On July 23, 2014, the Wisconsin Supreme Court decided Data Key Partners v. Permira Advisers LLC, 2014 WI 86. Remarkably, the decision appears to adopt the U.S. Supreme Court’s controversial decision in Bell Atl. Corp. v. Twombly, 550 U.S. 544 (2007). According to the minority opinion, the Court adopted Twombly without it having been briefed or argued. Perhaps, this explains why the Court adopted Twombly without even a mention of Ashcroft v. Iqbal, 556 U.S. 662 (2009), a case upon which most courts interpreting Twombly rely heavily.
Why Wisconsin’s highest court went out of its way to endorse a case many courts seem to be running away from is unknown, as are the reasons for choosing the otherwise innocuous Data Key Partners to announce such a controversial endorsement. What is known is that the implications for insurers and corporations litigating in Wisconsin could be far-reaching.
The case involved a dispute over the sale of a publicly-traded corporation, Renaissance Learning, Inc. Data Key Partners, 2014 WI 86, ¶ 4. Data Key Partners owned minority shares in Renaissance Learning, Inc. Permira purchased Renaissance for $15 per share to the Pauls, the founders of Renaissance, and $16.60 per share to minority shareholders, including Data Key Partners. Id. at ¶ 7. Included in the deal with Permira was a $13 million penalty clause that Renaissance was obligated to pay if the deal was cancelled. Id. Prior to the Permira deal closing, Plato Learning made an offer for “$16.90 per share for all shareholders’ interests, with no difference between minority and majority shares[,]” which would have caused the Pauls to procure approximately $38 million more in profits than they did through the sale to Permira. Id. at ¶ 8.
The plaintiffs contended that Renaissance directors, including the Pauls, breached their fiduciary duty to both minority and majority shareholders. Id. at ¶ 10. A federal court denied the plaintiffs’ motion to enjoin the sale, concluding they had no likelihood of success. Id. at ¶ 9. The plaintiffs, subsequently, removed their federal court claims and filed the state action. Id. at ¶ 10. The trial court dismissed the Second Amended Complaint after concluding it failed to state a claim upon which relief could be granted, reasoning that the business judgment rule protected the directors’ actions and that the Pauls violated no legal duty when they chose to sell to Permira. Id. at ¶ 13. The Court of Appeals reversed, in part, concluding there were sufficient facts alleged to show breach of fiduciary duty claims against the Pauls as well as the directors. Id. at ¶ 14.
Among the issues reviewed by the Wisconsin Supreme Court was the sufficiency of the Second Amended Complaint as requiring dismissal for failure to state a claim. Writing for the majority, Justice Roggensack cited all of the well-known Wisconsin cases related to motions to dismiss as well as the standard set forth in Wis. Stat. § 802.02(1). However, perhaps oddly, the majority opinion then embarks on a ten paragraph summary of the controversial U.S. Supreme Court case Twombly in which the Court “clarified what notice pleading requires in order to state a claim under Federal Rule 8(a)(2), the federal counterpart of Wis. Stat. § 802.02(1)(a).” Data Key Partners, 2014 WI 86, ¶ 22. The majority decision explicitly endorses Twombly, stating, “The Supreme Court’s decision in Twombly is consistent with our precedent.” Id. at ¶ 30. The majority opinion goes on to state:
In sum, Twombly makes clear the sufficiency of a complaint depends on substantive law that underlies the claim made because it is the substantive law that drives what facts must be pled. Plaintiffs must allege facts that plausibly suggest they are entitled to relief. With Twombly and Strid in mind, we turn to the substantive law that underlies plaintiffs’ claims. Id. at ¶ 31.
Ultimately, the majority concluded in Data Key Partners that the facts pled in the Second Amended Complaint fell short of plausibly showing that plaintiffs are entitled to relief and dismissed the action. Id. at ¶ 66.
Justice Abrahamson dissented. Her dissent noted that Twombly is interpreted together with Iqbal and that “[n]o one is sure what Twombly means.” Id. at ¶ 69. In addition, she argues, “Twombly and Iqbal have created confusion and chaos in the federal courts regarding the current state of pleading requirements.” Id. Justice Abrahamson explains that no Wisconsin case has adopted the rules as stated in Twombly and Iqbal and that neither case was argued or briefed in Data Key Partners. Id. at ¶ 70. One of her major criticisms is that “[t]he majority opinion relies on the Twombly heightened pleading standard without any briefing or argument.” Id. Justice Abrahamson then sets out 98 paragraphs in italics, indicating it is the opinion she thinks should have been written by the Court.
The Data Key Partners decision could have broad implications for Wisconsin litigation. Twombly and Iqbal have caused an increase in the number of motions to dismiss filed and granted in the federal courts. Id. at 69. The adoption of Twombly by the Wisconsin Supreme Court – albeit under perhaps suspect circumstances – will surely lead to the filing of greater numbers of motions to dismiss under Wis. Stat. § 802.02(1)(a). The implications for insurers and corporations doing business in Wisconsin are twofold:
- On subrogation claims pursued in litigation, complaints must be drafted with great care and skill, ensuring that facts sufficient to meet the heightened Twombly standard are pled. A failure to plead properly, for example, through a simple recitation of the elements of the cause of action, is almost certain to lead to a successful motion to dismiss under Data Key Partners.
- On defense actions, clients and counsel must carefully weigh whether a motion to dismiss for failure to state a claim should be brought and, if so, when. Plaintiff counsels who fail to stay on top of the law and who fail to plead facts sufficient to indicate the claim is plausible are likely to find themselves on the wrong side of a motion to dismiss and, depending on timing issues, they could have no way to revive otherwise potentially successful claims that were not pled sufficiently.
Like many, MWL will be closely monitoring how Data Key Partners is applied by the circuit courts and Wisconsin Courts of Appeals. Will the case receive treatment similar to Twombly, where lower federal courts routinely find ways to distinguish Twombly as inapplicable, or will lower courts accept the Wisconsin Supreme Court’s seemingly new invitation to more liberally dismiss causes of action for failing to state a claim?
If you have any questions regarding this article, please contact Richard Schuster at [email protected].