Wisconsin Court of Appeals Affirms Limited Scope of Insurance Agents’ Duties to Insureds

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

District III of the Wisconsin Court of Appeals recently addressed the scope of an insurance agent’s duties to an insured when retained to procure insurance coverage.  See Olson et al. v. Wisconsin Mutual Ins. Co. et al., Case No. 2017AP1567 (Oct. 2, 2018) [https://wscca.wicourts.gov/caseDetails.do?caseNo=2017AP001567&cacheId=FD38D2808B90DA8A4890651728193F6B&recordCount=1&offset=0].  By affirming the circuit court’s decision to dismiss the insured’s negligence claim against its agent, the Court confirmed that, absent unique circumstances, in Wisconsin an insurance agent is not obligated to actively advise an insured regarding the appropriate coverages for the insured’s circumstances.  Rather, an agent is obligated to exercise reasonable care in procuring only the coverages specifically requested by the insured.

At issue in this case was coverage for injuries suffered by the Olsons due to an automobile collision with Jeffrey Keyes, who was in the process of towing a gooseneck trailer full of cattle between his family farm properties.  Keyes was towing the trailer with a truck that he owned personally.

Keyes had in place a personal automobile insurance policy issued by Wisconsin Mutual Insurance Company, as well as a $1 million umbrella liability endorsement attached to a farmowners policy for his family farm issued by Rural Mutual Insurance Company. Keyes submitted a claim to both insurers for the accident with the belief that the umbrella endorsement attached to the Rural policy would cover any damages that exceeded the limit of the Wisconsin Mutual policy.

Rural denied the claim based on an exclusion in the endorsement disclaiming coverage for personal injury or property damage arising from off-farm use of personal automobiles.  This exclusion was in line with Rural’s standard business practice of not providing umbrella coverage for personal automobiles unless the insured purchased primary automobile coverage from Rural.  While Keyes asserted a contextual ambiguity argument to try to avoid the exclusion, the court found the provision unambiguous and concluded that the Rural policy did not provide coverage for the Olson claim.

In the alternative, Keyes pursued a claim against his agent, Lon Truax, for failure to procure coverage arising from the use of off-farm personal automobiles as part of the umbrella endorsement attached to the Rural policy.  In support of his claim, Keyes cited to evidence demonstrating that he had informed Truax that he wanted “full coverage” for “anything and everything,” that Truax sold only Rural insurance products and was aware of Rural’s practice to not offer umbrella automobile insurance unless the insured purchased primary automobile insurance from Rural, and that Keyes and Truax had specific conversations about switching Keyes’ automobile coverage from Western Mutual to Rural.  Keyes asserted that, under these circumstances, it was reasonable to expect Truax to inform him of the off-farm automobile exclusion in the umbrella endorsement, which he had failed to do.

The court was not persuaded by this argument.  The court noted that in Wisconsin an insurance agent-insured relationship is an ordinary agency relationship in which the agent assumes only a limited duty to carry out the principal’s instructions in good faith and, absent special circumstances, is not obligated to advise the insured regarding the availability or adequacy of coverage.  The court found that Keyes’ generalized requests for full coverage were insufficient to put Truax on notice that he specifically sought umbrella coverage for off-farm use of personal automobiles and, despite the specific conversations about switching his primary automobile coverage to Rural, there was nothing in the record sufficient to establish that Truax was obligated to advise Keyes regarding any potential gaps in the procured coverage.  The court accordingly held that the circuit court had properly granted summary judgment for Truax on this issue.

The Olson decision demonstrates how important it is for commercial enterprises and businesses to take an active role in procuring adequate insurance to protect their interests.  In Wisconsin, insurance agents are not fiduciaries that should be relied on to weigh in regarding the adequacy of an insurance portfolio unless they specifically offer such services and agree to do so (likely for an additional fee).  In any event, before procuring insurance products, commercial entities should ensure that their coverage forms are reviewed carefully by those who are familiar with all aspects of their operations and resulting risk profile (either an internal risk management department and/or coverage counsel) to minimize the potential for any coverage gaps.

