This article was originally posted on the “State Bar of Wisconsin’s Business Law Section Blog,” and was written by Attorney Lindsay M. Fedler.

Many people believe most capital is raised by companies (“Issuers”) making initial public offerings or trading on major exchanges such as the NYSE or NASDAQ. Notable 2017 examples include Snap! (parent company for social media app Snapchat) and real estate site Redfin. Generally, issuers must register publicly offered securities with the Securities and Exchange Commission (“SEC”) – a process involving extensive information reporting and expense.
However, most companies opt to raise capital from the private markets through private offerings exempt from registration if certain conditions are met, which reduces their regulatory burden, costs, and time required to raise new capital. Private offerings have increased substantially since the beginning of the Great Recession.[1] A large portion is raised through Regulation D, which is comprised of three rules: Rule 504, Rule 506(b) and Rule 506(c). Between 2009 and 2014, ten times as many private Regulation D offers were made (about 163,000) as there were public offerings (about 15,500).[2]
Today, over 90 % of issuers engaging in private offerings use the exemptions available under Rule 506. Two key terms applying to Rule 506 exemptions are “accredited investor” and “bad actor”.
An accredited investor[3] can be:
• Institutional, such as a bank, private business development company, or certain types of charitable organizations and trusts;
• A person associated with the issuer, such as a director, executive officer, or general partner;
• Individual investors meeting net worth or income requirements:
o Income: Individual or joint income must have exceeded $200,000 or $300,000 respectively in the previous two years (with no reasonable expectations of a change in the current year);
o Net Worth: the investor’s individual or joint net worth must exceed $1 million dollars (excluding the value of the investor’s primary residence); or
• An entity in which all equity owners are accredited investors.
If certain persons or entities involved in the offer and sale of the issuer’s securities engage in conduct which constitutes a disqualifying event under the definition of a “bad actor,” the issuer cannot use Regulation D exemptions.[4] “Covered persons” include:
• The issuer, its predecessors and affiliated issuers;
• The issuer’s directors, executive officers, general partners, managing members, and any other participating officers;
• Beneficial owners of 20% or more of the issuer’s voting securities;
• Promoters;
• Investment managers (if the issuer is a pooled investment fund); and
• Any person compensated for soliciting investors.
Disqualifying events[5] include:
• Criminal convictions, court injunctions and restraining orders involving the purchase or sale of securities, falsified SEC filings, or other securities related business.
• Final orders of certain state and federal regulators, certain SEC orders, and US Postal Service false representation orders.
• Suspensions or expulsions from memberships in a self-regulatory organization (SRO) such as FINRA, or from association with an SRO member.
Only events occurring after September 23, 2013 are disqualifying.[6] Disqualifying events occurring before September 23, 2013 must still disclosed to prospective investors.[7] A “look back” period of five to ten years may apply, measured from the date of the disqualifying event. For example, the date of the final order issued by a state securities regulator triggers the look-back period – not the date(s) of the underlying conduct.
There are some exceptions to bad actor disqualification. The issuer will not be disqualified if it shows it did not know and could not have reasonably known that a disqualified person participated in the offering, or the court or regulatory authority entering the relevant order, judgment, or decree advises in writing that disqualification under the rule should not result as a consequence.[8]
Rule 506(b) and (c)
In 2012, Title II of the JOBS Act amended Rule 506, directing the SEC to permit general solicitation and advertising in some Rule 506 offerings. As a result, the Rule 506(c) exemption allowing for general solicitation and advertising so long as all investors are accredited became effective on September 23, 2013. Rule 506(b) preserves Rule 506 as it existed before the adoption of Rule 506(c).
The exemptions under Rules 506(b) and (c) share several characteristics. Under both:
• Issuers may raise an unlimited amount of funds through the offer and sale of its securities to unlimited accredited investors;
• Prior to the sale of securities, issuers must decide what information should be provided to accredited investors, and ensure that it does not violate antifraud provisions of the securities laws; and
