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St. Paul Fire and Marine Ins. Co. v. Compaq Computer Corp.: CIVIL PROCEDURE | INSURANCE - MN Court of Appeals: result not res judicata; different circcumstances (Question not underlying facts, but per-complaint coverage denial)

United States Court of Appeals
FOR THE EIGHTH CIRCUIT
___________
No. 07-2865
___________
St. Paul Fire and Marine *
Insurance Company, *
*
Plaintiff Appellant, *
*
v. **
Compaq Computer Corporation, *
*
Defendant Appellee. *
___________
Appeals from the United States
No. 07-2949 District Court for the
___________ District of Minnesota.
St. Paul Fire and Marine *
Insurance Company, *
*
Plaintiff Appellee, *
*
v. **
Compaq Computer Corporation, *
*
Defendant Appellant. *
___________
Submitted: May 14, 2008
Filed: August 15, 2008
___________
1The Honorable David S. Doty, United States District Judge for the District of
Minnesota.
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Before WOLLMAN, MURPHY, and SMITH, Circuit Judges.
___________
MURPHY, Circuit Judge.
St. Paul Fire & Marine Insurance Company brought this declaratory judgment
action for a ruling that it had no duty to defend its insured, Compaq Computer
Corporation (Compaq), in a case brought against it in Texas by Hal LaPray (LaPray
litigation). Compaq counterclaimed for a declaratory judgment that St. Paul had such
a duty and for breach of contract damages and then moved for statutory damages
under Texas law. The district court1 ruled in deciding the motions before it that St.
Paul had a duty to defend and that Compaq was neither entitled to reimbursement for
certain defense costs nor to statutory damages under Texas law. Judgment was
entered accordingly, and St. Paul appeals the district court's ruling that it has a duty
to defend Compaq in the LaPray litigation. In its cross appeal Compaq attacks the
district court's rulings on reimbursement of defense costs and statutory damages. We
affirm in part and reverse in part.
I.
Compaq builds and sells computers, and St. Paul is Compaq's liability insurer.
On January 28, 2000 Hal LaPray brought a putative class action suit against Compaq
in Texas state court alleging breach of contract and breach of express warranty
(LaPray litigation). The plaintiffs alleged that they purchased Compaq computers
containing defective "floppy diskette controllers" (FDCs) and that the software
Compaq issued to "fix" the FDC problem the SoftPaq did not work and caused
additional damage. Another putative class action was filed on October 31, 1999 in the
Eastern District of Texas by Charles Thurmond (Thurmond litigation). In addition to
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state law claims, the complaint in that case alleged a federal claim under the Computer
Fraud and Abuse Act, 18 U.S.C. 1030. Yet another similar lawsuit was filed in the
District of Colorado (Sprung litigation).
Compaq was covered at all relevant times by a "Multicover Package Policy"
issued by St. Paul which included three separate insurance policies: a "Technology
Errors and Omissions Liability Protection" policy (Technology E&O policy), a
"Technology Commercial General Liability Protection" policy, and a "Technology
Umbrella Excess Liability Protection" policy. This lawsuit involves provisions of the
Technology E&O policy.
The Technology E&O policy states "[w]e'll pay amounts any protected person
is legally required to pay as damages for covered loss that . . . is caused by an error."
The agreement defines "error" as an "error, omission or negligent act." The policy
defines "damages" as "compensatory damages imposed by law [or] consequential
damages," but it expressly excludes "the contract price of [the] computer." The policy
also excludes damages that "result[] from any criminal, dishonest, fraudulent or other
intentionally wrongful act or omission." The insurer's duty to defend under this policy
is therefore triggered when a party sues Compaq alleging an error and demanding
damages, as both terms are defined by the Technology E&O policy, so long as the
damages are not the result of an intentionally wrongful act.
Compaq submitted the Thurmond litigation to St. Paul in late 1999. St. Paul
agreed to defend Compaq pursuant to the Technology E&O policy, but reserved its
right to deny coverage upon a subsequent determination that the Thurmond claim was
not covered by that policy. After the plaintiffs in Thurmond filed their second
amended complaint dropping the state law claims and alleging only the fraud claim,
a claim excluded under the policy as a form of intentionally wrongful conduct, St.
Paul concluded that it had no duty to defend the lawsuit. It reached the same
conclusion after reviewing an amended complaint in the Sprung litigation. Compaq
2Compaq had submitted the LaPray litigation to St. Paul for coverage on
February 8, 2000. St. Paul accepted coverage under the Technology E&O policy
subject to a reservation of rights.
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ultimately prevailed in the Thurmond litigation, which was dismissed on jurisdictional
grounds. See Thurmond v. Compaq Computer Corp., 171 F. Supp. 2d 667 (E.D. Tex.
2001). The court is not aware of the status of the Sprung litigation.
