Zurich American Insurance v. Watts Industries, Inc. , 466 F.3d 577 ( 2006 )

In the
United States Court of Appeals
For the Seventh Circuit
____________
No. 06-1415
ZURICH AMERICAN INSURANCE COMPANY,
Plaintiff-Appellee,
v.
WATTS INDUSTRIES, INCORPORATED,
Defendant-Appellant.
____________
Appeal from the United States District Court
for the Northern District of Illinois, Eastern Division.
No. 01 C 7673—Elaine E. Bucklo, Judge.
____________
ARGUED SEPTEMBER 15, 2006—DECIDED OCTOBER 20, 2006
____________
Before FLAUM, Chief Judge, and KANNE, and SYKES,
Circuit Judges.
KANNE, Circuit Judge. In a previous decision, we re-
manded this case to the district court “for clarification as to
which deductible agreements are subject to the arbitration
between Zurich and Watts.” Zurich Am. Ins. Co. v. Watts
Indus., Inc., 417 F.3d 682, 691 (7th Cir. 2005). On remand,
the district court found that there “are disputes under all
six deductible agreements. Arbitration may proceed under
all six deductible agreements and the arbitrator may
determine the effect of the California [state] court’s prior
judgment on the parties’ claims.” Zurich Am. Ins. Co. v.
2 No. 06-1415
Watts Indus., Inc., 415 F. Supp. 2d 887, 891 (N.D. Ill. 2006).
Watts argues in its present appeal that arbitration can
proceed on only two of the six one-year deductible agree-
ments because the preclusive effect of the underlying
California state court’s judgment limits the parties’ dispute
to those two years. We reject Watts’ argument and affirm
the district court.
I. HISTORY1
Watts is a manufacturer of valves and other waterworks
parts used in municipal water systems. Watts entered
into six one-year insurance contracts with Zurich. These six
one-year contracts covered Watts during the period of June
30, 1991 through June 30, 1997. The insurance contracts
were supported by six deductible agreements. The deduct-
ible agreements contained arbitration clauses while the
underlying insurance contracts did not.
In 1997 and 1998, Watts and the James Jones Company
were sued for fraud by third party municipalities in the
California state courts. Jones, a California company, had
been a wholly owned subsidiary of Watts from 1987 through
September 1996. The third party municipalities claimed
injuries allegedly caused by substandard parts sold by
Watts and Jones. In 2001, Watts sought to invoke the
insurance contracts with Zurich in light of the municipali-
ties’ lawsuits. Zurich refused Watts’s claims and in turn
Watts brought suit against Zurich in the California state
courts alleging breach of contract and bad faith. Zurich
responded with a demand for arbitration under the deduct-
1
The factual history in this case is set forth in greater detail in
Zurich Am. Ins. Co. v. Watts Indus., Inc., 417 F.3d 682 (7th Cir.
2005), and Zurich Am. Ins. Co. v. Superior Court for the State
of California, 326 F.3d 816 (7th Cir. 2003).
No. 06-1415 3
ible agreements against both Watts and Jones. Watts and
Jones refused to proceed to arbitration and Zurich brought
the present case in the Northern District of Illinois seeking
to compel arbitration. Zurich also sought an injunction from
the district court to stay the underlying California state
court proceeding between itself and Watts. The district
court granted a preliminary injunction staying a portion of
the California state court proceeding between Zurich and
Watts, Zurich Am. Ins. Co. v. Superior Court for the State
of California, 205 F. Supp. 2d 964 (N.D. Ill. 2002), but we
reversed the district court’s issuance of the preliminary
injunction. Zurich Am. Ins. Co. v. Superior Court for the
State of California, 326 F.3d 816 (7th Cir. 2003).
Parallel litigation ensued with the California state court
continuing its consideration of Watts’s breach of contract
and bad faith claims against Zurich and the district court
considering Zurich’s claim against Watts and Jones to
compel arbitration. The California state court concluded
that Zurich had breached its duties under the 1994-1995
and 1995-1996 insurance contracts and that decision
became final in 2004. Watts Indus., Inc. v. Zurich Am. Ins.
Co., 18 Cal. Rptr. 3d 61 (Cal. Ct. App. 2004). As for the
arbitration issue, we affirmed the district court’s decision
that Zurich could not compel Jones to proceed to arbitration
but that Zurich could compel Watts to proceed to arbitra-
tion. Zurich Am. Ins. Co. v. Watts Indus., Inc., 417 F.3d 682,
687-88 (7th Cir. 2005). However, we noted that Zurich and
Watts disagreed over which of the six one-year deductible
agreements were subject to arbitration. Watts argued that
arbitration could only be ordered under the 1994-1995 and
1995-1996 deductible agreements while Zurich countered
that arbitration could proceed under each of the six one-
year agreements. As the district court had not made a
finding on this issue, we remanded the case to the district
court to identify which of the six one-year deductible
agreements were subject to arbitration between Zurich and
4 No. 06-1415
Watts. On remand, the district court agreed with Zurich
holding that all six one-year deductible agreements are
subject to arbitration and the effect of the California state
court judgment was an issue reserved for the arbitrator.
II. ANALYSIS
“We review a district court’s decision, under the Federal
Arbitration Act (“FAA”), to compel parties to arbitrate their
disputes de novo [and] finding of facts for clear error.”
James v. McDonald’s Corp., 417 F.3d 672, 676 (7th Cir.