• The securities are not subject to the specific registration requirements of states where they are offered and sold, in contrast to Rule 504. While issuers must still file a notice form and pay a fee to the state(s) where the securities will be offered, there are no additional requirements above what is needed to complete Form D. Some states mandate electronic filing of Rule 506 document through the Electronic Filing Depository (“EFD”). For information on electronic filing procedures, check out https://efdnasaa.org, containing contact information for actual human regulators in each state to answer all questions related to Regulation D filings.
506(b)
In addition to raising unlimited funds from accredited investors, an issuer may sell its securities to up to 35 non-accredited investors under the 506(b) exemption. The issuer must reasonably believe each non-accredited investor has enough knowledge and experience in financial and business matters to properly evaluate the investment, otherwise known as the “sophistication” requirement, which is somewhat open to interpretation. Frequently, an issuer requires the prospective investor to complete a questionnaire certifying the investor as accredited or non-accredited, and if not, whether the investor has sufficient knowledge or experience in financial and business matters to make an informed decision about the investment.
Issuers must provide non-accredited investors with disclosure documents about the issuer and its securities depending on the offering size, and any information distributed to accredited investors.[9]
Advertising in connection with the offer or sale of 506(b) exempt securities is strictly prohibited. Issuers may approach investors if a substantive, pre-existing relationship exists.
506(c)
Unlike 506(b), under 506(c) an issuer may advertise the offer and sale of its securities under 506(c), through social media, email, and more traditional media (print and radio). No substantive pre-existing relationship with the prospective investor is required.
However, an issuer relying on 506(c) may only sell to accredited investors, with more stringent requirements for verifying the investor’s accredited than under 506(b).
Self-verification by a prospective investor of accredited status is insufficient – the onus is on the issuer to verify accredited status under 506(c). The SEC suggested several non-exhaustive ways to meet the verification requirement for accredited investors under 506(c)(2)(ii)(A)-(D):
• Income verification. Review investor’s two most recent years’ tax returns and obtain the investor’s written representation of a reasonable expectation of reaching the necessary income level in the current year.
• Net worth verification. Review bank and/or brokerage statements, tax assessments, or independent appraisal reports within the prior three months plus the investor’s written representation that all liabilities necessary for determining net worth were disclosed.
• Third party verification. Confirmation from a broker, investment adviser, attorney, or CPA verifying the investor met the accredited investor requirements in the past three months.
• Prior investor self-verification. If the investor purchased the same issuer’s securities as an accredited investor in a Rule 506(b) offering prior to September 23, 2013 and continues to hold the securities, the issuer can obtain the investor’s certification at the time of the sale of securities under Rule 506(c) that he or she qualifies as an accredited investor.
An accredited investor qualifying based on joint annual income or net worth requires the issuer to review documentation for and obtain a written representation from both spouses.
The stricter verification requirements result from the possibility that participation of non-accredited investors in a 506(c) offering using advertising makes the issuer ineligible under both 506(b) and (c). If an issuer using 506(c) does not advertise but inadvertently sells to a non-accredited investor, the filing can effectively be revised to a 506(b) exemption. However, once advertising is introduced, the offering will forever be a 506(c) offering and cannot be converted to a 506(b) offering allowing for sophisticated non-accredited investors.
Rule 506(c)’s Impact on Issuers
One big advantage of raising capital under Rule 506(c) is the ability to advertise to a far larger market than under Rule 506(b). However, issuers have been slow to embrace Rule 506(c), with the vast majority of Regulation D filings continuing to be made under Rule 506(b). Perhaps the field of private offerings has prohibited advertising for so long that issuers are wary of using it without more regulatory guidance, or maybe it’s the more stringent verification requirements for ensuring all investors are accredited, especially where advertising is used pursuant to Rule 506(c).
Some third party platforms are attempting to bridge the gap as a middleman for accredited investors and issuers. These platforms verify investors’ accredited status for the issuers advertised through the platform, in exchange for compensation or some portion of the proceeds raised. The platform also accepts some responsibility for “drawing the line” for advertising content of the issuer.
While Congress intended Rule 506(c) to expand investment opportunities and access to capital, time will tell if issuers take advantage.