In response to St. Paul's declination of coverage for the Thurmond defense
costs, Compaq filed suit in Minnesota state court seeking a declaration that St. Paul
had a duty to defend the Thurmond and Sprung litigations under the Technology E&O
policy. The trial court granted summary judgment for St. Paul because the complaints
in those actions alleged "only causes of action and damages resulting from Compaq's
intentional conduct," thus not alleging an "error" under the Technology E&O policy.
The Minnesota Court of Appeals affirmed. Compaq Computer Corp. v. St. Paul Fire
and Marine Ins. Co., 2003 WL 22039551 (Minn. Ct. App. Sept. 2, 2003)
(unpublished).
St. Paul then brought this action in Minnesota state court seeking a declaration
that it had no duty to defend Compaq in the LaPray litigation under the Technology
E&O policy.2 Compaq removed the case to federal court and then filed two
counterclaims: one seeking a declaration that St. Paul had a duty to defend and that
Compaq had no obligation to return defense costs related to the LaPray action and the
other seeking damages for breach of contract pursuant to the insurance policy
package. St. Paul moved for summary judgment on its complaint and Compaq's
counterclaim; Compaq filed a cross motion for summary judgment in its favor on St.
Paul's complaint and for partial summary judgment on its counterclaim.
The principal decision under review was issued on October 13, 2004. The key
issues in determining if St. Paul had a duty to defend Compaq in the LaPray litigation
was 1) whether the LaPray complaint alleged an "error" and demanded "damages" as
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the Technology E&O policy defined those terms and 2) whether a policy exclusion
applied. Applying Texas law the district court concluded that the complaint alleged
conduct falling within the policy's definition of "error," that the relief sought fell
within the definition of "damages," and that no exclusions applied. The district court
therefore held that St. Paul had a duty to defend Compaq in the LaPray litigation. St.
Paul Fire and Marine Ins. Co. v. Compaq Computer Corp., CIV 03-5471, Doc. 64 (D.
Minn. Oct. 13, 2004).
On appeal, St. Paul argues that the district court erred in three ways. It contends
that the LaPray complaint does not allege an "error" within the meaning of the
Technology E&O agreement, that the LaPray complaint does not seek damages
covered by the policy, and that the LaPray complaint triggers the exclusion for losses
resulting from intentional wrongful conduct. Compaq supports the district court's
determination that St. Paul has a duty to defend the LaPray litigation but claims that
the district court erred in ruling on its counterclaims. We address the background and
procedural history of those rulings below.
II.
We review a district court's grant of summary judgment de novo, viewing the
evidence in the light most favorable to the nonmoving party. Skare v. Extendicare
Health Servs., Inc., 515 F.3d 836, 840 (8th Cir. 2008). We review the district court's
findings of fact for clear error and its conclusions of law de novo. Crossett Paper
Mills Employees Fed. Credit Union v. Cumis Ins. Soc'y, Inc., 476 F.3d 578, 580 (8th
Cir. 2007).
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A.
The principal issue on appeal is whether St. Paul has a duty to defend Compaq
in the underlying LaPray litigation pursuant to the Technology E&O policy. The
question of whether an insurer has a duty to defend is a legal question that we review
de novo. Travelers Property Cas. Co. of America v. Gen. Cas. Ins. Cos., 465 F.3d
900, 903 (8th Cir. 2006).
We agree with the parties that Texas law governs the duty to defend analysis.
Under Texas law an insurer has a duty to defend if "any claim alleged in the pleadings
is within the coverage of the policy." Dresser Indus., Inc. v. Underwriters At Lloyd's,
London, 106 S.W.3d 767, 774 (Tex. App. 2003). Texas applies the "eight corners"
or "complaint allegation" rule when determining an insurer's duty to defend.
GuideOne Elite Ins. Co. v. Fielder Road Baptist Church, 197 S.W.3d 305, 308 (Tex.
2006). This rule provides that a court must consider only the factual allegations
within the four corners of the third party plaintiffs' complaint, together with the terms
within the four corners of the insurance policy. Nat'l Union Fire Ins. Co. of
Pittsburgh, Pa. v. Merchs. Fast Motor Lines, Inc., 939 S.W.2d 139, 141 (Tex. 1997)
(per curiam). The court "may indulge the most liberal interpretation of the allegations
of which they are susceptible and doubts as to the import of the allegations are to be
resolved in favor of the insured and coverage." Continental Sav. Ass'n. v. U. S.
Fidelity and Guar. Co., 762 F.2d 1239, 124344, amended on rehearing in part by 768
F.2d 89 (5th Cir. 1985) (applying Texas law).
