Wisconsin Lawyer
Vol. 85, No. 11, November 2012

Each year the U.S. Court of Appeals for the Seventh Circuit and Wisconsin's two U.S. district courts issue decisions interpreting Wisconsin common law and Wisconsin statutes, often under federal diversity jurisdiction. Although federal court interpretations of Wisconsin law are only of persuasive value to, and not binding on, Wisconsin state courts, these interpretations affect how Wisconsin law develops.

This article reviews nine significant 2011 and 2012 Wisconsin federal court decisions interpreting Wisconsin law. These decisions encompass Wisconsin common-law claims and interpretations of Wisconsin statutes.

Wisconsin Contract Law

• Economic Loss Doctrine (ELD). Wisconsin's version of this judicially created defense, which precludes contracting parties from pursuing recovery in tort for purely economic or commercial losses from a contractual relationship, has frequently been interpreted by federal courts.

For the ELD to be available, there must be an actual or potential contractual relationship between the party relying on the ELD and the party against whom the doctrine is asserted. In Tilot Oil LLC v. BP Products North America Inc.,¹ the plaintiff alleged that BP had contaminated real estate in Green Bay that the plaintiff owned. The only connection between the parties was as neighboring land owners – although BP had previously owned the plaintiff's parcel, it did not sell the parcel to the plaintiff. Based on the lack of any contractual privity, the absence of any relationship between the parties within the parcel's chain of sale, and the policies underlying the ELD, the U.S. District Court for the Eastern District of Wisconsin refused to apply the ELD to the plaintiff's trespass, nuisance, and negligence claims.²

A somewhat contrary result was reached by the same court in a case between a contractor and a designer concerning the relocation of an underground cable/conduit package. The contractor claimed that the designer negligently prepared drawings used during installation. In Custom Underground Inc. v. Mi-Tech Services Inc.,³ the district court – concerned that Wisconsin courts might not recognize the contractor's claim that a designer not in contractual privity with it may be sued for purely economic losses – applied the ELD. The court relied on the principle that recovery of economic losses in tort is available only when the economic loss is combined with damage to the plaintiff's person or property.⁴ The court did not, however, address contrary authority, which refused to apply the ELD when the parties have no contractual obligations to each other.⁵

Under existing law the ELD applies only to contracts for products, not contracts for services.⁶ When this distinction is not clear, courts apply the "predominant purpose" test to determine whether the contract is one for products or for services.⁷ This issue arose in the context of two restaurant franchise agreements in Cousin Subs Systems Inc. v. Better Subs Development Inc.⁸ After focusing on the terms of the contracts and their interplay with the claims, the district court ruled that the franchise agreements were predominantly for services, and therefore the defendants' counterclaims were not precluded by the ELD. The court found that "the dispute between the parties has nothing to do with the characteristics of the food or any goods, but rather the services contemplated by the agreement."⁹ The court also recognized that the ELD does not apply in cases in which the plaintiff seeks rescission.¹⁰

Barriers to imposition of the ELD include "fraud in the inducement," that is, an intentional misrepresentation claim if such fraud is "extraneous to, rather than interwoven with, the contract."¹¹ To invoke this exception, a party must establish that the fraudulent misrepresentation was made before the contract was formed and that the misrepresentation did not "relate to the quality or the characteristics of the goods for which the parties contracted or otherwise involve[] performance of the contract."¹²

In Triad Group Inc. v. Vi-Jon Inc.,¹³ a manufacturer of health care products sued one of its raw materials suppliers, seeking amounts owed under a contract. The supplier removed the case from state court to the Eastern District and asserted counterclaims for its losses, including a claim for fraudulent inducement to contract. When the manufacturer moved to dismiss the supplier's claim under the ELD, the supplier invoked the fraud-in-the-inducement exception.

The district court agreed that the exception applied and refused to dismiss the supplier's claim. The court ruled that the supplier's losses were not merely economic: the supplier claimed that because of the manufacturer's alleged fraudulent misrepresentations, the supplier had to repurchase raw materials on the open market after being unable to secure the return of similar materials that it had provided to the manufacturer under the parties' contract.¹⁴

Even if the supplier's alleged losses were purely economic, the court ruled, the supplier's allegations fell under the fraud-in-the-inducement exception. The supplier had sufficiently pleaded the elements of fraud, the alleged misrepresentation occurred before the contract was formed, and the alleged fraud was extraneous to the contract, that is, it concerned matters whose risk and responsibility did not relate to the quality or characteristics of the goods for which the parties contracted.¹⁵

Wisconsin Statutory Interpretation

• Wisconsin Open Records Law. In Hutchins v. Clark,¹⁶ a deputy sheriff sued the sheriff after the sheriff commented, in a phone call to a talk radio show, about the deputy sheriff's disciplinary history. The district court granted the deputy sheriff's motions for summary judgment with respect to his claims that the sheriff had violated Wisconsin's Public Records Law¹⁷ and right of privacy statute,¹⁸ and that the sheriff had engaged in employment retaliation in violation of the First Amendment.

