7th Circuit Finds Broad Breach of Contract Exclusion in Prof Services Liability Policy Unenforceable

Published by Bruce Huibregtse, Gregory M. Jacobs on | Permalink

Recently, in Crum & Forster Specialty Insurance Co. v. DVO, Inc., Slip Op., Case No. 18-2571 (7th Cir. Sept. 23, 2019) (“Slip Op.”), the Seventh Circuit held that, under Wisconsin insurance policy interpretation principles, an insurer may not avoid its coverage responsibilities by invoking an exclusion that is broad enough to fully encompass the scope of the coverage grant, thus rendering the policy illusory.

The dispute at issue originated from a state court action that WTE-S&S AG Enterprise, LLC (“WTE”) brought against DVO, Inc. (“DVO”), an anaerobic digester design and manufacturing company.  WTE alleged that DVO breached a contractual agreement between the parties by failing to properly design and produce a digester.  DVO provided notice of the claim to Crum & Forster Specialty Insurance Company (“Crum & Forster”), DVO’s primary and excess liability insurer, under its comprehensive insurance policy that included Errors & Omissions coverage to protect DVO from professional malpractice claims.

After initially providing a defense of the lawsuit under a reservation of rights, Crum & Forster subsequently disclaimed all of its coverage obligations based on language in the policy that excluded from coverage claims or damage “based upon or arising out of” breach of contract.  This denial ultimately led to a coverage dispute between the parties, with DVO taking the position that the breach of contract exclusion was unenforceable because it effectively rendered the E&O coverage illusory by broadly encompassing all potential professional liability claims.

The district court rejected DVO’s position, concluding that the breach of contract exclusion would not apply to third-party claims asserted against DVO by entities to which DVO was not in direct contractual privity.  Slip. Op. at 3.  The district court further held that, even if it accepted DVO’s position that the exclusion as written rendered the coverage illusory, the proper remedy would be to narrow the exclusion to allow coverage for third-party claims, which would not help DVO under the circumstances given that DVO and WTE had a contractual relationship.  Id.

On appeal, the Seventh Circuit took issue with both holdings.  Regarding the scope of the exclusion, Judge Rovner noted that it expressly applies not only to direct breach of contract allegations, but also to any claim “based upon or arising out of” that contract.  Thus, because Wisconsin courts have interpreted such language to broadly apply to any claim originating from, growing out of, or flowing from a contractual breach, including tort claims asserted by third parties (see Great Lakes Beverages, LLC v. Wochinski, 2017 WI App 13, ¶¶ 20-25, 373 Wis. 2d 649), the district court’s more narrow interpretation must be rejected.  Slip Op. at 6-8.  The court accordingly concluded that the scope of the breach of contract exclusion as written was more broad than the professional liability insuring agreement, thus rendering the E&O coverage illusory.  Slip Op. at 10.

Moreover, the Seventh Circuit found that the district court improperly focused on hypothetical third-party claims in asserting that the exclusion simply should be narrowed to not exclude such claims.  Rather, the court found that under Wisconsin law illusory insurance coverage must be reformed to meet the insured’s reasonable expectations, which requires a trial court to consider the intended role of the coverage and, under these particular circumstances, a determination regarding whether DVO expected its E&O coverage to apply to liability arising out of negligence, omissions, mistakes, and errors stemming from its professional services.  Slip Op. at 11-12.

While the Seventh Circuit ultimately remanded the case to the district court to properly evaluate DVO’s reasonable expectations of coverage, it did note that the breach of contract exclusion was set forth in an endorsement that applied to all of the various coverages offered by the comprehensive liability policy (including CGL, pollution liability, and cleanup costs).  The court suggested that a possible reformation would be to find that DVO did not reasonably expect the endorsement to apply specifically to its E&O coverage, as that is the only coverage in the policy that was rendered illusory by application of the exclusion.  Slip Op. at 12.

This case is an important reminder that, under settled Wisconsin principles of insurance policy interpretation, insurance policies must (and should) be applied consistently with the insured’s purpose and intent in purchasing the coverage.  Insureds should keep these equitable principles in mind when asserting their coverage rights, especially under circumstances where the policy at issue is written on standard coverage forms drafted unilaterally by the insurance industry.

Court of Appeals, District II, Upholds Town’s Denial of CUP for Cell Tower

Published by Elizabeth C. Stephens, Susan Allen, Kyle P. Olsen on | Permalink

In Eco-Site LLC et. al. v. Town of Cedarburg, 2019 WI App 42, the Wisconsin Court of Appeals, District II affirmed the Town of Cedarburg’s authority to deny Eco-Site LLC’s conditional use permit application to build a cell tower.

After a full discussion of the information and issues, the Town Board denied Eco-Site’s application on four bases - three rooted in its ordinance and one in state law. First, the Board found the cell tower would likely result in the reduction of nearby property values. Second, the Board determined the placement of the cell tower was incompatible with land uses on adjacent land. Third, the Board concluded the cell tower would pose dangers to public health, safety and welfare. And, fourth, the Board noted that Eco-Site did not comply with Wis. Stat. § 66.0404(2)(b)6.’s “search ring” requirement in its application.

The plaintiff argued that the federal Telecommunications Act of 1996 and Wis. Stat. § 66.0404 constrain municipalities’ ability to regulate the siting and construction of new mobile service support structures and facilities. Specifically, plaintiff argued municipalities are prohibited from denying siting or construction permission by ordinances that prohibit placement of a cell tower in a particular location, or “based solely on aesthetic concerns.”

