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

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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.

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

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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.

Wis. Supreme Court Finds TID Findings are Legislative Determinations, Subject to Certiorari Review

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Wis. Supreme Court Finds TID Findings are Legislative Determinations, Subject to Certiorari Review 

In a recent 5-2 decision, the Wisconsin Supreme Court held, inter alia, that findings of blight and a corresponding need for Tax Incremental Districts (TIDs) were “legislative determinations” and therefore not susceptible to full declaratory judgment review. Voters with Facts v. City of Eau Claire, 2018 WI 63. Voter with Facts strongly suggests, but stops short of directly holding, that certiorari review is the sole method for challenging findings in the creation of TIDs.

Municipalities will need to closely watch the next stages of the Voters with Facts litigation and other similar cases to see how courts conduct certiorari review of TID formation. In particular, it is unclear how courts will review the required finding that a TID is necessary because development of a blighted area would not occur “but for” the creation of a TID. See Wis. Stat. § 66.1105(4m)(b)2. Even under the more forgiving certiorari standard, it will be necessary to have a record supporting the blight and “but-for” determinations.

Voters with Facts Litigation

Plaintiffs, various Eau Claire area businesses and taxpayers, sought a declaratory judgment invalidating two TIDs that were part of the City’s “Confluence Project,” a downtown redevelopment effort. In approving the TIDs, the City found, as required by statute, that at least 50% of the area in the TIDs was “blighted.” 2018 WI 63, ¶ 8. The Joint Review Board (JRB) (also as required by statute) subsequently found that development in the area would not occur “but for” the creation of the TIDs. Id. ¶ 9.

The plaintiffs argued the TIDs were invalid because the City and the JRB failed to “articulate the basis for . . . and the evidence of record that support[ed]” these findings. Id. ¶ 11. In essence, the Plaintiffs wanted to engage in discovery and conduct a trial, seeking a judicial determination of whether the blight and “but for” determinations were justified by the facts on the ground. Alternatively, the Plaintiffs argued that if they could not get a full trial, they were entitled to certiorari review of the City and JRB’s actions. Id. ¶ 14.

The Wisconsin Supreme Court concluded that, because the blight and “but for” findings were “legislative determinations,” they “do not present justiciable issues of fact or law” and are not appropriate subjects for declaratory judgment relief. Voters with Facts v. City of Eau Claire, 2018 WI 63, ¶ 4. The Court noted that because blight findings involve determinations about areas which are “detrimental to the public health, safety, morals, or welfare,” they are a quintessential exercise of municipalities’ “police power,” a legislative power typically accorded deference by courts. Id. ¶ 37. The Court found that like other “[l]egislative determinations of public policy,” for example zoning decisions, TID determinations “[do] not raise justiciable issues,” Id. ¶ 39. The case was remanded to the circuit court with instructions to address the Plaintiffs’ challenges through certiorari review, which the court described as “the appropriate mechanism for a court to test the validity of a legislative determination.” Id. ¶ 5.

Justices Rebecca Bradley and Daniel Kelly authored a joint dissent, criticizing the court’s decision to dismiss the “Plaintiffs’ richly-detailed and amply supported 25-page Complaint . . . .” Voters, ¶ 77. The dissent opined that “[t]he court’s decision forecloses taxpayers from ever seeking declaratory judgment when municipalities violate the TIF statutes.” Id. ¶ 78. The dissent criticized both the majority opinion and the Wisconsin Court of Appeals, arguing (among other things) that: (1) Plaintiffs had standing to bring their declaratory judgment claims; (2) declaratory judgment was appropriate for challenging the TID findings; and (3) the Complaint adequately pleaded facts to support the Plaintiffs’ declaratory judgment challenges to the TID findings. Id.

Certiorari Review 

Certiorari review is generally limited to the “record compiled by the municipality,” and “there is a presumption of the correctness and validity to a municipality’s decision.” Ottman v. Town of Primrose, 2011 WI 18, ¶¶ 35, 48. On review, the court reviews whether the municipality: (1) “kept within its jurisdiction;” (2) “proceeded on a correct theory of law;” (3) “was arbitrary, oppressive, or unreasonable . . . ;” and (4) “whether the evidence was such that it might reasonably make the . . . determination in question . . . .” Voters with Facts, ¶ 71 (quoting Ottman, ¶ 35).

