Business Judgment Rule – Erroneous Application at Motion-to-Dismiss Stage of Breach-of-Fiduciary-Duty Case
Data Key Partners v. Permira Advisors LLC, 2013 WI App 107 (filed 1 Aug. 2013) (ordered published 25 Sept. 2013)
HOLDING: The circuit court erred when it applied the business judgment rule at the motion-to-dismiss stage of a case involving a claim of breach of fiduciary duty.
SUMMARY: Data Key Partners, a former minority shareholder in Renaissance Learning Inc., appealed a circuit court judgment that dismissed Data Key’s claims arising out of the sale of Renaissance to Permira Advisors LLC. Data Key alleged that Renaissance’s directors and its majority shareholders (who are also directors) breached various fiduciary duties and that Permira aided and abetted the breaches. Data Key argued that the circuit court erred in concluding that its complaint failed to state a claim on which relief may be granted. As primary support for this argument, Data Key contended that the circuit court erred in giving the Renaissance directors the benefit of the business judgment rule at the motion-to-dismiss stage of the proceedings. In a decision authored by Judge Blanchard, the court of appeals reversed.
edu daniel.blinka marquette Prof. Daniel D. Blinka, U.W. 1978, is a professor of law at Marquette University Law School, Milwaukee.
edu thomas.hammer marquette Prof. Thomas J. Hammer, Marquette 1975, is a law professor and Director of Clinical Education at Marquette University Law School, Milwaukee.
The business judgment rule generally works to immunize individual directors from liability and protects the board’s actions from undue scrutiny by the courts (see ¶ 19). The rule “contributes to judicial economy by limiting court involvement in business decisions where courts have no expertise and contributes to encouraging qualified people to serve as directors by ensuring that honest errors of judgment will not subject them to personal liability” (id.) (quotations and citation omitted). In Wisconsin, the rule is codified in Wis. Stat. section 180.0828.
Data Key contended that the business judgment rule is an “evidentiary” presumption that may be applied on a motion for summary judgment but not on a motion to dismiss (see ¶ 21). The defendants argued that the rule is one of “immunity” and is a “legal” presumption and that a complaint should be dismissed for failure to include allegations that would overcome the rule’s protections (see ¶ 22).
The court of appeals concluded that “Data Key’s arguments are more persuasive. The authorities that Data Key cites, along with our own research, persuade us that courts in notice pleading jurisdictions [like Wisconsin] traditionally disfavor application of the business judgment rule at the motion to dismiss stage because application of the rule generally requires a fact-intensive analysis that would be incompatible with notice pleading” (¶ 23).
Accordingly, the court of appeals held that “the circuit court erred in applying the business judgment rule in deciding whether Data Key’s complaint states a claim against the directors for breach of fiduciary duty. Data Key did not need to allege willful misconduct or other non-compliance with the rule in order to survive a motion to dismiss for failure to state a claim for breach of fiduciary duty against the directors” (¶ 26). (The appellate court also considered numerous additional arguments advanced by the parties.)
Guilty Pleas – Plea Negotiations – Illusory Benefits
State v. Dillard, 2013 WI App 108 (filed 31 July 2013) (ordered published 25 Sept. 2013)
HOLDING: A plea negotiation for an illusory benefit entitled the defendant to withdraw his no-contest plea.
SUMMARY: Defendant Dillard was charged in this case with two counts: armed robbery in violation of Wis. Stat. section 943.32(2), as a persistent repeater under Wis. Stat. section 939.62(2m)(c); and false imprisonment in violation of Wis. Stat. section 940.30, as a repeater under Wis. Stat. section 939.62(1)(b). At the time of his plea, all parties mistakenly believed that because of the “persistent repeater” penalty enhancer, Dillard was facing mandatory life imprisonment.
With that understanding and on his attorney’s advice, Dillard accepted the state’s offer to drop the persistent-repeater penalty enhancer as well as the false imprisonment charge in exchange for him pleading no contest to the armed robbery charge. Dillard believed that he was reducing his maximum exposure from mandatory imprisonment for the remainder of his life to a bifurcated 40-year term of imprisonment (that is, a maximum initial confinement of 25 years plus 15 years of extended supervision). Dillard was convicted per his plea and was sentenced to the maximum 40-year term.
