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DOR v. Microsoft Corp. (Franchise Tax on Software)

Posted on by Hamilton

In DOR v. Microsoft Corp. (2018AP2024), the Court of Appeals District IV held that Microsoft’s royalties from software sales to manufacturers outside of Wisconsin, whose products are used in Wisconsin, should not be used in calculating Microsoft’s Wisconsin tax liability.

Microsoft sells its software to manufacturers like Dell and HP, who manufacture computers containing the Microsoft software. Microsoft enters into license agreements with these manufacturers. When the manufacturers sell the computers with Microsoft software to end-use consumers, the consumer using the computer must enter into an end-user agreement with the manufacturer. Though Microsoft dictates the end-use agreement, it is not a party to the end-use agreement between the manufacturer and consumer.

Microsoft contended that its royalties from selling software to manufacturers not located in Wisconsin should not be included in its Wisconsin tax liability. The Wisconsin Department of Revenue argued those royalties should be included in Microsoft’s tax liability because the end-use consumers of the software on the computers were located in Wisconsin.

Wis. Stat. § 71.25(9)(df) states that software sales are included in a corporation’s Wisconsin tax liability if the “licensee uses the computer software at a location in this state.” The issue before the court was whether the Wisconsin end-use consumers were “licensees” for the purposes of that statute.

The court found that Wisconsin end-use consumers are not “licensees” of Microsoft, so Microsoft’s sales to out-of-state manufacturers whose consumers were located in Wisconsin should not be used to calculate Microsoft’s Wisconsin tax liability. According to the court, the manufacturers were licensees of Microsoft, and by entering into the end-use agreements consumers were sublicensees of Microsoft. However, the court distinguished “licensees” from “sublicensees” for the purposes of § 71.25(9)(df). The court found no direct relationship between Microsoft and the Wisconsin end users. Furthermore, the manufacturers were not agents of Microsoft in entering into the end-use agreements with consumers. Finally, consumers’ use of the software in Wisconsin does not satisfy the § 71.25(9)(df) requirement that there be a “licensee” in the state for the software sales to count toward Microsoft’s tax liability.

Anderson v. Town of Newbold (Shoreline Zoning & Subdivision Authority)

Posted on by Hamilton

In Anderson v. Town of Newbold (2018AP547), the Court of Appeals District III held that towns may enact shoreland frontage requirements under their subdivision authority, even though state law prohibits towns from enacting those requirements under their zoning authority.

Wisconsin law prohibits towns from enacting shoreland zoning ordinances (Wis. Stat. § 59.692). However, towns do have authority to enact subdivision regulations under Wis. Stat. § 236.45. The issue before the court in this case was whether the Town of Newbold could enforce a Shoreland Ordinance establishing minimum shoreland frontage requirements.

Plaintiff Michael Anderson argued the Shoreland Ordinance was in actuality an illegal zoning ordinance and thus unenforceable by the town. However, the court found that the town could enforce the ordinance because it enacted the ordinance via subdivision authority procedures under Ch. 236, not as a zoning ordinance.

The court noted the tension its decision creates with the Legislature’s intent in § 59.692 to prohibit towns from regulating shoreland. However, the court said it could not ignore explicit language in Ch. 236 allowing towns to enact subdivision regulations as the town did in this case. The court left it to the Legislature to resolve any conflict between § 59.692 and Ch. 236.

Polk Properties, LLC v. Grota Appraisals, LLC (Claim Preclusion in Property Assessment)

Posted on by Hamilton

In Polk Properties, LLC v. Grota Appraisals, LLC (2018AP2296-FT), the Court of Appeals District II held that claim preclusion barred the plaintiff’s negligence and misrepresentation claims against an assessor, after the Supreme Court had previously upheld the assessment challenge in a separate action.

In 2018, the Wisconsin Supreme Court upheld the Village of Slinger’s reclassification of a Polk property from agricultural to residential (Thoma v. Village of Slinger). Prior to the Supreme Court decision, Polk filed this lawsuit against the assessor, claiming negligence and misrepresentation. After the Supreme Court decision, the assessor argued this lawsuit was barred by claim preclusion.

The appeals court agreed that claim preclusion barred Polk’s negligence and representation claims against the assessor. The case met each of the three elements of claim preclusion:

  1. Identity of parties. While the assessor was not named in the first lawsuit, the assessor and the village shared a common legal interest in the validity of the residential assessment of Polk’s property.
  2. Identity of actions. Both cases arose from the same facts. In both cases, Polk sought recovery for the same increased tax amount between the current residential and previous agricultural assessments.
  3. Final judgment. The Supreme Court decision in Thoma was a final judgment on the validity of the village’s assessment. Since the Supreme Court did not base its Thoma decision on misrepresentations by the assessor, the final judgment in Thoma is valid and unaffected by the instant case.

