Has the Wisconsin Court of Appeals Shown A Path to Change Successor Liability Law?

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Ordinarily, an appellate court’s per curiam opinion—an unsigned ruling issued “by the court” rather than in the name of the authoring judge—does not merit close examination. In Wisconsin, per curiam opinions are unpublished and may not be cited in future cases, even for persuasive value.

Thus, it would be easy to overlook the court of appeals’ recent per curiam opinion in Veritas Steel, LLC v. Lunda Construction Company. At first blush, the decision appears to be a straightforward affirmance of the circuit court’s order dismissing two claims: successor liability and fraudulent transfer. However, the analysis is illuminating, and it seems to telegraph—pretty clearly—that the Wisconsin Supreme Court should reconsider long-standing precedent that narrows the exceptions to the general law of non-liability for corporate successors.

Facts:

PDM was a steel fabricating entity. It had a credit agreement with multiple lenders, who in turn had first-priority liens on PDM’s assets. When PDM defaulted, the lenders granted forbearance in exchange for PDM’s agreement to sell itself with the help of an investment bank. None of the bids to acquire PDM were sufficient to cover PDM’s outstanding debt to secured creditors (much less to unsecured creditors like Lunda, which had obtained a $16 million judgment against PDM).

Atlas, the common parent company of the lenders, was the highest bidder. Through a series of transactions, Atlas and the lenders acquired PDM’s assets and shed any obligations to pay additional debts. They did this in several steps. First, a “transition support agreement” between PDM and the lenders expressed “a mutual desire” to transition PDM’s business to the lenders. In the wake of that agreement, Atlas and its affiliates purchased all of PDM’s outstanding debt directly from the lenders at a steep discount. Then Atlas created a new entity, Veritas Steel, which was assigned a first-priority lien on PDM’s assets. Finally, PDM conveyed its assets to Veritas in exchange for the discharge of the secured debts. “Under Veritas’s ownership,” PDM continued operating as it had before these transactions, employing the same workforce and pursuing the same type of work.  See slip op. ¶13.

Meanwhile, Lunda took steps to execute its judgment against PDM. Eventually, Veritas responded by seeking a judicial declaration that Lunda had no claim against Veritas for payment of the judgment against PDM. Lunda counterclaimed against Veritas and brought a third-party complaint against Atlas and others. Lunda alleged that the defendants schemed to control PDM and continue to operate it, “albeit under a different name.” Id. ¶ 15. Applying Wisconsin precedent, the circuit court dismissed Lunda’s successor liability and fraudulent transfer claims.

Court of Appeals decision:

In its discussion of the successor liability claim, the court of appeals began with the general rule that when an acquiring corporation purchases assets of a target corporation it does not also succeed to the liabilities of the target corporation. There are well-recognized exceptions to this general rule, two of which Lunda invoked: (1) the “de facto merger exception,” which applies when the transaction amounts to a consolidation or merger of the two corporations, and (2) the “mere continuation exception,” which applies when the acquiring corporation is essentially a continuation of the target corporation.

The court of appeals recognized that earlier precedent supported Lunda’s argument. In Tift v. Forage King Industries, the Wisconsin Supreme Court expanded these exceptions and allowed piercing the corporate veil so that a court could “look to the substance and effect of business transformations or reorganizations to determine whether the original organization continues to have life or identity” in a subsequent organization. Id. ¶24 (quoting Tift, 108 Wis. 2d 72, 78–79, 322 N.W.2d 14 (1982)).

However, the court of appeals concluded that later Supreme Court precedent cut the other way. This newer precedent, Fish v. Amsted Industries, Inc., rejected “relaxation of the traditional test of successor liability and instead requires attention to concrete evidence of identity of ownership.” Id. ¶27 (citing Fish, 126 Wis. 2d 293, 300–02, 376 N.W.2d 820 (1985)). As the court of appeals noted, this focus on the “identity of ownership” appears to require a transfer of stock to trigger the de facto merger exception, and the common identity of officers, directors, and stockholders for the mere continuation exception. As neither key element was present here, neither exception applied and Lunda’s successor liability claim failed.

