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"Best of" Litigation Update 2015, Volume 70, Spring 2015
STATE BAR LITIGATION SECTION REPORT the ADVOCATE The “Best of” Litigation Update 2015 ✯ VOLUME 70 SPRING 2015 STATE BAR LITIGATION SECTION REPORT the ADVOCATE A listair Dawson EDITORS Editor in C hief P rofessor L onny Hoffman University of Houston Law Center 100 Law Center Houston, TX 77204-6060 [email protected] Editor Emeritus J. Patrick H azel* University of Texas School of Law *Deceased Graphic Designer Janie A lderman [email protected] EDITORIAL BOARD Sofia A drogue’, P.C., LRM, P.C. Beck Redden, LLP 1221 McKinney, Ste. 4500 Houston, TX 77010 Edward C. Dawson Southern Illinois University School of Law Assistant Professor of Law Lesar Law Building, Room 252 Carbondale, Illinois 62901 A llyson N. Ho Morgan, Lewis & Bockius LLP 1000 Louisiana Street, Suite 4200 Houston, TX 77002 L isa Hobbs Kuhn Hobbs 101 West 6th Street, Suite 812 Austin, TX 78701 Roger Wade Hughes Looper Reed & McGraw, P.C. 1300 Post Oak Boulevard, Suite 2000 Houston, TX 77056 Adams & Graham, LLP PO Box 1429 222 E. Van Buren, West Tower Harlingen, TX 78550 Jennifer Parker A insworth Erika K ane Wilson Law Firm 909 ESE Loop 323, Suite 400 Tyler, TX 75701 W. Stephen Benesh Bracewell & Giuliani LLP 111 Congress Avenue, Suite 2300 Austin, TX 78701-4061 Hon. Jane Bland First Court of Appeals 301 Fannin Street Houston, TX 77002 Hon. Jane B oyle United States District Court, Northern District of Texas 1100 Commerce Street Room 1376 Dallas, TX 75242-1003 Hon. Jeff Brown Supreme Court of Texas P.O. Box 12248 Austin, TX 78711-2248 C raig D. C herry Assistant Attorney General General Litigation Division Office of the Attorney General P.O. Box 12548 Austin, TX 78711 Thomas Kurth Haynes and Boone, LLP 2323 Victory Avenue, Suite 700 Dallas, TX 75219-7673 K aren Gren Scholer Carter Scholer Arnett Hamada & Mockler, PLLC 8150 N. Central Expressway, Suite 1950 Dallas, TX 75206 K ennon Wooten Scott, Douglass & McConnico, LLP 600 Congress Avenue, Suite 1500 Austin, TX 78701-3234 Wasoff & Cowart, PLLC 1440 One Lincoln Centre 5400 LBJ Freeway Dallas, TX 75240 Law Office of Cory L. Carlyle P.O. Box 66093 Washington, DC 20035 A lex B. Roberts Beck Redden, LLP 1221 McKinney St. Suite 4500 Houston, TX 77010 TERMS EXPIRE IN 2015 L. H ayes Fuller Waco, TX J. Paul M anning Lubbock, TX M ark A. Shank Craig T. Enoch, Vice-Chair Dallas, TX Enoch Kever 600 Congress Ave., Suite 2800 Austin, TX 78701-3044 TERMS EXPIRE IN 2016 J. Wes Christian, Secretary Longview, TX Christian Smith & Jewell LLP 2302 Fannin St Ste 500 Houston, TX 77002 Geoffrey A. G annaway Carlos Eduardo Cárdenas, Treasurer Attorney & Counselor at Law 717 East San Antonio Street Third Floor - Toltec Building El Paso, Texas 79901 Christy A muny, Immediate Past Chair Bain & Barkley 550 Fannin, Suite 1330 Beaumont, TX 77701 Friedman, Suder & Cooke 604 East 4th Street, Suite 200 Fort Worth, TX 76102 L inda S. McDonald Langley & Banack Trinity Plaza II 745 E. Mulberry Ave., Suite 900 San Antonio, TX 78212 Michael Smith Siebman, Burg, Phillips & Smith, LLP 713 South Washington Avenue Marshall, TX 75670 Dallas, TX A my M. Stewart Hon. F. A lfonso Charles Houston, TX Jennifer A nne H altom-Doan Texarkana, TX Mitch Chaney Brownsville, TX Hon. X avier Rodriguez San Antonio, TX TERMS EXPIRE IN 2017 C ade W. Browning Abilene, TX Steve H ayes Fort Worth, TX Sonia Rodriguez San Antonio, TX Hon. R ebecca Simmons San Antonio, TX George P. Young Fort Worth, TX LIAISONS/ADVISORS Hon. Paul W. Green Supreme Court Liaison Austin, TX Jeff Chandler Jeffrey M. Benton Cory L. C arlyle COUNCIL MEMBERS Winston & Strawn, LLP 1111 Louisiana, 25th Floor Houston, TX 77002 Walker Friedman Rad Law Firm 12900 Preston Road, Suite 900 Dallas, TX 75230-1325 Thomas B. Cowart Paula Hinton, Chair-Elect Eighth Court of Appeals 500 E San Antonio Ave # 500 El Paso, TX 79901 Hon. Tracy Christopher Diamond McCarthy LLP Renaissance Tower 1201 Elm Street, 34th Floor Dallas, Texas 75270 Burleson LLP Wall Tower East 201 W. Wall Street, Suite 505 Midland, TX 79701 CHAIR EMERITUS MEMBERS Assistant editors and members, ex officio: Jason Fulton Pat L ong Weaver, Chair Hon. A nn McC lure Haley and Olson 510 N. Valley Mills Drive, Suite 600 Waco, TX 76710 Fourteenth Court of Appeals 301 Fannin Street Houston, TX 77002 2014-2015 LITIGATION SECTION OFFICERS Texas Young Lawyers Association Liaison San Angelo, TX ✯ VOLUME 70 SPRING 2015 Tom R iney Board Advisor Amarillo, TX Susan Nelson Alternate Board Advisor Waco, TX Tracy Nuckols Liaison, State Bar of Texas Austin, TX Click on the topic to jump to the applicable article STATE BAR LITIGATION SECTION REPORT the ADVOCATE T a bl e of C ontent s S P R IN G 2015, VO LUME 70 E ditor ’ s C omments by Lonny S. Hoffman ................................................................. 5 C h air ’ s R eport by Pat Long Weaver.. ........................................................................... 6 S ustaining M ember s of the L itigation S ection of the State B ar of Tex as ............ 8 T HE “ B E S T O F ” L I T I G AT I O N UP DAT E 2015 Tex as S upreme C ourt U pdate by Lynne Liberato & Polly Graham Fohn.................................................................. 9 N av igating the N ew J ustice C ourt R ules by Julie M. Balovich.. ....................................................................................... 33 Trends and Tr aps in R ules of C iv il P rocedure by Lamont A. Jefferson... .................................................................................. 48 Top E merging I ssues Facing Tri al L aw y er s in B usiness Torts and C ommerci al L itigation by Brian P. Lauten & Reagan W. Simpson........................................................... 62 You Won ’ t B re ak I t : H ow E xperienced L aw y er s S urv iv e the D igital A ge by Michael C. Smith ........................................................................................ 88 E mploy ment L aw U pdate : C ov enants N ot to C ompete ; S ection 7 of the NLRA by Mark A. Shank & Priya A. Bhaskar.. ............................................................. 94 E mploy ment L aw U pdate by Katrina Grider......................................................................................... 138 U.S. S upreme C ourt /5th C ircuit U pdate by Judge Royal Furgeson, Jessica Haseltine & Jennifer Wondracek......................... 229 I nsur ance L aw U pdate : I t ’ s N ot J ust F or the O ther G u y by Amy Elizabeth Stewart... ............................................................................ 248 C urrent I ssues and Trends in B usiness D ivorce L itigation by Ladd A. Hirsch & Jason Fulton................................................................... 268 Ta b l e of C o n t e n t s , C o n t in ue d N e x t P ag e THE Advocate Ta b l e of ✯ Spring 2015 C o n t e n t s , C o n t in ue d energy Law update by Harper Estes & Derek Cook... ..................................................................... 282 pubLiCaLLy avaiL abLe disCovery resourCes by Stephen F. Malouf..................................................................................... 293 THE Advocate ✯ Spring 2015 Editor’s Comments T HIS ISSUE OF The Advocate IS OUR “BEST OF” ARTICLES from Litigation Section’s annual continuing legal education program. This year’s Litigation Update was held in San Antonio, Texas. As a reminder, we no longer print a hard copy of this issue. The issue is available through a link on the Litigation Section’s website, www.litigationsection.com. At this same site you can also access and download all previously published symposium issues. Alternatively, you can access The A dvocate’s past issues on Westlaw and Lexis. Looking ahead, the Summer 2015 symposium will be devoted to Statutory Interpretation. Topics include “Statutory Construction for the Practitioner,” “The Art of Statutory Interpretation,” “Legislative Override After Judicial Interpretation,” “The Attorney General’s Role in Statutory Construction,” “Avoiding Constitutional Concerns by Applying a Presumption of Constitutionality to Statutory Interpretation,” “Plain Text Lonny S. Hoffman Construction,” “Statutory Interpretation in the U.S. Supreme Court,” and “Insurance Policy Construction and Statutory Interpretation.” We are also in the middle of working up our Fall 2015 issue, which is now tentatively titled “Motion Practice In Texas.” I expect it will cover a broad spectrum of our pretrial motion practice in the state. Questions or comments about The Advocate are always welcome. My email address is [email protected]. Regards, Lonny Hoffman Editor in Chief RETURN TO TABLE OF CONTENTS THE Advocate ✯ Spring 2015 Chair’s R eport Thoughts of Spring or Why the Practice of Law is Just Like Gardening I F YOU ARE GOING TO BE A GREAT GARDENER you have to have a long-term vision, a present plan, a willingness to get down in the dirt, and most of all have a sense of optimism supported by faith. Oh and reading seed catalogs with help you make it through the winter. Lessons learned from my parents. The same rules apply to every endeavor. They particularly apply to the practice of law. My law firm is in the process of a firm wide strategic planning and review initiative. The key is to make sure we are really meeting our clients needs, forecasting change, creating adaptive solutions , and determining how to take our services to the highest level. And just like gardening, it takes time to see those efforts bear fruit. It also takes careful vigilance, to make sure that your efforts are not being compromised. Pat Long Weaver The members of the Litigation Section Council also engage in strategic planning throughout the year, with a particular focus in the spring. Our objective is to make sure we keep our members informed and provide them the tools they need to improve their practice. We appreciate your input and hope that we are meeting your needs. Just like in the garden, you have to keep moving forward and continually reassess and plan. So let us know how we are doing. While I am contemplating the gardening theme, I want to focus on three of our efforts, CLE , the Texas Legends Program, and our Legislative Committee. Careful study and education is key to successful gardening. The Council recognizes that it is imperative that we keep up with changing legal standards and best practices. We strive to offer the best CLE programs available. Already we have had the Litigation Update held in January, this issue of the Advocate highlights that program. We are presenting a Litigation Section CLE track on Thursday at the State Bar of Texas Annual Meeting. The meeting this year is to be held June 18-19, 2015 in San Antonio, Texas at the Grand Hyatt and the Henry B. Gonzalez Convention Center. We will have a section meeting at the conclusion of the track, and hope to see you there. On Friday the Section is sponsoring the Keynote Presentation Speaker at the Friday General Session Luncheon, Fred H. Bartlit, Jr. If you are in need of online CLE hours, do not forget to look over our slate of free online programs on the Litigation Section website, which currently features six presentations, of which there are 1.25 hours of ethics. www.litigationsection.com Successful gardens inspire and leave a lasting legacy. Looking to others plans and how they achieved successful outcomes can be both instructive and emotionally rewarding. The Texas Legal Legends program memorializes the careers and experiences of legendary lawyers who have practiced in Texas. A key part of the program is providing both a live program of induction, usually conducted at the law school of the honoree, and uploaded interviews of the Legends on the Section web site. RETURN TO TABLE OF CONTENTS THE Advocate ✯ Spring 2015 This past year the Legends committee had the pleasure of inducting George Chandler at Baylor Law School, and this fall will induct the Honorable Mary Lou Robinson, Federal District Judge of the Northern District, Amarillo, at the Texas Tech Law School. Please check out the Legends page on the Section web site. You have to keep your eye on the weather. The Litigation Section Council has monitored the “climate” at the Texas Legislature as well as monitored civil rule changes for many years. The primary function is to inform members of pending changes, but we also participate in the development of appropriate legislation and comment on rule changes. This session of the Legislature, just as in past sessions, the Litigation Section Council is tracking bills covering everything from net worth evidence to jury composition to first party insurance claims. The Council has also, just as it did in 2007, sought permission from the State Bar Board of directors to oppose a bill creating a specialty court. The issue of specialty courts was studied at length in 2007 after Senator Bob Duncan introduced a specialty courts bill, SB 1204. Members of the Litigation Section Council, after receiving permission to oppose the bill, served on the working group on the bill. I was pleased to serve on that working group. After careful consideration and input from many interested parties, SB 1204 failed in the session. But because of the interest in both specialty courts and the court system in general, in 2008 the Court Administration Task Force of the State Bar of Texas was formed. I again served on the Task Force, as well as members of many diverse interest groups. The Task Force ultimately did not recommend the use of specialty courts in the state, but recognized that our judiciary needed more resources in complex litigation. This led to Senator Duncan, who had worked closely with the Task Force, to introduce SB 992 in the next session. It contained a specific court resources component to aid courts in such cases, but it has never received adequate funding. This session HB 1603 attempts to create a special “chancery court “with seven appointed judges, and a special court of appeals, to hear cases involving business entities. The same issues as with SB 1204 are presented, access to justice for all parties and the impact on resources to the existing judiciary. It is the plan of the Council to still urge that former SB 992, now be fully funded and resources provided to the judiciary state wide. It takes a huge dose of optimism and faith. Faith is planting the bulb in fall, the tree in winter, the cutting of a plant, with the knowledge that it will grow. So this spring, be it hiring new associates, starting a new practice, moving to a new area, supporting your friends in their practice, or just being the kind of lawyer you know you need to be, understand that it requires a huge dose of optimism and faith. It also requires resources, and we hope the Section can aid you as your grow your practice. I wish you a great Spring and Summer. Pat Long Weaver Chair, Litigation Section RETURN TO TABLE OF CONTENTS S ustaining M embers of the L itigation S ection of the S tate B ar of T exas (As of April 2015) Brock C.Akers David Altenbern Christy Amuny Paul E. Anderson Jr. Tshombe Anderson Trey A. Apffel III Alejandro Ballesteros Horacio L. Barrera Misti Lachelle Beanland Blake L. Beckham Alexander Michael Begum Angela Bell Daniel W. Bishop Robert Black Talmage Boston Jr. Fred Bowers II Samuel Boyd Turner Williamson Branch Russell Scott Briggs Jeffrey Vincent Brown Lori Lei Brown Cade Weston Browning Robert Blake Brunkenhoefer Craig Caesar Kamryn Caldwell Hector Cardenas Jr. Carlos Eduardo Cardenas Edward Morgan Carstarphen III Edgar Leon Carter Sheryl Scott Chandler James “Wes” Christian Lester Davis Cochran Kevin L. Colbert Wayne Donald Collins William Joseph Collins III Charles Conrad Paul J. Coselli Scott Wagner Cowan Thomas B. Cowart John T. Cox III Jack R. Crews Tom Alan Cunningham Jeffrey Stewart Davis Jacob De Leon John Dietze Michael Donald Daniel M. Downey Fredrick D. Dreiling Allan K. DuBois Pamela R. Dunlop William C. Dvorak Darah Lyn Eckert Carmen E. Eiker Casey Sean Erick Oscar Favela Harrison R. Fisher Howard Fomby Jr. Walker C. Friedman Thomas M. Fulkerson Brian T. Gaddy Michael Scott Gardner Viola G. Garza Laura Benitez Geisler John Ralph Gilbert Daniel O. Goforth Paul Nicholas Gold Elizabeth N. Golden Michael Gomez Gregory Lamar Gowan Marc Gravely Paul W. Green Andrew M. Greenwell Richard Alan Grigg William Davis Guidry Edmund Lee Haag III Melissa Brook Hagan Thomas C. Hall Douglas D. Haloftis David Hart Kelly Harvey Steven Knowles Hayes Michael S. Hays Claire Henry Federico G. Hinojosa Jr. Paula Hinton Thomas Daniel Hollaway Floyd Honea II Samuel Houston William Craft Hughes Brian G. Janis Mary Ann Joerres Charles M. Jordan Michael Andrew Josephson Elizabeth Kamin Kristina Kastl Jeffrey Kehl David E. Keltner Angelle Kergosien Patricia J. Kerrigan Roger Alan Key Gayle Klein Allen Haber Kline Jr. Susan K. Knoll William H. Knull III Michael Robin Krawzsenek J. Albert Kroemer Robert Joseph Kruckemeyer Thomas E. Kurth Allen Landerman James Morris Lassiter III Thomas A. Laucius Larry De-Wayne Layfield James Russell Leahy Jared Gregory Leblanc Joyce Stamp Lilly Leslie Arletta Lockhart Victor Longo Nora L. Longoria Jose Antonio Lopez Jose Oscar Lopez Jeffrey Thomas Lucky Jeffrey Scott Lynch Elizabeth E. Mack Luke Madole Francis Majorie D. Nevill Manning Judson Paul Manning Malcolm Martin Kenneth McConnico Stephen E. McConnico Henry Hale McCreight Jr. Travis Cole McCullough Linda S. McDonald Roberto Hernandez Mendoza Tahira Khan Merritt C. Randall Michel Richard W. Mithoff Jr. Gregory Moore Marion Mitchell Moss James C. Mosser Jeffery Frank Nadalo Michael Alexander Nava Susan Nelson John F. Nichols William David Noel Weston O’Black Patrick Gregory O’Brien Harriet O’Neill Rene Ordonez Dominic John Ovella Jan Patterson Andrew Payne Michael W. Perrin Lance A. Pool John W. Proctor William Kelly Puls John V. Rabel Donato David Ramos RETURN TO TABLE OF CONTENTS Thomas E. Reddin Christopher Bernard Reed Marisa Resendez Rose Guerra Reyna Matthew Richard Rodgers Eduardo Rodriguez Jimmy Robert Ross Scott Jay Ryskoski Karen Scholer Leonard Wayne Scott Michael E. Shelton Avery Sheppard Rebecca Simmons John E. Simpson III Dwayne Simpson Clarissa Renee Skinner Michele Yennie Smith Michael Charles Smith Dwayne Smith Richard A. Solomon Frank R. Southers John J. Specia Jr. Bruce Kirk Spindler Broadus A. Spivey Steven A. Springer Robert Gary Stephens Stephen L. Tatum Eric J. Taube Jack George Ternan Andy Wade Tindel Cindy Venise Tisdale Jennifer Tomsen James Tracy Jr. Dale L. Trimble Thomas W. Umphrey John Urquhart Liza Michelle Vasquez Ruth Vernier Wesley Ward Patricia Long Weaver Scott Ryan Wiehle David K. Williams Jett Williams III Wade B. Williams Allen Linn Williamson Steven A. Wisch William D. Wood Earnest W. Wotring Virgil W. Yanta Syed-Saifuddin Tim Yusuf Luis Guillermo Zambrano Richard Stephen Zembek TEXAS SUPREME COURT UPDATE LYNNE LIBERATO POLLY GRAHAM FOHN Haynes and Boone, LLP Houston, Texas State Bar of Texas 31st ANNUAL LITIGATION UPDATE INSTITUTE January 15-16, 2015 San Antonio CHAPTER 1 RETURN TO TABLE OF CONTENTS Lynne Liberato Partner [email protected] 1221 McKinney Street Suite 2100 Houston, Texas 77010 Areas of Practice • • Appellate Litigation/Trial Practice Education • • • J.D., South Texas College of Law, 1980, Alumna of the Year, 1992 M.A., Texas A&M University Commerce, 1978, Distinguished Alumna Citation, 2002 B.S., Sam Houston State University, 1974, Distinguished Alumna Award, 1996 Bar Admissions • Texas Court Admissions • • United States Supreme Court U.S. Court of Appeals for the Fifth Circuit • U.S. Court of Appeals for the Eleventh Circuit • U.S. District Court for the Southern District of Texas • U.S. District Court for the Eastern District of Texas Judicial Clerkships • Chief Staff Attorney, First Court of Appeals [Houston] 1981-90 T +1 713.547.2017 F +1 713.236.5538 Lynne Liberato has argued before the United States Supreme Court, met with the president in the Oval Office regarding judicial appointments, and lobbied Congress for funding of legal services for the poor. Whether before the highest levels of the three branches of government or at home in Houston, she dedicates herself to her clients, her profession, and her community. Ms. Liberato has led teams in some of the most significant appeals and trials in Texas. Most recently, she handled pivotal legal issues for a major oil company in federal district court, represented a pipeline in one of the most significant energy cases before the Texas Supreme Court, and obtained a reversal of a $25.5 million judgment in the 5th Circuit. She includes among her proudest achievements her selection as "Volunteer of the Year" for the United Way of Greater Houston, winning the Karen H. Susman ADL Jurisprudence Award, her election as president of the State Bar of Texas, and her selection as a participant in the 59th Annual Security Forum of the Air Force War College. A prolific speaker and legal writer, she co-authored "Summary Judgments in Texas," often called the "bible" of summary judgments. Versions of this article have appeared in five law reviews since 1989, and it has been recognized as one of the 10 most-cited articles by appellate courts nationwide. She also is a member of the board of directors for the law firm. Professional Recognition • • • • • • • Recognized by Chambers USA 2009-2014 as one of the leading practitioners in the United States for Appellate Karen H. Susman Jurisprudence Award (2013), given by the Anti-Defamation League to honor a lawyer who exhibits an exceptional commitment to equality, justice, fairness and community service Civilian participant, 59th Annual National Security Forum, Air Force War College (2012) JA Hall of Achievement Laureate (2012), Junior Achievement of Southeast Texas Leon Jaworski Award (2010), first woman to win community service award named for the famed Watergate special prosecutor Robert Kneebone Award for Volunteer of the Year (2008) and Woman of the Year (2004), United Way of Greater Houston Award for Outstanding Law Review Article (two-time winner) for "Summary Judgments in Texas" (2007) and for "Reasons for Reversal in Texas Courts of Appeals" (2004), awarded by the Texas Bar Foundation RETURN TO TABLE OF CONTENTS • • • • • • • • Exemplary Article Award, Texas Center for the Judiciary (20052006) ("for contribution to judicial excellence") Gene Cavin Award, State Bar of Texas (2006) (highest award for excellence in continuing legal education) Top 100 Texas Super Lawyer, Top 50 Female Lawyer, Top 100 Houston Super Lawyer, and Appellate Super Lawyer, Texas Monthly magazine (2003-2014) Top Notch Appellate Lawyer, Texas Lawyer (2002 and 2007 two of the three years the recognition was given) (recognized as one of the top five appellate lawyers in Texas) Named one of the Best Lawyers in America for Appellate Practice and Commercial Litigation, 2005-2014, Litigation - Intellectual Property, 2012-2014 Martindale Hubbell® Law Directory with a Peer Review Rating of AV® Preeminent™ Member, American Law Institute Board Certified in Civil Appellate Law, Texas Board of Legal Specialization Professional Leadership • • • • • • • • • • President, State Bar of Texas (2000-2001) President, Houston Bar Association (1993-1994) (first woman) President, Texas Supreme Court Historical Society (2011-2012) Chair, Appellate Section, State Bar of Texas (1997-1998) Community Campaign Chair (first lawyer) (2013-2014), United Way of Greater Houston; Chair of the Board (2005-2007); Board of Trustees (2003-2011, 2012-present); Chair, THRIVE Committee (2008-present); Alexis de Tocqueville Society (2001present); Formerly Chair, Hurricane Ike Task Force; Chair, Community Goal Task Force; Chair, Hurricane Katrina/Rita Task Force; Chair/Founder, Law Firm Initiative Member, Board of Directors of the Greater Houston Partnership (2005-2010, 2012-2015) Executive Committee, South Texas College of Law Board of Directors (2005-2007); Trustee (2005-2007) Co-Author, Texas Practice Guide (West 1999 and Supp. 2011) Volunteer, Houston Bar Veterans Administration Clinic and Houston Volunteer Lawyers Program Board of Directors, United States Naval Academy Parents’ Club of the Texas Gulf Coast (2005-2007) RETURN TO TABLE OF CONTENTS Polly Graham Fohn Partner [email protected] 1221 McKinney Street Suite 2100 Houston, Texas 77010 Areas of Practice • Appellate Education • • J.D., Harvard Law School, 2008, cum laude, Journal on Legislation, Supervising Editor B.S., Chemistry, Brown University, 2004, magna cum laude, with honors Bar Admissions • Texas, 2009 Court Admissions • • • • • U.S. Court of Appeals for the Fifth Circuit U.S. Court of Appeals for the Ninth Circuit U.S. Court of Appeals for the Eleventh Circuit U.S. District Court for the Southern District of Texas U.S. District Court for the Western District of Texas Judicial Clerkships • Law Clerk for Judge R. Lanier Anderson, Eleventh Circuit Court of Appeals T +1 713.547.2570 F +1 713.236.5554 Polly Fohn works with trial teams to preserve error and craft innovative and winning legal arguments from before trial through appeal. She is skilled in trial and appellate procedure in both state and federal court, where she has handled charge conferences, drafted dispositive motions, authored numerous appellate briefs, and presented oral argument. Ms. Fohn also brings to every case her experience as a former federal law clerk to the Honorable R. Lanier Anderson on the United States Court of Appeals for the Eleventh Circuit. Ms. Fohn has achieved victories for her clients even when the odds were stacked against them. For example, she persuaded a trial court to render a take-nothing judgment in favor of one of her clients notwithstanding the existence of an adverse, multi-million dollar jury verdict. In another case, she successfully petitioned an en banc court of appeals to grant rehearing, reverse the decision of a three-justice panel, and render judgment in favor of her client. She has been named a Texas Super Lawyer “Rising Star” in appellate litigation. In addition to her success in court, Ms. Fohn has given numerous lectures on trial and appellate procedure. She is also an active member of the editorial board for The Houston Lawyer magazine and frequently publishes columns on a range of topics. Ms. Fohn gives back to her community as a Young Leader of the United Way of Greater Houston. Selected Speaking Engagements • • • • Speaker, “Preservation of Error at Trial,” State Bar of Texas Advanced Personal Injury Course (Houston, Dallas and San Antonio, 2014) Speaker, "Summary Judgments in Texas," State Bar of Texas Advanced Personal Injury Course (San Antonio, 2013) Speaker, "Reasons for Reversal," State Bar of Texas Advanced Civil Trial Course (Houston and San Antonio, 2012) Speaker, "Appellate Case Update," Houston Bar Association Appellate Section (Houston, 2012) Professional Recognition • Selected for inclusion in Texas Super Lawyers Rising Stars Edition in Appellate (2013-14) Professional Leadership • • Editorial Board Member, The Houston Lawyer (2011-2014) Young Leader, United Way of Greater Houston (2010-2014) RETURN TO TABLE OF CONTENTS TABLE OF CONTENTS I. INTRODUCTION TO THE COURT ..................................................................................................................... 1 II. HOW THE COURT WORKS................................................................................................................................. 1 III. CASES IMPACTING BUSINESSES ..................................................................................................................... 2 A. Contract Cases ................................................................................................................................................. 2 B. Employment Cases .......................................................................................................................................... 3 C. Corporate Governance Cases .......................................................................................................................... 4 D. Tort Cases ........................................................................................................................................................ 5 E. Arbitration ....................................................................................................................................................... 7 IV. ENERGY CASES ................................................................................................................................................... 8 V. PROCEDURAL CASES ....................................................................................................................................... 10 A. Forum and Venue .......................................................................................................................................... 10 B. Pleading ......................................................................................................................................................... 11 C. Discovery....................................................................................................................................................... 11 D. Spoliation....................................................................................................................................................... 12 E. Juries.............................................................................................................................................................. 13 F. Charge Error .................................................................................................................................................. 13 G. Judgments ...................................................................................................................................................... 14 H. New Trials ..................................................................................................................................................... 14 I. Sanctions ....................................................................................................................................................... 15 J. Appeal ........................................................................................................................................................... 15 VI. TORT CASES ....................................................................................................................................................... 16 VII. OTHER IMPORTANT CASES ............................................................................................................................ 18 RETURN TO TABLE OF CONTENTS TEXAS SUPREME COURT UPDATE INTRODUCTION TO THE COURT The Supreme Court of Texas is the highest civil appellate court in the Texas state system. Unlike every other state, Texas has a bifurcated system in which a different court, the Texas Court of Criminal Appeals, is the highest court for criminal matters. Both criminal and civil cases are decided by the first step in the appellate process—review by right to 14 courts of appeals. The Supreme Court is composed of the Chief Justice and eight Associate Justices. The Justices are elected to staggered six-year terms in state-wide elections. When a vacancy arises, the Governor may appoint a Justice, subject to Senate confirmation, to serve out the remainder of an unexpired term until the next general election. The current Justices of the Supreme Court are: • Justice John Phillip Devine. Justice Devine was elected to the Court in November 2012. He previously served for seven years as the District Judge of the 190th District Court in Houston. • Justice Jeff Brown. Justice Brown was appointed to the Court by Governor Rick Perry in September 2013. Previously, Justice Brown was an Associate Justice on the Fourteenth Court of Appeals in Houston. 1 I. • • • • • • • Chief Justice Nathan L. Hecht. Chief Justice Hecht is the 27th Chief Justice, and is the longestserving member of the Court in state history. He was first elected to the Court in 1988 as a Justice and was re-elected four times. He became the Chief Justice in October 2013. Justice Paul W. Green. Justice Green was elected to the Court in 2004 after serving ten years as a Justice on the Fourth Court of Appeals in San Antonio. Justice Phil Johnson. Justice Johnson was appointed to the Court on March 15, 2005, by Governor Rick Perry. He had been serving as chief justice of the Seventh Court of Appeals in Amarillo at the time of his appointment. Justice Don R. Willett. Justice Willett was appointed to the Court in August 2005 by Governor Rick Perry. Before assuming the bench, Justice Willett was Deputy Texas Attorney General, serving as chief legal adviser to Attorney General Greg Abbott. Justice Eva Guzman. Justice Guzman was appointed to the Court on October 8, 2009, by Governor Rick Perry. Previously, she was an Associate Justice on the Fourteenth Court of Appeals in Houston. Justice Debra Lehrmann. Justice Lehrmann was appointed to the Court by Governor Rick Perry on June 21, 2010. Before her appointment, she served as the District Judge of the 360th District Court in Fort Worth. Justice Jeffrey S. Boyd. Justice Boyd was appointed to the Court by Governor Rick Perry on December 3, 2012. Previously, Justice Boyd was the governor’s chief of staff. II. HOW THE COURT WORKS Although the Supreme Court has original jurisdiction in certain matters (e.g., mandamus proceedings), the majority of the Court’s decisions arise out of its appellate jurisdiction over decisions from the State’s appellate courts. The Court’s review of these decisions is discretionary, and thus the first step in most cases at the Supreme Court is persuading the Court to take the case. Petition for Review. The petition for review is the pleading asking the Court to review the lower court’s decision. Petitions should not focus simply on errors committed below, but should instead explain to the Court that the lower court’s opinion presents a conflict among the courts of appeals on an important issue of law, involves the interpretation or validity of a statute, or raises a question of state law that should be decided by the Supreme Court. Although one purpose of the petition is certainly to highlight the lower court’s mistake, the more important goal at this stage is to persuade the Court to grant review. Petitioners are limited to 15 pages (or 14,500 words). Petitions are automatically denied approximately one month after filing unless one or more Justices take some action on the petition other than denying it. A single Justice may request the other side to file a response. Briefs on the Merits. Three or more Justices may request the parties to file full briefs on the merits. Briefs on the merits are limited to 50 pages (or 15,000 words). Unlike in the U.S. Supreme Court, in the Supreme Court of Texas, the parties may proceed to full briefing on the merits without knowing whether the Court will ultimately decide to review the case. For this reason, although the parties may still argue about whether the Court should grant review, the primary focus of the briefs on the merits should be whether the lower court committed reversible error. Amicus briefs are also important during this stage. Briefs filed by other interested parties (amici) may demonstrate to the Court how the lower court’s opinion will impact others beyond the parties to the case, including an entire industry, class of individuals, or a segment of the market. 1 See http://www.supreme.courts.state.tx.us. RETURN TO TABLE OF CONTENTS Grant and Opinion. It takes four Justices to grant the petition. In many cases, the Court will simply issue a “per curiam” opinion without oral argument. In other cases, the Court will schedule oral argument, after which the case will be submitted for review. Recent Statistics. In 2013, the Court granted review in 94 cases (including 81 petitions for review, 8 petitions for a writ of mandamus, 2 certified questions from the Fifth Circuit, and 2 reinstated causes). The Court denied review in approximately 1,100 cases.2 III. CASES IMPACTING BUSINESSES A. Contract Cases a. FPL Energy, LLC v. TXU Portfolio Mgmt. Co., 426 S.W.3d 59 (Tex. 2014) Liquidated damages provisions are unenforceable when they operate with no rational relationship to actual damages. Facts: TXUPM entered into a contract to purchase renewable energy and “renewable energy credits” from FPL Energy, which owns and operates wind farms in West Texas. The contract provided that, if FPL failed to deliver, FPL would owe TXUPM $50 per credit without regard to TXUPM’s actual damages. FPL failed to deliver the energy or credits and TXUPM sued to recover liquidated damages. Law: The Court concluded that a liquidated damages clause is enforceable only if: (1) the harm caused by the breach is difficult to estimate, and (2) the amount of liquidated damages is a reasonable forecast of just compensation. A liquidated damages clause is “unreasonable” if “the actual damages incurred were much less than the amount contracted for.” Applying this test, the Court held that the damages clause here was unenforceable because the $50 rate operated “with no rational relationship to actual damages” and thus was unreasonable. b. Zachry Const’n Corp. v. Port of Houston Auth. of Harris Co., __ S.W.3d __, 2014 WL 4472616 (Aug. 29, 2014) A no-damages-for-delay provision is unenforceable if the delay is caused by intentional misconduct. Facts: Zachry Construction entered into a contract to build a wharf for the Port of Houston. The contract provided that Zachry’s sole remedy for delay on the project was an extension of time. Although it had no contractual right to do so, the Port of Houston insisted 2 See http://www.courts.state.tx.us/pubs/AR2013/sc/2sc-activity090113.pdf. that Zachary use a method of construction that substantially delayed completion of the project. Zachary sued for damages and the Port invoked the nodamages-for-delay provision as a defense to liability. Law: The Court held that a no-damages-for-delay provision is unenforceable as against public policy if the delay: (1) resulted from fraud, misrepresentation, or other bad faith on the part of one seeking the benefit of the provision, or (2) was based upon active interference with the contractor or other wrongful conduct, including arbitrary and capricious acts or willful and unreasoning actions, taken without due consideration and in disregard of the rights of other parties. Because the jury found that the delay here met the two criteria above, the Texas Supreme Court held that the no-damages-for-day provision was unenforceable. c. Moayedi v. Interstate 35/Chisam Rd., L.P., 438 S.W.3d 1 (Tex. 2014) A provision in a guaranty agreement that waived “each and every” defense against liability was enforceable and waived the defendant’s right of offset. Facts: The defendant guaranteed a $695,000 loan. The guaranty agreement included a general waiver of defenses “other than the full payment of the indebtedness hereby guaranteed.” Id. at 3. The loan went into default and the lender sold a piece of property securing the loan at foreclosure for well-under market value. Under section 51.003 of the Property Code the amount of any remaining deficiency on the loan could be offset by the difference between the fair market value of the property and its foreclosure price. The lender claimed that the defendant had waived all of its defenses including its statutory right of offset. Law: The Court held that the statutory right to offset under section 51.003 of the Property Code was a defense to liability that the defendant waived under its guarantee agreement. It reasoned that “[j]ust because the waiver is all encompassing does not mean that it is unclear or vague.” Id. at 8. “To waive all possible defenses seems to very clearly indicate what defenses are included: all of them.” Id. “Indeed, a waiver provision such as this one may be more descriptive to a layperson than a waiver referencing Property Code section numbers.” Id. d. Amedisys, Inc. v. Kingwood Home Health Care, LLC, 437 S.W.3d 507 (Tex. 2014) The variation between the terms of a settlement offer and the terms of an acceptance were immaterial and did not prevent enforcement of the offer. RETURN TO TABLE OF CONTENTS Facts: After the plaintiff repeatedly stated that it would accept nothing less than a “six figure” settlement offer, the defendant decided to make a $90,000 offer, which if rejected could serve as a basis to recover litigation costs under Texas Rule of Civil Procedure 167. To the defendant’s surprise, the plaintiff accepted the settlement offer and later sued for breach of contract when the defendant refused to honor the agreement. The defendant argued that the plaintiff’s acceptance was not effective, because it had offered in its letter “to pay a total sum of $90,000 to settle all claims asserted or which could have been asserted by [the plaintiff],” while the plaintiff’s letter had accepted only the defendant’s “offer to settle all monetary claims asserted against [the defendant].” Id. at 511. The trial court granted summary judgment in favor of the plaintiff and enforced the terms of the settlement agreement. Law: “Under the common law, an acceptance may not change or qualify the material terms of the offer, and an attempt to do so results in a counteroffer rather than acceptance.” Id. at 513-14. But an “immaterial variation” between the offer and acceptance will not prevent the formation of an enforceable agreement. Here, the Court noted that the terms of the defendant’s offer letter were internally inconsistent—referring sometimes to “all monetary claims between the parties” and in other instances to “all claims asserted or which could have been asserted.” Id. at 515. In light of this variation and because the plaintiff clearly stated its intent to accept “the settlement offer you sent,” the Court concluded that the variation in the terms of the acceptance were immaterial and that the offer letter and acceptance constituted prima facie evidence of the plaintiff’s clear intent to accept the settlement offer. Because the defendant did not submit any contrary evidence or challenge the validity of acceptance until after the entry of summary judgment, the Court affirmed the entry of summary judgment. B. a. Employment Cases Sawyer v. E.I. du Pont de Nemours and Co., 430 S.W.3d 396 (Tex. 2014) At-will employees may not sue their employer for fraud if the fraud claim is based on a promise of future employment. Facts: DuPont announced that it was spinning off part of its operations to a wholly-owned subsidiary. To ease the concern of its employees, many of whom were entitled to transfer to other DuPont jobs under a collective bargaining agreement, DuPont promised that it would not sell the new subsidiary. DuPont thereafter sold it, and the new owner reduced the employees’ compensation and benefits. The employees sued DuPont for fraudulently inducing them to terminate their employment, alleging that they collectively incurred more than $23 million in damages. Law: The Court held that at-will employees cannot sue for fraud where their claim depends on a promise of continued employment. “If the employer or employee can avoid performance of a promise by exercising a right to terminate the at-will relationship, which each is perfectly free to do with or without reason at any time, the promise is illusory and cannot support an enforceable agreement . . . [or] an action for fraud.” And no one, the Court explained, “can claim recovery of damages for the loss of an employment relationship he had no right to continue.” Although some of the employees had a modified at-will employment relationship under the collective bargaining agreement, their relationship was governed by contract, and their contractual remedies foreclosed an action for fraud. b. Exxon Mobil Corp. v. Drennan, No. 12-0621, __ S.W.3d __, 2014 WL 4782974 (Tex. Aug. 29, 2014) Forfeiture clauses in non-contributory benefits plans are not covenants not to compete and enforcing them under the law of another state is not “contrary to a fundamental policy of Texas.” Facts: William Drennan worked for Exxon for 31 years. He was awarded incentive compensation, including restricted stock that could be canceled by Exxon if he engaged in “detrimental activity,” such as working for a competitor. The incentive program included choice-of-law clauses providing that they were governed by New York law. Drennan thereafter left Exxon and went to work for a competitor. Exxon cancelled all of Drennan’s incentive awards. Drennan sued, arguing in part that the detrimental activity clause, which resulted in the forfeiture of his benefits, was a covenant not to compete, which is void under Texas law. Exxon argued that New York law applied. Law: Under the well-established choice-of-law analysis originally set forth in DeSantis v. Wackenhut Corp., 793 S.W.2d 670, 678 (Tex. 1990), the question before the Texas Supreme Court boiled down to whether enforcing the forfeiture provision under New York law would be “contrary to a fundamental policy of Texas.” As a threshold matter, the Court determined that forfeiture clauses in non-contributory benefit plans are not covenants not to compete, reasoning that such provisions incentivize employee loyalty, but “do not restrict the employee’s right to future employment.” RETURN TO TABLE OF CONTENTS Nonetheless, the Court sidestepped the question of whether such forfeiture clauses were enforceable in Texas, reasoning that, regardless, applying New York law would not be “contrary to a fundamental policy” of Texas. The Court explained that: “With Texas now hosting many of the world’s largest corporations, our public policy has shifted from a patriarchal one in which we valued uniform treatment of Texas employees from one employer to the next above all else, to one in which we also value the ability of a company to maintain uniformity in its employment contracts across all employees, whether the individual employees reside in Texas or New York.” c. Texas Dep’t of Human Servs. v. Okoli, 440 S.W.3d 611 (Tex. 2014) An employee’s internal complaint does not invoke the protection of the Texas Whistleblower Act, even if the person to whom the employee complains has an obligation to forward the complaint to a law-enforcement authority. Facts: The Plaintiff was an employee of the Texas Department of Human Services (“TDHS”). He was fired after reporting misconduct within the TDHS to his supervisors. The Plaintiff filed suit under the Texas Whistleblower Act, which protects public employees who in good faith report violations of law to an appropriate law-enforcement authority. TDHS filed a plea to the jurisdiction, claiming the trial court lacked jurisdiction because the