Dillard subsequently discovered that the mandatory life imprisonment sentence never applied to him because his prior record did not qualify him for persistent repeater status. In reality, at the time of the plea bargain, the maximum penalty he faced on the charge to which he pleaded was the same 40-year sentence that he “bargained for” in his plea. He sought to withdraw his plea on grounds of manifest injustice and ineffective assistance of counsel. The circuit court denied his motion.
In an opinion authored by Chief Judge Brown, the court of appeals reversed. Said the court, “[t]he fact that a defendant was misinformed about the maximum penalty applicable to his crime does not necessarily demonstrate manifest injustice, ‘when the maximum sentence communicated to the defendant is higher, but not substantially higher, than the actual allowable sentence.’ State v. Cross, 2010 WI 70, ¶ 38, 326 Wis. 2d 492, 786 N.W.2d 64. In the circumstances at hand, however, we can only conclude that the maximum penalty Dillard believed he was facing – the harshest criminal sentence available in our state, mandatory life imprisonment with no possibility of release – was ‘substantially higher’ than the actual allowable sentence. In view of this error, the burden was on the State to demonstrate that the defendant’s plea was nonetheless knowing, voluntary, and intelligent. The circuit court thought the showing had been made. We do not. The unassailable fact is that Dillard did not receive the benefit he bargained for because the so-called benefit never existed. It was an illusory benefit” (¶ 3) (citations omitted). Moreover, Dillard’s plea withdrawal would also be justified under the theory of ineffective assistance of counsel (see ¶ 20).
Searches – Traffic Stops
State v. House, 2013 WI App 111 (filed 14 Aug. 2013) (ordered published 25 Sept. 2013)
HOLDING: A dog sniff conducted after the end of a routine traffic stop violated the Fourth Amendment, thus justifying suppression of evidence found in a search of the vehicle’s trunk.
SUMMARY: A police officer stopped House for operating with a suspended license. After giving him a warning ticket, the officer got the drug dog from his car and walked it around the defendant’s car. When the dog indicated the presence of drugs in the car, the officer searched it and found marijuana in the trunk. The officer testified that he knew the defendant was on probation for a drug offense, that the traffic stop had ended with the warning ticket, and that the defendant was not “free to leave” when the dog sniff was conducted. The circuit court denied a motion to suppress.
The court of appeals reversed and remanded in an opinion authored by Judge Neubauer. The key here was that the traffic stop ended before the officer conducted the dog sniff. Thus, the “continued detention of House to conduct the dog sniff was not reasonably related in scope to the circumstances justifying the stop. Because [the officer] gave House no choice in the matter when he conducted the dog sniff, a reasonable person in House’s place would not have felt free to leave” (¶ 10). In sum, once the traffic stop ended, House was subjected to an unlawful seizure, which tainted the search that followed.
Compensation – Payment to Employees for “Donning and Doffing” Time
Weissman v. Tyson Prepared Foods Inc., 2013 WI App 109 (filed 1 Aug. 2013) (ordered published 25 Sept. 2013)
HOLDING: Employees were entitled to compensation for time spent in donning and doffing activities that were integral and indispensable to their principal work duties.
SUMMARY: Defendant Tyson Prepared Foods Inc. operates a meat-processing plant. Six hourly employees who work in the plant filed this wage-claim action, as a class action, against Tyson under Wis. Stat. chapter 109. The employees alleged that they are entitled to compensation for time they spend at the plant putting on (donning) and taking off (doffing) sanitary and protective equipment and clothing as required by Tyson. The circuit court granted summary judgment to Tyson on the ground that, under the pertinent Department of Workforce Development (DWD) Administrative Code provisions, donning and doffing this gear is not compensable because it is not “integral” and “indispensable” to principal work activities of the employees. The employees appealed. In a decision authored by Judge Blanchard, the court of appeals reversed.
Tyson requires its employees to don and doff the sanitary and protective equipment and clothing on Tyson premises for the purpose of allowing the employees to perform their principal activities in a safe, sanitary, and efficient manner. “Plainly,” said the court, “the activity is closely related to the principal activities of the employees” (¶ 28). The court said that the need to avoid food contamination surely adds to the indispensability of the donning and doffing (see ¶ 36).
