Strategic Outsourcing, Inc. v. Continental Casualty Co.

UNPUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
No. 07-1237
STRATEGIC OUTSOURCING, INCORPORATED,
Plaintiff - Appellee,
v.
CONTINENTAL CASUALTY COMPANY,
Defendant - Appellant.
No. 07-1279
STRATEGIC OUTSOURCING, INCORPORATED,
Plaintiff - Appellant,
v.
CONTINENTAL CASUALTY COMPANY,
Defendant - Appellee.
Appeals from the United States District Court for the Western
District of North Carolina, at Charlotte. Robert J. Conrad, Jr.,
Chief District Judge. (3:02-cv-00540)
Argued: March 19, 2008 Decided: April 16, 2008
Before Sandra Day O’CONNOR, Associate Justice (Retired), Supreme
Court of the United States, sitting by designation, and MOTZ and
SHEDD, Circuit Judges.
Affirmed in part, reversed in part, and remanded by unpublished per
curiam opinion.
ARGUED: Lynn H. Murray, GRIPPO & ELDEN, Chicago, Illinois, for
Continental Casualty Company. Edmund M. Kneisel, KILPATRICK &
STOCKTON, L.L.P., Atlanta, Georgia, for Strategic Outsourcing,
Incorporated. ON BRIEF: Gary M. Elden, Patrick T. Nash, Donald P.
Bunnin, GRIPPO & ELDEN, Chicago, Illinois; Douglas Marshall
Jarrell, ROBINSON, BRADSHAW & HINSON, P.A., Charlotte, North
Carolina, for Continental Casualty Company. Adam H. Charnes,
Elliot A. Fus, KILPATRICK & STOCKTON, L.L.P., Winston-Salem, North
Carolina, for Strategic Outsourcing, Incorporated.
Unpublished opinions are not binding precedent in this circuit.
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PER CURIAM:
Continental Casualty Company (CNA) and Strategic Outsourcing,
Inc. (SOI) entered into a contract under which CNA agreed to
provide SOI with workers’ compensation insurance for three years at
a specified rate. Prior to the third year, CNA attempted to
increase the rate on SOI’s policy; the parties disagreed as to
whether a certain clause in the contract permitted CNA to do so.
Unable to resolve this disagreement, the parties terminated their
relationship. SOI eventually brought this diversity action,
involving North Carolina substantive law, against CNA asserting
breach of contract, a common law “insurance bad faith” claim, and
violation of a state statute; CNA counterclaimed for unpaid
premiums. A jury awarded SOI over $10 million on its breach of
contract claim, and awarded CNA approximately $750,000 on its claim
for unpaid premiums. CNA appeals and SOI cross-appeals, each
raising numerous issues. Because the contract limited SOI’s
damages to those incurred during the ninety days after cancellation
of the contract, we must reverse and remand for the district court
to reduce the judgment accordingly. In all other respects, we
affirm.
I.
In March of 1998, CNA and SOI entered into a contract,
memorialized in a “confirmation letter,” under which CNA agreed to
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provide SOI with workers’ compensation insurance for three years at
a rate of $3.40 per $100 of payroll. The contract included a
clause allowing CNA to re-evaluate the $3.40 rate if “additional
exposures, premiums anticipated[,] and prior losses” represented
“significant changes from what has been contemplated herein” (the
“re-rating clause”). The contract also included a cancellation
clause, under which either party could terminate the agreement with
ninety days’ notice.
For almost two years, the parties performed under the contract
without dispute. During this time, SOI’s payroll more than doubled
and the company expanded into a number of new cities. Prior to the
third year, CNA advised SOI by letter dated October 26, 1999, that
it planned to invoke the re-rating clause. After further
discussions, and over SOI’s objection, CNA confirmed by letter
dated December 7 that it planned to raise SOI’s $3.40 rate for the
2000 calendar year; on December 28, CNA sent SOI a proposal for a
new policy at an increased rate. SOI did not accept this proposal.
The parties then attempted to agree upon a policy at an increased
rate and arranged for SOI’s coverage to continue for the month of
January at the old $3.40 rate while negotiations proceeded. The
parties failed to reach a new agreement, and CNA advised SOI by
letter dated February 14, 2000, that SOI’s coverage had expired as
of January 31, 2000, and that CNA would notify the appropriate
state agencies that SOI had discontinued its coverage.
