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USX CORP. v. ADRIATIC INSURANCE CO.

March 22, 2000

USX CORPORATION AND BESSSEMER AND LAKE ERIE RAILROAD COMPANY, PLAINTIFFS,
V.
ADRIATIC INSURANCE COMPANY, ET AL., DEFENDANTS, V. ICAROM, FORMERLY KNOWN AS INSURANCE CORPORATION OF IRELAND, ADDITIONAL DEFENDANT.



The opinion of the court was delivered by: Diamond, District Judge.

          OPINION

Summary Judgment

Fed.R.Civ.P. 56(c) provides that summary judgment may be granted if, drawing all inferences in favor of the non-moving party, "the pleadings, depositions, answers to interrogatories and admissions on file, together with the affidavits, if any, show that there is no genuine issue of material fact and the movant is entitled to judgment as a matter of law." Summary judgment may be granted against a party who fails to adduce facts sufficient to establish the existence of any element essential to that party's claim, and upon which that party will bear the burden of proof at trial. Celotex Corp. v. Catrett, 477 U.S. 317, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). The moving party bears the initial burden of identifying evidence which demonstrates the absence of a genuine issue of material fact. When the movant does not bear the burden of proof on the claim, the movant's initial burden may be met by demonstrating the lack of record evidence to support the opponent's claim. National State Bank v. Federal Reserve Bank, 979 F.2d 1579, 1582 (3d Cir. 1992). Once that burden has been met, the non-moving party must set forth "specific facts showing that there is a genuine issue for trial," or the factual record will be taken as presented by the moving party and judgment will be entered as a matter of law. Matsushita Electric Industrial Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986) (quoting Fed.R.Civ.P. 56(a), (e)) (emphasis in Matsushita). An issue is genuine only if the evidence is such that a reasonable jury could return a verdict for the non-moving party. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986).

In meeting its burden of proof, the "opponent must do more than simply show that there is some metaphysical doubt as to the material facts." Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 586, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986). The non-moving party "must present affirmative evidence in order to defeat a properly supported motion" and cannot "simply reassert factually unsupported allegations." Williams v. Borough of West Chester, 891 F.2d 458, 460 (3d Cir. 1989). Nor can the opponent "merely rely upon conclusory allegations in [its] pleadings or in memoranda and briefs." Harter v. GAF Corp., 967 F.2d 846 (3d Cir. 1992). Likewise, mere conjecture or speculation by the party resisting summary judgment will not provide a basis upon which to deny the motion. Robertson v. Allied Signal, Inc., 914 F.2d 360, 382-83 n. 12 (3d Cir. 1990). If the non-moving party's evidence merely is colorable or lacks sufficient probative force summary judgment must be granted. Anderson, 477 U.S. at 249-50, 106 S.Ct. 2505; see also Big Apple BMW, Inc. v. BMW of North America, 974 F.2d 1358, 1362 (3d Cir. 1992), cert. denied, 507 U.S. 912, 113 S.Ct. 1262, 122 L.Ed.2d 659 (1993) (although court is not permitted to weigh facts or competing inferences, it is no longer required to "turn a blind eye" to the weight of the evidence).

General Background

Plaintiffs seek damages for breach of contract from each named defendant under the respective policies, subject to the monetary limits of those policies, together with pre-judgment and post-judgment interest. The alleged breach is defendants' failure to indemnify plaintiffs for the liability arising from underlying third-party actions. The third-party actions followed the indictment of B & LE for a criminal violation of the Sherman Act and its subsequent conviction of the charged crime.

