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State ex rel. Universal Processing Services of Wisconsin, LLC v. Circuit Court of Milwaukee County

Supreme Court of Wisconsin

March 29, 2017

State of Wisconsin ex rel. Universal Processing Services of Wisconsin, LLC, Petitioner,
v.
Circuit Court of Milwaukee County and the Honorable John J. DiMotto, presiding, Samuel B. Hicks and Merchant Card Services, Inc. Respondents.

          ORAL ARGUMENT: November 1, 2016

         Circuit Court Milwaukee County L.C. No. 2014CV7986 John J. DiMotto Judge.

          For the petitioners, there was a brief by Ryan M. Billings, Robert L. Gegios, Melinda A. Bialzik and Kohner, Mann & Kailas,, S.C., Milwaukee, and oral argument by Ryan M. Billings.

          For the respondent the cause was argued by David C. Rice, assistant attorney general, with whom on the brief(s) was Brad D. Schimel, attorney general.

          For the respondent, there was a brief by Joan M. Huffman, Paul R. Erickson and Gutglasas, Erickson, Bonville & Larson, S.C., Milwaukee, and oral argument by Joan M. Huffman.

          JUSTICES: CONCURRED: CONCURRED/DISSENTED: ZIEGLER, J. concurs and dissents (Opinion filed). BRADLEY, R.G., J. joined by KELLY, J. concur and dissent (Opinion filed).

          SHIRLEY S. ABRAHAMSON, J.

         ¶1 Universal Processing Services of Wisconsin, LLC d/b/a Newtek, the plaintiff-petitioner, petitions this court, pursuant to Wis.Stat. § (Rule) 809.71 (2015-16), [1] for a supervisory writ. Newtek asks the court to exercise its constitutional authority to vacate an order of the Circuit Court for Milwaukee County, John J. DiMotto, Judge, appointing retired Judge Michael Skwierawski as the referee and to vacate unlawful orders of the referee issued pursuant to the reference. Samuel Hicks and his Idaho company, Merchant Card Services, are the defendants-respondents. The Circuit Court for Milwaukee County and the Honorable John J. DiMotto, presiding, are also named as respondents. The respondents oppose the petition.

         ¶2 Newtek argues that the circuit court's order appointing the referee expanded the role of referee into the role of de facto circuit court judge in violation of the Wisconsin Constitution and Wis.Stat. § (Rule) 805.06, a rule adopted by this court.[2] Newtek does not challenge the constitutionality of Wis.Stat. § (Rule) 805.06, governing references to a referee.[3]

         ¶3 The dispute underlying this petition arises from a lawsuit initiated by Universal Processing Services of Wisconsin, LLC d/b/a Newtek (Newtek), a bankcard processing services company, the plaintiff-petitioner, against one of its independent sales agents, Samuel Hicks, and his Idaho company, Merchant Card Services (collectively, Hicks), the defendants-respondents.

         ¶4 The following issues are presented:

1. Is Newtek's petition for a supervisory writ properly before this court?
2. Has Newtek waived or forfeited its objection to the Order of Reference, is it estopped from challenging the Order, or has it impliedly consented to the Order?
3. Does the circuit court's Order of Reference contravene Article VII, Section 2 of the Wisconsin Constitution vesting judicial power of this state in a unified court system?
4. Does the circuit court's Order of Reference, including the provision that the circuit court's review of the referee's "rulings" shall be based only on the referee's "erroneous exercise of discretion, " contravene the Wisconsin Constitution and the Wisconsin statutes and rules regarding circuit court and appellate court authority and practice?
5. Does the circuit court's Order of Reference contravene the parties' right to "obtain justice freely, and without being obliged to purchase it, " guaranteed by Article I, Section 9 of the Wisconsin Constitution, or to due process of law, guaranteed by Article I, Section 1 of the Wisconsin Constitution, or Newtek's right to a jury trial, guaranteed by Article I, Section 5 of the Wisconsin Constitution?
6. Should the orders of the referee to date be vacated and should the parties be allowed to request substitution of the judge on remand?

