Articles
Bench & Bar of Minnesota is the official publication of the Minnesota State Bar Association.

Notes & Trends – September 2018

EMPLOYMENT & LABOR LAW
JUDICIAL LAW

• Janus decision; Minnesota impact.As Labor Day 2018 rolls around, the ruling by the U.S. Supreme Court at the end of its 2017-2018 term, in Janus v. American Federation of State, County, and Mun. Employees, Council 31,is continuing to create waves in Minnesota, one of about two dozen states with “agency shop” laws stricken down by the High Court in its decision allowing public sector employees required to join labor unions to refuse to pay dues while remaining members of the bargaining union. The Court’s ruling, which overturned Abood v. Detroit Board of Education,431 U.S 209 (1977), is being felt by state employee unions, which are bracing for decline in revenue due to the Janusruling, which turned on the 1st Amendment rights of union members to refrain from being compelled to pay dues to unions they are required to join. One of the greatest potential effects may be on the largest union, Education Minnesota, representing some 90,000 public school teachers. About 5%of its membership has only been paying “fair share” dues, opting out of the charges attributable to union support of potential candidates or causes, as established by the Abooddecision. They and others can now refuse to pay any dues at all. The ruling poses a challenge to public sector unions in Minnesota and other states with similar laws and may even have reverberations in the private sector as well. Janus v. American Federation of State, County, and Mun. Employees, Council 31, 138 S.Ct. 2448(2018).

• Age disability claims; dismissal upheld. A dismissal of age discrimination and disability retribution claims by a discharged employee was upheld by the 8th Circuit. The employee’s age claim was defective because of failure to exhaust administrative remedies. A claim under the Americans with Disabilities Act (ADA) failed owing to lack of evidence that disability was the basis of the termination; and an ADA retaliation claim was thrown out due to a lack of “but-for causation.” Moses v. Dassault Falcon Jet, Wilmington Corp., 894 F.3d 911(8th Cir. 7/3/2018).

• FLSA claim; contempt reversed. A lower court order of contempt for a restaurant for failing to furnish documents in a governmental examination of possible overtime violations under the Federal Labor Standards Act (FLSA) was reversed. The 8th Circuit, in a decision written by Judge James Loken of Minnesota, held that evidence failed to show that the documents sought by subpoena were in the restaurant’s possession, custody, or control. Acosta v. La Piedad Corporation, 894 F.3d 947(8th Cir 7/3/2018).

• Whistleblower claim; dismissal vacated. The dismissal of a whistleblower lawsuit by an employee who was fired after telling a superior about stealing by another employee was vacated. The 8th Circuit held that the ruling by U.S District Court Judge Donovan Frank of Minnesota erroneously relied on the narrow definition of “report” and “good faith” that were expanded by statutory amendment in 2013. Scarborough v. Federated Mutual Ins. Co., 894 F.3d 1277 (8th Cir. 7/16/2018).

• Employer liability; criminal ruling affirmed.A determination and a miscellaneous $500,000 fine for an employer due to an employee falling to his death at a construction site were affirmed. The 8th Circuit held that the employer willfully violated safety regulations in violation of federal OSHA requirements. United States v. DNRB, Inc., 895 F.3d 1063 (8th Cir. 7/16/2018).

• Retaliation; driver’s termination upheld.A delivery driver’s termination for improper driving was upheld. The Minnesota Court of Appeals rejected a claim of retaliation on grounds that the poor driving record established a “legitimate nondiscriminatory reason” for discharge and was not pretextual. Yde v Coca-Cola Bottling Co., 2018 WL 3682513 (8th Cir. 8/2/2018) (unpublished).

• Nursing license; revocation upheld.The 15-year-minimum revocation of the licensure of a registered nurse (RN) was upheld. The court of appeals affirmed a decision of the Board of Nursing based upon the fact that the RN lost her license due to inappropriate prescription of controlled substances and the revocation was not disproportionate to the violation, which occurred previously when she was an advanced practice RN, and was not arbitrary or capricious. In re Matter of Johnson, 2018WL 3421269 (8th Cir. 7/16/2018) (unpublished).

• Unemployment compensation; work scheduling violation.A caregiver who was fired for making unauthorized changes in her work schedule was denied unemployment compensation benefits. The court of appeals ruled that failure to follow company policy regarding scheduling of work constitutes disqualifying “misconduct.” Bell v. CompassionCare Services, 2018 WL 3213175 (8th Cir. 7/2/2018) (unpublished).

