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  • Agricultural Law and Rural Practice Blog
    July
    21
    2020

    The Revitalization of Motions to Dismiss in Wisconsin Business Litigation

    Alexander T. Pendleton

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    The Wisconsin Supreme Court in recent business-dispute decisions has indicated that judges have the ability to be more demanding of claimant’s counsel when considering motions to dismiss for a failure to state a claim. Alexander (Sandie) Pendleton comments on these developments, and the related developments as to the incorporation-by-reference doctrine, and the economic loss doctrine.

    Time was, that motions to dismiss for a failure to state a claim did not play a big role in business litigation in Wisconsin courts. Wisconsin pleading rules conformed with federal pleading rules, and both standards required mere “notice pleading” (unless fraud or libel was being alleged).1 Business-related complaints tended to be relatively​ short and to the point. Key facts were identified, and the defendant was given notice of which type of claims were being alleged against it. A motion to dismiss alleging that a complaint failed to state a claim was relatively rare, and usually unsuccessful. Wisconsin judges considering such motions often appeared irritated, and disposed of the motion with an unsatisfying-to-the-defendant ruling (such as by allowing the plaintiff to “take a second whack at it” through an amendment of pleadings, or by concluding that “we can take that issue up at the summary judgment stage, after discovery has been conducted”).

    Alexander T. (Sandie) Pendleton Alexander T. (Sandie) Pendleton, Minnesota 1987, is a Milwaukee-based business lawyer and litigator with Pendleton Legal, S.C..

    Those days are gone. At the federal level, the U.S. Supreme Court raised the pleading bar (and thus invited more such motions) when it issued its decisions in Bell Atlantic Corp. v. Twombly and Ashcroft v. Iqbal.2

    And in Wisconsin, the legislature’s recognition that discovery in a business-related case can be quite burdensome and expensive led to the enactment of 2017 Wis. Act 235, which permits courts to reign in discovery especially where a motion to dismiss is filed.3

    Although perhaps not addressing the issue as clearly as some judges or practitioners might desire, the Wisconsin Supreme Court has ruled that Wisconsin pleading standards continue to be consistent with federal pleading standards (including those as articulated in Twombly).4

    What I have concluded from last year’s decision in Cattau v. Nat'l Ins. Servs. of Wisconsin, Inc. (and the 2014 decision in Data Key Partners v. Permira Advisers LLC), is that if you are a business litigator in a Wisconsin court, you are now operating in an environment that is exactly like, or at least more like, the federal court environment. As such, Wisconsin judges (like their federal counterparts), now have a greater ability to quash a weak or speculative business lawsuit at a very early stage.

    So as to best survive and thrive in this environment, here are some suggestions for business litigators regarding motions to dismiss for a failure to state a claim:

    For plaintiffs’ counsel:

    • When drafting a complaint, you probably want to provide more detail than you previously did, keeping in mind that a “formulaic recitation of the elements of a cause of action is not enough to state a claim upon which relief may be granted.”5

    • Warn the client that there is a chance that the defendant will respond to the complaint with a motion to dismiss, which could slow down the progress in the case considerably – and possibly increase costs.

    • So as to be able to “get to discovery,” be ready to argue that there exists “good cause” for the court to find that “particularized discovery is necessary” such that the automatic stay of discovery provided for in Wis. Stat. section 802.06(1)(b) is lifted.

    For defendants’ counsel:

    • Scrutinize the complaint, to determine whether “the well-pleaded facts in a complaint would satisfy each element of a cause of action.”6

    • Ask whether the delay that would likely be caused by such a motion would be in your client’s favor. Or would speed be more advantageous?

    • Consider the implications of a court ruling against you at the motion to dismiss stage. Specifically, will such a ruling only serve to educate your opponent as to potential weaknesses, and would a denial of the motion make it less likely that you are later able to obtain summary judgment?