         ¶5 For the reasons set forth, we conclude as follows:

1. Newtek's petition for a supervisory writ does not meet the requirements set forth in Wis.Stat. § (Rule) 809.71. The petition was not first filed in the court of appeals and Newtek has failed to show that it was impractical to file the petition in the court of appeals. We do, however, exercise our constitutional superintending authority under Article VII, Section 3(2) of the Wisconsin Constitution to determine the validity of the Order of Reference. A declaration of rights is an appropriate vehicle for an exercise of the superintending authority over circuit courts constitutionally granted to this court.[4] See Part II, ¶¶36-50.
2. Regardless of whether Newtek has waived or forfeited its right to challenge the Order of Reference, is estopped from challenging the Order, or has impliedly consented to the reference, this court may resolve the issue of the validity of the Order of Reference under its constitutional superintending authority. See Part III, ¶¶51-55.
3. The Order of Reference impermissibly delegated to the referee judicial power constitutionally vested in Wisconsin's unified court system. Accordingly, the Order does not survive Newtek's constitutional challenge. See Part IV, ¶¶56-82.
4. The circuit court's Order of Reference, including the provision that the circuit court's review of the referee's "rulings" shall be based only on the referee's "erroneous exercise of discretion, " contravenes the constitution and statutes or rules regarding circuit court and appellate court authority and practice. It infringes on the legislature's authority to define a circuit court's appellate jurisdiction. See Part V, ¶¶83-88.
5. We do not decide the instant case on the basis of Article I, Section 9 of the Wisconsin Constitution, the due process clause of Article I, Section 1 of the Wisconsin Constitution, or the right to jury trial of Article I, Section 5 of the Wisconsin Constitution, but we note that reference to a referee is the exception, not the rule; that there are constitutional limits on the powers of a referee; and that a reference can jeopardize a litigant's access to the justice system, due process, and right to a jury trial. The Wisconsin Constitution requires the state to provide a judicial system for the resolution of disputes. Access to state courts for conflict resolution is thus implicit in the state constitution. We express our concern that the use of referees increases the costs of litigation and may cause delay and, in certain cases, may deprive litigants of access to courts. See Part VI, ¶¶89-103.
6. To the extent the parties have agreed to abide by an order or ruling of the referee relating to discovery, that ruling or order shall stand. To the extent either party has objected to an order or ruling of the referee relating to discovery, that ruling or order shall be vacated. Any ruling or order of the referee on any dispositive motion is vacated. Either party may request substitution of the judge under Wis.Stat. §§ 801.58(1) and (7). See Part VII, ¶¶104-110.

         ¶6 We begin in Part I by setting forth the procedural facts relating to the appointment of the referee and the Order of Reference.

         I

         ¶7 On August 27, 2014, after nearly a decade of successful collaboration between Newtek and Hicks, Newtek terminated Hicks' contract. On September 16, 2014, Newtek brought an action against Hicks in the Circuit Court for Milwaukee County, John J. DiMotto, Judge, alleging breach of contract, tortious interference with contract, breach of fiduciary duty, and misappropriation of confidential information and trade secrets. Newtek demanded a jury trial.

         ¶8 The contract included restrictive covenants. The enforceability of these restrictive covenants is central to the underlying dispute. Hicks filed an answer to the complaint, asserting affirmative defenses and counterclaims and seeking nearly $17 million in damages.

         ¶9 Because the contract provided for injunctive relief, Newtek promptly sought and received an ex parte temporary restraining order from a duty judge just a few days after filing the complaint. The circuit court (Judge DiMotto) affirmed and reaffirmed the temporary restraining order.

         ¶10 Over the course of the next several months, the parties began extensive discovery. The parties periodically appeared before the circuit court for scheduling conferences and motion hearings.

         ¶11 In early 2015, Newtek moved to amend the scheduling order to extend the deadlines for naming experts and providing expert reports. Hicks opposed the extension and filed a motion to compel discovery.

