Each year Wisconsin’s two U.S. District Courts and the U.S. Court of Appeals for the Seventh Circuit render decisions interpreting Wisconsin common law and Wisconsin statutes, in many cases under federal diversity jurisdiction.

Although federal court interpretations of Wisconsin law are persuasive and not binding on Wisconsin courts,¹ these interpretations still affect how Wisconsin law develops and is argued, including in cases pending in Wisconsin state appellate and circuit courts.

This article reviews nine recent significant Wisconsin federal court decisions interpreting Wisconsin law in the areas of contract, tort, and insurance law and cases involving certain Wisconsin statutes and noncompete agreements in Wisconsin.

Wisconsin Tort Law

Shirley Johns died after taking a drug, Amiodarone, used to treat irregular heartbeats. Her children and her estate (the plaintiffs) brought state-law claims of negligence and wrongful death against two manufacturers of the drug, filing in the U.S. District Court for the Western District of Wisconsin. The defendants moved to dismiss, arguing that federal law impliedly preempted a claim that Johns was not provided with federally required medication guides.

Whether a claim of negligence per se could be brought under Wisconsin law based on an alleged violation of medication guidelines was at the center of Judge Barbara Crabb’s opinion in Marvin v. Zydus Pharmaceuticals (USA) Inc.²

The Wisconsin Supreme Court has held that “[f]or the violation of a safety statute to constitute negligence per se, a plaintiff must show: (1) the harm inflicted was the type the statute was designed to prevent; (2) the person injured was within the class of persons sought to be protected; and (3) there is some expression of legislative intent that the statute become a basis for the imposition of civil liability.”³

The parties cited competing authorities on whether Wisconsin law should recognize a claim of negligence per se in this situation. The defendant pharmaceutical manufacturers contended that the plaintiffs had failed to satisfy the third factor, arguing that the federal Food, Drug and Cosmetics Act does not allow private litigants to enforce its provisions.⁴ The plaintiffs relied on cases in which Wisconsin appellate courts had inferred a legislative intent to impose civil liability from a statute’s clear expression of concern for safety.⁵

Characterizing the decision as “a close call,” Judge Crabb concluded that it is unclear how the Wisconsin Supreme Court would rule as to whether the limitation on private rights of action in the Food, Drug and Cosmetics Act showed a legislative intent not to impose civil liability under state law on these facts.⁶ She noted that in certain decisions the Wisconsin Court of Appeals had inferred legislative intent to create a basis for civil liability from the language and purpose of Wisconsin’s safe-place statute,⁷ but she was not convinced that the appeals court had fully considered the question.⁸

Still, Judge Crabb found that the current statement on the law in Wisconsin based on existing case law was a Wisconsin Court of Appeals decision that held that “[i]n Wisconsin, violations of FDA regulations may constitute negligence per se” and that “compliance with FDA standards generally will foreclose negligence per se.”⁹ Accordingly, she found that the plaintiffs could bring a claim of negligence per se under Wisconsin law based on an alleged violation of the medication-guide regulations.¹⁰

Wisconsin Contract Law

In AVL Powertrain Inc. v. Fairbanks Morse Engine,¹¹ an engineering company that conducted environmental-emissions testing of large engines sued a testing facility for breach of contract, alleging that the testing company fraudulently induced the engineering company into the contract by misrepresenting that the testing facilities were in compliance with environmental regulations.

The defendant testing facility moved for partial summary judgment, and Judge William Conley of the Western District of Wisconsin considered Wisconsin contract law on the plaintiff engineering company’s arguments for rescission based on fraudulent inducement, the materiality of certain statements, the engineering company’s reliance on those statements, waiver, and contractual limitation of remedies.¹²

Judge Conley ruled that the engineering company had failed to prove a material misrepresentation sufficient for a reasonable jury to find fraud in the inducement about the testing facility’s compliance with environmental regulations.¹³ Even if the engineering company had proved such a misrepresentation, the company had, under Wisconsin contract law, affirmed the parties’ contract through its conduct, as after learning of the alleged misrepresentation, the company continued testing under the agreement despite noncompliance with the emissions permit.¹⁴

