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    Wisconsin Lawyer
    September 01, 2009

    Recent Significant Wisconsin Federal Court Decisions

    Federal court interpretations of Wisconsin law are persuasive, but not binding on Wisconsin courts. Yet they affect how Wisconsin law develops and is argued. Here is a look at some significant Wisconsin federal court decisions interpreting Wisconsin law since 2007, encompassing common law claims, statutory interpretations, and a criminal case considering Wisconsin law under federal habeas corpus jurisdiction.

    Michael B. Brennan

    Wisconsin LawyerWisconsin Lawyer
    Vol. 82, No. 9, September 2009

    Court Each year Wisconsin’s federal courts – the United States District Courts for the Eastern and Western Districts of Wisconsin and the United States Court of Appeals for the Seventh Circuit – issue decisions interpreting Wisconsin common law and Wisconsin statutes, in most cases under federal diversity jurisdiction.

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

    This article reviews some significant Wisconsin federal court decisions interpreting Wisconsin law since 2007. The decisions encompass common law claims, statutory interpretations, and a criminal case considering Wisconsin law under federal habeas corpus jurisdiction.

    Wisconsin Contract Law

    Quantum Meruit and Unjust Enrichment. In Lindquist Ford Inc. v. Middleton Motors Inc.,2 the Seventh Circuit clarified some confusing Wisconsin quasi-contractual theories of recovery

    After a planned joint venture between Iowa and Wisconsin automobile dealerships failed, the Iowa dealer sued the Wisconsin dealer for management fees that allegedly were not paid. The plaintiff asserted a variety of theories of recovery, including quantum meruit and unjust enrichment. After a bench trial the district court entered judgment for the Iowa dealer on both grounds. On appeal, the Seventh Circuit “restate[d] some first principles” concerning Wisconsin law on these two theories of recovery, noting they are related in principle but have distinct elements of proof and measures of damages.

    Unjust enrichment limits damages to the value of the benefit conferred on the defendant; any costs the plaintiff may have incurred generally are irrelevant. Quantum meruit has a more liberal recovery rule: a plaintiff can recover under quantum meruit even if no benefit is conferred on the defendant. Under quantum meruit, damages are measured by the reasonable value of the plaintiff’s services. To take advantage of this more liberal recovery rule, a plaintiff must prove that the defendant requested the plaintiff’s services and the plaintiff expected reasonable compensation for the services.

    In Lindquist, the Seventh Circuit, after analyzing treatises and other authorities, specified that the second element of quantum meruit should be focused on the plaintiff’s reasonable expectation of compensation and not on the reasonableness of the compensation. Accordingly, the appeals court rejected a reading of Wisconsin law that recovery under quantum meruit is warranted whenever a plaintiff does not render the services gratuitously.

    The court also discussed the distinction between contracts implied in law and contracts implied in fact, explaining that a contract implied in fact is governed by general contract principles and thus is conceptually separate from quantum meruit. Because these concepts had become confused in the district court, and that confusion affected the admission and consideration of the evidence, the appellate court reversed the district court’s judgment for the Iowa dealer and remanded the case for retrial.

    Privity. The Seventh Circuit recently considered Wisconsin law on privity of contract for breach of warranty claims in St. Paul Mercury Insurance Co. v. The Viking Corp.3 A sprinkler malfunctioned at Johnson Bank in Racine, causing serious damage. Johnson Bank’s insurer, St. Paul Mercury, reimbursed the bank, and then as subrogee sued the sprinkler manufacturer under its warranty provided to the original purchaser, a subcontractor. The district court granted the manufacturer’s summary judgment motion, concluding that a lack of privity between the manufacturer and the bank barred the insurer’s breach of warranty claim.

    The federal appeals court considered but rejected an argument that Wisconsin law is evolving toward eliminating the privity requirement for remote purchasers of products. The court considered the most recent Wisconsin Supreme Court pronouncement on this issue, Daanen & Janssen v. Cedarapids Inc.,4 and “decline[d] … an invitation to step ahead of our colleagues on the Wisconsin courts to change the status quo.”5 The federal appeals court also rejected arguments that there was an agency relationship between the bank and the subcontractor, and it discerned no equitable basis to find privity of contract.

