CIVIL LITIGATION
Judicial Law

Summary Judgment; Punitive Damages. The Minnesota Court of Appeals recently issued an important insurance coverage decision that also included some procedural aspects. In particular, the appellate court confirmed that its review of an appeal from summary judgment is limited to the materials on file with the district court. Specifically, the appellate court will not consider documents that were filed in an offer of proof after the district court denied summary judgment, and which the district court never considered. The appellate court also affirmed the district court's denial of a motion to amend the complaint to assert a claim for punitive damages, holding punitive damages are not available in a breach of contract case absent an independent tort. A claim for breach of the implied covenant of good faith and fair dealing is not a tort. The plaintiff relied on Jensen v. Walsh, 623 N.W.2d 247 (Minn. 2001), for its argument that punitive damages were available in any case in which a party's rights were deliberately disregarded and/or any case involving economic injury. The appellate court declined to extend Jensen to a case involving only economic injury and contractual rights, and held that Jensen should not be read to signal a change in the law of punitive damages. In re Silicone Implant Insurance Coverage Litigation, 2002 WL 31109708 (Minn. App. 9/24/02)

http://www.lawlibrary.state.mn.us/archive/ctappub/0209/c5011546.htm

Minn. R. Gen. Pract. 119.02: Attorneys' Fees. Plaintiff sought attorneys' fees for the costs incurred to bring a motion for contempt. In so doing, the attorney did not submit all information required by Minn. R. Gen. Pract. 119.02. Rule 119 requires that a motion for attorneys' fees shall be accompanied by an affidavit containing, among other details, the following information: (1) a description of each item of work performed, (2) the date on which the work was performed, (3) the amount of time spent on each item, (4) the attorney's billing rate, (5) a statement that the affiant has reviewed the pertinent time records, (6) a statement confirming that the work was actually performed for the client and was necessary, and (7) that charges for unnecessary or duplicative work have been eliminated from the fee request. Instead of submitting the detailed information spelled out in the rule, the attorney simply submitted a motion that stated only the amount of time spent in bringing the underlying motion for contempt (including a forward-looking estimate for time spent preparing for the hearing on the motion for contempt), the general nature of the work, the attorney's standard billing rate, and the amount of fees sought. The Minnesota Court of Appeals confirmed that the requirements of Minn. R. Gen. Pract. 119.02 are not intended to limit a court's discretion in handling fee applications. Citing Gull v. Gully, 599 N.W.2d 814 (Minn. 1999), the court held that it is not an abuse of discretion for a district court familiar with a case, and with access to the parties' financial records, to waive the detailed requirements of Rule 119. Tait v. Tait, C3-01-2159 (Minn. App. 08/13/02)(unpublished). http://www.lawlibrary.state.mn.us/archive/ctapun/0208/2159.htm

Class Certification. Plaintiff, the trustee of a family trust, sought class certification pursuant to Rule 23 for breach of fiduciary duty claims against a mutual fund management company and its principals. The plaintiff alleged that the mutual fund failed to disclose to shareholders, voting on a proposed plan of reorganization and termination, that the plan, if approved, would be followed by the declaration of unusually large long- and short-term capital gains. The Minnesota Court of Appeals addressed each element of class certification under Rule 23.01 and 23.02, with noteworthy comments on several elements: numerosity; adequacy of representation; predominance of common questions; and superiority. First, due to discovery limitations ordered in the case, the trustee could not specifically identify putative class members. However, the court held that such identification was not required; rather, the trustee need only establish a reasonable estimate of the number of class members. Since the trustee had done so, this element was satisfied. Second, the fact that the trustee did not have first-hand knowledge of the facts or law did not render it inadequate to represent the class because, in complex cases, the representative need not have first-hand knowledge of the facts or law. The court held that "general knowledge and participation in discovery are enough to demonstrate representational adequacy." Third, the fact that the amount of damages will vary from class member to class member does not destroy the predominance of common questions so as to preclude class certification, so long as damages are capable of mathematical or formulaic calculation. Finally, the court also explained that, because the average putative class member would sustain only $3,000 of damages, class certification would make it possible for the class members to bring suit to enforce their substantive claims, and thus the superiority element was satisfied. Glen Lewy 1990 Trust v. Investment Advisors, Inc., C6-02-416, 650 N.W. 2d 445 (Minn. App., 09/03/02). http://www.lawlibrary.state.mn.us/archive/ctappub/0209/c602416.htm

-- Emily Duke
-- Cynthia Moyer
Fredrikson & Byron

CRIMINAL LAW
Judicial Law

Evidence: DNA: PCR-STR: General Acceptance: Frye-Mack. It was reversible error for the trial court to deny the "general acceptance" portion of the Frye-Mack hearing, and to hold only the hearing required by the second prong of the standard, namely, whether the state could establish the necessary foundation for admission of the test results in this particular case. The trial court, by its denial, implicitly held that there was no need for a general acceptance determination. The Supreme Court, however, holds that the PCR-STR method of testing DNA is a new scientific technique that this Court has never before considered. As such, it is novel scientific evidence, subject not only to a Frye-Mack hearing on the procedures and controls involved in this particular case, but also a hearing on the general acceptance of the technique within the relevant scientific community. The Minnesota Supreme Court has not previously addressed this issue. Accordingly, the case is remanded for the general acceptance hearing before the trial court judge. State v. Tony Allen Roman Nose, CX-01-1560, (Minn. 08/22/02). http://www.lawlibrary.state.mn.us/archive/supct/0208/cx011560.htm

Evidence: Motion in Limine: Further Objection. "Ordinarily, a party need not renew an objection to the admission of evidence to preserve the claim of error for appeal following a ruling on a motion in limine." The Supreme Court cites the advisory committee's note in Minnesota Rule of Evidence 103 (a). for this proposition. Any change in the initial ruling on the in limine motion, however, requires renewal of the objection, citing Weinstein's Federal Evidence. State v. Kevin Richard Litzau, C3-00-2099, (Minn. 08/30/02). http://www.lawlibrary.state.mn.us/archive/supct/0208/c3002099.htm

Evidence: Confidential Reliable Informant: Need for Disclosure: Prominent Role of Tip. The appellant moved for disclosure of the confidential reliable informant (CRI), who had provided a tip resulting in the appellant's arrest for controlled substances. The trial court denied the appellant's motion. Also, the court granted the appellant's motion to preclude testimony about the contents of the tip, but later revisited this ruling and stated that the prosecution would be allowed to elicit testimony concerning the substance of the tip.

Held, it was plain error for the trial judge to allow evidence concerning the contents of the tip. Where an informant is an eyewitness to a crime, there is a reasonable probability that the informant's testimony is necessary for a fair determination of guilt or innocence. Additionally, the state cast the informant's tip into a prominent role at trial. Furthermore, the substance of the tip is clearly hearsay, impinging upon the appellant's rights of confrontation. State v. Litzau, supra.

Criminal Sexual Conduct: Solicitation of Minors: Construed: Chat Line. Respondent used a telephone chat line to respond to a message posted by two juveniles, representing their ages to be 18 and 19. He later talked live with them and rented a hotel room where he engaged in sexual intercourse with one, while the other allegedly watched. The trial court granted the appellant's motion to dismiss the solicitation charge for the reason that the appellant's conduct did not come within the statutory definition of the term "solicit".

Held, the trial court was correct in dismissing the charge. Minn. Stat. ¤609.352, subd. 2(c) defines "solicitation" of a child as "commanding, entreating, or attempting to persuade." Those terms imply a reluctant or resistant listener. Here, not only did each child initiate contact by being the first to post such a message, but the child did not exhibit any reluctance to discuss engaging in sexual activity. "Where the child's own words or conduct lead so directly to the sexual activity that the adult does not engage in any form of persuasion, then the crime of solicitation has not occurred." State v. Travis Wade Koenig, C4-02-303, (Minn. App. 08/20/02.

Forfeiture: Solicitation of Crime: Direct and Substantial Connection: Automobiles. The Court of Appeals is reversed. The appellant hired a police informant in a conspiracy for murder scheme. On four occasions the appellant drove his Jeep to a meeting place, exited his Jeep, then entered the informant's vehicle where the two made their plans. On one occasion, the final meeting, a "reconnaissance mission" took place wherein the appellant brought with him in his Jeep a number of burglary tools. The appellant was later charged and convicted of two counts of conspiracy to commit first-degree murder. The district court granted a motion for summary judgment, stating that the appellant's Jeep had been used as furtherance of the conspiracy to commit murder.

