CIVIL PROCEDURE
JUDICIAL LAW
• Minn. R. Civ. P. 6.05; affirming dismissal of late administrative appeal. Appellant contended the Worker’s Compensation Court of Appeals (WCCA) erred in dismissing her appeal as untimely, arguing she was entitled to a three-day extension under Rule 6.05 when a party is served by mail. In denying the appeal, the Supreme Court held that the Rules of Civil Procedure “govern the procedure in the district courts of the State of Minnesota in all suits of a civil nature.” Therefore, proceedings before the compensation judge and the WCCA are not district court proceedings and the three-day extension provided by Rule 6.05 does not apply. Because the Supreme Court lacked authority to extend the statutory deadlines for appeal, and the appeal was not filed within the statutory provided timeline, the appeal must be dismissed. Rogers v. Compass Airlines, Inc., A18-0319, __ N.W.2d __, 2018 WL 6519067 (Minn. 12/10/2018).
• Minn. R. Civ. P. 11.02; affirming denial of motion for sanctions. Pro se plaintiff alleged sanctions should have been issued against two of defendants’ attorneys for failure to respond to certain motions and for engaging in illegal and unethical behavior. A request for Rule 11 sanctions must: (1) be filed in a motion separate from other motions or requests; (2) contain a description of the specific conduct alleged to violate rule 11; (3) be served in compliance with rule 5; and (4) adhere to the “Safe Harbor” provisions, which state the motion cannot be filed with the court unless, within 21 days after service of the motion, the challenged document or claim is not withdrawn or appropriately corrected. Finding plaintiff’s motion did not comply with the procedure of Rule 11, sanctions were not appropriate. Krasner v. Hoffman, A17-1773, A18-0170, 2018 WL 6442164 (Minn. Ct. App. 12/10/2018) (unpublished).
• Minn. R. Civ. P. 8.01 and 12.02; affirming general pleading standards. Plaintiff filed defamation action against individual defendant and his employer, alleging that in late September 2015, defendant, “while acting in the course and scope of his employment… made false and defamatory statements” to specific individuals. The complaint included a summary of the allegedly false and defamatory statements.
Defendants moved to dismiss the complaint under Rule 12.02 for failure to state a claim upon which relief may be granted, alleging the complaint failed to “identify (1) who heard the alleged statement; (2) when the alleged statements were made; or (3) where the alleged statements were made.” Defendants also argued plaintiff failed to properly allege a defamation claim because the complaint did not contain the “precise defamatory language or even the context in which the alleged statements were made.” The district court granted the Rule 12.02 motion, finding the “description of the defamation… imprecise and vague.”
On review, the court of appeals confirmed that Rule 8.01 merely requires “a short and plain statement of the claim showing the pleader is entitled to relief.” The court of appeals also held a claim is sufficient against a Rule 12.02 motion if “it is possible on any evidence which might be produced, consistent with the pleader’s theory, to grant the relief demanded.” The court of appeals held that the complaint sufficiently described the allegedly defamatory statements and alleged the other elements of a valid defamation claim, satisfying the requirements of Rule 8.01. Reversed and remanded. Swartwood v. Fodness, et al., A18-0649, 2018 WL 6596281 (Minn. Ct. App. 12/17/2018) (unpublished).
• Minn. R. Civ. P. 60.02; affirming vacation of permanent injunction. Plaintiff is defendants’ neighbor. After failing to halt construction of a home through the city, plaintiff filed suit against defendants and the city for failure to enforce zoning ordinances. The current zoning ordinance requires lots be at least 120 feet wide, and defendants’ lot was only 50 feet wide. However, the lot was a “legal non-conforming lot” because it existed before the current zoning scheme took effect.
The district court granted summary judgment for the city and dismissed it from the case. It also granted partial summary judgment to plaintiff and defendants, ruling that the reconstructed building violated the zoning codes by expanding the floor area of the building by more than 25%. After trial, the court entered a permanent injunction against building the structure in violation of this zoning ordinance.
After the injunction was issued, the city amended the zoning rules, specifically stating the city had “been made aware of a recent court ruling where the court applied [the zoning rule] in a manner that was not intended by the city.” Defendants thereafter filed a Rule 60.02 motion for relief from final judgment, asking the court to vacate the permanent injunction. The court found the amendment was a mere clarification of the pre-existing rule that applied retroactively and dismissed the injunction.
On appeal, the court of appeals held that Rule 60.02 motions rest within the district court’s discretion and will not be reversed absent an abuse of discretion. The court of appeals agreed with the district court that the amendment was retroactive, and vacation of the permanent injunction was appropriate. Ruether, et al. v. Kathleen Mimbach Living Trust, et al., A18-0496, 2018 WL 6595916 (Minn. Ct. App. 12/17/2018) (unpublished).
• Minn. R. Civ. P. 12.02(e); affirming motion to dismiss. Plaintiff insured suffered a fire loss. The property was insured by two insurance policies, one of which is at issue in this case. The subject-policy included a one-year statute of limitations for claims. Plaintiff attempted to file suit against insurer within the one-year limitations period, but did not properly complete service. Plaintiff sought to dismiss complaint without prejudice. Plaintiff later re-filed a nearly identical action more than one year after the loss. The insured moved to dismiss as untimely. The district court granted insurer’s motion.
In affirming, the court of appeals reviewed the rules for Rule 12.02 motions, finding that motions to dismiss under Rule 12.02 review “the four corners of the complaint and not matters outside the pleadings.” The court may also consider documents “embraced by the complaint, including pleadings and orders in an underling proceeding.” Plaintiff objected to the court referring to its dismissed pleading as part of its Rule 12.02 review. The court of appeals held past pleadings are not documents outside the record and, nevertheless, were not dispositive of the issue. The dispositive document was the insurance policy, which was undisputedly embraced by the complaint. Affirmed. Raymond Oswald, et al. v. South Central Mut. Ins. Co., A18-0507, 2018 WL 6729771 (Minn. Ct. App. 12/24/2018) (unpublished).
• Minn. R. Civ. P. 19.01 and 12.02; affirming dismissal of a necessary party when no actionable claim exists. Plaintiff Aeshliman filed suit against his neighbor Smisek arising from water drainage issues on Aeshliman’s property. Aeshliman also named Wurm, another neighbor, claiming they were an indispensable party because complete relief cannot be afforded without their presence in the case. The district court dismissed all claims against Wurm for failure to state a claim.
The court of appeals affirmed dismissal of Wurm from the action, holding that Rule 19.01 does not create a cause of action, nor does it prevent dismissal of a party from a lawsuit under Rule 12.01 when no cause of action has been alleged. Even if a party is a “necessary party” under Rule 19.01, the plaintiff must still allege a cause of action against that party or face dismissal under Rule 12.02. Aeshliman, et al. v. Smisek, et al., A18-0752, 2018 WL 6729830 (Minn. Ct. App. 12/24/2018) (unpublished).
• Minn. R. Civ. P. 12.02; reversing dismissal when record lacked clear and unequivocal evidence. Plaintiff originally filed a discrimination charge against defendants with the Minnesota Department of Human Rights (MDHR). By two letters dated 9/30/2014, the MDHR updated plaintiff regarding her claims. The first letter said her charges had been referred to the Equal Employment Opportunity Commission for further processing on preemption grounds. The letter continued by saying the charges had been referred to the EEOC and all MDHR proceedings would be terminated. The second letter also discussed referral of plaintiff’s charges to the EEOC because it was a companion charge. Neither letter referenced a right to bring a civil action or a 45-day limitation period for doing so.
On 7/18/2016, plaintiff received a right-to-sue letter from the EEOC. Plaintiff filed a federal suit against the defendants on 10/21/2016. The federal court dismissed plaintiff’s claims for failure to comply with the 90-day statute of limitations. Plaintiff then filed suit in state court, and her claims were dismissed for failure to comply with the 45-day statute of limitations.
The court of appeals first reviewed the rules for Rule 12.02 motions. A claim is sufficient to survive a Rule 12.02 motion “if it is possible on any evidence which might be produced, consistent with the pleader’s theory, to grant the relief demanded.” Dismissal under Rule 12.02 is proper “only if it appears to a certainty that no facts, which could be introduced consistent with the pleading, exist which would support granting the relief demanded.” In making this determination, the court may only review the complaint, accepting the facts alleged therein as true and construing all reasonable inferences in favor of the nonmovant. The court may also consider documents attached to the complaint and documents referenced in the complaint.
