FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF
MASSACHUSETTS [Hon. Nathaniel M. Gorton, U.S. District
Kenneth R. Berman, with whom Heather B. Repicky and Nutter,
McClennen & Fish LLP were on brief, for appellant.
Burgess, Wilchins Cosentino & Novins LLP, Edward J.
Stein, Marshall Gilinsky, and Anderson Kill P.C. on brief for
United Policy Holders, amicus curiae.
J. Duane III, with whom Scarlett M. Rajbanshi and Peabody
& Arnold LLP were on brief, for appellee.
Michael F. Aylward and Morrison Mahoney LLP on brief for
American International Group, Inc. and Massachusetts
Insurance Federation Inc., amici curiae.
Thompson, Circuit Judge, Souter, Associate Justice,
and Barron, Circuit Judge.
THOMPSON, Circuit Judge.
a diversity-based declaratory-judgment action governed (all
agree) by Massachusetts substantive law. See Erie R.R.
Co. v. Tompkins, 304 U.S. 64, 78 (1938). The case pits
an insured, VisionAid, against its employment-practices
liability insurer (say that ten times fast!), Mount Vernon
(each party's official name appears in the caption).
VisionAid and Mount Vernon are back after the busy
Massachusetts Supreme Judicial Court ("SJC, " for
short) answered some state-law questions - arising from this
litigation - that we had certified to it (we thank the SJC
for its help). As things now stand, the only question left
for us to decide is: Does a conflict of interest exist
between the parties that permits VisionAid to choose the
attorney to defend a suit brought against it by an
ex-employee, with the tab for that defense picked up by Mount
Vernon? Like the federal district judge below, we believe the
answer is no.
We Got to This Point
opinion certifying the questions is found at 825 F.3d 67 (1st
Cir. 2016). And the SJC's opinion responding to the
questions is found at 76 N.E.3d 204 (Mass. 2017). Rather than
fill up the pages repeating everything said before, we assume
the reader's familiarity with these decisions and mention
here only those details necessary to put today's matter
is a defendant in a suit filed by Gary Sullivan in
Massachusetts state court. Sullivan essentially alleges there
that VisionAid fired him as its vice president because he was
too old. An attorney named Todd Bennett filed VisionAid's
answer, insisting that VisionAid had canned Sullivan not
because of his age, but because he had performed his job
poorly, had acted insubordinately, and had embezzled money
from VisionAid on a grand scale. Bennett got involved thanks
to Mount Vernon, which - invoking the liability policy's
terms - picked him to defend VisionAid. Mount Vernon
originally acted under a "reservation of rights"
(for anyone untutored in matters of insurance law, a proper
reservation preserves an insurer's right to challenge any
duty to defend at a later stage). But after VisionAid
objected, Mount Vernon explicitly withdrew its reservation of
rights and assumed the defense unconditionally.
midst of all this, Sullivan offered to drop his
age-discrimination claim if VisionAid agreed not to pursue
its embezzlement claim. VisionAid said no. VisionAid also
made it clear around this time that it wanted Bennett to do
more than just raise Sullivan's embezzlement as a defense
- it wanted Bennett to raise the embezzlement allegation as a
counterclaim. Mount Vernon refused, explaining that because
the policy between them was a defense-liability policy, it
had no duty to fund affirmative actions and so would not fund
VisionAid's counterclaim. Ultimately, VisionAid's
personal counsel drafted the embezzlement counterclaim
no punches, Mount Vernon filed the underlying
federal-diversity action seeking a declaratory judgment
vindicating its understanding of the policy. Not willing to
back down, VisionAid responded with a two-count counterclaim:
the first count seeking a declaration that Mount Vernon's
duty to defend includes a duty to prosecute the embezzlement
counterclaim, and the second count seeking a declaration that
a conflict of interest between Mount Vernon and VisionAid
entitles VisionAid to select the attorney to defend it in
Sullivan's suit - we will say more later about the
conflict issue; for now it is enough to note that VisionAid
thinks Mount Vernon has an interest in
"diminishing" the value of VisionAid's
counterclaim, because the counterclaim is
the parties cross-moved for summary judgment. Acting on the
motions, the federal district judge ruled that given the
policy's plain language, Mount Vernon's duty to
defend does not oblige it to foot the bill for
VisionAid's affirmative counterclaim - a result, he
added, that did not violate any state law. And then the judge
rejected what he called VisionAid's
"counter-intuitive assertion" that Mount Vernon and
Bennett "have an interest in devaluing the
counterclaim." "The strength of VisionAid's
counterclaim, " the judge wrote,
both weakens the wrongful termination case against VisionAid
and increases appointed counsel's bargaining power in
settlement negotiations. Devaluing the counterclaim would
undermine Mount Vernon's own interest in limiting
Sullivan's recovery for wrongful termination.