LEGISLATIVE ACTION

The past legislative session was soporific for employment and workplace-related legislation. One of the few new measures, Chapter 174, prohibits assignments of military pay and benefits by current or former service members, effective last month.

Another measure, Chapter 185, allowed the Workers Compensation Court of Appeals to select retired workers compensation judges or administrative law judges to file grievances on the appellate court as recommended by the Workers Compensation Advisory Council. 

MARSHALL H. TANICK

Meyer, Njus & Tanick

 

ENVIRONMENTAL LAW
JUDICIAL LAW

• Winona County ordinance banning industrial mineral mining found constitutional and not a regulatory taking. The Minnesota Court of Appeals held that a Winona County ordinance that “even-handedly bans all industrial-mineral mining” does not violate the dormant commerce clause and does not amount to a regulatory-taking claim where the affected property owner had no compensable property interest at the time of the ordinance’s adoption.

The court first found that the county-wide ordinance does not discriminate against interstate commerce on its face by banning all silica-sand mining within the county, because it does not favor in-state interests over out-of-state interests. The court found that the ordinance was detrimental to both in-state interests and out-of-state interests, and Winona County-based Minnesota Sands was adversely affected in the same manner as companies from outside the county.

The court also found that the ordinance was not facially discriminatory because it was applied even-handedly. Minnesota Sands argued that the ordinance was facially discriminatory because it singled out “the end-use of the industrial minerals; specifically, silica sand to be processed and used in fracking.” The court did not buy this argument, noting that the ordinance bans mining of all industrial minerals, including silica sand mining, not just the mining of silica sand to be processed and used in fracking.

Minnesota Sands also argued that the ordinance violated the dormant commerce clause because the county had previously permitted a different company, the Nisbit operation, to mine silica sand within the county. The court found that the permitting of the Nisbit operation was not a violation of the dormant commerce clause because the Nisbit operation had been issued a conditional use permit (CUP) prior to the ordinance amendment banning all industrial-mineral mining. Prior to the ordinance amendment, all sand mining was a conditional use in Winona County. The court held that the right of governmental bodies to enact zoning restrictions is limited by the preexisting uses already established. Here, the Nisbit operation had already been issued a CUP, and the county was limited in applying the ordinance amendment to the Nisbit operation.

Finally, the court rejected Minnesota Sands’ argument that the zoning ordinance was a regulatory taking of the company’s property, and it was thus entitled to compensation. The court determined that Minnesota Sands did not possess the predicate property interest for a takings claim. Specifically, the court found that although Minnesota Sands had obtained the necessary leases for its planned mining operations, it had failed to obtain the required CUPs, in spite of having ample time to do so. Accordingly, the court found, there was no accrual of a compensable property interest. Minnesota Sands, LLC v. County of Winona, No. A18-0090 (Minn. App. 7/30/2018).

 

ADMINISTRATIVE ACTION

• FWS and NMFS publish proposed regulations upending key aspects of Endangered Species Act.In July the U.S. Fish and Wildlife Service (FWS) and the National Marine Fisheries Service (NMFS) published three revisions to the rules that implement the Endangered Species Act (ESA), 16 U.S.C. §1531 et seq. The proposals consist of revisions to the process of determining species and designating critical habitat under Section 4, the protection of threatened species under Section 4(d), and the consultation process for federal agencies under Section 7.

The proposed changes to ESA Section 4 would adjust how the Services list and delist species and designate critical habitat. The proposed changes include clarifying that the Services would list a species as “threatened” if the species is determined to be likely to become endangered within the “foreseeable future.” Another proposed change emphasizes that the Services would ensure the standard for delisting potential species shall be the same as the standard for listing species, and that evaluating potential species to be delisted would receive the same amount of attention and effort as evaluating potential species to be listed. Finally, during determination of critical habitat, the proposed rules require the Services to first consider all areas of occupied habitat of the species, then to consider areas of unoccupied habitatonlyif the unoccupied habitat is necessary to ensure the conservation of the species. Under the current process, unoccupied areas are automatically considered for critical habitat designation.

