F I L E D
United States Court of Appeals
Tenth Circuit
PUBLISH
July 6, 2006
UNITED STATES CO URT O F APPEALS Elisabeth A. Shumaker
Clerk of Court
TENTH CIRCUIT
LEPRIN O FOODS COM PANY,
Plaintiff - Appellant/Cross-
Appellee,
Nos. 04-1319 and 04-1338
v.
FACTORY M UTUAL INSURANCE
C OM PA N Y ,
Defendant - Appellee/Cross-
Appellant.
Appeal from the United States District Court
for the District of Colorado
(D.C. No. 02-M -1559 (BNB))
M ichael A. Pope (with J. Christian Nemeth, M cDermott, W ill & Emery LLP,
Chicago, Illinois and M ichael G. Bohn, Campbell, Bohn, Killin, Brittan & Ray,
LLC, Denver, Colorado on the briefs), M cDermott, W ill & Emery LLP, Chicago,
Illinois for Plaintiff-Appellant/Cross-Appellee.
M atthew M ersfelder (with Russell E. Yates and Carlos Leal on the briefs), Yates
& Leal LLP, Denver, Colorado, for D efendant-Appellee/Cross-Appellant.
Before KELLY, HE N RY, and M CCO NNELL, Circuit Judges.
H E N RY , Circuit Judge.
This diversity action stems from a dispute involving the contamination of
over eight million pounds of mozzarella cheese manufactured by Leprino Foods
Company resulting in damages of $13,589,235.45. Leprino sought coverage
under an all-risk insurance policy issued by Factory M utual Insurance Company
(“FM ”), which denied the claim, citing the FM policy’s “contamination
exclusion.” Leprino argued first, that the insured cheese was covered under the
express terms of the FM policy, and second, that Leprino had a reasonable
expectation of coverage under the FM policy such that it had coverage for all
changes in flavor for its cheese.
The district court disagreed as to the first claim, granting partial summary
judgment because the cheese was clearly contaminated. It submitted the
reasonable expectations question to the jury. The jury found that Leprino’s
expectation of coverage was not reasonable.
Leprino appeals the grant of partial summary judgment, the jury verdict and
the district court’s denial of its motion for a new trial. FM cross-appeals, arguing
that the district court erred when it submitted the doctrine of reasonable
expectations to the jury. For the reasons given below, we REVERSE the grant of
partial summary judgment and REM AND for a new trial.
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I. BACKGROUND
A. Factual Background
Leprino, a privately-held Colorado corporation, specializes in
manufacturing mozzarella cheese and is the largest manufacturer of mozzarella
cheese in the United States. Leprino stores vast amounts of newly-manufactured
cheese in cold-storage warehouses before shipment, sometimes reaching an
inventory of forty million pounds at one time.
In 1998, Leprino sought a three-year “all-risk” property insurance policy to
cover risks related to its products, plants, and equipment. Leprino entered
negotiations with Arkwright Insurance, a predecessor company to FM . Arkwright
issued an All-Risk Policy, effective until November 1, 2001 covering “ALL R ISK
OF PH YSICAL DAM AGE” except where specifically excluded. The proposed
Arkwright Policy contained an exclusion (Exclusion No. 6) stating:
This Policy does not insure against . . . contamination including but not
limited to pollution; shrinkage or change in color, flavor, texture or
finish; all unless such damage directly results from other physical
damage not excluded by this Policy[.]
Aplt’s App. vol. V, at 1731 (emphasis added).
Leprino sought to delete the language regarding “change in color, flavor,
texture or finish,” noting that to leave such language in the exclusion “effectively
negated any coverage for the product while it was being stored or otherwise.” Id.
vol. IV, at 1163. After Arkwright completed a risk analysis regarding the
3
implications of this request, it was “agreeable to deleting” this exclusionary
language. Id. at A1165; A1849. On December 11, 1998, Arkwright issued an
endorsement stating:
Exclusion No. 6 is replaced by the following:
6. contamination including but not limited to pollution; or shrinkage; all
unless such damages directly results from other physical damage not
excluded by this Policy.
Id. vol. V, at A1698 (emphasis added).
The next year, Arkwright merged into Allendale M utual Insurance
Company and became FM . FM informed Leprino that, although the name of the
insurer had changed, Leprino’s “policy rights and obligations and those of [the
insurer] have not been altered or changed in any way.” Id. vol. IV, at A1169.