         ¶12 On February 17, 2015, the circuit court held a hearing on Newtek's motion to amend the scheduling order and decided to appoint a referee to the case. At the hearing, Newtek described the case as a "classic big case" with numerous issues and production of a substantial number of documents in discovery (50, 000 thus far):

[W]hen we appeared before you in November [everyone] was overly optimistic in terms of what could be accomplished. In particular, overly optimistic in where we slotted the expert disclosures in relation to what . . . this litigation has spawned by way of discovery. We're approaching just on our side nearly 40, 000 pages of production, about which the other side is still complaining. The other side has produced . . . in the order of 10, 000 [pages], about which we're complaining. . . .
We have the classic big case with lots of issues now. We have more than one case in the sense that we have filed a complaint with numerous causes of action but there is a counter complaint. The counterclaims have been filed by the other side, and discovery is occurring with regard to both of those pleadings. . . .
And so we are doing our best to produce without coming to the court . . . . And it has been a production that has gotten to the point of something like a thousand pages . . . that we are producing per day. That's what the average is since this began.

         ¶13 The circuit court granted Newtek's request for extension in part and also gave Hicks an extension. The circuit court expressed frustration with the already cumbersome discovery, especially the attorneys' conduct, stating:

Well you know, the one thing that I put a real high value on are [sic] attorneys being reasonable. Quite frankly, it seems to me that both sides here are not being--at least they're not being reasonable . . . .

         ¶14 Explaining that the circuit court had "some 450 cases" on its docket, the circuit court stated that it was "not going to expend a lot of time dealing with [the parties'] discovery bickering." Accordingly, the circuit court appointed retired Judge Michael Skwierawski as the referee under Wis.Stat. § (Rule) 805.06, explaining the appointment as follows:

I am going to be appointing . . . retired Judge Michael Skwierawski as the Special Master in this case under 805.06. . . . [Y]ou'll have to deal with him with respect to discovery disputes, etcetera, because I'm not going to waste precious court time that I can give to other cases to be your personal slave to your discovery disputes. So I just want you to know that. So the more reasonable you are with each other, the less likely you're going to need to pay the fees of retired Judge Michael Skwierawski. And he doesn't come cheap when it comes to being a Special Master. So I encourage you to be cooperative in your discovery, help each other out, get this case to mediation sooner than later. (Emphasis added.)

         ¶15 Although the circuit court uses the phrase "Special Master, " this opinion uses the word "referee, " adhering to Wis.Stat. § (Rule) 805.06, which uses the term "referee." The term "master" had such a pejorative connotation in 1848 at the time of statehood, as we shall explain later, [5] that the word "referee" has been used in Wisconsin.[6]

         ¶16 The circuit court explained that it would call retired Judge Michael Skwierawski to ask him if he would accept the appointment. The circuit court also explained that the referee would draft the Order Appointing Special Master/Referee (Order of Reference or Order)[7] because the referee has a list of things that he requires. Neither party objected to the circuit court's decision to appoint the referee.

         ¶17 The circuit court directed Newtek to draft a proposed order memorializing the outcome of the February 17 hearing, including the referee's appointment. Newtek's counsel contacted the referee on February 18 to confirm his availability before drafting this order. The referee said he was available and that he had already submitted a proposed Order of Reference to the circuit court; the referee directed counsel from each side to submit any objections to the proposed order.

         ¶18 Newtek told the referee that it was reviewing the Order of Reference and would submit objections, if any, as soon as possible. Less than a day after counsel received the Order, the circuit court informed the parties that it had entered the Order. Thus, neither side was able to submit any objections before the Order of Reference was signed.

         ¶19 The Order of Reference pertained to more than discovery issues. In addition to authority to manage discovery, the Order granted authority over nearly all aspects of the case and provided for limited review by the circuit court. The reference provided, inter alia:

• All motions, whether discovery or dispositive, were to be heard and decided initially by the referee.
• The referee's written rulings would be adopted and entered as the rulings of the court, automatically and without hearing, unless a party filed an exception within five days.
• The referee could certify matters to the circuit court, and the circuit court could refuse to decide these matters.
• The circuit court retained the power to modify or set aside a referee's ruling, but the circuit court could only do so if the ruling were based on an erroneous exercise of discretion.
• The parties were to compensate the referee at $450 per hour plus reasonable and necessary expenses. The parties were to divide the cost of the referee equally. (The total cost of the referee thus far has been about $45, 000.)

