Wisconsin Business and Commercial Litigation

In Miller v. Hanover Ins. Co., the Wisconsin Supreme Court undertook a careful analysis of the law surrounding the re-opening of default judgments, particularly the five interest of justice factors under Wis. Stat. s. 806.07(1)(h).  Notably, the court determined that no finding of excusable neglect is required under (1)(h) to re-open a default judgment:

We conclude that M.L.B., and subsequent cases, unambiguously establish that a circuit court is to consider the five interest of justice factors in determining whether extraordinary circumstances are present under Wis. Stat. § 806.07(1)(h) such that relief from a judgment, including a default judgment, is appropriate. M.L.B., 122 Wis. 2d at 552­53; see Connor, 243 Wis. 2d 279, ¶41 (applying the five interest of justice factors to determine whether the circuit court properly exercised its discretion in denying relief from default judgment under para. (1)(h)); Johns v. Cnty. of Oneida, 201 Wis. 2d 600, 607­08, 549 N.W.2d 269 (Ct. App. 1996) (same). A finding of excusable neglect is not required under the extraordinary circumstances test to obtain relief from a default judgment under para. (1)(h). See generally M.L.B., 122 Wis. 2d 536.

The court went on to apply each of the five factors to the facts in the case, which will, of course, be of use to those of us who find ourselves behind a default judgment 8 ball.  There is a spirited concurrence from Justice Bradley, who reaches the same result for drastically different reasons, concentrating on the “extraordinary circumstances” phrase, arguing that the majority’s approach is too formulaic.

Upside down house courtesy Sideshow Bruce’s flickr gallery via this license.

Ehlinger v. Hauser is a long one.  It’s about a dispute between two joint and equal shareholders in a moulding company.  First, I’ll ask the obvious question:  doesn’t anyone ever learn that equal partnerships, including equal shareholders, just doesn’t work?  Second, this going in halvsies on businesses is only good for us lawyers.  If any non-lawyers are reading this, and you remember only one thing, remember that you never want to be in a stand-off with your business partner who owns the exact same amount of the business that you do.

Okay, now on to the case itself.  The language of the shareholder agreement was at issue — if you’re going to be joint and equal, you better have a VERY tightly drafted agreement.  This case proves it.  Here’s the holding in a nutshell, because the full version will take a while:

Hauser contends that both the circuit court and court of appeals incorrectly concluded that the buyout agreement is unenforceable. First, he asserts that the circuit court erred when it determined that the undefined term “book value” rendered the buyout agreement unenforceable. Second, Hauser argues that the court of appeals incorrectly determined that supporting documentation is a necessary component of a computation under generally accepted accounting practices (“GAAP”). Third, he asserts that the circuit court erroneously exercised its discretion when it denied him further opportunity to challenge and counter the special magistrate’s conclusions. He argues that the meaning of “book value” is ambiguous and that he is entitled to a trial to determine the intent of the parties.

We conclude that the circuit court did not err when it determined that the agreement was unenforceable. Both parties agree that Ehlinger is entitled to examine Evald’s books to determine whether they accurately reflect the corporation’s assets and liabilities, a task that the special magistrate was unable to perform due to the state of Evald’s records. Accordingly, we need not resolve whether the contract is indefinite or ambiguous here because under these circumstances, it cannot be enforced.

Additionally, to the extent that Hauser’s characterization of the court of appeals’ decision is accurate, we determine that his argument about the scope of GAAP fails. The question is not what is required under GAAP, but what is required to determine the parties’ rights.

Finally, we conclude that the circuit court did not erroneously exercise its discretion when it denied Hauser the opportunity to subject the special magistrate to a broader scope of cross-examination, to depose the special magistrate, and to present his own expert witness in rebuttal.

In his cross-petition, Ehlinger argues that the circuit court erroneously permitted the defendants’ litigation expenses to be paid by the corporation. This decision would not be erroneous if Hauser was entitled to indemnification or if Evald spent its assets in its own defense. We determine that Hauser was not entitled to indemnification by Evald according to the provisions of Wis. Stat. § 180.0855 (2007-08).  Further, under these facts, the litigation expenses were not incurred by the corporation for its own defense. Therefore, we conclude that the circuit court erroneously exercised its discretion when it permitted the corporation to pay Hauser’s litigation expenses.

