U.S. Supreme Court Holds Employers May Require Individual Arbitration of Employment Disputes

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In a case that began in Verona, Wisconsin, the U.S. Supreme Court held earlier this week that the National Labor Relations Act (“NLRA”) does not prohibit employment agreements requiring arbitration of grievances on an individual basis. See Epic Systems Corp. v. Lewis, No. 16-285 (May 21, 2018). Epic Systems extends a string of cases over the past decade upholding arbitration requirements over various challenges. See, e.g., Stolt-Nielsen; Concepcion; Oxford Health Plans; Italian Colors.

The Federal Arbitration Act (“FAA”) generally requires enforcement of arbitration agreements—even those that prohibit participation in class actions by mandating arbitration on an individual basis. Epic Systems resolves a split among the federal appellate courts about whether contracts mandating individual arbitration of employment disputes violate the NLRA. After the National Labor Relations Board (“NLRB”) ruled in 2012 that that such contracts are inconsistent with the NLRA, the Sixth, Seventh, and Ninth Circuit Courts of Appeal followed suit, either deferring to the NLRB’s determination or independently reasoning to the same conclusion. The Second, Fifth, and Eighth Circuits, on the other hand, found such contracts enforceable.

Advocates for Lewis and other employees challenging individual arbitration agreements argued that class action waivers were unenforceable under the FAA’s “saving clause,” which prohibits enforcement of arbitration agreements that violate federal law. They argued that arbitration agreements prohibiting collective legal action violate section 7 of the NLRA, which allows workers “to bargain collectively . . . and to engage in other concerted activities for the purpose of . . . other mutual aid or protection.” 29 U.S.C. § 157. Alternatively, they suggested that even if the FAA’s “saving clause” does not apply, the NLRA “overrides” the FAA and makes individual arbitration requirements unlawful.

Advocates for employers, on the other hand, asserted that the NLRA and FAA do not conflict, arguing that neither the text nor the underlying purpose of the NLRA prohibit class action waivers. Alternatively, even if the NLRA and FAA did conflict, the employers argued that the FAA should control because it is the more specific statute, Congress had a history of specifically overriding the FAA only with express, clear language, and because “the enforceability of class waivers forms the core of the FAA, while such waivers are at most a peripheral concern of the NLRA.”

Decision

In a 5-4 decision written by Justice Neil Gorsuch, the Court rejected the employees’ arguments. First, the majority held the FAA’s “saving clause” was inapplicable. “[D]efenses that apply only to arbitration” do not trigger the “saving clause,” which “permits agreements to arbitrate to be invalidated by generally applicable contract defenses, such as fraud, duress, or unconscionability.” Epic Systems, slip op. at 7 (internal quotation marks omitted). Given that the central challenge to the agreements was over “(only) the individualized nature” of the mandated arbitration procedure, not to the underlying validity of the provision requiring arbitration, the Court found the FAA’s “saving clause” did not apply. Id.

Second, the Court refused to view the NLRA as conflicting with and “overriding” the FAA. Longstanding precedent places a heavy burden on parties who argue that two federal statutes conflict and cannot be harmonized. See id. at 10. The majority found no “clearly expressed congressional intention” that the NLRA override the FAA regarding arbitration agreements, in contrast to examples where Congress unambiguously created statutory exceptions to the FAA’s general policy of enforcing arbitration agreements. Id. (quoting Vimar Seguros y Reaseguros, S.A. v. M/V Sky Reefer, 515 U.S. 528, 533 (1995)). And it found no reason to defer to the NLRB’s statutory interpretation when that would impair the application of the FAA, which is beyond the NLRB’s subject matter expertise. See id. at 19–21.

Dissent

Justice Ruth Bader Ginsburg, writing for herself and three other Justices, dissented, calling the decision “egregiously wrong.” Id. at 2 (Ginsburg, J., dissenting). The dissent argues that the NLRA protects more than just traditional collective bargaining. This is consistent with Justice Stephen Breyer’s comment during oral argument that the NLRA represents “the entire heart of the New Deal.” Focusing on the phrase “other concerted activities for the purpose of . . . mutual aid and protection,” the dissent posits that the NLRA contemplates and protects the “right to engage in collective employment litigation.” Id. at 9 (Ginsburg, J., dissenting). It criticizes the majority’s reasoning in concluding that the NLRA did not protect collective employment litigation, pointing out the majority relied heavily on a canon of statutory interpretation, which it argues is appropriate only where congressional intent is unclear. See id. at 12 (Ginsburg, J., dissenting). Finding a clear congressional mandate to protect employees’ rights to act collectively, the dissent argues that resorting to canons of interpretation was improper and that the Court erred in construing the application of the NLRA so narrowly.