While acknowledging these limitations on municipal authority, the Circuit Court found that the Town’s denial of the cell tower CUP application was permissible, supported by substantial evidence, and not “just another way of saying aesthetics.” The Court of Appeals agreed, noting that of the Town’s six CUP standards regulating cell tower siting, none prohibited towers in certain locations or was based purely on aesthetics.

The Court of Appeals rejected Eco-Site’s claims that the Town misapplied its ordinance regarding the proposed cell tower’s compatibility with adjacent lands or relied on solely aesthetic concerns. Rather, the Town intentionally chose to zone land residential and agricultural “to keep this area rustic, rural and populated.” These zoning decisions and development goals were not purely aesthetic and did not prohibit towers in specific locations.

The Court also found the Town’s and citizen’s concerns regarding reduced property values were legitimate and not purely aesthetic. Eco-Site argued that the mere presence of “aesthetic language” in the Town’s denial letter suggested that the decision was impermissibly based on aesthetics. But the Court noted that the denial letter also discussed how the proposed project would affect broader uses of the neighborhood and nearby property values. The Court found this to be a decisive factor, explaining that the legislature’s choice of words matters. That is, an application can be denied for reasons relating to aesthetics, just not “based solely on aesthetic concerns.” 2019 WI App 42 at ¶23. Therefore, the Court found the Town’s CUP standards and its denial of Eco-Site’s permit valid because “it simply does not matter that aesthetic comments were made.”

The Court further held that, despite the parties’ differing interpretations of the statute, the Town provided the requisite substantial evidence for its denial. 2018AP580 at ¶24; see Wis. Stat. § 66.0404(2)(d)4. This deferential standard allows the Court to uphold a municipality’s decision if it finds sufficient evidence to suggest that “reasonable persons could decide as the Town did.” Oneida Seven Generations Corp. v. City of Green Bay, 2015 WI 50 ¶ 43.

In a concurring opinion, Judge Reilly stated that the Court could have affirmed the lower court’s holding for another reason: Eco-Site’s failure to demonstrate that existing locations or collocation could not meet the public’s communication needs. See Wis. Stat. § 66.0404(2)(b)6.

This decision represents an important acknowledgment of municipalities’ regulatory authority over cell tower siting. However, the Court’s decision suggests that, when denying cell tower permit applications, a municipality should ensure that it first gathers and examines substantial evidence, and finds multiple non-aesthetic reasons for denial.

Court of Appeals Weighs in on Class Action Cert Issues Under Federal Standard Recently Adopted in WI

Published by Susan Allen, Gregory M. Jacobs on | Permalink

Last month, District I of the Wisconsin Court of Appeals was provided an opportunity to review a circuit court’s grant of a motion for class certification under the newly-revised version of Wis. Stat. § 803.08, which adopted the language and scope of FRCP 23, the federal class certification analogue.  See Harwood v. Wheaton Franciscan Services, Inc., et al., Case No. 2018AP1836 (Aug. 20, 2019).

At issue were allegations that Wheaton Franciscan Services, Inc. and a number of affiliated entities (collectively, “Wheaton”) had violated Wis. Stat. § 146.83, which places strict limitations on what health care providers may charge for the production of certain medical records, including a prohibition on charging any certification or retrieval fees to any patients or persons authorized by the patient to access the records.  Ms. Harwood alleged that she was one of many patients that had been charged with such fees in violation of this statute and accordingly filed a complaint on behalf of all such persons that had been charged by Wheaton in the past six years.

The circuit court granted Ms. Harwood’s class certification motion, concluding that the forty-plus Wheaton invoices submitted in support of her motion demonstrated that the proposed class met the requirements of Wis. Stat. § 803.08—Wheaton had charged numerous patients the fees in dispute, the patients had all been charged the same fees and would be entitled to the same statutory remedies if such fees amounted to a violation Ms. Harwood’s claim was typical and substantially similar to the claims of the unnamed class members, and the class shared predominantly the same issues given the straightforward nature of the damages calculations under the statute.  Id. ¶¶ 31-39.

The Court of Appeals affirmed the circuit court’s decision in full, providing future litigants with a number of key takeaways in its written decision, including the following:

  • The Court of Appeals affirmed that Wisconsin appellate courts will continue to review all circuit court 803.08 class certification decisions under an abuse of discretion standard, which is consistent with the deference afforded to federal district courts.  Id. ¶ 41. 

 

  • When adopting the revisions to Wis. Stat. § 803.08, the Supreme Court left it up to the lower courts to determine whether application of the reformed statute to previously-filed matters (such as this one) “would not be feasible or would work injustice.”  Id. ¶ 4, n.4.  The Court of Appeals did not disturb the circuit court’s conclusion that application of the reformed statute here would actually benefit both parties in that Wheaton “get[s] the benefit of a more rigorous analysis, which in turn corresponds to less appellate risk for [Ms. Harwood].”  Id. ¶ 34.  Litigants should expect a similar adoption of the reformed standard in their pre-existing matters unless they can substantiate that it would result in one or more parties suffering significant and concrete prejudice.