Court of Appeals Interprets Wisconsin’s Fraudulent Transfer Law in a Garnishment Action

Published by Susan Allen, Olivia M. Pietrantoni on | Permalink

The Wisconsin court of appeals clarified in Beck v. BidRX, LLC the requisite elements to proving a fraudulent transfer claim under Wis. Stat. Ch. 242. App. No. 2017AP2043 (Ct. App. Aug. 15, 2018). The court reversed the circuit court’s ruling that a fraudulent transfer occurred because there was no evidence that the transfers were for an antecedent debt.

The Becks were awarded $108,235 in a default judgment against BidRX, LLC (“BidRX”) for an unpaid promissory note.  The Becks filed a nonearnings garnishment action against BidRX as the debtor and Fiscal Intermediary Third Party Funds Services, LLC (“Fiscal”) as garnishee. The Becks alleged in the garnishment action that BidRX fraudulently transferred funds to Fiscal. In addition to pointing to bank records allegedly showing a number of transfers between BidRX and Fiscal, the Becks argued that Fiscal was an “insider,” in part, because the entity had been formed by an attorney working for BidRX. The circuit court held that BidRX made fraudulent transfers to Fiscal under Wis. Stat. § 245.05(2). Additionally, the circuit court imposed a judgment of $2,073.77 against BidRX. The court of appeal reversed.

The court of appeals stated that a plaintiff must prove the following elements to establish a fraudulent transfer claim:

  1. The creditor’s claim arose before the transfer,
  2. The transfer was made to an insider for an antecedent debt,
  3. The debtor was insolvent when the transfer was made, and
  4. The insider-transferee had reasonable cause to believe the debtor was insolvent.

The only evidence the Becks submitted was over 300 pages of bank records showing transfers between BidRX to Fiscal. The court held that the Becks failed to prove element number two, and that no evidence was offered to show “why any transfer was made and for what debt.” ¶ 16. “The fact of a transfer to an insider is not enough; it is the preferential payment of prior debts to insiders to which the statute is addressed.” Id. The court rejected the Becks’ argument that Wis. Stat. 242.05(2) assumes the existence of an antecedent debt as the reason for the conveyance.

The court of appeals further held that the circuit court did not have the authority to order a judgment against BidRX because BidRX was the debtor, and not the garnishee, in this garnishment action. The purpose of a garnishment action is to recover debtor’s property held by third parties that is owed to a creditor; nothing in the garnishment statutes permits a court to issue a money judgment against non-garnishees.

Beck v. BidRX, LLC is the first Wisconsin case to definitively set out the elements for a fraudulent transfer claim under Wis. Stat. 242.05(2), and follows other courts across the nation in construing the elements in accordance with the Uniform Fraudulent Transfers Act. Additionally, this case establishes that circuit courts may not impose money judgments against debtors in garnishment actions.

What Will Follow from Wholesale Changes to Wisconsin’s Class-Action Statute?

Published by Jeffrey A. Mandell on | Permalink

On July 1, 2018, for the first time in more than a century, major changes to Wisconsin’s class-action statute took effect. See Supreme Court Order No. 17-03, 2017 WI 108. As a result, Wis. Stat. § 803.08 now mirrors, nearly identically, Federal Rule of Civil Procedure 23, which governs class-action suits in federal courts. The harmonization of § 803.08 with Rule 23 expands the breadth of guidance and precedent available in Wisconsin class actions, as lawyers and judges can now refer to extensive federal case law interpreting and applying Rule 23. While the effect this change will have on the volume, variety, and outcome of class actions in Wisconsin remains to be seen, several questions are foreseeable.

Will this change increase the number of class-action lawsuits in Wisconsin courts?

