Philips Electronics v. NH Insurance Co., Nos. 1-99-1130, 1-99-1175 Cons.

1st District, March 31, 2000

FIFTH DIVISION

JUSTICE HARTMAN delivered the opinion of the court:

Plaintiffs Philips Electronics N.V. and Philips Electronics North America Corporation, doing business as Advance Transformer Company, (collectively Philips) brought suit against the defendant insurers from whom it had purchased fidelity insurance policies (collectively Fidelity Insurers). Philips alleged that the Fidelity Insurers breached the insurance contracts for failure to indemnify Philips for its claimed losses and for damages allegedly caused by the Fidelity Insurers' misconduct and fraud during its claims-handling process. The circuit court dismissed the counts alleging claims-handling misconduct on forum non conveniens grounds; dismissed the count alleging the Fidelity Insurers' violation of Illinois' Consumer Fraud and Deceptive Business Practices Act (Consumer Fraud Act) (815 ILCS 505/1 et seq. (West 1996)) also on the grounds of forum non conveniens; and dismissed the counts alleging breach of insurance contract and fraud as barred by the doctrine of res judicata. Philips appeals⁽¹⁾, raising as issues whether (1) the court erred in dismissing the breach of contract and fraud counts as barred by res judicata; and (2) the court abused its discretion in dismissing its claims-handling fraud and misconduct, and Consumer Fraud Act counts on forum non conveniens grounds.

Philips Electronics N.V. is a corporation organized and existing under the laws of the Netherlands with its principal place of business in Eindhoven, Netherlands. Its subsidiary, Philips Electronics North America Corporation (PENAC), is a corporation organized and existing under the laws of Delaware with its principal place of business in New York; PENAC does business in Illinois under the name Advance Transformer Company (Advance). Advance is based in Rosemont, Illinois, and manufactures electronic ballasts, triggering devices used for starting and regulating flourescent lamp fixtures.

Between December 31, 1993 and December 31, 1994, Philips was insured by the Fidelity Insurers, a group of major foreign insurance companies, under "comprehensive crime" policies.⁽²⁾ Those comprehensive crime policies indemnified Philips for losses resulting from fraudulent or dishonest acts committed by employees.⁽³⁾ Philips was covered under a total of three policies: a primary, an excess and a deductible policy. The primary policy (and the excess policy, by incorporation) provided expressly for "United Kingdom," or English, law to govern the construction, meaning and interpretation of the policy terms; the deductible policy also provided for the application of "English" law.

All but two of the Fidelity Insurers operated in the London insurance market. Two insurers entered into the contract with Philips in the United States; the remaining 11 insurers entered into the contract in London, England. Most of the 13 insurers have limited ties to Illinois: only one is incorporated in Illinois; seven are incorporated in England; and the remainder are incorporated elsewhere in the United States, Italy or Belgium. The policies were negotiated in London between a Lloyd's of London broker, on behalf of Philips, and eleven of the Fidelity Insurers; the policies were entered into in London and were structured to give Philips a deductible of $2,780,000.

In late 1994, Philips notified the Fidelity Insurers (at their London office) of a planned claim for potential losses. On August 31, 1995, Philips submitted an 88-page "Proof of Loss" prepared "on behalf of [PENAC]" pursuant to policy requirements. Philips' Proof of Loss consisted of more than 200 exhibits and a lengthy narrative, detailing the nature of its claims. Those claims centered upon the alleged dishonest and illegal conduct of its employee Theodore Filson, president of Advance.

According to Philips' Proof of Loss, Filson, his wife and two other Advance employees and their wives formed a fraudulent travel agency, using it to defraud Philips by dishonest overcharging. The Proof of Loss also described how Filson knew that the electronic ballasts' design contained an inherent flaw, yet he continued to sell and ship the defective ballasts in order to preserve or increase the appearance of Advance's performance. Filson's remuneration while president of Advance consisted of a salary, bonuses and an incentive plan; the amount of the bonus and incentive depended upon performance of Advance with regard to sales, income and inventory. In essence, the more ballasts that were sold, the more Filson would receive. As long as the ballast flaws remained undetected, Filson would retain his position, earn his bonuses and continue to embezzle money through the fraudulent travel agency scheme. The Proof of Loss therefore alleged that the shipment of defective ballasts was done, at least, with the dual purpose of maintaining the travel business fraud and of earning bonuses which Filson otherwise would not have earned. Philips terminated Filson and the other employees, but not before Filson had allowed shipment of the defective ballasts to Philips' customers.