The appellant argues that his driving the Jeep to four meetings and carrying the burglary items, which were ultimately used in an attempt to break in, did not create a "sufficient nexus" between the Jeep and the designated offense. The state argues that under a broad interpretation of Minn. Stat. ¤609.5312, a vehicle used to transport a conspirator to meetings with another conspirator constitutes an overt act and furtherance of the conspiracy, facilitates a conspiracy, and therefore is subject to forfeiture.

The Minnesota Supreme Court, following the United States Supreme Court and other jurisdictions, rejects Minn. Stat. ¤609.531, subd. 1(a) (2000), which states that forfeiture statutes are "remedial in nature and are to be liberally construed." The Supreme Court notes that forfeiture statutes are not favored, and should be enforced only within the letter and spirit of the law to the extent that forfeiture statutes are at least, in part, punishment. They are disfavored generally, and the courts will construe language strictly and resolve any doubt in favor of the party challenging it. With respect to conveyance vehicles in particular, the court holds that there should be a substantially significant connection between criminal activity and the vehicle before an automobile may be seized and forfeited. A car by itself is not contraband, and its use in our society is pervasive. In this case, the sole connection between the Jeep and criminal activity was transportation to a meeting place and, at one point, carrying burglary tools. At no point did any conspiracy take place in the Jeep. At all times, the Jeep was one vehicle away from facilitating a commission of the conspiracy and was not directly involved in the commission of the designated offense. Michael K. Riley, Sr., Nicollet County Attorney vs. 1987 Station Wagon, C8-01-21, (Minn. 08/29/02). http://www.lawlibrary.state.mn.us/archive/supct/0208/c80121.htm

Gangs: Crime Committed for Benefit of a Gang: Constitutionality: Equal Protection: Disparate Impact. The appellant, a black male and an admitted member of the "New Breed Disciples," sold crack cocaine to a police informant. Upon entering a plea of guilty pursuant to a plea agreement, the appellant was convicted of one count of second-degree controlled substance committed for the benefit of a gang. The appellant moved the district court to sentence him without regard to Minn. Stat. ¤609.229, which provides a mandatory minimum sentence for crimes committed for the benefit of a gang. The appellant pointed out that 92 percent of the 1,025 confirmed gang members in Minnesota are members of a racial minority, while a state strike force asserted that 72 percent are of minorities

Exercising its traditional "extreme caution" to declare a statute unconstitutional, the Supreme Court holds that ¤609.229 does not deny equal protection under the Minnesota Constitution. The Court notes that the record is devoid of any factual record which permits it to evaluate the reliability and validity of data concerning the racially disparate impact of the law. Because of this lack, the Court holds that the appellant did not prove beyond a reasonable doubt that the law is unconstitutional. State v. William Allen Frazier, C8-00-2230, (Minn. 08/29/02). http://www.lawlibrary.state.mn.us/archive/supct/0208/c8002230.htm

Search and Seizure: Fish House: Conservation Officer. The Supreme Court affirms the Minnesota Court of Appeals in holding that a conservation officer is subject to the same state constitutional search and seizure constraints as any other law enforcement officer. Hence, the search of a fish house by a conservation officer without probable cause is unconstitutional, absent express consent, probable cause, or other circumstances to justify entry. Such an entry violates the constitutional protections against search and seizure under the 4th Amendment of the United States Constitution and Article I, Section 10 of the Minnesota Constitution.

In this case, the conservation officer entered the fish house of the respondent to conduct a routine license check. In doing so, he discovered that the respondent had three fishing lines, and that he was in possession of marijuana. The entry was accomplished by knocking on occupied shelters, identifying himself, and checking licenses. The respondent's house was entered at 6:30 at night, was illuminated, and had a vehicle parked next to it. In this case, the officer knocked on the door, identified himself as a state game warden, and simultaneously opened the door. As he entered, he had no reason to suspect any violation of fishing laws. The state also conceded that the respondent did not expressly consent to the entry. Upon entering he noticed the smell of marijuana, saw what appeared to be a marijuana cigarette, and conducted a pat search of the respondent yielding two bags of marijuana, and finally, noted that three fishing lines were in the water, when only two are permitted.

The Court holds that the appellant had a reasonable expectation of privacy in his fish house, noting that acts of a personal nature take place therein: "The poorest man may in his cottage bid defiance to all the forces of the crown," citing William Pitt, Earl of Chatham. The Court also rejects the argument that ice fishing is similar to a closely regulated industry so as to justify a warrantless search. The Supreme Court draws its distinction between recreational ice fishing and a private house versus running a commercial enterprise. State v. Marvin Russell Larsen, C5-01-980, (Minn. 08/29/02). http://www.lawlibrary.state.mn.us/archive/supct/0208/c501980.htm.

Search and Seizure: Automobile: Passenger: Suitcase: Consent of Driver. The appellant was a passenger in a vehicle stopped by police for having only one working headlight. Appellant and the other person were passengers in the vehicle. The detaining officer wrote the driver a fix-it ticket for the headlight, separated individuals, and questioned them further. The officer became suspicious because the answers of the three individuals diverged. The officer asked the driver for permission to search the vehicle. The driver consented to the search of the vehicle. The officer opened the trunk and found two suitcases. He did not ask who owned the suitcases, and did not ask permission from the passengers to search them. He opened a suitcase and found controlled substances and a handgun. On further investigation, he learned that the suitcase in question belonged to the appellant.

Held, this warrantless search of the appellant's suitcase was unreasonable. Two exceptions play in this scenario: the automobile exception and the consent exception. The automobile exception is not applicable because there was no probable cause for the officer to believe that the vehicle contained contraband. (The automobile exception would have permitted the officer to search any auto that contained or potentially contained contraband). Wyoming v. Houghton, 526 U.S. 295, 119 S.Ct. 1297 (1999).

The narrow issue in this case is not whether the suitcase was within the scope of the search but whether the driver had authority to consent to the search of the appellant's suitcase. It is undisputed that the driver lacked actual authority to consent, nor were any facts advanced to support the theory that the driver had apparent authority to search the appellant's suitcase. The officer's mistaken belief that the driver's consent to search the vehicle constituted legal authority for him to search any container in the vehicle is a mistake of law, and will not support a finding of apparent authority. The officer failed to act reasonably by searching the suitcase without ascertaining who owned it when the circumstances did not give rise to reasonable belief that the driver had authority to consent to search of the suitcase. State v. Anthony Lee Frank, C1-01-1625, (Minn. App. 09/03/02). http://www.lawlibrary.state.mn.us/archive/ctappub/0209/c1011625.htm

Constructive Possession: Permissive Inference: Minn. Stat. ¤152.028: Crim. Jig 20.56. The appellant was arrested and charged with the offense of first-degree controlled substance. The drugs were found in a vehicle which the appellant was driving, but did not own. The vehicle had been serviced recently. The arrest was based on a tip from an informant. The trial court instructed the jury, with respect to the possessory element, with an instruction patterned after Crim. Jig 20.56 which, in turn, is based on Minn. Stat. ¤152.028 (2000). These provisions, aimed at alleviating the prosecution's burden in constructive possession cases, can create, in effect, a permissive inference opportunity for the jurors.

Held, the instruction amounted to an intrusion of the jury's deliberative process because it effectively tells the jury that the judge thought there was sufficient evidence for a conviction. The instruction also focuses the jury on some facts rather than all the facts. The Supreme Court appears to strike down all permissive inference type instructions in criminal cases, finding that the submission of the instruction was plain error. The evidentiary statute also appears to have been invalidated by the Supreme Court, citing the separation of powers doctrine State v. Kevin Richard Litzau, supra.

Jury: Discharge of Non-Alternate 13th Juror. In an unusual set of facts, the trial judge proposed to the trial counsel that the one remaining alternate be allowed to deliberate with the other 12 jurors, specifying that the condition would still require a unanimous verdict of the 13 members. Trial counsel agreed on the record to this proposition. The judge told the jury that they can "ignore the whole concept of an alternate"; however, he further informed them that if, during the deliberations, a juror should become "sick or something," that juror can be excused and the remaining 12 would be the deciding jurors. During deliberations, one of the jurors asked to be excused because of a pressing commitment out of state. Without trial counsel or the appellant present, the judge assembled the jurors, and excused the 13th juror without the expressed consent of either defense counsel or the defendant.

Held, the district court did not violate the Minnesota Constitution or the Minnesota Rules of Procedure by allowing an alternate to participate in jury deliberations as a 13th juror, thus increasing the size of the jury from 12 to 13, but still requiring unanimity. Minn. R. Crim. P. 26.01, subd. 1 (4) does not prohibit a stipulation for a greater number of jurors provided by law; it is silent on the issue. Hence, it was not plain error to allow 13 jurors to deliberate under these circumstances.

