Watson v. Employers Liability Assurance Corporation/Concurrence Frankfurter

by Felix Frankfurter

United States Supreme Court

348 U.S. 66

Watson  v.  Employers Liability Assurance Corporation

 Argued: Oct. 14, 1954. --- Decided: Dec 6, 1954

Mr. Justice FRANKFURTER, concurring.

While I agree with the Court's result, I find the course of reasoning by which it is reached not without serious obstacles. Since the difficulties involve constitutional issues, decision upon them should be avoided if a less doubtful ground is available. In my opinion there is a basis which readily invites today's decision. Whether Louisiana may rewrite a contract, whose obligations are determined by Massachusetts or Illinois, by deleting a substantial feature of that contract and thereby enlarging the obligation of the insurance company, surely raises a serious question affecting the constitutional relationships of the States one to another. Contrariwise, whether Louisiana, free as it was to exclude the insurance company from coming into the State to do business, was empowered to condition the company's entry by an undertaking to observe a public policy binding on all local insurance companies and strictly related to the protection of serious interests of its own citizens, seems to me a question easier of solution. Accordingly I would rest the decision on this ground.

This controversy arises out of a contract made between Employers' Liability Assurance Corp., a British corporation, and the Toni Company, a division of the Gillette Safety Razor Co., a Delaware corporation with principal offices in Boston, Massachusetts. The contract contained this provision:

'No action shall lie against the company unless, as a condition precedent thereto, the insured shall have fully complied with all the terms of this policy, nor until the amount of the insured's obligation to pay shall have been finally determined either by judgment against the insured after actual trial or by written agreement of the insured, the claimant and the company.'

It was issued and delivered in Massachusetts to Gillette and copy delivered in Illinois to Toni. Happily, it is not necessary to determine whether the obligations flowing from this contract are determined exclusively by the law of Massachusetts or by the law of Illinois. Concededly, both States recognize the right of an insurance company to safeguard its treasury by making its indirect liability to a third person contingent on a judgment against the insured or compromise settlement participated in by the insurer. Howsoever the fact may be phrased or explained away, to allow suits by a third-party claimant directly against the insurance company prior to a judgment against the insured is to subject the insurance company to an obligation which it had not undertaken and which indeed it had expressly refused to assume. In sanctioning the protection of insurance funds afforded by the 'no-action' clause, Massachusetts and Illinois have expressed state policy of the same constitutional authority as Louisiana asserted in its legislation allowing direct actions. Massachusetts is deeply concerned with the fiscal well-being of insurance companies whose activities center in that State; this is of considerable importance to its citizens. In addition, both Massachusetts and Illinois share concern for the interest of the insured in the scope and nature of the obligations which bind as well as protect him. The premiums payable by the insured under this policy varied directly with the losses paid by the insurer and to that extent the insured had a stake in the 'no-action' clause. To treat that clause as though it were a redundant or an insubstantial part of the agreement is to flout familiar experience of the readiness of juries to amerce insurance companies. ^[1]

To resolve these conflicting policies solely on the basis of the public policy of Louisiana is to assume that there is only one principle involved in a problem when in fact there are conflicting principles of equal relevance. This Court has not heretofore disregarded the interests of States in the position of Massachusetts and Illinois by exclusive regard for the policy of a State in the position of Louisiana when regard for its interest necessarily tangles with the interests of sister States. To be sure, a State may refuse to give affirmative help in enforcing a contract valid in a sister State where the obligation was incurred, but against its own policy. At least it may do so insofar as the Full Faith and Credit Clause is no barrier. But to deny judicial enforcement of a contract through its courts when such contract sufficiently offends local policy is a very different thing from rewriting a contract and enforcing it in a manner contrary to the undertaking of the makers.

That Louisiana's attempt to change the terms of the contract of insurance in this case presents a serious question, apart from the power of Louisiana to exclude a foreign insurance company or admit it on condition, is emphatically shown by Hartford Accident & Indemnity Co. v. Delta & Pine Co., 292 U.S. 143, 54 S.Ct. 634, 78 L.Ed. 1178. In that case an action was brought in Mississippi on a fidelity bond insuring against employee defalcations 'in any position, anywhere.' The bond had been issued while the executive offices of the insured were temporarily in Tennessee, and was issued and delivered in that State. After the insured moved its main offices to Mississippi, the State of its incorporation, suit was brought there for its treasurer's thieving in Mississippi. The policy contained a provision that a claim under the contract must be made within 15 months after the termination of suretyship for the defaulting employee. The claim was not made within that period, but the Mississippi Supreme Court held that this condition was not enforceable because contrary to a Mississippi statute. This Court reversed the Mississippi court, holding that the Mississippi statute could not disregard the limiting provision of the contract. The principle was laid down that a State may not 'in an action based upon such a contract enlarge the obligations of the parties to accord with every local statutory policy solely upon the ground that one of the parties is its own citizen.' 292 U.S. at page 149, 54 S.Ct. at page 636. Joining in this unanimous decision were two members, Mr. Chief Justice Hughes and Mr. Justice Brandeis, who probably had more specialized knowledge to make them aware that 'Government has always had a special relation to insurance', Osborn v. Ozlin, 310 U.S. 53, 65, 60 S.Ct. 758, 763, 84 L.Ed. 1074, than any other Justices ever to sit on this Court.

