Supreme Court Ends Great Weight Deference to Agency Legal Interpretations, Splinters on Rationale

Published by Jeffrey A. Mandell, Barbara Neider on | Permalink

Supreme Court Ends Great Weight Deference to Agency Legal Interpretations, Splinters on Rationale 

For decades, Wisconsin courts deferred to administrative agencies’ interpretation of statutes and regulations under certain conditions. See Harnischfeger Corp. v. LIRC, 196 Wis. 2d 650, 659–60, 539 N.W.2d 98 (1995). The Supreme Court of Wisconsin put an end to this practice in its recent decision, Tetra Tech EC, Inc. v. Wisc. Dep’t of Revenue, 2018 WI 75. The Tetra Tech decision marks a sea change in Wisconsin administrative law. But because the Court fractured in its reasoning and analysis, how the decision will be applied in lower courts and what it will mean in practice remains uncertain.

Factual background

The basic dispute at the heart of the Tetra Tech litigation involved whether a sales tax applied when one company purchased environmental remediation services from another. Following a federal order to remove industrial pollutants from the Fox River, several paper companies created a LLC to carry out the work. Id., ¶4. That LLC hired Tetra Tech EC which, in turn, subcontracted with Stuyvesant Dredging, Inc. Id. Stuyvesant’s job was to dredge sediment from the river bed and then, using various filters, separate water from sand from contaminated sludge. Id. In 2010, the Wisconsin Department of Revenue audited Tetra Tech and assessed a sales tax on the portion of Stuyvesant’s work that yielded relatively clean sand. As authority, the Department of Revenue cited Wis. Stat. § 77.52(2)(a)10.­–11., both of which apply sales tax to services that involve “processing … tangible personal property….” Tetra Tech, 2018 WI 75, ¶5.

Tetra Tech fought the tax bill all the way to the Supreme Court of Wisconsin. At every step, the company lost and kept appealing. When the Supreme Court of Wisconsin agreed to hear Tetra Tech’s case, the Justices directed the parties to address an additional question, not raised in the company’s petition for review—whether “the practice of deferring to agency interpretations of statutes comport[s] with Article VII, Section 2 of the Wisconsin Constitution.” Id., ¶2. That question, not the underlying propriety of Tetra Tech’s tax bill, became the primary focus of the Supreme Court proceedings.

Legal background

The Supreme Court’s additional question did not come completely out of the blue. Indeed, it is part of a broader trend of questioning principles of federal and state law that some refer to as “decision avoidance” doctrines. Chief Justice Roggensack flagged this issue more than a decade ago in an article she wrote for the Marquette Law Review. See Patience Drake Roggensack, Elected to Decide: Is the Decision-Avoidance Doctrine of Great Weight Deference Appropriate in This Court of Last Resort?, 89 Marq. L. Rev. 541 (2006). And in a concurring opinion last year, three Justices on the Supreme Court wrote “separately to question whether [the] practice of deferring to agency interpretations of statutes comports with the Wisconsin Constitution, which vests judicial power in this court—not administrative agencies.” Operton v. LIRC, 2017 WI 46, ¶73, 375 Wis. 2d. 1, 894 N.W.2d 542 (R.G. Bradley, J., concurring). On a federal level, the issue gained attention during the U.S. Supreme Court confirmation hearings of Justice Neil Gorsuch, who has expressed concern about the degree to which federal courts defer to executive agencies. See, e.g., Gutierrez-Brizuela v. Lynch, 834 F.3d 1142, 1151–52 (10th Cir. 2016) (Gorsuch, J., concurring).

Prior to Tetra Tech, Wisconsin courts developed a multi-tiered deference analysis. In some circumstances, courts applied “great weight deference,” accepting an agency’s reasonable interpretation of the law, even if the court thought that alternative interpretations were more reasonable. The court explained that great weight deference to an agency decision on a question of law was appropriate if: (1) the statute was one the agency was charged by the legislature with administering; (2) the interpretation of the agency was one of long-standing; (3) the agency used its expertise or specialized knowledge in deciding the legal question presented; and (4) the agency’s interpretation provided uniformity in the application of the statute. Harnischfeger Corp., 196 Wis. 2d at 102. Essentially, under the “great weight deference” standard, if the agency could demonstrate a plausible explanation for its position, its interpretation would stand.

“Due weight deference” applied “when the agency ha[d] some experience in an area but ha[d] not developed the expertise that necessarily place[d] it in a better position than a court to make judgments regarding the interpretation of the statute.” Racine Harley-Davidson, Inc. v. State Div. of Hearings and Appeals, 2006 WI 86, ¶18, 292 Wis. 2d 549, 717 N.W.2d 184. Under “due weight deference,” the agency had to yield to better interpretations, but if multiple interpretations were equally plausible, the tie went in the agency’s favor. ABKA Ltd. P’ship v. DNR, 2002 WI 106, ¶116, 255 Wis. 2d 486, 648 N.W.2d 854 (Sykes, J., dissenting) (“[T]he agency’s legal interpretation will be upheld even if there is a different, equally reasonable interpretation—in other words, a tie goes to the agency.”).

Finally, when any of the following conditions was met: (1) the issue is one of first impression; (2) the agency had no experience or expertise in deciding the legal issue presented; or (3) the agency’s position on the issue had been so inconsistent as to provide no real guidance—courts would interpret statutes de novo. Racine Harley-Davidson, 2006 WI 86, ¶19. When a reviewing court accords an agency’s statutory interpretation no deference, “the reviewing court merely benefits from the agency’s determination and may reverse the agency’s interpretation even when an alternative statutory interpretation is equally reasonable to the interpretation of the agency.” Id., ¶20.

In its briefing, Tetra Tech argued that the Wisconsin Constitution charges courts with determining the meaning of the law, such that courts cannot defer at all to agency interpretations of statutes and must instead engage in de novo interpretation in every case. The Department of Revenue, represented by the Wisconsin Attorney General, largely agreed. The State argued that great weight deference is incompatible with the Wisconsin Constitution but that due weight deference should be retained as a proper way to balance, under appropriate circumstances, independent judicial review with the specialized expertise that administrative agencies bring to bear. Only one amicus curiae (friend of the court) brief offered any argument in support of great weight deference.

A Unanimous, Yet Fractured, Decision

The Supreme Court unanimously affirmed that Tetra Tech was on the hook for the sales tax at issue. But the seven Justices’ agreement did not extend to the deference question. On that topic, the Court produced four separate opinions. Making things more confusing, the lead opinion (by Justice Daniel Kelly) includes 15 separate sections, each attracting support from various combinations of Justices. Some—but significantly less than half—of the lead opinion has support from a majority of the Court and thus carries the force of law. But most of it does not. And three Justices declined to join any portion of the lead opinion’s analysis. (See the table at the bottom of this post.)

Five Justices broadly agree that great-weight deference should no longer be used.[1] Two Justices—Daniel Kelly and Rebecca Bradley—base that conclusion on the Wisconsin Constitution. See Tetra Tech, 2018 WI 75, ¶¶42–84. Three others—Patience Roggensack, Annette Ziegler, and Michael Gableman—avoid any constitutional analysis, invoking instead principles of judicial administration and the Court’s power to overrule its own prior decisions. See id., ¶¶135–142 (Ziegler, J., concurring, with Roggensack, C.J., joining in part); id., ¶¶159–170 (Gableman, J., concurring, with Roggensack, C.J., joining in full). Two Justices—Ann Walsh Bradley and Shirley Abrahamson—support the continued use of great weight deference. See id., ¶¶109–134 (A.W. Bradley, J., concurring, joined by Abrahamson, J.).