 

  • The Court of Appeals expressly agreed with the circuit court’s finding that public policy favors certifying a class when, as here, “the amount in controversy is so small that the wronged party is unlikely ever to obtain judicial review of the alleged violation without a class action.”   Id. ¶ 58.  Both courts appeared to find this reasoning especially persuasive and a core principle behind allowing individual aggrieved parties to litigate their claims collectively.

 

  • The Court of Appeals rejected Wheaton’s reliance on federal Third Circuit precedent imposing a “heightened ascertainability” requirement upon proposed class members (which requires “a reliable and administratively feasible mechanism for determining whether putative class members fall within the class definition,” see Byrd v. Aaron’s Inc., 784 F.3d 154, 163 (3d Cir. 2015)), noting that the federal Seventh Circuit disagrees that FRCP 23 imposes such a rigorous requirement upon potential class members.  Slip. Op. ¶ 64 (citing Mullins v. Direct Digital, LLC, 795 F.3d 654, 672 (7th Cir. 2015).  This suggests that Wisconsin courts will interpret federal Seventh Circuit precedent as more persuasive than other circuits when addressing class certification issues under the newly-reformed version of Wis. Stat. § 803.08, and may even view such precedent as binding (as the next bullet point suggests).

 

  • The Court of Appeals cited favorably to Szabo v. Bridgeport Machines, Inc., 249 F.3d 672 (7th Cir. 2001), for the proposition that it would be improper for a circuit court to certify a class based solely on the allegations raised in the complaint, as that would “‘move[] the court’s discretion to the plaintiff’s attorneys—who may use it in ways injurious to other class members, as well as ways injurious to defendants.’”  Slip. Op. ¶ 62 (quoting Szabo, 249 F.3d at 677)).  The Court of Appeals ultimately held that such circumstances were not present here, where the plaintiff had substantiated its claims by submitting the Wheaton invoices as evidence.  Id.  The Court further rejected Wheaton’s argument that it needed more discovery to properly respond to the plaintiff’s certification motion, noting that the parties had already had an opportunity to conduct discovery and that the crucial evidence to the analysis (i.e., the Wheaton invoices) were Wheaton’s own business records.  Id. ¶ 64.  Future litigants accordingly should take note that Wisconsin courts may be receptive to arguments seeking to delay class certification decisions under circumstances where discovery of potential evidence relevant to the analysis may be warranted.

Seventh Circuit Reaffirms Stringent Standards for Municipal Liability in Civil Rights Actions

Published by Susan Allen, Kurt M. Simatic, Elizabeth C. Stephens on | Permalink

Since the United States Supreme Court’s seminal decision in Monell v. New York Department of Social Services, a municipality can be only found liable for civil rights claims brought under 42 U.S.C § 1983 if a plaintiff can show that a policy or custom of the municipality caused the violation of his or her constitutional rights. In a recent case involving a Wisconsin county jail, the U.S. Court of Appeals for the Seventh Circuit affirmed the rigorous standard articulated by Monell and reaffirmed the limited applicability of “single-incident” violations where liability is found absent an established pattern or practice of the violation. 

Plaintiffs are two female former county jail inmates who both alleged that a male corrections officer committed repeated acts of sexual assault against them and subsequently encouraged them to conceal the assaults from other corrections officers and inmates. County officials were unaware of the assaults until one of the women reported them to investigators in a neighboring county after her release, prompting an internal investigation by the county in which the assaults had allegedly occurred. When county officials confronted the corrections officer with the assault allegations, he immediately resigned and was eventually sentenced to 30 years in prison for the assaults. 

Plaintiffs filed a civil rights lawsuit against both the corrections officer and the county alleging violations under the Fourth and Eighth Amendments of the U.S. Constitution. In support of their claims, plaintiffs asserted that (1) the jail’s sexual assault policies and training were inadequate; (2) county officials tolerated sexually offensive comments by corrections officers; (3) threats of sexual assault against inmates were not taken seriously by county officials; and (4) county officials declined to implement all of the provisions of the federal Prison Rape Eliminate Act (“PREA”). For these reasons, they argued, the county was deliberately indifferent to the risk of sexual assault of inmates by corrections officers and therefore liable for the corrections officer’s acts under Monell as well as under a single-incident liability theory.

The jury found in plaintiffs’ favor on all claims and awarded each plaintiff $2,000,000 in compensatory damages against both defendants, as well as $3,750,000 in punitive damages against the corrections officer.  The county moved for both judgment as a matter of law and a new trial, arguing that plaintiffs’ offer of proof was insufficient bordering on deceptive. The Court denied the county’s request. The county appealed. 

In a 3-1 decision, the Court of Appeals panel reversed, holding that plaintiffs failed to meet its burden of proof on any of the three Monell factors: (1) the existence of an express or implied unconstitutional custom or policy; (2) policymakers’ deliberate indifference to a known or obvious risk; and (3) evidence that the custom or policy caused the constitutional violation. 

First, the Court concluded that plaintiffs failed to produce any evidence at trial to support their argument that the county’s written policies against sexual assault were inadequate at preventing or detecting sexual assault. The Court held that in order to prove liability under this theory, plaintiffs were required to show actual culpability by the county (i.e. adherence to policies that the county knew or should have known failed to prevent sexual assaults against inmates). Having failed to produce any evidence of a history of sexual assaults by corrections officers against inmates or show the county’s decision not to adopt all of provisions of PREA constituted a custom or policy that led to the constitutional violations, the Court disposed of the argument.

