Safety National Casualty Corp. v. Bristol-Myers Squibb Co.

REVISED - June 26, 2000

UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
____________________

No. 99-40531
____________________

SAFETY NATIONAL CASUALTY CORPORATION,

Plaintiff-Appellant,

versus

BRISTOL-MYERS SQUIBB COMPANY; MEDICAL
ENGINEERING CORPORATION,

Defendants-Appellees.
_________________________________________________________________

Appeal from the United States District Court
for the Eastern District of Texas

_________________________________________________________________
___________________________
June 8, 2000

Before REAVLEY, DAVIS, and BARKSDALE, Circuit Judges.

RHESA HAWKINS BARKSDALE, Circuit Judge:

At issue is the district court, in deference to a related

Texas state court action, staying this action by Safety National

Casualty Corporation, by which it seeks to compel arbitration with

Bristol-Myers Squibb Company and Medical Engineering Corporation

(collectively BMS). We VACATE and REMAND.

I.

The Texas state court action began in March 1993, when BMS

sued Safety and more than 70 other insurers in its breast-implant

coverage dispute. The three Safety policies at issue provide
“excess umbrella” coverage to BMS for “occurrences” between 30 June

1983 and 30 June 1984.

As one of its responses to that state court action, Safety

filed an action in federal court in Missouri in April 1995.

Safety’s action sought, pursuant to a provision in its policies

with BMS, to compel arbitration of its dispute with BMS, under the

Federal Arbitration Act (FAA), 9 U.S.C. §§ 1-16.

Shortly thereafter, in July 1995, Safety and BMS entered into

a standstill agreement (SSA): BMS agreed to Safety being dismissed

from the Texas state court action in return for Safety dismissing

its Missouri federal court action. The Texas state court entered

a non-suit order in February 1996.

By 1 April 1998, BMS had settled with all original defendants

in the Texas state court action, except Safety and an insurer with

a pending counterclaim. That day, BMS filed its “Thirteenth

Amended Petition” in the Texas state court action, seeking a

declaration that, under its policies with Safety, it has a duty to

defend or indemnify BMS against breast implant claims (Bristol I).

On 24 April, having been brought back into the Texas state

court action, Safety removed it, based on diversity. And, on 30

April, Safety filed in federal district court in Texas the action

at hand (Bristol II). BMS’ motion to remand the Texas state court

action was granted on 29 March 1999, the same day as the stay order

in issue in Safety’s federal court action. Bristol-Myers Squibb

2
Co. v. Safety Nat’l Cas. Corp., 43 F. Supp. 2d 734, 736-37 (E.D.

Tex. 1999) (Bristol I).

In this action (Bristol II), Safety claims BMS breached the

SSA by filing the 13th amended petition in Bristol I, and seeks,

inter alia, (1) a declaratory judgment that the parties’ disputes

are arbitrable, pursuant to the policies; and (2) a stay of all

litigation, pursuant to the FAA, 9 U.S.C. § 3.

BMS moved to dismiss in Bristol II, urging abstention in favor

of the Texas state court action (Bristol I). The motion was

referred to a magistrate judge for a report and recommendation. He

recommended staying this action, based upon either the standard in

Brillhart v. Excess Ins. Co. of Am., 316 U.S. 491, 495 (1942) (in

action solely for declaratory (discretionary) relief, federal

court’s exercise of discretion to abstain is ordinarily

appropriate), or in Colorado River Water Conservation Dist. v.

United States, 424 U.S. 800, 817 (1976) (where, unlike declaratory

relief, non-discretionary relief is sought, abstention is

ordinarily not appropriate). Because he recommended that

abstention was proper under either standard, the magistrate judge

did not recommend which was applicable. Bristol-Myers Squibb v.

Safety Nat’l Cas. Corp., 43 F. Supp. 2d 713, 721 (E.D. Tex. 1999)

(Bristol II).

3
 Regarding Colorado River abstention, the magistrate judge

recommended it was proper because

there is the danger of piecemeal litigation
due to the various state issues relevant to
interpretation and enforcement of the [SSA;]
.... the state court obtained jurisdiction
first, and made notable progress in resolving
disputes between BMS, [Safety] and other
insurers[;] .... the rule of decision
regarding arbitrability is in doubt ... [and]
state law provides the rule of decision
regarding equally important issues concerning
enforcement of settlement agreements[;] ....
[and] the state court proceedings are adequate
to protect [Safety’s] federal rights.

Id. at 720-21. The magistrate judge recommended further that: the

parties’ negotiation of the SSA “in the context of an alternative

dispute resolution mechanism for ongoing state litigation”

constituted “exceptional circumstances” justifying abstention,

Colorado River, 424 U.S. at 813; and the state judge was “best

positioned” to resolve their disputes. Bristol II, 43 F. Supp. 2d

at 721.

Without a separate opinion, the district court overruled

Safety’s objections and adopted the stay recommendation. Id. at

715.

II.

As noted, Safety contests the district court’s decision not to

exercise its jurisdiction. We review its decision for abuse of

discretion; its underlying legal conclusions, de novo. See, e.g.,

4
Black Sea Inv., Ltd. v. United Heritage Corp., 204 F.3d 647, 649-50

(5th Cir. 2000).

Safety contends, and BMS appears to concede, that where, as

here, coercive relief (compel arbitration) is sought in addition to

declaratory relief, the applicable standard is Colorado River, as

refined by the Supreme Court in Moses H. Cone Mem. Hosp. v. Mercury

Constr. Corp., 460 U.S. 1 (1983). We agree. See Southwind

Aviation, Inc. v. Bergen Aviation, Inc., 23 F.3d 948, 951 (5th Cir.

1994).

