The Litigation Section of the State Bar of Texas

Hot Topics for Trial Lawyers

A compilation of journalistic articles to keep you abreast of changing developments and current events in the litigation realm. If you are interested in writing for this Hot Topics segment, email tnuckols@texasbar.com

TOPIC:

Jury Selection in a Social Media Age

Posted 12/3/10

Much has been written on the risk-management side about the potential for sequestration violations by jurors armed with twitter, facebook and the like, as we've seen on Law.com and the National Law Review.

And, courts have begun to respond with mistrials for tweeting during breaks in trial and contempt charges for post-verdict status updates in poor taste.

But, to borrow from the title of a recent ABA-sponsored venire CLE for young lawyers, voir dire isn't about 'picking a jury' it's about knocking out bad juror candidates.

And there lies the potential utility of social media for a trial attorney during venire.

4 Tips for Using Social Media to Find Ways to Disqualify:

1. Educate the Judge.

As the recent oral arguments in City of Ontario v. Quon demonstrated, even the best legal minds may need some help when it comes to understanding communications technology, including social media.

In jurisdictions where questionnaires are allowed, a lawyer may request a ruling on whether a poll on social media use will be allowed. Support this request with a brief on the dangers to sequestration that social media use poses (perhaps citing some of the cases noted above) along with some basic information on what exactly a tweet or status update are. Keep the tone helpful, don't try to give a history of the internet, and provide links to deeper background whenever technical 'jargon' is unavoidable. Having this on record will help prime the judge for challenges linked to anything dug up via steps 2-4.

2. Use Social Mention in tandem with Google.

Social Mention is a creeper's dream, a search engine that scrapes status updates and recognizes the code associated with usernames, and therefore, an essential tool in 21st century venire. You can also setup real-time social alerts to monitor the jurors social media habits during breaks in proceedings.

3. Utilize Facebook group names and Twitter hash-tags for hot-button key-worded associations.

Fans of NBC's 30 Rock will remember this scene:

Jack: Are you familiar with the GE tri-vection oven?
Liz: I don't cook very much.
Jack: Sure ... I gotcha. New York, third-wave feminist, college-educated, single and pretending to be happy about it, over-scheduled, undersexed, you buy any magazine that says "healthy body image" on the cover, and every two years you take up knitting for ... a week.
Pete: That is dead on!
Liz: What, are you going to guess my weight now?
Jack: You don't want me to do that.

Jack's not a mind-reader of course, he's simply, to put it in his Sigma-6 lingo: leveraging the synergized integrative potential of market research as applied to human resource related face-to-faces. In other words, like a 21st century Sherlock, Jack Donaghy uses logic to ascribe likely trends in social and personal behavior to Liz, based upon outward indicators that GE had tied to those consumer habits.

Trial lawyers can use social media to do the same with a pool of potential jurors and their 'likes' and group memberships on Facebook or hashtags in tweets. For example, say you're undertaking voir dire for a case involving a drunk driving accident. Simply Social Mention search "Jane Juror" and "#MADD," "#SADD," etc. and see if a potential disqualification for cause pops up.

4. Do it in real-time.

Interns and summer associates can do more than copy and eat sushi on your dime. They're likely as (if not more) social-media savvy as you. Use them to vet jurors online during open court voir dire. Once the judge, if in Federal Court or a State Court that has the judge conduct voir dire, asks for a show of hands of potential jurors who use social media, have a social-media competent assistant fire up the laptop and start the parallel vetting of all those with their hands up. For solo practitioners and small firm attorneys, this sort of online background research can easily be tasked to an intern, who would appreciate the chance to show what they can do, and most probably well.

Reprinted with permission of Legal Productivity (http://www.legalproductivity.com) © 2010. All rights reserved.

Brian Lewis, Esq.

Corporate Citizenship after Hertz v. Friend

Posted 5/10/10

Corporate Citizenship after Hertz v. Friend

By: Inchan Kwon¹

On February 23, 2010, the U.S. Supreme Court, in the case Hertz Corporation v. Friend, No. 08-1107, 559 U.S. ___ (2010), resolving a long-standing circuit split, unanimously decided that a corporation's "principal place of business" for purposes of determining its citizenship for federal diversity jurisdiction is ordinarily its corporate headquarters, or the location where the corporation's activities are directed, controlled, or coordinated (the corporate "nerve center"). Previously, circuit courts had used various approaches to evaluate a corporation's business activities in order determine its "principal place of business" under 28 U.S.C. § 1332(c)(1).

Section 1332(c)(1) states that a "corporation shall be deemed to be citizen of any State by which it has been incorporated and of the State where it has its principal place of business . . . ." In Hertz, the defendant Hertz Corp. had initially been sued in California state court by California plaintiffs for violations of California state wage and hour laws.² Hertz sought to remove the case to federal court on diversity grounds under 28 U.S.C. §§ 1332(a)(1) and 1441(a), alleging it was not a citizen of California.³ In addition to being incorporated in Delaware, Hertz alleged that its "core executive and administrative functions" were largely carried out at its "corporate headquarters" in New Jersey, and therefore that New Jersey was its "principal place of business" under § 1332(c)(1).⁴ Hertz also submitted a declaration to the district court regarding its business activities, stating that it operated in 44 states and that approximately 17% of its rental facilities were located in California.⁵

The district court, applying Ninth Circuit precedent, found that because a "plurality of each of [Hertz's] relevant business activities" was in California, and that the "differential between the amount of those activities" in California versus the next closest state was "significant," Hertz's business activity was "significantly larger" or "substantially predominate[d]" in California.⁶ Therefore California was Hertz's "principal place of business," and diversity jurisdiction was lacking.⁷ The Ninth Circuit affirmed.⁸

The Supreme Court reversed and remanded, adopting the Seventh Circuit's "nerve center" test and holding that "'principal place of business' is best read as referring to the place where a corporation's officers direct, control, and coordinate the corporation's activities," which is ordinarily the corporate headquarters.⁹ The Supreme Court noted that several different approaches have been used in various circuits to determine where a corporation's "principal place of business" is located (including the "nerve center" test, various tests looking at where a corporation's business activities are primarily conducted, and tests involving some combination of these factors).¹⁰ However, the "nerve center" test is "superior to other possibilities" because 1) it is the most consistent with the statutory language of § 1332(c)(1) which indicates that "principal place of business" is meant to refer to a singular place within a particular state, and not the combined activities within a state as a whole¹¹; 2) it is comparatively easy to apply from a factual standpoint and thus is most conducive to the goal of administrative simplicity¹²; and 3) the legislative history of § 1332 suggests that simplicity was also the goal of the legislature when the statute was enacted.¹³ The Court also noted that a test based on the distribution of a corporation's business activities, such as applied in the Ninth Circuit, was likely to render every national corporation a citizen of California for diversity purposes, given California's disproportionately large population, which would be an absurd result.¹⁴

The Court did note that "there will be hard cases" even under a "nerve center" test.¹⁵ For example, there may be situations where a corporation divides command and coordinating activities in several locations.¹⁶ The Court does not provide any specific guidance for such a situation, but simply suggests that the "nerve center" test "points courts . . . towards the center of overall direction, control, and coordination."¹⁷ In addition, the "basic rationale" of diversity jurisdiction is to "[open] the federal courts' doors to those who might otherwise suffer from local prejudice against out-of-state parties."¹⁸ However, under the Supreme Court's rule, a corporation might conduct the bulk of its activities "visible to the public" in a state other than the corporate headquarters, and be less subject to prejudice in that state, yet still be entitled to remove cases to federal court in that state.¹⁹ Finally, the Court refrained from strictly equating the corporate headquarters with the "principal place of business," noting that a hard rule would permit jurisidictional manipulation where a "headquarters" is identified at a location other than where the corporation's activities are actually controlled.²⁰ To guard against this last possibility, the Court reaffirmed that the "burden of persuasion for establishing diversity jurisdiction . . . remains on the party asserting it," and suggested that the mere filing of a form identifying a corporate headquarters with the Securities and Exchange Commission would not be sufficient to carry that burden, though the Court declined to state what would be sufficient.²¹ The Court downplayed these anomalies, however, holding them to be "the price the legal system must pay" for a clearer and more uniform jurisdictional rule.²²

The Supreme Court's holding provides for greater uniformity and predictability with respect to corporations' access to federal courts for litigating disputes, and may be a factor worth considering for those corporations that have not already established a clear corporate headquarters.

__________________________
¹ Mr. Kwon is an associate in the Intellectual Property Section of Haynes and Boone, LLP. The opinions expressed herein are not those of Haynes and Boone or its clients.

² Hertz, 559 U.S. at 2.

³ Id.

⁴ Id.

⁵ Id.

⁶ Id. at 3.

⁷ Id.

⁸ Id.

⁹ Id. at 14.

¹⁰ Id. at 10-13.

¹¹ Id. at 14.

¹² Id. at 15-16.

¹³ Id. at 16-17.

¹⁴ Id. at 15.

¹⁵ Id. at 17.

¹⁶ Id.

¹⁷ Id.

¹⁸ Id. at 6.

¹⁹ Id. at 17.

²⁰ Id. at 18.

²¹ Id.

²² Id.

Ichan Kwon, Haynes and Boone, LLP

Corporate Citizenship after Hertz v. Friend

Posted 4/22/10

Corporate Citizenship after Hertz v. Friend

By: Inchan Kwon¹

² Hertz, 559 U.S. at 2.

³ Id.

⁴ Id.

⁵ Id.

⁶ Id. at 3.

⁷ Id.

⁸ Id.

⁹ Id. at 14.

¹⁰ Id. at 10-13.

¹¹ Id. at 14.

¹² Id. at 15-16.

¹³ Id. at 16-17.

¹⁴ Id. at 15.

¹⁵ Id. at 17.

¹⁶ Id.

¹⁷ Id.

¹⁸ Id. at 6.

¹⁹ Id. at 17.

²⁰ Id. at 18.

²¹ Id.

²² Id.

Inchan Kwon, Haynes and Boone, LLP

Pleading Requirements and Surviving Rule 12(b)(6)

Posted 4/9/10

Pleading Requirements and Surviving Rule 12(b)(6)

By: Melissa L. Celeste¹

The federal pleading standards have undergone major changes in the last three years. Until recently, courts analyzing the sufficiency of a plaintiff's complaint relied on a "conceivability" standard - was the plaintiff's claim conceivable under any set of facts? In the last three years, the standard has shifted to one of "plausibility." This new standard asks courts to look only at the face of the complaint to determine whether it sets out adequate facts to establish a plausible right to relief.

The starting place for analyzing pleadings is always Rule 8 of the Federal Rules of Civil Procedure. Rule 8 requires merely a "short and plain statement of the claim showing that the pleader is entitled to relief." This low and arguably vague threshold was ripe for judicial interpretation and explanation.

The Supreme Court's first attempt at clarifying when a pleading satisfies Rule 8 was in Conley v. Gibson.² In the 1957 case, the Supreme Court held that a complaint should only be dismissed if there is "no set of facts" under which the plaintiff could succeed on his claim.³ Under this "no set of facts" or "conceivability" standard, it was nearly impossible for defendants to prove that a plaintiff's claims were meritless in a motion to dismiss under Rule 12 of the Federal Rules of Civil Procedure. The result was that defendants were forced to engage in the litigation and pay their counsel to conduct at least some discovery before the case could be dismissed.

Conley's conceivability standard stood for fifty years, until it was abrogated by the Supreme Court's decision in Bell Atlantic Corporation v. Twombley.⁴ The plaintiffs in Twombley were a putative class of subscribers of telephone and internet service. The plaintiffs alleged that the defendants had conspired to prevent competing local telephone companies from entering the market. The plaintiffs relied on the defendants' "compelling motivation" to keep local companies out of the market, and inferred agreements among the defendants not to compete with each other. These alleged agreements were inferred from the defendants' failure to pursue markets controlled by other defendants.

The Supreme Court determined that the plaintiffs' claims were mere legal conclusions unsupported by factual allegations, and thus affirmed dismissal of the case. In doing so, the Supreme Court expressly rejected Conley's "conceivability" or "no set of facts" standard.⁵ Instead, the Supreme Court implemented a "plausibility" standard. Twombley's new standard asks for enough factual matter to raise a reasonable expectation that discovery will reveal evidence of the elements of the claim.⁶ In other words, the complaint must allege more than the mere possibility of misconduct to survive a motion to dismiss.

However, questions remained following the Supreme Court's decision in Twombley. The Twombley Court granted certiorari to address the proper standard for pleading an antitrust conspiracy through parallel conduct. What would the role of the opinion be in cases alleging other claims?

Last year, the Supreme Court issued the opinion in Ashcroft v. Iqbal, clarifying that the Twombley standard applies to all cases filed in federal district court.⁷ Iqbal was a Muslim Pakistani who was arrested on charges of fraud and conspiracy after the terrorist attack on September 11, 2001. He pled guilty to the charges and was deported to Pakistan. Then, he filed a civil complaint against numerous federal officials, including then-Attorney General John Ashcroft, alleging that they violated his constitutional rights while he was detained.

Significantly, the Iqbal Court determined that it was not bound to accept "legal conclusions" as true in evaluating the sufficiency of a pleading.⁸ The Iqbal opinion establishes a two-part approach to measuring the adequacy of pleadings. First, the reviewing court should isolate only the well-pleaded, non-conclusory factual allegations that are entitled to a presumption of truth.⁹ Then, considering only the well-pleaded facts and assuming their truth, the court should determine whether those facts give rise to a plausible entitlement to relief.¹⁰ A complaint will survive a motion to dismiss under Rule 12(b)(6) of the Federal Rules of Civil Procedure only when the facts pleaded move the claim "across the line from conceivable to plausible."¹¹ Applying this framework, the Supreme Court determined that Iqbal's claims were properly dismissed for failure to state a claim for relief.

The Iqbal plausibility standard is a major departure from Conley's "no set of facts" standard, and should result in a great increase in the care plaintiffs take in framing their complaints, and also in the time and effort defendants will invest into critiquing plaintiffs' pleadings. The Supreme Court insists that it has not applied a "'heightened' pleading standard" or "broaden[ed] the scope" of the Federal Rules of Civil Procedure.¹² Commentators, on the other hand, insist that it takes more to survive a Rule 12(b)(6) attack today than it did just two years ago: "Iqbal and Twombly together have the potential to dramatically impair civil plaintiffs' ability to survive a motion to dismiss in all substantive areas ... . [T]hese newly articulated pleading standards will [be] an obstacle to asserting civil claims in federal court."¹³

_______________________
¹ Ms. Celeste is an associate in the Business Litigation Section of Haynes and Boone, LLP. The opinions expressed herein are not those of Haynes and Boone or its clients.

² Conley v. Gibson, 355 U.S. 41 (1957).

³ Id. at 45-46.

⁴ Bell Atl. Corp. v. Twombley, 550 U.S. 544 (2007).

⁵ Id. at 562-563.

⁶ Id. at 556.

⁷ 129 S. Ct. 1937 (2009).

⁸ Id. at 1949.

⁹ Id. at 1950.

¹⁰ Id.

¹¹ Id. at 1952 (citing Twombley, 550 U.S. at 570).

¹² Twombly, 550 U.S. at 569 n.14.

¹³ Kendyl Hanks, Kate David, & Stacy Nathanson, Our Mini-Theme: Corporate and Business Litigation, Supreme Court Update, Decisions from 2009, 19 BUS. L. TODAY 43, 46 (Oct. 2009).

Melissa L. Celeste, Haynes and Boone, LLP

When Rules Collide

Posted 4/9/10

When Rules Collide: "Snap Back" Rules Do Not Always Protect Against Inadvertent Disclosure of Privileged Documents

By: Josh Borsellino¹

Both the Texas and Federal Rules of Civil Procedure have "snap back" provisions designed to protect against the inadvertent production of privileged documents.² As a result, most litigators assume that an unintentionally produced, privileged document can always be "snapped back" if it is done in a timely manner. But a recent Texas Supreme Court case highlights the tension between snap back provisions and the rules governing expert discovery, and makes it clear that Texas' snap back provision does not apply when a party inadvertently provides privileged documents to its testifying expert.

This issue was decided by the Texas Supreme Court in 2007 in In re Christus Spohn Hosp. Kleberg, 222 S.W.3d 434 (Tex. 2007) (orig. proceeding). In Christus, the defendant attempted to "snap back" privileged documents that were accidentally provided to its designated testifying expert witness.³ The documents were provided to the expert because a paralegal mistakenly believed the documents would remain confidential.⁴ The first time the defendant's counsel learned that the documents had been provided to the expert was at the expert's deposition.⁵ At the deposition, the expert testified that she "didn't read every bit" of the privileged documents, but had merely "glanced" at them.⁶ The defendant then attempted to snap-back the documents under TEX. R. CIV. P. 193.3(d), which provides as follows:

A party who produced material or information without intending to waive a claim of privilege does not waive that claim under these rules or the Rules of Evidence if - within ten days or shorter time ordered by the court, after the producing party actually discovers that such production was made - the producing party amends the response, identifying the material or information produced and stating the privilege asserted.

The Court noted that TEX. R. CIV. P. 192.3(e) defines the scope of permissible discovery from experts, and provides that a party may discover, among other things, "all documents, tangible things, reports, models, or data compilations that have been provided to, reviewed by, or prepared by or for the expert in anticipation of a testifying expert's testimony ... ."⁷ The Court found that the concepts of waiver and intent required to effect the snap-back provision of Rule 193.3(d) "do not appear in our testifying-expert disclosure rule."⁸ As such, the Court concluded that under the plain language of Rule 192.3(e), "documents ... provided to a testifying expert lose their work-product designation irrespective of the intent that accompanied their production."⁹

The Court also rejected the defendant's argument that the inadvertently produced documents could be snapped back because they were not material to the expert's opinions. The Court held that the impact of the documents on the expert's opinions are irrelevant, because "[m]aterials both accepted and rejected by an expert are indicative of the process by which the expert went about forming his or her opinion and may provide an effective basis for cross examination." The Court noted that its holding was in accord with a majority of the rulings under the Federal Rules of Civil Procedure,¹⁰ as well as decisions by other state courts.¹¹

The Court stated in dicta that a party that has inadvertently produced documents is not without a remedy, as it "may presumably withdraw the expert's designation ... ."¹² With such a harsh "remedy," it is important for practitioners to carefully scrutinize any documents to be provided to their own experts (rather than relying on paralegals to gather and send such documents), and to thoroughly examine the working files of all opposing experts.

_______________________
¹ Mr. Borsellino is an associate in the Business Litigation Section of Haynes and Boone, LLP. The opinions expressed here are not those of Haynes and Boone or its clients.

² See TEX. R. CIV. P. 193.3(d); FED. R. CIV. P. 26(b)(5)(B).

³ Id. at 435.

⁴ Id. at 436.

⁵ Id.

⁶ Id.

⁷ Id. at 437-38 (emphasis added).

⁸ Id. at 439.

⁹ Id. at 439-40.

¹⁰ Id. at 441-42 (citing, e.g. Reg'l Airport Auth. v. LFG, LLC, 460 F.3d 697, 714 (6th Cir. 2006) (concluding that a "majority of courts" favor a bright-line rule of full disclosure of documents produced to a testifying expert); In re Pioneer Hi-Bred Int'l, Inc., 238 F.3d 1370, 1374 (Fed. Cir. 2001).

¹¹ Id. at 442-43 (citing Tracy v. Dandurand, 30 S.W.3d 831, 836 (Mo. 2000); Gall v. Jamison, 44 P.3d 233, 234 (Colo. 2002).

¹² Id. at 445.

Josh Borsellino, Haynes and Boone, LLP

ESI Preservation and Collection in the wake of Pension Committee v. Banc of America

Posted 4/9/10

ESI Preservation and Collection in the wake of Pension Committee v. Banc of America¹

By: Jennifer Butler Wells²

Judge Scheindlin of the Southern District of New York, author of the Zubulake opinions, recently released the opinion in Pension Committee v. Banc of America. The opinion, subtitled "Zubulake Revisited: Six Years Later," seeks to clarify the standards established in the Zubulake opinions.

The opinion begins with definitions of negligence, gross negligence, and willfulness and applies them in the discovery context, giving examples of what conduct may constitute which level of culpability.

The court notes that the first step in the discovery process is preserving relevant information. The duty to preserve arises when a party reasonably anticipates litigation. Once a party reasonably anticipates litigation, it must suspend its routine document retention/destruction policy and put in place a litigation hold to ensure the preservation of relevant documents. Note that this means that a plaintiff's duty is more often triggered before litigation commences.

A failure to preserve evidence resulting in the loss or destruction of relevant information is at least negligent, and, depending on the circumstances, may be grossly negligent or willful. For example, (as should be clear) the intentional destruction of relevant records, either paper or electronic, after the duty to preserve has attached, is willful. But, what might not be so clear is that after the Zubulake opinions were issued, the court considers the failure to issue a written litigation hold to constitute gross negligence because that failure is likely to result in the destruction of relevant information.

Collection and review are the next steps in the discovery process. The court again provides relevant examples. The failure to collect records, either paper or electronic, from key players constitutes gross negligence or willfulness as does the destruction of email or certain backup tapes after the duty to preserve has attached. On the other hand, the failure to obtain records from all employees, as opposed to key players, likely constitutes merely negligence. Additionally, the failure to take all appropriate measures to preserve ESI likely falls in the negligence category. The court notes that recent cases have also addressed the failure to collect information from the files of former employees that remain in a party's possession, custody, or control after the duty to preserve has attached (gross negligence) or the failure to assess the accuracy and validity of selected search terms (negligence).

The court reviewed the list of potential remedies for spoliation, from least to most harsh: further discovery, cost-shifting, fines, special jury instructions, preclusion, and the entry of default judgment or dismissal.

In this case, the court determined that an adverse inference instruction and monetary sanctions were appropriate. Although the court stated that this case does not present any egregious examples of litigants purposefully destroying evidence, it was a case where the plaintiffs failed to timely institute written litigation holds and engaged in careless and indifferent collection efforts after the duty to preserve arose. Thus, the court found that there could be little doubt that some documents were lost or destroyed.

Although the court does not draw any bright line rules, noting that whether to award sanctions is an inherently subjective and fact-intensive endeavor, the court does point out that after a discovery duty is well established, the failure to adhere to contemporary standards can be considered gross negligence. Thus, after Zubulake counsel should be aware that the failure to do the following supports a finding of gross negligence, when the duty to preserve has attached: to issue a written litigation hold; to identify all of the key players and to ensure that their electronic and paper records are preserved; to cease the deletion of email or to preserve the records of former employees that are in a party's possession, custody, or control; and to preserve backup tapes when they are the sole source of relevant information or when they relate to key players, if the relevant information maintained by those players is not obtainable from readily available sources.

_______________________
¹ Pension Comm. of the Univ. of Montreal Pension Plan v. Banc of Am. Sec., LLC, __ F. Supp. 2d __, 2010 WL 184312 (S.D.N.Y. Jan. 15, 2010) (internal citations omitted).

² Ms. Wells is an associate in the Business Litigation Section of Haynes and Boone, LLP. The opinions expressed here do not reflect the opinions of Haynes and Boone or its clients.

Jennifer Butler Wells, Haynes and Boone, LLP

Seriously - Piercing the Corporate Veil

Posted 7/27/09 SINGLE BUSINESS ENTERPRISE LIABILITY—AN OBITUARY
Born: 1986, Houston by Paramount Petroleum v. Taylor Rental Center
Died: 2008, Austin by SSP Partners v. Gladstrong Investments

The Texas Supreme Court has sounded the death knell for the single business enterprise theory of liability with its decision in SSP Partners v. Gladstrong Investments, 275 S.W.3d 444 (Tex. 2008). The single business enterprise theory was a veil-piercing technique that did not require the same strenuous "actual fraud" element required for the other veil-piercing theories by Article 2.21 of the Texas Business Corporation Act. The origin of single business enterprise liability is usually traced to Paramount Petroleum Corp. v. Taylor Rental Center, 712 S.W.2d 534, 536-37 (Tex. App.—Houston [14th Dist.] 1986, writ ref'd n.r.e.). The Paramount court found that two separate companies were operated as a "single business enterprise," and that one company's liability could therefore be imputed on the other. In determining whether corporations operated as a single business enterprise, Texas courts would consider whether the corporations had: (1) common employees, (2) common offices, (3) centralized accounting, (4) payment of wages by one corporation to another corporation's employees, (5) common business name, (6) services rendered by the employees of one corporation on behalf of another corporation, (7) undocumented transfers of funds between corporations, and (8) unclear allocation of profits and losses between corporations. See Nat'l Plan Adm'rs, Inc. v. Nat'l Health Ins. Co., 150 S.W.3d 718, 744 (Tex. App.—Austin 2004).

The Paramount decision touched off a powder keg of single business enterprise liability cases in the appellate courts, as plaintiffs seized the opportunity to pierce corporate veils without having to prove fraud or corporate abuse. See, e.g., Formosa Plastics Corp. v. Kajima Int'l, Inc., 216 S.W.3d 436, 454-55 (Tex. App. .—Corpus Christi 2006, pet. denied); In re U-Haul Int'l, Inc., 87 S.W.3d 653, 657 (Tex. App.—San Antonio 2002, orig. proceeding); Hall v. Timmons, 987 S.W.2d 248, 255 (Tex. App.—Beaumont 1999, no pet.). After a number of courts found liability without any showing of fraud, the Texas Supreme Court finally addressed the issue of single business enterprise in SSP v. Gladstrong.