When applying the eight corners rule we must determine whether the complaint,
properly construed, alleges conduct covered by the policy. GuideOne Elite, 197
S.W.3d at 308. We begin with the terms of the policy itself. The Technology E&O
policy "provides errors and omissions liability protection for your computer or
electronic products or services." It is a "claims made" policy which covers defense
expenses. To be covered, a "claim or suit must be first made or brought while this
3Other dictionaries offer substantially similar definitions of "error." See New
Oxford American Dictionary 573 (2d ed. 2005) ("a mistake") (first definition); Black's
Law Dictionary 582 (8th ed. 2004) ("[a]n assertion or belief that does not conform to
objective reality; a belief that what is false is true or that what is true is false;
-7-
agreement is in effect, or during a reporting period, if one applies." Under the heading
"What This Agreement Covers" the policy states:
Technology errors and omissions policy. We'll pay amounts any
protected person is legally required to pay as damages for covered loss
that:
results from your computer or electronic products or services; and
is caused by an error committed on or after the retroactive date
and before the ending date of this agreement.
Thus to invoke the policy's coverage, the underlying complaint must allege a loss
caused by an "error" for which the plaintiffs request "damages." The policy expressly
excludes coverage for "loss that results from any criminal, dishonest, fraudulent or
other intentionally wrongful act or omission."
1.
St. Paul argues that the LaPray complaint alleges intentionally wrongful
conduct that falls outside the policy's definition of an "error." For the reasons
discussed below, we disagree.
The policy defines "error" as "any error, omission, or negligent act." Because
the policy uses the term "error" to define itself, we look to common usage. An error
is "[a]n act, assertion, or belief that unintentionally deviates from what is correct,
right, or true;" it is a "mistake." The American Heritage Dictionary 606 (4th ed.
2000) (first and fourth definitions).3 In short, an error is an unintentionally incorrect
mistake."); Webster's Third New International Dictionary Unabridged 772 (1993) ("an
act involving an unintentional deviation from truth or accuracy" or "a mistake in
perception, reasoning, recollection, or expression.") (second definition).
-8-
act, assertion, or belief, or a mistake. Thus, "error" under the Technology E&O policy
"encompasses intentional, non-negligent acts like those associated with the breach of
a contract," as well as omissions and negligent acts. See Continental Cas. Co. v. Cole,
809 F.2d 891, 896 (D.C. Cir. 1987). It does not, however, include intentionally
wrongful conduct.
In deciding whether the LaPray plaintiffs alleged an "error" we look to the most
recent amended pleading the fourth amended complaint. Compaq disagrees with
this approach, arguing that each version of the complaint is relevant when determining
whether the insurer has a duty to defend for the time period for which that version of
the complaint was in effect. For this proposition it cites Bernard v. Gulf Ins. Co., 542
S.W.2d 429, 431 (Tex. Civ. App. 1976), which recognized that a judgment on an
insurer's duty to defend would be res judicata only as to the pleading that existed at
the time the judgment was entered, not as to any later amended pleading. Texas law
is clear, however, that a court looks only to the latest amended pleading when
evaluating an insurer's duty to defend. See Tex. R. Civ. P. 65 ("Unless the substituted
instrument shall be set aside on exceptions, the instrument for which it is substituted
shall no longer be regarded as a part of the pleading in the record of the cause."); see
St. Paul Ins. Co. v. Texas Dep't of Transp., 999 S.W.2d 881, 883 n.2 (Tex. App. 1999)
("The court evaluates an insurer's duty to defend by reviewing only the latest amended
pleading."); Rhodes v. Chicago Ins. Co., 719 F.2d 116, 119 (5th Cir. 1983) (under
Texas law "the duty to defend is determined by examining the latest, and only the
latest, amended pleadings."). We therefore decline to extend the Bernard rule beyond
the res judicata analysis for which it was originally intended and conclude that only
the fourth amended complaint is relevant for the purpose of our duty to defend
analysis.
4Unlike the allegations in the LaPray case, the Thurmond complaint was
"replete with allegations of 'intentional' and 'knowing' conduct." Compaq Computer
Corp., 2003 WL 22039551, at *5. The plaintiffs there alleged liability under the
Computer Fraud and Abuse Act and consequently had to plead intentional
wrongfulness as an element of fraud.
-9-
In that complaint the plaintiffs allege that each owns a Compaq computer with
a defective FDC, that the defective FDCs were expressly warranted by Compaq, and
that their claims under that express warranty were denied. See Comp. 1418. They
also allege that once the problem of the defective FDCs was brought to Compaq's
attention by the filing of a lawsuit, the company issued a software "fix," the SoftPaq,
to correct the FDC defect. Plaintiffs allege, however, that the SoftPaq is not an
adequate or timely repair, that it causes corruption of data, and that it does not fix the
defective FDCs. Comp. 20(A) (C). The complaint further states that Compaq "has
repudiated any obligation" to repair or replace the defective FDCs and that Compaq
is obligated to refund the full purchase price under the express warranty. Comp.
20(C). Finally, the complaint states that Compaq has communicated "false and
misleading information" about the FDC defect and the SoftPaq and that this
"misrepresentation perpetuates and compounds Compaq's knowing breach of express
warranty." Comp. 20(D).