In the Hartford Indemnity case, as here, the policy covered transitory risks, without a defined situs, and the State of the forum had a foreseeable concern with the protection of assets within its jurisdiction at the time the policy was issued, for the policy issued listed 21 employees who were then working in Mississippi. Nevertheless, Mississippi, the State of the forum, was not allowed to enlarge the obligations of a contract elsewhere validly consummated.

Our more recent cases have not made inroad on the governing consideration in the Hartford Indemnity case, that the State which fixes the terms of insurance contracts has interests to be protected by the Constitution no less important than has a State which seeks to excise provisions of such a contract. In both the Osborn case, supra, and Hoopeston Canning Co. v. Cullen, 318 U.S. 313, 63 S.Ct. 602, 87 L.Ed. 777, the Court was concerned merely with the validity of legislation of a regulatory nature. In neither was the Court faced with the problem of applying to an existing valid contract made outside the State local law modifying such contract. Realization that the Louisiana statute, in the context of this case, raises the delicate problem of balancing interests-that refractory aspect of due process-admonishes its avoidance when an easier solution lies at hand.

These, then, are the formidable constitutional hurdles that would have to be cleared were this an action against an insurance company which, somehow or other, was duly served in Louisiana but which had not exercised the privilege of doing business there subject to the condition of amenability to Louisiana direct action statutes. I have no doubt, however, that Louisiana can exact from Employers, as it did, valid consent to direct action in the case of injuries inflicted in Louisiana upon its citizens by Employers' policyholders. It can do so as part of the fair bargain by which it gave hospitality to Employers for doing business in Louisiana.

After the grain is winnowed from the chaff in some hundred opinions dealing with so-called 'unconstitutional conditions,' insofar as they relate to the power of a State to exclude a foreign corporation or condition its entry, the residuum is clear. In an early leading case the State's authority was asserted in absolute terms:

'Having no absolute right of recognition in other States, but depending for such recognition and the enforcement of its contracts upon their assent, it follows, as a matter of course, that such assent may be granted upon such terms and conditions as those States may think proper to impose. They may exclude the foreign corporation entirely; they may restrict its business to particular localities, or they may exact such security for the performance of its contracts with their citizens as in their judgment will best promote the public interest. The whole matter rests in their discretion.' Paul v. Virginia, 8 Wall. 168, 181, 19 L.Ed. 357. ^[2]

After a while, some obvious, strictly defined qualifications were made:

'The only limitation upon this power of the state to exclude a foreign corporation from doing business within its limits * * * or to exact conditions for allowing the corporation to do business or hire offices there, arises where the corporation is in the employ of the federal government, or where its business is strictly commerce, interstate or foreign. The control of such commerce being in the federal government, is not to be restricted by state authority.' Pembina Consolidated Silver Mining & Milling Co. v. Commonwealth of Pennsylvania, 125 U.S. 181, 190, 8 S.Ct. 737, 741, 31 L.Ed. 650.

After considerable further judicial experience, the matter was thus summarized in our own day by Mr. Justice Holmes:

'* * * we assume in favor of the defendants that the State has the power and constitutional right arbitrarily to exclude the plaintiff without other reason than that such is its will. But it has been held a great many times that the most absolute seeming rights are qualified, and in some circumstances become wrong. One of the most frequently recurring instances is when the socalled right is used as part of a scheme to accomplish a forbidden result. Frick v. (Commonwealth of) Pennsylvania, 268 U.S. 473, 45 S.Ct. 603, 69 L.Ed. 1058; American Bank & Trust Co. v. Federal Reserve Bank of Atlanta, 256 U.S. 350, 358, 41 S.Ct. 499, 65 L.Ed. 983; Badders v. United States, 240 U.S. 391, 394, 36 S.Ct. 367, 60 L.Ed. 706; United States v. Reading Co., 226 U.S. 324, 357, 33 S.Ct. 90, 57 L.Ed. 243. Thus the right to exclude a foreign corporation cannot be used to prevent it from resorting to a federal Court, Terral v. Burke Construction Co., 257 U.S. 529, 42 S.Ct. 188, 66 L.Ed. 352; or to tax it upon property that by established principles the State has no power to tax, Western Union Telegraph Co. v. (State of) Kansas, 216 U.S. 1, 30 S.Ct. 190, 54 L.Ed. 355, and other cases in the same volume and later that have followed it; or to interfere with interstate commerce, Sioux Remedy Co. v. Cope, 235 U.S. 197, 203, 35 S.Ct. 57, 59 L.Ed. 193; Looney v. Crane Co., 245 U.S. 178, 188, 38 S.Ct. 85, 62 L.Ed. 230; Western Union Telegraph Co. v. Foster, 247 U.S. 105, 114, 38 S.Ct. 438, 62 L.Ed. 1006. A State cannot regulate the conduct of a foreign railroad corporation in another jurisdiction, even though the company has tracks and does business in the State making the attempt. New York, Lake Erie & Western R.R. Co. v. Commonwealth of Pennsylvania, 153 U.S. 628, 646, 14 S.Ct. 952, 38 L.Ed. 846.' Fidelity & Deposit Co. of Maryland v. Tafoya, 270 U.S. 426, 434-435, 46 S.Ct. 331, 332, 70 L.Ed. 664.