    Wisconsin Insurance Law

    Occurrence. Last year the Seventh Circuit faced three important questions of Wisconsin insurance law in Plastics Engineering Co. v. Liberty Mutual Insurance Co.6 Plastics Engineering (Plenco), a Wisconsin manufacturer of molding compounds, previously made products that included asbestos. For decades Liberty Mutual, a Massachusetts insurer, provided Plenco with general liability insurance. Plenco sought a declaratory judgment that Liberty Mutual was obligated under its insurance policies to fully defend and indemnify Plenco in connection with all pending and future asbestos-related lawsuits.

    The parties moved for summary judgment, and the district court concluded that 1) each individual’s injury caused by exposure to asbestos-containing product is a separate occurrence; 2) when an injury is sustained over successive policy terms, the policies’ noncumulation provisions limit Liberty Mutual’s obligations to a single year; and 3) Liberty Mutual must pay “all sums” accruing from an injury that triggers any one policy, not a “pro rata” contribution from Plenco for an injury that spans successive insurance policies.

    The parties cross-appealed, and after reviewing Wisconsin authorities, the Seventh Circuit sought guidance from the Wisconsin Supreme Court by certifying those three questions of law.

    Michael B.   Brennan

    Michael B. Brennan, Northwestern 1989, is a trial and appellate lawyer with Gass Weber Mullins LLC in Milwaukee.

    The Wisconsin Supreme Court agreed to answer these questions, entertaining briefing and argument from the parties and nine amici curiae. The court concluded that 1) each individual’s repeated exposure to asbestos-containing products manufactured or sold constituted a single occurrence; 2) a statutory limit on “other insurance” provisions when two or more policies promise to indemnify an insured against the same loss does not apply to successive policies; and 3) once the liability policy was triggered by injury during the policy period, an insurer is responsible for “all sums” up to the policy limits, even if the alleged injury did not occur entirely within a policy period.7

    The debate over what constitutes an occurrence arose again before the Seventh Circuit in Lucterhand v. Granite Microsystems Inc.8 An individual sued his former employer, alleging among other things wrongful termination. The employer’s insurer intervened and sought a declaratory judgment that it had no duty to defend or indemnify the defendant under its liability insurance policy.

    The Seventh Circuit considered the Wisconsin Supreme Court’s two most recent opinions construing the term occurrence in liability policies.9 The court analyzed the distinction between focusing on intentional acts and focusing on intentional injury in determining insurance coverage and how this debate has played out under Wisconsin law. While it noted the competing interpretations of occurrence, the appeals court concluded that under either view, no coverage existed because the complaint alleged only intentional acts.

    Failure to Notify. An allegation of trademark infringement of a bank’s name led to the Seventh Circuit interpreting Wisconsin’s statutory requirement for timely notice of an insurance claim.

    After eight months of litigation, a Michigan federal district court issued a preliminary injunction forbidding Guaranty Bank from selling banking and financial services in southern Michigan in deference to another financial institution, Midwest Guaranty Bank. Only then did Guaranty Bank notify its insurer of the suit and ask it to defend. The insurer refused and shortly thereafter the suit was settled. In Guaranty Bank v. Chubb Corp.,10 Guaranty sued the insurer for reimbursement of the settlement amount and its attorney fees on the theory that the insurer should be estopped from denying coverage.

    The policy required the insured to notify the insurer “immediately,” and Wisconsin statutes require notice “as soon as reasonably possible.” Failure to give notice within the policy’s time limit, however, does not necessarily invalidate the claim. Even if the delay is unreasonable, it will not terminate the insurer’s duties if the insurer was not prejudiced by the failure, although the insured bears the risk of nonpersuasion.11

    The Seventh Circuit affirmed the district court’s finding that by waiting more than six months to notify the insurer, the insured had prejudiced that insurer and terminated the insurer’s duties under the policy. The appellate court went farther, however, and concluded that any damages caused by the insured’s alleged infringement of a trademark were not advertising injuries covered under the insurance policy.12

    Duty to Defend. The U.S. District Court for the Eastern District of Wisconsin might make new law on reimbursement of costs and fees associated with a duty to defend, in Krueger International Inc. v. Federal Insurance Co.13

    An Italian furniture design company, Studio and Partners (S & P), alleged that Krueger, a manufacturer, had misappropriated its designs. Krueger responded that S & P’s complaint was for “advertising injury,” which Krueger’s insurers denied. The district court granted Krueger summary judgment on S & P’s suit, agreeing that the suit did not involve advertising injury. S & P appealed, but the insurer settled the case and the appeal was dismissed. 

