Northbrook Excess and Surplus Insurance Company v. Procter & Gamble Company, Procter & Gamble Manufacturing Company and Procter & Gamble Distributing Company, Defendants-Counterclaimants-Appellants v. Commercial Union Insurance Company and American Employers Insurance Company, Counterclaim

Citation: 924 F.2d 633Docket: 89-2506

Court: Court of Appeals for the Seventh Circuit; February 14, 1991; Federal Appellate Court

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The case involves Northbrook Excess and Surplus Insurance Company as the plaintiff and Procter & Gamble Company, along with its affiliates, as defendants and counterclaimants. The central issue is a dispute over the deductible amount in an insurance policy, with the jury determining it to be $10 million. The district court upheld this verdict and awarded costs to the insurance company as the prevailing party. Procter & Gamble appealed, and the appellate court affirmed the district court's judgment but remanded the issue of taxability of expenses related to the insurance company's computer data base for further proceedings.

The background details the origins of the dispute, which arose from Procter & Gamble's liability for legal fees and settlements related to over a thousand injury claims linked to Toxic Shock Syndrome from Rely tampons. Procter & Gamble had umbrella liability insurance policies from American Employers Insurance Company and Commercial Union Insurance Company covering product liability claims. These insurance policies required Procter & Gamble to defend itself and provided reimbursement for defense and settlement costs after the deductible was met. American issued two umbrella policies providing $50 million in coverage with $500,000 deductibles per occurrence and in aggregate for the periods 1972-1978, while Commercial provided a policy for 1978-1979 with $25 million coverage and a $1 million deductible, subject to a $10 million annual aggregate deductible.

P.G withdrew its Rely tampons from the market in September 1980 due to reports linking them to Toxic Shock Syndrome, recognizing a significant product liability issue. P.G sought reimbursement from insurance companies for defense and settlement costs related to the Rely/Toxic cases. Northbrook Excess and Surplus Insurance Company brought Commercial into the litigation, alleging it had issued umbrella liability policies to P.G from July 1979 to July 1981 and had paid some claims under a nonwaiver agreement. Northbrook claimed it was not liable for future reimbursements until lower-level coverages from Commercial were exhausted and sought indemnification from Commercial. P.G counterclaimed, asserting that all insurers had obligations to reimburse for product liability losses.

The dispute centered on the definition of "occurrence" within the insurance policies. P.G argued that claims were a single occurrence with a $1 million deductible, while Commercial contended they were multiple occurrences subject to a $10 million deductible. The jury found that the Rely/Toxic claims constituted multiple occurrences, resulting in a $10 million deductible. Consequently, the district court ordered Northbrook to reimburse P.G over $2 million for defense costs, while Commercial was ordered to reimburse $40,000 for one injury exceeding the $1 million deductible, and American was ordered to reimburse $5,500. Northbrook's complaint against Commercial was dismissed. P.G appealed the judgment in favor of Commercial.

The central issue on appeal is the calculation of P.G's deductible under the Commercial umbrella policy, governed by Ohio law due to jurisdiction based on diversity of citizenship. The district court found the policy terms ambiguous and appropriately submitted the issue of policy construction to the jury, as it is the jury's role to interpret ambiguous contract language. The jury determined the deductible and the number of occurrences, siding with Commercial. P.G acknowledges the submission of ambiguities to the jury but argues that the court erred by denying a proposed jury instruction that would require ambiguities to be construed in favor of the insured, based on the principle of contra proferentum. The district court rejected this instruction, stating that the Commercial policy was not a contract of adhesion and that the jury should focus on the parties' intended meanings. The court instructed the jury to determine the meaning of the contracts based on all evidence and circumstances. P.G can only contest the refusal of the instruction if it accurately states the law, and any decision to grant or deny jury instructions will not be reversed unless it misled the jury and seriously affected its understanding of the issues.

The district court's jury instructions were upheld, as the instruction proposed by P.G, while accurate in principle, did not apply to this case. In Ohio, ambiguous insurance contract terms are generally interpreted in favor of the insured, reflecting a need to protect them from insurers who draft these terms. However, this principle is not relevant here because P.G was a co-drafter of the Commercial policy, rather than just a passive participant. The court noted that the policy was customizable and tailored to P.G's specifications, indicating that they had significant input and sophistication in the drafting process. Therefore, applying the contra proferentum rule, which interprets ambiguities against the insurer, was inappropriate as it would disregard the parties' intent.

Regarding prejudgment interest, P.G sought reimbursement and requested that the jury decide on the interest award. However, the district court opted not to present this issue to the jury, delaying any decision on interest until after the jury's verdict, which confirmed a $10 million deductible under the Commercial policy. Subsequently, the court chose not to award prejudgment interest.

