Wisconsin Business and Commercial Litigation

Back in July of 2010, I wrote about Cottonwood, a court of appeals case holding that class-action waivers run afoul of Wis. Stat. § 421.106(1), and are therefore unenforceable against consumers.  Then came Cottonwood II, in which the Wisconsin Supreme Court on December 20, 2011 considered the US Supreme Court case AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011), and its impact on the Cottonwood decision.  According to the Wisconsin State Bar’s Joe Forward,

However, in Concepcion, the nation’s high court ruled (5-4), that the Federal Arbitration Act (FAA), section 2, preempts state laws that classify “most collective-arbitration waivers in consumer contracts as unconscionable.” Id. at 1746, 1753.

After Concepcion, the Wisconsin Supreme Court vacated Cottonwood I and remanded for reconsideration. In Cottonwood II, the appeals court ruled that, “[i]n light of Concepcion,” the classwide arbitration waiver at issue “is enforceable and is not substantively unconscionable.”

Thus, under Concepcion and Cottonwood II, Wisconsin consumers cannot challenge similar arbitration provisions.

You can read the rest of Forward’s article here. 

But now there’s a new twist to the story.  The Supreme Court, on January 11, withdrew its Dec. 20 opinion.  It’s anyone’s guess as to where we’re headed from here, but it certainly seems like this won’t be good news for any Wisconsin business with a class-action waiver in its consumer contracts.

On Friday, January 13th, 2012, the Supreme Court heard oral argument from the three remaining parties to the litigation arising from a 2000 e. coli outbreak at a Milwaukee-area Sizzler restaurant.  This case, begun in 2000, is the longest-running I’ve ever been involved with. 

The issues presented to the court have implications for warranty and UCC interpretation, equitable indemnity, the Weinhagen exception to the American attorney fee rule, and contractual indemnity and offset for insurer payments.  If you’re interested in reviewing the briefs filed with the Supreme Court, you can find them on the appellate version of CCAP, called WSCCA (Wisconsin Supreme Court and Court of Appeals Access).  For easy access and searching, the appellate case number is 09AP1212 (a number I will likely not be able to forget).  The court of appeals briefs are available on the same page.

This decision is sure to hold interest for pretty much all Wisconsin attorneys who practice in civil litigation.  The court of appeals decision, authored by Judge Fine and filed on June 7, 2011, is available here.

Viking Packaging Technologies v. Vassallo Foods (August 9, 2011) saw the Wisconsin Court of Appeals address UCC issues of acceptance, the definition of “commercial unit,” and revocation of acceptance, all in the context of a contract for the purchase of a pasta bagging system.  Vassallo Foods (d/b/a Country Pasta) ordered from Viking a system to more accurately weigh bags of pasta and automatically close the pasta bags.  The package closing proved to be impossible to accomplish, but that was only discovered after the system had been delivered and installed. 

When Vassallo demanded a refund, Viking sued for the balance of the purchase price, and Vassallo counterclaimed for breach of contract.  As did the trial court, the court of appeals made short work of the breach of contract claim, determining that the lack of specification in the contract meant that Vassallo got what it contracted to get:

The trial court found specifically that Country Pasta wanted its packaging system to be more automatic. It wanted to have the “bags closed or tied and the bags to be weighed more accurately.” Nothing in those photographs, or elsewhere in the contract, establish how quickly the packaging system was required to function. By the end of his second visit to Country Pasta, Parrish testified he was able to give Kellogg a package closed with a tin-tie, but Kellogg was dissatisfied because of the way the tin-tied bag performed during handling. Kellogg himself testified that he thought the bags looked “sloppy.” Nothing in the contract even hints at any handling standards the tin-tie must withstand. The record does not explain how the “look” of the bag delivered differed from the photographs attached to the contract. Country Pasta has not established that the packaging system as a whole, or the tin-tie applicator specifically, failed to meet any identifiable “[p]roduct [p]erformance [s]pecifications.”

Likewise, the court determined that Vassallo had accepted the entire packaging system by accepting a part of the commercial unit:

By retaining all of the items in the contract, Country Pasta treated the packaging system in a way that was inconsistent with the seller’s ownership. This conduct constitutes acceptance of goods pursuant to Wis. Stat. § 402.606(1)(c).