Nowhere in these factual allegations does the complaint allege that Compaq
engaged in intentionally wrongful conduct. There are no allegations that Compaq
acted "knowingly" or "intentionally." The complaint does not allege that Compaq
knew, or even that it should have known, that it was selling computers with defective
FDCs. There is no allegation that Compaq provided the SoftPaq knowing that it was
defective. While the allegations do claim wrongful conduct, there is no allegation that
the conduct was intentionally wrongful. Rather, the allegations support the inference
that Compaq unintentionally sold defective computers and unintentionally provided
a defective product to fix the original defect. They thus fall squarely within the
policy's definition of "error" an unintentionally incorrect act.4
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St. Paul argues that the phrase "knowing breach" in paragraph 20(D) is an
allegation of intentionally wrongful conduct. That paragraph reads: "Compaq has
compounded the wrongful acts and damage to the class by communicating to some of
the Plaintiffs and other members of the class false and misleading information about
the FDC Defect and SoftPaq. This misrepresentation perpetuates and compounds
Compaq's knowing breach of express warranty." Emphasis added. Although this
sentence references a "knowing breach," it does not itself allege conduct establishing
that Compaq knowingly or intentionally breached a contract or express warranty and,
as discussed above, nowhere else does the complaint allege an intentional or
"knowing" breach to which that sentence could be referring. We thus conclude that
this use of the phrase "knowing breach" is a conclusory remark unsupported by any
factual allegations. Under Texas law, courts focus only on factual allegations and
disregard conclusory statements. See Nat'l Union Fire Ins. Co., 939 S.W.2d at 142
("Although the pleadings allege that [defendant] negligently discharged the firearm,
we must focus our review on the pleading's factual allegations, not on legal theories
asserted.").
St. Paul also contends that another use of the phrase "knowing breach" alleges
intentionally wrongful conduct. Under the heading "Second Cause of Action (Breach
of Contract and Express Warranty)," the complaint states that "[s]upplying defective
FDCs . . . is a breach of contract and a breach of Compaq's express warranty against
defects in materials and workmanship." Comp. 34. In a later paragraph under that
heading the complaint states "Defendant's acts and omissions are a knowing breach
of Defendant's express warranty and breach of contract and a producing cause of
economic damages." Comp. 36(B) (emphasis added). St. Paul argues that reading
these phrases together is an allegation that "Compaq distributed defective computers
with knowledge of their defect." This reading misconstrues the complaint.
Paragraph 34 is a summary of the factual allegations stating the fundamental
factual assertion underlying the breach of contract and breach of express warranty
-11-
claim that supplying defective FDCs and the SoftPaq was a breach of contract and
a breach of express warranty. This conclusion is supported by the factual allegations
laid out earlier in the complaint. Paragraph 35 transitions from factual statements to
requested remedies, namely specific performance. Paragraph 36 the paragraph
containing the "knowing breach" phrase demands damages. Like the use of this
phrase in paragraph 20(D), the statement that Compaq committed a "knowing breach,"
on which St. Paul places decisive weight, is a conclusory statement that is unsupported
by the factual allegations in the complaint, all of which are intent neutral. To read
paragraph 34 in concert with paragraph 36(B) as if it were a single factual allegation
misconstrues the complaint.
Because there is no allegation that Compaq sold computers knowing of the FDC
defect, we conclude that the sale of computers with defective FDCs is an error as
defined by the Technology E&O policy.
2.
The parties also dispute whether the LaPray complaint alleges damages covered
by the Technology E&O policy. The policy defines "damages" as "compensatory
damages imposed by law," "consequential damages incurred by the protected person
under a contract or agreement," and "prejudgment interest awarded against the
protected person on a judgment in connection with those compensatory or
consequential damages." Expressly excluded from the "damages" definition is "the
contract price of [the] computer or electronic products or services."
The complaint seeks as damages a "full refund under [Compaq's] express
warranty based on failure and refusal or inability to repair or replace," "the difference
in value of the computer when purchased with and without the defect," and "damages
for breach of the obligation to repair or replace." Comp. 36(B). The complaint
5A separate policy bundled under the Multicover Package Policy, the
Technology Commercial General Liability Protection policy, covers tort liabilities.
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disclaims "any consequential damages as the result of the actual loss or corruption of
data." Comp. 19.
The first damage request seeks "a full refund under [Compaq's] express
warranty." This request does not seek covered damages because the policy expressly
excludes from the definition of "damages" the contract price of the computer; a refund
is necessarily based on the contract price. This particular request consequently does
not request damages under the Technology E&O policy.
St. Paul contends that the complaint does not request "compensatory damages
imposed by law" because "damages imposed by law" includes only tort damages, not
damages for breach of contract or express warranty. For this proposition St. Paul
relies on dicta from Gulf Portland Cement Co. v. Globe Indem. Co., 149 F.2d 196,
198 (5th Cir. 1945) ("What, other than Insured's negligence, could render Insured
liable for damages imposed by law for personal injuries?"). We find this dicta
unpersuasive. St. Paul's cited case sounded in tort, not in contract, and the insurance
policy there covered liability imposed by law for personal injuries and other torts.