Take Away

Epic Systems Corp. v. Lewis makes clear that the NLRA does not invalidate collective legal action waivers in employment arbitration agreements, presenting employers with an even wider array of options when creating and implementing employee agreements. It also underscores that only in exceptional cases will another federal law invalidate an agreement to arbitrate. Combined with the Supreme Court’s other recent arbitration decisions, Epic Systems further cements the enforceability of arbitration requirements, even when the parties to such agreements lack equal bargaining power. Congress may revisit the policy decisions underlying the FAA, see id. at 6, 25 (Op. of the Court); id. at 2 (Ginsburg, J., dissenting), but unless and until that happens, employers have broad power to limit employees’ options in redressing complaints about the conditions of their employment.

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

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.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Background

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

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

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

Court Decision

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

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

Seventh Circuit Predicts That Wisconsin Will Adopt Learned Intermediary Doctrine

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

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

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

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

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

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

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

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

 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Background

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

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

NLRB Decision

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

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

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

Take-Away

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

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

Seventh Circuit Holds Pharmaceutical Product Liability Claims Preempted By Federal Law

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The Seventh Circuit Court of Appeals held on January 19, 2018, that federal law preempts thousands of product liability claims, brought under the laws of various states, concerning Depo-T (a testosterone drug). Guilbeau v. Pfizer Inc., No. 17-2056 (7th Cir.). The case illuminates the intersection of tort law, federal regulation, and intellectual property.

Generally, a new drug must undergo a rigorous “new drug application” (NDA) process before the Food and Drug Administration will approve them for public use. The NDA process includes a laborious review to determine a drug’s safety and efficacy. If approved, a drug that has gone through the NDA process is considered a brand name drug and any drug made thereafter of the same composition will be considered a generic drug. The distinction between brand name and generic drugs implicates intellectual property rights, pricing, and obligations with respect to labeling.

If a second drug is considered to be the same as or bioequivalent to a drug approved through the NDA process, that second drug may be reviewed by the FDA under the “abbreviated new drug application” (ANDA) process. A drug approved through the ANDA process is generally considered a generic drug. However, in certain circumstances, a drug approved through the ANDA process is deemed to be the reference-listed drug (that is, the first drug of that physical composition to be approved by the FDA), and is therefore considered a brand name drug.

This case fell into those unusual circumstances. In 1953, Delatestryl (a testosterone replacement drug) was approved as a new drug by the Food and Drug Administration after NDA review. Then, in 1979, Depo-T was found to be the same as Delatestryl and was approved through the ANDA process. However, because Depo-T was slightly different in physical composition to Delatestryl, the FDA deemed it a separate reference-listed drug. Depo-T therefore became the brand-name drug for any later generic versions using its particular formulation.

In 2014, more than a thousand plaintiffs filed suit in several states, alleging that, after taking Depo-T as prescribed, they suffered heart attacks or strokes. The plaintiffs sued Pfizer, Inc. (the drug’s manufacturer), under the theory that the company failed to warn physicians and patients of the drug’s potentially fatal side effects. After those cases were consolidated and the district court concluded that the plaintiffs’ state-law claims were preempted by federal law, the plaintiffs appealed.

The Seventh Circuit held that Depo-T’s classification as a brand name drug was less important than its regulatory approval under the ANDA process. The plaintiffs argued that, because Depo-T is a reference-listed drug, Pfizer had a duty to warn prescribers and patients of any dangers and should, therefore, have updated its labels explaining the risks of heart attack and stroke as those risks were discovered. The court disagreed. Because Depo-T was approved under an ANDA, it was to be treated legally as if it were a generic drug.

Generic drugs are obligated to use a label that matches the one used by the corresponding brand name drug and cannot make changes absent FDA approval. As a result, manufacturers of generic drugs cannot be sued on the theory that their labels fail to contain information not included on the label of the corresponding brand name drug.

The Seventh Circuit cited the Supreme Court’s decision in Pliva, Inc. v. Mensing, 564 U.S. 604 (2011), which held that when federal drug regulations that apply to generic drugs conflict with state law claims, like failure to warn of adverse side effects, the state law is preempted. In other words, because Depo-T’s was approved through the ANDA process and its label conforms with what the FDA required, the state-law failure to warn state law claims against Pfizer are preempted by federal law. The court noted that the unusual fact of Depo-T being a reference listed drug while also having the legal status of a generic does not change the outcome here.

Laura Lamansky is a law student at the University of Wisconsin and a law clerk working under supervision. She will be a full-time lawyer at Stafford Rosenbaum beginning later this year.

Top 10 Municipal Law Developments of 2017

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Stafford Rosenbaum’s Government Law and Government Relations teams continuously stay apprised of the latest developments in Wisconsin municipal law. Below, in no particular order, are the top 10 municipal law developments of 2017.

