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.


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).

Wisconsin Supreme Court Holds Municipalities Are Subject to Wisconsin Fair Dealership Law

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In a shocking decision that will increase the cost of local governance and limit the ability of local governments to control their own affairs, the Wisconsin Supreme Court held last week that the Wisconsin Fair Dealership Law (“WFDL”) applies to municipalities. Benson v. City of Madison, 2017 WI 65. The remainder of this post discusses the municipal law implications of the decision; a companion post addresses additional aspects of the decision of interest to those who rely upon or follow the evolution of the WFDL.

The City of Madison owns four municipal golf courses. Beginning in 1977, the City contracted with golf pros, to operate, manage and provide services at the City-owned courses. Under the contracts, the golf pros were each responsible for one course, at which they collected green fees, hired and managed attendants, supervised golfing, operated the clubhouse and pro shop, sold concessions, and gave lessons; City employees handled all physical maintenance of the golf courses. On October 8, 2012 (less than 90 days before the most recent contracts’ expiration date of December 31, 2012), the City informed the golf pros that it would not be renewing their contracts.

The golf pros filed a lawsuit against the City. The lawsuit alleged that the City failed to comply with the WFDL in ending its contractual relationships with them and sought damages. Briefly, the WFDL, adopted in 1974, governs “dealerships,” which are specially defined contracts entered into between “grantors” and “dealers.” Wis. Stat. §§ 135.02-135.025. The WFDL prohibits grantors from terminating dealership contracts without good cause, Wis. Stat. § 135.03, and requires 90 days’ notice prior to termination, Wis. Stat. § 135.04. If a grantor violates the WFDL, a dealer may bring an action against such grantor for damages. Wis. Stat. § 135.06.

The circuit court dismissed the golf pros’ lawsuit on summary judgment, concluding that the relationships between the golf pros and the City did not constitute “dealerships” protected by the WFDL, Wis. Stat. § 135.02(3). When the golf pros appealed, the court of appeals affirmed. The golf pros appealed again, and the Wisconsin Supreme Court agreed to review the case.

The Wisconsin Supreme Court reversed, answering two principal questions in the affirmative: first, whether the WFDL applies to the City at all; and second, whether the relationships between the golf pros and the City are “dealerships” under the WFDL.

First, the Court determined that the WFDL applies to the City. To determine this issue, the Court started with the defined terms of the statute. The WFDL defines “dealer” as “a person who is a grantee of a dealership situated in this state,” Wis. Stat. § 135.02(2), and “dealership” as “[a] contract… between 2 or more persons, by which a person is granted the right to sell or distribute goods or services, or use a trade name, trademark, service mark, logotype, advertising or other commercial symbol, in which there is a community of interest in the business of offering, selling or distributing goods or services at wholesale, retail, by [contract],” Wis. Stat. § 135.02(3)(a). Because the terms dealer and dealership require a “person” to be a party to the contract, the Court then turned to the first issue—whether the City is a “person” under the WFDL. Again, the Court looked to the definitions in the WFDL and found that the WFDL’s definition of “person” included “corporation or other entity.” Wis. Stat. § 135.02(6). The Court concluded that because the City is a municipal corporation, it falls within the category of “corporation” and therefore qualifies as a person subject to the WFDL.

Second, the Court held that the contractual relationships between the golf pros and the City are “dealerships” under the WFDL. The Court found that all three statutory elements for a dealership were satisfied: (1) a contract between two or more persons existed; (2) the contract granted the golf pros the right to sell or distribute a City service (here, access to the golf courses); and (3) the golf pros’ business of selling the City’s services created a “community of interest.”

In dissent, Justices Shirley Abrahamson and Ann Walsh Bradley argued that the Fair Dealership Law should not apply because the City is not a “person” under the WFDL. Notably, the dissent emphasized that the majority’s analysis “neglects to address the relationship of the Dealership Law, municipal constitutional and statutory home rule, and other statutes governing governmental entities.” 2017 WI 65, ¶136.

The majority’s analysis failed to consider the City’s home-rule authority at all. This case continues the trend in Wisconsin cases of ignoring entirely, or limiting the extent of, municipal home rule. As the dissent notes, this decision has far-reaching consequences.