    All business litigators need to be cognizant of trends in recent case law in two related areas:

    • Wisconsin’s adoption of the incorporation-by-reference doctrine; and

    • the continued expansion of the economic loss doctrine (ELD).

    The Incorporation-by-Reference Doctrine

    When a court considers a motion to dismiss, does the court only consider the allegations within “the four corners of the complaint,” or are there instances in which the court can go beyond the four corners, and consider other documents?

    Federal courts have long held that they are not restricted to just a complaint’s four corners.7

    While there is no Wisconsin Supreme Court decision on this issue yet, the Wisconsin Court of Appeals adopted the federal incorporation-by-reference doctrine in 2015.8

    There remain several issues relating to the incorporation-by-reference doctrine that the courts have not yet addressed or fully resolved.9 Such issues include the issue of the interplay between the doctrine and the rules of evidence (such as rules relating to authenticity, the “rule of completeness” in Wis. Stat. section 901.07, and the rule relating to judicially noticeable facts in Wis. Stat. section 902.01).

    The Economic Loss Doctrine

    The ELD is a potent weapon for getting rid of tort claims, including at the motion to dismiss stage, and recent court decisions indicate that courts are continuing to expand the reach of the ELD in business settings.10

    Moreover, while most cases dealing with the ELD involve claims brought by a buyer against a seller, there are now several decisions in which courts have held that the ELD also bars tort claims brought by sellers or would be sellers.11 Many of the above cases also indicate that courts continue to give a narrow interpretation to the “fraud in the inducement” exception first recognized in Kaloti Enterprises, Inc. v. Kellogg Sales Co.12

    Conclusion: More Power to Scrutinize

    Data Key and Cattau have revitalized the previously weak motion to dismiss for a failure to state a claim, and lower courts now have the power to scrutinize more rigorously business-related complaints.

    Business litigators ignore these recent developments (and the remaining unresolved issues) at their peril.

    This article was originally published on the State Bar of Wisconsin’s Agriculture Law and Rural Practice Blog of the Solo/Small Firm & General Practice Section. Visit the State Bar sections or the Solo/Small Firm & General Practice Section web pages to learn more about the benefits of section membership.

    Endnotes

    1 See Wis. Stat. § 802.02(1); Fed. R. Civ. Proc. 8(a).

    2 See Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 127 S. Ct. 1955, 167 L. Ed. 2d 929 (2007); Ashcroft v. Iqbal, 556 U.S. 662, 129 S. Ct. 1937, 173 L. Ed. 2d 868 (2009).

    3 See Wis. Stat. § 802.06(1)(b).

    4 See Cattau v. Nat'l Ins. Servs. of Wisconsin, Inc., 2019 WI 46, ¶ 7, 386 Wis. 2d 515, 520, 926 N.W.2d 756, 759, reconsideration denied, 2019 WI 84, ¶ 7, 388 Wis. 2d 652, 931 N.W.2d 538; see also Data Key Partners v. Permira Advisers LLC, 2014 WI 86, ¶¶ 30-31, 356 Wis. 2d 665, 680, 849 N.W.2d 693, 701; Kathy Nusslock, What is Wisconsin’s Pleading Standard?, 92 Wis. Law. 8 (Sept. 09, 2019) (concluding that the “only way to reconcile these seemingly different interpretations of Wis. Stat. section 802.02 is to conclude Wisconsin adopted the heightened plausibility standard of Twombly in 1983 (in Strid), decades before the U.S. Supreme Court decided Twombly”); accord Sarah Zylstra, Cattau and Pleading Standards: Comments from the Wisconsin Supreme Court, InsideTrack, Nov. 20, 2019.

    5 Cattau, ¶ 5 (citing Data Key, ¶ 25).

    6 Cattau, ¶ 6 (emphasis added).

    7 See, e.g., Hecker v. Deere & Co., 556 F.3d 575, 582-583 (7th Cir. 2009) (discussing and applying the “incorporation-by-reference” doctrine); see also Laurence A. Steckman & Rita D. Turner, Determining When Extrinsic Evidence Not Attached to or Incorporated by Reference in a Pleading May be Considered on a Rule 12 Dismissal Motion, 31 Touro L. Rev. No. 1, Art. 10 (2015).

