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

Notes & Trends – October 2018

CIVIL PROCEDURE
JUDICIAL LAW

• Minn. R. Civ. P. 63.03; affirming timely removal of assigned judge. Appellant is a petitioner in the Minnesota Tax Court in three cases. In June 2016 one of three tax court judges issued a scheduling order to control the first case, and in May 2017, a second tax court judge granted the parties’ joint motion to consolidate the three cases and to proceed under the initial scheduling order. Petitioner later filed motions in limine. 

On 8/21/2017, the tax court administrator provided the parties dates for the motion in limine on which the tax court judge—the same judge who signed the consolidation order—would be available to hear the motions. On 8/30/2017, the petitioner filed a notice of removal under Rule 63.03. Respondent moved to quash the notice of removal. First, respondent argued the notice was untimely, contending the 10-day period to remove ran and expired in May 2017. Second, respondent argued honoring the notice of removal was not practicable given the unique circumstances of the case. The tax court granted respondent’s motion to quash. Tax court petitioner sought a writ of mandamus in the Minnesota Supreme Court directing the tax court to vacate its order. 

Upon review, the Minnesota Supreme Court granted the petition for writ of mandamus. Relying on a plain reading of Rule 63.03, the Court determined the May 2017 order consolidating the cases did not satisfy Rule 63.03 because it did not provide the parties advance notice of which judge would preside over the motion to consolidate. Because there was no advance notice of that order, the 10-day period did not run until the motions in limine were scheduled on 8/21/2017. The notice of removal was filed within 10 days of that date, and, therefore, was timely.

The Court also rejected the tax court’s finding that honoring the request was not practicable given the small bench and the petitioner’s attorney’s history of filing notice of removals against the particular judge. Recognizing the right of removal rests with the party, not the attorney, the Court rejected the attorney’s history of removing the judge as irrelevant to its analysis. The tax court’s other concerns did not affect the question of whether honoring this particular notice of removal was practicable in this particular case. OCC, LLC v. County of Hennepin, ___N.W.2d ___, 2018 WL 4100481 (Minn. 8/29/2018).

• Minn. R. Civ. P. 60.02; affirming motion to amend expungement order. Appellant sought to expunge a record of prosecution against him for disorderly conduct and misdemeanor obstruction of legal process, as well as a no-contact order related to those charges. Appellant initially filed a form proposed order, which was modified by retained counsel. At a hearing on the motion, the state objected to language inserted by appellant counsel concerning how appellant could respond to the expungement in future job applications. Appellant counsel ultimately submitted a revised order that removed the challenged language, but inserted additional language stating that the prosecution lacked probable cause for the initial charges and the court lacked predicate facts to sign the no-contact order. 

More than 60 days after the order was signed, the state moved to modify, arguing they were unaware the additional language was included in the order when it was submitted and that they would have objected to the language if they had known it was in the order. The state also noted the appellant had used the disputed language against the state in a separate proceeding. After hearing, the district court granted the state’s motion. 

In affirming the order, the court of appeals recognized that expungement proceedings are special proceedings subject to the Minnesota Rules of Civil Procedure, rather than criminal proceedings. The court of appeals also affirmed the district court’s application of Rule 60.02, which requires a showing that the movant presented a meritorious claim, had a reasonable excuse for its failure to act, acted with due diligence after learning of the claim, and no substantial prejudice resulted from the modification. State v. T.K.S., A17-1365, 2018 WL 3966223 (Ct. App. Minn. 8/20/2018) (unpublished).

• Minn. R. Civ. P. 12.02; affirming motion to dismiss. Appellant and respondent entered into an agreement under which the respondent agreed to provide certain consultation and support services to the appellant upon request. Section 4.2 of the agreement provided that appellant was responsible for performing backups of all systems affected by the services of the contract and that the respondent was not responsible for lost data. While respondent was performing a requested service, a substantial portion of appellant’s data was permanently lost. Appellant filed claims for breach of contract and negligence. The district court dismissed appellant’s claims, and appellant appealed.

The court of appeals affirmed dismissal under Rule 12.02, finding that, upon reviewing the allegations in the light most favorable to the non-movant, appellant failed to state a legal claim. For the breach of contract claim, the court of appeals determined the exculpatory clause was not ambiguous and was properly limited to negligent conduct, rather than liability for intentional, willful, or wanton acts. Because the exculpatory clause was legally enforceable, the court properly dismissed the breach of contract claim.

For the negligence claim, the court found respondent’s duties were all established by the contract. As appellant failed to plead an extra-contractual duty, the district court properly dismissed the negligence claim. East View Information Services, Inc. v. Xigent Solutions, LLC, 2018 WL 3966233 (Ct. App. Minn. 8/20/2018) (unpublished).

• Minn. R. Civ. P. 59.01; finding subsequent termination was not newly discovered evidence. During divorce trial, appellant introduced evidence that although he currently maintained full-time employment, he expected to be laid off upon completion of his current long-term project. Despite this testimony, the court used appellant’s full-time employment income in its spousal maintenance calculation and denied appellant’s spousal maintenance request. Appellant was laid off after trial.

Appellant timely moved for a new trial or for amended findings, arguing that his firing and subsequent retirement were newly discovered evidence under Rule 59.01 that required a new trial or reconsideration of his request for spousal maintenance. The district court denied appellant’s motion.

The court of appeals affirmed, holding evidence is newly discovered only if it was in existence at the time of trial but not known at that time. Finding the record lacked evidence to support a determination that appellant’s employer had decided before trial to terminate appellant, the post-trial lay off was not newly discovered evidence. Adams v. Adams, 2018 WL 4201173 (Ct. App. Minn. 9/4/2018) (unpublished).

• Minn. R. Civ P. 50.02; affirming denial of post-trial motions. Appellant purchased two commercial properties with four commercial tenants. An addendum to the purchase agreement required respondent to notify appellant if any commercial tenants provided notice of intent not to renew their leases prior to closing. Respondent did not provide any notice.

Shortly after closing, one tenant informed appellant it would not renew its lease, and claimed it provided respondent notice before the sale closed. Appellant brought suit alleging claims for breach of contract, consumer fraud, actual fraud, and contract reformation. The district court granted partial summary judgment, finding the notice provision of the purchase agreement was breached. At trial, the jury found appellant suffered no damage from the breach of contract, and found for the respondent on all other claims. The district court denied appellant’s post-trial motions for judgment as a matter of law and a new trial. Appellant appealed.

On appeal, the court of appeals affirmed the district court’s denial of appellant’s post-trial motions. Under Rule 50.02, an appellate court will set aside a jury verdict upon a motion for judgment as a matter of law only if it is perverse and palpably contrary to the evidence, or where the evidence is so clear as to leave no room for differences among reasonable persons. Finding the jury’s no-damage finding supported by a reasonable view of the evidence, the district court properly denied appellant’s motion for judgment as a matter of law.

The court of appeals also affirmed the district court’s denial of appellant’s motion for a new trial. On appeal from denial of a motion for a new trial, the appellate court should not set aside the jury verdict unless it was manifestly and palpably contrary to the evidence viewed as a whole and in the light most favorable to the verdict. Finding the district court’s admission of respondent’s damages expert was not unfairly prejudicial, the district court did not abuse its discretion by denying appellant’s motion for a new trial. SM Investments, LLC v. Erickson, 2018 WL 4201178 (Ct. App. Minn. 9/4/2018) (unpublished).

Michael Mather

HKM, P.A.

 

Commercial and Consumer Law
JUDICIAL LAW

• Disclaimer: No way? Uniform Commercial Code (UCC) Article 2 allows a seller to disclaim the implied warranty of merchantability (UCC §2-314 and 2-316(2) or (3)), if done properly. Note that in some states a statute outside of the UCC, or a non-uniform amendment, may not permit a disclaimer.

One method to disclaim the warranty under the UCC is to employ the expression “as is.” UCC §2-316(3)(a). That is exactly what the seller did in Sorchaga v. Ride Auto, but to no avail.

When the buyer in the case test-drove the truck prior to the purchase, the seller’s salesperson told her

  • the check engine light was illuminated merely due to a faulty sensor;
  • the truck emitted smoke from the tailpipe because it was a diesel; and
  • she would receive a warranty that would allow any necessary repairs.