The Seventh Circuit reversed the district court based on its interpretation of the two Wisconsin statutes. First, the appeals court found that the Public Records Law did not apply to the sheriff's oral reference to the deputy's disciplinary record, because there was no request to inspect the deputy's disciplinary record, no permission granted, and no balancing test undertaken, as required by that law.¹⁹ The appeals court reached the same conclusion with regard to Wisconsin's right of privacy statute. Because the information the sheriff communicated was available as a matter of public record, the public's interest in disclosure of the information was not outweighed by the public's interest in maintaining it as a closed record.²⁰

• Wisconsin Fair Dealership Law (WFDL). After 20 years of doing business, Kaeser Compressors Inc., a manufacturer of air compressors, sought a declaration that a refusal by its dealer, Compressor & Pump Repair Services, to sign a new dealership agreement constituted good cause under the WFDL for Kaeser to terminate the dealership.²¹

The Eastern District court reviewed Wisconsin and federal case law interpreting the WFDL's "good cause" standard, including whether a requirement imposed by a grantor on a dealer is both "essential" and "reasonable."²² The court found none of these cases controlling.²³ Ultimately, the court was persuaded that the burden was on the grantor, not the dealer, to explain why the new dealership agreement was reasonable, given that "the new contract effects a very substantial change in the dealership arrangement."²⁴

The district court found support for this interpretation of the WDFL in Wisconsin Supreme Court case law²⁵ and recent Seventh Circuit case law,²⁶ which explained that a grantor's circumstances could justify a change in the dealership relationship, but the need for change must be "objectively ascertainable."²⁷ Given what the Eastern District judged to be "difficulty articulating both an objective need for the proposed change as well as an explanation for how the change represents a proportional response to its economic concerns,"²⁸ it found a genuine issue of fact for trial.²⁹

• Wisconsin Law on Restrictive Covenants. Two recent companion cases considered covenants not to compete under Wisconsin statutory and case law. In Priority International Animal Concepts Inc. v. Bryk,³⁰ a microbiology company claimed that a veterinarian, Bryk, with whom it had a consulting agreement conspired to use confidential product and proprietary information to set up a competing business. The Eastern District court, sitting in diversity, considered restrictive covenants within the veterinarian's consulting agreement under Wisconsin statutory law³¹ and the Wisconsin Supreme Court's "canons of construction" applicable to covenants not to compete.³² On Bryk's motion for partial dismissal, the district court found overbroad the agreement's restrictive covenants concerning business activity and solicitation of future customers.³³ But the court also found those restrictions divisible from others in the agreement and consequently left for another day litigation of a restriction concerning the use of confidential information.³⁴

The same company had claimed that an employee, Gleisner, who was hired to facilitate sales violated nearly identical confidentiality and noncompete agreements. On Gleisner's motion for partial dismissal,³⁵ the Eastern District reached the same conclusions, using the same reasoning, as in Bryk.³⁶

Wisconsin Corporate Law

A majority stockholder decided to acquire the remaining shares in a Wisconsin corporation, but a minority stockholder dissented. The company then commenced a judicial proceeding, required by Wisconsin's Business Corporation Law, to have the company stock appraised.³⁷ The company filed the case, Albert Trostel & Sons Co. v. Notz,³⁸ in federal court under diversity jurisdiction, but the minority investor insisted that the appraisal proceedings must be conducted in state court. The federal district judge disagreed, heard the case, and set the fair value of the company's stock.

That appraisal gave the U.S. Court of Appeals for the Seventh Circuit occasion to interpret Wisconsin's venue provision for such a corporate appraisal action.³⁹ The appeals court ruled that Wisconsin's venue provision does not contractually bind corporations to bring an action in state court rather than federal court. Chief Judge Easterbrook observed that Wisconsin draws its corporate code from the Model Business Corporation Act and that several other states (including Delaware) have functionally identical venue provisions that concern venue, rather than jurisdiction. To treat such a "statute as a claim by a state to oust the jurisdiction of the federal courts would simply render it unconstitutional,"⁴⁰ so the appeals court read the state statute as allocating authority within that state's own judiciary.

The Seventh Circuit also rejected the minority shareholder's argument that the appraisal action belonged in state court as a matter of contract, because Wisconsin's corporate venue statute is not part of a private contract nor is all Wisconsin corporate law part of all articles of incorporation thus rendering it contractual.⁴¹

Other aspects of Wisconsin corporate law are discussed in Executive Center III LLC v. Meieran.⁴² In this diversity suit the U.S. District Court for the Eastern District of Wisconsin refused to invalidate a transfer under Wisconsin's version of the Uniform Fraudulent Transfer Act,⁴³ because the judgment debtor had received reasonably equivalent value in exchange for the transfer.⁴⁴ The district court reasoned that under Wisconsin law, common-law fiduciary duties apply to the operations of limited liability companies (LLCs) to protect people who are affected by the actions of those who control the businesses,⁴⁵ but that an LLC owes a fiduciary duty to its creditors only after it is both insolvent and no longer a going concern.⁴⁶ The court also noted that Wisconsin does not recognize inequitable preference claims, and it did not want to be the first to apply such a claim under Wisconsin law.⁴⁷

Endnotes

¹ Tilot Oil LLC v. BP Prods. N. Am. Inc., __ F. Supp. 2d __, No. 09-CV-210-JPS, 2012 WL 124395 (E.D. Wis. Jan. 17, 2012).