The result of these fractured opinions is that most of the analysis in the lead opinion lacks enough support to be considered law and to provide clear guidance to agencies, private parties, and lower courts. There are four votes for this key paragraph in the lead opinion’s conclusion (in Section III):

We have also decided to end our practice of deferring to administrative agencies’ conclusions of law. However, pursuant to Wis. Stat. §227.57(10), we will give “due weight” to the experience, technical competence, and specialized knowledge of an administrative agency as we consider its arguments.

Id., ¶108. (The four votes were from Justices Kelly, R. Bradley, and Gableman, as well as Chief Justice Roggensack. Id., ¶3 n.4.) That is, therefore, the new law.

But what it means in practice, and how lower courts are to afford “due weight” remains unclear. The lead opinion heavily criticizes the prior use of “due weight deference” and advocates for a significant change to how courts assess agencies’ legal interpretations. See id., ¶¶71–81. But that portion of the lead opinion (in Section II.A.5) attracted support from only two of the seven Justices. Id., ¶3 n.4. The lead opinion explained: “Henceforth, we will review an administrative agency’s conclusions of law under the same standard we apply to a circuit court’s conclusions of law—de novo. As with judicial opinions, we will benefit from the administrative agency’s analysis, particularly when they are supplemented by the “due weight” considerations discussed above.” Id., ¶84 (internal citations omitted). But that portion of the opinion (in Section II.A.6) also lacks the force of law as it attracted support from only three Justices (still short of a majority). Id., ¶3 n.4 (“Therefore, this opinion announces the opinion of the court with respect to Sections I., II.A.1., II.A.2., II.B., and III.”).

Consequences on Prior Adjudications

Adding yet another layer of uncertainty is the concern expressed in the concurring opinions that the lead opinion fails to adequately account for the effect its analysis will have on cases decided under the pre-Tetra Tech standard. The lead opinion asserts that the Tetra Tech decision “is incapable of reopening cases that have already been decided. If they were final upon release of this opinion, their finality will go on undisturbed by our decision today.” Id., ¶89. In the next paragraph, the lead opinion cites Schauer v. DeNeveu Homeowner’s Ass’n, Inc., 194 Wis. 2d 62, 75, 533 N.W.2d 470 (1995), to support its conclusion that Wis. Stat. § 806.07 “does not authorize relief from a judgment on the ground that the law applied by the court in making its adjudication has been subsequently overruled in an unrelated proceeding.” Tetra Tech, 2018 WI 75, ¶90.

But there are two reasons to doubt that this resolves the issue. First, like so much of the lead opinion, Section II.A.6 lacks enough support to have the force of law. Id., ¶3 n.4. This means that paragraphs 89 and 90 do not provide a conclusive adjudication on the issue. Second, as the concurring opinions point out, there are colorable arguments that Schauer does not resolve the issue. Wis. Stat. § 806.07(1) authorizes relief from a judgment on eight distinct grounds. Schauer addressed only one of those—subsection (1)(f) (“A prior judgment upon which the judgment is based has been reversed or otherwise vacated”). The lead opinion’s conclusion that great weight deference is unconstitutional leaves open the possibility that a previously decided case could be attacked under several other subsections: (1)(a), on the basis of “mistake”; (1)(d), on the basis that “[t]he judgment is void”; or (1)(h), on the basis of “[a]ny other reasons justifying relief from the operation of the judgment.” Tetra Tech, 2018 WI 75, ¶139 & n.3 (Ziegler, J., concurring); accord id., ¶131 (A.W. Bradley, J., concurring). There also remains the possibility of attack under (1)(f), because Schauer did not address the consequence of a constitutional adjudication (like the one undertaken by the Tetra Tech lead opinion). The Court’s fractured decision seems to create the opportunity to argue that the lead opinion is correct as to the constitutional basis for departing from the great weight deference standard (an issue on which there was no majority) and that, if so, there is room to interpret (1)(f) as a valid basis for relief from a prior judgment based on a deference regime that is now understood to be unconstitutional. Like the precise contours of the post-Tetra Tech deference regime, all of these tangential issues will require further clarification.

Conclusion

In time, lower courts—and perhaps additional opinions from the Supreme Court—will flesh out the extent of deference Wisconsin courts should now afford to administrative agencies’ legal conclusions and whether Tetra Tech’s changes to the standard of review of administrative decisions on issues of law have any effect on cases previously decided under the great-weight deference standard. For now, agencies, litigants, and lower courts have the unenviable task of trying to build a roadmap from the Supreme Court’s fractured opinions in Tetra Tech.

Law Clerk Collin Weyers assisted with researching and writing this post.

Table: How many Justices support which arguments in Tetra Tech opinions

Opinion

Section

Title

¶¶

Supported by

Lead

Introduction

n/a

1-3

3: Justices Kelly, R.G. Bradley & Gableman

Lead

Section I.

Factual Background & Procedural History

4-7

4: Justices Kelly, R.G. Bradley, Gableman & C.J. Roggensack

Lead

Section II.

Discussion

8-9

3: Justices Kelly, R.G. Bradley & Gableman

Lead

Section II.A.

Deference to Administrative Agencies

10

3: Justices Kelly, R.G. Bradley & Gableman

Lead

Section II.A.1.

Current Standard for Reviewing Administrative Agency Decisions

11-16

4: Justices Kelly, R.G. Bradley, Gableman & C.J. Roggensack

Lead

Section II.A.2.

History of the Deference Doctrine

17

4: Justices Kelly, R.G. Bradley, Gableman & C.J. Roggensack

Lead

Section II.A.2.i.

A Brief History of “Great Weight” Deference

18-33

4: Justices Kelly, R.G. Bradley, Gableman & C.J. Roggensack

Lead

Section II.A.2.ii.

A Brief History of “Due Weight” Deference

34-41

4: Justices Kelly, R.G. Bradley, Gableman & C.J. Roggensack

Lead

Section II.A.3.

The Judiciary’s Constitutional Responsibilities

42-54

2: Justices Kelly & R.G. Bradley

Lead

Section II.A.4.

“Great Weight” Deference Considered

55-70

2: Justices Kelly & R.G. Bradley

Lead

Section II.A.5.

“Due Weight” Deference Considered

71-81

2: Justices Kelly & R.G. Bradley

Lead

Section II.A.6.

Standard of Review

82-84

3: Justices Kelly, R.G. Bradley & Gableman (except for one implication)

Lead

Section II.A.7.

Discontinuing Deference for Administrative Reasons

85-93

2: Justices Kelly & R.G. Bradley

Lead

Section II.B.

“Processing” River Sediment

94-106

4: Justices Kelly, R.G. Bradley, Gableman & C.J. Roggensack

Lead

Section III.