In fact, the seller knew the truck had severe engine damage, and the promised warranty would not cover the truck as it had a salvaged title.

The buyer then sued the seller for breach of warranty, and the seller raised the disclaimer in defense. Admittedly, the case cries out for a remedy, and there could be many on the facts of the case—such as fraud (see UCC §2-721), and that the disclaimer, being in the purchase agreement and buyer’s guide, was not placed so as to “call the buyer’s attention to the exclusion of warranty” (UCC §2-316(3)(a)), or was unconscionable (UCC §2-302).

Instead the court seized on the prefatory words to UCC §2-316(3)(a), “unless the circumstances indicate otherwise,” and held here the fraudulent representations were a circumstance that indicated otherwise and rendered ineffective the disclaimer.

Is the opinion a sound interpretation of these words, which are ambiguous at best? The only clue in the Official Comments is that sellers may avoid oral sales enthusiasm by use of the parol evidence rule (UCC §2-316(1) and Official Comment 2), but that is not applicable when fraud exists. White and Summers, Uniform Commercial Code, Hornbook Series, Second Edition, at §12-6, do offer some examples of what these words could mean. Perhaps the most relevant example is that words like “as is,” “with all faults,” and the like are understood in ordinary commercial usage, according to Official Comment 7 to UCC §2-316; and that in the consumer as opposed to the commercial context, the particular buyer’s understanding would be relevant as to whether a non-commercial buyer had that understanding. Applied here, it could be argued that even if the buyer understood, focusing on “as is” alone, that she would bear the risk of defects, that understanding, given the salesperson’s assertions, would not equate to an understanding that those assurances were of no consequence.

In the end, as noted by White and Summers, many cases give effect to clauses using “as is” in consumer sales without considering the circumstances surrounding the transaction, but the Sorchaga case serves notice that in some cases, the words “unless the circumstances indicate otherwise” are not to be ignored. Sorchaga v. Ride Auto, LLC, 95 U.C.C. Rep. Serv. 2d 466, 2018 WL 1414082 (Minn. Sup. Ct. 2018).

Fred Miller

Ballard Spahr

 

CRIMINAL LAW
JUDICIAL LAW

• Interstate agreement on detainers: Motion to dismiss for lack of probable cause tolls 180-day speedy trial period. After being charged with fifth-degree possession of a controlled substance, appellant was detained in North Dakota and missed his Minnesota omnibus hearing. Appellant filed a detainer disposition request under the Interstate Agreement on Detainers (IAD) to require the state to bring him to trial within 180 days. Appellant was transferred to Minnesota’s custody on August 17 and filed a motion to dismiss for lack of probable cause on October 23, which the court denied on December 5. Trial was set for January 9, but the complaint was dismissed at the January 4 settlement conference on the basis that more than 180 days had elapsed since the filing of the detainer disposition request. The state appealed.

Under the IAD, a prisoner “shall be brought to trial within 180 days” on any out-of-state charges after the prisoner sends to the official having custody over him “written notice of the place of his imprisonment and his request for final disposition.” The official must then forward the request to the out-of-state prosecuting officer. If the receiving court does not grant “any necessary or reasonable continuance” “for good cause shown,” failure to bring the defendant to trial within 180 days requires dismissal of the charge with prejudice.

In this case of first impression, the court of appeals considers whether a motion to dismiss for lack of probable cause tolls the 180-day period under the IAD. The court refers to case law interpreting the Uniform Mandatory Disposition of Detainers Act (UMDDA), which provides that a prisoner’s request for speedy disposition of his or her charges requires that the case be brought to trial within six months or the complaint is to be dismissed with prejudice. Those cases permit tolling of the statutory time limit when the defendant caused or created the delay, such as when the defendant files a motion to dismiss. Thus, the court finds that the district court erred in finding appellant’s speedy trial right under the IAD had been violated and should have excluded from its calculations the 42-day period between appellant’s filing and the court’s resolution of the motion to dismiss. Excluding those 42 days, the IAD required appellant to be brought to trial by February 12, well after the January 9 trial date. State v. Jeremy Brian Roy, No. A18-0054, __ N.W.2d __, 2018 WL 3520543 (Minn. Ct. App. 7/23/2018). 

• Juvenile: Continuance without adjudication may be extended up to an additional 180 days only after review hearing. A juvenile pleaded guilty to fifth-degree criminal sexual conduct and his case was continued without adjudication for two 180-day periods. The juvenile violated the terms of his probation and the district court revoked the stay and adjudicated him guilty. On appeal, the juvenile argues the district court lacked jurisdiction to adjudicate him delinquent because the court continued the case for 360 days, without conducting a review after the first 180 days. 

Minn. Stat. §260B.198, subd. 7(a), permits the court to stay adjudication of a juvenile case for 180 days, and to extend the continuance for one additional 180-day period, but only if the prosecutor consents and the court has reviewed the case and entered an order for the additional continuance. The district court here did not comply with the statute’s plain language. Requiring review of a juvenile’s case after 180 days “provides valuable means to intervene quickly to help a juvenile offender be successful in the community and to provide additional accountability measures before the juvenile’s problems escalate.” Additionally, the Minnesota Rules of Juvenile Delinquency Procedure describe these statutory timeframe requirements as jurisdictional. Minn. R. Juv. Delinq. P. 15.04, subd. 4(F), and 15.05, subd. 4(B). 

As the district court did not conduct a review of the juvenile’s case after the first 180-day continuance period, the court lacked jurisdiction to consider any probation violation or to adjudicate the juvenile delinquent after the first 180 days. Reversed and remanded to dismiss the probation violation petition against the juvenile. Matter of Welfare of C.S.N., No. A17-1736, __ N.W.2d __, 2018 WL 3520982 (Minn. Ct. App. 7/23/2018). 

• Controlled substances: “School zone” includes entire area of a city block located diagonal to school property, if area surrounding property is organized in city-block system. Appellant was convicted of selling a controlled substance in a school zone after the state presented evidence at trial that appellant sold heroin and Vicodin out of his home, which was located on a city block kitty-corner to the school property. In his postconviction petition, appellant argued the state failed to prove the drug sale occurred in a school zone.

The question before the Supreme Court is: Does a “school zone,” as defined in Minn. Stat. §152.01, subd. 14a, include the entire area of a city block situated kitty-corner to school property? Section 152.01, subd. 14a defines “school zone” as “(1) any property owned, leased, or controlled by a school district or an organization operating a nonpublic school,” and “(2) the area surrounding school property as described in clause (1) to a distance of 300 feet or one city block, whichever distance is greater, beyond the school property…” The Court ultimately concludes that, when the area surrounding school property is organized in a city-block system, “one city block” in section 152.01, subd. 14a(2), refers to an area, not a distance, and creates a zone that includes the entirety of “first-ring” city blocks.

“One city block” can refer either to distance or area. In State v. Caraful, 783 N.W.2d 539 (Minn. 2010), which considered whether a drug sale occurred within a “park zone,” defined by statute to include “the area within 300 feet or one city block, whichever distance is greater, of the park boundary,” the Court found “one city block” to mean both a distance measurement from the park, and to encompass the entire area of that city block. Because “one city block” has two reasonable meanings, it is ambiguous. Therefore, the Court looks to the Legislature’s intent, which the Court has previously found to be protecting children from the dangers associated with illegal drugs. Given this intent, the Court finds the only reasonable interpretation of “one city block” to be an area measurement that creates a buffer zone that includes the entirety of all “first-ring” city blocks. Under this definition of “one city block,” the evidence was sufficient to support appellant’s conviction. Edward John Lapenotiere, Jr. v. State, No. A17-0456, 916 N.W.2d 351 (Minn. 8/1/2018). 

• Criminal sexual conduct: No substantive due process right to assert mistake of age defense when charged with sexual penetration or contact with 14-year-old. On appeal from his convictions for third- and fourth-degree criminal sexual conduct for engaging in sexual penetration and sexual contact with a 14-year-old who told appellant he was 18 years old, appellant raises the following arguments regarding the two statutes at issue (Minn. Stat. §§609.344, subd. 1(b), and 609.345, subd. 1(b)): (1) the statutes violate substantive due process by limiting the mistake of age defense to defendants who are no more than 120 months older than the victim; (2) the statutes violate equal protection because they allow the mistake of age defense for some defendants but not others; and (3) the statutes unconstitutionally impose strict liability.