The excusal of the 13th juror, however, violated Minn. R. Crim. P. 26.02, subd. 8, which requires that a defendant agree personally in writing or orally under record that one juror may be excused after serving in deliberations. No prejudice need be shown because "the rule operates as a presumption of prejudice." Furthermore, the fact that the jurors knew that one juror was expendable, creates a substantial risk that a lone dissenting juror might feel pressured to seek discharge in order to break a deadlock. State v. Edward Uriah Roberts, C8-01-1430, (Minn. App. 09/24/02). http://www.lawlibrary.state.mn.us/archive/ctappub/0209/c8011430.htm

Sentence: Consecutive Sentences: Presumptive Execution. The appellant was sentenced for the conviction of aggravated robbery and fleeing a police officer. In the process of fleeing police, appellant struck and seriously injured the driver of another vehicle. The appellant was sentenced to 48 months on the aggravated robbery, and one year and one day for fleeing a police officer, consecutive to the 48 months for the robbery, also executed.

The appellant argues that, given his criminal history score of zero, the presumptive disposition for the fleeing police officer offense was a stayed sentence.

Held, the guidelines provide consecutive sentences are permissive, and require no departure. Clarifying language in the sentencing guidelines provides that the presumptive disposition for a permissive consecutive sentence is always an executed sentence. For a consecutive sentence, it is only the presumptive duration which is calculated by using a zero criminal history. State v. George Cornelius Watkins, C6-01-1877, (Minn. App. 09/24/02). http://www.lawlibrary.state.mn.us/archive/ctappub/0209/c6011877.htm.

-- Frederic R. Bruno
Frederic R. Bruno & Associates

EMPLOYMENT & LABOR LAW
Judicial Law

Noncompete Contracts. The Minnesota Court of Appeals and the 8th Circuit both recently upheld temporary injunctions against employees in noncompete cases. In TestQuest, Inc. v. LaFrance, 2002 WL 196287 (Minn. App. 2002) (unpublished), the Minnesota appellate court upheld the temporary injunction against a former sales executive for a company that sells testing products for technology systems. The court held that there was sufficient consideration for the noncompete clause, which was contained in the second agreement signed by the employee after he already commenced working, because it allowed him to continue working and obtain additional vested stock options. Additionally, the court reasoned that the former company would be harmed if the exsalesman could sell competitive products through a newly formed company, although the exemployee had not sold any products yet, he had solicited the largest customers of his former employer, which warranted injunctive relief. The noncompete agreement was not too broad because it permitted the exsalesman to sell competitive products outside of the United States, which did not make the agreement unreasonably restrictive in geographic scope.

The 8th Circuit upheld an injunction against a customer service representative for a waste management company in Safety-Kleen v. Hennkens, 301 F.3d. 931 (8th Cir. 2002). The former employee's close contacts with customers of the company warranted injunctive relief because those customers constituted a "protectable interest" on the part of the former employer.

Arbitration. An arbitration clause which designated an individual who allegedly was biased in favor of the employer could not be set aside before the arbitration hearing was conducted, according to the Court of Appeals in Alexander v. Minnesota Vikings Football Club, LLC, 649 N.W.2d 464 (Minn. App. 2002). A group of former assistant coaches of the Minnesota Vikings football team claimed that they were entitled to bonus pay. Their employment contract provided that arbitration of disputes was to be presided over by the commissioner of the National Football League. The coaches claimed that he was biased because of his existing relationship with league and the Vikings. The appellate court, however, rejected a prearbitration challenge by the coaches. It reasoned that the players were aware of the "relationship" between the commissioner and the team before signing the arbitration agreement and, therefore, could not challenge his impartiality prior to the arbitration, or seek his removal, prior to the arbitration proceeding.

An employee who claimed that she was mistakenly classified and underpaid was not entitled to an arbitrative agreement against her employer in District 318 Service Employees Association v. Independent School District No. 318, 649 N.W.2d 896 (Minn. App. 2002). The employee, who was a teacher's technician, claimed that she was actually performing the duties of a higher-paid technician and should have been compensated accordingly. However, since the collective bargaining agreement between the woman's labor union and the employer did not refer to job duties, the grievance was not arbitrable.

Early childhood family education teachers are not "public employees" for purposes of collective bargaining agreements under the Minnesota Public Employment Labor Relations Act (PELRA). In Education of Minnesota v. Independent School Dist. No. 695, Chisholm, 649 N.W.2d 474 (Minn. App. 2002), the appellate court held that, because they worked part-time, the course was optional and it was not for credit, the educators were not considered "public employees" for purposes of collective bargaining with the school district.

Right of Privacy. A trucking company that furnished a listing of Social Security numbers of its employees to a trucking terminal was sued for invasion of privacy by the affected employees. In Bodah v. Lakeville Motor Express, Inc., 649 N.W.2d 859 (Minn. App. 2002), the appellate court ruled that the employees could proceed with a class action for invasion of privacy because their Social Security numbers should have been private and could be misused because of the widespread distribution.

Interference and Defamation. An employee who was removed from a position as executive director of a community-based organization may sue for interference with contract, but not for defamation. In Metge v. Central Neighborhood Improvement Association, 649 N.W.2d 488 (Minn. App. 2002), the appellate court held that a member of the board of directors, who allegedly acted with malice in securing removal of the director from her job, could be sued for tortuous interference. But a defamation claim based upon statements that the former director was "manipulating" the organization and "wasting" its resources were too imprecise and vague to be actionable.

Unemployment Compensation. An employee who furnishes a letter of resignation, at the request of her employer, after being told that she was going to lose her job, was entitled to unemployment compensation in Langeslag v. Northfield Dairy Queen, 2002 WL 1968580 (Minn. App. 2002) (unpublished). The employee was not disqualified on grounds that she voluntarily quit because her action was prompted by the employer's demand that she submit a resignation.

An employee who used the company computer to transmit sexually oriented email to a coworker was not entitled to unemployment compensation benefits in Pidd v. Bergquist Company, 2002 WL 1837996 (Minn. App. 2002) (unpublished). The employee's conduct violated the company's policy in the norms that an employer is reasonably entitled to expect from an employee.

Legislation

Two newly-enacted federal laws affect whistleblowers. The Notification and Federal Employee Antidiscrimination and Retaliation Act of 2002 (No Fear Act), 5 U.S.C. ¤2301, requires notification to federal employees of their rights and remedies in the workplace and mandates annual reporting by federal agencies of cases, verdicts, and settlements of employment claims, including whistleblower matters. Title III of the Sarbanes-Oxley Act of 2002, 15 U.S.C. ¤7241, prohibits retaliation by publicly traded companies against employee whistleblowers who report about corporate fraudulent activities to management, law enforcement, regulating agencies, or members of Congress.

-- Marshall H. Tanick
Mansfield, Tanick & Cohen, pa

ENVIRONMENTAL LAW
Judicial Law

RCRA Enforcement; EPA Overfiling. The 10th Circuit Court of Appeals recently held that the EPA may bring its own enforcement action under the Resource Conservation and Recovery Act ("RCRA"), despite the fact that a state had already initiated an enforcement action in connection with the same violations under a federally approved state program. United States v. Power Engineering Co., 2002 WL 2017134, (10th Cir. 2002). The decision conflicts with the decision of the 8th Circuit Court of Appeals in Harmon Industries v. Browner, 191 F.3d 894 (8th Cir. 1999), under which such "overfiling" is prohibited after EPA approval of a state hazardous waste program, unless the EPA withdraws its authorization of the state program or the state fails to initiate enforcement action. Under Power Engineering, the EPA need only notify the state before bringing its own enforcement action.

In Power Engineering, the state of Colorado brought an enforcement action against Power Engineering Company ("PEC"), a metal refinishing and chrome electroplating business in Denver, for violations of Colorado's EPA-approved hazardous waste management program. The state issued a compliance order to PEC and subsequently imposed civil penalties for failure to comply with the order. When the state failed to enforce RCRA's financial assurance requirements, EPA initiated its own action seeking $2 million in financial assurances. The district court granted EPA's motion for summary judgment and PEC appealed, arguing that the EPA's action was precluded by the state enforcement action.

The 10th Circuit Court of Appeals rejected the 8th Circuit Court of Appeals' interpretation of RCRA in Harmon Industries and upheld the district court's grant of summary judgment to the EPA. According to the Power Engineering court, 42 U.S.C. ¤6926(b), stating that an approved state hazardous waste program operates "in lieu of" the federal program, does not encompass enforcement powers. Under this section, approved state requirements replace federal requirements and state-issued permits obviate the need to obtain permits from the EPA. Federal enforcement, however, is governed by 42 U.S.C. ¤6928, which does not expressly preclude enforcement by the EPA after a state program has been approved. Thus, the court found the statute ambiguous and deferred to the EPA's interpretation.