State-court class actions have been relatively rare in Wisconsin. So few occur annually that the Wisconsin Court system does not track class actions as a category in its yearly “Civil Disposition Summary.” Among the reasons for this scarcity may be the fact that, prior to July 1, Wisconsin’s previous class-action statute provided very little guidance (and therefore very little predictability) for potential litigants, making federal court or other jurisdictions preferable venues. Now that Wisconsin class-action law parallels federal law, Wisconsin state courts may become a more appealing venue. (Note, however, that Congress relaxed removal rules for class actions, see 28 U.S.C. §§ 1332(d) & 1446, so that, even if more class-action plaintiffs choose to file in Wisconsin state courts, defendants will often have the option to move those cases to federal court.)

There are also some unique features of Wisconsin law that may make litigating class actions here more attractive to plaintiffs and defendants alike. For example, consider the opportunity for appellate review early in the class-action process. The crucial moment in many class-action suits is the trial court’s decision whether to certify a class. Where certification is granted, the defendant often faces enormous potential liability, which is why a certification order sometimes constitute a “death knell” for defendants, forcing them to settle rather than risk an adverse judgment after a full trial on the merits. See Balser et al., Interlocutory Appeal of Class Certification Decisions under Rule 23(f): An Untapped Resource, Bloomberg BNA (Mar. 16, 2017). And where certification is denied, the named plaintiff must decide whether to settle or proceed alone, which often means continuing in extensive, expensive litigation though the potential damages for their individual injury do not justify the costs of the process.

In federal court, litigants do not have an appeal as of right from the trial court’s critical decision of whether to certify a class. Instead, the party aggrieved by that decision must convince a federal appeals court to accept a discretionary appeal under Rule 23(f). By contrast, Wis. Stat. § 803.08(11) now grants litigants an appeal as of right from a class certification order. The chance to appeal class certification before proceeding to final judgment could be a substantial boon for whichever party loses on that issue in the trial court. It may be enough to encourage class-action plaintiffs to file in Wisconsin state court and to make class-action defendants sued in Wisconsin state court think twice before opting for removal to federal court.

Another feature of Wisconsin law that could attract more class-action suits is Wisconsin’s comparatively lenient standing requirements. In federal courts, standing is a constitutionally mandated jurisdictional prerequisite. But Wisconsin state courts view standing more leniently. In Wisconsin, standing is a prudential doctrine, “aimed at ensuring that issues and arguments presented will be carefully developed and zealously argued.” McConkey v. Van Hollen, 2010 WI 57, ¶¶15-16, 326 Wis. 2d 1, 783 N.W.2d 855. The greater flexibility Wisconsin law affords state courts to allow suits to proceed may be particularly advantageous for class-action plaintiffs, who frequently face arguments that the named plaintiff has not suffered a concrete and particularized injury sufficient to trigger federal jurisdiction. Additionally, it remains an unresolved question whether federal standing doctrine requires that all absent class members have standing or if the named plaintiff’s proof of standing is sufficient. Wisconsin’s more pragmatic approach to standing allows state-court plaintiffs to sidestep this thorny question.

How will Wisconsin courts address some of the open questions under federal class-action law?

While functionally adopting Rule 23 will likely bring improved clarity to Wisconsin’s class-action law in many respects, Wisconsin may be adopting some of Rule 23’s unresolved questions as well. To the extent that the language now incorporated into § 803.08 has led to disagreements among federal courts, Wisconsin courts will now face those same bedeviling questions.

One such question, which has divided federal appellate courts, concerns whether Rule 23 has an ‘implicit’ requirement that the members of a proposed class be “ascertainable.” See, e.g., In re Petrobas Securities, 862 F.3d 250, 264 (2d Cir. 2017), petition for cert. filed (No. 17-664). Traditionally, “a class is ascertainable if it is clearly defined by ‘objective criteria.’” Andrew J. Ennis and Catherine A. Zollicker, The Heightened Standard of Ascertainability in Class Actions, ABA Section of Litigation (Mar. 13, 2018). Most circuits, including the Seventh Circuit, adhere to this traditional rule. Id. However, the Third Circuit has held that “a class action plaintiff must also ‘demonstrate his purposed method for ascertaining class members is reliable and administratively feasible.’” Id. (quoting Carrera v. Bayer Corp., 727 F.3d 300, 308 (3d Cir. 2013)). The U.S. Supreme Court has thus far declined several requests to address this issue.