As a result of Filson's dishonest conduct, Philips claimed losses of "at least $28,063,982." Specifically, Philips claimed $910,721.58 "embezzled by Filson *** through the fraudulent travel business" (the travel fraud); a $24,935,260.75 loss "resulting from the replacement of [the] defective product Filson fraudulently and dishonestly *** shipped into the market" (the defective ballast fraud); $218,000 in unearned bonuses paid to Filson (the bonus fraud); and "at least $2,000,000 in investigation fees." Additionally, Philips estimated its potential losses resulting from the replacement of defective parts to be "in excess of $100,000,000." Philips also reserved the right to amend or supplement the Proof of Loss as it continued to investigate its mounting losses.

Concerned that the allegation of Filson's deliberate placement of defective products into circulation on the market should not be made public, Philips further notified the Fidelity Insurers that "[t]he information contained herein is confidential and is not to be used *** for any other purpose. The release of this information to others without our express consent will be considered a breach of your fiduciary and contractual obligations under the policy." (Emphasis in original). Accordingly, Philips urged upon the Fidelity Insurers the importance of keeping the Proof of Loss confidential and made it plain that it desired to resolve any dispute with the Fidelity Insurers by arbitration or some other form of alternative dispute resolution.

Negotiations between Philips and the Fidelity Insurers regarding coverage of claims began shortly after notice was given. To that end, in late 1994 and 1995, Philips' attorney, Patrick Ardis, met with the Fidelity Insurers' independent claims adjuster, Edward Davies, in London and Illinois. As part of his investigation, Davies interviewed former and current employees of Advance and requested additional documentation from Philips. Philips provided substantial amounts of documents and information to assist Davies' investigation.

In September 1995, after learning that Davies intended to interview Filson and other former Advance employees, Ardis wrote to Davies, reminding him of the confidentiality of information contained in the Proof of Loss and requesting that Davies not provide copies of that document to the ex-employees or their counsel. Davies responded by informing Philips that he did "not consider it public dissemination to release the documents to the attorneys of the persons about whom allegations are made in the [Proof of Loss] for the purpose of giving these persons the opportunity to answer the allegations and then to judge the answers in the light of facts."⁽⁴⁾ Accordingly, Davies confronted the former employees about Philips' allegations and showed the Proof of Loss to those former employees and their attorneys during his investigation.

On November 29, 1995, while Davies' investigation was on-going, the Fidelity Insurers initiated declaratory judgment proceedings against Philips, naming PENAC, in the Commercial Court of the High Court of Justice, Queen's Bench Division, in London, England (Commercial Court), seeking a declaration that they owed no duty to indemnify Philips under the policies for losses resulting from the bonus fraud, the defective ballast fraud, and investigation fees. Philips moved to dismiss the action on jurisdictional grounds, but its motion was denied.

In refusing dismiss the Fidelity Insurers' claim, the Commercial Court found that the issues before it involved threshold issues of construction. Recognizing that the facts underlying Philips' claims of loss (the former employees' allegedly fraudulent and dishonest conduct) were largely centered in Illinois, the Commercial Court nonetheless determined that England was an appropriate forum in large part because the question before the court was one entirely of policy construction and was not fact-sensitive. In particular, the Commercial Court recognized that Philips, or PENAC, had submitted a detailed Proof of Loss, specifying the basis for its claim, which was presumed to be true for purposes of determining coverage. The Commercial Court further emphasized that it had provided Philips' attorney with the opportunity to "take [the Commercial Court] through the Proof of Loss to show [it] that by reason of perhaps inconsistent or alternative allegations of fact any attempt to resolve the matters of construction which [the Fidelity Insurers] put in issue would be doomed to failure or would likely prove difficult, but [Philips' attorney] declined the invitation." Thereafter, Philips sought interlocutory leave to appeal the Commercial Court's decision, which the English Court of Appeal granted on June 19, 1996.