-- Robert F. Devolve
Leonard Street and Deinard PA

FEDERAL PRACTICE
Judicial Law

Class Actions; Unnamed Class Members; Right to Appeal Absent Intervention. Overlooked by many (including this author) in the flurry of activity that accompanied the end of the last Supreme Court term was the Court's decision in Devlin v. Scardeletti, in which the Court held that unnamed class members who have objected in a timely manner to the settlement of a mandatory class action may appeal the settlement even if they failed to intervene before the district court.

Following its decision in Devlin, the Court granted certiorari to review the 8th Circuit's decision in In Re Gen. Am. Life Ins. Co. Sales Practices Lit., in which the 8th Circuit had dismissed an appeal by an unnamed class member on jurisdictional grounds. The Court vacated the 8th Circuit's decision and remanded the case to the 8th Circuit for further consideration in light of Devlin. On remand, the 8th Circuit found that Henderson's appeal had been mooted, but nevertheless questioned in dicta whether the rule established in Devlin applied with equal force to opt-out class actions governed by Fed. R. Civ. P. 23(b)(3).

Accordingly, litigants within the 8th Circuit should consider the possibility that Devlin's scope will be limited to mandatory class actions. Devlin v. Scardeletti, 122 S. Ct. 2005 (2002). In Re Gen. Am. Life Ins. Co. Sales Practices Lit., 268 F.3d 627 (8th Cir. 2001), cert. granted sub nom., Henderson v. Gen. Am. Life Ins. Co., 122 S. Ct. 2584 (2002), on remand, ___ F. 3d. ___ (8th Cir. 2002).

Daubert; Fire Causation; Summary Judgment. Plaintiffs sued the manufacturer of their boat for damages arising from a fire on the boat. The boat manufacturer brought third-party claims against Sears, which manufactured the dishwasher plaintiffs alleged was the source of the fire. Sears moved to strike the reports offered by plaintiffs' experts under Daubert.

Judge Frank found that the first of the two experts provided "little information" regarding the scientific principles and methodology that were used in reaching his conclusions, and that the conclusions he reached did not "logically flow" from his assumptions and the evidence, and that they lacked foundation. Finding the expert's testimony "not sufficiently reliable," Judge Frank excluded the expert's testimony.

The second expert conceded that he was unable to determine which (if any) of the electrical appliances on the boat was the source of the fire. Judge Frank cited both Daubert and Fed. R. Evid. 104, in finding that this expert's testimony "had no foundation," and struck that expert's testimony as well.

Having stricken both of the plaintiffs' experts and finding no other evidence implicating Sears' dishwasher as the source of the fire, Judge Frank then awarded summary judgment to Sears.

There has been a substantial increase in the number of Daubert decisions within the district in the past few years, and as demonstrated by this decision and others, the members of the court continue to take their gate-keeping role quite seriously. Erpelding v Skipperliner Industries, Inc., 2002 WL 31014823 (D. Minn. 09/05/02).

Other Noteworthy Decisions. Judge Magnuson declined defendants' invitation to dismiss plaintiff's claims pursuant to Fed. R. Civ. P. 12(b)(1) and the Rooker-Feldman doctrine, finding that the plaintiff had not had a "reasonable opportunity" to raise his federal claims in a prior state court proceeding, and that the relief sought in the federal action would not "effectively reverse" the prior state court ruling. Lueth v. City of Glencoe, 2002 WL 31059892 (D. Minn. 09/11/02).

Judge Montgomery struck a hearsay affidavit submitted by a law clerk employed by plaintiff's counsel which purported to recount a conversation between the law clerk and a witness. Plaintiff argued that the affidavit could be admitted under the catch-all hearsay exception found in Fed. R. Evid. 807. Judge Montgomery found that the affidavit was not "the most probative evidence" available on the issue in question. Johnson v. Moundsvista, Inc., 2002 WL 2007833 (D. Minn. 08/28/02).

-- Josh Jacobson
Law Office of Josh Jacobson PA

INTELLECTUAL PROPERTY LAW
Judicial Law

Patents; Preliminary Injunction. Preliminary injunctions are rare in patent cases. Recently, however, Judge Doty ruled on two motions for preliminary injunction in separate patent cases, and reached different results. Advanced Communication Design, Inc. v. Premier Retail Networks, Inc., 01-cv-983 (D. Minn. 02/21/02) (motion granted) and 3M Innovative Properties Company and Minnesota Mining and Manufacturing Company v. Avery Dennison Corporation, 01-cv-1781 (D. Minn. 02/15/02) (motion denied). The contrary results turned on the availability, or lack thereof, of a presumption of irreparable harm. The presumption arises when the patentee makes a clear showing of validity and infringement of the patent. Absent such a showing, the patentee must present evidence of irreparable harm.

In the first case, the court found that the patentee established that it has a valid patent and that its patent had been infringed. The court previously entered a default judgment against the defendant, and the allegations of infringement in the complaint were taken as true (although the court still conducted a claim construction and comparison of the allegedly infringing product). The defendant was not able to rebut the presumption of patent validity. Based upon the above, Judge Doty found that a "clear showing" of infringement and validity existed. The court held that the patentee was entitled to the presumption of irreparable harm, which ultimately led to the granting of the motion for preliminary injunction.

In the second case, the court found that the patentee had not established that its patent had been literally infringed. No default judgment existed, as in Premier, so the court construed the patent claims and found they did not rest literally on Avery's accused device. Not entitled to a presumption of irreparable harm, the patentee was required to submit evidence and reasoned analysis showing irreparable harm. Although several arguments were made to establish irreparable harm, including loss of reputation, good will and market share, the court found that money damages would remedy any harm. Judge Doty denied the motion for a preliminary injunction.

Patents; Bona Fide Purchaser Defense. The United States Court of Appeals for the Federal Circuit, sitting en banc, reversed an earlier panel decision (reported in Notes & Trends, 02/02), and held that the bona fide purchaser defense is not available to a nonexclusive patent licensee. The Federal Circuit reasoned that a nonexclusive license does not convey actual title, a requirement of the defense, because there is no assignment, grant or conveyance of all the patent rights. However, the court left open the possibility that some exclusive licensees may be entitled to use the defense if the licensee holds "all substantial rights" under the patent. Rhone-Poulenc Agro, S.A. v. DeKalb Genetics Corporation, 00-1266-1532 (Fed. Cir. 03/2702).

Patents; Unclaimed Matter. The United States Court of Appeals for the Federal Circuit, again sitting en banc, held that a patentee could not expand the scope of its patent using the doctrine of equivalents to include disclosed but unclaimed matter. The court reasoned that a patent's claims define the scope of the invention. By disclosing broader subject matter, but not claiming that subject matter, the patentee dedicates to the public the unclaimed matter. Johnson & Johnston Associates, Inc. v. R.E. Service Co., Inc., 99-1076,-1179,-1180 (Fed. Cir. 03/28/02).

-- Tony Zeuli
-- Rebecca Bortolotti
Merchant & Gould

JUVENILE LAW
Judicial Law

Withdrawal of Guilty Plea; Timing. Appellant juvenile appealed the decision of the trial court denying his motion to withdraw his guilty plea, arguing the motion was timely and there was no factual basis for the plea, and the Court of Appeals reversed and remanded.

Appellant J.J.R., pleaded guilty to one amended charge of fifth-degree criminal sexual conduct. In the written petition to enter his admission, the appellant simply admitted to "nonconsensual contact" and furthermore on the record basically stated that he understood the plea agreement. Subsequently in the predisposition report the appellant was quoted as asserting his innocence. Approximately one and one-half years after being adjudicated as delinquent pursuant to that plea, appellant moved to withdraw his plea, arguing there was no factual basis for the plea. The trial court denied appellant's motion, on the basis of a finding that appellant had engaged in "detailed discussions" with his mother and attorney regarding the charges, that appellant had admitted the charge, that the motion to withdraw his plea was untimely, and that the state would be prejudiced should the plea be withdrawn due to the length of time which had elapsed.

Pursuant to Minn. R. Crim. P. 15.05, subd. 1, a motion to withdraw a plea of guilty must be timely. However, in a juvenile proceeding, the court may allow the child to withdraw a guilty plea "at any time, upon showing that withdrawal is necessary to correct a manifest injustice." Minn. R. Juv. P. 8.04, subd. 2(B). As the Court of Appeals noted, the plain language of the controlling rule places no restrictions on the timing of a motion to withdraw a plea of guilty, and accordingly a motion to withdraw a plea of guilty may not be denied as "being untimely.".