Finally, the court of appeals relied upon the factual findings of the trial court in deciding that Country Pasta knew too much to revoke the contract:

The trial court found that when Parrish “told [Country Pasta's] employees that the tin-tie applicator would not work, that certainly was an indication that there was not going to be additional work done.” The trial court also found that “there was no evidence presented at trial as to any further discussion of [additional work].” Thereafter, as the trial court found, Country Pasta “could not reasonably assume that the nonconformity of the machinery would be cured.” These findings make revocation under Wis. Stat. § 402.608(1)(a) and (2) unavailable to Country Pasta.

The moral of the story is the same as always — make your contracts as specific as you can.  What works 99% of the time in business will fail the 1% of the time you land in litigation.  If something’s wrong with an expensive product purchase, complain early, and often, and find someone who knows how to protect your rights under the UCC. 

Pasta photo courtesy Dottie Mae’s photostream via this license.

Many of you will remember the 2000 Milwaukee e. coli outbreak that occurred at a local Sizzler restaurant.  After defending Sizzler, the franchisor of the restaurant, in the Kriefall e. coli poisoning case, my firm was also retained to represent Sizzler in the appeal of a jury verdict finding that Excel, the company supplying meat to Sizzler and its franchisees, was the cause of the outbreak.  The jury also found that Sizzler had suffered approximately $7.161 million in lost profits, expenses, and lost franchise royalties as a result of Excel’s provision of contaminated meat.  The basis for liability was Excel’s breach of the implied warranty of merchantability under the Wisconsin Uniform Commercial Code (the trial court previously dismissed, on summary judgment, the express warranty claim). 

Excel appealed the verdict, and Sizzler cross appealed.  Sizzler sought to reverse, among other things, the trial court’s decision preventing Sizzler from recovering a $1.5 million advance payment (made in exchange for a $2 million credit against any eventual judgment) made to the Kriefalls, the parents of the child who died as a result of e. coli poisoning.  The District 1 Court of Appeals, in a decision written by Judge Fine, upheld the verdict and reversed the trial court’s advance pay decision, awarding Sizzler another $1.5 million. 

I’ve been working on this case since 2005, when I joined my current firm.  Congrats to my partner Russ Klingaman, and to trial counsel Fred Gordon from San Diego, California, who succesfully tried the case and argued before the court of appeals. 

At issue in the court’s decision is the reading of a contract provision which said “This Guaranty shall not render Seller liable for any incidental or consequential damages of whatsoever nature. . . .”  Excel argued that the exclusion should extend to limit consequential damages arising from breaches of all warranties.  Sizzler, on the other hand, contended that the language of the contract applied the exclusion only to the express warranty, and not to any other warranties.  The appellate court (as did the trial court) agreed with Sizzler:

As the trial court recognized, the phrase in the Continuing Guaranty excluding the right of Sizzler USA Franchise to recover consequential damages is hardly ambiguous and encompasses only the express warranties undertaken by the Continuing Guaranty: “This Guaranty shall not render Seller liable for any incidental or consequential damages of whatsoever nature.” (Emphasis added.) Stated another way, incidental and consequential damages are excluded from those damages that might be recovered if the express warranties in the Continuing Guaranty were breached. Excel argues that the Continuing Guaranty’s consequential-damages exclusion should apply to the implied warranties under the Uniform Commercial Code because, as Excel writes in its main appellate brief, the exclusion represents the parties’ “bargained for allocation of risk.” (Capitalization omitted.) The parties specifically limited their “allocation of risk” in connection with consequential damages, however, to the express warranties agreed-to in the Continuing Guaranty.

The court’s decision is much more detailed and both well-reasoned and well-written.  For those of you whose practice includes the UCC, it’s a must read, particularly the court’s reasoning relating to damages limitations and its analysis of the intersections between UCC 2-719 and 2-316.

In Briggs & Stratton v. Generac Power Systems (Feb. 8, 2011), these two Wisconsin industrial heavyweights went toe-to-toe over the interpretation of contract language by Milwaukee Circuit Court Judges Jean DiMotto and Bill Pocan.  In 2001, Briggs purchased the assets of Generac’s Portable Products Division.  Four years earlier (1997), Generac created its Portable Products Division, later selling the Division by means of a 1998 Asset Purchase and Sale Agreement to GPPC, which then sold its rights in the Agreement to Briggs. 