A recent example of just how deferential certiorari review is (at least as understood by the current members of the Wisconsin Supreme Court) is AllEnergy Corp. v. Trempealeau Cty. Env. & Land Use Committee, 2017 WI 52. In that case, the plaintiffs challenged the denial of a conditional use permit for non-metallic mining on several grounds, including that there was insufficient evidence to support the committee’s denial. Id. ¶ 3. While no one opinion garnered four votes, the court upheld the committee’s decision on a 4-3 vote under the certiorari standard. See id. ¶¶ 130, 133.

Justice Ziegler’s concurrence demonstrated a view that certiorari review is very deferential to municipal decisions. Her opinion (joined by Justice Roggensack) summed her rationale in one sentence: “This case should be decided narrowly: ours is a certiorari review.” Id. ¶ 133. Rather than delve into a deep review of the Environment & Land Use Committee’s evidence in the record and rationale, Justice Ziegler pointed out that the Committee’s decision “is entitled to a presumption of correctness and validity.” Id. ¶ 135. Given that presumption, Justice Ziegler could not conclude “that the Committee’s decision [was] invalid.” Id. ¶ 136. 

The dissenters in AllEnergy took another view. Three justices dissented, demonstrating a willingness to undertake a closer review of the Committee’s decision.  The dissent argued that the Committee exceeded its jurisdiction and acted arbitrarily. Id. ¶ 146. The dissent also criticized the record compiled by the Committee, saying that “no evidence” of whether the committee properly evaluated the plaintiff’s proposed mining plans “made its way into the record.” Id. ¶ 183.

The fractious nature of the AllEnergy decision, along with the strong views of the dissenters in AllEnergy and Voters with Facts, suggests that even with a “deferential” certiorari standard, municipal bodies would do well to create detailed records supporting legislative determinations, particularly for TIDs.

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

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

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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

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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.

Wisconsin Supreme Court Upholds Dismissal of Claims by John Menard’s Former Fiancée

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The Wisconsin Supreme Court issued its last decision of 2017 in Sands v. Menard, 2017 WI 110, which involved a Watts v. Watts-type unjust enrichment claim by Debra Sands, the former fiancée of president and CEO of Menard, Inc., John Menard, Jr.  In a 5-2 decision authored by Chief Justice Roggensack, the court upheld the court of appeals’ decision dismissing Sands’ claims.  Our discussion of the court of appeals decision is available here.

Sands, an attorney and businesswoman, claimed that from 1998 through 2006, she and Menard participated in a joint enterprise intended to further grow and develop Menard’s business for their joint benefit.  Asserting that she provided both business and personal contributions to Menard throughout the course of their relationship that resulted in financial gain to his business, Sands sought a portion of Menard’s “net worth or assets, ownership interests in the Menard companies, or any part of the increased value in the Menard Companies.” Id. at ¶ 16.

The court spent an extensive portion of the majority decision discussing Watts and its progeny, highlighting the fact that the Watts Court evaluated the standard factors for an unjust enrichment claim:  (1) whether a benefit was conferred on the defendant by the plaintiff; (2) whether the defendant knew and/or appreciated the benefit; and (3) whether it would be inequitable for the defendant to retain the benefit under the circumstances.  While Watts involved cohabitating parties, the court noted that it is the joint enterprise, not the romantic relationship, that provides a basis for the unjust enrichment claim. 

The court then distinguished Watts from the facts before it, noting that Menard had already established his highly successful business before meeting Sands, both Sands and Menard were educated and involved in business, and both had sufficient financial resources.  Further, Sands did not allege that she and Menard comingled any funds, purchased any real estate or personal property jointly or that she had obligated herself on any of Menard’s business or personal debt.  Thus, the court concluded that Sands and Menard did not engage in a joint enterprise.  Despite making this determination, the court went on to evaluate the unjust enrichment factors, further concluding that Sands could not state a claim under this analysis.  Most notably, in evaluating whether it would be inequitable for Menard to accept or retain any benefits conferred by Sands, the court determined Sands could not demonstrate that any benefits she conferred upon Menard during the relationship were not offset by the benefits she received given that she lived a luxurious lifestyle during the relationship.