The proposed changes to ESA Section 4(d) would rescind the “blanket 4(d) rule” of protection for threatened species. Section 9 of ESA prohibits the “take” of endangered species, but the blanket rule extends that protection to threatened species as well. The proposed rules would rescind the blanket rule for all species listed as threatened after the date of implementation of the rule, and would require the FWS to determine on a species-specific basis the protective regulations, including the take prohibition, for newly listed threatened species. (The reason these proposed rules would only affect the FWS is due to the fact that NMFS regulations are already implemented in a very similar way.)

The proposed changes to ESA Section 7 would adjust and streamline how other federal agencies consult with the Services to ensure that agency actions do not jeopardize protected species or result in “destruction or adverse modification” of critical habitat. Of the many changes proposed, some of the notables include: clarifying the definition of “destruction or adverse modification of critical habitat;” creating a “but for” standard to determine the “effects of an [agency] action;” allowing the Services to use the information in an agency’s consultation application in the Service’s biological opinion; and proposing a 60-day deadline for informal consultation. The published proposed rules are open for public comments through 9/24/2018. 83 Fed. Reg. 35174, 35178, and 35193 (7/25/2018).

• EPA withdraws no-action assurance letter to manufacturers of glider vehicles.On 7/26/2018, EPA withdrew a no-action assurance letter relating to those small manufacturers that either are manufacturing or have manufactured glider vehicles in calendar year 2018. A glider vehicle, or “glider,” is a truck that utilizes a previously owned powertrain but which has new body parts. When these new body parts are put together to form the shell of a truck, the assemblage of parts is referred to collectively as a “glider kit.” The final manufacturer of the glider vehicle, i.e., the entity that takes the assembled glider kit and combines it with the used powertrain salvaged from a “donor” truck, is typically a different manufacturer than the original manufacturer of the glider kit.

EPA issued the no-action assurance letter on 7/6/2018, former EPA Director Scott Pruitt’s final day as head of the agency. The letter announced that EPA would exercise its enforcement discretion and take no action against small manufacturers (and the suppliers that sell them glider kits) pending finalization of a November 2017 proposed rule that would repeal an Obama-era determination that glider vehicles were “new motor vehicles” within the meaning of 42 U.S.C. §7550(3) and thus subject to greenhouse gas and fuel efficiency emission standards. 82 Fed. Reg. 53,442 (11/16/2017).

In withdrawing the no-action assurance letter, EPA Acting Director Andrew R. Wheeler noted that environmental groups and a coalition of states had filed several separate administrative requests to EPA to withdraw the assurance letter and that the environmental groups had petitioned for review of the assurance in the D.C. Circuit, which, on July 18, issued an administrative stay of the assurance. Wheeler also cited an Office of Enforcement and Compliance Assurance policy specifying that no-action assurances should be issued only in “extremely unusual” cases when necessary to protect the public interest and when no other mechanism can adequately address that interest. Wheeler concluded that the glider situation did not present such extreme circumstances and that therefore he was withdrawing the no-action assurance. Wheeler emphasized that the agency would move to complete rulemaking on glider air-emission requirements “as expeditiously as possible.” www.epa.gov/enforcement.

JEREMY P. GREENHOUSE
The Environmental Law Group, Ltd.

JAKE BECKSTROM

Admitted to MN bar 2017

ERIK ORDAHL

Flaherty & Hood, P.A.

 

FEDERAL PRACTICE
JUDICIAL LAW

• 28 U.S.C. §1447(c); removed action; dismissal for lack of standing; remand.Where the defendant in a putative TCPA class action removed the action to federal court and then successfully moved to dismiss the action for lack of standing, the 8th Circuit affirmed the district court’s finding that the plaintiff lacked standing, but held that the district court had erred in dismissing the action with prejudice, and that 28 U.S.C. §1447(c) requires a district court to remand a removed action to state court whenever it lacks subject matter jurisdiction. St. Louis Heart Ctr., Inc. v. Nomax, Inc., ___ F.3d ___ (8th Cir. 2018).

• Fed. R. Civ. P. 32(a)(4)(B); no error in admitting deposition testimony of unavailable expert witness. Finding that Fed. R. Civ. P. 32(a)(4)(b) “operates as an independent exception to the hearsay rule,” the 8th Circuit found no error in the admission of the deposition testimony of an absent expert witness at trial, and that the testimony did not also have to meet the requirements for admissibility under Fed. R. Evid. 804(b)(1). Fletcher v. Tomlinson, ___ F.3d ___ (8th Cir. 2018).

