In Payless ShoeSource, Inc. v. The Travelers Companies, Inc., 585 F. 3d 1366 (10th Cir. 2009), the Tenth Circuit held that Travelers did not have a duty to defend and indemnify Payless against a California state court class action alleging violations of the California Labor Code (“CLC”). Though acknowledging that an exclusion in the Travelers’ Employment Practices Liability Policy was grammatically imprecise, the court concluded that the “punctuation peccadillo notwithstanding, the meaning of the parties’ contract is unambiguous.” 585 F. 3d at 1368. And in the Court’s view, the exclusion unmistakably excluded coverage for the claims in the California state court class action.
The dispute centered on Exclusion A.3 of the policy:
The Insured should not be liable for Loss on account of any Claim made against any Insured . . . for an actual or alleged violation of the Fair Labor Standards Act . . . the National Labor Relations Act, the Worker Adjustment and Retraining Notification Act, . . . any workers’ compensation, unemployment insurance, social security, or disability benefits law, other similar provisions of any federal, state or local statutory or common law or any amendments, rules or regulations promulgated under any of the foregoing . . . .
585 F. 3d at 1368-69.
The Court held that this exclusion unambiguously precluded coverage both for claims arising under the Fair Labor Standards Act (“FLSA”) and for claims involving violations of state laws that are similar to the FLSA, pursuant to the exclusion’s final clause.
Payless contended that for two reasons the exclusion did not apply to claims under the CLC. First, Payless contended that the “other similar provisions” phrase modified only the clause immediately preceding it, rather than every preceding clause in the exclusion. Applying the last antecedent grammatical rule, Payless contended that the “other similar provisions” phrase encompassed only violations of state laws that are similar to “workers’ compensation, unemployment insurance, social security or disability benefits laws.” Second, Payless contended that the FLSA and the CLC were not “similar provisions.” The Court rejected both arguments.
The Court concluded “that Payless’s interpretation simply is not a plausible reading of the document.” 585 F. 3d at 1370. The Court’s determination rested on four conclusions. “First, in order for the ‘other similar provisions’ clause plausibly to modify only the immediately preceding ‘workers’ compensation’ clause rather than all of the preceding clauses as Payless suggests, one would expect a signal suggesting some connection between them.” Id (emphasis in original). “Without some such conjunction, the ‘other similar provisions’ clause bears no more apparent relation to the immediately preceding ‘workers’ compensation’ clause than it does to any of the other preceding clauses.” Id.
“Second, the ‘other similar provisions’ clause is setoff by a comma in much the same manner as every other separately enumerated item in the list, thus further indicating its independence from the ‘workers’ compensation’ clause.” Id. “Lists commonly distinguish between separate items by the introduction of commas or semicolons, and that’s exactly what we have here.” Id.
“Third, the ‘other similar provisions’ clause comes at the end of the exclusion, not stuck somewhere in the middle, and it is at the end of the list where modifiers meant to address all of the preceding items are often found.” Id. Rather pointedly, the Court remarked that “after all, no airport that posted a sign prohibiting on airplanes ‘knives, explosives, rifles, other similar items or any item that could be mistaken for any of the foregoing’ would think that it had forbidden shotguns, but not samurai swords.” Id.
“Finally, under Payless’s competing reading of the contract, Travelers disclaimed coverage for litigation under a whole host of federal laws – FSLA, NLRA, WARN, COBRA, OSHA, and ERISA – yet, retained coverage for intentional violations of similar or identical state laws.” Id. “On this view of the contract, then, the parties clearly foresaw the possibility of claims arising under state laws with the malidous, even identical, counterpart in federal law; they also demonstrated the knowledge of how to exclude them from coverage; yet, they excluded such claims only half-hazardly or randomly.” 585 F. 3d at 1370-71. The Court rather unremarkably concluded that “the crazy-quilt scheme of coverage and exclusion resulting from Payless’s interpretation” did not “represent a rational understanding of the parties’ intent.” 585 F. 3d at 1371.
The Court further rejected Payless’s argument that the possibility of competing interpretations engendered ambiguity regarding the contract’s meaning. The Court noted that the “last antecedent principle” is only an “interpretive presumption.” The Court pragmatically observed that “grammatical rules are bent and broken all the time and we will not enforce the more grammatical interpretation of a contract when evidence, sense and meaning require a different construction.” 585 F. 3d at 1371. Reflecting a decidedly post-modern view, the Court concluded that “while the rules of English grammar often afford a valuable starting point to understanding the speaker’s meaning, they are violated so often by so many of us that they can hardly be safely relied upon at the end point of any analysis of the parties’ plain meaning.” 585 F. 3d at 1372.
The Court further rejected Payless’s invocation of the contra proferentem canon of construction. “It is less clear whether and to what degree the doctrine has an appropriate role to play when the contracting parties are sophisticated and able as Payless and Travelers both assuredly are.” Id. What is more, the Court observed “even assuming without the citing the doctrine has some appropriate function in a dispute between commercial Jupiters like Travelers and Payless, it is a function that can be triggered only if the terms of the policy are ambiguous.” 585 F. 3d at 1373. And the Court concluded that the Policy was not ambiguous.
The Court had little difficulty in rejecting Payless’s argument that the FLSA and the CLC were not “similar” because “the FLSA, unlike the California law, does not require employers to provide rest periods, meal periods or compensation for either.” 585 F. 3d at 1373. The Court concluded that “the parties’ contract does not require that the federal and state laws at issue be identical – for the exclusion to apply – the laws only must be ‘similar.’” Id. And the Court noted that “the Oxford English Dictionary defines ‘similar’ as meaning ‘of the same substance or structure throughout; homogenous’ or ‘having a marked resemblance or likeness of a like nature or kind.’” Id. On this understanding, the Court concluded that “the parties’ contract in this case asks us only to measure whether one statute, CLC that regulates the workplace is ‘similar’ to another federal statute, FLSA, that does exactly the same thing.’” The Court emphasized that we have no doubt that it is. 585 F. 3d at 1375.