The court of appeals cited federal case law that similarly understood Fish to foreclose claim, even where the results may be “‘unsettling’ because an asset transfer has occurred under what appear to have been ‘quite cozy’ circumstances.” Id. ¶28 (quoting Gallenberg Equip., Inc. v. Agromac Int’l, Inc., No. 98-3288, slip op. at 5 (7th Cir. Aug. 4, 1999)). The court of appeals also observed that Lunda’s argument would have “traction” in other jurisdictions, but not in Wisconsin “at this time.” Id. (emphasis added). And the court of appeals cautioned that it may be “impossible to square our reading of Fish with statutory merger language under ch. 180” of the Wisconsin Statutes. Id. ¶32, n.11. Finally, the court of appeals noted that Fish was a closely decided case, from which three justices dissented, “urging more flexible approaches to the exceptions.” Id. ¶33. But the court of appeals ultimately acknowledged its hands were tied, as only the Supreme Court can overrule its prior decisions.

Conclusion:

It may very well be that the court of appeals deemed this an open-and-shut case, meriting no more than an unsigned ruling. It may also be true that the court of appeals felt aggrieved by an unsecured judgment creditor getting the short end of the stick and went out of its way to explain why it could not offer relief. However, given the tone, the length, and the word choice of this opinion, the court of appeals may indeed have been urging litigants to ponder, and perhaps even providing rhetorical ammunition to use in, pursuing a change in the controlling precedent by seeking further review at the Wisconsin Supreme Court.

U.S. Supreme Court Holds That Federal Age Discrimination Law Applies to All Public Employers

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In the first opinion of its new term, the United States Supreme Court unanimously held that the federal Age Discrimination in Employment Act (the “ADEA”) applies to all public employers, regardless of the number of employees that the entity has.  The ruling in Mount Lemmon Fire District v. Guido affirmed the Ninth Circuit Court of Appeals, which was alone among the circuits in holding that the ADEA applies to small as well as larger public employers.

The fire district involved in the case is a political subdivision in Arizona, and in order to resolve a budget shortfall, laid off its two oldest full-time firefighters (aged 46 and 54).  The firefighters sued the fire district and alleged that their termination violated the ADEA.  The fire district moved to dismiss the suit on the ground that the district was too small to qualify as an “employer,” as defined by the ADEA.  The ADEA’s definitional provision, which can be found at 29 U.S.C. § 630(b), states as follows:

The term “employer” means a person engaged in an industry affecting commerce who has twenty or more employees . . . . The term also means (1) any agent of such a person, and (2) a State or political subdivision of a State . . . .

The Equal Employment Opportunity Commission (the “EEOC”) found reasonable cause that the fire district had discriminated against the fire fighters.  The district court reversed and—following the at least four other circuit courts, including the Seventh Circuit—held that the 20-employee threshold applied to state and local public employers.  The Ninth Circuit reversed the district court.

In an opinion written by Justice Ruth Bader Ginsburg, the Court sided 8-0 with the Ninth Circuit and the fire fighters (Justice Kavanaugh took no part).  The Court briefly recounted that the ADEA originally imposed liability on private employers only and even then only when those entities “met a numerical threshold” for employees.  Slip op. at 2.  When Congress amended the ADEA to cover state and local governments, it added them to the definition of employer at the end of the definitional provision.  Thus, the Court focused on the parties’ dispute over the phrase “also means”:  Does it “add new categories to the definition of ‘employer,’ or does it merely clarify that States and their political subdivisions are a type of ‘person’ included” in the first sentence?  Id. 

The Court concluded the former interpretation—that in adding “also means,” Congress added new categories of employers to the ADEA—was the right one.  “First and foremost, the ordinary meaning of ‘also means’ is additive rather than clarifying.”  Id. at 4.  The Court also noted that the phrase appears “dozens of times throughout the U.S. Code, typically carrying an additive meaning.”  Id. at 4–5.  Finally, the Court rejected the fire district’s warning that applying the ADEA to small public employers “risks curtailment of vital public services such as fire protection,” as the EEOC has consistently interpreted the ADEA as covering all public employers regardless of size and many state age discrimination statutes do the same, and “[n]o untoward service shrinkages have been documented.”  Id. at 6. 