On October 13, 1981, a federal grand jury indicted B & LE and other railroads for criminal conspiracy in violation of § 1 of the Sherman Act, 15 U.S.C. § 1. On August 31, 1992, B & LE entered a plea of nolo contendere to the offense of conspiracy in restraint of trade as charged in the indictment. B & LE voluntarily entered the plea knowing it constituted a plea of guilt to the charges in the indictment and would result in a judgment of guilt as a matter of law. Transcript of July 26, 1982, Acceptance of nolo contendere Pleas in United States of America v. Bessemer & Lake Erie Railroad, Inc., et al., Criminal No. 81-396, United States District Court for the District of Columbia, at pp. 23-28, set forth in Volume I of Appendix to Defendants' Motion for Summary Judgment ("Defendants' Appendix") at pp. 82-87. The entry of the plea admitted every essential element of the offense. United States v. Bessemer & Lake Erie Railroad Co., 717 F.2d 593, 597 (D.C.Cir. 1983). It likewise barred any subsequent attack of the indictment on the merits and constituted an admission of the truth of all material factual allegations therein. Id. at 597 & 599. The indictment charged a multi-faceted conspiracy to eliminate potential competition in the transportation of iron ore which was mined in Minnesota, Wisconsin and Canada, shipped across the Great Lakes and transported by the railroads from docks on the southern shore of Lake Erie to inland steel mills in Western Pennsylvania, West Virginia, Ohio and Kentucky. Id. at 594-95.

Between 1982 and 1984, five steel companies, three dock companies and five trucking companies filed civil actions against ten railroads involved in the conspiracy, including B & LE, in federal district courts in Pennsylvania, Ohio, New York and the District of Columbia.*fn1 On April 17, 1984, the Judicial Panel on Multi-District Litigation consolidated the ten actions for pretrial proceedings at "MDL No. 587" (captioned In Re Lower Lake Erie Iron Ore Antitrust Litigation), and assigned the proceeding to the Honorable John P. Fullam of the United States District Court for the Eastern District of Pennsylvania. In May of 1989, Judge Fullam ordered the consolidated cases be tried as a consolidated action. The trial was bifurcated. The liability phase was tried between May 9 and June 18, 1989, and the jury returned verdicts against B & LE in nine of the actions.*fn2 The damage phase was tried between June 26 and July 28, 1989, to a separate jury, and it awarded substantial damages in eight of the actions. Judgments were entered on June 17, 1989, totaling $4,457,652,953.00, exclusive of interest, costs and attorneys' fees.*fn3 On February 27, 1991, Judge Fullam entered an opinion and order denying all post-trial motions except for one aspect of B & LE's motion which challenged an item of damage claimed by one steel company. Final judgments were otherwise entered in accordance with the damage jury's verdicts. See In re Lower Lake Erie Iron Ore Antitrust Litigation, 759 F. Supp. 219 (E.D.Pa. 1991). Appeals and cross-appeals were taken. On May 27, 1993, the United States Court of Appeals for the Third Circuit substantially affirmed the district court. See In re Lower Lake Erie Iron Ore Antitrust Litigation, 998 F.2d 1144 (3d Cir. 1993). B & LE's petition for rehearing and suggestion for rehearing en banc were denied on July 26, 1993. Id. at 1185. The Supreme Court denied B & LE's petition for writ of certiorari on January 24, 1994, and plaintiffs thereafter satisfied or settled the MDL 587 judgments.

Plaintiff USX Corporation seeks indemnification under the insurance policies procured pursuant to its catastrophic liability insurance program for seven policy periods between May 12, 1977, and April 1, 1983.*fn4 The May 12, 1977, through June 1, 1978, program included 5 layers of insurance providing $130 million of coverage in excess of a $50 million self-insured retention. The June 1, 1978, through June 1, 1979, program included six layers providing $150 million of coverage in excess of a $50 million self-insured retention. The June 1, 1979, through December 1, 1979, program included four layers providing $150 million of coverage in excess of a $50 million self-insured retention. The December 1, 1979, through December 1, 1980, program included six layers providing $275 million of coverage in excess of a $25 million self-insured retention. The December 1, 1980, through December 1, 1981, program included seven layers providing $275 million of coverage in excess of a $25 million self-insured retention. The December 1, 1981, through April 1, 1982, program included seven layers providing $325 million of coverage in excess of a $25 million self-insured retention. The April 1, 1982, through April 1, 1983, program included six layers providing $325 million of coverage in excess of a $25 million self-insured retention. See Joint Statement of Uncontested Facts (Document No. 427) ("Joint Statement") at ¶ 20-26. Collectively, defendants are domestic and international insurers (or their predecessors, successors-in-interest or assumptive re-insureds, as appropriate) who issued or subscribed to the policies comprising the seven-year program.