  1. 2017 Wisconsin Act 67 made broad changes to conditional use permits and preemption of clauses that merge substandard lots. For more information regarding this Act and its implications, read our blog post here. Additionally, the Act was partially a response to the U.S. Supreme Court’s decision in Murr v. Wisconsin, which we covered extensively with blog posts and a series of videos.

  2. In McKee Family I, LLC v. City of Fitchburg, 2017 WI 34, 374 Wis. 2d 487, 893 N.W.2d 12, the Supreme Court affirmed the bright-line limitations on the building permit exception to the general prohibition on vested rights in land use. McKee reaffirmed the common-law principle that 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. We posted about this decision in May.  After the McKee case was filed but years before it was decided, the legislature engrafted a vested-rights provision onto Wis. Stat. § 66.10015. Under that provision, local governments are prohibited from applying new changes or conditions to permit-approval processes after a property owner has submitted an application for a development-related permit. We do not yet know how courts will interpret the new statute and how much it will change established common-law principles.

  3. In Benson v. City of Madison, 2017 WI 65, 376 Wis. 2d 35, 897 N.W.2d 16, the Supreme Court held that the Wisconsin Fair Dealership Law applies to municipalities. Though the WFDL is the subject of extensive litigation, this was an unexpected resolution. We posted about this decision in June, addressing both its municipal aspects and its business aspects.

  4. In Melchert v. Pro Elec. Contractors, 2017 WI 30, 374 Wis. 2d 439, 892 N.W.2d 710, the Supreme Court held that a private contractor was entitled to governmental immunity for damage done while carrying out the government’s specifications. The private contractor severed a sewer lateral line while working on a government construction project. Neighboring property owners then sued to recover damages from the resulting flood. The Court held the contractor immune because its work complied with the Wisconsin Department of Transportation’s reasonably precise specifications for the project.

  5. In Wilmet v. Liberty Mut. Ins. Co., 2017 WI App 16, 374 Wis. 2d 413, 893 N.W.2d 251, the Court of Appeals held the supervision of a child engaged in recreational activity falls within the immunity granted for recreational activities by Wis. Stat. § 895.52. We posted about this decision in March.

  6. In City of Oshkosh v. Kubiak, 2017 WI App 20, 374 Wis. 2d 337, 893 N.W.2d 271, the Court of Appeals held that the use of the term “organizer” in a municipal special events permitting ordinance was not unconstitutionally vague. The ordinance required that the “organizer” of an event apply for a permit and pay the City’s costs. The ordinance did not define the term “organizer.” After a college pub crawl proceeded without a permit, the City sued the students who planned the event. The court held that the ordinance was not unconstitutionally vague because it did not invite guesswork in application and enforcement.

  7. In Wisconsin Carry Inc. v. City of Madison, 2017 WI 19, 373 Wis. 2d 348, 891 N.W.2d 803, the Supreme Court held that Wisconsin’s concealed-carry statute preempts the City of Madison’s rule restricting a licensee’s right to carry concealed weapons on City’s buses so long as the licensee complies with the statute’s requirements. The concealed-carry statute states that no political subdivision may adopt an ordinance or resolution that regulates the possession, bearing, or transportation of any firearm in a manner more stringent than state law. The Court held that the concealed-carry statute applies to all legislative activity by local governments, including Madison’s rule against guns on public buses.

  8. In Voces De La Frontera Inc. v. Clarke, 2017 WI 16, 373 Wis. 2d 348, 891 N.W.2d 803, the Supreme Court held that I-247 immigration detainer forms issued by U.S. Immigration and Customs Enforcement (ICE) are exempt from disclosure under Wisconsin’s public records law. Wisconsin public records law prevents disclosure of any record that is exempted by federal law. The Court found that certain federal regulations prohibited the disclosure of the forms.

  9. In Bank of America Corp. v. City of Miami, Fla., ocal governments have standing to sue banks under the Fair Housing Act for economic harm caused to them by discriminatory lending practices, but in order to prove causation, local governments must show “some direct relation between the injury asserted and the injurious conduct alleged.” We posted about this decision in May.

  10. In AllEnergy Corp. v. Trempealeau Cty. Env’t & Land Use Comm., 2017 WI 52, 375 Wis. 2d 329, 895 N.W.2d 368, the Supreme Court held that: 1) a county committee did not exceed its jurisdiction when acting on a conditional use permit application by considering public health, safety and general welfare matters; 2) public testimony and opinion provided substantial evidence for a conditional use permit application denial; and 3) a conditional use permit applicant is not entitled to the permit whenever it meets the specific conditions set forth in the ordinance and any additional conditions imposed by the permitting authority. AllEnergy applied for a conditional use permit for a 265-acre silica sand mine shortly before the County imposed a temporary moratorium on new non-metallic mining activities. The County denied the permit, and AllEnergy filed suit.

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