Another involves the propriety of side-deals with individual objectors to a class-action settlement. Because the outcome of a class-action suit is binding upon all members of the class, when the named plaintiff and the defendant negotiate a settlement, the terms are submitted for the court’s review and all absent (that is, unnamed) class members have the opportunity to lodge objections to the settlement. Fed. R. Civ. P. 23(e)(5). Sometimes an absent class member files such an objection for the sole purpose of gaining an individual benefit in the form of a separate settlement payment in exchange for dismissing their objection. At least one litigant has characterized this practice as “objector blackmail.” See Pearson v. Target Corp., 893 F.3d 980, 982 (7th Cir. 2018).

This issue is a particularly interesting example because the U.S. Supreme Court has adopted an amendment to Rule 23 to address this by requiring court approval of any payment provided in connection with dismissing an objection to settlement. Unless Congress takes action to stop it, this proposed amendment will take effect on December 1, 2018. However, Wis. Stat. § 803.08 mirrors Rule 23’s text prior to the proposed amendment. Absent a further change to section 803.08, the settlement issue will remain one for the Wisconsin courts to handle in state-court class actions.

Conclusion

The first wholesale changes to Wisconsin’s class-action statute in a century might have unintended consequences. While changes to harmonize Wisconsin class-action law with federal class-action law mean that Wisconsin lawyers and judges have greater guidance on class-action procedures, they also bring to Wisconsin several thorny questions as yet unresolved by federal courts. And some differences between Wisconsin law and federal law could lead to an increased incidence of class-action litigation in Wisconsin state courts.

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

Europe’s New Personal Data Protection Law Will Have Broad Impact on U.S. Businesses

Published by Scott A. Seid, Olivia M. Pietrantoni on | Permalink

SAS and OMP

The European Union Parliament enacted the General Data Protection Regulation (“GDPR”), which aims to protect the personal information of individuals in the EU. Many U.S. businesses will have to comply with the GDPR if they have personal information—which includes a variety of data from name to birthdate, home address to IP address, and many other data points in between—of individuals in the EU. The GDPR went into effect on May 25, 2018.

Scope of the GDPR

U.S. companies engaged in processing personal data of individuals in the EU (not just EU residents, but anyone residing there or traveling through) may have to comply with the GDPR even if they have do not have a brick and mortar place of business in Europe. “Processing” has an expansive definition and includes collecting, storing, using, or retrieving personal data. “Personal data” is also broadly defined and includes any information relating to an identifiable person. Information obtained using cookies or web beacons, for example, may qualify as personal data. As a result, any business that has any personally identifiable information about any individual in the EU is arguably subject to the GDPR.

The GDPR gives individuals who are covered by the law certain rights that may be utilized against companies that control and process their data. For example, under certain circumstances, individuals may object to the processing of their data or request that it be deleted. Additionally, individuals in the EU are entitled to receive certain disclosures about how their information is collected and used. This means that companies will likely have to revise their privacy policies, and it explains why many people, even in the United States, received a flurry of updated privacy policies in late-May and early-June of this year.

As a means of protecting covered data, the GDPR requires companies that possess personal data and utilize third-parties to assist in supplying their goods or services to include certain provisions in their contracts with those third parties. And the GDPR establishes requirements for how companies respond to data breaches, in some cases mandating that companies notify the appropriate regulatory authority within 72 hours of learning that a breach occurred.

Compliance Efforts

The GDPR has garnered extensive attention. In part, that is because the law allows EU regulators to impose large fines for violations of the statute. Depending on which article is violated, the cap may be as much as €20 million (approximately 23 million U.S. dollars) or 4% of the company’s worldwide annual revenue—whichever is greater. On top of the provisions authorizing administrative fines, the GDPR also provides private causes of action under which individuals have the right to sue companies for damages.