In light of this standard, the court of appeals determined it could not conclude, on the record before it, that the statute of limitations “clearly and unequivocally” had run, because the relevant statues, administrative rules, and case law “do not suggest that the September letter provided notice that the commissioner had dismissed” plaintiff’s claims. Thus, the record did not establish that the 45-day limitations period was triggered or that it had lapsed. Reversed and remanded for further proceedings. Brinkman v. Nasseff Mechanical Contractors, Inc., A18-0089, 2018 WL 6735447 (Minn. Ct. App. 12.24.2018) (unpublished).
• Minn. R. Civ. P. 5.04; case properly filed within one year of service. Appellant obtained a judgment against respondent for outstanding credit card debt in 2006. In 2016, appellant moved to renew the judgment for an additional 10-year term shortly before the original judgment was set to expire. Respondent did not oppose the motion or otherwise appear in the action. Nevertheless, the district court denied appellant’s motion, contending respondent’s divorce decree allocated marital debt to respondent’s ex-wife, making the respondent the improper party defendant. The district court thereafter dismissed the action under the principle of nunc pro tunc and Rule 5.04. On appeal, appellant argued that the divorce decree may have allocated responsibility for marital debt, but did not vacate the prior judgment, making its motion proper.
On appeal, the court of appeals held that appellant was not bound by the determinations of the divorce decree because appellant was not a party to that proceeding and the court in that case lacked jurisdiction over appellant to alter its judgment. The court of appeals also reversed the district court’s ruling dismissing the action under Rule 5.04, which requires filing the complaint within one year of service, finding the case was filed within the one-year time period. Reversed and remanded. Discovery Bank v. William J. Kaufmann, A18-0671, 2018 WL 6837470 (Minn. Ct. App. 12/31/2018) (unpublished).
• Minn. R. Civ. P. 12.02(e); affirming judicial interpretation of contract as part of motion to dismiss. Plaintiff and defendant are parties to a contract governing defendant’s provision of electricity to plaintiff. The contract includes an appendix that provides a rate formula that governs how defendant charges its members, including plaintiff, for power and energy. The appendix also includes procedures for amending the rate formula by obtaining approval of (i) at least 55% of defendants’ members and (ii) members representing 45% of defendants’ electric load.
In 2009, defendant amended the rate formula by satisfying each requirement outlined in the appendix. Plaintiff challenged application of the amended rate formula to itself because it had voted against the amendment. Plaintiff argues the contract also required approval of the amendment by each individual member before the amended formula may be applied against that member. The district court dismissed plaintiff’s breach of contract and declaratory judgment claims.
On appeal, the plaintiff argued the district court applied the wrong standard of decision under Rule 12. According to the plaintiff, the complaint alleged that the contract required approval of each individual member before an amendment could be applied against that member. Plaintiff argued the district court was required to accept that allegation as true when reviewing defendant’s motion to dismiss.
The court of appeals rejected this argument. “When a complaint refers to a contract and the contract is central to the claims alleged, then a court may consider the entire written contract along with the factual allegations in the complaint.” A court is not bound by the legal conclusions stated in a complaint, and when a contract is unambiguous, interpretation of that contract is a question of law that can be determined on a motion to dismiss.
The complaint referred to the contract throughout and attached the contract to the complaint. Thus, the district court properly considered the language of the contract when deciding a Rule 12 motion. Moreover, plaintiff’s allegations about member approval were its interpretation of the contract, which is a legal conclusion that poses a question of law, not a question of fact that must be accepted as true. The plain language of the contract was unambiguous, the rate formula was properly applied, and the district court properly dismissed plaintiff’s complaint. Crow Wing Cooperative Power and Light Company v. Great River Energy, et al., A18-0471, 2019 WL 114200 (Minn. Ct. App. 1/7/2019) (unpublished).
• Minn. R. Civ. P. 56.03; affirming summary judgment where plaintiff failed to support argument with admissible evidence. District court granted summary judgment to defendant on plaintiff’s claim for tortious interference with prospective economic advantage and tortious interference with contractual relations.
On appeal, plaintiff argued there was a genuine issue of material fact as to whether defendant had knowledge of the potential sale to a different buyer, satisfying the elements of his claims. The court of appeals rejected this argument as conclusory. Plaintiff failed to cite any admissible evidence in the record indicating defendant had knowledge of the potential sale. While plaintiff did cite defendant’s affidavits, those affidavits explicitly denied any knowledge of the sale. As plaintiff failed to cite to admissible evidence, summary judgment was affirmed. Generations Law Office, Ltd. v. Lonny D. Thomas, et al., A18-0729, 2019 WL 114211 (Minn. Ct. App. 1/7/2019) (unpublished).
Michael Mather
HKM, P.A.
CRIMINAL LAW
JUDICIAL LAW
• 4th Amendment: Terry stop exception to warrant requirement does not apply when officer suspects person “might” commit crime. Appellant was convicted of being a felon in possession of a firearm after police responded to a 911 call from a woman who feared for her safety and that of her infant child because an unknown intoxicated man with a gun, appellant, was in her apartment. Upon their arrival, police found appellant asleep on the couch, patted him down while he slept, and found a handgun. Police chose not to wake appellant before securing the handgun to remove the threat that he may act erratically. The officers did not suspect criminal activity or intend to arrest anyone in the apartment before patting down appellant.
Appellant argued that police unreasonably searched and seized him and also challenged the district court’s denial of his motion to remove a juror for actual bias. The court of appeals found that appellant was entitled to a new trial on the juror issue, but held that the pat-frisk was reasonable under the warrant requirement exception recognized in Terry v. Ohio, 392 U.S. 1 (1968). The Supreme Court affirms the court of appeals, agreeing that appellant is entitled to a new trial because of the presence of an actually biased juror, but finding the pat frisk of appellant valid, instead, under the emergency aid exception to the warrant requirement.
It is well-settled that a pat-frisk for weapons is a search under the 4th Amendment. In considering whether an exception to the warrant requirement applies to the search in this case, the Supreme Court notes that the court of appeals found the Terry pat-frisk exception applies when an officer has reasonable suspicion that a person “might” commit a crime. However, Terry is clear that the exception applies when police suspect an individual is “about to” commit a crime. Nevertheless, there was no suspicion of any crime or intent to make an arrest in this case.
The Supreme Court next distinguishes between the community caretaker exception and the emergency aid exception. The Court notes that, while some federal and other state courts have applied the community caretaker exception in a broader context, the case that first recognized the exception, Cady v. Dombrowski, 413 U.S. 433 (1973), addressed routine administrative searches of vehicles taken into police custody, or, in Minnesota, “inventory searches.” Such searches are “totally divorced” from officers’ criminal investigation and law enforcement roles. The emergency aid exception, on the other hand, involves the need to protect or preserve life or avoid serious injury. Police need reasonable grounds to believe an emergency is at hand and some reasonable basis to associate the emergency with the area or place to be searched.
Because the U.S. Supreme Court has never applied the community caretaker exception outside of the automobile context, the Court refuses to do so here. However, it does find the emergency aid exception applicable. Responding officers were objectively motivated by the need to assist the caller and prevent serious injury due to the presence of an unsecured handgun in the possession of a sleeping, intoxicated individual. Officers also had a reasonable basis to associate the emergency with the object of the search, appellant. They had no other way of addressing the exigency without risking harm to themselves or others than to act as they did—that is, to search appellant and secure the handgun before waking appellant. Thus, the pat frisk of appellant did not violate the 4th Amendment. Justin Stephen Ries v. State, No. A16-0220, 920 N.W.2d 620 (Minn. 12/5/2018).
• 4th Amendment: Stop of car for cracked windshield lawful only if reasonable suspicion that crack limited or obstructed vision. Appellant was charged with and convicted of DWI and violating a driver’s license restriction after being pulled over for a cracked windshield and not wearing a seatbelt. Minn. Stat. §169.71, subd. 1(a)(1), prohibits a person from driving a “motor vehicle with… a windshield cracked or discolored to an extent to limit or obstruct proper vision.” Thus, the question is whether a stop can rest on the appearance of a crack alone, regardless of the extent of the crack. The Minnesota Court of Appeals says no.
The qualifier “to an extent to” in the statute indicates that not every cracked windshield constitutes a violation. To stop a vehicle for a cracked windshield, the officer must have reason to suspect the extent of the crack limits the driver’s vision. Here, the record shows only that appellant’s windshield was cracked and nothing more regarding the extent to which it affected appellant’s vision. This is not enough to validate the stop of appellant’s vehicle.