² Id. at **14-15.

³ Custom Underground Inc. v. Mi-Tech Servs. Inc., No. 10-CV-222-JPS, 2011 WL 5008343 (E.D. Wis. Oct. 20, 2011).

⁴ Id. at *4.

⁵ See Shister v. Patel, 2009 WI App 163, ¶ 14, 322 Wis. 2d 222, 776 N.W.2d 632 (refusing to apply ELD to two parties with no contractual obligations to each other); Trinity Lutheran Church v. Dorschner Excavating Inc., 2006 WI App 22, ¶ 20, 289 Wis. 2d 252, 710 N.W.2d 680 (same).

⁶ See, e.g., Grams v. Milk Prods. Inc., 2005 WI 112, ¶ 15, 283 Wis. 2d 511, 699 N.W.2d 167.

⁷ See, e.g., Linden v. Cascade Stone Co., 2005 WI 113, ¶¶ 20-22, 283 Wis. 2d 606, 699 N.W.2d 189.

⁸ Cousin Subs Systems Inc. v. Better Subs Devel. Inc., No. 09-C-0336, 2011 WI 4585541 (E.D. Wis. Sept. 30, 2011).

⁹ Id. at *6.

¹⁰ Id. at *7.

¹¹ See Kaloti Enters. Inc. v. Kellogg Sales Co., 2005 WI 111, ¶ 42, 283 Wis. 2d 555, 699 N.W.2d 205.

¹² Id.

¹³ Triad Group Inc. v. Vi-Jon Inc., No. 11-CV-766-JPS, 2012 WL 1580438 (E.D. Wis. May 4, 2012).

¹⁴ Id. at *4-5.

¹⁵ Id. at *5-6.

¹⁶ Hutchins v. Clark, 661 F.3d 947 (7th Cir. 2011).

¹⁷ Wis. Stat. § 19.31.

¹⁸ Wis. Stat. § 995.50.

¹⁹ Hutchins, 661 F.3d at 951-52.

²⁰ Id. at 952-55.

²¹ Kaeser Compressors Inc. v. Compressor & Pump Repair Servs. Inc., 781 F. Supp. 2d 819 (E.D. Wis. 2011).

²² Id. at 822.

²³ Id. at 823-25.

²⁴ Id. at 825 (parenthetical omitted).

²⁵ Ziegler Co. v. Rexnord Inc. (Ziegler II), 147 Wis. 2d 308, 433 N.W.2d 8 (1988).

²⁶ Manitou Council Inc. v. Girl Scouts of U.S. of Am., 549 F.3d 1079 (7th Cir. 2008), discussed in Michael B. Brennan, Top 8 Recent Wisconsin Federal Court Decisions, 84 Wis. Law. 6, 11 (Nov. 2011).

²⁷ Kaeser, 781 F. Supp. 2d at 826 (quoting Ziegler II, 147 Wis. 2d at 320).

²⁸ Id. at 826.

²⁹ Id. at 827.

³⁰ Priority Int'l Animal Concepts Inc. v. Bryk, No. 12-C-150, 2012 WL 1995113 (E.D. Wis. June 1, 2012).

³¹ Wis. Stat. § 103.465.

³² Farm Credit Servs. of N. Cent. Wis. ACA v. Wysocki, 2001 WI 51, ¶ 9, 243 Wis. 2d 305, 627 N.W.2d 444 (citing Streiff v. American Family Mut. Ins. Co., 118 Wis. 2d 602, 611, 348 N.W.2d 505 (1984)): 1) such covenants are prima facie suspect; 2) they must withstand close scrutiny to pass legal muster as being reasonable; 3) they will not be construed to extend beyond their proper import or further than the contractual language absolutely requires; and 4) they are to be construed in favor of the employee.

³³ Priority Int'l Animal Concepts Inc. v. Bryk, 2012 WL 1995113 at *6-*7.

³⁴ Id. at *8-*9.

³⁵ Priority Int'l Animal Concepts Inc. v. Bryk, No. 12-C-0150, 2012 WL 1854121 (E.D. Wis. May 21, 2012).

³⁶ Id. at *6-*9.

³⁷ The proceeding was brought pursuant to Wis. Stat. section 180.1330(1).

³⁸ Albert Trostel & Sons Co. v. Notz, No. 07-C-0763, 2010 WL 3835117 (E.D. Wis. Sep. 28, 2010).

³⁹ 679 F.3d 627 (7th Cir. 2012).

⁴⁰ Id. at 629.

⁴¹ Id. at 629-30.

⁴² Executive Ctr. III LLC v. Meieran, 823 F. Supp. 2d 883 (E.D. Wis. 2011), reconsideration denied (Jan. 23, 2012).

⁴³ Wis. Stat. § 242.04(1)(b).

⁴⁴ Executive Ctr. III, 823 F. Supp. 2d at 888.

⁴⁵ Id. at 890-92.

⁴⁶ Id. at 892-93.

⁴⁷ Id. at 892.

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