The Supreme Court finds first that the statutes do not violate substantive due process. Historically, Minnesota has not permitted a mistake of age defense, and only recently allowed the defense in certain cases. Most other states also prohibit a mistake of age defense in statutory rape cases. Thus, the Court finds appellant failed to show he was deprived of a fundamental right and applies the rational basis test. One of the purposes of the criminal sexual conduct statutes is to protect children from sexual abuse and exploitation, a legitimate legislative objective. The Court finds that one reasonable way to deter or sanction this conduct is to preclude the mistake of age defense for certain adults. Therefore, the statutes at issue do not violate substantive due process.

Next, the Court also finds that the statutes do not violate equal protection. The Court agrees with appellant that he is similarly situated to defendants who are allowed to raise the mistake of age defense, in that both those who can raise the defense and those who cannot are subject to criminal liability for engaging in identical conduct, the only difference being the age of the individuals involved in the offense. However, the Court applies the rational basis test to appellant’s challenge, because a fundamental right is not implicated, and age is not a “suspect class.” The state’s interest in protecting minors is undoubtedly legitimate, and this particular means of furthering that interest, creating a limited mistake of age defense, is not manifestly arbitrary and is relevant to the purpose of the law. The limited defense fits in the statutory framework, which shows the Legislature’s determination that the younger the child is, the greater the legal protection they need.

Lastly, the Court rejects appellant’s argument that the statutes are unconstitutional because they impose strict liability, because, as the Court found in State v. Wenthe, 865 N.W.2d 293 (Minn. 2015), criminal sexual conduct offenses are crimes of general intent. Appellant’s convictions are affirmed. State v. Christopher Lee Holloway, No. A16-1489, 916 N.W.2d 338 (Minn. 8/1/2018). 

• Criminal sexual conduct: “Presence of minor” includes simultaneous online communications with minor. A jury found appellant guilty of fifth-degree criminal sexual conduct and indecent exposure for sending a picture of his genitals to a minor via Facebook Messenger. On appeal, appellant argued his convictions must be reversed because (1) he was not physically present with the minor, and (2) he did not expose his actual genitals, having sent the minor only a likeness of his genitals (a photograph taken approximately 15 minutes prior to being sent). The court of appeals affirmed the convictions. 

Appellant was convicted of “engag[ing] in… lewd exhibition of the genitals in the presence of a minor…” (fifth-degree criminal sexual conduct), and “willfully and lewdly expos[ing] the person’s body, or private parts thereof… in the presence of a minor” (indecent exposure). “Presence” is an ambiguous term, but the Supreme Court finds that “the mischief to be maintained,” “the object to be attained,” and “the consequences of a particular interpretation” canons of interpretation support a conclusion that “presence” in these contexts extends to simultaneous online communications between the defendant and a minor victim.

The Court also finds that the fifth-degree criminal sexual conduct and indecent exposure statutes covers photographic likenesses of genitals, and rejects appellant’s argument that the plain meanings of “exhibit” and “expose” requires exposure or exhibition of actual genitals. Appellant’s convictions are affirmed. State v. Daniel Joseph Decker, A16-0830, 916 N.W.2d 385 (Minn. 8/8/2018).

• Criminal sexual conduct: Lack of initial intent to solicit minor improper reason for downward durational sentencing departure after conviction for soliciting minor to engage in prostitution. Respondent responded to an advertisement on Backpage.com, which was part of an undercover prostitution sting. The undercover officer who responded told Respondent the girl advertised, “Brittni,” was 15 years old. Respondent went to the address with $120 and was arrested. He was charged with and pleaded guilty to hiring an individual he believed to be 13-16 years old to engage in prostitution. Respondent moved for a downward durational departure from the presumptive 18-month stayed sentence, requesting a gross misdemeanor sentence. The district court granted a downward durational departure, based on its conclusion that respondent’s case was less serious than others because respondent initially intended to solicit an adult female, not a minor. The state appealed the sentence.

The court of appeals notes that a downward durational departure must be supported by offense-related grounds, which show that the defendant’s conduct was significantly less serious than that typically involved in the commission of the crime in question. The court distinguishes what a defendant intended to do from what he actually did, finding the former is not an offense-related reason for a downward durational departure. “That [Respondent] did not initially intend to solicit a 13-16 year old does not change the fact that he ultimately solicited a minor to engage in prostitution.” What respondent initially intended to do does not make respondent’s conduct significantly less serious as a matter of law. Ultimately, the court finds that, overall, respondent’s case is not less serious than the typical case, and that there is not a substantial and compelling reason justifying a departure. Reversed and remanded for resentencing. State v. Justin Taylor Dentz, A18-0068, __ N.W.2d __, 2018 WL 4056019 (Minn. Ct. App. 8/27/2018). 

• Implied consent: Petitioner may raise procedural due process argument at implied consent hearing. Appellant was arrested for DWI and failed a breath test at the sheriff’s office. Appellant was given a computer-generated notice and order of driver’s license revocation, which noted his revocation period would be for one year beginning 7/13/2017, seven days from the time the form was provided and stated “[n]o temporary license issued because driver is currently under withdrawal, not licensed or is not licensed in Minnesota.” Appellant had an Iowa driver’s license. Appellant and the deputy electronically signed the form and a copy was given to appellant. Appellant was then transported to detox, after which the deputy noticed appellant had left behind the notice and order of revocation form. It was sent to appellant via certified mail on 7/10/2017. Appellant requested an implied consent hearing, arguing his due process rights were violated because he did not receive the notice of revocation. The district court sustained the revocation of appellant’s driver’s license, finding his due process challenge was outside of those permitted at implied consent hearings. 

First, the court of appeals finds that a due process argument regarding the adequacy of notice may be raised at an implied consent hearing. The implied consent statute explicitly limits the issues that may be raised at an implied consent hearing to those listed in Minn. Stat. §169A.53, subd. 3, which do not include arguments concerning procedural due process. The court distinguishes Axelberg, which held that the defense of necessity could not be raised at an implied consent hearing, because appellant’s case involves the critical constitutional right to due process, which guarantees fundamental fairness, rather than a common law affirmative defense. The Legislature can limit what arguments may be raised at an implied consent hearing, but “it cannot legislate away constitutional rights.”

As to the merits of appellant’s procedural due process challenge, the court finds he received adequate notice of his revocation, because testimony established the deputy gave the form to appellant. The court also finds that appellant was not entitled to a seven-day temporary hardship license, was not entitled to a temporary license, and the notice was not ambiguous. The district court’s order declining to rescind appellant’s revocation is affirmed. Stephen Chadwick Gray v. Comm’r Pub. Safety, A18-0270, __ N.W.2d __, 2018 WL 3716262 (Minn. Ct. App. 8/6/2018).

• 4th Amendment: Dog sniff in hallway adjacent to apartment door not a search, because no curtilage intrusion or invasion of privacy. After police corroborated a tip from a confidential informant that respondent was selling methamphetamine out of his apartment, police conducted a warrantless dog-sniff at the apartment building. Police used a Knox box, a locked key box installed on the outside of the building containing a set of keys to the building for police to use. The dog sniffed doors in the hallway leading to respondent’s apartment, but did not alert until the dog sniffed the door seam of respondent’s apartment. Police then obtained and executed a warrant to search respondent’s apartment, in which they found firearms, ammunition, scales with methamphetamine residue, marijuana, and 226 grams of methamphetamine. After a jury trial, appellant was convicted of first-degree and fifth-degree possession of a controlled substance, and possession of a firearm by a prohibited person.

The court of appeals found the area outside respondent’s apartment door was not curtilage, but that the dog sniff was a search because it violated respondent’s reasonable expectations of privacy. Because police did not have a warrant for the dog sniff and no exception to the warrant requirement applied, the court of appeals determined the district court should have suppressed evidence obtained as a result of the dog sniff.