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The parties then negotiated an “Extension Agreement,” in which
CNA agreed to provide SOI with insurance until February 29, 2000,
at the $3.40 rate. SOI obtained a replacement policy from a
different carrier for the remaining ten months of the 2000 calendar
year, at a total additional cost of almost $8 million.
SOI then brought the instant action, claiming that CNA
breached the original contract by refusing to renew its policy at
the $3.40 rate and seeking in damages the additional cost of its
replacement policy plus interest. SOI also asserted an “insurance
bad faith” claim and a claim under the North Carolina Unfair and
Deceptive Trade Practices Act (UDTPA). CNA filed a counterclaim
for unpaid premiums plus interest.
On the parties’ cross-motions for summary judgment, the
district court granted summary judgment to SOI on CNA’s statute of
limitations and modification defenses; CNA appeals these rulings.
The court also granted summary judgment to CNA on SOI’s UDTPA and
“insurance bad faith” claims; SOI appeals these rulings. During
trial, the district court ruled, as a matter of law, that SOI’s
damages were not limited to those incurred during the ninety day
notice period in the cancellation clause; CNA appeals this ruling.
After a six-day trial, the jury found for SOI on its breach of
contract claim, awarding over $10 million in damages and interest;
the jury found for CNA on its claim for unpaid premiums, awarding
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approximately $750,000 in damages and interest. We first address
CNA’s appeal, and then turn to SOI’s cross-appeal.
II.
A.
CNA initially contends that the district court erred in
denying its Rule 50(b) motion on the question of breach of
contract. We review the district court’s denial of a Rule 50(b)
motion de novo. See Adkins v. Crown Auto, Inc., 488 F.3d 225, 231
(4th Cir. 2007).
The re-rating clause provides that CNA may re-evaluate the
policy rate if, “in [CNA’s] opinion,” “additional exposures,
premiums anticipated[,] and prior losses” all represent
“significant changes from what has been contemplated herein.” CNA
argues that it did not breach the contract by refusing to renew
SOI’s policy at the $3.40 rate because the re-rating clause
permitted CNA to raise the rate on SOI’s policy. After
deliberation, the jury returned a verdict for SOI on this claim.
CNA maintains that insufficient evidence supports this
verdict. CNA contends that “exposures,” as used in the re-rating
clause, refers only to the amount of payroll insured under the
policy as a matter of law, and that SOI’s payroll indisputably
increased significantly. CNA argues that the evidence indisputably
shows that “premiums anticipated” and “prior losses” changed
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significantly as well. CNA thus contends that all three conditions
in the re-rating clause were met, and that therefore it was
entitled to re-evaluate the policy rate.
The district court correctly found that SOI offered evidence
at trial from which the jury could conclude that CNA did breach the
contract. Specifically, SOI introduced evidence that “exposures”
refers not just to the amount of payroll, as CNA asserted, but also
to the risk associated with that payroll. SOI also offered
evidence that the risk associated with SOI’s payroll did not
increase. On the basis of this evidence, the jury could conclude
that “exposures” did not change significantly and that therefore
CNA breached the contract when it attempted to raise the rate on
SOI’s policy.
B.
CNA also appeals the district court’s grant of summary
judgment to SOI on CNA’s statute of limitations and modification
defenses. We review the district court’s grant of summary judgment
de novo, viewing the facts in the light most favorable to the
nonmoving party -- with respect to this argument, CNA. See Meson
v. GATX Tech. Servs. Corp., 507 F.3d 803, 806 (4th Cir. 2007).
Under North Carolina law, a plaintiff must bring an action for
breach of contract within three years of the date of the breach.
N.C. Gen. Stat. § 1-52(1) (2007); see also Penley v. Penley, 332
S.E.2d 51, 62 (N.C. 1985). SOI filed its complaint in this case on
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December 27, 2002. CNA argues that the statute of limitations bars
SOI’s suit because if CNA breached the contract, it did so no later
than December 7, 1999, when it definitively told SOI that it
planned to raise the rate on SOI’s policy for the 2000 calendar
year. SOI contends that CNA did not breach the contract until its
letter dated February 14, 2000, which advised that SOI’s coverage
had expired and that CNA would notify the appropriate state
agencies accordingly.
North Carolina courts have recognized that a repudiation, or
anticipatory breach, constitutes an actual breach of contract that
triggers the statute of limitations if the injured party treats the
repudiation as a breach. See Vreede v. Koch, 380 S.E.2d 615, 617-
18 (N.C. Ct. App. 1989); Cook v. Lawson, 164 S.E.2d 29, 32 (N.C.