[1] S. Bauguess et al., Securities and Exchange Commission, Capital Raising in the U.S.: An Analysis of the Market for Unregistered Securities Offerings, 2009-2014, 10 (2015). (https://www.sec.gov/dera/staff-papers/white-papers/30oct15_white_unregistered_offering.html)
[2] Id. at 7.
[3] 17 C.F.R. § 230.501(a)(1)-(8).
[4] 17 C.F.R. § 230.506(d)
[5] 17 C.F.R. §§ 230.506(d)(1)(i)-(viii)
[6] 17 C.F.R. § 230.506(d)(2)
[7] 17 C.F.R. § 230.506 (e)
[8] 17 C.F.R. § 230.506(d)(2)
[9] 17 C.F.R. § 230.502(b)(2)


Lindsay Fedler, University of Wisconsin Law School 2013, is an attorney with the Wisconsin Department of Financial Institutions in Madison, Wisconsin where she specializes in the areas of securities and franchise laws and regulations at the state and federal level, and prosecutes enforcement actions on behalf of the Division of Securities. She may be reached at lindsay.fedler@wisconsin.gov . The Department of Financial Institution’s website is www.wdfi.org .

The attorneys at Schober Schober & Mitchell, S.C. are excited about the recent news that a Commercial Court Docket (“CCD”) will be coming to circuit courts in the Fox Valley, as well as in Southeastern Wisconsin– right here in Waukesha County! On February 16, 2017, the Supreme Court of Wisconsin voted 5 to 2 to adopt a pilot program that creates a separate commercial court docket in these judicial districts. This specialized commercial court will be solely responsible for resolving disputes pertaining to businesses brought in these judicial districts.

Depending on the type of dispute brought in these circuit courts, a case may automatically qualify for placement in the CCD. Cases qualifying for the CCD  will begin being assigned in these courts starting July 1, 2017. Some examples of the types of cases that qualify are those involving internal governance issues, business torts and restrictions in trade, merger and acquisition issues, securities, intellectual property, and franchise issues. Initially, the judges assigned to the CCD will be chosen by the Supreme Court. The Court has said that it will likely choose those judges with business law backgrounds, at least for the initial rotation during the three years of the pilot program.

This is a welcome change to both the legal and business landscape here in Wisconsin, and will hopefully be here to stay. Twenty-Six other states in the U.S. have created some type of special commercial court docket in their states, and studies have shown that this has had a positive impact on communities as a whole within those states. Here are a few reasons why this addition should be celebrated by all Wisconsinites:

With at least the initial judges overseeing the CCDs having demonstrated business law backgrounds, parties will have greater confidence that resolutions of complex commercial disputes will  reflect an understanding of the realities of day to day business issues;

The CCD should attract more businesses—whether they be start-ups or established companies—to relocate and do more business in Wisconsin, because of increased confidence that disputes will be resolved more quickly, fairly, and at a lower cost. This creates jobs, greater tax revenue, and increased quality and quantity of services available to businesses and consumers alike;

Separating commercial issues from the civil docket should significantly speed up litigation time, giving businesses greater incentive to fully litigate complex issues. This creates consistency and reliability in the law for the entire business community, and also reduces costs for businesses that otherwise might be deterred from litigation for purely economic reasons; and

In states that have created commercial court dockets, there has been an increased level of capital investment by venture capital groups and angel investors into start-ups and other early-stage businesses—something Wisconsin desperately needs to help foster growth of the many entrepreneurs and startups seeking to grow in this state.

Have questions or comments about the new Commercial Court Docket and how it might impact you or your business? Contact one of the attorneys at Schober Schober & Mitchell, S.C.

For those of you who follow professional football, you are no doubt aware that Tom Brady, the 4-time Super Bowl winning Quarterback for the New England Patriots, recently came back from a suspension for (allegedly) deflating footballs. But why would I bring this up on our firm’s business law blog? Beside the implications for your fantasy football team, the reason is because Brady’s suspension was in large part a result of something called an arbitration clause in his contract.