However, the officer did have reasonable suspicion to stop appellant for a seat belt violation, as the officer testified he based the stop not only on the windshield crack but also his observation that appellant was not wearing a seatbelt, a violation of Minn. Stat. §169.686, subd. 1(a). Thus, appellant’s convictions are affirmed. State v. James Wilmar Poehler, No. A18-0353, __ N.W.2d __, 2018 WL 6442313 (Minn. Ct. App. 12/10/2018).
• Criminal procedure: Defendant does not forfeit right to challenge for-cause ruling by failing to use peremptory challenge. The parties do not dispute that one juror at appellant’s trial was biased, but the state argues that appellant should have used a peremptory challenge to remove the juror. For-cause challenges and peremptory challenges are addressed in Minn. R. Crim. P. 26.02. Nothing in this rule provides that a party forfeits the right to challenge the district court’s for-cause ruling by not using an available peremptory challenge to remove the juror. The court declines to read such a requirement into the rule. The court holds that appellant did not forfeit his right to challenge the district court’s denial of his motion to remove Juror 18 for cause by not using a peremptory challenge to remove the juror. As the state concedes Juror 18 was actually biased, appellant is entitled to a new trial. Justin Stephen Ries v. State, No. A16-0220, 920 N.W.2d 620 (Minn. 12/5/2018).
• Criminal sexual conduct: Minn. Stat. §609.342, subd. 1(h), requires proof of sexual penetration. Appellant sexually abused a 10-year-old for several months, including touching her inappropriately and engaging in genital-to-genital contact. Appellant never sexually penetrated her. Appellant was charged with and convicted of first- and second-degree criminal sexual conduct, but appellant challenges the sufficiency of the evidence to support his first-degree conviction, arguing the statute of conviction, Minn. Stat. §609.342, subd. 1(h), requires proof of sexual penetration, which the state concedes it did not prove.
The Supreme Court notes that the statute expressly uses the words “sexual penetration” in defining the crime. The statute’s plain language requires that the state first prove the defendant engaged in one of the two categories of prerequisite conduct (sexual penetration or bare genital-to-genital contact with a person under 13), then prove one of the seven “following circumstances” set forth in subdivision 1(a) through 1(h) existed. The two steps are independent inquiries.
In this case specifically, the state had to prove that (1) appellant had a significant relationship to the complainant, (2) the complainant was under the age of 16 years of age at the time of the sexual penetration, and (3) the sexual abuse involved multiple acts committed over an extended period. The state did not prove penetration as required by the statute. State v. Juan Manuel Ortega-Rodriguez, No. A17-0450, 920 N.W.2d 642 (Minn. 12/5/2018).
• Conditional release: Court had jurisdiction to reimpose mandatory conditional release term if authorized when imposed and defendant does not have crystallized expectation of finality in sentence lacking conditional release term. Appellant pleaded guilty in 2009 to failing to register as a predatory offender and was sentenced to 15 months in prison. The district court failed to include the statutorily mandated conditional release term, but amended its sentencing order three months later to include the 10-year conditional release term, without a jury finding or appellant admitting his risk level status. While serving his conditional release term in 2015, appellant moved the district court to vacate the conditional release term based on State v. Her, 862 N.W.2d 692 (Minn. 2015) (Constitution requires that determination of status as risk-level-III offender be made by jury) and Reynolds v. State, 888 N.W.2d 125 (Minn. 2016) (defendant may challenge conditional release term via motion to correct sentence under Minn. R. Crim. P. 27.03, subd. 9).
At a resentencing hearing, appellant moved to terminate the proceedings and vacate the conditional release term because the original complaint did not make reference to his risk level designation. The state moved to amend the complaint, but the district court denied the motion and terminated the proceedings, finding no question for the jury to consider because the complaint did not allege appellant was a risk-level-III offender. The district court issued a second amended sentencing order stating there was no conditional release period. Based on State v. Meger, 901 N.W.2d 418 (Minn. 2017) (Her does not apply retroactively), filed subsequently, the state moved to reconsider. The district court issued a third amended sentencing order, reimposing a 10-year conditional release term.
The court of appeals reads the Supreme Court’s remand instructions in Her and Meger to suggest that the district court does not lack jurisdiction to impose a lawful conditional release term even when the defendant has otherwise completed the terms of imprisonment and supervised release. It also rejects appellant’s argument that the district court’s jurisdiction ended when it removed the conditional release term. As Her is not retroactive, appellant’s period of conditional release was authorized when it was first imposed. Thus, the district court had jurisdiction to reimpose the legal and mandatory conditional release term.
The court also distinguishes cases in which the defendants were not on notice that conditional release was part of the mandatory terms of their sentences. Here, the complaint referred to conditional release as a penalty, appellant’s sentence was amended to include a conditional release term less than three months after the original sentencing hearing, and conditional release was lawfully imposed while appellant was still imprisoned. Meger’s ruling that Her did not apply retroactively and the state’s motion for reconsideration challenging the order vacating conditional release prevented appellant from having “a crystallized expectation of finality in a sentence that did not include a conditional-release term.” State v. Michael Allen Franson, No. A18-0539, __ N.W.2d __, 2018 WL 6442707 (Minn. Ct. App. 12/10/2018).
Samantha Foertsch
Bruno Law PLLC
Stephen Foertsch
Bruno Law PLLC
COMMERCIAL & CONSUMER LAW
JUDICIAL LAW
• What is the right law? A recent case, Pain Center of SE Indiana LLC v. Origin Healthcare Solutions LLC, provides an opportunity to explore an important area of modern law. The case involved contracts between a medical practice and a computer software company pursuant to which the medical practice acquired licenses and support services for the software company’s practice management and electronic medical records software. The medical practice alleged breach of contract claims, and the issue was whether these claims were barred by a statute of limitations. The medical practice asserted the 10-year statute of limitations for written contracts, but the software company asserted the four-year statute of limitations in Uniform Commercial Code §2-725. The software computer programs were pre-existing and standardized and were not custom programming. The contracts, aside from the software, provided for ongoing billing and IT support, the software being a tool that allowed the software company to perform those services; the medical practice paid monthly for the services; the software was licensed only in conjunction with those services; and the relative costs of the software and services were (1) $8,000 to license the management software and $26,294 for the services over the contract period, and (2) over $23,000 to license the medical records software but over $24,000 for services over the contract period.
The court considered the contracts “mixed,” involving both the software and the services, and used the common predominant-purpose test to determine that the services predominated and thus the UCC statute of limitations did not apply, and neither did the UCC warranties of merchantability or fitness, nor the good-faith performance provision of UCC Article 1 in §1-304. This certainly is a common analysis, but it leaves questions: (1) Does the law of services apply to the asserted breach-of-contract claims? If so, since the claims were for not providing service when the medical billing software went awry, the result may be acceptable on a negligence test even though that may offer the medical practice less protection; (2) if a separate issue remains about whether the software conformed to the contract, does the determination that the contracts’ predominant purpose dictates that services law (negligence) apply to that issue, which offers less protection than warranty or contract law might, or can the court now apply warranty law (which seems to contradict the predominant-purpose analysis), or can the normal rules of contract apply, which may lead to a result closer to what application of the UCC would produce? See, e.g., Farnsworth, Contracts, §§8.8 and 8.12 (Third Edition, Aspen Publishers 1999). Unfortunately, courts often do not focus on this question.
It also is worth consideration of what the court did focus on—that the software was a good and thus subject to UCC Article 2. UCC Article 2 in §2-102 does apply to a transaction in goods, a license could qualify as a transaction, and since goods as defined in UCC §2-105(1) includes all things which are moveable at the time of identification to the contract of sale(emphasis supplied), one might argue the court is right. But a license is not a sale—a sale transfers title (UCC §2-106(1)) and a license does not, and to obliterate that distinction may lead the licensor to lose control over its asset. Moreover, to treat a license as a sale involves warranties that may be inappropriate for software even if acceptable for goods (see the Uniform Computer Information Transactions Act enacted in several states). In short, shoving a transaction for which it was not designed under UCC Article 2 is a serious mistake even if in the case it may not have mattered. To avoid such a result, the contract should be able to provide for application of appropriate provisions of the uniform act, not as a choice of the law of one of the enacting states but as a matter of freedom of contract as announced in UCC §1-302, for example. See Official Comments to UCC §1-302. This of course does not preclude a court from applying a provision from UCC Article 2 by analogy, as courts often did before UCC Article 2A on leases was enacted.
