Wisconsin Supreme Court Procedural Orders Limit Circuit Court Authority To Issue Injunctions

Published by Jeffrey A. Mandell on | Permalink

The Wisconsin Constitution grants circuit courts the power to “issue all writs necessary in aid of [their] jurisdiction.” Wis. Const. art. VII, § 8. And the Legislature has expressly authorized circuit courts to issue injunctions. Wis. Stat. §§ 813.01, 813.02. Yet, in two unsigned and unpublished procedural orders issued this past spring, the Supreme Court has—intentionally or not—stripped circuit courts of the power to enjoin enforcement of unconstitutional laws.

The supreme court issued these orders in two underlying lawsuits, both challenging legislative overreach in last fall’s lame-duck extraordinary session. (Full disclosure: I represented the plaintiffs in one of those suits.) In each case, a circuit court concluded that the laws passed in the December 2018 Extraordinary Session violated the Wisconsin Constitution and issued an injunction prohibiting their enforcement. In each case, the Legislature appealed the injunction and sought a stay that would prevent the injunction from taking effect during the appeal. In each case, the supreme court granted the Legislature’s request in an unsigned, unpublished procedural order issued before the case was resolved on the merits.

These two orders suggest a substantial shift in Wisconsin law governing injunctions against the enforcement of unconstitutional laws (as well as in the legal standard that applies to motions to stay an injunction pending appeal). Understanding that shift requires examining three questions:

  1. To what extent do these orders have precedential effect?
  2. How do these orders alter the standard for stays pending appeal?
  3. Do these orders prohibit circuit courts from enjoining unconstitutional laws?

I address all three questions in detail in a new essay published in the Wisconsin Law Review Forward. This blog post provides a brief synopsis of my conclusions.

First, the orders are unpublished and unsigned. But that does not mean they lack precedential effect. The Supreme Court issues per curiam opinions that create binding precedent. And both actions of the Court and the text of the orders themselves clearly suggest that the Justices—both those in the majority and those in the written dissents—understand the orders to be precedential. Given that, it is particularly problematic that the orders were not published in any official reporter or in any online legal research databases. They are now posted online by the Wisconsin Law Review.

Second, these orders significantly change the analysis that Wisconsin courts apply in determining whether to stay an injunction pending appeal.

Almost 25 years ago, the Supreme Court established that test in State v. Gudenschwager, 191 Wis. 2d 431, 529 N.W.2d 225 (1995) (per curiam). It did so by approving the court of appeals’ prior adoption of four factors used in federal courts. See id., 191 Wis. 2d at 440 (citing Leggett v. Leggett, 396 Wis. 2d 787 (Wis. Ct. App. 1986), which cites Reserve Mining Co. v. United States, 498 F.2d 1073 (8th Cir. 1974)). The Gudenschwager opinion then adopted a balancing approach that is not entirely consistent with the factors as it articulated them.

Where the application of the balancing test yielded clear results, the weaknesses of the Gudenschwager framework were easily papered over. But where, as in the extraordinary-session cases, all parties had substantial interests at stake, the balancing became more difficult. The Supreme Court’s recent orders modified all four Gudenschwager standards:

  • The requirement that a movant make “a strong showing it is likely to succeed on the merits of the appeal,” Gudenschwager, 191 Wis. 2d at 440, is now per se satisfied in any case where the appellate court will apply de novo review.
  • The requirement that the movant show it will, in the absence of a stay, suffer irreparable harm, is satisfied anytime the movant is connected with the Legislature and a court has interfered with the enforcement of a law adopted through the legislative process.
  • And the remaining requirements—“no substantial harm … to other interested parties” and “no harm to the public interest,” id.—are subsumed to the “irreparable harm of the first magnitude” that the Court now says the Legislature suffers when enforcement of a statute is enjoined.

All of this was done without recognition, much less consideration, of the public’s interest in ensuring that all branches of the state government act within the limited power granted them by the people in the Wisconsin Constitution.

Moreover, all of it was done without acknowledgement (at least by the unsigned majority portions of the orders) that the Supreme Court was significantly changing Wisconsin law. Such modifications should not be made sub silentio, and certainly not in unpublished orders that provide the public and the Bar no notice of how the law has changed.

Third and most importantly, the orders make clear that a circuit court commits legal error any time it declines to immediately stay its own injunction preventing enforcement of an unconstitutional law. This necessarily follows from the way the orders recast the Gudenschwager test, creating per se rules for the first two factors while largely discounting the third and fourth factors. But it means that the Supreme Court has, in practical terms, divested the circuit courts of power to issue such injunctions, notwithstanding the express grants of such power to the circuit courts in both the Constitution and the Chapter 813 of the Wisconsin Statutes.

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 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 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.

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. 

Noncompliance with Notice-of-Claim Statute Is Affirmative Defense, Must Be Pleaded

Published by Kyle P. Olsen, Jeffrey A. Mandell on | Permalink

Wis. Stat. § 893.80(1d) requires a potential claimant to provide notice, including “an itemized statement of the relief sought,” to a government entity within 120 days of the event giving rise to a potential suit. In Maple Grove Country Club Inc. v. Maple Grove Estates Sanitary District, 2019 WI 43, the Wisconsin Supreme Court recently held that a government entity waives a defense of noncompliance with this statute if it fails to affirmatively raise the issue in a responsive pleading.

This matter began in 1990, when a country club constructed a sewer treatment plant to serve the club and a nearby subdivision. In 1998, the local sanitary district adopted an ordinance that required the district to lease or purchase the plant from the club. In 1999, the club and the district agreed to a five-year lease, which was renewed for another five years in 2004. In 2009, the parties did not renew the lease, but the district continued to occupy and use the facility.