USX employed a commercial insurance brokerage service as its agent to procure the insurance in its catastrophic liability program. Employees of the insurance brokerage service worked closely with employees of USX's risk management department to accommodate USX's insurance needs. The policy providing for the initial layer of coverage during the first year was obtained in the London insurance market. USX provided significant amounts of underwriting data to certain underwriters in that market. Shortly after obtaining the first year of coverage, USX's insurance broker prepared a memorandum reviewing the liability insurance policy form. USX thereafter continued to obtain a substantial portion of its catastrophic liability program insurance in the London market.

In each of the seven periods, USX's insurance coverage begins with a first-layer policy that contains the terms of and conditions for coverage. Each layer above the first layer consists of policies which follow the form of the first-layer policy, subject to any special terms or conditions of the individual policy. The first-layer policies generally are designated as "umbrella" policies and are, in all material respects, based upon a standard insurance form known as "the 1971 London umbrella wording." This form was modeled after the 1966 standard form commonly used in the North American market. With the exception of some of the policies comprising the 1982-1983 policy period, the first-layer policies were issued by London Market Insurers, which are certain underwriters at Lloyds' London and certain other companies participating in the London insurance market ("the London Defendants").

In procuring the policies, USX sought to and did obtain the broadest casualty coverage available. The underlying self-insured retentions signified that the insurance was to provide coverage for catastrophic liability. The insurance policies include or incorporate by reference the following "Insuring Agreement:"

COVERAGE —

Underwriters hereby agree, subject to the limitations, terms and conditions hereinafter mentioned, to indemnify the Assured for all sums which the Assured shall be obligated to pay by reason of liability: —
(a) imposed upon the Assured by law, or (b) assumed under contract or agreement . . .,

for damages on account of: —

(i) Personal Injuries

(ii) Property Damage

(iii) Advertising Liability,

caused by or arising out of each occurrence happening anywhere in the world.

Joint Statement at ¶ 27.

The key terms of the Insuring Agreement are as follows. The term "Occurrence"

shall mean an accident, or a happening, or an event, or a continuous or repeated exposure to conditions, which unexpectedly and unintentionally results in a personal injury, property damage or advertising liability during the policy period.

Joint Statement ¶ 28. The term "Personal Injuries"

means bodily injury (including death at any time resulting therefrom), mental injury, mental anguish, shock, sickness, disease, disability, false arrest, false imprisonment, wrongful eviction, detention, malicious prosecution, discrimination, humiliation; also libel, slander or defamation of character or invasion of rights of privacy, except that which arises out of any advertising activities.

Joint Statement at ¶ 29. The term "Property Damage"

shall mean loss of or direct damage to or destruction of tangible property (other than owned by the Named Assured).

Joint Statement at ¶ 30. The term "Advertising Liability" shall mean: —

1) Libel, slander or defamation;

2) Any infringement of copyright or of title or of slogan;
3) Piracy or unfair competition or idea misappropriation under an implied contract;

4) Any invasion of right of privacy;

committed or alleged to have been committed in any advertisement, publicity article, broadcast or telecast and arising out of the Named Assured's advertising activities.

Joint Statement at ¶ 31. The term "Damages"

includes damages for death and for care and loss of service resulting from personal injury and damages for loss of use of property resulting from property damage.

Joint Statement at ¶ 32.