Ct. App. 1968). The district court properly concluded that SOI did
not treat CNA’s December 7 letter as a breach, and so the statute
of limitations did not begin to run until CNA’s February 14 letter
cancelling coverage. SOI therefore timely filed suit.
CNA next argues that the Extension Agreement modified the
original contract, and so CNA did not breach the contract because
it abided by all of the terms of the Extension Agreement. “A
modification to a contract occurs if there is mutual assent to the
terms of the modification and consideration for the contract.”
Lewis v. Edwards, 554 S.E.2d 17, 23 (N.C. Ct. App. 2001). The
district court properly found that the Extension Agreement did not
8
reflect a mutual agreement that SOI would waive its rights to sue
under the original contract because, while the Agreement expressly
includes a waiver of CNA’s right to otherwise applicable penalties,
it does not include a waiver of SOI’s right to sue.
C.
Finally, we turn to CNA’s contention that the district court
erred as a matter of law in refusing to limit SOI’s damages to
those incurred during the notice period following cancellation.
1.
The contract between CNA and SOI provides that all policies
would be subject to a “90 day cancellation provision (except 10-day
if for non-payment).” The policy itself provides that “[CNA] may
cancel this policy. If [CNA] cancel[s] because [SOI] fail[s] to
pay all premium when due, [CNA] will mail or deliver to [SOI] not
less than 10 days advance written notice stating when the
cancellation is to take effect. If [CNA] cancel[s] for any other
reason, [CNA] will mail or deliver to [SOI] not less than 90 days
advance written notice stating when the cancellation is to take
effect.”
Prior to trial, CNA argued that SOI’s damages should be
limited to those incurred within ninety days of the alleged breach
of contract because the cancellation clause allowed either party to
cancel with ninety days’ notice. During trial, the district court
ruled, as a matter of law, that SOI’s damages were not limited by
9
the cancellation clause and so SOI could seek damages incurred
during the full ten months that would have been covered by the
original contract. CNA renewed this argument in its Rule 50(b)
motion and the district court again rejected it. We review the
district court’s ruling on this question of law de novo. See
Anderson v. Sara Lee Corp., 508 F.3d 181, 191 (4th Cir. 2007).*
Under North Carolina law, every contract includes “‘an implied
covenant of good faith and fair dealing that neither party will do
anything which injures the right of the other to receive the
benefits of the agreement.’” Governors Club, Inc. v. Governors
Club Ltd. P’ship, 567 S.E.2d 781, 789 (N.C. Ct. App. 2002) (quoting
Bicycle Transit Auth. v. Bell, 333 S.E.2d 299, 305 (N.C. 1985)).
When a contract confers discretion on one of the parties that
affects the rights of the other, that discretion “‘must be
*
SOI argues that CNA has waived its damages limitation
“affirmative defense” because it failed to “plead the defense” in
its answer. See Fed. R. Civ. P. 8. Even assuming that the
limitation of damages is an affirmative defense subject to the
pleading requirements of Rule 8, this issue is not waived. CNA
first asserted that SOI’s damages should be limited to those
incurred during the ninety day notice period in its Statement of
Disputed Issues for Trial and Trial Brief. The court heard
argument on this question at the pretrial conference and SOI
explicitly stated that it had “no objection to these issues” being
resolved. The court invited further briefing and the parties
submitted supplemental briefs on the first day of trial. The
court then ruled from the bench that SOI’s damages were not limited
by the notice period in the cancellation clause. This issue was
therefore tried by the parties’ implied consent, and we treat it
“in all respects as if raised in the pleadings.” See People for
Ethical Treatment of Animals v. Doughney, 263 F.3d 359, 367 (4th
Cir. 2001) (relying on Fed. R. Civ. P. 15(b)).
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exercised in a reasonable manner based upon good faith and fair
play.’” See Dysart v. Cummings, 640 S.E.2d 832, 836 (N.C. Ct. App.
2007) (quoting Mezzanotte v. Freeland, 200 S.E.2d 410, 414 (N.C.
Ct. App. 1973)). SOI contends that the duty of good faith applies
to CNA’s exercise of discretion to cancel the contract. According
to SOI, because CNA could not have cancelled without breaching the
duty of good faith, SOI’s damages should not be limited to those
incurred during the notice period.