Brady is represented by the NFL Player’s Association (the “NFLPA”), a union that advocates on behalf of players (who are employees) through a collective bargaining agreement with the National Football League (the “NFL”). In negotiating some provisions of NFL player contracts, the NFL and NFLPA have agreed to submit all disputes between the players (the employees) and the NFL (the employer), to what is called arbitration. Arbitration is a common way for private parties to resolve any disputes instead of going to court, and the decision to arbitrate is typically agreed upon between the parties in whatever contract governs the parties’ relationship.

To many, arbitration is a preferable method of dispute resolution for a few reasons:

The parties can specifically choose arbitrators to resolve their dispute that are knowledgeable in the particular area of dispute, and avoid the risk of drawing a circuit court or federal court judge without the background in that area;

Arbitration is not necessarily subject to the stringent rules of evidence found in trial court; and

Except in limited circumstances, the decision of the arbitrators is final and binding upon the parties, meaning protracted litigation and appeals are unlikely.

In Tom Brady’s case, he tried arguing that one of those limited circumstances should overturn the arbitration decision against him. United States Courts and Wisconsin Courts have a strong policy of deferring to arbitration decisions and only overturning them in circumstances where it is clear that the decision was corrupted, there was some evident bias, where there is evidence and meaningful procedural misconduct, or where the arbitrator exceeded his or her power at some point in the arbitration.

Brady’s arbitration was unusual because the arbitrator was Roger Goodell, the Commissioner of the NFL. Brady’s argument was that Goodell acted with evident bias, that there was procedural misconduct, and that Goodell exceeded his power as an arbitrator. After having the arbitration decision overturned in circuit court in 2015, in summer 2016, the 2nd Circuit Court of Appeals (in New York) finally ruled against Brady, deciding that the actions of Goodell were not egregious enough to upset the policy of deferring to arbitration decisions. Ultimately, Brady accepted the suspension, foregoing an opportunity to take the case to the United States Supreme Court.

 

Ok, But What Does This Have to Do With Your Business?

            The Brady case is another illustration that contractually opting for arbitration is preferable for those who prioritize cost-effectiveness in dispute resolution. The law that defers to arbitration in the United States doesn’t just apply to high-profile athletes and employers bringing in billions of dollars in revenue like the Tom Brady and the NFL. Because of this, the likelihood of an arbitration decision being overturned is low for all parties who opt for it to resolve their disputes.

For all businesses, when entering into contracts with third parties like vendors, employees or customers, both parties have incentive to minimize the risks involved in your relationship, many of which are uncertain and unforeseeable. You can even agree how costs will be allocated based upon which party is successful. Where a dispute arises, opting for a cost-effective and time sensitive solution to limit the litigation through arbitration may be a preferred option over going to state or federal court.

Not every contract calls for an arbitration clause, however. Because of US Courts’ policy to not upset arbitration decisions, opting for arbitration to resolve your disputes also means that you will have to live with the consequences of the decisions, even when it goes against you. Accordingly, arbitration should be opted to only in strategic situations, and contracts containing such clauses should be drafted by an attorney who has knowledge of the risks prevalent in your particular industry as well as local contract law. If you have any questions about how you can manage your business’ risks through arbitration clauses, contact one of the business attorneys at Schober Schober & Mitchell, S.C. We would be happy to help.

top secretA long awaited Federal Law on trade secret misappropriation was signed into effect last month. The new law, titled the Federal Defend Trade Secrets Act, or “DTSA”, creates a Federal cause of action for businesses who own trade secrets against individuals who have misappropriated the business’ confidential information. The law creates a uniform definition of
trade secret; a definition that currently differs from state to state, and that has made litigation difficult for businesses with multi-state presences.

Many businesses’ livelihoods depend upon protection of trade secrets. Trade secrets include secret formulas, designs, ideas, and other forms of intellectual property that are the basis for the business’ competitive advantage in their particular market.  While other type of intellectual property like trademarks, patents, or copyrights require publicizing the particular information to mark it as the business’ own property, publicity of a trade secret risks hindering the business’ competitive advantage, giving the business incentive to keep that trade secret, a secret! A couple famous examples of trade secrets that are currently utilized by American companies are Coca-Cola’s formula for Coke, and Google’s search algorithm.