On May 17, 1996, after the Commercial Court issued its opinion but before leave to appeal was allowed, Philips filed its original complaint in the circuit court of Cook County. Initially, Philips asserted that the Fidelity Insurers breached the insurance contract and breached their duty of good faith and fair dealing by providing former Advance employees with copies of its Proof of Loss, despite repeated requests to keep the information confidential, and by filing a peremptory claim against Philips in England. Philips further asserted a violation of the Illinois Insurance Code (215 ILCS 5/155 (West 1994)), alleging that Fidelity Insurers unreasonably refused to indemnify Philips for its losses.⁽⁵⁾

Contemporaneous with the circuit court case, the English action proceeded. On May 17, 1997, the English Court of Appeal affirmed the Commercial Court's refusal to dismiss. Recognizing Philips' Illinois complaint, the English Court of Appeal nonetheless found that England was the appropriate forum to determine issues of construction.⁽⁶⁾

Following the determination of the English Court of Appeal, the Fidelity Insurers' English declaratory judgment action again proceeded in the Commercial Court. There, the Fidelity Insurers accepted liability as to the claim involving $910,721.58 embezzled by Filson through the fraudulent travel business. Philips conceded that its claim for $2,000,000 in investigation fees was not recoverable under the policies. Remaining, therefore, were claims regarding the defective ballast fraud and the bonus fraud, resulting in two main issues of construction in dispute: whether the claim for bonuses fraudulently obtained is excluded by the words "other than *** bonuses *** earned in the normal course of employment" contained in the policies and (2) whether the claims for bonuses and, more significantly, for the cost of replacing defective ballasts, are claims for "loss of Money, Securities, and other property" within the meaning of the policies.

As to Philips' first claim of loss, the bonus fraud, the Commercial Court found that, as a preliminary matter, Filson's bonus fraud resulted in a loss of "Money, Securities, and other property" as provided by the policies. The Commercial Court further determined that the fraudulent bonuses were not "earned in the normal course of employment" and therefore were not excluded by the policies. The Commercial Court held, therefore, that the Fidelity Insurers were "not entitled to a declaration that on the assumed facts they are not liable under section 1 of the policy in respect of the bonus fraud. Whether they are liable or not will be a matter for the jury in Illinois, unless of course the claim is settled."

As to Philips' second claim of loss, the defective ballast fraud, the Commercial Court determined that Filson's shipment of the defective ballasts did not constitute a "loss of Money, Securities and other property" within the meaning of the policies. The Commercial Court further found the question of Filson's "manifest intent" to be "irrelevant" in light of its determination that the defective ballast fraud did not result in property "loss" as contemplated by the policies. Accordingly, the Commercial Court held "[o]n the assumed facts [the defective ballast fraud claim] fails because there was no loss of relevant property under the policy. Subject to further argument it appears *** that the insurers are entitled to an appropriate declaration to reflect that conclusion. The same is not true of [the bonus fraud claim], which [Philips] is entitled to pursue on the assumed facts." Judgment was entered on July 2, 1998, in favor of the Fidelity Insurers declaring that the Fidelity Insurers had no liability under the policies to indemnify Philips for the ballast fraud claim.

Sometime after the Commercial Court's declaratory judgment, Philips filed a third amended complaint, containing six counts against the Fidelity Insurers, in the circuit court of Cook County, raising the same allegations regarding the defective ballast fraud as in its prior complaints, namely, that the Fidelity Insurers' policies covered the losses Philips incurred in replacing the defective ballasts shipped by Filson. Count I of Philips' third amended complaint therefore again alleged that the Fidelity Insurers breached the insurance contract by refusing to indemnify Philips for its ballast fraud claim; count IV again alleged a violation of the Illinois Insurance Code as a result of the Fidelity Insurers' failure to indemnify Philips.

Count V raised, for the first time in Philips' pleading, the Fidelity Insurers' violation of the Consumer Fraud Act, alleging that "in the course of their trade and/or commerce with [Philips], the Fidelity Policy Defendants engaged in deceptive acts and practices, such as intentionally making false and deceptive promises to" Philips regarding the disclosure of Philips' Proof of Loss.

