Raising the Bar for Plaintiffs' Complaints: The Wisconsin Supreme Court Adopts Twombly Heightened Pleading Standards in Data Key Partners

WDC Journal Edition: Spring 2015
By: Aaron J. Graf, Mallery & Zimmerman, S.C.

Introduction

In Data Key Partners v. Permira Advisers LLC,1 the Wisconsin Supreme Court, in a 4-3 decision handed down on July 23, 2014, adopted the federal pleading standard set forth in Bell Atlantic Corp. v. Twombly,2 requiring plaintiffs to allege facts in their complaint which plausibly state entitlement to relief. While the facts of the case dealt with substantive rules on corporate director liability to shareholders, this standard now benefits a broad range of defendants that are considering challenging a plaintiff’s complaint for failure to state a claim by raising the bar that plaintiffs must meet.

The Data Key Partners Decision

Data Key Partners revolved around the sale of a publicly traded company, Renaissance Learning, Inc., in which Data Key Partners owned minority shares. The trial court was faced with various claims by Data Key Partners in regard to whether the directors of Renaissance had breached their fiduciary duties to the shareholders. The trial court found that the business judgment rule (Wis. Stat. § 180.0828) protected the directors and that no legal duty was violated when the directors opted to sell to one buyer over another. The business judgment rule is an evidentiary presumption which shields corporate directors from liability to shareholders unless the director’s conduct falls within one or more of the several enumerated categories which remain actionable.

Based upon the notice pleading standard, Data Key Partners contended that the factual allegations in its complaint concerning the disloyalty of the director, which must be taken as true on a motion to dismiss, were sufficient to defeat a Wis. Stat. § 802.06(2) motion to dismiss for failure to state a claim. The court spent considerable time analyzing Data Key Partners’ factual allegations to determine whether, if such conduct was proven, it would be actionable in light of the business judgment rule. The supreme court upheld the dismissal by the trial court and, rather surprisingly, adopted the federal pleading standard set forth in Twombly.

Since the revision of Wisconsin’s rules of civil procedure in 1976, Wisconsin courts have routinely applied the forgiving “notice pleading” test set forth in Wis. Stat. § 802.02(1). The court of appeals has explained the standard: “[w]e are, indeed, a notice pleading state. Under notice pleading, one need only give the opposing party fair notice of what the claim is and the grounds upon which it is based. When we review the complaint’s sufficiency, we examine whether it contains sufficient details to give the defendant and the court a fair idea of what the plaintiff is complaining about.”3

The decision in Data Key Partners caught many individuals in Wisconsin’s legal community off guard as there was little indication that a change in the law was on the horizon. The Wisconsin Supreme Court had just recently reaffirmed the notice pleading standards in Wisconsin in the case of CED Properties, LLC v. City of Oshkosh.4 There, the court, comprised of the same justices, repeated the oft-cited principles that attorneys and clients have operated under for much of the last several decades. The language in that decision was decidedly in favor of resolving “legal disputes … on the merits of the case rather than on the technical niceties of pleading.”5 The court repeatedly noted that Wisconsin’s rules are “liberal” and should be “construed to do substantial justice” so long as “reasonable notice is given to the defendant in respect to the nature of the claim.”6 Thus, as of the CED Properties decision from March of 2014, the Wisconsin Supreme Court seemed to have no interest in, or intention of, altering the rules of pleading, and certainly no intention of adopting the Twombly standard in whole.

Not only was the shift in the law not readily foreseen, but there are also several oddities to the Data Key Partners decision. The shift in Wisconsin law was accomplished in a case where neither party briefed or argued that Wisconsin should adopt the federal pleading standard under Twombly. Rather, and as recognized by Chief Justice Shirley Abrahamson in her dissent in Data Key Partners, the court seemed to sua sponte raise, develop, and adopt the argument.7 In fact, the underlying court of appeals decision, in a footnote, mentioned Twombly and Iqbal in passing in discussing a scholarly article, but specifically noted “[w]e have found no Wisconsin case relying on Twombly or Iqbal to impose heightened pleading standards.”8 It seems as though the justices in the Data Key Partners majority viewed this footnote as an invitation to impose those very heightened pleading standards. At the same time, the Data Key Partners decision seemed to ignore subsequent federal decisions, such as Ashcroft v. Iqbal,9 which most federal courts commonly cite to along with Twombly to provide further clarification and refinement of the pleading standard.