    The insurers requested reimbursement of their defense costs. The question presented was whether an insurer that defends under a reservation of rights with an express reservation to seek reimbursement of fees and costs – often with the risk of additional liability (such as allegations of bad faith) – and that later is found not to have owed a defense can recover the costs of the defense it provided its insured.

    The district court surveyed law from Wisconsin and from other states on the issue, acknowledging the majority position that permits an insurer to seek reimbursement for defense costs and the minority position that refuses to permit an insurer to recover defense costs. The district court allowed the insurer leave to file an amended counterclaim, allowed Krueger to reply, and then agreed to consider additional argument before it decides whether the insurer is entitled to reimbursement of both the settlement amount and the defense attorneys’ fees and costs.

    Wisconsin Statutory Misrepresentation

    Wisconsin Statute section 100.18 prohibits fraudulent representations in certain business transactions. While the law has existed in various forms since 1925, currently its elements are stated as the following: 1) the defendant made a representation to the public with the intent to induce an obligation; 2) the representation was untrue, deceptive, or misleading; and 3) the representation caused the claimant to incur a pecuniary loss.14

    While Wisconsin courts have yet to fully elucidate what constitutes “the public” for purposes of the first element, in Uniek Inc. v. Dollar General Corp.,15 the U.S. District Court for the Western District of Wisconsin reviewed in great detail Wisconsin law on that element. The district court noted that the public can constitute a single person, but not “everyone.” The test is whether the plaintiff had a “particular relationship” with the defendant of a type the legislature did not intend to protect by the statute, such as if a contract existed between the parties. Parties in long-term, established relationships are in a better position than most to protect themselves, unlike the consumers historically protected by Wis. Stat. section 100.18.

    The Western District’s synthesis of Wisconsin law noted how the duration, dollar amount, and number of purchases help define the particular relationship between the parties and consequently limit the protection of section 100.18 to those consumers without such a relationship.

    Wisconsin Lemon Law

    A high-performance car did not perform well enough for one buyer, which led to new questions for Wisconsin courts in Tammi v. Porsche Cars North America Inc.16

    The buyer leased a 2003 Porsche 911 Turbo for use in competitive car-club events. The car had a rear spoiler designed to deploy at 75 miles per hour, but it failed to retract as promised at 40 miles per hour. The spoiler’s warning system also repeatedly rang and flashed red warning signs. The buyer sued under Wisconsin’s lemon law and won a jury verdict.

    The Seventh Circuit affirmed the verdict on the sufficiency of the evidence, but after considering the case under the standards of Wisconsin’s lemon law, certified certain damages questions to the Wisconsin Supreme Court, including 1) whether a buyer who, after making his demand under the lemon law then exercised an option to purchase and bought the vehicle as provided in the lease, could be entitled to recover the amount of the purchase price; and 2) whether a damages award is subject to a reduction for reasonable use of the vehicle.

    In July 2009 the Wisconsin Supreme Court answered those certified questions. A consumer who leases a car, brings an action under Wis. Stat. section 218.0171(7), and then exercises an option to purchase the vehicle under the lease’s terms is not entitled to damages for the dollar amount of the voluntary purchase, because the purchase was not “caused” by any violation of the statute by the manufacturer.17 The court also read section 218.0171 to mean that a “pecuniary loss” must incorporate a reasonable allowance for use before the pecuniary loss is doubled.18

    To succeed on a lemon law claim, one of the elements a plaintiff must show is that the motor vehicle suffered from a nonconformity subject to an applicable express warranty. This element became the matter of debate before the Western District federal court in Begalke v. Sterling Truck Corp.19

    A Seventh Circuit decision from 199320 in a diversity case involving Wisconsin’s lemon law had upheld an express warranty disclaiming reliance on oral warranties. In Begalke, the federal district court distinguished the federal appeals court case and instead relied on the decision of the Wisconsin Court of Appeals in Schonscheck v. Paccar Inc.,21 which held that manufacturers cannot avoid liability by excluding all major component parts from their express warranties. Although the defendants challenged Schonscheck, the district court said that “it remains the most recent and analogous statement of Wisconsin law. Federal courts are not free to rewrite state law or overrule the decisions of state courts. For good or ill, it is the 2003 Schonscheck decision that controls this case; not the Seventh Circuit’s 1993 decision….”