2005) (citing Fyrnetics (Hong Kong) Ltd. v. Quantum Group,
Inc., 293 F.3d 1023, 1027 (7th Cir. 2002)). The FAA is
Congress’s manifestation of a national policy favoring
arbitration and results in the placement of arbitration
agreements on equal footing with all other contracts.
Buckeye Check Cashing, Inc. v. Cardegna, 126 S. Ct. 1204,
1207 (2006) (citing 9 U.S.C. § 2). “Arbitration agreements
[are] enforceable to the same extent as other contracts, so
courts must enforce privately negotiated agreements to
arbitrate, like other contracts, in accordance with their
terms.” Hasbro, Inc. v. Catalyst USA, Inc., 367 F.3d 689,
692 (7th Cir. 2004) (quoting Volt Info. Scis., Inc. v. Stanford
Univ., 489 U.S. 468, 478 (1989); Sphere Drake Ins. Ltd. v.
All Am. Life Ins. Co., 307 F.3d 617, 620 (7th Cir. 2002)
(internal quotations omitted)).
“Whether or not [a] company [is] bound to arbitrate, as
well as what issues it must arbitrate, is a matter to be
determined by the court on the basis of the contract entered
into by the parties.” AT&T Tech., Inc. v. Commc’ns Workers
of Am., 475 U.S. 643, 649 (1986); see, e.g., Continental Cas.
Co. v. Am. Nat’l Ins. Co., 417 F.3d 727, 730 (7th Cir. 2005)
(“Whether the parties have agreed to arbitrate is a question
normally answered by the court rather than by an arbitra-
tor. The issue is governed by state law principles governing
contract formation.”) (citing First Options of Chicago, Inc.
No. 06-1415 5
v. Kaplan, 514 U.S. 938, 944 (1995); Reliance Ins. Co. v.
Raybestos Prods. Co., 382 F.3d 676, 678-79 (7th Cir. 2004)).
To compel arbitration, a party need only show: (1) an
agreement to arbitrate, (2) a dispute within the scope of the
arbitration agreement, and (3) a refusal by the opposing
party to proceed to arbitration. Zurich Am. Ins. Co. v. Watts
Indus., Inc., 417 F.3d 682, 690 (7th Cir. 2005) (citing Kiefer
Speciality Flooring, Inc. v. Tarkett, Inc., 174 F.3d 907, 909
(7th Cir. 1999)).
Both parties recognize that there is an otherwise valid
arbitration agreement within each of the six one-year
deductible agreements, that each arbitration clause broadly
covers all disputes arising under each deductible agree-
ment, and that Watts has refused to proceed to arbitration
on four of the six one-year deductible agreements. However,
Watts argues that the preclusive effect of the California
state court’s judgment effectively limits the parties’ dispute
to the 1994-1995 and 1995-1996 periods and therefore,
according to Watts, arbitration is only permissible on the
corresponding deductible agreements for those two years.
Conversely, Zurich, although recognizing the existence of
the California state court judgment, argues that determin-
ing the preclusive effect of the California state court
judgment is an issue for the arbitrator, not the court.
Zurich’s position is that the parties’ dispute covers all six
one-year deductible agreements and this dispute is suffi-
cient to require arbitration under all six one-year deductible
agreements. Thus, the dispute between Zurich and Watts
centers on whether the district court properly left the issue
of the preclusive effect of the California state court judg-
ment to the arbitrator. We conclude that the district court
properly left this issue to the arbitrator.
In determining a request to compel arbitration, the court’s
duty is to determine whether the parties’ grievance belongs
in arbitration, not rule on the potential merits of the
6 No. 06-1415
underlying dispute between the parties. AT&T Tech., Inc.,
475 U.S. at 649. “Procedural questions which grow out of
the dispute and bear on its final disposition are presump-
tively not for the judge, but for an arbitrator to decide. So,
too, the presumption is that the arbitrator should decide
allegations of waiver, delay, or a like defense to
arbitrability.” Howsam v. Dean Witter Reynolds, Inc., 537
U.S. 79, 84 (2002) (emphasis in original) (internal citations
and quotations omitted).
The preclusive effect of the California state court judg-
ment is a matter for the arbitrator to decide because Watts
wishes to use the preclusive effect of the California state
court judgment as a defense to Zurich’s attempt to compel
arbitration on all six one-year deductible agreements. The
district court was able to determine that there is a dispute
between the parties implicating the otherwise valid arbitra-
tion agreement contained in each of the six one-year
deductible agreements without having to progress to a
consideration of the preclusive effect of the California state
court judgment. See Stevens Const. Corp. v. Chicago Reg’l
Council of Carpenters, ___ F.3d ___, No. 05-4468, 2006 WL
2739317, at *4 (7th Cir. Sept. 19, 2006) (holding that it was
permissible for the court to look to the merits of the case
because the court’s consideration of the merits was neces-
sary to determine whether a valid arbitration agreement
existed between the parties); R.J. Corman Derailment
Servs., LLC v. Int’l Union of Operating Eng’rs, Local Union
150, AFL-CIO, 422 F.3d 522, 528 (7th Cir. 2005) (holding
that it was proper for the court to determine whether the
arbitration agreement expired in order to determine
whether a valid contract requiring arbitration existed
between the parties). As such, the district court properly
left the issue of the preclusive effect of the California state
court judgment to the arbitrator.
No. 06-1415 7
III. CONCLUSION
The decision of the district court is AFFIRMED.
A true Copy:
Teste:
________________________________
Clerk of the United States Court of
Appeals for the Seventh Circuit
USCA-02-C-0072—10-20-06