While not necessary for the disposition of this case, the court nonetheless addressed the additional issue of whether Supreme Court Rule 20:1.8(a) served as an absolute bar to Sands’ unjust enrichment claim.  Unlike the court of appeals, the majority determined that Supreme Court Rule 20:1.8(a), which governs Wisconsin lawyers’ involvement in business transactions with clients and financial conflicts of interest, did not create an absolute bar to Sands’ claims.  Citing the preamble to the Supreme Court Rules, the court explained that the rules assist the courts in determining whether lawyers have met the standards of care applicable in each case.  The court explained that Rule 20:1.8(a) was not determinative on the viability of Sands’ unjust enrichment claim because Sands was not engaged in “the practice of law in Wisconsin” during the time period at issue.

After fully evaluating the unjust enrichment claims, the court also upheld the court of appeals’ decision to dismiss Menard’s, Inc.’s counterclaim against Sands for breach of fiduciary duty.  The purported claim arose from the closing of a 2005 transaction in which Sands was involved; however, the claim was not asserted until after Sands sued Menard years later.  The court determined that Menard – a very experienced businessman – knew or should have known that he needed to investigate Sands’ role in the transaction sooner, and thus, the statute of limitations barred his claim.  Finally, the court upheld the dismissal of claims by Sands against Menard Trustees on the grounds that Watts does not support an unjust enrichment claim against a third party, because such a claim would lack the necessary joint enterprise.

Justice Abrahamson concurred in part and dissented in part, and was joined by Justice Ann Walsh Bradley.  The dissent opined that Sands did state an adequate claim for unjust enrichment such that the claim should proceed, taking particular issue with the majority’s comparison of the facts in Watts and its progeny to the facts in this case.

This case highlights the importance of clear agreements between business partners and cohabitating partners to avoid confusion and potential litigation.  Even the most experienced business people and attorneys can become involved in litigation when the parties’ relationship terms are unclear.

Wisconsin Supreme Court Sets Tight Standard of Proof for Conspiracy to Misappropriate Trade Secrets

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The Wisconsin Supreme Court recently clarified the evidentiary requirements for establishing a conspiracy to misappropriate trade secrets under Wis. Stat. § 134.90.  See North Highland Inc. v. Jefferson Machine & Tooling Inc. et al., 2017 WI 75, 898 N.W.2d 74 (2017).  In a narrow 4-3 decision written by Justice Ann Walsh Bradley, the Court concluded that such a claim may proceed to trial only if there is evidence establishing the defendant had direct knowledge of the misappropriation.

North Highland Inc. is a small manufacturing company that served as a vendor for Bay Plastics, a distributor of customized plastic parts.  Dwain Trewyn worked as a business generator for North Highland.  His duties included submitting bids for potential projects.  When Frederick Wells, Bay Plastics’ owner, decided to form his own manufacturing company, Jefferson Machine & Tool Inc., he approached Trewyn about joining the new venture.  Trewyn became a 25% owner of Jefferson, even as he continued to work at North Highland.

A dispute arose when Jefferson and North Highland submitted competing bids to manufacture stainless steel trolley assemblies for Tyson Foods Inc.  Trewyn submitted North Highland’s confidential bid for the project. Then, he submitted a slightly lower bid on behalf of Jefferson. Tyson awarded the contract to Jefferson, until North Highland threatened to sue and the deal fell apart.

North Highland sued Trewyn, Wells, Jefferson, and Bay Plastics, alleging, among other theories, that Wells and Trewyn had conspired to misappropriate North Highland’s trade secrets (namely, the amount of the Tyson bid).  After Trewyn filed for bankruptcy and settled North Highland’s claims against him, the circuit court granted Wells’ summary judgment motion and dismissed the claims against Wells.

On appeal, the Court of Appeals affirmed the dismissal of the claims against Wells. The court concluded that (1) North Highland had failed to set forth any facts establishing that Trewyn and Wells conspired to misappropriate North Highland’s trade secrets, and (2) North Highland had not established that the amount of its bid qualified as a trade secret under Wis. Stat. § 134.90(1)(c).  At North Highland’s request, the Wisconsin Supreme Court agreed to review the case.

Writing for the majority, Justice Ann Walsh Bradley affirmed the dismissal.  Like the lower courts, the Supreme Court determined that the evidentiary record did not support the allegation that Wells had conspired with Trewyn to misappropriate North Highland trade secrets allegedly protected by statute.  Id. ¶ 39.  While it was undisputed that Trewyn had formulated the Tyson bids for both North Highland and Jefferson, the Court was unwilling to permit a jury to say that meant that Wells himself must have known the amount of North Highland’s bid.  Id. ¶ 41.  The Court cited repeated deposition testimony from both Wells and Trewyn that (1) Wells was not aware Trewyn had submitted a Tyson bid on North Highland’s behalf, (2) Wells was not involved in formulating Jefferson’s bid, and (3) Wells had not created Jefferson to compete against North Highland.  Id. ¶¶ 11-15, 30-33.