Plaintiff failed to make a goodfaith report of a violation of law to an appropriate lawenforcement authority. The Plaintiff claimed he fell within the statute because TDHS policy required him to report misconduct “up the chain of command” to supervisors who in turn were required to forward the complaint to a part of the agency with outward-looking law-enforcement authority. Law: The Court reaffirmed that a plaintiff seeking the protection of the Texas Whistleblower Act must prove that the report was made to an appropriate lawenforcement authority, or that the employee had a good-faith belief that it was. Id. at 614. “An employee’s belief is in good faith if: (1) the employee believed the governmental entity qualified, and (2) the employee’s belief was reasonable in light of the employee’s training and experience.” Id. The Court reiterated that generally “reports up the chain of command are insufficient to trigger the Act’s protections.” Id. When an employee has knowledge that a supervisor must refer a complaint to another person for prosecution, then the employee cannot have a good-faith belief that he is making a report to an appropriate law-enforcement authority. For an excellent, issue-by-issue discussion of recent labor law issues decided by the Texas Supreme Court see The Texas Supreme Court Update written and presented by Clyde J. Jackson, III at the 30th Annual Person Injury Law Course. C. Corporate Governance Cases a. Ritchie v. Rupe, 443 S.W.3d 856 (Tex. 2014) No common law cause of action exists in Texas for minority shareholder oppression; other remedies available. Facts: This case involved a Dallas-based family company. A dispute arose among the four shareholders. One family member, Ann Rupe, wanted the others to buy out her shares. Another shareholder offered her $1.7 million. Ann refused, claiming that the shares were worth far more. She decided to try to sell her shares to an outside party. Her agent determined that Ann’s shares were worth between $3.4 and $3.9 million. Ann was unsuccessful in finding a buyer, however, because the other shareholders refused to meet with any potential purchaser. Ann’s agent testified that it would be “incredibly difficult” to market Ann’s shares without such meetings, and that the likelihood of selling them was “zero.” Law: The Texas Supreme Court held that there is no common-law cause of action for minority shareholder oppression. Although members of closelyheld corporations often use “various squeeze-out or freeze-out tactics to deprive minority shareholders of benefits,” the Court explained that there are other remedies for minority shareholders. Those remedies include the appointment of a provisional director or custodian under special provisions of the Texas Business Organizations Code, bringing a shareholder derivative suit, or entering into a shareholders’ agreement to govern their respective rights and obligations. There are also other common-law causes of action that address misconduct by corporate directors and officers, including breach of fiduciary duty, fraud, and fraudulent transfer. There is therefore no need for a new common law cause of action for shareholder oppression. b. Cardiac Perfusion Servs., Inc. v. Hughes, 436 S.W.3d 790 (Tex. 2014) (per curiam) A buy-out order is not a proper remedy under the receivership statute; remanding in the interests of justice. Facts: A jury determined that the defendant had engaged in oppressive conduct and unfairly squeezed a minority shareholder out of the company. The trial RETURN TO TABLE OF CONTENTS court ordered the defendant to “buy out” the plaintiffs minority shares at an amount that the jury determined was the “fair value” of those shares. Law: As the Court first held in Ritchie v. Rupe, 443 S.W.3d 856 (Tex. 2014), a claim for shareholder oppression is only available under section 11.404 of the Texas Business Organizations Code, and the only remedy available under that statute is a rehabilitative receivership, not a buyout. Accordingly, the Texas Supreme Court reversed the trial court’s buy-out order. However, the Court remanded in the interest of justice for the plaintiff to pursue alternative relief. D. Tort Cases a. Waste Mgmt. of Tex. Inc. v. Tex. Disposal Sys. Landfill, Inc., 434 S.W.3d 142 (Tex. 2014) For-profit companies can bring a business defamation lawsuit if they suffer reputation damages. Facts: Waste Management of Texas and Texas Disposal Systems competed against each other for waste-disposal and landfill-services contracts. Texas Disposal sued Waste Management for defamation in connection with allegedly false statements regarding its landfills, seeking economic damages and punitive damages. Waste Management argued that a corporation cannot suffer reputation damages and that, even if it could, reputational harm is an economic injury subject to the statutory cap on punitive damages. Law: The Texas Supreme Court held that “corporations, like people, have reputations and may recover for harm inflicted on them.” Id. at 149. Thus, “if false and disparaging statements injure a corporation’s reputation, it can sue for defamation per se just like flesh-and-blood individuals.” Id. at 151. The Court also held that a corporation’s reputation damages are non-economic damages because defamation is “regarded as inflicting a kind of personal injury: harm to the plaintiff’s reputation.” Id. at 154. And personal injury damages are non-economic. b. Kia Motors Corp. v. Ruiz, 432 S.W.3d 865 (Tex. 2014) Manufacturer could not rely on compliance with federal standards to avoid designdefect liability. Facts: Lawrence Ruiz sued Kia after his wife was killed in a head-on accident in which her airbag did not inflate. A jury returned a verdict in Ruiz’s favor and awarded him more than $4.4 million dollars. On appeal, Kia argued among other things that it was entitled to a statutory presumption of no liability because the vehicle complied with government standards for crashworthiness. Law: The Texas Supreme Court disagreed, holding that the particular federal regulation with which Kia complied did not govern the “product risk that allegedly caused the harm.” Id. at 184. The regulation requires vehicles to be equipped with frontal air bags and seat belts and specifies the maximum amount of force and acceleration that dummy occupants may encounter during a frontal-crash test. Ruiz, in contrast, had alleged that the air bag’s wiring harness was defectively designed. The federal regulation thus governed product performance, not design, and was of no help to Kia here. c. MAN Engines & Components, Inc. v. Shows, 434 S.W.3d 132 (Tex. 2014) The implied warranty of merchantability extends to purchasers of used goods. Facts: The plaintiff purchased a used, fifty-foot yacht. When the engines on the yacht repeatedly failed, the plaintiff sued the manufacturer for breach of the implied warranty of merchantability. The manufacturer argued that it could not be held liable because it was not in privity with the plaintiff. Law: The Court reasoned that: “A merchant bound by the implied warranty of merchantability is obligated to ensure that the good is merchantable when it leaves the merchant.” Id. at 138. “A downstream purchaser who seeks to recover for economic loss under an implied-warranty theory, whether he buys the product new or used, seeks to hold the merchant accountable only for the state of the product when it passed to the first buyer.” Id. “We see no reason why the merchant’s legally imposed duty to issue merchantable goods should automatically end when a good passes to subsequent buyers.” Id. d. Chapman Custom Homes, Inc. v. Dallas Plumbing Co., No. 13-0776., -- S.W.3d --2014 WL 4116839 (Tex. Aug. 22, 2014) (per curiam) For purposes of the economic loss rule, a plumber’s duty not to flood a home was independent of the obligations undertaken in its plumbing subcontract. RETURN TO TABLE OF CONTENTS Facts: The plaintiff hired a contractor to build a new home. The contractor hired the defendant to install the plumbing. The defendant failed to properly join the plumbing system, causing extensive water damage to the home. Law: “Having undertaken to install a plumbing system in the house, the plumber assumed an implied duty not to flood or otherwise damage the trust’s house while performing its contract with the builder.” Id. at *2. e. LAN/STV v. Martin K. Eby Const. Co., 435 S.W.3d 234 (Tex. 2014) One participant on a construction project cannot recover from another for economic loss caused by negligence or negligent misrepresentation. Facts: The Dallas Area Rapid Transportation Authority (“DART”) contracted with an architectural firm to prepare plans and specifications for the construction of a light rail line. The general contractor quickly discovered that the plans were full of errors, causing significant delays. The contractor settled its claims for breach of contract against DART and then sued the architect for negligent misrepresentation. Law: The architect argued that the claims against it were barred by the economic loss rule and the Texas Supreme Court agreed, stating: “We think it beyond argument that one participant on a construction project cannot recover from another . . . for economic loss caused by negligence.” Id. at 246. “If the roofing subcontractor could recover from the foundation subcontractor damages for extra costs incurred or business lost due to the latter’s negligent delay of construction, the risk of liability to everyone on the project would be magnified and indeterminate.” Id. The Court reasoned that the better solution was for the parties to contractually allocate the risks, buying business protection insurance when necessary. f. Boerjan v. Rodriguez, 436 S.W.3d 307 (Tex. 2014) (per curiam) The only duty a premises owner or occupier owes a trespasser is not to injure him wilfully, wantonly, or through gross negligence. Facts: The plaintiffs hired a “coyote” to transport them to Houston. When they entered the plaintiffs’ ranch they were stopped by an employee. When confronted, the plaintiffs fled at high speed, leading to a fatal car crash. The plaintiffs sued for negligence and gross negligence. Law: The Texas Supreme Court reaffirmed that: “The only duty a premises owner or occupier owes a trespasser is not to injure him wilfully, wantonly, or through gross negligence.” Id. at 311. Accordingly, the Court held, as a matter of law, that the plaintiffs were barred from asserting a negligence claim and also that the trial court properly entered a no-evidence summary judgment in favor of the defendant on the plaintiffs’ claims for gross negligence. For a comprehensive discussion of current summary judgment practice in Texas see Summary Judgments in Texas: State and Federal Practice, 46 HOUSTON LAW REVIEW (2014) written by Judge David Hittner and Lynne Liberato. g. Petroleum Solutions, Inc. v. Head, No. 11-0425, 2014 WL 3511509 (Tex. July 11, 2014) Under section 82.002 of the Texas Civil Practice and Remedies Code, the manufacturer of a defective finished product has a duty to indemnify an innocent seller of a component integrated into that product for its loss arising out of a products-liability action; improvements to real property may qualify as “products” under the statute. Facts: The plaintiff sued the manufacturer of its diesel-fuel storage system after a defective connector caused a major oil spill. The manufacturer filed a thirdparty petition against the company it believed to be the manufacturer of the connector, but it was never able to prove this claim. The component manufacturer filed a claim for indemnity under section 82.002 of the Texas Civil Practice and Remedies Code. Law: The Court held that, under section 82.002 of the Texas Civil Practice and Remedies Code, the manufacturer of a defective finished product has a duty to indemnify an innocent seller of a component integrated into that product for its loss arising out of a products-liability action. The Court reasoned that “an innocent seller who suffers loss is protected regardless of whether it is upstream or downstream of that product’s manufacturer.” Id. at *10. The Court also held that improvements to real property may qualify as “products” under the statute. Id. at *11. h. Burbage v. Burbage, No. 12-0563, 2014 WL 4252274 (Tex. Aug. 29, 2014) A business owner provided no basis to support the estimated value of his company; no evidence established that the business lost value as a result of allegedly defamatory statements. RETURN TO TABLE OF CONTENTS Facts: The defendant created a website to air his grievances against his brother, as well as his brother’s funeral home business. The brother and the funeral home both brought suit for defamation. Law: The Texas Supreme Court held that there was legally insufficient evidence to support the jury’s award of future reputation damages. Although the plaintiff estimated the value of his business, he failed to provide a concrete basis to support his opinion. Moreover, there was no evidence that the funeral home lost business as a result of the defamation. E. a. Arbitration Kennedy Hodges, L.L.P. v. Gobellan, 433 S.W.3d 542 (Tex. 2014) (per curiam) A party who litigated one claim with an opponent did not substantially invoke the litigation process for a related yet distinct claim against another party with whom it had an arbitration agreement. Facts: A firm sued one of its former associates to recover contingency fees for clients that the associate took with him when he left the firm. The firm later sued one of the clients under its contingency contract and eventually moved to compel the dispute to arbitration under an arbitration provision. The client argued that the firm had waived its right to arbitration by litigating against its associate in court. Law: “A party waives its right to arbitration by substantially invoking the judicial process to the other party’s detriment or prejudice.” Id. at 543. “Proving waiver is a high hurdle due to the strong presumption against waiver of arbitration.” Id. Here, the Court held that the firm’s litigation against its associate did not substantially invoke the litigation process against its client. Although the suits were related, the firm did not have an arbitration agreement with its associate and the two lawsuits involved different claims. Nor did the firm’s litigation against its associate prejudice the client in any way “as it did not cause delay, expense, or damage to the [client’s] legal position.” Id. at 545. b. Tenaska Energy, Inc. v. Ponderosa Pine Energy, LLC, 437 S.W.3d 518 (Tex. 2014) Although an arbitrator revealed his ties to one party’s law firm, his failure to disclosure the true extent of the relationship demonstrated evident partially; arbitration award vacated. Facts: A neutral arbitrator disclosed: (1) that the law firm representing one party to the arbitration had recommended him as an arbitrator in three other arbitrations, and (2) that he was a director of a litigation services company and attended a meeting at the law firm, but there was no indication the firm and company would ever do business. However, the arbitrator failed to disclose that all of his contacts at the 700–lawyer firm were with the two lawyers that represented the party to the arbitration at issue; he owned stock in the litigation services company that was pursuing business opportunities with the firm; he served as the president of the company’s United States subsidiary; he conducted significant marketing in the United States for the company; he had additional meetings or contacts with the two lawyers in question to solicit business from the firm for the company; and he allowed one of the two lawyers to edit his disclosures to minimize the contact. Law: “Evident partiality of an arbitrator is a ground for vacating an arbitration award under both the Federal Arbitration Act and the Texas Arbitration Act.” Id. at 519. “[A] neutral arbitrator is evidently partial if she fails to disclose facts that might, to an objective observer, create a reasonable impression of her partiality.” Id. at 519-20. Here, the Court held that the arbitrator’s partial disclose might lead an objective observer to question his partiality. The Court rejected the idea that the losing party had a duty, based on the arbitrator’s partial disclose, to seek additional information. The Court reasoned that: “To hold otherwise would put a premium on concealment in a context where the Supreme Court has long required full disclosure. Id. at 528. C. Venture Cotton Co-op. v. Freeman, 435 S.W.3d 222 (Tex. 2014) A provision in an arbitration agreement that waived DTPA remedies without meeting the DTPA’s waiver standards was contrary to public policy and unenforceable; an arbitration provision that prevented the plaintiff from recovering attorneys’ fees under Chapter 38 was not unconscionable. Facts: The plaintiffs entered into an agreement to sell cotton through a cooperative marketing pool. When the deal soured, the plaintiffs sued and the cooperative sought to compel arbitration. The plaintiffs argued that the arbitration agreement was unconscionable because it limited their statutory right to attorneys’ fees and other remedies under the DTPA. Law: The Court noted that DTPA remedies can be contractually waived, but that under the DTPA waiver must “conspicuous and in bold-face type of at least 10 points in size, identified by a specific heading indicating the waiver, and include language substantially similar to the form the statute provides.” RETURN TO TABLE OF CONTENTS Id. at 230. Because the contracts at issue did not comply with the statutory waiver requirements, the waiver of DTPA remedies was contrary to public policy and therefore invalid. But it noted that, under the Restatement, “[w]here a term rather than the entire contract is unconscionable, the appropriate remedy is ordinarily to deny effect to the unconscionable term.” Id. Thus, the Court concluded that the unenforceable provision could be severed and the remainder of the arbitration provision enforced. The Court also held that an arbitration provision that failed to provide reciprocal rights to attorneys’ fees and, in fact, prevented the plaintiff from recovering attorneys’ fees under Chapter 38 was not unconscionable. Id. at 231-33. d. Americo Life, Inc. v. Myer, 440 S.W.3d 18 (Tex. 2014) An arbitration panel selected contrary to a contract-specified method lacks jurisdiction over the dispute. Facts: The parties entered into an arbitration agreement, which stated that “Each arbitrator shall be a knowledgeable, independent businessperson or professional.” Id. at 20. The AAA rejected two of Americo’s first-choice arbitrators for lack of impartiality. Americo sought to vacate the award. Law: “An arbitration panel selected contrary to the contract-specified method lacks jurisdiction over the dispute.” Id. at 21. Accordingly, courts “do not hesitate to vacate an award when an arbitrator is not selected according to the contract-specified method.” Id. Here, the parties’ contract required only that each arbitrator “be a knowledgeable, independent businessperson or professional.” Because the AAA disqualified two previously selected arbitrators for partiality, “the arbitration panel was formed contrary to the express terms of the arbitration agreement,” and thus “exceeded its authority when it resolved the parties’ dispute.” Id. at 25. IV. ENERGY CASES a. French v. Occidental Permian Ltd., 440 S.W.3d 1 (Tex. 2014) The cost of removing CO2 used in secondary recovery operations from casinghead gas is a post-production expense, usually chargeable to a royalty owner under the terms of the lease. Facts: French owned the royalty interests under two pooled oil and gas leases. Oxy owned the working interest. The parties signed a Unitization Agreement to “effect secondary recovery operations.” Id. at 4. Under the agreement, Oxy had the complete discretion to determine how to conduct secondary recovery operations and all secondary recovery costs were assigned to Oxy, unless French was already obligated to pay such costs under other agreements. Oxy began a CO2 flooding program and French argued that Oxy should be responsible for the cost of removing CO2 from casinghead gas. French alleged that this was a postproduction cost expense that, under the leases, was to be deducted from the market price of the gas before determining French’s royalty. Law: The Texas Supreme Court reasoned that it was not necessary for continued oil production to remove CO2 from the casinghead gas and, in fact, that Oxy had the right, under the parties’ agreement, to reinject all of the casinghead gas into the field. If Oxy had pursued that course, French would not receive any royalty on the casinghead gas. Accordingly, the Court held that “French, having given Oxy the right and discretion to decide whether to re-inject or process the casinghead gas, and having benefitted from that decision, must share in the cost of CO2 removal.” Id. at 10. b. Houston Unlimited, Inc. Metal Processing v. Mel Acres Ranch, 443 S.W.3d 820 (Tex. 2014) Expert valuation testimony was legally insufficient to support an award of stigma damages. Facts: Cattle on the plaintiff’s land started to experience an increased number of birth defects and deaths. An investigation discovered that Houston Unlimited had committed an unauthorized discharge of industrial hazardous waste that affected the plaintiff’s property. The plaintiff sued, seeking to recover the loss of market value of its land due to stigma resulting from fear, risk, and negative public perceptions. The plaintiff hired an expert who purported to calculate the lost market value of the plaintiff’s land by finding two comparable parcels—which were surrounded by contaminated land, but not actually contaminated themselves—and calculating the percentage diminution in value of these allegedly stigmatized parcels. Houston Unlimited challenged the reliability of the expert’s testimony. Law: The Texas Supreme Court declined to address the recoverability of stigma damages and instead held that even if Texas law permits recovery of stigma damages, the plaintiff’s evidence was legally insufficient to prove them. The Court found numerous RETURN TO TABLE OF CONTENTS flaws in the analysis of the plaintiff’s expert. Of particular note, the Court criticized the expert for merely assuming, without supporting evidence, that the diminished value of the comparable properties was due to contamination. The Court also reasoned that the expert’s “failure to account for differences between the three properties at issue, differences between the nature of the contamination and remediation of the properties, and contamination not attributable to Houston Unlimited, leaves analytical gaps in her reasoning.” Id. at 836-37. For these reasons, the Court held that the expert’s opinions “cannot constitute evidence sufficient to support the award of damages in this case” and rendered a take-nothing judgment in favor of the defendant, Houston Unlimited. Id. at 837. For an exhaustive and scholarly analysis regarding the admissibility of expert testimony in Texas read Eight Gates for Expert Witnesses: Fifteen Years Later, 52 HOUSTON LAW REVIEW (2014) authored by the Honorable Harvey Brown and Melissa Davis. c. Gilbert Wheeler, Inc. v. Enbridge Pipelines (East Texas), L.P., No. 13-0234, -- S.W.3d. --, 2014 WL 4252273 (Tex. Aug. 29, 2014) Damages for injury to real property are determined with respect to whether the injury is temporary or permanent, regardless of whether the action sounds in contract or tort. Facts: The Wheeler family owned a 153-acre family ranch in a heavily wooded area transected by a natural stream. The Wheelers granted Enbridge a rightof-way to construct a pipeline on the land, on the condition that Enbridge would install the pipeline by boring underground in order to preserve the trees. Enbridge failed to inform its contractor about the boring provision and the contractor cut down several hundred feet of trees. Wheeler sued for breach-ofcontract and trespass. The jury awarded Wheeler $300,000 for the cost to restore the property and $288,000 for the intrinsic value of the trees. Law: The Court held that in cases involving injury to real property the appropriate measure of damages is determined with respect to whether the injury is temporary or permanent, regardless of whether the action sounds in tort or in contract. Id. at *4. “An injury to real property is considered permanent if (a) it cannot be repaired, fixed, or restored, or (b) even though the injury can be repaired, fixed, or restored, it is substantially certain that the injury will repeatedly, continually, and regularly recur, such that future injury can be reasonably evaluated.” Id. “Conversely, an injury to real property is considered temporary if (a) it can be repaired, fixed, or restored, and (b) any anticipated recurrence would be only occasional, irregular, intermittent, and not reasonably predictable, such that future injury could not be estimated with reasonable certainty.” Id. Whether an injury is temporary or permanent is generally a question of law for the court to resolve. However, if the facts that underlie the temporary-versus-permanent distinction are disputed, they must be resolved by the jury upon proper request. Id. at *5. There are at least two exceptions to the general rule. The “economic feasibility” exception applies “when the cost of required repairs or restoration exceeds the diminution in the property’s market value to such a disproportionately high degree that the repairs are no longer economically feasible.” Id. at 5. “In those circumstances a temporary injury is deemed permanent, and damages are awarded for loss in fair market value.” Id. A second exception applies “when a landowner can show that the destruction of trees on real property resulted in no diminishment of the property’s fair market value, or in so little diminishment of that value that the loss is essentially nominal.” Id. at *7. In this circumstance, the landowner may recover the intrinsic value of the trees lost; that is, the ornamental and utilitarian value of the trees.” Id. In the case here, the latter exception applied and the landowner was allowed to recover the intrinsic value of lost trees. d. Key Operating & Equip., Inc. v. Hegar, 435 S.W.3d 794 (Tex. 2014) A mineral owner’s rights include the right to ingress and egress over the surface of any pooled acreage to produce minerals from any part of the pooled acreage. Facts: Surface owners sued the lessee of the mineral estate for trespass and injunction to prohibit the use of a road on their property to produce minerals from a well on an adjacent, pooled tract. Law: The Texas Supreme Court held that: “The primary legal consequence of pooling is that production and operations anywhere on the pooled unit are treated as if they have taken place on each tract within the unit.” Id. at 798. Thus, once pooling occurs, pooled tracts “no longer maintain their separate identities insofar as where production from the pooled interests was located.” Accordingly, the Court held that the mineral owner here had the implied right to use the surface owner’s land to further production from anywhere on the pooled acreage. e. Gotham Ins. Co. v. Warren E&P, Inc., No. 120452, 2014 WL 1190049 (Tex. Mar. 21, 2014) RETURN TO TABLE OF CONTENTS When an insurance contract covers a matter in dispute, an insurer is limited to its contractual claims and may not pursue equitable theories unless the contractual provisions at issue violate positive law or offend public policy. Facts: The insured obtained an insurance policy to reimburse its expenses in regaining control of an oil well in the event of a blowout. When the well blew out, the insured represented to the insurer that it owned a 100% working interest in the well and the insurer paid claims accordingly. But a later-discovered joint operating agreement reflected that the insured might have possessed less than a 100% working interest in the well. The insurer also concluded that the insured breached the contract by using improper blowout prevention equipment. The insurer sued for a return of its payments under breach of contract and equity theories. Law: The Court reiterated its prior holding in Fortis Benefits v. Cantu, 234 S.W.3d 642 (Tex. 2007) that: “[w]here a valid contract prescribes particular remedies or imposes particular obligations, equity generally must yield unless the contract violates positive law or offends public policy.” Id. at *3. Here, the Court noted that the contract contained clauses related to: (1) use of proper blowout prevention equipment, (2) material misrepresentations, (3) salvage and recovery through settling a loss, and (4) subrogation rights. Accordingly, because the contract covered the matter at issue in this dispute, the Court held that the insurer was limited to recovery under the contract rather than in equity. f. Texas Coast Utilities Coal. v. R.R. Comm’n of Texas, 423 S.W.3d 355 (Tex. 2014) The Railroad Commission’s statutory authority to “establish rates” includes the authority to approve clauses that provide for automatic adjustments based on cost fluctuations. Facts: CenterPoint Energy Resources Corporation distributes gas to customers in Texas. In 2008, CenterPoint filed a “statement of intent” to raise its rates. The proposed rate schedule included a “cost of service adjustment” (COSA), which permitted the rate to increase or decrease annually without the necessity of an additional full rate case. Nine municipalities rejected the rate increase and CenterPoint appealed to the Railroad Commission. The Commission approved the new rate schedule finding it reasonable. The municipalities challenged the Commission’s jurisdiction to approve automatic rate changes. Law: The Texas Supreme Court held that Gas Utility Regulation Act (GURA) “expressly authorizes the Commission to establish both that which a utility ‘demand[s], observe[s], charge[s], or collect[s]’ for distributing gas and that which ‘affect[s]’ that which the utility ‘demand[s], observe[s], charge[s], or collect[s].’” Id. at 364. The Court concluded that by including the COSA clause in the rate schedule, the Commission has “established” a “practice” that “affects” CenterPoint’s charges and compensation. Accordingly, it held that the COSA clause was a “rate” that the Commission had jurisdiction to establish. V. PROCEDURAL CASES A. Forum and Venue a. In re Ford Motor Co., 442 S.W.3d 265 (Tex. 2014) The Court clarifies the circumstances under which intervenors can invoke the Texasresident exception to the forum non conveniens statute. Facts: The plaintiff was injured when the left rear tire in his brother’s Ford Explorer burst, causing the vehicle to careen off the road in the Mexican state of Nuevo Leon. His brother, who was a passenger in the car, died. The plaintiff, who was a Mexican citizen, sued his brother’s estate in Texas for failure to properly maintain the vehicle. The children of the deceased brother, who were legal residents of Texas, intervened in the lawsuit and asserted claims for negligence and design defect against Ford and Michelin. The trial court denied Ford’s motion to dismiss for forum non conveniens and Ford sought mandamus relief. Law: There is a Texas-resident exception to the forum nonconveniens rule, which states that a court may not stay or dismiss a claim under the forum nonconveniens rule if the plaintiff is a legal resident of Texas. The term “plaintiff” is defined in the statute as “a party seeking recovery of damages for personal injury or wrongful death.” Id. at 270. But the statute expressly excludes a “counterclaimant, cross-claimant, or third-party plaintiff.” Id. Nonetheless, the Court held that in the context of the statute as a whole, the statute “excludes only defendants who file counterclaims, cross-claims, or third-party claims.” Id. The Court then addressed whether the intervernors should be considered plaintiffs or defendants. It held that: “Where the intervenor is seeking affirmative relief and is not defending a claim, we should operate under a presumption that the intervenor is a plaintiff.” Id. at 275. “Such an intervenor is only a defendant where the intervenor is closely aligned with the defendant, direct antagonism exists between intervenor and plaintiff, and equitable factors weigh in favor of treating the RETURN TO TABLE OF CONTENTS intervenor as a defendant.” Id. Here, the court held that the intervenors asserted affirmative claims and operated more like plaintiffs than defendants. Finally, the Court held that wrongful-death beneficiaries are distinct plaintiffs, whose residency can satisfy the Texas-resident exception. b. Rule 202 of the Texas Rules of Civil Procedure allows “a proper court” to authorize a pre-suit deposition to investigate a potential claim. A proper court must have personal jurisdiction over the potential defendant. In re Fisher, 433 S.W.3d 523 (Tex. 2014) Under section 15.020 of the Texas Civil Practice and Remedies Code, in “major transactions” involving a written agreement of $1 million or more, a trial court must enforce a venue agreement, even over a statutory venue provision. Facts: After a business acquisition went south and led to litigation between the parties, the defendants sought to enforce mandatory venue clauses in the acquisition document. When the trial court refused to transfer the action pursuant to the venue clauses, the defendants sought mandamus relief. Law: Section 15.020 of the Texas Civil Practice and Remedies Code requires courts to enforce mandatory venue agreements in “major transactions,” which are defined as transactions evidenced by a written agreement involving $1 million or more. Id. at 529. This section of the code applies “[n]otwithstanding any other provision of this title,” and therefore controlled over any other mandatory venue provisions in the Code. B. a. C. Discovery a. In re Doe, 444 S.W.3d 603 (Tex. 2014) Pleading MAN Engines & Components, Inc. v. Shows, 434 S.W.3d 132 (Tex. 2014) Express disclaimer is an affirmative defense that must be pled or it is waived. Facts: The plaintiff sued the defendant for breach of implied warranty. The defendant argued for the first time on appeal that it had disclaimed all implied warranties. Law: “Rule 94 provides a list of affirmative defenses and then adds a catch-all that sweeps in ‘any other matter constituting an avoidance or affirmative defense.’” Id. at 136. “Disclaimer falls into this ‘any other matter’ catch-all.” Id. “The enumerated defenses share the common characteristic of a bar to the right of recovery even if the general complaint were more or less admitted to.” Id. “Disclaimer performs a similar role, not rebutting the facts asserted by the plaintiff, but establishing an independent reason why the plaintiff should not recover.” Id. Accordingly, the Court held that the defendant waived disclaimer by failing to pled it in the trial court or have it tried by consent. Facts: Calling himself “the Trooper,” an anonymous blogger launched an on-line attack on The Reynolds & Reynolds Co. and its chairman and CEO. To discover the Trooper’s identity, Reynolds filed a Rule 202 petition in the district court in Harris County, seeking to depose Google, Inc., which hosts the blog. Google did not oppose Reynolds’ petition, but the Trooper did. He filed a special appearance arguing that he did not have minimal contacts with Texas sufficient for a Texas court to establish personal jurisdiction. Law: Rule 202 of the Texas Rules of Civil Procedure allows “a proper court” to authorize a deposition to investigate a potential claim before suit is filed. The Texas Supreme Court held that it was implicit that a “proper” court must have personal jurisdiction over the potential defendant. First, to hold otherwise would deprive the defendant of the protections of Rule 120a, which entitles a defendant who files a special exception to have personal jurisdiction heard and decided before any other matter. Second, it would unreasonably broaden the scope of the pre-suit deposition rule such that it “could be used by anyone in the world to investigate anyone else in the world against whom suit could be brought within the court’s subject-matter jurisdiction.” Id. at 610. b. In re Ford Motor Co., 427 S.W.3d 396 (Tex. 2014) (per curiam) A discovery order aimed at exploring the potential bias of testifying experts by compelling corporate-representative depositions from their employers was overly broad; mandamus relief granted. Facts: The plaintiff sued Ford for design defect. He sought to expose the potential bias of Ford’s two testifying experts by inquiring at their depositions into the frequency with which they testified in favor of design-defect defendants. The trial court then compelled corporate-representative depositions from each of the expert’s employers. The deposition notices sought detailed financial and business information for all cases the companies had handled for Ford or any other automobile manufacturer from 2000 to 2011. RETURN TO TABLE OF CONTENTS Law: Texas Rule of Civil Procedure 192.3 allows parties to seek information about “any bias” of a testifying witness. However, under Rule 195, the methods for obtaining such information are limited to “disclosures, expert reports, and oral depositions of expert witnesses.” Id. at 397. The Court recognized that “overly expansive discovery about testifying experts that can permit witnesses to be subjected to harassment and might well discourage reputable experts from participating in the litigation process.” Id. (internal quotations omitted). Here, it held that the plaintiff’s discovery request “seeking sensitive information covering twelve years, is just the type of overbroad discovery the rules are intended to prevent.” Id. Indeed, it noted that the best evidence of bias had already come from the depositions of the experts themselves. Accordingly, without hearing oral argument, the court granted mandamus relief. c. In re Nat’l Lloyds Ins. Co., No. 13-0761, 2014 WL 5785871 (Tex. Oct. 31, 2014) (per curiam) A discovery order that compelled an insurer to produce the claims files of unrelated third-parties was overly broad; mandamus relief granted. Facts: The plaintiff sued National Lloyds Insurance Company claiming that it undervalued the storm damage to her home. At the plaintiff’s request, the trial court compelled production of all the claims files handled by the two adjusting firms that handled the plaintiff’s claims, limiting the order to claims related to properties in the city where the plaintiff lived that suffered damage in the same storm that affected the plaintiff. National Lloyds sought mandamus relief. Law: Discovery requests must not be overbroad, but rather must be “reasonably tailored to include only matters relevant to the case.” Id. at *2. “A discovery order that compels production beyond the rules of procedure is an abuse of discretion for which mandamus is the proper remedy.” Id. at *1. Here, the Court reasoned that National Lloyds’ overpayment, underpayment, or proper payment of the claims of unrelated third parties was not probative of its conduct with respect to the plaintiff’s undervaluation claims. According, it held that: “Because the information [the plaintiff] seeks is not reasonably calculated to lead to the discovery of admissible evidence, the trial court’s order compelling discovery of such information is necessarily overbroad.” Id. at *3. D. Spoliation a. Brookshire Brothers, Ltd. v. Aldridge, 438 S.W.3d 9 (Tex. 2014) The Texas Supreme Court clarifies spoliation standards and remedies. Facts: In this slip-and-fall case, the plaintiff argued that Brookshire Brothers had spoliated evidence by allowing all but 8 minutes of its surveillance video to be erased 30 days after the accident. The 8 minutes of tape preserved began just before the plaintiff entered the store and concluded shortly after his fall. Law: The Texas Supreme Court concluded that a “spoliation analysis involves a two-step judicial process: (1) the trial court must determine, as a question of law, whether a party spoliated evidence, and (2) if spoliation occurred, the court must assess an appropriate remedy.” Id. at 14. “To conclude that a party spoliated evidence, the court must find that (1) the spoliating party had a duty to reasonably preserve evidence, and (2) the party intentionally or negligently breached that duty by failing to do so.” Id. “Upon a finding of spoliation, the trial court has broad discretion to impose a remedy that, as with any discovery sanction, must be proportionate; that is, it must relate directly to the conduct giving rise to the sanction and may not be excessive.” Id. “[T]he harsh remedy of a spoliation instruction is warranted only when the trial court finds that the spoliating party acted with the specific intent of concealing discoverable evidence, and that a less severe remedy would be insufficient to reduce the prejudice caused by the spoliation.” Id. “A failure to preserve evidence with a negligent mental state may only underlie a spoliation instruction in the rare situation in which a nonspoliating party has been irreparably deprived of any meaningful ability to present a claim or defense.” Id. Applying these standards, the Court held that the trial court: (1) improperly admitted evidence relevant only to the issue of whether Brookshire Brothers breached a duty to preserve evidence (which is a legal question for the court), and (2) abused its discretion by submitting a spoliation instruction when there was no evidence that Brookshire Brothers had the intent to conceal or destroy relevant evidence and no evidence that the plaintiff was irreparably deprived of any meaningful ability to present his claim. RETURN TO TABLE OF CONTENTS b. Petroleum Solutions, Inc. v. Head, No. 11-0425, 2014 WL 3511509 (Tex. July 11, 2014) The restrictions in Brookshire Brothers with regard to spoliation instructions also limit a trial court’s discretion to issue other remedies akin to death-penalty sanctions, such as striking a party’s claims or defenses. Facts: The trial court struck the defendant’s affirmative defenses and gave the jury a spoliation instruction in light of evidence that the defendant had allowed a key piece of evidence to be destroyed. Law: The Texas Supreme Court held that the trial court abused its discretion in issuing a spoliation instruction and striking its affirmative defenses where no proof exists that the defendant intentionally concealed evidence or that spoliation irreparably deprived the plaintiff of any meaningful ability to present its claims. Id. at *6. E. a. Juries In re M.G.N., 441 S.W.3d 246 (Tex. 2014) (per curiam) A juror may be excused and replaced by an alternate if he is disqualified from service. If no alternates are available, a court may only excuse a juror and proceed with fewer than twelve jurors if a juror is disabled. Disability is a higher standard than disqualification. Facts: During the course of a trial, one juror was excused from service after it was discovered that he knew one of the witnesses. He was replaced by an alternate juror. The trial proceeded and a second juror was excused for illness. Because there were no more alternates, the trial proceeded with eleven jurors. The court of appeals reversed for a new trial. It reasoned that under the Texas Constitution a jury must consist of twelve members unless not more than three of them die or become disabled from service. Here, the first juror to be dismissed was not constitutionally disabled. Law: The Texas Supreme Court reversed, holding that under the Texas Government Code, a court may allow an alternate juror to substitute for a regular juror when the regular juror is “unable or disqualified to perform his duties.” Id. at 248. A juror is deemed disqualified if he “has a bias or prejudice in favor of or against a party in the case.” Id. This is a lesser standard than set forth in the Texas Constitution, which states that as few as nine jurors may render a verdict if as many as three jurors die or become disabled from sitting. Id. at 248. Here, because the first juror was replaced by an alternate, the Court held that the court of appeals erred by reviewing the propriety of his excusal under the constitutional disability standard, rather than the lower standard for disqualification under the Government Code. F. a. Charge Error King Fisher Marine Serv., L.P. v. Tamez, 443 S.W.3d 838 (Tex. 2014) As long as the parties have a “reasonable time” to review and object to the charge, Rule 272 plainly grants trial courts authority to set a deadline for charge objections that falls before the reading of the charge to the jury. Facts: The parties held a formal charge conference the evening before the charge was to be submitted to the jury. The trial court warned the parties: “[T]omorrow when we come in, I’m not going to mess with this any further.... [W]hen you leave, you better be very happy with it, or unhappy, but satisfied that we got everything in that reflects my ruling.” Id. at 842. Nonetheless, the defendant’s counsel requested new wording on a jury instruction the following day. The trial court denied the request as untimely. Law: The Texas Supreme Court held that as long as the parties have a “reasonable time” to review and object to the charge, Rule 272 plainly grants trial courts authority to set a deadline for charge objections that falls before the reading of the charge to the jury. However, the Court admonished that it did “not necessarily endorse” the trial court’s decision. Id. at 846. In light of the stresses on counsel during the charge conference: “Trial courts should therefore make every effort to entertain on the merits a charge objection brought in good faith after conclusion of the formal charge conference but before the charge is read to the jury.” Id. at 847. In refusing to do so in the case before it, “the trial court potentially risked placing its own schedule above the integrity of the charge.” Id. b. Burbage v. Burbage, No. 12-0563, 2014 WL 4252274 (Tex. Aug. 29, 2014) An objection to jury questions regarding allegedly privileged statements was not sufficiently specific to preserve error because it failed to ask the court to withdraw the improper questions. Facts: The defendant argued that the trial court erred in submitting liability questions on potentially privileged statements. If the qualified privilege applied, then the defendant argued that the trial court erred in submitting a broad form damages question that RETURN TO TABLE OF CONTENTS incorporated both valid and invalid theories of liability—i.e., both privileged and non-privileged statements. While the defendant failed to object to the form of the liability and damages questions, he did raise an objection regarding qualified privilege. Law: The Texas Supreme Court left open