Contracts municipalities thought were terminable at will or on a specific date now may not be terminable without giving 90 days notice and having good cause. Lacking the funds to continue a contractual relationship does not fall within the WFDL’s definition of good cause. Thus, if a municipality does not have sufficient funds to renew a contract, it may face the choice of either cutting essential services or getting sued by its golf pros or other contractors for violation of the WFDL.

In considering future contracts, municipalities will need to assess whether their contractual relationships might be considered dealerships and if there is a way to avoid that status. The municipality may decide not to provide certain services rather than take the chance of being bound under the WFDL.

Until or unless the law is changed in light of this decision, the Benson case will certainly give municipalities pause when considering privatizing municipal functions.

U.S. Supreme Court Decides Wisconsin Takings Case, Adopts Complex Test, and Approves Merger Clauses

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The U.S. Supreme Court decided a major regulatory takings case last week, ending a Wisconsin land-use battle that lasted more than a dozen years. See Murr v. Wisconsin, No. 15-214 (U.S. June 23, 2017). It is not common for a case to jump from an unpublished, non-precedential opinion in a state intermediate court of appeals to the nation’s highest court. Even less often does a local case provide an opportunity to resolve a long-standing doctrinal puzzle that has stymied courts and litigants for decades. Murr v. Wisconsin was notable, and the Supreme Court’s decision is both interesting and instructive. In particular, the Court’s express endorsement of a zoning provision commonly used in Wisconsin and across the country should set municipal regulators’ minds at ease.

The facts of the Murr case

I have written about the case in detail, summarized the parties’ arguments, and shared my assessment of the oral argument. (Full disclosure: Stafford Rosenbaum submitted an amicus brief on behalf of the Wisconsin Counties Association, the Wisconsin Towns Association, and the League of Wisconsin Municipalities, urging the Supreme Court not to reach the constitutional issue at the heart of the case. The views in this post are my own; they go beyond the arguments expressed in the amicus brief and do not necessarily reflect the opinions of my clients.)

The essential facts are these: The Murrs who litigated this case were the second generation to own the property in question. Their parents purchased two lots along the Lower St. Croix River, in northwestern Wisconsin, more than fifty years ago. They built a small cabin on one lot and transferred ownership to their family business. A couple of years later, they purchased the adjacent lot, which they kept in their own names and never built on. In the 1990s, the parents transferred the land to their children, bringing the two adjacent lots into common ownership for the first time.

This mattered a great deal because, in the intervening years, the federal, state, and local governments all adopted laws to protect the river’s scenic beauty. The regulations limited development to those lots with at least one acre of land, excluding the river’s floodplain and the slope of the bluffs that tower above the river. Neither of the Murrs’ lots, though approximately 1.25 acres each, had enough buildable space to meet the development requirements on its own. The regulations addressed this fairly common issue through two complementary provisions. The first grandfathered in any property owners who had purchased their land prior to the regulations; they could still build, even if their lots lacked one acre of buildable space. The second merged adjacent lots without sufficient buildable space if those lots came under common ownership.

Here, when the two adjacent lots passed to the second generation, they came under common ownership and therefore merged as a matter of law. When the Murrs later sought a zoning variance to sell the empty lot and use the proceeds to improve the cabin on the other lot, the County said no. The Murrs alleged that the state and county regulations amounted to an uncompensated taking of their property in violation of the U.S. Constitution. The Murrs’ takings claim was rejected by the trial court, the state appellate court, and ultimately the U.S. Supreme Court.

The applicable legal framework

The Constitution provides that private property cannot “be taken for public use, without just compensation.” U.S. Const., amend. V. The framers and early courts were focused on physical appropriations of property for public use (to build a road, for example). But for almost a century courts have recognized that regulations restricting an owner’s use of property can amount to a compensable taking. How and when regulations impose enough of a burden to require compensation has been a vexing question. In response, the Supreme Court has provided two tests. Where a regulation deprives the owner of all economically beneficial use of the property, that is a taking. See Lucas v. South Carolina Coastal Comm’n, 505 U.S. 1003 (1992). Even where a regulation is less invasive, it can still require compensation, based on a balancing of several factors, including the economic impact of the regulation, the character of the regulation, and the extent to which the regulation interferes with reasonable investment-backed expectations for the property. See Penn Central Transp. Co. v. New York City, 438 U.S. 104 (1978).