Furthermore, for a plea to be valid, the plea must have been "entered intelligently, voluntarily, and accurately," and to be accurate the plea "must be supported by a proper factual basis." As the Court of Appeals noted, it is the court's responsibility to ensure that an adequate factual basis for the plea is shown in the record. In this case, the appellant admitted to the charge of criminal sexual conduct in the fifth degree. To do so, appellant must have verified, "sufficient facts on the record to support the conclusion that his conduct falls within the charge to which he is offering to plead guilty." Accordingly, the Court of Appeals held, appellant would have had to admit one or more types of touching which fit the actual definition set forth in the statute, and appellant's admission of "nonconsensual contact" did not fit any category of the requisite statutory definitions, nor did it meet the requirement for the offense of a "sexual or aggressive intent."

As this case demonstrates, it is important for practitioners to ascertain on the record not only the juvenile's understanding and acceptance of the agreement to plead guilty, but to make the requisite record of the facts supporting the plea as well. In Re Welfare Of J.J.R., 648 N.W.2d 739 (Minn. App. 2002).

-- Jessica J.W. Maher
Walling & Berg PA

REAL PROPERTY
Judicial Law

Landlord/Tenant. Landlord rents to tenants under a Department of Housing and Urban Development (HUD) subsidized program. During Tenants' tenancy, Landlord filed 69 late-rent notices and eight unlawful detainer/eviction actions against Tenants. While Tenants paid current all rental payments, Landlord maintained its latest eviction action claiming it suffered an adverse financial effect as a result of Tenants' chronic defaults. The trial court dismissed the action, finding that Landlord failed to prove it suffered adverse financial effect. The Court of Appeals disagreed. Under 24 CFR ¤247.3(c) a landlord is authorized to evict a tenant for material noncompliance with the rental agreement. Repeated minor violations of the lease that have an adverse financial effect on the property would constitute material noncompliance under HUD regulations. Not paying rent is considered a minor violation. The court determined that Landlord's administrative costs associated with preparing the numerous late-rent and eviction notices created an adverse financial effect. Chancellor Manor v. Gales et al. C7-02-84, (Minn. App. 08/27/02). http://www.lawlibrary.state.mn.us/archive/ctappub/0208/c70284.htm

Zoning. The burdened parcel owners gave the benefited parcel owners an easement over their land which provided the benefited parcels access to Fish Lake. The Declaration of Easement prohibits the commencement of any "improvements, alterations" on the easement land that violates the regulations of any governmental agency with proper jurisdiction over the property. In 1992 Scott County enacted a zoning ordinance in which the easement would be considered a legal nonconforming use. In 2000, the benefited parcel owners built a dock at the end of the easement. Scott County determined the dock to be an impermissible expansion of a legal nonconforming use. The Court of Appeals found that the zoning ordinance appropriately regulated controlled-access lots and is consistent with state law. In addition, the ordinance is a "permissible restriction of any riparian rights" held by the benefited parcel owners. Robin, Jr., et al. v. Puls, et al., C0-02-265, (Minn. App. 08/28/02) (unpublished). http://www.lawlibrary.state.mn.us/archive/ctapun/0208/265.htm

Practical Location. Bickhardt owns the southern parcel and Gewerth owns the adjacent northern parcel. Bickhardt commenced a legal action to determine the legal boundary line in preparation of a sale of his parcel. Gewerth argued that a fence line is the proper boundary line between the two parcels. The court held that a survey is not necessary to determine the location of a boundary line when both property owners acknowledge a fence as the boundary line for at least 15 years. Bickhardt, et al. v. Gewerth, et al. C3-02-177, C4-02-334, (Minn. App. 09/24/02) (unpublished). http://www.lawlibrary.state.mn.us/archive/ctapun/0209/177.htm

-- Melissa A. Baer
Moss & Barnett PA

TAX
Judicial Law

Insufficient Evidence to Establish Fair Market Value or Discrimination. The Minnesota Tax Court in a property valuation case held that the taxpayer had submitted insufficient evidence to establish a different market value than the assessment value for the motel because the taxpayer's evidence on the estimated market value of the neighboring property was not a sale, and thereby did not establish market value under the sales approach. The court also held there was no discrimination since the 2000 Assessment Sales Ratio Study showed that the median ratio was greater than 90 percent. The court valued the property at $1.4 million. Kashi Corp. v. County of Hennepin, No. 28346, 2002 WL 1732994, (Minn. T. Ct. 06/18/02).

Minnesota Property Tax Petition: Failure to Make Proper Service. The Minnesota Tax Court held that the failure to serve a real property tax petition on the county attorney and the county auditor as required by Minn. Stat. ¤278.01, Subd. 1 deprived the court of jurisdiction and must be dismissed. Just because the taxpayer had previously filed a petition only upon the county assessor (not on the county attorney or the auditor/treasurer) and the county did not object to the service, did not constitute a waiver or estoppel of the county from seeking a dismissal in this case. Failure to make proper service is jurisdictional. Robert L. Brackey v. County of Washington, No. C5-02-256, 2002 WL 1732983, (Minn. T. Ct. 07/24/02).

Tax Protestor's Arguments Rejected in Minnesota Tax Court. The Minnesota Tax Court rejected a taxpayer's challenge to Minnesota's taxation of compensation for services and the gains from the sale of stock. The taxpayer reported zero income although disclosing that he had received approximately $60,000 in compensation, taxable sales, etc. for the years 1999 and 2000. The taxpayer claimed that the gains did not constitute "income" and, alleged that the Minnesota income tax could not be constitutionally imposed because the tax is not apportioned according to the federal census and was not uniform. These claims were rejected. It was well-established law that under both federal and Minnesota law that wages and compensation are taxable income. Rodney F. Lucero v. Commissioner of Revenue, No. 7404-R, 2002 WL 1732987, (Minn. T. Ct. 07/24/02).

Wages and Compensation Are Taxable Income. The Minnesota Tax Court held, over the protestations of the taxpayer, that compensation for services is "gross income" and therefore dismissed his appeal as frivolous. Knutson v. Commissioner of Revenue, No. 7362, 2002 WL 850862, (Minn. T. Ct. 04/02/02).

"Stop-Loss" Insurance Not Subject to Premiums Tax. The Minnesota Tax Court held that stop-loss insurance was not "direct business" under the gross premiums tax and, therefore, not subject to taxation. When an employer assumes the risk of insurance for its employees and then reinsures a portion of that risk with an insurance company, the stop-loss insurance premiums are not "direct business" and, therefore, not subject to the premiums tax under Minn. Stat. ¤60A.15, Subd. 1(b). BCBSM, Inc. (d.b.a. BlueCross BlueShield of Minnesota) v. Commissioner of Revenue, No. 7387, 2002 WL 1987975, (Minn. T. Ct. 08/01/02).

Discovery; Sale Documents; Real Property Tax Dispute. The Minnesota Tax Court recently held in a discovery motion that the business was required to comply for those documents not produced. The zoning change information was required to be turned over by prior Tax Court decisions that held that such information was a matter of fact to be heard at trial and was therefore discoverable. Under Minn. R. Civ. P. 34.01, a party may request another party to produce sale documents "which are in the possession, custody, or control of the party upon whom the request is served" and the business should respond with the sale documents that its former realtor possessed. The court allowed the exbroker for the business to be deposed by the county on his knowledge of the sale of the subject property. Lastly, the court ordered the business to provide a privilege log to the county listing any documents for which a claim of privilege was made. SPX Corp. v. County of Steele, Nos. C1-00-350, CX-01-342, 2002 WL 1988180 (Minn. T.Ct. 08/19/02).

Minnesota Real Property Tax Homestead Exemption; Nonresident; Qualifications. The Minnesota Tax Court recently held that a taxpayer was a domiciliary and resident of South Dakota and therefore did not qualify for the Minnesota homestead classification found in Minn. Stat. ¤273.124, Subd. 1 for the assessment period January 1, 2000. The court applied the domiciliary and residency rules found in Minnesota Rule 8001.0300 to determine whether the taxpayer was a "domiciliary," "resident," and also used the presumption of where her family principally resided in rendering its determination. Lizette Aanenson v. County of Murray, No. C9-01-63, 2002 WL 1988199 (Minn. T. Ct. 08/22/02).