the question of whether an appellant must object both to the lack of evidence to support the submission of a question and the form of the submission. However, the Court emphasized that: “Whether or not both is required, some timely and specific question must be raised.” Id. at *5. The Court held that the defendant had not met this standard because although he mentioned qualified privileged, he never distinctly asked the trial court to withdraw the questions regarding the privileged statements from the jury charge. G. Judgments a. In re Vaishangi, Inc., 442 S.W.3d 256 (Tex. 2014) (per curiam) A Rule 11 agreement does not constitute an agreed judgment unless the words used by the trial court to approve the agreement clearly indicate the intent to render judgment at that time. Facts: The parties reached a settlement, memorialized in a handwritten Rule 11 agreement, which the parties and the trial court signed. Four days later, the trial court signed an agreed order dismissing all claims. The order of dismissal did not incorporate the entire Rule 11 agreement and a dispute later arose regarding its terms. After the plaintiff filed a second lawsuit, the defendant filed a motion to transfer the case to the venue of the first lawsuit and asked that court to enforce the Rule 11 agreement. The plaintiff argued that the trial court had no jurisdiction to enforce the Rule 11 agreement because the trial court’s plenary power had already expired. The defendant claimed that the Rule 11 agreement was a final judgment that the trial court had continuing jurisdiction to enforce. Law: The Court noted that Rule 11 agreements generally are treated as separate and distinct from agreed judgments. “When parties dictate a settlement agreement on the record (creating an enforceable agreement under Rule 11) and the trial court approves it on the record, such a settlement agreement does not constitute an agreed judgment unless the words used by the trial court ... clearly indicate the intent to render judgment at the time the words are expressed.” Id. at 259 (internal quotations omitted). Here, although the Rule 11 agreement stated that the parties agreed to dismiss all claims, when the trial court signed the agreement he did not indicate the “intent to render judgment at the time the words were expressed.” Id. at 260. Indeed, the Rule 11 agreement had no decretal language like the type usually seen in a judgment. Accordingly, the trial court had no jurisdiction to enforce the Rule 11 agreement. b. Long v. Castle Texas Prod. Ltd. P’ship, 426 S.W.3d 73 (Tex. 2014) If the trial court reopens the record on remand, post-judgment interest accrues from the date of the later judgment and not the original judgment. Facts: In an earlier appeal, the court of appeal remanded for the trial court to recalculate prejudgment interest. The trial court determined it needed to reopen the record to calculate prejudgment interest. In response, the plaintiff waived its claim for prejudgment interest. The trial court entered a new judgment awarding postjudgment interest from the date of the original judgment in the case. Law: “[T]he general rule is that postjudgment interest accrues from the date of the judgment, which is the final judgment in a case where the trial court issues multiple judgments.” Id. at 80. “The exception is when the appellate court renders (or could have rendered) judgment, in which case postjudgment interest accrues from the date of trial court’s original, erroneous judgment.” Id. at 80. “But when an appeal instead results in a retrial or a remand for further proceedings where new evidence is required, postjudgment interest will accrue from the trial court’s subsequent judgment.” Id. Here, because the trial court reopened the record on remand, the trial court should have calculated postjudgment interest from the date of the later judgment, not the original judgment. H. New Trials a. In re Health Care Unlimited, Inc., 429 S.W.3d 600 (Tex. 2014) (per curiam) A trial court cannot grant a motion for new trial based on a juror’s communication with a party unless there is evidence that the communication probably caused injury. Facts: After trial, evidence came to light that one of the defendant’s representatives had exchanged phone calls with a juror during the time the jury was deliberating. Both individuals claimed that they knew each other from church and that the calls involved only discussions regarding food for an upcoming church retreat. The plaintiff filed a motion for new trial which the trial court granted, expressing concern for the integrity of the verdict rendered in the case. RETURN TO TABLE OF CONTENTS Law: The Texas Supreme Court held that the trial court had improperly used an “appearance of impropriety standard” to grant the motion for new trial. Id. at 603. Texas Rule of Civil Procedure 327 requires not only that a movant establish misconduct, but also that the movant show that the misconduct “probably caused injury.” Id. at 602. “To show probable injury, there must be some indication in the record that the alleged misconduct most likely caused a juror to vote differently than he would otherwise have done on one or more issues vital to the judgment.” Id. at 603. Here, there was no evidence of probable injury. b. In re Whataburger Restaurants LP, 429 S.W.3d 597 (Tex. 2014) (per curiam) A trial court cannot grant a motion for new trial based on a juror’s failure to disclose information during voir dire unless there is evidence that the misconduct probably caused injury. Facts: The plaintiff’s attorney filed a motion for new trial after discovering that one of the jurors failed to disclose that she had been a defendant in two prior credit card collection suits. Although other jurors had disclosed that they had been defendants in prior lawsuits, the plaintiff’s attorney never questioned them about it and did not challenge or exercise peremptory strikes against those jurors. Law: To obtain a new trial, Texas Rule of Civil Procedure 327 requires not only that a movant establish misconduct, but also that the movant show that the misconduct probably caused injury. “[T]here is no showing of a probable injury when the evidence is such that, even without the misconduct, the jury would in all probability have rendered the same verdict that it rendered with the misconduct.” Id. at 599. Here, there was no evidence that the juror’s failure to disclose her role as a defendant in prior lawsuits influenced the verdict and no evidence that the plaintiffs’ attorney would have acted on such information even if he had been aware of it. I. a. Sanctions Nath v. Texas Children’s Hosp., No. 12-0620, 2014 WL 4252269 (Tex. Feb. 5, 2014) Facts: The trial court award $1.3 million in sanctions against a physician for baseless pleadings. Law: The Texas Supreme Court upheld the trial court’s decision to award sanctions based on the trial court’s conclusion that the physician made irrelevant allegations and asserted time-barred claims for the purpose of leveraging settlement. However, the Court remanded the case for the trial court to reconsider whether the sanctions imposed were excessive. It concluded that the trial court abused its discretion by failing to consider “the degree to which the offended person’s own behavior caused the expenses for which recovery is sought.” Id. at *12. Here, although the physician’s claims were time-barred from the time they were filed, the defendants delayed over four years in moving for summary judgment on those claims. The Court reasoned that “if issues asserted in pleadings are revealed to be frivolous, and the defending party delays moving for summary judgment and sanctions, the defending party adopts some responsibility for the overall increase in litigation costs.” Id. J. a. Although the Court will not consider issues that were not raised in the courts below, the parties are free to construct new arguments in support of issues properly before the Court. Facts: The plaintiff’s insurance company refused to pay for fire damage to the plaintiff’s home based on a vacancy clause in the plaintiff’ insurance policy. The insurance company consistently argued that the vacancy provision suspended coverage, but noted for the first time on appeal to the Supreme Court that, although the policy had several endorsements, it did not have a standard endorsement that providing dwelling coverage during an extended vacancy. The plaintiff claimed that this argument had been waived. Law: The Court held that although it will not consider issues that were not raised in the courts below, the parties are free to construct new arguments in support of issues properly before the Court. b. The trial court abused its discretion in awarding attorneys’ fees as sanctions without considering the degree to which the opposing party’s own behavior caused the fees sought. Appeal Greene v. Farmers Ins. Exch., No. 12-0867, 2014 WL 4252271 (Tex. Jan. 7, 2014) Pike-Grant v. Grant, No. 13-0277, 2014 WL 4933010 (Tex. Oct. 3, 2014) (per curiam) Reversing the dismissal of a restricted appeal where the evidence conclusively established that the party appealing did not participate in the hearing that resulted in the judgment, despite conflicting recitals in the judgment. RETURN TO TABLE OF CONTENTS Facts: A mother sought to file a restricted appeal from a trial court’s divorce decree. The decree contained two conflicting recitals. One recital indicated that the mother had attended the “Final Hearing for Divorce” on November 29, 2011. However, another recital indicated that the hearing had occurred earlier in September of 2011. Law: A party may file a restricted appeal if, among other things, the party can show that she did not participate in the hearing that resulted in the judgment complained of. Here, because the recitals in the judgment regarding the date of the divorce hearing were conflicting, the Court determined that it “must look to the record to determine which statement is true, mindful of our admonition to liberally construe the non-participation requirement to favor the right to file a restricted appeal.” Id. at *3. The Court concluded that “[n]othing in the record beyond the first recital in the divorce decree indicates a hearing occurred on November 29.” Id. To the contrary, “at least eight references in the record, including portions of the trial court’s docket sheet and the reporter’s record, conclusively confirm the hearing occurred in September 2011 and the petitioner did not participate.” Id. at *1. Accordingly, the Court reversed the court of appeals’ judgment dismissing the restricted appeal. c. In re Corral-Lerma, No. 12-0485, 2014 WL 6612872 (Tex. Nov. 21, 2014) (per curiam) Attorney’s fees are not compensatory damages for purposes of calculating a supersedeas bond, even when a statute requires an award of fees regardless of whether a party recovers damages. Facts: The trial court ordered that the appellant include within its supersedeas bond an award of attorneys’ fees under the Texas Theft Liability Act. Law: The Texas Supreme Court held in In re Nalle Plastics Family Ltd. P’ship, 406 S.W.3d 168 (Tex.2013) that attorney’s fees are neither compensatory damages nor costs for purposes of superseding enforcement of a money judgment. Here, the prevailing party at trial argued that “an exception should apply under the Texas Theft Liability Act because a prevailing defendant must be awarded attorney’s fees even without an award of compensatory damages.” Id. at 2. The Texas Supreme Court concluded that this was a distinction without a difference, reiterating that “[w]hile attorney’s fees for the prosecution or defense of a claim may be compensatory in that they help make a claimant whole, they are not, and have never been, damages.” Id. at *1. d. Venture Cotton Co-op. v. Freeman, 435 S.W.3d 222 (Tex. 2014) In an interlocutory appeal, the Court considered an issue raised for the first time on appeal, noting that waiver in an interlocutory appeal often “serves only to delay a decision in the case.” Facts: After the Court held that a provision in an arbitration agreement was unconscionable, the defendant argued for the first time on appeal that the offending provision could be severed from the remainder of the arbitration agreement. The plaintiff claimed that the defendant had waived the right to severance by not raising the issue in the trial court and the court of appeals agreed. Law: The Texas Supreme Court reversed, noted that “this is an interlocutory appeal, and the case remains pending in the trial court.” Id. at 230. “If the court [of appeals] merely means to suggest that [the defendant] waived the right to complain about severance in this interlocutory appeal, the waiver argument serves only to delay a decision in the case.” Id. “Conservation of time and resources recommend that we consider the issue now because nothing prevents [the defendant] from urging severance in the trial court and, if denied, from renewing its complaint in yet another interlocutory appeal.” Id. VI. TORT CASES a. Tenet Hospitals Ltd. v. Rivera, No. 13-0096, 2014 WL 4116813 (Tex. Aug. 22, 2014) The ten year statute of repose in the Texas Medical Liability Act survived constitutional open court and retroactivity challenges, as applied to a minor who had notice of her claims and showed lack of diligence in filing suit. Facts: The plaintiff was injured during childbirth. When she was seven years old, the Legislature enacted the Medical Liability Act, which contains a statute of repose that operates to bar claims not brought within ten years of the date of medical treatment. Within a year after the Act was passed, an attorney for the mother notified the hospital of the child’s claim, but six-and-a-half years passed before the mother filed suit, well after the deadline in the statute of repose. The mother argued that the statute was unconstitutional as applied, because it: (1) violated the open courts provision, and (2) retroactively extinguished the child’s claim before she reached the age of majority. RETURN TO TABLE OF CONTENTS Law: The Texas Supreme Court stated that a party raising an open courts challenge “must raise ‘a fact issue establishing that he did not have a reasonable opportunity’ to be heard.” Id. at *4. The Court noted that it had previously found “delays of four months, seventeen months, and twenty-two months to constitute a lack of due diligence as a matter of law—such that an open courts challenge must fail at summary judgment.” Id. Here, the child’s mother and next friend offered no explanation for the over six year delay in filing suit after giving notice of her claim and, thus, her open court’s challenged failed as a matter of law. In reviewing retroactivity challenges, the Court considers “the nature and strength of the public interest served by the statute as evidenced by the Legislature’s factual findings; the nature of the prior right impaired by the statute; and the extent of the impairment.” Id. at *6. Here, the statute furthered a compelling public interest “aimed at broadening access to health care by lowering malpractice insurance premiums.” Id. The sparse record provided no evidence of the strength of the child’s claims. And finally, although the statute impaired the child’s previous right to assert her claims until the age of 20, she had a grace period of 3 years to bring her claim after the statute of repose was enacted. In light of the compelling public purpose of the statute and the three-year grace period, the Court rejected the minor’s retroactivity challenge. b. Henkel v. Norman, 441 S.W.3d 249 (Tex. 2014) (per curiam) A homeowner’s “don’t slip” statement to a mail carrier was adequate as a matter of law to warn the carrier of an icy sidewalk and negate a claim for premises liability. Facts: A mail carrier slipped on the defendant’s icy sidewalk and sued for premises liability. Law: A claim for premises liability is negated if a property owner adequately warns an invitee about a dangerous condition. Id. at 252. “To be adequate, a warning must be more than a general instruction such as ‘be careful’; the warning must notify of the particular condition.” Id. Here, the homeowner told the mail carrier: “don’t slip.” The Texas Supreme Court held that this statement was adequate, as a matter of law, to warn a mail carrier of an icy sidewalk because “temperatures had been and were well below freezing and there is no evidence of any other circumstance that a reasonable person might have contemplated would precipitate [the] “don’t slip” warning.” Id. at 252. c. Kinney v. Barnes, 443 S.W.3d 87 (Tex. 2014) The Texas Constitution does not permit injunctions against future speech following an adjudication of defamation. Facts: The defendant posted on-line statements implicating the plaintiff in a recruiting kickback scheme during his time at a legal recruiting firm. The plaintiff sued for defamation. He did not seek damages, but instead requested a permanent injunction following a trial on the merits that would prohibit the defendant from making the same or “substantially the same” defamatory statements in the future. Law: The Court held that the Texas Constitution does not permit injunctions against future speech following an adjudication of defamation. It reasoned that such injunctions are necessarily “ineffective, overbroad, or both.” Id. at 97. “Given the inherently contextual nature of defamatory speech, even the most narrowly crafted of injunctions risks enjoining protected speech because the same statement made at a different time and in a different context may no longer be actionable.” Id. at 98. “Untrue statements may later become true; unprivileged statements may later become privileged.” Id. Conversely, the Court reasoned that an injunction limited to prohibiting only the exact statements adjudicated defamatory would only invite the defamer to engage in wordplay. d. Ford Motor Co. v. Castillo, 444 S.W.3d 616 (Tex. 2014) (per curiam) Circumstantial evidence was legally sufficient to support a jury finding that a settlement agreement was fraudulently induced; remanded for consideration of the factual sufficiency of the evidence. Facts: The jury sent out a note during deliberations, which stated: “What is the maximum amount that can be awarded?” Id. at 619. The parties promptly settled. However, Ford pursued post-verdict discovery that showed that only the foreperson signed the note and that the remaining jurors did not even know of its existence. Further discovery revealed other unusual facts, including a phone call from the foreperson to an attorney later implicated in an extortion scheme with the judge who tried the case. Law: The Court held that there was enough circumstance evidence to establish a pattern that suggested a fraudulent scheme to send the jury note. It then remanded to the court of appeals to consider the factual sufficiency of the evidence. RETURN TO TABLE OF CONTENTS VII. OTHER IMPORTANT CASES a. Hamrick v. Ward, No. 12-0348, 2014 WL 4745575 (Tex. Aug. 29, 2014) One claiming an implied easement for roadway access to a landlocked, previously unified parcel must pursue a necessity easement rather than a prior use easement. Facts: The defendants owned landlocked property that was part of a previously unified parcel. For many years, they used a dirt road across the plaintiffs’ property to access their land. Eventually, the plaintiffs sued to enjoin further use of the road. The defendants asserted an implied “prior use” easement. Law: Implied easements fall into two categories: (1) necessity easements, and (2) prior use easements. An easement by necessity continues until the necessity terminates. In contrast, to establish a prior use easement a party need not establish strict necessity. Instead, the courts look at the circumstances existing at the time of the severance to assess whether the parties intended for continued use of the improvement. The Court clarified that “courts adjudicating implied easements for roadway access for previously unified, landlocked parcels must assess such cases under the necessity easement doctrine.” Id. at *6. It explained that the less forgiving proof requirements for necessity easements “serve as acknowledgment that roadways typically are more significant intrusions on servient estates.” Id. Prior use easements are aimed to address such improvements as water lines, sewer lines, and power lines that tend to involve more modest impositions on servient estates. Although the plaintiff, in Hamrick pled the wrong cause of action, the Court remanded the case to the trial court “in the interest of justice” due to prior confusion in the law. Id. at *7. b. In re Essex Ins. Co., No. 13-1006, 2014 WL 6612590 (Tex. Nov. 21, 2014) (per curiam) An injured party cannot sue the tortfeasor’s insurer directly until the tortfeasor’s liability has been finally determined by agreement or judgment. Facts: The plaintiff sued his employer for personal injury. The employer’s insurance company determined that its policy did not cover the plaintiff’s claims. The plaintiff sued the insurer seeking a declaration of coverage. The insurance company filed a motion to dismiss the plaintiff’s claims against it under Texas Rule of Civil Procedure 91a. The trial court denied the motion and the insurer sought mandamus relief. Law: The Texas Supreme Court reaffirmed that: “In Texas, the general rule ... is that an injured party cannot sue the tortfeasor’s insurer directly until the tortfeasor’s liability has been finally determined by agreement or judgment.” This rule applies regardless of whether the plaintiff seeks damages or a declaratory judgment. It is based on the rationale that allowing the plaintiff to pursue claims for liability and coverage in the same action would prejudice the defendants by: (1) creating a conflict of interest for the insurer, and (2) requiring the admission of evidence of liability insurance in violation of Texas Rule of Evidence 411. The Court has allowed declaratory suits to proceed prior to the determination of liability only where it was the insurer or the insured defendant, not the plaintiff, who sought declaratory relief. Accordingly, the Court granted mandamus relief “to spare the parties and the public the time and money spent on fatally flawed proceedings.” Id. at *3. c. Crosstex Energy Servs., L.P. v. Pro Plus, Inc., 430 S.W.3d 384 (Tex. 2014) The statutory “good cause” exception that allows a plaintiff to obtain an extension of time to file a certificate of merit applies only if a plaintiff files suit within 10 days of the expiration of limitations; the defendant’s participation in early discovery does not waive the certificate of merit requirement. Facts: A pipeline service provider brought an action against an engineering firm for damages arising from a fire at its compressor station, asserting negligence in the design and construction of the station. The parties began exchanging discovery and even entered into a Rule 11 agreement to move expert designation dates beyond the limitations period. After limitations ran, the defendant moved to dismiss because the plaintiff had not filed a certificate of merit with its original petition as required by section 150.002 of the Texas Civil Practice and Remedies Code. The trial court granted the plaintiff an extension of time for “good cause” and denied the motion to dismiss. The defendant filed an interlocutory appeal. Law: Although there is a “good cause” exception within the statute that allows a plaintiff to obtain an extension of time to file a certificate of merit, the Court determined that the exception is limited by the terms of the statute to circumstances where the plaintiff: (1) files within ten days of the expiration of the limitations period; and (2) alleges that such time constraints prevented the preparation of an affidavit. Id. at 391. Because the plaintiff filed suit outside this 10-day window, it could not claim the benefit of the exception. RETURN TO TABLE OF CONTENTS The filing of a certificate of merit is a mandatory, but non-jurisdictional, requirement that can be waived by the defendant. Id. at 393. However, the Court held that the defendant’s action in exchanging 11,000 pages of written discovery, filing an answer, and entering into a Rule 11 agreement to extend expert designation deadlines fell short of clearly demonstrating an intent to waive the right to file a motion to dismiss. Id. at 394-95. Moreover, the defendant was not required to first file special exceptions because the failure to file a certificate of merit with the original petition cannot be cured by amendment. Id. at 395. d. contained only generalities such as the total hours worked and the categories of tasks performed. Law: “[W]ithout any evidence of the time spent on specific tasks, the trial court had insufficient information to meaningfully review the fee request.” Id. at 255. The Court noted that although contemporaneous time records may not exist “the attorneys may reconstruct their work to provide the trial court with sufficient information to allow the court to perform a meaningful review of the fee application.” Id. at 256. Accordingly the Court remanded for a redetermination of the award of attorneys’ fees. Jaster v. Comet II Const., Inc., 438 S.W.3d 556 (Tex. 2014) The certificate of merit requirement in section 150.002 of the Civil Practice and Remedies Code does not apply to a thirdparty defendant. Facts: A homeowner sued his contractor for damages arising from the improper design and construction of his home. The contractor filed a thirdparty claim against its architect. The architect moved to dismiss the claim because the contractor failed to file a certificate of merit as required by section 150.002 of the Civil Practice and Remedies Code. Law: Section 150.002 of the Civil Practice and Remedies Code states: “The plaintiff’s failure to file a [certificate of merit] in accordance with this section shall result in dismissal of the complaint against the defendant.” Id. at 560. The ordinary meaning of the term “plaintiff” means “a party who initiates the action or suit, not any party who asserts claims or causes of action within the suit.” Id. at 565. Accordingly, the contractor was not required to file a certificate of merit with its third-party claim. e. Long v. Griffin, 442 S.W.3d 253 (Tex. 2014) (per curiam) There was legally insufficient evidence to support the amount of an attorneys’ fee award because the affidavit submitted did not provide any evidence of the time spent on specific tasks. Facts: The plaintiffs sought an award of attorneys’ fees under Chapter 38 of the Texas Civil Practice and Remedies Code and under the Uniform Declaratory Judgment Act. They submitted an affidavit using the lodestar method and multiplying the hours worked for each of the two attorneys by their hourly rates for a total fee. Id. at 255. However, the affidavit RETURN TO TABLE OF CONTENTS NAVIGATING THE NEW JUSTICE COURT RULES JULIE M. BALOVICH Texas RioGrande Legal Aid, Inc. 114 N. 6th Street Alpine, Texas 79830 Tel: (432) 837-1199 Fax: (432) 837-9946 [email protected] State Bar of Texas 31st ANNUAL LITIGATION UPDATE INSTITUTE January 15-16, 2015 San Antonio CHAPTER 3.1 RETURN TO TABLE OF CONTENTS TABLE OF CONTENTS I. INTRODUCTION ............................................................................................................................................. 1 II. JUSTICE COURT JURISDICTION ................................................................................................................. 1 III. STRUCTURE AND APPLICATION OF THE RULES ................................................................................... 2 IV. NEW RULES APPLICABLE IN ALL CASES ................................................................................................ 2 A. Nonattorney representation ........................................................................................................................ 2 B. Computation of time .................................................................................................................................. 2 C. Evidence and procedure ............................................................................................................................. 3 D. No discovery without court permission .................................................................................................... 3 V. CITATION......................................................................................................................................................... 3 VI. SERVICE ........................................................................................................................................................... 3 VII. PLEADINGS ..................................................................................................................................................... 4 A. Petition ....................................................................................................................................................... 4 B. Efiling......................................................................................................................................................... 4 C. Fees and inability to pay............................................................................................................................. 4 D. Venue ......................................................................................................................................................... 4 E. Answer ....................................................................................................................................................... 5 F. Counterclaims and third party claims......................................................................................................... 5 G. Amendments and clarifications .................................................................................................................. 5 H. Notice of trial and postponement ............................................................................................................... 5 VIII. TRIAL ................................................................................................................................................................ 5 A. Default Judgment ....................................................................................................................................... 5 B. Summary Disposition ................................................................................................................................. 6 C. Alternative Dispute Resolution .................................................................................................................. 7 D. Trial7 E. Judgment and enforcement......................................................................................................................... 7 IX. POSTJUDGMENT MOTIONS AND APPEAL ............................................................................................... 7 A. Postjudgment motions ................................................................................................................................ 7 B. Appeal ........................................................................................................................................................ 7 C. Writ of certiorari ........................................................................................................................................ 8 D. Plenary power............................................................................................................................................. 8 X. CONCLUSION .................................................................................................................................................. 8 APPENDIX A ................................................................................................................................................................. 9 APPENDIX B ............................................................................................................................................................... 13 RETURN TO TABLE OF CONTENTS NAVIGATING THE NEW JUSTICE COURT RULES I. INTRODUCTION The legislation that dissolved small claims courts in 2011 and added small claims cases to the jurisdiction of justice courts also required the Texas Supreme Court to develop rules of practice for the restructured justice courts. 1 The guiding principles for the rules were explicit. The new rules could not (1) require a party to be represented by an attorney, (2) be so complex a reasonable person without training would have difficulty understanding or applying the rules, or (3) require discovery, the rules of civil procedure, or the rules of evidence to be applicable unless required by a justice of the peace.2 The revised Part V of the Texas Rules of Civil Procedure comprises the new rules of practice in justice courts. 3 Many of the rules were not changed, but were reorganized, rewritten, and expanded to provide more guidance for the pro se litigant. Some of the rules from the now repealed Chapter 28 of the Government Code (governing small claims courts) have been incorporated to apply to all justice court cases. In addition, a few completely new provisions were added. The new rules are comprehensive in their scope as to what governs a justice court case and are therefore, perhaps necessarily, a dense read. They are structured in such a way that different sections must be compared to ensure that applicable rules are followed. The purpose of this article is to help the practitioner navigate the new justice court rules. Not all of the rules will be discussed, but the article will cover the new rules as well as the rules that require comparison of different sections to see which apply in a specific type of case. In the appendix, a chart is provided that summarizes which rules apply to different types of cases brought in justice court. II. JUSTICE COURT JURISDICTION The most significant change in justice court jurisdiction is that it now includes small claims cases. Small claims cases are defined as suits brought for the recovery of money damages, civil penalties, personal property, or other relief authorized by law. 4 Under Chapter 27 of the Government Code, justice courts have jurisdiction to issue writs of garnishment, attachment, and sequestration, but not injunctive 1 Tex. Gov’t Code § 27.060(c). Id. 3 Supreme Court of Tex., Final Approval of Rules for Justice Court Cases, Misc. Docket No. 13–9049, 76 Tex. B.J. 440 (Apr. 15, 2013). 4 Tex. R. Civ. P. 500.3(a). 2 relief. 5 Justice courts also have jurisdiction over forcible detainer actions, foreclosures and suits to recover liens on personal property worth less than $10,000, and declaratory judgment actions to enforce deed restrictions. 6 Amount in controversy and attorneys fees. For all cases, the jurisdictional limit for monetary damages is $10,000, which includes attorneys fees but does not include interest and costs.7 The rules are not clear as to whether the express inclusion of attorneys fees in the jurisdictional limits requires the plaintiff to prospectively cap the amount of attorneys fees that may be sought. What is the effect on the justice court’s jurisdiction if, at the time of trial, damages plus attorneys’ fees exceed $10,000? The general rule is that the court will look to the allegation of monetary relief sought in the petition to determine the amount in controversy, and presume that the allegation is made in good faith.8 Only if a defendant pleads and proves that the alleged amount is a sham to obtain the jurisdiction of the court will a court dismiss the case. 9 Recently in Elkins v. Immoniyong, the Dallas Court of Appeals held that a justice court properly exercised jurisdiction in a case in which the petition sought damages in the amount of $8416.26 and reasonable attorneys fees, but the judgment obtained was for $13,550.27. 10 On appeal to county court, the defendant moved to dismiss, arguing it was disingenuous for the plaintiff to suggest its fees would be limited to $1,583.74 – the difference between the jurisdictional limit and its claim for damages. 11 The Court of Appeals rejected that argument, finding no authority for the proposition that a plaintiff had to estimate the amount of future attorney’s fees required to bring a case to conclusion for purpose of calculating the amount in controversy. The Court observed that such an estimate would depend on unknown factors, such as whether the defendant would answer or defend the suit. 12 The Court also noted that damages that increase as a result of the passage of time do not cause a justice court to lose jurisdiction, and those damages can include attorneys’ fees.13 The holding of Elkins aligns with decisions from other courts that have held that “postjudgment attorney’s fees” are not included in the amount in 5 Tex. Gov’t Code § 27.034; Nash v. Peters, 303 S.W.3d 359 (Tex. App.—El Paso 2009, no pet.) 6 Tex. Gov’t Code § 27.031. 7 Id. 8 Bland Indep. Sch. Dist. V. Blue, 34 S.W.3d 547, 554-55 (Tex. 2000). 9 Id. 10 Elkins v. Immanivong, 406 S.W.3d 777 (Tex. App.— Dallas 2013, no pet.) 11 Id. 12 Id. 13 Id. at 780. RETURN TO TABLE OF CONTENTS controversy. 14 However, these cases do not analyze the new rule and it remains to be determined whether the language of the new rule – which expressly requires attorneys fees included in the jurisdictional cap – changes the analysis. At least one other court has held that, under the former rules, a petition must specifically plead attorneys’ fees within the amount in controversy or the judgment is void. 15 III. STRUCTURE AND APPLICATION OF THE RULES Part V is organized into ten sets of rules. 16 The first seven sets of rules apply generally to all claims brought in justice courts and are the exclusive rules that govern small claims cases: • • • • • • • • Rule 500 General Rules Rule 501 Citation and Service Rule 502 Institution of Suit Rule 503 Default Judgment; Pre-Trial Matters; Trial Rule 504 Jury Rule 505 Judgment; New Trial Rule 506 Appeal Rule 507 Administrative Rules for Judges and Court Personnel. The last three sets of rules apply to three types of cases that may be brought in justice court. • • • 14 Rule 508 governs debt claim cases which are those brought by an assignee of a claim, a debt collector, collection agency, financial institution or other lender whose primary occupation is lending money at interest. Rule 509 applies to repair and remedy cases which are cases brought under Chapter 92, Subchapter B of the Texas Property Code to enforce a landlord’s obligation to make repairs. Rule 510 controls eviction cases which are cases brought to recover possession of real property See Serrano v. Francis Properties I, Ltd., 411 S.W.3d 661 (Tex. App.—El Paso 2014, pet. dism’d w.o.j.) (holding justice court had jurisdiction where amount in controversy was alleged as $9,600 in unpaid rent plus attorneys fees); see also Crumpton v. Stevens, 936 S.W.2d 473, 477 (Tex. App.—Fort Worth 1996, no writ.) (attorneys fees incurred on appeal from justice court do not deprive court of jurisdiction). 15 Burdette v. Huffy, No. 12-01-00031-CV, 2001 WL 1566687 (Tex. App.—Tyler, Dec. 5, 2001, no pet. h.) (per curiam). 16 The previous organization of Part V employed “sections” and individual rules within each section. The new organization has an overriding rule and then subrules for each. under Chapter 24 of the Property Code, and which may include a claim for rent. When there is a conflict between Rules 500-507 and the last three sets of rules, the more specific rules in 508, 509, and 510 control. 17 IV. NEW RULES APPLICABLE IN ALL CASES Rule 500 is divided into nine subrules of general application, including the following new rules. A. Nonattorney representation Nonattorneys may represent individuals and corporations in justice court. 18 This was true to some extent before, but the rule has been expanded significantly. Now an individual may be represented by an “authorized agent” in any eviction case and corporations or other entities may be represented by any employee, owner, officer or partner. 19 In addition, for good cause shown, a justice of the peace may allow an individual representing himself to be “assisted in court” by a family member or other individual who is not being compensated. 20 Nonattorney representation is not permitted in county court on appeal from a justice court judgment, except in a motion or hearing over a tenant’s failure to pay rent into the registry or a motion to dismiss an appeal of an eviction case.21 In those cases, either party may be represented by an authorized agent. 22 B. Computation of time Time periods move faster in justice court. When calculating a time period, every day, including Saturdays, Sundays and legal holidays are counted. 23 Because some justice courts have different operating hours, the rule provides that if the last day of the period falls on a day the court is closed before 5:00 p.m., the time period extends to the next business day. 24 The 17 Tex. R. Civ. P. 500.3(b), (c), (d). Tex. R. Civ. P. 500.4 19 Under the former rules, authorized agents could only represent parties in nonpayment of rent and holdover cases. Tex. Prop. Code § 24.011; Tex. R. Civ. P. 747a (repealed). In small claims actions, corporations were not required to be represented by attorneys. Tex. Gov’t Code § 28.003(e) (repealed). 20 Tex. R. Civ. P. 500.4(c). 21 McClane v. New Caney Oaks Apartments, 416 S.W.3d 115, 120 (Tex. App.—Beaumont 2013, no pet.); Tex. Prop. Code § 24.0054(e). 22 Tex. Prop. Code § 24.0054(e). 23 Tex. R. Civ. P. 500.5(a); compare Tex. R. Civ. P. 4 “Computation of Time” in which Saturdays, Sundays, and legal holidays are not counted for any purpose in any time period of five days or less. 24 Tex. R. Civ. P. 500.5(a)(3)(B). 18 RETURN TO TABLE OF CONTENTS mailbox rule applies. 25 However, in eviction cases, the mailbox rule cannot be relied upon to stay a writ of possession from issuing when an appeal is filed by mail. 26 To prevent a writ of possession from issuing, an appeal must be received by the clerk on the deadline and rent must be deposited in the court registry on the deadline. 27 The judge may for good cause extend a time period except time periods relating to new trials and appeals. 28 C. Evidence and procedure The rules of evidence and civil procedure that apply in justice court are those within Part V of the Rules of Civil Procedure. 29 A judge has discretion to apply a particular rule of procedure and evidence; the judge also has authority to develop a case by summoning witnesses and questioning parties. 30 The Rules of Civil Procedure and Rules of Evidence must be made available by the court for examination in paper form or electronically during the court’s business hours. 31 Justice court litigants may invoke “the rule”: the court must exclude witnesses on a party’s request except for a spouse, a representative of a party who is not a natural person, or a party whose presence is shown to be essential to the presentation of the party’s case. 32 D. No discovery without court permission Pretrial discovery is limited to what a judge considers reasonable and necessary. 33 To obtain discovery in justice court, a party must file a motion with the court; the justice court may rule on the motion without a hearing. 34 Until the judge issues a signed order approving the request, pretrial discovery may not be served. 35 Postjudgment discovery is expressly authorized and does not have to be filed with the court.36 V. CITATION The rule makers obviously intended to ensure defendants received clear, comprehensible notice and instruction as to how to respond to the suit and the effect of ignoring the suit. For small claims and debt claim cases, the notice that appears on the citation must be in bold type. 37 The notice informs the defendant of the requirement to file a written answer a lawsuit by the 14th day after service and includes the warning: “Do not ignore these papers.” 38 For landlord-tenant cases, the citation informs the defendant of an appearance date, which is the trial date, which must be no less than 10 and no more than 21 days after the suit was filed. 39 In addition, citation in eviction suits informs the defendant of the right to request a jury up to three days before trial 40 and must include special warning language for active military as well as a referral number for persons who need help locating an attorney, written in English and Spanish.41 Citations are typically prepared by clerks but it is the plaintiff’s case that could be impacted by defects in citation. The plaintiff is well-advised to review the citation to ensure it is correct and compliant with current law before citation issues and the defendant is served. VI. SERVICE Citation. For the most part, the rules for service of citation in justice courts are the same as those applicable in district and county courts. One difference is that the rules expressly authorize a constable, sheriff or process server to initiate the request for alternate service. 42 The types of service that may be authorized depend on the type of suit. For small claims and debt claim suits, alternate service may be either (1) mailing a copy of the citation to the defendant at a specified address and leaving a copy of the citation and petition at the defendant’s address or other place where the defendant can probably be found with a person at least 16 years of age, or (2) mailing a copy and also serving by any other method the court finds reasonably likely to provide defendant with notice of suit. 43 Service by publication is permitted and is governed by the rules governing such process in district and county courts, although the justice court rules does not specify which rules those are. 44 Presumably this includes not only Rules 109-114, but also Rule 244 which requires a statement of evidence to be filed and an attorney ad 25 Tex. R. Civ. P. 500.5(b). Tex. R. Civ. P. 510.2. 27 Tex. R. Civ. P 510.9(.a), 510.9(c)(5)(B); 510.13. 28 Tex. R. Civ. P. 500.5(c). 29 Tex. R. Civ. P. 500.3(e); see also Tex. R. Evid. 101(b) (excluding application of rules to small claims courts). 30 Tex. R. Civ. P. 500.3(e)(1); 500.6. 31 Tex. R. Civ. P. 500.3(f). 32 Tex. R. Civ. P. 500.7; compare Tex. R. Evid. 614. 33 Tex. R. Civ. P. 500.9(a). 34 Id. 35 Id. 36 Tex. R. Civ. P. 500.9(b). 26 37 Tex. R. Civ. P. 501.1(c). Id. 39 Tex. R. Civ. P. 509.3; 510.4. 40 Tex. R. Civ. P. 510.4(a)(12). 41 Tex. Prop. Code § 24.0051. 42 Tex. R. Civ. P. 501.2(e); compare Tex. R. Civ. P. 106(b) providing that alternate service may be requested by motion supported by affidavit. 43 Id. 44 Tex. R. Civ. P. 501.2(f); Tex. R. Civ. P. 109-14.. 