FM sent Leprino the FM Policy as a replacement for the Arkwright policy. The
original FM Policy contained exclusionary language nearly identical to that
deleted from the Arkwright policy the year before:
D. This Policy excludes the following unless directly
resulting from other physical damage not excluded by
this Policy:
1) contamination including but not limited to the
presence of pollution or hazardous material.
2) shrinkage.
3) changes in color, flavor, texture or finish.
Id. at A1882 (“Exclusion D”) (emphasis added).
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Once again, Leprino demanded that the third clause (“changes in color,
flavor, texture or finish”) be removed, and FM agreed. FM issued a formal
endorsement that deleted this clause.
In October 2001, after receiving complaints about an off-flavor in both raw
and cooked cheeses, Leprino traced the cheese to a third-party warehouse in
Scranton, Pennsylvania. Leprino recalled the cheese and delivered replacement
shipments to its customers. Leprino executives investigated and noted a strong
odor and an objectionable off-flavor in the cheese stored in the Pennsylvania
warehouse. Also noted in the warehouse were spills of fruit juice concentrate on
the sides of 55-gallon juice concentrate barrels, on the floor, and on pallets on
which food was stored, and generally all over the warehouse. Numerous popsicle
products appeared to have been smashed by forklifts in the warehouse. Leprino
employees testified that they noted stagnant air and a strong odor in the
warehouse.
On October 26, 2001, Leprino notified FM of the possible loss. Testing on
the Leprino cheese from the Pennsylvania warehouse indicated that a number of
chemicals had contaminated the cheese, including “toluene, ethyl benzene,
m/p-xylene, o-xylene, 1, 2, 4 trimethylbenzene, IR-.alpha.-Pinene and Limonene.”
Aplt’s App. vol. V, at A 1925. Leprino determined that the cheese was not usable
(even as salvage for feed to animals), and it disposed of all 8,220,495 pounds of
the cheese in a landfill.
5
In July 2002, FM denied the claim under the FM Policy. FM noted that
contamination of the cheese resulted from “exposure to limonene,” and FM
maintained that the damage was not due to “other physical damage.” Thus, FM
applied Exclusion D to preclude coverage of Leprino’s claim.
B. Procedural History
Leprino filed a complaint against FM (1) alleging breach of contract against
FM as a result of FM ’s denial of Leprino’s claim for damages; (2) seeking
declaratory judgment regarding the existence of coverage for the same, and (3)
seeking coverage under the reasonable expectations doctrine. In its answer, FM
admitted that the “loss to Leprino’s cheese was caused by contamination from
limonene, a chemical found in fruit concentrate also stored at the . . . facility in
Pennsylvania. The limonene contamination altered the flavor and aroma of the
cheese.” Aplt’s App. vol. I, at A0036; see also id. at A0250 (Final Pretrial Order,
filed Jan. 12, 2004) (same) (emphasis added). Therefore, according to FM , the
contamination was excluded.
The parties filed cross-motions for summary judgment. Leprino contended
(1) its loss was covered under the FM Policy because it fell within the “other
physical damage” exception to the exclusion, and/or (2) because the “other
physical damage” exception is ambiguous, Leprino prevails under the reasonable
expectations doctrine. FM countered, arguing the damage to the cheese fell
6
squarely within the contamination exclusion. The district court initially denied
both motions, noting that “the question of whether contamination occurred in this
case or whether there was a change of flavor without contamination is a mixed
question of law and fact requiring participation by the jury.” Id. at A0243-44.
In April 2004, FM filed motions in limine to exclude certain proposed
expert witness testimony about how the cheese became contaminated. 1 Leprino
sought to present expert testimony regarding its investigation of the damaged
cheese, the effect of spills at the Pennsylvania warehouse, and the results of
testing samples of the damaged cheese. At a hearing on M ay 6, 2004,
the district court concluded that this expert testimony was “irrelevant” because
the cheese was indisputedly contaminated. Id. vol. III, at A0763. “There’s no
1
In April 2004 Leprino also filed a renewed motion for summary judgment
based on a purportedly “concealed document” (the “FM Policy analysis”) that
supported its theory that the contamination provision in the FM Policy was
ambiguous. Leprino also moved for sanctions against FM for its violation of the
court’s discovery rules. Leprino argued that the FM Policy analysis, which had
been produced in an unrelated case, was relevant to whether Exclusion D was
ambiguous and to reasonable expectations. Leprino sought permission to
introduce the FM Policy analysis during trial. The district court elected not to
address the motion on the first day of trial.