The Court of Appeals District II also held recently in a separate case that Polk’s agricultural use of a residentially zoned property was not a legal nonconforming use, so the village was entitled to recover daily forfeitures and the value of residential taxes on the land. 

Sinkler v. American Family Insurance Co. (Cost of Collection)

Posted on by Hamilton

In Sinkler v. American Family Insurance Co. (2019AP88), the Court of Appeals District III upheld an award of $0 in attorney’s fees to a worker’s compensation insurer and declined to adopt a rule dividing costs of collection on a pro rata basis – in proportion to their recoveries – between the employee’s and the insurer’s attorneys in third-party liability actions.

Plaintiff Brian Sinkler was injured in a work-related automobile accident and received worker’s compensation benefits from EMCASO Insurance Co. (EMC). Sinkler also hired law firm Habush Habush & Rottier to pursue a third-party liability claim against the other driver in the accident. Sinkler entered into a contingency fee agreement with Habush in which the firm would receive one-third of the recovery from the case.

Named as a defendant in Sinkler’s case, EMC hired attorneys from the Ron Harmeyer Law Office and also entered into a contingency fee arrangement with the firm.

Sinkler settled with the other driver’s insurer, but EMC and Sinkler disputed the distribution of the settlement proceeds.

Wis. Stat. § 102.29(1)(b) provides a formula for dividing third-party liability claim proceeds like Sinkler’s settlement. First, the parties deduct amounts for loss of consortium claims – in this case, 30 percent of the recovery was awarded to Sinkler’s wife. The remaining proceeds go to:

  1. Cost of collection
  2. The injured person (one-third of proceeds remaining after step one)
  3. The worker’s compensation insurer (reimbursement for all benefits paid)
  4. The injured person (any proceeds remaining after steps one through three)

Regarding cost of collection, the Sinklers argued that one-third of all the proceeds remaining after the loss of consortium claim, plus costs, should go to their attorney Habush. EMC argued that one-third of all the proceeds remaining should be distributed between Habush and EMC’s attorney Harmeyer on a pro rata basis based on their clients’ recoveries.

The appeals court upheld the circuit court’s decision in favor of the Sinklers, awarding no portion of the reasonable cost of collection to EMC’s attorney. The court found Habush’s attorney fees were reasonable because contingency fee arrangements are typical for plaintiffs in third-party liability actions, Habush had extensive experience in these types of actions, and Habush “aggressively pursued” the case on behalf of the Sinklers. In contrast, EMC’s attorney Harmeyer’s participation in the settlement negotiations was minimal and the Harmeyer attorneys had less expertise. Additionally, the court found worker’s compensation insurer EMC’s contingency fee arrangement with Harmeyer “non-customary” and thus found Harmeyer’s attorney fees were unreasonable.

The court declined to adopt a rule dividing the cost of collection on a pro rata basis between the injured employee and worker’s compensation insurer in third-party liability actions, when both parties hire lawyers on a contingency fee basis. According to the court, the statutes and previous case law grant courts wide discretion in dividing the cost of collection, and pro rata distribution would be unreasonable.

 

 

Supreme Court Holds Oral Arguments in Second Extraordinary Session Challenge

Posted on by Hamilton

On Oct. 21, the Wisconsin Supreme Court held oral arguments in the second challenge in state courts to the laws passed in the 2018 extraordinary session (2017 Acts 368, 369, and 370).

The plaintiffs, Service Employees International Union, Wisconsin Federation of Nurses and Health Professionals, American Federation of Teachers-Wisconsin, and Milwaukee Area Service and Hospitality Workers, allege that the laws passed in the 2018 extraordinary session are an unconstitutional violation of the separation of powers doctrine. The Wisconsin Supreme Court will review whether provisions, including increased legislative oversight of rulemaking, attorney general lawsuits, and agency appropriations, interfere with the governor’s and attorney general’s constitutional power and whether committee oversight without opportunity for a gubernatorial veto violates constitutional separation of powers.

At oral arguments, Justices asked questions regarding whether the attorney general’s authority lies in the executive or legislative branch of state government. Plaintiffs argued the attorney general is a part of the executive branch described in Wis. Const. Art. V § 4, which enforces the law.  The defendant Legislature argued Art. VI § 3 allows the Legislature to determine the powers and duties of the attorney general.

Justice Kelly noted that, if the attorney general was part of the executive branch, the attorney general would, potentially, be subordinate to the governor. In reality, the attorney general can take different positions and act outside the governor’s purview.

