Carolina Casualty Insurance Co v. Merge Healthcare Solutions, In , 728 F.3d 615 ( 2013 )

In the
United States Court of Appeals
For the Seventh Circuit
Nos. 12-2275 & 12-2341
C AROLINA C ASUALTY INSURANCE C OMPANY,
Plaintiff-Appellant,
Cross-Appellee,
v.
M ERGE H EALTHCARE S OLUTIONS INC.,
Defendant-Appellee,
Cross-Appellant.
Appeals from the United States District Court
for the Northern District of Illinois, Eastern Division.
No. 11 C 3844—Suzanne B. Conlon, Judge.
A RGUED O CTOBER 26, 2012—D ECIDED JULY 16, 2013
Before E ASTERBROOK, Chief Judge, and C UDAHY and
T INDER, Circuit Judges.
E ASTERBROOK, Chief Judge. Amicas, Inc., agreed to
merge with Thoma Bravo, LLC, in a transaction that
valued each Amicas share at $5.35. Some of its share-
holders sued in a state court of Massachusetts, contesting
2 Nos. 12-2275 & 12-2341
the adequacy of the proxy statement used to seek
their approval for the transaction. After a preliminary
injunction stopped the vote on the merger, the suit was
settled when Merge Healthcare, Inc., made a tender
offer of $6.05 a share, which Amicas’s board recom-
mended that investors accept. Amicas’s shareholders
gained $26 million.
The lawyers who filed the suit sought attorneys’ fees
based on the difference between the two suitors’ bids.
Carolina Casualty Insurance had issued a policy covering
as part of the insured “loss” not only what Amicas and
its directors pay their own lawyers in litigation but also
what Amicas must pay to its adversaries’ lawyers.
The state court awarded plaintiffs’ counsel $3,150,000,
derived from a lodestar of $630,000 (1,400 hours at $450
per hour) times five. The multiplier represented an ad-
justment for both the risk of nonpayment and what
the judge called “an exceptionally favorable result for
Amicas’ shareholders.” In re Amicas, Inc. Shareholder
Litigation, 2010 Mass. Super. L EXIS 325 at *10 (Mass.
Super. Dec. 6, 2010).
Amicas appealed to the Massachusetts Appeals Court,
contending that the award is excessive. (By then Amicas
had been renamed Merge Healthcare Solutions Inc.; to
simplify this opinion we call it Amicas consistently.)
Carolina Casualty contends in this suit under the
diversity jurisdiction that its policy’s coverage is limited
to the $630,000 lodestar. The district judge held other-
wise, however, and concluded that Carolina Casualty
owes the entire $3.150 million, plus whatever Amicas
Nos. 12-2275 & 12-2341 3
paid its own lawyers—though the court rejected
Amicas’s demand for damages on the theory that
Carolina Casualty had displayed bad faith or vexatiously
failed to pay. 2012 U.S. Dist. L EXIS 4772 (N.D. Ill. Jan. 13,
2012) (coverage and bad-faith rulings); 2012 U.S. Dist.
L EXIS 60765 (N.D. Ill. Apr. 30, 2012) (vexatious-failure
ruling). Both sides have appealed.
After the appeals were argued in this court, the
Massachusetts appeal on the fees issue was settled.
Carolina Casualty paid the plaintiffs’ lawyers in the
proxy suit a sum that cannot be affected by the results
of the federal litigation. But that does not make our case
moot, because Amicas seeks to recover its own litiga-
tion expenses (in the state appeal and in these federal
proceedings), which are “loss” under the policy, plus
damages.
Carolina Casualty invokes this exclusion in its policy:
“Loss shall not include civil or criminal fines or penalties
imposed by law, punitive or exemplary damages, the
multiplied portion of multiplied damages, taxes, any
amount for which the Insureds are not financially liable
or which are without legal recourse to the Insureds, or
matters which may be deemed uninsurable under
the law pursuant to which this Policy shall be con-
strued.” It believes that the phrase “multiplied portion of
multiplied damages” applies to the state judge’s use
of a multiplier in calculating attorneys’ fees. Carolina
Casualty concedes that $630,000, the lodestar, counts as
“loss” under the policy but maintains that the remaining
$2.52 million is the “multiplied portion of multiplied
4 Nos. 12-2275 & 12-2341
damages”. The parties do not contest the district judge’s
conclusion that Illinois law controls—a conclusion in-
fluenced by the district judge’s belief that Illinois and
Massachusetts law are identical with respect to the
issues at stake.
The state judge used a multiplier, but an award of
attorneys’ fees differs from “damages.” The underlying
litigation rested in part on Massachusetts securities
law and in part on §14 of the Securities Exchange Act of
1934, 15 U.S.C. §78n. Neither Massachusetts nor federal
securities law defines attorneys’ fees as damages; in
both state and federal systems fees (when shifted at all)
are treated as part of costs. That’s why awards are
appealable separately from the merits. See Budinich v.
Becton Dickinson & Co., 486 U.S. 196 (1988). That’s also
why fees for time spent after a suit begins do not count
toward the amount in controversy required for suits
under the diversity jurisdiction. See Gardynski-Leschuck
v. Ford Motor Co., 142 F.3d 955 (7th Cir. 1998). An
insurance policy could give “damages” a more compre-
hensive meaning. Some policies define “damages” broadly.