In the face of this “unrebutted” deposition testimony, the Court concluded that “[t]here are simply no facts or reasonable inferences derived from the facts to support such an allegation [of trade secret misappropriation against Wells].”  Id. ¶ 42.  Having found no evidence of misappropriation, the Court had no need to decide whether the amount of a confidential project bid qualifies as a “trade secret” under Wis. Stat. §134.90(1)(c).

In a detailed dissent, Chief Justice Roggensack noted that § 134.90(2) extends liability to anyone who “knows or had reason to know” about misappropriation, such that circumstantial evidence of an actor’s knowledge should be enough to prove a violation.  Id. ¶¶ 109-110 & n.38.  Applying this standard, the dissent referenced additional deposition testimony from Wells that (1) Wells worked with Trewyn to develop Jefferson’s bid, (2) Wells knew Trewyn continued to work at North Highland during the Tyson bidding process, (3) Wells recognized that North Highland and Jefferson were competitors, and (4) Wells was aware that Trewyn’s employment contract with North Highland did not contain  a non-compete provision.  Id. ¶¶ 56-61, 109.  Given this additional testimony, the dissent argued that the evidentiary record presented factual issues appropriate for a jury to resolve.

In the wake of North Highland, entities considering suit against former employees and/or competitors for violations of Wis. Stat. § 134.90 should evaluate what admissible evidence ties their competitors’ conduct to the alleged misappropriation.  The majority was unwilling to allow North Highland to extend liability beyond its own employee (Trewyn), who clearly was the primary actor, despite Wells’ presumed awareness of Trewyn’s business conflicts.  Accordingly, before undertaking expensive litigation under Wisconsin trade-secrets law, companies should be prepared to establish a clear, strong, direct link between their targeted defendants and the alleged misappropriation.

Seventh Circuit Clarifies Applicability of Economic Loss Doctrine to Liability Insurance Coverage

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The Seventh Circuit recently clarified the potential impact of Wisconsin’s Economic Loss Doctrine on the availability of liability insurance coverage for commercial insureds facing defective product claims.  See Haley et al. v. Kolbe & Kolbe Millwork Co. et al., Nos. 16-3563 & 16-3648 (7th Cir. 2017).  In holding that coverage was available for the defective residential windows claims at issue in this case, the Seventh Circuit concluded that Wisconsin common law requires a case-by-case analysis to determine liability insurance coverage for underlying claims subject to the Economic Loss Doctrine, thus rejecting the more broad proposition that any claim subject to the doctrine is per se not covered.

The Economic Loss Doctrine is a common law rule that has been adopted by the Wisconsin courts to allocate monetary risks arising from the purchase of commercial goods between buyers and sellers.  The rule eliminates a purchaser’s access to tort-based causes of actions to recover purely economic losses from the manufacturer of a defective product.  Injuries to people or third-party property continue to be redressable in tort, but purely economic claims (i.e., loss of economic value of the product itself and/or consequential monetary loss arising from the product’s failure to function as expected) can be compensated only under contract law. 

Wisconsin courts also have expanded the Economic Loss Doctrine by adopting the integrated-system rule. Under that rule, when a defective product has been incorporated with other products to function cohesively as an “integrated system,” the Economic Loss Doctrine applies to preclude tort-based claims for damage to any other component of that system.  See, e.g., Wausau Tile, Inc. v. County Concrete Corp., 226 Wis. 2d 235, 249-53 (1999).

In March 2016, the Wisconsin Supreme Court applied the Economic Loss Doctrine and the correlating integrated-system rule to hold that no liability insurance coverage was available for defective product claims brought against a pharmaceutical supplement supplier.  See Wis. Pharmacal Co. v. Neb. Cultures of Cal., Inc., 367 Wis. 2d 221 (2016).  In that case, Pharmacal was sued for producing defective daily supplement tablets; the tablets as a whole were alleged to be defective because they contained an incorrect probiotic bacterial species. Pharmacal had obtained that probiotic species from a downstream supplier and combined it with other ingredients when formulating the defective tablets.