Chief Justice Roggensack pointed out a federal statute similar to Act 369 provisions requiring Legislative oversight of settlement agreements. The Chief Justice and others did note that the Legislature may be able to remove some but not all of the attorney general’s powers.

A significant portion of the argument also focused on bicameralism. Plaintiffs argued the provision of Act 369 allowing the Joint Committee for Review of Administrative (JCRAR) rules to suspend rules multiple times subverts the Wisconsin’s Constitution because JCRAR can stop rules, which have the force of law, without votes in both chambers of the Legislature.

This case is one of several challenging the 2018 extraordinary session laws. Read more about the extraordinary session litigation.

 

Brown v. Muskego Norway School District Group Health Plan (Worker’s Compensation)

Posted on by Hamilton

In Brown v. Muskego Norway School District Group Health Plan (2018AP1799), the Court of Appeals District II held that the plaintiff was in the course of his employment when he was injured in a motorcycle accident; therefore, his health plan excluded coverage because he was eligible for worker’s compensation.

Plaintiff William Brown was injured in a motorcycle accident that occurred while he was travelling on the main route between a plant in Juneau and his primary office in West Bend. Brown’s employer provided worker’s compensation benefits, but Brown declined the benefits, hoping instead to use coverage under his health insurance plan.

The health insurance plan included a provision excluding coverage for injuries arising out of employment if worker’s compensation benefits are available. The language of the plan specifically stated that the exclusion applies whether or not the policyholder obtains the available worker’s compensation benefits.

The issue before the court was whether Brown was eligible for benefits under the worker’s compensation statute Wis. Stat. § 102.03(1)(f), which provides for benefits for employees injured while travelling. The statute provides a presumption of coverage unless the employee is “engaged in a deviation for a private or personal purpose.” Brown claimed his motorcycle ride was a personal deviation, so the exemption applied. However, the court found § 102.03(1)(f) was applicable to Brown’s accident because testimony suggested he had left on a lunch break and was ultimately to return to his primary office that day. Since Brown was eligible for worker’s compensation, the coverage exclusion under his health insurance policy applied.

 

Varsity Tutors LLC v. LIRC (Worker Classification)

Posted on by Hamilton

In Varsity Tutors LLC v. LIRC (2018AP1951), the Court of Appeals District I held that a worker was an independent contractor, not an employee, of an online business connecting tutors and students.

Varsity Tutors hosts online profiles of contracted tutors and allows students to browse and select tutors. Once students have selected and been accepted by a tutor, the tutor is responsible for organizing dates and locations, procuring materials, and arranging their own transportation. Varsity does not require a minimum number of tutoring hours, nor does it train or assess tutors using its platform.

Holland Galante entered into a contract with Varsity Tutors to tutor students as a side job. Two years after beginning tutoring via Varsity, Galante applied for unemployment benefits. The Department of Workforce Development determined she was an employee of Varsity for the purposes of unemployment benefits, and the Labor & Industry Review Commission (LIRC) affirmed.

The court found that Galante was not eligible for unemployment benefits because she was an independent contractor, not an employee, of Varsity. Wis. Stat. § 108.02(12)(bm) provides that a worker is not an employee if 1) the worker’s services are performed without control or direction of the employer and 2) the worker meets six or more conditions for classification as an independent contractor. LIRC agreed with Varsity that Galante’s tutoring was performed without Varsity’s control or direction. The court overturned LIRC’s decision finding that Galante did not meet six of the classification conditions. The court found that

  1. Galante advertised and held herself out as being in the tutoring business by creating a profile on Varsity’s website. (§ 108.02(12)(bm)2.a.)
  2. Galante tutored in locations of her own choice, using her own equipment. (§ 108.02(12)(bm)2.b.)
  3. Galante incurred the main expenses to her tutoring services because she provided her own training, curriculum, transportation, etc. (§ 108.02(12)(bm)2.d.)
  4. Galante was obligated to redo unsatisfactory work for no additional compensation or would be subject to a monetary penalty for unsatisfactory work. (§ 108.02(12)(bm)2.e.)
  5. Galante’s tutoring services did not directly relate to Varsity’s business of connecting students and tutors via its website. Varsity was not itself in the business of tutoring. (§ 108.02(12)(bm)2.f.)
  6. Galante had recurring business liabilities, such as Varsity’s requirement that she obtain automobile insurance. (§ 108.02(12)(bm)2.h.)

Because Galante’s work met six of the classification conditions, the court found she was not an “employee” of Varsity eligible for unemployment benefits.

Wisconsin Lawsuit Climate Ranked 13th in U.S.