• Approval of class action settlement affirmed despite low claim submission rate. The 8th Circuit found no abuse of discretion in a district court’s approval of a settlement of a class action alleging that rifles were defective, despite a claim submission rate of significantly less than 1%, finding that the district court “took great care to ensure the best notice that was practical was provided to class members,” and that a “low claim submission rate, while not ideal, is not necessarily indicative of a deficient notice plan.” Pollard v. Remington Arms Co., ___ F.3d ___ (8th Cir. 2018).

• Fed. R. Civ. P. 37(e)(2)(A); denial of adverse inference sanction affirmed. The 8th Circuit affirmed a district court’s denial of the plaintiff’s motion for an adverse inference sanction arising out of the alleged loss of ESI, finding that even if ESI had been lost, the plaintiff had offered no evidence of the defendant’s “intent to deprive” her of access to that information as Fed. R. Civ. P. 37(e)(2)(A) requires. Auer v. City of Minot, ___ F.3d ___ (8th Cir. 2018).

• Denial of motion for leave to amend complaint on futility grounds reversed.Reviewing the matter de novo, and reversing Judge Magnuson’s denial of a motion to amend a complaint in an ADA action on grounds of futility, the 8th Circuit found that the plaintiff’s allegations were sufficient to state a claim where it was “at the motion-to-dismiss stage” and had “not been factually developed.” Hillesheim v. Myron’s Cards & Gifts, Inc., ___ F.3d ___ (8th Cir. 2018).

• Punitive damages; Fed. R. Civ. P. 15; Minn. Stat. §549.191.Over the past year, this column has tracked opinions by multiple magistrate judges finding that motions to amend to add claims for punitive damages are governed by Fed. R. Civ. 15 rather than Minn. Stat. §549.191. In what appears to be the first ruling by judge in the District of Minnesota that addresses this issue, Judge Montgomery rejected the defendant’s argument that she could review Magistrate Judge Rau’s Order de novo, and found that Magistrate Judge Rau’s order applying Fed. R. Civ. P. 15 was neither clearly erroneous nor contrary to law. Urbieta v. Mentor Corp., 2018 WL 3475484 (D. Minn. 7/19/2018).

• Class certification denied in NHL concussion litigation.Judge Nelson denied plaintiffs’ motion for class certification in the NHL concussion litigation, finding that “individualized legal issues” related to medical monitoring “will substantially predominate over common legal issues in this litigation.” In re: NHL Players’ Concussion Injury Litig., ___ F.R.D. ___ (D. Minn. 2018).

• 28 U.S.C. §1782; request for discovery in aid of a foreign proceeding granted. Analyzing the petitioner’s request for discovery in aid of a foreign proceeding under the prevailing four-part test, Magistrate Judge Leung granted the request for leave to take the deposition of a Minnesota resident for use in an action pending in the European Union’s Intellectual Property Office. In Re Application of Armcon Ltd., 2018 WL 3455485 (D. Minn. 7/18/2018).

• Good cause required for retraction ofLexecon waiver.Judge Ericksen joined “every court” that has addressed the issue and held that so-called Lexeconwaivers, pursuant to which certain plaintiffs consented to trial in the District of Minnesota, could be retracted only for “good cause,” and the court’s prior decision on choice-of-law did not provide the good cause required for retraction. In Re: Bair Hugger Forced Air Warming Devices Prod. Liab. Litig., ___ F. Supp. 3d ___ (D. Minn. 2018).

• Fed. R. Civ. P. 35(a)(2)(A); motion to compel genetic testing granted. Reversing an order by Magistrate Judge Noel, Judge Frank, while describing the issue as “an extremely close call,” granted the defendants’ motion to compel genetic testing, finding the good cause required by Fed. R. Civ. P. 35(a)(2)(A), and further finding that the parties’ Stipulated Protective Order was “adequate to protect Plaintiffs’ private genetic information from disclosure to third parties.”Burt v. Winona Health, 2018 WL 3647230 (D. Minn. 8/1/2018).

• Motion for leave to file second amended class complaint denied.In a lengthy order, Magistrate Judge Noel denied the lead plaintiff’s motion to file a second amended class complaint in a long-running securities fraud action, finding a lack of the good cause required under Fed. R. Civ. P. 16(b)(4) to justify the motion having been brought yearsafter the December 1, 2013 deadline in the Scheduling Order, and that the delay was also “undue” for purposes of Fed. R. Civ. P. 15(a)(2). IBEW Local 98 Pension Fund v. Best Buy Co., ___ F. Supp. 3d ___ (D. Minn. 2018).