Leprino neither sought to amend the pretrial order, nor raised the issue
during trial. Leprino raised the issue only after the jury issued its verdict.
Leprino admits that it neither proffered the document at trial, nor sought to amend
the pre-trial order. W e do not agree with Leprino that it sufficiently requested
that the Court admit the exhibit at trial through its motion for sanctions and its
renewed motion for summary judgment. This court will not consider claims that
have been waived or abandoned in the district court. O’Connor v. City & County
of Denver, 894 F.2d 1210, 1214 (10th Cir. 1990).
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question here that the flavor of this cheese has been altered as a result of some
chemical, we don’t know what chemical it is, for sure, or where it came from, but
it’s changed.” Id. at A0764. “W hether that change in flavor from contamination
is w ithin the policy as a result of the objective expectations of the plaintiff here is
a matter for the jury to decide. That’s what we’re going to trial on.” Id. The
district court thus precluded the introduction of evidence regarding the cause of
the damage to the cheese.
Leprino’s experts proffered testimony about whether the “other physical
damage” exception to Exclusion D caused the damage to the cheese. FM
challenged Leprino’s proffer of evidence regarding spillage in the warehouse as
“speculation and conjecture.” Id. vol. IV, at A1110. The court reiterated that it
was not “necessary . . . for the insured to prove what specifically happened that
contaminated this cheese.” Id. at A1112. The court stated it did not “see that
spillage is something we need to concern ourselves about.” Id. The court
emphasized that the parties should “focus only on the reasonable expectation . . .
and not on the exception.” Id. (emphasis added).
At the same hearing, the district court clarified its earlier ruling concerning
the parties’ motions for summary judgment, stating:
It’s apparent to me from the papers that you filed that there is
confusion in this case about my view of [the case], and what is to be
tried at the forthcoming trial. . . .
The case, of course, is for the loss of cheese as a result of
8
changes in the flavor of the cheese, which was stored in a warehouse in
Pennsylvania, and the defendant has denied coverage here by
contending that this event is subject to the exclusion for contamination
that is in the subject policy.
W hen we argued these cross-motions for summary judgment, and
discussed the meaning of contamination, and also what happened to the
cheese, and I said it was a mixed question of law and fact here, I want
to clarify my understanding now.
In my view , the exclusion is not ambiguous. Contamination
means that it has been affected, made impure by contact or mixture with
a foreign substance, which means in this case, something not within the
ingredients in the manufacture of the cheese. . . .
[T] here’s no dispute that this cheese was contaminated, which
changed its flavor. . . . Therefore, the issue to be tried in this case, and
to be decided by the jury is whether, given the evidence concerning the
negotiations for the policy . . . [it was] objectively reasonable for the
plaintiff to understand [it had] coverage . . . . Accordingly, it doesn’t
seem to me to make any difference what precise chemicals are in there
that contaminates the cheese. . . . Both parties agree there is
contamination.
Id. vol. III, at A0755-58 (emphasis added).
At the trial regarding Leprino’s reasonable expectations, the jury found
“that [Leprino] believed it had purchased insurance policies [from Arkwright and
FM ] that covered its cheese stored in the warehouse from contamination that
changes the flavor of the cheese.” Id. vol. III, at A0827. A1558. The jury also
found, however, that Leprino’s belief was not reasonable “as a result of the
statements and conduct of the insurance company.” Id. Thus, the jury agreed
with FM ’s decision to deny coverage.
Leprino filed a motion for judgment as a matter of law and, alternatively,
9
for a new trial, which the district court denied. Leprino timely filed this appeal.
II. DISCUSSION
Leprino argues that the district court erred when it granted partial summary
judgment to FM and denied Leprino’s motion for a new trial because (A) the FM
Policy covers Leprino’s loss because the damages stemmed from covered “other
physical damage”; (B) Exclusion D was ambiguous; and (C) Leprino’s
expectation of coverage was reasonable. FM , in its cross-appeal, contends that
the district court erred when it submitted the question of reasonable expectations
to the jury.