The Supreme Court first considers whether the warrantless dog sniff was valid under the United States Constitution. First, the Court finds the area immediately outside of respondent’s apartment, such as the door seam, is not curtilage, because, while it is in close proximity to respondent’s home, it is not enclosed within the home, is part of a common hallway of which respondent does not have exclusive use or possession, and was not obscured from the people with whom respondent jointly used the hallway. The Court also concludes that the dog sniff did not invade respondent’s reasonable expectation of privacy. Relying on United States Supreme Court precedent, the Court finds that, because a narcotics dog sniff cannot disclose lawful activity, it does not implicate an expectation of privacy society recognizes as reasonable, and is not a search.

The Court then considers whether the dog sniff, although not a search under the federal constitution, violated the Minnesota Constitution. The Court has previously held that a narcotics dog sniff in the hallway of an apartment building is a search under the Minnesota Constitution, but only reasonable articulable suspicion of criminal activity is required to permit a dog sniff, if police are lawfully present in the place where the sniff is conducted, given the minimally intrusive nature of a dog sniff. The record shows police were lawfully present in the hallway outside respondent’s apartment and that police had a reasonable, articulable suspicion of criminal activity when they conducted the dog sniff. Thus, although the dog sniff in this case was a search, it did not violate Article I, section 10 of the Minnesota Constitution. The court of appeals is reversed. State v. Cortney John Edstrom, A16-1382, __ N.W.2d __, 2018 WL 3867515 (Minn. 8/15/2018).

• Sentencing: Classification of prior offense for criminal history score determined by rules in effect when current offense committed. Appellant was convicted of fifth-degree possession of a controlled substance in 2007. When he committed a new first-degree controlled substance offense in March 2016, the offense for which he was convicted in 2007 was a felony. However, when he was sentenced in September 2016, the 2007 offense had been reclassified as a gross misdemeanor under certain circumstances. The district court calculated appellant’s criminal history, counting his 2007 conviction as a felony. Appellant appealed, arguing a defendant can receive felony criminal history points only if the prior felony conviction is still deemed a felony-level offense at the time of sentencing. The court of appeals rejected appellant’s argument.

Held, section 2.B.7.a of the Minnesota Sentencing Guidelines’ statement that “[t]he classification of a prior offense as a… felony is determined by current Minnesota offense definitions… and sentencing policies,” refers to Minnesota offense definitions and sentencing policies in effect when the current offense was committed. The guidelines do not define “current,” so the court consults dictionary definitions that the offense definitions and sentencing policies a sentencing court is to consider in calculating criminal history are those in effect at “the present time”—i.e., at the time of sentencing the current offense, which the court finds reasonable. However, it finds another reasonable interpretation applying the “whole-statute canon,” which involves reading the guidelines as a whole and interpreting each section in light of surrounding sections. Other provision in section 2.B of the guidelines, such as those addressing how to classify out-of-state prior offenses, suggests that “current” is shorthand for “in effect when the current offense was committed.” 

Because there are two reasonable interpretations of 2.B.7.a, the court finds it ambiguous, leading the court to consider the circumstances under which the provision was enacted and former law. Both support a conclusion that “current” in section 2.B.7.a mean “in effect when the current Minnesota offense was committed.” The court finds this interpretation more reasonable than the dictionary definition of “current,” because it avoids conflict with other guideline provisions and serves the guidelines’ objective of maintaining uniformity, proportionality, rationality, and predictability in sentencing, and notes that it is consistent with the fact that the current offense date controls many other inquiries the guidelines require. Ultimately, the court finds the district court properly counted appellant’s 2007 conviction as a felony. State v. Keith Lee Scovel, A16-1931, 2018 WL 3868579 (Minn. 8/15/2018).

• DWI: Birchfield, Trahan, and Thompson rules are substantive and apply retroactively. This case is a collateral review of appellant’s two DWI test refusal convictions. Appellant filed a consolidated petition for postconviction relief challenging both convictions on the grounds that Birchfield v. North Dakota, 136 S.Ct. 2160 (2016), State v. Trahan, 886 N.W.2d 216 (Minn. 2016), and State v. Thompson, 886 N.W.2d 224 (Minn. 2016), announced a new, substantive rule of federal constitutional law that should be applied retroactively on collateral review. The district court and court of appeals concluded that Birchfield announced a procedural rule that does not apply retroactively. The United States Supreme Court’s decision in Birchfield and its application in Trahan and Thompson “mean that, in the DWI context, the state may not criminalize refusal of a blood or a urine test absent a search warrant or a showing that a valid exception to the warrant requirement applies.” 

Generally, new rules of law do not apply retroactively to final convictions. However, applying the test for retroactivity announced in Teague v. Lane, 489 U.S. 288 (1989), the Court finds that Birchfield shall be applied retroactively, as it announced a new, substantive rule. The Birchfield rule is substantive because it places a category of conduct outside of the state’s power to punish—refusal of blood or urine tests that are not supported by a warrant or valid warrant exception. While the new rule requires a case-by-case analysis to determine whether there was a warrant or an exception to the warrant requirement, this does not transform a substantive rule into a procedural one. The key is that the function of the Birchfield rule is substantive because it defines who can and cannot be culpable for refusing to submit to a chemical test.

Reversed and remanded to the district court with instructions to apply the Birchfield rule to determine if the test refusal statute was unconstitutional as applied to appellant. Mark Jerome Johnson v. State, A17-0842, A17-0883, __ N.W.2d __, 2018 WL 3999734 (Minn. 8/22/2018).

• DWI: Failure to inform that refusal to submit to blood test after warrant obtained does not require suppression of test results. After his arrest for DWI, police obtained a warrant for a chemical blood test. Before the test, police did not inform respondent that refusal to submit is a crime or give him an opportunity to consult with an attorney. The test showed a BAC of 0.23, and respondent was charged with third-degree DWI. Upon respondent’s motion, the district court suppressed the test results and dismissed the charges. The state appealed.

First, the court of appeals finds that respondent had no right to consult with an attorney before the blood test. The court applies the holding in State v. Hunn, 911 N.W.2d 816 (Minn. 2018), that the Friedman right to counsel (limited right to consult an attorney before deciding whether to submit to a chemical test for blood alcohol) is triggered only if the statutory implied consent advisory is read. Here, respondent was not read the implied consent advisory, so his limited right to counsel was not triggered.

Next, the court concludes that failure to comply with the requirement, found in Minn. Stat. §171.177, subd. 1, that “[a]t the time a blood or urine test is directed pursuant to a search warrant…, the person must be informed that refusal to submit to a blood or urine test is a crime,” does not require suppression of the test results. While section 171.177, subd. 1, is included in a chapter of statutes regarding driver’s license revocations, the section does not limit its application to only a license revocation context, and the criminal DWI statute, section 169A.20, subd. 2(2), incorporates section 177.177 by reference. Thus, police were required here to inform respondent that refusal to submit to a warranted blood or urine test is a crime.

However, violation of a statute or rule requires suppression of evidence obtained as a result of the violation only if the violation undermines the purpose of the statute or rule. The purpose of the implied consent advisory is to inform the driver of the serious consequences of his or her refusal in an effort to compel the driver to take the test. This purpose is not subverted if a driver submits to a test without being read the advisory. Thus, suppression of the test results is not required in a criminal prosecution for DWI where the police failed to provide the implied consent advisory prior to the test. The district court erred in suppressing respondent’s test results. State v. Charles Lee Mike, A18-0730, __ N.W.2d __, 2018 WL 4056594 (Minn. Ct. App. 8/27/2018).

Samantha Foertsch

Bruno Law

Stephen Foertsch

Bruno Law

 

EMPLOYMENT & LABOR LAW
JUDICIAL LAW

• Overtime pay; judicial abstention. A federal court lawsuit asserting that an overtime pay lawsuit under Minnesota state law was preempted by the Federal Fair Labor Standards Act (FLSA) was properly dismissed while a state court lawsuit was pending. The 8th Circuit Court of Appeals affirmed a ruling by U.S. District Court Senior Judge David Doty in Minnesota, abstaining under the Younger doctrine. Minnesota Living Assistance, Inc. v. Peterson, 2018 WL 3748656 (8th Cir. 8/8/2018) (unpublished).

n Overtime pay; donning and doffing dismissed. An overtime pay claim for time spent donning and doffing work-required apparel was dismissed. The 8th Circuit upheld a lower court ruling that the collective bargaining agreement barred the claim and the appeal sought was de minimis, anyway. Lyon v. Conagra Foods Packaged Foods, LLC, 2018 WL 3767184 (8th Cir. 8/8/2018) (unpublished).