In SSP v. Gladstrong, the Texas Supreme Court held that "corporations cannot be held liable for each other's obligations merely because they are part of a single business enterprise." In the case, a wholesaler sought indemnity from the supplier of a defective cigarette lighter that started a fire which killed a young boy. The lighter's wholesaler wanted to hold both Gladstrong Hong Kong (the lighter's manufacturer) and its subsidiary Gladstrong USA (the lighter's importer) liable as a single business enterprise. The Plaintiff sued Gladstrong USA under Texas statutory law which requires that manufacturers indemnify innocent wholesalers against losses arising out of the use of the manufacturer's products. Gladstrong USA was clearly not a "manufacturer" under Texas law, but its parent, Gladstrong Hong Kong did meet the statutory definition of a manufacturer. Accordingly, the plaintiff sought to hold the subsidiary liable for the actions of the parent through single business enterprise. To support its single business enterprise claim, the plaintiff presented evidence that both companies had the same owners and president, shared accounting functions, transferred funds back and forth, and that the allocation of profits and losses between the companies was unclear.

The Court noted that the plaintiff's theory did not entail "the abuse required before the law disregards the corporate structure to impose liability" under such piercing theories as alter-ego liability. Further, the Court said that all of the theories laid out in the seminal Castleberry decision—which narrowed the scope of veil-piercing in Texas—"involved an abuse of the corporate structure." The Court stated that "there is nothing abusive or unjust" about the types of conduct that Gladstrong USA engaged in—"such as centralized control, mutual purposes, and shared finances." The Court held that in addition to these relationship factors, "there must also be evidence of abuse, or as we said in Castleberry, injustice and inequality."

Relying on both its Castleberry decision and the legislature's clear intent in passing Article 2.21 of the Business Corporation Act, the Texas Supreme Court repeated that there must always be two levels of analysis for veil-piercing: (1) the relationship between the two entities; and (2) whether the entities' use of limited liability was illegitimate. However, "abuse and injustice are not components of the single business enterprise theory stated in Paramount Petroleum." Accordingly, the Court stated that "the single business enterprise theory is fundamentally inconsistent with the approach taken by the Legislature in article 2.21." The Court therefore rejected the plaintiff's claim and held "the single business enterprise theory set out in Paramount Petroleum will not support the imposition of one corporation's obligations on another."

But is Single Business Enterprise really dead?

While the SSP v. Gladstrong case appears on its face to be the last nail in the coffin of the single business enterprise theory, it remains to be seen whether the Supreme Court left enough wiggle-room for creative attorneys to craft new variations of the theory. The Court made repeated references to the illegitimacy of the theory "as it was laid out" in the Paramount case, noting that Paramount relied on dubious precedent. Even in the Court's strongest language condemning the theory, the Court qualified its holding, stating: "the single business enterprise theory set out in Paramount Petroleum will not support the imposition of one corporation's obligations on another." Does this mean the single business enterprise theory as set out under some other factual scenario would support such liability? In another portion of the opinion the Court ponders "whether a theory of 'single business enterprise' is a necessary addition to Texas law," given the other available veil-piercing options. Rather than simply answering its own question, and stating that the theory is not a necessary addition to Texas law, the Court merely said that single business enterprise is no longer viable as "set out in Paramount."

George Young, Haynes and Boone, LLP

Texas Supreme Court Update On Insurance Cases

Posted 4/27/09

In Tanner v. Nationwide Mutual Fire Insurance Co., ______ S.W.3d _____, the Texas Supreme Court interpreted the intentional exclusion in Nationwide's auto liability policy. The Court reversed and rendered judgment for the plaintiff.

Nationwide was sued by the Tanner family for the actions of its insured, Richard Gibbons ("Gibbons"). Gibbons led the police on a high-speed chase through San Marcos that resulted in a traffic accident with the Tanner family. Prior to the accident, Gibbons slammed on his brakes but failed to avoid the collision. The members of the Tanner family suffered injuries as a result of the accident.

Initially, the Tanners filed suit against Gibbons and obtained a default judgment. However, Nationwide, Gibbons' insurer, refused to pay damages and filed a declaratory judgment action claiming that the intentional-injury exclusion in their policy barred coverage for Tanners' claims. Despite their assertion, the jury found that Gibbons did not intentionally cause the Tanners' injuries. Thereafter, the trial court granted Nationwide's motion for judgment notwithstanding the verdict. The court of appeals affirmed the trial court's judgment because the intentional-acts exclusion in Gibbons' policy with Nationwide excluded any coverage for the Tanners' claims as a matter of law.

In its analysis, the Court determined that Nationwide was required to show that the evidence conclusively proved that Gibbons intentionally injured the Tanners and that no reasonable jury would come to a different conclusion. Nationwide asserted that once Gibbons fled the police, his actions voided the coverage under the policy's intentional-injury exclusion. This exclusion withholds coverage for "property damage or bodily injury caused intentionally by or at the direction of an insured, including willful acts the result of which the insured knows or ought to know will follow from the insured's conduct."

The Court emphasized that the word intentionally as used in Nationwide's exclusion speaks to the resulting damage or injury, but not to the actions that led to it. The language should be considered effect-focused and not cause-focused, and void coverage when the resulting injury was intentional, not merely when the insured's conduct was intentional.

In application to the underlying facts, the Court stated the evidence at trial did not indicate that the property damage and injuries to the Tanners was intentional by Gibbons. Instead, the evidence demonstrated that Gibbons slammed on his brakes to avoid impact which showed that he tried to avoid the collision and any harm. The Court further noted that Gibbons' high speed chase could have ended in several different scenarios, and as a result, Nationwide failed to establish as a matter of law that the Tanners' injuries were caused intentionally per the policy exclusion.

The Court also discussed additional language in Nationwide's policy exclusion which excludes coverage for "willful acts the result of which the insured knows or ought to know will follow." The Court felt that this policy language also reiterates the view of inquiry as to whether the insured intended to inflict damage or injury. In order to forfeit coverage, the insured must intend to harm and not intend to act. The Court stated this portion of Nationwide's exclusion denies coverage if the insured "ought to know" that injury "will follow" his actions. The jury charge used in the trial court tracked the language in this exclusion, and Nationwide did not object to such language in the charge. The Court concluded it had to review the policy as written, and considering the clarity of the exclusion and jury charge, the Court could not conclude that jurors disregarded the policy and the evidence in reaching their verdict.

Here, Nationwide's exclusion is more restrictive than other policies. It will be interesting to see if intentional injury exclusions become broader than the one used by Nationwide.

William Allred, Cooper & Scully, P.C.

Texas Supreme Court Update on Insurance Cases

Posted 3/11/09

In Pine Oak Builders, Inc. v. Great American Lloyds Insurance Company, ______ S.W.3d ______, the Texas Supreme Court addressed a coverage dispute regarding construction defects and in its analysis, the Court also revisited three of its recent cases involving coverage disputes. Here, the Court offers a roadmap regarding what triggers coverage and the duty to defend in construction defect cases.

Pine Oak Builders, Inc. ("Pine Oak") was sued by five homeowners regarding construction defects. Thereafter, Pine Oak made a demand on its insurers for a defense; however, the insurers denied any duty to defend. As a result, Pine Oak filed suit.

Great American provided occurrence-based commercial general liability policies to Pine Oak for the time period of April 1993 to April 2001, and Mid-Continent also provided commercial general liability policies covering April 2001 to April 2003. Thereafter, five homeowners sued Pine Oak alleging claims of water damage to their homes due to defective installation of an exterior stucco product or water damage due to the improper construction.

The trial court granted summary judgment for the insurers on all issues. The court of appeals affirmed the summary judgment for Mid-Continent based on an exclusion in Mid-Continent's policies, and for one of the homeowners' suits covered by Great American. However, the court of appeals determined that Great American had a duty to defend the other four homeowners' suits, and Pine Oak could not recover statutory damages under the Prompt Payment of Claims Statute.

In its analysis, the Court applied its prior holdings in three cases to Pine Oak. First, the Court discussed Lamar Homes regarding the coverage of faulty workmanship claims and the application of Article 21.55 of the Texas Insurance Code. Great American believed the faulty workmanship claims should not be considered property damage caused by an occurrence under the terms of the policies. In Lamar, the Court held that "a claim of faulty workmanship against a homebuilder was a claim for property damage caused by an occurrence under a CGL policy." The Court concluded the Great American policy language was the same as the policy language in Lamar. The Court also determined that the Prompt Payment of Claims Statute did not apply.

Next, the Court discussed Don's Building Supply and the trigger of coverage under an occurrence-based commercial general liability policy. In its analysis, the court of appeals followed the "exposure rule" for determining whether a property damage claim is covered; however, Great American asked the Court to adopt the "manifestation rule". In Don's Building Supply, the Court rejected both rules and adopted the "actual-injury" rule where property damage occurs during the policy period only if actual physical damage occurred during the policy period. Further, the policy language in Don's Building Supply is the same as the policy language used by Great American. The Court determined that on remand, the trial court should apply the "actual-injury" rule to any remaining issues concerning whether property damage claims fall within the terms of Great American's policies.

The Court also discussed the GuideOne Elite regarding extrinsic evidence to the eight corners of the insurance policy and if such evidence may be used to establish an insurer's duty to defend. One of the exclusions in the policy removed coverage for any property damage to the insured's completed work, except for damaged work performed by a subcontractor. Here, four of the underlying lawsuits concerned alleged defective work done by subcontractors. The remaining underlying lawsuit, Glass, did not contain allegations of defective work by a subcontractor, but asserted claims for breach of contract and warranty, negligence, and violation of the Residential Construction Liability Act. Further, in the Glass case, Pine Oak submitted evidence that the defective work was conducted by subcontractors, and as a result, Great American had a duty to defend.

In GuideOne, the Court held that an exception to the eight corners rule would not extend to evidence that was relevant to both insurance coverage and the merits of the case if alleged by a third-party plaintiff. Here, the Court felt that the extrinsic fact Pine Oak was seeking to assert contradicted the facts alleged in the Glass suit. The Court stated that the duty to defend depends on the policy language and not on extrinsic evidence from either the insurer or insured that contradicts the allegations in the underlying petition. The Court felt that Great American's duty to defend was not triggered by the Glass petition. The Court affirmed in part, reversed in part and remanded the case to the trial court for further proceedings.

William Allred, Cooper & Scully, P.C.

Trammell Crow Residential Co. v. Virginia Surety Co., Inc.

Posted 2/19/09

In Trammell Crow Residential Company v. Virginia Surety Company, Inc., 2008 WL 5062132 (N.D. Tex. 2008), the United States District Court for the Northern District of Texas considered whether an insured was entitled to recovery under the Prompt Payment of Claims Act where no legal bills or invoices for expenses had been submitted to the insurer. Applying Lamar Homes, the Court held that the amount of attorneys' fees was relevant only to the calculation of damages, not liability under the Act. Thus, the determination that Virginia Surety violated the Prompt Payment of Claims Act by wrongfully denying Trammell Crow's claim for defense costs could be made without Trammell Crow having forwarded their legal bills or invoices for expenses to Virginia Surety.

Trammell Crow was sued in the underlying lawsuit by the Equal Rights Center for alleged violations of the Fair Housing Act and the Americans with Disabilities Act. The underlying lawsuit asserted that these violations occurred between 1995 and 2006. Trammell Crow had a commercial general liability policy written by Virginia Surety which covered the period from February 15, 2002 to February 15, 2003. Virginia Surety denied Trammell Crow's tender of the underlying lawsuit, stating that the underlying lawsuit did not allege facts that brought the lawsuit within the scope of coverage. Trammell Crow filed an action against Virginia Surety, seeking a declaration that there was a duty to defend in the underlying lawsuit. The declaratory judgment action additionally made a claim for damages pursuant to the Prompt Payment of Claims Act.

Applying the eight-corners rule, the Court held that Virginia Surety had a duty to defend Trammell Crow in the underlying lawsuit, and that it had breached that duty. After finding that Trammell Crow had suffered damages as a result of Virginia Surety's breach of the insurance policy, the Court considered whether Trammell Crow was entitled to recover under the Prompt Payment of Claims Act. Virginia Surety asserted that Trammell Crow could not recover under the Act because the insured had not submitted any legal bills or invoices for expenses incurred in defending the underlying lawsuit. The Court disagreed.

"Although the court agrees that proof of the insured's defense costs are necessary to calculate the damages for which the insurer is liable, it disagrees with the premise that the insurer cannot be liable under the Prompt Payment of Claims Act unless the insured has submitted statements of its defense costs to the insurer." Id. at *10. Interpreting Lamar Homes, the Court held that an insurer becomes liable under the Prompt Payment of Claims Act when it wrongfully rejects its defense obligation, but that attorneys' fees cannot be awarded and prejudgment interest does not begin accruing until the insured actually incurs the defense costs. Id. at *11. In sum, consistent with the Supreme Court's decision in Lamar Homes and the Prompt Payment of Claims Act, the Court found liability could be determined without a calculation of damages. Thus, Virginia Surety was liable to Trammell Crow under the Prompt Payment of Claims Act. The amount of defense costs Trammell Crow is entitled to as damages remained to be determined at trial.

Lee Shidlofsky, Visser Shidlofsky LLP

Injury-In-Fact in Action: Don’s Building Supply Applied

Posted 2/19/09

In Thos. S. Byrne v. Trinity Universal Insurance Company, et al., 2008 WL 5095161 (Tex. App.¡VDallas, December 4, 2008, no pet. h.), the Dallas Court of Appeals applied Texas Supreme Court's recent decision in Don's Building Supply, Inc. v. OneBeacon Ins. Co., 267 S.W.3d 20 (Tex. 2008). The Court held that the factual allegations in the underlying pleadings asserted claims for property damage that potentially occurred within the coverage periods of the policies at issue; thus, there was a duty to defend.

Thos. S. Byrne, Ltd., ("Byrne") was hired as the general contractor to build an apartment complex in 1997. In turn, Byrne hired Subfloor Systems and S.W.I. as subcontractors responsible for installing the concrete flooring and stucco, respectively, at the complex. Upon completion in 1999, the complex was purchased by Mercantile. In 2001, Mercantile sued Byrne and others for alleged substantial construction and design defects, but did not name Subfloor Systems or S.W.I. in the suit.

Byrne demanded a defense in the Mercantile lawsuit from Subfloor Systems and S.W.I.'s insurers as an additional insured. When the subcontractors' insurers failed to tender a defense, Byrne sought declarations of its additional insured status under the policies and that it was owed a defense in the Mercantile lawsuit. The insurers moved for summary judgment, asserting that there was no duty to defend because Mercantile's live pleading demonstrated that any potentially covered property damage manifested after the policy period, after the work was completed and put into use (and therefore excluded from coverage), or both. The trial court entered summary judgment in favor of the insurers, and Byrne appealed.

Applying the eight corners rule, the Court of Appeals found the insurers had a duty to defend Byrne in the Mercantile lawsuit. The Court noted that the policy language in this case was identical to that considered by the Supreme Court of Texas in Don's Building Supply. It then looked to the allegations contained in Mercantile's live pleading. The Court held, "Mercantile is suing Byrne for property damage that began to occur some time in the past, but the time that damage started to occur is left unclear. Read as a whole, the petition leaves open the possibility that property damage occurred during the necessary time period . . ." In sum, the live pleading in the Mercantile lawsuit stated claims that could have occurred during the coverage period of the subcontractors' insurance policies, which allegedly arose from the subcontractors' work, and that were potentially outside of the policies' exclusions. Thus, there was a duty to defend Byrne in the Mercantile lawsuit.

While this case was not the first court of appeals case to apply the Supreme Court's opinion in Don's Building Supply, it provides a good example of the way the injury-in-fact trigger operates where allegations of property damage are murky. As the Supreme Court noted in Don's Building Supply, pinpointing the moment of injury retrospectively can be difficult in some cases. To determine the outcome in Byrne, the Dallas Court of Appeals applied the long-standing principle that allegations are to be interpreted liberally in favor of the insured. Here, the pleading was not crystal clear as to when the property damage occurred. But, viewing the Mercantile lawsuit's live pleading as a whole paints a picture of when the damage could have occurred during the relevant policy periods. Thus, because some covered property damage could have occurred within the policy periods, the subcontractors' insurers were obligated to defend the entire Mercantile lawsuit pursuant to additional insured endorsements.

Lee Shidlofsky, Visser Shidlofsky LLP

Mid-Continent Casualty Company v. JHP Development, Inc.

Posted 2/19/09

On January 28, 2009, the Fifth Circuit Court of Appeals issued an opinion addressing exclusions J(5) and J(6) of the standard CGL insurance policy. See Mid-Continent Cas. Co. v. JHP Development, Inc., No. 05-50796, ___ F.3d ___, 2009 WL 189886 (5th Cir. Jan. 28, 2009).

TRC and JHP entered into a construction contract wherein JHP agreed to build a four-story, five-unit condominium project. Only the model condominium was to be completed under the construction plans, leaving the remaining four units unfinished so that the new owner for each unit could choose how the unit was finished. Sometime later, water intrusion problems developed with the condominiums. In particular, it was determined that JHP failed to properly water-seal the exterior finishes and retaining walls, which allowed large quantities of water penetrated the units, damaging building materials and interior finishes. JHP refused to repair the damage and complete the work, so TRC terminated the company's contract. TRC retained a substitute contractor who repaired and completed the condominiums, who spent more than $400,000 investigating, demolishing, repairing and replacing the non-defective interior finishes and wiring damaged by the water intrusion.

JHP notified Mid-Continent of the problems on the TRC project and sought coverage under its CGL policy. Mid-Continent denied coverage, claiming there was no "occurrence" or "property damage" as defined in the insurance policy. In addition, Mid-Continent alleged that various exclusions applied to bar coverage. Thereafter, TRC filed suit against JHP, and JHP tendered defense of the claim to Mid-Continent. Again, Mid-Continent denied coverage for the claim and refused to provide a defense. Ultimately, a default judgment was entered against JHP in excess of $1.5 million.

Mid-Continent then filed a declaratory judgment action against JHP and TRC, seeking a declaration that (1) JHP was not entitled to coverage; (2) no defense or indemnity duties existed; (3) TRC was not entitled to recover any sums as a third-party beneficiary or judgment creditor; and (4) the default judgment was not binding on Mid-Continent. JHP never filed an answer in the declaratory judgment action. TRC, in contrast, filed a counterclaim against Mid-Continent. Mid-Continent and TRC ultimately filed cross-motions for summary judgment on the coverage issues in the district court. That court granted TRC's motion and denied Mid-Continent's. The Western District of Texas ruled that there was an "occurrence" and "property damage," none of the exclusions applied to bar coverage and the default judgment in the underlying suit was binding on Mid-Continent.

On appeal, Mid-Continent urged the appellate court to find that exclusions J(5) and J(6) barred coverage and that, in any event, the default judgment against its insured was not binding on Mid-Continent because there was not a fully adversarial trial. With respect to J(5), the parties were in agreement that "the use of the present tense 'are performing operations'" in the exclusion clarifies that the exclusion applies only to property damage that occurred during the performance of JHP's construction operations. The parties, however, disagreed as to whether JHP was "performing operations" when the water intrusion took place. TRC argued that JHP was not "performing operations" because construction had been suspended until the four unfinished units were purchased. Mid-Continent, on the other hand, claimed that the project involved ongoing construction because the units remained unfinished.

According to the Fifth Circuit, "[t]he prolonged, open-ended, and complete suspension of construction activities pending the purchase of the condominium units does not fall within the ordinary meaning of 'performing operations.'" Further, "[a]lthough JHP intended to eventually complete construction work once the units were sold, an actor is not actively performing a task simply because he has not yet completed it but plans to do so at some point in the future." And, the cases cited by Mid-Continent actually all support that position, as none of them suggests that the exclusion applies to damage occurring during a prolonged suspension of construction work. Because JHP was not actively engaged in construction work at the time of the water intrusion, the exclusion did not apply.

Turning to J(6), the Fifth Circuit's focus was on the phrase "that particular part." TRC urged the court to find that it meant the exclusion only barred coverage for that portion of the condominium project that was the subject of the defective work at issue (i.e., the inadequately waterproofed exterior portions of the condominium units), as opposed to the otherwise non-defective work that was damaged as a result of the defective work (i.e., sheetrock, studs, wiring and flooring). Mid-Continent, on the other hand, argued that the phrase applied to the entire condominium project, and thus it excluded all the damage resulting from JHP's work.

The Fifth Circuit held that "[t]he plain meaning of the exclusion . . . is that property damage only to parts of the property that were themselves the subjects of the defective work is excluded." Further, the court said, "[t]he narrowing 'that particular part' language is used to distinguish the damaged property that was itself the subject of the defective work from other damaged property that was either the subject of non-defective work by the insured or that was not worked on by the insured at all." The court found "that exclusion J(6) bars coverage only for property damage to parts of a property that were themselves the subject of defective work by the insured; the exclusion does not bar coverage for damage to parts of a property that were the subject of only non-defective work by the insured and were damaged as a result of defective work by the insured on other parts of the property."

As a result, because no allegations existed that JHP performed defective work on the interior portions of the condominiums, the damage to such property was not excluded from coverage under J(6). Rather, only the exterior finishes and retaining walls are "[t]hat particular part of any property that must be restored, repaired or replaced because [JHP's work] was incorrectly performed on it."

The Fifth Circuit's opinion in JHP is the latest in a growing line of cases in Texas where courts adhere to the plain language in the insurance policy while rejecting arguments about what the insurer meant to exclude. As a result, insureds continue to gain traction with respect to the proper interpretation of CGL policies for construction defect lawsuits. This decision is particularly significant in that it addresses the two main "course of construction" exclusions, which previously had been interpreted to broadly exclude property damage that occurred during construction. In addition, the court's adherence to the Block and ATOFINA line of cases also is significant. By binding Mid-Continent to the default judgment in this case, more insurers might now think twice before denying an insured a defense outright.

Lee Shidlofsky, Visser Shidlofsky LLP

Pine Oak Builders v. Great American Lloyds

Posted 2/19/09

On February 13, 2009, the Supreme Court of Texas issued another important opinion for insurance law jurisprudence. See Pine Oak Builders, Inc. v. Great Am. Lloyds Ins. Co., No. 06-0867 (Tex. Feb. 13, 2009). Pine Oak, a homebuilder, was insured by Great American under consecutive, occurrence-based commercial general liability insurance policies covering April 1993 to April 2001. Mid-Continent Casualty Co. issued similar policies from April 2001 to April 2003. Both insurers refused to defend Pine Oak in lawsuits filed by five homeowners during a one-year period from February 2002 to March 2003, which alleged that their homes suffered water damage as a result of defective construction.

As a result of the insurers' denials, Pine Oak filed a declaratory judgment action against them both. The insurers counterclaimed and all parties moved for summary judgment. Great American argued that its policies did not cover the claims in the underlying lawsuits and Mid-Continent argued that its EIFS exclusion barred coverage. The trial court ruled in favor of the insurers on all the motions, and the court of appeals affirmed as to Mid-Continent because of the application of its EIFS exclusion. On appeal, with regard to both insurers, the court affirmed the trial court's ruling on the Glass lawsuit given the absence of any allegation that a subcontractor performed the work, but concluded that Great American owed a defense on each of the other four underlying lawsuits. The appellate court ruled that notwithstanding Great American's improper denial of defense, Pine Oak was not entitled to statutory damages. All parties appealed.

At the outset, the Supreme Court of Texas said that Lamar Homes foreclosed Great American's argument that the faulty-workmanship claims asserted against Pine Oak did not constitute "property damage" caused by an "occurrence." Turning to the issue of whether Great American's policies were triggered by the allegations in the underlying lawsuits, the Court noted that the houses at issue were built in 1996 and 1997—during Great American's time on the risk. The appellate court applied the "exposure rule" in finding that the Great American policies were potentially implicated and thus owed a defense. Great American, in turn, urged the Supreme Court to apply the "manifestation rule," which could have precluded coverage in its entirety. Having already rejected both such trigger rules and adopting instead an "actual injury rule" in its decision in Don's Building Supply, the Court ordered the trial court to apply the "actual injury rule" on remand "to any remaining disputes about whether the property-damage claims fall within the terms of the Great American policies."

The final issue addressed by the Court involved the admissibility of extrinsic evidence regarding the Glass lawsuit in order to establish Great American's duty to defend. The importance of the evidence stemmed from exclusion (l) of the CGL policy, which excludes property damage to the insured's completed work unless "the damaged work or the work out of which the damages arises was performed on your behalf by a subcontractor." The Glass lawsuit omitted any reference to defective work performed by a subcontractor, unlike the other four lawsuits. Rather, Pine Oak was alleged to have failed to perform its work in a good and workmanlike manner and failed to make requested repairs. In Pine Oak's lawsuit against the insurers, the company submitted extrinsic evidence that the work at issue was performed by Pine Oak's subcontractors, and thus it contended that Great American had to defend the company in the Glass lawsuit.

The Court acknowledged that the duty to defend is determined by the "eight corners" of the insurance policy and the underlying pleading. It noted that its decision in GuideOne Elite Insurance Co. v. Fielder Road Baptist Church, 197 S.W.3d 305 (Tex. 2006), had been issued six days before the appellate court's ruling in the Pine Oak matter. In GuideOne, "[w]ithout recognizing an exception to the eight-corners rule, we held that any such exception would not extend to evidence that was relevant to both insurance coverage and the factual merits of the case alleged by the third-party plaintiff." Applying that rule to the case before it, the Court found that Pine Oak's evidence contradicted the facts alleged in the Glass lawsuit.

The Court said that in "deciding the duty to defend, the court should not consider extrinsic evidence from either the insurer or the insured that contradicts the allegations of the underlying petition." Because Pine Oak's evidence would have changed the allegations of the underlying lawsuit, it was inadmissible. "The policy imposes no duty to defend a claim that might have been alleged but was not, or a claim that more closely tracks the true factual circumstances surrounding the third-party claimant's injuries but which, for whatever reason, has not been asserted." Because the duty to defend does not extend to allegations—true or false—that have not been made, Great American's duty to defend was not triggered by the Glass lawsuit. By finding that Great American did not owe a defense in that underlying lawsuit, the Court affirmed the appellate court's opinion. The appellate court had ruled that because no duty to defend existed, Great American also was not obligated to indemnify Pine Oak. Thus, in essence, the Court affirmed the holding that "no duty to defend means no duty to indemnify."