This case is a lesson that what seems right or just is not always what’s legal, and once again, don’t go in equal shares on a business.  The procedural history is convoluted, but the legal issues are fascinating, at least for those of us who deal in shareholder and business disputes.  The discussions in this case should set the standard for considerations of shareholder agreements and liquidation valuation for a few years to come.  If you’re writing or negotiating a business start-up, read this case now.

By the beginning of next year, Wisconsin will have new rules governing e-discovery.  In the Wisconsin Law Journal, Jack Zemlicka writes about the path and content of the new rules.  The rules aren’t final yet, and will require some additional tweaking, but they generally follow the outline of the federal rules on the same topic.

E-discovery, much discussed in the past five years or so, hasn’t made as much of a day-to-day impact as was predicted (buth then again, what ever does?  remember the swine flu epidemic, the avian flu, the year 2000, etc.?).  Nevertheless, in cases where e-discovery is important, it can become one of the central issues in the case, and certainly one of the most expensive components of discovery. 

In federal court, many lawyers have taken to using e-discovery as a crowbar to open opponents’ wallets and get a case resolved through financial blackmail rather than through consideration of the substance of the claims and defenses.  While I don’t at this time quibble much with the details of the suggested rule, my fervent hope is that Wisconsin courts will police the use of the rule in a way that preserves the facts of the case as the most important part of the dispute.

computer photo courtesy dlisbona’s flickr gallery via this creative commons license

The Wisconsin Supreme Court will decide whether you get to be represented by the attorney you choose when that attorney has previously represented a third-party witness to the litigation.  In Foley-Ciccantelli v. Bishop’s Grove Condo Assoc., the District II Court of Appeals (which includes Waukesha County) was faced with a situation where the plaintiffs hired counsel of their choice to represent them in a slip and fall that occurred on Bishop’s Grove property.  Unfortunately, that lawyer’s firm had previously represented the property manager for Bishop’s Grove condos.  Although not a party, the property manager, as you can imagine, was a witness who would figure prominently in the litigation.  The Wisconsin Law Journal has more detail on the facts of the case.

The issue, as phrased by the court of appeals, is:

Can a circuit court disqualify retained counsel-of-record in a civil suit, thereby denying the client the right to representation by chosen counsel and restricting the attorney’s right to practice law in a civil action where the attorney previously represented a nonparty witness for the opposing side?

Moving for disqualification of the opposing party’s counsel is, unfortunately, not uncommon, but not generally successful.  The Supreme Court will, hopefully, provide additional guidance to Wisconsin practitioners on this issue.

On May 18, 2009, I wrote about Racine County v. Oracular, and I said that it didn’t appear that the case had been appealed.  I was wrong.  The Supreme Court just released its decision on April 2, 2010, in which it confirmed the court of appeal’s ruling that the issues in the case did not require expert witness testimony to assist the jury.  The court of appeals reversed Racine County Judge Steve Simanek’s dismissal of Racine County’s case because of its failure name an expert.

Contrary to the circuit court’s conclusion, the court of appeals held that for purposes of this case, computer consultants are not “professionals” and thereby not subject to professional standards of care.  Instead, the court concluded that the Agreement between Racine County and Oracular was a simple contract for services.

The Supreme Court, through Justice Ziegler, agreed:

In this case, in order to survive summary judgment, Racine County was not required to name an expert witness.  As a preliminary point, Racine County alleged breach of contract, not negligence.  There is no allegation that Oracular’s performance failed to meet the standards of the computer consulting industry——whatever those may or may not be.  Accordingly, the issue is not whether Racine County is required to present expert testimony in order to demonstrate that Oracular’s performance fell below the industry standard of care. Instead, the issue is whether in order to survive summary judgment, Racine County was required to name an expert witness when the complaint alleged that Oracular breached the parties’ Agreement.