This was a particularization of his earlier generalization in Denver v. Denver Union Water Co., 246 U.S. 178, 38 S.Ct. 278, 62 L.Ed. 649:

'The ordinance of the city could mean no more than that the Company must accept the city's rates or stop-and as it could be stopped by the city out and out, the general principle is that it could be stopped unless a certain price should be paid. * * * It is true that this principle has not been applied in cases where the condition tended to bring about a state of things that there was a predominant public interest to prevent, but I see no ground for the application here of anything to be deduced from Western Union Telegraph Co. v. (State of) Kansas, 216 U.S. 1, 30 S.Ct. 190, 54 L.Ed. 355; Pullman Co. v. (State of) Kansas, 216 U.S. 56, 30 S.Ct. 232, 54 L.Ed. 378; or Motion Picture Patents Co. v. Universal Film Manufacturing Co., 243 U.S. 502, 37 S.Ct. 416, 61 L.Ed. 871.' Id., 246 U.S. at page 197, 38 S.Ct. at page 285.

The upshot of our decisions was most recently thus summarized by Mr. Justice Roberts for the Court:

'It has repeatedly been said that qualification of a foreign corporation in accordance with the statutes permitting its entry into the state constitutes an assent on its part to all the reasonable conditions imposed. Lafayette Insurance Co. v. French, supra, page 408 of 18 How. (404), 15 L.Ed. 451; St. Clair v. Cox, supra, page 356 of 106 U.S. (350), 1 S.Ct. 354, 27 L.Ed. 222; Connecticut Mutual Life Insurance Co. v. Spratley, 172 U.S. 602, 614, 19 S.Ct. 308, 43 L.Ed. 569; Old Wayne Mut. Life Ass'n v. McDonough, 204 U.S. 8, 22, 27 S.Ct. 236, 51 L.Ed. 345; Commercial Mutual Accident Co. v. Davis, 213 U.S. 245, 254, 29 S.Ct. 445, 53 L.Ed. 782. It is true that the corporation's entry may not be conditioned upon surrender of constitutional rights, as was attempted in the cases on which the appellant relies. Terral v. Burke Construction Co., 257 U.S. 529, 42 S.Ct. 188, 66 L.Ed. 352; Fidelity & Deposit Co. (of Maryland) v. Tafoya, 270 U.S. 426, 46 S.Ct. 331, 70 L.Ed. 664; Frost Trucking Co. v. Railroad Commission, 271 U.S. 583, 46 S.Ct. 605, 70 L.Ed. 1101; Hanover Fire Insurance Co. v. Harding, 272 U.S. 494, 47 S.Ct. 179, 71 L.Ed. 372. And for this reason a state may not exact arbitrary and unreasonable terms respecting suits against foreign corporations as the price of admission, Power Mfg. Co. v. Saunders, 274 U.S. 490, 47 S.Ct. 678, 71 L.Ed. 1165. * * *

'The power of the state altogether to exclude the corporation, and the consequent ability to condition its entrance into the state, distinguishes this case from those involving substituted service upon individuals * * *.' State of Washington ex rel. Bond & Goodwin & Tucker, Inc., v. Superior Court, 289 U.S. 361, 364-365, 53 S.Ct. 624, 626, 77 L.Ed. 1256.

The standard of reasonableness, as expressed in the Washington case, imposed on the power of a State to admit a foreign corporation on conditions, embraces all prior instances of denial of state power. It gives a rational basis for the holdings that a State may not restrict federal judicial power or burdensomely regulate or tax interstate commerce, or, without justification of ample interests of its own, project its powers into the domain of another State.