The Supreme Court of Texas' decision in Pine Oak is another monumental case with significant ramifications. Importantly, while the Court once again failed to recognize any exception to the "eight corners" rule, it did not necessarily foreclose the adoption of a limited exception for "coverage only" facts. Rather, it merely found a way to bar the evidence presented by Pine Oak, stating that it would contradict the allegations of the facts pleaded by the plaintiff in the underlying lawsuit. Presumably, the Court may still recognize a limited exception for "coverage only" facts.

The most disturbing aspect of the Court's opinion in Pine Oak is the ruling that no duty to defend necessarily means no duty to indemnify. In this author's opinion, such a ruling simply is wrong. Here, the actual facts established that the defective work at issue was performed by a subcontractor. The duty to indemnify, in contrast to the duty to defend, is based on the actual facts. Accordingly, even if the Court adheres to a strict eight corners approach for determining the duty to defend, nothing should have prevented Pine Oak from using the extrinsic evidence to establish a duty to indemnify. In effect, the Court's ruling in Pine Oak places too much emphasis on the oft-recognized principle that the duty to defend is broader than the duty to indemnify. While that principle is true in most cases, it does not hold true in every case. Pine Oak is a perfect example of where a strict adherence to an "eight corners" rule defeated a duty to indemnify even though extrinsic evidence could have established coverage.

Lee Shidlofsky, Visser Shidlofsky LLP

Texas Supreme Court Update on Insurance Cases

Posted 2/3/09

In United States Fidelity and Guaranty Company ("USF&G") v. Louis Goudeau, _____ S.W.3d _____, the Court addressed the issues of coverage and interpretation of policy language. The Court reversed the portion of the Court of Appeals' judgment regarding Goudeau's underinsured motorist claim and rendered judgment that Goudeau take nothing on that claim.

The underlying case concerned Goudeau's claims for injuries sustained in an accident. Goudeau, an employee of Advantage BMW in Houston, stopped on a Houston toll road to help a stranded driver. After exiting his car, Goudeau sustained serious injuries when a third driver, Alex Rodriguez, crashed into both parked cars, thus pinning Goudeau between the cars and the retaining wall of the toll road. Goudeau suffered a crushed pelvis as a result of the accident. At the time of the accident, Goudeau was driving one of Advantage BMW's cars in the course of his employment.

Thereafter, Goudeau filed suit and recovered from the driver who caused the accident; however, said driver had only $20,000 in insurance coverage. Advantage BMW had two policies with petitioner USF&G, one a workers compensation policy and another policy with uninsured/underinsured coverage of $1,000,000. As a result of the accident, USF&G paid more than $100,000 in benefits to Goudeau and his medical providers under the workers compensation policy. However, USF&G denied benefits to Goudeau under the underinsured motorist policy.

Goudeau later amended his lawsuit asserting a claim for breach of the underinsured motorist policy against USF&G. In the underlying case, USF&G utilized one law firm to file an answer in the suit; however, USF&G used another firm to intervene in the suit asserting a $100,000 subrogation for the funds Goudeau already received from USF&G. The Trial Court granted summary judgment and denied Goudeau's underinsured claim. However, the Court of Appeals reversed and remanded this matter for trial after finding a fact issue as to whether Goudeau was "occupying" his vehicle at the time of the accident.

The Court determined per the insurance policy at issue, Goudeau was not "occupying" his car at the time of the accident and as a result, Goudeau cannot recover under the policy. In its discussion, the Court discussed the policy at issue; the underinsured policy covered designated Advantage BMW employees, as well as anyone else "occupying" an Advantage vehicle during a collision. However, Goudeau was not designated in the policy and he would not be covered unless he was "occupying" a covered car when the collision occurred. The standard policy language defined "occupying" as "in, upon, getting in, on, out or off". Due to the circumstances of the accident, Goudeau asserted coverage because he was "occupying" the car by being "upon" the car when he was injured. However, the Court disagreed. The Court stated, "but a driver who has exited the car, closed the door, walked around the front, and then has the vehicle smashed into him cannot be said to be "occupying" the vehicle at the time of the collision, even if afterwards he ends up partly "upon" it.

In their decision, the Court of Appeals used a test requiring claimants to show only a causal connection between the incident that caused the injury and the covered vehicle. The Supreme Court has also required a causal connection in other cases in situations when deciding whether an uninsured motorist claim "arises out of" the use of the motor vehicle; however, the Court felt it was not the same question as whether a person was "occupying" a covered car. The Court followed Texas Law which requires insurance policies to be construed according to their plain language, and adhered to the law that the plain meaning of "occupying" as defined in this policy could not apply to Goudeau.

In the future, it will be interesting to see if insurance carriers add more specific language to their policies or if litigants become more creative with their pleadings.

William Allred, Cooper & Scully, P.C.

Texas Supreme Court Update on Insurance Cases

Posted 12/5/08

In Sonat Exploration Company v. Cudd Pressure Control, Inc., ______ S.W.3d ____, the Supreme Court discussed choice of law issues regarding insurance policies. The Supreme Court affirmed the decision of the Court of Appeals for the Sixth District of Texas that Louisiana law applied in this matter. The Court of Appeals based their decision on the fact that Louisiana was the location where the contract was performed and Louisiana was also the location impliedly chosen by the parties. Although the Supreme Court agreed with the Court of Appeals' decision, the Court did so for different reasons.

In May 1998, Sonat Exploration Company and Cudd Pressure Control, Inc. entered into a master service agreement regarding Cudd's oilfield services for Sonat. The service agreement specified operations in four places, but only determined the controlling law for three of the locations. The service agreement also included provisions requiring each company to indemnify the other for claims brought by their own employees. For the jobs located in Louisiana, the provisions required Cudd to name Sonat as an additional insured on its insurance policies.

On October 1998, an explosion happened at one of Sonat's oil wells in Louisiana; the explosion killed seven workers, including four of Cudd's own employees. Thereafter, the surviving families of the four Cudd employees sued both Cudd and Sonat in Texas. As a result, Sonat requested indemnity from Cudd, however, Cudd refused. Also, Sonat sought coverage as an additional insured from Cudd's insurer Lumbermans Mutual Casualty Company, however, Lumbermans also refused. Sonat filed claims for indemnification against the survivors of Cudd's employees and also filed a lawsuit against Lumbermans including claims against Cudd for failing to name Sonat as an additional insured.

Both Sonat and Cudd settled with one of the Cudd survivors; however, the parties could not agree to the settlement amount for the remaining three Cudd survivors. Thereafter, Sonat paid approximately $28 million to settle the survivors' claims, and then sought indemnity from Cudd. The trial court found the indemnity agreement between Cudd and Sonat to be enforceable under Texas law. The trial court also entered a judgment against Cudd in the amount of $20,718,166.74. Thereafter, Cudd filed a notice of appeal with Lumbermens posting $29 million as security.

Prior to its appeal, Cudd signed a Rule 11 agreement with Sonat which waived the argument that Louisiana law applied in exchange for Sonat to nonsuit the separate contract suit. Also, the Sixth Court of Appeals did not allow Lumbermens to intervene in the suit in order to assert that Louisiana law applied; the Texas Supreme Court granted mandamus relief indicating that the Rule 11 agreement might allow Cudd to "foist liability for uninsured claims onto its insurer." The court of appeals on remand agreed with Lumbermans and reversed the trial court's application of Texas law. As a result, Sonat appealed the judgment from Court of Appeals claiming the indemnity provision was valid under Texas law, despite Lumbermens' assertion that the indemnity agreement was invalid under Louisiana law. Cudd also asserted that the indemnity agreement was invalid under Texas law.

The Court agreed with the parties that these laws conflicted. In its analysis, the Court looked to Sections 187 and 188 of the Second Restatement of the Conflict of Laws. Further, the choice of law provision in the master service agreement contained a choice of law provision, however, it was inapplicable to the case. Lumbermens believed Louisiana law controlled because other sections of the service agreement referred to work done in Louisiana, including an attachment to the agreement that Cudd was to name Sonat as an additional insured. The Court of Appeals felt by naming Sonat as an additional insured was the only effective way to obtain indemnity in Louisiana, therefore, it should be treated as the choice by the parties to apply Louisiana law. However, the Court disagreed.

In its analysis, the Court stated that if there is no specific choice of law, then the use of legal terms or doctrines particular to one state provides evidence as to what state's law that parties wanted to apply. However, the indemnity provision in question made no reference to Louisiana law. Also, the Court indicated that there was no evidence in the indemnity provision stating it was not to be applied under Louisiana law. Since the parties failed to choose one law for all purposes of the agreement, the Court then determined the appropriate law on other grounds.

The Court felt the place of performance of the contract was relevant in determining the choice of law issue. The parties specified for the work to be conducted in Louisiana and that Sonat would be covered as an additional insured under Cudd's policies and at Sonat's own expense. However, the parties chose no law to cover the Louisiana jobs. The Court held that contracts should be governed by the law the parties had in mind when the contract was made and the Court believed Louisiana law applied. The Court then discussed the Rule 11 agreement Cud signed. Sonat's claims of unfairness were outweighed by requirements that the insured must act in good faith on behalf of the insured.

In light of this decision, it will be interesting to see in the future if indemnity agreements regarding workers in several states will be specific about choosing which state's law should apply.

William Allred, Cooper & Scully, P.C.

Don’s Building Supply, Inc. v. OneBeacon Insurance Co.

Posted 11/4/08

The Supreme Court Pulls the Trigger on Manifestation

In Don's Building Supply, Inc. v. OneBeacon Insurance Co., a unanimous Supreme Court of Texas held that, absent specific policy language to the contrary, "property damage" under a CGL policy occurs when actual physical damage to the property occurs¡Xnot when the damage was or could have been discovered.

In Don's Building Supply, Inc. v. OneBeacon Insurance Co., 2008 WL 3991187 (Tex. Aug. 29, 2008), a unanimous Supreme Court of Texas addressed the issue of which "trigger" applies under an occurrence-based insurance policy in the context of latent "property damage" claims. The Court held that, absent specific policy language to the contrary, "property damage" under a commercial general liability policy occurs when actual physical damage to the property occurs—not when the damage was or could have been discovered.

Don's Building Supply, Inc. ("DBS") is a seller and distributor of a synthetic stucco product known as an Exterior Finish and Insulation System ("EIFS"). EIFS was installed on a number of homes from December 1, 1993 and December 1, 1996. From 2003 to 2005, numerous homeowners filed lawsuits against DBS, alleging that the EIFS was defective and not weather-tight, allowing moisture to enter the wall cavities. As a result of the water intrusion, the walls purportedly suffered wood rot and other damages. According to the homeowners, the damages began to occur after the first instance of water intrusion behind the EIFS, which allegedly occurred within six months to one year after the EIFS was applied to their homes. The homeowners claimed that the water intrusion caused extensive damage, reduced their property values, and necessitated a retrofit or replacement of the EIFS.

In an apparent attempt to avoid a statute of limitations defense against their claims, the homeowners relied on the discovery rule. In particular, the homeowners alleged that the damages were "hidden from view" because the siding's exterior was undamaged and it was "not discoverable or readily apparent to someone looking at the surface until after the policy period ended."

OneBeacon initially provided a defense to DBS, but it later filed a declaratory judgment action in which it sought a declaration that it had no duty to defend or indemnify DBS because the damages were not alleged to have become identifiable until after the OneBeacon policies had expired. The district court, relying on a "manifestation" trigger, agreed with OneBeacon. DBS appealed to the Fifth Circuit Court of Appeals, which certified questions to the Supreme Court.

The Supreme Court of Texas held that property damage occurred when actual physical injury to the property at issue occurred under the plain meaning of the OneBeacon policy provisions. In other words, the Court adopted what other courts have called the "actual injury" or "injury-in-fact" approach by which an insurer must defend any claim of physical property damage that occurred during the policy period. The Court held the plain language of the policy linked coverage to damage, not to damage detection, thus supporting the application of the injury-in-fact trigger.

As for the manifestation rule, which was the theory urged by OneBeacon and followed by most Texas courts, the Court found that the language of the policy did not provide for the application of that trigger. Under the "manifestation trigger," the insurer's duty arises only when the injury manifests itself during the policy period, but the Court recognized that the plain language of the policy only requires the "property damage" to occur during the policy period—not be discovered. In addition, the Court was concerned that if a manifestation rule was adopted, the line between occurrence-based and claims-made policies would be blurred. And further, despite OneBeacon's claim that the manifestation rule is easier to apply, the Court said that it "does not eliminate the need to address sometimes nettlesome fact issues." The Court recognized that pinpointing the moment of injury retrospectively can be difficult in some cases, "but we cannot exalt ease of proof or administrative convenience over faithfulness to the policy language; our confined task is to review the contract, not revise it." Once the proper trigger for coverage was decided, the Court promptly determined that OneBeacon had a duty to defend DBS in the underlying lawsuits because any amount of physical damage to tangible property during the OneBeacon policy period was sufficient to trigger the duty to defend.

While deciding an important issue, the DBS opinion left many questions unanswered. When is coverage triggered for "bodily injury" claims under commercial general liability and other policies? If property damage occurs during the course of a continuing process, but began prior to the inception date of a policy, is the duty to defend triggered under the policy? What about the duty to indemnify? How will insurers adjust losses where property damage begins during the policy period but continues into other policy periods? Will insurance companies take the Court's suggestion and try to modify the insuring agreement in a standard CGL policy in order to better reflect a manifestation trigger? Despite these questions, one principle remains clear: The language of the policy at issue must be read in a manner so as to give words their plain meaning.

OneBeacon's motion for rehearing is currently pending before the Supreme Court of Texas. OneBeacon argues that the Court's opinion has set aside twenty years of established jurisprudence applying the manifestation trigger rule to latent property damage claims. OneBeacon also argues that the Court incorrectly interpreted the policy's insuring language and the opinion conflicts with the Court's ruling in Mid-Continent Insurance Co. v. Liberty Mutual Insurance Co., 236 S.W.3d 765, 773-76 (Tex. 2007). Given the significance of the Court's opinion, it is a safe bet that OneBeacon will receive an abundance of amicus support from other insurance carriers.

Lee Shidlofsky, Visser Shidlofsky LLP

The Estoppel Doctrine

Posted 11/4/08

On August 29, 2008, the Supreme Court of Texas issued its opinion in Ulico Casualty Co. v. Allied Pilots Association, 2008 WL 3991083 (Tex. Aug. 29, 2008). The issue before the Court was "whether an insurer's contractual coverage under a claims-made policy can be expanded by the doctrines of waiver and estoppel to cover a risk not otherwise within the policy coverage." The decision addressed the doctrines of waiver and estoppel, and more specifically established that if an insurer prejudices its insured by its actions, it may be estopped from denying benefits that would be payable under its policy as if the risk had been covered. The Court also found that the doctrines of waiver and estoppel cannot be used to re-write the contract of insurance and provide contractual coverage for risks not insured.

Allied Pilots Association ("APA") was insured under a claims-made liability policy issued by Ulico Casualty Company ("Ulico"). As a condition precedent to coverage, APA was to give written notice to Ulico of any claim made against it during the policy period or extended reporting period. On October 4, 1999, APA was served with a lawsuit that it forwarded to its insurance broker and its regular outside counsel, who undertook APA's defense. Ulico, however, was not notified of the lawsuit until APA's agent forwarded notice to it on November 5, 1999. At the time that Ulico received notice, APA was insured under a new policy issued by Lexington Insurance Company.

In November of 2001, Ulico filed a declaratory judgment action, seeking a declaration that it did not have coverage for the lawsuit and did not owe APA's defense costs. At trial, the jury found that (1) Ulico granted an extended reporting period during which APA reported the lawsuit; (2) Ulico agreed to pay defense costs separate and apart from the policy; (3) Ulico waived its right to assert that the policy did not cover the defense costs; and (4) Ulico was estopped from asserting that the defense costs were not covered. On cross-motions for judgment notwithstanding the verdict, the trial judge set aside the jury findings that Ulico granted an extended reporting period, that Ulico agreed to pay defense costs separately from the policy, and of damages. It entered judgment in favor of APA on the waiver and estoppel findings in the amount of $616,468.55.

On appeal, the Fort Worth Court of Appeals relied upon the Wilkinson exception, affirming the trial court's decision on the basis of waiver and estoppel. The Wilkinson exception states that is an insurer who has knowledge of facts indicating non-coverage assumes the insured's defense without a reservation of rights, all policy defenses are waived, or the insurer may be estopped from raising them.

On petition for review to the Supreme Court of Texas, Ulico claimed that the appellate court erred in its reliance upon the doctrines of waiver and estoppel. The Supreme Court held that Ulico's coverage was not expanded by either waiver or estoppel so as to bring the claims made in the lawsuit against APA within coverage. The Court criticized the Wilkinson opinion, noting that the cases cited by the Wilkinson court do not support its conclusion. The Court emphasized that the Wilkinson decision held that based on an "apparent" conflict of interest that "might" arise it was justified in rewriting the insurance contract to include a risk not agreed to by the parties at the execution of the contract. The Court expressly stated that it did "not agree with Wilkinson's statement to the effect that 'noncoverage' of a risk is the type of right an insurer can waive and thereby effect coverage for a risk not contractually assumed."

While the opinion disagreed with the Wilkinson exception, the Court went on to hold that if an insurer prejudices its insured by its actions, it may be estopped from denying benefits that would be payable under its policy as if the risk had been covered. The Court found that the insured was adequately protected by this prejudice rule, ethical rules governing attorneys defending insured, and the doctrine of estoppel without "remolding the doctrines of waiver and estoppel to create an anomaly in the law by judicially rewriting agreements between insurers and insureds." The Court held that in the absence of evidence that Ulico's offer to defend without reservation prejudiced APA, APA's claim against Ulico should be dismissed. Requiring Ulico to defend where written notice of a claim was given after the claims-made policy period terminated would effectively rewrite the policy. The Court upheld the trial court's disregard of the jury's finding as to the extended reporting period and Ulico's separate agreement to cover APA's defense costs.

The Supreme Court of Texas seemingly has eliminated the Wilkinson exception upon the pronouncement of their opinion in Ulico Casualty Co. v. Allied Pilots Association. Or has it? Now, it appears we have the Ulico exception. More specifically, as the concurring judges noted: "If the insurer defends without reserving its rights, and the insured shows prejudice, the insured is entitled to recover the benefits that would have been due under the policy. To that extent, it matters little whether a court says coverage was created or that the benefits are those that would have been payable had there been coverage; a rose by any other name would smell as sweet." The true impact of this decision remains to be seen in its application to future cases.

Lee Shidlofsky, Visser Shidlofsky LLP

Don’s Building Supply v. OneBeacon Insurance Co.

Posted 10/16/08

TEXAS SUPREME COURT UPDATE ON INSURANCE CASES
When does property damage occur under an occurrence-based commercial general liability insurance policy?

In Don's Building Supply v. OneBeacon Insurance Company, _______ S.W.3d _________, the Court answered two certified questions regarding insurance coverage disputes from the United States Court of Appeals for the Fifth Circuit. The insurance policy at issue is an occurrence-based commercial general liability insurance policy. The Court held that under Texas law, an insurer's duty is triggered on the date "when the injury happens on not when someone happens upon it" in the particular policy at issue.

Don's Building Supply, Inc., is in the business of selling and distributing a home siding product. From December 1993 to December 1996, this siding product was installed on various homes. Also during this time, Don's Building Supply was covered by comprehensive general liability issued by Potomac Insurance Company. The policy was then assigned to OneBeacon Insurance Company.

From 2003-2005, several homeowners began filing lawsuits against Don's Building Supply. The homeowners' property damage allegations stemmed from claims that the siding was defective and allowed moisture to leak in to the walls behind the siding which damaged their homes. The alleged damage happened the first time moisture seeped behind the siding; the homeowners believed this occurred six months to a year after the installation of the siding. The homeowners also claimed the damage was hidden and not easily discoverable until after the insurance policy period because the exterior of the siding appeared to be undamaged.

Initially, OneBeacon provided a defense to Don's Building supply, but later filed a declaratory judgment action in federal court claiming it had no duty to defend and indemnify Don's Building Supply under the commercial general liability policies. The District Court agreed that OneBeacon's duty did not arise until the damage became identifiable; thereafter, Don's Building Supply appealed to the Fifth Circuit.

The first certified question to the Texas Supreme Court:

"When not specified by the relevant policy, what is the proper rule under Texas law for determining the time at which property damage occurs for purposes of an occurrence-based commercial general liability policy?"

In response, the Court stated that insurance policies are construed according to the same general rules of construction that apply to contracts. After reading the provisions in this policy for the plain meaning, the Court held the property damage occurred when the actual physical damage occurred; the date that such physical damage was discovered or could have been discovered was irrelevant.

The Court further discussed the other approaches used by Texas courts to determine when an insurer must defend any claim of physical property damage occurring during the policy term. Aside from the actual injury or injury in fact approach adopted by the Court in this case, the Court also analyzed other theories. The manifestation rule used by some courts imposes a duty to defend only if the property damage became discoverable during the policy period. The Court reiterated that its goal was to effectuate the parties' intent as expressed by the insurance policy, and not to create a universal rule for determining when an insurer's duty to defend is triggered under an insurance policy.

The second certified question to the Texas Supreme Court:

"Under the rule indentified in the answer to the first question, have the pleadings in lawsuits against an insured alleged that property damage occurred within the policy period of an occurrence-based commercial general liability insurance policy, such that the insurer's duty to defend and indemnify the insured is triggered, when the pleadings allege that actual damage was continuing and progressing during the policy period, but remained undiscoverable and not readily apparent for purposes of the discovery rule until after the policy period ended because the internal damage was hidden from view by an undamaged exterior surface?"

In response, the Court concluded that under Texas insurance law, the insurer's duty to defend turns on the policy's terms and Plaintiff's allegations. In application to the insurance policy at issue, the Court clarified that the insurer's duty to defend depended on whether the homeowner's pleadings alleged the property damage occurred during the policy term even if the underlying claims were not meritorious. The Court also reiterated that their decision rested upon the specific language of the parties' insurance policies and offered no position as to whether the underlying property damage claims were meritorious.

In the future, it will be interesting to see if insurance companies add policy language to follow the manifestation rule and begin to limit an insurer's duty to defend only to situations where the damage to the property manifested during the policy period.

William Allred, Cooper & Scully, P.C.

Trial Court Arbitrability Decisions

Posted 10/16/08

PATHWAYS TO REVIEW OF TRIAL COURT ARBITRABILITY DECISIONS

The route to, and availability, of appellate review of trial court decisions regarding the arbitrability of disputes depends on whether (1) the arbitration agreement at issue arises under the Texas Arbitration Act (TAA) or the Federal Arbitration Act (FAA), (2) the trial court is a federal or state court, and (3) the challenged order is favorable to arbitration (e.g., an order compelling arbitration or denying a motion to stay arbitration) or hostile to arbitration (e.g., an order denying a motion to compel arbitration or granting a motion to stay arbitration).

Review of Orders Hostile to Arbitration under the TAA in State Court. The TAA allows for interlocutory appeals of (1) an order denying an application to compel arbitration and (2) an order granting an application to stay arbitration. See TEX. CIV. PRAC. & REM. CODE §171.098(a).

Review of Orders Favorable to Arbitration under the TAA in State Court. The TAA does not provide for interlocutory appeals of orders compelling arbitration or denying a motion to stay arbitration. The Texas Supreme Court has not addressed whether mandamus relief is available where the trial court erroneously compels arbitration under the TAA, but most courts of appeals have concluded that it is. See, e.g., In re Kepka, 178 S.W.3d 279, 286 (Tex. App.¡XHouston [1st Dist.] 2005, orig. proceeding); Glazer's Wholesale Distrib., Inc. v. Heineken USA, Inc., 95 S.W.3d 286, 294 (Tex. App.—Dallas 2001, pet. dism'd by agr.); In re Godt, 28 S.W.3d 732, 738 (Tex. App.—Corpus Christi 2002, orig. proceeding).

Review of Orders Hostile to Arbitration under the FAA in State Court. The Texas Supreme Court repeatedly has held that an order denying arbitration under the FAA is reviewable by mandamus. See, e.g., In re Bank One, 216 S.W.3d 825, 826 (Tex. Feb. 23, 2007) (per curiam); In re Weekley Homes, L.P., 180 S.W.3d 127, 130 (Tex. 2005); In re Nexion Health at Humble, Inc., 173 S.W.3d 67, 69-70 (Tex. 2005).

Review of Orders Favorable to Arbitration under the FAA in State Court. The question of whether mandamus review is likewise available to review orders favorable to arbitration under the FAA in Texas courts is not altogether clear. In 1994, the Texas Supreme Court held that it could review an order granting arbitration under the FAA by mandamus. See Fries v. Canales, 877 S.W.2d 283, 284 (Tex. 1994). However, in 2006, the Court overruled Fries and held that mandamus relief generally is not available in these circumstances. In re Palacios, 221 S.W.3d 564, 565-66 (Tex. June 30, 2006) (per curiam). The Court declined to decide whether mandamus review was precluded in all circumstances, however, and instead suggested that review might be available "if a party can meet a 'particularly heavy' mandamus burden to show 'clearly and indisputably that the district court did not have the discretion to stay the proceedings pending arbitration.'" Id. at 565.