Although it is a short and unanimous opinion, Mount Lemmon is notable in that the Court sided with employees and the oft-maligned Ninth Circuit.  And, for a more local angle, the Supreme Court has implicitly overruled the Seventh Circuit’s decision in Kelly v. Wauconda Park District, 801 F.2d 269 (7th Cir. 1986), which held that the ADEA covered state and local governments only if they have at least 20 employees.  Small Wisconsin municipalities and other political subdivisions should take note of their vulnerability to age discrimination claims filed with the EEOC.  Of course, similar claims filed under Wisconsin law do not face any numerosity requirement for any kind of employer.  See Wis. Stat. §§ 111.32(6), .321–.322. 

Two Strikes and You’re Out:  7th Circuit Addresses Federal and State Rules on Voluntary Dismissal

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Earlier this week, in Dvorak v. Granite Creek GP Flexcap I, LLC, No. 18-1892, 2018 WL 5801244 (7th Cir. Nov. 6, 2018), the Seventh Circuit addressed the interaction between federal and state rules governing voluntary dismissals of actions. Both Federal Rule of Civil Procedure 41(a) and its corresponding Illinois statute provide a “two strikes” rule: a plaintiff may dismiss an action once without prejudice, but refiling and dismissing again serves as an adjudication on the merits that bars plaintiff from filing any future action based on the same claim.

Dvorak presented a twist: What if a plaintiff files and dismisses a federal suit, then refiles and dismisses in state court, and then files again in federal court? The Seventh Circuit’s ultimate holding—the plaintiff’s third suit was barred and properly dismissed—provides an important lesson for litigants and litigators alike. 

All three suits Dvorak filed arose from an allegedly “mishandled … capital call for a limited partnership.” Dvorak first filed in federal court on the basis of diversity jurisdiction. But he and at least one other partner were both Florida citizens, destroying diversity as a basis for federal jurisdiction. So, he dismissed his initial federal suit with the consent of the defendants and refiled in Illinois state court. In this second suit, the state court dismissed one claim on the merits. Rather than litigate the remaining claims in the state court, Dvorak dismissed the rest of his suit and refiled those claims in the federal court where he had started. This new, third suit omitted the partnership and the claim dismissed by the state court.

The defendants moved to dismiss the third suit on the ground that Dvorak had refiled twice, even though under Illinois law his prior dismissals both counted as strikes. In response, Dvorak argued that his first dismissal did not count as a strike under Illinois law because it was entered with the consent of all parties. The district court rejected Dvorak’s argument, and dismissed the third suit with prejudice. Dvorak appealed.

The Seventh Circuit affirmed the district court’s dismissal order, in an opinion authored by Judge Frank Easterbrook and issued only eight days after oral argument. As an initial matter, the court had to characterize the dismissal of the first federal suit, as that characterization would affect the treatment of the second, state-court dismissal. Looking to the text of Rule 41(a), the court concluded that, regardless of whether Dvorak dismissed unilaterally or by stipulation of the parties, “both situations [are] voluntary dismissals by the plaintiff.” Slip op. at 5. A stipulated dismissal “is not less a voluntary dismissal by the plaintiff just because other parties agree that the suit should end.” Id. The court then held that, under Illinois precedent, the stipulated dismissal in the first federal suit was also voluntary for purposes of the state dismissal statute, 735 Ill. Comp. Stat. 5/13-217. 

Applying the Illinois two-strikes rule, the Seventh Circuit reasoned that, if the dismissal of Dvorak’s first federal suit was one strike and dismissal of the unadjudicated claims in state court was the second strike, then the refiled suit in federal court (Dvorak’s third suit overall) was barred by § 5/13-217. The court was unmoved by Dvorak’s argument that his third suit included two defendants who had not been named parties to the first suit, because the Illinois statute “applies with respect to all persons who could have been named in the initial suits, whether or not they were, provided that the new suit arises from the same transaction (or, equivalently, the same core of operative facts).” Slip op. at 6.