Under either test, however, there is a predicate question: How do courts define the relevant property against which to measure the effects of the regulation at issue? The Murrs complained that the merger provision deprived them of the right to use or sell the vacant lot adjacent to their cabin. When a court considers that alleged deprivation, does it measure the loss against only the vacant lot (in which case it could be seen as a near-total taking) or against the Murrs’ combined riverside properties (in which case it appears to be a smaller loss)? As legal commentators have long discussed, in many cases “the answer to this question may be outcome determinative.” Murr, slip op. at 9.

The prospect that the Murr case would answer this question drew significant interest. The case presented the Court with multiple options:

  • The Murrs argued that the right answer begins and (largely) ends with the lot lines on the property rolls. They conceded that evidence of how the property is actually used might be sufficient to overcome the lot lines in certain instances.

  • The State of Wisconsin argued that the answer is found in the application of state law, including but not limited to the lot lines and, importantly in this case, also including the merger provision.

  • St. Croix County, for its part, argued that multiple factors are relevant, beginning with state property law, but also including the physical characteristics of the property and the economic impact the regulation has on the property.

  • Finally, the federal government, appearing as an amicus curiae (friend of the court), offered an alternative multi-factor balancing test, placing no special weight on state law and instead looking to achieve fairness and justice.

The Murrs obviously argued that their proposed test would favor their taking claim. All of the various governmental entities argued that there was no taking in this case.

The majority opinion

The Court fully adopted St. Croix County’s approach, holding that “the question of the proper parcel in regulatory takings cases cannot be solved by any simple test,” such that “courts must consider a number of factors.” Id. at 11, 20. “These include the treatment of the land under state and local law; the physical characteristics of the land; and the prospective value of the regulated land.” Id. at 11. In doing so, the Court incorporated the factors both the Murrs and the State had offered as bright-line tests, explaining that “courts should give substantial weight to the treatment of the land, in particular how it is bounded or divided, under state and local law,” but also insisted that those factors were, on their own, insufficient. Id. at 12-15.

Notably, the Court also gave a full-throated endorsement to the merger provision that the Murrs challenged, calling it “a legitimate exercise of government power.” Id. The Court rooted its approval in both tradition and efficacy. After noting that merger provisions “originated nearly a century ago” and are now widely used, the Court praised those provisions as a way of “balancing the legitimate goals of regulation with the reasonable expectations of landowners.” Id. at 15-16. The St. Croix County zoning provisions at issue “represent a classic way of doing this: by implementing a merger provision, which combines contiguous substandard lots under common ownership, alongside a grandfather clause, which preserves adjacent substandard lots that are in separate ownership.” Id. While one criticism of balancing tests is that they lack certainty, here the Court clearly mapped one way in which zoning ordinances can strike a judicially sanctioned balance between limiting development and protecting existing property rights.

The dissenting opinions

Chief Justice Roberts wrote the primary dissent, joined by Justices Thomas and Alito. (Justice Gorsuch did not participate in the case, which was argued before he joined the Court.) The Roberts dissent adopted the State of Wisconsin’s approach. Chief Justice Roberts did not argue the Murrs should win their suit, but he eschewed the multi-factor test adopted by the majority.

Chief Justice Roberts identified two primary rationales for his position. First, because “[t]he question of who owns what is pretty important,” it follows that “[t]he rules must provide a readily ascertainable definition of the land to which a particular bundle of rights attaches that does not vary depending upon the purpose at issue.” Slip op. at 6 (Roberts, C.J., dissenting). On this basis, the dissent decried “[t]he majority’s new, malleable definition of private property” for the takings inquiry. Id. at 2.

Second, Chief Justice Roberts asserted that the majority’s balancing test improperly advantages the government in every takings dispute. Because one factor relevant to defining the property is “the reasonableness of the regulation as applied to the claimant[,] … the government’s regulatory interests will come into play not once, but twice—first when identifying the relevant parcel, and again when determining whether the regulation has placed too great a public burden on that property.” Id. at 9-10. (This is true only for regulations assessed under Penn Central; any per se taking under Lucas will not be subject to the second analysis.)