As an initial matter, it is not at all clear that the North
Carolina courts would find that the duty of good faith and
objective reasonableness applies to the cancellation provision at
issue here. Certainly the duty of good faith limits the exercise
of discretion when a contract grants a power to terminate only upon
the occurrence or non-occurrence of a specific event or condition.
See Dysart, 640 S.E.2d at 836; Mezzanotte, 200 S.E.2d at 414. But
North Carolina courts have declined to decide whether a contract
that requires notice of cancellation, but imposes “no additional
restrictions upon the rights of either party to terminate the
agreement,” carries “an implied good faith limitation upon [the
parties’] rights to terminate at will.” Dull v. Mut. of Omaha Ins.
Co., 354 S.E.2d 752, 757 (N.C. Ct. App. 1987). Here the
cancellation provision does not require cause, nor does it make the
parties’ right to cancel depend on any contingency; it only
requires ninety days’ notice for either party to cancel. Therefore
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the clause may not include any implied limitation on the parties’
power to terminate their relationship.
We need not speculate as to how the North Carolina courts
would resolve this open question, however, because even if the duty
of good faith does apply here, CNA could invoke the clause without
breaching this duty. Nothing in this record even suggests that CNA
chose to terminate its relationship with SOI “with the intent to
wrongfully deprive [SOI] of . . . benefits to which [it was]
entitled or for any other wrongful or unconscionable purpose.”
Dull, 354 S.E.2d at 757; see also Claggett v. Wake Forest Univ.,
486 S.E.2d 443, 447-48 (N.C. Ct. App. 1997) (declining to find
breach of the duty of good faith and fair dealing when party’s
discretionary decision was “rational”). Unquestionably, CNA had
lost a substantial amount of money under the contract with SOI and
this loss constituted the reason that CNA wanted to terminate the
contract if negotiation of a more profitable rate was impossible.
Such a motive is neither wrongful nor unconscionable; indeed, North
Carolina courts have specifically held that a party’s desire to
avoid financial losses constitutes reasonable grounds for declining
to perform otherwise applicable contractual obligations. See,
e.g., Jones v. Andy Griffith Prods., Inc., 241 S.E.2d 140 (N.C. Ct.
App. 1978). Therefore, even if an implied duty of good faith
limited the parties’ exercise of their cancellation rights under
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the contract, CNA could invoke the cancellation clause without
breaching this duty.
Because CNA was entitled to terminate the contract under the
cancellation clause, SOI’s damages should have been limited to
those incurred during the ninety-day notice period. See Bloch v.
Paul Revere Life Ins. Co., 547 S.E.2d 51, 58-59 (N.C. Ct. App.
2001). As discussed above, CNA did not breach the contract until
its letter cancelling coverage, dated February 14, 2000. SOI’s
damages are therefore limited to those incurred within ninety days
after February 14, 2000.
2.
The district court held to the contrary for three reasons. We
find none of them persuasive.
First, relying on Chevrolet Motor Co. v. Gladding, 42 F.2d 440(4th Cir. 1930), the court found that the cancellation clause did
not limit SOI’s damages because CNA had not invoked that clause as
its reason for terminating the agreement. SOI argues that the
“mend the hold” doctrine also compels this result. The “mend the
hold” doctrine is “an equitable doctrine that precludes the
assertion of inconsistent litigation positions, usually concerning
the meaning of a contract, within the context of a single lawsuit.”
Whitacre P’ship v. Biosignia, Inc., 591 S.E.2d 870, 886 (N.C.
2004). Gladding applied a similar rule, holding that “one who
breaches his contract for reasons specified at the time will not be
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permitted afterwards, when sued for damages, to set up other and
different defenses.” 42 F.2d at 445 (internal quotation marks and
citations omitted). Unlike Gladding and cases applying the “mend
the hold” doctrine, however, CNA’s argument that damages should be
limited to the notice period does not present an inconsistent
position taken during, or in preparation for, litigation because
the cancellation provision did not require specific cause.
Therefore, both Gladding and the “mend the hold” doctrine are
inapposite here.
Second, the district court held that the jury’s conclusion --
that CNA’s decision to raise the rate on SOI’s policy was not
objectively reasonable -- “necessarily foreclosed” a finding that
CNA could invoke the cancellation clause without breaching the
implied duty of good faith. As discussed above, the re-rating
clause provides that CNA may re-evaluate the policy rate if “[1]
additional exposures, [2] premiums anticipated[,] and [3] prior
losses” all changed significantly, and SOI introduced evidence at
trial that “exposures” had not changed. While all three of these
conditions must be met in order to invoke the re-rating clause, the
cancellation clause does not require that any of these conditions
be met. The jury’s conclusion that CNA did not have an objectively
reasonable, good faith belief that all three specific conditions in
the re-rating clause were met thus does not foreclose the holding
that CNA had reasonable grounds to invoke the cancellation clause.