• FELA; federal interest ratio applies. The federal rate for prejudgment interest applies to Federal Employees Liability Act (FELA) claims brought in state court of appeals for workplace injuries. The Minnesota Court of Appeals, affirming a Hennepin County District Court ruling, held that to ensure “uniformity” on claims that concurrently can be brought under federal or state law, the lesser Federal rate (capped at about 2%) applies, rather than the 10% Minnesota rate. Alby v. BNSF Railway Company, 2018 WL 3716257 (8th Cir. 8/6/2018) (unpublished).

• ERISA claims; complaint dismissed. An employee’s breach of fiduciary duty claim against his employer under ERISA was dismissed for failure to plead facts showing that the investment funds were underperforming. The 8th Circuit upheld a ruling by U.S. District Court Senior Judge David Doty, who deemed the allegations in the complaint too conclusory. Meiners v. Wells Fargo & Company, 2018 WL 3685525 (8th Cir. 8/3/2018) (unpublished).

• Rehabilitation Act; state immunity. A state official is immune from disability discrimination claims under the Federal Rehabilitation Act. The 8th Circuit affirmed a lower court ruling that the receipt and distribution of federal funds by the state treasurer did not constitute a waiver of immunity. Singer v. Harris, 2018 WL 3614631 (8th Cir. 7/30/2018) (unpublished).

• Retaliation lawsuit; dismissal upheld. The dismissal of a lawsuit for retaliation under the Federal Railway Safety Act was upheld. The 8th Circuit ruled that the report of a workplace injury was not causally connected to the termination on grounds of absenteeism. Hess v. Union Pacific Railroad Company, 2018 WL 3682513 (8th Cir. 8/2/2018) (unpublished).

• Forfeiture of commissions; proportionality standard. The standard for deciding whether an employee’s failure to satisfy a provision in the employment contract (to return property upon termination) justified a forfeiture of earned commissions should be based on mutuality of the breach and its proportionality to the amount to be forfeited. The state Supreme Court remanded the determination of whether the significance of the failure to return the property balanced proportionality against the amount of the commissions sought by the employee. Capistrant v. Lifetouch National School Studios, 2018 WL 3558943 (8th Cir. 7/25/2018) (unpublished).

• Workers compensation; causal connection. An employee who was injured when falling down stairs at work was entitled to statutory workers compensation benefits. The Supreme Court held that the employee, who was carrying a plant from her desk at the workplace, satisfied the “insurance-risk” test for coverage under the statute. Roller-Dick v. CentraCare Health Systems, 2018 WL 3748565 (8th Cir. 8/8/2018) (unpublished).

• Non-compete agreement; injunction reversed. An injunction expanding the scope of a noncompete agreement beyond the terms of the contract was reversed. The court of appeals held that the Anoka County District Court erred in exceeding the scope of the restriction, as set forth in the noncompete document. Medtronic, Inc. v. Petitti, 2018 WL 3520858 (8th Cir. 7/23/2018) (unpublished).

• Arbitration agreement; settlement upheld. The refusal to compel arbitration over a dispute in a settlement agreement was upheld. The appellate court ruled that the Hennepin County District Court properly determined that the arbitration provision did not extend to disputes “to enforce” the terms of the settlement. Adherent Laboratories, Inc. v. Di Pietro, 2018 WL 3520843 (8th Cir. 7/23/2018) (unpublished).

Marshall H. Tanick

Meyer, Njus & Tanick

 

FAMILY LAW
JUDICIAL LAW

• Parental alienation can support custody modification. The parents divorced in Wisconsin in 2011, and were granted joint legal custody of their two children (then 8 and 6). Following the divorce, the children primarily resided with mother subject to father’s parenting time. Father alleged that in 2016, mother moved the children from Wisconsin to Minnesota without his permission, and prevented him from having contact with the children for several months. In response, father moved to modify custody based on mother’s alleged “denial and interference” with his parenting time. See generally, Minn. Stat. §518.175, subd. 6(h). The district court denied father’s modification motion without an evidentiary hearing for failure to sufficiently allege “endangerment” as required by Minn. Stat. §518.18.

Father appealed and the court of appeals reversed, holding that interference with a parent-child relationship (often referred to as parental alienation) can, by itself, rise to the level of statutory endangerment. In so doing, the appellate court concluded the district court should have held an evidentiary hearing on father’s motion to determine whether or not to modify custody. 

The decision is most notable for the connection it draws between a parent’s interference with parenting time (which may be sufficient cause of custody reversal) and the endangerment standard required of most custody modification motions. C.f. Sharp v. Bilbro, 614 N.W.2d 260, 263 (Minn. Ct. App. 2000) (holding “a denial or interference with visitation is not controlling in a custody-modification proceeding, but such events are to be considered along with the custody-modification standard.”) Amarreh v. Amarreh, No. A18-0198, 2018 WL 3826604, at *1 (Minn. Ct. App. 8/13/2018). 

Michael Boulette

Barnes & Thornburg LLP

 

FEDERAL PRACTICE
JUDICIAL LAW

• Stipulation limiting attorney’s fees cannot preclude CAFA jurisdiction. Reversing a prior 8th Circuit decision and relying instead on an intervening Supreme Court decision, the 8th Circuit held that a stipulation limiting the amount of attorney’s fees cannot serve to limit CAFA jurisdiction. Faltermeier v. FCA US LLC, 899 F.3d 617 (8th Cir. 2018). 

• Remedy for lack of standing on removed claim is remand, not dismissal. The 8th Circuit, relying on 28 U.S.C. §1447(c), reversed Judge Davis’s dismissal of removed MHRA claims for lack of standing and held that where a district court determines that a plaintiff lacks standing on a claim removed from state court, the claim must be remanded to state court. Hillesheim v. Holiday StationStores, Inc., ___ F.3d ___ (8th Cir. 2018). 

• Verified complaint can be considered on summary judgment even after filing of amended complaint. Affirming the denial of summary judgment to the defendants in litigation arising out of a prison assault, the 8th Circuit held that while the filing of an unverified amended complaint rendered the original verified complaint “without legal effect as a pleading,” the district court could still consider the original complaint as the equivalent of an affidavit when considering defendants’ summary judgment motion. Berry v. Doss, ___ F.3d ___ (8th Cir. 2018). 

• Partial denial of motion to compel arbitration reversed. Reversing Chief Judge Tunheim, the 8th Circuit held that arbitration clauses between consumers and finance companies that encompassed claims “arising out of” or “relating to” finance agreements were “broad” enough to encompass disputes between the consumers and the retailer that had sold them the goods they had financed. Parm v. Bluestem Brands, Inc., ___ F.3d ___ (8th Cir. 2018). 

• Sua sponte reduction of attorney’s fees in settlement agreement reversed. Where the parties settled an FLSA action for a confidential amount and agreed that plaintiffs’ counsel was to be awarded $87,500.00 in attorney’s fees, costs and expenses, and the district court, sua sponte, reduced the fees award to $22,500, the 8th Circuit held that the district court erred in not affording “a certain level of deference” to the parties’ agreement, reversed the district court’s fees order, and remanded the case to the district court with instructions to award the agreed-upon fees. Melgar v. OK Foods, ___ F.3d ___ (8th Cir. 2018). 

• Motions to dismiss for lack of personal jurisdiction granted. Despite finding that the plaintiff’s health might prevent him from litigating in another forum, Judge Nelson dismissed claims brought by a former NHL player against two NHL teams and their workers’ compensation insurer for lack of personal jurisdiction, finding that the defendants were not subject to general jurisdiction in Minnesota, and that there were no acts by the defendants directed at Minnesota that would make them subject to specific jurisdiction. Peluso v. New Jersey Devils, LLC, 2018 WL 4054108 (D. Minn. 8/24/2018). 