The outcome would be the same if the state suit had been filed and dismissed in Wisconsin, which also has a “two-strikes” statute. Wis. Stat. § 805.04. Section one of that statute explicitly states that

“(u)nless otherwise stated in the notice of dismissal or stipulation, the dismissal is not on the merits, except that a notice of dismissal operates as an adjudication on the merits when filed by a plaintiff who has once dismissed in any court an action based on or including the same claim.”

(emphases added). As the second emphasized phrase demonstrates, Wisconsin clearly addresses the issue of forum. The Wisconsin statute expressly counts prior dismissals “in any court.” Note, however, that the first clause expressly encompasses both dismissals and stipulations, but that the exception references only notices of dismissals only. Does the statutory text leave room to argue that a stipulated dismissal does not count as a strike under the Wisconsin statute? Possibly, but such an argument would now need to overcome Dvorak’s interpretation of Rule 41(a). 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Wisconsin Issues Emergency Rule Implementing Wayfair Requiring Internet Sellers to Collect Sales Tax

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             On September 6, 2018, the Wisconsin Department of Revenue (“WDOR”) issued Emergency Rule 1819 requiring out-of-state internet sellers to collect and remit Wisconsin sales taxes if the seller’s sales or number of transactions exceed the substantial nexus thresholds upheld by the U.S. Supreme Court in its June 21, 2018 decision in South Dakota v. Wayfair, Inc., et al.  The WDOR’s emergency rule becomes effective on October 1, 2018, meaning that internet sellers may need to start collecting sales taxes as soon as October 1, 2018 and filing sales tax reports and remitting sales taxes as soon as November 2018.

            The WDOR’s position is current Wisconsin Statutes § 77.51(13g)(c) permits the emergency rule to become effective on October 1, 2018 without action of the Legislature.  As noted in the comments to the emergency rule, if an internet seller of tangible personal property did not have nexus prior to Wisconsin implementing the Wayfair standard for substantial nexus, then Wisconsin will not seek to cause the seller to collect and remit Wisconsin sales or use taxes for sales prior to October 1, 2018.

            As to Wisconsin franchise and income taxes, the emergency rule expressly notes that internet sellers with substantial nexus for sales and use tax applying the Wayfair thresholds may also have substantial nexus in Wisconsin for imposing Wisconsin franchise and income tax.  While not stated, P.L. 86-272 (a 1959 federal law providing that a state is not permitted to impose a tax measured by net income on an out-of-state company if orders for tangible personal property are solicited in the state and then accepted or rejected, and filled, from outside the state) continues to limit Wisconsin’s ability to assert substantial nexus for franchise or income tax purposes regarding sales of tangible personal property.

            Similar to Wayfair, in the emergency rule Wisconsin adopted a small out-of-state retailer rule providing that retailers who have sales that do not exceed $100,000 (which $100,000 is inclusive of both taxable sales and sales exempt from tax) and annual transactions of less than 200 are not required to collect and remit sales taxes to Wisconsin.  For purposes of what “year” a retailer uses when determining whether the $100,000 of sales and 200 transactions thresholds are exceeded, it is the retailer’s taxable year for federal income tax purposes.

            Under the emergency rule, if an out-of-state retailer’s annual gross sales into Wisconsin exceeds $100,000 in the “previous year,” or if the retailer’s annual number of separate sales transactions into Wisconsin is 200 or more in the previous year, the retailer is required to register and collect Wisconsin sales or use tax for the entire current year.  An example in the emergency rule describes an out-of-state retailer that has more than $100,000 in gross sales in 2018 and so for the entirety of 2019 the retailer is required to collect and remit Wisconsin sales or use taxes. 

            By a separate webpage uploaded onto the WDOR website on September 10, 2018 (captioned “Registration and Collection Dates for Remote Sellers”), the WDOR answered a question left open by the emergency rule, which is if an out-of-state retailer had more than $100,000 of sales for 2017, or 200 or more transactions in 2017, is the out-of-state retailer required to collect and remit Wisconsin sales or use taxes for sales beginning October 1, 2018?  That is, when the emergency rule refers to “previous year” do 2017 sales count for determining the obligation to collect and remit taxes beginning on October 1, 2018?