Two things cause a little concern.  First, the Supreme Court claims that it decided the appeal on “different grounds” than the appellate court.  The grounds, if different, appear only  minimally so.  Second, the Supreme Court went to great pains to repeatedly point out that Racine County did not have to name an expert witness to “survive summary judgment.”  This begs the question whether Racine County is required to name an expert at some other point in the process. 

For practical purposes, this case falls into the category of one to cite when your opponent takes a shot at your case because you didn’t name an expert in discovery. 

Permission to speak freely image courtesy jurvetson flickr gallery via this creative commons license.

The Wisconsin Supreme Court has selected seven cases for review.  Rather than rehash them all in my own words, I invite you to check out the pithy descriptions of the Wisconsin Law Journal’s  Dave Ziemer (at least, I think it’s Ziemer).  As the cases get decided, I’ll keep you up to date.

The Wisconsin courts of appeal recently instituted a new electronic filing requirement, and I just electronically filed my first appellate brief.  The electronic filing process, while not difficult, seems to be totally superfluous, since parties are still required to file paper copies of briefs, governed by some very detailed rules.  For instance, let’s just address the cover pages, leaving alone all other specifics like font, page length, justification, etc.: 

The covers of the appellant’s brief shall be blue; the respondent’s, red; a combined respondent−cross−appellant’s, red with a blue divider page; a combined reply−cross−respondent’s, gray with a red divider page; a guardian ad litem’s, yellow; a person other than a party, green; the reply brief, gray; and the appendix, if separately printed, white.

Moreover, when filing in the supreme court, an appellant must file 22 copies of its brief, and serve three on each party, while in the court of appeals, an appellant files 10 copies, and serves three on each party. 

I’m a big fan of the federal district court model, in action for many years now.  That system has the state process completely beat.  It’s entirely paperless and does not require any messing around with colored covers, inserts, multiple copies and other details that are traps for the unwary or the inexperienced.  I had hoped that the state would move directly to such a process, since most lawyers are already familiar with the federal system.

While this new state electronic filing requirement may be a step to a completely paperless system, right now it’s just an extra hole to fall into.

Stack of paper photo courtesy iLoveButter flickr gallery under this creative commons license.

The Wisconsin Supreme Court recently (July 14, 2009) undertook to analyze non-compete and confidentiality agreements between an employee and employer.  In Star Direct v. Dal Pra, the court considered claims that Dal Pra violated various provisions of his agreement by, after voluntarily terminating his employment with Star Direct, starting his own competing business servicing Star Direct’s customers.

The Court addressed each of the three contract clauses at issue, beginning with the “customer clause,” and focusing on Star Direct’s interests in prohibiting competition:

The customer clause prohibits Dal Pra, for 24 months following termination, from interfering with or endeavoring to entice away a person or entity “which is a customer” or “which was a customer . . . within a period of time of one year prior to . . . termination.”  The clause further specifies that prohibited customers are those “for which Employee performed services or otherwise dealt with” or “obtained special knowledge” about in the course of employment.  The provision also prohibits Dal Pra from approaching “any such customer or past customer” for prohibited purposes or cooperating with others toward that end.

Addressing an issue not previously directly decided, the Court approved of the customer clause’s application to past customers of Star Direct.  In reaching its decision, the Court relied primarily on the idea that Dal Pra would have a significant advantage in competing for those past customers because of his special knowledge of Star Direct’s business and of the customers themselves.  Moreover, the Court pointed to the nature of the business itself as support for this decision and for its conclusion that Star Direct had an interest in protecting customers with whom Dal Pra had not recently contacted.

The court turned next to the “business clause:”

[F]or a period of twenty-four (24) months after termination of Employee’s employment with Employer, Employee shall not, directly or indirectly . . . become engaged in any business which is substantially similar to or in competition with the business of the Employer, within a fifty (50) mile radius of Rockford, Illinois.

The Court concluded that the business clause’s restriction on engaging in a “substantially similar” business was overbroad and not reasonably necessary to protect Star Direct:

The lack of any protectable interest means the business clause is unreasonable and unenforceable.