38 RETURN TO TABLE OF CONTENTS litem to be appointed before a default judgment may be taken after service by publication. For repair and remedy suits, if service cannot be effected at the landlord’s business address, service must be attempted at the management company or the landlord’s authorized agent for service of process if those are known. 45 If those efforts are unsuccessful, the court may authorize service by placing the citation and petition through a door mail chute, slipping them under the front door, or affixing them to the front door or main entry of the landlord's business address in addition to mailing the citation and petition by first class mail to the landlord’s business street address.46 For eviction suits, if service cannot be personally effected, the judge may authorize service by placing the citation and petition through a door mail chute, slipping them under the front door, or affixing them to the front door or main entry of the premises in addition to mailing the citation and petition by first class mail to the premises. 47 Documents other than citation. Service of documents may be done in person, by mail, fax, or email, just as under Rule 21a. 48 Service of mail adds three days to the response time, and notice of any hearing may only be done on three days’ notice. 49 VII. PLEADINGS A. Petition Oral pleadings used to be the rule in justice court – no more. Pleadings and motions must be in writing and must give sufficient notice of the plaintiff’s claims. 50 Each type of suit that may be brought in justice court has its own particular pleading requirements. 51 For instance, in eviction suits, the plaintiff must name all tenants obligated under a written lease whom the plaintiff seeks to evict. 52 The Texas Supreme Court has promulgated a form justice court civil information sheet which must be filed in all cases. 53 B. Efiling Documents may be efiled if the justice court allows efiling. 54 At the time this article was written, only Williamson County had mandatory efiling in 45 Tex. R. Civ. P. 509.3(b)(1). Tex. R. Civ. P. 509.3(b)(2)(A). 47 Tex. R. Civ. P. 510.4(c)(3). 48 Tex. R. Civ. P. 501.4. 49 Id. 50 Tex. R. Civ. P. 502.2. 51 Tex. R. Civ. P. 502.2 (small claims); 508.2 (debt claims); 509.2 (repair and remedy); 510.3 (evictions). 52 Tex. R. Civ. P. 510.3(c) 53 http://www.txcourts.gov/rules-forms/forms.aspx 54 Tex. R. Civ. P. 502.1. 46 justice court and eleven counties have permissive efiling in their justice courts. 55 C. Fees and inability to pay The new rules include a section that mirrors Rule 145 and its provision for filing an affidavit on indigency in lieu of paying court costs. 56 The main difference: under Rule 145, a clerk or defendant may file a contest. 57 In justice court, only a defendant may file a contest. 58 However, regardless of whether the defendant files a contest, a judge may examine the statement of inability to pay and conduct a hearing to determine the plaintiff’s ability to pay. 59 If the judge determines the plaintiff can afford the fees, the judge must enter a written order listing the reasons for the determination and the plaintiff must pay the fees or the case will be dismissed. 60 D. Venue The venue rules are not changed, expressly incorporating Chapter 15 of the Civil Practice and Remedies Code. 61 However, there is a new process to challenge venue which is unique to justice court. Venue may be challenged both because it is improper and mandatory in another precinct and because of a perceived inability to obtain a fair trial. To challenge improper venue, a defendant may file a motion to transfer venue before trial and no later than 21 days after the answer was filed. 62 The motion must be sworn and must state the specific county and precinct where the suit should have been filed.63 If the motion is granted, the plaintiff must pay filing fees in the new court (or a new statement of inability to pay). 64 A party may also seek a change of venue if it believes it cannot get a fair trial in a specific precinct or before a specific judge. 65 The motion must be supported by sworn statements of two other credible persons and must be filed 7 days before trial unless good cause is shown. 66 If the suit is for eviction and exclusive jurisdiction is within a specific precinct, the only remedy is a change of judge. 67 If no other justice 55 http://www.efiletexas.gov/active-courts/dcpj-courts.htm Tex. R. Civ. P. 502.3. 57 Tex. R. Civ. P. 145(d). 58 Id. 59 Id. 60 Id. 61 Tex. R. Civ. P. 502.4. 62 Tex. R. Civ. P. 502.4(d). 63 Id. 64 Id. In addition to the risk of having to pay a new filing fee, a debt collector who files suit in an improper venue is subject to liability under Section 811(a)(2) of the federal Fair Debt Collection Practices Act. 15 U.S.C. § 1692i. 65 Tex. R. Civ. P. 502.4(e). 66 Id. 67 Id. 56 RETURN TO TABLE OF CONTENTS of the peace is available, the county judge must appoint a visiting judge to hear the case.68 The rules do not give discretion to a judge to deny a fair trial change if this procedure has been followed. E. Answer For small claims and debt claim cases, the answer must be in writing and filed 14 days from the date of service. 69 When service is by publication, the answer date is the 42nd day after service. 70 For landlord-tenant cases, no answer is required; the citation states an appearance date which is the trial date.71 The trial date is within 10 and 21 days of the date of filing. 72 If an eviction suit is appealed to county court, the tenant must file a written answer within eight days or risk default on appeal. 73 Also if a tenant defaults after being served with a possession bond, the landlord will be entitled to a writ of possession on the 7th day after service. 74 When a written answer is filed, only a general denial is required. Affirmative defenses need not be pled to be raised at trial.75 F. Counterclaims and third party claims Subject to the jurisdictional limits of the court, a defendant in a small claims or debt claims case may file a counterclaim or third party claims. 76 These claims are not permitted in repair and remedy and eviction suits. 77 Claims that could have been litigated in justice court are not barred by res judicata or estoppel. 78 Accordingly, these claims and other causes of action the plaintiff of defendant may want to assert can be brought in a subsequent suit. G. Amendments and clarifications A party may amend his or her pleadings by filing and serving the amendment not less than 7 days before trial, unless permitted by the court.79 A party may challenge another party’s pleadings for insufficient notice of issues by filing a written request with the court seeking clarification.80 H. Notice of trial and postponement Generally, 45 days notice of trial is required in small claims and debt claims cases. 81 The court may determine an earlier setting is required “in the interest of justice.” 82 For landlord-tenant cases, notice of the trial date is given in the citation and at least six days’ notice is required. A party seeking postponement in any type of case may file a motion stating why the postponement is necessary. 83 For all cases but evictions, a trial may be postponed for good cause for a “reasonable time.” 84 In eviction suits, a postponement may not be for more than 7 days unless the parties agree. 85 VIII. TRIAL Cases may be resolved in justice court by default judgment, summary disposition, bench trial, jury trial, or ADR. A. Default Judgment In small claims and debt claims cases, a plaintiff may take a default judgment if the defendant fails to answer and the return of service has been on file at least three days. 86 On default, the plaintiff must introduce proof of damages. 87 Proof of damages. For cases based upon a written document, there must be a sworn statement by the plaintiff that the written document is a true and correct copy and that all payments, offsets, or credits have been accounted for, and the statement and documents must have been filed and served on the defendant. 88 To prove damages to support default judgment in a debt claims case, the plaintiff must produce evidence that essentially establishes both liability and damages, i.e.: 68 Id. Tex. R. Civ. P. 502.5(a). 70 Tex. R. Civ. P. 502.5(e). 71 Tex. R. Civ. P. 509.3(b), 510.4(a)(10).. 72 Tex. R. Civ. P. 509.3(b), 510.4(a)(10). 73 Tex. R. Civ. P. 510.10(b); Williams v. Bayview-Realty Assoc., 420 S.W.3d 358, 366 (Tex. App.—Houston [14th Dist.] 2014, no pet.) 74 Tex. R. Civ. P. 510.5 75 Tex. R. Civ. P. 502.5(b). 76 Tex. R. Civ. P. 502.6. 77 Tex. R. Civ. P. 509.7, 510.3(e). 78 Tex. Civ. Prac. & Rem. Code § 31.005. 79 Tex. R. Civ. P. 502.7(a). 80 Tex. R. Civ. P. 502.7(b). 69 81 Tex. R. Civ. P. 503.3(a). Id. 83 Tex. R. Civ. P. 503.3(b). 84 Id. 85 Tex. R. Civ. P. 510(c). 86 Tex. R. Civ. P. 501.3(h). 87 Tex. R. Civ. P. 503.1(a), 508.3(a). 88 Tex. R. Civ. P. 503.1; 503.3(b) 82 RETURN TO TABLE OF CONTENTS (a) That the account or loan was issued to the defendant and the defendant was obligated to pay; (b) That the account was closed or the defendant breached the terms of the account or loan agreement; (c) The amount due on the account or loan as of a date certain after payment credits and offsets have been applied; and (d) That the plaintiff owns the account or loan and, if applicable, how the plaintiff acquired the account or loan. 89 Business records exception to hearsay. In these debt claims cases, the rules implicitly adopt the prohibition against hearsay when it comes to documentary evidence and, correspondingly, the hearsay exception for business records. 90 Documentary evidence that proves damages may be considered if it is attached to a sworn statement made by a plaintiff, a prior holder, or the original creditor (or their representatives) that attests to the requirements of a business records affidavit under Texas Rule of Evidence 901(10). 91 A judge is not required to accept a sworn statement if the source of information or the method of circumstances of preparation indicate a lack of trustworthiness, but may not reject a sworn statement only because it was not prepared by the original creditor or because the documents attested to were created by a third party and incorporated into and relied upon by the business of the plaintiff. 92 This rule may permit a debt buyer to introduce an original creditor’s records through a sworn statement by the debt buyer’s representative that the original creditor’s records were incorporated into and relied upon by the debt buyer’s business. This is a truncated version of the common law “incorporating business” exception that applies to a third party’s business records; the other factors the proponent must prove are that the incorporating business typically relies upon the accuracy of the records and that circumstances otherwise indicate the trustworthiness of the document. 93 What this could mean is that evidence that would be sufficient to support a default judgment in justice court may be insufficient to support a judgment on de novo review in the county court, depending upon the contents of the sworn statement that attaches the records and the appellate jurisdiction of the county 89 Tex. R. Civ. P. 508.3(b). Tex. R. Civ. P. 508.3(b)(4). 91 Id. 92 Tex. R. Civ. P. 508.3(b)(5). 93 Bell v. State, 176 S.W.3d 90, 92 (Tex. App.—Houston [1st Dist.] 2004, pet. ref’d). 90 court. 94 Because these rules are found only under a rule for “default judgments,” it is also not clear if the rules are intended to apply if a defendant answers and there is a trial. Landlord-tenant cases. In these cases, the return of service must have been on file for at least one day before the case may proceed on default. 95 In repair and remedy cases, if the landlord defaults, the tenant must prove her entitlement to recovery. 96 In eviction suits, liability is admitted if the tenant fails to file an answer and fails to appear. 97 If the tenant answers, but fails to appear, the landlord must prove the grounds for forcible detainer. 98 Special rules apply if a landlord files a possession bond in an eviction case. If a defendant is served with notice that the landlord filed a possession bond and the defendant defaults, the landlord will be entitled to possession of the property seven days after the defendant was served with notice. 99 Notice on default judgment. Although not mentioned in the rules, before obtaining default judgment, a plaintiff must file an affidavit of nonmilitary status in compliance with the Servicemembers’ Civil Relief Act. 100 The plaintiff must also file a certificate of last known address which is the address where the clerk will send notice of the judgment. 101 B. Summary Disposition A motion for summary disposition on claims or defenses may be considered 14 days after the date it was filed. 102 The motion must be sworn and set out all supporting facts and any documents on which the motion relies. 103 The rule is silent as to whether the rules for documentary evidence found in the default judgment rule apply. A party may oppose the motion with a sworn response, but also may offer evidence at the hearing. 104 94 There is currently a split in the jurisdictions that accept a debt buyer’s affidavit to sponsor business records without other evidence of reliability. Compare Simien v. Unifund CCR Partners, 321 S.W.3d 325, 244-45 (Tex. App.— Houston [1st Dist.] 2010, no pet.), with Abrego v. Harvest Credit Management VII,LLC, 2010 WL 1718953, *3 (Tex. App.–Corpus Christi 2010, no pet.) (mem. op.) 95 Tex. R. Civ. P. 509.4(a). 96 Tex. R. Civ. P. 509.5(b), 510.4(b)(3). 97 Tex. R. Civ. P. 510.6(b). 98 Id. 99 Tex. R. Civ. P. 510.5. 100 50 U.S.C.S. App. § 521. 101 Tex. R. Civ. P. 503.1(d). 102 Tex. R. Civ. P. 503.2(a). 103 Id. 104 Tex. R. Civ. P. 503.2(b), 503.2(c). RETURN TO TABLE OF CONTENTS C. Alternative Dispute Resolution Any case may be ordered to mediation or alternative dispute resolution, except for an eviction case if it would delay trial. 105 D. Trial Trial may be by bench or jury. To obtain a jury in a small claims or debt claims case, a party must make a written demand 14 days before trial and pay the jury demand or file an affidavit of indigence, although a judge could excuse a late filing for good cause. 106 In an eviction case, the deadline to demand a jury is three days before trial. 107 The rules do not appear to authorize trial by jury in a repair and remedy case, although they do not expressly prohibit it. 108 On appeal, however, trial by jury is expressly authorized. 109 E. Judgment and enforcement For each type of case, what must be included in the form of judgment is prescribed by rule. 110 Justice court judgments are enforceable in the same manner as county and district court judgments, except as provided by law. 111 For recovery of personal property, a court may award a writ for seizure and delivery and enforce its judgment by attachment or fine. 112 In a repair and remedy case, if the landlord is served with an order and fails to comply, the failure is grounds for citing the landlord for contempt of court under Section 21.002 of the Government Code. 113 If a defendant in an eviction case is served with a possession bond and the defendant defaults, the landlord will be entitled to possession of the property seven days after the defendant was served with notice. 114 Otherwise, the plaintiff may request a writ of possession on the sixth day after judgment is signed unless the defendant timely appealed.115 The writ may not be issued more than 60 days after judgment (except for good cause) and may not be executed 90 days after a judgment for possession is signed. 116 To stay a writ of possession, the tenant must do two things: (1) perfect an appeal (which includes 105 Tex. R. Civ. P. 503.5. Tex. R. Civ. P. 504.1. 107 Tex. R. Civ. P. 510.7(b). 108 Tex. R. Civ. P. 509.5 (“[T]he judge may proceed to hear evidence.”) 109 Tex. R. Civ. P. 509.8(e). 110 Tex. R. Civ. P. 505.1 (small claims and debt claims); 509.6 (repair and remedy); 510.8 (evictions). 111 Tex. R. Civ. P. 505.02. 112 Id. 113 Tex. R. Civ. P. 509.6(d). 114 Tex. R. Civ. P. 510.5. 115 Tex. R. Civ. P. 510.8(d)(1). 116 Tex. R. Civ. P. 510.8(d). 106 posting bond or filing a sworn statement of inability to pay) within five days of the judgment, and (2) in a nonpayment of rent case, deposit monthly rent within the court registry within five days of the date the appeal is filed and then every month as the rent comes due. 117 The payment of rent into the court registry is triggered by notice from the justice court regarding the amount of rent, how it must be paid, the deadline to pay the rent, and a statement that failure to pay may result in a writ of possession issuing. 118 IX. POSTJUDGMENT MOTIONS AND APPEAL A. Postjudgment motions In small claims and debt claims cases, the deadline to file a motion to reinstate, motion to set aside default, or motion for new trial is 14 days after the dismissal order or judgment was signed. 119 The other party must be served no later than the next business day. 120 The standard to prevail on a motion to reinstate or motion to set aside default is good cause shown. 121 The standard for a new trial is that justice was not done. 122 Each of these motions is automatically denied if not ruled upon by 5:00 p.m. on the 21st day after the judgment was signed. 123 In repair and remedy cases, postjudgment motions do not appear to be contemplated although there is no express prohibition; the appeal deadline runs from the date a judgment is signed or amended, but not from the date postjudgment motions are denied. 124 In contrast, motions for new trial are expressly prohibited in eviction cases. 125 B. Appeal An appeal from justice court vacates the judgment of the justice court. 126 Trial is de novo. 127 To appeal from a small claims or debt claims case, a party may file a bond, make a cash deposit, or file a sworn statement of inability to pay within 21 days after judgment is signed or after a postjudgment motion is denied. 128 Plaintiffs must file a $500 bond, 117 Tex. R. Civ. P. 510.9(a), 510.9(b)(5)(B). Tex. R. Civ. P. 510.9(b)(5)(A). 119 Tex. R. Civ. P. 505.3. 120 Id. 121 Tex. R. Civ. P. 505.3(a), (b). 122 Tex. R. Civ. P. 505.3(c). 123 Tex. R. Civ. P. 505.3(d). 124 Tex. R. Civ. P. 509.8(a). 125 Tex. R. Civ. P. 510.8(e). 126 Markham v. Deutsche Bank Nat. Trust Co., No. 13-1200198-CV, 2013 WL 5522748, *2 (Tex. App.—Corpus Christi-Edinburg, Oct. 3, 2013, no pet.). 127 Tex. R. Civ. P. 506.3. 128 Tex. R. Civ. P. 506.1 118 RETURN TO TABLE OF CONTENTS while defendants must file a bond equal to twice the amount of the judgment. 129 Rule 502.3 applies to the statement of inability to pay including the other party’s ability to contest the statement on seven days’ notice. 130 An appeal may not be dismissed for defects or irregularities in form or substance without providing the party an opportunity to cure. 131 A bond is not required to perfect an appeal in a repair and remedy case. 132 Filing an appeal stays enforcement of any order from the court.133 The appeal must be filed within 21 days of judgment. 134 On appeal, trial may be had by bench or jury, and may take place anytime after the eighth day after the date the transcript is filed in county court. 135 To appeal a judgment in an eviction case, a party may file a bond, pay a cash deposit, or file a sworn statement of inability to pay within five days after the judgment is signed. 136 The justice court judge sets the amount of the security, which must be based on damages that may be incurred such as loss of rentals and attorneys’ fees. 137 To remain in possession while the case is pending, a tenant must also pay rent into the court registry within five days of filing an appeal and then upon coming due. 138 applied and plenary power expired 30 days after judgment. X. CONCLUSION The new justice court rules successfully implement the legislative mandate to consolidate in one place the procedural rules that govern justice courts. The practitioner who handles a case in justice court needs to be aware of the new deadlines and requirements imposed by the rules and be prepared to prosecute or defend her case under the applicable procedural and evidentiary rules. C. Writ of certiorari A writ of certiorari is available in all cases tried in justice court other than eviction cases.139 Within 90 days after the date judgment is signed, a party may file an application for writ of certiorari to the county court on the grounds that the justice court lacked jurisdiction or that the final determination worked an injustice to the applicant not caused by his or her own inexcusable neglect. 140 If granted, the case is tried de novo. 141 D. Plenary power A justice court loses plenary power over a case when an appeal is perfected or, if no appeal is perfected, 21 days after the later of the date judgment is signed or the date a postjudgment motion is denied. 142 This is a change; previously Rule 329b 129 Tex. R. Civ. P. 506.1(b). Tex. R. Civ. P. 506.1(d). 131 Tex. R. Civ. P. 506.1(g). 132 Tex. R. Civ. P. 509.8(b). 133 Tex. R. Civ. P. 509.8(c). 134 Tex. R. Civ. P. 509.8(a). 135 Tex. R. Civ. P. 509.8(e). 136 Tex. R. Civ. P. 510.9(a). 137 Tex. R. Civ. P. 510.9(b); 510.11. 138 Tex. R. Civ. P. 510.9(c)(5)(B). 139 Tex. R. Civ. P. 506.4(a). 140 Tex. R. Civ. P. 506.4(b). 141 Tex. R. Civ. P. 506.4(k). 142 Tex. R. Civ. P. 507.1. 130 RETURN TO TABLE OF CONTENTS APPENDIX A Small Claims Debt Claims Evictions 500-507, 508 Repair and Remedy 500-507, 509 Applicable rules Time computation 500-507 500.5 500.5 500.5 Citation 501.1 501.1 501.1, 509.3 Service and alternate service Petition 501.2 501.2 509.4 500.5, 510.2. Mailbox rule will not stay issuance of writ of possession. 501.1, 510.4 Tex. Prop. Code section 24.0051 510.4(b)(2), 510.4(c) 502.1, 502.2 502.1, 502.2, 508.2 509.2 502.2, 510.3. TSC promulgates a Must name all form petition tenants obligated under the lease. Venue 502.4 502.4 502.4, CPRC Ch. 15. Answer 502.5 must be in writing 502.5 must be in writing 509.3. No written answer required. Deadline after service 501.5(d), (e). 14th days after service. 42nd day after service by publication. 502.6. Permitted 501.5(d), (e). 14th days after service. 42nd day after service by publication. 502.6. Permitted. 509.3(b). No less than 10 days nor more than 21 days after suit is filed. 510.3(b). May seek a change of judge, but not precinct. 510.10. No written answer is required in justice court. On appeal, written answer must be filed within 8 days of case being docketed. 509.3(b). No less than 10 days nor more than 21 days after suit is filed. 509.7. Not permitted 510.3(e). Not permitted Counterclaims and third party claims RETURN TO TABLE OF CONTENTS 500-507, 510 Default judgment Summary disposition Notice of trial 503.1 503.1, 508.3 509.5(b) 510.6(b). 503.2 503.2 No provision. No provision. 503.3. 45 days notice. 503.3. 45 days notice. Postponement 503.3(b). For good cause, trial may be postponed a “reasonable time.” 503.4 503.3(b). For good cause, trial may be postponed a “reasonable time.” 503.4 509.3. Trial date is included in citation. Service must be at least 6 days before trial. 503.3(b). For good cause, trial may be postponed a “reasonable time.” No provision. 510.6, 510.7. Trial date included in citation. Service must be at least 6 days before trial. 510.7. No more than 7 days unless both sides agreed. ADR 503.5. Encouraged. 503.5. Encouraged. 503.5. Encouraged. Trial Jury 503.6 504.1 – 504.4 May be requested 14 days before trial date. 505.1 505.2 503.6 504.1 – 504.4 May be requested 14 days before trial date. 505.1 505.2 509.5. No provision. Expressly authorized on appeal. 509.8(e).. 509.6 509.6(d) Contempt of court 505.3 Must be filed 14 days from judgment Overruled 21st day after judgment signed 506.1. Must be filed 21 days after judgment is signed; $500 bond; twice amount of judgment; surety or cash 505.3 Must be filed 14 days from judgment Overruled 21st day after judgment signed 506.1. Must be filed 21 days after judgment is signed; $500 bond; twice amount of judgment; surety or No provision. 510.8. 510.8(d). Writ of possession may be issued 6 days after judgment unless stayed by the filing of an appeal. A writ may not issue more than 60 days after judgment or 90 days for good cause shown. May not be executed after 90 days. 510.8. Not allowed 509.8. Appeal to statutory county court, county court, or district court with jurisdiction; must 510.9. Must be filed 5 days after judgment. Security set by judge. In nonpayment of Pretrial conference Judgment Enforcement Motion to set aside, motion to reinstate, MNT Appeal RETURN TO TABLE OF CONTENTS 503.4(b). Not allowed if it would delay trial. 503.5(b). May not be ordered if it will interfere with trail 510.7. 510.7(b). May be demanded 3 days before trial. Writ of certiorari Plenary power deposit. cash deposit. 506.5. Must be filed within 90 days of judgment. 507.1 21 days after judgment or after postjudgment motion denied. 506.5. Must be filed within 90 days of judgment. 507.1 21 days after judgment or after postjudgment motion denied. be filed 21 days after judgment.; no bond required; filing appeal stays enforcement; appellant must pay costs; writ of possession moots a judgment for repair or remedy. 506.5. Must be filed within 90 days of judgment. 507.1 21 days after judgment or after postjudgment motion denied. RETURN TO TABLE OF CONTENTS rent cases, defendant must pay monthly rent to remain in possession. 506.5. Not allowed 510.9. 5 days after judgment. 510.8(d). Court has jurisdiction to issue writ of possession up to 90 days after judgment. APPENDIX B JUSTICE COURT CIVIL INFORMATION SHEET RETURN TO TABLE OF CONTENTS JUSTICE COURT CIVIL CASE INFORMATION SHEET (4/13) CAUSE NUMBER (FOR CLERK USE ONLY): STYLED ______________________________________________________________________________________ (e.g., John Smith v. All American Insurance Co; In re Mary Ann Jones; In the Matter of the Estate of George Jackson) A civil case information sheet must be completed and submitted when an original petition is filed to initiate a new suit. The information should be the best available at the time of filing. This sheet, required by Rule of Civil Procedure 502, is intended to collect information that will be used for statistical purposes only. It neither replaces nor supplements the filings or service of pleading or other documents as required by law or rule. The sheet does not constitute a discovery request, response, or supplementation, and it is not admissible at trial. 1. Contact information for person completing case information sheet: 2. Names of parties in case: Name: Telephone: Plaintiff(s): ______________________________________ _________________________ _________________________________________________ Address: Fax: _________________________________________________ ______________________________________ _________________________ City/State/Zip: State Bar No: ______________________________________ _________________________ Email: ___________________________________________________________________ Defendant(s): _________________________________________________ _________________________________________________ _________________________________________________ [Attach additional page as necessary to list all parties] Signature: ___________________________________________________________________ 3. Indicate case type, or identify the most important issue in the case (select only 1): □ Debt Claim: A debt claim case is a lawsuit brought to □ □ Repair and Remedy: A repair and remedy case is a □ Small Claims: A small claims case is a lawsuit brought for recover a debt by an assignee of a claim, a debt collector or collection agency, a financial institution, or a person or entity primarily engaged in the business of lending money at interest. The claim can be for no more than $10,000, excluding statutory interest and court costs but including attorney fees, if any. lawsuit filed by a residential tenant under Chapter 92, Subchapter B of the Texas Property Code to enforce the landlord’s duty to repair or remedy a condition materially affecting the physical health or safety of an ordinary tenant. The relief sought can be for no more than $10,000, excluding statutory interest and court costs but including attorney fees, if any. Eviction: An eviction case is a lawsuit brought to recover possession of real property, often by a landlord against a tenant. A claim for rent may be joined with an eviction case if the amount of rent due and unpaid is not more than $10,000, excluding statutory interest and court costs but including attorney fees, if any. the recovery of money damages, civil penalties, personal property, or other relief allowed by law. The claim can be for no more than $10,000, excluding statutory interest and court costs but including attorney fees, if any. RETURN TO TABLE OF CONTENTS TRENDS AND TRAPS IN RULES OF CIVIL PROCEDURE LAMONT A JEFFERSON Haynes and Boone, LLP 112 E. Pecan, Suite 1200 San Antonio, Texas State Bar of Texas 31st ANNUAL LITIGATION UPDATE INSTITUTE January 15-16, 2015 San Antonio CHAPTER 3.2 RETURN TO TABLE OF CONTENTS TABLE OF CONTENTS I. INTRODUCTION ................................................................................................................................................ 1 II. RULE 91A: MOTIONS TO DISMISS BASELESS CLAIMS ............................................................................ 1 A. City of Austin v. Liberty Mutual Insurance................................................................................................... 1 B. GoDaddy.com, LLC v. Toups........................................................................................................................ 2 C. In re Greyhound Lines, Inc. .......................................................................................................................... 2 D. Comparison Between Rule 91a and Fed. R. Civ. P. 12(b)(6) ....................................................................... 2 E. Texas Supreme Court Weighs In .................................................................................................................. 3 III. RESPONSIBLE THIRD PARTIES (RTP) .......................................................................................................... 3 A. Notice Pleading is the Standard .................................................................................................................... 3 B. The Effect of Limitations .............................................................................................................................. 4 C. Availability of Mandamus ............................................................................................................................ 4 IV. APEX DEPOSITIONS ......................................................................................................................................... 4 A. History of the Apex Doctrine........................................................................................................................ 4 B. Apex Procedure............................................................................................................................................. 5 C. In re David Miscavige................................................................................................................................... 5 D. Apex in Context of Special Appearance ....................................................................................................... 5 V. SPOLIATION ....................................................................................................................................................... 6 A. Brookshire Brothers, Ltd. v. Aldridge........................................................................................................... 6 B. Spoliation Instruction Requires Intent .......................................................................................................... 6 C. Spoliation Evidence is not Admissible ......................................................................................................... 6 VI. ATTORNEY CLIENT AND WORK PRODUCT PRIVILEGES ....................................................................... 7 A. Federal 7 B. In re KBR ...................................................................................................................................................... 7 C. Waiver in the Presence of Outside Auditors? ............................................................................................... 7 VII. OTHER FEDERAL RULES PENDING APPROVAL ........................................................................................ 8 VIII. E-FILING ............................................................................................................................................................. 8 A. E-Filing: Mandatory and Optional ................................................................................................................ 8 B. Timeliness ..................................................................................................................................................... 9 C. Signature and Format .................................................................................................................................... 9 D. Request for Correction by the Clerk ........................................................................................................... 10 IX. RULE 21A: METHODS OF SERVICE ............................................................................................................. 10 X. RULE 21C: PRIVACY ...................................................................................................................................... 10 XI. RULES 500-510: THE JUSTICE COURTS ...................................................................................................... 11 XII. OTHER RULE CHANGES................................................................................................................................ 11 A. Rule 45 11 B. Rule 736: Forms for Expedited Proceedings .............................................................................................. 12 XIII. CONCLUSION .................................................................................................................................................. 12 RETURN TO TABLE OF CONTENTS TRENDS AND TRAPS IN RULES OF CIVIL PROCEDURE, 2014 I. INTRODUCTION This paper discusses issues of recent development involving rules of civil procedure in Texas. A comprehensive review of all rules is beyond the scope of this article. Instead, the paper is intended to identify emerging rules of procedure which are new, unsettled, or are the subject of recent interest in the jurisprudence of the state. II. RULE 91A: MOTIONS TO DISMISS BASELESS CLAIMS In 2013, the Court instituted a new rule, Rule 91a, that allows a motion for dismissal based on the merits of the pleadings. The rule states: [A] party may move to dismiss a cause of action on the grounds that it has no basis in law or fact. A cause of action has no basis in law if the allegations, taken as true, together with inferences reasonably drawn from them, do not entitle the claimant to the relief sought. A cause of action has no basis in fact if no reasonable person could believe the facts pleaded. 1 A party must explicitly invoke the rule2 and both parties have opportunities to amend. 3 The judge must award attorney’s fees and costs to the prevailing party. 4 Though still very early, the courts of appeals have analyzed the new rule in three cases that may be instructive for understanding how the courts will apply the rule. A. City of Austin v. Liberty Mutual Insurance 5 In City of Austin v. Liberty Mutual Insurance, the court upheld a Rule 91a motion to dismiss an inverse condemnation claim because the plaintiffs did not plead a valid takings claim necessary to circumvent the city of Austin’s immunity. 6 The court reviewed the question de novo, stating the Rule 91a motion was a “challenge to the trial court’s subject-matter jurisdiction.” 7 The plaintiffs, homeowners and insurance companies (through subrogation) alleged the city’s utility lines caused a fire that damaged several 1 TEX. R. CIV. P. 91a.1 (emphasis added). Id. 91a.2. 3 Id. 91a.5. 4 Id. 91a.7. 5 City of Austin v. Liberty Mut. Ins., 431 S.W.3d 817 (Tex. App.—Austin 2014, no pet.). 6 Id. at 831. 7 Id. at 821. 2 homes. 8 Plaintiffs claim that the city’s decision to forgo regular inspection of its utility lines and to instead implement a repair-as-needed policy caused the fire. 9 Plaintiffs brought claims for inverse condemnation, negligence, and trespass. 10 With respect to the first claim for inverse condemnation, the city would be immune unless its actions constituted a taking. 11 A taking requires an “intentional” act for the “public use.”12 Under the intent element, the plaintiffs alleged the fire was a “substantially certain result” of the city’s actions and alleged a chain of events that created the fire.13 The court held those allegations were not sufficient because plaintiffs’ alleged chain of events did not have a substantially certain result of causing the fire.14 The court also held the plaintiffs insufficiently pleaded the public use element because plaintiffs did not allege facts supporting the assertion that the fire advanced the purpose of transmitting power. 15 Because the plaintiffs did not sufficiently plead the two elements, the court held the plaintiffs “failed to state [a] valid takings” claim, and the court therefore lacked subject-matter jurisdiction over the inverse condemnation claim due to the city’s immunity. 16 The court did not grant the plaintiffs further opportunity to amend their pleadings because (1) the court could not “conceive of a set of plausible factual allegations” that would satisfy the intent element, (2) plaintiffs already amended once in response to the city’s Rule 91a motion, and (3) plaintiffs had refused before the hearing to amend a second time and expressly stated “they were standing on their pleading.” 17 The court then analyzed the city’s immunity under the Texas Torts Claim Act for the common-law claims and denied the city’s Rule 91a motion as to the negligence and trespass claims. 18 First, the court rejected the city’s claim that the court lacked subjectmatter jurisdiction because the operation of the utility lines were part of the city’s “governmental activities” which are immune from suit. 19 The court concluded the city was not immune because maintaining utility lines was proprietary and not a “governmental activity.” 20 Second, the court rejected the city’s arguments that the 8 Id. Id. 10 Id. 11 Id. at 822. 12 Id. 13 Id. at 826. 14 Id. 15 Id. at 826-27. 16 Id. at 827. 17 Id. at 831. 18 Id. at 827-830. 19 Id. at 829-830. 20 Id. at 830. 9 RETURN TO TABLE OF CONTENTS plaintiffs’ failure to comply with the city’s notice-ofinjury requirement divested the court of subject-matter jurisdiction. 21 Notably, the court couched the city’s motions as a challenge to the trial court’s subject-matter jurisdiction and implicitly concluded these challenges were appropriately raised through a 91a motion. GoDaddy.com, LLC v. Toups 22 In contrast to the City of Austin court, the court in GoDaddy.com, LLC v. Toups did not mention subjectmatter jurisdiction. 23 The plaintiffs sued GoDaddy.com on the basis that it hosted “revenge porn” websites that violated the law. 24 GoDaddy.com filed a Rule 91a motion claiming it was immune under the federal Communications Decency Act, which protects internet service providers from being treated as publishers of third party content. 25 The Toups court drew heavily from Federal Rule of Civil Procedure 12(b)(6) case law, holding that GoDaddy.com was immune and thus the plaintiffs “failed to state a viable claim” because plaintiffs could not win under any set of facts. 26 The court did not allow the plaintiffs to amend their pleading. Similar to the court in City of Austin, the court in Toups noted than any amendment would be “futile” and plaintiffs had already amended their petition twice after defendant’s first Rule 91a motion.27 B. PRACTICE TIP The defendants in both City of Austin and Toups based their successful 91a motions on strong arguments that immunity barred the plaintiffs’ claims. That indicates courts may look favorably upon 91a motions when based on valid immunity claims. PRACTICE TIP Defense counsel should detail in a Rule 91a motion any reasons why allowing plaintiff’s counsel to amend would be futile, considering the courts in both City of Austin and Toups denied further amendment. Further, Rule 91a only mentions amendments before a ruling, not after. While neither court addressed that fact, defense counsel may be prudent to include it in their brief. 21 Id. at 829-830. GoDaddy.com, LLC v. Toups, 429 S.W.3d 752 (Tex. App.—Beaumont 2014, pet. filed May 22, 2014). 23 Id. 24 Id. at 753. 25 Id. 26 Id. at 754-55, 762. 27 Id. at 761. 22 C. In re Greyhound Lines, Inc. 28 A third case, while not squarely addressing a Rule 91a motion, may give some insight into the scope of the “no basis in law or fact” standard. In In re Greyhound Lines, Inc., the relator, Greyhound, was being sued for a vehicle collision. 29 The trial court denied Greyhound’s motion for leave to designate a responsible third-party defendant. 30 Greyhound’s motion had to “satisfy the pleading requirement of the Texas Rules of Civil Procedure.” 31 At the appeals court on mandamus, the injured party argued Greyhound’s motion should be denied because it had no basis in law or fact. 32 The court noted in dicta that the Rule 91a standard applies only when a party files a motion specifically invoking Rule 91a. 33 Because no party filed a Rule 91a motion, the standard was inapplicable. 34 Though indirect, Greyhound shows that the court would not independently judge whether a pleading had a “basis in law or fact” without a Rule 91a motion. A pleading that does not meet the Rule 91a standard is thus not deficient in the same manner as other pleading deficiencies. The court cannot strike a pleading for stating a baseless claim, or grant a special exception requiring a party to state a claim with a basis in law. As the Greyhound court interpreted the rule, those powers would only be applicable in the context of granting or denying a Rule 91a motion. D. Comparison Between Rule 91a and Fed. R. Civ. P. 12(b)(6) The relationship between Rule 91a and Federal Rule of Civil Procedure 12(b)(6) may be a budding issue for appeal in a future case. The court in Toups explicitly compared the two rules, stating that they are “analogous” and comparison to Federal Rule 12(b)(6) case law is “instructive.” 35 The court then proceeded to extensively discuss Federal Rule 12(b)(6) case law. 36 On the other hand, a federal court held in Bart Turner & Associates v. Krenke that Federal Rule 12(b)(6) is still “more stringent” than the Rule 91a standard. 37 That court noted that Texas courts can now 28 In re Greyhound Lines, Inc., No. 05-13-01646-CV, 2014 WL 1022329 (Tex. App.—Dallas Feb. 21, 2014, orig. proceeding) (mem. op.). 29 Id. at *1. 30 Id. 31 Id. at *2. 32 Id. at *2 n.1. 33 Id. 34 Id. 35 Toups, 429 S.W.3d at 754. 36 Id. 37 Bart Turner & Associates v. Krenke, No. 3:13-CV-2921L, 2014 WL 1315896 (N.D. Tex. Mar. 31, 2014). In Krenke, a diversity jurisdiction case, the court was evaluating the plaintiff’s motion to remand to state court on the basis that RETURN TO TABLE OF CONTENTS “do what a federal court is allowed to do” under Federal Rule 12(b)(6), and concluded the Texas pleading standard is still fair notice but “in the context of Rule 91a.” 38 Two questions arise from these cases. First, how similar is the Rule 91a standard to Federal Rule 12(b)(6)? None of the cases truly attempted to analyze that question. Until the question is resolved, citations to Federal Rule 12(b)(6) cases may be helpful to courts when filing a Rule 91a motion. Second, must pleadings have “a basis in law or fact,” even when the defendant does not file a Rule 91a motion? The federal court in Krenke answered yes 39 but the Texas court in Greyhound answered no. 40 E. Texas Supreme Court Weighs In On November 21, 2014, the Texas Supreme Court weighed in on Rule 91a in the case of In re Essex Ins. Co., ruling that mandamus relief may be available for a trial court’s denial of a Rule 91a motion. Essex involved a personal injury lawsuit that morphed into a declaratory judgment action by the plaintiff against the defendant’s liability insurance carrier. The law is well settled that a plaintiff may not bring an action against a defendant’s liability insurance carrier unless and until the defendant’s liability is established by judgment. Angus Chem. Co. v. IMC Fertilizer, Inc., 939 S.W.2d 138, 138 (Tex. 1997) (per curiam) (citing Great Am. Ins. Co. v. Murray, 437 S.W.2d 264, 265 (Tex. 1969)); see also Aviles v. Aguirre, 292 S.W.3d 648, 649 (Tex. 2009) (per curiam). However, the trial court in Essex denied the insurance carrier’s Rule 91a motion and the San Antonio Court of Appeals denied the subsequent petition for mandamus relief. The Texas Supreme Court granted mandamus relief in a per curiam opinion, finding that the defendant satisfied the legal prerequisites for mandamus, (1) an abuse of discretion by the trial court, and (2) no adequate remedy by appeal. This ruling underscores the vitality of Rule 91a in the Texas Supreme Court. Although there is no provision for an the defendants engaged in improper joinder to create diversity jurisdiction. Id. at *1. The defendants filed a Rule 12(b)(6) motion, and the court determined that “whether jurisdiction exists is resolved by looking at the complaint at the time the notice [of removal] is filed.” Id. at *3. Since the complaint was in Texas state court under Texas pleading standards at the time of removal, the Krenke court evaluated the sufficiency of the pleadings under its interpretation of Texas law. Id. at *5. 38 Id. at *3. 39 Id. 40 See In re Greyhound, 2014 WL 1022329, at *2 & n.1. interlocutory appeal under 91a, 41 a trial court will not necessarily escape appellate review by denying a Rule 91a motion. PRACTICE TIP Parties should consider all possible appellate remedies after any ruling on a Rule 91a motion. The Texas Supreme Court seems to be amenable to correcting clearly erroneous rulings and mandamus relief may be available depending on the facts of the case. III. RESPONSIBLE THIRD PARTIES (RTP) The designation of RTPs is receiving recent attention in Texas courts. More particularly, how does a court determine whether a motion to designate an RTP should be granted? What if limitations has already run? And is a trial court’s ruling on a motion to designate an RTP subject to review by mandamus? A. Notice Pleading is the Standard In February 2014, the Dallas Court of Appeals considered the propriety of a court order denying the designation of an RTP in In re Greyhound 42 (discussed above). Greyhound was a suit by a bus passenger against the bus company following a vehicle accident between the bus and a crane truck. 