Conclusion

107-108

4: Justices Kelly, R.G. Bradley, Gableman & C.J. Roggensack

A.W. Bradley concurrence

Introduction

n/a

109-113

2: Justices A.W. Bradley & Abrahamson

A.W. Bradley concurrence

Section I

n/a

114-120

2: Justices A.W. Bradley & Abrahamson

A.W. Bradley concurrence

Section II

n/a

121-134

2: Justices A.W. Bradley & Abrahamson

Ziegler concurrence

Introduction

n/a

135-137

1: Justice Ziegler

Ziegler concurrence

Section I.

Interpreting and Applying the Law

138-142

2: Justice Ziegler & C.J. Roggensack

Ziegler concurrence

Section II.

Interpreting and Applying Wis. Stat. 77.52(2)(a)11

143

1: Justice Ziegler

Ziegler concurrence

Section II.A.

Specially-Defined Terms: Pricing and Imprinting

144-146

1: Justice Ziegler

Ziegler concurrence

Section II.B.

Surplusage

147-153

1: Justice Ziegler

Ziegler concurrence

Section IV. [sic]

Conclusion

155-158

1: Justice Ziegler

Gableman concurrence

Introduction

n/a

159-163

2: Justice Gableman & C.J. Roggensack

Gableman concurrence

Section I.

The Traditional Five Circumstances for Overturning Precedent

164

2: Justice Gableman & C.J. Roggensack

Gableman concurrence

Section I.A.

The Prior Decision is “Unsound in Principle”

165-166

2: Justice Gableman & C.J. Roggensack

Gableman concurrence

Section I.B.

The Need to Make a Decision Correspond to Newly Ascertained Facts

167

2: Justice Gableman & C.J. Roggensack

Gableman concurrence

Section I.C.

The Other Circumstances

168

2: Justice Gableman & C.J. Roggensack

Gableman concurrence

Section II.

Conclusion

169-170

2: Justice Gableman & C.J. Roggensack

 

 

[1] Because the Tetra Tech case arose from an administrative proceeding under chapter 227 of the Wisconsin Statutes, it is not clear how the decision will affect the use of deference in cases outside of that context. This issue is accentuated by the Court’s express reference to section 227.57(10)—which governs only in proceedings under chapter 227—as the reason that some degree of due weight deference will continue. See id., ¶108.

Enbridge Pipeline Expansion Likely to Proceed After Proof of Insurance

Published by Larry Konopacki, Jeffrey A. Mandell on | Permalink

Enbridge Corporation (“Enbridge”) transports crude oil through a pipeline that runs from Superior, Wisconsin to Pontiac, Illinois. Enbridge wants to expand the volume of crude oil pumped through their line. The Dane County Board of Supervisors granted Enbridge a conditional use permit (“CUP”), subject to two insurance-related conditions. Condition 7 required Enbridge to procure and maintain $100,000,000 in General Liability insurance with a time element exception to the pollution exclusion and $25,000,000 in Environmental Impairment Liability insurance. Condition 8 required the liability insurance in Condition 7 to meet the specifications in a County- commissioned underwriting report, including a requirement that Enbridge provide proof of such insurance at the County’s request.

            While the Dane County Board was considering Enbridge’s permit application, the Wisconsin legislature adopted 2015 Act 55, which limits the insurance requirements that counties can include in CUPs for interstate hazardous liquid pipelines. Specifically, Act 55 prohibits counties from requiring pipeline operators to obtain insurance if the operator “carries comprehensive general liability insurance coverage that includes coverage for sudden and accidental pollution liability.” Wis. Stat. § 59.70(25). Dane County granted Enbridge’s CUP, with Conditions 7 and 8, after Act 55 took effect.

            Enbridge first appealed the inclusion of Conditions 7 and 8 to the Dane County Board. When that failed, Enbridge sought certiorari review in the circuit court.  A month later, seven local landowners filed a separate circuit court action seeking an injunction to enforce Conditions 7 and 8. The court consolidated the two lawsuits. The circuit court decided that (1) the landowners had no standing (that is, legal right) to participate in Enbridge’s challenge to the legality of the CUP, (2) Dane County had agreed that Enbridge’s representations during the permitting process were sufficient to trigger Act 55’s insurance limitations, and (3) Conditions 7 and 8 of the CUP were void and unenforceable. The circuit court struck Conditions 7 and 8 from the CUP, leaving the rest of the permit intact.

            Both the County and the landowners appealed. The Wisconsin Court of Appeals reversed and remanded the matter to the circuit court with instructions to return it to the county zoning committee. The court of appeals held that (1) the landowners have standing to participate in the certiorari review action; (2) Enbridge had not demonstrated that it maintains the required comprehensive general liability insurance; and (3) Act 55 does not preclude counties from requiring pipeline operators from showing, upon request, proof of compliance with the statutory insurance requirements.

1. The landowners had standing to pursue an injunction

            The circuit court, in consolidating the actions of the landowners and Enbridge, initially treated the landowners as intervenor-respondents to the action and told them that they did not need “leave to implead” in the action. There was therefore no reason the landowners should expect that they would be required to file a separate certiorari action to gain standing in an action in which the circuit court had already made them full participants. The court of appeals held that the circuit court’s dismissal of the landowners’ request for an injunction on the basis of standing had no legal foundation.

2. Enbridge did not demonstrate that it carries insurance for

sudden and accidental pollution liability

            Act 55 prohibits counties from requiring a liquid pipeline operator to obtain additional insurance coverage if the operator “carries comprehensive general liability insurance coverage that includes coverage for sudden and accidental pollution liability.” Wis. Stat. § 59.70(25). During the permit review process, Dane County’s underwriter confirmed that Enbridge had the required amount of comprehensive general liability insurance, but noted that the policy was set to expire before any permit would be issued. Because Enbridge had not shown continued or ongoing coverage, it did not demonstrate that it “carries” the required insurance and had not triggered Act 55’s exclusion of other insurance requirements. Further, the Act requires coverage for sudden and accidental pollution liability. The court of appeals reasoned that “sudden and accidental,” as defined in Just v. Land Reclamation, Ltd., 155 Wis.2d 737, 742-57 (1990), includes circumstances that are “abrupt or immediate” or “unexpected and unintended.” The insurance historically carried by Enbridge, even if renewed and ongoing, was a general liability policy with a “time element exception” to a pollution exclusion that covered abrupt or immediate pollution but did not provide coverage for unexpected or unintended pollution. Because there was no coverage for unexpected or unintended pollution, the court held that Enbridge’s comprehensive general liability policy did not trigger the Act 55 exclusion.

3. Act 55 does not preclude a county from including valid permit conditions related to insurance

            The circuit court severed CUP Conditions 7 and 8 from the permit as void and unenforceable but left the rest unchanged. The court of appeals found this action was an impermissible usurpation of authority by the courts, and it remanded the matter to the circuit court with instructions that the permit should be returned to the Dane County Zoning Committee for review. The court also found that Act 55 prohibits counties from requiring compliant operators from obtaining additional insurance, but it does not limit other insurance-related conditions. Thus, even if Enbridge had satisfied the Act 55 trigger, there was no reason Dane County could not require ongoing proof of the compliant insurance policy. In remanding to the County, the appellate court held that the Zoning Committee is the “body best suited to evaluate the facts and weigh appropriate conditions,” such that it can best determine whether to grant the permit and under what conditions.