In sum, the appellate court concluded that “the donning and doffing of this equipment and clothing at the Tyson plant is required by Tyson in order for the employees to perform their principal activities, is closely related to those activities, and is indispensable to their performance. The activity of donning and doffing is not for the mere convenience of the employees…” (¶ 37). Accordingly, the donning and doffing time is compensable (see ¶ 2).
Annexation – Standing
Darboy Jt. Sanitary Dist. No. 1 v. City of Kaukauna, 2013 WI App 113 (filed 6 Aug. 2013) (ordered published 25 Sept. 2013)
HOLDING: A town and a sewerage district lacked standing to contest a city’s annexation of land.
SUMMARY: The sole owners of the “subject territory” petitioned for direct annexation by the city so that they could receive municipal services. The city adopted the petition by ordinance. The town and the sanitary district affected by the annexation disapproved and brought this lawsuit challenging the lawfulness of the city’s annexation. The circuit court dismissed the claims because the town and the sanitary district lacked standing.
The court of appeals affirmed in an opinion written by Judge Brennan. First, the town lacked standing. “We conclude that the plain language of Wis. Stat. § 66.0217(11)(c) is unambiguous: ‘No action on any grounds, whether procedural or jurisdictional, to contest the validity of an annexation under sub. (2), may be brought by any town.’ (Emphasis added.) The phrase ‘on any grounds,’ by its plain terms, includes the Town’s procedural challenge to Ordinance No. 1644 based upon the Town’s allegations that the City did not meet the criteria set forth in § 66.0217(2) for annexation because the City did not obtain the Town Board’s approval pursuant to § 66.0217(14)(b)1” (¶ 11). Moreover, case law precluded the town’s contention that the statutory bar applied only if the city could demonstrate the annexation’s validity.
Finally, while other statutes also addressed a town’s standing to challenge annexations, the more specific language of Wis. Stat. section 66.0217 controlled (see ¶ 16).
Second, the sanitary district also lacked standing. Like abutting landowners, a sanitary district “has no legally protected interest” (¶ 24). Moreover, a sanitary district’s power is delimited by statute. “While the Sanitary District argues that a statute, § 60.79(2), by its silence, suggests that sanitary districts have the authority to challenge annexations, the Sanitary District has made no argument that the ability to challenge an annexation is ‘necessarily implied from the powers conferred’ upon sanitary districts by the legislature” (¶ 25).
Finally, the Uniform Declaratory Judgments Act (Wis. Stat. § 806.04) did not create standing for either entity (see ¶ 26).
Dog Bite – “Harbors”
Augsburger v. Homestead Mut. Ins. Co., 2013 WI App 106 (filed 28 Aug. 2013) (ordered published 25 Sept. 2013)
HOLDING: A home’s owner who did not reside there nonetheless “harbored” dogs kept on the property by his daughter’s family, who lived there rent free.
SUMMARY: Kontos owned a residence where he permitted his daughter, her family, and her dogs to reside rent free. Kontos lived in a separate house. The plaintiff was injured by the dogs while visiting Kontos’s daughter. She sued Kontos and his homeowner’s insurer. The trial judge ruled that Kontos was a statutory owner of the dogs and that public policy did not preclude liability even though he did not live at that residence.
The court of appeals affirmed in an opinion written by Judge Gundrum. Applying case law and Wis. Stat. section 174.001(5), the court held that Kontos “harbored” the dogs owned by his daughter’s family (the Veiths). Nor was it critical that Kontos resided in a different home (¶ 13). “Kontos had the authority to remove the Veiths and/or their dogs from the property. Because Kontos unquestionably provided shelter and lodging for the dogs just as surely as he did for the Veiths, he harbored the dogs and was a statutory owner of them” (¶ 14).
The court also rebuffed the argument that various public policy factors precluded Kontos’s liability. For example, “[holding] strictly liable a property owner who knowingly affords a sizable number of dogs shelter and lodging on his or her property for multiple months, even though the property owner is not personally residing at the property, does not create open-ended liability” (¶ 22).