Second the Court rejected plaintiffs’ argument that the county’s implicit policies (i.e., custom or practice) condoned and encouraged sexual misconduct.  The Court held that a jail captain’s participation in “tier talk,” a term described as “not necessarily flattering talk,” inappropriate remarks by jail officials over a twelve year period, and the county’s investigation into a single allegation of inappropriate touching of an inmate by a corrections officer were insufficient proof of a “widespread” unconstitutional policy or practice. The Court found that the alleged “tier talk” and other remarks were not necessarily sexually explicit and the inappropriate touching (putting an arm around an inmate’s waist and patting her backside) did not rise to the same degree of the “repeated and coercive sexual abuse” perpetrated by the corrections officer in this case.  Slip op. at 24. 

Third, the Court rejected plaintiffs’ argument that the county failed to adequately train its employees to prevent inmate sexual assault. The Court found that these were little more than conclusory allegations, that there was no widespread pattern of comparable behavior and, most significantly, that the offending corrections officer admitted at trial that his conduct was contrary to all of the training he received, jail policy, and Wisconsin law.

Finally, the Court also rejected plaintiffs’ attempt to shoehorn their failure-to-train claim into a single-incident liability exception to Monell’s “policy or custom” requirement. Although the U.S. Supreme Court has left open the possibility that “in limited circumstances, a local government’s decision not to train certain employees about their legal duty to avoid violating citizens’ rights may rise to the level of an official government policy for purposes of § 1983,” slip op. at 36 (quoting Connick v. Thompson, 563 U.S. 51, 61 (2011)), the circumstances that would give rise to the exception is exceedingly narrow and requires that policymakers are negligently unaware of their obligation to safeguard citizens’ constitutional rights. The Court found that was not the case here. The county had implemented official policies prohibiting corrections officers from having any sexual contact with inmates and regularly conducted state-certified training to corrections officers to protect inmates from sexual assault.  

Judge Scudder dissented from the panel opinion. He, too, recognized the “demanding standard for municipal liability,” slip op. at 50 (Scudder, J., dissenting in part), but concluded that in light of all of the evidence at trial, a reasonable jury could have found that the county acted with deliberate indifference to the need for more training for and monitoring of jail staff. The dissent seems to raise broader concerns that the majority’s forceful rejection of the sufficiency of the evidence presented at trial may act as a disincentive for municipal entities to take more aggressive measures to prevent sexual abuse of inmates housed in their jails.

Importantly, both the majority and dissenting opinions affirmed that the high evidentiary threshold plaintiffs must meet to prove municipal liability remains intact. 

On July 24, 2019, plaintiffs filed a motion petitioning the court for rehearing and rehearing en banc. In support of their motion, plaintiffs argue for a lower evidentiary standard in Monell claims and challenge the sufficiency of the county’s official policies and training designed to prevent inmate sexual assault. This case is generating substantial interest among high-profile civil rights organizations. On the same day plaintiffs filed their motion for rehearing, the ACLU and other prisoners’ rights organizations filed a brief amici curiae in support of plaintiffs’ position.

In light of the substantial and growing interest of civil rights organizations in this case and others like it, municipalities should take special note of one key aspect implicit in the majority’s holding: Although the Monell standard remains a rigorous one, a municipality may be required to have affirmative policies in place to avoid liability. This is evident in the majority’s rejection of plaintiffs’ argument that the county was deliberately indifferent to the sexual abuse of inmates based in large part on the county’s adoption and implementation of state-approved policies and training as well officials’ reasonable responses to prior allegations of sexual misconduct.

Municipalities may thus be well-advised to review their policies and practices in light of this decision and, where deficient, modify them. For assistance with conducting a compliance review and update of sexual assault policies, contact Kurt Simatic or Liz Stephens at (608) 256-0226.

Public Records Requests: Form Matters

Published by Kurt M. Simatic, Kyle P. Olsen on | Permalink

Wisconsin’s Public Records Law requires officials to provide “the greatest possible information” in response to public records requests. Wis. Stat. § 19.31. In Lueders v. Krug, the Wisconsin Court of Appeals, District II, clarified that this mandate requires officials to provide electronic copies of materials if electronic copies are requested.

In June 2016, Bill Lueders emailed State Representative Scott Krug to request copies of all citizen correspondence relating to specified bills and key terms. Krug made paper copies of the responsive emails, which Lueders personally inspected. In July, Lueders again emailed Krug to revise his request, clarifying that he wished “to receive the records in electronic form.” Krug refused, arguing that the paper copies were sufficient, and citing Wis. Stat. § 19.35(1)(b):

If a requester appears personally to request a copy of a record that permits copying, the authority having custody of the record may, at its option, permit the requester to copy the record or provide the requester with a copy substantially as readable as the original.

Lueders filed a mandamus action to require Krug to release the documents in electronic form. The circuit court granted mandamus relief to Lueders. The court of appeals affirmed.

The court of appeals first concluded that Krug misinterpreted the applicable statute. Section 19.35(1)(b) only applies when a requester appears in person and makes a request. Here, Lueders made both of his requests by email. Further, the Legislature amended this section in the 1990s; previously, the section applied to all public records requests. This change demonstrated to the court of appeals that the Legislature intentionally distinguished between in-person and other public records requests.