         ¶20 Three relevant provisions of the Order of Reference are as follows (emphasis added):

4. The [referee] shall have the full authority of the Court in coordinating and establishing all pretrial procedures. The [referee] shall also have the full authority of the Court to hear and decide, subject to Court review as set forth below, any other matters assigned to him by the Court. All motions filed, whether discovery or dispositive, shall initially be heard and decided by the [Referee], subject to review processes available as described below.[8]
7. If the [referee] is of the opinion that a specific issue presented by the parties is of such fundamental importance to the progress or outcome of the case that effective case management would not be furthered by having the [referee] render a decision in the first instance, the [Referee] may at his discretion certify that issue to the Court. As the final arbiter of case management, the Court may, but need not, accept the certification. . . .
8. Exceptions to any decisions made by the [referee] may be taken to this Court and must be filed with the Court within five (5) business days of the issuance of the decision. Review by the Court shall be based on the materials and record before the [referee]. No additional filings will be permitted unless good cause and exceptional circumstances are demonstrated by the requesting Party. The Court has full authority to modify or set aside the ruling of the [referee] but will do so only if the ruling is based on an erroneous exercise of discretion. Unless an exception is taken, any ruling by the [referee] shall automatically and without hearing be adopted and entered as a ruling of the Court within five (5) business days of submission by the [referee] to the Court and parties. All decisions made by the [referee] shall be appealable after the final disposition of this case, to the full extent as if made by this Court. A party need not take exception to a decision by the [referee] in order to preserve the issue for appeal, either on an interlocutory basis or as an appeal of a final order.

         ¶21 A copy of the complete order appointing the referee is attached as Attachment A.

         ¶22 Shortly after the referee's appointment, Hicks moved to vacate the temporary injunction previously issued by the circuit court. As counsel for both parties and the referee were e-mailing back and forth about this motion and scheduling issues, the circuit court (copied on the e-mail chain by the referee) told the referee to handle this motion and any others that would arise.

         ¶23 The circuit court explained to the referee: "I appointed you to serve as [referee] because I anticipated extensive motion practice and discovery issues/disputes that would need [to be] addressed more quickly than I could do with my 400 case calendar. I would like you to resolve these, and all, pretrial motions/discovery issues."

         ¶24 The parties briefed the issue of vacating the temporary injunction; the referee heard oral argument and issued a written order that granted Hicks' request to vacate the temporary injunction. Newtek subsequently filed an exception to this decision with the circuit court; the circuit court affirmed the referee's decision.

         ¶25 After vacating the temporary injunction, the referee ruled on more than 15 discovery motions and a few motions for sanctions (related to discovery conduct) over the course of several months. Newtek objected to several of these orders, all of which the circuit court affirmed without a hearing.

         ¶26 In 2015, the referee was asked to decide multiple dispositive motions. In July 2015, Hicks filed two motions for summary judgment; in October 2015, Newtek filed its own motion for summary judgment. These motions for summary judgment primarily involved the enforceability of the restrictive covenants and claims or discovery issues related thereto. Hicks also sought a motion in limine barring Newtek from introducing evidence at trial relating to the restrictive covenants.

         ¶27 Both parties submitted briefs and evidentiary materials on these motions and participated in a hearing before the referee. The referee recommended partially granting each side's motion for summary judgment and granting Hicks' motion in limine. The referee recommended, inter alia, that summary judgment be granted to Newtek on certain of Hicks' counterclaims and found that some restrictive covenants upon which Newtek relied were unreasonable, invalid, and unenforceable under Wis.Stat. § 103.465.

         ¶28 Newtek filed exceptions to these rulings, requesting leave to submit additional briefing or evidence to the circuit court regarding the referee's decisions. Newtek also asked the circuit court to review the referee's orders de novo (rather than under the Order's prescribed "erroneous exercise of discretion" standard of review) because the "magnitude of errors that have plagued this case, if uncorrected, will necessitate an interlocutory appeal."