Judge Reilly dissented, contending that “not a single case” has imposed liability on a person who resides in a home separate from the dog that caused the injury (¶ 25). The dissent also pointed to Kontos’s status as a “pro bono landlord” under the exemption accorded landlords (see ¶ 28).
Exclusivity Provision – Wis. Stat. § 102.03(2)
Flores v. Goeman, 2013 WI App 110 (filed 6 Aug. 2013) (ordered published 25 Sept. 2013)
HOLDING: The exclusivity provision of the Worker’s Compensation Act precluded a police officer’s personal injury claim against another officer and the city for injuries inflicted by the other officer while both officers were on the job.
SUMMARY: While on duty, a police officer, Flores, was inadvertently injured by another police officer, Goeman. Flores received worker’s compensation benefits for his injuries. Flores sued Goeman and the city, alleging that the Worker’s Compensation Act’s exclusivity provision (Wis. Stat. § 102.03(2)) was inapplicable by statute and the police union’s collective bargaining agreement (CBA). The circuit court dismissed the claims against Goeman and the city, finding that the CBA did not nullify the exclusivity provision.
The court of appeals affirmed in an opinion written by Judge Kessler. The CBA contained no express waiver of the exclusivity provision. The court also rejected Flores’s contention that Wis. Stat. section 895.46(1)(a) and the CBA permitted the claims. A 1978 revision of Wis. Stat. section 102.03(2) “specifically eliminated a local government unit’s obligation to pay judgments under § 895.46. To conclude otherwise now would contradict the legislature’s specific intent in amending § 102.03(2) in 1978. Such an interpretation would undermine the fundamental premise of the legislature: worker’s compensation for injuries without regard to fault in exchange for avoiding fault-based coemployee litigation and unpredictable damages. Such an interpretation, as the Floreses seek, would also require us to ignore § 102.03(2), which we cannot do” (¶ 15). Nor did a city session law “trigger” the coemployee exception based on prior case law.
Judge Fine dissented on grounds that the “clear language” of the pertinent statutes and the CBA permitted the claims.
Safe Place Statute – Additional Compensation
Sohn Mfg. Inc. v. LIRC, 2013 WI App 112 (filed 7 Aug. 2013) (ordered published 25 Sept. 2013)
HOLDING: An employer violated the safe place statute, and the injured employee was properly entitled to enhanced compensation.
SUMMARY: An employee was severely injured while cleaning a machine while it was running, as required by company policy. At a worker’s compensation hearing, the administrative law judge (ALJ) assessed against the employer, Sohn Manufacturing Inc., an extra 15 percent of the damages after finding that Sohn had violated both an Occupational Safety and Health Administration (OSHA) standard, which required machines be shut down for cleaning, and the safe place statute (Wis. Stat. § 101.11).
The court of appeals affirmed in an opinion written by Judge Reilly. First, the enhanced penalty provision, Wis. Stat. § 102.57, was not preempted by the federal Occupational Safety and Health Act (OSH Act) (see ¶ 7). Rather, “Congress explicitly preserved worker’s compensation laws from preemption through a saving clause in the OSH Act” (¶ 8). Sohn failed to overcome “the presumption that the OSH Act permits states to increase worker’s compensation awards due to workplace safety violations” (¶ 9).
Second, the Labor and Industry Review Commission (LIRC) had authority to assess the penalty despite Sohn’s contention that Wis. Stat. section 102.57 “permits increased compensation only when an employer has violated a statute, rule, or order pertaining to the department of workforce development (i.e., a ‘statute … of the department’)” (¶ 11).
“Statutes are not ‘of’ departments of the state. The reasonable reading of § 102.57 is that ‘of the department’ modifies ‘order’ and not ‘statute.’ The only word that modifies ‘statute’ in the disputed portion of § 102.57 is the word ‘any.’ Section 102.57 allows an ALJ to increase worker’s compensation benefits if it finds that the employer failed to comply with any statute. In this case, Sohn failed to comply with the safe place statute, Wis. Stat. § 101.11” (¶ 12) Finally, the penalty was properly assessed for Sohn’s violation of the safe place statute, not the OSHA standard itself, which served only to prove the safe place violation (see ¶ 13).