In conclusion, the Pain Center case is one that holds many lessons. Pain Center of SE Indiana LLC v. Origin Healthcare Solutions LLC, 96 U.C.C. Rep. Serv. 2d 66, 2018 WL 3045278 (7th Cir. 2018).
Fred Miller
Ballard Spahr
EMPLOYMENT & LABOR LAW
JUDICIAL LAW
• Disability discrimination; five claimants lose. A quintet of claimants lost their appeals before the 8th Circuit Court of Appeals recently.
An employee of a health care facility who refused to comply with a job requirement that she take a rubella screening test and pills to develop immunity to the disease due to close patient contact was properly terminated. The 8th Circuit upheld a ruling by Judge Joan Ericksen in Minnesota, who rejected the employee’s claim of a failure to provide a reasonable accommodation under the Americans with Disabilities Act, although on alternate grounds. The appellate court reasoned that the health screen complied with the ADA and parallel provisions of the Minnesota Human Rights Act. Hustvet v. Allina Health System, 910 F.3d 399 (8th Cir. 12/7/18).
An employee who missed work occasionally because of the need for medical treatment for an incurable disease was properly terminated. The 8th Circuit upheld a lower court dismissal of the lawsuit after the employee was fired because she failed to provide medical verification for missing work during a flare-up following receipt of a “last notice.” The employer’s failure to excuse the lack of medical verification, contrary to its attendance policy, did not violate the ADA. Lipp v. Cargill Meat Solutions Corp., 2018 WL 6625770 (8th Cir. 12/19/2018) (unpublished).
A restaurant employee with a permanent medical restriction was properly fired for inability to perform essential functions of the job. The court upheld summary judgment on grounds that the facility was not obligated to provide a reasonable accommodation. Denson v. Steak ‘N Shake, Inc., 910 F.3d 368 (12/3/18).
An employee’s inability to perform the essential functions of her job barred her ADA claim. The court held that her inability to do so, with or without reasonable accommodations, warranted dismissal of her ADA claim. Blevins v. AT&T Services, Inc., 2018 WL 6431544 (8th Cir. 12/6/2018) (unpublished).
Termination of total disability benefits for an employee was upheld after an independent medical examination showed that the employee was only partially disabled after gall bladder surgery (because he was able to perform daily activities) was upheld. The court held that the determination did not constitute an “abuse” of discretion under the applicable ERISA standard. Leirer v. Proctor & Gamble Disability Plan, 910 F.3d 392 (12/6/18).
• Age, race claims estoppel denied. A 56-year-old African American man who was laid off after returning to work following a work-related injury lost his lawsuit for age and race discrimination. The court rejected his estoppel claim that he was promised a job would be available when he healed, but the position was given to a younger, white applicant. There was no evidence that the employer took affirmative action to prevent the claimant from timely asserting her claims or requested to be rehired. Kirklin v. Joshen Paper & Packing of Arkansas Co., 2018 WL 6625766 (8th Cir. 12/19/2018) (unpublished).
• FMLA interference; untimely notice. An employee who gave untimely notice of a request for a leave of absence under the Family Medical Leave Act (FMLA) had her claim dismissed under the statute. Summary judgment was affirmed because the requirement for a leave was not communicated on a timely basis, barring the employee’s interference claim. Stringfield v. Cosentino’s Food Stores, 2018 WL 6629394 (8th Cir. 12/18/2018) (unpublished).
• Minimum wage; travel expenses included. Travel expenses paid to truck drivers are includible in calculating whether they were paid a minimum wage. The 8th Circuit rejected a claim in a class action lawsuit that those payments should not have been used to determine whether the employees were properly paid a minimum wage amount. Baouch v. Werner Enterprises, 908 F.3d 1107 (11/14/2018).
• Unemployment compensation; dishonesty bars claim. A bartender who was dishonest during an investigation of his own alleged improper transactions with customers was precluded from receiving unemployment compensation benefits. The Minnesota Court of Appeals held that making false statements in the interview constituted disqualifying misconduct. Nachtigall v. Marriott International, Inc., 2018 WL 6442183 (12/10/2018) (unpublished).
• Unemployment compensation; failure to attend hearing. An employee’s failure to attend an evidentiary hearing to challenge denial of unemployment benefits barred her appeal. The appellate court held that the employee did not establish “good cause” or present newly discovered evidence to justify a new hearing and that this warranted denial of benefits. McCorisin v. Pizza Luce III, Inc., 2018 WL 6442118 (12/10/2018) (unpublished).
Marshall H. Tanick
Meyer, Njus & Tanick
ENVIRONMENTAL LAW
JUDICIAL LAW
• US Supreme Court holds no “critical habitat” under ESA unless actual species present. On 11/27/2018, the Supreme Court of the United States held that a “critical habitat” for an endangered species cannot be protected as such unless it is actually a “habitat” for the endangered species. In 2001, the U.S. Fish and Wildlife Service (FWS) listed the dusky gopher frog as an endangered species. See 16 U. S. C. §1533(a)(1). The listing required FWS to designate “critical habitat” for the frog, and the FWS proposed designating a 1,544-acre site in St. Tammany Parish, Louisiana. Although at one time the dusky gopher frog had lived on the site, no frogs had been spotted in many years. Nonetheless, FWS determined that because of the site’s physical features, such as rare, high-quality breeding ponds, it qualified as critical habitat for the frog. The FWS estimated the loss to the landowners as a result of the designation (resulting from the additional regulatory hurdles and limitations associated with developing land designated as critical habitat) exceeded $33 million. Nonetheless, the FWS determined this cost was not disproportionate to the conservation benefits and went ahead with the listing. The district court and the 5th Circuit Court of Appeals upheld the designation.
In vacating the 5th Circuit, the high court held that an area is eligible for designation as critical habitat only if it is habitat for the species. The Court looked to the statutory context and the plain language of §1533(a)(3)(A)(i), the only source of authority for critical habitat designation, which simply provides that once FWS determines a species in endangered or threatened, it must “designate any habitat of such species which is then considered to be critical habitat” (emphasis added). This language, the Court held, does not authorize the FWS to designate the area as critical habitat unless it is also an actual habitat for the species. Weyerhaeuser Co. v. United States Fish & Wildlife Serv., 139 S. Ct. 361 (2018).
ADMINISTRATIVE ACTION
• EPA and Corps propose rule narrowing Waters of the United States definition, Clean Water Act jurisdiction. On 12/11/2018, the U.S. Environmental Protection Agency and U.S. Army Corps of Engineers (the agencies) issued a proposed rule that would recodify the 2015 Waters of the United States (WOTUS) rule under the Clean Water Act (CWA). The agencies issued the proposed rule in response to Executive Order 13778, issued on 2/28/2017. The executive order directed the agencies to review and rescind the 2015 WOTUS rule, and to issue a new WOTUS rule “interpreting the term ‘navigable waters’… in a manner consistent with” Justice Scalia’s opinion in Rapanos v. United States. 547 U.S. 715 (2006).
The Supreme Court case attempted to define which type of wetlands and waterways could or could not be considered “waters of the United States,” and thus subject to the agencies’ jurisdiction under CWA. The 2015 WOTUS rule aligned with Justice Kennedy’s dissent, which held that CWA jurisdiction would cover waterways with a “significant nexus” between the wetland and the other traditional navigable water. Id. at 780. On the other hand, Justice Scalia’s plurality-opinion held that WOTUS includes only waterways that are adjacent to and have “a continuous surface connection” with other traditional navigable waters. Id. at 742.
The proposed rule establishes six categories of water that would be considered WOTUS. First, traditional navigable waters (TNW) such as large rivers, territorial seas, and wetlands along coastlines influenced by the tides that are used in interstate or foreign commerce. Second, tributaries that flow into TNW on a perennial or intermittent basis. Third, ditches or “artificial channel[s]” where they are used for navigation or influenced by the tides. Fourth, certain lakes and ponds where they are TNW, or where they contribute perennial or intermittent flow to TNW either directly, or through other non-jurisdictional surface waters, and where they are flooded by protected waters in a typical year. Fifth, impoundments and reservoirs connected to protected waters. And sixth, adjacent wetlands that physically touch other jurisdictional waters, wetlands with a surface connection to protected waters by flooding in a typical year, or by perennial or intermittent flow between the wetland and jurisdictional water.