What Louisiana has done here falls outside any of the specific instances or the guiding principles recognized by this Court from time to time as limitations upon what still remains the practically arbitrary power of a State in dealing with the desire of a foreign corporation, not privileged to do so by federal authority, to do business within its bounds. ^[3] Here we have no claim of interference with interstate commerce or with the operations of the Federal Government. There is no discrimination between foreign and domestic insurance companies. And there is no denial of due process because the Louisiana condition of admission meets the test of reasonableness, a standard to be applied in diverse contexts in the light of all relevant factors, including here the recognized power to exclude a foreign corporation. It meets the test of reasonableness because the conditions imposed are fairly related to the interests which Louisiana may appropriately protect in surrendering its right to exclude a foreign corporation. The interests of Massachusetts or Illinois do not so obviously subordinate those of Louisiana that the latter must constitutionally yield to the former.

Surely it was reasonable for Louisiana to adopt the method it did of meeting some of the difficulties in obtaining jurisdiction over out-of-state tortfeasors, typified in the present case by the dispute over the efficacy of attempted service upon Gillette, the insured. Even where that specific problem is not present, the State may justifiably have felt concern over the delays in satisfaction of judgments for injuries sustaned in Louisiana by Louisiana citizens that are inherent under the traditional system which requires a separate action by the victim of an insured tortfeasor to reach the latter's insurance should he default in payment of a judgment against him. It cannot be said that Louisiana was extorting an unfair or unreasonable advantage for its citizens as the price of its permission to Employers' to tap the Louisiana insurance market. ^[4] Nor can it be said that in thus protecting its own serious interests it was selfishly or ruthlessly seeking to inject itself into matters that were the sole or predominant concern of sister States. ^[5]

Notes

1. Additional protections to both insurer and insured are swept aside under the Louisiana direct action statute. The interest of the insured in the outcome of the litigation decreases, with concomitant reduction in the likelihood of his vigorous cooperation in the insurer's defense. The burden of this same obligation of cooperation becomes increasingly oppressive to a conscientious insured as service on far-flung agents of the insurer leads to remote judicial proceedings.
2. An earlier case expressed, in a jumble of loose generalizations, the assumption that there were some inherent restrictions on a State's power to deal with foreign corporations. Lafayette Insurance Co. v. French, 18 How. 404, 407, 15 L.Ed. 451. Phrases like 'natural justice' or 'natural reason' or 'the principles of the social compact' were in fashion at that time for stating intrinsic limitations on the exercise of all political power. More recently, the power of this Court to strike down legislation has been more acutely analyzed and less loosely expressed. Rhetorical generalizations have not been deemed sufficient justification for invalidating legislation.
3. Whatever the survival value of Frost & Frost Trucking Co. v. Railroad Commission, 271 U.S. 583, 46 S.Ct. 605, 70 L.Ed. 1101, cf. Stephenson v. Binford, 287 U.S. 251, 53 S.Ct. 181, 77 L.Ed. 288, it is significant that, while it was there held that to subject a private carrier to a common carrier's liabilities as a condition of permitting a local trucking company to use the highways was violative of due process, the opinion did not even advert to the earlier case of Pierce Oil Corp. v. Phoenix Refining Co., 259 U.S. 125, 42 S.Ct. 440, 66 L.Ed. 855, in which the imposition of a common carrier's liabilities on a private oil carrier was upheld as a condition on the entry of the foreign corporation.
4. Thus it has been held that a State may, as a condition of admission, require compliance with local antitrust policy, Waters-Pierce Oil Co. v. State of Texas, 177 U.S. 28, 20 S.Ct. 518, 44 L.Ed. 657, even as to the operations of foreign corporations in another State, Hammond Packing Co. v. State of Arkansas, 212 U.S. 322, 29 S.Ct. 370, 53 L.Ed. 530. It may require the assumption by a private carrier of some of the duties of a common carrier, Pierce Oil Corp. v. Phoenix Refining Co., 259 U.S. 125, 42 S.Ct. 440, 66 L.Ed. 855; and it may impose methods of substituted service on foreign corporations which, if applied to individuals, would be violative of due process, State of Washington ex rel. Bond & Goodwin & Tucker, Inc., v. Superior Court, 289 U.S. 361, 53 S.Ct. 624, 77 L.Ed. 1256.
5. Such cases as St. Louis Cotton Compress Co. v. State of Arkansas, 260 U.S. 346, 43 S.Ct. 125, 67 L.Ed. 297, and Fidelity & Deposit Co. of Maryland v. Tafoya, 270 U.S. 426, 46 S.Ct. 331, 70 L.Ed. 664, invalidating state statutes which attempted to prevent or penalize acts outside of the forum State are not pertinent. In these cases a State was seeking to assert its power over the happenings in another State. And so, likewise, a State may not tax property within the taxing jurisdiction of another State.