Pharmacal’s liability insurance policies included standard coverage for damage to other property, but excluded coverage for damage to Pharmacal’s own property.  The Pharmacal Court, citing the Economic Loss Doctrine and the integrated-system rule, concluded that no coverage was available.  The Court reasoned that, although only one ingredient used in the supplement tablets was defective, the ingredients were combined into an inseparable integrated system.  As a result, damage to any component of the tablets was considered damage to Pharmacal’s own property.

Based on the Pharmacal decision, Kolbe & Kolbe Millwork’s insurers argued that they had no obligation to defend the defective windows claims at issue. They started from the proposition that in prior decisions Wisconsin courts have applied the Economic Loss Doctrine to defective windows claims, holding that windows form an integrated system with the other structural components of a house.  They then argued that, just as Pharmacal’s insurer had no duty to cover damage to an integrated system, they had no duty to cover the alleged damages to any component of the plaintiffs’ homes.

The Seventh Circuit rejected the broad proposition that Pharmacal required an integrated system analysis under all circumstances.  In doing so, the Court noted that whether insurance coverage exists depends instead on the nature of the underlying plaintiff’s alleged loss.  In contrast to the claims at issue in Pharmacal, where the plaintiff sought to replace the supplement tablets entirely because the defective ingredient was indistinguishable from the non-defective ingredients, here the class-action plaintiff homeowners were seeking repairs to identifiable components of the houses other than the defective windows themselves.  The Seventh Circuit accordingly concluded that the resulting damage to the drywall, wood framing, and brick surrounding the defective windows constituted damage to “other property” under the policy language, thus triggering the insurers’ coverage obligations notwithstanding that the claims were subject to Wisconsin’s Economic Loss Doctrine.

Assuming the Seventh Circuit has interpreted the Pharmacal decision correctly, Kolbe & Kolbe Millwork serves as a significant clarification regarding the impact of the Economic Loss Doctrine on liability insurance coverage under Wisconsin law.  As a result, commercial insureds facing product defect claims alleging damages to distinguishable components of integrated systems should be able to assert the Economic Loss Doctrine as an absolute defense to any tort-based causes of action without in turn eliminating their liability insurers’ obligation to defend the litigation.

From a practical standpoint, it is also noteworthy that in this case the Western District of Wisconsin federal court denied the insurers’ request to stay the underlying product defect lawsuit when they intervened to litigate the related insurance coverage issues for the matter.  As a result, the insurers were forced to continue to pay to defend Kolbe & Kolbe Millwork in the ongoing defective windows litigation while simultaneously seeking a ruling that they were not obligated to do so under their liability insurance policies.

Going forward, therefore, insurers may be better off litigating any defense coverage disputes for underlying product defect claims in Wisconsin state courts, where it is standard practice for courts to stay the underlying litigation pending resolution of an insured’s defense obligations and where an insurer may have more success in arguing that the Seventh Circuit inappropriately narrowed the Wisconsin Supreme Court’s holding in Pharmacal.

WI Courts Continue To Limit Criminal Expungement, Even as Legislature Considers Expanding Scope

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In May, Representatives Steffer (R-Howard) and Hoyke (D-Milwaukee) introduced 2017 AB 331 in the Wisconsin Assembly. The proposed legislation would change current Wisconsin law to make expungement available to those previously convicted of a crime or who were ineligible for expungement at the time their case was resolved, and it would expand the number of defendants who can seek expungement. However, this legislative proposal is at odds with the current trend in Wisconsin courts interpreting existing expunction law.

Wisconsin’s current expungement statute, Wis. Stat. § 973.015, allows courts, at the time of sentencing, to order a defendant’s conviction to be expunged after “successful completion” of a sentence, if the defendant is under age twenty-five at the time of conviction and the offense has a maximum period of imprisonment of six years or less. This statute gives the court a chance to “shield youthful offenders from some of the harsh consequences of criminal convictions.” State v. Matasek, 2014 WI 27, ¶42.

The combination of Wisconsin’s Open Records Law and the availability of court records online through the Consolidated Court Automation Program (CCAP) means that anyone with Internet access—read: nearly everyone—can easily obtain criminal history and case history from any Wisconsin court. Without expungement, convictions (whether of the original charge or a lesser, amended charge), charges that do not lead to convictions, and dismissed charges are all viewable by prospective employers, admissions officers, landlords, in-laws, etc. This access has practical consequences. For example, the American Bar Association has identified 38,000 statutes that impose collateral consequences for those with criminal convictions—of those, nearly half negatively impact employment opportunities. State v. Ozuna, 2017 WI 64, ¶ 39 (A.W. Bradley, J., dissenting).