The parties disagree, however, about (1) our jurisdiction to

consider the stay order; and (2) the district court’s application

of the six factors used to determine whether a case falls within

the “extraordinary and narrow exception”, warranting surrender of

the “virtually unflagging obligation” to exercise jurisdiction,

Colorado River, 424 U.S. at 817, in the light of concerns regarding

“federalism, comity, and conservation of judicial resources”.

Black Sea, 204 F.3d at 650 (citing Evanston Ins. Co. v. Jimco,

Inc., 844 F.2d 1185, 1189 (5th Cir. 1988)). Those six factors are:

(1) assumption by either court of jurisdiction
over a res; (2) the relative inconvenience of
the forums; (3) the avoidance of piecemeal
litigation; (4) the order in which
jurisdiction was obtained by the concurrent
forums; (5) whether and to what extent federal
law provides the rules of decision on the
merits; and (6) the adequacy of the state
proceedings in protecting the rights of the
party invoking jurisdiction.

5
Id. (citation omitted).

A.

Regarding jurisdiction, Safety maintains that, under Cone, 460

U.S. at 10, a district court’s stay of federal proceedings in

deference to a pending state action is a final decision, appealable

under 28 U.S.C. § 1291. BMS contends we have no jurisdiction

because Safety did not establish an exception to the finality rule,

as outlined in Cone.

Cone provides the answer. Because, as in Cone, arbitrability

is the central substantive issue in the federal action at hand, the

stay means Safety is “effectively out of court” and “the state

court’s judgment on the issue [will] be res judicata”. Cone, 460

U.S. at 10. In short, the stay operates as a dismissal. We have

jurisdiction.

B.

In addition to challenging the abstention decision, Safety

urges our holding the parties must arbitrate under the FAA.

1.

According to Safety, abstention was improper because, inter

alia: its federal action seeks relief under the FAA, and BMS’

state action seeks insurance coverage determinations, so the

actions are not parallel; the state court cannot transfer the

dispute to the forum where the parties agreed to arbitrate

(Missouri), so it is more inconvenient than the federal court;

6
there was no progress in the state court action regarding Safety,

other than the 1996 non-suit; and, as enunciated in Cone, 460 U.S.

at 26, arbitration is an important issue of federal law, “weighing

against” abstention.

BMS counters that the district court properly abstained

because construction of the SSA and the policies under state

contract law is required before Safety’s entitlement to FAA relief

can be addressed. In this regard, but without any support in the

record, BMS states that: at the time it entered into the SSA, it

mistakenly assumed the Safety policies contained a valid

arbitration clause; but, as a result of subsequent discovery, it

learned the underlying Lloyd’s of London policy to which Safety’s

policies must “follow form” does not contain an arbitration

provision and, in fact, includes a “service of suit” clause.

Safety replies that, as noted, the underlying policy is not in the

record.

BMS also maintains, inter alia, that: because the state court

is authorized by Congress to apply the FAA and obligated to grant

relief if warranted, it would be a waste of judicial resources to

require the federal district court to “retain a case merely because

it contains a second-tier federal issue”; the state and federal

courts may render different interpretations of the SSA and the

policies at issue; and the state court’s substantial contribution

in resolving BMS’ more comprehensive coverage suit, which Safety

7
participated in for more than two years, makes it the more suitable

forum.

Once again, Cone provides the answer. There, the Supreme

Court held that Congress’ desire “to move parties to an arbitrable

dispute out of court and into arbitration as quickly and easily as

possible”, as a matter of federal law, counseled against

abstention. Cone, 460 U.S. at 22-23. It further held the

“piecemeal litigation” factor is not applicable in the FAA context,

where the overriding federal policy is “to give effect to ...

arbitration agreement[s]”. Id. at 20. See also Black Sea, 204

F.3d at 650-51 n.7 (where, as here, there is no res at issue,

danger of inconsistent rulings is less relevant). Needless to say,

federal policy favoring arbitration is hardly a “second-tier”

issue, as so described by BMS.

The other relevant factors also fail to support abstention.

Regarding which court first had jurisdiction, Safety was not a

party to the state court action after February 1996, per the July

1995 SSA. Therefore, the proper time frame for comparison is April

1998, when BMS filed its 13th amended petition (Bristol I) and

Safety filed this action (Bristol II).

Additionally, despite BMS’ contention that state contract law

governs interpretation of the SSA, only rarely will “the presence

of [a] state law issue[] weigh[] in favor of” abstention, and even

where the state court can adequately protect all parties, this fact

8
“can only be a neutral factor or one that weighs against ...

abstention”. Evanston, 844 F.2d at 1193. In sum, the

“extraordinary circumstances” for abstention are not present.

2.

Safety contends that, because, in its appellate brief, BMS

raised the merits of the underlying issue of arbitrability, and the

Safety policies and the SSA are in the record, available for our

review, we should hold the parties can only proceed in arbitration,

pursuant to the FAA. Safety points to the district court’s

interpretation of the SSA as “infer[ring], without expressly

providing, that upon entry of final judgment in the Texas court

disposing of all claims against all other defendants, BMS or

[Safety] could compel the other to arbitrate”. BMS responds that

remand is required, because the district court did not address the

validity of the arbitration provisions at issue.

Arbitrability vel non is not properly before us. On remand,

the district court must, inter alia, determine whether the parties’

coverage dispute “is governed by an arbitration clause”, and

“resolve doubts concerning [its] scope ... in favor of an

arbitration”. Pennzoil Exploration & Prod. Co. v. Ramco Energy

Ltd., 139 F.3d 1061, 1067 (5th Cir. 1998) (internal quotation marks

and citation omitted).

9
 III.

For the foregoing reasons, the stay order is VACATED, and this

action is REMANDED for further proceedings consistent with our

opinion.

VACATED and REMANDED

10