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Therefore the jury’s verdict with respect to the re-rating clause
does not foreclose CNA’s invocation of the cancellation clause.
Finally, the district court concluded that North Carolina
cases limit damages to the notice period only in at-will employment
contracts and other contracts of indefinite duration, and permit
recovery of all damages incurred during the entire contract in
contracts of fixed duration. But no North Carolina case so holds.
Rather, North Carolina law merely holds that an injured party to a
contract of fixed duration may recover damages incurred during the
entire contract period when one party prematurely terminates the
contract if it does not include a cancellation provision. See
Bloch, 547 S.E.2d at 237-38 (citing Lowery v. Love, 378 S.E.2d 815(N.C. Ct. App. 1989)). North Carolina courts have explained that
this follows from the general rule that the non-breaching party’s
reasonable “expectation interest” defines the scope of recoverable
damages. See id. (citing Restatement (Second) of Contracts §
344(a) cmt. a (1979)). Thus, when a contract does provide a right
to cancel with notice the parties must reasonably expect that this
right might be exercised, regardless of whether the contract is for
a fixed term or of indefinite duration.
In sum, contrary to the conclusion of the district court,
SOI’s damages should have been limited to those incurred during the
ninety-day notice period.
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III.
A.
In its cross-appeal, SOI contends that the district court
erred in denying its motion for a new trial or remittitur on CNA’s
claim for unpaid premiums. We review the district court’s denial
of a motion for a new trial or remittitur for abuse of discretion.
See F.D.I.C. v. Bakkebo, 506 F.3d 286, 294 (4th Cir. 2007).
CNA based its counterclaim for unpaid premiums, in part, on a
minimum payroll provision that allegedly applied to the 1999 policy
year. SOI argues that it is entitled to a new trial because the
weight of the evidence shows that the parties never actually agreed
to the minimum payroll provision. The district court did not abuse
its discretion in declining to disturb the jury’s conclusion that
SOI did in fact agree to this term. The district court also
properly found that the minimum payroll provision only applied to
the $3.40 rate program and that therefore any alleged
miscalculation of premiums that SOI owed under other programs did
not affect the jury’s award.
B.
In addition to its breach of contract claim, SOI brought a
claim under the North Carolina Unfair and Deceptive Trade Practices
Act, N.C. Gen. Stat. § 75-1.1 (2007) (UDTPA) and a common law
“insurance bad faith” claim, for which it sought punitive damages.
CNA moved for summary judgment on these claims, and the district
16
court granted the motion. We again review the district court’s
grant of summary judgment de novo, with respect to this argument
viewing the facts in the light most favorable to SOI. See Meson,
507 F.3d at 806.
The North Carolina UDTPA makes unlawful unfair or deceptive
acts affecting commerce. See N.C. Gen. Stat. § 75-1.1. A mere
breach of contract does not constitute an unfair or deceptive act,
but additional aggravating factors -- like fraudulent or deceptive
conduct, or conduct that amounts to an inequitable assertion of
power -- can trigger the Act. See Mosley & Mosley Builders, Inc.
v. Landin Ltd., 389 S.E.2d 576, 579-80 (N.C. Ct. App. 1990). North
Carolina courts have held that a plaintiff may not recover punitive
damages absent similar aggravating factors; punitive damages are
appropriate only in “breach of contract actions that smack of tort
because of the fraud and deceit involved.” Oestreicher v. Am. Nat.
Stores, Inc., 225 S.E.2d 797, 809 (N.C. 1976). The district court
correctly found, as a matter of law, that SOI’s UDTPA and
“insurance bad faith” claims fail because no reasonable jury could
conclude that CNA’s conduct included sufficient aggravating
behavior.
IV.
To summarize, we hold that the district court should have
limited SOI’s damages to those incurred during the ninety day
17
notice period in the cancellation clause, and we reverse and remand
with instructions for the district court to reduce the judgment
accordingly. Otherwise we affirm. The judgment of the district
court is therefore
AFFIRMED IN PART,
REVERSED IN PART,
AND REMANDED.
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