A 2005 products lawsuit began the disagreement between Generac and Briggs.  The 2005 lawsuit sought damages arising from the use of a generator manufactured in 1992.  Generac tendered defense of the lawsuit to Briggs, who refused the tender and brought a declaratory judgment action to determine who was on the hook for the defense.

Citing basic rules of grammar and punctuation, the court determined that Briggs only bought liabilities arising after the Division was formally created:

As relevant to this appeal, the parties agreed the Assumed Liabilities consist only of “[a]ll liabilities of [Generac] related to the Division arising in the ordinary course of business after the Closing Date directly on account of [Generac's] ownership and operation of the Division prior to the Closing Date.”  The qualifying phrase “prior to the Closing Date” modifies the next preceding phrase “directly on account of Seller’s ownership and operation of the Division.”  See Hope Acres, Inc., 27 Wis. 2d at 291.  Because the Division did not exist until January 1, 1997, Generac could not have owned or operated the Division before that time.  The Closing Date identified in the Agreement is June 30, 1998.  Thus the Assumed Liabilities for which Briggs agreed to be responsible must relate to Generac’s ownership or operation of the Division between January 1, 1997 and June 30, 1998.  The portable generator involved in the Thompson claim was manufactured in 1992 and sold by Generac several years before the Division existed.  Generac did not own the generator when it operated the Division or when it sold all of the Purchased Assets to Briggs.

The court also relied on the default asset purchase rule that an asset purchaser does not purchase liabilities, unless expressly or impliedly agreed.

Yet another reminder to carefully word your agreements and carefully define terms.

Portable generator photo courtesy Sarvodaya Sri Lanka’s flickr gallery via this creative commons license.

Like many others, I took a little time off around the holiday, and now I’m playing catch up on Wisconsin business and commercial litigation cases that came out late in 2010.  The case below has a good discussion of the application of merger clauses and the parol evidence rule, a must for anyone who deals with contracts even occasionally.

In Town Bank v. City Real Estate, 2010 WI 134 (Dec. 14, 2010), the parties signed a commitment letter outlining the expected financing for a condo development in Milwaukee, Wisconsin.  Later, the parties signed a Term Credit Agreement (TCA) that included a merger clause encompassing all previous agreements and discussions.  When the relationship fell apart, and City Real Estate had to obtain alternative financing, Town Bank sought a declaration that it had fully complied with the TCA, and City Real Estate counterclaimed for breach.

The Supreme Court summarized the applicable merger clause / integration law and its effect on the application of the parol evidence rule:

However, as Town Bank accurately points out, when the contract contains an unambiguous merger or integration clause, the court is barred from considering evidence of any prior or contemporaneous understandings or agreements between the parties, even as to the issue of integration. See Dairyland Equip. Leasing, 94 Wis. 2d at 608; Matthew, 54 Wis. 2d at 341-42. Again, this principle stems from basic contract law: if the contract is unambiguous, the court’s attempt to determine the parties’ intent ends with the language of the contract, without resort to extrinsic evidence. See Huml, 293 Wis. 2d 169, ¶52. In Dairyland Equipment Leasing, this court defined a merger clause as a “written provision which expressly negatives collateral or antecedent understandings.” 94 Wis. 2d at 608. Thus, by definition, an unambiguous merger or integration clause demonstrates that the parties intended the contract to be a final and complete expression of their agreement. See id.; Matthew, 54 Wis. 2d at 341-42. The contract is therefore fully integrated, and the parol evidence rule goes into effect.

In the end, the Court determined that the merger clause effectively integrated the agreements between the parties, and the parol evidence rule applied.  As a result, the Court also determined that the TCA had been fully complied with, and affirmed the decision of the appellate court.  Justices Bradley and Abrahamson dissented, providing good fodder for arguments on both sides of future merger clauses.