• Nominal attorney’s fees awarded in RICO action.Where the plaintiff prevailed on its RICO claim, sought an award of more than $411,000 in trebled attorney’s fees, but acknowledged that the likelihood of recovery was “speculative” and elected not to detail its alleged attorney’s fees, Magistrate Judge Leung recommended that the plaintiff be awarded only $1 in attorney’s fees, which was then trebled under RICO. Judge Schiltz subsequently adopted the report and recommendation. CitiMortgage, Inc. v. Sellors, 2018 WL 3422074 (D. Minn. 6/14/2018), Report and Recommendation adopted, 2018 WL 3421344 (D. Minn. 7/13/2018).

• Attorney’s fees request slashed for lack of documentation and failure to enter appearance. While finding that the plaintiff was a prevailing party entitled to attorney’s fees under 42 U.S.C. §1988, Judge Tunheim awarded only $6,075 in attorney’s fees rather than the requested $17,300, awarding no fees for a student attorney who failed to comply with Local Rule 83.8 while a student and also failed to be admitted to the District of Minnesota bar or enter an appearance following graduation, and cutting the student’s supervising attorney’s requested fees by 50% where the attorney admitted that he “did not keep contemporaneous records of the hours worked on this case.” Christianson v. Markquart, 2018 WL 3474058 (D. Minn. 7/19/2018).

JOSH JACOBSON

Law Office of Josh Jacobson

 

INDIAN LAW
JUDICIAL LAW

• Tribal sovereign immunity can’t be asserted ininter partesreview proceedings. An Indian tribe moved to terminate an inter partesreview of its patent on the basis of sovereign immunity. The United State Patent Trial and Appeal Board denied the motion. The Federal Circuit Court of Appeals affirmed, holding that inter partesreview is akin to federal-agency-initiated enforcement proceedings, and that Indian tribes generally can’t assert common-law sovereign immunity in agency-initiated proceedings. Saint Regis Mohawk Tribe v. Mylan Pharmaceuticals Inc., ___ F.3d ___ (2018).

• Recordkeeping provisions of the Contraband Cigarette Trafficking Act apply to tribal corporations in Indian country. Tribally owned corporations located in the Winnebago Reservation in Nebraska manufacture and distribute cigarettes. The Bureau of Alcohol, Tobacco, Firearms, and Explosives, acting under the Contraband Cigarette Trafficking Act, sent inspection notices to the corporations. The tribal corporations sued, asking a federal court to declare that the Act’s recordkeeping provisions didn’t apply to them, but lost their bid on summary judgment. The District of Columbia Circuit Court of Appeals affirmed, rejecting the tribal corporations’ arguments that they were not “persons” under the Act and that the Act didn’t apply in Indian country. Ho-Chunk, Inc. v. Sessions, 894 F.3d 365 (D.C. Cir. 2018).

JESSICA INTERMILL

Hogen Adams PLLC

PETER J. RADEMACHER

Hogen Adams PLLC

 

 

INTELLECTUAL PROPERTY
JUDICIAL LAW

• Patents: Attorney’s fees awarded only in “exceptional” cases. Magistrate Judge Leung recently denied a motion for an award of attorney’s fees in a patent case because the case was not “exceptional.” Arctic Cat sued Bombardier Recreational Products (BRP) alleging infringement of five patents related to snowmobile engine ignition-timing systems. BRP prevailed: It obtained summary judgment of non-infringement for three of the asserted patents, invalidated the fourth for indefiniteness, and settled over the fifth. BRP then moved for an award of $2.9 million in “attorney fees, expert witness fees, and expenses.” The district court denied the motion, however, holding that “reasonable attorney fees” may only be awarded in “exceptional cases.” Patent law defines “exceptional cases” as those that stand out via (1) substantive strength of a party’s litigating position or (2) unreasonable manner of litigation.

As to substantive strength, the court found that Arctic Cat’s infringement and validity allegations were not “so substantively weak as to support an attorney-fees award.” In particular, invalidity due to indefiniteness was found only after considering the intrinsic record and extrinsic testimony, and non-infringement was found only after prosecution history estoppel was applied to the doctrine of equivalents. As to the manner of litigation, the court found that Arctic Cat did not litigate in an unreasonable manner. Specifically, Arctic Cat performed a pre-suit investigation that resulted in naming of specific BRP snowmobile models in the complaint, the suit was not retaliatory, and a parallel ITC investigation was abandoned for budget reasons, not because of a claim construction ruling. Accordingly, the court held that this patent case was not “exceptional” and denied BRP’s motion for attorney’s fees. Arctic Cat Inc. v. Bombardier Rec. Prods., Inc., No. 12-2692 (JRT/LIB), 2018 U.S. Dist. LEXIS 120806 (D. Minn. 7/19/2018).