the judge refused "to acknowledge VisionAid's parade
of horribles" it believes will occur if appointed
counsel defends against Sullivan's claims and
VisionAid's personal counsel prosecutes the counterclaim.
"[T]here is, " the judge noted, "nothing
inherently impractical or unwieldy about VisionAid relying on
its own separate counsel to assert the counterclaim."
For support, the judge noted that in responding to
Sullivan's complaint, appointed counsel wrote the answer
and VisionAid's own counsel wrote the counterclaim.
Which, the judge stressed, goes to show that these
"separate attorneys" can "collaborate and yet
accomplish their distinct objectives."
disappointed VisionAid appealed to us. And for the reasons
recorded in our prior opinion, we certified three questions
to the SJC - two on the duty-to-defend issue and one on the
(1) Whether, and under what circumstances, an insurer
(through its appointed . . . counsel) may owe a duty to its
insured . . . to prosecute the insured's counterclaim(s)
for damages, where the insurance contract provides that the
insurer has a "duty to defend any Claim, " i.e.,
"any proceeding initiated against [the insured]"?
(2) Whether, and under what circumstances, an insurer
(through its appointed . . . counsel) may owe a duty to its
insured to fund the prosecution of the insured's
counterclaim(s) for damages, where the insurance contract
requires the insurer to cover "Defense Costs, " or
the "reasonable and necessary legal fees and expenses
incurred by [the insurer], or by any attorney designated by
[the insurer] to defend [the insured], resulting from the
investigation, adjustment, defense, and appeal of a
(3) Assuming the existence of a duty to prosecute the
insured's counterclaim(s), in the event it is determined
that an insurer has an interest in devaluing or otherwise
impairing such counterclaim(s), does a conflict of interest
arise that entitles the insured to control and/or appoint
independent counsel to control the entire proceeding,
including both the defense of any covered claims and the
prosecution of the subject counterclaim(s)?
825 F.3d at 72 (brackets in original; ellipses added). That
court recently returned its answers, albeit by a divided
vote. On question (1), the SJC ruled that "an insurer
with a contractual duty to defend an insured is not required
to prosecute an affirmative counterclaim on the insured's
behalf, " either under the "contractual language in
the policy at issue or the common-law" of Massachusetts.
76 N.E.2d at 208. On question (2), the SJC held that
"the duty to pay defense costs has the same scope as the
duty to defend, and thus does not require an insurer to pay
the costs of prosecuting a counterclaim on behalf of the
insured[.]" Id. And on question (3), the SJC
concluded that given its other two answers, it need not reach
the conflict-of-interest issue as framed by us. Id.
the SJC's opinion came down, VisionAid asked us to let
each side file supplemental briefs "to address how the
[S]C's] decision affects the resolution of the
remaining" conflict-of-interest question. In its
telling, regardless of who pays the fees to prosecute the
embezzlement counterclaim (VisionAid or Mount Vernon), an
obvious conflict of interest exists "that affects the
right to select counsel" to "defend VisionAid
against Gary Sullivan's complaint." Mount Vernon
opposed the request for more briefing. Accepting
VisionAid's view that the SJC's decision does not
necessarily dispose of the conflict issue, we allowed
additional briefing from both sides and invited any
interested amicus to chime in too. With these materials in
hand, we tackle the conflict question (which again is the
only question before us), without requiring another round of
parties argue over the conflict-of-interest matter keenly and
vigorously - which is not a surprise, given how hard they
have fought in multiple courts. Bear with us now as we plow
through their contentions.
throws a lot of arguments at us, all based on its
understanding of Massachusetts law. For starters, VisionAid
argues that Bennett - the insurer-appointed counsel -
represents both VisionAid and Mount Vernon. This being so,
the argument continues, Bennett must act in good faith,
diligently carrying out his duties without sacrificing
VisionAid's interests to Mount Vernon's interests.