Palacios created some confusion about whether mandamus may ever be proper to review an order compelling arbitration. Several courts of appeals interpreted Palacios to mean that orders compelling arbitration may be reviewable by mandamus if the relator satisfies a heightened burden of proof, and proceeded to the merits of the mandamus petitions. See, e.g., In re Great Western Drilling, Ltd., 211 S.W.3d 828, 835 (Tex. App.—Eastland 2006, orig. proceeding); In re Premont Indep. Sch. Dist., 225 S.W.3d 329, at 332 (Tex. App.—San Antonio Feb. 7, 2007, orig. proceeding); In re Wolff, No. 231 S.W.3d 466, at 468 (Tex. App.—Dallas July 27, 2007, orig. proceeding). In many other cases, however, courts denied mandamus relief based on the general rule in Palacios that orders compelling arbitration under the FAA ordinarily are not reviewable until a final judgment is entered. See, e.g., In re Jim Walter Homes, Inc., 207 S.W.3d 888, 894-95 (Tex. App.—Houston [14th Dist.] 2006, orig. proceeding).

The Texas Supreme Court recently compounded the confusion in its In re Poly-America decision when it addressed the merits of mandamus petition challenging an order compelling arbitration. See ---S.W.3d---, 2008 WL 3990993 (Tex. Aug. 29, 2008). Notwithstanding its Palacios decision two years earlier, the Court began by stating that "[m]andamus is the proper means by which to seek review of an order compelling arbitration under the FAA." Id. at **2-3. The court qualified, however, that mandamus is rarely granted in such a situation, and "courts must be hesitant to intervene." Id. Justice Brister, in a vigorous dissent, observed: "Today the Court comes full circle, saying once again that mandamus review of orders compelling arbitration is 'proper,' though courts should be 'hesitant' about it. Apparently so long as one expresses qualms, Palacios is a dead letter." Id. at *16 (Brister, J., dissenting).

Review of decisions hostile to arbitration under the FAA in federal court. In federal court, where federal procedural law controls, the FAA permits an appeal from an order refusing to stay litigation pending arbitration, 9 U.S.C. §16(a)(1)(A), or an order denying a motion to compel arbitration, 9 U.S.C. §16(a)(1)(B).

Review of decisions favorable to arbitration under the FAA in federal court. The FAA also provides appellate review of any final order with respect to an arbitration, regardless of whether it is favorable or hostile to arbitration, 9 U.S.C. §16(a)(3), but most orders favorable to arbitration (compelling arbitration or staying litigation) are interlocutory and do not result in a final order. A party may not appeal from such an interlocutory order unless it obtains permission to take an interlocutory appeal under 28 U.S.C. §1292(b). See 9 U.S.C. §16(b).

In reconciling Section 16(a)(3) and Section 16(b) of the FAA, the United States Supreme Court has held that when a district court compels arbitration and dismisses the remainder of the action, the order is a final judgment and immediately appealable. Green Tree Fin. Corp. Alabama v. Randolph, 531 U.S. 79, 89 (2000). However, where the district court stays the litigation pending completion of arbitration, rather than dismissing the case, the order is interlocutory and appellate review is unavailable. Mire v. Full Spectrum Lending, Inc., 389 F.3d 163, 167 (5th Cir. 2004). This is true even where the district court administratively closes the case. Id.

The need for dual proceedings in challenging orders hostile to arbitration in state court. Because of the different appellate remedies available under the TAA and the FAA and the frequent uncertainty about which statute applies, a party seeking review of an order denying a motion to compel or an order staying arbitration must pursue both an interlocutory appeal (in the event the TAA governs) and a petition for writ for mandamus (in the event the FAA governs). Anglin v. Tipps, 842 S.W.2d 266, 272 (Tex. 1992)

Justice Brister recently urged that court discontinue requiring litigants to pursue parallel mandamus and interlocutory appeal proceedings. In re D. Wilson Constr. Co., 196 S.W.3d 774, 784 (Tex. 2006) (Brister, J. concurring). While the majority sympathized with Justice Brister's sentiments, it concluded that the problem was one for the Legislature to address, and it again called upon the Legislature to do so. Id. at 780 n.4.

Mark Trachtenberg and Christina Crozier, Haynes and Boone, LLP

Conflict of Interest - Part 3

Posted 10/7/08

Have you ever had your shield turned into a sword, and then used against you?

What does every lawyer think is the shield that protects the lawyer from discipline because of a conflict of interest? The client's consent to waive the conflict.

Let me start by observing that there are some conflicts of interest that cannot be waived by the client, no matter what. Like representing opposing parties in the same lawsuit or preparing an instrument giving the lawyer a substantial gift from a non-relative client. Most other conflicts of interest, however, can be waived by the client. A client's waiver would, for example, permit a lawyer to represent Client A in a substantially related matter in which Client A's interest is materially and directly adverse to the interest of Client B. As we discussed last month, a lawyer could even represent opposing parties in a non-litigation dispute, as an intermediary, pursuant to Rule 1.07, with the two clients' consent.

In each of these instances, it is the client's agreement that permits the lawyer to go forward without risk to her law license. So, how do you secure the client's consent?

First, the consent always, always, always, has to be in writing. The fact that the Rule requires conflict waivers to be in writing really only codifies what we already instinctively know: if the lawyer says the client orally consented and the client denies the oral consent, the client is probably telling the truth.

Having secured the client's signature on a letter that waives the conflict of interest, some lawyer's believe that they now have the impenetrable shield to protect them from allegations of improper, unethical behavior. How then, can this shield be turned into a sword against the lawyer? Here's how.

Virtually every time the Disciplinary Rules refer to client consent to waive a conflict of interest, you will find some form of the following words: "after full and complete disclosure to the client." As Hamlet said, "Ah, there's the rub." Failure to make full disclosure to the client invalidates the consent every time.

Typically, there is no requirement that the "full disclosure" be in writing, so you end up with the lawyer telling one story about what was disclosed and the client telling a completely different story. Guess who juries and grievance committees are going to believe? Smart lawyers include as a part of the conflict waiver the "full and complete disclosure," so that there is no dispute about what was disclosed. This is a wise practice but is still not without its perils.

My personal experience has been that every disclosure to a client concerning a conflict of interest is unavoidably incomplete and, therefore, fails to satisfy the requirement of full and complete disclosure. Trust me, a motivated adversary can always find something that you failed to disclose. And then the shield no longer protects you.

So, how then does the shield become a sword? When I have a waiver of a conflict of interest letter in a legal malpractice case, I usually mark it Plaintiff's Exhibit #1. Here's what the juries think when they see the waiver of the conflict letter, prepared by you, and signed by your client: "Well, would you looky here. That lawyer knew she was doing something wrong from the start and she talked her client into letting him do it anyway. That sneaky so-and-so!"

And there is your sword, turned against you.

Let me close by saying that there are obviously situations where a conflict can be waived and the client wants to waive the conflict. The best client consent to waive a conflict would have the following components:

The consent is in writing;
The letter sets out an honest attempt at full and complete disclosure, which includes the reason for the conflict rule and the consequences of both waiving and not waiving the conflict;
The letter encourages the client to seek separate counsel to advise the client on whether to waive the conflict;
The letter offers to pay for the separate counsel to advise the client on whether to waive the conflict, so that the client does not incur additional expense in order to accommodate the lawyer's conflict; and
The client actually contacts independent counsel (not picked by the lawyer) and after such consultation, waives the conflict.

Now that, my friends, is a shield that can't be turned into a sword.

Randy Johnston, Johnston ♦ Toby, P.C.

Conflict of Interest - Part 2

Posted 10/7/08

When can a lawyer represent both sides of a dispute?

The actual rules defining a lawyer's ethical obligations for dealing with Conflicts of Interest are found in the Texas Disciplinary Rules of Professional Conduct, Rules 1.06, 1.07, 1.08, and 1.09. Today we are only going to look at one aspect of this complicated subject.

Rule 1.06(a) states that a lawyer shall not represent opposing parties in the same litigation. Subsection (f) of that Rule makes it unlawful for another lawyer in the same firm to do what the individual lawyer cannot do, so two lawyers in the same firm cannot represent opposing parties in the same litigation. No great shock here, huh?

This seems like a simple rule, relatively easy to follow, and not likely to get any thoughtful lawyer in trouble. Historically, the lawyers who fall into this open and obvious trap are the ones who agreed to represent both the husband and wife in a divorce, to save them both money. Occasionally, the same thing will happen with a lawyer who agrees to handle both sides of a will contest, or other family dispute.

If you ask the lawyers what they thought the lawyer's role was in these situations and compared it to what the clients thought the lawyer's role was, you would find drastically different interpretations of the lawyer's duty to the clients. The lawyer would probably say that they thought they were acting as a combination Mediator and Scrivener, helping the parties reach agreement and then documenting it for them. The clients on both sides of this dispute, however, believe that the lawyer represents them, that the lawyer is looking out for each of their individual best interests. It is, of course, impossible for a lawyer to look out for the best interest of both sides of a dispute and lawyers should not need the Rules of Professional Conduct to know that a servant cannot serve two masters.

There is, however, a specific rule for the lawyer who is friends with both sides of a dispute and wants to help them try to resolve it. Rule 1.07 sets out the terms and conditions of a lawyer acting as an Intermediary. Not advocate - "Intermediary." To act in this capacity, the lawyer must, of course, consult with each client concerning the implications of the common representation and then obtain each client's written consent to the common representation. The consultation with the client must include a discussion about the loss of the attorney-client privilege and a candid explanation of both the advantages and disadvantages of not having individual, zealous, personal representation versus the use of an Intermediary. The law is silent on what constitutes adequate disclosure in this regard, but, as always, the more discussion and disclosure, the better. While the clients' consent must be in writing, the disclosure to the client is not required to be in writing but, the prudent lawyer would be wise to put the disclosures in writing also.

Before the lawyer consults with a client, however, they must first satisfy themselves that they reasonably believe: (1) that the matter can be resolved without contested litigation, (2) on terms compatible with each client's best interest, (3) that each client is capable of making an informed decision in the matter, and (4) that there is little risk of a material prejudice to the interest of either client if the hoped-for settlement does not occur. And lastly, that the lawyer is capable of undertaking this common representation impartially, with fairness to both sides. These requirements in the rule essentially obligate the lawyer to be honest with themself about the prospects of success and their ability to act fairly and impartially as an Intermediary on behalf of both clients.

Once the lawyer has assumed the role as Intermediary between two parties to a dispute, the lawyer has the obligation to consult with each client concerning the decisions to be made by the client. This consultation usually relates to settlement discussions back and forth and whether settlement offers should be accepted or not. As an aside here, let me just ask: what will the Intermediary do if the husband tells the Intermediary that he really needs the case to settle quickly, before the wife discovers his bank account in Bermuda? Remember, the role of an Intermediary is a role of representing two parties: it is not the role of a Mediator where one side or the other can insist that the Mediator keep something secret from the other side. In addition, the lawyer is obligated to withdraw immediately as an Intermediary if either of the clients so requests or if the lawyer's previous reasonable belief in the probable success of an Intermediary arrangement changes.

The lawyer who successfully serves as an Intermediary has performed a valuable service for both clients. The lawyer who assume the role of Intermediary, in the hope of helping two common friends resolve a dispute should recognize, however, that they may end up losing both friends in the process.

As we will discuss next month, the ethical challenge to acting as an Intermediary is the same as the challenge anytime a lawyer requests a client's consent in connection with the conflict of interest: how do you satisfy the obligation of full and complete disclosure as a predicate for securing the consent?

More on that next time.

Randy Johnston, Johnston ♦ Toby, P.C.

Conflict of Interest - Part 1

Posted 10/6/08

Why is it that clients understand a conflict of interest but many lawyers do not?

For the next couple of months, we are going to be talking about conflicts of interest. The actual rules defining the lawyer's ethical obligations for dealing with conflicts of interest are found in Texas Disciplinary Rules of Professional Conduct, Rules 106, 107, 108 and 109. Today, however, we are going to look at only one aspect of Rule 106 (b). That rule makes it a conflict of interest for a lawyer to represent a client under circumstances where it reasonably appears that the representation of the client will become adversely limited by the lawyer's responsibilities to another client.

The rule sounds straight forward enough, right? But, is a violation of Rule 106(b) triggered when a lawyer attacks the credibility of a doctor on behalf of Client Jones, but the same lawyer must defend the good doctor's credibility in a separate proceeding on behalf of Client Smith? Is there a conflict when a lawyer argues for strict interpretation of a notice provision on behalf of Client Jones even though strict interpretation of that notice provision would result in the dismissal of the claims of Client Smith? Is there an ethical violation when one lawyer in a firm argues for Client Jones that $600 per hour is a reasonable attorneys' fee, even though another lawyer in the same firm must argue before the same judge tomorrow on behalf of Client Smith that $500 per hour is unreasonable?

This type of conflict is sometimes referred to as "Issue Conflicts": one client's side of an issue conflicts with another client's view of the same issue. They are presented when a lawyer's efforts for one client will adversely affect another client. Such Issue Conflicts are lurking everywhere in a law office, although not every Issue Conflict violates Rule 106. Every Issue Conflict should, however, be compared to the language, the comments, and the case law of Rule 106, to ensure that the lawyer has not unwittingly walked right into a conflict of interest.

Let's start with a bedrock principle: the fundamental baseline for all client representation is undivided loyalty. That is the foundation for Rule 106 also. It is important, not only that the lawyer give undivided loyalty, but also that the client sense that the lawyer is giving the client undivided loyalty. Imagine, for example, how Mr. Smith feels when he sits at the back of the courtroom during Ms. Jones divorce, and hears his lawyer argue to the very judge who will decide his divorce case that adultery should automatically result in a disproportionate division of community property. Or, alternatively, that a wife's adultery should have no effect upon the issue of child custody. The lawyer may believe that there is no conflict of interest, but Mr. Smith will undoubtedly disagree.

So does the lawyer have a conflict of interest? These issues rarely reach the courts. They tend to get decided by grievance committees, which are very understanding of the lawyer's predicament. So long as the lawyer did not actually compromise the representation, there's no violation. Just getting a good result for one client that hurts another client is not unethical. But the public hates it, and it is powerful evidence in a malpractice trial. Lawyers should be aware of the client's view of these issues at least, and more sensitive to it.

So what's a lawyer to do? The save harbor for an Issue Conflict is client consent and waiver of the conflict. The test of whether you can navigate into the safe harbor, however, is whether you made a full and complete disclosure to the client before the consent. More on that next time.

Randy Johnston, Johnston ♦ Toby, P.C.

Pathways to Review of Trial Court Arbitrability Decisions

Posted 10/6/08

The route to, and availability of, appellate review of trial court decisions regarding the arbitrability of disputes depends on whether (1) the arbitration agreement at issue arises under the Texas Arbitration Act (TAA) or the Federal Arbitration Act (FAA), (2) the trial court is a federal or state court, and (3) the challenged order is favorable to arbitration (e.g., an order compelling arbitration or denying a motion to stay arbitration) or hostile to arbitration (e.g., an order denying a motion to compel arbitration or granting a motion to stay arbitration).

Review of Orders Favorable to Arbitration under the TAA in State Court. The TAA does not provide for interlocutory appeals of orders compelling arbitration or denying a motion to stay arbitration. The Texas Supreme Court has not addressed whether mandamus relief is available where the trial court erroneously compels arbitration under the TAA, but most courts of appeals have concluded that it is. See, e.g., In re Kepka, 178 S.W.3d 279, 286 (Tex. App.—Houston [1st Dist.] 2005, orig. proceeding); Glazer's Wholesale Distrib., Inc. v. Heineken USA, Inc., 95 S.W.3d 286, 294 (Tex. App.—Dallas 2001, pet. dism'd by agr.); In re Godt, 28 S.W.3d 732, 738 (Tex. App.—Corpus Christi 2002, orig. proceeding).

Review of Orders Hostile to Arbitration under the FAA in State Court. The Texas Supreme Court repeatedly has held that an order denying arbitration under the FAA is reviewable by mandamus. See, e.g., In re Bank One, 216 S.W.3d 825, 826 (Tex. Feb. 23, 2007) (per curiam); In re Weekley Homes, L.P., 180 S.W.3d 127, 130 (Tex. 2005); In re Nexion Health at Humble, Inc., 173 S.W.3d 67, 69-70 (Tex. 2005).

Review of Orders Favorable to Arbitration under the FAA in State Court. The question of whether mandamus review is likewise available to review orders favorable to arbitration under the FAA in Texas courts is not altogether clear. In 1994, the Texas Supreme Court held that it could review an order granting arbitration under the FAA by mandamus. See Fries v. Canales, 877 S.W.2d 283, 284 (Tex. 1994). However, in 2006, the Court overruled Fries and held that mandamus relief generally is not available in these circumstances. In re Palacios, 221 S.W.3d 564, 565-66 (Tex. June 30, 2006) (per curiam). The Court declined to decide whether mandamus review was precluded in all circumstances, however, and instead suggested that review might be available "if a party can meet a 'particularly heavy' mandamus burden to show 'clearly and indisputably that the district court did not have the discretion to stay the proceedings pending arbitration.'" Id. at 565.

Palacios created some confusion about whether mandamus may ever be proper to review an order compelling arbitration. Several courts of appeals interpreted Palacios to mean that orders compelling arbitration may be reviewable by mandamus if the relator satisfies a heightened burden of proof, and proceeded to the merits of the mandamus petitions. See, e.g., In re Great Western Drilling, Ltd., 211 S.W.3d 828, 835 (Tex. App.—Eastland 2006, orig. proceeding); In re Premont Indep. Sch. Dist., 225 S.W.3d 329, at 332 (Tex. App.—San Antonio Feb. 7, 2007, orig. proceeding); In re Wolff, No. 231 S.W.3d 466, at 468 (Tex. App.—Dallas July 27, 2007, orig. proceeding). In many other cases, however, courts denied mandamus relief based on the general rule in Palacios that orders compelling arbitration under the FAA ordinarily are not reviewable until a final judgment is entered. See, e.g., In re Jim Walter Homes, Inc., 207 S.W.3d 888, 894-95 (Tex. App.—Houston [14th Dist.] 2006, orig. proceeding).

Review of decisions hostile to arbitration under the FAA in federal court. In federal court, where federal procedural law controls, the FAA permits an appeal from an order refusing to stay litigation pending arbitration, 9 U.S.C. § 16(a)(1)(A), or an order denying a motion to compel arbitration, 9 U.S.C. § 16(a)(1)(B).

Review of decisions favorable to arbitration under the FAA in federal court. The FAA also provides appellate review of any final order with respect to an arbitration, regardless of whether it is favorable or hostile to arbitration, 9 U.S.C. § 16(a)(3), but most orders favorable to arbitration (compelling arbitration or staying litigation) are interlocutory and do not result in a final order. A party may not appeal from such an interlocutory order unless it obtains permission to take an interlocutory appeal under 28 U.S.C. § 1292(b). See 9 U.S.C. § 16(b).

In reconciling Section 16(a)(3) and Section 16(b) of the FAA, the United States Supreme Court has held that when a district court compels arbitration and dismisses the remainder of the action, the order is a final judgment and immediately appealable. Green Tree Fin. Corp. Alabama v. Randolph, 531 U.S. 79, 89 (2000). However, where the district court stays the litigation pending completion of arbitration, rather than dismissing the case, the order is interlocutory and appellate review is unavailable. Mire v. Full Spectrum Lending, Inc., 389 F.3d 163, 167 (5th Cir. 2004). This is true even where the district court administratively closes the case. Id.

Justice Brister recently urged that court discontinue requiring litigants to pursue parallel mandamus and interlocutory appeal proceedings. In re D. Wilson Constr. Co., 196 S.W.3d 774, 784 (Tex. 2006) (Brister, J. concurring). While the majority sympathized with Justice Brister's sentiments, it concluded that the problem was one for the Legislature to address, and it again called upon the Legislature to do so. Id. at 780 n.4.

Mark Trachtenberg and Christina Crozier, Haynes and Boone, LLP

New Methods for Protecting Privilege (Part II)

Posted 10/2/08

On September 19, 2008, President Bush signed a bill adding Rule 502 to the Federal Rules of Evidence. The new Rule provides a systemic approach to the challenges associated with the management of electronic documents in discovery. Specifically, the new Rule protects against the inadvertent waiver of the attorney-client privilege and work product protection. The goal of Rule 502 is to reduce the costs of discovery and production of information in litigation.

Summary of Rule 502 Provisions

Rule 502 applies in all cases in federal court—including cases in which state law provides the rule of decision—and in state court as to disclosure previously made in federal matters, but not to disclosures made first in state court.

Under the new Rule 502, inadvertent disclosure of privileged or protected information during discovery constitutes a waiver only if the party did not take reasonable precautions to prevent disclosure and did not make reasonable and prompt efforts to rectify the error. The Rule also emphasizes that a "subject matter" waiver occurs only when the waiver is intentional and partial waiver would be misleading and unfair. Parties are not required to take extraordinary efforts to prevent disclosure of privilege and work product; nor are parties required to conduct a post-production review to determine whether any protected information has been inadvertently disclosed. Reasonable steps, however, are required both to avoid and to remedy inadvertent disclosure.

Non-Waiver Agreements

Rule 502(e) codifies the practice of party agreements designed to limit the effects of waiver by disclosure. In most circumstances, a non-waiver agreement and its inclusion in a case management order should preclude waiver of an inadvertently produced privileged or protected document. There are two types of such agreements. One is the "quick peek" agreement, under which the responding party will provide certain requested materials for initial examination without waiving privilege. The requesting party then designates the documents to be actually produced. The responding party then screens the documents actually requested and asserts privilege where necessary, as outlined in the Rules. The other type of non-waiver agreement is the "clawback agreement," which provides that production made without intent to waive privilege or protection does not waive it, so long as the responding party identifies the documents mistakenly produced, and that the documents should be returned under those circumstances. Once the parties have reached an agreement, they should have the agreement included in the court's case management order pursuant to the court's discretionary authority. Rule 502(e) states that such an agreement is only binding on the signatory parties—but not non-parties—unless incorporated into a court order.

The failure to obtain a court-approved non-waiver agreement can prove fatal. Victor Stanley, Inc. v. Creative Pipe, Inc., 250 F.R.D. 251 (D. Md. 2008). In Victor Stanley, the defendants failed to identify 165 privileged documents in their review and subsequently produced those documents. As the plaintiffs found the documents, they segregated them and notified the defendants of the production of potentially privileged documents. The court held that the defendants' approach through its keyword searches was not reasonable precautions, and that the privilege was consequently waived as to those documents. In addition, the court specifically noted that a court-approved non-waiver agreement would have protected the defendants from waiver. Although this case was decided before Rule 502, the same situation might still fail the new Rule's "reasonable steps" test, demonstrating that a non-waiver agreement remains critically important in e-discovery.

Rule 502 works in conjunction with Rule 26(b)(5) of the Federal Rules of Civil Procedure, which outlines the procedure if privileged information has been produced. Under Rule 26(b)(5), if privileged information is produced in discovery, the producing party may notify any party that received the information of the privilege claim and the basis for it. After being notified of a claim of privilege or protection, the receiving party must promptly return, sequester, or destroy the specified information, and any copies it has, and may not use or disclose the information until the claim is resolved. If the receiving party disclosed it to a non-party before being notified, the party must take reasonable steps to retrieve the information. That notice must be sufficiently detailed so that the receiving party can determine whether to challenge the claim. Any receiving party may present the information to the relevant court under seal for a determination of the claim.

No Selective Waiver

Rule 502 has no language allowing for "selective waiver." Selective waiver would apply when a party has previously produced materials to a government entity performing investigatory functions and then seeks to protect that information because the information was not waived through the voluntary surrender of the information to the governmental entity. It is a doctrine that has not been broadly accepted by courts, and although language was prepared for a provision contemplating selective waiver, Congress did not choose to include it.

Closing Thoughts

Rule 26(b)(5) gave producing attorneys some direction for preserving privilege, but standing alone it did not provide any confidence or predictability that the producing parties' pre- and post-production actions would preserve privilege. New Rule 502 offers additional protection. Together, Rule 26(b)(5) and Rule 502 are critical steps towards more effective management of the costs, delays, and risks associated with producing documents in the e-discovery era. However, the adoption of these rules does not signal the end of the burdensome privilege review. Rule 502 does not resolve the "state-to-state" problem, whereby material is disclosed in a state proceeding and then offered in another state proceeding. A disclosure in state court receives the greater protection as between Rule 502 and the state privilege law when offered in a subsequent federal proceeding, but the Rule does not govern the state court disclosure offered in a subsequent state proceeding. Thus, the prudent approach in state proceedings remains a thorough privilege review. It is possible that the states will follow the federal model as many have done with the December 2006 amendments, but that has not happened at this point.

In any case, parties should discuss and enter into some type of non-waiver agreement regarding the potential for inadvertent disclosure. The parties should include these terms in any case management order. While this will not guarantee that privilege will be preserved after an inadvertent production, it will give producing parties the best chance to avoid waiving privileges and protections. Rule 502 is a useful tool in avoiding waiver of privilege or protection, but it is neither a panacea nor a substitute for caution.

David A. Chaumette and Andrew Biberstein, Baker & McKenzie LLP

Texas Supreme Court Update on Insurance Cases

Posted 9/16/08

In Zurich American Insurance Co. v. Nokia, ______ S.W.3d____, the majority of the Texas Supreme Court held that the insurers had a duty to defend because the underlying suits sought damages because of bodily injury. The Court modified and affirmed the judgment of the court of appeals.

In the underlying case, Nokia alleged the insurance companies had a duty to defend in several class action suits. The allegations included claims that radiation from wireless phones caused biological injuries and also claims that headsets were not provided with the cell phones. Additionally, some members of the class were future purchasers who had not suffered any injuries. Initially, the insurance companies had agreed to defend claims seeking damages arising from bodily injury; however, they later determined they had no duty to defend Nokia because the plaintiffs were only seeking headsets and not damages because of bodily injury.

In its opinion, the Court discussed whether biological injuries or biological effects, as pled in the class action suits, were considered the same as the term bodily injury outlined in the insurance policies. The Court concluded that the biological injuries as alleged did potentially state claims for damages because of bodily injuries under the insurance policies. The Court compared such injuries to the injuries at the cellular level for people exposed to asbestos.