Finally, the Court turned to the “confidentiality clause:”

The confidentiality clause bars Dal Pra, for 24 months following his termination, from using or disclosing “any information or knowledge, known, disclosed or otherwise obtained by him during his employment by Employer or CB Distributors.” It then lists a variety of specific information that is to be deemed confidential and protected, including but not limited to knowledge “conceived, discovered or developed by Employee or CB Distributors,” “proprietary products or procedures,” trade secrets, customer lists, “marketing techniques which are not generally known in the business community, and which relate to the business of the Employer or CB Distributors or are in the nature of trade or business secrets,” mailing lists, and special pricing information.

Again, the court focused on whether the clause was necessary to protect Star Direct.  Because it concluded that the information protected was proprietary, it determined that the clause was reasonably necessary.  Finally, the court addressed divisibility of restrictive covenants in general, and particularly those above. 

If you haven’t read it, and you or your company uses restrictive covenants, click the link and get going.

Congratulations to my colleague Jeff Fertl who recently prevailed (July 17, 2009) on questions certified from the Seventh Circuit to the Wisconsin Supreme Court on Lemon Law issues.  In Tammi v. Porsche Cars, the Supreme Court considered four certified questions and concluded:

When a consumer who is leasing a motor vehicle brings an action against the manufacturer of the vehicle pursuant to subsection (7) of Wis. Stat. § 218.0171, and then exercises his option to purchase the vehicle under the terms of the lease, the consumer is not entitled to damages for the price of his voluntary purchase because his purchase was not “caused” by any violation of the statute by the manufacturer. See Wis. Stat. § 218.0171(7).

The second and third questions were mooted by the answer to the first question.  As to the final question, the Supreme Court concluded:

The plain language of the statute makes clear that a consumer’s refund under Wis. Stat. § 218.0171(2)(b)2.b. or 3.a. is subject to a reasonable allowance for use. Because we read subsection (7) in conjunction with the rest of the statute, we conclude that the amount of “pecuniary loss” under Wis. Stat. § 218.0171(7) must incorporate a reasonable allowance for use before the pecuniary loss is doubled.

With the questions answered, the case has been remanded to the Seventh Circuit for further proceedings.

If you’re a lemon law practitioner, the analysis is interesting.  If you’re not, the background discussion of the lemon law and its history might still be interesting.  In either event, congratulations to Jeff and his client.

In Behrendt v. Silvan Industries, Inc. , opinion filed July 9, 2009, the Wisconsin Supreme Court addressed a question that plagues many manufacturing and service provider employers:  What is the employer’s liability for side jobs performed by its employees using company equipment?  The answer (not as clear as you might like):

In order for an employer to be vicariously liable for an employee’s act, the act must have been within the scope of employment. We agree with the court of appeals that summary judgment is appropriate on the claim of vicarious liability because the only evidence presented was that the tank was a side project that was completed for the employee’s own purpose and thus was outside the scope of employment.

The plaintiff’s argument that permitting side jobs raised employee morale did not persuade the court. 

In the lengthiest portion of the decision, the court emphasized that the employer bore the duty that all Wisconsin residents bear to exercise care to prevent creating an unreasonable risk of injury to another.  However, it also concluded that the injury here, caused when a tank, originally built as a side job by a Silvan employee and later modified, exploded, was not a reasonably foreseeable risk.  The court’s language is worth a look by any employer whose employees occasionally take on side jobs.

However, we then look at whether Silvan breached that duty by failing to exercise the care a reasonable person would use in similar circumstances. In most cases, whether a defendant breached a duty is a question of fact that is submitted to the jury and thus is not appropriate for summary judgment. In this case, however, it is the lack of foreseeable risk that convinces us, as a matter of law, that Silvan cannot be said to have failed to exercise ordinary care with regard to its policy on side jobs. Further, there is no material fact in dispute as to Silvan’s policies about side jobs and its prohibition on employees making pressurized vessels as side jobs for personal use. There is in addition uncontroverted evidence in the record that Silvan took steps such as having holes cut into any tanks that were considered as scrap—-as well as testimony of the tank’s owner that this tank itself originally had holes in it—-and that the point of cutting holes into the tanks was to keep them from being used with air pressure. Summary judgment is appropriate on the negligence claim because under these circumstances Silvan did not breach its duty to act with ordinary care.