The proposed rule specifically states that waters not listed above would not be considered WOTUS. Waters that are excluded in the proposed rule include, inter alia, interstate waters (no longer an independent category automatically triggering WOTUS jurisdiction), water features that flow only in response to precipitation (ephemeral streams), isolated wetlands, groundwater, artificial lakes and ponds, farm ditches, stormwater runoff features, and wastewater recycling structures.
The agencies did not provide data on how many water bodies would be excluded from the proposed rule as compared to the 2015 WOTUS rule; however, it is estimated that as much as 60% of currently protected streams and wetlands would lose WOTUS jurisdiction. If finalized, the proposed rule would apply nationwide and replace the 2015 WOTUS rule, which is currently only enforced in 22 states (including Minnesota). The agencies will take public comments on the proposed rule for 60 days after publication in the Federal Register, and have scheduled a public hearing in Kansas City, Kansas. Docket ID: EPA-HQ-OW-2018-0149.
• Gov. Walz appoints new MPCA and DNR commissioners. Two women were appointed to top jobs in the state—one a former Best Buy executive and the other a former Minnesota city mayor. Minnesota native Laura Bishop was appointed commissioner of the MPCA, and St. Paul native Sarah Strommen was named commissioner of the DNR. Bishop spent 15 years with Best Buy Co., where she was the chief sustainability and corporate responsibility officer and a member of the Best Buy Operating Committee. Before joining Best Buy, Bishop served as the assistant commissioner of the Minnesota Department of Administration for the Ventura administration and worked in Washington D.C at the State Department and in Switzerland with the U.S. Embassy. While at Best Buy, Bishop ushered in an e-waste recycling program and led the company’s efforts to reduce its carbon footprint. She has indicated that climate change and greenhouse gas emissions are one of the governor’s top five priorities for the new administration. In response to this priority, Bishop plans to appoint an assistant commissioner of air and climate change. At a recent meeting with the Minnesota Chamber of Commerce Environmental and Natural Resources Policy Committee, Bishop indicated her experience in bringing people together and finding efficiencies in programs is a strength that will help her bring the agency, the regulated community, and stakeholders together to address the state’s environmental concerns.
St. Paul native Sarah Strommen is the first woman appointed to lead the DNR. Strommen most recently served as the DNR’s assistant commissioner of parks and trails, fish, and wildlife. Previously, she worked as an assistant director with the Minnesota Board of Water and Soil Resources. Strommen was elected mayor of the city of Ramsey in 2012 and held that office until May 2018. She has served the nonprofit sector as the policy director for the Friends of the Boundary Waters Wilderness and as associate director of the Minnesota Land Trust. Outdoor News quoted Walz as saying, “Strommen built her career integrating science and policymaking across sectors and has a deep understanding and appreciation for our natural resources. She embraces our vision for one Minnesota and will work to build consensus among citizens and stakeholders alike.” Strommen’s involvement with Friends of the Boundary Waters Wilderness, an organization that opposed the PolyMet copper-nickel mining project (which has already received DNR permits), has many wondering what her agency will do with another copper-nickel mine proposed by Twin Metals. Asked about her plans, she told MPR News that the “agency’s approach to regulatory process [is that] there’s statutes and rules that dictate how the process goes, there’s public engagement, and then there’s science and data. So it will be about ensuring we have a good process.”
• Minnesota DNR grants permit for Fargo-Moorhead flood diversion project. The Minnesota Department of Natural Resources (DNR) announced on 12/27/2018 that it granted a dam safety and public waters work permit for a revised “Plan B” version of the Fargo-Moorhead Flood Risk Management Project. The Fargo-Moorhead project is a substantial flood diversion venture intended to redirect flood waters from the Red River of the North in the Fargo, ND and Moorhead, MN area using a series of dams, levees, and channels throughout the Fargo-Moorhead area.
The project had been originally halted in September 2017 when the Federal District Court for the District of Minnesota ordered an injunction to stop construction. The DNR had argued that the Fargo-Moorhead Flood Diversion Board of Authority was required to obtain the proper permits before any work could be undertaken. Because the diversion authority had not obtained the proper permits, the court ordered all construction work to be stopped.
Since the Court’s injunction, the DNR has completed the state’s required environmental review process. Through this process, the DNR determined that the Supplemental Environmental Impact Statement (SEIS) for the project was adequate, and therefore issued the permit. As approved by the DNR, the revised project will include a 30-mile long diversion channel on the North Dakota side of the Fargo-Moorhead area. It will also allow for dams and other water control features to be located on the Red River. The DNR found that the project as revised will result in reduced impacts to the health and safety of Minnesotans and their properties due to the reduced size of flood areas in the Fargo-Moorhead area.
In all, the permit contains 54 conditions that must be met, including required mitigation—which includes fish passage at Drayton Dam and acquisition of property rights for all impacted property in Minnesota. Although issuance of the permit is a key step in the process, additional permits are still required from the DNR, and approval is still required from local, state and federal agencies. http://news.dnr.state.mn.us/
Jeremy P. Greenhouse, The Environmental Law Group, Ltd.
Susan Wiens, The Environmental Law Group, Ltd.
Jake Beckstrom, Vermont Law School 2015
Erik Ordahl, Flaherty & Hood, P.A.
FAMILY LAW
JUDICIAL LAW
• The parentage act allows an alleged biological father to bring an action to establish parentage notwithstanding the existence of a valid recognition of parentage identifying another man as the child’s father. Mother became pregnant in 2013. Despite knowing her current partner (and later husband), J.N., was not the child’s biological father, Mother and J.N. signed a recognition of parentage (ROP) under Minn. Stat. §257.75 acknowledging J.N. as the child’s father. Two years passed and Mother and J.N. lived with the child as a family.
In 2016, the child’s biological father, A.S., commenced a parentage action seeking genetic tests after receiving a tip through social media. Mother agreed to the testing, which confirmed A.S.’s paternity. A.S. then asked the court to adjudicate him as the child’s father. Despite both procedural and substantive opposition from Mother, J.N., and a guardian ad litem appointed for the child, the court declared A.S. to be the child’s father after a two-day trial. Mother and J.N. then appealed, arguing primarily that the district court should have treated the signed ROP as determinative of the child’s parentage—thus depriving A.S. of standing to maintain a parentage action.
The Minnesota Court of Appeals disagreed, and affirmed the district court. While acknowledging that an ROP acts as an adjudication of a child’s legal parents, the court emphasized that the statute only prohibits further litigation over parentage where “there are no competing presumptions of paternity.” Here, the court reasoned, the ROP could not be treated as final because A.S.’s genetic testing gave rise to a competing presumption of parentage and A.S. was not a party to the ROP. The court of appeals further rejected Mother’s argument that A.S. lacked standing to vacate the ROP, holding that “vacatur of a ROP is not a prerequisite to relief” under the parentage act. In other words, the statutory provisions for vacating a recognition do not apply to an action by a presumptive father to vacate a recognition to which he is not a party. Mother also challenged the court’s decisions to adjudicate A.S. as the child’s father rather than J.N. and requiring the parties to share joint legal custody. The appellate court held that the record sufficiently supported the lower court’s determinations. In re the Welfare of C.F.N., No. A18-0635, __ N.W.2d __ (Minn. Ct. App. 12/31/2018).
Michael Boulette
Barnes & Thornburg LLP
FEDERAL PRACTICE
JUDICIAL LAW
• Threshold issues of arbitrability; “wholly groundless” exception rejected. The Supreme Court unanimously held that where the parties have agreed that an arbitrator is to decide threshold issues of arbitrability, that agreement will be enforced even where the party opposing arbitration argues that any claim of a right to arbitration is “wholly groundless.” Henry Schein, Inc. v. Archer & White Sales, Inc., ___ S. Ct. ___ (2019).
• Summary judgment; affidavits; statements made on personal knowledge. Affirming summary judgment for the defendants in a Section 1983 action, the 8th Circuit rejected the plaintiff’s argument that police officers’ affidavits should not have been considered on summary judgment because the affidavits did not state that they were based on personal knowledge, with the 8th Circuit “declin[ing] to endorse the formalism” the plaintiff advocated, and noting that the district court had found that the affidavits were based on personal knowledge. Awnings v. Fullerton, ___ F.3d ___ (8th Cir. 2019).