Plaintiffs' complaint avers and their pending motion for partial summary judgment seeks to establish that the outcome of B & LE's underlying conspiratorial conduct constituted an occurrence under Pennsylvania law and the resulting liability reflects a covered form of damage/injury under each key term in the Insuring Agreement. Plaintiffs generally contend, inter alia, that the MDL 587 losses constitute (1) a form of economic discrimination within the scope of "discrimination" as used in the term "personal injuries" because the conspirators refused to establish lower rates for less expensive and time-consuming service; (2) a form of "unfair competition" which was committed in and arose out of B & LE's "advertising activities" because the railroads' tariffs were used as a means of implementing the conspiratorial agreement; and (3) a form of "loss of use" of tangible property because the MDL 587 plaintiffs were deprived of the ability to use equipment and assets which would have been used to compete with the railroads. Plaintiffs further contend that proper notice was given or that the lack of notice did not cause prejudice to the defendants.*fn5 Plaintiffs further argue that the MDL 587 plaintiffs sustained a form of covered damage/injury during each policy period due to the non-linear, progressive nature of their injuries. Based on these general premises, plaintiffs argue that each defendant is obligated to indemnify USX for the losses arising from the MDL 587 judgments.

Defendants generally contend that B & LE was not held liable for causing any injury/damage covered by the policies and plaintiffs' attempts to recharacterize the actual liability determined by the MDL 587 juries is contrary to the undisputed facts and governing law.*fn6 Beyond plaintiffs' asserted failure to fit the underlying loss within the basic requirements of coverage, defendants contend that the antitrust liability, which was imposed for restraint of trade and attempted monopolization, epitomizes the essence of an intended and expected harm and a non-fortuitous loss, and any such loss is expressly precluded under the definition of an occurrence and is uninsurable as a matter of Pennsylvania public policy. Similarly, defendants assert that torturing the terms of the policies to permit recovery here would relieve plaintiffs of the financial consequences of B & LE's illegal conduct and allow a monopolist to retain the benefits derived from participating in an antitrust conspiracy, a proposition which would offend both state and federal public policy. Finally, defendants argue that because plaintiffs failed to give notice of the MDL 587 litigation until after the Third Circuit affirmed the judgments against B & LE, defendants suffered prejudice as a matter of law, thereby precluding coverage on this independent ground as well.

Overview of the MDL 587 Litigation*fn7

Most of the ore used in making steel in the multi-state region served by lower Lake Erie originated in mines in Michigan, Minnesota and Eastern Canada. The ore was shipped across the Great Lakes and unloaded at docks in Pennsylvania and Ohio. For years the prevailing method of transportation involved the shipment of bulk quantities of the ore, which was in an unprocessed, mud-like form. Large transportation vessels known as "bulkers" transported virtually all the ore across the Great Lakes. The bulkers were unloaded by heavy cranes commonly known as "huletts." A hulett unloaded the ore from the hold of a bulker using a clamshell-like claw that dipped into the hold, scooped up a load of the mud-like substance and moved it to the dock where it was loaded directly onto railroad cars or stockpiled at onshore storage areas. The docks used in this process were owned by the railroads and equipped with huletts.

The rates for the various services at all of the railroad docks were identical and established pursuant to Interstate Commerce Commission ("ICC") approved tariffs which specifically were exempt from antitrust scrutiny under § 5(a) of the Interstate Commerce Act ("ICA"), as amended by the Reed-Bullwinkle Act of 1948, 49 U.S.C. § 10701(a) (1949). Pursuant to that amendment, the ICC approved an agreement of the Eastern Railroads which established the Rate Bureau (the Coal, Coke and Iron Ore Committee). B & LE was a member of the Rate Bureau. All railroad action taken pursuant to that agreement was given § 5(a) immunity and conclusively presumed to represent reasonable rates and charges. Id. at 223-24. Private (i.e., non-railroad) docks at the lower Lake Erie ports were not equipped with huletts and were unable to compete for ore traffic, which in turn gave the railroads a lawful monopoly over the unloading and land transportation of ore.

In the early 1950s a new technology developed which enabled ore producers to process the ore into high-grade marble-sized pellets. The formation of ore into pellets permitted shipment of the ore in self-unloading vessels. These vessels were able to unload their cargo with an internally mounted conveyor belt. Following the enlargement of a particular lock on the Great Lakes, self-unloaders were able to carry substantially larger loads of ore than bulkers, were able to unload in less time and with a smaller crew and did not require any special equipment. The use of self-unloaders created the potential for non-railroad docks to compete as unloading sites and these docks potentially were able to store and ship ore at lower costs than railroad docks because the land-based unloading equipment and large work crews were not needed. Thus, self-unloaders and non-railroad docks could be used to compete directly with the railroads and this development also made possible the use of trucks as an alternative means of transporting the ore inland.