Lack of Notice to Taxpayer No Excuse for Failure to Turn Over Records. The Minnesota Tax Court recently held that a taxpayer who believed that the county assessor would set-up a time to view the property and make copies of his records at the time of the inspection but which did not occur, was not excused from failure to turn over within 60 days after filing the petition "income and expense figures, verified net rentable areas, and anticipated income and expenses, for income-producing property ..." found in Minn. Stat. ¤278.05, Subd. 6(a). Although the court sympathized with the taxpayer and felt that the motion to dismiss by the county bordered on "an abuse of the system," the court was compelled to follow the law and dismissed taxpayer's action contesting real property taxes. Joseph P. VanOss v. County of Wright, No. C3-02-1005, 2002 WL 1988189 (Minn. T. Ct. 08/22/02).

Penalties: Reasonable Cause: Willful Neglect: Summary Judgment. Penalties for returned checks and for failure to timely file employment tax returns were upheld on summary judgment against solely owned health care corporation. Taxpayer didn't establish reasonable cause for failing its statutory duties where, even if it reasonably relied on CPA/employee, it didn't explain why she failed to make requisite filings. But, IRS' alternate willful neglect argument, that the taxpayer's reliance solely on CPA and failure to institute compliance safeguards was willful neglect per se, was rejected. The penalties for failure to pay taxes and make payroll tax deposits was not determinable on summary judgment. Whether taxpayer's financial difficulties, which were caused at least in part by unexpected state rate-cuts and taxpayer's potential incurrence of more detrimental "take backs" had it paid IRS over other essential creditors, was reasonable cause for its failure was remaining material fact question. PARCC Health Care, Inc. v. U.S., No. 3:01cu379 (JBA), 90 aftr 2d 2002-5267 (D.C. Ct. 06/27/02).

Damage Awards/Sick Pay. An employee's recovery of front and back pay under the Americans With Disabilities Act wasn't exempt from taxation because the award was based on discrimination, not personal injury. Rodell Johnson v. U.S., No. 01-wy-1107-cb (PAC), 90 aftr 2d 2002-5662, (D.Colo. 07/03/02).

Combined Valuation Approaches Used to Value Decedent's Closely Held Stock. Block of common stock owned by decedent in a closely held corporation is valued by applying a weight of 85 percent to an earnings-based valuation approach and a weight of 15 percent to an asset-based valuation approach, with the assets' market value reduced to account for tax liability on built-in taxable gain. Tax Court opinion reversed and remanded. Estate of Dunn v. Commissioner, No. 00-60614, 90 aftr 2d 2002-5527 (5th Cir. 08/01/02).

IRS Internal Documents Relating to Denial of Plaintiff's Tax-Exempt Status Privileged. Deliberative process privilege protects from court-ordered disclosure internal IRS documents relating to decision to deny plaintiff's tax-exempt status. Christian Coalition International v. United States, No. 2:01cv377, 90 aftr 2d 2002-6010 (E.D. Va. 07/30/02).

VEBA Contributions Exceeding Benefit Costs Not Deductible as Business Expenses. Contributions made into voluntary employees' beneficiary association that exceed cost of term life insurance benefit to VEBA participants are taxable constructive dividends to participants rather than ordinary and necessary business expenses deductible under IRC Section 162 of Code. Neonatology Associates PA v. Commissioner, No. 04-2862, 90 aftr2d 2002-5442 (3rd Cir. 07/29/02).

Online Computer Services; AOL; Nexus; Tennessee. The Tennessee Court of Appeals reversed and remanded the Chancery Court's summary judgment that AOL, which sells online computer services throughout the United States, did not establish a physical presence in Tennessee by providing online services in the state or through its other alleged contacts with Tennessee, and therefore did not have nexus with the state to satisfy Commerce Clause requirements for franchise and sales and use tax purposes. The Court of Appeals found that there was a factual question as to whether the contacts were sufficient to establish nexus with Tennessee, which precluded the use of a summary judgment. Nexus is created by activities that contribute to a taxpayer's ability to maintain operations in a taxing state and does not require physical presence by the taxpayer itself. Because the lower court decision relied on the physical presence standard and did not look to other nexus-creating activities, the appeals court remanded the case to Chancery Court for further proceedings. American Online, Inc. v. Johnson, No. m 2001-00927-coa-r3-cv, 2002 WL 1751434 (Tenn. Ct. App. 07/30/02).

Implied Waiver of Right to Invoke Attorney-Client Privilege. Court grants IRS' motion to deny taxpayers' entitlement to assert the attorney-client privilege with respect to communications with his tax attorney, based on doctrine of implied waiver, because taxpayer invoked his reliance on tax attorney's advice as a defense on the merits. Johnston v. Commissioner, 119 T.C. No. 3 (08/08/02).

Tax Underpayments; Equitable Recoupment; Reversal of Adjustments. IRS is entitled to equitably recoup, from overpayments of taxes for 1989 and 1990, underpayments of taxes for 1991 and 1992 resulting from reinclusion of dividend income in 1991 and 1992 following 8th Circuit's reversal of IRS adjustments involving taxpayer's American Depository Receipts transactions. IES Industries Inc. v. United States, No. c9t-206, 90 aftr 2d 2002-5833 (N.D. Ia. 07/22/02).

"COLI" Policy Scheme Ruled a Sham; Company's Interest Deduction Denied. Broad-based coli policies that were highly structured and highly leveraged, and calibrated to limit policy loans to only three of the first seven years of the policy and to yield positive cash flows in each year as a result of policy loan interest deductions, are shams, so that interest on the policy loans is not deductible. IRS v. CM Holdings Inc., (In re CM Holdings Inc.), No. 00-3875, 90 aftr 2d 2002-5850 (3rd Cir. 08/16/02).

Interest on Income Tax Underpayment Nondeductible. Interest paid by taxpayers on their underpayment of individual income taxes for a prior year is nondeductible "personal interest", and Treasury regulations ¤1.163-8T and ¤1.163-9T(b)(2)(i)(A) to that effect are valid. Robinson v. Commissioner, 119 T.C. No. 4 (09/05/02).

1st Amendment Challenge; Section 527 Disclosure Law. District court granted summary judgment in part to plaintiffs, who challenged a law that imposes disclosure requirements on IRC Section 527 political organizations, as an unconstitutional infringement on free speech. National Federation of Republican Assemblies, et al. v. U.S.A., et al., 00-0759-rv-C, 90 aftr 2d 2002-6150 (S.D. Ala. 08/27/02).

Interest On Overpayments -- Date Interest Runs. The Court of Federal Claims determined that end date for accrual of interest on corporation's calendar year agreed overpayments was date on which tax was due for later-arising liability, not the date when the overpayments were actually applied to such liability. Although IRC Section 6611(b)(1) was ambiguous as to whether "due date" referred to return's due date or date on which there was net deficit in taxpayer's account for the particular year, Regulation ¤301.6611-1(h)(1) resolved that ambiguity in IRS's favor that due date was last day for tax payment. Marsh McLennan Companies, Inc. and Subsidiaries v. U.S., 90 aftr 2d 2002-6216 (C.A. Fed. Cir. 2002).

Relief Check Issued Under 2001 Tax Act Advance Refund, Not Attributable to 2000. "Relief check" of $600 issued by IRS to taxpayer in 2001 pursuant to Economic Growth and Tax Relief Reconciliation Act of 2001 was not attributable to tax year 2000. The check was an advance refund of anticipated 2001 tax payments, and thus should be allocated between debtors and bankruptcy trustee according to petition date in 2001. Sticka v. Lambert (In re Lambert) No. or-02-1136-MoRyK (9th Cir. B.A.P. 08/26/02).

Regulation on Sales Between Consolidated Group Members. Temporary regulation under IRC Section 267(f)(2) in effect in 1984 barring controlled group member from taking a loss deduction on sale of property to another member that resold the property to an outsider after taxpayer, the selling member, had left the consolidated group, was a valid regulation. This was so even though the buying member, as a foreign corporation, was itself barred from taking a stepped-up basis under foreign law. Union BanCal Corp. v. Commissioner, No. 00-70764 (9th Cir. 09/18/02).

California Taxes Online Retailer After In-State Store Distributed Coupons. An online retailer became subject to California use tax when an affiliated corporation distributed coupons, which could be redeemed online, in its California stores. The retailer had a substantial physical presence in California through its affiliated corporation's "brick-and-mortar" stores, establishing nexus and justifying an obligation to collect use tax. In Re Barnes & Noble.com., No. SCOHB 97-732835 89872 (SBOE 09/12/02).

Administrative Matters

Sales and Use Tax: Revocation of Revenue Notice #1992-27. Revenue Notice #1992-27, "Place of Sale," was revoked. The temporary storage and use section was revoked for temporary storage or use occurring after June 30, 1997. The remainder of the Revenue Notice #1992-27 was revoked for sales and purchases made after December 31, 2001. Both notices will remain in effect for tax periods that remain open and that are prior to the date the notice became obsolete. Minnesota Department of Revenue #02-07: "Sales and Use Tax -- Revocation of Revenue Notice #1992-27" (06/10/02).

