Feb. 15, 2010 – The Wisconsin Court of Appeals, in a recent decision in Flooring Brokers, Inc. v. Florstar Sales, Inc.¹, has re-enforced the standard test for issue preclusion and has had to remind a lower court that claims preclusion and issue preclusion are two different doctrines with different analyses.

Flooring Brokers, Inc. (Flooring Brokers) installed flooring at an assisted living center owned and operated by CB Investments (CBI). The flooring in question, which began to fail shortly after installation, was recommended by and sold to Flooring Brokers by Florstar Sales, Inc. (Florstar). CBI sued Flooring Brokers, Florstar, and Armstrong World Industries, Inc. (Armstrong), the manufacturer of the flooring, for breach of contract and misrepresentation. Both Florstar and Armstrong settled with CBI, and the case proceeded against Flooring Brothers, with the jury ultimately awarding CBI $39,690 in damages.

Subsequently, Flooring Brothers brought a claim against Florstar in Waukesha County Circuit Court for negligent misrepresentation, strict liability misrepresentation, intentional misrepresentation, fraudulent misrepresentation and contribution. Florstar submitted a motion to dismiss, alleging that collateral estoppel, or issue preclusion, applied to all of Flooring Brokers’ claims.

The circuit court dismissed Flooring Brokers’ complaint against Florstar for issue preclusion, stating that Flooring Brokers’ claims against Florstar should have been brought in the earlier litigation with CBI. On appeal, the court of appeals had to remind the lower court that the analysis of whether a claim should have been brought in a previous case is claim preclusion, not issue preclusion, and reversed and remanded the case.

Claim preclusion vs. issue preclusion

Issue preclusion forecloses relitigation of an issue that was previously litigated between the same parties.² Courts must apply a two-step analysis: (1) whether issue preclusion can, as a matter of law, be applied, and if so, then (2) whether the application of issue preclusion would be fundamentally fair.³

In evaluating the first step of the analysis, a court must determine whether the issue was actually litigated and determined and whether the determination was essential to the judgment.⁴ The second step of the analysis, whether applying issue preclusion is fundamentally fair, is only reached if the first step is satisfied.

In this case, the circuit court erred because it failed to address the first question of the analysis – whether the issues in the action “actually litigated” in a previous litigation. Instead, in its analysis, the circuit court noted that both parties were named in the earlier CBI litigation, that Flooring Brokers should have brought its claims in the earlier litigation, and then it moved straight to the issue of fundamental fairness. In fact, the circuit court stated that, “[W]hat is being sought here today … [was] clearly capable of being vetted in the [CBI] litigation.”⁵ The court never returned to the question of whether the issues presented by Flooring Brokers were actually litigated in the previous suit. The court of appeals noted that the analysis the circuit court conducted is appropriate for claim preclusion, which applies when a claim could have been brought in a previous case, but not issue preclusion, which is at issue here.

The correct analysis

The court first untangled the relationships between Flooring Brokers, Florstar, and CBI. The case on appeal involved the distribution contract Flooring Brokers entered with Florstar, which was never litigated in the original litigation brought by CBI. In addition, Flooring Brokers raised the issues of misrepresentation and breach of the distribution contract, which, to be properly litigated, would require evidence of Florstar’s knowledge of the fitness of the flooring for the particular purpose, Flooring Brokers’ reliance on any Florstar representations, Florstar’s liability for breach of any warranty provided to Flooring Brokers and Florstar’s joint liability for damages assessed against Flooring Brokers.

In contrast, the earlier CBI litigation involved the sales and installation contract between Flooring Brokers and CBI, to which Florstar was not even a party.

The court found that even though both actions arose from the same circumstances, which was the unsatisfactory flooring provided to CBI, the parties and obligations involved were different at each stage of the transaction.⁶ Therefore, the issues in the current litigation were not actually litigated in the previous litigation, so issue preclusion did not apply. The court then reversed and remanded for further proceedings.