The court considered but rejected the engineering company’s arguments that it had not waived its right of rescission.¹⁵ Although some Wisconsin law provides that a party’s limited efforts to mitigate damages do not necessarily constitute a waiver of the remedy of rescission, the engineering company’s operation under the terms of the contract for 16 months waived its right to rescission.¹⁶ The engineering company had not provided evidence that after learning of the alleged fraud in the inducement the engineering company took any affirmative steps to stop testing at the defendant’s facilities. The court also rejected the argument that the facilities’ actions made it impracticable for the engineering company to stop using the facilities, and it granted summary judgment to the testing facility on liability.¹⁷

The court did not grant summary judgment as to damages, however, finding ambiguous the provision in the parties’ contract concerning whether the emissions tester shall “indemnify, defend and hold harmless” the engineering company. Judge Conley reviewed terms of the parties’ contract under various Wisconsin cases on contract interpretation and concluded that this provision did not unambiguously limit the availability of consequential damages.¹⁸ 

Whether a construction contractor and subcontractor had entered into an enforceable contract on a project – and whether the subcontractor was barred by promissory estoppel from withdrawing its bid on that project – were at issue in C.G. Schmidt Inc. v. Permasteelisa North America.¹⁹

The subcontractor, Permasteelisa North America (PNA), bid to provide a glass curtainwall in a new Milwaukee office building. The general contractor, C.G. Schmidt, selected PNA as its “contractor of choice.” The parties were not prepared to execute a formal subcontract, however, and stayed in communication for one year.²⁰ After the general contractor finalized the prime contract, the parties continued to discuss the terms of the subcontract, but then PNA abruptly disengaged from the project, explaining that because of civil unrest in its home country of Thailand, it no longer had the capacity to produce the curtainwall.²¹

The contractor sued PNA in the Eastern District of Wisconsin, alleging breach of contract and promissory estoppel. PNA moved for summary judgment, which Judge J.P. Stadtmueller granted, holding that the parties never manifested an intent to be bound, but that they were negotiating toward a final written subcontract that never transpired. The Eastern District court also rejected a claim of promissory estoppel, on the ground that any reliance by the contractor was unreasonable because both parties intended to be bound by a final written agreement.

The contractor appealed to the U.S. Court of Appeals for the Seventh Circuit, which reviewed the case de novo. Judge Joel Flaum for the court reviewed Wisconsin common law on what constitutes an enforceable contract, as well as Wisconsin’s adoption of the applicable Uniform Commercial Code provisions.²² Under either standard, the Seventh Circuit agreed with the district court that considering the course of negotiations and the slow build up to what would have been an integrated subcontract, no reasonable jury could find that the parties manifested an intent to be bound.²³

The more difficult question for the court was whether or not promissory estoppel rendered the subcontractor liable. The contractor argued it had relied on the subcontractor’s promise to supply the curtainwall when it incorporated the bid price into the general contract. The Seventh Circuit reviewed Wisconsin promissory estoppel law,²⁴ and stated that “the construction bidding context is a classic battleground for the application of promissory estoppel.”²⁵

The federal appeals court distinguished the general rule in Wisconsin recognizing promissory estoppel in the construction context from those cases in which a general contractor attempts to renegotiate the subcontractor’s bid. Because in this case the general contractor had delayed accepting the subcontractor’s bid, and negotiated with the subcontractor while also negotiating with the project owner, the court held that the contractor’s promissory estoppel claim failed as a matter of law.²⁶ Given that both parties expected to negotiate further, the court would not construe the subcontractor’s bid as a promise on which the general contractor could reasonably rely.

Also, to apply promissory estoppel would essentially give the contractor an option contract on the subcontractor’s bid that was not bargained for, transforming the negotiations into a “no lose” situation for the general contractor.²⁷

Wisconsin Insurance Law

The U.S. Court of Appeals for the Seventh Circuit considered Wisconsin insurance law in B.B. Syndication Services Inc. v. First American Title Insurance Co.²⁸ The case involved the most litigated provision in the standard-form title insurance policy, used by real estate lenders to protect their security interests in construction projects.