However, the Court did find that Naquin et. al. v. Nokia, Inc., et al, the insurance companies did not have a duty to defend because the amended complaint only sought warranty based economic loss which was not covered by the insurance policies.

In light of the decision in Nokia, the Supreme Court also held that insurance companies had a duty to defend in Trinity Universal Insurance Company v. Cellular One Group, and Federal Insurance Company v. Samsung Electronics America, Samsung Telecommunications America, Inc. and Samsung Electronics Co., Ltd.

What will this mean to insurance policies in future? One possibility is that insurance companies will be more precise in their policy language as to what qualifies as bodily injury for coverage purposes. Or insurance policies could include language that excludes the term "biological injury" or "biological effects" and possibly limit damage for any future purchasers of a product that could cause "biological injury."

Another point to consider is lawsuits in the future. Will Nokia cause creative pleading as to damages?

William Allred, Cooper & Scully, P.C.

Coastal v. Garza

Posted 9/15/08

On August 29, 2008, almost two years after the case was argued, the Texas Supreme Court issued its long-awaited opinion in Coastal Oil & Gas Corp. v. Garza Energy Trust, et al., No. 05-0466, 2008 Tex. LEXIS 771, (Tex. August 29, 2008) (internal citations omitted). Perhaps the most important issue on appeal was the validity of the Plaintiffs' trespass cause of action against a natural gas producer ("Coastal"), whose hydraulic fracturing operations extended across a lease property line and underneath the Plaintiff's property.¹ At trial in Hidalgo County, the jury awarded $1 million in lost royalties due to drainage of natural gas from the Plaintiffs' property resulting from the trespass.² On appeal, Coastal argued that hydraulic fracturing is not an actionable trespass. The Court received amicus curiae briefs from "every corner of the industry," including regulators, landowners, royalty owners, operators, and hydraulic service providers opposing trespass liability for hydraulic fracturing.

On this issue, the Supreme Court ultimately held that mineral interest lessors hold only a royalty interest with the possibility of reverter, but "no right to possess, explore for, or produce the minerals," which is similar to a landlord's reversion interest in the surface estate. As such, the Plaintiffs were required to prove actual, permanent harm to the property. In its opinion, the Supreme Court sidestepped the issue of whether or not subsurface fracturing operations could conceivably constitute a trespass under a different set of facts by ruling that the Plaintiffs' cause of action is precluded by the famous "rule of capture." Under this rule, a mineral rights owner is given title to all of the oil and gas produced from a lawful well bottomed on the property, even if the oil and gas flowed to the well from beneath another owner's tract. Therefore, the Court reasoned that the gas the Plaintiffs claimed to have lost simply did not belong to them. The Plaintiffs also made no claim and admitted no evidence at trial that the Defendant's fracturing operations caused any actual, physical damage to any part of their property.

As further justification for the ruling, the Court's majority opinion reasons that the law already affords an owner claiming drainage full recourse because he can drill wells and institute fracturing operations on his own property to offset drainage, sue his lessee for failure to drill an offset well to protect against drainage, offer to pool interests in the area and/or apply to the Texas Railroad Commission for forced pooling. Furthermore, the Court's majority voiced concerns that allowing recovery for the value of gas drained by hydraulic fracturing would usurp the Railroad Commission's lawful authority to regulate oil and gas production in Texas.

For the moment at least, natural gas producers should be able to breathe a sigh of relief, because the precedent set by Garza opinion should prevent a multitude of post-fracturing trespass suits seeking royalties for drained gas from neighboring properties that would have most likely been filed had the outcome been different. However, as addressed above, the Supreme Court's opinion does not address the ultimate question of whether or not subsurface fracturing operations could constitute an actionable trespass under a different set of facts. For example, the Court left open the possibility that landowners may still be entitled to recover "nondrainage" damages if they present evidence of actual damage to any specific portion of their property, which could include damage to subsurface gas-bearing formations such as the Barnett Shale.

_______________________

¹ It is important to note that in this case the wellbore did not extend across the property line, and that the only evidence of any alleged trespass was that fracing fluid and granulated slurry crossed underneath the Plaintiff's property.

² The total award was over $15 million, including $10 million in punitive damages, all of which was either reversed and judgment rendered for the Defendant or remanded to the trial court for a new trial based upon other issues on appeal.

Koy R. Killen, Winstead, P.C.

Waiving Your Pro Bono Client’s Rights

Posted 9/11/08

Most litigators at large firms will, at some point or another, make a commitment to giving back to the community through performing pro bono legal services. More often than not, these pro bono legal services will come in the form of a pro bono divorce (or a number of pro bono divorces). More often than not, the lawyer performing the pro bono divorce will have little knowledge of family law and will rely heavily on standardized, fill-in-the-blank petitions, decrees, temporary orders, and other forms. While it is unlikely, and probably unnecessary, to learn the details and nuances of family law in order to perform a pro bono divorce, it is extremely important to become familiar with the details of each and every form you file with the court - or your client could suffer the consequences.

The best cautionary example is the standard use of "Mother Hubbard" clauses in divorce decrees. The case law is clear that by including a Mother Hubbard clause in your pro bono divorce decree you are likely waiving your client's rights to pursue other causes of action against his or her spouse that existed at the time of the decree. In many cases, there may be no harm done. However, the risk of waiving a client's otherwise valid claim by failing to pay attention to an archaic clause in a standard form should be sufficient to make any lawyer spend a little extra non-billable time protecting their client's best interests.

Let's face it, I'm not qualified to be a family lawyer. It's not likely that you are either. Nonetheless, we will undoubtedly be asked at some point in our careers to be family lawyers. The least we owe our clients is a little attention to detail and - when that's not good enough - a phone call to someone who knows better.

Brandon Renken, Locke Lord Bissell & Liddell LLP

The Insurability of Punitive Damages

Posted 9/9/08

Under Texas law, are punitive damages covered by insurance? The Supreme Court answered a certified question from the Fifth Circuit on that point on February 15, 2008 in Fairfield Insurance Company v. Stephens Martin Paving, LP, et al., ___ S.W.3d ___ (Tex. 2008).

This opinion addresses whether public policy prevents insurance coverage for punitive damages. This case was a worker's compensation death case, seeking punitive damages only (since actual damages were prohibited by worker's compensation). The Supreme Court ruled that public policy does not prohibit coverage for "exemplary damages for gross negligence in the workers' compensation context." Beyond that, the majority declined "to make a broad proclamation of public policy here but instead offer some considerations applicable to the analysis in other cases."

First, the Supreme Court determined that the policy language would cover punitive damages, and "presume the policy language covers the exemplary damages sought."

Next, the majority noted situations in which coverage for punitive damages is prohibited by statute, e.g. health care providers and guaranty funds and excess liability pools. "The Legislature is aware of and sensitive to ... exemplary damages ... [and has decided] to prohibit insurance coverage of those damages in selected circumstances."

In particular, in workers' compensation, the statute "does not prohibit recovery of exemplary damages. ..." Additionally, the Department of Insurance has approved a policy form with that coverage. Thus, the "Legislature's expressed intent is that Texas public policy does not prohibit insurance coverage for claims of gross negligence in this context."

The above holding "ends our inquiry in the present case." Nevertheless, the opinion goes further. For instance, "the majority of states that have considered whether public policy prohibits insurance coverage of exemplary damages ... have decided that it does not." Texas generally favors "freedom of contract." "The Legislature has passed many laws declaring certain agreements illegal and, therefore, against public policy." Also, some contracts required specific conditions (such as waiver of the DTPA). If the Legislature has not spoken, "a court should consider the purpose of exemplary damages." For 150 years, it was "to punish the wrongdoer and set 'a public example to prevent the repetition of the act.'" The latter phrase has since been deleted. In addition, punitive damages are not compensatory: "[e]xemplary damages are neither economic nor noneconomic damages."

Pursuant to Chapter 41 of the Civil Practice and Remedies Code, punishment must be directed to the wrongdoer, and vicarious liability is limited. Specifically, under Section 41.011(a), three elements are objective, and three are subjective. The subject elements are relevant if the defendant must pay the damages. Therefore, it is "against public policy" to obtain punitive damages "under uninsured or underinsured motorist policies. ..." However, "disallowing coverage for a large corporation means that exemplary damages" paid by it will be passed on to consumers. "In the uninsured and underinsured motorist context, it may be appropriate for policyholders to share in the burden of injuries caused by underinsured motorists, but not their punishment." "The considerations may weigh differently when the insured is a corporation or business that must pay exemplary damages for the conduct of one or more of its employees. Where other employees and management are not involved in or aware of an employee's wrongful act, the purpose of exemplary damages may be achieved by permitting coverage so as not to penalize many for the wrongful act of one. When a party seeks damages in these circumstances, courts should consider valid arguments that businesses be permitted to insure against them."

As Fairfield indicates, the Supreme Court may rule that punitive damages are not insurable, at least for individuals, despite the Supreme Court's recent resurrection of and reliance upon the hoary concept of "freedom of contract." That is, except for corporations: it appears that investors should not lose money because they entrust their businesses to managers who are grossly negligent or who ratify grossly negligent acts or omissions.

Clyde J. "Jay" Jackson, III, Abraham, Watkins, Nichols, Sorrels & Friend

Post-Trial Motions Denied in Saffran v. Boston Scientific

Posted 9/8/08 Saffran v. Boston Scientific Corp., 2:05cv657-TJW (E.D. Tex. July 9, 2008)
Judge: T. John Ward
Holdings: Motions for JMOL and New Trial DENIED

This is a lengthy post, as it discusses three extraordinarily lengthy orders by U.S. District Judge T. John Ward of Marshall in a complex patent case.

In this patent infringement case, the plaintiff, Bruce Saffran ("Saffran") Ph.D., M.D., sued BSC for infringing, directly and/or contributorily, claims 1-4, 6-11, 13, and 15-18 (the "Asserted Claims") of United States Patent No. 5,653,760 (the "'760 patent"). The jury returned a verdict for $431 million in February 2008, judgment was entered, and the usual flurry of postjudgment motions were filed. Judge Ward resolved these motions last week, denying BSC's Motion for Judgment as a Matter of Law, BSC's Alternative Motion for a New Trial and BSC's Alternative Motion for a New Trial on Damages in three voluminous opinions.

Alternative Motion for a New Trial

On the Alternative Motion for a New Trial, BSC asserted ten grounds for setting aside the jury's verdict. Judge Ward opened his analysis with an issue that had played an important part at the trial of this case.

The court conducted a pre-trial hearing on January 30, 2008 at which the court issued warnings to both sides about the gravity with which the court treats violations of its orders, particularly its orders in limine. This warning included a stern admonition that the court would instruct the jury of the offending party's failure to abide by the court's orders. The court notified both parties at the pre-trial hearing (and also at trial) that its rulings on the parties' motions in limine were not definitive rulings on the admissibility of evidence. Rather, the court instructed the parties to approach the bench before delving into subject matter about which the court granted a party's motion in limine to obtain a final definitive ruling on the evidence.

Judge Ward went on to note that one of his rulings was that the parties' experts could not predicate their opinions on the experts' constructions of claim terms that the court did not construe as that would violate the court's Markman Order. However, at trial, Judge Ward wrote, "BSC repeatedly violated the court's orders in limine despite repeated warnings from the court. In an effort to guarantee compliance with the court's orders, the court notified the jury that BSC had violated the court's orders."

Here are some highlights from the order:

At one point BSC argued that it was entitled to a new trial because the court "precluded BSC from comparing the Taxus stents to the preferred embodiments described in the specification of the '760 patent." Motion at 4. Except that the Court did no such thing.

BSC ignores the court's instructions to the parties concerning its rulings on the parties' motions in limine. The court informed the parties that its rulings on motions in limine were not definitive rulings on the admissibility of evidence. See e.g., 2/7/2008 A.M. Tr. 37:08-38:04; 2/4/2008 Tr. at 6:1-4. Now, however, BSC argues that it was precluded from presenting evidence at trial because the court granted certain paragraphs of Saffran's motions in limine. An order granting a motion in limine requires the offering party to approach the bench before offering the evidence in order to obtain a ruling on the admissibility of the evidence. (citations omitted). Thus as with the QPSX v. Nortel case last year, the losing party was complaining it was precluding from offering evidence, but it never made an order of proof or, here, even obtained a definitive ruling excluding the evidence, simply (and erroneously) relying on an order on a motion in limine. Another evidentiary gap showed up when BSC argued that the court "effectively" precluded it from presenting evidence related to its anticipation and obviousness defenses at trial. Not so, Judge Ward wrote:

BSC chose to base its invalidity case on expert opinions for which the expert did not lay the proper factual predicate as discussed supra. The court will not create exceptions to the Federal Rules of Civil Procedure and Evidence because a party's strategic decisions ultimately fail. The central fact is that Dr. Hopfenberg made conclusions that he did not support in his expert report. ... Ultimately, BSC made the decision to predicate expert opinions on facts that it chose not to support. The law prohibits the court from allowing an expert to testify to opinions that he does not support analytically or factually.

Finally, BSC complained that the Court's prior order striking its amended invalidity contentions precluded it from presenting its "prior art" defenses. The Court wrote:

The court incorporates by reference its order striking BSC's amended invalidity contentions [which] explains why the court struck BSC's amended invalidity contentions. As noted in that order, BSC, without excuse, belatedly amended its invalidity disclosures to include multiple prior art references and contentions. BSC's justifications for making these disclosures ultimately could be considered specious and frivolous. The court did not strike BSC's original invalidity contentions. Consequently, the court never struck BSC's "prior art" defenses as BSC claims in the motion.

Instead, the court enforced its rules. The fact that BSC chose not to make "prior art" defenses at trial reflects a strategic decision by BSC, not the court's rulings. The court made this point clear to BSC's counsel at a bench conference. See 2/8/2008 A.M. Tr. 9:9-10:19.

In sum, BSC chose to amend its invalidity contentions to disclose a significant amount of prior art and add new theories less than two months from trial and long after expert reports were due. BSC argued that the court's claim constructions mandated its amendment, but that argument was woefully unsupported. For example, BSC alleged surprise because of the court's construction of "small molecules." Apparently, BSC was surprised that the court adopted the parties' agreed construction for that term. (Emphasis added). But the failure to offer evidence shows up here as well, since "BSC made the strategic decision to elicit no testimony from its expert witnesses on subjects it properly disclosed [in its original invalidity contentions]; the court never precluded BSC from doing so." But most damning was the last section of the order, where Judge Ward responded to BSC's claim that a new trial was warranted due to its claim that the Court made prejudicial comments to the jury concerning BSC's trial misconduct. Judge Ward rejected this argument, writing that "[t]he court has never had counsel so recklessly disregard its orders before this trial. The court repeatedly warned BSC against violating its orders, but counsel for BSC paid little, if any, heed to the court's instructions and warnings." (Emphasis really added). The court issued the following admonition to both parties with respect to motions in limine:

when they are violated ... my instruction is going to be considerably more than, 'counsel, don't do that anymore," generally speaking. Sometimes, I've had the unfortunate experience of taking real serious steps, and, hopefully, I won't have to do that, but I'm forewarning you that's my attitude. So forewarned is usually forearmed.

Here's what happened after the witness didn't follow the instruction the first time. Judge Ward said:

... we went over it extensively, that we were going to limit your cross to the scope of direct. He [the witness] expressly said he wasn't expressing an opinion on that. ... Now, Mr. Delucia, you're beginning to try my patience. If you continue to try my patience, I'm going to start instructing the jury about some things ... that's going to be very disadvantageous to your client. ... And, you know, you're here on pro hoc [sic] vice. If you think I'm going to let you just run over this Court's rules without penalty - - Mr. Canada, you better get ready, you and Mrs. Gardner because if he continues, he is not going to continue as counsel in this case. And I'm not warning you again.

Sure enough, it didn't stop, and eventually "[t]he court had no choice but to instruct the jury that BSC violated the court's orders to put an end to the misconduct." Was the instruction necessary to stop the conduct? Judge Ward noted that "[ i]t bears mention that BSC's misconduct substantially subsided after the court gave the instruction to the jury." So yes, apparently it was.

To summarize, the rulings on this motion, "BSC repeatedly violated the court's orders warranting an instruction from the court. BSC failed to timely amend its invalidity contentions, tried to elicit improper opinion testimony from fact witnesses, and exceeded the scope of direct examination on cross-examination. BSC made a strategic decision not to present evidence to the jury in its invalidity case."

Motion for Judgment as a Matter of Law

On the Motion for Judgment as a Matter of Law, to make a long story short, BCS disagreed with Judge Ward's claims construction rulings. Early and often, according to the order. Why did the Court bring it up?

The court revisits the claim construction history of this case because BSC tried to informally circumvent the court's claim construction rulings in its motions for summary judgment, motions in limine, and expert reports. ... Although BSC commented in various briefs that it did not agree with the court's claim constructions, it did not file a motion for reconsideration at those times. ... To make matters worse, BSC's proposed constructions and supporting arguments changed as the case progressed. The net effect of BSC's shifting-sands approach was to provide the court a "moving target" with respect to claim construction. ... The claim construction positions taken in the [JMOL] differ still from BSC's prior positions. Thus, ironically, many of BSC's claim construction proposals made throughout this case are, as a matter of law, incorrect according to BSC's arguments in the Motion.

BSC sought JMOL in part based on its claims construction. Judge Ward denied it. Judge Ward also frowned on BSC's tactic of incorporating "by reference" over 100 pages of briefing from its prior SJ motions, which he noted "eviscerates the court's page limit restriction."

Judge Ward's order deals exhaustively with the myriad of grounds asserted for JMOL and I won't detail them here - many can be summarized by his statement at one point that:

[t]his evidence presents a classic fact issue. BSC asks the court to disregard the fact that the jury viewed BSC documents and videos, listened to testimony, and believed that Saffran's characterization of the evidence was more credible than BSC's characterization. The court finds that the evidence supports the jury's finding that the Taxus Stents met the claimed functional limitation.

Alternative Motion for a New Trial on Damages

Finally, BSC's Alternative Motion for a New Trial on Damages was denied as well. BSC essentially claimed that its evidence was better than Dr. Saffran's, and Judge Ward noted that "[ b]oth sides presented evidence supporting their positions. The jury found Saffran's evidence more credible and the court may not supplant its judgment for the jury's verdict where the evidence in the record can support the jury's verdict. Consequently, the court rejects BSC's argument." BSC's violation of the court's pretrial order (that the scope of the cross-examination was limited to the scope of the direct examination) prompted the court to issue the following warning:

When I granted these motions in limine, all I asked you to do in pretrial, and again on Monday afternoon, was to tell you not to go in and violate the terms of the order. ... If you think you've got a reason that I should reconsider it, what you need to do is first approach the Bench ... [the] first thing you [BSC] do is violate the motion in limine and then require [opposing] counsel to say "let's approach." You do just the opposite of what I asked you to do. I do not understand why you will not take that instruction. I told you at pretrial that the rulings were not definitive. I would reconsider any one if you would just approach the Bench first. But you have continuously throughout this case chosen to violate the motion in limine and then try to convince me that it's okay. So you violate two orders, I do not understand it.

A light moment in this order came when BSC argued that it was prejudiced because at the close of the plaintiff's case the court granted its motion for JMOL that BSC did not willfully infringe the '760 patent. (No, seriously - that's really what they said). Its argument was that Saffran was allowed to offer evidence that BSC willfully infringed the '760 patent, but that BSC could not rebut that testimony since the court granted BSC's motion for JMOL and that this testimony was harmful to BSC in the eyes of the jury. "This argument makes up in creativity what it lacks in merit," Judge Ward observed, but pointed out the flaw (okay one of the flaws) in it. "BSC makes no allegation that the court precluded it from offering rebuttal testimony or evidence. BSC alleges that the court committed error by not including BSC's proposed curative instruction in the court's final instructions to the jury. However, BSC never raised that objection to the court's jury instructions at trial. Consequently, BSC waived its objection."

Shades of QPSX v. Nortel again.

Michael C. Smith, Siebman, Reynolds, Burg, Phillips & Smith, LLP

Corporate Crime Prosecutions

Posted 8/19/08

At a July 9, 2008 oversight hearing of the Department of Justice (DOJ) by the Senate Judiciary Committee, Attorney General Michael Mukasey indicated that the DOJ would be making several important changes to its corporate charging policies contained in the McNulty Memorandum (McNulty Memo). The McNulty Memo, published in November 2006 - and predecessor memos dating back to the Clinton Administration - direct federal prosecutors across the country as to the DOJ’s policies for investigating, charging, and prosecuting corporate crimes.

Over the past year, Congress has repeatedly threatened legislation to cure the McNulty’s purported failure to protect the attorney-client and work-product privileges in corporate crime prosecutions. More specifically, Congress has been critical of several provisions in the McNulty Memo that allow federal prosecutors to, after seeking approval from Main Justice in Washington D.C., demand waivers of attorney-client privileged communications, as well as non-core (Category I) and core (Category II) work-product, essentially in exchange for “cooperation credit.”

On the same day as the oversight hearing, Deputy Attorney General Mark Filip wrote to Senator Patrick Leahy (D-VE), Chairman of the Judiciary Committee, and Senator Arlen Spector (R-PA), ranking Committee member, to outline several prospective revisions to the McNulty Memo that the DOJ expects to publish in the next few weeks. Filip’s letter summarizes the following revisions:

• Cooperation will be measured by the extent to which a corporation discloses relevant facts and evidence, not its waiver of privileges. The government’s key measure of cooperation will be the same for a corporation as an individual: to what extent has the corporation timely disclosed the relevant facts about the misconduct? That will be the operative questions - not whether the corporation waived the attorney-client privilege or work product protection in making its disclosures.

• Federal prosecutors will not demand the disclosure of “Category II” information as a condition for cooperation credit. To be eligible for cooperation credit, a corporation need not disclose, and the government may not demand, what the McNulty Memo defines as “Category II” - namely, non-factual attorney-work product and core attorney-client privileged communications.

In addition, Filip noted that the revised memorandum will prohibit federal prosecutors from considering whether a targeted corporation has entered into a joint defense agreement, or whether it has sanctioned or terminated culpable employees, in evaluating cooperation by the corporation. Nonetheless, how and whether a corporation disciplines culpable employees may still bear on the quality of its remedial measures, an element that federal prosecutors consider when determining whether to prosecute a business organization.

Senator Spector quickly criticized Filip’s letter, calling the revisions “unsatisfactorily vague.” In addition, Senator Spector pointed out that the proposed revisions, unlike the legislation that Congress was proposing, did not bind other federal enforcement agencies such as the SEC and IRS.

While the outcome is still unclear, it appears that there will soon be movement at the DOJ and/or through legislation to modify DOJ policies that have a significant impact on lawyers and their corporate clients. Additional information will be provided as it becomes available.

This contribution was made by Gregory S. Saikin. Mr. Saikin is an associate in the white collar criminal defense and internal investigation practice group of Locke Lord Bissell & Liddell LLP’s Houston office.

Gregory S. Saikin, Locke Lord Bissell & Liddell LLP

June 2008 Patent Filing Statistics

Posted 8/3/08

PAT (Patent Appeal Tracker) posts a monthly report in patent filing stats. The June 2008 report shows 255 cases filed in 56 of the 94 federal judicial districts in June 2008. The Eastern District of Texas ranks first again, with 32 new cases, with Delaware and CD Cal coming in second and third respectively with 24 and 20. Overall filings were up fifteen from May, and the Eastern District was up ten over its May count.

PAT followed up with an interesting post over the weekend breaking the overall 2007 patent filings down by judge, rather than district, and seeing who came out on top. ED Tex was still first, with an average of 46.375 per judge, followed by Delaware at 41.25. WD Wisconsin was third at 25, then CD Cal at 12.07. PAT promises more analysis to come.

Michael C. Smith, Siebman, Reynolds, Burg, Phillips & Smith, LLP

Medtronic v. Boston Scientific Corp

Posted 8/3/08

Medtronic v. Boston Scientific Corp 2:06cv078-TJW (E.D. Tex. July 11, 2008) Judge: T. John Ward

Defendant’s Motion for Judgment as a Matter of Law Par. 5 - GRANTED

Two days after Boston Scientific lost all of its post-trial motions before Judge Ward in the Saffran v. Boston Scientific patent case, which resulted in a $501 judgment earlier this year, it fared better with the same judge on claims arising out of its $250 million loss, also earlier in the year.

The first claim was that judgment as a matter of law (JMOL) under FRCP 50 was appropriate as to the accused products not tested by the plaintiff’s expert. Plaintiff argued that the cost of testing all the accused products could have exceeded two million dollars, to which Judge Ward observed that not all sizes needed to be tested, and in any event, you may have to break a couple of eggs when you’re asking for 20 dozen. Judge Ward concluded that “[f]or the accused products not tested by Mr. Sheehan, or otherwise shown to meet the relevant claim limitation, the jury was not presented with any evidence upon which to base a finding of infringement. As a result, a reasonable jury would not have a legally sufficient evidentiary basis to find that the untested products infringe the Anderson patent. For these reasons, the court GRANTS BSC’s JMOL No. 5 with respect to the untested catheters.”

Next, BSC argued that the infringement finding should be set aside where the expert’s measurements put the product outside the range of what he claimed constituted infringement. Concluding that the plaintiff had not adduced expert testimony to support its infringement claims as to these products, Judge Ward granted the JMOL on these two catheters as well.

What effect does this ruling have? To quote Jim Belushi in that masterpiece of Western cinema About Last Night “At this point, we don’t know.” Judge Ward directed the parties to submit a proposed reduction to the damages
award within 10 days. And of course the rest of BSC’s JMOL remains pending.