Of course, without protection of trade secret laws, businesses’ risk their trade secrets falling into the wrong hands. Necessarily, employees, independent contractors, and other individuals often become aware of trade secrets when becoming involved with a particular business. Because these individuals could exploit those trade secrets for their own gain, many states, including Wisconsin, have devised their own trade secret misappropriation laws to give businesses a right to recover damages from a person who gained access to the trade secret and then exploited it for his or her own benefit. However, with the increased nationalization (and indeed globalization) of the modern marketplace,  businesses should welcome a uniform definition of trade secret and a uniform forum in Federal Court for litigating trade-secret misappropriation. These changes in the DTSA ease the procedural and financial burdens that accompany state court trade secret litigation.

What this means for your business

One particularly important section in the DTSA is one affecting confidentiality agreements in business contracts, whether they be between the business and its employees, or between the business and independent contractors. The section requires that, as of May 16, 2016, in order for a business to have the full protection of the DTSA, any agreement regarding trade secrets must provide a specific notice to individuals signing those agreements of their rights and protections as whistleblowers in particular types of trade secret cases.

This recent development in trade secret law demonstrates the importance of keeping your business apprised and compliant with the latest changes to the legal landscape. Whether your business’ confidentiality agreements need review, updating, or need to be drafted in the first place, or if you have a former employee or contractor who you believe misappropriated your trade secrets, contact one of our business attorneys at Schober Schober & Mitchell, S.C. to discuss how we can help.

It’s too bad the United States Supreme Court didn’t issue its ruling in Comptroller v. Wynne in time for the 2014 tax season. In early May 2015, the nation’s highest Court ruled in favor of a couple in Maryland who argued that part of Maryland’s state tax regime was unconstitutional because it failed to give them a tax credit for taxes paid on income in another state’s county, municipality, or other local taxing authority. The couple, the Wynne’s, are Maryland residents that held stock in an S-Corporation which had gained income in other U.S. states in the taxable year, and they had paid state level and sub-state level taxes on that out-of-state income in states other than Maryland. Maryland’s tax code requires the Wynne’s to pay income tax on that out-of-state income to the state of Maryland in addition to the tax paid on that income in other states, resulting in a double tax on that income. While Maryland allows individuals a tax credit for taxes paid to the state-level taxing authority in other states, it does not allow individuals a tax credit for payment of taxes to out-of-state municipal, county, or other local taxing authority lower than the state level. In Wynne, the United States Supreme Court held that Maryland’s disallowance of a credit for an individual’s payment of tax to an out-of-state county, municipality, or other sub-state level taxing authority violates the dormant Commerce Clause because the disallowance provides those individuals who only engage in commerce within a particular state with an advantage, while it burdens those residents who engage in interstate commerce with a double tax.

Maryland is one of the few remaining states that have such a tax regime, but among these few remaining states is Wisconsin, which has an identical stance that allows tax credits for individuals who pay taxes to state level tax authorities but disallows credits for payment on out-of-state income to any sub-state level taxing authority. See Tax Publication 125, (January 2015), page 2, ¶ D. While most municipalities, counties, or other taxing authorities, such as school districts, at least in Wisconsin, derive much of their tax revenue from sales taxes and property taxes, many sub-state level taxing authorities outside Wisconsin impose income taxes in addition to the state level income tax. For example, about 80% of Iowa school districts impose a surtax that requires individuals to pay additional tax to a local school district on income earned in Iowa for a taxable year. These school districts are allowed to tax as much as 20% of the Iowa state income tax required to be paid to the state in the taxable year. Many other nearby states such as Michigan, Indiana, Ohio, and several other U.S. states also have some type of sub-state level income tax. For all those Wisconsin residents doing business or working with the jurisdiction of out-of-state taxing authority, under current Wisconsin law, you must pay an income tax both to Wisconsin and to the out-of-state sub-level taxing authority, but cannot receive any credit in Wisconsin for the payment to the out-of-state sub-state level taxing authority.