After determining that the sole-remaining defendant had not waived her personal jurisdiction defense while she was acting pro se, Chief Judge Tunheim granted the defendant’s motion to dismiss for lack of personal jurisdiction, finding that the defendant’s only contact with Minnesota—non-commercial posts to an online forum operated by a Minnesota corporation—were insufficient to make her subject to personal jurisdiction in Minnesota. East Coast Test Prep LLC v. Russ, 2018 WL 3795942 (D. Minn. 8/9/2018). 

• 28 U.S.C. §1404(a); motion to transfer denied. Where the convenience of the parties only “slightly” favored transfer and other relevant factors were neutral, Judge Wright denied the defendant’s motion to transfer venue, finding that it had not “carried its heavy burden” to establish that the relevant factors “strongly” favored transfer. My Pillow, Inc. v. LMP Worldwide, Inc., ___ F. Supp. 3d ___ (D. Minn. 2018). 

• Denial of ex parte motion for leave to serve third-party subpoena reversed. In July 2018, this column noted a series of decisions addressing ex parte requests for leave to serve third-party subpoenas intended to identify John Doe defendants.

A recent decision by Judge Frank reversed Magistrate Judge Schultz’s denial of such a request, finding that a subpoena could issue under Fed. R. Civ. P. 45. Judge Frank also instituted a number of safeguards to protect the privacy of the Doe defendant. Strike 3 Holdings LLC v. Doe, 2018 WL 4210202 (D. Minn. 9/4/2018). 

• Motion for discovery-related sanctions denied. Rejecting the plaintiffs’ request for sanctions premised on an alleged “document dump” shortly before the close of discovery, Magistrate Judge Thorson found that no document dump had occurred, and that even if it had, the remedies requested by the plaintiffs did not correspond to the prejudice they alleged. Murphy ex rel. Murphy v. Piper, 2018 WL 3727385 (D. Minn. 8/6/2018). 

• Motion to quash subpoenas transferred to venue of underlying action. Magistrate Judge Leung granted the parties’ joint motion to transfer petitioners’ motion to quash subpoenas to the Western District of Pennsylvania, where the underlying action is pending, pursuant to Fed. R. Civ. P. 45(f). Mueting, Raasch & Gebhardt, P.A. v. PPG Indus., Inc., 2018 WL 3971945 (D. Minn. 8/20/2018). 

Josh Jacobson

Law Office of Josh Jacobson 

 

IMMIGRATION LAW
ADMINISTRATIVE ACTION

• Attorney General Sessions overrules BIA’s Matter of A-R-C-G- in Matter of A-B-. On 6/11/2018, U.S. Attorney General Jeff Sessions issued a decision overruling the Board of Immigration Appeals’ decision in Matter of A-R-C-G, 26 I&N Dec. 388 (BIA 2014), a case involving domestic abuse, which held that “married women in Guatemala who are unable to leave their relationship” may constitute a “cognizable particular social group” and thus form a basis for asylum and withholding of removal under sections 208(a) and 241(b)(3) of the Immigration and Nationality Act, 8 U.S.C. §§1158(a) and 1231(b)(3). 

Several key points may be taken from Attorney General Sessions’ decision. First, establishing persecution that is based on membership in a “particular social group” (composed of members who share a common immutable characteristic) must prove that the group membership is defined with “particularity” and is “socially distinct” within the society in question. At the same time, that group membership must be a central reason for persecution and, thus, necessitate flight from the home country. Second, to be cognizable, a particular social group must exist independently of the harm asserted in a specific application for asylum. Third, when the alleged persecutor is an individual without ties to the home country government, the asylum applicant must establish that the government is “unwilling or unable” to provide protection from that persecution. In other words, the asylum applicant must show more than the home government’s difficulty controlling such actions, but rather demonstrate the government actually condones those actions or exhibits an inability to protect victims of such actions. Fourth, the fact that a country may have problems policing certain crimes (such as domestic abuse or gang violence) or that certain populations (such as married women unable to leave their relationship or persons resistant to gang violence) are more likely to become victims of “private criminal activity,” cannot by itself establish an asylum claim, asserts Attorney General Sessions.

Fifth, the asylum applicant seeking asylum on this basis must clearly and precisely, on the record, delineate the proposed particular social group. In short, according to Attorney General Sessions, “Because Matter of A-R-C-G-, 26 I&N Dec. 388 (BIA 2014) recognized a new particular social group without correctly applying these standards, I overrule that case and any other Board precedent to the extent those other decisions are inconsistent with the legal conclusions set forth in this opinion.” The case was remanded to the immigration judge for further proceedings. Matter of A-B-, 27 I&N Dec. 316 (A.G. 2018). 

• USDOJ reaches settlement with egg producer for discriminatory action toward work-authorized non-U.S. citizens. On 8/6/2018, the U.S. Department of Justice announced a settlement with Rose Acre Farms, Inc., one of the largest egg producers in the United States, in a long-lasting lawsuit based on Rose Acre’s discriminatory acts toward work-authorized non-U.S. citizens when verifying their work authorization, specifically subjecting employees to “unnecessary documentary demands.” According to Acting Assistant Attorney General John Gore (Civil Rights Division), “The INA [Immigration and Nationality Act] makes clear that when employers verify the identity and work authorization of employees, they must not treat employees differently based on their citizenship or national origin.” Per the terms of the settlement, Rose Acre must pay a civil penalty of $70.000; educate its employees about the INA’s anti-discriminatory provision; and submit to departmental monitoring for a two-year period. More information about protections against employment discrimination under our nation’s immigration laws may be found at the division’s Immigrant and Employee Rights Section (IER) employee hotline at 1-800-255-7688 (1-800-237-2515, TTY for hearing impaired); IER’s employer hotline at 1-800-255-8155 (1-800-237-2515, TTY for hearing impaired); IER’s free webinars; email (IER@usdoj.gov); or IER’s English and Spanish websites.

https://www.justice.gov/opa/pr/justice-department-settles-immigration-related-discrimination-claim-against-nation-s-second 

• Extension of temporary protected status for Yemen and Somalia.

Yemen: On 8/14/2018, Secretary of Homeland Security Kirstjen M. Nielsen announced the extension of temporary protected status (TPS) for Yemen to 3/3/2020. According to the secretary, continued armed conflict and other extraordinary conditions prompting Yemen’s 2017 TPS extension and new designation persist, while at the same time the country continues to experience a significant humanitarian crisis. Requiring the return of Yemeni nationals (or those without a nationality who last habitually resided there) would present a serious threat to their personal safety. Nor, states the secretary, is it contrary to the national interest of the United States. 83 Fed. Reg. 40307-13 (8/14/2018). https://www.gpo.gov/fdsys/pkg/FR-2018-08-14/pdf/2018-17556.pdf

Somalia: On 8/27/2018, Secretary of Homeland Security Kirstjen M. Nielsen announced the extension of temporary protected status (TPS) for Somalia to 3/17/2020. According to the secretary, continued armed conflict and other extraordinary conditions in the country prevent the return of Somali nationals (or those without a nationality who last habitually resided there) in view of the serious threat to their personal safety. Nor, states the secretary, is this action contrary to the national interest of the United States. 83 Fed. Reg. 43695-00 (8/27/2018). https://www.gpo.gov/fdsys/pkg/FR-2018-08-27/pdf/2018-18444.pdf

R. Mark Frey

Frey Law Office

INTELLECTUAL PROPERTY
JUDICIAL LAW

• Patents: Damage award not excessive. Chief Judge Tunheim recently denied a patent-infringement defendant’s post-trial argument that the jury’s damages award, which amounted to a 15.5% royalty rate, was excessive. Jodi Schwendimann sued Arkwright Advanced Coating, Inc. (AACI) for patent infringement related to T-shirt technology. AACI lost at trial. In determining whether the evidence could have led a reasonable jury to the awarded royalty rate, the court relied on three pieces of evidence. First, the commercial relationship between the parties as direct competitors would allow a reasonable jury to find that Schwendimann would have demanded a high royalty. Second, the jury could have found Schwendimann’s T-shirt technology made printed shirts less expensive to manufacture and sell, making a demand for a higher royalty reasonable. Finally, the court found the profitability of the parties’ products was so great that a royalty rate of 15.5% was reasonable. The rate was less than half of AACI’s profit margin on the infringing products. Accordingly, the court denied AACI’s request for a new trial, finding that 15.5% was a royalty rate that a jury could reasonably award Schwendimann for AACI’s infringement. Schwendimann v. Arkwright Advanced Coating, Inc., No. 11-820 (JRT/HB), 2018 U.S. Dist. LEXIS 127732 (D. Minn. 7/30/2018). 