Michael C. Smith, Siebman, Reynolds, Burg, Phillips & Smith, LLP

Overlooked Gems (or Traps) For Trial Lawyers

Posted 7/16/08

The Texas Civil Practice & Remedies Code is filled with traps for the unwary and contains numerous interesting rules of law that can operate as both a shield and a sword in the litigation battlefield. Included below are several overlooked or unrecognized provisions of the Civil Practice & Remedies Code that trial lawyers should be aware of.

A. Section 16.070 - Contractual Limitations Period
There have been instances where a party to a contract attempts to limit its exposure to liability by inserting a contractual provision that establishes a limitations period that is shorter than the standard four-year limitations period for bringing a breach of contract action. For example, a party may insist on including a contractual provision requiring that all claims arising out of the contract be brought within one year from the date of the alleged breach.

The contract is then subsequently breached and the complaining party brings suit after the one-year statute of limitations period set forth in the contract. The defending party moves for summary judgment on the grounds that the claim was not timely filed pursuant to the negotiated upon limitations period contained in the contract. The motion for summary judgment, however, will be denied pursuant to Section 16.070 of the Civil Practice & Remedies Code, as Section 16.070 dictates that a contractual provision that establishes a limitations period shorter than two years is void as a matter of law.

Specifically, Section 16.070 provides:
(a) Except as provided by Subsection (b), a person may not enter a stipulation, contract, or agreement that purports to limit the time in which to bring suit on the stipulation, contract, or agreement to a period shorter than two years. A stipulation, contract, or agreement that establishes a limitations period that is shorter than two years is void in this state.

(b) This section does not apply to a stipulation, contract, or agreement relating to the sale or purchase of a business entity if a party to the stipulation, contract, or agreement pays or receives or is obligated to pay or entitled to receive consideration under the stipulation, contract, or agreement having an aggregate value of not less than $500,000.

Consequently, if you run across a contract that calls for a limitations period that is shorter than two years, be advised that the contractual provision, even if freely negotiated and agreed upon, is void as a matter of law under Section 16.070 of the Civil Practice & Remedies Code unless it falls under the narrow exception provided for in Subsection (b).

B. Section 18.061
It is not uncommon in personal injury litigation for the defendant to offer his condolences or express sympathy for the plaintiff’s injuries, especially in catastrophic injury cases.This situation usually involves one of two situations. The first is when the defendant communicates to the plaintiff either immediately after an accident or shortly thereafter that he or she “is sorry” or some other expression of sympathy. The other situation arises during a deposition or trial testimony when the defendant testifies more or less “I am really sorry for what happened,” and Plaintiff’s counsel attempts to use these expressions of sympathy to argue to the jury that the defendant was negligent, i.e., “there would not be any reason for you to apologize if you did nothing wrong.”

Another possible scenario arises when plaintiff’s counsel argues to the jury that “the defendant has not shown any remorse or expressed any sympathy for the plaintiff¡¦s injuries,” or something along these lines when the defendant has not expressed any sympathy for the plaintiff’s injuries in order to paint the defendant as a soulless and indifferent tortfeasor. Under either instance, the defendant is at a significant disadvantage because whether or not he or she expressed any sympathy, plaintiff’s counsel can use it against him or her in front of the jury. This is a classic “damned if you do, damned if you don’t” situation.

This evidence, however, is inadmissible under Section 18.061 of the Civil Practice & Remedies Code. Specifically, Section 18.061 of the Civil Practice & Remedies Code provides:

(a) A court in a civil action may not admit a communication that:

(1) expresses sympathy or a general sense of benevolence relating to the pain, suffering, or death of an individual involved in an accident;
(2) is made to the individual or a person related to the individual within the second degree by consanguinity or affinity, as determined under Subchapter B, Chapter 573, Government Code; and
(3) is offered to prove liability of the communicator in relation to the individual.

(b) In this section, “communication” means:

(1) a statement;
(2) a writing; or
(3) a gesture that conveys a sense of compassion or commiseration emanating from humane impulses.

(c) Notwithstanding the provisions of Subsections (a) and (b), a communication, including an excited utterance as defined by Rule 803(2) of the Texas Rules of Evidence, which also includes a statement or statements concerning negligence or culpable conduct pertaining to an accident or event, is admissible to prove liability of the communicator.

Consequently, any expression of sympathy or the communication of sympathy is not admissible. A fine line must be drawn however; a statement to the effect of, “I am so sorry, it¡¦s all my fault,” will be admissible as an admission by a party opponent, as set forth in Subsection (c).

For example, following a routine traffic accident, a statement by the driver allegedly at fault to the effect of, “I am sorry, are you okay,” will not be admissible under Section 18.061 of the Civil Practice & Remedies Code. Conversely, a statement to the effect of, “I am sorry, I was not paying attention and I did not see the red light,” will be admissible.

C. Section 71.005 - Evidence Relating to Marital Status
In wrongful death causes of actions, defense counsel will often attempt to explore the surviving spouse’s romantic relationships since the death of his or her spouse in an effort to weaken the surviving spouse’s loss of consortium, loss of companionship, loss of society, and mental anguish claims arising out of the death of his or her spouse. Typically, defense counsel will inquire as to whether the surviving spouse is currently dating anyone or whether he or she has remarried or has plans to remarry. Under Section 71.005 of the Civil Practice & Remedies Code, this line of questioning and any evidence with regard to the same is inadmissible with the lone of exception of a ceremonial remarriage.

Specifically, Section 71.005 of the Civil Practice & Remedies Code provides:

In an action under this subchapter, evidence of the actual ceremonial remarriage of the surviving spouse is admissible, if it is true, but the defense is prohibited from directly or indirectly mentioning or alluding to a common-law marriage, an extramarital relationship, or the marital prospects of the surviving spouse.

Therefore, evidence that the surviving spouse has actually remarried is admissible, but any evidence concerning a common-law-marriage or the martial prospects of the surviving spouse is inadmissible. Considering that nearly all of the damages recoverable by a surviving spouse in a wrongful death action derive out of the loss of the marital relationship, Plaintiff’s counsel must carefully guard against any mention or implication that the surviving spouse has engaged in a new relationship.

D. Section 30.007 Production of Financial Institution Records
Oftentimes, when a party requests records from a financial institution, the party will fire off a subpoena or a request for production to a financial institution without giving a second thought to Section 30.007 of the Civil Practice & Remedies Code and Section 59.006 of the Texas Finance Code. Section 30.007 of the Civil Practice & Remedies Code provides that “[c]ivil discovery of a customer record maintained by a financial institution is governed by Section 59.006, Finance Code.” Therefore, any request for the records of a financial institution must comply with Section 59.006 of the Finance Code, which is the exclusive method for obtaining an individual or entity¡¦s financial records from a financial institution. Section 59.006 of the Texas Finance Code has several strict requirements a requesting party must follow and adhere to before a financial institution is required to produce any records with regard to its customer.

First, a financial institution’s obligation under Section 59.006 of the Texas Finance Code to produce financial records is dependent on whether the customer whose records are at issue is a party to the lawsuit. If the customer is not a party to the lawsuit, the requesting party must give the customer notice advising the customer of his rights, as well as a copy of the request served upon the financial institution. Additionally, the requesting party must file a certificate of service stating that the customer has been mailed or served with a copy of the notice and a copy of the record request served upon the financial institution. The requesting party must also request the customer¡¦s written consent authorizing the financial institution to comply with the request before the financial institution has an obligation to produce any records.

If the customer does not execute the written consent on or before the date compliance is requested, it is the requesting party’s obligation to seek an in camera inspection with the court by filing a written motion, as a financial institution may not produce the customer’s records until it receives the customer’s written consent or a court order to produce the records.The judge then reviews the documents and determines which documents should be produced and then enters a protective order preventing the records being produced from being disclosed to a person who is not a party to the lawsuit or to be used by a person for any purpose other than resolving the dispute before the court.

If the customer is a party to the lawsuit, the customer bears the burden of preventing or limiting the financial institution’s compliance with the records request by filing a motion to quash or a motion for a protective order.

Once the proper procedures for requesting the records have been followed, the financial institution’s deadline to comply with the request is the later of:

(1) the 24th day after it receives receipt of the record request;
(2) the 15th day after the date of receipt of a customer’s written consent to disclose a record; or
(3) the 15th day after the date a court orders production of a record after an in camera inspection of a requested record.

Therefore, a financial institution is entitled to at least twenty-four (24) days to comply with a record request under Section 59.006(f) of the Finance Code.

One last note of interest is that the requesting party is required to pay the financial institution’s reasonable costs of complying with the request, including costs of reproduction, postage, research, delivery, and attorney¡¦s fees before the financial institution is obligated to comply with the request. In the alternative, the requesting party can post a cost bond in an amount estimated by the financial institution to cover the costs of producing the records.

Sean Michael Reagan, Leyh & Payne, L.L.P.

Reasonable Attorney’s Fees for Breach of Express Warranty

Posted 6/4/08

The Texas Supreme Court recently held in Medical City Dallas, Ltd. v. Carlisle Corporation that reasonable and necessary attorney’s fees are recoverable in an action for breach of an express warranty if the express warranty at issue arises out of a written or oral contract.

In Medical City, Medical City Dallas ("MCD") contracted with a roofing contractor to re-roof a building owned by MCD, and the roofing material was supplied by Defendant, Carlisle Corporation, which issued express warranties to MCD with regard to the roofing material. One of the express warranties was a Twenty Year Membrane Material Warranty, which promised that the roof membrane would not deteriorate prematurely. Shortly after the roof was installed, however, MCD discovered multiple leaks, and the leaks would continue to worsen over the next nine years to the point where the leaks became “continuous.” MCD then retained a consultant to inspect the roof, and the consultant advised MCD that the roofing material had material defects and exhibited premature signs of aging. The consultant also opined that the roof was in extremely poor condition and advised MCD to contact Carlisle to discuss warranty issues. After attempts to resolve the dispute failed, MCD sued the contractor and Carlisle for, among other things, breach of express warranties, and sought to recover the direct costs it incurred in replacing the roof, attorney¡¦s fees, and costs.

At trial, the jury returned a verdict in favor of MCD, finding that Carlisle breached the Twenty Year Membrane Material Warranty. The jury awarded MCD $110,449.59 in damages and an additional $121,277.04 in attorney’s fees. Carlisle appealed, and the court of appeals reversed the award of attorney’s fees on the grounds that Section 38.001(8) of the Texas Civil Practices & Remedies Code, which allows for the recovery of reasonable and necessary attorney’s fees for claims based on oral or written contracts, did not specifically encompass breach of warranty claims.

MCD then petitioned the Texas Supreme Court to review the attorney’s fees issue, which the Court granted. On appeal, MCD argued that an express warranty is like a contract in that the party asserting it is seeking damages based upon an opponent’s failure to uphold its end of a bargain, and therefore, attorney’s fees are recoverable under Section 38.001(8) of the Texas Civil Practices & Remedies Code in a breach of express warranty action arising out of a written or oral contract.

The Texas Supreme Court was persuaded by MCD’s argument and held that while breach of warranty and breach of contract claims are distinct causes of action, a breach of an express warranty cause of action that involves a party seeking damages based on an opponent’s failure to uphold its end of the bargain is a claim based on a written or oral contract, and therefore, Section 38.001(8) of the Texas Civil Practices & Remedies Code applies to support an award of attorney¡¦s fees in a breach of express warranty action arising out of a written or oral contract.

Additionally, the Court reiterated that the economic loss rule supports its’ holding that the breach of express warranty at issue in this case sounds in contract in that, “when the injury is only the economic loss to the subject of a contract itself, the action sounds in contract.” Furthermore, the Court stated, “recognizing that breach of an express warranty is founded on contract thus comports with a party’s expectations under the economic loss rule.”

In this case, the Court held that the type of damages sought by MCD supports the conclusion that its breach of express warranty claim was based in contract, which entitled MCD to recover attorney’s fees under Section 38.001(8) of the Texas Civil Practices & Remedies Code. Specifically, MCD claimed that the roof and the roofing materials were defective, which Carlisle expressly promised would not deteriorate prematurely. The jury found that the materials provided by Carlisle were defective, and therefore, Carlisle did not uphold its end of the bargain. Additionally, the damages sought by MCD support the conclusion that its breach of express warranty claim is based in contract, as MCD’s damages were economic injuries based on the defective roof and roofing materials. Consequently, the Texas Supreme Court reversed the court of appeals and held that attorney¡¦s fees are recoverable in a cause of action for breach of an express warranty that is based on a contract.

Sean Michael Reagan, Leyh & Payne L.L.P.

Supreme Court Rejects Contractual Expansion of Appellate Review of Arbitration Awards under FAA

Posted 6/2/08

On March 25, 2008, the United States Supreme Court denied litigants their ability to expand appellate review of arbitration awards under the FAA by contract. Hall Street Assocs., LLC v. Mattel, Inc., No. 06-989, 2008 U.S. LEXIS 2911, at * (Mar. 25, 2008). In Hall Street, the parties’ arbitration agreement allowed a district court to set aside an arbitrator’s award if “(1) the arbitrator¡¦s findings of facts are not supported by substantial evidence, or (2) where the arbitrator’s conclusions of law are erroneous.” Id. at *7. After an arbitrator rendered an award in favor of Mattel, Hall Street moved to vacate the award because of an erroneous conclusion of law. Id. at *8.

Applying the contractually agreed standard of review, the district court agreed with Hall Street, vacated the award, and remanded the case back to the arbitrator. Id. The district court cited LaPine Technology Corp. v. Kyocera Corp., 130 F.3d 884, 889 (9th Cir. 1997), holding that the FAA allows parties to dictate an alternative standard of review. Hall Street, 2008 U.S. LEXIS 2911, at *8-9. On remand, the arbitrator amended the award to apply the correct legal standard in favor of Hall Street. Id. at *9. The parties each sought modification of the second award by the trial court, and after consideration, the trial court affirmed the second award with one slight modification. Id.

On appeal, the Ninth Circuit Court of Appeals reversed the award in favor of Mattel holding that “the terms of the arbitration agreement controlling the mode of judicial review are unenforceable and severable.” Hall Street Assocs., LLC v. Mattel, Inc., 113 Fed. Appx. 272, 273 (9th Cir. 2004). The Ninth Circuit instructed the district court to review the award under the standards set forth in the FAA, which it held were the exclusive grounds for vacating or modifying an award. Id. On remand, the district court again held for Hall Street, and the Ninth Circuit reversed again. Hall Street Assocs., LLC v. Mattel, Inc., 196 Fed. Appx. 476, 477-78 (9th Cir. 2006).

The Supreme Court held that under 9 U.S.C. Section 9, a court “‘must’ confirm an award ‘unless’ it is vacated, modified, or corrected ‘as prescribed’ in Sections 10 and 11.” Hall Street, 2008 U.S. LEXIS 2911, at *11. The Court held that the grounds listed in sections 10 and 11 for vacating or modifying an award are exclusive and cannot be expanded by the parties’ arbitration agreement. First, the Court rejected Hall Street’s argument that, if the courts can add “manifest disregard” as a ground for vacating an arbitration award, then parties can alter the grounds by contract. Id. at *15-17. The Court held that the case on which Hall Street relied, Wilko v. Swan, 347 U.S. 427 (1953), could not be read to allow parties to modify the statutory grounds for vacating an award. Hall Street, 2008 U.S. LEXIS 2911, at *18.

Second, the Court rejected Hall Street’s argument that because arbitration is a creature of contract, parties ought to be able to expand judicial review of arbitration awards through their contracts. Id. at *18. The Court held that the FAA’s language was at odds with this proposition. Id. at *19. The language of the FAA demonstrates that the grounds for vacating and modifying an award were meant to be exclusive. Id. at *19-20. Furthermore, limiting the avenues of review is more consistent with the FAA’s purpose:

Instead of fighting the text, it makes more sense to see the three provisions, Sections 9-11, as substantiating a national policy favoring arbitration with just the limited review needed to maintain arbitration’s essential virtue of resolving disputes straightaway. Any other reading opens the door to the full-bore legal and evidentiary appeals that can “rende[r] informal arbitration merely a prelude to a more cumbersome and time-consuming judicial review process,” and bring arbitration theory to grief in post-arbitration process.

Id. at *22 (citations omitted).

Apparently, at oral argument, the parties pointed out that the trial court had adopted the parties’ arbitration agreement as an order. Id. at *28-29. Thus, the Court questioned whether the agreement, as an order, should be treated as the trial court’s exercise of its authority to manage its docket under Federal Rule of Civil Procedure 16. Id. at *29. Because the lower courts had not considered this possibility, the Court remanded the case to the court of appeals for consideration of the issue. Id. at *29-30. Justices Stephens, Kennedy, and Breyer dissented.

Brandy M. Wingate is a senior staff attorney for Justice Gina M. Benavides at the Thirteenth Court of Appeals in Edinburg, Texas. Any opinions expressed in articles posted on this website reflect those of the author and not the Thirteenth Court of Appeals.

Brandy Wingate, Senior Staff Attorney, Thirteenth Court of Appeals

Patent Infringement

Posted 5/22/08

Air Measurement Technologies, Inc. v. Akin Gump Strauss Hauer & Feld, L.L.P., 504 F.3d 1262 (Fed. Cir. Oct. 15, 2007)

Immunocept, LLC v. Fulbright & Jaworski, LLP, 504 F.3d 1281 (Fed. Cir. Oct. 15, 2007).

These two companion opinions involve federal subject matter jurisdiction questions raised in legal malpractice suits where the underlying representation involved patent infringement litigation. Both cases presented the issue of whether the federal courts had “arising under” jurisdiction over the state-law malpractice claims under Section 1338(a) ("The district courts shall have original jurisdiction of any civil action arising under any Act of Congress relating to patents, plant variety protection, copyrights and trademarks. Such jurisdiction shall be exclusive of the courts of the states in patent, plant variety protection and copyright cases.").

Akin Gump involved legal malpractice claims stemming from patent infringement litigation which was settled. The Court explained that the legal malpractice claims presented a “case within a case” scenario because to prevail in the malpractice suit, the plaintiff must demonstrate that he would have prevailed in the underlying litigation. The Court then reasoned that because the underlying suit was a patent infringement action, the district court would have to adjudicate the merits of the infringement claim. Because proof of patent infringement was necessary to show the party would have prevailed in the prior litigation, it was a “necessary element” of the legal malpractice claim, and therefore presents a substantial question of patent law conferring Section 1338 jurisdiction. The Court wrote that it would consider it illogical for the district court to have exclusive jurisdiction under Section 1338 to hear the underlying infringement suit and for the Court then to determine that the same court does not have the same jurisdiction under Section 1338 to hear the same substantial patent question in the state malpractice claim.

In Immunocept, the Court considered the jurisdiction issue sua sponte, reasoning that because the malpractice claim turned on the attorney’s drafting of the scope of the patent, the malpractice claim involved a substantial question of patent law. The Court wrote, “[a]s a determination of patent infringement serves as the basis of Section 1338 jurisdiction over related state law claims, so does a determination of claim scope. After all, claim scope determination is the first step of a patent infringement analysis.” Immunocept, 504 F.3d at 1285.

Both opinions were issued by the three-judge panel of Michel, Lourie, and Rader. Akin Gump has moved for En Banc reconsideration of the Court¡¦s decision. Akin Gump argues that the Court¡¦s opinion conflicts with U.S. Supreme Court precedent, Grable & Sons Metal Products, Inc. v. Darue Engineering & Manufacturing, 545 U.S. 308 (2005) and Empire Healthchoice Assurance, Inc. v. McVeigh, 126 S. Ct. 2121 (2006). It is further likely that this issue will be presented to the U.S. Supreme Court.

John T. Wilson IV and David E. Keltner, Kelly Hart & Hallman

Murff v. Pass

Posted 5/19/08

The Texas Supreme Court continues to shape the law of voir dire with regard to striking a veniremember for cause by holding that a veniremember’s statement that he would hold the plaintiff to a clear and convincing standard of proof in a health care liability case, rather the proper preponderance of the evidence standard, was not grounds for disqualifying the veniremember for cause. Murff v. Pass, 51 Tex. Sup. Ct. J. 688, 2008 WL 820577 (Tex. March 28, 2008).

Murff v. Pass was a health care liability case brought against a physician and his professional association for their alleged failure to act in accordance with the requisite standard of care during the labor and delivery of Plaintiff¡¦s daughter, which caused the daughter to sustain extensive and permanent physical and mental disabilities. During voir dire, Plaintiff’s counsel engaged the panel in a discussion about the appropriate burden of proof, attempting to define and compare the terms “preponderance of the evidence,” “clear and convincing evidence,” and “beyond a reasonable doubt.” Plaintiff’s counsel defined “preponderance of the evidence” as “the greater weight and degree of credible testimony,” and this lead to an exchange with one of veniremembers over the precise standard of proof to be applied in the case. One of the veniremembers stated that he would hold the Plaintiff to the clear and convincing standard of proof because the clear and convincing standard was “closer to the greater weight measure” mentioned previously by counsel than the “more likely than not” measure also mentioned by counsel. Plaintiff¡¦s counsel then asked the panel who agreed with veniremember’s statement and three other veniremembers responded affirmatively.

Further questioning concerning the precise definition of “the ponderance of the evidence” ensued, which lead to additional comments from the panel indicating that they were confused. Even the trial judge noted the confusion on the record by stating, “the jury sounds like they¡¦re getting confused.” None of the veniremembers, however, answered affirmatively when asked by defense counsel whether they would apply a standard of proof other than the one outlined by the judge in the jury charge.

Plaintiff’s counsel subsequently objected to four veniremembers who stated that they would hold the Plaintiff to the clear and convincing standard of proof, arguing that these veniremembers should have been stricken for cause. The trial court overruled the challenges for cause, and Plaintiff then used her three peremptory challenges to eliminate three of the veniremembers, which left one of the objectionable veniremembers to serve on the jury. The case proceeded to trial and the jury found for the Defendants. The trial court subsequently entered a take-nothing verdict.

Plaintiff appealed, and the court of appeals reversed, holding that the veniremembers should have been disqualified because their responses demonstrated prejudice and an “inability to follow the court"s instructions regarding the law.”

The Texas Supreme Court subsequently reversed the court of appeals, holding that the trial court did not abuse its discretion in refusing to strike these veniremembers for cause even though the veniremembers stated that they would hold the Plaintiff to the incorrect clear and convincing standard of proof. The Court reiterated its position that “bias, prejudice, or inability to follow the court’s instructions may not be discernible from a single statement or response to a general question,” and that “statements of partiality may be the result of inappropriate leading questions, confusion, misunderstanding, ignorance of the law, or merely loose words spoken in warm debate, and do not necessarily establish disqualification.”

Additionally, the Court stated that when a veniremember expresses bias or confusion, the trial court has the discretion to stop the line of questioning to clarify the veniremember¡¦s response, and because the trial judges are present in the courtroom and are in the best position to evaluate the sincerity and attitude of individual panel members, they are given wide latitude in both conducting voir dire proceedings and in determining whether a veniremember is impermissibly partial.

In this case, the trial judge observed the exchange at issue and considered it confusing, as evident by the judge stating on the record “the jury sounds like they’re getting confused.” Consequently, the trial court did not abuse its discretion in refusing to disqualify the veniremembers for cause as the veniremembers’ responses exhibited the type of “confusion, misunderstanding, and ignorance of the law” as discussed in the Court’s decision in Cortez.

Plaintiff also argued that the trial court abused its discretion in refusing to strike these veniremembers for cause by asserting that rehabilitation is necessary once a veniremember makes a statement indicating an inability to follow the court"s instructions, citing the Court’s decision in Cortez. Therefore, Plaintiff argued that the first veniremember to state that he would hold the Plaintiff to the incorrect clear and convincing standard of proof and the three veniremembers who agreed with him should have been disqualified because they were never rehabilitated.

The Court quickly dismissed this argument by stating that its holding in Cortez does not require rehabilitation in order to prevent disqualification. Conversely, the Court stated that in Cortez, it held that rehabilitation is permissible to clarify whether a veniremember’s response results from confusion or misunderstanding, and that the extent and use of rehabilitation is within the trial court¡¦s discretion. Consequently, in this case, the Court stated that the trial court was satisfied that the veniremember was sufficiently impartial without having to conduct additional individual questioning and therefore, the trial court did not abuse its discretion.

Sean Michael Reagan, Leyh & Payne L.L.P.

Data Collection Pitfalls

Posted 5/12/08

Computer users destroy and alter electronic data every day, and often without knowledge. Simply turning on a computer can overwrite documents such as those in “slack” and “temporary” files. And just clicking on a file can change the documents metadata (data about the data) such as the “last-accessed” date.

So how can you avoid spoliation issues when data may be relevant to a lawsuit? Best practices dictate that a party immediately make a copy of relevant data using mirror-imaging technology and halt electronic document-destruction processes such as the recycling of backup tapes. Mirror imaging creates a copy of every sector in the computers hard drive. This is very different from simply copying every file, which may result in alterations such as those listed above. While many internal IT departments are familiar with mirror imaging technology, e-discovery experts can also assist you in securing this data and explaining what actions could potentially cause spoliation. An added benefit of working with an outside expert to perform mirror imaging services is that you have independence in the process, lessening the chance of any questions of impropriety.

Those of us who breathe this stuff every day know that mistakes made at the start can be very difficult (read: expensive) to fix later. The following pointers are adapted from a 2005 Kroll newsletter. Each project (and its challenges) will be different, but this list is a solid beginning of concerns practitioners might face and pitfalls they should avoid:

1. Failing to Have a Data Collection Plan. Having an initial data collection “plan of attack” is vital in every electronic discovery situation. It is equally important to document that plan so that everyone is on the same page and that you do not have to recreate your efforts at a later date (when you have no idea what was actually done).

2. Failing to Prioritize the Data. Clearly defining the collection scope and priority of key players will avoid creating unnecessary delays and increased costs down the road.