CONCLUSION

            With Enbridge Energy, Inc. v. Dane County, the court of appeals essentially established three things. First, a court cannot grant a party status as an intervenor, allow the party to rely on that status, and then later dismiss the party on standing grounds for failing to file a separate action in that same case. Second, 2015 Act 55 only prohibits counties from requiring a liquid pipeline operator to obtain additional insurance if the operator has fully met the triggers in the Act. Even if the triggers are met, the Act does not prohibit all insurance-related conditions on conditional use permits, including requirements that an operator show proof of the required insurance. Finally, unless otherwise authorized by statute (e.g., livestock siting), it is inappropriate for courts to rework rather than simply reverse invalid permits issued by counties.

            Although it extends the permitting process for Enbridge, the court’s decision provides a clear, and relatively simple path forward for Enbridge to obtain the CUP. Enbridge should be able to work with its insurer to obtain the coverage outlined in Act 55, including coverage for both “sudden” and “accidental” pollution. And, it should be no hardship to provide ongoing proof of such insurance if required. The decision also clearly limits the role of courts, delineating zoning and permitting as legislative functions. Therefore, with few exceptions, courts should restrict their review to whether a county zoning commission correctly interpreted the law and leave to that body any specific determinations of whether and under what conditions permits should be granted.

Law clerk Leakhena Au assisted with researching and writing this post.

The Final Countdown: Changes to Discovery Rules (and more!) Await Litigants Starting Next Month

Published by Susan Allen, Kyle Engelke on | Permalink

As litigants turn the calendar on June, significant new rules await for cases filed after July 1, 2018. Rather than take its cues from the Wisconsin Supreme Court, which traditionally governed procedural rules, the Legislature enacted substantial changes to Wisconsin’s laws on discovery. In 2017 WI Act 235, the Legislature implemented many new rules covered below that will affect civil procedure in Wisconsin.

New Limitations on Interrogatories and Depositions

The changes in Act 235 are highlighted by new limitations on interrogatories and depositions. Unless otherwise stipulated or ordered by the Court, parties are now limited to the following:

  • 25 interrogatory requests, including all subparts. Wis. Stat. § 804.08(1)(am).
  • 10 depositions, none of which may exceed seven hours in duration. Wis. Stat. § 804.045.

As in the Federal Rules, there remains no limit on the number of document requests that can be made. However, unlike the Federal Rules, Act 235 creates new limitations on requests for certain electronically stored information (ESI) as explained below.

In another noticeable departure from the Federal Rules, Act 235 does not require initial disclosures like those mandated by Fed. Rule Civ. Proc. 26(a)(1). The initial disclosures under the Federal Rules help alleviate the need for discovery in light of the limits on interrogatories, but Act 235 provides no such requirement for the parties to identify individuals likely to have discoverable information, the categories of documents that support a claim or defense, a computation of damages, or any insurance agreements that may be available to satisfy a judgment. 

These changes will likely increase motion practice (requesting and/or opposing additional discovery) and demand more active court management.

Automatic Stay on Discovery

Act 235 creates a new provision that stays all discovery requests upon the filing of a motion to dismiss, a motion for judgment on the pleadings, or a motion for a more definite statement, “unless the court finds good cause upon the motion of any party that particularized discovery is necessary.” The stay applies for the shorter of 180 days or until the court rules on the motion. Wis. Stat. § 802.06(1)(b). By comparison, the Federal Rules permit discovery once the parties have a scheduling meet and confer conference under Rule 26(f) and otherwise provide no automatic stay.

Proportionality

Act 235 removes the “reasonably calculated” language that previously framed Wisconsin’s scope of discovery. In its place, the Act adds a “proportionality” standard borrowed from the Federal Rules. Wis. Stat. § 804.01(2)(a). Parties may still obtain discovery concerning non-privileged matters relevant to the party’s claims or defenses, but now discovery requests must be proportional to the needs of the case. Courts must consider the following when weighing “proportionality”:

  • The importance of the issues at stake in the action;
  • The amount in controversy;
  • The parties’ relative access to relevant information;
  • The parties’ resources;
  • The importance of the discovery in resolving the issues; and
  • Whether the burden or expense of the proposed discovery outweighs its likely benefit.

Although early in its development under the Federal Rules, the proportionality test appears to have resulted in the federal courts taking a more proactive role in managing or tailoring discovery requests. See, e.g., O’Boyle v. GC Servs. Ltd. P’ship, No. 16-C-1384, 2018WL2271033, at * 5 (E.D. Wis. May 17, 2018) (denying motion to compel because requests are not “proportional to the needs of the case”).

New Limitations on ESI

Act 235 creates new rules related to electronically stored information (“ESI”) by requiring “substantial need” and “good cause” to request the following information:

  • Data that cannot be retrieved without substantial additional programming or without transforming it into another form before search and retrieval can be achieved;
  • Backup data substantially duplicative of more accessible data;
  • Legacy data remaining from obsolete systems; or
  • Data not available to the producing party in the ordinary course of business and not reasonably accessible because of burden or cost.

These new rules depart from the Federal Rules by carving out particular categories of ESI subject to the “substantial need” and “good cause” standard. Wis. Stat. § 804.01(2)(e)1g. In light of the already frequent fights over ESI, this new standard could significantly alter the playing field in discovery disputes—especially when only one party holds significant ESI and there is less incentive to be reciprocally reasonable with respect to discovery responses.

Act 235 also limits requests for any document within five years of the accrual of the cause of action; this limit does not apply to health care, vocational, or educational records. Finally, parties should also be aware of the existing requirement that parties confer before requesting any ESI. Wis. Stat. § 804.01(2)(e)1r.

New Standards for Protective Orders

Act 235 includes provision that the court “shall” limit discovery if either:

  • The discovery sought is cumulative or duplicative, can be obtained from another source that is more convenient, less burdensome, or less expensive; or
  • The burden or expense of the proposed discovery outweighs its likely benefit or is not proportional to the claims and defenses at issue.

Interestingly, the standard for a protective order—Wis. Stat. § 804.01(2)(am)2—does not exactly mirror the “proportionality” test found in the new scope of discovery. Wis. Stat. § 804.01(2)(a). Among other differences, the standard for granting a protective order omits the “parties’ relative access to relevant information” as a consideration that is found under the “proportionality” test. Neither Act 235 nor legislative history appears to explain this discrepancy. It will remain to be seen if the courts apply these standards differently as a result.

Finally, like the Federal Rules, the new rules permit the court to allocate discovery expenses among the parties.

Amendments to Class Certification Rules

Act 235 authorizes an appeal as a matter of right from the circuit court’s class certification decision. The Act also requires detailed reasoning for the benefit of the appellate court and automatically stays all proceedings until the appellate decision. These changes come in conjunction with the Wisconsin Supreme Court’s recent adoption of changes to conform Wisconsin class action law to the requirements of Federal Rule 23.

Revisions to Statute of Limitations / Repose Periods

Act 235 shortens the Statute of Limitations from six years to three for:

  • Statutory claims (unless otherwise specified) (Wis. Stat. § 893.93(1m));
  • Injury to character, or rights of another (Wis. Stat. § 893.53); and
  • Certain claims by franchised motor vehicle dealers (Wis. Stat. § 218.0125).