• Trademarks: Source-identifying function. The Court of Appeals for the 8th Circuit recently revived an artist’s trademark claims. Artist Bruce Munro sued Lucy Activewear, Inc. for infringing his trademarks “Field of Light” and “Forest of Light,” which were used for his unique, artistic light installations. Lucy titled its own light-based installation “Light Forest.” A trademark can be any word, name, symbol, or device, or any combination thereof used to identify and distinguish a producer’s goods (including a unique product) from those sold by others, and to indicate the source of the goods. Despite these principles, the district court found that Munro failed to provide facts suggesting that the names of his installations serve a source-identifying function for his artwork. The court of appeals disagreed, holding that in alleging he and his studio create, design, develop, produce, promote, and market the identified light installations, Munro is the producer of the goods at issue. Therefore, the court found that the names “Field of Light” and “Forest of Light” serve a source-identifying function for the installations as unique products made by Munro and his studio, entitling him to bring an action for Lucy’s use of “Light Forest” for its own light-based installation artwork. Munro v. Lucy Activewear, Inc., 16-4483, 2018 U.S. App. LEXIS 22121 (8th Cir. 8/9/2018).

Tony Zeuli 

Joe Dubis

Lindsay Jones

Merchant & Gould

 

TAX LAW
JUDICIAL LAW

• Legend Drug Tax applies to non-resident pharmacies. Respondent Walgreens Specialty Pharmacy, LLC (WSP) requested refunds from the Minnesota Department of Revenue for taxes paid under Minnesota’s Legend Drug Tax (Minn. Stat. §295.52, subd. 4 (2016)) on transactions between WSP’s non-resident pharmacies and Minnesota-based patients and doctors. The Minnesota Tax Court granted summary judgment for WSP, ordering the Department of Revenue to pay the refund. The Commissioner of Revenue appealed the decision to the Minnesota Supreme Court. The Legend Drug Tax levies a 2% tax on the gross revenues of hospitals, surgical centers, wholesale drug distributors, and on the price paid (here, the wholesale cost) by those who receive or deliver legend drugs in Minnesota. WSP contends that the tax applies only to the receipt of legend drugs in Minnesota, while the commissioner contends that the tax applies to in-state receipt or delivery of the drugs. Using plain language interpretation, the Supreme Court determined the Legend Drug Tax applies (1) to a person who receives legend drugs for resale or use in Minnesota and (2) when that person receives or delivers those drugs in Minnesota. The Supreme Court held that the first prong of this test was clearly met. To determine whether the second prong was met, they addressed the meaning of “deliver.” With no definition of “deliver” being supplied, the Supreme Court looked at its uses within the Chapter and the dictionary definition. The Supreme Court concluded that “deliver” means “give or yield possession of, or bring, transport to, or distribute.” Using this definition, the Supreme Court reversed the tax court decision and held that the second prong was met and that the Legend Drug Tax applied to WSP. Walgreens Specialty Pharm., LLC v. Comm’r of Rev., No. A17-1991, 2018 Minn. LEXIS 445 (Minn. 2018).

• Minnesota’s tobacco tax not on amount for federal excise tax. Minnesota assesses a 95% tax on tobacco products brought into Minnesota. Minn. Stat. §297F.05, subd. 3. Winner Tobacco requested a refund, alleging that it had been paying Minnesota tobacco tax on the total price of its tobacco product purchases, including the federal tobacco tax, when it should have been paying Minnesota tobacco tax on only the prices of the tobacco products themselves. The commissioner denied Winner Tobacco’s refund request and Winner Tobacco appealed to the Minnesota Tax Court. The tax court looked to legislative intent to determine the definition of “wholesale sales price” used in the tobacco tax statute. The tax court held that it was the Legislature’s intent to tax only the tobacco product and not any additional charges (in this case federal excise tax). However, the tax court granted summary motion to Winner Tobacco only for the invoices that had the federal excise tax as a separate line item and not those with a single total. This is because the federal excise tax is not an additional charge that is passed to the tobacco distributor; the wholesaler chose to absorb the excise tax and the single amount solely represents the amount for tobacco. Winner Tobacco Wholesale, Inc. v. Comm’r of Rev., No. 9049-R (Minn. T.C. 8/6/2018). 

• Sales tax on the redemption of points. Schoeneckers designs, implements, and administers programs to improve the performance of corporate employees and to spur sales to corporate customers. Under these programs, employees and customers earned points to redeem for merchandise. While Schoeneckers agreed that the redemption of points for merchandise is subject to sales tax, it disputed the commissioner’s calculation of the sales tax (i.e., the sales price for this type of transaction). The commissioner argued that the sales price was the price-per-point Schoeneckers negotiated with their customers, while Schoeneckers argued that it is the price that they paid for the merchandise redeemed. The tax court held that the commissioner’s proposed interpretation is conceptually unsound and thus unreasonable because it is not the economic reality of the transaction. The economic reality was that the transaction was between the individual and Schoeneckers and not the corporation and Schoeneckers. Thus, the tax court granted Schoeneckers’ motion for summary judgment. Schoeneckers, Inc. v. Comm’r of Rev., No. 8881-R (Minn. T.C. 8/10/2018).

• Minnesota’s R&D credit calculation. IBM and General Mills (appellants) requested a refund, arguing that their calculation of the Minnesota R&D credit was wrong. Appellants appealed to the Minnesota Tax Court. There were two issues that came out of this dispute: 1) whether the definition of “base amount” that Minnesota incorporated from federal law includes a minimum base amount; and 2) whether Minnesota law modifies the federal definition of “aggregate gross receipts.” On the first issue, Minnesota defines “base amount” as the definition in I.R.C. §41(c). Minn. Stat. §290.068, subd. 2(c). Appellants contended that this means only the definition in §41(c)(1), while the commissioner argued that the minimum base amount in §41(c)(2) is incorporated. The tax court determined that (c)(2) helped bring meaning to (c)(1) and thus was part of the definition of “base amount.” Appellants further argued that by accepting §41(c)(2) as part of the definition of “base amount,” the court must accept all of §41(c), including the alternative credit computation. Again the tax court disagreed, stating that the alternative calculation does not bring meaning and thus is not a definition. On the second issue, the commissioner argued that Minnesota modified the term “aggregate gross receipts” from the federal definition. The tax court determined that the term was not modified because the Minnesota statutes do not use the term nor redefine the term; thus, the Legislature did not intend to modify the term to mean only Minnesota aggregate gross receipts. As a result, the tax court granted in part and denied in part appellants’ motions for summary judgment. Int’l Bus. Mach. Corp. v. Comm’r of Rev., No. 9053-R (Minn. T.C. 8/17/2018); General Mills, Inc. v. Comm’r of Rev., No. 9016-R (Minn. T.C. 8/17/2018). 

• Sales comparison of rare property. In a dispute over the property value of a 2.5-acre rambler-style residential home in StoneRidge Golf Course, Washington County argued that sales of sufficiently similar properties are so rare that the reasonable time period after the valuation date should be extended. The tax court rejected this argument as a “broad assertion.” The tax court held that to be a comparable property, it only needs to be recently sold, listed for sale, or under contract as of the assessment date. Thus, after considering the five houses it deemed comparable, the tax court decreased the valuation of the property. Ranum v. Ctny of Washington, No. 82-CV-15-1517 (Minn. T.C. 8/1/2018). 

• Adjustments to property value for expenditures. The appraisal of real estate allows the sales comparison approach for property valuation to be modified based on “expenditures made immediately after purchase.” Normally this provision is used to increase the home value with improvements after purchase; however, Kent used this provision to back into his past home value on an appeal to the tax court. Kent used his current home valuation and subtracted out improvements to the property to reach his past property value when it had damages. The tax court allowed this approach because the appraisers at the time were not fully aware of some of the damage to the property. However, the tax court would only allow the repair amount for the structural expenditures and not the cosmetic expenditures, putting weight on the expert appraisers’ testimony that this does not affect a property’s value. Kent v. Cnty of Douglas, No. 21-CV-16-663 (Minn. T.C. 8/2/2018).