    Wisconsin Criminal Law

    In an unusual case, the U.S. Court of Appeals for the Seventh Circuit criticized the Wisconsin Court of Appeals’ interpretation of important precedent concerning the questioning of a person in custody.

    As part of a homicide investigation, Eric Smiley was arrested, gave police a first statement without having received Miranda warnings, and then after receiving those warnings made a second statement in which he admitted to the killing but argued self-defense. The trial court denied his motion to suppress the first statement because it determined that Smiley had been questioned as a witness, not as a suspect. The prosecution relied on both statements, and the jury convicted Smiley. The Wisconsin Court of Appeals affirmed his conviction and sentence on direct review, and Smiley exhausted his state habeas remedies.

    In affirming the denial of Smiley’s motion to dismiss his first statement, the Wisconsin Court of Appeals had relied on State v. Armstrong,22 which in turn relied on the U.S. Supreme Court’s decision in Rhode Island v. Innis.23

    In Innis, the Supreme Court ruled that Miranda applies to express questioning and its “functional equivalent,” which is any police statements that are reasonably likely to elicit an incriminating response from the suspect. According to the state appeals court, Innis limited Miranda to situations in which the officers conducting a custodial interrogation might reasonably expect the person under interrogation to make an incriminating statement. Under this view, it would not be an unreasonable application of Innis to find that that Smiley’s first statement was admissible.

    The federal courts that reviewed Smiley’s habeas corpus petition disagreed with the reading of Innis by the state appeals court. The Eastern District of Wisconsin granted Smiley a writ of habeas corpus, holding that the state court had been confronted with a set of facts materially indistinguishable from Miranda. Smiley was in custody, and he was expressly questioned. Therefore, the state court of appeals had no reason to apply the rule for the functional equivalent of express questioning.

    The Seventh Circuit affirmed, finding the state court of appeals erroneously interpreted Innis, which does nothing more than define when police practices other than express questioning constitute interrogation. Because Smiley was in custody when the police subjected him to express questioning about the killing, clearly established U.S. Supreme Court precedent required that Smiley be informed of his Miranda rights. The failure to do so means the first statement should have been suppressed. The Seventh Circuit found that this error was not harmless and therefore upheld the writ. In June 2009, Smiley was resentenced and given an indeterminate sentence, and he became eligible immediately for parole.

    Endnotes

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

    2557 F.3d 469 (7th Cir. 2009).

    3539 F.3d 623 (7th Cir. 2008).

    4216 Wis. 2d 395, 397, 573 N.W.2d 842 (1998).

    5539 F.3d at 628 (citation omitted).

    6514 F.3d 651 (7th Cir. 2008).

    72009 WI 13, 315 Wis. 2d 556, 759 N.W.2d 613.

    8564 F.3d 809 (7th Cir. 2009).

    9Stuart v. Weisflog’s Showroom Gallery Inc., 2008 WI 86, 311 Wis. 2d 492, 753 N.W.2d 448 (Stuart II); Estate of Sustache v. American Family Mut. Ins. Co., 2008 WI 87, 311 Wis. 2d 548, 751 N.W.2d 845.

    10538 F.3d 587 (7th Cir. 2008).

    11Id. at 590.

    12Id. at 593-94.

    13No. 07-C-0736, 2008 WL 4962669 (E.D. Wis. Nov. 19, 2008).

    14See Wis. J.I.-Civil 2418 (2009).

    15474 F. Supp. 2d 1034 (W.D. Wis. 2007).

    16536 F.3d 702 (7th Cir. 2008).

    172009 WI 83, ¶¶ 41-52, __ Wis. 2d __, __ N.W.2d __.

    18Id. ¶¶ 54-56.

    19480 F. Supp. 2d 1146, 1152-55 (W.D. Wis. 2007).

    20Bushendorf v. Freightliner Corp., 13 F.3d 1024 (7th Cir. 1993).

    212003 WI App 79, ¶ 17, 261 Wis. 2d 769, 661 N.W.2d 476.

    22223 Wis. 2d 331, 588 N.W.2d 606 (1999).

    23446 U.S. 291 (1980).  


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