• Trademarks: Expedited ex parte application for discovery order in aid of foreign proceeding. Magistrate Judge Leung also recently granted an Expedited Ex Parte Application for Discovery Order to assist a party in a European trademark dispute. Armcon filed an Application for a Declaration of Invalidity to invalidate Cemen Tech’s trademark with the European Union Intellectual Property Office (EPO). Armcon sought to depose Cemen Tech’s former president, Thomas Palme, a resident of Minnesota. Armcon brought the application for discovery order in the District of Minnesota to assist with the EPO proceedings. The district court granted the discovery order. Under 28 U.S.C. §1782(a), a district court has the authority to grant a discovery order when sought from a person in the district for use in a proceeding before a foreign tribunal, and when the applicant is an “interested person” before such a tribunal. District courts with the authority, however, should only grant discovery in light of the following four factors: (1) whether discovery is sought from a participant in the foreign proceeding, (2) the nature, character, and receptiveness to assistance of the foreign tribunal, (3) the intent to circumvent foreign proof-gathering restrictions or policies, and (4) undue intrusiveness or burden. Although Palme is not a participant in the foreign proceedings, the remaining factors weighed in favor of the requested discovery. In re Armcon Ltd., No. 18-mc-51 (JRT/TNL), 2018 U.S. Dist. LEXIS 119567 (D. Minn. 7/18/2018).

TONY ZEULI

Merchant & Gould

JOE DUBIS

Merchant & Gould

RACHEL HAMMOND

Merchant & Gould

 

PROBATE & TRUST LAW
JUDICIAL LAW

• Minn. Stat. § 290.01.Settlor was a Minnesota domiciliary who created four trusts in 2009 and funded them with stock in a Minnesota S corporation. The trusts were originally “grantor type trusts” that became irrevocable in 2011 when the settlor relinquished his power to substitute trust assets. At that time, settlor was a Minnesota domiciliary and the trusts were classified as “resident trusts” pursuant to Minn. Stat. §290.01, subd. 7(b)(a)(2).

In 2014, the trusts sold all stock in the Minnesota corporation, and because they were classified as “resident trusts” as a result of settlor’s 2011 domiciliary, were subject to Minnesota tax on gain from the stock sale and the full amount of income from other investments. At that time, the trustee and three of the four beneficiaries were not Minnesota domiciliaries. The trustee filed Minnesota tax returns under protest and filed an amended return seeking a refund based on the trusts’ classification as “resident trusts.” The Commissioner of Revenue denied the refund claim and the trusts appealed, arguing that there was insufficient contact with Minnesota to satisfy due process clause requirements. The tax court held that “Minnesota did not have a sufficient basis to tax the Trusts as ‘residents’” because the settlor’s domicile at the time the trusts became irrevocable was not “a connection of sufficient substance” to support exercise of taxing jurisdiction.

The Minnesota Court of Appeals affirmed. The court first held that its inquiry was not limited to the statutory language and that it would examine all relevant contacts between the taxpayer and the state. The court then held that the contacts relied upon by the Commissioner of Revenue were either irrelevant or too attenuated to establish that the tax levied complies with due process requirements. In reaching that conclusion, the court reasoned that settlor’s connections to Minnesota (as opposed to the trustee’s connections) were irrelevant, the trusts did not own any physical property in Minnesota, and the trust’s contacts with Minnesota prior to 2014 were irrelevant. Fielding v. Comm’r of Revenue, No. A17-1177, 2018 WL 3447690 (Minn. 7/182018).