Perhaps more significantly, Act 235 shortens the repose periods for personal injury claims following construction. Wis. Stat. § 893.89. Here, the Act shortens the period from ten years to seven years. Practitioners should take particular notice because this change took immediate effect on April 5, 2018. This change may result in litigation regarding whether the Act intended this change to have retroactive effect. See Gutter v. Seamandel, 103 Wis. 2d 1, 308 N.W.2d 403 (1981) (declining to apply a new statute of limitations to causes of actions accruing prior to the effective date of the new statute of limitation absent express language in the statute imposing retroactive effect).

Other significant changes

Under state law, unless otherwise provided by law, an insurer must pay insurance claims within 30 days after the insurer is furnished written notice of the fact of a covered loss and loss amount. Under prior law, overdue payments must bear simple interest at the rate of 12% per year. Wis. Stat. § 628.46(1). The Act changes the interest rate applicable to overdue payments to 7.5% per year (by comparison, offers of settlement accrue prime rate plus 1%—currently 4.5% per year. Wis. Stat. § 807.01).

Act 235 creates novel mandatory disclosures for a party to provide any agreement in which any person has a right to receive compensation contingent upon the proceeds of the civil action (this requirement does not apply to attorneys’ contingent fee representations).

Finally, Act 235 also limits the Secretary of Revenue from using third-party contingent agreements to enforce the Uniform Unclaimed Property Act.

Conclusion

Although some of the discovery provisions are already in effect (noticeably, the “proportionality” test that already exists in federal courts), the demarcation for most of Act 235’s changes is for cases filed after July 1, 2018. The Act creates new battlefronts on whether discovery is proportional, ESI is reasonably accessible, and the likely benefit of discovery justifies its costs. Forewarned of these changes, parties can proceed accordingly.

Wis. Supreme Court Narrows Fraudulent-Transfer Exception, Suggests Stringent Pleading Requirements

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

Generally, companies purchasing the assets of another company are not responsible for the seller’s liabilities. One long-established, but poorly defined, exception applies when the assets are transferred fraudulently in an effort to evade liabilities. In Springer v. Nohl Electric Products Corp., the Wisconsin Supreme Court took a step towards clarifying (and perhaps limiting) this fraudulent-transfer exception, over the dissent of Justice Abrahamson.

While the majority opinion focused on the legal issue presented in the case—the proper legal standard for fraudulent transfer exception—Justice Abrahamson’s dissent was most concerned with the outcome of the litigation and its broader implications for due process.

In a 5-2 decision, the Court held that the Wisconsin Uniform Fraudulent Transfer Act (“WUFTA”), in chapter 242 of the Wisconsin Statutes, does not define the scope of the fraudulent-transfer exception to successor non-liability under common law. The Court additionally decided that summary judgment was appropriate because the plaintiff’s complaint did not clearly allege that the defendants were liable under a successor-liability theory. Justice Abrahamson dissented, briefly arguing that WUFTA should play a role in the fraudulent-transfer analysis, but focusing primarily on the Court’s decision to dismiss the case. She argued that even addressing an issue with the pleadings was inappropriate because the issue was not raised by the defendants and plaintiff had no opportunity to be heard on that issue.

Brief Background

Springer involved negligence and strict-liability claims against several companies for creating, distributing, and selling asbestos products. The complaint named Fire Brick Engineers Company, Inc. (“FBE2”) and its successor, Powers Holdings, Inc., as defendants. FBE2 was formed in the 1980s to purchase the assets of Fire Brick Engineers Company (“FBE1”), a company formed in the 1940s to manufacture and distribute asbestos products. FBE2 later merged with another company to form Powers.

After initially allowing the claims to continue to discovery, the trial court granted the defendants’ motion for summary judgment, holding that FBE2 (now Powers) could not be liable because it was formed more than a decade after the plaintiff’s husband was exposed to asbestos. In response, Springer argued that there was a factual dispute about whether FBE2 (and thus Powers) could be held liable under the fraudulent-transfer exception to successor non-liability because a number of circumstances surrounding the sale indicated a possible fraudulent intent. These included the fact that a FBE2 shareholder was aware of FBE1’s potential liabilities, several FBE2 shareholders acted as attorneys for FBE1, and FBE1’s assets were sold for inadequate consideration, without appraisal or negotiation.

Springer appealed to the Wisconsin Court of Appeals, which reversed, finding that WUFTA should govern the fraudulent-transfer exception and that the evidence showed there was a genuine issue of material fact as to whether the transfer from FBE1 to FBE2 triggered the fraudulent-transfer exception. Powers then successfully petitioned the Wisconsin Supreme Court for review.

Fraudulent Transfer Exception and WUFTA

The Wisconsin Supreme Court reversed, holding that WUFTA does not apply to the common law fraudulent-transfer exception. The Court pointed out that successor non-liability and its exceptions arose out of the American and English common law. On the other hand, WUFTA “exists independently from this common law history” and is focused not on holding successor entities responsible for their predecessors’ obligations, but on helping creditors collect claims which “may be frustrated by recent asset transfers.” 2018 WI 48, ¶27. After surveying a number of common law sources, the Court found WUFTA’s standard inapplicable to claims of fraudulent transfer regarding successor liability. Justice Abrahamson disagreed, stating that WUFTA should be a source of guidance for courts in identifying “indicia of fraud” for purposes of the fraudulent-transfer exception.

Summary Judgment and Justice Abrahamson’s Dissent

After determining that WUFTA does not govern the fraudulent transfer exception, the Court turned its attention to the procedural posture of the case. The Court noted that while Springer argued for successor liability in response to a motion for summary judgment, she never amended her complaint to allege successor liability. Evaluating the sufficiency of the pleadings, the majority found that Springer’s pleadings failed to “allege facts that plausibly suggest [she was] entitled to relief” against Powers and therefore affirmed the trial court’s order of summary judgment dismissing Powers.

Justice Abrahamson stridently disagreed with the Court’s decision to review the pleadings, noting that the defendants never challenged the sufficiency of the pleadings at any stage of litigation, including before the Wisconsin Supreme Court. Justice Abrahamson insisted that the issue of the sufficiency of the pleadings was not “properly before this court.” Id., ¶49 (Abrahamson, J., dissenting). She was particularly troubled by the fact that the parties were not given notice that the Court “[was] concerned about these issues” and were therefore given no opportunity to address them. Id. Pointing to two recent cases, Justice Abrahamson lamented what she described as “the court’s growing bad habit of addressing issues without giving parties notice and the opportunity to address the issue . . . .” Id., ¶52. She voiced a concern that this trend might violate due process, which “requires (at a minimum) notice and an opportunity to be heard.” Id., ¶51.

Take-Away

Springer makes clear that the fraudulent-transfer exception to successor non-liability is rather narrow. It is also serves as a startling reminder of increasingly demanding pleading standards. The long-established flexibility of notice pleading was somewhat curtailed by the U.S. Supreme Court’s Twombly and Iqbal decisions a decade ago, and the Wisconsin Supreme Court has largely followed suit. Springer reminds litigants to take care to amend or seek leave to amend pleadings as part of the defense of a summary judgment motion, even when that motion does not expressly attack the sufficiency of the initial pleading.