Prejudgment interest in diversity cases is determined by state law, specifically Ohio law, which allows for 10% per annum interest on amounts due under a written agreement. P.G claims that Ohio law assigns the jury the role of determining the applicability of this interest and argues that the amounts in question were ascertainable. However, under Ohio law, prejudgment interest is not mandatory and can be granted only if the liability is established and the amount owed is not contested or easily determined. 

The courts have established that if the amount owed is disputed, prejudgment interest may be denied. In this case, the court found that the amount owed by Commercial was unclear until the jury interpreted the insurance policy's terms, making the debt unascertainable. Thus, the district court's decision to deny prejudgment interest to P.G was deemed appropriate.

Regarding costs, after the jury verdict, P.G sought to recover costs under Federal Rule of Civil Procedure 54(d), claiming to be the prevailing party against Commercial. Commercial disputed this, asserting that it prevailed and was entitled to costs. The district court sided with Commercial, determining that the critical issue was whether the Rely/Toxic claims were a single or multiple occurrences and concluded Commercial prevailed on this significant point. P.G's appeal, arguing that it was the prevailing party because a judgment was entered in its favor, was subject to a deferential review standard, which would not overturn the district court's decision without evidence of discretion abuse.

The court, referencing Rule 54(d), established that the "prevailing party" is the one who succeeds on a substantial part of the litigation. In the case discussed, the key issue was whether the Rely/Toxic cases were considered a single occurrence or multiple occurrences under the Commercial policy, which affected the deductible amount. The jury concluded that the deductible was $10 million and that the cases were multiple occurrences, leading the court to agree with the district court's determination that P.G. did not prevail on a substantial part of the litigation, as the $45,500 recovered was minimal compared to the over $5 million in claims asserted.

Regarding costs awarded to Commercial, P.G. raised objections to Commercial's initial bill, which included expenses for trial-related materials and a database. The district court subsequently ordered an amended bill and awarded Commercial $97,463.16 in costs. P.G. contested the documentation and taxability of various expenses, including photocopying and database costs. The court emphasized that district courts have broad discretion under Rule 54(d) to determine and award reasonable costs, provided they are allowable and necessary. The court will not overturn such determinations unless there is clear abuse of discretion, affirming that costs under 28 U.S.C. § 1920 may include specific fees and expenses deemed necessary for the case.

The Supreme Court has established that section 1920 defines "costs" as referenced in Rule 54(d), as noted in Crawford Fitting Co. v. J.T. Gibbons, Inc. The court also clarified that it does not restrict courts from interpreting the terms within section 1920. The document addresses two challenged costs: 

1. **Photocopying Expenses**: P.G argues that the photocopying expenses presented by Commercial lacked adequate documentation. Specifically, P.G claims Commercial did not specify which documents were copied, the number of copies, or the cost per page. However, it was determined that Commercial was only required to provide the best records available rather than exhaustive detail. The district court found that the documentation submitted sufficed to confirm these copies were made for the case in the ordinary course of business. Although the total copying bill exceeded $50,000, the court deemed it reasonable given the lengthy litigation context. Unlike in Weihaupt, where findings were absent, the district court made specific findings supporting the costs, affirming its discretion to tax the photocopying expenses at $50,930.45.

2. **Rely Database**: P.G contests the award for the Rely database, claiming that a computerized litigation support system is not recoverable under section 1920. Alternatively, P.G contends that Commercial did not prove the necessity of the database. Commercial argues that the Rely database was not merely a support system but aimed to minimize document review time and related costs, which are recoverable as copying costs. The district court's remarks on this matter were limited, concluding only that the database served as a less expensive alternative for otherwise recoverable costs.

Expenditures for a computerized litigation support system, including a database, are not considered taxable costs under section 1920, as established in Chicago College of Osteopathic Medicine v. George A. Fuller Co. and E.E.O.C. v. Sears, Roebuck Co. Even if a database serves a function that could justify its inclusion as a taxable cost, such as reducing document review time and storage expenses, it does not automatically qualify as a recoverable expense. In a related case, the court disallowed expenses for microfilm used for similar purposes, determining they were unnecessary and primarily for convenience. The appellate court vacated the award for the database preparation costs and remanded for further findings.

Regarding costs for photos, graphs, and charts, the district court found these materials necessary for jury understanding given the trial's complexity. All parties, including P.G., utilized them, and the court deemed the expenses of $14,297.65 reasonable. The court affirmed the district court's judgment on this issue.

In conclusion, the appellate court affirmed the district court's rulings except for the database costs, which were vacated for further proceedings. A dissenting opinion supported the district court's judgment on the database costs, emphasizing that it was a factual finding which should stand due to its reasonableness in the context of the case.