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The U.S. Chamber Institute for Legal Reform recently ranked Wisconsin as the 13th best litigation climate in the country.

The high ranking in fairness and reasonableness of the state’s liability system comes after the state legislature passed significant tort reforms in 2017 Act 235, led by Rep. Mark Born (R-Beaver Dam), Rep. John Nygren (R-Marinette), Sen. Dave Craig (R-Big Bend) and Sen. Tom Tiffany (R-Hazelhurst). The legislation included common-sense reforms such as how to handle electronic documents and to address the high transactional cost of litigation. Act 235 also made Wisconsin the first state in the nation to require third party litigation funding transparency.

In the 2019 Lawsuit Climate Survey, Wisconsin jumped seven spots from 20th to the 13th best ranked liability system in the country. Wisconsin beat neighboring states Minnesota (20th), Michigan (33rd), and Illinois (50th). After passing the class action reforms in Act 235, Wisconsin also achieved a top-ten ranking in treatment of class action suits and mass consolidation suits in the 2019 Survey. Wisconsin was ranked 27th in this category in 2017.

PFAS Update: Recent Regulatory Actions in Wisconsin

Posted on by Hamilton

Regulation of PFAS compounds is quickly moving forward in Wisconsin at both the legislative and administrative rule levels. PFAS (per- and polyfluoroalkyl substances) are man-made chemicals that are found in many everyday products, including nonstick pans, cleaning products, paints, and firefighting foam. PFAS are present in the bloodstream of 98 percent of Americans. Competing studies debate whether or not PFAS have negative health effects and, if they do, at what level they are harmful.

WCJC is part of the Water Quality Coalition, a coalition of industries, job creators, and taxpayers in the state, as well as scientists and legal scholars, which supports balanced, science-based environmental standards to regulate PFAS. Unnecessarily strict of standards would be costly to Wisconsin industry and would open up the state for frivolous lawsuits and potentially millions of dollars in liability.

 

Executive Actions

On August 23, Gov. Tony Evers signed Executive Order 40, which directs the state Department of Natural Resources (DNR) to coordinate with the Department of Health Services (DHS) and Department of Agriculture, Trade & Consumer Protection to:

  • Establish a public information website.
  • Collaborate with municipal wastewater treatment plants on screening to identify potential PFAS sources.
  • Expand monitoring for PFAS in wildlife.
  • Develop regulatory standards.
  • Modify the Voluntary Party Liability Exemption law, “which provides future liability exemptions after successful completion of hazardous substance cleanup.”
  • Assess opportunities for using natural resources damages claims under state or federal law.
  • Create the PFAS Coordinating Council among state agencies. The council’s directions include developing an action plan, developing public education protocols, identifying sources, developing treatment protocols, collaborating with academic institutions on research, and exploring avenues for funding.

 

Agency Rulemaking

In June 2019, DHS recommended a groundwater standard of 20 parts per trillion (ppt) combined for PFOA and PFOS, the two most-studied types of PFAS. DHS also recommended a Preventive Action Limit (PAL) of 2 ppt. The PAL is the point at which DNR can begin working with a regulated entity to mitigate contamination before formal enforcement action. As part of the statutory process for developing groundwater standards in Wisconsin, DHS sends these recommendations to DNR, which then must promulgate administrative rules before the standard becomes enforceable.

WCJC, as part of the Water Quality Coalition, submitted a letter and comments to DHS regarding these strict recommendations. The comments noted DHS’s preventive action limit of 2 ppt for PFOA and PFOS combined could result in the most restrictive enforceable standard in the world, potentially greatly harming Wisconsin’s economy and significantly raising the cost of residential water. In particular, such a standard would require a permit holder, including municipal utilities, industrial facilities, and energy producers, to reach near-zero discharge levels of compounds that are pre-existing in groundwater.

DNR issued three scope statements related to PFAS earlier this month. Scope statements are the first step in the administrative rulemaking process. The scope statements would:

  1. Adopt groundwater standards. (SS 090-19). Under this scope statement, DNR would promulgate the DHS standards recommendations of 20 ppt combined for PFOA and PFOS and a 2 ppt PAL. This rule would apply to all regulated facilities that may impact groundwater.
    Economic impact: DNR estimates a “moderate to significant” economic impact, ranging from $50,000 to greater than $5 million. However, other estimates of future business liability for PFAS have ranged in the billions.
    Public hearings: DNR expects public hearings to occur in November 2020.
  2. Adopt surface water quality standards for PFAS. (SS 091-19). Under the scope statement, DNR could also change Wisconsin Pollution Discharge Elimination System (WPDES) permit implementation procedures related to PFAS chemicals, including additional monitoring and new effluent limitations. Currently, DNR can address PFAS discharges in WPDES permits on a case-by-case basis. The proposed rule would set a uniform standard and procedures.
    Economic impact: DNR anticipates the economic impact to “sources of PFOS and/or PFOA…to be significant,” citing costs associated with treatment technology.
    Public hearings: DNR expects public hearings to occur in August 2021.
  3. Adopt maximum contaminant levels (MCLs) for drinking water. (SS 089-19). MCLs for drinking water would mostly affect municipal water systems.
    Economic impact: DNR estimates the economic impact of the rule to be “significant.” Treatment could cost municipal public water systems at least $25 million.
    Public hearings: DNR expects public hearings to occur in August 2021.

If the scope statements become rules promulgated by DNR, they will be enforceable against regulated entities. In Wisconsin, rulemaking is a relatively lengthy process. DNR has stated they believe this rulemaking process will take about 30 months. The scope statements are the very first step in that process.

The DNR Board is set to approve the scope statements and an initial preliminary comment period at their meeting on Oct. 23.

 

Legislation

Rep. John Nygren (R-Marinette) & Sen. Rob Cowles (R-Green Bay) have introduced legislation (SB 310/AB 323) to address PFAS contamination from fire-fighting foams. The bill would prohibit the use of fire-fighting foams that contain intentionally added PFAS in training, unless the testing facility has appropriate containment and treatment measures (as determined by DNR rule).

The bill has mostly Republican cosponsors but also includes Rep. Melissa Sargent (D-Madison), whose district includes a well in Madison that has tested positive for PFAS. Other supporters of the bill include American Chemistry Council, American Petroleum Institute, Wisconsin Manufacturers & Commerce, Wisconsin Paper Council, and Wisconsin Rural Water Association. Several environmental advocacy groups have concerns that the bill does not go far enough to address PFAS contamination in Wisconsin.

The Senate Committee on Natural Resources & Energy and the Assembly Committee on Environment each held a public hearing on the bill on Sept. 3. At the hearing, DNR testified recommending changes to the bill to strengthen the state’s authority to prevent future PFAS discharges. The DNR recommendations included:

  1. Authorizing DNR to regulate more types of PFAS-containing foams.
  2. Requiring manufacturers to clearly label PFAS-containing foams.
  3. Requiring preventative and mitigative actions for entities using PFAS-containing foams in emergencies.

DNR noted that, in their opinion, the bill does not go far enough to address PFAS from other industries and noted that another bill currently introduced in the Legislature would address their concerns: SB 302/AB 321 by Sen. Mark Miller (D-Monona), Sen. Dave Hansen (D-Green Bay), Rep. Chris Taylor (D-Madison), Rep. Stausch Gruszynski (D-Green Bay) & Rep. Melissa Sargent (D-Madison). This bill has not yet received a hearing in the Legislature.

The Democrats’ bill would require DNR to establish and enforce PFAS standards by rule for drinking water, groundwater, surface water, air, solid waste, beds of navigable waters, and soil and sediment if DNR deems it harmful to human health or the environment. The bill also provides that DNR may require entities possessing PFAS to provide proof of financial responsibility for remediation of potential discharge. Additionally, the bill requires any facility under investigation by DNR to provide DNR with access to information related to transportation of hazardous waste to any other site. The bill provides 7.5 positions at DNR and 2 positions at DHS, plus $150,000 for identifying and prioritizing PFAS sources, $50,000 for a study on use of fire-fighting foam containing PFAS, $87,000 for testing landfills and leachate, and $120,000 for investigation of PFAS sources and providing drinking water.

Assembly Speaker Robin Vos (R-Rochester) has also convened a Speaker’s Task Force on Water Quality, which has discussed PFAS at several of their public hearings throughout the summer.

For more information on PFAS developments in Wisconsin, visit /pfas/.

 

AG Kaul Declines Opioid Settlement Proposal

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Wisconsin Attorney General Josh Kaul has declined to join a proposal to settle multidistrict litigation against opioid manufacturer Purdue Pharma. Purdue had reportedly reached a $10 to $12 billion settlement deal with the multidistrict plaintiffs. Kaul, along with several other state attorneys’ general, declined to sign off on the proposed settlement.

The multidistrict litigation combined claims of over 2,000 cities and counties and 22 states, including over 50 Wisconsin local governments. Plaintiffs filed the claims against Purdue over the company’s alleged role in the opioid crisis.

Both the U.S. Chamber Institute for Legal Reform and the American Tort Reform Association released reports this year on the rise of public nuisance lawsuits such as this multidistrict opioid litigation.