3. Neglecting to Conduct Thorough Interviews. Counsel must make it a priority to thoroughly interview the IT team regarding the client¡¦s IT systems. This is something that you should document so that you can confirm the steps that you have taken.

4. Ignoring Key Data Locations & Important File Types. Often, it can be difficult to ascertain where electronic evidence is held. This issue was part of Qualcomm’s problem as the court in that case held that Qualcomm did not produce a significant number of documents.

5. Conducting Do-It-Yourself Data Collection. Many software products allow a client to collect data themselves. This is unfortunately the fastest way to create significant problems for the client several months later, when the problems can no longer be fixed. More than ever before, collection methods are at the forefront of discovery, as pointed out in a recent case, holding that attorneys who relied on the client¡¦s search methods were negligent. Finley v. Hartford Life and Acc. Ins. Co., 2008 WL 509084 (N.D. Cal. Feb. 22, 2008).

6. Failing to Mirror Image v. Imaging Excessively. Remember that this area of the law is new and, to some extent, untested. Unfortunately, the person grading performance does so several years after the acts were completed, but with proper documentation, clients can achieve good results.

7. Limiting Names. When collecting data, consider alternative names, including maiden names, initials, nicknames, e-mail addresses, and everything else. This can be particularly tricky given the informality of e-mails.

8. Assuming IT Can Shoulder the Burden Alone. Simply, IT does not always understand how to best handle data subject to legal discovery. It is also often outsourced and already stretched as to resources. This approach also makes your IT department primary deposition targets.

9. Failing to Maintain Proper Chain of Custody. Proper documentation includes indicating where the media has been, whose possession it has been in, and the reason for that possession. If you do this wrong, you might not be able to fix it without re-doing the entire production.

Even with full consideration of these issues, problems may still arise. Therefore, it is equally important to document every step so that when the time comes, you can mount a proper defense to any claims against you. Unfortunately, these new constraints and challenges are not easy and require attention from the start.

David Chaumette, Shook, Hardy & Bacon L.L.P.

Municipal Drilling Ordinances as Constitutional Takings

Posted 5/11/08

In an earlier submission, a recent appellate opinion was discussed in which a jury’s award of $16,849,099.00 to an oil company was affirmed based upon the premise that municipal drilling ordinances can qualify as constitutional takings in situations where access to minerals is effectively denied. Trail Enterprises, Inc. v. City of Houston, 2007 Tex. App. LEXIS 9199 (Tex. App. Waco Nov. 21, 2007). On joint motions for rehearing, the Court’s prior opinion was withdrawn, and its substituted opinion is even more favorable for urban oil and gas producers. See Trail Enters. v. City of Houston, 2008 Tex.App. LEXIS 2575 (Tex. App. Waco Apr. 9, 2008).

In its original opinion, the Court found that a constitutional taking had occurred and awarded inverse condemnation damages to the Plaintiff, but also rendered judgment awarding the City of Houston fee simple title to all of the oil, gas, and other minerals in and under 1,025 acres of land in Harris County. Upon reconsideration, the Court changed its earlier ruling, holding that the imposition of the ordinance prohibiting drilling merely qualified as a “damaging” of the oil company’s mineral interests rather than a true “taking.” The end result is that although the Court left the $16,849,099.00 damages award in favor of the Plaintiff intact, it divested the City of the title to the mineral which were conveyed via the prior opinion.

The City unsuccessfully argued that a judgment which does not grant title to the City would result in a windfall to the oil company because it may well be able to further develop its mineral interests in the future. The City further pointed to the fact that oil company took the position at trial that the City had “effectively taken” the mineral estate because the mineral rights had been “rendered valueless.” However, the Court nevertheless ruled that a true taking had not occurred because the oil company continued to receive some royalties from the mineral estate after the ordinance was enacted, citing prior caselaw labeling ordinances that deprive an owner of “all economically beneficial or productive use of the property as constitutional takings”. See Hallco Texas, Inc. v. McMullen County, 221 S.W.3d 50, 56 (Tex.2007).
__________________________________
1 The Waco Court of Appeals decided this appeal due to docket equalization.

Koy R. Killen, Winstead, P.C.

Bell Atlantic Corp. v. Tombly

Posted 5/11/08

The recent U. S. Supreme Court decision in Bell Atlantic Corp. v. Twombly, 127 S. Ct. 1955 (2007) should be a wake up call for all trial lawyers and all trial judges everywhere for several reasons. For one thing, it sets up another barrier to entry into federal court by changing the rules for motions to dismiss under 12(b)(6) because complaints now must state a “plausible” claim or face dismissal. Now, every civil action in federal court will not only face a summary judgment motion and a Daubert motion, but also a 12(b)(6) motion. It is not because such motions are mandatory, it is just because they will be filed, out of an abundance of caution. Or just to work the plaintiffs and the courts to death.

But that is not the only problem with Twombly. In the case, six Supreme Court Justices apparently agree with Justice Souter that discovery in civil cases is impossible to control as a practical matter and that we should just give up and make it much harder to be in federal court, so that discovery doesn’t happen at all. This is an enormous challenge to the practicing trial bar and to trial courts, because it is a clear signal that if we do not get discovery under control, access to federal courts is going to be more and more restricted. Now is the time for those of us at the trial level who think that the civil justice system matters to come together and show our appellate courts that discovery can work effectively and efficiently. That means that trial lawyers must re-dedicate themselves to working with each other to be cooperative and reasonable about discovery. That also means that trial judges must quit treating discovery disputes as a pain in the backside and must start dealing with them in a creative and helpful way.

In my view, the biggest problem with the civil justice system today is discovery. It is where so much of the fighting takes place and it is where so much of the cost is absorbed. Either we get this under control or else the judges upstairs are going to keep chopping away at court access. If we fail in this task, we will have failed this nation and the cause of justice and liberty for all time to come. It will be said, quite accurately, that, during our watch, we let justice die. If this is not a call to action, I do not know what is. Yet. I think that we can do this. I think that we can rise to the challenge and make discovery work and preserve this system that has served America so well and that has done so much to keep the rule of law in place here. But the time to act is now. What do you think?

W. Royal Ferguson, Jr., U.S. District Court, Western District of Texas

Fifth Leans on Learned Intermediary Doctrine in Failure to Warn Case

Posted 5/9/08

On April 24, 2008, a panel of the Fifth Circuit affirmed a summary judgment in favor of drug manufacturer Wyeth Pharmaceuticals in Ackermann v. Wyeth Pharms., No. 06-41774 (5th Cir., Apr. 24, 2008). This case out of the Eastern District of Texas alleged that inadequate warnings on Wyeth’s antidepressant Effexor caused the plaintiff’s husband to commit suicide.The Fifth Circuit held that the learned intermediary doctrine barred the plaintiff’s claims of strict liability and failure to warn. The record showed that the decedent’s physician was aware of claims that modern antidepressants might lead to an increased rate of suicide, that he carefully monitored the plaintiff’s husband for significant signs of suicidal tendencies, and that he would not have altered the course of treatment if different warnings had been provided. Under the learned intermediary doctrine, a warning to an intermediary such as a doctor fulfills a supplier’s duty to warn its consumers. The doctrine thus excuses a drug manufacturer from warning each patient who receives the product when the manufacturer properly warns the prescribing physician of the product’s dangers. Wyeth moved for summary judgment on the plaintiff’s warnings claims based on the learned intermediary doctrine and federal preemption; the district court granted the motion. Ackerman v. Wyeth Pharms., 471 F. Supp. 2d 739 (E.D. Tex. 2006).

The Fifth Circuit panel consisted of Chief Judge Edith Jones, and Circuit Judges Wiener and Clement. Affirming the district court’s grant of summary judgment, the court found that there were no genuine fact issues regarding whether any inadequacy of the warning was a producing cause of the plaintiff’s husband’s death. The prescribing physician “would have prescribed Effexor even had the warnings been stronger.”

The Fifth Circuit avoided weighing in on the hot-button issue of whether pharmaceutical failure-to-warn claims are preempted by FDA approval. The U.S. Supreme Court will consider that issue next term in Wyeth v. Levine, No. 06-1249.

Meanwhile, the Third Circuit ruled that the makers of Paxil and Zoloft cannot be sued for failing to warn of a risk of suicide because the FDA has explicitly refused to order such warnings. Colacicco v. Apotex, Inc., ”>Colacicco v. Apotex, Inc., No. 06-3107 (3d Cir., Apr. 18, 2008). Writing for the majority, Judge Dolores K. Sloviter said the FDA has “actively monitored” the possible risk of suicide from taking the class of antidepressant drugs known as selective serotonin re-uptake inhibitors, or SSRIs, for two decades, and concluded that the suicide warnings demanded by plaintiffs “are without scientific basis and would therefore be false and misleading.”

The pharmaceutical preemption cases follow on the heels of the Supreme Court’s decision in Riegel v. Medtronic, 06-179, decided in February 2008, holding that suits against medical device manufacturers for claims arising out of FDA-approved medical devices are preempted by the Food, Drug, and Cosmetic Act.

Alex B. Roberts, Beck, Redden & Secrest, L.L.P.

Mediation and Confidentiality Agreements

Posted 5/9/08

You’re in a mediation and towards the end of the day, the defendant and plaintiff appear to be getting ready to settle. Both sides know that there is probably going to be an agreement on the money - which is the hard part, right? Then right at the end of the negotiations, the defendant inserts a new issue in the negotiations and asks for a confidentiality provision. Usually, the plaintiff is willing to give it. The plaintiff just wants the money, right? The plaintiff’s lawyer, however, objects: she wants to take out a full page ad in Texas Lawyer and tell everyone who will listen about the good result she got for her client.

Where are the ethical boundaries to help a lawyer when the client wants to close the settlement and the lawyer wants to publicize the result?

Rule 1.05 of the Texas Disciplinary Rules of Professional Conduct provides our basic guidance in this situation. The key to this rule is in the first paragraph, in the definition of ”Confidential Information.” Confidential Information includes both privileged information and “unprivileged” information. Most lawyers have a good feel for what constitutes privileged, attorney-client information (information that is shared only with the lawyer by a client seeking legal services, with the expectation that it be kept secret). Yet, many lawyers think, wrongly, that the only limitation on their right to talk about their client’s case is the obligation not to disclose privileged, attorney/client information. However, Rule 105 makes it clear that a lawyer’s obligation of confidentiality extends far beyond the narrow doctrine of privileged attorney-client communications.

Rule 105 states that Confidential Information also includes unprivileged client information and defines this unprivileged, but nevertheless confidential, information as “all information relating to a client or furnished by a client during the course of or by reason of the representation of the client.” Put another way, everything you learn “during the course of or by reason of” your representation of your client is confidential, whether it is privileged or not.

The Rule goes on to prohibit lawyers from disclosing confidential information (whether privileged or not) except in certain circumstances. A lawyer can, for example, disclose confidential information when it is necessary to prevent the client from committing a crime or when it is necessary to defend the lawyer against a claim of wrongful conduct. The only time a lawyer is required to disclose confidential information is when information clearly establishes that a client is likely to commit a crime or fraudulent act that would result in death or substantial bodily harm or when . . .

Now, let¡¦s apply lessons of Rule 1.05 to the mediation hypothetical. Is this settlement related to the client? Of course it is. Was the information acquired by the lawyer during the course of or by reason of the representation of the client? Again, the answer is obvious. Under the plain and simple reading of Rule 1.05, this settlement is already confidential information for the lawyer and the lawyer cannot disclose it without the client’s permission.

I am no fan of confidentiality provisions, although I recognize they serve a useful purpose in some cases. I also recognize, however, that the confidentiality provision negotiated in mediation is not what binds me to confidentiality: the confidentiality provision binds my client, but I am bound to keep settlement information confidential even in the absence of the defendant¡¦s request for a confidentiality provision, unless my client consents.

There are many good and valid reasons to resist a confidentiality provision, and a lawyer in mediation has the duty to advise the client properly before the client agrees to confidentiality. If, however, the lawyer is putting her own selfish interests above the interests of the client, because of the lawyer’s desire to use the settlement in advertisements, something is wrong.

Lawyers who resist confidentiality provisions for their own personal economic benefit and, in the process, jeopardize their clients’ settlements, should recognize they do so at their own peril.

Randy Johnston, Johnston ~ Tobey

Bidness torts ain’t what they used to be - part II

Posted 4/24/08

Let’s take another stroll down memory lane, shall we? Back to when Texans knew more about tortas than torts. Before our legislature started winging personal injury torts and business torts with the same buckshot.

Now we take up what UT Law Professor David A. Anderson calls “judicial tort reform” - specifically the Texas Supreme Court’s role in making tort cases harder for plaintiffs to win. See Judicial Tort Reform in Texas, 26 THE REVIEW OF LITIGATION 1 (2007). Gary P. Nunn’s London Homesick Blues will furnish our background music.

Putting ourselves back in that place again. A quarter-century ago - a mere decade after the Lost Gonzo Band recorded the epochal Via Terlingua! album in the Luckenbach Dancehall - torts enjoyed a golden age in Texas, in large part because a let-the-jury-decide attitude prevailed on the Supreme Court. Holdings that reflect that view include:

• Reviewing courts must disregard all evidence that tends to negate a jury finding of gross negligence. Burk Royalty Co. v. Walls, 616 S.W.2d 911 (Tex. 1981).

• A jury may award damages for any percentage of harm that defendants’ conduct caused - even if the plaintiff caused more than 90 percent. Duncan v. Cessna Aircraft Co., 665 S.W.2d 414 (Tex. 1984).

• If a defendant denies making a promise, a jury may find that he made the promise with intent to defraud. Spoljaric v. Percival Tours, Inc., 708 S.W.2d 432 (Tex. 1986).

The Court also, um, neglected procedural matters that might hinder trial on the merits. Before 1995, for instance, the Court seldom rejected expert evidence. Despite a complete re-write of the class action rule in 1977, the Court didn’t reverse a single class certification order until 1996. And only in the following year did the Court revive forum non conveniens as a doctrine allowing dismissal of cases that involve foreign corporations as plaintiffs.

I’m leavin’ just as fast as I can. The 60 Minutes report in late 1987 on the coziness of some justices with the personal injury bar - that “Justice for Sale” thing - helped prompt a backlash. At that moment, Democrats - as they’d done since 1876 - held all the positions on the Court. Then the Dems commenced a not-entirely-voluntary exodus. Three Republicans sat on the Court in 1988-90, four during 1991-94, five in 1995, six in 1996-98, and nine since 1999.

When a Texan fancies, he’ll take his chances. Has the change in personnel made business tort litigation riskier for plaintiffs? Yes. Heavens, yes. As UT Law Professor Anderson found, defendants won a whopping 87 percent of tort cases in the Supreme Court of Texas during 12 months in 2004-05.

Interestingly, the cornucopia of defense victories resulted mostly from the harsher way the Court interprets statutes, construes pleadings, applies procedural rules, and reviews evidence. “No evidence” analysis of verdicts has proven especially fatal for plaintiffs. See City of Keller v. Wilson, 168 S.W.3d 802 (Tex. 2005) (holding that reviewing court must disregard evidence that court concludes “reasonable jurors” could not have believed even though they did). And, in the 15 or so decisions since Southwestern Refining Co., Inc. v. Bernal, 22 S.W.3d 425 (Tex. 2000), the Court has disallowed, affirmed disallowance, or substantially narrowed every class certification order it reviewed.

You can put up your dukes. The Court’s shift from a let-the-jury-decide ethos to a judge-centric approach coincided with, and likely contributed to, a decline in civil trials generally. Fewer cases got past pre-trial motions to jury trials, and the ones that juries did decide a lot more often died in post-trial proceedings.

According to the “Jury Activity” reports by the Texas Office of Court Administration for 1996, Texas district courts tried 2,971 civil cases to verdict and directed verdicts in 253. Ten years later, the same courts put a mere 1,335 civil cases to juries while instructing verdicts in 459 cases. That comes to a 55 percent drop in jury trials and an 81 percent increase in taking cases out of jurors’ hands.

I want to go home with the armadillo. Party affiliation probably doesn’t define any justice’s judicial philosophy or determine justices’ votes in any particular case or on any specific issue. But balance does seem to improve the quality of decisions. A recent study of state supreme courts¡¦ “influence” shows a fascinating - and in its way encouraging - phenomenon at the Texas Supreme Court: It wielded by far the most influence during the six years, from 1993 through 1998, when a mix of Democratic and Republican justices sat on it.

Home in the Texas Bar. Okay. Now that we’ve had our history lesson, let’s get down to the business of litigating business torts. Next time we’ll start doing just that.

Barry Barnett, Susman Godfrey

Compelling Arbitration in the Trial Court

Posted 4/17/08

A motion to compel arbitration is evaluated under a burden-shifting scheme akin to a motion for partial summary judgment, and it is subject to the same evidentiary standards. In re Jebbia, 26 S.W.3d 753, 756 (Tex. App. - Houston [14th Dist.] 2000, orig. proceeding). The process can be divided into three steps.

• Step one: The party seeking to compel arbitration must establish the existence of an arbitration agreement and that the claims fall within the agreement.

First, the party seeking to compel arbitration has the burden to establish that an arbitration agreement exists. In re Oakwood Mobile Homes, Inc., 987 S.W.2d 571, 573 (Tex. 1999); Wachovia Sec., LLC v. Emery, 186 S.W.3d 107, 113 (Tex. App. - Houston [1st Dist.] 2005, orig. proceeding). This requires a showing that the agreement containing the arbitration clause “meets the requirements of general contract law,” such as offer and acceptance, but it does not require the movant to disprove the nonmovant’s potential affirmative defenses. See In re Advanced PCS Health L.P., 172 S.W.3d 603, 606 (Tex. 2005); USB Fin. Serv., Inc. v. Branton, 241 S.W.3d 179, 184 (Tex. App. - Fort Worth 2007, no pet. h.). Submission of an authenticated copy of the agreement containing the arbitration clause generally will satisfy this initial burden. In re H.E. Butt Grocery Co., 17 S.W.3d 360, 367 (Tex. App.-Houston [14th Dist.] 2000, orig. proceeding). Additional proof may be needed, however, if a party’s right to enforce the agreement is not obvious from the face of the agreement. See Mohamed v. Auto Nation US Corp., 89 S.W.3d 830, 836 (Tex. App. - Houston [1st Dist.] 2002, orig. proceeding). For example, a non-signatory to an arbitration agreement should produce evidence that it is entitled to enforce the agreement. Id. at 836-38.

Next, the party seeking arbitration must show that the claims in dispute fall within the scope of the arbitration clause. In re Oakwood Mobile Homes, 987 S.W.2d at 573; In re Autotainment Partners, 183 S.W.3d 532, 534 (Tex. App. - Houston [14th Dist.] 2006, orig. proceeding). To determine whether a claim falls within the scope of an arbitration clause, courts look to the language of the clause and the factual allegations of the complaint (as opposed to the legal causes of action asserted). In re Autotainment Partners, 183 S.W.3d at 536. A broad arbitration clause, purporting to cover all claims, disputes, and other matters relating to the contract or its breach, creates a presumption of arbitrability. American Realty Trust, Inc., v. JDN Real Estate-McKinney, L.P., 74 S.W.3d 527, 531 (Tex. App. - Dallas 2002, pet. denied). A court should not deny a motion to compel arbitration unless it can be said with positive assurance that the arbitration clause is not susceptible to an interpretation that would cover the dispute. In re D. Wilson Constr. Co, 196 S.W.3d 774, 783 (Tex. 2006).

• Step two: The party opposing arbitration must raise defenses to arbitration.

Once the party seeking to compel arbitration has satisfied its initial burden, the burden shifts to the opposing party to raise defenses to arbitration. Emery, 186 S.W.3d at 113. The party opposing arbitration may attack his opponent’s “case-in-chief” by raising a fact issue on the existence of the arbitration agreement or arguing that the claims do not fall within the scope of the arbitration agreement. Nabors Drilling USA, LP v. Carpenter, 198 S.W.3d 240, 246 (Tex. App - San Antonio 2006, orig. proceeding).

Alternatively, the party opposing arbitration may present evidence supporting an affirmative defense to enforcement of the arbitration clause, such as waiver, duress, unconscionabilty or fraud. In re Oakwood Mobile Homes, 987 S.W.2d at 573. To defeat arbitration, these defenses specifically must relate to the arbitration clause. In re FirstMerit Bank, N.A., 52 S.W.3d 749, 756 (Tex. 2001). Under the “separability doctrine,” if the defenses relate to the entire agreement, then they must be adjudicated in arbitration, rather than by the trial court. American Med. Tech., Inc. v. Miller, 149 S.W.3d 265, 272 (Tex. App. - Houston [14th Dist.] 2004, no pet.).

If the opposing party does not meet its burden of presenting evidence that would prevent enforcement of the arbitration clause, the trial court must compel arbitration and stay its own proceedings. In re H.E. Butt Grocery, 17 S.W.3d at 367.

• Step three: A hearing is necessary if material fact issues remain.

An evidentiary hearing is not required in every case, and a trial court may summarily decide whether to compel arbitration based on affidavits, pleadings, discovery, and stipulations. In re Jim Walter Homes, Inc., 207 S.W.3d 888, 896 (Tex. App. - Houston [14th Dist.] 2006, orig. proceeding). But if issues of material fact remain as to whether there is an enforceable arbitration agreement, the trial court must promptly allow an evidentiary hearing on the matter. In re Jebbia, 26 S.W.3d at 757. Such an evidentiary hearing must be held “summarily.” Trico Marine Servs., Inc. v. Stewart and Stevenson Technical Servs., Inc., 73 S.W.3d 545, 548 (Tex. App. - Houston [1st Dist.] 2002, orig. proceeding). The term “summarily” describes not only the procedure, but the speed with which a court should rule. In re MHI P’ship Ltd., 7 S.W.3d 918, 922 (Tex. App. - Houston [1st Dist.] 1999, orig. proceeding).

Look for an analysis of the reviewability of an order granting or denying a motion to compel arbitration in a future posting.

Mark Trachtenberg is a partner in the Appellate Section of Haynes and Boone, LLP in Houston. He is a member of the American Law Institute and serves on the editorial board of The Houston Lawyer. He received his J.D. from the Yale Law School, where he served as an editor on the Yale Law Journal.

Christina Crozier is an associate in the Appellate Section of Haynes and Boone, LLP in Houston. She graduated from the University of Texas with highest honors and obtained her J.D. from the University of Houston Law Center in 2005.

Mark Trachtenberg and Christina Crozier, Haynes and Boone, LLP

Arbitration Can Kill Malpractice Coverage

Posted 4/9/08

It’s ironic that many lawyers routinely put arbitration clauses in their engagement letters with clients. Here you have a profession that is quite literally the foot soldiers in the third branch of government, charged by our professional oath to be officers of the court. And yet, in contracts with clients, these attorneys opt out of the court system by obligating clients to take any dispute with them to arbitration.

The subtext of that conduct seems clear to me: lawyers don¡¦t trust the court system to treat them fairly and prefer the private dispute resolution process of arbitration to court. Call me crazy, but that certainly sounds out of whack. It’s kind of like a doctor saying, “If I get sick, whatever you do, do not take me to a hospital.”

So, what are the real differences between arbitration and a lawsuit in a court of law that have caused so many businesses, including law firms, to prefer arbitration to court? To start with, arbitration is private: there are no public records for others to read. In arbitration, there will be few, if any, depositions. Discovery is pretty much limited to document production, with a limited right to ask written questions, similar to interrogatories. There is no enforceable subpoena power: if people don’t want to testify, they just don’t show up. There is no judge to refer a witness to the DA for perjury or a lawyer to the disciplinary committee. Motions for summary judgment are almost never granted. Statutes of limitations are more advisory than binding, and few cases are even thrown out as time-barred. It is extremely rare for any evidence to be excluded.

Like with a bench trial, the rules of evidence go more to the weight of the evidence than admissibility. There is no absolute right of cross examination and it is not uncommon for affidavits to be admitted as evidence, for whatever weight the arbitrator wants to give them. Most people feel arbitrators tend to “split the baby,” by giving compromise awards and denying both sides an out-and-out win. And when the arbitration case is over, there is virtually no right of appeal.

This trend of lawyer fee contracts with arbitration clauses has generated some appellate decisions, most of which have dealt with the question of whether a legal malpractice claim is a claim for personal injuries. If it is a claim for personal injuries, an arbitration clause would not be enforceable unless it is signed both by the parties and their counsel. Texas Appellate Courts have gone both ways on that question, but the trend seems to be that a legal malpractice claim is not a claim for personal injuries and, therefore, your arbitration clause in your engagement letter, signed by the client, is enforceable.

While it may seem ironic that lawyers are running for protection to arbitration clauses, there is an even bigger surprise waiting for lawyers who opt out of the court system. Keep in mind that the arbitration clause in your engagement letter obligates your client to pursue the malpractice claim against you in arbitration instead of in court. It therefore obligates your insurance carrier to have its liability for your malpractice determined in arbitration. It turns out, though, that insurance companies actually like jury trials and are not always all that fond of arbitration. Lawyers who force their clients into arbitration and then get an arbitration case for malpractice are now routinely receiving a “reservation of rights” letter from their insurance carrier, threatening to deny insurance coverage because the lawyer deprived the insurance company of its right to a jury trial.

Next time you are tempted to show your distrust for the court system by including an arbitration clause in your fee contracts, keep in mind that you may have just cancelled your malpractice insurance policy.

Randy Johnston, Johnston ~ Tobey

Attorneys Beware - E Discovery Sanctions

Posted 3/17/08

The Judge in the Qualcomm, Inc. v. Broadcom Corp case referred several lawyers to the California Bar Association to determine what sanctions should be imposed against them for failing to produce several thousand emails. The lawyers were also ordered to participate in an educational program to “identify the failures in the case management and discovery protocol utilized by Qualcomm and its in-house and retained attorneys in this case, to craft alternatives that will prevent such failures in the future.” The Judge also awarded $8.5 million in attorney fees.