In BV/B1, LLC v. InvestorsBank, the court of appeals reviewed a summary judgment decision by Judge Kahn in the Milwaukee County Circuit Court awarding $833,798.52 to InvestorsBank.  BV/B1 sought financing from InvestorsBank without the necessity of personal guaranties from the borrower’s principals.  InvestorsBank was willing to provide the financing, but required that the agreement provide a penalty for prepayment of the loan.  The penalty provision, drafted specifically for the contract, read: 

If the loan is prepaid in full or in part at any time on or before July 30, 2006 there shall be no prepayment penalty. If the loan is prepaid in full or in part at any time after July 30, 2006 or if the prepayment is the result of an acceleration due to an event of default, the prepayment penalty shall be equal to the fixed rate on the loan minus the yield on a US Treasury Bond with a maturity similar to the number of years remaining on the fixed rate loan plus 2.5% times the number of years remaining at a fixed rate times the outstanding principal balance of the loan.

Naturally, there was a prepayment (if there wasn’t, the story would have ended happily), and a fight over how to calculate the prepayment penalty.  The court of appeals considered and discarded BV/B1’s three different suggestions, and also disagreed that InvestorsBank waived its right to collect its penalty. 

The best lesson to draw from this case is to take care in negotiating and drafting contract clauses.  Lawyers will pick everything apart with the benefit of hindsight, and unless you’ve got things completely screwed down, they’re going to get screwed up.

First of all, I must apologize for the lag in posting here.  I was on vacation for a week, and upon returning, have been completely underwater with a brief in the court of appeals.  However, since I’ve now caught up (kind of), I anticipate that I’ll return to my schedule of regular posting.  On to the interesting part.

Many of the companies with whom I work use venue provisions in the contracts they sign with customers or suppliers.  This is, of course, particularly helpful for companies that do business throughout the world or the country.  It can also be useful for companies that work statewide, making sure that they retain home-field advantage by designating the county that will serve as the site of any litigation. 

Venue provisions are often contested, and almost as often, the opposing party will start an action in the venue that it prefers, rather than travel to the venue designated in the contract.  While I won’t talk today about drafting strong venue provisions in general, a venue provision can carry some extra teeth by adding a separate provision to the contract requiring the payment of attorney fees.

When combined with an attorney fee provision, a strong venue provision provides extraordinary leverage.  It can be challenged, but the financial risk of the litigation just increased, along with the possibility of fighting a two-front war, and being on the hook for the fees incurred in both.  If you’ve already got a venue provision, add the attorney fee provision.  And if you’ve already got both, consider specifically linking the two, or making clear that the fee provision applies to all litigation arising from the relationship, including any cases started in the wrong venue.

World map photo courtesy Norman B. Leventhal Map Center at the BPL flickr gallery via this creative commons license.

Otherwise known as frustration of purpose, discharge by supervening frustration is a policy that excuses contractual non-performance, such as in Ryan v. Estate of Sheppard, a recent District II court of appeals case arising in Washington County.  There, Sheppard c0ntracted with Ryan to provide personal flight instruction and pilot in command services for Sheppard.  Unfortunately, Sheppard died before any payment or services could be rendered, and Ryan sued his estate, seeking to recover the payments agreed to in the contract.

The Estate argued that the contract was for personal services, and non-performance was excused by frustration:

The doctrine of frustration of purpose, referred to generally as “frustration,” or as “discharge by supervening frustration” by the Restatement, is as follows:

Where, after a contract is made, a party’s principal purpose is substantially frustrated without his fault by the occurrence of an event the non-occurrence of which was a basic assumption on which the contract was made, his remaining duties to render performance are discharged, unless the language or the circumstances indicate the contrary.

RESTATEMENT (SECOND) OF CONTRACTS § 265. See also WIS JI–CIVIL 3070.

The court of appeals agreed.

We agree with the circuit court’s conclusion that the purpose of the agreement has been frustrated, discharging the Estate of its applicable duties. While Sheppard’s promise in the agreement was only to pay, his purpose in making the contract is clear: to obtain personal flight instruction and pilot services, as evidenced by Ryan’s obligations. In a personal service contract such as this one, a basic assumption is that both parties will be alive. See RESTATEMENT (SECOND) OF CONTRACTS §§ 262, 265 cmt. a.  Sheppard’s death, then, frustrated the contract’s purpose–it made personal flight instruction unfeasible. When there is nothing an obligor can do to fulfill his or her contractual duties, the obligee’s duty to compensate is excused. See Wm. Beaudoin, 63 Wis. 2d at 448-49. The Estate’s duty to render payment is thus discharged under frustration of purpose.

Ryanair photo courtesy aromano’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.