         ¶29 Newtek also declared that "[a]s the parties were never afforded an opportunity to object to the scope and terms of the [referee's] appointment, Newtek will also seek to brief the issue of the appointment of the [referee]."

         ¶30 The circuit court agreed to review the referee's recommendations on the dispositive issues de novo. In regard to Newtek's other requests--to brief the dispositive issues further, submit additional evidence, and brief the issue of the appointment of the referee--the record is silent. Newtek claims that the circuit court denied these requests at an off-the-record status conference in chambers on January 12, 2016.

         ¶31 On January 21, 2016, the circuit court issued a lengthy order on the parties' cross-motions for summary judgment and on the exceptions taken to the referee's recommendations. The circuit court agreed with most of the referee's recommendations, granting partial summary judgment to each party and limiting the evidence that Newtek could present at trial to prove its claims.

         ¶32 Although the circuit court's opinion states that it is based on a de novo review of the record and the parties' submissions, Newtek contends that the circuit court did not actually conduct a de novo review.[9]

         ¶33 On February 4, 2016, Newtek filed a petition with the court of appeals for leave to appeal from the circuit court's order granting partial summary judgment and limiting evidence at trial.

         ¶34 In its February 2016 petition for leave to appeal, Newtek detailed problems relating to the referee's appointment, role, and lack of control by the circuit court, but it did not request the court of appeals to vacate the referee's appointment, to consider any constitutional issues, or to determine the referee's authority to find facts, make legal conclusions, and issue orders. Newtek's major argument focused on substantive legal issues; Newtek argued that the circuit court and the referee ignored the record and misstated the law.

         ¶35 On April 6, 2016, the court of appeals denied the petition for leave to appeal on a usually stated ground that the "petition fails to satisfy the criteria for permissive appeal. See Wis.Stat. § 808.03(2) (2013-14) . . . ." Newtek did not petition this court for review of the court of appeals' order denying the petition for leave to appeal. See Wis.Stat. § (Rule) 809.62. Nor did Newtek petition the court of appeals for a supervisory writ under § (Rule) 809.51 to vacate the circuit court's order appointing the referee. Instead, Newtek sought a supervisory writ in this court on May 6, 2016.

         II

         ¶36 The first issue presented is whether Newtek's petition for a supervisory writ asking the court to vacate a circuit court order appointing retired Judge Michael Skwierawski as the referee is properly before this court. We conclude that the petition is not properly before this court, but we exercise our superintending authority to vacate the Order of Reference.

         ¶37 The Wisconsin Constitution grants three separate powers to this court: appellate and original jurisdiction; the power to issue all writs necessary in aid of its jurisdiction; and superintending authority over all courts. Wis. Const. art. VII, § 3.[10]

         ¶38 We begin with the court's power to issue supervisory writs. Wisconsin Stat. §§ (Rules) 809.71 and 809.51 govern writ practice.

         ¶39 Wisconsin Stat. § (Rule) 809.71 authorizes a person to request the supreme court to exercise its supervisory jurisdiction over a court and the judge presiding therein by filing a petition in accordance with § (Rule) 809.51. Section (Rule) 809.51 governs the contents of the petition and supporting memorandum and provides that the court may grant or deny the petition or order such additional proceedings as it considers appropriate. According to § (Rule) 809.71, a person seeking a writ in the supreme court shall first file a petition for a supervisory writ in the court of appeals unless it is impractical to do so.[11]

         ¶40 Wisconsin Stat. § (Rule) 809.71, governing supervisory writs in this court, provides as follows:

809.71 Rule (Supervisory writ). A person may request the supreme court to exercise its supervisory jurisdiction over a court and the judge presiding therein or other person or body by filing a petition in accordance with s. 809.51. A person seeking a supervisory writ from the supreme court shall first file a petition for a supervisory writ in the court of appeals under s. 809.51 unless it is impractical to seek the writ in the court of appeals. A petition in the supreme court shall show why it was impractical to seek the writ in the court of appeals or, if a petition had been filed in the court of appeals, the disposition made and reasons given by the court of appeals.