The Technology E&O policy does not cover tort liabilities, but rather other
damages caused by an "error."5 As discussed above, "error" under this policy includes
intentional, non-negligent and negligent acts like those associated with a breach of
contract or express warranty. "Damages imposed by law" under the Technology E&O
policy thus includes damages for breach of contract and breach of warranty.
The plaintiffs also ask for the difference in value between a computer with and
without the FDC defect. St. Paul argues that this is nothing more than a request for
a partial refund, but the complaint is not so limited. Value is not necessarily tied to
6Black's defines compensatory damages as "[d]amages sufficient in amount to
indemnify the injured person for the loss suffered." Black's Law Dictionary 416 (8th
ed. 2004).
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the contract price. Texas courts have recognized that breach of warranty damages are
measured by the difference in value of the warranted good or services with and
without the defect, not the difference in price. See Tex. Bus. & Commerce Code
2.714(b) ("The measure of damages for breach of warranty is the difference at the time
and place of acceptance between the value of the goods accepted and the value they
would have had if they had been as warranted."); Melody Home Mfg. Co. v. Morrison,
502 S.W.2d 196, 20203 (Tex. Civ. App. 1973). While the contract price is evidence
of the value of an item, it is not conclusive. JHC Ventures, L.P. v. Fast Trucking, Inc.,
94 S.W.3d 762, 767 (Tex. App. 2002), abrogated on other grounds by Medical City
Dallas, Ltd. v. Carlisle Corp., 251 S.W.3d 55, 62 (Tex. 2008). The plaintiffs' request
for the difference in value is thus a request for covered damages.
Webster's defines compensatory damages as "damages awarded to make good
or compensate for an injury sustained." Webster's Third New International Dictionary
463 (1993).6 The complaint demands damages for the difference in value because the
plaintiffs "never got what they bargained for and purchased." Comp. 18. In other
words the plaintiffs request compensation for the loss of their expectation under the
warranty agreement. The damages requested are therefore compensatory and within
the Technology E&O policy's coverage.
3.
Finally, St. Paul contends that two policy exclusions preempt coverage. Courts
construing exclusionary clauses "must adopt the construction . . . urged by the insured
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as long as that construction is not unreasonable." Utica Nat'l Ins. Co. of Texas v.
American Indem. Co., 141 S.W.3d 198, 202 (Tex. 2004), quoting Nat'l Union Fire Ins.
Co. of Pittsburgh, Pa. v. Hudson Energy Co., Inc., 811 S.W.2d 552, 555 (Tex. 1991).
St. Paul again argues that the complaint alleges that the plaintiffs' loss resulted
from an "intentionally wrongful act" which the policy excludes from coverage.
Compaq urges us to construe an "intentionally wrongful act" as one motivated by
malice. See State Farm Fire & Cas. Co. v. S.S., 858 S.W.2d 374, 378 (Tex. 1993)
(construing an intentionally wrongful act exclusion to require more than reckless or
wanton conduct). Since the Texas Supreme Court in State Farm used that
interpretation of a similar phrase when construing an "intentional injury exclusion,"
it is not unreasonable and is relevant here. See Utica Nat'l, 141 S.W.3d at 202. We
have already concluded the two uses of the phrase "knowing breach" do not allege that
Compaq distributed the computers knowing of their defect and certainly do not allege
malice. Because the complaint does not allege that Compaq committed an
intentionally wrongful act, this exclusion is inapplicable.
St. Paul next asserts that a policy exclusion precludes coverage for the claims
related to computer replacement or repairs. That exclusion denies coverage for losses
resulting from a "delay in delivery" or "failure to deliver [Compaq's] computer or
electronic products or services." The policy defines "computer or electronic products
or services" as "any electronic equipment or computer hardware or software
developed, distributed, licensed, marketed or sold by or for [Compaq]" and "any
service for others, including maintenance or repair, performed or provided by or for
you in connection with any electronic equipment or computer hardware or software."
The policy provides an example of this exclusion's application, indicating that the
7The policy contained this example of how the delay in delivery exclusion
applies:
You promise to have a software product ready for a customer by a
certain date. A delay in your development of that product makes you
unable to have it ready by the date promised. As a result of not having
that software, your customer loses sales. We won't cover such loss.
-15-
exclusion was intended to preclude coverage in the event of a delayed or failed
delivery of a product or service after it had been promised to the insured's customer.7
While the complaint seeks "damages for breach of the obligation to repair or
replace," it contains no allegations of a product or service delivery delay or failure
giving rise to damages. The complaint does not allege that Compaq promised the
plaintiffs that it would repair or replace their computers under the express warranty
by a certain date and then reneged on that promise. Rather, the alleged damages arise
from the asserted breach of the express warranty. The complaint alleges that Compaq
determined either rightly or wrongly that it had no obligation to repair or replace
the defective computers under its express warranty. The delay in delivery exclusion
thus has no application here.