Law Clerk Collin Weyers assisted with researching and writing this post.

Court of Appeals Reverses Agency Prohibition on Strip Searches at Juvenile Residential Care Centers

Published by Tiffany L. Highstrom, Erika Bierma on | Permalink

In Milwaukee Academy v. Department of Children and Families, 2016 AP 2377, the Wisconsin Court of Appeals faced the question of whether residential care centers for minors are prohibited from ever strip-searching residents. The Court concluded that state law does not contain a blanket prohibition against strip searches in all circumstances.

The specific strip search at issue before the court took place at Milwaukee Academy, a DCF-licensed residential care center for girls ages ten through seventeen. The children placed at Milwaukee Academy include victims of sexual abuse, subjects of CHIPS cases (where children and parents are subject to court supervision due to findings related to abuse or neglect), children experiencing emotional and behavioral disorders who need respite care, and children who have been adjudicated delinquent. 

The subject of the search is identified only as J. The record is silent regarding the nature of her placement at Milwaukee Academy. After she cut her arms with pieces of plastic, J had been taken to the Milwaukee Mental Health Center.  When J returned to Milwaukee Academy, she refused to cooperate or answer questions about whether she had any weapons. J was taken to the “time out room” with four female staff members present. After J kicked one staff member in the head, the staff took her to the floor using a “team lateral restraint.”

Milwaukee Academy acknowledged that J was forcibly searched and her clothing was cut off. According to an internal investigation , “[s]taff were able to complete the body search but due to J’s continued attempt to kick, bite, scratch and pinch, the nurse had to cut off her bras (she had two of them on) and shirt, and removed her pants.” After the search, Milwaukee Academy staff called for assistance from sheriff’s deputies, who took J to the hospital and then to jail.

Milwaukee Academy subsequently prepared and filed a “Serious Incident Report,” as required by DCF regulations. DCF then imposed a forfeiture on Milwaukee Academy, stating that the relevant statutes and code sections impose an absolute prohibition against strip searches in a residential care center for minors. Milwaukee Academy’s administrative challenge to the forfeiture failed, as the Division of Hearings and Appeals concluded that the strip search had violated J’s rights under state law.  

Milwaukee Academy petitioned for review in circuit court. The circuit court concluded that, under the relevant statutes, minors in residential care centers have right comparable to those granted to patients under state law. According to the circuit court, those rights do not include an absolute right to be free from strip searches. As the circuit court explained, “[d]epending on the security needs and other circumstances of each kind of facility, [an RCC] resident’s right to be free from strip searches might be as limited as an inpatient’s.”

On appeal, DCF argued that, as a matter of law, strip-searching an RCC resident is never permissible. DCF based its argument on Wis. Admin. Code § DCF 52.31(1)(a), which cross-references Wis. Admin. Code ch. DHS 94, and Wis. Stat. § 51.61. Because this was an appeal of an administrative decision, the Court of Appeals reviewed the agency action, not the circuit court’s analysis, and it afforded due-weight deference, under which the agency’s legal interpretation is sustained unless there is a more reasonable interpretation.

Ultimately, the Court of Appeals came reached the same result as the circuit court. It held that DCF’s interpretation—based on a distinction between a “patient” and an “inpatient”—lacked textual support in the statutes and regulations. Those sources, the Court determined, do not distinguish between “patient” and “inpatient” but use those terms interchangeably. As an example, the Court focused on the administrative code section that DCF cited, finding “no clear or meaningful distinction between the rights of a ‘patient’ and an ‘inpatient’ in § DHS 94.24(2)(d), contrary to DCF’s argument.” Slip op., ¶26.

The Court of Appeals held that the plain text of the relevant statutes and regulations led to a conclusion more reasonable than that reached by DCF: there is nothing in the DCF regulations that prohibits a strip search of an RCC resident in all circumstances. Instead, such searches are limited by the framework contained in § DHS 94.24(2)(d). Because the Courtdeemed the record insufficient to apply the governing regulations to this particular search,  it remanded the case to DCF for further proceedings.

While it is too early to know how Milwaukee Academy’s strip search of J will be adjudicated, this case may have a significant effect on juveniles’ out-of-home placements moving forward. It remains to be seen if courts will be more hesitant to place certain juveniles in RCCs, even when the juveniles need services that cannot be managed exclusively by the Department of Children and Families.

New Technologies Will Present New “Walking Quorum” Challenges for Governmental Bodies

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

A “walking quorum” is a series of gatherings among separate groups of members of a governmental body, each less than quorum size, who agree, tacitly or explicitly, to act uniformly in sufficient number to reach a quorum. Recognizing that a walking quorum may produce a predetermined outcome and deprive the public the opportunity to observe the decision making process, Wisconsin courts have long warned public officials that any attempt to circumvent a public meeting through use of a walking quorum is subject to prosecution under the Open Meetings Act. See e.g., State ex rel. Newspapers v. Showers, 135 Wis.2d 77, 398 N.W. N.W.2d 154 (1987).

In State ex rel. Zecchino v. Dane County (February 27, 2018), the Court of Appeals (District IV) considered an Open Meetings Act claim based on a series of email messages between Dane County Board Supervisor Paul Rusk and no more than eight of his fellow supervisors prior to a controversial vote on the renewal of a billboard lease. The plaintiffs argued that the emails suggested the effort to assemble a walking quorum in violation of the Open Meetings Act, such that he should be allowed discovery to ascertain the full extent of informal communications.

The Court of Appeals dismissed the complaint for failure to state a claim. The Court first determined that the emails Zecchino already had did not indicate a “tacit agreement” between the defendants to vote against the lease. One of the emails dealt with a scheduling matter, while others asked supervisors for their opinion or expressed Rusk’s personal position. The Court also found that because the quorum of the Board on the day of the vote was eighteen, Rusk’s communications with eight supervisors could not establish a walking quorum. The court confronted the walking quorum prohibition in the context of email messages. Applying the walking quorum concept in light of newer technologies will raise new issues for Wisconsin governmental bodies. Today, members of governmental bodies can communicate using a wide variety of real-time communications platforms. Along with email, public officials can chat through tweets, Gchat, Yik Yak, Snapchat, Facebook, Instagram, Viber, Skype, HipChat, FireChat, Cryptocat, What’s App, and, of course, text messaging. Stafford Rosenbaum LLP’s Municipal Law team works with governmental bodies to navigate the challenges that new technologies present in complying with the Wisconsin Open Meetings Law.

U.S. Supreme Court Decides Bankruptcy Case in Favor of Trustees’ Avoidance Powers

Published by Laura Skilton Verhoff, Jeffrey A. Mandell, Olivia M. Pietrantoni on | Permalink

The Supreme Court unanimously decided a bankruptcy issue that had the circuit courts across the country split. The Court weighed in favor of trustees’ ability to avoid debtors’ pre-petition transfers. Merit Mgmt. Grp., LP v. FTI Consulting, Inc. (Feb. 27 2018). Specifically, the Court analyzed an exception to trustees’ avoidance powers carved out in the bankruptcy code for transfers made by or to entities such as financial institutions in connection with a securities contract.  The Court’s interpretation is favorable to bankruptcy trustees because it limits the ability of transferees to invoke the “safe harbor” provision in 11 U.S.C. § 546(e).