The Data Key Partners Decision Adopted the Twombly Pleading Standards in Their Entirety.

Despite all this, it is difficult to concoct an argument that the court did not intend to adopt the Twombly heightened pleading standards in their entirety. First, the Chief Justice certainly believed the majority had increased the pleading standard, as evidenced in her lengthy dissent, which notes a divergence from Wisconsin law and notes the possibility of an increased rate of dismissals under this new standard.10 The Chief Justice even went as far as to suggest that the majority was adopting a “specific fact” pleading standard.11

Second, the majority repeatedly used the “plausibility” language from Twombly—language largely absent from the Wisconsin legal lexicon in analyzing the sufficiency of pleadings—throughout the decision.12Third, the majority set forth in detail Wisconsin’s pleading requirements, spent eight paragraphs describing the decision in Twombly, and specifically noted “the Supreme Court’s decision in Twombly is consistent with our precedent.”13

It would also be difficult to argue that the court meant to limit its holding to specific types of claims and circumstances—such as the business judgment rule at issue in Data Key Partners. Of course, it would be strange indeed to apply one set of pleading requirements to claims involving the business judgment rule and a more relaxed standard to all other claims, especially without explicitly making such a distinction in the decision. The court made no such distinction. Also, the cases the court relied upon in reaching its decision were not applying the business judgment rule but, rather, were addressing a host of different types of claims. For example, Twombly addressed the sufficiency of alleging a violation of the Sherman Act, while the Wisconsin decision the court described Twombly as being “consistent with,” Strid v. Converse,14 was a malicious prosecution and abuse of process case. Thus, Data Key Partners stands for nothing short of a new standard in Wisconsin pleading, raising the bar to the levels set forth in Twombly.

An Overview of the Twombly Pleading Standards

Now that the Twombly heightened pleading standards apply in Wisconsin, in analyzing a plaintiff’s complaint defense counsel in state court must be cognizant of what Twombly requires for a complaint to pass muster. A plaintiff must provide “more than labels and conclusions[,] and a formulaic recitation of the elements of a cause of action will not do.…”15 As to the remaining factual allegations, they “must be enough to raise a right to relief above the speculative level.”16 Subsequent courts have read this to require a two prong approach.17 First, the court should discard any and all legal conclusions from the pleading. Second, as to the remaining factual allegations, the court should test the sufficiency of the facts pled to determine whether they provide the necessary “factual enhancement” to push the claim across the line from a mere possibility of entitlement to relief into the territory of plausibility of entitlement to relief.18

If defense counsel seeks to rely on Data Key Partners in bringing a motion to dismiss, it would be prudent to invoke the same rationale and policy arguments that seemed to sway the court in Data Key Partners. There, just like the court in Twombly, the court appeared especially concerned with the enormous costs of discovery and litigation in those types of suits (director liability and Sherman Act). The court specifically noted that Wisconsin’s legislature “enacted statutory provisions requiring director indemnification because directors often were sued for actions taken on behalf of corporations and that litigation was causing directors to resign and to refuse to serve on boards of directors.”19 Further, “[t]he Supreme Court recognized that discovery in civil cases accounts for as much as 90 percent of litigation costs when discovery is actively employed.”20 While there does not appear to be any basis to limit the Data Key Partners pleading standard to specific types of cases, there appears to be a heightened concern in cases where there is either a vulnerable type of defendant or there is an enhanced risk of expansive discovery and litigation costs. Emphasizing these concerns in a motion to dismiss can only further bolster such a motion based on Data Key Partners.