In light of this Wynne ruling, it remains to be seen whether the Wisconsin Department of Revenue will change their stance to allow tax credits for out-of-state payments. With the Wisconsin law and the Maryland law being virtually identical, there isn’t much wiggle room for Wisconsin to continue to disallow these credits. Though the Wisconsin law has not be expressly ruled unconstitutional by the Supreme Court like the Maryland law was in this case, it’d be surprising if the Wisconsin Department of Revenue didn’t to join the vast majority of states that allow a credit across the board for out-of-state income tax payments to sub-state level taxing authorities. However, if the Department of Revenue continues to disallow these credits for the 2015 tax year, it would be doing so in spite of controlling precedent from the nation’s highest Court.

Schober Schober & Mitchell will stay tuned to any changes on the Wisconsin Department of Revenue’s stance on this issue.

This article is the combined effort of Thomas Schober and our law clerk, Jeremy Klang.

The Wisconsin Senate recently passed a bill that would yet again fundamentally change the current state of Labor & Employment law in Wisconsin. The bill still requires Assembly approval and the Governor’s signature.

Senate Bill 69 repeals current Wisconsin Statute section 103.465, which governs the enforceability of non-compete agreements in employment contracts. The bill would replace the current statute with a less restrictive and more comprehensive mandatory statutory scheme that Wisconsin courts would be required to follow when determining whether a non-compete is enforceable contractual provision. Currently, under § 103.465, non-compete agreements are more likely than not to be ruled unenforceable because the statute only allows enforcement “if the restrictions imposed are reasonably necessary for the protection of the employer or principal.” This statutory reasonableness standard has allowed for significant judicial law making, making enforcement of non-compete agreements less likely. If the bill becomes law, it would make it much more difficult for courts to strike down non-compete clauses in employment contracts, and make enforceability much more likely.

Notable provisions in the bill include:

  • allowing an employer’s offer continued employment to an at-will employee that is conditioned upon the employee’s acceptance of a contractual non-compete provision to constitute valid consideration for an enforceable contract (which statutorily enacts the recent Wisconsin Supreme Court holding in Runzheimer International, Ltd. v. Friedlen, 2015 WI 45.);
  • requiring “blue-penciling,” a practice recently rejected by the Wisconsin Supreme Court in Star Direct, Inc. v. Dal Pra, 2009 WI 76, in which a court is limited to “crossing-out” only the unreasonable portion of the non-compete agreement, whereas the current law under Star Direct allows courts to eliminate all non-compete provisions (even reasonable ones) where only one individual non-compete is found to be unreasonable;
  • creating a rebuttable evidentiary presumption that a provision that only restrains competition for 6 months or less is presumed to be reasonable; while providing that a provision restraining competition for more than 2 years is presumably unreasonable, but still allowing the employer to prove that the provision is reasonable through clear and convincing evidence;
  • expanding the scope of legitimate business interests protected by the statute to include an employer’s prospective clients, rather than just existing ones;
  • requiring a court to jump through some hoops in order to strike down the provision on public policy grounds by requiring that the court explicitly set out the public policy ground it rests its decision on as well as requiring the court to state why the public policy for non-enforcement substantially outweighs the recognized legitimate business interest of the employer;
  • prohibiting a court from using a terminated employee’s individual economic hardship (from being prohibited from competing against their former employer) as a basis for non-enforcement, unless that person can show there are exceptional circumstances for non-enforcement;
  • requiring that if a terminated employee is found to have violated an enforceable non-compete agreement, that any contractually determined attorney fee shifting must be enforced, or in the absence of that, allowing the court to give the cost and attorney fee to the winning party;
  • disallowing the narrow construction of contract interpretation against the employer, and requiring interpretation of the contract in the favor of providing reasonable protection of the legitimate business interest of the employer; and
  • providing that for employers who have secured an injunction against their former employee, they would not be required to post a bond in order to gain injunctive relief, however, the court could require the employer to provide the former employee security for any damages they might incur due to the injunction.

A link to the bill can be found here.