43 The passenger filed suit only against the bus company and the bus company filed a motion to designate the crane truck company as an RTP. 44 The trial court denied the motion. 45 In its opinion, the Dallas court noted that an RTP is “any person who is alleged to have caused or contributed to causing in any way the harm for which recovery of damages is sought, whether by negligent act or omission, by any defective or unreasonably dangerous product, by other conduct or activity that violates an applicable legal standard, or by any combination of these. TEX. CIV. PRAC. & REM. CODE ANN. § 33.011(6) (West 2008).” 46 The court further notes that the pleading standard at the designation stage is “notice pleading under the Texas Rules of Civil Procedure.” 47 At the pleading stage, the trial court is “restricted to evaluating the sufficiency of the facts pleaded by relators and is not permitted to 41 See, for instance, Jones v. Louis Vuitton Houston Galleria, 2014 Tex. App. LEXIS 6196, (Tex. App. – Houston [1st Dist.] (mem. op. issued June 10, 2014). 42 In re Greyhound Lines, Inc., No. 05-13-01646-CV, 2014 WL 1022329 (Tex. App.—Dallas Feb. 21, 2014, orig. proceeding) (mem. op.). 43 Id. at *1. 44 Id. 45 Id. 46 Id. 47 Id. at *2. RETURN TO TABLE OF CONTENTS engage in an analysis of the truth of the allegations or consider evidence on the third party’s ultimate liability.” 48 The pleading requirements thus presented a low hurdle and the court had little trouble concluding that the standards were met. B. The Effect of Limitations What is the effect if the statute of limitations against the RTP has already run? Prior to the 2011 amendment repealing § 33.004(e), a plaintiff was able to directly sue an RTP despite the running of limitations, as long as he did so within 60 days of the designation. That statutory provision was in direct conflict with other statutes that specified periods of limitation. The Supreme Court of Texas held that the Lazarus-effect of § 33.004(e) could not be squared with other statutes and decided that specific limitations statutes should control. 49 The legislature subsequently repealed § 33.004(e), but created a new § 33.004(d). The new section provides as follows: A defendant may not designate a person as a responsible third party with respect to a claimant's cause of action after the applicable limitations period on the cause of action has expired with respect to the responsible third party if the defendant has failed to comply with its obligations, if any, to timely disclose that the person may be designated as a responsible third party under the Texas Rules of Civil Procedure. 50 This provision potentially gives added significance to a party’s supplementation responsibilities under the rules of procedure. Parties are required to timely answer and supplement disclosure requests to indicate possible RTP’s. 51 In some instances, new § 33.004(d) may accelerate the need to assess whether a defendant should designate an RTP. Moreover, this provision makes misleading § 33.004(a) which provides that a motion to designate must be filed “on or before the 60th day before the trial date” unless the court finds good cause. 52 This 60-day provision will prove too late to designate an RTP if limitations has run and a court finds that a defendant has “failed to comply” with his supplementation obligations under the rules of procedure. 48 Id. Molinet v. Kimbrell, 356. S.W.3d 407, 415 (Tex. 2011). 50 TEX. CIV. PRAC. & REM. CODE ANN. § 33.004(d) (West Supp. 2013) (Emphasis added.) 51 TEX. R. CIV. P. 194.2. 52 TEX. CIV. PRAC. & REM. CODE ANN. § 33.004(a) (West 2008). 49 C. Availability of Mandamus Is a trial court’s erroneous denial of a motion to designate an RTP subject to mandamus review? There is a split of authority on this question. The Dallas Court of Appeals says yes, 53 the San Antonio Court of Appeals says no, 54 (with one justice writing a strong dissent). PRACTICE TIP Defendants should consider whether to designate an RTP early in the litigation process, especially if limitations is imminent or has run. IV. APEX DEPOSITIONS A. History of the Apex Doctrine The fight over deposing key executives is often paramount in business disputes. Cases are suddenly and mysteriously resolved when a corporate president or CEO is compelled to submit to a deposition, regardless of the merits of the case. Recognizing the potential this presents for harassment and abuse, the Supreme Court of Texas first adopted the apex doctrine in Wal-Mart Stores, Inc. v. Street, in 1988. 55 Wal-Mart was followed seven years later by Crown Central Petroleum Corp. v. Garcia. 56 The apex doctrine was further explained by the supreme court in In re Alcatel.57 Texas has received national recognition for leading the way in apex deposition jurisprudence.58 53 In re Greyhound Lines, Inc., No. 05-13-01646-CV, 2014 WL 1022329 (Tex. App.—Dallas Feb. 21, 2014, orig. proceeding) (mem. op.). 54 In re Taymax Fitness, LLC, No. 04-14-00119-CV, 2014 WL 1831100 (Tex. App.—San Antonio May 7, 2014, oirg. proceeding) (mem. op.). 55 Wal-Mart Stores, Inc. v. Street, 754 S.W.2d 153, 154-55 (Tex. 1988). 56 Crown Cent. Petroleum Corp. v. Garcia, 904 S.W.2d 125, 128 (Tex. 1995). 57 In re Alcatel USA, Inc., 11 S.W.3d 173, 175-76 (Tex. 2000). 58 See, e.g., Scott A. Mager, Curtailing Deposition Abuses of Senior Corporate Executives, 45 JUDGES JOURNAL 30 (Winter 2006) (“One decision that many courts especially look to is Crown Central Petroleum Corp. v. Garcia, because the Texas Supreme Court established a set of workable guidelines therein that seem reasonable and widely applicable . . .”); Adam M. Moskowitz, Deposing “Apex” Officials in Florida Shooting Straight for the Top, FLA. B.J., Dec. 1998) at 10 (“In determining whether an apex motion or protective order will be granted, many courts look to the guidelines established by the Texas Supreme Court in Crown Central Petroleum Corp. v. Garcia”); Heidi M. Staudenmaier & Corey D. Babington, Effectively Defending High-Level Corporate Officials, 37 Ariz. ATT’Y 12 August 2001) at 14 (citing Crown Central and noting that “Texas arguably has the most developed apex discovery law”). RETURN TO TABLE OF CONTENTS B. Apex Procedure The Apex doctrine applies when a party seeks to depose “a corporate president or other high level corporate official.” 59 The party resisting the deposition must move for protection and attach an affidavit or declaration from the corporate official whose deposition is sought demonstrating a lack of knowledge of relevant facts. 60 In evaluating the motion for protection, the trial court should determine whether the party seeking the deposition has “arguably shown that the official has any unique or superior personal knowledge of discoverable information.” 61 If the party seeking the deposition fails in this initial showing, then the court must consider whether the party has arguably shown “(1) that there is a reasonable indication that the official’s deposition is calculated to lead to the discovery of admissible evidence, and (2) that the less intrusive methods of discovery are unsatisfactory, insufficient or inadequate.” 62 The mere fact that a high level officer was personally involved in the relevant dispute does not, standing alone, support taking the executive’s deposition. 63 Mere knowledge by the executive of the offending conduct is likewise insufficient. 64 C. In re David Miscavige 65 The Austin Court of Appeals recently addressed an issue of first impression in apex jurisprudence. While the apex doctrine has been held to apply to witnesses who happen to be high level executives, the question of whether the doctrine applies to named parties had not before been decided. After examining the history of the doctrine and its application in other states, the Austin court answered in the affirmative. In reaching this conclusion, the court noted that the apex rule is only an issue when the “executive’s corporate position bears some relationship to the underlying information the deposing party seeks.” 66 As the court notes, if the CEO witnessed a car accident, the plaintiff would be entitled to the deposition regardless of the CEO’s corporate status. 67 Thus, the court concludes that when an executive is sued “based on an alleged tort, contract dispute, or other theory of liability that does not arise from actions he took in his capacity as an executive, then the executive is subject to deposition just as any other individual would be.” 68 However, when the witness is sued “based on his capacity as an executive,” then a Crown Central analysis should be applied to determine whether the executive is subject to deposition. 69 PRACTICE TIP Corporate counsel should carefully assess the level of involvement necessary for any high level corporate officer in matters of concern to the company. Best to avoid an apex deposition fight altogether. D. Apex in Context of Special Appearance In re David Miscavige is likewise noteworthy because it provides the first reported judicial analysis in Texas for how apex rules should be applied in a special appearance context.70 The court first notes that discovery in a special appearance context is limited to jurisdictional issues. 71 The court then examines the supreme court’s 2013 opinion in Moncrief Oil v. Gazprom, 72 in which the court limits jurisdictional discovery by requiring the party seeking the discovery to identify “some additional, non-cumulative information that is relevant to the jurisdictional inquiry which the deposition is likely to produce.” 73 The court concludes that in order to take an apex deposition in the context of a special appearance, a party must show either “(1) that the apex deponent has some unique or superior knowledge of facts relevant to personal jurisdiction or (2) that the deposition of the executive is reasonably calculated to lead to discoverable information about personal jurisdiction and less intrusive means of discovery are unsatisfactory, insufficient, or inadequate.” 74 The permissible scope of discovery is less than clear in the time period before a court issues a ruling on a special appearance. The rules allow some discovery, but only on matters that are pertinent to the special appearance.75 Courts often indicate that meritsbased discovery is inappropriate at the special appearance stage. However, there is virtually always overlap between discovery that is “merits-based” and discovery that relates to personal jurisdiction. Perhaps the best articulation of permissible special appearance 59 Crown Central, 904 S.W.2d at 128. Id. 61 Id. 62 Id. 63 In re Alcatel, 11 S.W.3d at 176-77. 64 Id. 65 In re David Miscavige, No. 03-00091-CV, 2014 WL 3558767 (Tex. App. – Austin, July 17, 2014, no pet. hist.) (opinion subject to revision or withdrawal). 66 Id. at *5. 67 Id. 60 68 Id. at *6 Id. 70 Id. 71 Id. 72 Moncrief Oil International, Inc. v. OAO Gazprom, 414 S.W.3d 142, 157–58 (Tex. 2013). 73 In re David Miscavige, 2014 WL 3558767, at *8. 74 Id. 75 Tex. R. Civ. P. 120a(2) and (3). 69 RETURN TO TABLE OF CONTENTS discovery appears in In re Stern 76 where the court stated, “We conclude that Rule 120a(3) by its plain language authorizes discovery by a party prior to a ruling on a special appearance only with respect to facts ‘essential to justify his opposition’ to the special appearance.” The jury returned a verdict for the plaintiff including over $1 million in compensatory damages. 82 The supreme court decided that the trial court abused its discretion, both by allowing evidence pertinent to the spoliating conduct and by including the jury instruction. 83 V. SPOLIATION A. Brookshire Brothers, Ltd. v. Aldridge 77 The Supreme Court of Texas recently dived back into the spoliation arena in Brookshire Brothers v. Aldridge, which was decided on July 3, 2014. The case was decided by a 6 to 3 margin, with lengthy opinions by both majority and dissent. The main point of disagreement among the justices seems to be whether there ought to be a supreme court pronouncement on the subject at all, or whether the issue should either be addressed by rulemaking procedures, or simply left to trial courts to address on a case-by-case basis. The case arose out of a slip and fall accident that was partially captured on a store surveillance camera. 78 The store preserved approximately 8 minutes of the 24hour video tape, including the portion showing when the plaintiff entered the store until the time of his accident. 79 However, the remainder of the tape was recorded over, in the regular course of business, about a month later. 80 The trial court allowed the plaintiff to introduce evidence of the spoliating conduct during the trial. The court also included the following instruction in the jury charge: B. In this case, Brookshire Brothers permitted its video surveillance system to record over certain portions of the store surveillance video of the day of the occurrence in question. If you find that Brookshire Brothers knew or reasonably should have known that such portions of the store video not preserved contained relevant evidence to the issued in this case, and its nonpreservation has not been satisfactorily explained, then you are instructed that you may consider such evidence would have been unfavorable to Brookshire Brothers. 81 Spoliation Instruction Requires Intent In general, the court in Brookshire Brothers held that a party must be guilty of intentionally destroying evidence before a court has the discretion to include a spoliation instruction in the jury charge. 84 The “narrow” exception to that rule is when a party’s negligence has resulted in the loss of evidence that is so vital that the opponent is “irreparably deprived of any meaningful ability to present a claim or defense.” 85 The intent element is met if a party acts with “the subjective purpose of concealing or destroying discoverable evidence.” 86 Proof of “willful blindness,” or subjectively allowing relevant evidence to be destroyed, even if passively, would meet the necessary “intent” requirement.87 C. Spoliation Evidence is not Admissible The supreme court further concluded that the trial court abused its discretion by allowing admission of the defendant’s spoliating conduct into evidence. 88 The court holds that the responsibility for making spoliation findings and assessing the proper sanction is borne by the trial court, not the jury. 89 The court is careful to allow for the introduction of evidence about the lost evidence, but prohibits evidence on the duty of a party to preserve evidence or details about the manner in which the offending party spoliated the evidence. 90 PRACTICE TIP A plaintiff wishing to invoke a duty to preserve evidence should avoid a demand that is too specific. As in Brookshire, a demand to preserve specific items of evidence might relieve a defendant of the duty to preserve other relevant evidence. 82 76 In re Stern, 321 S.W.3d 828, 839 (Tex. App.—Houston [1st Dist.] 2010, orig. proceeding). 77 Brookshire Brothers, Ltd. v. Aldridge, No. 10-0846, 2014 WL 2994435 (Tex. July 3, 2014). 78 Id. at *2. 79 Id. 80 Id. at *3. 81 Id. at *4. Id. Id. at *14. 84 Id. at *10. 85 Id. at *12, 14. 86 Id. at *11. 87 Id. 88 Id. at *12. 89 Id. at *13. 90 Id. 83 RETURN TO TABLE OF CONTENTS VI. ATTORNEY CLIENT AND WORK PRODUCT PRIVILEGES A. Federal One issue that regularly generates angst in the corporate boardroom is the scope of the attorney client privilege, especially as it applies to internal investigations. The topic has become all the more prominent in the Sarbanes-Oxley era, when corporations are required to detect and report suspected fraudulent activity. In re KBR 91 In re KBR was decided June 27, 2014 by the highly respected United States Circuit Court for the District of Columbia. The case concerned a whistleblower employee of defense contractor, Kellogg Brown and Root. 92 KBR commissioned an internal investigation in response to a report of fraud, bribery and kickback activity within the company. 93 The investigation was overseen by the company’s law department as prescribed by the company’s Code of Business Conduct. 94 In the subsequent action by the whistleblower, requests were made to discover the results of the investigation. 95 The whistleblower argued that the investigation was conducted to comply with corporate policy rather than for the purpose of obtaining legal advice. 96 The district court agreed and ordered the production. 97 According to the district court, the company was unable to show that the investigation would not have taken place “but for” the fact that legal advice was sought. 98 The DC Circuit court reversed and held that the district court’s ruling violated the long-standing doctrine enunciated by the United States Supreme Court in Upjohn Co. v. United States, 449 U.S.383 (1981). 99 The fact that the investigation was conducted by in-house rather than outside counsel was not significant enough to change the outcome. 100 Nor was the fact that interviews were conducted by non-lawyers under the direction of in-house counsel. 101 Further, the absence of an admonishing statement that the interviews were for the purpose of obtaining legal advice was not determinative. 102 The meat of the opinion concerned the argument that the primary purpose of the investigation was not to obtain legal advice, but rather to comply with company policy. The DC Circuit stated the applicable legal standard as follows: So long as obtaining or providing legal advice was one of the significant purposes of the internal investigation, the attorney-client privilege applies, even if there were also other purposes for the investigation and even if the investigation was mandated by regulation rather than simply an exercise of company discretion. 103 B. 91 In re Kellogg Brown & Root, Inc., No. 14-5055, 2014 WL 2895939 (D.C. Cir. June 27, 2014) (slip op.). 92 Id. 93 Id. 94 Id. 95 Id. 96 Id. 97 Id. 98 Id. 99 Id. at *2-4. 100 Id. at *3. 101 Id. 102 Id. Other courts have used a “primary purpose” test in determining whether conduct falls within legal advice or not. 104 That test poses the question of whether the “primary purpose” for an investigation was the provision of legal advice, or some other business purpose. The DC Circuit in KBR concluded that such a test was potentially misleading because it implies that there may only be one “primary purpose” for an engagement. 105 As long as legal advice was one of the significant purposes of the engagement, then the privilege applies. 106 PRACTICE TIP Corporate counsel should consider implementing a corporate policy requiring that specified investigations be conducted under the auspices of the Legal Department for the purpose of obtaining legal advice and evaluating legal rights and duties. C. Waiver in the Presence of Outside Auditors? One topic that remains unresolved in the privilege arena is whether a waiver occurs when a lawyer reports findings of an internal audit to, or in the presence of, outside accounting professionals. This is especially worrisome for companies subject to the public reporting requirements of the Securities and Exchange Commission following the passage of Sarbanes-Oxley. Among the regulations of Sarbanes-Oxley is the requirement that the “signing officers” disclose “to the issuer’s auditors and the audit committee … any fraud, whether or not material, that involves management or other employees who have a significant role in the issuer’s internal controls.” 107 103 Id. at *4. See, for instance, In re Sealed Case, 737 F.2d 94, 98-99 (D.C. Cir. 1984). 105 In re KBR, 2014 WL 2895939 at *5. 106 Id. 107 15 U.S.C. § 7241(a)(5). 104 RETURN TO TABLE OF CONTENTS If a suit is governed by federal common law, the answer so far seems to be that any matter disclosed to outside auditors results in waiver. 108 This result seems counterproductive. On one hand, we want corporate officers to detect and disclose all material information that might bear on corporate integrity. On the other hand, we discourage such officers from being frank with auditors by imposing a rule that privilege is waived when reports are made in their presence. This ramification will undoubtedly encourage less than complete disclosure, especially in situations where facts are unclear or not fully developed. The result may be different in federal cases where state law, rather than federal common law, determines the applicable law of privilege. Under Texas law, there is no waiver of a privilege when a communication is made under circumstances where the disclosure of privileged information is itself privileged. 109 In Texas, there is an accountant-client privilege, of sorts, stated in the Texas Occupations Code. 110 That statute prevents accountants, presumably including outside auditors, from disclosing information about a client to third parties without the client’s consent. However, courts typically hold that statutory provisions requiring confidentiality do not automatically create evidentiary privileges. 111 There is thus uncertainty regarding whether Texas Rule of Evidence 511 would insulate communications made to outside auditors. Conference, the Supreme Court, and then Congress. Below are proposed rules and forms amendments currently under consideration at each level following approval by the Committee on Rules of Practice and Procedure. 112 While various rule changes have been winding their way through the approval process over the past 4 years, the earliest that any substantive change could become effective is December 2015. 113 Among the most noteworthy rule change proposals are those allowing discovery to be sent before the Rule 26(f) discovery meeting, changing the scope of discovery to include a “proportionality” element, and provisions to address the situation where relevant Electronically Stored Information (ESI) in the hands of a responding party becomes unavailable. In general, the ESI proposal provides that the requesting party must show prejudice, whereupon the court may enter such orders as are necessary to cure the prejudice. When the loss of ESI is intentional, the court may presume that the lost information would have been harmful to the responding party, may instruct the jury that it must presume that the lost information was harmful, or may enter the severe sanctions of judgment or default against the offending party. VII. OTHER FEDERAL RULES PENDING APPROVAL The following statement governs the adoption of federal rules of procedure: Any change to the federal rules must be designed to promote simplicity in procedure, fairness in administration, the just determination of litigation, and the elimination of unjustifiable expense and delay. The process for promulgating an amendment to a rule or form involves several levels of consideration and approval, the first of which is consideration and approval by the appropriate advisory committee and then the Committee on Rules of Practice and Procedure. Following approval by the Committee on Rules of Practice and Procedure, proposed amendments must be considered and approved by the Judicial 108 S.E.C. v. Brady, 238 F.R.D. 429, 439 (N.D. Tex. 2006); Ferko v. Nat’l Ass’n for Stock Car Auto Racing, Inc., 218 F.R.D. 125, 134 (E.D. Tex. 2003). 109 TEX. R. EVID. 511. 110 See TEX. OCC. CODE ANN.§ 901.457 (West 2004). 111 Pearson v. Miller, 211 F.3d 57, 68 (3d Cir. 2000) PRACTICE TIP Company legal departments should remain abreast of state and federal rulemaking procedures and timelines. Most rulemaking bodies include ample procedures to solicit input from the public. VIII. E-FILING A. E-Filing: Mandatory and Optional Rule 21 now includes a new section, 21(f), to govern electronic filing (“e-filing”). The new subsection requires the Office of Court Administration to establish an “electronic filing manager” (“e-filing manager”). 114 To file documents, parties must use an “electronic filing service provider certified by the Office of Court Administration.” 115 E-filing is already mandatory in the Texas Supreme Court, most courts of 112 Pending Rules Amendments, USCOURTS.GOV, http://www.uscourts.gov/RulesAndPolicies/rules/pendingrules.aspx (last visited August 5, 2014). 113 Thomas Y. Allman, The 2013 Civil Rules Package As Adopted (April 17, 2014), http://www.lfcj.com/documents/ALLMAN%20The%20201 3%20Civil%20Rules%20Package%20As%20Adopted%204. 17.14.pdf 114 TEX. R. CIV. P. 21(f)(3). 115 Id. RETURN TO TABLE OF CONTENTS appeal, and many district and county courts. 116 District courts, statutory county courts, and statutory probate courts must implement mandatory e-filing for civil cases on a rolling basis, determined by the population of the county where the court sits. 117 County Population 500,000 or more 200,000-499,999 100,000-199,999 50,000-99,999 20,000-49,999 Less than 20,000 Deadline January 1, 2014 July 1, 2014 January 1, 2015 July 1, 2015 January 1, 2016 July 1, 2016 E-filing is optional for wills, 118 unrepresented parties, and in jurisdictions where e-filing is not otherwise mandatory. 119 Certain documents must not be filed electronically: documents filed under seal, documents presented to the court in camera, and “documents to which access is otherwise restricted by law or court order.” 120 Parties e-filing a document do not need to also submit a paper document, unless another rule so requires. 121 Parties should therefore check the local rules for the court in which they are filing to determine if a paper copy must be submitted. B. Timeliness E-filed documents are timely if “transmitted to the filing party’s electronic filing service provider” before midnight of the due date in the destination court’s time zone. 122 There are a few exceptions to this rule. First, if the document is transmitted on Saturday, Sunday, or a legal holiday, the document is considered filed on the next date that is not a Saturday, Sunday, or a legal holiday. 123 Second, if the document requires a motion 116 Tex. S. Ct. Misc. Docket No. 13-9164 (Dec. 9, 2013), available at https://www.supreme.courts.state.tx.us/ miscdocket/13/13916400.pdf. 117 Deadlines by County: Mandatory E-Filing, EFILETEXAS.GOV, available at http://www.efiletexas.gov/ documents/Mandatory_County_List.pdf (detailing the deadline for each county). 118 TEX. R. CIV. P. 21(f)(4)(A). If a party e-files a document in probate as an original will, the original will itself must be filed with the clerk within three business days after the efiling. Id. 21(f)(12). 119 Id. 21(f)(1). E-filing also appears to be optional for juvenile cases under Title 3 of the Family Code, but the rule only specifies that e-filing in those cases is “not mandatory.” Id. 120 Id. 21(f)(4)(B). 121 Id. 21(f)(9). 122 Id. 21(f)(5). 123 Id. 21(f)(5)(A). and order to allow filing, the document is filed on the date the motion is granted.124 Untimely e-filings due to “technical failure or a system outage” will not prejudice the filing party. 125 If such an outage occurs, and the deadline is imposed by the Rules of Civil Procedure, the court “must” grant a reasonable extension to complete the filing. 126 Rule 21 is not specific about what problems “technical failure” and “system outage” encompass. “Technical failure” is a broad term, potentially including any preventable or avoidable problems the filing party encounters. 127 “System outage” is also vague. Rule 21(f) does not refer elsewhere to a “system,” but the most sensible interpretation would include a failure in the e-filing manager or the party’s e-filing service provider. C. Signature and Format All e-filed documents must be signed in one of four ways: • • • • A “/s/” and name typed in the space where the signature would otherwise be A notarized or sworn document An electronic image of the signature A scanned image of the signature128 The document must be a text-searchable PDF, 129 directly converted to PDF if possible, 130 not be locked, and otherwise follow standards set by the Judicial Committee on Information Technology and approved 124 Id. 21(f)(5)(B). Id. 21(f)(6). 126 Id. 127 For example, if the filing party’s hard drive containing the document in question crashes, that problem is plausibly a technical failure. But that problem would equally affect a paper-filed document, and it would be curious for the Rules to give substantially more leniency to e-filing. E-filing presents problems unique to networks that parties cannot control. Those unique problems may be the “technical failures” the rule addresses. A court might thus conclude that a hard-drive crash is not a technical failure for the purpose of the rule. But reading “technical problems” to only include problems that paper filings do not encounter may create redundancy in the rule by only encompassing technical problems that are also “system outages.” 128 Id. 21(f)(7). 129 Id. 21(f)(8). 130 “Directly converted to PDF” means that “the document should be generated directly from the originating software using a PDF distiller.” JUDICIAL COMMITTEE ON INFORMATION TECHNOLOGY, TECHNOLOGY STANDARDS 1.3 § 3.1, Tex. S. Ct. Misc. Docket No. 14-9079 (Mar. 21, 2014), available at http://www.courts.state.tx.us/jcit/ standards/Technology%20Standards_v1.3.pdf [hereinafter TECHNOLOGY STANDARDS]. 125 RETURN TO TABLE OF CONTENTS by the Supreme Court. 131 The signature block of all e-filed documents and all pleadings, paper or electronic, must now also include an email address.132 D. Request for Correction by the Clerk The court’s clerk cannot refuse to accept an efiling for nonconformity to the rules. 133 But if a filing does not conform to the rules, the clerk may identify the error and give the filing party a deadline to resubmit a conforming document. Rule 21(f)(8)(D) states that e-filed documents must “comply with the Technology Standards . . . approved by the Supreme Court.” The most recent standards, released on March 21, 2014, outline the only grounds a clerk may state for a request for correction: 134 • • • • • • • • Insufficient fees Insufficient funds Document addressed to wrong clerk Incorrect/incomplete information (cause number, case type, case category, filing code, party names on document) Incorrect formatting PDF documents combined (more than one document in the PDF) Illegible/unreadable Sensitive data It is unclear what procedure a clerk follows if the filing party submits a nonconforming document and then fails to resubmit by the deadline, or the resubmission also does not conform. There is no penalty provision for doing so. IX. RULE 21A: METHODS OF SERVICE The rule governing methods of service, Rule 21a, was amended to include a new section for electronic filings. The e-filing manager must be used to serve a document e-filed under Rule 21 if the e-filing manager has the email address of the party or attorney to be served in the system. 135 If filed by paper, or if the efiling manager does not have the destination party’s or attorney’s email address, the document can be served “in person, by mail, by commercial delivery service, by fax, by email,” or by any other manner the court directs. 136 For documents not filed electronically, the notable changes to Rule 21a are the addition of email and “commercial delivery service” as acceptable methods of service, and the elimination of the “certified or registered” mail requirement for traditional mail.137 There are modifications to the completion of service provisions as well. • • • Electronic service is complete when transmitted to the serving party’s electronic filing service provider. 138 Mail or commercial delivery service is complete when placed in the mail. The rule language has also been streamlined to only require a “postpaid and properly addressed” document. 139 Fax service is complete on receipt. Receipt after 5:00 p.m. local time of the recipient is served the following day. 140 Also, Rule 21a(c) previously stated that if a “party has the right or is required to do some act within a prescribed period” after being served by fax or by mail, the party receives a three day extension. Now, the accommodation for fax has been repealed, though mail still receives the extension.141 X. RULE 21C: PRIVACY The Supreme Court instituted a brand new rule to protect sensitive data in documents submitted to the court. Sensitive data on any filed document, paper or electronic, generally must be redacted by placing an “X” for each omitted character. 142 Sensitive data includes: 131 TEX. R. CIV. P. 21(f)(8)(D). The current standards purport to make the text-searchable requirement optional. TECHNOLOGY STANDARDS § 3.1. But Rule 21(f)(8) states that the document “must” be text-searchable, and the Rules do not contemplate the standards contradicting another provision of the Rules. Parties should err on the side of making the PDF text-searchable. 132 TEX. R. CIV. P. 57. 133 Id. 21(f)(11), 21c(e). 134 The standards state, “The request must state the reason and reference any supporting authority.” TECHNOLOGY STANDARDS § 5.6.2. While Rule 21(f)(8)(D) appears to confer authority upon anything within the standards, the standards themselves only cite Rule 21(f)(8)(D) as “authority” for a clerk to request a correction based on incorrect formatting. Id. Several other grounds, such as “PDF Documents Combined,” do not cite any authority. Id. 135 TEX. R. CIV. P. 21a(a)(1). Id. 21a(a)(2). 137 Id. 138 Id. 21a(b)(3). The rules require the manager to send a confirmation. Id. 139 Id. 21a(b)(1). The rule previously required the document to be “enclosed in a postpaid, properly addressed wrapper, in a post office or official depositor under the care and custody of the United States Postal Service.” 140 Id. 21a(b)(2). 141 Id. 21a(c). Rule 4, which refers to the extra time granted in Rule 21a(c), was also amended to remove the extra time for service by fax. 142 Id. 21c(b)-(c). 136 RETURN TO TABLE OF CONTENTS • • • • • Driver’s license number Passport number Social Security number Tax identification number Other similar government-issued personal identification number Bank account number Credit card number Other similar financial account number Birth date Home address Name of any person who was a minor when the underlying suit was filed143 • • • • • • PRACTICE TIP Digitally obscuring sensitive data is not sufficient for e-filed documents under the rule. Also as a practical matter, the obscured information may leave a digital presence. A careful practitioner should clean all filings of metadata before e-filing. The filing party must keep an unredacted copy while the case is pending and any appellate proceedings filed within six months of the date the judgment is signed. 144 And any document containing sensitive data must not be posted to the Internet.145 Sensitive data may be included if the document is a will, a document under seal, or if including the information is required by other law or rule. 146 If a document is e-filed and including the sensitive information is required, the filing party must “designate[] the document as containing sensitive data.” 147 If not e-filed, the filing party must include on the upper left-hand side of the first page, “NOTICE: THIS DOCUMENT CONTAINS SENSITIVE DATA.” 148 Sensitive data in a will does not have to be redacted. 149 But if e-filed, there is a risk the information will be compromised due to a security breach. Further, the clerk may electronically scan a paper filing, 150 presumably into a computer connected to a network. Any network-connected computer is susceptible to a security breach. Rule 21c(b) also makes redacting sensitive data in documents filed under seal optional. But while 143 Id. 21c(a). Id. 21c(c). 145 Id. 21c(f). 146 Id. 21c(b). 147 Id. 21c(d)(1). The rule does not specify how to make this designation. 148 Id. 21c(d)(2). 149 Id. 21c(b). 150 Id. 21(f)(13) (“The clerk may designate . . . a scanned paper document as the official court record.”). 144 documents under seal cannot be e-filed, 151 the clerk may still scan the document into a computer susceptible to security breach. PRACTICE TIP Due to the risk of a security breach, or the circumstance that a sealed case is unsealed, a careful practitioner should redact all sensitive information from wills or documents under seal that is not required to be included. XI. RULES 500-510: THE JUSTICE COURTS The rules affecting small cases are now governed by Rules 500-510. 152 Rules 523-591 and 737-755, and TEX. PROP. CODE § 92.0563(d), which previously governed small cases, have been repealed. The new rules cover four types of cases: • • • • Small claims. Suits for recovery of money damages, civil penalties, personal property, or other relief of not more than $10,000. These cases are governed by Rules 500-507. Debt Claims. Suits for debt-recovery of not more than $10,000. These cases are governed by Rules 500-508. Repair and Remedy. Suits by a residential tenant under Chapter 92, Subchapter B of the Texas Property Code to enforce the landlord’s duty to repair or remedy a condition materially affecting the physical health or safety of an ordinary tenant. Relief sought cannot be more than $10,000. These cases are governed by Rules 500-507 and 509. Eviction. Suits to recover possession of real property under Chapter 21 of the Texas Property Code. The amount of rent due and unpaid cannot be more than $10,000. These cases are governed by Rules 500-507 and 510.153 The rest of the Rules of Civil Procedure do not apply to these cases unless the judge hearing the case believes the outside rule must be followed “to ensure that the proceedings are fair to all parties,” or if another rule is specifically provided for. 154 XII. OTHER RULE CHANGES A. Rule 45 Rule 45 previously required parties who submitted a copy of a pleading to the court to keep the 151 Id. 21(f)(4)(B)(i). TEX. R. CIV. P. 500-510, available at https://www.supreme.courts. state.tx.us/miscdocket/13/13904900.pdf. 153 Id. 500.3(a)-(d). 154 Id. 500.3(e). For example, Rule 502.1 states that e-filing is governed by Rule 21. 152 RETURN TO TABLE OF CONTENTS signed original. That requirement has been repealed. B. Rule 736: Forms for Expedited Proceedings The Supreme Court approved a number of forms for use in expedited foreclosure proceedings under Rule 736. 155 XIII. CONCLUSION Texas courts seem to be particularly sensitive to their obligation to ensure the efficient administration of justice. This concern includes considerations of cost, reasonable speed, and avoiding abuse. Rule 91a and the cases interpreting that rule provide a prime example. The rules under consideration in the federal system reveal these same concerns. Rules of procedure are constantly evolving and counsel should remain abreast of both new developments in cases interpreting rules, as well as in draft rules that are under consideration and subject to public comment. 155 Tex. S. Ct. Misc. Docket No. 14-9047 (Feb. 10, 2014), available at https://www.supreme.courts.state.tx.us/ miscdocket/13/13917100.pdf. RETURN TO TABLE OF CONTENTS TOP EMERGING ISSUES FACING TRIAL LAWYERS IN BUSINESS TORTS AND COMMERCIAL LITIGATION BRIAN P. LAUTEN, ESQ. Deans & Lyons, L.L.P. 325 N. St. Paul St., Ste. 1500 Dallas, Texas 75201 Telephone: 214-965-8500 Facsimile: 214-965-8505 [email protected] www.deanslyons.com REAGAN W. SIMPSON, ESQ. Yetter Coleman, LLP 909 Fannin, Ste. 3600 Houston, Texas 77010 Telephone: 713-632-8075 Facsimile: 713-632-8002 [email protected] www.yettercoleman.com State Bar of Texas 31st ANNUAL LITIGATION UPDATE INSTITUTE January 15-16, 2015 San Antonio CHAPTER 7 RETURN TO TABLE OF CONTENTS BRIAN P. LAUTEN, MBA, J.D. Deans & Lyons, L.L.P. 325 N. St. Paul Street, Ste. 1500 Dallas, Texas 75201 Telephone: 214-965-8500 Facsimile: 214-965-8505 [email protected] www.deanslyons.com BIOGRAPHICAL INFORMATION Brian P. Lauten is a partner at Deans & Lyons, LLP in Dallas, Texas. Lauten is board certified in Civil Trial Law by the Texas Board of Legal Specialization, Board Certified in Civil Trial Law Advocacy by the National Board of Trial Advocacy, and Board Certified in Civil Pretrial Practice. Lauten is a member of the American Board of Trial Advocates (ABOTA) and serves on the Executive Committee for the Dallas Chapter. Lauten is also an ABOTA National Board Representative. Lauten has been recognized as a Rising Star, Super Lawyer by Texas Monthly Magazine every year since 2003. Lauten graduated from SMU Law School where he was a member of Phi Delta Phi legal honorary society. Lauten is a frequent speaker in the area of Business Torts, Jury Charge, and Business Litigation and his article on “Top 10 Emerging Issues in Business Torts” has been published in the South Texas Business Journal, which is one of the University of South Texas’ distinguished Law Reviews. Lauten is licensed to practice in Texas, Montana, and Wyoming. RETURN TO TABLE OF CONTENTS REAGAN W. SIMPSON [email protected] | 713.632.8075 Reagan’s practice focuses on complex commercial litigation and appeals in the areas of tort, personal injury, and commercial torts. Reagan is admitted to practice in all state courts in Texas, all state courts in Illinois, the United States Supreme Court, United States Courts of Appeals for the Fifth and Eleventh Circuits, and the United States District Courts for the Southern, Northern, Western, and Eastern Districts of Texas, Central District of Illinois, and the Northern District of Florida. Professional Honors and Affiliations • Fellow, American College of Trial Lawyers and past Chair of the College’s Federal Legislation Committee. • Fellow, American Academy of Appellate Lawyers • Advocate, American Board of Trial Advocates (ABOTA), past President of the Houston ABOTA Chapter, and past Member of Board of the Texas State Chapter of ABOTA • Member, American Law Institute • Board Certified in Civil Trial Law, Texas Board of Legal Specialization, since 1985 • Board Certified in Civil Appellate Law, Texas Board of Legal Specialization, since 1988 • Best Lawyers in America® in the areas of Appellate, Commercial Litigation, Energy Law and Personal Injury Defense Litigation • Chambers U.S.A. Top Ranking in Appellate and Energy and Natural Resources Litigation in Texas, 2014 • “Texas Super Lawyer” in Appellate, Thomson Reuters, 20032014, Recognized in the Top 100 Lawyers in Texas, Top 100 Lawyers in Houston, and South Texas, and the Top 50 of Central & West Texas Region • 2010 Houston Appellate Lawyer of the Year and 2013 Austin Appellate Lawyer of the Year, The Best Lawyers in America® PARTNER The University of Texas School of Law J.D., 1977 High Honors The University of Texas B.A., 1974 Highest Honors Law Clerk to the Hon. Thomas Gibbs Gee U.S. Court of Appeals, Fifth Circuit 1977-78 Admitted to Practice Texas, 1977 Illinois, 2014 RETURN TO TABLE OF CONTENTS TABLE OF CONTENTS I. CAN PARTIES NOW CONTRACT AWAY THEIR OWN FRAUD? THE ENFORCEABILITY OF A WAIVER-OF --RELIANCE PROVISION IN AGREEMENTS AS CONCLUSIVELY NEGATING A LATER RAISED CLAIM FOR FRAUDULENT INDUCEMENT. FOREST OIL CORP. V. MCALLEN, 268 S.W.3D 51 (TEX. 2008) .................................................................................................................................... 1 II. THE TEXAS SUPREME COURT IS TAKING A BRIGHT LINE APPROACH TO ENFORCING CONTRACTS AS WRITTEN, REGARDLESS OF THE POLICY RAMIFICATIONS, TO PROVIDE CERTAINTY AND CONSISTENCY IN BUSINESS TRANSACTIONS. FORTIS BENEFITS V. CANTU, 234 S.W.3D 642 (TEX. 2007). .......................................................................................................................... 4 III. CAN LAWYERS REASONABLY ANTICIPATE THAT THE PATTERN JURY INSTRUCTION FOR PROXIMATE CAUSE WILL CHANGE IN COMMERCIAL CASES IN LIGHT OF THE HOLDINGS IN FORD MOTOR CO. V. LEDESMA, 242 S.W.3D 32 (TEX. 2007) AND WAL-MART STORES, INC. V. MERRELL, NO. 09-0224, 2010 WL 2431635 (TEX. JUNE 18, 2010? ............................................................ 5 IV. RECOVERING ATTORNEY’S FEES IN A MIXED TORT/CONTRACT CASE. NEW AND EVER CHANGING RULES ON PREVAILING PARTIES, RECOVERY, PROOF, AND SEGREGATION OF FEES .................................................................................................................................................................. 6 V. CAPPING THE UNLIMITED CAPS: NEW DEVELOPMENTS IN EXEMPLARY DAMAGES IN BUSINESS TORT CASES. A LOOK AT BENNETT V. REYNOLDS, NO. 08-0074, 2010 WL 2541096 (TEX. JUNE 25, 2010), WHICH SET ASIDE A CAP BUSTING FINDING ON EXEMPLARY DAMAGES AND HELD THAT A RATIO ANALYSIS BETWEEN ACTUAL AND EXEMPLARY DAMAGES APPLIES UNDER A CONSTITUTIONAL ANALYSIS REGARDLESS OF A CAP BUSTING FINDING ........................................................................................... 9 VI. SETTLEMENT AGREEMENTS REACHED DURING JURY DELIBERATIONS. A BRAND NEW DECISION FROM THE TEXAS SUPREME COURT MAY CHANGE HOW RULE 11 SETTLEMENTS ARE ENFORCED DURING TRIAL. FORD MOTOR CO. V. CASTILLO, 279 S.W.3D 656 (TEX. 2009) ......................................................................................................................... 10 VII. AN UPDATE ON FORUM SELECTION CLAUSES. ARE THEY BECOMING MORE CLOSELY SCRUTINIZED IN THE COURTS OF APPEAL AND IS MANDAMUS A REMEDY? IN RE INTERNATIONAL PROFIT ASSOCIATES, INC., 274 S.W.3D 672 (TEX. 2009), IN RE ADM INVESTOR SERVICES, INC., 304 S.W.3D 371 (TEX. 2010), AND QUIXTAR INC. V. SIGNATURE MANAGEMENT TEAM, LLC, 315 S.W.3D 28 (TEX. 2010). ..................................................................................................... 11 VIII. AN UPDATE ON NEW CASE LAW FROM THE SUPREME COURT ON ARBITRATION CLAUSES. IS THE TEXAS SUPREME COURT NOW EXPANDING THE SCOPE AND BREADTH OF TRADITIONAL ARBITRATION CLAUSES BY ENFORCING THOSE PROVISIONS AGAINST NON-SIGNATORIES TO THE AGREEMENT? IN RE LABATT FOOD SERVICE, L.P., 279 S.W.3D 640 (TEX. 2009) AND IN RE JINDAL SAW LIMITED, LLC, 289 S.W.3D 827 (TEX. 2009). .................................................................................................................................................... 13 IX. AN UPDATE ON SUBROGATION AND WORKER’S COMPENSATION LIENS. ARE ATTORNEYS NOW PERSONALLY ON THE HOOK FOR FAILING TO HONOR A LIEN? A NEW CLAIM FOR CONVERSION AND DISGORGEMENT. TEXAS MUTUAL INSURANCE CO. V. LEDBETTER, 251 S.W.3D 31 (TEX. 2008). ................................................................................................................................. 14 X. AN UPDATE ON FIRST PARTY INSURANCE CASES. CAN AN INSURANCE CARRIER AVOID LIABILITY, STATUTORY PENALTIES, AND EXTRACONTRACTUAL DAMAGES BY INTERPLEADING THE DISPUTED FUNDS? A NEW SUPREME COURT CASE IN STATE FARM LIFE INSURANCE CO. V. MARTINEZ, 216 S.W.3D 799 (TEX. 2007) .. 14 RETURN TO TABLE OF CONTENTS XI. 2014 COMMERCIAL LITIGATION UPDATE ............................................................................................. 