Background

In 2003, Valley View Downs LP and Bedford Downs Management Corporation both sought licenses to operate a horse racetrack in Pennsylvania. The state had only one racetrack license left. Bedford Downs agreed to withdraw its license application if Valley View purchased Bedford Downs for $55 million. Valley View agreed. Upon attaining the license in 2007, Valley View obtained loans to fund the purchase from a variety of financial institutions, including Credit Suisse. Credit Suisse wired funds to Citizens Bank of Pennsylvania, the escrow agent.  Citizens Bank then wired the appropriate share of the purchase price to each of the Bedford Downs’ shareholders, including Merit Management Group (which had a 30% interest).

Although Valley View secured the racetrack license, it was unable to obtain a gaming license to operate slot machines. Valley View soon thereafter filed for Chapter 11 bankruptcy protection. During the course of the bankruptcy, the bankruptcy trustee sued Merit Management, seeking to avoid the transfer of funds it had received for Bedford Downs’ shares prior to the bankruptcy filing—that is, the trustee sought to force Merit Management to return its share of the purchase price. Merit Management argued that the safe harbor provision in § 546(e) applied and prevented the trustee from avoiding the transfer.

Section 546(e) prohibits trustees from avoiding “settlement” payments “made by or to” a “financial institution” in connection with a securities contract. As a result, Merit Management argued that the § 546(e) “safe harbor” applied because the payments for the purchase of securities were not made directly from Valley to it, but rather including intervening payments made by or to two separate financial institutions: Credit Suisse and Citizens Bank. In contrast, the trustee argued that the § 546(e) “safe harbor” did not apply because the relevant transfer was the payment made in conjunction with the overarching transaction between Valley View and Merit Management.

Court Decision

The Supreme Court unanimously rejected Merit Management’s argument. Relying on the plain text of § 546(e), the Court explained that the pertinent transfer for purposes of the safe harbor in § 546(e) was the same transfer that the trustee sought to avoid (undo). Here, the trustee sought to reverse the Valley View–to–Merit Management transfer because it was constructively fraudulent. Under bankruptcy law, a transaction is constructively fraudulent if the transferor (1) receives less than reasonably equivalent value in exchange for the transfer, and (2) is insolvent on the date of the transfer. 11 U.S.C. § 548(a)(1)(B). The Court held that the component parts of the transfer—Credit Suisse’s and Citizens Bank’s involvement—were “simply irrelevant to the analysis under § 546(e),” and that “[t]he focus must remain on the transfer the trustee sought to avoid.”

This decision limits the applicability of § 546(e) because transferees may invoke it only with respect to the overarching transfer the trustee seeks to avoid.  The Merit case means that intermittent transfers made by financial institutions who are “mere conduits” are no more than a component part of the overarching transfer and therefore do not provide a “safe harbor” in defense of a trustee’s avoidance action in connection with securities, commodities, and forward contracts.

Seventh Circuit Predicts That Wisconsin Will Adopt Learned Intermediary Doctrine

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

The Seventh Circuit recently addressed an open issue under Wisconsin products liability law—do manufacturers of prescription drugs or medical devices satisfy their duty to warn of product risks by informing prescribing physicians (rather than the patients themselves) of those risks?  In In re: Zimmer, NextGen Knee Implant Products Liability Litigation, No. 16-3957 (7th Cir. Mar. 8, 2018), the federal appeals court predicted that the Wisconsin Supreme Court likely would answer “yes” to that question by adopting the “learned intermediary doctrine.”

At issue in this case was a knee implant manufactured by Zimmer NexGen Flex, an entity that has been subject to numerous complaints from patients alleging that their implants are subject to premature loosening.  The claimant in this particular case, Theodore Joas, is a patient who had knee-replacement surgery in Eau Claire in 2008 and filed suit against Zimmer after beginning to feel pain in his new knee in 2011.

Due to the number of similar claims against Zimmer, all litigation involving the Zimmer knee implants, including Mr. Joas’ lawsuit, were transferred to a multidistrict proceeding pending in the Northern District of Illinois.  The judge in the multidistrict proceeding subsequently selected Mr. Joas’ suit as a bellwether—a test case—and scheduled his claim to move forward.

Prior to trial, Zimmer moved for summary judgment on all of Mr. Joas’ claims.  Zimmer argued that the testimony of Joas’ only medical expert must be excluded as unreliable. The doctor’s report applied a differential etiology method that identified the most likely cause of Joas’ injury by eliminating other potential causes. But the medical expert could not affirmatively prove a specific cause for the loosening. The judge excluded the doctor’s opinion under the Daubert standard as lacking any discernable basis for concluding which potential causes were reasonable.  The judge then granted Zimmer’s summary judgment motion, holding that, absent expert medical testimony, the factual record did not support Joas’ causation theories.  Slip. op. at pp. 3-4.

Rather than challenge the Daubert ruling, Joas argued on appeal that, even without his own medical expert's testimony, he could win by proving that Zimmer failed to adequately warn both himself and his doctor of the risks associated with the knee implants. Joas supported his positions with testimony from one of Zimmer’s experts, who opined that it would take two bags of cement to properly bond the knee implant to a patient’s shinbone.  Because his doctor used only one bag, Joas theorized that Zimmer failed to satisfy its duty to warn that two bags of cement were needed to properly bond the implant.  Id. p. 4.

The Seventh Circuit rejected this argument on a number of grounds.  With respect to Zimmer’s duty to warn Joas directly, the Seventh Circuit noted that this was an issue of first impression under Wisconsin law.  The Court noted, however, that the overwhelming majority of courts from other jurisdictions facing this issue have adopted the “learned intermediary doctrine,” which states that medical device manufacturers satisfy their duty to warn of product risks by informing the prescribing physicians of those risks.  The Court predicted that Wisconsin would follow suit. It reasoned that the doctrine recognizes the practical reality that patients cannot obtain such devices without physician intervention and that patients reasonably rely on their physicians to warn them of the risks associated with medical procedures.  Id. pp. 5-8.

The Court also noted that Joas’ argument suffered from a lack of evidence to establish causation.  A warning directly to Joas would not have changed the outcome given that it was his physician (rather than Joas himself) who selected to use the Zimmer brand of knee implant for his procedure.  Any warning directed towards Joas’ surgeon similarly would have failed to make a difference, as the surgeon testified that he performed the surgical cementing technique based on his medical fellowship and residency training and that he did not review Zimmer’s device instructions.  While Joas argued for a “heeding presumption” that would allow for a factfinder to presume that a proper warning would have been read and followed by a medical professional, he cited no Wisconsin authority in support of this argument. The Court determined that such a presumption likely would not be adopted by Wisconsin courts.  Id. pp. 8-13.