The court of appeals next explained why paper copies were not an adequate substitute for electronic copies. As in State ex rel. Milwaukee Police Ass’n v. Jones—where an amended request for a digital copy of an audio recording was not satisfied by having previously provided an analog copy—electronic copies contain substantially more and different information compared to paper copies. For example, metadata (i.e., data about other data) can “show when documents were created and who created them[; …] a paper printout from electronic records, unlike an electronic copy, results in a loss of some information.” Lueders at ¶ 12.

Ultimately, Krug was left arguing that the paper copies were “good enough” in response to a request for electronic copies. The court disagreed, and ordered release of electronic copies.

Moving forward, public records custodians should carefully review all records requests, and provide answers in the desired format (when this would not require them to create additional documents, i.e., create a record). Officials should also understand what metadata is, and what it can reveal to public records requesters.

Right to Appeal an Order on a Motion to Compel Arbitration: Wisconsin Supreme Court Makes It Final

Published by Laura E. Callan, Jeffrey A. Mandell on | Permalink

Buried in many modern contracts (from standard construction industry contracts to employment agreements, and from consumer contracts to mortgages and leases) are agreements to arbitrate any existing or future disputes. These arbitration provisions may appear innocuous, but, when a subsequent dispute develops between the contracting parties and one party prefers to be in court, a dispute-within-the-dispute arises. The party wishing to arbitrate must ask the court for an order mandating that the parties resolve their dispute in arbitration. In considering a request for such an order, the court must determine whether the arbitration provision is valid and, if so, whether it applies to the parties’ dispute. The court then rules on whether to compel arbitration.

As in most litigation, the party that loses the fight over whether to proceed in court or arbitration may wish to appeal. In Wisconsin, most appeals fall into one of two categories: appeals as of right and permissive appeals. “A final judgment or final order … may be appealed as a matter of right … unless otherwise expressly provided by law” under Wis. Stat. § 808.03(1). This provision encompasses “a judgment, order or disposition that disposes of the entire matter in litigation as to one or more of the parties, whether rendered in an action or special proceeding.” Id. “A judgment or order not appealable as of right” cannot be appealed before final judgment, unless the party wishing to appeal asks permission from the appellate court and the request for leave to appeal is granted. Wis. Stat. § 808.03(2). Notably, the time allowed for requesting leave (14 days, per Wis. Stat. § 809.50) is shorter than the time for initiating an appeal as of right (generally 45 or 90 days, per Wis. Stat. § 808.04).

Whether an order on a motion to compel arbitration is immediately appealable as of right under § 808.03(1) was unclear until the Wisconsin Supreme Court’s recent decision in L.G. v. Aurora Residential Alternatives, Inc. In that case, the Court held that if a circuit court denies a motion to compel arbitration, the party wishing to arbitrate has an immediate opportunity to appeal.

L.G., a mentally disabled resident of one of Aurora’s facilities, accused an Aurora employee of sexually assaulting her. After the employee was convicted of fourth-degree sexual assault, L.G. filed suit against Aurora, seeking monetary damages. Aurora responded with a motion to compel arbitration (and to stay the lawsuit pending the outcome of the arbitration), relying on an arbitration agreement L.G. had signed. The circuit court denied Aurora’s motion.

When Aurora appealed, L.G. moved to dismiss the appeal for lack of jurisdiction, arguing that the underlying order was non-final and that Aurora therefore needed to seek permission to appeal. By the time Aurora filed its appeal, the 14-day window for seeking permission had closed, so the entire question was whether the circuit court’s order declining to mandate arbitration was a final order appealable as of right. 

The court of appeal granted L.G.’s motion to dismiss the appeal. It held that, because the order denying arbitration does not dispose of the entire lawsuit, it is not a final order appealable as of right under § 808.03(1). In the court of appeals’ view, Aurora’s only avenue to appeal the circuit court’s arbitration order was § 808.03(2), which requires a request for permission to appeal within 14 days of the order. Since Aurora had not made a timely request for permission to appeal, the court of appeals dismissed Aurora’s appeal for lack of jurisdiction.

The Wisconsin Supreme Court reversed. Writing for the Court (which was unanimous, with two Justices not participating), Justice Daniel Kelly explained that a motion to compel arbitration and an accompanying request to stay litigation is a “special proceeding” within § 808.03(1). The Court held that the text of the Wisconsin Arbitration Act (Wis. Stat. Ch. 788) makes clear that the proceedings on whether the parties agreed to arbitrate a dispute are distinct from the merits of the dispute itself. When the circuit court issues an order resolving arbitrability, its order disposes of the entire special proceeding. Accordingly, even though the order denying Aurora’s arbitration request meant that the merits of L.G.’s case remained to be litigated before the circuit court, the order was nonetheless final for purposes of appeal under § 808.03(1).

Parties to modern contracts should take note of the Aurora decision. Under the Court’s holding, a party need not bear the expense and ordeal of a full trial (or a complete arbitration) before it has the right to appeal the circuit court’s ruling on a motion to compel arbitration. For parties who value mandatory arbitration, care should be taken to include a provision specifying that disputes will be governed by Wisconsin law and heard only in Wisconsin courts so that any arbitration dispute can be immediately appealed under Aurora.