Ultimately, the Roberts dissent argued, the majority decision “knocks the definition of ‘private property’ loose from its foundation on stable state law rules and throws it into the maelstrom of multiple factors that come into play at the second step of the takings analysis. The result: The majority’s new framework compromises the Takings Clause as a barrier between individuals and the press of the public interest.” Id. at 12.

Justice Thomas also wrote his own separate dissent. He affirmed his agreement with Chief Justice Roberts’s application of the Court’s regulatory takings precedent, but he reiterated his belief that the Court should reexamine the past century’s regulatory takings jurisprudence to see if it can be rooted in the original meaning of the Constitution.


The balancing test adopted in Murr will not make takings litigation any simpler or more predictable. It amplifies the subjectivity—and thus the variability—of the takings analysis. In different courts, that may redound to the benefit of the government or to the benefit of the property owner. However, the Murr decision is a clear victory for municipal governments, environmentalists, and other proponents of regulation inasmuch as the Court rejected efforts to rewrite the takings analysis in ways that would more frequently require compensation to property owners. The decision also provides a modest degree of clarity by expressly endorsing merger provisions for adjacent, substandard lots that share an owner. That alone marks Murr as a big win for municipal governments in Wisconsin and across the country that utilize this common tool.

Wisconsin Supreme Court Reaffirms Bright-Line Building Permit Rule

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In McKee Family I, LLC and JD McCormick Company, LLC v. City of Fitchburg, 2017 WI 34, No. 2014AP1914 (April 12, 2017), the Wisconsin Supreme Court affirmed the bright-line building permit rule, under which a property owner cannot claim vested rights absent submission of an application for a building permit that conforms to the zoning or building code requirements in effect at the time of application.

A McKee entity owned property in the City of Fitchburg, including two undeveloped lots. Those lots were zoned as residential-medium (R-M) zoning classification. McKee applied for and received approval to rezone the land as planned development district (PDD) zoning, which would allow mixed-used development of a higher density than under the R-M classification. Fitchburg enacted an ordinance rezoning this land to a PDD classification and at the same time approved McKee’s general implementation plan for developing the property. As approved, the plan provided for development of a senior living community.

In 2008, McKee entered into negotiations to sell JD McCormick Company, LLC the two undeveloped lots. The sale was contingent on McCormick’s ability to obtain approval from Fitchburg to build 128 apartment units on the undeveloped lots. McCormick prepared a PDD-specific implementation plan for the 128-unit apartment complex on the two undeveloped lots.

After McCormick submitted the plan, Fitchburg rezoned the two lots from PDD to R-M classification. This rezoning limited McCormick to developing 28 dwelling units, as compared to a maximum of 132 dwelling units under the PDD zoning classification. McKee and McCormick (which was eventually dismissed for lack of standing) filed a lawsuit seeking declaratory judgment, damages, and injunctive relief, all on the theory that City’s the rezoning was unlawful.

The circuit court granted summary judgment in favor of Fitchburg. McKee appealed, asserting on appeal that: it had a vested right in the PDD zoning classification; the PDD classification created a contract that gives rise to expectations on which developers may rely; and to the extent the reclassification was unlawful, the rezoning ordinance constituted a taking. The court of appeals determined that McKee did not have a vested right and affirmed the circuit court’s grant of summary judgment to Fitchburg.

On review before the Wisconsin Supreme Court, McKee relied upon the same arguments raised before the court of appeals. With respect to the vested rights argument, McKee argued that the court should depart from the well-established rule in Wisconsin that rights vest only once a developer has applied for a building permit and instead evaluate vested rights on a case-by-case basis. McKee asserted that in this case, it had obtained vested rights based on the substantial expenditures incurred in preparation for development under the PDD zoning plans submitted to Fitchburg.

Relying on Lake Bluff Housing Partners v. City of South Milwaukee, 197 Wis. 2d 157, 540 N.W.2d 189 (1995), the court rejected McKee’s argument and reaffirmed the bright-line building permit rule. The court noted that such a rule “creates predictability for land owners, purchasers, developers, municipalities and the courts.”

The court further opined that, even if it were to determine that a rule based on substantial expenditures should apply in this case, McKee’s claim would still fail because McKee had not introduced sufficient evidence to support that claim. McKee had failed to present evidence that it made expenditures in reliance on the PDD zoning or submitted an application for a building permit.