CASEY D. MARSHALL

Bassford Remele

 

 

TAX LAW
JUDICIAL LAW

• Supreme Court clarifies commissioner’s alternative-apportionment authority. To avoid the taxation of certain interest income, Associated Bank created two non-financial institution LLC partnerships under Wisconsin law in 2007. As non-financial institutions, the LLCs were subject to different tax apportionment methods than Associated Bank, a financial institution. Upon audit, the commissioner found that the returns did not fairly reflect taxable net income allocable to Minnesota because the prescribed formula failed to account for Associated Bank’s Minnesota business activities. Accordingly, the commissioner invoked her authority under section 290.20, subdivision 1, and applied an alternative apportionment method to correct the alleged distortion of reported income, which included the bank’s interest income from Minnesota loans. Associated Bank appealed the assessed taxes to the Minnesota Tax Court. Agreeing with Associated Bank, the tax court concluded that the commissioner could not exercise her authority under section 290.20 in the manner that she did.

The commissioner then appealed that decision to the Minnesota Supreme Court. The Supreme Court reversed and remanded the tax court’s decision, distinguishing the present case from the case relied upon by the Minnesota Tax Court (HMN Fin., Inc. v. Comm’r of Rev., 782 N.W.2d 558 (Minn. 2010)) and holding that precedent did not preclude the commissioner from exercising her alternative-apportionment authority under section 290.20. The Supreme Court clarified that in order for the commissioner to exercise her alternative-apportionment authority, she must present substantial evidence to show (1) that the apportionment method required by Minnesota Statutes section 290.191 does not fairly reflect the taxpayer’s taxable net income arising from Minnesota sources, and (2) that an alternative apportionment method does so. Associated Bank, N.A. v. Comm’r of Rev., No. A17-0923 (Minn. 2018).

• Constitutionality of Minnesota income tax. Taxpayer administratively appealed the commissioner’s 2016 assessment for his failure to file and pay income taxes for tax years 2010-2014. The commissioner affirmed her assessment. The taxpayer appealed to the Minnesota Tax Court, which granted the commissioner’s motion for summary judgment. The case reached the Minnesota Supreme Court on certiorari. The Minnesota Supreme Court considered and decided the case without oral argument. The taxpayer’s argument that Minnesota’s income tax violates the United States Constitution and the Minnesota Constitution rested on four theories: (1) No law authorizes a state to tax an individual’s wages; (2) a state income tax is a direct tax that violates article I, section 9; (3) a state income tax violates the right to earn a living; and (4) Minn. Stat. §290.014, subd. 1 (2016), is unconstitutionally vague because it does not define “income.” The Minnesota Supreme Court rejected all four arguments, pointing to established case law and statutory authority. Sargent v. Comm’r of Rev., A18-0216 (Minn. 2018).

• Insufficient nexus to tax trusts. Four irrevocable inter vivostrusts alleged that their classification as “resident trusts” under Minn. Stat. §290.01, subd. 7b, was unconstitutional as applied to them under the due process clauses of the United States and Minnesota Constitutions. A resident trust under Minn. Stat. §290.01, subd. 7b is defined as an irrevocable trust where the grantor was domiciled in Minnesota upon the trust becoming irrevocable. The Minnesota Supreme Court reviewed the tax court’s decision in favor of the trusts. A tax satisfies due process if (1) there is a “minimum connection” between the state and the person, property, or transaction subject to the tax, and (2) the income subject to the tax is rationally related to the benefits conferred on the taxpayer by the state. (Luther v. Comm’r of Rev., 588 N.W.2d 502 (Minn. 1999)). The commissioner argued that the grantor being domiciled in Minnesota when he created the trusts under Minnesota law is enough to meet the minimal connection test. The trusts argued that no trustee is a resident, the trusts have not been administered in Minnesota, the records of the trusts’ assets and income have been maintained outside of Minnesota, some of the trusts’ income is derived from investments with no direct connection to Minnesota, and three of the four trust beneficiaries reside outside of Minnesota. The Minnesota Supreme Court held in favor of the trusts because trusts are separate legal entities from their grantors and beneficiaries and thus separate taxpayers. The Supreme Court held that the trusts’ creation under Minnesota law was irrelevant and thus held that Minn. Stat. §290.01, subd. 7b(a)(2), unconstitutional as applied to the trusts because there were no minimal contacts.Fielding v. Comm’r of Rev., No. A17-1177 (Minn. 2018).