What the U.S. Supreme Court’s Bethune-Hill Decision Means for Legislative Intervenors in Wisconsin

Published by Jeffrey A. Mandell on | Permalink

Earlier this week, the U.S. Supreme Court decided in Virginia House of Delegates v. Bethune-Hill, No. 18-281 (U.S. June 17, 2019), that one chamber of the Virginia legislature lacked legal standing to appeal a federal court order requiring that some legislative districts be withdrawn. Virginia’s Attorney General had defended the districts in the trial court, but ultimately decided not to pursue the argument on appeal. When the House of Delegates, which had intervened in the redistricting dispute, sought to prosecute the appeal itself, the Supreme Court dismissed the appeal.

The case is of more than passing interest here in Wisconsin, where our Legislature has recently increased its legal authority to intervene in litigation. What, if anything, does this new decision from the U.S. Supreme Court portend for cases in which the Wisconsin Legislature might seek to participate? The answer in any given case will likely turn on the particular circumstances, but this week’s decision suggests the new intervention laws might not give the Wisconsin Legislature as much leverage in federal-court litigation as might have been imagined.

To begin, a little background. In December 2018, new Wisconsin laws expanded the Legislature’s authority to intervene in litigation. (Litigation challenging these laws, both procedurally and substantively, is pending at the Wisconsin Supreme Court; this blog post assumes for the sake of argument that the intervention provisions are valid.) Under a new provision of law, any time

a party to an action challenges in state or federal court the constitutionality of a statute, facially or as applied, challenges a statute as violating or preempted by federal law, or otherwise challenges the construction or validity of a statute, as part of a claim or an affirmative defense, the assembly, the senate, and the legislature may intervene … at any time in the action as a matter of right.

Wis. Stat. § 803.09(2m); accord Wis. Stat. § 13.365. In the case of such intervention, “the assembly shall represent the assembly, the senate shall represent the senate, and the joint committee on legislative organization shall represent the legislature.” Wis. Stat. § 13.90(2). Additionally, with respect to appeals, “[t]he joint committee on legislative organization may intervene as permitted under s. 803.09(2m) at any time.” Wis. Stat. § 165.25(1).

In short, since last December the law purports to let either house of the Wisconsin Legislature, or both houses acting as the Legislature, insert itself into any litigation involving the validity, enforceability, or proper interpretation of a state statute. Such intervention is accomplished on behalf of the legislative organ that intervenes—that is, the assembly, the senate, or the legislature represents itself, not the State of Wisconsin—and, at least with respect to appeals, legislative intervention neither “deprives [n]or relieves the attorney general or the department of justice of any authority or duty under this chapter.” Wis. Stat. § 165.25(1). 

With this background, we can compare Wisconsin’s intervention statutes with the Virginia framework that informed the Bethune-Hill decision. In Bethune-Hill, the majority opinion (written by Justice Ruth Bader Ginsburg for an ideologically heterodox coalition including Justices Thomas, Sotomayor, Kagan, and Gorsuch) considered two possible bases for the House of Delegates to pursue the appeal. First, “if the State had designated the House to represent its interests, and if the House had in fact carried out that mission, [then] the House could stand in for the State.” Slip op. at 4. Second, if the redistricting order caused sufficient harm to the House itself, that could confer legal standing for the House to appeal. See id. at 7. Only the first of these arguments is relevant for present purposes. (There is a dissenting opinion in Bethune-Hill, but it addresses only the second argument and is therefore not relevant to the discussion below.)

The majority notes that, under Virginia law, “[a]uthority and responsibility for representing the State’s interests in civil litigation … rest exclusively with the State’s Attorney General. Id. at 4 (citing Va. Code Ann. § 2.2-507(A)). It notes that the State “could have authorized the House to litigate on the State’s behalf, either generally or in a defined class of cases. Some States have done just that.” Id. at 5 (internal citation omitted). So, where in this scale does Wisconsin fall?

Arguably, Wisconsin is more like Virginia than those “other States” that have authorized legislative intervenors to represent the State’s sovereign interest. Wisconsin’s intervention statutes specify that, when one or more legislative organs intervenes, “the assembly shall represent the assembly, the senate shall represent the senate, and the joint committee on legislative organization shall represent the legislature.” Wis. Stat. § 13.90(2). None of the legislative entities authorized to intervene is empowered by law to represent the State. Moreover, at least for purposes of appeal, Wisconsin, like Virginia, appears to have “chosen to speak as a sovereign entity with a single voice.” Bethune-Hill, slip op. at 5. The Attorney General represents the State as a sovereign entity, and legislative intervention neither “deprives [n]or relieves the attorney general or the department of justice of any authority or duty under this chapter.” Wis. Stat. § 165.25(1).

One might argue that, under Wisconsin precedent, an intervenor’s “status after intervention is the same as all the other participants in the proceeding.” Zellner v. Herrick, 2009 WI 80, ¶22, 319 Wis. 2d 532, 770 N.W.2d 305 (quoting Kohler Co. v. Sogen Int’l Fund, Inc., 2000 WI App 60, ¶11, 233 Wis. 2d 592, 608 N.W.2d 746). If Wisconsin law authorizes the assembly, the senate, or the legislature to intervene, why should that organ not have every right afforded the original parties to the case? There is some power to that argument, but Bethune-Hill rejected the idea that state-court precedent authorizing a legislative intervenor to participate in an appeal would suffice to meet the jurisdictional prerequisites for a legislative intervenor to prosecute an appeal in federal court. See slip op. at 5-6 (discussing Vesiland v. Virginia State Bd. of Elections, 295 Va. 427, 813 S.E.2d 739 (2018)).