The court also opined that the planned development district zoning classification did not create contractual expectations upon which McKee could rely. The court explained that there is a strong presumption that legislative enactments do not create contractual or vested rights, and that presumption cannot be overcome without a clear indication that a legislative body intends to bind itself contractually. McKee failed to make such a showing.

This case highlights the necessity for developers that wish to develop land under existing zoning classifications to submit a completed building permit application before zoning law changes under their feet.

Wisconsin Supreme Court holds that courts cannot privatize determinations of legal rights

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Private parties can agree to resolve their disputes through arbitration. When they do so, courts enforce those agreements, and the merits of the parties’ disputes are not addressed within the judicial branch. Instead, the parties pay arbitrators to consider evidence, hear argument, and issue binding decisions. But what happens if the court, rather than the parties, wants to divert a dispute to a different decisionmaker? The Wisconsin Constitution places limits on what courts can outsource and to what degree a judge can defer to a private decisionmaker’s determinations. A majority of the Wisconsin Supreme Court expounded on those limits in State of Wisconsin ex rel. Universal Processing Services of Wisconsin, LLC v. Circuit Court of Milwaukee County, 2017 WI 26.

Facts and procedural history

The case began as a commercial dispute. Universal Processing Services (which the court refers to as Newtek) filed suit against a former contract employee, Samuel Hicks, for misappropriation of trade secrets and other related claims. Hicks filed several counterclaims. The parties engaged in extensive discovery, which itself created new disputes. Several months into the litigation, the trial court granted each side additional time for discovery while declaring that its docket was too full “‘to expend a lot of time dealing with [the parties’] discovery bickering.’” Id., ¶14. The trial court thereby appointed a retired judge (now in private practice) to resolve “‘discovery disputes, etcetera.’” Id. The court explained that this step should incentivize the parties to be reasonable, as they would be paying hourly for time the retired judge spent resolving their disputes. See id.

Wisconsin law authorizes judges to appoint referees to assist in complicated cases, though such outsourcing “shall be the exception and not the rule.” Wis. Stat. § 805.06(2). (While the trial court in this case used the term special master, which is also the term used in federal courts, the Wisconsin Statutes, and the Supreme Court’s opinion in this case use the term referee.) The court order appointing a referee and delineating the referee’s powers in the particular case is called an order of reference. In this case, the Supreme Court assessed the constitutionality of the order of reference.

The case did not reach the Supreme Court in a typical way. After discovery, the referee issued a partial summary judgment ruling and limited the evidence to be presented at trial. Over Newtek’s objections, the circuit court largely affirmed that ruling. Newtek then petitioned the court of appeals for immediate appellate review. Newtek’s petition focused on the substance of the partial summary judgment ruling and related evidentiary holdings, not on the legality of the order of reference. The court of appeals declined to hear an immediate appeal. Newtek did not appeal that denial. Instead, Newtek asked the Supreme Court to issue a supervisory writ vacating the referee’s appointment. This atypical procedure led three Justices to conclude that the constitutional issues were not properly presented to the Supreme Court. See 2017 WI 26, ¶¶112-16 (Ziegler, J., concurring in part, dissenting in part); ¶¶117-42 (R. Bradley, J., joined by Kelly, J., concurring in part, dissenting in part). Additionally, because the court found certain aspects of the order of reference unconstitutional but deemed others acceptable, the case has an odd outcome where Newtek’s petition for a supervisory writ is denied, even though Newtek got much of the relief it sought.

The Supreme Court’s constitutional analysis

While the opinion devotes significant space to the procedural history, this post is focused on the substance of the court’s constitutional analysis. For those purposes, the Supreme Court focused on three provisions in the order of reference:

  1. The provision that “All motions filed, whether discovery or dispositive, shall initially be heard and decided by the [referee].”
  1. The allowance that the referee could certify specific issues for decision by the trial court, but that the trial court could decline to decide the issues and send them back to the referee.
  1. The limited availability of judicial review for the referee’s decisions. Individual rulings to which a party raised prompt objections were reviewable by the trial court under a deferential abuse-of-discretion standard. All other rulings would be reviewable on appeal after final judgment to the same extent as if rendered by the trial court.

Id., ¶20.