Cost overruns halted a large commercial real estate development in Kansas City, Mo. The developer would not cover the shortfall, so the construction lender stopped releasing loan funds to the project, and contractors filed liens against the property for their unpaid work. In the resulting bankruptcy, the contractors’ liens had priority over the lender’s security interest, so the lender looked to its title insurer for indemnification. The title insurance policy contained a standard exclusion for liens “created, suffered, assumed, or agreed to” by the insured lender. At issue in the B.B. Syndication Services case was whether that exclusion applied to the liens in the case that resulted from the lender stopping its release of loan funds.²⁹

Judge Diane Sykes for the court reviewed the rules of Wisconsin insurance law, among them that ambiguities in policy language (including about the scope or effect of an exclusion) are construed against the insurer.³⁰ The court considered the title insurance policy exclusions under that law to determine whether the lender or the title insurer bore the risk of liens arising from loan funds being cut off as a result of cost overruns.

The Seventh Circuit noted that other federal appellate courts had considered the exclusion for liens “created, suffered, assumed, or agreed to” by the insured lender but that their decisions varied.³¹ Key to the court was who had the ability, and consequent duty, to investigate, discover, and monitor the construction project’s economic viability.³² The court found that only the lender, not the insurer, could play that role.

So the court concluded that when liens arise from insufficient funds, the insured lender has “created” them by failing to discover and prevent cost overruns. Accordingly, the exclusion applies, and the liens were not within the scope of the title insurance policy. The court also found that this interpretation “has the advantage of being a clear rule that parties can bargain around.”³³ Consequently, the appeals court affirmed the Western District of Wisconsin’s decision that the insurer had no duty to indemnify the lender.

Insurance in the construction industry was also at issue in another Seventh Circuit decision involving Wisconsin law, Edward E. Gillen Co. v. Insurance Co. of Pennsylvania.³⁴

The facts and procedural posture of the case are somewhat complicated: BMO Harris Bank held a security interest in the assets of the Gillen construction company. Gillen failed to perform on a subcontract with a company, Meyne, which received an arbitration award. Liberty Mutual, Gillen’s primary insurer, wrote Meyne a check for a portion of the award (only up to the policy’s limit). Gillen asked the Eastern District of Wisconsin to vacate the arbitrator’s award, which that court declined to do, so Gillen appealed.

To avoid execution of the judgment, Gillen posted a bond underwritten by Fidelity and Deposit Company of Maryland (F&D). The appeal of the arbitration award was settled and dismissed, but as part of that agreement F&D paid Meyne and stepped into Meyne’s shoes as Gillen’s creditor.³⁵

Gillen’s excess insurer also paid funds into the court’s registry, expressing indifference as to who receives its payment. The bank argued it was owed those funds.³⁶ Both the Eastern District of Wisconsin court, in an opinion by the late Judge Rudolph T. Randa, and the Seventh Circuit, in an opinion by Judge Frank Easterbrook, were unpersuaded by the bank’s various arguments that the bank was entitled to the excess insurer’s payment.

First, the bank argued that because Meyne was Gillen’s unsecured creditor, F&D’s subrogation to Meyne’s position also makes F&D an unsecured creditor. To the bank, if the excess insurer’s funds were in Gillen’s hands, there would be no question that the bank’s interest would be superior.³⁷

But the Seventh Circuit noted that the bank had never asserted an interest in the primary insurer’s payment. Because Wisconsin is a direct-action jurisdiction in which the victim of an insured wrong can collect from the insurer, even the insolvency of the client and the presence of other creditors does not affect the victim’s right to collect. The appeals court noted that under Wisconsin insurance law, insurance bypasses a security interest.³⁸

The bank also argued that because the excess insurer deposited its funds into the court registry, rather than to F&D, the money should be treated as Gillen’s and subjected to the bank’s security interest. While the Seventh Circuit found that to be an interesting question of Wisconsin law, it was not the question before the court because the excess insurer’s money never entered Gillen’s coffers.³⁹

The bank further argued that the excess insurer’s payment was not really insurance but damages from a bad-faith (initial) denial of insurance coverage. The federal appeals court was unpersuaded that the characterization of the funds made a difference as to whether the insured or a secured creditor receives the funds. Judge Easterbrook was confident that the Wisconsin Supreme Court would give the beneficiary of the insurance policy (here F&D as Meyne’s subrogee) the same rights regardless of the characterization. So the Seventh Circuit affirmed Judge Randa’s decision.⁴⁰