For the reasons set forth below, we agree that the district court erred when
it granted partial summary judgment to FM , and excluded testimony regarding the
application of the “other physical damage” exception to Exclusion D. The trial
was incorrectly constrained to consider only the reasonable expectations doctrine.
As a result, the district court abused its discretion when it denied Leprino’s
motion for a new trial, and we address these contentions together. W e reverse
and remand for a new trial as to the application of Exclusion D and its exceptions
and we reject FM ’s cross-appeal.
A. The dam age to the cheese may have stemmed from a covered
source.
Leprino contends that because the damage to the cheese was caused by the
10
condition of the third-party warehouse, the “other physical damage” exception to
Exclusion D applied. Thus, according to Leprino, the district court erred when it
denied its motion for summary judgment, and motion for a new trial. In the
alternative, Leprino argues that a genuine issue of material fact exists as to the
source of the damage. Because we agree that a genuine issue of material fact
exists as to the cause of the damaged cheese, we will address these contentions
together.
1. Standard of review
W e review the district court’s order granting summary judgment de novo
under the same standards employed by the district court under Rule 56 of the
Federal Rules of Civil Procedure. Summary judgment is proper only if there is no
disputed issue of material fact, and the moving party is entitled to judgment as a
matter of law. F ED . R. C IV . P. 56(c). W e must examine the record in the light
most favorable to the party opposing the motion. Riley v. Brown & Root, Inc.,
896 F.2d 474, 476 (10th Cir. 1990).
W e review a trial court’s ruling on a motion for new trial for an abuse of
discretion. See Anaeme v. Diagnostek, Inc., 164 F.3d 1275, 1284 (10th Cir.1999).
“W e review a district court’s exclusion of evidence under an abuse of discretion
standard, reversing ‘only if we have a firm and definite belief that the trial court
made a clear error in judgment.’” Tanberg v. Sholtis, 401 F.3d 1151, 1162 (10th
Cir. 2005) (quotation marks and internal citation omitted).
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2. Application of Colorado law
In this diversity case, we apply Colorado law and interpret insurance
policies as a Colorado court would. Farmington Cas. Co. v. Duggan, 417 F.3d
1141, 1142 (10th Cir. 2005). W e interpret the insurance contract as a matter of
law , and we review de novo the district court’s conclusions of law.
“Under an all-risk policy, once the insured demonstrates a loss to the
property covered by the policy, the insurance carrier has the burden of proving
that the proximate cause of the loss was excluded by the policy language.” Novell
v. Am. Guar. and Liability Ins. Co., 15 P.3d 775, 778 (Colo. Ct. A pp. 1999).
“The burden is on the insurer to establish the applicability of an exclusion from
coverage. Any exclusion must be clear and specific to be enforceable.” Fire Ins.
Exchange v. Bentley, 953 P.2d 1297, 1301 (Colo. Ct. App. 1998).
To obtain the benefit of an exclusion, an insurer must establish that the
exclusion applies and is not subject to any other reasonable interpretation. See
American Fam ily M ut. Ins. Co. v. Johnson, 816 P.2d 952, 953 (Colo. 1991). If
the insurer shows that an exclusion applies, “[t]he burden then shifts back to the
insured to prove the applicability of an exception to the exclusion.” Public Serv.
Co. of Colo. v. Wallis and Cos., 955 P.2d 564, 568 (Colo. Ct. A pp. 1997), rev’d
on other grounds by 986 P.2d 924 (Colo. 1999).
3. Application of Exclusion D
W hen it granted partial summary judgment to FM , the district court
12
determined that Exclusion D was “not ambiguous” and that the cheese was
contaminated, and therefore Exclusion D applied. Aplt’s App. vol. III, at A0756.
Here, the parties agree that there is contamination of the cheese. Id. vol.
III, at A0758. The burden thus shifts to FM to establish the applicability of
Exclusion D. Novell, 15 P.3d at 778. FM argues that the contamination of the
cheese falls within Exclusion D, because “the cheese contained numerous
chemical compounds [that the] cheese does not normally, and should not,
contain.” Aple’s Br. at 17.