In July 2011, the club filed a notice of claim with the district, but without itemizing damages as required by Wis. Stat. § 893.80(1d). The club filed suit in 2014. The district raised six affirmative defenses in its answer, but none mentioned the insufficiency of the notice under section 893.80(1d).

Both sides moved for summary judgment. Only then did the district allege, for the first time, that the club failed to comply with the notice-of-claim statute. The club responded that, because noncompliance was an affirmative defense, the sanitary district waived the issue by failing to raise it in its answer. The district insisted that noncompliance was not an affirmative defense, but a jurisdictional prerequisite that could not be waived and was available to be raised at any point during litigation.

The circuit court dismissed the club’s case on the basis of the “untimely and incomplete” notice of claim. The court of appeals affirmed, relying upon Lentz v. Young, 195 Wis. 2d 457, 536 N.W.2d 451 (Ct. App. 1995). In so doing, however, the court of appeals expressed reservations about Lentz, especially its claim that “a defendant may raise an affirmative defense by motion.” Those reservations proved well-founded.

Last month, the Wisconsin Supreme Court reversed in a 6-0 decision.

First, the court found that noncompliance with Wis. Stat. § 893.80(1d) is an affirmative defense, not a jurisdictional defect. While Mannino v. Davenport, 99 Wis. 2d 602, 29 N.W.2d 823 (1981), deemed noncompliance with Wis. Stat. § 893.82(3) jurisdictional, the Supreme Court distinguished the two statutory provisions. Section 893.82(3) requires strict compliance, whereas 893.80(1d) includes a carve-out for when the government has actual notice and suffered no prejudice from a defective claim document. The Court bolstered its conclusion with cases describing compliance with Wis. Stat. § 893.80(1d) as a condition for governmental liability (not for stating a cause of action), and characterizing noncompliance as a defense. See Rabe v. Outagamie Cty., 72 Wis. 2d 492, 241 N.W.2d 428 (1976); Weiss v. City of Milwaukee, 79 Wis. 2d 213, 255 N.W.2d 496 (1977).

Second, the Court determined that an affirmative defense based on section 893.80(1d) must be raised in a responsive pleading, not in a separate motion. The plain language of Wis. Stat. § 802.02(3) requires all affirmative defenses to be raised in a responsive pleading. By comparison to section 802.06(2)(a), which contains an exhaustive list of ten defenses (not including noncompliance with the notice of claim statute) that can be raised by motion, the Court reasoned that the government must raise noncompliance in a responsive pleading, rather than a motion. In light of its conclusion, the Court also overruled Lentz.

Moving forward, government entities must consider all possible affirmative defenses upon receipt of a notice of claim. Especially if Wis. Stat. § 893.80(1d) applies, the “kitchen-sink” defense may be the safest option.

State Can Raise New Argument in Civil Forfeiture Action, Even After Dismissing Criminal Charges

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

Some civil and criminal cases rely on indistinguishable facts. However, a recent Wisconsin Court of Appeals decision – Wisconsin v. Scott, et. al., 2017AP1345 – demonstrated that the parties need not make indistinguishable arguments in each case.

In 2016, police seized drugs, money and vehicles pursuant to a search warrant for the Scotts’ property. However, it was determined that there was not sufficient probable cause to support the search warrant. The evidence from the search was therefore suppressed, and the State voluntarily dismissed the criminal charges against the Scotts.

Despite dismissal of the criminal charges, the State proceeded with the civil forfeiture action, seeking retention of the seized cash and vehicles. See Wis. Stat. § 961.55. The Scotts moved for summary judgment, arguing that, under One 1958 Plymouth Sedan v. Pennsylvania, 380 U.S. 693 (1965), the exclusionary rule extends to this civil forfeiture action because it is of a “quasi-criminal nature”. The State argued that Plymouth Sedan should not apply to this action.

The State also sought an evidentiary hearing on an argument not made in the criminal case: whether the good-faith exception to the exclusionary rule would permit introduction of the cash and vehicles. The State relied on State v. Eason, where the supreme court found that the exclusionary rule might not apply when police objectively and reasonably rely on a search warrant, because then the rule would not fulfill its purpose (deterring unreasonable police actions). 2001 WI 98, ¶ 27, 245 Wis. 2d 206, 629 N.W.2d 625. The Scotts did not rebut the merits of the good-faith exception, but instead argued the State should be foreclosed from making this argument in the civil proceeding because it had not been raised in the criminal case.

The Circuit Court granted summary judgment to the Scotts. It agreed that, with the search evidence suppressed under Plymouth Sedan, the State could not prove criminal conduct, and the civil forfeiture action could not proceed.

The Wisconsin Court of Appeals, District IV reversed. It agreed that Plymouth Sedan applied, so the exclusionary rule would typically end this sort of civil forfeiture action based on a lack of proof of criminal conduct. However, the court held that the State should have been allowed to contest the applicability of Plymouth Sedan with the good-faith exception argument. The Court of Appeals asserted that the State deserved this opportunity even if it had not argued for the exception at the accompanying criminal proceedings.

The Court of Appeals reached this decision for two reasons. First, the Scotts did not argue against the good-faith exception on appeal; instead, they simply repeated that the State had not raised this argument in the criminal cases. The Court of Appeals considered this a concession by the Scotts that the State should have the opportunity to make this argument. Further, the Circuit Court had not addressed either the applicability or merit of this argument, so the Court of Appeals lacked the evidence to determine either. As a result, the Court of Appeals remanded for further proceedings on the good-faith exception.

The State still may not end up with the cash and vehicles. But this case is an important reminder that – absent issue or claim preclusion – parties can be strategic about which claims to pursue, and arguments to make, in civil versus criminal cases.

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