Wisconsin Statutes

Deceptive Trade Practices Act. Wisconsin’s federal courts sitting in diversity jurisdiction often interpret Wisconsin statutes. The Eastern District of Wisconsin interpreted Wisconsin’s Deceptive Trade Practices Act (WDTPA or the statute)⁴¹ in Murillo v. Kohl’s Corp.⁴²Customers had brought a putative class action against the department store, alleging an advertising scheme based on false price comparisons on product receipts, which the department stored denied.

Judge J.P. Stadtmueller reviewed the elements of the WDTPA and how Wisconsin courts have interpreted the statute. This included limits on those representations for which the statute provides a remedy (in contrast with nonactionable omissions),⁴³ as well as who remains a member of “the public” such that they can bring a claim (that is, were the parties bound by a contract when the alleged misrepresentation was made, and was such a contract for the goods or services at issue).⁴⁴

The court also reviewed Wisconsin law on quasi-contractual theories of quantum meruit and unjust enrichment and Wisconsin equitable principles as to when a party induced to enter a contract by another’s misrepresentation can rescind a contract.⁴⁵

After close analysis of the pleadings and the law, the court rejected Kohl’s arguments that the plaintiffs failed to state a WDPTA claim as to each ground and denied the defendants’ motion to dismiss.⁴⁶

Uniform Fraudulent Transfer Act. Wisconsin’s fraudulent-transfer act was at issue in Primex Plastics Corp. v. Zamec,⁴⁷ before the Western District court. For two years the plaintiff had sold various plastic products to the defendant under a credit agreement. The plaintiff alleged that after the defendant fell behind on its payments, rather than pay for invoiced goods the defendant transferred funds to several family trusts in violation of Wisconsin’s Uniform Fraudulent Transfer Act.⁴⁸ With millions of dollars in dispute, the case was before the court in diversity.

The plaintiff moved for partial summary judgment, and Judge Barbara Crabb reviewed two related statutes under the Act, each of which described a fraudulent transfer made or obligation incurred by a debtor.⁴⁹ The focus of the dispute was whether the defendant transferred funds with an “actual intent” to avoid paying its debt to the plaintiff. The court rejected the plaintiff’s reading of Wisconsin’s fraudulent-transfer law: that a list of objective factors constituted a statutory definition of “actual intent.”⁵⁰ The court also found genuine issues of material fact in the parties’ correspondence as to whether the defendant believed it would incur debts beyond its ability to pay as they became due.

Accordingly, the court deemed premature the plaintiff’s request for a constructive trust, which was contingent on a finding that the defendant violated the Uniform Fraudulent Transfer Act, and denied the plaintiff’s motion.⁵¹

Noncompete Statute. Wisconsin’s noncompete statute⁵² was interpreted and applied in two Eastern District of Wisconsin cases.

In the first, Kohler Co. v. Kopietzki, Kohler sued a former executive and his employer, alleging that they tortiously interfered with a contract between Kohler and a distributor and that the executive had breached the nondisclosure provision of his employment contract.⁵³

The executive’s nondisclosure agreement barred him from using or disclosing confidential information “unless and until such confidential information shall become public knowledge.” Judge Lynn Adelman found that to mean that the agreement “applies until it doesn’t apply,” which, because it did not include a time limitation, was per se unreasonable.⁵⁴

The executive argued that Kohler’s tortious-interference claim failed because he was privileged or justified to interfere as a competitor.⁵⁵ Kohler disputed that the executive and his new employer, as consultants, were actually competitors. The court disagreed, finding that they competed at least indirectly.⁵⁶

The manufacturer also argued that the executive could not avail himself of the competition-privilege defense because he induced a previous Kohler client to become a client of another manufacturer, with whom the executive now consults. Kohler argued the defense does not apply when a defendant induces a party to breach a contract because “an existing contract … involves established interests that are not subject to interference on the basis of competition alone.”⁵⁷ The court found fact questions in the case’s extensive record about whether the executive is entitled to the defense.⁵⁸

In the second case, Schetter v. Newcomer Funeral Service Group Inc.,⁵⁹ a former employee of a funeral home sought a declaration that her employment agreement was void under Wisconsin’s noncompete law as an impermissible restrictive covenant.

