War Between the States: Federal Court Decides PA Law Precludes Third-Party Indemnity Action Against Employer

With a conflicting web of state versus state policies that would make any Conflict of Laws professor salivate, a federal district court in Pennsylvania found a choice of law provision in a contract of sale between two businesses was unenforceable and, therefore, Pennsylvania law, rather than Texas law, applied so as to bar a third-party complaint filed against a deceased employee’s employer [Jones v. SWEPI L.P., 2020 U.S. Dist. LEXIS 7390 (W.D. Pa. Jan. 16, 2020)]. Since the fatal injury had occurred in Pennsylvania, reasoned the Court, the interest of the Keystone State was “materially greater” than the interest of Texas. Pennsylvania’s more restrictive law as to third-party complaints against an employer meant the deceased employee’s employer was immune from suit.

Background

Jones, an employee of Deep Well, sustained fatal injuries in a workplace accident that occurred at a work site in Pennsylvania. Prior to the fatal accident, Consolidated Rig sold a hydraulic jack, which allegedly played a role in Jones’s death, to Deep Well under a contract that included a choice of law provision—selecting Texas law to interpret the agreement. The contract also included a general indemnity provision pursuant to which Deep Well agreed to indemnify Consolidated Rig should the latter be sued for damages associated with the use of the hydraulic jack.

As pointed out by the District Court, as Jones’ employer, the only way Deep Well could be liable for Jones’ injuries was if Deep Well waived its statutory immunity. Under Pennsylvania’s Bester test [see Bester v. Essex Crane Rental Corp., 422 Pa. Super. 178, 619 A.2d 304, (Pa. Super. Ct. 1993) (en banc) (citing 77 P.S. § 481)], an employer only waives its statutory workers’ compensation immunity if it does so expressly and unequivocally in the contract. Texas, in contrast, does not have a Bester-like doctrine for waiver of workers’ compensation immunity—something that Consolidated Rig conceded. Simply stated, if Texas law was utilized, Deep Well was subject to liability under the rather general wording of the contract’s indemnification clause.

Forum’s State Choice of Law Rules Generally Govern

The Court initially noted that in a diversity action, a federal court must apply the forum state’s choice of law rules. The Court then added that Pennsylvania courts generally enforce the language of the agreement if the parties apply a specific state’s law to their contract. Generally speaking, therefore, Texas law should apply. However, there are, said the Court, two exceptions to this general rule:

1. When “the chosen state has no substantial relationship to the parties or the transaction and there is no other reasonable basis for the parties’ choice [Restatement (Second) of Conflict of Laws § 187(2)(a)].
2. When applying the parties’ chosen law “would be contrary to a fundamental policy of a state which has a materially greater interest than the chosen state in the determination of the particular issue and which … would be the state of the applicable law in the absence of an effective choice of law by the parties’ [Id. § 187(2)(b)].

Pennsylvania Had a “Materially Greater” Interest than Texas

The Court said the first exception did not apply. The court noted that Deep Well appeared to invoke the first exception, but only halfheartedly, and for good reason; Texas had at least some relationship to the parties. Consolidated Rig was based in Texas and it manufactured the hydraulic jack at issue in that state. The Court, therefore, rejected any argument that Texas had no substantial relationship to the parties.

The Court added, however, that the Restatement’s second exception did apply to the case. According to the Court, Pennsylvania had a materially greater interest in protecting workers injured on the job within the Commonwealth’s borders. Moreover, said the Court, the Pennsylvania General Assembly had codified that fundamental public policy in the state’s Workers’ Compensation Act. Under this analysis, therefore, the choice of law of the contract was unenforceable.

Applying Pennsylvania Law

The Court said that while determining which state’s governed the dispute was challenging, apply the law once that decision had been made was not. Consolidated Rig had conceded that its contract with Deep Well did not meet Pennsylvania’s Bester test. The Court agreed. In its contract with Consolidated Rig, Deep Well did not waive its immunity from indemnity claims brought by third parties facing personal injury liability to one of Deep Well’s employees. As a result, Consolidated Rig’s indemnity claim cannot move forward.

Conclusion

The Court concluded that applying Texas law, as the choice of law agreement provided, would violate Pennsylvania’s materially greater interest in protecting workers within the Commonwealth. The choice of law provision, then, was unenforceable. Applying the law of the state with the materially greater interest—here, Pennsylvania—meant that Deep Well was immune from Consolidated Rig’s indemnity claim. Deep Well’s Motion to Dismiss was accordingly granted.