FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF
MASSACHUSETTS [Hon. Nathaniel M. Gorton, U.S. District Judge]
Kenneth R. Berman, with whom Heather B. Repicky and Nutter,
McClennen & Fish LLP were on brief, for appellant.
J. Duane III, with whom Scarlett M. Rajbanshi and Peabody
& Arnold LLP were on brief, for appellee.
Thompson, Circuit Judge, Souter, Associate Justice,
and Barron, Circuit Judge.
THOMPSON, Circuit Judge.
dispute between an insurance company and its insured has
potentially wide-reaching implications for how liability
insurers must conduct themselves in the Commonwealth of
Massachusetts. The controversy here revolves around whether
an insurer may be required to, as part of its defense of a
claim against its insured, provide and pay for counsel to
prosecute its insured's counterclaim against the
case, the insured, VisionAid, Inc. ("VisionAid"),
is a defendant in a state court suit filed by a former
employee, Gary Sullivan, who alleges that his termination was
the product of illegal age discrimination. VisionAid's
defense includes, among other bases, a claim that it
terminated Sullivan not because of his age, but because it
discovered that he had misappropriated several hundred
thousand dollars of corporate funds. But VisionAid does not
want to simply rely on this as a defense. It wants to sue
Sullivan for misappropriation in an attempt to recover those
funds. Importantly for our purposes, it wants its insurer,
Mount Vernon Fire Insurance Company ("Mt. Vernon"),
who is covering the defense against the age-discrimination
claim, to also cover the prosecution of the misappropriation
claim. Whether or not Mt. Vernon has to do this is the crux
of this case.
resolve this issue, we have to look to Massachusetts law,
which governs in this diversity action. When we do that, it
becomes clear that the dispositive state law questions here
have not been resolved by the Massachusetts Supreme Judicial
Court ("SJC"). As a result, we respectfully certify
the questions for resolution by the SJC. See Mass.
S.J.C. Rule 1:03.
the facts in the underlying dispute are contested, the ones
bearing on the issues before us today are not. We'll give
a rundown to put the legal issues into perspective.
is a Massachusetts-based company, which manufactures and
distributes (among other things) lens cleaning and eye safety
products. At the times that matter to us, VisionAid was
insured, under an "employment practices" liability
policy (the "Policy"), by Mt. Vernon.
October 2011, VisionAid fired Sullivan, its then-Vice
President of Operations. About a year later, Sullivan brought
VisionAid before the Massachusetts Commission Against
Discrimination ("MCAD"), alleging that
VisionAid's termination of him was based on his age and,
therefore, illegal. VisionAid told Mt. Vernon about the MCAD
claim, and Mt. Vernon appointed counsel to defend VisionAid
in that forum. Counsel sought to defend the claim by arguing
that VisionAid fired Sullivan because of legitimate
non-discriminatory reasons, namely his sub-par performance
and misappropriation of company funds.
negotiations proved fruitless. Sullivan, who had started with
a demand of $400, 000, repeatedly reduced this number
(bottoming out at $5, 000) before he eventually told
VisionAid's appointed counsel that he would walk away
with no money at all if VisionAid would agree to sign a
mutual release. VisionAid was unwilling to do this as it
still wanted to go after Sullivan for the allegedly stolen
money and, as such, it did not consent to the settlement.
Sullivan voluntarily dismissed his MCAD complaint in February
months later, Sullivan filed an age discrimination complaint
(which asserted several additional causes of action) against
VisionAid in Massachusetts state court. Mt. Vernon indicated
that it would continue to defend VisionAid in the state court
action subject to a reservation of rights. The
"reservation of rights letter" indicated that
counsel appointed in connection with the MCAD proceedings
would continue to represent VisionAid in the state court
action "unless and until such time that it is determined
that there is no coverage under this policy" and that
VisionAid had the right to accept or reject this defense.
reacted. It asserted that it did not accept Mt. Vernon's
reservation of rights and that it would exercise its right to
choose its own attorney. Mt. Vernon responded via letter. It
withdrew its reservation of rights and, because of this,
indicated that appointed counsel would remain VisionAid's
defense counsel. The letter also stated that while Mt. Vernon
was aware that VisionAid wished to pursue a counterclaim
against Sullivan, Mt. Vernon's position was that the
Policy was strictly a defense-liability policy and that it
was not required pursuant to the Policy to pay for ...