• Fed. R. Civ. P. 56(d); summary judgment; stay pending additional discovery. Affirming an order by Judge Davis awarding the defendants summary judgment in a product liability action, the 8th Circuit found no abuse of discretion in his denial of the plaintiff’s Fed. R. Civ. P. 56(d) motion to stay consideration of the summary judgment motion pending additional discovery, where the case had been pending for more than two years and the discovery the plaintiff sought was not relevant to his summary judgment arguments. Mancini v. Boehringer Ingelheim Pharms., Inc., ___ F.3d ___ (8th Cir. 2019).
• Pleading punitive damages; intra-district split widens. For more than a year, this column has tracked the growing split within the District of Minnesota regarding whether motions for leave to assert claims for punitive damages are governed by Fed. R. Civ. P. 15 or Minn. Stat. §549.191.
In recent decisions:
While not reaching the issue of which standard applies, Judge Tostrud acknowledged “a recent intra-District trend” favoring the application of Fed. R. Civ. P. 15(a). Shank v. Carleton College, 2019 WL 121938 (D. Minn. 1/7/2019).
Magistrate Judge Brisbois found that Minn. Stat. §549.191 applied to the plaintiffs’ motion to amend their complaint to seek punitive damages. Rilley v. Money Mutual, LLC, 2018 WL 6920764 (D. Minn. 12/13/2018).
In an action raising the closely related question of whether a motion to add a claim for bad faith denial of insurance benefits is governed by the Federal Rules of Civil Procedure or Minn. Stat. §604.18, Judge Schiltz found that the statute conflicted with Fed. R. Civ. P. 8 and 15, and that the motion was governed by those rules. Selective Ins. Co. v. Sela, ___ F. Supp. 3d ___ (D. Minn. 2018).
• Early discovery; John Doe defendants. Reversing an order by Magistrate Judge Schultz, Chief Judge Tunheim granted the plaintiff’s motion for leave to serve a third-party subpoena seeking to obtain the name and address of the alleged unlawful downloader of adult motion pictures, but imposed a number of restrictions on the subpoena in order to temporarily protect the anonymity of the alleged downloader. Strike 3 Holdings, LLC v. Doe, 2019 WL 79316 (D. Minn. 1/2/2019).
Magistrate Judge Leung granted the bulk of the plaintiffs’ motion for leave to serve early discovery in the form of subpoenas seeking to obtain names, addresses, and other identifying information associated with the defendants in a copyright action while, like Chief Judge Tunheim, imposing strict conditions on the use of any information obtained as a result of the subpoenas. Paisley Park Enters., Inc. v. Ziani, 2018 WL 6567828 (D. Minn. 12/13/2018).
• Fed. R. Civ. P. 4(f)(3); motions for alternative service granted. Finding that “email service is not inconsistent with the Hague Convention or with due process,” Judge Tostrud affirmed an order by Magistrate Judge Menendez that had authorized alternative service by email on an Indian defendant pursuant to Fed. R. Civ. P. 4(f)(3). Patrick’s Restaurant, LLC v. Singh, 2019 WL 121250 (1/7/2019).
Magistrate Judge Leung granted the plaintiffs’ motion for alternative service by publication on a Canadian trucking company pursuant Fed. R. Civ. P. 4(f)(3). List v. Carwell, 2018 WL 6787662 (D. Minn. 12/26/2018).
• Motions to seeking leave to amend denied. Denying the plaintiff’s motion to amend seeking leave to assert a Title IX claim, Judge Frank criticized the motion as a de facto motion for reconsideration of Magistrate Judge Noel’s previous denial of a similar motion. Doe ex rel. Doe v. Saint Paul Conservatory for the Performing Arts, 2018 WL 6624203 (D. Minn. 12/18/2018).
Chief Judge Tunheim affirmed Magistrate Judge Brisbois’s denial of the plaintiffs’ untimely motion to amend the scheduling order to allow them to seek to amend their complaint, criticizing the plaintiffs for their “minimally supported and unspecific” claims of diligence, and finding no other good cause that would offset their lack of diligence. Diocese of St. Cloud v. Arrowood Indem. Co., 2019 WL 79003 (D. Minn. 1/2/2019).
Magistrate Judge Schultz denied the plaintiff’s motion for leave to file a second amended complaint on the basis of both futility and bad faith, finding that certain allegations in the proposed second amended complaint were “flatly contradict[ed]” by admissions in its original complaint. ecoNugenics, Inc. v. Bioenergy Life Science, Inc., 2019 WL 157288 (D. Minn. 1/10/2019).
• General personal jurisdiction; agent for service of process. In what is at least third decision in the district on this issue since the Supreme Court’s decisions in Goodyear(Goodyear Tire Ops., S.A. v. Brown, 564 U.S. 915 (2011)) and Daimler (Daimler AG v. Bauman, 134 S. Ct. 746 (2014)), Judge Nelson held that the defendant’s registration with the Minnesota Secretary of State as a foreign corporation and the corresponding presence of its registered agent for service of process within the state made it subject to general personal jurisdiction, despite “persuasive arguments” to the contrary. Am. Dairy Queen Corp. v. W.B. Mason Co., 2019 WL 135699 (D. Minn. 1/8/2019).
• Motion to strike jury demand granted. Where the parties’ dispute was governed by a contract that contained a waiver of the right to a jury trial, the plaintiff’s 2013 complaint did not request a jury trial, the defendant demanded a jury trial in its multiple answers, and the case proceeded through discovery without either party raising the jury issue, Judge Nelson granted the plaintiff’s 2018 motion to strike the defendant’s jury trial demand, rejecting the defendant’s argument that the motion to strike the jury demand was untimely, and that it would be prejudiced by the striking of the jury demand based on its “litigation strategy.” In Re: RFC and ResCap Liquidating Trust Action, 2018 WL 6696788 (D. Minn. 12/20/2018).
Josh Jacobson
Law Office of Josh Jacobson
IMMIGRATION LAW
JUDICIAL LAW
• Applying for asylum on the southern border: An update. Following the 11/19/2018 U.S. District Court grant of the plaintiffs’ request for a temporary restraining order—imposing a nationwide injunction on the government to 12/19/2018 or further court order to allow continued review of the matter until final disposition—the 9th Circuit Court of Appeals denied the government’s subsequent request to stay the district court’s 11/19/2018 temporary restraining order on 12/7/2018. (East Bay Sanctuary Covenant, et al. v. Trump et al., No. 18-17274, 2018 WL 6428204 (9th Cir. 12/7/2018). http://cdn.ca9.uscourts.gov/datastore/opinions/2018/12/07/18-17274.pdf
Then, on 12/11/2018, the government filed application with the U.S. Supreme Court for a stay of the district court’s 11/19/2018 temporary restraining order. On 12/19/2018, the district court issued a preliminary injunction barring the government from taking any further action to implement its rule on asylum claims along the southern border for an extended period of time. “The Court again concludes that Plaintiffs have established an overwhelming likelihood that the new rule barring asylum is invalid. Accordingly, the Court will grant Plaintiffs’ request for a preliminary injunction.” East Bay Sanctuary Covenant, et al. v. Trump et al., 18-cv-06810-JST (N.D. Cal. 12/19/2018). https://ccrjustice.org/sites/default/files/attach/2018/12/99%20Order%20Granting%20Preliminary%20Injunction%202018.12.19%20(1).pdf
On 12/21/2018, the U.S. Supreme Court denied, in a 5-4 decision, the government’s request for a stay of the plaintiffs’ preliminary injunction. Donald J. Trump, President of the United States, et al., v. East Bay Sanctuary Covenant, et al., No. 18A615, 2018 WL 6713079 (2018). https://www.supremecourt.gov/orders/courtorders/122118zr_986b.pdf
• Asylum, domestic abuse, and gang violence. In December 2018, a federal judge permanently blocked the expedited removal of immigrants seeking asylum based on flight from domestic or gang violence without first allowing credible review of their claims as dictated by current immigration law. The judge also ordered the return to the United States of those asylum seekers denied a credible fear interview in order that they might have one. This expedited removal policy came about as a result of then-Attorney General Sessions’s 6/8/2018 decision, Matter of A-B-, 27 I&N Dec. 316 (A.G. 2018), reversing a Board of Immigration Appeals finding that a Salvadoran woman fleeing domestic and sexual violence at the hands of her husband met the requirements for asylum. This decision and subsequent policy effectively eliminated consideration of either domestic abuse or gang-related violence as a basis for asylum in the credible fear context and overruled, in the process, the precedent decision, Matter of A-R-C-G-, 26 I&N Dec. 388 (BIA 2014), which recognized domestic violence as a possible basis for an asylum claim. Grace, et al. v. Whitaker et al., No. 18-cv-01853, 2018 WL 6628081 (D.D.C. 12/19/2018). https://ecf.dcd.uscourts.gov/cgi-bin/show_public_doc?2018cv1853-106
R. Mark Frey
Frey Law Office
INTELLECTUAL PROPERTY
JUDICIAL LAW
• Trademark: Attorneys’ fees denied where both parties prevail. Judge Frank recently denied both sides’ motions for attorneys’ fees because each side partly prevailed in the case. Select Comfort sued competitors for false advertising and Lanham Act claims related to online ads and statements made about its beds. The jury determined that the defendants were not liable for any of the Lanham Act claims, but found the defendants liable for false advertising. Both parties moved for attorney’s fees as prevailing parties, but the court denied the motions. Under the Lanham Act, a court may award attorney’s fees to the prevailing party in “exceptional cases,” which has been defined as cases in which a party’s behavior went “‘beyond the pale.’” However, since defendants successfully defeated Select Comfort’s Lanham Act claims, and Select Comfort prevailed on its false advertising claim, the court held that each party prevailed in part and should each bear their own costs. The court also found that the case was not exceptional. Select Comfort Corp. v. Baxter, Civil No. 12-2899 (DWF/SER), 2018 WL 6529493 (D. Minn. 12/12/2018).