The story: Qualcomm brought a patent infringement suit against Broadcom. One of the issues in the case was the extent to which Qualcomm had participated in a joint video team project with other companies. If it could be proven that Qualcomm had participated in this project, then Qualcomm would not have been able to assert its patent claims against Broadcom. Broadcom issued several discovery requests asking for documents relating to Qualcomm’s participation. Qualcomm took the position—and even had a corporate representative testify—that it had not participated in this project during a time period that was critical to the lawsuit.

While preparing a witness for trial, one of Qualcomm’s outside counsel discovered 21 emails showing that Qualcomm had participated in the joint video team project. Incredibly, Qualcomm’s counsel made the decision not to produce these documents, despite their clear relevance to the case and the fact that they had been requested. Worse - Qualcomm put the witness on the stand and allowed him to testify. Not surprisingly, the existence of the 21 emails was revealed on cross-examination. The revelation of these led the trial judge to conduct further investigation. Ultimately, Qualcomm was forced to admit and acknowledge that it “had thousands of relevant unproduced documents and that their review of these documents “revealed facts that appear to be inconsistent with certain arguments that [counsel] made on Qualcomm’s behalf at trial.” When the investigation was over, Qualcomm “searched the email archives of twenty-one employees and located more than forty-six thousand documents (totaling more than three hundred thousand pages), which had been requested but not produced in discovery.”

While this case involved a number of very poor decisions made by counsel for Qualcomm, it nevertheless underscores the importance of having a comprehensive system to search for, preserve and produce relevant emails and other electronic documents.

Another interesting issue in this case is that Qualcomm was ordered to pay the $8.5 million sanction even though there was very little, if any, direct evidence that the company had participated in the decisions that led to the failure to produce the documents. The court determined that Qualcomm was obviously aware that it had participated in the video project and it either knew that its trial counsel was taking a contrary position - or the court charged Qualcomm with such knowledge. In any event, the court was not willing to let the company put the blame on its outside counsel.

A copy of the ‘Order Granting In Part And Denying In Part Defendant’s Motion For Sanctions And Sanctioning Qualcomm, Incorporated And Individual Lawyers’ can currently be viewed on Westlaw. In many respects, it is road map of what not to do if you want to avoid discovery sanctions.

Alistair Dawson, Beck Redden & Secrest, L.L.P.

Shut-in Wells and Lease Primary Term Extension

Posted 3/14/08

The Waco Court of Appeals recently affirmed a Johnson County trial court’s summary judgment declaring that an oil and gas lease had terminated, holding that a shut in well with no rods, tubing, or pumping equipment was not “capable of producing in paying quantities” at the end of the primary term.

The lease at issue in Chesapeake Exploration L.P., et. al v. Corine Inc. and Drewland Enterprises, Inc., 2007 Tex.App. LEXIS 6986 provided that the lease could be maintained beyond its primary term by a shut-in well if such well was capable of production in paying quantities at the end of the primary term.(Emphasis added). In the trial court, the summary judgment evidence established that the well was not equipped with rods, tubing, or pumping equipment at the end of its primary term, which Texas courts have required in order for a well to be deemed capable of producing in paying quantities. The lessee, Chesapeake, also admitted through deposition testimony that the well did not have the equipment necessary to make it a well capable of producing in paying quantities on the day that the primary term expired.

The issue on appeal was the proper point in time that the well was required to have been capable of production in paying quantities. Despite the language of the lease, Chesapeake argued that the well only needed to be capable of production in paying quantities at the time it was shut-in, which occurred during the primary term. However, Corine argued that the trial court applied the proper temporal inquiry by focusing on the well¡¦s capability of production at the end of the primary term. The Court, citing the “plain language of the lease,” ruled that the operative time to determine whether this particular well was capable of producing in paying quantities was at the end of the lease’s primary term.

The practical effect of this ruling is that if a well is shut in, for whatever reason, during the primary term of an oil and gas lease with similar provisions to the lease in this case as described above, the lessee must ensure that all equipment necessary for the well to be turned “on” and begin flowing must be replaced and in working order when the primary term expires. For practitioners representing lessees, it would be prudent to negotiate for the inclusion of lease provisions providing for the measure of a well¡¦s capability for production at the time of shut-in, even when it occurs during the primary term.

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1 A well is capable of production if it is capable of producing in paying quantities without additional equipment or repairs. Anadarko Petroleum Corp. v. Thompson, 94 S.W.3d 550, 558 (Tex. 2002). A well is not ¡§capable of producing in paying quantities¡¨ if the well switch is turned ¡§on¡¨ and thewell does not flow, because of mechanical problems or because the well needs rods, tubing, or pumping equipment. Hydrocarbon Mgmt. v.Tracker Exploration, 861 S.W.2d 427, 434 (Tex.App.--Amarillo 1993, no writ.)

2 Chesapeake relied upon several reported cases focusing on a well¡¦s capability of production at the time of shut-in, but the Court found those cases distinguishable because the wells in those cases were shut in during the secondary terms of the leases, as opposed to during the primary term.

Koy R. Killen, Winstead, P.C

New Methods for Protecting Privilege

Posted 3/9/08

Now more than ever, maintaining privilege, especially given large production volumes, can be a significant challenge. It is well documented that the time, delay, and costs associated with an e-discovery privilege review are substantial. To reduce these costs and the risk of waiver, the advisory committee appears to encourage parties, during their Rule 26 meeting and conference, to enter into non-waiver agreements that become part of the Rule 26(f) order. Although helpful, these agreements are not dispositive of whether privilege has been waived. If, however, the assertion of privilege is challenged, these agreements will provide evidence that the parties did not intend to waive the privilege or protection.

One type of agreement is called “quick peek,” under which the responding party will provide certain requested materials for initial examination without waiving any privilege. The requesting party then designates the documents it wishes to actually have produced. This is the Rule 34 request. The responding party then responds, screening the documents requested and asserting privilege to those documents.

Another type of agreement is called a “clawback agreement.” Under a clawback agreement the parties agree that production made without intent to waive privilege or protection should not be a waiver so long as the responding party identifies the documents mistakenly produced, and that the documents should be returned under those circumstances. Other voluntary agreements may be appropriate depending on the circumstances of the litigation. Once the parties have reached an agreement, they should have the agreement included in the court’s case management order. According to the advisory committee, in most circumstances, a non-waiver agreement and its inclusion in a case management order should preclude waiver of an inadvertently produced privileged or protected document.

These agreements are not necessarily a complete solution. n recognition of this, there have also been some important changes to the procedural rules in federal courts. The 2007 amendments to the Federal Rules of Civil Procedure contained a new version of Rule 26 (b)(5) designed to specifically address inadvertent disclosure. The amended rule specifies the steps needed to preserve the privilege when documents are inadvertently produced to the other side. Under the rule, if information is produced in discovery which is subject to a claim of privilege or protection as trial preparation material, the party making the claim may notify any party that received the information of the claim and the basis for it. This notice must be in writing unless circumstances - such as the disclosure of privileged information during a deposition - preclude it. After being notified of a claim of privilege or protection, the receiving party must promptly return, sequester, or destroy the specified information, and any copies it has, and may not use or disclose the information until the claim is resolved. The advisory committee included this provision in part because the receiving party may have included this information in its trial preparation materials. Also, if the party that received the information disclosed it to a non-party before being notified, the party must take reasonable steps to retrieve the information.

The rule also affords the party receiving the privileged information the right to challenge the assertion. The new rule states that a party receiving a notice of claim of privilege or protection may promptly present the information to the court under seal for a determination of the claim. The producing party shall preserve the information until the claim is resolved. Accordingly, notice must be sufficiently detailed so that the receiving party can determine whether to challenge the claim. Also, if challenged, detail is needed to assist the court as to the basis of the claim.

More recently, the Senate approved S. 2450, a bill adding new Federal Rule of Evidence 502 to the Federal Rules of Evidence, by unanimous consent in February 2008. The next step for the bill is the House of Representatives. Under the new rule, inadvertent disclosure of privileged or protected information during discovery would constitute a waiver only if the party did not take reasonable precautions to prevent disclosure and did not make reasonable and prompt efforts to rectify the error. The Rule is intentionally broad. In its current form, the proposed rule:

1. Applies in all cases in federal court, including cases in which state law provides the rule of decision.
2. Applies in state court with respect to the consequences of disclosure previously made at the federal level.
3. Emphasizes that a subject matter waiver occurs only when the waiver is intentional.
4. Mandates that parties are not required to take extraordinary efforts to prevent disclosure of privilege and work product; nor are parties required to conduct a post-production review to determine whether any protected information has been inadvertently disclosed.
5. Applies the protections against waiver by inadvertent disclosure to federal offices or agencies.
6. Has no language allowing for selective waiver.

Amended Rule 26(b)(5) is a step towards more effective management of the costs, delays, and risks associated with producing documents in the e-discovery era. However, by no means does its adoption signal the end of the burdensome privilege review. Until a definitive ruling has been made enforcing non-waiver agreements, or until proposed Rule 502 is fully adopted, the wiser approach is for producing parties to engage in a complete privilege review. In addition to a full privilege review, producing parties should, as a matter of course, discuss and enter into some type of non-waiver agreement regarding inadvertent disclosure during the Rule 26(f) conference. The parties should also insist that courts make the non-waiver agreement part of the case management order. These actions do not guarantee that privilege will be preserved. However, at this point in the e-discovery era, compliance with amended Rule 26(b)(5) gives producing parties the best chance to avoid inadvertently waiving privileges and protections.

David Chaumette, Shook, Hardy & Bacon L.L.P.

Tips From the Trenches - Edition 1

Posted 2/29/08

As most attorneys recognize, experience is an intangible asset that cannot be learned from in law school or extracted from legal treatises or case law. Experience cannot be bought, but thankfully, it can be shared which is the purpose of “Tips from the Trenches.” This section will provide useful advice from a variety of Texas litigators on a range of topics which will change frequently. To kick off this new section, the first topic was a broad question posed to various Texas litigators in different practice areas as well as the judicial branch. Each was asked:

“What is your best piece of advice? What do you know now that you wish you had known when you started in the legal profession?”

Supreme Court Justice Harriet O’Neill reminds lawyers that underlying most legal principles is some element of common sense and that learning to trust intangible instincts will often prove the most valuable. She also encourages attorneys to value the people whose hard work allows you to shine. She sums up her advice by stating:

“When adrift on a sea of legal complexity, common sense and reasoned instinct are your best navigational tool. And you’ll never make port without the respect of your crew.”

Muhammad Aziz is an attorney with Abraham Watkins and he offers advice about long term success as an attorney. He reminds all lawyers, but in particular younger lawyers, that success in private practice is not just long hours and hard work, it is also about learning to bring in business. He explains:

“After passing the bar exam, lawyers seem to think that all they need to do is put in long hours and work hard and success is guaranteed. However, that is far from the truth. Long term success can only be guaranteed by having the ability to bring in new business. The sooner a young lawyer has a business plan and starts to implement it, the better.”

Jim Repass, Head of Intellectual Property and Technology Department at Fulbright & Jaworski, LLP counsels young lawyers to use their first years in practice to develop their legal skills. He explains that as lawyers continue to practice of law, demands on their time increase and you do not have the ability to hone the basic skills you need to succeed in this business. The first years of practice are the best time to develop the foundation on which attorneys will build their careers. He also advises lawyers during these early years to:

“Figure out the balance that works for you. No one can tell you the one type of lifestyle that is right because it’s an individual decision for each lawyer. And, for all lawyers, if you want to practice law, client development starts Day 1.”

Steve McConnico, Partner at Scott, Douglass & McConnico, LLP encourages trial lawyers to be realistic in their approach to cases. He explains:

“A hard thing for a trial lawyer to do is nothing. Good trial lawyers like to make things happen. Good trial lawyers are self-confident. Many times, we have to stop ourselves. Do not ask one question too many. Do not take every client that walks into your office. Do not think you can turn bad facts into good facts. Be realistic.”

Gib Walton, Texas State Bar President and Partner at Vinson & Elkins, LLP advises that time management is key to success as a trial lawyer. He counsels:

“Work hard at learning to manage your time. Time management may be the most difficult skill for a lawyer to master. I remember then Attorney General (later Chief Justice) John Hill telling our entering class at UT Law School that one of his secrets to success in the law was ¡¥intelligent postponement.’ We all must learn to prioritize logically, intelligently, and with common sense.”

Readers are encouraged to suggest future topics of interest for “Tips from the Trenches.” Please contact the author at apaterson@brsfirm.com with any suggestions.

Andrea Paterson, Beck, Redden & Secrest, LLP.

The PJC Takes Another Hit

Posted 2/18/08

Ford Motor Co. v. Ledesma,—S.W.3d --, 2007 WL 4465732 (Tex. Dec. 21, 2007).

Justice Willett, writing for an undivided Court, disapproved of the Texas Pattern Jury Charge’s definition of “producing cause”. Ledesma, an Austin motorist, lost control of his Ford F-350 dually pick-up while turning a corner, resulting in a collision with 2 cars parked at the curb. At the time of the accident, Ledesma’s truck had 4,100 miles on the odometer. Ledesma sued Ford Motor Company, the manufacturer of the truck, claiming that a manufacturing defect was the cause of the accident. A Bastrop County jury sided 11-1 with Ledesma and awarded him economic damages of $215,380. The Austin Court of Appeals affirmed. The Supreme Court granted Ford Motor Company’s Petition for Review, and reversed on two charge definitions: the definitions of manufacturing defect and producing cause.*

Both of the trial court’s submitted definitions had come from the Pattern Jury Charges, yet the Court found them flawed. With respect to the definition of manufacturing defect, the Court found that the PJC’s definition failed to account for the “deviation from specifications or planned output” requirement as established a decade ago in American Tobacco Co. v. Grinnell, 951 S.W.2d 420, 434 (Tex. 1997). The Court explained that the deviation requirement “serves the essential purpose of distinguishing a manufacturing defect from a design defect.” Ledesma, at *7. Moreover, because Texas law does not generally recognize a product failure or malfunction, standing alone, as sufficient proof of a product defect, a manufacturing deviation from the product’s design must be shown as a prerequisite to liability for a manufacturing defect.

The Court then turned to the trial court¡¦s definition of producing cause, submitted pursuant to PJC 70.1: “‘Producing cause’ means an efficient, exciting, or contributing cause that, in a natural sequence, produces the incident in question. There may be more than one producing cause.” The Court found that while it had seemingly sanctioned the definition in prior decisions, “[t]o say that a producing cause is ‘an efficient, exciting, or contributing cause that, in a natural sequence, produces the incident in question’ is incomplete and, more importantly, provides little concrete guidance to the jury.” Ledesma, at *7. The Court therefore disapproved the PJC 70.1 definition.

The Court provides guidance with respect to submitting proper definitions for both “manufacturing defect” and “producing cause.” The Court noted that the Restatement (Third) of Torts: Products Liability ¡± 2(a) (1998) properly provides that “a product ‘contains a manufacturing defect when the product departs from its intended design even though all possible care was exercised in the preparation and marketing of the product.’” Ledesma, at *7. With respect to producing cause, the Court approved producing cause language previously used in Trinity Universal Insurance Co. v. Bleeker, 966 S.W.32d 489, 491 (Tex. 1991): a producing cause is “one ‘that is a substantial factor that brings about injury and without which the injury would not have occurred.’” Ledesma, at *10.
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*The Court’s opinion also discusses the reliability of the expert testimony offered by Ledesma; however, the Court ultimately concluded that the trial court did not err with respect to the admissibility of the challenged expert opinions.

John T. Wilson IV and David E. Keltner, Kelly Hart & Hallman

Things to Consider Before Filing a Petition to Vacate an Arbitration Award

Posted 1/14/08

Given the limited grounds for vacating an arbitration award and the onerous standard of review, the odds are stacked heavily against a successful vacatur action. Sometimes, however, a party that loses big in arbitration is willing to roll the dice. If your client is in this position, there are a number of substantive and procedural factors to consider before advising your client on how and whether to proceed.

Substantive Considerations

The obvious first step is to analyze whether one of the limited grounds for vacatur is applicable to your case. See, e.g., TEX. CIV. PRAC. & REM. CODE § 171.088(a)(1)-(4) (grounds for vacatur under the Texas Arbitration Act); 9 U.S.C. & sect; 10(a) (grounds for vacatur under the Federal Arbitration Act). Because of the great deference courts must give to arbitration awards, these vacatur grounds are focused on the integrity of the arbitration process, not the propriety of the result. A showing of legal error is not enough, and courts will indulge every reasonable presumption to uphold an arbitrator’s decision.

To gauge your chances of success for your vacatur petition, you may want to consult a recent study that reviewed every state and federal case over a ten month period in which a court decided a motion to vacate on any of the federal vacatur grounds. See Lawrence R. Mills et al., Vacating Arbitration Awards, Vol. 11, No. 4, DISPUTE RESOLUTION JOURNAL 23 (Summer 2005). Of the 182 cases in which vacatur was sought, the motion to vacate succeeded 37 times, or in 20% of the cases. The study also reported success rates for each statutory and common law ground for vacatur and compared success rates in state courts versus federal courts. You can also consult our Texas-specific study, which found a roughly 13% success rate in Texas cases over a 39-month period. See Mark Trachtenberg and Christina Crozier, The Intersection Between Arbitration and Litigation in Texas, Advanced Civil Trial Course, State Bar of Texas, at 24 (Fall 2007) (based on cases decided between January 1, 2003 and March 31, 2007).

Procedural Considerations

The second step is to evaluate whether procedural considerations may limit the possibility of vacatur, even if a substantive ground for vacatur is available. Some of these considerations are discussed below.

1. Make sure that any error was preserved.

Counsel should confirm that error was properly preserved in the arbitration proceeding. For example, a party can waive an otherwise valid objection to the partiality of the arbitrator by proceeding with arbitration despite knowledge of facts giving rise to such an objection. See Kendall Builders, Inc. v. Chesson, 149 S.W.3d 796 (Tex. App.—Austin 2004, pet. denied). To preserve error, it is recommended that a party object both orally and in writing to the arbitrator and opposing parties. The written objection should be proffered as part of the record in the evidentiary hearing and preserved in any hearing briefs. Thomas H. Oehmke, Appealing Adverse Arbitration Awards, 94 AM. JUR. TRIALS 211, at § 77 (2006).

Make sure you have a complete record.

A party filing a motion for vacatur bears the burden to bring forth a complete record that establishes its basis for relief. Anzilotti v. Gene D. Liggin, Inc., 899 S.W.2d 264, 267 (Tex. App.—Houston [14th Dist.] 1995, no writ). In most cases, the “record” for a vacatur action will consist of (1) the arbitration award, (2) the underlying contract between the parties, (3) the transcript of the arbitration proceedings, and (4) any written briefing or documentary evidence submitted to the arbitrators. When there is no transcript of the arbitration proceedings available, a reviewing court will presume that evidence supports the arbitration panel’s award. Thomas v. Prudential Sec., Inc., 921 S.W.2d 847 (Tex. App.—Austin 1996, no writ).

Make sure the award is final.

An arbitral award must be final and definite before it can be reviewed by a court. To be final, the arbitration award must resolve all issues submitted to arbitration so that the rights and obligations of the parties need no further adjudication. The award must be intended by the arbitrator to be a complete determination of all issues. See Thomas H. Oehmke, Appealing Adverse Arbitration Awards, 94 AM. JUR. TRIALS 211, at § 40 (2006).

Make sure that your vacatur petition is timely.

Under the FAA, a party challenging an award must serve its notice of a motion to vacate within three months after the award is filed or delivered. 9 U.S.C. § 12. Under the TAA, an application to vacate must be made within 90 days after the date of delivery of the award, or within 90 days after the date the party knew or should have known of corruption, fraud, or other undue means as a ground for vacating the award. TEX. CIV. PRAC & REM. CODE § 171.088(b). If, however, the opposing party files an application for confirmation and sets it for a prompt hearing, the 90-day deadline may be accelerated because a vacatur petition must be decided before or simultaneously with an application for confirmation. Hamm v. Millennium Income Fund, L.L.C., 178 S.W.3d 256, 262-68 (Tex. App.—Houston [1st Dist.] 2005, pet. denied).

If your case falls short under any of these procedural considerations, it may be time to cut your losses. Courts are hesitant to interfere with arbitration awards and may use such procedural hurdles to side-step addressing the merits of your case. Moreover, a motion to vacate that is clearly groundless is sanctionable. See Zars v. Davis, 2006 WL 2955326, at *2-3 (Tex. App.—San Antonio 2006, no pet.); see also B.L. Harbert, Int’l, LLC v. Hercules Steel Co., 441 F.3d. 905, 906 (11th Cir. 2006).

But if statutory or common law grounds support your motion to vacate and your motion is procedurally sound, the gamble to seek vacatur might just pay off.

Mark Trachtenberg is a partner in the Appellate Section of Haynes and Boone, LLP in Houston. He is a member of the American Law Institute and serves on the editorial board of The Houston Lawyer. He received his J.D. from the Yale Law School, where he served as an editor on the Yale Law Journal.

Mark Trachtenberg and Christina F. Crozier, Haynes and Boone L.L.P.

Business torts ain’t what they used to be

Posted 1/7/08

The Halcyon Days - In September 1985, the giddiness from the 1979-81 spikes in oil prices - the equivalent of almost $70 a barrel today! - hadn’t started wearing off. Popular culture reflected fascination with things Texan. People fondly remembered John Travolta and Debra Winger in Urban Cowboy (1980) - itself a celebration of the broad prosperity that the oil boom spread across the Lone Star State. And lots of folks still watched Dallas, a series about a rich oil family. It ranked as the second most popular show on television.

Then, on November 19, 1985, Pennzoil won a $10.53 billion verdict from a Harris County jury against Texaco for tortious interference with Pennzoil’s oral contract to buy Getty Oil. The largest verdict ever - in a business tort case! The high Texas sky seemed the limit for an aspiring business trial lawyer late out of law school, fresh from a Fifth Circuit clerkship, and starting at a firm that cut its teeth on commercial cases.

A Shadow Falls - Enter Mike Wallace, he of 60 Minutes fame, and a segment on the Supreme Court of Texas. Mr. Wallace titled the story “Justice for Sale”, the nub of which accused the Court of kowtowing to their personal injury lawyer backers. The broadcast aired on December 6, 1987.

We can now see the program as a watershed event - not only for torts of the personal injury genre but also for business torts (not to mention plain old breach of contract claims).

Can You Say Tort Reform? - Thanks in part to “Justice for Sale”, the movement in Texas for tort reform gathered steam in the late 1980s and 1990s. The year 1990 saw the founding of Citizens Against Lawsuit Abuse. Texans for Lawsuit Reform drew its first breath somewhere around 1995. And all three branches of government - the legislature, the executive, and the judiciary - started taking on a distinctly more conservative, business-friendly, and anti-lawsuit cast.

Let me pause here to mention that - rhetorically at least - the folks who still seek “reform” of tort law have moved on. Now they want to shut down the “litigation lottery”, end “jackpot justice”, and fill in ”judicial hellholes”. They have almost ceded the debate about “reform” to the againsters, who apparently enjoy whipping a dead horse and put quotation marks around phrases - “tort reform” - they mean to ridicule.

The new terminology taps into people’s ambivalence about civil lawsuits as a way to resolve disputes. Even SpongeBob Square Pants features a spurious personal injury lawsuit (by Plankton against Mr. Krabs) for a slip-and-fall in the Krusty Krab restaurant. (Episode 62). The piscatorial jury at first seems sympathetic to Plankton. But attorney SpongeBob shows that Plankton cooked up the lawsuit to get the secret formula for Krabby Patties, and - despite much jurorial grumbling about Mr. Krabs’s stinginess - the episode ends in a defense verdict. The result renews faith in Bikini Bottom civil justice and in juries everywhere.

Baby and Bath Water? - The Plankton v. Krabs case highlights the worry that appeals to emotion for personal injuries may, in the hands of a gullible jury, cause justice to miscarry. But what we once called tort reform nowadays goes way beyond personal injury and wrongful death cases. Presently it seeks across-the-board changes that would weaken tort law protections for businesses. A leading tort reform group, for example, touts Texas legal changes that disadvantage business litigants as much as or more than personal injury claimants.

Examples of the legislative innovations that affect business tort litigation include:

limits on appeal bond requirements,
procedural barriers to class actions,
liberalization of forum non conveniens dismissals,
expansion of trial-delaying interlocutory appeals,
offsets for fraud and other intentional torts,
caps on punitive damages, and
curtailment of venue choices.

Whatever their merits in the context of personal injury lawsuits, these measures have made prosecuting business tort claims harder and defending them easier. I don’t know whether or not the legislature intended that to happen, but it certainly did.

The Courts Next Time - Tort reform in Texas has also involved efforts to elect and appoint judges and justices who share the reformers’ views. The next post will review the evolution of Texas Supreme Court decisions in business tort cases over the last two decades.

Barry Barnett, Susman Godfrey L.L.P.

Complex Courts

Posted 1/7/08

Perhaps the most controversial issue facing the SCAC these days is the creation of complex courts. Despite the fact that the Texas Legislature was unable to pass a bill that would have created complex courts, Chief Justice Jefferson and Justice Hecht have asked the SCAC to consider a rule that would implement complex courts.

While no rule has been drafted yet, it is clear that certain Justices of the Supreme Court want a system that would allow parties to replace the sitting trial judge with a judge chosen by a court-appointed committee. The question of whether “complex courts” are needed in Texas and, if so, how to implement such a court system is being studied by the State Bar’s Court Administration Task Force. At this point, it is not clear whether a proposal for “complex courts” will be made by the Task Force nor is it clear whether the Supreme Court will institute a rule of procedure for “complex cases.” Stay tuned!

Alistair Dawson, Beck, Redden & Secrest, L.L.P.