The noncompete agreement prohibited her from engaging in services “substantially similar to [defendant’s] programs” within a radius of 25 miles of the funeral home in which she was employed “or any other location owned or operated by” the defendant or its related corporations. The noncompete agreement was in effect for two years after termination, contained a severability provision, and stated it was to be governed by Kansas law.⁶⁰

First, Chief Judge Griesbach for the Eastern District determined that Wisconsin law rather than Kansas law applied, because public policy concerns mandated overriding the parties’ contractual choice-of-law stipulation.⁶¹ Then the court evaluated the noncompete agreement with regard to its geographical reach, the type of work it prohibited, and a nondisclosure clause it contained. The court could not conclude from the record that the territorial limits were unreasonable or that the substantive scope was overbroad,⁶² although the nondisclosure clause did lack a time limit and thus was unenforceable.

Chief Judge Griesbach noted that although reasonable restraints in a restrictive covenant fall upon a finding that any part is unreasonable, the Wisconsin Supreme Court has held that that rule does not apply to divisible covenants.⁶³ Because the parties had not addressed the issue, he denied in part the plaintiff’s motion for summary judgment and stated that before he will rule on the issue, the parties must prepare a more complete record.

Endnotes

¹ Lexington Ins. Co. v. Rugg & Knopp Inc., 165 F.3d 1087, 1092-93 (7th Cir. 1999).

² Marvin v. Zydus Pharmaceuticals (USA) Inc., ___ F. Supp. 3d ___, 2016 WL 4444939 (W.D. Wis. Aug. 23, 2016).

³ Tatur v. Solsrud, 174 Wis. 2d 735, 743, 498 N.W.2d 232 (1993) (citing Walker v. Bignell, 100 Wis. 2d 256, 268-69, 301 N.W.2d 447 (1981)).

⁴ 21 U.S.C. § 337(a) (enforcement proceedings “shall be by and in the name of the United States”).

⁵ Walker, 100 Wis. 2d at 271; Johnson v. Blackburn, 220 Wis. 2d 260, 281, 582 N.W.2d 488 (Ct. App. 1988), aff’d but criticized on other grounds, 227 Wis. 2d 249, 595 N.W.2d 676 (1999); Nordeen v. Hammerlund, 132 Wis. 2d 164, 168-69, 389 N.W.2d 828 (Ct. App. 1986).

⁶ Marvin, 2016WL 4444939 at *6.

⁷ Id. at *5 (citing Johnson, 220 Wis. 2d at 281; Nordeen, 132 Wis. 2d at 168-69).

⁸ Id. at *6.

⁹ Id. at *5-*6 (citing Kurer v. Parke, Davis & Co., 2004 WI App 74,
¶¶ 1-2, 272 Wis. 2d 390, 679 N.W.2d 867).

¹⁰ Id. at *6.

¹¹ AVL Powertrain Inc. v. Fairbanks Morse Engine, ___ F. Supp. 3d ___,  2016 WL 1559177 (W.D. Wis. Apr. 15, 2016).

¹² Id. at *4-*10.

¹³ Id. at *5.

¹⁴ Id. at *7-*8 (citing inter alia Grube v. Daun, 213 Wis. 2d 533, 551-52, 570 N.W.2d 851 (1997)); id. at *4 (citing Beers v. Atlas Assurance Co., 231 Wis. 361, 285 N.W. 794 (1939)).

¹⁵ Id. at *8-*9.

¹⁶ Id. at *9.

¹⁷ Id. at *10.

¹⁸ Id. at *10-*13.

¹⁹ C.G. Schmidt Inc. v. Permasteelisa N. Am., 825 F.3d 801 (7th Cir. 2016).

²⁰ Id. at 803.

²¹ Id. & n.2.

²² Id. (citing Wis. Stat. section 402.102, which defines “offer” and “acceptance” more liberally than under Wisconsin common law).