15 XII. JOINT AND SEVERAL LIABILITY FOR KNOWING PARTICIPATION IN A BREACH OF FIDUCIARY DUTY ........................................................................................................................................ 16 XIII. ECONOMIC LOSS RULE .............................................................................................................................. 17 XIV. FRAUD CLAIMS AGAINST EMPLOYERS ................................................................................................. 17 XV. COVENANTS NOT TO COMPETE .............................................................................................................. 19 XVI. EVIDENT PARTIALITY – ARBITRATION ................................................................................................. 19 XVII. VALIDITY OF RELEASES ............................................................................................................................ 20 VXIII. CAUSATION .................................................................................................................................................. 21 RETURN TO TABLE OF CONTENTS TOP EMERGING ISSUES FACING TRIAL LAWYERS IN BUSINESS TORTS AND COMMERCIAL LITIGATION I. CAN PARTIES NOW CONTRACT AWAY THEIR OWN FRAUD? THE ENFORCEABILITY OF A WAIVER-OF -RELIANCE PROVISION IN AGREEMENTS AS CONCLUSIVELY NEGATING A LATER RAISED CLAIM FOR FRAUDULENT INDUCEMENT. FOREST OIL CORP. V. MCALLEN, 268 S.W.3D 51 (TEX. 2008) In its most recent decision on the enforceability of a waiver-of-reliance provision in an agreement, the Texas Supreme Court has made it clear that it is trending toward barring fraud claims where parties previously agreed in writing that they are not relying upon one another in the transaction at issue. If the parties are operating at arms length through their own lawyers, and a waiver-of-reliance provision is included in the agreement, it is now increasingly difficult to maintain a claim for fraud even if there are fact issues to the contrary. See Forest Oil Corp. v. McAllen, 268 S.W.3d 51 (Tex. 2008). The line of cases preceding Forest Oil starts with Prudential Insurance Co. of America v. Jefferson Associates, Ltd., 896 S.W.2d 156, 161-62 (Tex. 1995). In Prudential, Goldman purchased the Jefferson Building in Austin from The Prudential Insurance Company of America (“Prudential”). Id. at 159. Approximately two years later, Goldman discovered that the building contained asbestos fireproofing. Id. Goldman sued Prudential. Id. It was Goldman’s contention that Prudential misrepresented the condition of the building and failed to disclose that it contained asbestos which undermined its value. Id. In response, Prudential argued that Goldman purchased the building “as is”; therefore, he could not recover damages. Id. The Texas Supreme Court held that Goldman’s agreement to purchase the Jefferson Building “as is” precluded any argument that Prudential proximately caused any alleged damages. Id. at 161. Prudential reasoned that, where, as here, there is an agreement to purchase something “as is”, the buyer consents to making his own appraisal and accepts any risk that he may be incorrect. Id. [citations omitted]. Because Goldman acknowledged that he was not relying upon any representation with respect to the condition of the property, the “as is” agreement negated any claim that Prudential caused his injury. Id. But the Texas Supreme Court did hold that an “as is” agreement does not preclude a fraudulent inducement claim. Id. at 162. Prudential held: A seller cannot have it both ways: he cannot assure the buyer of the condition of a thing to obtain the buyer's agreement to purchase ‘as is’, and then disavow the assurance which procured the ‘as is’ agreement. Also, a buyer is not bound by an “as is” agreement if he is entitled to inspect the condition of what is being sold but is impaired by the seller's conduct. A seller cannot obstruct an inspection for defects in his property and still insist that the buyer take it ‘as is’. In circumstances such as these an ‘as is’ agreement does not bar recovery against the seller. Id. [citations omitted]. Prudential provided two noteworthy exceptions to the enforceability of as-is or a waiver-of-reliance provision in an agreement. Id. The first exception is the inducement of the injured party to execute an agreement by the concealment of information by the very party seeking to enforce the language in the agreement. See id. The second exception is that a purchaser is not bound by an “as is” agreement if he is entitled to inspect the condition of what is being sold but is impaired from doing so by the seller's conduct. Id. Thus, a seller cannot obstruct an inspection for defects in his property and still insist that the purchaser take it “as is”. Id. In these two limited circumstances, an “as is” agreement does not bar recovery against the purchaser. Id. Two years after Prudential was decided, the Texas Supreme Court issued its opinion in Schlumberger Technology Corp. v. Swanson, 959 S.W.2d 171, 179 (Tex. 1997). In Schlumberger, the Court reasoned that both exceptions carved out in Prudential are still legally enforceable, but held that under the fact pattern presented in Schlumberger, fraudulent inducement did not prevent the court from enforcing the waiver-ofreliance language in the release executed by the Swanson’s. See id. at 179-81. The issue in Schlumberger and its progeny was whether a contractual disclaimer precluded, as a matter of law, a claim that a party was fraudulently induced into executing the agreement. See id. at 173 (“The question is whether this disclaimer precludes, as a matter of law, the Swanson’s from recovering damages against Schlumberger for fraudulently inducing them to settle.”). There, Schlumberger Technology Corporation (“Schlumberger”) sought to purchase the Swanson’s interest in an underwater diamond mining operation. Id. at 173-174. After becoming embroiled in a dispute over the value of their interests, the Swanson’s agreed to a price and sold their interest to Schlumberger. See id. at 174. As part of the transaction, the Swanson’s signed a release. In the release, the parties specifically noted the interest’s RETURN TO TABLE OF CONTENTS value was in dispute, the release extinguished the Swanson’s interest, and the agreement included a waiver-of-reliance provision. See id. at 180. The Swanson’s later sued Schlumberger, asserting that Schlumberger fraudulently induced them to enter into this transaction. See id. at 174. In discussing the enforceability of the waiver-ofreliance provision, the Texas Supreme Court began with a presumption that Schlumberger had fraudulently induced the Swanson’s to enter into the transaction and sign the release. See id. at 174, 178. The Texas Supreme Court rejected Schlumberger's argument that, as long as the releasing party was represented by counsel in an arms-length transaction, a waiver-ofreliance provision in a release bars a claim that the releasing party was fraudulently induced to sign the release. See id. at 175, 178. In Schlumberger, the Texas Supreme Court recognized that prior precedent had held that a release can be set aside upon proof of fraudulent inducement, even if the release contains a waiver-of reliance provision. See id. at 178. However, Schlumberger acknowledged that other cases reached the opposite result. See id. at 178-79. The court then stated that it resolved these two conflicting lines of authority in Dallas Farm Machinery Co. v. Reaves, a case decided four decades earlier, in which it adhered to the former line of cases that refuse to enforce fraudulently induced waiver-of-reliance provisions. See id. at 179 (discussing Dallas Farm Machinery Co. v. Reaves, 307 S.W.2d 233 (Tex. 1957)). Schlumberger recognized that the holding in Dallas Farm Machinery brought Texas law into compliance with the overwhelming weight of authority in other jurisdictions, the Restatement of Contracts, and the opinions of legal scholars. See id. After appearing to follow Dallas Farm Machinery Co., the Schlumberger court then stated that there was a previously unaddressed competing concern, which is the ability of the parties to resolve their disputes without further litigation. See id. Reasoning that parties should be able to release each other from further disputes, Schlumberger held that circumstances may exist under which a contracting party can disclaim reliance on misrepresentations so as to defeat a claim of fraudulent inducement as a matter of law. See id. According to Schlumberger, a disclaimer of reliance, under certain circumstances, may conclusively negate the element of reliance, which is a required element to maintain a fraudulent inducement claim. In so illustrating, Schlumberger relied upon Prudential Insurance Co., 896 S.W.2d 156, 161-62 (Tex. 1995) and Estes v. Hartford Accident & Indemnity Co., 46 S.W.2d 413, 417-18 (Tex. Civ. App. -- El Paso 1932, pet. ref'd). Although Prudential did enforce a waiver-of-reliance provision in an agreement, the part of that opinion relied upon by Schlumberger refers to Dallas Farm Machinery Co. and notes that the same language is unenforceable against a purchaser induced to enter into an agreement by the seller's misrepresentations. See Prudential Ins. Co., 896 S.W.2d at 161-62. The other case cited by Schlumberger, Estes v. Hartford Accident & Indemnity Co., held that there was no evidence of reliance on the alleged fraudulent misrepresentation that induced the party to execute a release. See Estes, 46 S.W.2d at 41718. However, Estes does not say that the release contained a waiver-of-reliance clause, and the court states that the release would be unenforceable if the releasing party had proven fraud. See id. at 417. Schlumberger elaborated upon the circumstances in which a waiver-of-reliance provision may negate proof of fraudulent inducement. Schlumberger held: The contract and the circumstances surrounding its formation determine whether the disclaimer of reliance is binding. Because the parties were attempting to put an end to their deal, and had become embroiled in a dispute over the feasibility and value of the project, we conclude that the disclaimer of reliance the Swansons gave conclusively negates the element of reliance. Schlumberger Tech. Corp., 959 S.W.2d at 179-80 [citations omitted]. It was significant in Schlumberger that during the negotiations that led to the execution of the release, the parties could not agree upon the value of the Swanson’s interest. See id. at 180. Thus, the very purpose of the release was to conclude the dispute as to the value of Swanson’s interest. See id. Because the Swanson’s disclaimed any reliance upon Schlumberger about the value of their interest, the Swanson’s intended to forego relying upon any representations about the value of the project. See id. Schlumberger underscored the point that a waiverof-reliance provision will not necessarily preclude a fraudulent-inducement claim and observed that Prudential had identified some situations in which an as-is clause would not bar a similar claim. See id. (citing Prudential Ins. Co., 896 S.W.2d at 162)). As noted above, the language in Prudential relied upon in Schlumberger includes a citation to Dallas Farm Machinery Co. and recognizes that the purchaser would not have been bound by an as-is clause that contained similar waiver-of-reliance language if it had been induced to execute an agreement by a fraudulent representation. See id; Prudential Ins. Co. of Am., 896 S.W.2d at 162. After recognizing that the exceptions from Prudential are still valid, Schlumberger opined, “We conclude only that on this record, the disclaimer of reliance conclusively negates as a matter of law the element of reliance on representations about the feasibility and value of the sea-diamond mining project RETURN TO TABLE OF CONTENTS needed to support the Swanson’s claim of fraudulent inducement.” See id. at 181 (emphasis added). If Schlumberger is interpreted broadly, its holding could be applied in many situations where two common factors exist: (1) an arm's length transaction occurs between sophisticated parties that are represented by independent legal counsel and (2) waiver-of-reliance language that unequivocally applies to the very representations upon which the injured party makes its complaint is included in the contract. Moreover, a broad application of Schlumberger would have the practical effect of overruling the fraudulentinducement exceptions established in Prudential and many other authorities indicate the case is still good law. See Geodyne Energy Income Prod. P'ship I-E v. Newton Corp., 161 S.W.3d 482, 487, 490 & n. 32 (Tex. 2005) (holding that quitclaim deed containing asis provision did not violate Texas Securities Act but noting the two Prudential exceptions and observing that the reasoning would change if there were evidence of fraudulent inducement); Schlumberger Tech. Corp., 959 S.W.2d at 181; Kane v. Nxcess Motorcars, Inc., No. 01-04-00547-CV, 2005 WL 497484, at *6-7 (Tex. App. -- Houston [1st Dist.] 2005, no pet. h.) (reversing summary judgment based upon as-is clause because fact issues were raised as to fraudulent-inducement exception); Bynum v. Prudential Residential Services, Ltd. P'ship, 129 S.W.3d 781, 787-92 (Tex. App. -Houston [1st Dist.] 2004, pet. denied) (applying Prudential exceptions to an agreement containing waiver-of-reliance and as-is provisions and finding that summary-judgment evidence did not raise a fact issue as to those exceptions); Nelson v. Najm, 127 S.W.3d 170, 173, 175-76 (Tex. App. -- Houston [1st Dist.] 2003, pet. denied) (applying Prudential to an agreement containing both waiver-of-reliance and as-is language and finding that fraud claims were not barred because there was evidence that the seller fraudulently concealed information from the purchaser). The Texas Supreme Court continued to blazed this trail with its most recent decision in Forest Oil Corp. v. McAllen, 268 S.W.3d 51 (Tex. 2008). At issue in Forest Oil was whether an unambiguous waiver-of-reliance provision precluded a fraudulent inducement claim as a matter of law. Id. at 52. Because Forest Oil involved sophisticated parties represented by counsel in an arms-length transaction, the Texas Supreme Court held that the waiver-ofreliance provision conclusively negated the element of reliance; and, therefore, any claim for either fraud or fraudulent inducement was contractually barred. Id. at 52-53. In Schlumberger supra, the court held that a fraudulent inducement claim was precluded by the contractual disclaimer. This principle was re-affirmed in Forest Oil. See id. at 52-53 (unambiguous waiverof-reliance provision precludes fraudulent inducement claim as matter of law). However, in Forest Oil and in Schlumberger the court expressly declined “to adopt a per se rule that a disclaimer of reliance automatically precludes a fraudulent-inducement claim....” Id. at 61; Schlumberger, 959 S.W.2d at 181 (“We emphasize that a disclaimer of reliance or merger clause will not always bar a fraudulent inducement claim.”). Rather, it stated, “Courts must always examine the contract itself and the totality of the surrounding circumstances when determining if a waiver-of-reliance provision is binding.” Forest Oil, 268 S.W.3d at 60. The Court articulated several factors that are of paramount importance in making this determination: (i) whether the contract was negotiated or boilerplate, (ii) whether the complaining party was represented by counsel, (iii) whether the parties dealt with each other at arms length, (iv) whether the parties were knowledgeable in business matters, (v) and whether the release language was clear. Forest Oil, 268 S.W.3d at 60; see Schlumberger, 959 S.W.2d at 179-81. The Court also considered how the disclaimer provision impacted the plaintiffs' remaining claims for commonlaw and statutory fraud. Schlumberger, 959 S.W.2d at 181-82. Upon attempting to clarify Schlumberger, the Court observed that, “Schlumberger holds that when knowledgeable parties expressly discuss material issues during contract negotiations but nevertheless elect to include waiver-of-reliance and release-ofclaims provisions, the Court will generally uphold the contract. An all-embracing disclaimer of any and all representations, as here, shows the parties' clear intent.” Forest Oil, 268 S.W.3d at 58; see also Jacuzzi, Inc. v. Franklin Elec. Co., Inc., 2008 WL 190319 at *4 (N.D. Tex. 2008) (Fitzwater, J.) (enforcing a “no reliance” disclaimer); Whitney Nat. Bank v. Air Ambulance by B & C Flight Mgmt., Inc., 2007 WL 1256612 at *8-13 (S.D. Tex. 2007) (standard merger clauses barred fraudulent inducement claim); Stark v. Benckenstein, 156 S.W.3d 112, 122-123 (Tex. App. -Beaumont 2004, pet. denied) (“Here the release, as in Schlumberger, covers all claims, whether known or unknown and further disclaims reliance on representations about the specific matter in dispute. The Parties here were represented by counsel, and bargained at arm’s length over the Agreement’s terms. The final Agreement contained releases of claims and a payment of cash.”) [citations omitted]. More recently, in Italian Cowboy Partners, Ltd. v. Prudential Insurance Co. of America, 341 S.W.3d 323 (Tex. 2011), the issue before the Texas Supreme Court was whether a “disclaimer of representations” within a lease contract amounts to a standard merger clause, or also disclaims reliance on representations, thus conclusively negating a claim for fraudulent inducement. Id. at 327-328. In Italian Cowboy, the owners of a restaurant (Italian Cowboy) terminated their lease because of a sewer gas odor. Id. at 328. In a suit against the landlord (Prudential), Italian Cowboy RETURN TO TABLE OF CONTENTS sought to rescind the lease and pursue money damages. Id. During the lease negotiations, Prudential represented that the building was new and had practically no problems. Id. The lease contained the following language: “Tenant acknowledges that neither Landlord nor Landlord’s agents, employees or contractors have made any representations or promises with respect to the Site, the Shopping Center or this Lease except as expressly set forth herein.” Id. The lease also contained a merger clause. Reversing the Court of Appeals take nothing judgment in favor of Prudential, the Texas Supreme Court held that the disclaimer of reliance clause did not bar a fraudulent inducement claim. Italian Cowboy held that “the only reasonable interpretation of the contract language at issue here is that the parties to this lease intended nothing more than the provisions of a standard merger clause, and did not intend to include a disclaimer of reliance on representations.” Id. at 334. The Court claimed that it was not departing from the holdings in either Forest Oil or Schlumberger, but noted instead that the “language of the contract at issue here differs significantly from the provisions at issue” in these two prior decisions. Id. at 335. Because the parties did not unequivocally disclaim “reliance,” the Texas Supreme Court held that it was reversible error to hold that the fraudulent inducement claim was barred as a matter of law. II. THE TEXAS SUPREME COURT IS TAKING A BRIGHT LINE APPROACH TO ENFORCING CONTRACTS AS WRITTEN, REGARDLESS OF THE POLICY RAMIFICATIONS, TO PROVIDE CERTAINTY AND CONSISTENCY IN BUSINESS TRANSACTIONS. FORTIS BENEFITS V. CANTU, 234 S.W.3D 642 (TEX. 2007). The macro approach to Forest Oil supra is that the Texas Supreme Court seems to be telling businesses, corporations, and sophisticated parties that the court is simply not going to re-write contracts executed between business players even if it bars a later lawsuit between them regarding a specific transaction. That theme seems particularly true in Fortis Benefits v. Cantu, 234 S.W.3d 642 (Tex. 2007), where the Supreme Court enforced the plain language of an insurance policy that provided for contractual subrogation and ignored the made whole doctrine. There are three types of subrogation: contractual, statutory, and equitable. See id. at 648. In Texas, the case-law typically addresses contractual or “conventional” subrogation and equitable subrogation. See Mid-Continent Ins. Co. v. Liberty Mut. Ins. Co., 236 S.W.3d 765, 774 (Tex. 2007); see also Hartnett v. Hampton, Inns, Inc., 870 S.W.2d 162, 167 n. 7 (Tex. App. -- San Antonio 1993, pet. denied) (a right to subrogation may arise either from a contract or in equity to prevent fraud). To prevail on an equitable subrogation claim, a party must establish that it involuntarily paid a debt that is primarily owed by another party that, in equity, should have been incurred by the other party. Mid-Continent Ins., 236 S.W.3d at 774; Frymire Eng'g Co. v. Jomar Intern., Ltd., 259 S.W.3d 140, 142, 144-46 (Tex. 2008). In contrast, contractual subrogation is “created by an agreement or contract that grants the right to pursue reimbursement from a third party in exchange for payment of a loss . . ..” Mid-Continent Ins., 236 S.W.3d at 774; Hartnett, 870 S.W.2d at 167 n. 7 (noting that contractual subrogation rights are enforceable). Under either form of subrogation, the insurer stands in the shoes of the insured, and may assert only those rights held by the insured against the third party, subject to any defenses of the third party against the insured. Mid-Continent Ins., 236 S.W.3d at 774. It is the underlying principle of subrogation that once an insured is made whole from its damages, the insurer that paid those losses is entitled to the insured's rights and remedies against a third party for the covered claims. Harris v. American Prot. Ins. Co., 158 S.W.3d 614, 622 (Tex. App. -- Fort Worth 2005, no pet. h). In Texas, the courts are “particularly hospitable” to the concept. Id. (quoting Interfirst Bank Dallas, N.A. v. United States Fid. & Guar. Co., 774 S.W.2d 391, 397 (Tex. App. -- Dallas 1989, pet. denied)); see also Rowland & Rowland, P.C. v. Texas Employers Indem. Co., 973 S.W.2d 432, 436 (Tex. App. -- Austin 1998, no pet. h.) (“there is an abundance of case law in which Texas courts have manifested their interest in examining settlements in third-party actions to ensure an insurance carrier's right to subrogation”). Absent an agreement to the contrary, subrogation is based on equity and the appellate courts will not disturb a trial court's balancing of the equities unless “it would be inequitable to allow the judgment to stand.” Esparza v. Scott & White Health Plan, 909 S.W.2d 548, 552 (Tex. App. -- Austin 1995, pet. denied) (abrogated by Fortis Benefits v. Cantu, 234 S.W.3d 642 (Tex. 2007)). If either the insurer or the insured “must to some extent go unpaid, the loss should be borne by the insurer for that is a risk the insured has paid it to assume.” Ortiz v. Great S. Fire & Cas. Ins. Co., 597 S.W.2d 342, 344 (Tex. 1980) (quoting Garrity v. Rural Mut. Ins. Co., 253 N.W.2d 512, 514 (Wis. 1977)). An insurer is not entitled to equitable subrogation until the insured is “made whole” for his loss. Esparza, 909 S.W.2d at 552; Ortiz, 597 S.W.2d at 343. In Fortis Benefits v. Cantu, 234 S.W.3d 642, 648 (Tex. 2007), Vanessa Cantu (“Cantu”) sustained catastrophic injuries in an automobile accident. Id. at 644. Cantu sued the driver of the vehicle, the driver’s RETURN TO TABLE OF CONTENTS employer, and Ford Motor Company. See id. Cantu settled her claims for $1.445 million. Id. Cantu’s past medical expenses totaled $378,500 of which Fortis claimed to have paid $247,534.14. Id. Cantu obtained two life care plans estimating that her need for future medical care could be as high as $5,300,000. Id. Cantu obtained summary judgment in the trial court that Fortis was not entitled to recover the medical benefits that it paid because Cantu had not been made whole by the settlement. Id. The Texas Supreme Court reversed and held that Fortis was entitled to recover the full amount of the lien because the insurance policy contained a contractual subrogation provision. Id. Under Fortis, if an agreement provides for subrogation irrespective of whether the insured is first made whole, “[t]he contract's specific language controls . . . and the equitable defense of the ‘made whole’ doctrine must give way.” Fortis Benefits v. Cantu, 234 S.W.3d 642, 651 (Tex. 2007). “[C]ontractbased subrogation rights should be governed by the parties' express agreement and not invalidated by equitable considerations that might control by default in the absence of an agreement.” Id. at 650. In noting the distinctions between contractual and equitable subrogation in Fortis, the Texas Supreme Court observed that while the two concepts rest on common principles and are somewhat similar, they are separate and distinct rights independent of each other. Id. at 648. In Fortis, the Texas Supreme Court underscored that, although the two rights are separate and independent, that does not suggest that they are coequal, observing that equitable doctrines must reconcile with contractual agreements, “not the other way around.” Id. A contractual subrogation right stems directly from the contract executed between the parties, and does not derive its existence from amorphous principles of equity. Id. at 647. “The policy declares the parties' rights and obligations, which are not generally supplanted by court-fashioned equitable rules that might apply, as a default gap-filler, in the absence of a valid contract . . . Contractual subrogation clauses express the parties' intent that reimbursement should be controlled by agreed contract terms rather than external rules imposed by the courts.” Id. at 647-48. “Where a valid contract prescribes particular remedies or imposes particular obligations, equity generally must yield unless the contract violates positive law or offends public policy.” Id. at 648-49. A contractual subrogation clause, moreover, does not violate Texas public policy. See id. at 649. Thus, according to Fortis a contractual subrogation provision must be enforced as written, subject to general contract law principles of construction. Id. at 648 n. 36, 650, 651 n. 54. Unlike Forest Oil where the parties had negotiated at arms length with their own lawyers, in Fortis the Supreme Court interpreted an arguably boilerplate insurance contract and held that the policy would be enforced against Cantu as written. Fortis underscores the theme in the Texas Supreme Court that it is reluctant to re-write agreements, insurance policies, or to even find that certain language is unenforceable despite any result that may necessarily ensue. It was forcefully argued by Cantu in Fortis that the insurance company should bear the risk that it would not be reimbursed if Cantu was not made whole because that is the entire concept behind insurance. The Texas Supreme Court rejected this argument. Fortis leaves the door open for insurers to test the boundaries of reasonableness in insurance policies. III. CAN LAWYERS REASONABLY ANTICIPATE THAT THE PATTERN JURY INSTRUCTION FOR PROXIMATE CAUSE WILL CHANGE IN COMMERCIAL CASES IN LIGHT OF THE HOLDINGS IN FORD MOTOR CO. V. LEDESMA, 242 S.W.3D 32 (TEX. 2007) AND WAL-MART STORES, INC. V. MERRELL, NO. 09-0224, 2010 WL 2431635 (TEX. JUNE 18, 2010? In Texas, the overwhelming number of commercial and business torts require proof of proximate causation. See e.g., Forbes Inc. v. Granada Biosciences, Inc., 124 S.W.3d 167, 170 (Tex. 2003) (business disparagement requires proof of proximate cause); see also Abetter Trucking Co. v. Arizpe, 113 S.W.3d 503, 508 (Tex. App. -- Houston [1st Dist.] 2003, no pet.) (“to recover for breach of fiduciary duty, the jury was required to find the existence of a fiduciary duty, breach of the duty, causation, and damages.”) [citations omitted]; Gray v. Woodville Healthcare Center, 225 S.W.3d 613, 617 (Tex. App. -El Paso 2006, pet. denied) (“As we have noted, this lawsuit alleged medical malpractice, gross negligence, and negligence per se. Proximate cause is an element for each of these causes of action.”) [citations omitted]; Larsen v. Carlene Langford & Assocs., 41 S.W.3d 245, 249 (Tex. App. -- Waco 2001, pet. denied) (fraud and negligent misrepresentation require proof of proximate cause). In Ford Motor Co. v. Ledesma, 242 S.W.3d 32 (Tex. 2007), a products liability decision, the Supreme Court held that the pattern jury instruction on a manufacturing defect and on producing cause was clearly erroneous and reversible error. In Ledesma, Ford argued that the trial court improperly instructed the jury on producing cause. The trial judge, following the pattern jury instruction, instructed the jury: “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.” Id. at 45. It was Ford’s contention that the producing cause instruction was incorrect; RETURN TO TABLE OF CONTENTS rather, according to Ford, the proper instruction should be that producing cause “means that cause which, in a natural sequence, was a substantial factor in bringing about an event, and without which the event would not have occurred. There may be more than one producing cause.” Id. The Supreme Court held that the second part of the definition, that “there may be more than one producing cause,” was legally correct. Id. But Ledesma also held that producing cause “is a substantial factor that brings about injury and without which the injury would not have occurred.” See id. (emphasis added) [citations omitted]. The Court reasoned that “efficient” and “exciting” are adjectives foreign to the English language as a practical way of explaining causation. Id. at 46. Although Ledesma was a products liability case, it should raise concerns for the commercial trial lawyer because the Texas Supreme Court indicated that it was not reluctant to find an abuse of discretion and reversible error even though the trial court submitted a pattern jury instruction on causation. The more significant issue that is raised in Ledesma is whether the Supreme Court’s logic in changing the definition of producing cause would also apply to changing the definition of proximate cause. It could certainly be argued that the pattern definition of proximate causation is flawed for the same reasons the Texas Supreme Court held that the definition of producing cause is flawed. This is true because, like producing cause, the pattern instruction on proximate cause is very similar. Moreover, if “substantial factor” is now the test for producing cause it begs the question as to whether similar language will now apply to proximate cause. The Texas Supreme Court’s recent decision in Wal-Mart Stores, Inc. v. Merrell, 313 S.W.3d 837 (Tex. 2010) re-defines causation standards in tort cases contrary to the pattern instruction’s definition that states there can be more than one proximate cause. In Merrell, Charles Merrell and Latosha Gibson (collectively, “Merrell”) died from smoke inhalation while they slept in their rented home. Id. at 838. The Fire Department found candles, melted wax, an ashtray, as well as smoking paraphernalia throughout the house including a bong and marijuana cigarette butts. Id. The fire marshal declared the fire accidental and of unknown origin. Id. Merrell’s parents filed suit against Wal-Mart and alleged that a halogen lamp purchased from one of its stores caused the fire. Id. Merrell’s expert, Dr. Craig Beyler (“Dr. Beyler”), opined that the “nonpassive failure” of the lamp ignited the recliner. Id. at 839. It was Dr. Beyler’s opinion that the halogen bulb exploded causing the fire. Id. The expert ruled out smoking materials as a cause because none were found in the immediate area of origin. Id. In contrast, Wal-Mart’s expert opined that the more likely cause of the fire was careless disposal of smoking materials. Id. The trial court granted summary judgment. The Court of Appeals reversed and held fact issues precluded summary judgment. The Supreme Court granted a petition for review and reversed the Court of Appeals. The Texas Supreme Court held that Dr. Beyler’s causation opinion was no evidence. Merrell reasoned that Dr. Beyler did not explain “why a burning cigarette could not have caused the fire.” Id. at 839-840. According to the Supreme Court, Dr. Beyler improperly dismissed the postmortem toxicology report that stated the deceased were smoking on the night of the fire. Id. Merrell held: Beyler did undertake to eliminate one potential cause of the fire that might otherwise seem on a par with the lamp theory. He explained why the melted candle wax and location of the candles precluded the candles as the source of the fire. Yet he provided no explanation for why lit smoking materials could not have been the source. An expert’s failure to explain or adequately disprove alternative theories of causation makes his or her own theory speculative and conclusory. Most importantly, while Beyler laid a general foundation for the dangers of halogen lamps, his specific causation theory amounted to little more than speculation. Evidence that halogen lamps can cause fires generally does not establish that the lamp in question caused this fire. Id. at 839-840 (emphasis added) [citations omitted]. Merrell could be read to mean that tort plaintiffs must eliminate and adequately disprove alternative theories of causation in all tort cases. Although Merrell does not cite Ledesma, the Texas Supreme Court seems to be moving away from the language in the pattern instruction that specifically states there can be more than one proximate cause. It can certainly be argued that Merrell means that a plaintiff must prove the defendant’s negligence was “the” cause rather than “a” cause. Merrell certainly puts a heightened onus of proof on causation standards in tort cases. IV. RECOVERING ATTORNEY’S FEES IN A MIXED TORT/CONTRACT CASE. NEW AND EVER CHANGING RULES ON PREVAILING PARTIES, RECOVERY, PROOF, AND SEGREGATION OF FEES It is axiomatic that attorney’s fees are recoverable only if authorized by a specific statute or if the party seeking relief recovers on a breach of contract claim. Tony Gullo Motors I, L.P. v. Chapa, 212 S.W.3d 299, 311 (Tex. 2006); Travelers Indem. Co. of Conn. v. Mayfield, 923 S.W.2d 590, 594 (Tex. 1996); RETURN TO TABLE OF CONTENTS Cameron & Co. v. Am. Surety Co. of N.Y., 55 S.W.2d 1032, 1035 (Tex. Comm'n App.1932, holding approved). Stated differently, attorney’s fees are not recoverable in a tort action. Knebel v. Capital Nat'l Bank, 518 S.W.2d 795, 803-04 (Tex. 1974). Issues as to whether an agreement or statute authorizes recovery of attorney’s fees present questions of contract or statutory construction, and these generally are questions of law. Coker v. Coker, 650 S.W.2d 391, 394-95 (Tex. 1983) (explaining that courts construe unambiguous contracts and determine the existence of ambiguity as matters of law); New Amsterdam Cas. Co. v. Tex. Indus., Inc., 414 S.W.2d 914, 914-15 (Tex. 1967) (construing contract and statute as a matter of law to determine whether recovery of attorney’s fees was authorized). From 1991 to 2006, the exception to the feesegregation rule applied “when the causes of action involved in the suit are dependent upon the same set of facts or circumstances and thus are intertwined to the point of being inseparable.” Stewart Title Guar. Co. v. Sterling, 822 S.W.2d 1, 11-12 (Tex. 1991) (quoting Gill Sav. Ass'n v. Chair King, Inc., 783 S.W.2d 674, 680 (Tex. App. -- Houston [14th Dist.] 1989), modified, 797 S.W.2d 31 (Tex.1990) (per curiam)). In light of the Texas Supreme Court’s recent decision in Chapa, the factors that determine whether the feesegregation exception rule applies changed. See Chapa, 212 S.W.3d at 311. After Chapa, the determination focuses upon the legal work performed that pertains solely to causes of action for which attorney’s fees are not recoverable. See id. Under Chapa, the jury does not examine the work product in its entirety, but must parse the work into separate tasks allocated to recoverable claims. See id. at 313 (“But when Chapa's attorneys were drafting her pleadings or the jury charge relating to fraud, there is no question [that] those fees were not recoverable.”). If any of the tasks at issue pertain solely to a claim for which legal fees are unrecoverable, the claimant must segregate the fees. 7979 Airport Garage, L.L.C. v. Dollar Rent A Car Sys., 245 S.W.3d 488, 509 (Tex. App. -- Houston [14th Dist.] 2007, pet. denied). As articulated in Chapa, the question of the extent to which the exception to the fee segregation rule would apply presents a mixed question of law and fact: [T]he fees necessary to prove particular claims often turn on such facts-how hard something was to discover and prove, how strongly it supported particular inferences or conclusions, how much difference it might make to the verdict, and a host of other details that include judgment and credibility questions about who had to do what and what it was worth. Tony Gullo Motors, 212 S.W.3d at 313 (emphasis added). Thus, Chapa requires the party seeking to recover attorney’s fees “to segregate fees between claims for which they are recoverable and claims for which they are not.” See id. at 311 [citations omitted]. However, the opposing party must preserve the contention that the party seeking affirmative relief failed to segregate the fees sought. See Green Int'l, Inc. v. Solis, 951 S.W.2d 384, 389 (Tex. 1997). An exception exists to this general duty to segregate if the claims are inextricably intertwined. Id. To establish that attorney’s fees are inextricably intertwined, the party seeking the recovery of attorney’s fees must establish that discrete legal services advanced both a recoverable and an unrecoverable claim. Id. at 313-14. Since Chapa was decided, there have been some new developments in the area of recovering attorney’s fees. First, it is noteworthy that the Texas Supreme Court in Medical City Dallas, LTD. v. Carlisle Corporation, 251 S.W.3d 55, 63 (Tex. 2008) held that attorney’s fees could be recovered for a breach of an express warranty. See id. at 63 (“Because Texas Civil Practice and Remedies Code section 38.001(8) permits an award of attorney’s fees for a suit based on a written or oral contract, and because we conclude that breach of an express warranty in such a claim, the court of appeals erred in reversing Medical City’s attorney’s fees award in connection with its successful claim for breach of an express warranty.”). Second, in Varner v. Cardenas, 218 S.W.3d 68 (Tex. 2007) the Texas Supreme Court held that in a breach of contract claim the prevailing party could also recover attorney’s fees in defending a counterclaim because the claimant had to respond to the counterclaim to prove their breach of contract case. See id. at 69 (“But we disagree that fees defending against the Cardenases’ counterclaim must be segregated too. By asserting a shortfall in acreage as a defense and counterclaim, the Cardenases sought to reduce the amount collected on the note; to collect the full amount the Varners had to overcome this defense. As their attorney’s fees to that effect were necessary to recover on their contract, they are recoverable.”) [citations omitted]. Third, in AMX Enterprises, LLP v. Master Realty Corp., 283 S.W.3d 506 (Tex. App. -- Fort Worth 2009, no pet. h.) the Court of Appeals, in an issue of first impression, held that in house counsel could recover attorney’s fees under a “market value” method. See id. at 517-519. Thus, in house counsel can recover attorney’s fees calculated at the market rate for outside counsel, even though the in house lawyers are salaried employees of the party appearing in the case. Id. Third, as recently as this past August the Texas Supreme Court decided two more companion cases that directly impact an award of attorney’s fees. In Intercontinental Group P’ship v. KB Homes Lone State L.P., 295 S.W.3d 650 (Tex. 2009), the issue before the RETURN TO TABLE OF CONTENTS Texas Supreme Court was whether a stand-alone finding of breach of contract with no award of actual damages made the non-breaching party a “prevailing party” that would trigger an award of attorney’s fees under a mandatory provision in a contract. Id. at 653. In Intercontinental, the contract contained the following provision: Attorney’s fees. If either party named herein brings an action to enforce the terms of this Contract or to declare rights hereunder, the prevailing party in any such action, on trial or appeal, shall be entitled to his reasonable attorney’s fees to be paid by losing party as fixed by the court. Id. at 652. Of note, “prevailing party” was not defined in the agreement. See id. At trial, KB Home Lone Star, L.P. (“KB Home”) received a jury finding at trial that Intercontinental Group Partnership (“Intercontinental”) breached the contract, but the jury awarded no actual damages stemming from that breach, although the jury did award KB Homes $66,000 in attorney’s fees. Id. Meanwhile, the jury rejected Intercontinental’s counter-claim. Id. Both parties claimed victory on the other’s claims and argued that each were “prevailing parties” under the contract. In an issue of first impression, the Texas Supreme Court adopted a “no-harm/no-fee” rule. Id. at 662. Rejecting the attorney fee claim, the Supreme Court held that “a stand-alone finding of breach unaccompanied by any tangible recovery (either monetary or equitable relief) cannot bestow ‘prevailing party’ status.” Id. Thus, Intercontinental holds that to be a “prevailing party” under a mandatory attorney’s fees provision the party must be awarded actual damages or some form of equitable relief such as specific performance, a declaratory judgment, or injunctive relief. In so far as K.B. Homes’ attorney’s fees claim is concerned, the Texas Supreme Court held that error was waived because K.B. Homes did not submit an attorney’s fees claim to the jury. It is important to note that Intercontinental also holds that the parties could have defined “prevailing party” in terms that are either narrower or stricter than the law provides for the recovery of attorney’s fees. On the same day the Texas Supreme Court issued its opinion in Intercontinental, it also decided a similar attorney’s fees claim in MBM Financial Corp. v. Woodlands Operating Co., 292 S.W.3d 660 (Tex. 2009). In MBM, the Woodlands Operating Company (“Woodlands”) leased 19 copiers from MBM Financial Corporation (“MBM”) and each copier was covered by a separate four year lease. Id. at 663. According to the leases, the agreements automatically renewed unless there was written notice provided between 90 and 180 days before the expiration of the lease term. Id. The Woodlands opted not to renew the leases and requested from MBM end-of-term dates and instructions for return. Id. MBM provided the dates and approved a draft termination letter provided by the Woodlands. Id. However, when the actual termination letter arrived MBM’s president unilaterally changed the dates so the notice would be untimely and demanded rent for another year. Id. To bolster MBM’s position, the president then signed the leases and inserted commencement dates for the first time after the Woodland’s filed suit. Id. Until suit was filed, MBM refused to designate a return location for the copiers. Id. The Woodlands sought declaratory relief and brought claims for breach of contract and fraud. Id. MBM counter-claimed and sought additional rent of $160,000. Id. After a two day bench trial, the trial court awarded the Woodlands $1,000 in damages and over $145,000 in attorney’s fees through trial. The Court of Appeals affirmed. The Texas Supreme Court reversed. Justice Brister opined that the Woodlands requested only nominal damages; and, furthermore, there was no evidence to support the award of $1,000 in actual damages. Id. Because there was no evidence of actual damages, the Court held that an award of attorney’s fees could not be affirmed on that basis. Id. The Woodlands countered and argued that the trial court granted declaratory relief; and, therefore, attorney’s fees are appropriate under the Declaratory Judgment Act (TEX. CIV. PRAC. & REM. CODE § 37.009 (Vernon Supp. 1986)). Rejecting this argument, the Texas Supreme Court held that allowing the Woodlands to recover attorney’s fees under the Declaratory Judgments Act (Chapter 37) when it could not have recovered attorney’s fees under the Attorney’s Fees Statute (Chapter 38) would frustrate the provisions and limitations of the neighboring chapter in the same code. Id. at 670. Nevertheless, the Woodland’s argued that there were five separate issues that it prevailed upon in its application for a declaratory judgment. However, Justice Brister opined that these same points of relief were part and parcel of the Woodland’s breach of contract claim upon which there was no evidence of damages. Accordingly, the Court held that attorney’s fees were inappropriate under either statute. Finally, in Midland Western Building L.L.C. v. First Service Air Conditioning Contractors, Inc., 300 S.W.3d 738 (Tex. 2009), First Service Air Conditioning Contractors, Inc. (“First Service”) sued Midland Western Building, LLC (“Midland”) on a $21,693.56 sworn account for failing to pay under a services agreement and sought to recover its attorney’s fees. Id. at 739. At trial, First Service’s attorney testified that between $24,000 and $26,000 would be a reasonable attorney’s fee. The jury awarded First RETURN TO TABLE OF CONTENTS Service $14,645.10 in damages, but awarded no attorney’s fees. Id. The Court of Appeals reversed and awarded attorney’s fees because there was no controverting evidence offered and First Service was entitled to fees. The Texas Supreme Court reversed the Court of Appeals. Midland reasoned that First Service’s attorney admitted that some of the fees sought involved claims against parties other than the defendant. Thus, fees could not be awarded as a matter of law. But the Court held that an award of zero fees was improper. Id. While the jury could have concluded that a lesser fee was appropriate, an award of zero fees was inappropriate because fees were necessary to prove the claim. Id. Thus, the Supreme Court remanded for a new trial on attorney’s fees. V. CAPPING THE UNLIMITED CAPS: NEW DEVELOPMENTS IN EXEMPLARY DAMAGES IN BUSINESS TORT CASES. A LOOK AT BENNETT V. REYNOLDS, NO. 08-0074, 2010 WL 2541096 (TEX. JUNE 25, 2010), WHICH SET ASIDE A CAP BUSTING FINDING ON EXEMPLARY DAMAGES AND HELD THAT A RATIO ANALYSIS BETWEEN ACTUAL AND EXEMPLARY DAMAGES APPLIES UNDER A CONSTITUTIONAL ANALYSIS REGARDLESS OF A CAP BUSTING FINDING It has long been settled law that if plead, submitted to the jury, and proven based upon a unanimous finding certain criminal offenses may remove the statutory cap on exemplary damages in civil cases. See TEX. CIV. PRAC. & REM. CODE ANN. § 41.008 (Vernon 2003); see e.g., Signal Peak of Enterprises, Inc. v. Bettina Investments, Inc., 138 S.W.3d 915, 927 (Tex. App. -- Dallas 2004, pet. stricken); Poliner v. Texas Health Systems, 239 F.R.D. 468, 477 (N.D. Tex. 2006) (Solis, J.) (rev’d on other grounds) 537 F.3d 368 (5th Cir. 2008), cert. denied, 129 S. Ct. 1002 (2009); see also Myers v. Walker, 61 S.W.3d 722, 732 (Tex. App. -- Eastland 2001, pet. denied) (no cap on punitive damages and affirming award of exemplary damages where documents were executed by deception). For example, in a fraud dispute if the jury found that the defendant secured the execution of documents by deception (a felony) there would be no legislative cap on an award of exemplary damages that were found in excess of the cap. See e.g., TEX. CIV. PRAC. & REM. CODE § 41.008 (11) (Vernon 2003). Similarly, if a jury found murder in a wrongful death case, there would be no cap on exemplary damages. See id. at § 41.008. Texas courts had previously noted that both constitutional and cap limitations on exemplary damages were inapplicable when the jury makes a cap busting finding. Compare Bennett v. Reynolds, 242 S.W.3d 866, 901-905 (Tex. App. -- Austin 2007, reversed) (exemplary damages award of $1,000,000 did not violate due process because the jury found felony theft, which is a cap buster, even though the actual damages awarded was only slightly more than $5,000.), with, 2010 WL 2541096 (Tex. June 25, 2010); Myers, 61 S.W.3d at 732-733 (where attorney secured the execution of a settlement agreement by deception the caps on exemplary damages did not apply following bench trial on the merits). The legislature has voiced a policy intention to make certain crimes, such as executing documents by deception, murder, kidnapping, and sexual assault to name a few as worse offenses than others. However, Chapter 41 crimes that removed the caps on exemplary damages was effectively repealed by judicial fiat in Bennett v. Reynolds, 315 S.W.3d 867 (Tex. 2010). In Bennett, Thomas Bennett (“Bennett”) became embroiled in a cattle feud with his neighbor, Randy Reynolds (“Reynolds”). Id. at 869-870. After prevailing in a small claims dispute over reconstructing a fence the two parties shared, Reynolds mentioned in the courtroom to Bennett that he was missing some cattle and inquired as to whether Bennett had seen them. Id. Bennett immediately went to the Sheriff’s office and accused Reynolds of stealing his cattle. Id. at 870. Bennett had stolen thirteen head of cattle while knowing those heads belonged to Reynolds. Id. Both of Bennett’s ranch hands raised concerns that Bennett did not actually own the cattle. One of Bennett’s ranch hands, Larry Grant (“Grant”), told Reynolds that Bennett had stolen his cattle. Id. While driving to the auction, Grant photographed the cattle showing Reynolds registered brand. Id. When Bennett discovered Grant had incriminating evidence, Bennett encouraged Grant to lie and Bennett later offered Grant a lucrative job. Id. at *6. When Grant refused, one of Bennett’s ranch hands attempted to threaten Grant with bodily injury, but mistakenly made the threat to Grant’s brother in law. Id. Bennett then filed a slander suit against Grant to intimidate him. Id. Bennett even attempted to register Reynolds’ brand so that he could cover up the theft. Id. There were also allegations that Bennett tampered with the photographs to bolster his defense. Id. Bennett was indicted for cattle theft, but acquitted. The civil trial proceeded to a jury verdict that resulted in an award of $5,327.11 in actual damages for the cattle and 1.25 million in combined uncapped exemplary damages for felony theft against Bennett and his corporation. The Court of Appeals affirmed the uncapped exemplary damages. The Texas Supreme Court reversed and held that uncapped exemplary damages are subject to a constitutional ratio analysis between actual and exemplary damages. Bennett held that any ratio above 4:1 “might be close RETURN TO TABLE OF CONTENTS to the line of constitutional impropriety.” Id. at *8 [citations omitted]. In fact, the Supreme Court stated that an award of 4.33 times actual damages is constitutionally excessive, but cautioned that a rigid 4:1 ratio is not universally required. In determining what ratio might apply, the Texas Supreme Court adopted five “reprehensibility” factors from the United States Supreme Court’s decision in BMW of North America, Inc. v. Gore, 517 U.S. 559 (Tex. 1996), which include the following: 1. 