at 16-17).

Ultimately the district court focused on the provision of the D & O policy limiting Federal's liability to fees the insured directors and officers were "legally obligated to pay." Id. at 807 (Order at 20). The court ruled that this phrase was unambiguous because it was not susceptible to more than one interpretation. Said the district court, "`Legally obligated to pay' means simply what it says, that the insurance policy only covers defense costs that the insured person has a legal obligation to pay, not a desire to pay or even a moral obligation to pay." Id. at 808 (Order at 21) (emphasis in original). The court found that "there is no evidence that Meyo and Wipff undertook any legal obligation to pay Goodman Weiss's and Skadden's fees after those officers retained separate counsel." Id. After noting that the larger settlement rule was also inapplicable since the underlying action was not settled, the district court concluded that all of the fees and expenses charged by Goodman and Skadden were Telxon's sole responsibility. Accordingly, the district court granted Federal's motion for summary judgment and denied Telxon's motion for the same. This appeal followed.

II. STANDARD OF REVIEW

We review de novo a district court's grant of summary judgment. See White Consol. Indus., Inc. v. Westinghouse Elec. Corp., 179 F.3d 403, 407 (6th Cir. 1999) (citing EEOC v. Prevo's Family Market, 135 F.3d 1089, 1093 (6th Cir. 1998)). "Summary judgment is proper `if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law.'" Id. (quoting Fed. R. Civ. P. 56(c)). "Where the record taken as a whole could not lead a rational trier of fact to find for the non-moving party, there is no `genuine issue for trial.'" Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 587, 106 S. Ct. 1348, 89 L. Ed. 2d 538 (1986).

III. DISCUSSION

The issue in this appeal is whether Telxon can recover the defense fees and costs charged by Goodman and Skadden under its D & O policy. Telxon asserts that its alleged liability in the underlying action was wholly derivative of, and concurrent with, that of Meyo and Wipff. Telxon argues that affording it the coverage it seeks will give full effect to the D & O policy's underlying purpose of protecting an uninsured corporation against liability arising from the wrongful acts of its directors and officers.

Our jurisdiction to address Telxon's arguments is based solely on the diversity of the citizenship of the parties; the insurance coverage issue Telxon raises is a matter of state law. See Transamerica Ins. Co. v. Duro Bag Mfg. Co., 50 F.3d 370, 372 (6th Cir. 1995) ("Interpretation of insurance contracts is, of course, a matter of state law...."); Omaha Prop. and Cas. Ins. Co. v. Johnson, 923 F.2d 446, 448 (6th Cir. 1991) ("The states regulate insurance companies for the protection of their residents...."). We apply the relevant state law in accordance with the controlling decisions of the highest court of that state. See Erie R.R. Co. v. Tompkins, 304 U.S. 64, 58 S. Ct. 817, 82 L. Ed. 1188 (1938); see also Owens Corning v. National Union Fire Insurance Company of Pittsburgh, Pa., 257 F.3d 484 (6th Cir. 2001) (citing Erie and applying Ohio law to resolve an insurance coverage question).

Applying this analytical framework, we conclude that Telxon is not entitled to the coverage it seeks under its D & O policy. It is well-established in Ohio, and indeed universally, that contracts, including insurance policies, "are to be interpreted so as to carry out the intent of the parties, as that intent is evidenced by the contractual language." Skivolocki v. East Ohio Gas Co., 38 Ohio St.2d 244, 313 N.E.2d 374, 376 (1974) (citations omitted). The words of the insurance policy should be given their "`ordinary and commonly understood meaning.'" King v. Nationwide Ins. Co., 35 Ohio St.3d 208, 519 N.E.2d 1380, 1383 (1988) (quoting Dealers Dairy Prods. Co. v. Royal Ins. Co., 170 Ohio St. 336, 164 N.E.2d 745, 747 (1960)).

Telxon's D & O policy unambiguously covered only losses that the "Insured Person(s)" — here, Meyo and Wipff — were "legally obligated to pay." The "ordinary and commonly understood meaning" of this provision is that Telxon's D & O policy necessarily excludes from coverage any amount that Meyo and Wipff were not "legally obligated to pay."

We conclude that Meyo and Wipff were never "legally obligated to pay" Goodman and Skadden. There was no express contract between Meyo or Wipff on one hand, and Goodman or Skadden on the other. Nor were the ingredients of an implied contract present. In Ohio, when a client seeks and obtains an attorney's advice on a legal matter, an implied contract to pay a reasonable value for the professional services rendered may arise, unless there is a special agreement to the contrary. See Warm v. Greenberg, 29 Ohio App.2d 163, 279 N.E.2d 640, 641-42 (1971).

Here, it is undisputed that Meyo and Wipff engaged their own counsel and never sought advice or services directly from Goodman and Skadden, as distinguished from Thompson and Howrey. In their filings in the district court in the underlying action, Goodman and Skadden stated that they represented only Telxon. Neither Goodman nor Skadden ever entered an appearance on behalf of Meyo. Both firms originally entered appearances on behalf of Telxon and Wipff. Soon thereafter, however, Wipff retained Howrey, who appeared on his behalf "in place and stead of" Goodman. Goodman's pleadings filed in the underlying action identify Goodman and Skadden only as "Attorneys for Defendant Telxon Corporation." See, e.g., J.A. at 228-36 (excerpts from pleadings filed in the underlying action).