            The WDOR takes the position on its website page that if an out-of-state retailer exceeds either the $100,000 sales/200 transactions thresholds in 2017, then the retailer needs to register and collect Wisconsin sales taxes beginning on October 1, 2018.  See Example 1.  Similarly, if from January 1, 2018 to September 30, 2018 an out-of-state retailer exceeds either the $100,000 sales/200 transactions thresholds, then the retailer needs to register and collect Wisconsin sales taxes beginning October 1, 2018.  See Example 3.  While not necessarily the outcome one may infer from the emergency rule, there is little impediment from the WDOR taking the position on its website.

            If an out-of-state retailer’s annual gross sales into Wisconsin are $100,000 or less in the previous year, and separate sales transactions into Wisconsin is less than 200 in the previous year (where each periodic payment constitutes a “sale”), then according to the emergency rule the retailer is not required to collect and remit taxes until its sales or transactions exceed the $100,000 or 200 transactions thresholds for the current year.  Once having exceeding the thresholds, a retailer is required to collect and remit taxes for the remainder of the year.  The emergency rule provides a clarifying example showing how once a retailer has exceeded the $100,000 of sales, or the 200 or more transactions, thresholds then the obligation to collect and remit sales and use tax begins with the retailer’s next sale transaction. 

           In terms of implementing reporting and registration, Wisconsin is one of the 24 states that have adopted the Streamlined Sales and Use Tax Agreement (SSUTA) and is a “full member” of the Streamlined Sales Tax Governing Board.  So registration, reporting and software are available through the Streamlined Sales Tax Governing Board’s website.  Based on conversations with WDOR personnel, the use of the Streamlined Sales Tax Governing Board processes, SSUTA and certified software providers listed on the Streamlined Sales Tax Governing Board’s website are the method by which the emergency rule will have negligible costs to the private sector (and the emergency rule says “This proposed rule does not have anticipated costs on the private sector.”).

            While Wisconsin has now clarified that internet sellers that exceed the $100,000 in sales and 200 transactions thresholds of Wayfair are required to collect and remit Wisconsin sales tax, it is yet unclear whether Wisconsin will seek to expand what constitutes “substantial nexus” for sales/use taxes, and franchise/income taxes.  Based on tax audit experiences of the author, it will not be surprising if the WDOR seeks to expand substantial nexus by looking at economic nexus, click-thru nexus, “cookie” nexus and notice requirements to broaden the base of Wisconsin taxpayers.  The WDOR already has audit office presence in states outside of Wisconsin to facilitate audits to expand the number of businesses subject to Wisconsin tax.  The WDOR has a voluntary disclosure program (VDP), as to which Wisconsin’s policy is to collect four years’ taxes where a VDP has been implemented, if a VDP is entered into by a taxpayer.  Businesses that are on the cusp of meeting substantial nexus in Wisconsin may want to consider availing themselves of the VDP process.

            Comments on the emergency rule may be submitted to the WDOR no later than a to be announced date for a public hearing regarding the emergency rule.  When information as to the place, date and time of the public hearing is published in the Wisconsin Administrative Register, this article will be updated to provide the deadline for comments.

Conclusion 

            The emergency rule announced by the WDOR leaves internet sellers with little time to implement collection and remitting processes to comply with the new rule.  While the emergency rule assists in harmonizing Wisconsin’s sales and use tax nexus thresholds with other states that adopt the Wayfair thresholds for substantial nexus, Wisconsin’s timeline for implementation of the emergency rule places a significant decision burden (e.g., start collecting sales tax in Wisconsin on October 1, 2018) and may place a procedural burden on internet sellers.

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

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

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

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

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

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

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

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

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

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

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

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

Conclusion

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

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

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

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SAS and OMP

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

Scope of the GDPR

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

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

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

Compliance Efforts

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

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

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

Court of Appeals Suggests Possible Path To Waiver of PFC Review

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Court of Appeals Suggests Possible Path To Waiver of PFC Review

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

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

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

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

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

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

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

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


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

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

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

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

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

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

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

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

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

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

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