2. 3. 4. 5. the harm inflicted was physical rather than economic; the tortious conduct showed an indifference to or a reckless disregard for the health or safety of others; the target of the conduct had financial vulnerability; the conduct involved repeated actions, not just an isolated incident; and the harm resulted from intentional malice, trickery, or deceit, as opposed to mere accident. See Bennett, 315 S.W.3d at 874 [citations omitted]. The Supreme Court remanded an appropriate exemplary damage award to the Court of Appeals, but stated that a 4:1 ratio in this case with no physical injury would be a stretch. Id. at 878. Bennett held: Our settled practice is not to remit unconstitutional awards ourselves or to prescribe a required ratio, though on this record, even 4:1 seems a stretch: ‘Pushing exemplary damages to the absolute constitutional limit in a case like this leaves no room for greater punishment in cases involving death, grievous physical injury, financial ruin, or actions that endanger a large segment of the public . . . The Supreme Court is decidedly hands-on when scrutinizing high-dollar exemplary-damages awards, and we are confident the Court would conclude this award ‘was neither reasonable nor proportionate to the wrong committed, and it was an irrational and arbitrary deprivation of the property of the defendant.’ Id. at 882-883 [citations omitted]. In light of the standards set forth in Bennett, the cap busters on exemplary damages are judicially repealed because every exemplary damages award is subject to a 4:1 actual to exemplary damages ratio or less under this holding. The irony of Bennett is that instead of receiving uncapped exemplary damages of 1.25 million the plaintiff is probably not even entitled to approximately $20,000 in exemplary damages on remand ($5,327.11 (actual damages) x. 4 (a stretch) = $21,308.44)). If the statutory cap on exemplary damages had been applied, Reynolds would have at least received the statutory minimum of $200,000. Thus, the Supreme Court’s application of due process limitations lowers the exemplary damages to less than one-tenth of the legislative cap, which the jury removed in its entirety by its finding of felony theft. Bennett now caps all exemplary damages regardless of the application of the unlimited caps and would suggest to trial courts that the best ratio a plaintiff could ever obtain is 4:1. VI. SETTLEMENT AGREEMENTS REACHED DURING JURY DELIBERATIONS. A BRAND NEW DECISION FROM THE TEXAS SUPREME COURT MAY CHANGE HOW RULE 11 SETTLEMENTS ARE ENFORCED DURING TRIAL. FORD MOTOR CO. V. CASTILLO, 279 S.W.3D 656 (TEX. 2009) In Ford Motor Co. v. Castillo, 279 S.W.3d 656 (Tex. 2009), Ford Motor Company (“Ford”) and Ezequiel Castillo (“Castillo”) settled their lawsuit while the jury was deliberating. Id. at 659. The settlement occurred after the presiding juror sent a note to the judge asking the maximum amount that could be awarded. Id. Based on later discussions with jurors, Ford suspected that outside influence may have been brought to bear upon the presiding juror. Id. After Ford sought, but was refused permission to obtain discovery on the outside influence question it withdrew its consent to the settlement. Id. The trial court granted summary judgment in Castillo’s favor on the breach of the settlement claim. Id. The Texas Supreme Court reversed and held that Ford was entitled to discovery on the breach of contract claim. Id. In Castillo, the Supreme Court held that when consent is withdrawn the agreed judgment that was part of the settlement may not be entered; rather, the court held that the party seeking enforcement of the settlement agreement must pursue a separate claim for breach of contract. Id. at 663 [citations omitted]. Castillo further held that, because a breach of a settlement agreement is a separate case from the underlying lawsuit, discovery is permitted on the claim. Id. The Texas Supreme Court also held that the “validity of a settlement agreement cannot be determined without full resolution of the surrounding facts and circumstances.” Id. [quotations omitted]. The Texas Supreme Court reasoned that “the rules specifically allow jurors to testify about outside influence brought to bear on any of them.” Id. at 666 (citing TEX. R. CIV. P. 327(b)). Lastly, Castillo held that it was harmful error by denying Ford the RETURN TO TABLE OF CONTENTS opportunity to conduct discovery on Castillo’s claim for breach of the settlement agreement. Id. at 667. As this paper illustrates, the Texas Supreme Court has trended toward enforcing agreements especially contracts executed at arms length with independent counsel. In contrast to the cases cited above, Castillo seems to buck that trend providing an avenue for lawyers to bust settlement agreements and potentially examine jurors about the meaning of their notes to the judge in jury deliberations where, as here, a settlement is reached based upon an interpretation of such a note. It will be interesting to see if Castillo leads to a future problem in enforcing settlement agreements when parties withdraw their consent. Castillo also begs the question that if the plaintiff’s attorney had placed a waiver-of-reliance provision in the Rule 11 settlement agreement, would that have precluded Ford from arguing on appeal that it was somehow relying on the jurors comment in settling the underlying case. But because the precise language of the Rule 11 agreement in Castillo is not contained in the opinion, and since this point of error was not raised on appeal, we do not know whether this was addressed or not. Castillo, read in light of Forest Oil, would certainly imply that lawyers should place waiver-of-reliance provisions in their settlement agreements. VII. AN UPDATE ON FORUM SELECTION CLAUSES. ARE THEY BECOMING MORE CLOSELY SCRUTINIZED IN THE COURTS OF APPEAL AND IS MANDAMUS A REMEDY? IN RE INTERNATIONAL PROFIT ASSOCIATES, INC., 274 S.W.3D 672 (TEX. 2009), IN RE ADM INVESTOR SERVICES, INC., 304 S.W.3D 371 (TEX. 2010), AND QUIXTAR INC. V. SIGNATURE MANAGEMENT TEAM, LLC, 315 S.W.3D 28 (TEX. 2010). Forum-selection clauses are generally enforceable, and a party attempting to show that such a clause should not be enforced bears a heavy burden. In re Lyon Fin. Servs., Inc., 257 S.W.3d 228, 232 (Tex. 2008) (per curiam) (citing In re AIU Ins. Co., 148 S.W.3d 109, 113 (Tex. 2004)). A trial court abuses its discretion if it refuses to enforce a forum-selection clause unless the party opposing enforcement clearly shows that (1) the clause is invalid for reasons of fraud or overreaching, (2) enforcement would be unreasonable or unjust, (3) enforcement would contravene a strong public policy of the forum where the suit was brought or (4) the selected forum would be seriously inconvenient for trial. Id. at 231-232; AIU, 148 S.W.3d at 112; see also M/S Bremen v. Zapata Off-Shore Co., 407 U.S. 1, 15-17 (1972). Mandamus relief is available to enforce forum-selection agreements because there is no adequate remedy by appeal when a trial court abuses its discretion by refusing to enforce a valid forum-selection clause that covers the dispute. Lyon, 257 S.W.3d at 231; AIU, 148 S.W.3d at 115-120. In in Re International Profit Associates, 274 S.W.3d 672 (Tex. 2009), the Texas Supreme Court granted mandamus relief, reversed the Corpus Christi Court of Appeals, and held that a forum selection clause was enforceable. In International Profit, McAllen Tropicpak (“Tropicpak”) entered into separate contracts with International Profit Associates, Inc. and three related management and tax consulting firms (collectively, “IPA”). Id. at 674. The contracts provided that IPA would provide, inter alia, general business consulting services to Tropicpak. Id. In each of the agreements, there was the following paragraph: “It is agreed that exclusive jurisdiction and venue shall vest in the Nineteenth Judicial District of Lake County, Illinois, Illinois law applying.” See id. According to Tropicpak, IPA made business recommendations, including that Tropicpak hire David Salinas to help boost sales. Id. Tropicpak hired Salinas, who embezzled large sums of money from the company. Id. Tropicpak sued Salinas and IPA; the latter was sued for fraud, negligence, and negligent hiring and retention. Id. IPA moved to dismiss the suit based upon the forum-selection clause; thereafter, the trial court denied the motion and the Court of Appeals affirmed in an unpublished opinion. Reversing the Court of Appeals, International Profit reasoned, in part, that forum selection clauses are analogous to arbitration provisions. Id. at 677. It was Tropicpak’s contention, inter alia, that the claims being asserted were outside the scope of the contracts because none of the contracts called for IPA to make employment recommendations. Id. at 678. Rejecting this argument, International Profit held that “[b]y agreeing to the forum-selection clauses, Tropicpak represented to IPA that the agreed forum would not be so inconvenient that enforcing the clause would deprive Tropicpak of its day in court.” Id. at 680 [citations omitted]. The Texas Supreme Court stated that Tropicpak failed to prove that special and unusual circumstances developed after the contracts were executed and that litigation in Illinois would be so “gravely difficult and inconvenient” that Tropicpak for practical purposes would be deprived of its day in court. Id. [citations omitted]. Thus, Tropicpak failed to rebut the presumption that the clause was valid; and further, it failed to show that the claims fell within the scope of the clause. Id. Accordingly, the Supreme Court granted mandamus relief ordering the trial court to dismiss the case. Similarly, in re ADM Investor Services, Inc., No. 304 S.W.3d 371 (Tex. 2010), Jetta Prescott (“Prescott”) executed an agreement with ADM to trade commodities on Prescott’s behalf. Id. at 373. When RETURN TO TABLE OF CONTENTS Prescott’s balance reached a deficit in excess of $50,000, ADM was authorized to close her account and collect the deficit from Texas Trading. Id. Prescott’s balance reached a deficit of $57,844.29. Id. ADM closed her account and collected the deficit from Texas Trading’s CEO, Charles Dawson. Id. Dawson sued Prescott and obtained a judgment against her. Prescott then sued Texas Trading and ADM alleging fraud, negligence, and breach of fiduciary duty. Id. ADM moved to dismiss pursuant to a contractual forum selection clause. Id. Prescott argued that ADM waived enforcement by waiting three months to seek dismissal. Id. at 373. The Supreme Court granted mandamus relief and dismissed the case against ADM. ADM reasoned that there is a strong presumption against waiver. Id. at 374 [citations omitted]. The Court noted that “merely participating in litigation does not categorically mean the party has invoked the judicial process so as to waive enforcement.” Id. [citations omitted]. ADM held the burden of proof is “heavy” for the party challenging enforcement. Id. at 375. Prescott was nearing 80 years of age and presented proof that her health would prohibit her from pursuing litigation in two different states. The Texas Supreme Court rejected this argument. ADM held: We conclude that Prescott did not overcome the presumption against ADM’s waiving its right to enforce the forum selection clause by showing that ADM substantially invoked the judicial process. We also conclude that Prescott failed to satisfy her burden to demonstrate that enforcement of the forum selection clause would be unjust and unreasonable. Accordingly, we hold that the trial court abused its discretion in denying ADM’s motion to dismiss. There is no adequate remedy by appeal when a trial court refuses to enforce a forum selection clause. Id. at 376 [citations omitted]. Parties whose agreements contain forum selection clauses can assume that the Texas Supreme Court will expect those contractual provisions to be enforced even when there is an independent tort that is being asserted outside the agreement itself and even if enforcement would result in multiple suits in different forums. It is also important to note that, akin to forum selection clauses, the Supreme Court has modified the forum non-conveniens analysis to provide the trial court with more flexibility and deference in dismissing cases that may or may not be inappropriately filed in Texas. In Quixtar Inc. v. Signature Management Team, LLC, 315 S.W.3d 28 (Tex. 2010), a dispute arose between Quixtar, Inc. (“Quixtar”) and Signature Management Team, LLC (“Signature”). Quixtar is a Virginia corporation with its principal place of business in Michigan. Id. at 30. Team is an LLC organized in Nevada with its principal place of business in Michigan. Id. Quixtar alleged that Team taught its individual business owners improper and potentially illegal business building techniques that put Quixtar’s entire business at risk. Id. Team filed suit in Collin County. The trial court dismissed the case based upon forum non-conveniens. The Court of Appeals reversed the trial court. And, the Texas Supreme Court reversed the Court of Appeals and held the trial court did not abuse its discretion in dismissing the case. “A defendant seeking forum non-conveniens dismissal ordinarily bears a heavy burden in opposing the plaintiff’s chosen forum.” Id. at 31. [citations omitted]. However, there is substantially less deference to a non-resident’s choice of forum. Id. Team argued that its individual business owner affiliates are located in Texas. Id. at 32-33. Nevertheless, the Supreme Court held that Team was not a Texas resident; and, therefore, it was entitled to less deference than a Texas resident. Id. at 35. The Court followed Gulf Oil Corp. v. Gilbert, 330 U.S. 501, 508 (1947), and noted the central focus of the analysis is convenience. See Quixtar, 315 S.W.3d at 33. Id. Private considerations under Gulf Oil include the following: (1) the relative ease of access to sources of proof; (2) the availability of compulsory process for attendance of unwilling and the cost of obtaining attendance of willing witnesses; (3) the possibility to view the premises if view would be appropriate; (4) the enforceability of a judgment; (5) all other practical problems that make trial of a case easy, expeditious, and inexpensive. Id. [citations omitted]. Public considerations include the following: (1) administrative difficulties … for courts when litigation in congested centers, rather than being handled at its origin; (2) the burden of jury duty upon a community that may have no relation to the litigation; (3) local interest in having local controversies decided at home; and (4) avoiding conflicts of law issues. Id. [citations omitted]. Upon applying these factors, the Supreme Court held there was no abuse of discretion in dismissing the case on the basis of forum non-conveniens. The Court stated that forum non-conveniens dismissals are within the sound discretion of the trial court and involve weighing various factors that may be difficult to quantify. Accordingly, the Court held the dismissal was appropriate and refused to employ a formulaic standard for evaluating the trial court’s ruling. RETURN TO TABLE OF CONTENTS VIII. AN UPDATE ON NEW CASE LAW FROM THE SUPREME COURT ON ARBITRATION CLAUSES. IS THE TEXAS SUPREME COURT NOW EXPANDING THE SCOPE AND BREADTH OF TRADITIONAL ARBITRATION CLAUSES BY ENFORCING THOSE PROVISIONS AGAINST NONSIGNATORIES TO THE AGREEMENT? IN RE LABATT FOOD SERVICE, L.P., 279 S.W.3D 640 (TEX. 2009) AND IN RE JINDAL SAW LIMITED, LLC, 289 S.W.3D 827 (TEX. 2009). There are two recent Texas Supreme Court decisions that expand the scope and the enforceability of arbitration clauses to non-signatories of such agreements. Compare In re Labatt Food Service, L.P., 279 S.W.3d 640 (Tex. 2009), with, In re Jindal Saw Limited, 289 S.W.3d 827 (Tex. 2009). In Labatt, the issue facing the Texas Supreme Court was whether wrongful death beneficiaries are bound by their decedent’s pre-death contractual agreement to arbitrate any claims. See Labatt, 279 S.W.3d at 642. Labatt Food Service, L.P. (“Labatt”) was a non-subscriber to the Texas Worker’s Compensation system. Id. at 642. It provided an occupational injury plan under which its employees could elect to participate. Id. In order to become participants in the plan, employees were required to sign an agreement entitled “Election of Comprehensive Benefits, Indemnity, and Arbitration Agreement.” Id. Under the plan, the employee elects to be covered under the plan and individually and on behalf of his heirs and beneficiaries. Id. Carlos Dancy, Jr. (“Dancy”), a Labatt employee, elected to participate in the plan and signed an agreement. Id. Dancy later died from an asthma attack that occurred during the course and scope of his employment. Id. Dancy’s parents and children filed a wrongful death suit. Id. Labatt moved to compel arbitration. In opposition to arbitration, Dancy’s beneficiaries argued that (i) they were not signatories to the agreement and (2) the agreement was void because the indemnity clause was a pre-injury waiver in violation of the Texas Labor Code. Id. In response, Labatt argued that the beneficiaries are bound by the agreement because they are third party beneficiaries, the claims are derivative, and the Texas Family Code provided Dancy with the authority to bind his children. Id. The trial court denied the motion. The Court of Appeals denied mandamus. The Texas Supreme Court reversed, granted mandamus relief, and ordered the parties to arbitration. Labatt held: While it is true that damages for a wrongful death action are for the exclusive benefit of the beneficiaries and are meant to compensate them for their own personal loss, the cause of action is still entirely derivative of the decedent’s rights. Thus, regardless of the fact that Dancy’s beneficiaries are seeking compensation for their own personal loss, they still stand in Dancy’s legal shoes and are bound by his agreement. Id. at 646 [citations omitted]. With respect to Labatt’s claim that the agreement was unenforceable as an improper pre-injury release, the Texas Supreme Court refused to address that question holding instead that it was an issue for the arbitrator. Id. at 649. Because Dancy would have been forced to arbitrate his personal injury claim, the Texas Supreme Court held that his beneficiaries were similarly required to arbitrate. Id. Similarly, in In Re Jindal Saw Limited, 289 S.W.3d 827 (Tex. 2009), Saw Pipes USA, Inc. (“Saw Pipes”) did not provide worker’s compensation insurance to cover its employees in the event of an on the job injury. Id. at 827. Rather, it provided an employee benefit plan and its employees could elect to participate. Id. Attached to the plan was an agreement to arbitrate. Id. Carlos Lara (“Lara”), a Saw Pipes employee, elected to participate in the agreement and signed the plan. Id. Lara died from injuries that occurred during the course and scope of his employment. Id. His wife and children filed a wrongful death and survival action. Id. Saw Pipes filed a motion to compel arbitration. Id. The trial court denied the Motion. Id. The Texas Supreme Court reversed and granted mandamus relief relying upon Labatt supra. In re Jindal Saw Limited held: In Labatt, we held that a decedent’s pre-death arbitration agreement binds his or her wrongful death beneficiaries because under Texas law the wrongful death cause of action is entirely derivative of the decedent’s rights. Id. [citations omitted]. Labatt and Jindal Saw Limited underscore the trend in the Texas Supreme Court to broadly enforce agreements to arbitrate even when such agreements bind non-signatories and even when the agreement is signed pre-death. These decisions are consistent with a recurring theme that the Texas Supreme Court will bend over backwards to enforce the parties agreement even if it prejudices parties that neither signed nor participated in the negotiations to the agreement at issue. RETURN TO TABLE OF CONTENTS IX. AN UPDATE ON SUBROGATION AND WORKER’S COMPENSATION LIENS. ARE ATTORNEYS NOW PERSONALLY ON THE HOOK FOR FAILING TO HONOR A LIEN? A NEW CLAIM FOR CONVERSION AND DISGORGEMENT. TEXAS MUTUAL INSURANCE CO. V. LEDBETTER, 251 S.W.3D 31 (TEX. 2008). A recent case from the Texas Supreme Court in the area of worker’s compensation liens creates or at least better defines a new business tort against attorneys for conversion and disgorgement of settlement funds where the settlement is designed to circumvent either a carrier’s lien or its right to subrogation. In Texas Mutual Insurance Co. v. Ledbetter, 251 S.W.3d 31 (Tex. 2008), Charles Ledbetter (“Ledbetter”) was electrocuted during the course and scope of his employment. Id. at 34. Ledbetter’s worker’s compensation carrier, Texas Mutual Insurance Company (“Texas Mutual”), paid funeral expenses and began paying monthly death benefits to his widow and minor son. Id. at 34. Ledbetter’s widow, his minor son, and his adult daughters filed a third party liability claim against the parties that were responsible for his death. Id. The case settled for $4.5 million. Id. An ad litem was appointed to approve the settlement. Id. Before the minor prove up, Texas Mutual intervened. Id. At the start of the hearing, the plaintiff’s attorney non-suited all claims except those of the estate. Id. The trial court over Texas Mutual’s objection granted the non-suit. Id. The plaintiffs then announced that the settlement would be allocated to Ledbetter’s estate, to the plaintiff’s attorney, and there would be no proceeds to the widow, minor child, or the adult daughters. Id. The trial court approved the settlement. Id. The Texas Supreme Court held that a worker’s compensation carrier has a mandatory right to first money and a plaintiff cannot non-suit a claim that would prejudice the carrier’s rights to either a lien or subrogation. See id. at 38 (“Rule 162 is not limited to affirmative claims against the nonsuiter; it prohibits dismissal if the effect would be to prejudice any pending claim for affirmative relief, period.”). Of import here, Ledbetter specifically held that the worker’s compensation insurance carrier had a cause of action for conversion against the plaintiffs, the plaintiff’s attorney, and the defendants and that the remedy against the plaintiffs and the plaintiff’s attorney is disgorgement. Id. at 38-39. Ledbetter held: When an injured worker settles a case without reimbursing a compensation carrier, everyone involved is liable to the carrier for conversion – the plaintiffs, the plaintiffs’ attorney, and the defendants. As between those parties, we have held that generally those who received the funds unlawfully (the plaintiffs and their attorney) should disgorge them rather than making the tortfeasors pay twice. Id. [citations omitted]. Ledbetter is one of the most aggressive opinions nationwide in protecting a worker’s compensation insurance carrier’s lien against a personal injury settlement. In light of Ledbetter, the plaintiff’s attorney cannot even non-suit claims anymore without the consent of the carrier; and, furthermore, because the carrier is entitled to first money under all circumstances it makes the plaintiff’s attorney a lawyer for the carrier as much as his own client. But the question remains if the plaintiff’s lawyer is retained only to represent the estate’s claim, can the compensation carrier nevertheless intervene to claim first money or will the carrier be forced to expend its own proceeds and file a separate claim for subrogation against the same third parties. X. AN UPDATE ON FIRST PARTY INSURANCE CASES. CAN AN INSURANCE CARRIER AVOID LIABILITY, STATUTORY PENALTIES, AND EXTRACONTRACTUAL DAMAGES BY INTERPLEADING THE DISPUTED FUNDS? A NEW SUPREME COURT CASE IN STATE FARM LIFE INSURANCE CO. V. MARTINEZ, 216 S.W.3D 799 (TEX. 2007) In interpreting the 1991 changes to the Insurance Code, the Texas Supreme Court recently held that an insurer who interpleads policy proceeds cannot be subject to statutory penalties for delayed payments after interpleader occurs. In State Farm Life Insurance Co. v. Martinez, 216 S.W.3d 799 (Tex. 2007), Ed and Linda Martinez divorced and Ed agreed to pay Linda contractual alimony for a period of ten years, with his estate to continue paying if he died earlier. Id. at 800. Ed also agreed to name Linda as an irrevocable beneficiary on three life insurance policies, providing that he could drop those policies as long as the total amount of unpaid alimony was recovered. Id. At issue in this case is a $500,000 policy issued by State Farm. Id. In 1994, Ed listed his ex-wife as the beneficiary per the divorce decree. Id. However, shortly before his death Ed signed a change of beneficiary form designating his current wife as the beneficiary. Id. State Farm refused to process the request requiring proof that the change complied with the divorce agreement. Id. Ed died days after signing RETURN TO TABLE OF CONTENTS the request and before he could act on State Farm’s response. Id. Upon death, State Farm receiving conflicting claims from Ed’s daughter, Linda, and his current wife. Id. Two days later, State Farm filed an interpleader and deposited $506,061 (the policy proceeds plus interest) in the court’s registry. Id. The trial court granted summary judgment in Ed’s current wife’s favor and ordered State Farm to pay all of the proceeds to her save and except the unpaid alimony to Linda. Id. at 801. But Ed’s current wife also claimed that State Farm violated the Texas prompt payment of claims statute by failing to pay her within sixty days; thus, entitling her to penalty interest of 18 percent and attorney’s fees. Id. One of the issues before the Texas Supreme Court was whether State Farm owed statutory penalties after the interpleader was filed. Id. at 805-806. The Texas Insurance Code provides no exception from statutory penalties when an interpleader is filed. Id. Nevertheless, in Martinez the Texas Supreme Court held that State Farm could not be assessed statutory penalties after the date the interpleader was filed. Martinez held: Assessing penalty interest and attorney’s fees after an interpleader is filed would punish insures for doing exactly what Texas law encourages. Indeed, the more difficult and protracted the dispute between rival claimants (and thus the more justified the interpleader), the larger those penalties would grow. We must avoid construing the prompt payment statute to reach such an absurd result. Id. at 806 [citations omitted]. Thus, under Martinez an insurance company cannot be held liable for statutory penalties after an interpleader is filed and after the funds have been placed in the court’s registry. XI. 2014 COMMERCIAL LITIGATION UPDATE In 2014, Texas Courts continued to develop the case law in four highly explosive areas: (1) shareholder oppression as a cause of action; (2) the spoliation of evidence; (3) the continuing evolution of the interpretation of the Texas Anti-SLAPP statute; and (4) the statute of limitations in tortious interference claims based on defamatory statements. A. Shareholder Oppression is not a Cause of Action in Texas First, the Texas Supreme Court issued two landmark decisions that now govern shareholder oppression claims. In Ritchie v. Rupe, 2014 WL 2788335 (Tex. June 20, 2014), the Texas Supreme Court declined to recognize a cause of action for shareholder oppression and concluded that the only statutory remedy for “oppressive” actions is a rehabilitative receivership. The Court rejected a “buy out” remedy as being appropriate under the oppression statute. Similarly, in Cardiac Perfusion v. Hughes, 436 S.W.3d 790 (Tex. June 27, 2014), the Court held that a “buy-out order is not available under a common-law claim for shareholder oppression or under the receivership statute . . . .” See id. at 792. B. New Standards Governing the Spoliation of Evidence Second, the Texas Supreme Court issued two new decisions that have re-shaped the law in the areas of spoliation and the destruction of evidence. In Brookshire Brothers, Ltd. v. Aldridge, 438 S.W.3d 9 (Tex. 2014), the trial court reversibly erred where the jury was charged with a spoliation instruction when a premises owner retained the requested portion of the surveillance video footage of the plaintiff’s fall, but allowed additional footage to be erased. There, the Court held that a spoliation analysis involves a twostep process: (1) the trial court must determine whether a party spoliated evidence, and (2) if spoliation occurred, the court must assess the appropriate remedy. In order to find that a party spoliated evidence, the court must determine that (1) the spoliating party had an obligation to preserve evidence, and (2) the party intentionally or negligently breached that duty by failing to preserve the evidence. Spoliation findings— and any accompanying sanction—are to be determined outside the presence of the jury. Key considerations include the level of culpability of the spoliating party and the degree of prejudice sustained by the nonspoliating party. A spoliation instruction is warranted only when the trial court finds that the spoliating party acted with the specific intent to conceal discoverable evidence, and that a less severe remedy would be insufficient to curb any prejudice resulting from the spoliation. A similar holding was reached in Petroleum Solutions v. Head, 2014 WL 3511509 (Tex. 2014). RETURN TO TABLE OF CONTENTS C. The Anti-SLAPP Statute is a Good Vehicle For Dismissing Defamation Claims Third, the Texas Anti-SLAPP statute has yet to be interpreted by the Texas Supreme Court. In 2011, Texas adopted an Anti-SLAPP (“Strategic Lawsuits against Public Participation”) law, entitled the Texas Citizens Participation Act (TCPA). See TEX. CIV. PRAC. & REM. CODE §§ 27.001-.011 (Vernon 2011). Section 27.003 provides that a party may file a motion to dismiss if a legal action “is based on, relates to, or is in response to [that] party's exercise of the right of free speech, right to petition, or right of association.” TEX. CIV. PRAC. & REM. CODE § 27.003(a). Thus, defamation and business disparagement claims are easy targets for an early dismissal upon motion. For example, in Rehak Creative Servs., Inc. v. Witt, 404 S.W.3d 716, 730 (Tex. App.—Houston [14th Dist.] 2013, no pet. h.), Ann Witt ran unsuccessfully for the legislature. Id. at 719. Witt’s opponent, Jim Murphy, was the incumbent. Id. at 720. Witt alleged that an advertising agency was bankrolling Murphy’s campaign and it accused Rehak of allegedly “gaining influence over an elected official to obtain work, to steal and cheat taxpayers, and to help the elected official break the law.” Id. at 729. Witt made comments directed toward the advertising agency that included “rewarding Cronies,” “bilking” and “ripping off” to describe her opponent’s conduct. The Court held these were not defamatory statements of fact and, under the broad protections of the Anti-SLAPP statute, the Motion to Dismiss was appropriately granted. See id. at 730. D. New Limitations Period for Tortious Interference Claims that Stem from Defamation Finally, in Nath, M.D. v. Texas Children’s Hospital, 2014 WL 4252269 (Tex. 2014), the Texas Supreme Court held that, although tortious interference is subject to a two year statute of limitations, if the claim is based solely on defamatory statements, the one year limitations period for defamation applies. Thus, when considering either a defamation or a business disparagement claim, the practitioner should carefully consider whether the Anti-SLAPP statute and the statute of limitations make such a claim worthy of pursuit. XII. JOINT AND SEVERAL LIABILITY FOR KNOWING PARTICIPATION IN A BREACH OF FIDUCIARY DUTY Notwithstanding the proportionate responsibility provisions in Chapter 33 of the Civil Practice & Remedies Code, it remains an open question in Texas law whether a defendant may be held jointly and severally liable for knowing participating in a breach of fiduciary duty. One court addressed this issue recently, without coming to any conclusion. In Hunter Bldgs. & Mfg., LP v. MBI Global, LLC, No. 14-12-00246-CV, 2014 WL 1258017 (Tex. App.—Houston [14th Dist.] March 27, 2014), MBI Global brought suits against two individual defendants, Milo Nickel and Michael LeBlanc, as well as several corporate entities for breach of fiduciary duties and misappropriation of trade secrets. Nickel and LeBlanc were former officers at MBI Global who left to start their own company, allegedly bringing MBI Global’s trade secret information with them. At trial, the jury made a number of findings, including (1) Nickel and LeBlanc violated their fiduciary duties to MBI Global; (2) the corporate defendants knowingly participated in Nickel and LeBlanc’s breaches of fiduciary duty; (3) Nickel, LeBlanc, and the corporate defendants all misappropriated MBI Global’s trade secrets; (4) a preponderance of evidence did not prove the existence of a conspiracy regarding the breach of fiduciary duty or misappropriation of trade secrets; and (5) the percentage of responsibility attributable to both Nickel and LeBlanc was zero percent. In spite of the jury’s finding that Nickel and LeBlanc had zero percent responsibility, the trial court rendered judgment that MBI Global should recover all damages against Nickel, LeBlanc, and the corporate defendants jointly and severally. On appeal, MBI Global argued in support of the judgment that the corporate defendants’ knowing participating in the breach of fiduciary duty made all defendants liable for all damages, regardless of whether the damages stemmed from the breach of fiduciary duty or from the misappropriation of trade secrets. The defendants obviously argued against joint and several liability. The court of appeals noted that “[t]he parties have not cited, and research has not revealed, any Texas case in which the court addresses (1) the distinction between civil conspiracy and knowing participation in a breach of fiduciary duty, or (2) the issue of whether a knowing-participation finding, by itself, makes the party breaching his fiduciary duty liable for damages caused by the party who knowingly participated in the breach of fiduciary duty.” Id. Instead, the only case law cited on this issue was an opinion dealing with “aider and abettor” liability. Halberstam v. Welch, 705 F.2d 472, 477-78 (D.C. Cir. 1983), holding that an aider or abettor is liable for damages which the primary participant caused, but that the primary participant is not liable for the acts of the aiders or abettors unless there is a finding of a civil conspiracy). Ultimately, the Court of Appeals did not reach a conclusion as to whether all defendants could be jointly and severally liable for damages caused by any one of the defendants. The Court, instead, held that the evidence at trial was not legally sufficient to support RETURN TO TABLE OF CONTENTS the amount of damages and reversed the judgment on that specific ground. Id. at 10. Hendricks, therefore, raises but does not answer the joint and several liability question. XIII. ECONOMIC LOSS RULE The economic loss rule is an amorphous legal concept, which the Texas Supreme Court attempted to clarify in LAN/STV v. Martin K. Eby Construction Co., 435 S.W.3d 234(Tex. 2014). In that case, the Dallas Area Rapid Transportation Authority (DART) hired an architect, LAN/STV, to develop plans for a light rail transit line from the downtown West End area of Dallas to American Airlines Center. Eby was the general contractor on the project, and it sued the architect because of cost overruns that it claimed to have resulted from numerous defects in the architectural plans. The Supreme Court held that the construction company could not sue the architect because of the economic loss rule. The general contractor had entered into an agreement with DART, under which DART assumed the contractual obligation to provide proper architectural plans. Under that contract any breach of DART’s obligation to provide proper plans would lead to specific, bargained-for contractual remedies. The Court held Eby to the remedies it had agreed to from the part it had contracted with, rather than a contractual stranger with no independent duty to Eby. This case presents is a typical “web of contracts” scenario. So it may be useful to a minor contractor on a project that is sued by the owner or the general contractor for damages that were otherwise limited in other contractual arrangements. For example, a relatively minor piece of equipment from a third-tier subcontractor may cause a substantial problem, and that subcontractor may find itself the target of a suit by the owner or the general contractor. In that predicament, the subcontractor may be able to rely on the Eby case to protect it from the prospect of enormous potential liability in contrast to the relatively small size of its contract. In reaching its decision in Eby, the Court discussed the philosophical underpinnings of the economic loss rule, relying on two Deans of the University of Texas Law School— former Dean William Powers and current Dean Ward Farnsworth. Dean Farnsworth is the reporter for the Restatement (Third) of Torts on Liability for Economic Harm, which is focusing on the economic loss rule. Borrowing from the Deans’ writings, the Court found applicable in this case two of the rationales for applying economics loss rule, namely, (1) indeterminate or disproportionate liability and (2) deference to contract. In applying those rationales, the Court analyzed the economics of the contractual arrangement, noting which party had accepted the risk in question and, thus, could have insured against losses. Perhaps to illustrate that the economic loss rule is not a rule but a set of principles—a point made in Eby—the Court denied the application of the rule only two months later in Chapman Custom Homes, Inc. v. Dallas Plumbing Co., 2014 WL 411839 (Tex. Aug. 22, 2104). In this per curiam opinion, the Court reversed a summary judgment in favor of a plumbing contractor in a suit brought by homeowner alleging that the plumber had negligently performed hundred subcontract with the homeowners’ general contractor. The basis for the Court’s decision appears to have been the characterization of the loss in question. While damage to a home that results from flooding is certainly economic in nature, it is not the “economic loss of a contractual benefit.” Id. at *2. I fact a key question in determining the applicability the economic loss rule is whether the loss is truly economic, or perhaps more specifically what is meant by the term “economic” in this context. The Court also engaged in duty analysis. While the plumbing contractor did not have a duty wholly independent of contract— such as a duty not to commit fraud, which has been held to side step the economic loss rule, see, e.g., Formosa Plastics Corp. U.S.A. v. Presidio Eng’rs & Contractors, 960 S.W.2d 41, 47 (Tex. 1998) — it did assume a tort duty by virtue of its contractual relationship with the general contractor, according to the Court in this opinion. Thus, the type of injury and the existence of duties independent from contractual are two other factors to apply in deciding with this economic loss “rule” applies. Prior to these two opinions, the Dallas Court of Appeals held that a partner may not recover for breach of fiduciary duty where the economic loss rule applies. Victory Park Mobile Home Park v. Booher, No. 05-1201057-CV, 2014 WL 1017512 (Tex. App.