The complaint alleges an error and requests damages as both terms are defined
by the Technology E&O policy and no exclusion applies. We conclude therefore that
St. Paul has a duty to defend Compaq in the LaPray litigation under the Technology
E&O policy.
B.
The first issue on Compaq's cross appeal is whether the district court erred in
denying it "double duty" recovery of defense costs. The so-called "double duty"
defense costs are those which Compaq incurred during the period of time that both the
8After the Thurmond plaintiffs filed their second amended complaint, St. Paul
reviewed its obligation to defend Compaq under the Technology E&O policy based
on the allegations in that complaint. It determined that the complaint alleged
intentionally wrongful conduct not covered by that policy and consequently withdrew
its defense of that action retroactive to March 10, 2000, the date the second amended
complaint was filed.
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Thurmond and LaPray actions were pending and which benefitted its defenses in both
actions. Compaq claims that it spent million on defense costs that inured to both
actions during the period from January 28, 2000, the date the LaPray action was filed,
to March 15, 2001, the date the Thurmond action was dismissed. See Thurmond, 171
F. Supp. 2d at 667.
As previously noted Compaq filed a state court action in Minnesota in January
2002, seeking a declaration that St. Paul had a duty to defend the Thurmond litigation.
The state court determined that St. Paul had no duty to defend in that action, and the
Minnesota Court of Appeals affirmed. See Compaq, 2003 WL 22039551, at *5. St.
Paul subsequently filed this declaratory judgment action in Minnesota state court
arguing that it had no duty to defend Compaq in the LaPray litigation, and Compaq
removed it to federal district court.
Shortly after St. Paul filed this action seeking a declaration that it had no duty
to defend the LaPray litigation, it also filed a separate action to recover expenses it
had incurred in defending the Thurmond case between March 10, 2000, the date the
Thurmond plaintiffs filed their second amended complaint, and September 5, 2000,
the date it withdrew its defense (St. Paul's recoupment action).8 Compaq removed St.
Paul's recoupment action to federal district court and filed a counterclaim for its
remaining unpaid defense costs incurred before the Thurmond second amended
complaint was filed. The district court granted summary judgment for St. Paul on
Compaq's counterclaim, finding that because the Minnesota court had held that St.
Paul had no duty to defend any part of the Thurmond action, including the original
9The district court also held that the law of the case and the terms of the
Technology E&O policy prevented Compaq from recovering the double duty defense
costs. Because of our resolution of the res judicata issue, we do not address the parties'
arguments on these alternative grounds.
-17-
and first amended complaints, the counterclaim was barred by res judicata. St. Paul
Fire and Marine Ins. Co. v. Compaq Computer Corp., 377 F. Supp. 2d 719, 725 (D.
Minn. 2005). We affirmed. St. Paul Fire and Marine Ins. Co. v. Compaq Computer
Corp., 457 F.3d 766 (8th Cir. 2006).
In this case Compaq claims that St. Paul's duty to defend the LaPray litigation
should include the obligation to pay the double duty defense costs incurred by
Compaq. In the district court St. Paul argued it could not be held liable for any
defense costs associated with the Thurmond action since the Minnesota state courts
had ruled that it had no duty to defend it. The district court concluded that res judicata
barred Compaq from relitigating the double duty defense costs.9
Compaq contends that previous rulings regarding St. Paul's duty to defend in
the Thurmond litigation cannot have res judicata effect on its claim for defense costs
incurred before the dismissal of that litigation because some of those costs benefitted
the LaPray action. St. Paul responds that the district court properly found that res
judicata barred Compaq's attempt to secure reimbursement for those costs, and
alternatively, that St. Paul's recoupment action in federal court should have res
judicata effect this claim because it encompassed Compaq's counterclaim for defense
costs.
The law of the forum that rendered the first judgment controls the res judicata
analysis. See 28 U.S.C. 1738; Ruple v. City of Vermillion, 714 F.2d 860, 86162
(8th Cir. 1983). The district court determined that the Minnesota state court action
which concluded that St. Paul had no duty to defend the Thurmond litigation had res
judicata effect on Compaq's claim for double duty defense costs. Minnesota law
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controls the res judicata effect of that action, and Minnesota courts review the
application of res judicata de novo. Hauschildt v. Beckingham, 686 N.W.2d 829, 840
(Minn. 2004).
Under Minnesota law res judicata bars a subsequent claims where "(1) the
earlier claim involved the same set of factual circumstances; (2) the earlier claim
involved the same parties or their privies; (3) there was a final judgment on the merits;
(4) the estopped party had a full and fair opportunity to litigate the matter." Id. A
party is required to assert "'all alternative theories of recovery in the initial action'" to
avoid the effects of res judicata. Id., quoting Dorso Trailer Sales, Inc. v. American
Body and Trailer, Inc., 482 N.W.2d 771, 77374 (Minn. 1992). Res judicata applies
to all claims that could have been litigated in the earlier action in addition to those
claims that actually were litigated. Id. Minnesota courts do not apply res judicata
principles rigidly but rather focus on whether their application "would work an
injustice on the party against whom the doctrine[] [is] urged." Id. at 837. The parties
do not dispute that the second and third res judicata factors are satisfied here.