Where does this leave legislative intervention in Wisconsin? It depends on whether the case is proceeding in state or federal court. In a state-court proceeding—where, in contrast to federal court, standing requirements are both less stringent and not jurisdictional in nature—a legislative intervenor may well be able to argue that it has the same procedural rights as an original party, including the right to appeal an adverse ruling, even if the Attorney General or some other State actor opts not to appeal. (What happens if and when both houses of the Legislature intervene and advocate opposing positions is a question that perhaps a court will need to determine at some point in the future.)

In federal court, however, legislative intervenors may find that Bethune-Hill poses a greater obstacle. As the Bethune-Hill majority explains, “intervenor status alone is insufficient to establish standing to appeal” in federal court. Slip op. at 10. Wisconsin’s intervention laws do not appear to give legislative intervenors a strong basis to argue that, as a general matter, they have legal authority to represent the State. There may be specific suits in which legislative actors have stronger claims to appeal, either because they were named parties from the outset or because they have clearer legal authority to speak for the State on the issue under dispute.

Notably, would-be legislative intervenors may run into problems in federal court even before they wish to appeal. Intervention in federal court is governed by federal law, not state statute. See 28 U.S.C. § 2403(b); Fed. R. Civ. P. 24. Though Wis. Stat. § 803.09(2m) purports to authorize the assembly, senate, or legislature to intervene “in state or federal court   … at any time … as a matter of right,” federal courts may not open their doors on that basis alone. Indeed, the Legislature has already been denied intervention in one federal case. See Planned Parenthood of Wis., Inc. v. Kaul, No. 19-cv-038-wmc (W.D. Wis. Apr. 22, 2019). The Wisconsin Legislature may find that federal courts look askance at its efforts to intervene, just as the Bethune-Hill Court did at the Virginia House’s effort to appeal.

Use It Or Lose It:  SCOTUS Ruling Means Employer Defense To Discrimination Claims Can Be Waived

Published by Meg Vergeront on | Permalink

On June 3, 2019, the U.S. Supreme Court unanimously held that failure of an employee to file a discrimination claim with the EEOC prior to bringing a discrimination lawsuit does not deprive a court of jurisdiction over the suit.  That means that an employer can waive the defense to a discrimination claim based on failure to timely file with the EEOC.  Consequently, employers should raise the defense as early as possible in the litigation. 

Title VII of the Civil Rights Act of 1964—a federal anti-discrimination law—requires employees to file discrimination and retaliation claims with the Equal Employment Opportunity Commission (EEOC) before filing a lawsuit against their employers regarding those claims.  Title VII further requires that such claims be filed within a specified period of time.  So, what happens if an employee fails to follow the rules?  The federal appellate courts split on the issue.  Some ruled that it was jurisdictional and so could be raised at any time in the litigation.  Other courts held that the rule was merely procedural and so could be waived if not raised early in the litigation.

In Fort Bend County v. Davis, the Supreme Court settled the split.  It held that the failure-to-file defense was not jurisdictional.  That is, the failure to file a claim with the EEOC did not deprive a court of constitutional authority to hear the claim.  Rather, the requirement that an employee filed a claim with the EEOC before proceeding to court is a claims-processing rule.  This distinction is significant because jurisdictional defenses can be raised at any time in the litigation and cannot be waived.  Failure to follow a claims-processing rule—a non-jurisdictional failure—can be waived if not timely raised.  The bottom line?  Employers need to raise the failure-to-file defense at the earliest possible point in the litigation, either in a motion to dismiss or in an answer.  Otherwise, the defense may be deemed waived. 

Supreme Court Finds Unexpected Difference between Corporations and Limited Liability Companies

Published by Olivia M. Pietrantoni, Kurt M. Simatic, Jeffrey A. Mandell on | Permalink

In Marx v. Morris, 2019 WI 34, the Wisconsin Supreme Court interpreted the Wisconsin LLC Act in an unexpected way. Specifically, Marx held that LLC members may bring suit in their capacity as members, instead of on behalf of the LLC, against other members, even when the harm alleged is primarily to the LLC. This deviates from corporate law principles, which require that, if the primary harm is to the corporation, shareholders must bring a derivative action on behalf of the corporation and cannot sue in their own capacities.

Background

Marx arose out of the operations of North Star Sand, LLC. North Star was a Wisconsin LLC with six members. Each member was itself an LLC, and each of the member LLCs was controlled by a different individual. Among other assets, North Star had a wholly owned subsidiary, Westar Proppants, LLC. Dispute arose when one of North Star’s members sought to purchase Westar.

During a meeting to conduct North Star’s business, Morris (who controlled R.L. Co., LLC, a member of North Star) offered to purchase Westar for $70,000. (He made this offer on behalf of DSJ Holdings, LLC, another entity in which he had a partial ownership interest.) A majority of North Star’s members voted not to accept the offer. 2019 WI 34, ¶13.

After the vote, Morris became “very aggressive.” Id., ¶14. He then made a new motion to sell Westar to DSJ. Murray (who controlled R&R Management Funds, LLC, another member of North Star) objected on the bases that a vote had already occurred, that there was insufficient notice of this motion, and that Morris had a conflict of interests. Nonetheless, when the members voted on Morris’s motion, it passed. Id. DSJ subsequently sold Westar to another entity for a “substantial sum.” Id., ¶15.