While the Seventh Circuit’s decision is not a binding statement of Wisconsin law, Wisconsin courts will likely follow its well-reasoned analysis adopting and applying the “learned intermediary doctrine” to insulate medical device and pharmaceutical manufacturers from claims that they have a duty to warn patients directly.  Patients should also view In re: Zimmer, NextGen Knee Implant Products Liability Litigation as a warning that direct causal evidence likely will be needed to prevail on any liability claims against manufacturers of medical products

 

Court of Appeals Denies Nonprofit Medical Clinics from Claiming Property Tax Exemption

Published by Meg Vergeront, Elizabeth C. Stephens on | Permalink

The Wisconsin Court of Appeals recently held that a hospital owned by a non-profit entity failed to demonstrate that three medical clinics it also owns are not used as “doctor’s offices,” and therefore are not exempt under Wisconsin’s nonprofit hospital property tax exemption.  Mile Bluff Medical Center, Inc. v. Village of Necedah, City of New Lisbon and City of Elroy, No. No. 2017AP751, 2018 WL 1040203 (Wis. Ct. App. Feb. 22, 2018) (slip opinion) (unpublished.)  Mile Bluff is the most recent decision in a line of cases addressing whether medical clinics owned by a nonprofit hospitals qualify for the exemption.

Mile Bluff is a non-profit entity that owns a hospital in Mauston and the three medical clinics at issue in this case.  Mile Bluff sought an exemption from property taxation for the clinics under Wis. Stat. § 70.11(4m)(a).  Under § 70.11(4m)(a), real property owned and used exclusively for the purposes of a non-profit hospital of 10 beds or more devoted primarily to the diagnosis, treatment or care of the sick, injured or disabled is eligible for the exemption provided, among other things, that the property is not used as a doctor’s office. 

In concluding that the Mile Bluff medical clinics are used as doctor’s offices, and therefore not exempt from property taxation, the court considered seven factors previously articulated by other courts as relevant in determining whether a facility is a doctor’s office.  The seven factors the Court analyzed include whether the:

  1. physicians at the clinics owned or lease the facility or equipment;

  2. physicians at the clinics received “variable compensation,” that is, compensation based on their “productivity”;

  3. physicians at the clinics employed or supervised non-physician staff, or received extra compensation for such duties;

  4.  clinics and hospital generated separate billing statements or use separate billing software;

  5.  physicians at the clinics had office space in the clinics;

  6.  clinics provided services of the type that had been formerly performed inpatient at the hospital; and

  7. clinics were open during regular business hours during which time the physicians generally saw patients by appointment.

The Court sided with Mile Bluff on the first factor and assumed, without analysis, that the second factor also supported Mile Bluff’s position. The Court found that the fourth factor did not favor either of the parties.  The Court sided with the municipalities with respect to a majority of the factors—the third, fifth, sixth and seventh factors.  The Court further concluded that the clinics lacked typical hospital amenities, like a gift shop, and did not offer urgent care services, making the clinics more like doctor’s offices. 

The Court also rejected Mile Bluff’s argument that the fact that the clinics were “rural health clinics” and are required by federal and state law to have a certain level of integration with the non-profit hospital that owns them should be considered in determining whether the clinics were hospitals or doctor’s offices. The Court found that this status did not result in any significant change in the nature or manner of patient services, a critical element in determining whether a clinic is a doctor’s office, and therefore was not enough to tip the scales in favor of Mile Bluff’s argument.

Based on these findings, the Court held that the clinics were in fact doctor’s offices and therefore not exempt under the non-profit hospital exemption. 

The case makes clear that there is no bright line test for whether, on balance, property owned by a non-profit is a doctor’s office.  Assessors should carefully weigh the particular facts of each case against the guidelines relied upon by the Court. 

If you have questions on this case or on other property taxation related matters, contact Meg Vergeront at (608) 259-2663.

The NLRB Creates a New Standard for Evaluating Workplace Rules’ Effect on the Right to Unionize

Published by Meg Vergeront, Olivia M. Pietrantoni on | Permalink

In The Boeing Company and Society of Professional Engineering Employees in Aerospace, IFPTE Local 2001 the National Labor Relations Board (NLRB) articulated a new standard for determining whether employers’ rules and handbook provisions violate the National Labor Relations Act’s (NLRA) prohibition on rules that interfere with employees’ right to join labor organizations and bargain collectively. Cases 19-CA-09032, 19-CA-090948, and 19-CA-095926. The NLRB believes that this new standard will be easier to apply on a case-by-case basis, and will invalidate fewer “common-sense rules and requirements that most people would reasonably expect every employer to maintain.”

Background

In The Boeing Company, Boeing had a policy that banned the use of “devices to capture images or video” without a valid business need and camera permit (No-Camera Rule). The No-Camera Rule prohibited only the use of the camera–not the entire device–therefore employees were allowed to use cellphones and laptops on company property. The question before the Board was whether the No-Camera Rule violated the NLRA’s prohibition against employers interfering with employees’ right to unionize.

Section 7 of the NLRA guarantees employees the right to self-organize and join labor organizations. Section 8(a)(1) makes it an unfair labor practice for an employer to interfere with that right. Under prior law, if a rule did not explicitly interfere with employees’ right to unionize, the NLRB would consider whether: (1) employees would reasonably construe the language to prohibit Section 7 activity; (2) the rule was promulgated in response to union activity; or (3) the rule has been applied to restrict the exercise of Section 7 rights. Lutheran Heritage Village-Livonia, Case 7-CA-44877 (emphasis added). The administrative judge held that Boeing’s No- Camera Rule was unlawful because it failed prong (1) of the test; that is, employees would “reasonably construe” the rule to prohibit Section 7 activity.

NLRB Decision

The NLRB overruled the “reasonably construe” standard iterated in Lutheran Heritage and held that, under its new test, the No-Camera Rule was lawful. The NLRB listed many reasons why the test was insufficient. Among those reasons, was that the “reasonably construe” test “entails a single-minded consideration” in that it does not consider justifications for having the employer’s rule in place. The NLRB noted that the test created confusion for employers because outcomes were unpredictable, and that the test was based on the false premises that employees are best served by not having employment policies.

Under the NLRB’s new test, the first question is whether the rule would potentially interfere with the exercise of NLRA rights. If not, then the rule is lawful. If yes, then the NLRB considers (1) the nature and extent of the potential impact on NLRA rights, and (2) legitimate justifications associated with the rule. Then the NLRB will classify the rules it evaluates under this new standard into one of the three categories. Category 1 includes rules that are lawful because they don’t interfere with NLRA rights or the potential adverse impact on rights is outweighed by the rule’s justification. Category 2 includes rules that warrant individualized scrutiny in each case as to whether the rule would prohibit or interfere with NLRA rights, and if so, whether any adverse impact is outweighed by justifications. Finally, Category 3 includes rules that the NLRB designates as unlawful because they violate NLRA-protected conduct and are not properly justified.

As for Boeing, the NLRB determined that the No-Camera Rule fell under Category 1 because it only had a slight adverse impact on Section 7 activity and Boeing had legitimate justifications for the rule. Boeing has highly sensitive and classified information because it manufactures military aircrafts for the federal government.

Take-Away

The NLRB’s ruling affects union and non-union workplaces because non-union workplaces must also comply with the provisions in the NLRA prohibiting interference or restraint on collective bargaining and self-organizing. Therefore the ruling has a widespread impact. The new test is more employer friendly in that it gives weight to the reasoning behind implementing a workplace rule or policy.  Additionally, the categorization scheme should provide employers with more guidance in creating lawful work policies.

The case is available at: https://dlbjbjzgnk95t.cloudfront.net/0995000/995170/decision.pdf

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