Many variables are considered in assessing fines. An effort to comply with the law will certainly weigh in a business’s favor. All companies that keep or process personal data should evaluate whether they are subject to the GDPR. Once a company determines that it is subject to the GDPR, the next step is identifying the key areas of noncompliance that need to be addressed.

One way the EU may enforce the GDPR against U.S. companies without a physical presence in the EU is through the requirement that companies outside the EU (that process personal data more than “occasionally”) designate a representative in the EU to act on their behalf. This designated representative can be subject to enforcement proceedings in the event of non-compliance. If you are a Wisconsin business with questions about the GDPR, Stafford Rosenbaum’s business law experts can answer your questions about the GDPR and assist you in auditing your vulnerabilities under the new law.

Court of Appeals Suggests Possible Path To Waiver of PFC Review

Published by Paul W. Schwarzenbart on | Permalink

Court of Appeals Suggests Possible Path To Waiver of PFC Review

Can a municipality and a public safety employee agree to waive the disciplinary process before a police and fire commission under Wis. Stat. § 62.13(5). Yes, at least in some circumstances, according to the Wisconsin Court of Appeals.

City of Janesville v. WERC, 193 Wis. 2d 492, 535 N.W.2d 34 (Ct. App. 1995), held that Wis. Stat. § 62.13(5) provides the exclusive method for law enforcement officers to challenge discipline and that a labor union’s proposal for arbitration of grievances related to discipline was a prohibited subject of bargaining. City of Menasha v. Wisconsin Employment Relations Comm’n, 2011 WI App 108, 335 Wis. 2d 250, 802 N.W.2d 531, recognized that by enacting Wis. Stat. §§ 111.70(4)(c)2.b. and (4)(mc) the Wisconsin Legislature had abrogated the City of Janesville decision. In 2011, the legislature then reversed itself, abolishing those sections,[1] essentially resuscitating City of Janesville from the legal graveyard.

But this legislative yo-yo on the ability to “opt out” of the PFC disciplinary process was of no consequence to the court in State ex rel. Beck v. Lamb, 2017AP969 (Wis. Ct. App. July 25, 2018). In Beck, the waiver was made in the context of a “Last Chance Agreement” between Officer Beck and his employer, the City of Fond du Lac. The LCA was the product of a 2014 settlement between Beck and the City to resolve an investigation of Officer Beck’s honesty.

Pursuant to the LCA, Beck received a short suspension and agreed that any further “untruthful conduct” by him would constitute “cause” for his immediate discharge. He also agreed that any investigation into his alleged untruthful conduct would include a Loudermill hearing[2] but would not be subject to the PFC procedure under Wis. Stat. § 62.13(5). Instead, reminiscent of the procedures that could be used during the brief period when Wis. Stat. § 111.70(4)(c)2.b. was in effect, the LCA afforded Lamb the right to appeal the investigation’s findings to the Wisconsin Employment Relations Commission (“WERC”).

Lamb tried to have it both ways. He resigned his employment, in order to preserve his vacation pay, and then grieved the matter to the WERC. But the WERC dismissed the grievance on the basis that Beck had voluntarily resigned. Beck then filed an action in circuit court seeking a writ of mandamus to order his reinstatement, alleging the LCA was a void and unlawful agreement to circumvent Wis. Stat. § 62.13(5). The circuit court agreed and ordered Beck’s reinstatement.

The court of appeals reversed. Rejecting Beck’s reliance on City of Janesville, the court stated that Beck failed to show “that a procedure that is exclusive and mandatory is also necessarily individually unwaivable.” Beck, ¶ 16 (emphasis added). The court also rejected Beck’s reliance on Faust v. Ladysmith-Hawkins School Systems, 88 Wis. 2d 525, 277 N.W.2d 303, on motion for reconsideration, 88 Wis. 2d 525[JM1] , 281 N.W.2d 611 (1979) (per curiam) for the proposition that statutory procedures protecting both a private interest and a public policy purpose could not be waived. Concluding that Faust was limited to its peculiar facts, the court held it did not apply to void the LCA under which Beck knowingly and intentionally waived his statutory rights in the context of settling misconduct allegations. Beck, ¶¶ 17-21.