Minnesota Internet Access Charges Included in Bundled Charge. Minnesota is currently prohibited by federal laws from taxing Internet charges and telecommunication service providers are allowed to deduct a reasonable amount from the sales price for Internet access before applying sales tax to the bundled charge. This applies only to the amount attributable to Internet access charges. If there are other charges that would be nontaxable if stated separately which are included in the bundled price, those charges are taxable. The telecommunication service provider must keep adequate records to support the amount deducted for Internet access. The Revenue Notice expires on November 2, 2003. Upon expiration of the Revenue Notice, Internet access charges are subject to sales or use tax unless separately stated on the customer's bill. Minnesota Department of Revenue Revenue Notice 02-09: "Internet Access Charges" (07/09/02).

Sales and Use Tax -- Single-Member LLC. Minnesota treats a limited liability company ("LLC") or single-member limited liability company ("SMLLC") as a separate entity for Minnesota sales tax purposes. A SMLCC owned entirely by a corporation is not treated as a branch or division of the corporation. Transfers of tangible personal property and taxable services for consideration between an entity and a LLC or SMLLC are subject to the Minnesota sales and use tax, unless exempted by law. A SMLLC or a corporation owning a SMLLC may purchase items exempt for resale if the items are purchased exclusively for resale to either the other entity or a third party. Even though a SMLLC and a corporation that owns the SMLLC are treated as separate legal entities for purposes of the sales tax, if the Minnesota entity is acting as an agent or representative of a non-Minnesota entity, the non-Minnesota entity will be found to have nexus with Minnesota. Minnesota Department of Revenue #02-10: "Single-Member Limited Liability Company" (07/08/02).

Explanation of Meals Purchased at Post-High School Institutions. Minnesota Department of Revenue Notice 02-11 explained the exemption from the sales tax for meals and lunches sold at post-high school institutions such as colleges to students. Such meals are exempt from the sales tax if provided under a board contract with the institution either by prepaid contract or lump sum charge for a set term and includes meals when purchased with debit cards, bonus bucks, or flex money as long as it is under a board contract. The exemption also applies to education or recreational programs held at the post-high school institution by a sponsoring entity if the meals are provided under a board contract with the educational institution. Nonqualifying meal purchases include sales made for a la carte food items, purchases by vending machine, or for any purchases by nonstudents of food and meals at the institution. Minnesota Department of Revenue Notice 02-11: "Sales and Use Tax -- School Meals -- Board Contracts at Colleges, Universities or Private Career Schools" (07/15/02).

DOR Requests Comments on Veterinarian Sales Tax Rules. The Minnesota Department of Revenue requests comments or questions on the amendment of the rules governing the applications of the sales and use tax laws to veterinarians. Responses sent to 6000 North Robert Street, Mail Station 2220, St. Paul, MN 55146-2220, Tel. (651) 296-0853, Fax (651) 296-8229, and email joan.tujetsch@state.mn.us (06/11/02).

DOR Proposes to Amend, Repeal Cigarette, Tobacco Tax Rules. The Minnesota Department of Revenue proposes to amend and repeal cigarette and tobacco products tax rules that no longer reflect department practice or where terminology has changed. Proposed Minnesota Rules, Chapter 8120 (07/23/02).

DOR Reminds Parents About Education Tax Credit Changes For 2002. The Minnesota Department issued a news release to remind parents of the kindergarten through 12th grade education income tax credit and to alert them of significant changes to the program in 2002. Press Release 08/09/02.

IRS Reissues Publication 971 Describing Innocent Spouse Relief. New Revision of Publication 971, Innocent Spouse Relief (and Separation of Liability and Equitable Relief) is now available from the Internal Revenue Service. It replaces the April, 2000 revision. This publication discusses the innocent spouse relief initiatives that protect taxpayers whose spouses violate the tax laws without their knowledge. You can get a copy of this publication by calling 1-800- 829-3676. You can also write the IRS Forms Distribution Center nearest you. Check your income tax package for the address. The publication is also available on the IRS website at www.irs.gov.

IRS Issues Ruling on Reorganizations by Certain Real Estate Leasing LLCs. The IRS issued guidance by examples on when it would consider reorganizations undertaken by certain leasing corporations to meet the active trade or business requirement under IRS Section 355. The corporation holds a membership interest in a member-managed limited liability company that owns and leases commercial office buildings. Revenue Ruling 2002-49.

New IRS Web Page Debuts on Estate & Gift Tax Issues. Looking for information on estate and gift ("e&g") taxation? The IRS website now offers a basic e&g primer, plus an overview of recent tax law changes -- increased estate and gift tax applicable exclusion amounts, reduction of the maximum estate and gift tax rate, and increased annual exclusion for gifts. The site also contains a "Frequently Asked Questions" area and a page where some of the more common e&g forms may be downloaded. The e&g general information page can be located on the IRS website by typing the words "estate and gift tax" in the search window at http://www.irs.gov/.

Estate and Gift Unveils Toll-Free IRS Account Service. The concept of centralizing workload is at the core of the IRS modernization effort, with clear benefits resulting from employees being able to become specialists in specific types of tax returns. For estate and gift tax return filers, the centralization process began in January, 2002 with the submission of all Forms 706 and 709 through one IRS processing center in Cincinnati. Now, to provide customer support for that consolidation, all e&g tax account inquiries have been streamlined into a new toll-free service, also located at the Cincinnati center. Taxpayers can contact the new e&g toll-free service, at (866) 699-4083, Monday through Friday, from 7:00 a.m. until 7:00 p.m., local time.

IRS Tax-Exempt Study Released. The IRS released the Compendium of Studies of Tax-Exempt Organizations, 1989-1998, the third volume in a continuing series published by the Statistics of Income Division (SOI). The publication is a periodic compilation of previously published statistical research data pertaining to tax-exempt organizations. To obtain a free copy of the Compendium of Studies of Tax-Exempt Organizations, 1989-1998, Publication 1416, write to the Director, Statistics of Income (SOI) Division, n:adc:r:s, Internal Revenue Service, P.O. Box 2608, Washington, DC 20013-2608. Alternatively, requests for the Compendium can be made to the SOI statistical information services officer by telephone at (202) 874-0410, or by fax at (202) 874-0964.

Retirement Plan Options for Small Businesses. IRS released a new publication, "Publication 3998: Choosing A Retirement Solution for Your Small Business," which describes the retirement plan options available to small businesses.

GAO Report Criticizes IRS Oversight, Disclosure of Political Organization Data. The GAO report, "Political Organizations: Data Disclosure and IRS's Oversight of Organizations Should Be Improved" (gao-02-444) (July 17), is available on the GAO website at http://www.gao.gov/cgi-bin/getrpt? GAO-02-444.

IRS Cracks Down on Split-Dollar Life Insurance Shelters. The IRS moved to shut down a tax shelter involving undervaluation of taxable policy benefits under split-dollar life insurance arrangements. The IRS is cracking down on these arrangements in cases where the parties attempt to avoid taxes by using inappropriately high current term insurance rates, prepayment of premiums, or other benefit undervaluation techniques. IRS Notice 2002-59 (09/09/02).

Legislation

New Accounting Reform and Corporate Revenue Legislation. The Sarbanes-Oxley Act of 2002 was signed into law in July in response to the many corporate and accounting scandals roiling the public markets. The law toughens penalties for accounting fraud, provides greater transparency, and establishes an independent board to oversee the accounting industry. Among other things, the Sarbanes-Oxley reform law would:

• create a five-member public company accounting oversight board funded by fees on all publicly traded companies;
• prohibit nonaudit services to audit clients, except with preapproval by the oversight board;
• mandate audit partner rotation and establish a one-year employment restriction on accountants;
• require company officials to certify periodic reports, subject to civil and criminal penalties;
• make it a crime for issuers to interfere with audits;
• prohibit corporate loans to company executives;
• require enhanced financial disclosures, including periodic reviews for the largest issuers and real-time disclosures of material company information;
• authorize $776 million in additional funding for the sec in fiscal year 2003;
• enhance criminal penalties for a broad array of white-collar crimes and increase the statute of limitations for securities-fraud lawsuits;
• make it a crime to retaliate against corporate whistleblowers;
• regulate the responsibilities and composition of audit committees;
• limit trading by insiders during pension fund blackout periods; and
• institute disclosure regarding code of ethics for senor financial officers.

  See Public Company Accounting Reform and Investor Protection Act of 2002, H.R. 3763.