Leprino argues, however, that even if FM show s that Exclusion D applies,
an exception to that exclusion also applies here. The burden falls on Leprino to
prove the applicability of an exception the exclusion. Public Serv. Co. of Colo.,
955 P.2d at 568. Leprino maintains that the damage to the cheese was covered
under the “other physical damage” exception to the FM Policy because the
damage stemmed from a covered source, i.e. the condition of the third-party
warehouse that stored the cheese. Leprino further contends it was deprived of an
opportunity to prove this exception by presenting to the jury any evidence that the
damage resulted from that covered source, including observations of “countless
spills of juice concentrate” on the floor and on pallets throughout the warehouse.
Aplt’s App. vol. III, at A0874.
Leprino sought to argue that spills in the warehouse, and the crushing of
products such as popsicles by forklifts, released chemicals that caused the damage
13
to Leprino’s cheese. Leprino also sought to introduce evidence that two FM
representatives w ould testify “that if there was a spill that caused the off-flavor to
the cheese, that would be covered, because it would fall within the [other
physical damage not excluded] exception to the contamination exclusion.” A plt’s
App. vol. III, at A0873. According to Leprino, a jury could find that it was
entitled to damages because the contamination resulted from third-party
negligence that was covered by the policy, and that the chemical compounds from
these spills caused the off-flavor to the cheese. Thus, Leprino contends that the
district court erred by precluding the presentation of any evidence in support of
the “other physical damage not excluded” exception.
Relying on this court’s decision in Adams-Arapahoe Joint School District
v. The Continental Insurance Co., 891 F.2d 772, 777 (10th Cir. 1989), FM
counters that no exception to Exclusion D applies because nobody knows how,
when or where the cheese became contaminated. In Adams-Arapahoe, we
determined that a policy’s exclusion clause operated to provide coverage. Under
the clause, coverage was excluded for corrosion “unless such loss results from a
peril not excluded in this policy.” Id. There, the school district sought coverage
under its all-risk policy for extensive corrosion in newly constructed roofing. W e
saw “no other reasonable construction of the clause . . . . [T]he policy still
excludes losses due to corrosion with no identifiable non-excluded cause. In
effect, the corrosion exclusion applies only to naturally occurring corrosion.” Id.
14
FM argues that Leprino has not show n that the exception to Exclusion D applies,
as is its burden, because Leprino has not pointed to an “identifiable, non-
excluded” event that caused the contamination. FM also contends that, assuming
the cheese was contaminated by the general conditions of the w arehouse, those
conditions would not amount to “other physical damage” that would satisfy the
exception to Exclusion D. See Aple’s Br. at 24.
W e begin our examination applying the axiom that “[w]e enforce insurance
contracts as written, giving the w ords and phrases their plain and ordinary
meaning.” Certain Underwriters at Lloyd's London Subscribing to Certificate No.
986557 v. Rychel, 126 P.3d 234, 236 (Colo. Ct. App. 2005), cert. granted, No.
05SC590, 2006 W L 259661 (2006). It is somew hat difficult to follow FM ’s
argument as to what the “other physical damage” exception may include, except
to surmise it encompasses little. FM ’s brief clearly argued that the w arehouse’s
condition is not covered “other physical damage.” Aple’s Br. at 24. At oral
argument, counsel admitted that sunlight exposure altering the cheese’s flavor
would be covered, because exposure to sunlight would not be an “infiltration of
chemicals or foreign substances like those present here.” A lso, at argument,
FM ’s counsel noted that a pipe leak or even a barrel leak causing contamination
would be a covered event. FM seems to be arguing that, because the parties did
not agree as to what caused the damage, it must prevail.
Thus, FM reads Adams-Arapahoe to require that the source of the
15
contam ination be known. Leprino argues that it was denied the opportunity to
combat this theory by proffering evidence that these concentrate spills were
“other physical damage” constituting an exception to Exclusion D. W e note that
both sides acknowledge that limonene, a chemical found in fruit juice
concentrates, was found in the damaged cheese, in addition to other chemicals.
M oreover, FM , in its answer and in the pre-trial order, specifically identified
limonene, also stored at the warehouse, as the cause of the contamination that
“altered the flavor and aroma of the cheese.” A plt’s A pp. vol. I, at A0036; see
also id. at A 0250.
W e reject FM ’s insistence that we must read Adams-Arapahoe’s reference
to other “perils” rather than “other physical damage” as precluding coverage here.