• Copyright and trademark: court grants expedited discovery of defendants’ information. Magistrate Judge Leung recently granted a motion for expedited discovery needed to serve a complaint. Paisley Park filed suit against several parties for trademark and copyright infringement related to music belonging to the estate of Prince. Paisley Park sent the complaint by email, but the defendants refused to provide a physical address for formal service. To properly serve defendants, Paisley Park moved to subpoena email, internet, and social media providers for contact information related to the defendants’ respective accounts. Magistrate Judge Leung analyzed several factors that weighed in favor of granting the motion. First, Paisley Park showed a high likelihood of succeeding in its infringement suit. Second, the discovery requests were also specific and limited in scope, seeking only relevant information from known accounts that were directly related to the defendants. Finally, the defendants’ expectation of privacy weighed in favor of granting early discovery because Paisley Park had alleged sufficient facts showing that defendants infringed the intellectual property, and defendants’ expectation of privacy paled in comparison to Paisley Park’s interest in protecting its intellectual property. The court granted the discovery motion and stipulated that the information produced from each subpoena could only be used for protecting and enforcing Paisley Park’s intellectual property rights. Paisley Park Enters., Inc. v. Ziani, Case No. 18-CV-2556 (DSD/TNL), 2018 WL 6567828 (D. Minn. 12/13/2018).
Tony Zeuli
Merchant & Gould
Ryan Borelo
Merchant & Gould
PROBATE & TRUST LAW
JUDICIAL LAW
• Evidence required to appoint a guardian or conservator. A friend of appellant’s petitioned to have a guardian and conservator appointed after appellant was observed in local businesses with soiled pants on two separate occasions. In addition, the proposed guardian and conservator, who was also a friend of appellant’s, visited appellant’s home, found it to be “dilapidated” and “unlivable,” and smelled fuel oil throughout the home. These observations were generally confirmed by the court appointed visitor. Finally, appellant exhibited signs of confusion, including when he claimed he had just had his furnace checked, even though it had not been checked in ten years.
The district court granted the petition and appointed a guardian and a conservator. The court of appeals reversed, holding that the district court made only “conclusory findings” that were “not substantiated with specific evidence.” Specifically, the court noted that the only evidence referenced by the district court was that appellant exhibited confusion during the hearing and the “unquestionable” motives of the petitioner and the proposed guardian and conservator. The court of appeals also noted that “[t]here was no evidence presented and minimal testimony provided about the availability of alternative services that could have been provide to [appellant] to avoid the need for a guardian and conservator.” Given those deficiencies, the court held that “the record evidence was insufficient to meet the clear and convincing standard of proof required to support the appointment of a guardian and conservator.” In re the Guardianship and Conservatorship of Reinhold Struhs, 2018 WL 6273101 (Minn. Ct. App. 12/3/2018).
Casey D. Marshall
Bassford Remele
TAX LAW
JUDICIAL LAW
• Charitable contribution deductions for conservation easement; tax court splits the difference. Taxpayers are permitted deductions for charitable contributions, including contributions of property other than money. When property other than money is contributed, the regulations dictate that “the amount of the contribution is the fair market value of the property at the time of the contribution.” Sec. 1.170A-1(c)(1). “Fair market value,” in turn, is defined as “the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of relevant facts.” Id. subpara. (2). In this dispute, the taxpayer contributed a partial interest in property—in particular, the taxpayer contributed a perpetual conservation restriction.
Yet another regulation specifies the process for valuing such a contribution. Sec. 1.170A-14(h)(3)(i). As is frequently the case in this type of dispute, the Service challenged the taxpayer’s deduction as overstating the fair market value of the conservation easement. Competing experts offered staggeringly disparate values: the taxpayer’s expert valued the contribution at $9,110,000 while the Service valued the contribution at $449,000. Holding that “[n]either side’s expert witness employed a method that fits within the parameters of the regulation,” the court engaged in a lengthy analysis in which it parsed each sentence of the regulation to point out how each side’s expert erred. Despite the experts’ errors, the court reasoned that each expert’s value was sufficiently helpful that the court arrived at its own valuation “by giving equal weight to the values assigned by [each expert].” To reach this conclusion, the court discussed “(1) how both experts’ opinions have aspects that are useful to the determination of the easement’s value, (2) the nature of the errors made by each expert, and (3) how weighting the two experts’ opinions tends to correct the errors in their respective approaches.” Ultimately, the court used an equally weighted average to conclude that the value of the easement was $4,779,500, equal to 50% of the taxpayer’s $9,110,000 value plus 50% of Service’s $449,000 value. Pine Mountain Pres., LLLP v. Comm’r, T.C.M. (RIA) 2018-214 (T.C. 2018).
• Personal income tax: Arbitration award ordinary income, not capital gain. Taxpayer Robert Connell was a highly successful financial advisor who worked for many years for Smith Barney. A decision to move from Smith Barney to Merrill Lynch set in motion a series of events that led Mr. Connell and his former wife to tax court, where they disputed whether an industry arbitration award that extinguished a debt owed by Mr. Connell to Merrill Lynch represented cancellation of indebtedness (taxed as ordinary income) or a payment for taking Mr. Connell’s book of business (taxed as capital gain). The saga began when Mr. Connell learned that Smith Barney was likely to be acquired; he responded by moving to Merrill Lynch, and worked to take his book of business, which represented $350 million of assets under management, with him. Merrill Lynch welcomed Mr. Connell and his book of business. In a compensation move apparently not unusual in the industry, Merrill Lynch “loaned” Mr. Connell just over $3 million, which the parties contemplated Mr. Connell would pay back out of his monthly compensation of $42,980. As the court explained, this arrangement “allowed Mr. Connell to receive the full amount of his transition compensation upfront, while recognizing income only as each monthly payment came due. No moneys changed hands with respect to each monthly ‘repayment’ of the loan.”
The loan became immediately repayable under certain conditions, including the termination of Mr. Connell’s employment with Merrill Lynch. About a year after joining Merrill Lynch, the relationship between Mr. Connell and the company collapsed. Merrill Lynch opened an investigation into whether Mr. Connell complied with industry norms and regulations, as well as his employment agreement, when he brought his clients to the company. Although Merrill Lynch’s outside counsel recommended that the matter be resolved with a letter of reprimand, Merrill Lynch pursued a more aggressive track and forced Mr. Connell to resign. Upon his resignation, Merrill Lynch froze Mr. Connell’s personal accounts, which the firm had required him to keep with the company, and it instituted legal action against him.
Eventually, the parties arbitrated the dispute. The arbitration resulted in Merrill Lynch’s claims being denied in their entirety. Mr. Connell did not have to pay the balance owing under the promissory note and he was not obligated to pay the balance of the upfront forgivable loan to Merrill Lynch. The panel also awarded compensatory damages of $476,500, attorney’s fees of $288,732, and costs of $22,734. The arbitration panel did not specify its reasoning or the basis of the award. Mr. Connell first reported the cancellation of debt as ordinary income. However, on an amended return, he “recharacterized the extinguishment of the balance of the Merrill Lynch upfront forgivable loan, $3,242,248, from ordinary income to capital gain.” Since the arbitration panel did not specify the basis on which the award was granted, it was Mr. Connell’s burden to prove to the court that the payment from Merrill Lynch was “in lieu of” a capital payment for his book of business.