We conclude that the first res judicata factor is dispositive as to the effect of the
Minnesota state court judgment. That factor requires us to consider how Minnesota
courts have defined "claim" and how they analyze whether a subsequent claim arises
out of the same set of factual circumstances. Minnesota courts use the terms "claim"
and "cause of action" interchangeably, see Hauschildt, 686 N.W.2d at 840, and define
it as "'a group of operative facts giving rise to one or more bases for suing.'" Id.,
quoting Martin ex rel. Hoff v. City of Rochester, 642 N.W.2d 1, 9 (Minn. 2002).
The fact that both of the underlying actions Thurmond and LaPray arise out
of the same set of factual circumstances obfuscates this issue. The key fact giving rise
to Compaq's state court cause of action against St. Paul was the insurer's decision that
it had no duty to cover defense costs under the Technology E&O policy based on the
allegations in the Thurmond complaint, not the sale of computers with defective
-19-
FDCs. Although the sale of computers with defective FDCs was a circumstance
leading to the Thurmond litigation, it was the alleged breach of the duty to defend that
litigation that gave rise to the Minnesota state court action which the district court
determined to have res judicata effect on the double duty defense costs.
The key fact at the heart of the case before the court is not the sale of computers
with defective FDCs, but rather the breach of St. Paul's duty to defend the LaPray
action under the Technology E&O policy which is based on allegations in the LaPray
complaint. This is a separate and distinct breach from that litigated in the Minnesota
state courts. The allegations in the Thurmond and LaPray litigations were different.
The alleged breach of the duty to defend Compaq in the Thurmond action is entirely
distinct from the breach of the duty to defend Compaq in the LaPray litigation. That
the factual circumstances that lead to the underlying actions may be the same is of no
consequence to the res judicata analysis here. Because these are separate breaches of
St. Paul's duty to defend occurring at different times and involving different
underlying actions, the Minnesota state court action does not bar Compaq's claim for
double duty defense costs here.
St. Paul offers as an alternative argument that St. Paul's recoupment action has
res judicata effect on Compaq's claim for the double duty defense costs. Compaq
contends that we should not consider whether that case has res judicata effect because
St. Paul did not raise this argument in the district court. When a party fails to bring
an argument in the district court, we may consider that argument waived, Yankton
Sioux Tribe v. U.S. Dep't of Health and Human Servs., 2008 WL 2628931, at *9 n.6
(8th Cir. July 7, 2008), but we are free to affirm on any grounds supported by the
record, American Home Assur. Co. v Pope, 487 F.3d 590, 598 (8th Cir. 2007).
Although the judgment in St. Paul's recoupment action was rendered in the
federal district court, we apply Minnesota law on the substantive question of res
judicata because state law controls this issue in a diversity action. See Hillary v. Trans
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World Airlines, Inc., 123 F.3d 1041, 1043 (8th Cir. 1997). The second and third
elements of res judicata that the earlier claim involved the same parties or their
privies and that there was a final judgment on the merits are both satisfied.
The question here is whether Compaq's claim for double duty defense costs
involved the same set of factual circumstances. In St. Paul's recoupment action St.
Paul sought to recoup funds paid to Compaq for the defense of the Thurmond action,
including a portion of the double duty defense costs. Compaq contested the action,
seeking to retain the funds and counterclaiming for funds incurred in the Thurmond
defense prior to March 10, 2000, which also included double duty defense costs. The
operative fact giving rise to St. Paul's recoupment action and to Compaq's
counterclaim were the contested funds. The right to the funds litigated in the
recoupment action involved many of the same funds at issue in this litigation they
arose from the same work performed by the same attorneys. The two actions thus
involve the same set of factual circumstances. If Compaq had any claim to
reimbursement for funds expended in defense of the Thurmond action, it should have
raised it at that point.
We also conclude that Compaq had a full and fair opportunity to litigate its
claim in the recoupment action. In the disagreement over whether Compaq had to
repay those funds, it was required to present all alternative theories of recovery of
contested funds. It certainly could have raised the argument that it should not be
required to repay funds because even if those funds were not covered under
Thurmond, they were covered under LaPray. Compaq was in the best position to
recognize this avenue of recovery. It failed to do so, and the final judgment in St.
Paul's recoupment action therefore has a res judicata effect as to Compaq's claim for
double duty defense costs here.
