“Frankenstein” Veto Language Interpreted by Federal District Court

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A recent post on this blog noted that wine distributors were not covered by an expansion of the definition of “dealer” under 1999 amendments to the Wisconsin Fair Dealership Law (“WFDL”) due to “a creative partial veto from then-Gov. Thompson.”

That creative partial veto was front and center in a decision and order issued last week by the U.S. District Court for the Eastern District of Wisconsin, denying defendants’ motion to dismiss for failure to state a claim. The plaintiff, Winebow, Inc., had brought a declaratory judgment action seeking to affirm that it could terminate all wine distribution relationships with defendants Capitol-Husting Co., Inc., and L’eft Bank Wine Company Limited without violating the WFDL.

The crux of the defendants’ motion to dismiss was that the 1999 amendments to the WFDL should be interpreted to define wine distributors as “per se dealers” under the WFDL, subject only to limitations on small producers and sales lines constituting less than 5% of a distributor’s business. They contended that the statute covers distributors of “intoxicating liquor” as defined in section 125.02(8) of the Wisconsin Statutes, regardless of whether such distributors can meet the “community of interest” test ordinarily required for dealer status.  Defendants noted that the WFDL definition that provides per se dealer status to distributors of intoxicating liquor defines “wholesalers” with reference to section 125.02(21) of the Wisconsin Statutes, which definition does not exclude wine wholesalers.

The WFDL, however, defines “intoxicating liquor” as having “the meaning given in s. 125.02(8) minus wine.”  The words “minus wine” were inserted via Gov. Thompson’s use of what was dubbed a “Frankenstein veto,” with many other words in succeeding clauses of the legislation deleted by his veto pen, leaving only “minus” and “wine” in place. The District Court denied the motion to dismiss, finding that “[t]he statutory definition of “intoxicating liquor” is clear, and wine is expressly excluded.”

Other arguments in this case, however, may also prove to be instructive. The plaintiff’s complaint seemingly alleges that the “minus wine” language means that all wine distribution agreements are exempt from coverage under the WFDL – even if the parties’ relationship satisfies the community of interest test of section 135.02(3)(a).  The complaint states the defendants’ wholesale distribution of Winebow portfolio wines does not qualify for protection under the WFDL “as wine is expressly exempt from the WFDL.”  Plaintiff’s contention was not directly at issue in the defendants’ motion to dismiss, but presumably would be raised in a motion for summary judgment or for judgment on the pleadings.

Additional Insured Endorsements: Beware!

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Many franchise agreements require that the franchisee name the franchisor as an “additional insured” on the franchisee’s liability insurance policies.  Similar requirements are included in many distribution agreements.  The purpose of this coverage is to protect the “additional insured” from claims relating to the operations of the party purchasing the policy, as well as the purchasing party itself.

It is easy to forget, however, that insurance policies are contracts that must be carefully reviewed to confirm that the insurer is obligated to provide coverage and defend a lawsuit as the parties intended.  A recent case heard by the Illinois Appellate Court illustrates the difficulties in assuring that proper additional insured protection has been obtained.

An individual suffered injuries while lighting a cigarette behind a gas station. He sued  the gas station owner and Shell Oil, which had granted a franchise to the gas station owner to use Shell Oil’s marks.  The franchise agreement required the gas station owner to name Shell Oil as an additional insured on its liability policies.

The applicable policy endorsements, however, contained limiting language.  The first endorsement applied to Shell Oil “only with respect to their liability as grantor of a franchise to you.” The second provided that Shell Oil was an additional insured, but “only with respect to liability arising out of your operations and premises owned by or rented by you.” In the end, the Illinois court found that notwithstanding their ambiguity, the endorsements created a duty for the insurer to defend Shell Oil. 

In working with clients, we increasingly see insurers claiming they cannot provide satisfactory additional insured endorsements, for a multitude of reasons. With a little persistence, however, these objections may be overcome.  A couple reminders:

  • Merely being listed as an additional insured on a certificate of insurance does not guarantee insurance coverage.  To be afforded coverage as an additional insured, a party must be named in an endorsement to the policy, and not just on a certificate of insurance.
  • The endorsement and policy should be reviewed to confirm that (a) the party is properly named in the endorsement and (b) coverage definitions and limitations do not serve to defeat the intention of the parties, which is to protect the additional insured against claims related to the operations of the franchisee or distributor.