In a similar vein, count II alleged the Fidelity Insurers' "fraud" in making false statements regarding the disclosure of the Proof of Loss, fraudulently inducing Philips to provide documents and in filing the English action "without adequately investigating [Philips'] claim or declining coverage." Count III alleged the Fidelity Insurers' "tortious breach of duty" in disclosing confidential policyholder information to the former employees.⁽⁷⁾ Count VI alleged the Fidelity Insurers' "breach of separate confidentiality contract," claiming that the Fidelity Insurers breached their "partially oral" and "partially written" contract to protect Philips' confidentiality.

In response, the Fidelity Insurers moved to dismiss counts I through VI of Philips' third amended complaint. The Fidelity Insurers argued that the English judgment was res judicata as to Philips' coverage claims (counts I and IV); the claims-handling misconduct counts (counts II, III and VI) should be dismissed in favor of transfer to England on forum non conveniens grounds; and the claim for violation of the Consumer Fraud Act (count V) failed to state a valid claim.

Philips countered that the English judgment was not res judicata because Philips had "a theory that [it] did not present [in England] that [it does] want to present here" and that it had "a right to seek to recover in this case on the basis of theories, facts, and witnesses that were not presented in the English case." Philips' further asserted that it "consciously avoided making [the English action its] entire case because [it] knew that [it was] in an incomplete proceeding." Notwithstanding Philips' new theory--"that there has been a diversion of corporate assets, time, and effort by the culpable persons" which constitutes a "loss" as defined by the policies--the circuit court determined that the declaratory judgment of the English Commercial Court was res judicata as to counts I and IV.

The circuit court further dismissed counts II, III and VI, which had alleged the mishandling of Philips' insurance claims and fraudulent disclosure of confidential information, on forum non conveniens grounds. In so ruling, the court weighed such factors as the respective availability of discovery in Illinois and England, the respective court dockets of Illinois and England, the situs of the cause of action, and the availability of compulsory process for the attendance of unwilling witnesses. Finding both England and Illinois to be appropriate forums for litigation, the court nevertheless determined that the majority of relevant witnesses were located in England, as opposed to Illinois. Accordingly, the court found this factor to weigh heavily in favor of dismissal on forum non conveniens grounds. After the court dismissed counts II, III and VI on forum non conveniens grounds, it heard argument on the Fidelity Insurers' motion to dismiss count V, the alleged violation of the Consumer Fraud Act, for failure to state a claim, which it denied, leaving pending before it the Consumer Fraud Act claim.

The circuit court thereafter noticed that it had essentially bifurcated substantially similar claims which were based on the same conduct, keeping one claim (count V) in Illinois and dismissing other claims (counts II, III, and VI) to be re-filed in England. Recognizing the risk of parallel proceedings in England and Illinois, the court remarked that it "wasn't prepared to live with the fact that [it] was going to try the same issue over that [it] sent somewhere else for the convenience of it." Consequently, the court sua sponte raised the possibility of dismissing count V on forum non conveniens grounds. Despite their earlier position that the Consumer Fraud Act claim "remains here no matter what" and "would [not] be appropriately sent to England because it involves the pure interpretation of an Illinois statute," the Fidelity Insurers orally moved to dismiss count V, the Consumer Fraud Act claim, on forum non conveniens grounds. Following argument, the court granted the Fidelity Insurers' motion to dismiss count V on forum non conveniens grounds.

Philips timely appeals the circuit court's order dismissing, as barred by res judicata, counts I and IV of its third amended complaint. Philips timely sought, and was granted by this court, leave to appeal the circuit court's order dismissing counts II, III, V, and VI on forum non conveniens grounds. See 134 Ill. 2d R. 306.

I

Philips first argues that the circuit court erred in determining that the judgment of the English Commercial Court was res judicata as to counts I and IV of its complaint, which had alleged breach of insurance contract and violation of the Illinois Insurance Code. Philips characterizes the English judgment as "artificially truncated" because the English court's determination was based on a set of "assumed" facts which Philips insists were incomplete somehow.