Minnesota Corrects Unconstitutional Charitable Contribution Deduction. The Minnesota Legislature went into Special Session on September 19, 2002, to offer state assistance to flooded communities located in the northwestern corner of Minnesota. In addition to the flood relief, the Legislature overruled the case of Chapman v. Commissioner of Revenue, C5-02-245, 2002 WL 1980811 (Minn. 08/29/02). The Chapman case held that allowing a charitable deduction for a contribution to Minnesota charities but not for contributions to non-Minnesota charities violated the Commerce Clause because it discriminated against interstate commerce. Applying severance principles, the Court then severed the unconstitutional provision causing discrimination, with the result that no deduction was available for any charitable contributions, whether in-state or out-of-state in computing Minnesota's alternative minimum tax. The repealer reinstated deductions for charitable contributions for individual taxpayers subject to the amt. The new law allows deduction of 100 percent of all Minnesota contributions (Minnesota and non-Minnesota) in 2002 in excess of 1.3 percent of federal adjusted gross income. See H.F. 2.

Looking Ahead

Tax and Accounting Treatment of Stock Options. Unrelated to the Sarbanes-Oxley Act, a number of bills are pending in Congress to address the tax and accounting treatment of compensatory stock options issued by public, and in some cases private, companies. Currently, under APB 25 a company is not required to record any expense for GAAP purposes when granting a "fixed" option which is not in the money at grant. A company may, however, elect to utilize FASB 123 rather than APB 25 (which until recently few have done), in which case the company takes a GAAP accounting charge equal to the option's fair value at time of grant (generally as calculated under the Black-Scholes method approximately 35 precent of the option price for an option granted at the money) amortized as an expense over the option's vesting period.

Under the Levin and Dodd bills (S.2004), the sec and/or a new public accounting board would establish rules relating to accounting for stock options.

Under the Levin-McCain bill (S.1940), the Internal Revenue Code would be amended to deny a federal income tax deduction in excess of the company's accounting charge (apparently even where the company is privately held). Since the company's deduction for an NGO is normally the full spread at exercise, this bill would generally reduce the company's tax deduction even where the company adopts fasb123-like rules by expensing the option's fair value at grant (since the option's fair value at grant is often less than the option's spread at exercise).

Under the Lieberman bill (S.2877), a corporation's deductions would be limited to the extent it does not grant them to rank and file employees as well as officers and directors.

It is not clear at this time whether any of these stock option provisions will be enacted.

Administration's Proposed Investor Tax Package. The Bush Administration announced it is considering a federal tax package that would:

• increase the capital loss deduction;
• cut and/or index capital gains taxes;
• eliminate or reduce the so-called double taxation of corporate dividends; and/or
• raise the contribution limits for individual retirement accounts (IRAs), 401(k)s, or other retirement plans.

ABA Panel Proposes Model Rule Changes. An American Bar Association task force has asked for comment on a preliminary report that recommended that several of the Model Rules of Professional Conduct be amended to spur lawyers who represent corporations to take action when they learn of criminal or fraudulent conduct by corporate officers, employees, or agents. The ABA Task Force on Corporate Responsibilities suggested amendments to Model Rules 1.13 (organization as client), 1.6 (confidentiality), 1.2 (scope of representation), and 4.1 (truthfulness in statements to others). 143 BNA Daily Tax Report at 6-4 (07/25/02).

-- Jerry Geis
Briggs & Morgan

TORTS & INSURANCE
Judicial Law

Preexisting Condition -- Jury Instruction. Plaintiff was injured in an automobile accident, and he and his wife sued their insurer to recover underinsured motorist benefits for severe back and neck injuries and loss of consortium benefits. Liability was admitted and the only issue was damages. Plaintiff had experienced intermittent back problems and related hospitalizations from a previous accident which occurred almost 40 years prior. The district court instructed the jury on aggravation of a preexisting condition based on CIVJIG 91.40 which instructed the jury to allocate all "damages" to the defendant for plaintiff's noncausally related preexisting condition if the jury was unable to determine what part of the plaintiff's injuries predated the accident. Plaintiff's own doctors admitted plaintiff was suffering from preexisting conditions, as well as new injuries. The jury returned a significant special verdict for plaintiffs. Defendant appealed, arguing that the jury instruction was a misstatement of Minnesota law. The Court of Appeals agreed and reversed.

In a 3-2 split, and notwithstanding the undisputed evidence of preexisting problems, the Supreme Court reversed, concluding that although it was an abuse of discretion to give an aggravation of a preexisting condition instruction given the parties' "conflicting theories" of aggravation of a preexisting condition, the instruction was not prejudicial to defendants so as to justify granting a new trial. The Court reasoned that the jury was presented with an "all or nothing scenario" on damages, with plaintiffs arguing that the recent accident caused all damages and defendant arguing damages after surgery were due solely to plaintiff's continuing preexisting condition, and in the majority's view the jury "chose to believe plaintiffs." Despite these "theories," the evidence was somewhere in the middle.

In dissent, Justices R. Anderson and Stringer stated that the current pattern jury instruction on aggravation of preexisting conditions does misstate Minnesota law by permitting an allocation of liability to a defendant for a plaintiff's preexisting condition if the jury is unable to determine what part of the plaintiff's injuries predated the accident. The dissent acknowledged the preexisting evidence and would have remanded for a new trial. Morlock v. St. Paul Guardian Ins. Co., C2-01-340, (Minn. 08/29/02). http://www.lawlibrary.state.mn.us/archive/supct/0208/c201340.htm

No-Fault Insurance. Plaintiff was involved in a car accident in South Dakota. Her no-fault insurer denied benefits. She commenced a personal injury action in South Dakota to recover damages from the tortfeasor and recovered a greater amount than her no-fault benefits would have paid. Plaintiff then sued her no-fault insurer to recover future medical expenses and past income loss. The district court granted the insurer's motion for summary judgment on the grounds that any benefits received from the no-fault insurer would constitute a double recovery. The Court of Appeals affirmed.

The Supreme Court reversed, holding that under the No-Fault Act, plaintiff was entitled to recover a proportionate share of attorney fees in the South Dakota action. The Court reasoned that both parties should be left in the same position as if the no-fault insurer had properly paid benefits to the plaintiff. Accordingly, the insurer would have recovered its subrogation interest, less attorney fees, and plaintiff would have recovered her personal injury losses against the tortfeasor, less attorney's fees. Since the no-fault insurer paid nothing to receive what was essentially its subrogation interest, plaintiff was entitled to payment of a proportionate amount of attorney fees from the no-fault insurer. Nelson v. American Family Ins. Group, C4-01-266, (Minn. 08/29/02). http://www.lawlibrary.state.mn.us/archive/supct/0208/c401226.htm

Class Actions -- Damages. The trustees of a family trust sought certification as a class action in their suit against a mutual fund management company. The district court determined that the trustees could pursue individual claims against the defendants but denied certification of the class. The district court found that although the class met the commonality requirement for certification of a class, the class did not meet the remaining three requirements: numerosity, typicality, and representational adequacy. The district court also found that common law legal issues would not predominate in the litigation and that a class action was not the proper means for resolving the case since the potential class members would have varying amounts of damages.

The Court of Appeals reversed the district court, holding that the plaintiffs had met all of the requirements for certification as a class. The court noted specifically that when injury and damages are capable of mathematical or formulaic calculation, individualized claims are not a barrier to managing the case as a class action. Glen Lewy 1990 Trust v. Investment Advisors, Inc., C6-02-416, (Minn. App. 09/03/02). http://www.lawlibrary.state.mn.us/archive/ctappub/0209/c602416.htm

Spoliation of Evidence. Defendant, a Minneapolis police officer, was involved in an intersection auto accident with a tow truck. The parties' various claims were consolidated. The central issue at trial was whether the squad car's siren had been activated. Undisputed evidence demonstrated that radio transmissions between officers and the dispatch center are recorded, but that the tapes are erased after 60 days for reuse. The tape recording was material in that it may have indicated whether the siren was activated prior to the collision. As a sanction, the trial court instructed that the jury could infer that the evidence on the tape was unfavorable to defendant and the city.

The Court of Appeals affirmed, holding that when evidence critical to a party's claim is under the exclusive control of an adverse party and the evidence is destroyed, the district court has discretion to permit the jury to make an unfavorable inference from that fact. The pertinent question is whether the party knew or should have known that the evidence was relevant to imminent litigation. Wajda v. Kingsbury, C2-02-90, (Minn. App. 09/10/02). http://www.lawlibrary.state.mn.us/archive/ctappub/0209/c20290.htm

-- Michael Klutho
Bassford Lockhart Truesdell & Briggs PA