Remaining Issues after Data Key Partners

Perhaps unsurprisingly, the Data Key Partners decision raises a fair amount of additional, unanswered questions that will likely need to be addressed in the near future. For example, the business judgment rule at issue in Data Key Partners, which the court essentially found a plaintiff is required to plead around, is an evidentiary presumption.21 The court held that, regardless of whether the business judgment rule was implicated on the face of the complaint, the plaintiffs did not allege sufficient facts to avoid the application of the evidentiary presumption.22 This raises the important question of whether Data Key Partners can be read to require that a plaintiff also must plead around certain affirmative defenses with sufficient facts to plausibly state a claim for relief. After all, if a party is required to plead around evidentiary presumptions that would not typically come to a head until the summary judgment process or trial, why would a party not be required to plead around affirmative defenses that often appear at the motion to dismiss stage (such as the statute of limitations or jurisdictional issues) or others that typically appear at the summary judgment or trial stage?

Similarly, while the supreme court adopted the pleading standard in Twombly, as the Chief Justice noted in her dissent, “[n]o one is sure what Twombly means: Exactly how implausible is ‘implausible’ remains to be seen.... Twombly and Iqbal have created confusion and chaos in the federal courts regarding the current state of pleading requirements.”23 There have been numerous federal decisions clarifying and expounding upon Twombly and it is unclear which, if any, of these decisions will apply in Wisconsin.

Conclusion

The plain language of the Data Key Partners decision adopts the Twombly pleading standards as Wisconsin’s new pleading bar. It will be interesting to see how trial courts and appellate courts treat the Data Key Partners decision and whether the supreme court will clarify or limit its holding when given an opportunity in the future. However, for the time being, the Data Key Partners case provides defense counsel with an extremely useful tool in seeking to have inadequately pled complaints dismissed by Wisconsin trial courts. Borderline complaints that may have been sufficient to pass muster previously are now likely appropriate for a motion to dismiss under the increased bar adopted by Data Key Partners.

Aaron Graf is a litigator in the Milwaukee, Wisconsin office of Mallery & Zimmerman, S.C. He focuses his practice on labor and employment law and municipal law and is certified as a Professional in Human Resources (PHR). He routinely defends employers and municipalities throughout Wisconsin and proactively advises them on ways to avoid liability. Aaron was selected for inclusion as a Wisconsin Rising Star in 2014 by Super Lawyers. He received his J.D. from Marquette University Law School in 2008 and his B.S. from Concordia University Wisconsin in 2004. He is licensed to practice in the Eastern and Western Districts of Wisconsin.

References

1 2014 WI 86, 356 Wis. 2d 665, 849 N.W.2d 693.
2 550 U.S. 544 (2007).
3 Wolnak v. Cardiovascular & Thoracic Surgeons of Cent. Wis., S.C., 2005 WI App 217, ¶¶ 47-48, 287 Wis. 2d 560, 706 N.W.2d 667 (internal citations omitted).
4 2014 WI 10, ¶¶ 19-22, 352 Wis. 2d 613, 843 N.W.2d 382.
5 Id., ¶ 21 (citing Korkow v. General Cas. Co. of Wis., 117 Wis. 2d 187, 193, 344 N.W.2d 108 (1984)).
6 Id., ¶¶ 19-22.
7 Data Key Partners, 356 Wis. 2d 665, ¶ 70.
8 Data Key Partners v. Permira Advisors LLC, 2013 WI App 107, ¶ 23 n.6, 350 Wis. 2d 347, 837 N.W.2d 624. 9 556 U.S. 662 (2009).
10 Data Key Partners, 356 Wis. 2d 665, ¶¶ 68-70 (Abrahamson, C.J., dissenting).
11 Id., ¶ 143 (Abrahamson, C.J., dissenting).
12 See, e.g., id. at ¶¶ 2, 3, 21, 26, 31.
13 Id., ¶ 30.
14 111 Wis. 2d 418, 331 N.W.2d 350 (1983).
15 Twombly, 550 U.S. at 555.
16 Id. at 556.
17 Iqbal, 556 U.S. at 678-79.
18 Twombly, 550 U.S. at 556.
19 Data Key Partners, 356 Wis. 2d 665, ¶ 55.
20 Id., ¶ 27 (citing Twombly, 550 U.S. at 559).
21 Data Key Partners, 356 Wis. 2d 665, ¶ 2.
22 Id., ¶ 43.
23 Id., ¶ 69 (Abrahamson, C.J., dissenting) (internal citations omitted).