The doctrine of res judicata provides that a final judgment, rendered on the merits by a court of competent jurisdiction, constitutes an absolute bar to a subsequent action involving the same claim, demand or cause of action. Village of Maywood Board of Fire & Police Commissioners v. Department of Human Rights, 296 Ill. App. 3d 570, 578, 695 N.E.2d 873 (1998); Airtite v. DPR Ltd. Partnership, 265 Ill. App. 3d 214, 217, 638 N.E.2d 241 (1994). The essential elements of res judicata are: a final judgment on the merits rendered by a court of competent jurisdiction; an identity of causes of action; and an identity of parties or their privies. People ex rel. Burris v. Progressive Land Developers, Inc., 151 Ill. 2d 285, 602 N.E.2d 820 (1992). Res judicata applies not only to those claims fully litigated in the first proceeding, but also to those issues that could have been raised or decided, but were not. La Salle National Bank v. County Board of School Trustees, 61 Ill. 2d 524, 337 N.E.2d 19 (1975) (La Salle National Bank). The issue of whether a subsequent claim is barred by res judicata is a question of law which this court reviews de novo. 735 ILCS 5/2--619(a)(4) (West 1996); American National Bank & Trust Co. v. Village of Libertyville, 269 Ill. App. 3d 400, 403, 645 N.E.2d 1013 (1995).

In the instant case, the parties do not dispute that the English and circuit court suits involve an identity of parties. They do disagree with respect to the existence of the other two factors, however. According to the Fidelity Insurers, the Commercial Court's declaratory judgment, determining the scope of insurance coverage as to the defective ballast fraud claim, operated as a final adjudication on the merits. The Fidelity Insurers point to this court's opinion in Philips Electronics, 295 Ill. App. 3d 895, claiming that this court "decided that the judgment of the English court would be enforceable against [Philips], precluding [it] from relitigating [its] coverage claims in [its] Illinois action." In addition, the Fidelity Insurers contend that the Commercial Court's judgment was made upon Philips' own Proof of Loss, which Philips refused to amend.

Philips' countervailing argument is that the Commercial Court's judgment, determining the scope and coverage of the relevant insurance policies, is not res judicata as to its complaint in the circuit court, because that action was severely truncated having involved a limited and incomplete set of facts. In particular, Philips maintains that the English judgment, rendered upon only those facts contained in Philips' Proof of Loss, did not resolve the dispute or address the actual merits of the controversy.

The initial inquiry in determining applicability of res judicata involves whether the declaratory judgment of the Commercial Court was final as to the merits. Notwithstanding Philips' assertion, a review of that judgment reveals that it thoroughly analyzed the policy language and its application to the set of facts contained in the Proof of Loss. Philips presents no new facts not otherwise before the Commercial Court; rather, it argues only that it had a new "theory" to present to the circuit court. Philips does not demonstrate that this new "theory" could not have been raised before the Commercial Court. Accordingly, the judgment of the Commercial Court, which assumed the truth of the facts contained in Philips' own Proof of Loss and determined coverage thereon, operates as res judicata as to the coverage claims in the circuit court. See La Salle National Bank, 61 Ill. 2d at 529-30.

Significantly, the Commercial Court provided Philips with the opportunity to "take [the court] through the Proof of Loss to show [the court] that by reason of perhaps inconsistent or alternative allegations of fact any attempt to resolve the matters of construction which [the Fidelity Insurers] put in issue would be doomed to failure or would likely prove difficult," which Philips declined. This led the Commercial Court to the conclusion that "all the parties and the interest of justice would *** be served by an earlier rather than later determination of those issues."

Alternatively, Philips argues that certain exceptions to the application of res judicata apply. In particular, Philips contends that the Fidelity Insurers have "acquiesced" in the splitting of claims; the English Commercial Court "expressly reserved" Philips' right to maintain the Illinois action; Philips was unable to rely on a certain theory because of the limitation of subject matter jurisdiction of the English court; and it would be "inequitable" to allow for an artificially truncated action to control. See Restatement (Second) of Judgments