The result in Beck should not be construed broadly. The court emphasized that the question of a “prospective officer forsaking statutory PFC rights to land a job are not the facts before us.” Beck, ¶ 24. It emphasized that there was substantial caselaw addressing waivers of rights in the context of LCA agreements, suggesting that its holding here may be limited to that context.

Given that Beck is not recommended for publication, it is citable only “for its persuasive value.” Wis. Stat. § 809.23(3)(b). However, it does suggest that an individualized waiver of the PFC disciplinary process may be permissible, notwithstanding City of Janesville’s general prohibition upon opting out of the PFC process.


[1]           See 2011 Wisconsin Act 32, §§ 2407dg and 2409cp, effective July 1, 2011.

[2]           A due process hearing afforded under Cleveland Bd. of Educ. v. Loudermill, 470 U.S. 532 (1985).

Condemnor’s Duty to Negotiate in Good Faith is Limited to Compensation

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

Condemnor’s Duty to Negotiate in Good Faith is Limited to Compensation

In Zastrow v. American Transmission Company LLC, Case No. 17-AP-1848 (July 3, 2018) (unpublished) the Wisconsin Court of Appeals confirmed that a condemnor’s duty to negotiate in good faith relates only to the issue of compensation.

American Transmission Company (ATC) held a pre-existing transmission line easement on the plaintiffs’ property.  In May 2014, ATC applied to the Wisconsin Public Service Commission (PSC) for permission to construct and operate two new high-voltage transmission lines that would run across plaintiffs’ property, and which, if approved, would ultimately require an extension of the existing easement.  Plaintiffs participated in the PSC proceedings, opposing the project and specifically complaining that the vegetation management practices relating to the clearing of the right-of-way during construction and thereafter were too extensive.  The PSC staff recommended approval of the application, but with the condition that ATC employ the wire zone-border zone vegetation management technique that was preferred by plaintiffs.  In issuing its decision, the PSC acknowledged the concerns raised by plaintiffs and its own staff, but did not include the recommended conditions.  Despite ongoing discussions between the PSC and plaintiffs, no modifications were ever made to the vegetation management terms for the relevant area.  ATC proceeded through the statutory process for condemnation of the easement area, under Wis. Stat. § 32.06, serving its jurisdictional offer in August 2016.

Plaintiff filed suit challenging ATC’s right to condemn the property on the grounds that ATC had not negotiated in good faith relating to the vegetation management issue.  The circuit court granted summary judgment in favor of ATC, finding Wis. Stat. § 32.06(2a) only required ATC to negotiate in good faith with respect to compensation.  The court of appeals affirmed, noting that while Wis. Stat. § 32.06(2a) includes multiple references to compensation or price, it does not include similar references to other topics.  Similarly, “(2a) grants landowners the right to appeal only one issue – i.e., the amount of compensation – [which] further indicates that the negotiation required by subsec. (2a) is limited to that topic.”  ¶ 18.

The court also rejected plaintiffs’ claims that ATC agreed to negotiate in good faith by accepting the PSC certificate because ATC has specifically advised plaintiffs that it did not generally negotiate on the vegetation issue.  Similarly, the court found no support for plaintiffs’ argument that ATC made any false statements in violation of Wis. Stat. § 32.29, and noted that even if there was a violation of the statute, the only penalty was a forfeiture and/or jail time.

Finally, the court held that the circuit court lawsuit was not the proper means of challenging the PSC’s decision.  Rather, the court noted that plaintiffs could have sought judicial review of the PSC’s decision and raised PSC’s failure to include any specific vegetation management conditions in the certificate.  By not seeking judicial review at that time, plaintiffs forfeited their right to challenge the substance of the PSC certificate.

Though this opinion is unpublished, it is instructive to parties involved in condemnation proceedings, particularly providing valuable instruction to condemnors on the scope of their obligations.  It also suggests that condemnors should be actively involved in PSC proceedings in attempt to manage potential issues that may arise in condemnation proceedings.

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.

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