    8 See Soderlund v. Zibolski, 2016 WI App 6, ¶ 37, 366 Wis. 2d 579, 598, 847 N.W.2d 561, 570 (court considers documents referenced in the complaint, even though not attached to the complaint); accord Kaste v. Amery Reg’l Med. Ctr., No. 14-cv-294, slip op. at 2, 9 (Polk Cnty. Cir. Ct. Mar. 31, 2015) (at motion to dismiss stage, in dismissing plaintiff’s claims, court considers employment agreement submitted by defendant with motion for the purpose of showing plaintiff was an “at will” employee), aff’d No. 2016AP962, 2016 WL 4324880, ¶ 5 (Wis. App. Aug. 16, 2016) (unpublished per curium decision); see also Friends of Kenwood v. Green, 2000 WI App 217, ¶¶ 10-11, 239 Wis. 2d 78, 84–85, 619 N.W.2d 271, 274–75 (on motion to dismiss, court considered facts in the 52 documents attached to the plaintiff’s complaint).

    9 See Steckman & Turner, supra.

    10 See:

    • Mech., Inc. v. Venture Elec. Contractors, Inc., 2020 WI App 23, ¶¶ 28-30, 944 N.W.2d 1, 7-8 (electrical subcontractor’s tort claims against sub-subcontractor for delay damages caused by sub-subcontractor’s alleged negligent performance dismissed based on ELD, as contract claims, not tort, are the sole remedy where the parties’ relationship was formed by a network of related contracts);
    • Parnau v. Weiman, No. 2013AP1795, 2015 WL 247889, ¶¶ 15-17 ( Ct. App. Jan. 21, 2015) (unpublished authored opinion) (ELD bars common law tort claims in the context of a corporate asset sale transaction);
    • Reinke v. Jacobson, No. 2015CV426, 2016 WL 11235335 (Cir. Ct. Sep. 28, 2016) (dismissing tort claims based on the ELD doctrine in the context of a stock sale/purchase transaction) aff’d No. 2016AP2197, 2017 WL 4862075 (Wis. Ct. App., Oct. 26, 2017) (unpublished per curium decision); and
    • Falk v. Wheeler, No. 19-CV-1168, 2020 WL 759180, at *3 (E.D. Wis. Feb. 13, 2020) (ELD held to bar misrepresentation claims brought by a purchaser of a franchise business against the seller of the business).

    11 See:

    • Creekwood Farms, Inc. v. Daybreak Foods, Inc., 2007 WI App 34, ¶¶ 6-8, 299 2d 783, 728 N.W.2d 374 (unpublished per curium decision) (ELD bars tort claims brought after a proposed corporate acquisition of assets fell through);
    • Schreiber Foods Inc. v. Wang, 651 F.3d 678, 680 (7th 2011) (Posner, J.) (Wisconsin ELD applies to tort claims by sellers, not just as to tort claims by buyers);
    • Hackel v. Nat'l Feeds, Inc., 986 F. Supp. 2d 963, 981 (W.D. 2013) (Wisconsin ELD bars tort claims alleged by seller-manufacture against buyer-distributor); and
    • Grice Eng'g, Inc. v. JG Innovations, Inc., No. 09-CV-632-WMC, 2011 WL 13244787, at *5 (W.D. Wis. Mar. 23, 2011) (“a seller’s claim may be barred by Wisconsin’s economic loss doctrine for the same reason as a buyer’s”).

    12 Kaloti Enterprises, Inc. v. Kellogg Sales Co., 2005 WI 111, 283 Wis. 2d 555, 699 N.W.2d 205. See, e.g., Creekwood Farms, 2007 WI App 34, ¶¶ 7-8; Falk, 2020 WL 759180, at *4.​

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