• Property tax appeal deadline. The tax court dismissed the appeals of three energy cooperatives as untimely because they were not filed within the 60-day deadline for appeals from orders of the commissioner. The cooperatives appealed to the Minnesota Supreme Court, arguing that the tax court failed to recognize that the two appeal paths provided in Minnesota Statutes §273.372 subdivision 2 effectively establish a single deadline of April 30 in the year the tax becomes payable. The Minnesota Supreme Court rejected this argument because the two appeal paths provided by §273.372 apply to distinct steps in the property tax assessment process and therefore have separate deadlines. This decision, they held, is consistent with the plain language of the statute that keeps them separate and explains which one prevails if both deadlines apply. Ultimately the Supreme Court determined that the cooperatives’ notices of appeal were governed only by the 60-day deadline and that their appeals were untimely. Lake Country Power Coop. v. Comm’r of Rev., Nos. A17-1478 et. al (Minn. 2018).

• Property tax appeal automatic dismissal.The Minnesota Supreme Court reviewed a tax court decision where it determined it lacked jurisdiction due to an automatic dismissal statute. One year after the Johnsons filed a property tax petition, Hennepin County notified the tax court that the petition had been automatically dismissed under Minnesota Statutes section 278.03. Section 278.03, subdivision 1, which requires a property owner to pay the assessed taxes while a petition is pending, regardless of the pending and outstanding legal challenge to the assessment. Absent a court order permitting the petitioner to continue prosecution of the petition without payment, if a property owner fails to pay the amount required when due, then the petition and all proceedings are automatically dismissed. Since the Johnsons did not seek court approval to not pay the taxes due or seek a reinstatement of petition, the Minnesota Supreme Court held the tax court lacked jurisdiction. Furthermore, the Minnesota Supreme Court held that the automatic dismissal is not unconstitutional because the right to challenge a county’s tax assessment by petition under Chapter 278 is a statutory right and not a constitutional right. Johnson v. Cnty. of Hennepin, No. A17-2032 (Minn. 2018).

• Sales & use tax on intercompany transactions.The Minnesota Tax Court addressed the question of whether Minnesota use tax applies to payments made by two related corporations for the use of construction equipment. Minnesota use tax is imposed on the purchase price of retail sales of tangible personal property or taxable services purchased for use, storage, distribution, or consumption in Minnesota. Minn. Stat. §297A.63, subd. l(a). However, the sale of tangible personal property primarily used in a trade or business is exempt if the sale is not made in the normal course of business of selling that kind of property and if the sale is between members of a controlled group as defined in §1563(a) of the Internal Revenue Code. The Minnesota Tax Court found that the intercompany transactions were not in the normal course of business and thus not subject to use tax because neither of the related companies ever sold or leased construction equipment to anyone besides each other. Knutson Constr. Servs. Rochester, Inc. v. Comm’r of Rev., No. 8997-R (Minn. T.C. 7/16/2018).

JESSICA DAHLBERG

Grant Thornton

MATTHEW WILDES

Mitchell Hamline School of Law

TORTS & INSURANCE
JUDICIAL LAW

• Breach of contract; forfeiture. Pursuant to plaintiff’s employment contract with defendant, plaintiff was entitled to post-employment “residual commission” provided he did not breach non-solicitation and confidentiality provisions, and that he “immediately deliver to [defendant] all of [defendant’s] property” after his employment ended. Plaintiff filed suit seeking declaratory relief regarding his entitlement to and the amount of post-employment “residual commissions.” After he resigned during the litigation, however, plaintiff failed to return all of defendant’s property, such as customer lists, sales data, and financial statements, for over three months. The district court granted summary judgment to defendant, holding that defendant’s obligation to pay commissions was excused due to plaintiff’s failure to comply with the return of property clause. The court of appeals reversed.

The Minnesota Supreme Court affirmed in part and reversed in part the decision of the court of appeals. The Court first looked to the Restatement (Second) of Contracts §229 for guidance, which provides: “To the extent that the non-occurrence of a condition would cause disproportionate forfeiture, a court may excuse the non-occurrence of that condition unless it was a material part of the agreed exchange.” As a result, the Court held that whether or not plaintiff’s failure to return defendant’s property properly resulted in forfeiture was to be determined by a two-prong test: “(1) whether the occurrence of the condition was a material part of the agreed exchange and (2) a proportionality analysis that balances the risk to be protected with the amount to be forfeited.” Because the materiality determination could not be made as a matter of law on the record before the Court, the case was remanded to the district court. Capistrant v. Lifetouch Nat’l Sch. Studios, Inc., No. A16-1829 (Minn. 7/25/2018). https://mn.gov/law-library-stat/archive/supct/2018/OPA161829-072518.pdf 

JEFF MULDER

Bassford Remele

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