The court looked to the pleadings to determine the character of the award that Mr. Connell sought. Although the court was persuaded that “the filings heavily emphasize Mr. Connell’s argument that Merrill Lynch lured Mr. Connell to Merrill Lynch in order to acquire his book of business and that thereafter it set out to ruin his professional reputation so as to keep him from working at a competing financial services firm,” that was not the only argument Mr. Connell made. Mr. Connell also argued that Merrill Lynch breached the terms of the employment contract, causing Mr. Connell to suffer damages that would be characterized as ordinary income. The court was not persuaded that petitioners met their burden to establish that the amount at issue was solely for the acquisition of Mr. Connell’s book of business. The court sustained the Service’s determination that the extinguishment of Mr. Connell’s debt to Merrill Lynch constituted cancellation of debt income and that the amount of the extinguishment was taxable as ordinary income. Connell v. Comm’r, T.C.M. (RIA) 2018-213 (T.C. 2018).
• No clear authority to guide taxpayer; no penalty for nonprofit health corporation for marijuana-related underpayment. Section 280E denies to taxpayers any deduction or credit for trade or business expenses if those trade or business consists of trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act) that is prohibited by federal law. §280E. Marijuana, although legal in many states, remains a schedule I controlled substance, the trafficking of which is illegal under federal law. Taxpayer Patients Mutual Assistance Collective Corporation (d.b.a. Harborside Health Center) successfully avoided an accuracy-related substantial understatement penalty for years for which it was precluded by Code Sec. 280E from deducting ordinary and necessary expenses of its medical marijuana dispensary business.
In an opinion authored by Judge Holmes, the court held that the IRS met its burden of production on the applicability of the penalties. The taxpayer, however, also met its burden of demonstrating that it acted with reasonable cause and in good faith. Persuasive to the court were the taxpayer’s arguments that there was no clear authority on which the taxpayer could rely. Also helpful to the taxpayer were its accurate books and records; its operation in accordance with state law; and its decision to begin allocating a percentage of its operating expenses to a “non-deductible” category starting the year a case with facts similar, yet not on all fours with the taxpayer’s case, was released. (Olive v. Commissioner, 139 T.C. 19, 36-42 (2012), aff’d, 792 F.3d 1146 (9th Cir. 2015)). The court noted that Harborside began this “non-deductible” category even before Olive was affirmed on appeal. Furthermore, although Harborside was not primarily a caregiver like the taxpayer in another marijuana-related case, Californians Helping to Alleviate Med. Problems, Inc. v. Commissioner (CHAMP), 128 T.C. 173, 181 (2007), its non-drug-trafficking activities were less negligible than those in Olive, putting it factually somewhere between those cases. Patients Mut. Assistance Collective Corp. v. Comm’r, T.C.M. (RIA) 2018-208 (T.C. 2018).
• Individual income; disguised personal expenses not deductible as business expenses.Taxpaying couple John P. Rossini and Alisa M. Rossini claimed deductions on jointly filed federal and state individual income tax returns for several tax years. The couple claimed deductions for: (1) unreimbursed employee expenses, including expenditures for professional business attire; (2) expenses incurred in relation to several consulting activities; and (3) charitable contributions. After audit, the commissioner denied many of the claimed expenses, and reduced the permitted charitable deductions. The couple appealed administratively and the permitted charitable contribution was adjusted. The Rossinis appealed the commissioner’s order to the tax court and the parties agreed to submit the matter on a stipulation of facts (with stipulated exhibits) and cross-motions for summary judgment. The court granted the commissioner’s motion, denied the motion of the taxpayers, and affirmed the order of the commissioner. The tax court dispensed quickly with the taxpayer’s argument that her business attire was a “uniform” and therefore deductible. The court similarly disallowed Mrs. Rossini’s reported travel expenses, incurred in Washington D.C. while working in the United States House of Representatives. The tax court held that D.C. was Mrs. Rossini’s tax home during that time and the claimed expenses were personal expenses. Last, the tax court disallowed the business expenses for the four purported businesses that reported losses on Schedule C. The claimed deductions were not permitted because the businesses had not yet begun to function as going concerns and had not yet performed those activities for which they were organized. Furthermore, the expenses included DirecTV and significant meals and entertainment expenses. Taxpayers are not permitted to shift their tax burden to their fellow taxpayers by disguising as business their personal consumption. The court affirmed the commissioner’s order. Rossini v. Comm’r, No. 9068-R (Minn. T.C. 12/28/2018).
• Property tax: Special agricultural homestead classification. Mr. Luthens argued that his Hutchinson property should receive the special agricultural homestead classification, authorized under Minn. Stat. §273.124, subd. 14, and not subd. 8(a) for entity-owned property. To receive the special classification, the owner must meet five criteria: 1) the agricultural property consists of at least 40 acres; 2) the owner is actively farming the agricultural property; 3) both the owner of the agricultural property and the person who is actively farming the agricultural property are Minnesota residents; 4) neither the owner nor the spouse of the owner claims another agricultural homestead in Minnesota; 5) neither the owner nor the person actively farming the agricultural property lives farther than four cities from the agricultural property. However, Luthens did not meet the fifth criteria because the county claimed that Luthens lived at his Bearpath property. Luthens could not supply sufficient evidence to overcome the county’s prima facie validity of his residence. The tax court held that his actions showed that he resided in the Bearpath property, regardless of whether his mail was sent to the Hutchinson property. Thus, the Minnesota Tax Court found in favor of the county. Luthens v. Cnty of McLeod, No. 43-CV-15-641, et al. (Minn. T.C. 12/10/2018).
• Petition for return of seized property. The Minnesota Department of Revenue (DOR) sales-and-use-tax division conducted an audit of appellants Shogun Mankato, Inc. and Shogun Burnsville, Inc. (the Shoguns), sushi restaurants. After examining their point-of-sale (POS) system data, the DOR suspected that the Shoguns were using an electronic-sales-suppression device to hide sales. The DOR seized computers, data, records, and other materials from the Shoguns. The Shoguns petitioned, under Minn. Stat. §626.04(a), seeking the return of their property without retention of copies, alleging violations of their 4th Amendment rights, which were denied in district court. The court of appeals affirmed this decision, holding that the DOR can retain the property that will be used in a future trial and the sales-suppression device is subject to forfeiture because its use is a felony. Shogun Mankato Inc. v. Comm’r of Rev., 2018 Minn. App. (unpublished) LEXIS 1103 (Minn. Ct. App. 12/31/2018).
ADMINISTRATIVE UPDATES
• Government shutdown. The United States Tax Court is closed during the government shutdown. The Court issued no opinions through the first week of January (federal district courts continue to issue opinions). Tax Court trial sessions for the week of January 28 were canceled; none were scheduled for Minnesota for January.
• Sales & use tax: New revenue notices. In December, Minnesota published three sales and use tax revenue notices. The first notice revokes 96-08, which instructs contractors on how to draft purchasing agreements when they are purchasing and installing capital equipment into real property. Rev. Not. #18-03. The second revenue notice revokes and replaces 04-04, which provides guidance on when tangible personal property becomes an improvement or a fixture to real property for sales and use tax purposes. Rev. Not. #18-04. The last notice explains the sales tax treatment of a lease or rental of portable toilets when the transaction requires the lessor to service the toilet. Rev. Not. # 18-05.
LOOKING AHEAD
• Legislative tax committees. A new group of legislators was sworn in in St. Paul, along with newly constituted tax committee in both chambers. The tax committees in the Minnesota Senate will be chaired by Sen. Roger C. Chamberlain (R-Lino Lakes). The vice-chair is Sen. David H. Senjem (R-Rochester) and the ranking minority member is Ann Rest (DFL-New Hope). The equivalent committee in the Minnesota House is chaired by Rep. Paul Marquart (DFL-Dilworth) and the vice-chair is Rep. Dave Lislegard (DFL-Aurora). The Republican lead is Rep. Greg Davids (R-Preston).
Morgan Holcomb
& Matthew Wildes
Mitchell Hamline School of Law
Jessica Dahlberg
Grant Thornton