The majority misapplies relevant case law regarding the recovery of reasonable costs under 28 U.S.C. Sec. 1920, which requires that costs be both listed in the statute and necessary for the litigation. The majority's cited cases focus solely on the necessity of costs without properly addressing the allowance of costs, as demonstrated in SK Hand Tool Corporation v. Dresser Industries. In contrast, the District Court found that the computerized document system was necessary and reduced total recoverable costs appropriately, contradicting the majority's claims. The reliance on Weihaupt v. American Medical Association is misplaced, as the District Court made clear findings on cost allowance, meeting the necessary standards for review. The concern over vacating the District Court's award, which amounts to $1,936.66, highlights the futility and expense of holding a further evidentiary hearing that is unlikely to yield meaningful results. The majority's actions may stem from a reluctance to embrace technological advancements in legal processes, potentially hindering efficiency and justice in an already overburdened court system. Penalizing parties for adopting innovative practices, such as computerized documents, does not align with the pursuit of just outcomes.

The dissenting opinion argues that the majority failed to demonstrate that the District Court abused its discretion in awarding costs for a document database. The dissent emphasizes that the cited case law is irrelevant, the financial stakes do not justify the majority's remand, and policy considerations discourage appellate courts from scrutinizing cost awards when parties utilize innovative, cost-effective methods for traditionally reimbursable tasks. Furthermore, the excerpt details Procter and Gamble's significant financial expenditures exceeding $80 million related to Rely/Toxic cases and describes the company's interpretation of an "occurrence" concerning the Rely product and Toxic Shock Syndrome. It also references case law emphasizing that insurance contracts must be construed in favor of the insured, particularly when the language is ambiguous or drafted by the insurer. However, this principle may not apply in cases involving large corporations or municipalities with equal bargaining power, where the intent of the parties should guide the interpretation of ambiguous terms.

A sophisticated insured, Johnson, cannot invoke the doctrine of contra proferentum because he negotiated the policy and its numerous addenda himself. The principle of contra proferentum applies when the insurer prepares the policy language; however, since Johnson contributed to the drafting, the policy should not be interpreted strictly against him. This is supported by a broker's acknowledgment of Johnson's involvement in negotiating the policy terms. Furthermore, Johnson's reliance on the Owens-Illinois case, which suggests that contra proferentum applies regardless of the insured's role in drafting, is incorrect as Ohio courts have rejected the "reasonable expectations" doctrine endorsed by that case. The litigation involved disputes over claim amounts submitted by Johnson's company to the insurer, with challenges regarding allocations and the need for adjustments on certain claims. Ultimately, the amount of claims owed under the policy was not clear until the trial court resolved ambiguities, indicating that the debt was not ascertainable from the contract language alone.

The trial revealed differing views between the parties regarding the debt amount, leading to the conclusion that the debt was unliquidated. In Texas State Teachers Association v. Garland Independent School District, the Supreme Court defined "prevailing party" for attorney's fees under 42 U.S.C. Sec. 1988, stating that a plaintiff can be considered prevailing if they succeed on any significant issue that achieves some of their objectives in the lawsuit. For a party to qualify as a prevailing party, there must be a resolution that alters the legal relationship with the defendant. P. G argued that its legal relationship with Commercial changed since Commercial had denied owing any money before the trial, yet it was determined that P. G's recovery was nominal compared to its claims, suggesting a lack of substantial success. The court emphasized that when awarding fees, the extent of success must be closely examined, especially when only partial claims succeed. Additionally, the court noted that while large photocopying costs from extensive litigation may be recoverable, there is no authority for recovery of storage costs under 28 U.S.C. Sec. 1920, unlike in government seizure cases covered by 28 U.S.C. Sec. 1921. The dissenting opinion does not suggest that the district court abused its discretion in awarding costs.

Sufficient information is necessary for a meaningful review under the abuse of discretion standard, indicating that appellate review is still applicable. The court emphasizes that its refusal to accept "rough justice" is based on respect for congressional mandates found in 28 U.S.C. Sec. 1920, rather than a fear of technology. Innovative applications of this statutory mandate require detailed justification, distinguishing them from conventional interpretations. The dissent's reference to S.K. Hand Tool Corp. v. Dresser Industries is deemed irrelevant, as the Dresser decision involved permissible costs for deposition transcripts, unlike the disputed database costs. Additionally, the court refers to a previous ruling questioning whether expert-witness fees can be awarded as costs based solely on necessity, asserting that necessity alone does not justify cost awards, while clarifying that using a computer system to reduce costs does not present legal issues.