To adopt that reading would be to render the “other physical damage” exception
meaningless.
In this respect, the facts here closely resemble those of Allianz Ins. Co. v.
RJR Nabisco Holdings Corp., 96 F. Supp. 2d 253 (S.D.N.Y. 1999). In that case,
Nabisco’s food products were included under an all-risk policy issued by Allianz
and other insurance companies (together, “Allianz”). Shortly after Nabisco began
moving its products into a new warehouse, it began receiving complaints
regarding a chemical odor and flavor in various products. Nabisco’s investigation
revealed that, during the warehouse’s construction, the concrete floor had been
sealed with certain suspect chemicals, which the construction company had failed
16
to properly clean up. The insurer did not dispute that the warehouse was the
“source of the contamination.” Id. at 255.
Nabisco submitted a claim for coverage, which Allianz denied, based on an
exclusion clause in the all-risk policy. That clause excluded coverage for “loss or
damage caused by or resulting from contamination unless such loss or damage
results from a peril not otherwise excluded.” Id. (emphasis added). As the
Allianz court noted, “[t]his somewhat aw kward wording, in effect a double
negative, was drafted by the insurers, possibly so as to try to come w ithin the
doctrine that places on the insured the burden of demonstrating that an exception
to an exclusion applies.” Id. However, as to the exclusion, the court stated:
the only reasonable reading of this language is that contamination
losses resulting from perils otherwise covered by the policy are likewise
covered and contamination losses resulting from perils expressly
excluded by the policy are likewise excluded. Any other interpretation
. . . would, as a practical matter, exclude contamination losses
altogether and thereby render the [exception] language meaningless.
Id. (emphasis added).
The court further determined that Allianz failed to produce any competent
evidence disputing Nabisco’s contentions that the chemicals at the w arehouse
were the proximate and likely the “sole practical cause” of the contamination. Id.
at 256. “Thus, on any fair interpretation of the exclusionary language, the
damage to the insured food . . . resulted from a non-excluded “peril,” namely, a
third-party’s actions.” Id. at 255.
17
Although there is no known pipe break or spill, we must examine the record
in a light most favorable to Leprino. Factual disputes exist as to what precisely
caused the contamination, despite FM ’s suggestion that there was an insufficient
amount of fruit concentrate to damage such large quantities of cheese. W e note
that this argument also relates to disputed facts. Accordingly, we hold that the
district court erred when it granted partial summary judgment to FM and when it
excluded evidence regarding the application of the exception to Exclusion D.
B. Ambiguity and E xpectation of coverage
Because we hold that the district court erred when it granted partial
sum mary judgment to FM and excluded evidence of “other physical damage,” w e
need not here address Leprino’s arguments regarding the (1) ambiguity of the FM
Policy or (2) the jury’s verdict that Leprino’s expectation of coverage was
unreasonable. Because the district court saw no need to consider the “other
physical damage” exception, it excluded testimony regarding the reasonableness
of Leprino’s interpretation of coverage. On remand, the district court should
reconsider its holdings regarding expert testimony, and hold a new trial based on
the above conclusions concerning the admission of evidence about Exclusion D
and any exception.
C. FM ’s cross-appeal
Finally, as to FM ’s cross-appeal, FM appears to argue that should we
disagree with the jury’s verdict as to the reasonableness of Leprino’s expectations
18
under the policy, that we should then consider FM ’s argument that the issue of
reasonable expectations was erroneously submitted to the jury. Based on our
previous holdings that the district court erred in its grant of partial summary
judgment to FM and a new trial is warranted, this contention is moot. However,
we note that “[t]aking a cross-appeal was neither necessary nor appropriate for
this purpose. Only a party aggrieved by the judgment may appeal, and [FM ] was
100% successful.” Gooden v. Neal, 17 F.3d 925, 935 (7th Cir. 1994). FM “was
entitled to make clear his position . . . without the need for a cross-appeal.” Id.
W e direct FM to bear the costs of the cross-appeal.
III. CONCLUSION
Accordingly, we REVERSE the district court’s grant of partial summary
judgment in favor of FM , and we REVERSE the district court’s denial of a
m otion for a new trial. We V A CATE the district court’s judgment and REM AN D
for a new trial in accordance with this opinion. W e DISM ISS FM ’s cross-appeal.
19