This is a significant and comprehensive change in the current state of employment law in Wisconsin. The bill ties the hands of the judiciary in striking down non-competes, and gives employers much more power over their employees after termination.

It remains to be seen whether the Governor will sign this bill, but those businesses currently with non-compete agreements should know that these changes will only affect those contracts signed after the bill becomes law while current agreements would still be subject to the judicial discretion allowed by the current § 103.465. Schober Schober & Mitchell S.C. will be keeping a careful eye out for if and when this bill becomes law. Please contact us with any questions regarding the potential change in non-compete law; our business law attorneys will be happy to help.

This post is the combined efforts of Jeremy Klang and Thomas Schober.

 

We learned this morning about another data breach, this time relating to the widely used Cloud Service called Dropbox.

Steve Kovach, of BusinessInsider.com reported yesterday that over 7 million Dropbox passwords have been compromised.

After the Target, Home Depot and other recent breaches, this isn’t a big surprise. However, since many lawyers use dropbox to share confidential information with their clients, it may certainly startle many.

If you haven’t considered encrypting the messages you send, now may be the time.

We thank our friends at Abacus Data Systems, Inc. for getting us word of the above news!

Noncompetes are generally thought of as unique agreements given the varying way states view the restrictive covenants imposed on employees by such agreements. The U.S. Supreme Court recently clarified that that Federal Arbitration Act, 9 U. S. C. §1 et seq., requires arbitration, not litigation, as the proper dispute resolution method for determining enforceability of noncompetes if the applicable noncompete agreement contains an enforceable arbitration clause. In, NITRO-LIFT TECHNOLOGIES, L. L. C. v. EDDIE LEE HOWARD, the Supreme Court vacated the Oklahoma Supreme Court’s decision that the state court was the proper forum for deciding whether the particular noncompete was enforceable under state law.

The Wisconsin Supreme Court in Brenner v. New Richmond Regional Airport Commission 2012 WI 98 (July 17, 2012) reversed a circuit court decision dismissing inverse condemnation claims made by property owners abutting a municipal airport due to the effect of flights of private aircraft over their properties resulting from the extension of runways at the airport.

The Court took into consideration the fact that Wisconsin Statutes Section 114.03 and 114.04 gave property owners certain rights with respect to airspace over their properties.  It determined referring to federal case law that the proper standard to be applied in determining whether a taking occurs in airplane overflight cases is whether the government action results in aircraft flying low enough and with such frequency as to have a direct and immediate effect on the property owner’s use and enjoyment of the property.  The circuit court had held that the appropriate standard to apply was whether the property owners had been deprived of all or substantially all of the use of their properties.

The Supreme Court found that the circuit court had applied the wrong standard, and remanded the case for submission of evidence and a determination whether the flights were so low and frequent as to constitute a taking.

When an insurance company feels it has a defense to coverage, it generally issues a “Reservation of Rights” letter advising its insured that it feels it does not provide insurance coverage regarding a particular claim.  Its failure to send such a letter to its insured has been held to prevent it from claiming it need not provide coverage.  The Wisconsin Supreme Court in Maxwell v. Community Insurance, 2012 WI 58 (May 30, 2012) in a 4-3 decision has now held such failure will not preclude a coverage defense.

In that case, the insurance company elected to defend its insured, but did so unsuccessfully.  The insured claimed that because the insurance company failed to issue a Reservation of Rights, it could not claim it had no liability for the judgment against its insured despite the fact that a policy exclusion clearly indicated it would provide no such coverage.  The majority held that the failure to issue a Reservation of Rights does not require an insurance company to provide coverage that otherwise would not exist.

This is a significant decision, as when an insurer reserves its right to raise a coverage defense and notifies its insured, the insured is given warning that it may have to pay any judgment rendered against it.  Insureds under those circumstances may elect to hire their own attorneys even if the insurance company provides a defense, to decrease the chance of an adverse decision.  If insurers need not notify insureds of the existence of policy defenses but may raise them in the future regardless, insureds may be surprised not only by an adverse judgment but by the fact they must pay it themselves.