Two members of North Star—Fracsand, LLC (whose sole member is Marx) and R&R Management Funds, LLC (whose sole member is Murray)—filed suit, alleging that R.L. Co., LLC (who sole member is Morris), “willfully failed to deal fairly with them while having a material conflict of interest … in violation of Wis. Stat. § 183.0402(1).” Id., ¶2. In addition to the various LLC parties, Marx and Murray participated as plaintiffs in their individual capacities, and Morris was named as a defendant in his individual capacity.

Marx, Murray, and their LLCs alleged several claims against Morris and his LLC, including violation of § 183.0402 (“Duties of Managers and Members”). Morris moved for summary judgment on all claims, asserting that Marx and Murray’s claims properly belonged to North Star (which was not a plaintiff) and that the Wisconsin LLC Act displaced any common-law duties of LLC members (as well as claims arising from alleged breaches of such duties).

The circuit court denied Morris’s summary judgment motion. The court of appeals certified the case to the Wisconsin Supreme Court, which affirmed the circuit court’s ruling.

The Court’s Decision

In a majority opinion authored by Chief Justice Roggensack, the Supreme Court rejected Morris’s argument that members of an LLC lack standing to sue in their own capacity and that the only permissible plaintiff here was North Star. The Supreme Court reviewed general principles of LLCs and how they differ from corporations, specifically noting that LLCs may elect to be taxed as partnerships, such that income, gain, loss, and deductions pass through to the individual members. See 2019 WI 34, ¶¶22-34. Based on that review, the Court concluded that an injury to an LLC is not the same as an injury to a corporation where the LLC has adopted partnership-like treatment in its Operating Agreement. Accordingly, the corporate standing principle that individual shareholders cannot directly sue a corporation’s director or officers when the primary injury is to the corporation is inapplicable. “injuries to [an LLC] and to its members are not mutually exclusive because financial injury to [the LLC] flows through to its members just as injury would if [the LLC] were a partnership rather than an LLC.” Id., ¶43. The court further explained that nothing in ch. 183 (the portion of the Wisconsin Statutes governing LLCs) requires claims against LLC members to be brought in the LLC’s name. Id., ¶¶45-46.

The Court also held that ch. 183 did not preclude the plaintiffs’ common-law claims. Wis. Stat. § 183.1302(2) states “unless displaced by particular provisions of this chapter, the principles of law and equity supplement this chapter.” The Court held that a statutory displacement under ch. 183 must be specific and that the LLC Act does not “constitute[] the entirety of an LLC member’s or manager’s obligations to other members and to the LLC.” 2019 WI 34, ¶53. Because Morris did not develop arguments for displacement of each claim, the common-law claims survived summary judgment. Id.

Separate Opinion

Justice Kelly wrote a separate opinion concurring in part and dissenting in part. See id., ¶¶69-110. Both Justice Abrahamson and Justice Grassl Bradley joined that opinion.

The separate opinion argued that Marx and Murray should not have been able to bring any claims in their individual capacities because they are not members of the LLC. Id., ¶¶71-80. Furthermore, it contended the LLCs they control (which are members of North Star) lacked standing in this instance because Wis. Stat. § 183.0305 provides that members may bring suit by or against the LLC only if:

  1. The object of the proceeding is to enforce a member’s right against or liability to the limited liability company, or
  2. The action is brought by the member under Wis. Stat. § 183.1101, which requires a majority vote of disinterested members. 

Justice Kelly would have held that the first point is not at issue in this case, and the second point does not permit the members to bring suit because there was no majority vote by disinterested members.

The separate opinion further concluded that the majority’s reliance on “differential treatment of LLCs and corporations in matters of taxation and distribution of profits” is misplaced.  Id., ¶¶80-89.  Any differences are “largely a matter of choice,” and should not serve as a basis for members to be able to sue an LLC in their personal capacities and not on behalf of the LLC.  Id., ¶84.

Analysis

This case breaks new ground in Wisconsin law by holding that members of an LLC may pursue claims directly against other members of the LLC, even when the alleged harm is primarily to the LLC. This is noteworthy not only because it deviates from corporate-law principles, but also because it provides an avenue around Wis. Stat. §183.1101’s requirement that an action on behalf of a LLC must be authorized by a majority vote of disinterested members. The separate opinion warns that “immediate, real-life problems” will result from this sea change in Wisconsin LLC law.  2019 WI 34, ¶86 (Kelly, J., concurring in part and dissenting in part). Only time, and further actions in the circuit courts, will tell. 

Under Wisconsin Law, Commute Time is Non-Compensable Even if Using Employer’s Vehicle

Published by Meg Vergeront on | Permalink

The Wisconsin Supreme Court recently decided that Wisconsin law does not require employers to pay employees for the time spent driving company vehicles between their homes and job sites.  Kieninger v. Crown Equipment Corp.  Federal law has a similar rule, but it is subject to more limitations than the Wisconsin rule.  Under federal law, employees are not entitled to pay for the time spent driving company vehicles between their homes and job sites if the travel is within the normal commuting area for the employer’s business and the employer and employee agree to such a set up.  Where state and federal wage and hour law apply, the law that is most favorable to the employee must be followed.  In this case, the federal law is more favorable to employees and therefore controls on this issue. 

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