While the purpose and scope of Wis. Stat. § 973.015 seem straightforward at first glance, the law contains ambiguities that courts have interpreted to limit access to expungement. Recent court cases have featured debates over what “expunge” and “successful completion” mean within the statutory context. The judicial trend has been to answer these questions in favor of narrowing the availability and scope of expungement under Wisconsin law.

The committee notes to Wis. Stat. § 973.015 define “expunge” as “to strike or obliterate from the record all references to the defendant’s name and identity.” Comm. Note to Wis. Stat. § 973.015(3) (citing 67 Atty. Gen. 301). But recent decisions have limited the efficacy of expungement in practice. Yes, the criminal record is sealed, with access barred absent a court order—but the police and some other governmental entities can still view the arrest. The court records still exist despite being removed from CCAP and can still be accessed by some individuals. Additionally, the record is still accessible in the Wisconsin Department of Justice’s Crime Information Bureau (CIB) database and the Criminal Justice Information Services Division of the federal Department of Justice’s National Crime Information Center (NCIC) database.

Moreover, under State v. Leitner, 2002 WI 77, courts can use information from judicial records, Department of Corrections files, and police reports relating to a prior, expunged conviction to formulate the sentence for a subsequent conviction, even though the record of the earlier conviction was “obliterate[d].” The Leitner Court clarified that, while § 973.015 bars formal consideration of a prior, expunged conviction, it does not otherwise “shield a misdemeanant from all of the future consequences of the facts underlying a[n expunged] record of a conviction,” so long as “those facts are not obtained from expunged court records.” Leitner, 2002 WI 77,38.

In one recent decision, the Supreme Court expanded even further the acceptable use at sentencing of underlying facts from an expunged record. In State v. Allen, 2017 WI 7 (Feb. 9, 2017), the criminal background check contained in the Pre-Sentence Investigation Report detailed the incident behind the defendant’s ostensibly obliterated record: “This incident involved a fight with another boy at high school and he was charged because the other boy lost a tooth in the fight.” Id., ¶10. Although the report acknowledged that the record was “officially expunged,” the circuit court sentenced more harshly based on the fact of prior offense, noting that Allen “had an opportunity to learn something from that [occasion].” Id., ¶12. The Supreme Court affirmed the circuit court, holding that, even where a record is expunged, many (if not all) of the incriminatory details are still available for a sentencing court’s review and may factor into the court’s subsequent sentencing decision.

In another recent decision, the Wisconsin Supreme Court further limited the availability of expungement. State v. Ozuna, 2017 WI 64, addressed another ambiguity in Wis. Stat. § 973.015: where expungement automatically occurs upon the successful completion of a probation sentence, who decides what “successful” means? Under the terms of his plea agreement, Ozuna’s convictions for criminal damage to property and disorderly conduct were to be expunged once he successfully completed probation. At the end of Ozuna’s probation, the DOC filed a “Verification of Satisfaction of Probation Conditions for Expungement” with the circuit court, indicating that Ozuna had “successfully completed” his term of probation. Notwithstanding the DOC’s determination, the circuit court disregarded the DOC form and denied Ozuna’s expungement. The circuit court based its decision on Ozuna’s receipt of an underage drinking citation—in violation of a no-alcohol probation rule.

The question on appeal was narrow: had Ozuna successfully completed probation, entitling him to expungement? Ozuna’s brief to the Supreme Court pointed out that, “upon successful completion of the sentence the detaining or probationary authority shall issue a certificate of discharge which shall be forwarded to the court of record and which shall have the effect of expunging the record.” Under the statute, he argued, the expungement process is ‘self-executing’ once the probation officer determines the sentence is complete.

Ozuna relied on State v. Hemp, 2014 WI 129, and State v. Matasek, 2014 WI 27. Under Hemp, a probation officer was given discretion to determine whether or not probation had been successfully completed. Moreover, once the officer determined the sentence was completed, expungement would be automatic, or self-executing. Under Matasek, the decision of expungement should be made at the sentencing stage, rather than after completion of the sentence. In other words, the circuit court’s role is before the sentence is served, and the probation officer’s role is after. In response, the State claimed that Ozuna had not successfully completed his probation sentence, differenting him from the defendants in Hemp and Matasek, who had done so.