See, e.g., Outboard Marine Corp. v. Liberty Mutual Insurance
Co., 154 Ill. 2d 90, 117 (1992) (expense of complying with
an injunction treated as damages). But nothing in
Carolina Casualty’s policy defines the word “damages”
broadly enough to include attorneys’ fees. Indeed, the
very clause on which Carolina Casualty relies uses “loss”
and “damages” as distinct concepts.
An insurer might omit a definition of “damages” if state
insurance law supplied one automatically. We therefore
Nos. 12-2275 & 12-2341 5
looked for state decisions asking whether the phrase
“multiplied portion of multiplied damages” in insurance
policies includes attorneys’ fees. We could not find a
single decision from a court of any state, or for that
matter any federal court. The few decisions, state or
federal, that do interpret this phrase arise from disputes
about the coverage of treble damages under antitrust
or antifraud legislation. Courts unsurprisingly say that
the policies cover single damages but not the sum after
trebling. See, e.g., Foster v. D.B.S. Collection Agency, 2008
U.S. Dist. L EXIS 22264 (S.D. Ohio Mar. 20, 2008).
The context of the phrase “multiplied portion of multi-
plied damages” tells us that treble damages and the
like are the target. Here is the full exclusion again: “Loss
shall not include civil or criminal fines or penalties im-
posed by law, punitive or exemplary damages, the multi-
plied portion of multiplied damages, taxes, any amount
for which the Insureds are not financially liable or
which are without legal recourse to the Insureds, or
matters which may be deemed uninsurable under the
law pursuant to which this Policy shall be construed.”
This list, which includes punitive damages and criminal
penalties, covers a category of losses that insurers
regularly exclude to curtail moral hazard—the fact that
insurance induces the insured to take extra risks. The
insured hopes to profit from risky conduct and to shift
to the insurer any loss if the risk comes to pass. Moral
hazard drives up the cost of insurance and can make
some kinds of coverage unavailable, because a price
high enough to make the policy profitable would lead
6 Nos. 12-2275 & 12-2341
potential clients that plan to operate safely to shun
the coverage.
Adversaries’ attorneys’ fees in commercial litigation
are not remotely like punitive damages, trebled damages,
or criminal fines and penalties. A multiplier of hourly
rates provides compensation for the attorney’s risk.
That does not entail moral hazard, which is risk-taking
by the insured, induced by the insurance. A risk adjust-
ment for legal fees, by contrast, makes up for the fact
that in other suits defendants will prevail and lawyers
will get nothing.
Plaintiffs’ lawyers in the proxy litigation asked the
state court to set their compensation as a percentage of
the investors’ gains. This is often done in suits that gener-
ate a fund. The plaintiff in a tort suit may agree to pay
counsel a third of any recovery. This fee often
substantially exceeds the lawyer’s hourly rate times the
number of hours expended, and over the run of many
cases it must do so to make up for the times counsel
will sue, lose, and go unpaid. But we doubt that Carolina
Casualty would call a contingent fee calculated at a
third of the plaintiff’s recovery the “multiplied portion
of multiplied damages”.
The proposal in this suit was 19% of the $26 million
benefit, or $4,940,000. The state judge thought this ex-
cessive. The judge could have reached $3,150,000 by
reckoning it as 12.11% of the shareholders’ gain, and we
assume that Carolina Casualty then would not be
relying on the exclusion. Why should it matter that the
judge got to the final award using the lodestar method
Nos. 12-2275 & 12-2341 7
rather than the percentage-of-benefit method? Carolina
Casualty does not have a good answer. It would not be
helpful, as Carolina Casualty favored in the district
court, to obtain expert opinion about custom and
usage in the industry; there isn’t any relevant custom
in classifying fee awards under a policy written like
this one.
Now to the cross-appeal. Amicas contends that
Carolina Casualty acted in bad faith by contending that
its policy covers only 20% of the award. But the insurer
did just what Illinois prefers: it filed a declaratory-judg-
ment action to resolve the meaning of the policy. It also
paid Amicas’s costs of separate counsel, though under
a reservation of rights. Amicas observes that, before
the state judge acted, Carolina Casualty promised to
indemnify Amicas for any fees awarded to plaintiffs’
counsel. Reneging on that promise is evidence of bad
faith, Amicas insists. Yet the insurer did not renege; the
letter referred to the policy as a potential source of limita-
tion. Until the state judge issued his opinion, Carolina
Casualty could not know that the court would use a
multiplied-lodestar method that at least arguably
activated the policy’s exclusion. The insurer be-
haved responsibly after the state judge replaced
counsel’s preference (an award based on a percentage
of the gain) with the court’s own (the lodestar with multi-
plier). Amicas contends that Carolina Casualty could
be liable for negotiating to settle with the plaintiffs’
lawyers in the Massachusetts case while arguing that
Amicas would have to pay 80%, but that possibility
8 Nos. 12-2275 & 12-2341
evaporated when the final settlement provided that all
of the money would come from Carolina Casualty.
A FFIRMED
7-16-13