For years the railroads had controlled access to the unloading docks and provided inland rail transportation of the ore. The self-unloader/non-railroad dock system threatened to compromise the railroads' monopoly over inland transportation. The ability to use private docks created the option of hauling the ore by rail or truck to the inland steel companies, and this competition had the potential to produce significant saving to the steel companies. The MDL 587 plaintiffs' central contention was that the railroads, perceiving the significant threat from the self-unloaders/non-railroad docks/trucking system, entered into an agreement designed to thwart the progress of the self-unloader technology in order to maintain their dominance in the market and protect their substantial investments in lake shore property and conventional unloading equipment.

As early as 1956 high-ranking railroad officials convened and forged a planned course of action designed to circumvent the development of self-unloaders. The implementation of this agreement was accomplished by three separate means. Railroad officials orally agreed that leases of railroad docks or facilities were to be examined and modified to frustrate the efforts of non-railroad docks to handle ore from self-unloaders. The railroads thus either refused to sell or lease any property that could be used to establish a private dock or began to sell or lease property with express restrictions against such use. The railroads further agreed to keep dock-handling and shipment rates for self-unloaders artificially high at railroad-owned docks and refused to recognize a discount rate for ore transported on self-unloaders, despite the reduced costs in providing such services. Finally, the railroads agreed among themselves to refuse to publish different (competitively priced) commodity line haul rates for hauling ore from private docks.

The railroads converted their agreement into action to effectuate the goal of market preclusion. They used coercion to enforce adherence to the facets of the agreement and succeeded in restricting the lease and sale of railroad-owned dock property and boycotting non-railroad docks. These activities diminished the economic incentives to use self-unloaders and by impeding the development of a private dock system, the railroads succeeded in precluding direct competition from the trucking industry.

The MDL 587 plaintiffs sued under Sections 1 and 2 of the Sherman Act (15 U.S.C. § 1, 2), Section 4 of the Clayton Act (15 U.S.C. § 15) and the Ohio Valentine Act, Ohio Rev'd Code §§ 1331.01-1331.99. In addition to other forms of injury, the steel company plaintiffs sought damages for lost savings which would have been realized had the railroads' anti-competitive behavior not retarded the development and implementation of the self-unloader technology. The steel companies identified five compensable forms of injury: (1) savings from lower dock handling rates from private commercial docks, (2) savings from railroad docks that would have been realized from the competition of private docks, (3) lower trucking rates for actual shipment, (4) savings from market-sensitive commodity line haul rates, and (5) inherent savings from the option to choose the most efficient and economical combination of transportation alternatives. The dock companies sought to recover the profits they would have realized had they been able to establish themselves in the market. The trucking companies likewise sought similar damages on the theory that had they not been precluded from entering the market, they would have established themselves and realized significant profits.

B & LE sought to preclude or limit the recovery of damages based upon (1) its (and the other railroads') entitlement to immunity under the ICA and the doctrine in Keogh v. Chicago & Northwestern Ry. Co., 260 U.S. 156, 43 S.Ct. 47, 67 L.Ed. 183 (1922) and (2) the antitrust standing principles established in Illinois Brick Co. v. Illinois, 431 U.S. 720, 97 S.Ct. 2061, 52 L.Ed.2d 707 (1977). In Keogh, the Supreme Court held that private litigants cannot recover damages under the anti-trust laws where the damages are based upon rates and charges approved by the ICC. Having established such rates and charges in accordance with the ICA, such rates presumptively are legal and a private litigant is precluded from attempting to prove that hypothetical lower rates would have been charged in the absence of asserted antitrust conduct and the acceptance of the established rates by the ICC. Through the Reed-Bullwinkle Act of 1948, Congress extended the railroads' immunity to engaging in collective rate-setting activity. Thereafter, any railroad action undertaken pursuant to the rate bureau established by the authorized agreement of Eastern Railroads was immune from antitrust scrutiny.*fn8 The MDL 587 juries were instructed fully on all immunity issues. The liability jury determined that B & LE had violated the antitrust laws through forms of conduct which were not immune.*fn9 The damages jury calculated its awards based upon the railroads' non-immune conduct.*fn10 The Third Circuit ultimately concluded "that the district court correctly characterized B & LE's anti-competitive activity as market preclusion, and Keogh's protective rule [could not be applied] to forbid recovery for the resulting economic detriment." 998 F.2d at 1159.