The Supreme Court sided with the State. Its reasoning was simple. The statute says a record can be expunged “upon successful completion” of the sentence—here, probation. Successfully completing his probation required Ozuna to follow all of its requirements. Because Ozuna did not follow the no-drinking conditions of his probation, he did not successfully complete his probation. It did not matter that the DOC indicated otherwise. Nor did it matter that expungement is typically self-executing. What controlled the outcome of the case was that “Ozuna did not meet the criteria for expungement, because he did not satisfy the conditions of his probation.” 2017 WI 64, ¶19.

While the courts have consistently limited expungement, the legislature continues to consider changes in the opposite direction. A series of failed legislative efforts last session would have expanded the expungement statute. AB 1005 would have allowed defendants to petition for expungement of records related to a criminal prosecution after either acquittal or dismissal of charges. AB 1004 would have required expungement of records related to a criminal prosecution where the defendant was found not guilty or the conviction was reversed on appeal. And AB 1008 would have allowed courts to consider expungement after a defendant served their sentence, rather than only at the sentencing hearing.

In light of these failed measures, the prospects for 2017 AB 331 remain unclear. Unlike last session’s proposals, AB 331 has bipartisan sponsorship, but that does not mean it will gain sufficient support to become law. In the meantime, while the expungement statute appears straightforward, defendants should be cautious, bearing in mind judicially imposed limitations.

Law clerk Charles Ureña assisted in researching and writing this post.

Wisconsin Supreme Court Decision Raises Fair Dealership Law Questions Beyond Municipal Liability

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The primary issue in Benson v. City of Madison, 2017 WI 65, is clearly the question of whether the Wisconsin Fair Dealership Law (“WFDL”) reaches contractual relationships involving municipalities. As discussed here, this is an issue of first impression, and the Court’s holding has broad implications.

There are, however, additional aspects of the decision worth consideration. Three in particular bear mention.

First, the Wisconsin Supreme Court had not heard a WFDL case in a while. In the interim, the composition of the Court changed substantially, and that turnover yielded a majority oriented toward a more free-market paradigm. Some commentators have wondered how the WFDL would be applied by the current Court. Benson suggests that in many respects not much has changed. The Benson majority, joined by all five Justices perceived as more conservative, follows settled law granting the WFDL a broad construction. (Indeed, by holding that municipalities are covered by the WFDL, the majority significantly expands the law’s scope.) And it firmly forecloses arguments that a party can contract around the WFDL, nullifying a contractual provision that the City of Madison cited as exculpatory. See 2017 WI 65, ¶48.

Second, the Court shed a little light on the doctrinal Gordian knot at the heart of most WFDL litigation. The vast majority of WFDL cases turn on the question of whether the parties’ relationship constitutes a “community of interest.” This has always been a vague standard. Three decades ago, the Court identified two “guideposts” for this inquiry: “continuing financial interest” and “interdependence.” Ziegler Co. v. Rexnord, Inc., 139 Wis. 2d 593, 604-05, 407 N.W.2d 873 (1987). The Ziegler Court also identified ten, non-exclusive facets of a relationship that might shed light on one or both guideposts. See id. at 606. Lower courts have been somewhat vexed by applying the various facets—and others that might seem relevant in individual cases—to the guideposts. Benson provides some wiggle room, noting that the Ziegler facets need not all be measured in every case, because “it is more accurate to say that some or all ‘may’ be considered; the factors are meant to be a helpful aid in addressing the overriding community of interest question, not an unwieldy burden.” Benson, 2017 WI 65, n.15.

Third, the Court’s newest Justice, Dan Kelly, wrote a separate concurring opinion to, in his words, address “one persnickety point.” Id., ¶64 (Kelly, J., concurring). But his point is not a minor one: he disagrees with the majority about what goods and services should be considered the subject of the contract that binds the parties in a dealership. Justice Kelly believes that only those goods and services that belong to the grantor (here, the City of Madison) can be considered part of the dealership, while the majority opinion cites both those and additional goods and services provided wholly by the dealer (here, the golf pros). See id., ¶¶65-66.  The fact that Justice Kelly raised this issue and that none of the other five Justices in the majority joined his concurrence can be read to suggest that a majority of the Court—at least four Justices—disagree with his reading of the statute and believe that a dealer can bring its own goods and services into a dealership relationship. That issue was not decisive here, but it could loom large in a future dispute about application of the WFDL (and in calculating damages due to the golf pros on remand).

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