• Cross motions for sanctions. In a property tax dispute, Menard and Anoka County filed motions for sanctions against each other. The county’s motion for sanctions arose out of the tax court’s granting a motion to compel to have Menard provide a suitable witness to be deposed on 11 topics the county provided them. Persons designated to testify on behalf of an organization are required to testify as to the matters known or reasonably available to the organization as a whole. Minn. R. Civ. P. 30.02(f). However, Menard provided a witness who only testified to his personal knowledge. Furthermore, the witness stated on record that he did not prepare for the deposition. The tax court stated that “producing an unprepared witness for an organization deposition is tantamount to a failure to appear at a deposition and therefore constitutes sanctionable conduct.” Thus, it granted the county’s motion for sanctions for attorney’s fees but not the county’s motion to dismiss. Menard filed a motion for sanctions for spoliation after the county deleted an email from the Minnesota Department of Revenue regarding the valuation of Menard’s properties. A sanction for spoliation is proper whenever there is prejudice to a party. Patton v. Newmar Corp., 538 N.W.2d 116, 119 (Minn. 1995). The tax court held that there was no prejudice to Menard from the deleted email because Menard obtained a copy of the email directly from the Department of Revenue and the information in the email is not unique because it is publicly available. Thus, Menard’s motion for sanctions was denied. Menard Inc. v. Cnty of Anoka, Nos. 02-CV-15-2043, 02-CV-16-1997 (Minn. T.C. 8/1/2018).

• When removing a tax court judge is timely and practical. OCC, LLC, a property owner in Hennepin County, petitioned the Minnesota Supreme Court for a writ of mandamus that directs the tax court to vacate an order that quashed OCC’s notice to remove the assigned tax court judge and to honor the notice. For a tax court judge to be removed, the motion must 1) be timely (Minn. R. Civ. P. 63.03) and 2) practical (Minn. Stat. §271.06, subd. 7). First, for there to be a timely motion, it must i) have been filed within 10 days after the party receives notice of which judicial officer is to preside, and ii) the judicial officer has presided at a motion or any other proceeding of which the party had notice. Minn. R. Civ. P. 63.03. The Minnesota Supreme Court held that the judge’s signing an administrative scheduling order does not make it readily apparent that the judge has been assigned to the case and thus the signing of the administrative scheduling order does not start the 10-day period. Furthermore, the court held that the parties must receive formal or express notice regarding a judicial assignment. Second, for the motion to be practical, it must be capable of being put into practice or being done or accomplished, or feasible. The Minnesota Supreme Court held that there was nothing in the record that demonstrates that it would be impractical to remove the judge. Therefore, the Supreme Court granted OCC’s petition for a writ of mandamus. In re OCC, LLC, No. A18-0526, 2018 Minn. LEXIS 524 (Minn. 2018).

• 8th Circuit Court vacates and remands in Medtronic billion-dollar dispute. The 8th Circuit agreed, at least in part, with the commissioner’s critique of the tax court’s valuation of Medtronic’s (and its consolidated subsidiaries’) true income for the 2005 and 2006 tax years. The commissioner characterized the dispute as involving “’the classic case of a U.S. multinational taxpayer… shifting income from its highly profitable U.S. operations and intangibles to an offshore subsidiary operating in a tax haven… by charging an artificially low rate for the intangibles.” Medtronic, Inc. & Consolidated Subsidiaries v. Comm’r (quoting appellant’s brief). The taxpayer countered that the valuation was appropriate because Medtronic’s Puerto Rico subsidiary bore the lion’s share of potential liability arising from any defectively manufactured products, so the company was entitled to a commensurate rate of return on its operations there. In particular, the dispute involves the appropriateness of the comparable uncontrolled transactions (CUT) transfer pricing method to determine the royalty rates paid on Medtronic’s intercompany licenses. The dispute reached the 8th Circuit after a six-week trial in which the tax court engaged in its own valuation analysis and determined that the Medtronic’s CUT method was the best way to determine an arm’s length royalty rate for intercompany agreements. The tax court, however, made a number of adjustments, including the modification of certain rates. 

In vacating, the reviewing court pointed to a number of essential findings that the tax court failed to make. In a concurring opinion, Judge Shepherd summarized the deficiencies as follows: When the tax court selected the CUT transaction, the tax court “did not sufficiently address (1) the fact it arose out of litigation; (2) the lump sum payment that was a part of it; (3) the cross-licenses that were a part of it; and (4) certain intangibles that were not part of it.” The case drew attention in the popular and business press, and could have broad implications for transfer pricing. Medtronic, Inc. & Consolidated Subsidiaries v. Comm’r, 900 F.3d 610 (8th Cir. 2018).

LOOKING AHEAD

• SCOTUS cert grants. The Supreme Court has granted cert on several tax-related cases for its October term. Cases include: 

  • Franchise Tax Board of California v. Hyatt, No. 17-1299. Issue(s): Whether Nevada v. Hall, which permits a sovereign state to be haled into another state’s courts without its consent, should be overruled. 
  • Dawson v. Steager, No. 17-419. Issue(s): Whether the doctrine of intergovernmental tax immunity, as codified in 4 U.S.C. §111, prohibits the state of West Virginia from exempting the retirement benefits of certain former state law-enforcement officers from state taxation without providing the same exemption for the retirement benefits of former employees of the United States Marshals Service.
  • BNSF Railway Company v. Loos, No. 17-1042 [argument is set for 11/6/2018]. Issue(s): Whether a railroad’s payment to an employee for time lost from work is subject to employment taxes under the Railroad Retirement Tax Act.

Morgan Holcomb

Mitchell Hamline School of Law

Jessica Dahlberg

Grant Thornton

 

TORTS & INSURANCE
JUDICIAL LAW

• Collateral source offsets; payments under Minnesota’s Prepaid Medical Assistance Program. Plaintiff drove a motor vehicle that was struck by a bus driven by defendant driver and owned by defendant employer. A jury returned a special verdict that assigned 20 percent fault to plaintiff and 80 percent fault to defendant driver. The jury also found that plaintiff had incurred damages for past medical expenses in the amount of $224,998.16. As a medical-assistance enrollee, plaintiff received Medicaid benefits through contracted managed care organizations (MCOs) operating under the state’s Prepaid Medical Assistance Program (PMAP). Defendants moved for a determination of collateral sources and to limit the award of past medical expenses to the amount paid by plaintiff’s MCOs ($45,979.41), which accounted for negotiated discounts under the PMAP. The district court then reduced the amount of the total award to $45,979.41. Plaintiff appealed.

The Minnesota Court of Appeals reversed. Minn. Stat. §548.251, subd. 1, the collateral source statute, provides that damages awarded to plaintiffs are reduced by “payments related to the injury or disability in question made to the plaintiff, or on the plaintiff’s behalf up to the date of the verdict… except … payments made pursuant to the United States Social Security Act.” The court acknowledged that the word “payments” was previously held to include negotiated discounts obtained by a plaintiff’s private insurer, but it also had been previously interpreted to exclude Medicare-negotiated discounts because they were “payments made pursuant to the United States Social Security Act.” Because the discounts negotiated in this case were accomplished by MCOs pursuant to PMAP under section 1032(a) of the Social Security Act, the court held that they were “payments made pursuant to the United States Social Security Act” and not to be used to reduce plaintiff’s recovery. In so holding, the court rejected defendants’ argument that focused on who must make the payment, stating: “The exception clause does not specify who must make such payments; it only specifies the law governing and authorizing the excepted collateral source payments: the United States Social Security Act.” Getz v. Peace, No. A18-0121 (Minn. Ct. App. 9/17/2018). http://www.mncourts.gov/mncourtsgov/media/Appellate/Court%20of%20Appeals/Standard%20opinions/OPa180121-091718.pdf 

Jeff Mulder

Bassford Remele

 

Comments are closed on this post.

Articles by Issue

Articles by Subject