The MDL 587 plaintiffs successfully demonstrated that the railroads conspired to protect their control over the ore transportation market and effectively retarded the entry of lower-cost competitors into that market. It was the railroads' collective hindering of the development of the lower-cost market which defined the MDL 587 litigation. The railroads' concerted action was found to have thwarted competition by precluding the steel companies from utilizing alternative, lower-cost private docks, which in turn diminished the steel companies' economic incentives to develop self-loaders.*fn11 The natural consequences of these activities compelled the steel companies to continue to pay the rates lawfully established by the railroads. And, while the measure of damages began with the ICC-approved tariffs, the non-immune anti-competitive market preclusion orchestrated by the railroads distinguished the steel companies' damage awards from those based on concerted rate-making activities protected by Keogh. Because the juries were instructed fully on the scope of the Keogh doctrine and found both the offensive conduct and the resulting damages to be beyond its scope, the steel companies' damages were not based on activities undertaken to establish tariff rates approved by the ICC.*fn12

B & LE also argued that the MDL 587 damage claims were precluded by the indirect purchaser doctrine established in Illinois Brick, as interpreted in Mid-West Paper Products Co. v. Continental Group, Inc., 596 F.2d 573 (3d Cir. 1979). Illinois Brick was a price-fixing case where the Supreme Court held that only the original purchaser who initially paid the inflated price could maintain an antitrust action. In Mid-West Paper, the Third Circuit applied the doctrine and held that only purchasers from a price-fixing conspirator sustained an antitrust injury and purchasers from non-conspiring competitors of the conspirators could not recover, even though the conspiracy may have enabled the independent competitor to charge higher prices due to an inflated market. Judge Fullam reasoned that the indirect purchaser doctrine did not bar recovery of the steel companies' material-handling awards or the dock and trucking companies' recoveries. He similarly reasoned that the inflated dock-handling charges were incurred by the steel companies as customers of the railroads and thus as direct purchasers. The inflated lake transportation charges, although less clear, also survived an Illinois Brick challenge because of the steel companies' history of direct involvement in the ownership and control of ore transportation vessels.*fn13

The Third Circuit upheld the steel companies' damage awards against B & LE's Illinois Brick challenge under a more complex and differently focused inquiry. It considered each component of the recovered damages to determine whether the injury had a causal relation to the anti-trust violation, focusing on and balancing the consideration of (1) the causal connection between the violation and the harm and the intent of B & LE to cause that harm, (2) whether the injury was intended to be redressed by the antitrust laws, (3) the directness of the injury, (4) the existence of other direct victims and (5) the potential for duplicative recoveries or the recovery of damages which would require a complex apportionment analysis. The court reasoned that the steel companies' lake transport savings awards were recoverable because the conspiracy took the form of and sought to effectuate a market exclusion, the transportation industry existed exclusively for the steel companies, the direct nature of the injury established a sufficient causal connection to the conspiracy, the injury was a type intended to be redressed by the antitrust laws and, while there were other direct victims and the potential for duplicative recoveries and complex apportionment problems, this component of the steel companies' damages was measured by the difference between the amounts they actually paid to transport the ore and the lower prices they would have paid had the conspiracy not blocked implementation of the lower-cost system. Ascertaining this difference did not require undue speculation. It likewise upheld the steel companies' recoveries for inflated dock handling charges against B & LE's challenge of indirect injury, reasoning that although the dock companies were another direct victim of the conspiracy, the steel companies were awarded damages for the inability to utilize private docks and thus the damages arose from the conspiracy's ...


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