The Supreme Court assessed these provisions in light of Article VII, Section 2 of the Wisconsin Constitution. That provision “vests the ‘judicial power’ of this state in a unified court system.” Id., ¶56. The Wisconsin Constitution does not define “judicial power,” but the Supreme Court has described it as the “ultimate adjudicative authority of courts to finally decide rights and responsibilities as between individuals.” State v. Williams, 2012 WI 59, ¶36, 341 Wis. 2d 191, 814 N.W.2d 460.

Here, the issue was whether the order of reference exceeded the scope of what may be permissibly delegated to a referee. Nineteenth-century Wisconsin case law suggests that “the power to refer [is] not limitless.” 2017 WI 26, ¶64. And the court cited federal cases discussing the scope of a referee’s abilities and highlighting that the referee serves as a judicial aid. Id., ¶69. The court should not delegate “‘the core function of making dispositive rulings, including findings of fact and conclusions of law on issues of liability.’” Id., ¶71 (quoting In re Bituminous Coal Operators’ Ass’n, 949 F.2d 1165, 1166 (D.C. Cir. 1991)).

Wisconsin courts have not, before now, clearly delineated the parameters of how referees may aid judges. Id., ¶ 75. The Supreme Court adopted the federal standard that courts cannot delegate core judicial powers--for example the power to decide dispositive motions and conduct trials. Id., ¶76. Under this standard, it followed that the order of reference exceeded constitutional limits when it delegated the authority to hear and decide all motions. This delegation—compounded by the certification provision that allowed the circuit court to refuse to resolve issues in the first instance—and reduced the trial judge’s responsibilities to something more akin to a reviewing court. Id., ¶77. “A referee may share judicial labor, but the Order of Reference may not allow a referee to assume the place of the judge.” Id., ¶82.

The Supreme Court next considered how closely a circuit court must review the referee’s determinations. The order of reference in this case provided for a deferential, abuse-of-discretion review. Such a standard contemplates affirmance even if the court may not necessarily have reached the same conclusion. See id., ¶86. It is unlike de novo review, in which “the reviewing court reaches whatever decision it would reach independently of the decision of the prior decision maker.” Id., ¶85. Agreeing to apply only such surface review “gives the appearance of an abdication of the circuit court’s responsibility to exercise independent judgment.” Id., ¶86. While the Wisconsin Constitution permits the legislature to grant the circuit court appellate jurisdiction over referee rulings, the legislature has not done so. Id., ¶87. The court therefore held application of abuse-of-discretion review was unconstitutional here.

Takeaways from this decision

The Court’s decision makes clear that circuit courts may not delegate their fundamental, or “core,” functions to referees. Private parties may choose to arbitrate their disputes outside of the judicial branch if they so desire. But circuit courts may not compel privatization of the judicial function, because the Wisconsin Constitution entitles parties to litigate their claims before a court. This is why the Supreme Court cautions trial judges to utilize referees sparingly and only as support, rather than as stand-ins.

Finally, it’s notable that the Supreme Court’s decision cut across the Court’s ideological divisions. Justice Abrahamson wrote the majority opinion. She was joined not only by Justice A.W. Bradley, but also by Chief Justice Roggensack and Justice Gableman. This is highly unusual. Last term, for example, Justices Abrahamson and A.W. Bradley agreed in every case decided, while Justice Abrahamson agreed with the Chief Justice in only 12 percent of non-unanimous cases and with Justice Gableman in 25 percent of those cases. See Alan Ball, Wisconsin Supreme Court Statistics, 2015-2016, SCOWstats (July 22, 2016). Even in a separate opinion concurring in part and dissenting in part, Justices R. Bradley and Kelly “agree with the majority’s conclusion that the Reference impermissibly delegated the circuit court’s constitutionally vested judicial power to the referee.” 2017 WI 26, ¶118. Only Justice Ziegler does not endorse the majority’s constitutional analysis; she offers no opinion on the constitutional issues at all, focusing only on procedural flaws in the presentation of the case. See id., ¶115 (Ziegler, J., concurring in part and dissenting in part). Defending the judiciary’s constitutional role seems to be the rare issue that transcends the current schisms on the Court.

Law clerk Olivia Pietrantoni assisted in researching and writing this post.

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