         ¶41 Newtek did not first file a petition for a supervisory writ in the court of appeals as required by Wis.Stat. § (Rule) 809.71. Newtek claims that it was impractical to seek the writ in the court of appeals because the court of appeals denied its petition for leave to file an appeal, and that its petition for leave to file an appeal sought the assistance of the court of appeals for reasons similar to those offered in its petition in this court for a supervisory writ.

         ¶42 Newtek's interlocutory appeal to the court of appeals primarily focused on the substantive merits of the summary judgment and on limiting evidence at trial, and only tangentially raised objections to the Order of Reference. The court of appeals gave no specific explanation other than its usually stated ground that the "petition fails to satisfy the criteria for permissive appeal. See Wis.Stat. § 808.03(2) (2013-14) . . . ." We therefore do not know why the court of appeals denied the petition for leave to appeal.

         ¶43 The grounds for the court of appeals to grant a petition for leave to appeal[12] are not necessarily the same as the grounds for granting a supervisory writ.[13] On this record, we cannot determine the ground on which the court of appeals denied Newtek's petition for leave to appeal or whether it was impractical for Newtek to seek a supervisory writ in the court of appeals that focused on the validity of the Order of Reference.

         ¶44 We decline to extend our supervisory writ jurisprudence and cast doubt on the continued vitality of the "impracticality" requirement of Wis.Stat. § (Rule) 809.71. We therefore decline to hold that Newtek has shown that it was impractical for it to seek a supervisory writ in the court of appeals and that Newtek's petition for a supervisory writ complies with Wis.Stat. § (Rule) 809.71.

         ¶45 In the alternative, Newtek asks that we use our constitutional power of "superintending authority" over all Wisconsin courts, Wis. Const. art. VII, § 3(1), to review the validity of the Order of Reference.

         ¶46 We can and should decide the issue of the validity of the Order of Reference using our constitutional superintending authority under the circumstances of this case. The validity of the Order of Reference is an important issue for Wisconsin courts and the public.

         ¶47 The superintending authority provision of the Wisconsin Constitution endows this court "with a separate and independent jurisdiction, which enables and requires it in a proper case to control the course of ordinary litigation in . . . inferior courts . . . ."[14] The nature and scope of the superintending authority of this court has been before this court numerous times since at least 1853.[15] The scope of this authority is "as broad and as flexible as necessary to insure the due administration of justice in the courts of this state."[16]"In exercising this power of superintending control, this court is not restricted to the use of common-law writs and is limited only by the necessities of justice."[17] But the superintending authority of the court is not to be used lightly.[18]

         ¶48 The question of exercising the constitutional grant of superintending authority is one of judicial policy rather than one relating to the power of this court. To convince this court to exercise this constitutional grant of power, a party must establish that an appeal from a final judgment is inadequate and that grave hardship will follow a refusal to exercise the power.[19]

         ¶49 Whether an erroneously ordered compulsory reference creates such a hardship is judged on the facts of the case. The following circumstances compel the exercise of our superintending authority over circuit courts in the instant case:

• The Order of Reference broadly delegates to the referee the authority to decide all motions, whether discovery or dispositive.
• The Order of Reference is apparently used with some frequency in Milwaukee County, and the appointment of referees may become an increasingly common practice in the circuit courts.
• This court has not recently reviewed the permissible scope of references under Wisconsin law.
• The case presents significant state constitutional issues having statewide importance relating to core functions of the circuit courts and access to the courts.
• If this court does not review the validity of the Order of Reference at this time, the parties will endure great hardship; they will have to submit to a long and expensive reference and then trial before being afforded the opportunity to seek relief on appeal. And after trial and appeal if the reference is held invalid, the parties will again be at the discovery stage.[20]

         ¶50 We therefore use our constitutional superintending authority to declare the rights of the parties in the instant case. III

         ¶51 Hicks argues that Newtek has sat on its rights too long by participating in proceedings with the referee for about a year without objection to the Order of Reference and then objecting only after it received an adverse summary judgment ruling. The argument is that Newtek has waived or forfeited its right to challenge the Order, is estopped from challenging the Order, or has impliedly consented to the Order.[21] We now turn to whether this ...


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