Moreover, Compaq admitted in its briefing to the state court during the
Thurmond duty to defend litigation that the LaPray action was "essentially dormant"
-21-
from the time it was filed until after the federal court's dismissal of Thurmond in
March 2001. Compaq stated the both Thurmond and LaPray were brought by the
same class of plaintiffs and prosecuted by the same attorneys and that these plaintiffs
only began active litigation in LaPray after their federal Thurmond action was
dismissed. The record confirms Compaq's admission that LaPray was largely dormant
until after Thurmond was dismissed. Compaq's attempt to recast the costs incurred
in defending Thurmond as really LaPray costs appears to be a post hoc justification
for reimbursement of fees.
C.
Compaq also appeals the district court's ruling denying statutory damages under
Texas law. Compaq moved for statutory damages pursuant to the Texas Insurance
Code's Prompt Payment of Claims statute. See Tex. Ins. Code 542.051.061. The
Texas Prompt Payment statute provides deadlines for insurance companies to decide
whether to accept or reject claims from an insured. If liable for a claim under a policy,
an insurer which fails to comply with the prompt payment statute must pay the insured
eighteen percent of the amount of the claim plus attorney fees in addition to the
amount of the claim. 542.060. The statute is triggered by the filing of a "first-party
claim." 542.051. The district court denied Compaq's motion for statutory damages
on the ground that such damages were not available because the duty to defend is a
third party claim under Texas law rather than a first party claim. See St. Paul Fire and
Marine, CIV 03-5471, Doc. 190 (D. Minn. July 16, 2007).
Compaq contends that the district court erred in its conclusion. St. Paul argues
for the first time on appeal that Minnesota's choice of law rules required the district
court to apply Minnesota law rather than Texas law to the statutory damages claim.
Compaq argues that St. Paul should not be permitted to raise this argument for the first
time on appeal. It also contends that Minnesota's choice of law rules favors applying
Texas law.
10Minn. Stat. 549.09 is Minnesota's prejudgment interest statute, and post
judgment interest in a diversity case is governed by 28 U.S.C. 1961.
-22-
At the time the district court was considering whether an insured's claim for
defense costs under a liability policy is a first or third party claim, there was a split of
authority on that issue between lower Texas state court decisions and those of federal
courts. The Texas Supreme Court has since authoritatively resolved the issue, holding
that an insured's claim against its insurer for defense costs is a first party claim
"because the insured is the only party who will suffer the loss or benefit from the
claim." Lamar Homes, Inc. v. Mid-Continent Cas. Co., 242 S.W.3d 1, 17 (Tex. 2007).
The district court did not have the benefit of that decision, but we now follow the
Texas Supreme Court in holding that an insurer's breach of its duty to defend its
insured gives rise to statutory damages under the Texas prompt payment statute. See
id. at 20.
St. Paul asserts that even if a claim for statutory damages arising out of the
breach of the duty to defend is a first party claim, those damages are still not available
to Compaq because damages under the prompt payment statute are the equivalent of
pre and post judgment interest. It argues that because interest on judgments is a
procedural issue, Minnesota's choice of law rules dictate that Minnesota and federal
law apply rather than the Texas statute.10 Compaq suggests that St. Paul waived this
argument by not raising it below.
St. Paul responds that a single sentence in its district court brief on the statutory
damages issue preserves its argument on this point: "[u]nder Minn. Stat. 549.09,
which governs the award of prejudgment interest in this diversity case, the purpose of
prejudgment interest under [sic] is 'to compensate the plaintiff for the loss of use of
his money, and, by implication, to deprive the defendant of any [wrongful] gain.'" See
St. Paul Fire and Marine, CIV 03-5471, Doc. 182, at 4, quoting Burniece v. Illinois
Farmers Ins. Co., 398 N.W.2d 542, 544 (Minn. 1987). Taken in isolation this
-23-
sentence could be understood to preserve St. Paul's choice of law argument, as it now
contends. Context is key in determining if a party has preserved an issue for appeal,
however.
St. Paul's brief urged the district court that it would be unnecessarily punitive
to assess statutory damages under Texas law given that Compaq would be
compensated for the use of its money by receiving pre and postjudgment interest
under Minnesota and federal law. The sentence on which it relies in arguing that it
preserved its equivalency argument was offered in support of its position that recovery
of statutory damages would be punitive, not to suggest that the Texas statutory
damages provision should give way to Minnesota law. In the district court St. Paul
spent forty two pages arguing various legal theories as to why statutory damages
should not be assessed under the prompt payment statute. It never suggested that they
were unavailable because such damages are equivalent to pre and postjudgment
interest and that Minnesota and federal law should be applied instead of the Texas
statute. We conclude that St. Paul waived its choice of law argument by not raising
the issue before the district court. See Yankton Sioux Tribe, 2008 WL 2628931, at
*9 n.6 (argument not raised in the district court is waived).
In sum, the issue of statutory damages should be remanded to the district court
for calculation of the amount due Compaq. See 542.058, 542.060.
V.
We affirm the judgment of the district court with the exception that we reverse
its ruling denying Compaq statutory damages under Texas law. We remand that claim
for calculation of the amount due Compaq and for entry of an amended judgment
consistent with this opinion.
______________________________
 

 
 
 

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