²³ Id.

²⁴ Id. (citing Hoffman v. Red Owl Stores Inc., 26 Wis. 2d 683, 133 N.W.2d 267 (1965)).

²⁵ Id.

²⁶ Id.

²⁷ Id.

²⁸ B.B. Syndication Servs. Inc. v. First Am. Title Ins. Co., 780 F.3d 825 (2015).

²⁹ Id. at 826.

³⁰ Id. at 830. In an interesting footnote, the Seventh Circuit expressed doubt about the application of this contra proferentem rule in the construction-loan context because the first standard-form policy from which the more recent versions are derived was drafted by lenders. Id. at n.4.

³¹ Id. at 833-36.

³² Id at. 836.

³³ Id.

³⁴ Edward E. Gillen Co. v. Insurance Co. of Pa., 825 F.3d 816 (7th Cir. 2016).

³⁵ Id. at 817-18.

³⁶ Id.

³⁷ Id.

³⁸ Id. at 818 (citing Wis. Stat. § 632.22; and Decade’s Monthly Income & Appreciation Fund v. Whyte & Hirschboeck S.C., 173 Wis. 2d 665, 676, 495 N.W.2d 335 (1993)).

³⁹ Id.

⁴⁰ Id.

⁴¹ Wis. Stat. § 100.18.

⁴² Murillo v. Kohl’s Corp., ___ F. Supp. 3d ___, No. 16-CV-196-JPS, 2016 WL 3919555(E.D. Wis. June 24, 2016).

⁴³ Id. at *4 (citing Tietsworth v. Harley-Davidson Inc., 2004 WI 32, ¶¶ 40-41, 270 Wis. 2d 146, 677 N.W.2d 233 (silence is insufficient to support a claim under Wis. Stat. section 100.18(1).)

⁴⁴ Id at *6 (citing K&S Tool & Die Corp. v. Perfection Mach. Sales Inc., 2007 WI 70, ¶¶ 26-27, 301 Wis. 2d 109, 732 N.W.2d 792).

⁴⁵ Id. at *9-*10. The court also considered whether the plaintiffs had statutory standing to pursue a multistate claim, id. at *10-*11, and whether an actual controversy existed with the department store for purposes of a declaratory-judgment claim. Id. at *12-*13. Although Wis. Stat. section 100.18 does not grant Wisconsin state courts the power to grant injunctive or declarative remedies, the federal court “may afford an equitable remedy for a substantive right recognized by a State even though a State cannot give it.” Guar. Tr. Co. of N.Y. v. York, 326 U.S. 99, 105-06 (1945).

⁴⁶ Murillo, 2016 WL 3919555 at *14.

⁴⁷ Primex Plastics Corp. v. Zamec, No. 15-cv-175-bbc, 2016 WL 750669(W.D. Wis. Feb. 24, 2016) (slip copy).

⁴⁸ Wis. Stat. ch. 242.

⁴⁹ Wis. Stat. §§ 242.04(1), 242.05(1).

⁵⁰ Primex Plastics Corp., 2016 WL 750669 at *3.

⁵¹ Id. at *5-*6.

⁵² Wis. Stat. § 103.465.

⁵³ Kohler Co. v. Kopietzki, No. 13-cv-1170, 2016 WL 1048036 (E.D. Wis. March 11, 2016) (slip copy).

⁵⁴ Id. at *2.

⁵⁵ Id. at *3 (citing Restatement (Second) of Torts § 768).

⁵⁶ Id. at *4.

⁵⁷ Id. (citing Restatement (Second) of Torts § 768 cmt. a).

⁵⁸ Id. at *4-*6.

⁵⁹ Schetter v. Newcomer Funeral Serv. Grp. Inc., ___ F. Supp. 3d ___, 2016 WL 3167088 (E.D. Wis. June 6, 2016).

⁶⁰ Id. at *1.

⁶¹ Id. at *1-*2.

⁶² Id. at *2-*4.

⁶³ Id. at *4 (citing Star Direct Inc. v. Dal Pra, 2009 WI 76, ¶ 15, 319 Wis. 2d 274, 767 N.W.2d 898).