—Dallas Feb. 26, 2014). The parties had an oral partnership agreement, which included sharing profits from renting out the lots. The trial court issued a directed verdict for Booher on the breach of fiduciary duty claims, and the court of appeals affirmed. The appellate court noted that Victory was seeking to recover only damages owed to it under the oral contract. Id. at *4. Where there was no allegation of a breach of fiduciary duty other than Booher’s failure to turn over rent money, the economic loss rule operated to bar the claim. Id. at *4. XIV. FRAUD CLAIMS AGAINST EMPLOYERS The Texas Supreme Court answered two questions in 2014 regarding the ability of employees to bring fraud claims against their employers relating to their discharge. Sawyer v. E.I. DuPont De Nemours & Co., No. 12-0626, 2014 WL 1661492 (Tex. 2014), involved a fraudulent inducement lawsuit brought by a RETURN TO TABLE OF CONTENTS number of DuPont employees against their employer in federal district court. DuPont had announced that it was moving certain operations to a subsidiary, DuPont Textiles and Interiors (DTI), and it wanted employees to move over to DTI, to save the company training costs. On the other hand, the employees were concerned that DuPont would soon sell DTI, causing a negative impact on their compensation and retirement packages. The employees were covered by a collective bargaining agreement, allowing them to move to other jobs within DuPont rather than transferring to DTI. DuPont allegedly told the employees that it would not sell DTI, and the employees chose to move to the subsidiary—but DuPont had already entered discussions to sell DTI. Approximately a year later, DuPont sold DTI to another company, which reduced the employees’ compensation and retirement benefits. The employees brought their suit on the basis of DuPont’s fraudulent assurances that they would not sell DTI. DuPont argued that the employees were at-will, and that at-will employees could not sue their employer for fraud. The employees, however, pointed out that, under their collective bargaining agreement, they could not be discharged without just cause. In response, DuPont further noted that the bargaining agreement could be terminated with sixty days’ notice, and therefore, the employees were still considered atwill. The district court granted summary judgment for the employer. On appeal the Fifth Circuit certified two questions to the Texas Supreme Court: “(1) Under Texas law, may at-will employees bring fraud claims against their employers for loss of their employment?; (2) If the above question is answered in the negative, may employees covered under a 60-day cancellationupon-notice collective bargaining agreement that limits the employer’s ability to discharge its employees only for just cause, bring Texas fraud claims against their employer based on allegations that the employer fraudulently induced them to terminate their employment?” Id. at *2. In answering the first question, the Supreme Court noted that Texas has long held that “absent a specific agreement to the contrary, employment may be terminated by the employer or the employee at will, for good cause, bad cause, or no cause at all.” Id. Texas does not recognize many limits on the termination of at-will employment that other jurisdictions have put in place—Texas does not recognize common-law whistleblower liability, any duty of the employer to exercise ordinary care in investigating employee misconduct, or any duty of the employer to act with good faith and fair dealing. Id. While the Supreme Court did not decide the issue at hand until Sawyer, it noted that courts of appeals had previously held that a fraud claim could not be based on a promise of continued at-will employment. Id. The Supreme Court adopted this holding as well, based on the principle that if an “employer or employee can avoid performance of a promise by exercising a right to terminate the at-will relationship, which each is perfectly free to do with or without reason at any time, the promise is illusory and cannot support an enforceable agreement.” Id. Just as the employee could not sue for breach of contract in such an at-will situation, they may not sue for fraud, as there can be no justifiable reliance “on the continuation of employment that can be terminated at will.” Id. The Supreme Court then turned to the second question. Concluding it made no difference that the collective bargaining agreement could be canceled with sixty days’ notice—as DuPont did not, in fact, cancel it—the Court only asked whether the “just cause” provision in the bargaining agreement modified the employees’ at-will status. The Court noted that Texas permits employees and employers to modify their at-will relationship, but only when their intent to do so was expressed definitively. Id. at *4. General statements that an employee will be terminated only for “good cause” are insufficient to modify the at-will relationship when the term is not defined. Id. In the case at hand, “just cause” was not defined in the bargaining agreement, but the agreement allowed for a complaint process for unjust termination, including the determination of whether there actually existed just cause, by either committee or arbitration. The Court held that the bargaining agreement was therefore definite enough to modify the at-will relationship. The analysis continued, however, to determine whether employees who could be discharged only for just cause had a cause of action against their employer for fraudulently inducing them to transfer to DTI. The Court rules that there was no such cause of action here. The employees essentially alleged constructive discharge from their employment, and the bargaining agreement carried its own remedies for discharge without just cause, namely reinstatement and lost wages. Id. at *5. While the employees argued that DuPont did not discharge them, but in fact wanted them to stay at their jobs, DuPont actually wanted them to move to DTI, which was sold. The employees’ relationship with DuPont was, in fact, terminated, and if it was terminated due to fraudulent inducement—that is, without just cause—the bargaining agreement is the sole remedy: “An employee discharged for refusing to go to DTI would clearly have been limited to his remedies under the [collective bargaining agreement]. To allow an employee fooled into going to DTI to recover for fraud would defeat the [collective bargaining agreement].” Id. Therefore, both the employees and the employers would be held to the terms of the bargaining agreement. Id. Under the facts RETURN TO TABLE OF CONTENTS presented, the employees had no cause of action for fraudulent inducement. Id. at *6. XV. COVENANTS NOT TO COMPETE One court of appeals has confirmed that public interest is a valid consideration in determining the enforceability of covenants not to compete. See Nacogdoches Heart Clinic, P.A. v. Pokala, No. 12-1100133-CV, 2013 WL 451810 (Tex. App.—Tyler Feb. 6, 2013, pet. filed). Two doctors opened a cardiovascular laboratory, Nacogdoches Heart Clinic (NHC), and after a disagreement, Pokala left the office to open his own. NHC sued Pokala for breaching a covenant not to compete. The trial court and the appellate court held that the covenant was unenforceable. First, the covenant prevented Pokala from practicing any variety of medicine, not just the cardiology and internal medicine he previously practiced at NHC. Id. at *4. The court held this term was not reasonably limited in scope. Id. Second, and more importantly, both courts held that the public interest is a factor in determining the validity of covenants not to compete. Id. In the words of the appellate court, the statute allowing for the enforcement of covenants not to compete is a “codification of the rule of reason, of which the public interest is one factor.” Id. The appellate court recognized that “being a small community, Nacogdoches needs all the doctors it can get.” Id. at *5 (internal citations and alterations omitted). There was a shortage of cardiologists in Nacogdoches that meant Pokala’s absence would have a negative effect on the public. Id. at *6. Further, there was evidence that Pokala did not turn away patients who were unable to pay, while NHC did. Id. Finally, while NHC argued that the court was forcing it to bear the financial consequences of Pokala’s competition, the appellate court noted, “If NHC did not want to bear financial consequences from a potential violation of the covenant not to compete, it was incumbent on it to draft a covenant that did not violate public policy.” Id. XVI. EVIDENT PARTIALITY – ARBITRATION The Texas Supreme Court recently decided to vacate an arbitration award based on evident partiality. Tenaska Energy, Inc. v. Ponderosa Pine Energy, L.L.C., 437 S.W.3d 518 (Tex. 2014). This case illustrates the intrusive discovery that may result when one party seeks to vacate an arbitration award on the ground of evident partiality. Figuring prominently in the Court’s opinion was a series of emails between the challenged arbitrator and the lawyers that had nominated him to serve in this “ad hoc” arbitration, that is, an arbitration not administered by the AAA or any similar organization. Before the Supreme Court stepped in, the Dallas Court of Appeals had reversed the trial court’s vacatur of the award on the ground of waiver because the party seeking to vacate the award had been informed at the outset of arbitration about the relationships that led to the evident partiality challenge. The Supreme Court disagreed with the waiver ruling on the ground that non-trivial details about the relationships had not been disclosed by the arbitrator. Rejected by the Supreme Court — and never discussed by the Dallas Court of Appeals—was an express waiver of conflicts provision in the scheduling order signed by the parties at the beginning of the arbitration. The waiver might have been effective if it had not contained language susceptible of being interpreted as a representation of full disclosure by the arbitrators as a condition to the waiver. Arbitrators and parties wishing to avoid postaward evident partiality challenges should consider a more potent express waiver of conflicts, which would waive conflicts relating to any disclosed relationships with a representation that the parties had been given the full opportunity to inquire about any disclosed relationships. Otherwise, the losing party may be tempted to uncover post-award details about a disclosed relationships—which at the outset of the arbitration were viewed by that party as insignificant— and then claim those undisclosed details a basis for vacating the award. After all, it is not easy for an arbitrator to disclose all non-trivial details of any relationship, which seems to be the touchstone of evident partiality under Tenaska. Tenaska is further important because of its continued adherence to a standard for evident partiality that is easier to satisfy than the standard applied in some federal courts and particularly the Fifth Circuit. The Texas standard is whether the failure to disclose a fact might cause a reasonable observer to conclude that the arbitrator was partial (437 S.W.3d at 524), whereas the Fifth Circuit requires a significant or substantial relationship in order to meet a “reasonable impression” standard. Positive Software Solutions, Inc. v. New Century Mortg. Corp., 476 F.3d 278, 281 (5th Cir. 2007) (en banc); see also Morelite Constr. Corp. v. N.Y.C. Dist. Council Carpenters Benefit Funds, 748 F.2d 79, 84 (2d Cir. 1984) (requiring that nondisclosure must have been such that a reasonable person would have to conclude that the arbitrator was partial). The argument could be advanced that the standard for evident partiality under the Federal Arbitration Act is different from the Texas standard. In Tenaska, some of the non-disclosed details had not been found by the trial court to have been known by the arbitrator, a point not discussed by the Texas Supreme Court. The arbitrator’s knowledge was, by contrast, considered important in a ruling by the Houston First Court of Appeals in Port Arthur Steam Energy LP v. Oxbow Calcining LLC, 416 S.W.3d 708 (Tex. App.—Houston [1st Dist.] 2104, pet. denied). In that case, the arbitrator testified by deposition and in an RETURN TO TABLE OF CONTENTS evidentiary hearing that he had not been aware that the counsel for one party to the arbitration had represented on appeal a party adverse to a no longer active law firm in which the arbitrator was still a shareholder for purposes of winding up the firm’s affairs. Even in Oxbow, there was still no finding by the trial court that the arbitrator was unaware of that situation. In addition to relying on the arbitrator’s claimed lack of knowledge, the Court of Appeals held that the alleged conflict is not material because there was no relationship between the arbitrator and the law firm representing the party adverse to the arbitrator’s law firm. This case is one of the very few examples nationwide of an objection to an arbitrator made prior to the award. While arguably a different evident partiality standard could be applied to pre-award as to post-award objections because the latter may be more indicative of sour grapes, the timing of the objection seemed to make no difference to the Court of Appeals in Oxbow. In Tenaska, the Supreme Court suggested that evident partiality challenges are a rarity (437 S.W.3d at 527), and it did so in response to arguments that vacating the award would encourage attacks on arbitration awards. The challenge in Ponderosa had in fact put the arbitration award on hold for six years before the ultimate decision by the Supreme Court. Yet evident partiality challenges are not rare in Texas. They have occurred with some frequency, more than in other states. See Burlington N. RR. Co. v. TUCO Inc., 960 S.W.2d 629 (Tex. 1997); Mariner Fin. Grp., Inc. v. Bossley, 79 S.W.3d 30 (Tex. 2002); Alim v. KBR (Kellogg, Brown & Root)—Halliburton, 331 S.W.3d 178 (Tex. App.—Dallas 2011, no pet.); Amoco D. T. Co. v. Occidental Petroleum Corp., 343 S.W.3d 837 (Tex. App.—Houston [14th Dist.] 2011, pet. denied); ; Craft v. Davis, 2008 WL 4180357 (Tex. App.— Fort Worth, Sept. 11, 2008, no pet.); FCA Constr. Co. v. J & G Plumbing Servs., LLC, 2012 WL 761147 (Tex. App.—Houston [1st Dist.] Mar. 8, 2012, no pet.); GE Commercial Distrib. Fin. Corp. v. Momentum Transp., 2009 WL 6327471 (Tex. App.—Beaumont Apr. 8, 2010, no pet.); Gold Rush, Inc. v. Wayne, 2006 WL 2076725 (Tex. App.—Corpus Christi July 27, 2006, pet. denied); Henry v. Halliburton Energy Servs., Inc., 100 S.W.3d 505 (Tex. App.—Dallas 2003, pet. denied); Houston Village Builders, Inc. v. Falbaum, 105 S.W.3d 28 (Tex. App.—Houston [14th Dist.] 2003, pet. denied); In re Chevron USA, Inc., 419 S.W.3d 329 (Tex. App.—El Paso 2010, mand. denied); J.D. Edwards World Solutions Co. v. Estes, Inc., 91 S.W.3d 836 (Tex. App.—Fort Worth 2002, pet. denied); Johnson v. Korn, 117 S.W.2d 514 (Tex. Civ. App.—El Paso 1938, writ ref’d); Judd v. Texakoma Oil & Gas Corp., 2000 WL 19534 (Tex. App.—Dallas Jan. 13, 2000, no pet.); Karlseng v. Cooke, 346 S.W.3d 85 (Tex. App.—Dallas 2011, no pet.); Kendall Builders, Inc. v. Chesson, 149 S.W.3d 796 (Tex. App.—Austin 2004, pet. denied); Las Palmas Med. Ctr. v. Moore, 349 S.W.3d 57 (Tex. App.—El Paso 2010, pet. denied); Perry Homes v. Cull, 173 S.W.3d 565 (Tex. App.—Fort Worth Aug. 31, 2005), rev’d on other grounds, 258 S.W.3d 580 (Tex. 2008); Petrobas Am., Inc. v. Astra Oil Trading, NV, 2012 WL 1068311 (Tex. App.—Houston [1st Dist.] Mar. 29, 2012, no pet.); Pettus v. Petus, 237 S.W.3d 405 (Tex. App.— Fort Worth Sept. 13, 2007, pet. denied); Port Arthur Steam LP v. Oxbow Calcining, LLC, 416 S.W.3d 708 (Tex. App.—Houston [1st Dist.] 2013, pet. denied); Roe v. Ladymon, 318 S.W.3d 502 (Tex. App.—Dallas 2010, no pet.); Skidmore Energy, Inc. v. Maxus (U.S.) Exploration Co., 345 S.W.3d 672 (Tex. App.—Dallas 2011, pet. denied); Swonke v. Swonke, 2011 WL 1584809 (Tex. App.—Houston [1st Dist.] Apr. 21, 2011, no pet); Tex. Commerce Bank v. Universal Technical Inst. of Tex., Inc., 985 S.W.2d 678 (Tex. App.—Houston [1st Dist.] 1999, pet. dism’d w.o.j.) . XVII. VALIDITY OF RELEASES In Zachry Construction Corp. v. Port of Houston Authority of Harris County, 2014 WL 4472616 (Tex. Aug. 29, 2014), the Texas Supreme Court invalidated a “no-damages-for-delay” provision in a contract between Zachry and the Port. The provision insulated the Port from compensating the contractor on account of construction delays attributable to the Port’s own negligence, breach of contract or other fault. The Court refused to enforce a provision that essentially gave the Port immunity even from delays that the Port had intentionally caused. How far this ruling will go in other situations is, of course, an interesting question. This case may resolve an unsettled issue in Texas, namely, whether a prospective release for gross negligence is effective before an injury occurs. The court noted in Zachry v Port Authority as follows: “We had indicated that pre-injury waivers of future liability for gross negligence are void as against public policy.” Id. at *5. For that proposition, the Court cited, inter alia, its decision in Fairfield Insurance Co. v. Stephens Martin Paving L.P., 246 S.W.3d 653, (Tex. 2008). At page 688 of the Fairfield opinion, the Texas Supreme Court cited Smith v. Golden Triangle Raceway, 708 S.W.2d 574 (Tex. App.–Beaumont 1986, no writ), which held that a party cannot release another party from future gross negligence. But Fairfield did not answer the full certified question, which was whether insurance coverage for gross negligence is against public policy; it held that legislative approval for such insurance validated coverage in that case. That was not the first time that the Supreme Court had cited Smith v. Golden Triangle Raceway. It did so with apparent approval in Memorial Medical RETURN TO TABLE OF CONTENTS Center v. Keszler, 943 S.W.2d 433, 435 (Tex. 1997). But later, in Atlantic Richfield Co. v. Petroleum Personnel, Inc., 768 S.W.2d 724, 726 (Tex. 1989), the Court held in construing an indemnity agreement that negligence and gross negligence are not separable concepts and thus could both be covered by an indemnity that protected against negligent acts. Further, the Court expressly did not decide whether it is against public policy for a party to obtain indemnity from gross negligence. Id. at 726 n.2. Still later, In re Labatt Food Serv., L.P., 279 S.W.3d 640, 645 (Tex. 2009). cited Newman v. Tropical Visions, Inc., 891 S.W.2d 713, 722 (Tex. App.–San Antonio 1994, writ denied), for the proposition that a release can bar subsequent wrongful death claims, In contrast to Smith v. Golden Triangle Raceway, Newman upheld a release for future negligence and gross negligence, on the ground expressed in the Atlantic Richfield case that gross negligence and negligence are not separable claims. Perhaps Zachry v Port Authority finally resolves the confusion over this issue. In any event, it is probably not wise to rely upon a pre-injury or predamage waiver, release, or indemnity with respect to grossly negligent for intentional conduct. soon scuttled amidst controversies between Host and Keystone over compliance with notice provisions and conflicting signals from Host on whether it would waive its right of first refusal. The death knell of the sale was a letter from Host making it clear that a waiver would not be forthcoming and demanding a new set of negotiations for the sale of the property to Host. Despite the substantial effect of Host’s letter, the Court nevertheless held that there was no evidence of proximate cause on the ground that the element of butfor causation was missing. While the letter from Host had a dramatic effect on the deal, there was no evidence, said the Court, that the result would have been different if the letter had not been sent because the title company on the sale of the property to the third party was insistent upon receipt of a waiver letter from Host that Host was not obligated to provide. So the contrast is this: Under Bostic, the substantial factor element is sufficient for causation in a mesothelioma case even when the but-for causation element is missing. Yet in HMC Hotel Properties, Host’s letter was a substantial factor in the failure of the sale, but causation was absent because of the missing element of but-for causation. VXIII. CAUSATION Causation concepts can be difficult, and they seem to be a favorite topic of the Texas Supreme Court. An interesting contrast exists between two recent opinions by the Supreme Court that hinged on causation issues—Bostic v. Georgia-Pacific Corp., 439 S.W.3d 332 (Tex. 2014), and HMC Hotel Properties II Ltd. v. Keystone-Texas Property Holding Corp., 439 S.W.3d 910 (Tex. 2014). In Bostic, the Court addressed the complex causation issue in multi-exposure asbestos cases. Without attempting to explain what the causation standard Bostic established for mesothelioma cases— a somewhat daunting task— the basic principle in Bostic seems to be that but-for causation is not required in a multi-exposure asbestos case as long as the exposure to the product at issue was a substantial factor in causing the disease. Nevertheless, on the facts of Bostic, the Court held that there was no legally sufficient evidence of the substantial factor element in this particular case. In the contrasting case of HMC Hotel Properties, the causation issue arose from a failed attempt to sell the real property on which is located San Antonio’s Marriott Riverwalk Hotel. The operator of the hotel, Host, leased the real property from Keystone, the property owner. Host not surprisingly had a right of first refusal in the event that Keystone wanted to sell the property. After Keystone had virtually completed negotiations for the sale of the property to a third party, it gave Host notice of the intent to sell. The sale was RETURN TO TABLE OF CONTENTS YOU WON’T BREAK IT: HOW EXPERIENCED LAWYERS SURVIVE THE DIGITAL AGE MICHAEL C. SMITH Siebman, Burg, Phillips & Smith, LLP 113 East Austin Street Marshall, Texas 75670 (903) 938-8900 (office) (972) 767-4620 (fax) [email protected] www.EDTexweblog.com State Bar of Texas 31st ANNUAL LITIGATION UPDATE INSTITUTE January 15-16, 2015 San Antonio CHAPTER 8 RETURN TO TABLE OF CONTENTS MICHAEL C. SMITH is a partner in the Marshall office of Siebman, Burg, Phillips & Smith, LLP, where he specializes in complex commercial and patent litigation in federal court. Mr. Smith, who has appeared as counsel of record in over 600 civil cases in the U.S. District Court for the Eastern District of Texas, served as chairman of the Eastern District’s Local Rules Advisory Committee from 2000-2009. He has also been the editor of the O’Connor’s Federal Rules * Civil Trials handbook on federal civil procedure since 1998, and maintains the nationally recognized Eastern District of Texas Federal Court Practice web log at www.EDTexweblog.com, which tracks Eastern District news and caselaw. Mr. Smith is a frequent author and speaker on topics including intellectual property, patent, and product liability litigation, federal court practice, ethics, and law office administration. Mr. Smith holds a law degree from Baylor University, a master’s degree in public administration from the LBJ School of Public Affairs at the University of Texas at Austin, and a bachelor’s degree from East Texas State University (now Texas A&M University-Commerce). Mr. Smith is a Sustaining Life Fellow of the Texas Bar Foundation. He also served on the Board of Directors of the State Bar of Texas from 2005-08, representing the 24 counties of State Bar district 1 in northeast Texas, where he was recognized as Outstanding Third Year Director and received a Presidential Citation for his work in the area of member benefits. He is immediate past chair of the editorial board for the Texas Bar Journal, and is also a past chair of the Litigation Section of the State Bar of Texas. Mr. Smith is a past president of the Eastern District of Texas Bar Association, East Texas Trial Lawyers Association, and the Harrison County Bar Association, and is a charter member of the T. John Ward American Inn of Court, and an associate member of the American Board of Trial Advocates, where he serves as an officer for the East Texas ABOTA chapter and a Life Fellow of the ABOTA Foundation. He has also been selected for inclusion in the 2008-2013 Texas Super Lawyers lists, and is a recipient of the Texas Access to Justice Foundation’s Cy Pres: Impact on Justice award, as well as TexasBarCLE’s Standing Ovation award in 2010. In 2012, Texas Lawyer named Mr. Smith one of five Top Notch lawyers in Texas in the field of intellectual property. Before entering private practice, Mr. Smith was a law clerk for the late U.S. District Judge Sam B. Hall, Jr. of the Eastern District of Texas, Marshall and Texarkana Divisions, and worked in Baylor University’s Office of General Counsel. Prior to attending law school, Mr. Smith worked for the National Commission to Prevent Infant Mortality in Washington, D.C., and the Texas General Land Office and the Texas Education Agency in Austin, Texas Mr. Smith, a Marshall native, has also been active in community affairs. He served on the Marshall City Commission for three terms, from 1996-2002, and is a former president of the Harrison County Historical Museum and the Citizens Advisory Committee and member of the Marshall Chamber of Commerce Board of Directors. Mr. Smith is married to Harrison County Treasurer Jamie Marie Noland. They have three sons, Grayson, 15 and twins Collin & Parker, 12. In addition to his legal writings, Mr. Smith is also the author of two books on aircraft carriers, Essex Class Carriers in action, and US Light Carriers in action, published by Squadron-Signal publications. In 2010 he was recognized by the Marshall Historic Landmark Preservation Board for renovating the historic Hub Shoe Store offices for use by his law firm. RETURN TO TABLE OF CONTENTS TABLE OF CONTENTS I. INTRODUCTION ................................................................................................................................................... 1 II. TECHNOLOGY AND THE TRIAL LAWYER .................................................................................................... 1 A. Law Office Management ................................................................................................................................. 1 1. The Office ................................................................................................................................................ 1 2. The Files .................................................................................................................................................. 1 3. Office Hardware ...................................................................................................................................... 1 4. Staff ......................................................................................................................................................... 2 B. Legal Research ................................................................................................................................................ 2 C. Document Production ...................................................................................................................................... 2 D. Personal Productivity ...................................................................................................................................... 2 E. Courtroom Presentation ................................................................................................................................... 3 III. CONCLUSION ....................................................................................................................................................... 3 RETURN TO TABLE OF CONTENTS YOU WON’T BREAK IT: HOW EXPERIENCED LAWYERS SURVIVE THE DIGITAL AGE I. INTRODUCTION This paper is intended to provide an overview of some issues in the field of technology in the practice of law, specifically a trial practice, which I hope will be of use to readers. II. TECHNOLOGY AND THE TRIAL LAWYER Today’s lawyers have numerous opportunities to make their practices more efficient and provide better legal services through the use of technology. These opportunities exist in the fields of office management, legal research, document production, and courtroom presentation. A. Law Office Management Lawyers require a logistical operation to promote allow them to provide services to clients. In the past this often involved large offices with numerous secretarial and accounting personnel, extensive law libraries, and numerous other specialists depending on the lawyer’s field of practice, from accountants to law librarians to information technology experts. Today, however, technology has provided lawyers with numerous options for providing services more efficiently by eliminating the need for much of the traditional overhead. In fact, there is an entire network of small office and solo practitioners that do not necessarily even accept the need for a traditional office, and provide services to clients from homes, coffee shops, and the local courthouse. How do they do it? In almost every case the answer is the efficient use of technology, which replaces the need for the systems that formerly provided attorneys with the infrastructure for the provision of services to clients. 1. The Office Gone are the days when a lawyer would consider – or at least admit to considering - a fancy office at a desirable location a prerequisite to the provision of adequate client services. While some lawyers’ practices may benefit from the stereotypical mahogany paneled offices with marble floors, either for client development or other purposes, efficiency studies have made clear that the most efficient office for the practice of law is actually remarkably similar in size and layout to a block of jail cells. Recognizing this, newer law firm offices in large cities have consistently cut office size and amenities, realizing that in a competitive legal environment, clients are unwilling to pay for the type of overhead that was previously standard in many markets. Nor is it needed. Similarly, location no longer has the importance it once did. Again, while some lawyers’ practice requires that they have offices convenient to a courthouse, jail, or perhaps a title office, the availability of records online and the prevalence of online filing in many courts means that the physical location of a law firm is often a fairly minor detail when planning a new office. In fact, the burgeoning number of lawyers means that many lawyers, unable to afford traditional office space, are engaging in alternative arrangements, including practicing from their home, practicing at various temporary locations depending on their needs, office sharing, temporary officing, and even simply to meeting at coffee shops or working from a courthouse law library or other similar facility. For some practices, a less formal office along these lines is acceptable, but in most cases, a lawyer’s efficiency, if not peace of mind, benefits from a stationary office, where the lawyer can accumulate the necessary equipment and other supplies to engage in the various tasks needed, from meeting with clients to consulting with other counsel to preparing documents and reviewing a client’s files. 2. The Files Speaking of files, the very concept of a client’s file has undergone significant change in recent years. Previously, a client’s file was invariably a paper one, with separate folders or binders or notebooks or boxes for the various documents needed. These files were then housed in file cabinets or shelves that took up a substantial portion of an office’s floor space. However, in the modern law office, client files can be almost completely paperless, and as such can be stored either on a local server at the law firm, or on a remote server such as an online service. Online services such as Google Drive, Box, and Dropbox are also making it simple to take previously inaccessible files and make them available at any location on virtually any device. While many lawyers have had access to at least part of their firm’s files through virtual private networks (VPNs) for a number of years, firms increasingly are making entire case files available outside the office, and in doing so have in many cases eliminated the existence of a central paper file at all. There are economic as well as efficiency considerations at work here. Eliminating paper files saves substantial expensive floorspace, while making files available remotely eliminates copy costs and allows attorneys to work from any location, and collaborate more efficiently with others. 3. Office Hardware Increases in technology have also rendered some forms of previous technology virtually obsolete. For example, there is no longer any need for a stand-alone RETURN TO TABLE OF CONTENTS fax machine when an online service can routinely forward faxes to an email address, where they can be stored and printed only as necessary. Similarly, online filing by courts has meant that the need for large copying equipment may be substantially reduced. For example some offices have no photocopier – they make do with a simple desktop printer for typical small print jobs, and larger jobs are emailed to the local print shop. Similarly, the trend towards off-site storage has in many cases deemphasized the need for substantial servers and other computing hardware within law firms, such that firms which were formerly the sites of large central servers and numerous workstations for staff might now have a relatively small server, with much of the firm’s documents on off-site servers, and many of the employees working off of laptops, tablets or other smaller electronics, or even hardware at their homes as telecommuters. 4. Staff The need for staff has changed dramatically as well. Generations of lawyers used to computers and word processors means less need for typing and hence traditional secretarial staff. In addition, accounting and secretarial services may also be outsourced to third parties. Finally, offices are actually becoming more tech-savvy and often disperse with an in-house IT person instead contracting on an as-needed basis. B. Legal Research Changes in legal research have also affected what law firms look like today. Few new offices are designed with a substantial paper law library in mind, as was formerly the case. While firms may maintain some paper research tools, the vast majority of legal research currently is conducted through online services of one kind or another. This trend is driven by economics as well, as firms are only too happy to jettison the expensive floor space formerly occupied by law libraries. One effect is, however, that legal research can be conducted anywhere on portable devices such as laptops, tablets, and even smart phones, so lawyers no longer need to be in their office to consult the applicable law. In addition the proliferation of online services means that lawyers have access to infinitely more information about the law today that was previously the case. C. Document Production While much else is changed about the practice of law, one thing that has not changed is that lawyers provide client services for the most part in writing by means of carefully drafted documents. The document may be a court filing such as a pleading, or motion, or it may be a contract or a letter to another lawyer or client. What has changed, however, is that documents no longer need be prepared at the lawyer’s office by secretarial staff. Instead, the documents can be prepared anywhere, on almost any platform, and often by the lawyers themselves. Also, with the advent of electronic filing and email, in many cases the document may never see physical form. A letter may be transmitted by email to opposing counsel from a laptop, or a filing made from a paralegal’s home after hours. The copy that makes it into the case files may be saved online, or e-mailed to staff for filing. The manner in which the lawyer’s words are placed in the document has changed, as well. We are far from the days when lawyers routinely dictated correspondence and documents to secretaries sitting with a steno pad. But even the dictation systems that were standard in law offices for decades are now hopelessly obsolete or at the very least, unnecessary. Instead many lawyers either type their own documents, or use handheld recorders or other electronic devices to send dictation to dedicated secretarial staff either within the law firm or at a remote site. And increasing numbers are using dictation software which allows them to prepare documents quickly, even if they are not experienced typists D. Personal Productivity Another way in which technology manifests itself in lawyers’ lives is in the ability to improve a lawyer’s productivity through programs, “apps,” or even the latest tool – “extensions.” Here the nature of the lawyer’s practice has a significant impact on their ability to incorporate personal preferences into their pursuit of enhanced productivity. Lawyers working for large firms can benefit from the firm’s prior work identifying and implementing more efficient processes for accomplishing work firm-wide. This might include programs and other systems that allow a lawyer to track work needing to be done and accomplish it more efficiently. The flip side, however, is that lawyers in large firms may have less flexibility to use different programs or tools to maximize their individual productivity. Until recently, for example it was not unusual for employees in large organizations to have a phone provided by the employer for work, while the employee had a second phone for personal use. In large part, this was due to the difficulty the organization encountered in managing a wide variety of devices for office use. The recent trend of smartphones and tablets, however, has resulted in the vast majority of employers either adopting a “bring your own device” policy, or actually providing and servicing these devices for employees. Either way, employees at these firms may now have the ability to make use of RETURN TO TABLE OF CONTENTS programs and tools for personal productivity without interfering with the organization’s structure for getting work done. However, smaller firms and solo practitioners have always had the ability to select programs that satisfy their personal preferences as far as the most efficient way to get work done. These may include customized calendar and task list programs, as well as numerous other programs which tweak the standard programs in a way that individual lawyers find desirable. E. Courtroom Presentation Finally, many lawyers practice their craft in courtrooms, before either judges or juries. Here, too, technology has changed how hearings and trials are conducted. Most lawyers are familiar with the process of “death by PowerPoint” that hearings and in many cases trials seem to have devolved into. But although their overuse is appropriately ridiculed, presentation of information to judges and juries by means of slides displayed on a screen or computer monitor is a critical part of the persuasive process in today’s legal environment. Generations of judges and jurors brought up on television viewing and used to visual presentation invariably find a visual component to the persuasive process to be helpful. And analytical studies reinforce this point – jurors are more likely to be persuaded when a presentation consists of both verbal and visual information. But static Power Points are not the only tool available. There are numerous programs and services available that can add bells and whistles to a static PowerPoint, from the ability to play videos within presentations to the ability to call out and highlight documents, text and images within documents. It may be either preselected or in real time, but both allow for a sense of movement that studies have shown enhances juror comprehension of the matter being covered. Some of this information technology can be used by an attorney at the podium, but in most complex cases it is actually run by a second person either operating a laptop or a courtroom graphics professional who prepares and presents the information after lengthy preparation sessions with the attorney. III. CONCLUSION I hope the above information is helpful. For updates, see the “Law Office Management” tab on my weblog, www.EDTexweblog.com. MCS 11/26/14 RETURN TO TABLE OF CONTENTS EMPLOYMENT LAW UPDATE: COVENANTS NOT TO COMPETE; SECTION 7 OF THE NLRA MARK A. SHANK, Dallas Gruber Hurst Johansen Hail Shank LLP PRIYA A. BHASKAR State Bar of Texas 31st ANNUAL LITIGATION UPDATE INSTITUTE January 15-16, 2015 San Antonio CHAPTER 13.1 RETURN TO TABLE OF CONTENTS Employment Law Update: Covenants Not To Compete; Section 7 Of The NLRA Chapter 13.1 TABLE OF CONTENTS EMPLOYMENT LAW UPDATE: COVENANTS NOT TO COMPETE; SECTION 7 OF THE NLRA .................... 1 COVENANTS NOT TO COMPETE ............................................................................................................................. 1 Statewide Geographical Limitation Too Broad....................................................................................................... 1 Reasonable Time Limitations Still Required .......................................................................................................... 1 Nationwide Scope Unreasonable ............................................................................................................................ 1 Present-Tense Language Can Limit Covenant Not to Compete ............................................................................. 1 Limitations on Declaratory Judgments.................................................................................................................... 1 Waiver of Complaint and Reformation ................................................................................................................... 2 Proof Required to Enforce Covenant Not to Compete ............................................................................................ 2 Specificity Required for Injunction ......................................................................................................................... 2 Confidential Information as Adequate .................................................................................................................... 3 Consideration .......................................................................................................................................................... 3 Injunctions and Necessary Parties ........................................................................................................................... 3 The Pervasiveness of Knowledge of Trade Secrets and Other Confidential Information....................................... 3 Attorneys’ Fees ....................................................................................................................................................... 3 Injunctive Relief when Injury Includes Business Disruption .................................................................................. 4 Specificity Requirements to Obtain Injunctive Relief ............................................................................................ 4 Permanent Injunction Upheld to Enforce Non-Compete ........................................................................................ 4 Perpetual and Permanent Injunction Due to Creation of Product ........................................................................... 5 Absence of Buy-Out Provision Renders Covenant Not to Compete Unenforceable .............................................. 6 Forfeiture Clause in Non-Contributory Profit-Sharing Plan is Not an Enforceable Covenant Not to Compete ..... 6 Electronic Restricted Stock Agreement May Constitute Enforceable Non-Compete Agreement .......................... 7 SECTION 7 OF THE NLRA .......................................................................................................................................... 7 RELEVANT NLRB MEMORANDA ............................................................................................................................ 7 Rules on Using Social Media Technology ............................................................................................................ 11 USE GOOD JUDGMENT ABOUT WHAT YOU SHARE AND HOW YOU SHARE ............................................. 12 TREAT EVERYONE WITH RESPECT ...................................................................................................................... 13 OTHER [EMPLOYER] POLICIES THAT APPLY .................................................................................................... 13 EMPLOYER’S ENTIRE REVISED SOCIAL MEDIA POLICY—WITH EXAMPLES OF PROHIBITED CONDUCT--IS LAWFUL ........................................................................................................................................... 13 RECENT CASES REGARDING SECTION 7 ............................................................................................................ 13 Confidentiality Provisions and Wage Information Generally ............................................................................... 13 Social Media and Employer Anti-Harassment & Anti-Bullying Policies ............................................................. 14 Employer Online Communications Policies and Prohibitions on General Inappropriateness .............................. 14 Employer “Courtesy” Policies .............................................................................................................................. 15 Confidentiality Provisions Regarding HR Investigations ..................................................................................... 15 Media & Confidentiality Policies .......................................................................................................................... 15 Prohibitions on “Negativity or Gossip”................................................................................................................. 15 Prohibitions on “Poor Work Habits” and General Inappropriateness ................................................................... 16 Off-Duty Access.................................................................................................................................................... 16 Off-Duty Access — a Change in Direction? ......................................................................................................... 16 Mandatory Class Arbitration Agreements — Fifth Circuit vs. NLRB .................................................................. 16 Arbitration Agreements and Employees’ Rights to Collective Class Actions — NLRB View ............................ 17 Severance Agreements .......................................................................................................................................... 18 APPENDIX ................................................................................................................................................................... 19 i OF CONTENTS RETURN TO TABLE EMPLOYMENT LAW UPDATE: COVENANTS NOT TO COMPETE; SECTION 7 OF THE NLRA Dale v. Hoschar, No. 05-13-01135-CV, 2014 WL 3907997 (Tex. App. — Dallas Aug. 12, 2014). COVENANTS NOT TO COMPETE Statewide Geographical Limitation Too Broad The defendant in Morrell argued that a covenant not to compete covering the entire State of Texas was unreasonable and overbroad because Morrell’s business did not extend beyond San Antonio, Houston, and Beaumont. The Court held the covenant was broader than necessary to protect Morrell’s business interests and affirmed the trial court’s order granting summary judgment to the defendant on Morrell’s suit against him for breach of a covenant not to compete. Nationwide Scope Unreasonable Ally Financial dealt with whether the Covenant Not to Compete Act (the “Act”) (Tex. Bus. Comm. Code. Sec. 15.50 et seq.) determines the enforcement of a former employee’s covenant not to solicit her former employer’s employees. Here, the defendant signed a two-year non-solicitation covenant with her former employer in connection with a stock option grant. Analyzing the nationwide covenant not to solicit under the Act, the Court found that the covenant was unreasonable in scope and unenforceable because it was beyond what was necessary to protect Ally’s good will or other business interests. Morrell Masonry Supply, Inc. v. Coddou, No. 01-1300446-CV, 2014 Tex. App. LEXIS 4730 (Tex. App.— Houston [1st Dist.] May 1, 2014, no pet. h.)(mem. op.). Ally Fin., Inc. v. Gutierrez, No. 02-13-00108-CV, 2014 Tex. App. LEXIS 792 (Tex. App.—Fort Worth Jan. 23, 2014, no pet.)(mem. op.). Reasonable Time Limitations Still Required Independent insurance sales agent Tammy S. Hoschar and principal Richard P. Dale, Jr. d/b/a Senior Healthcare Partners entered into an agent agreement in which the parties agreed: “Upon Termination of the Agreement, the Agent shall return to General Agent any and all information and supplies provided to Agent including any and all lead information and agrees to take no action either directly or indirectly, as an agent, employee, principal, or consultant of any third party or to utilize and [sic] third party, to attempt to replace business with any policyholder by soliciting or offering competing policies of insurance to any policyholder to which Agent sold any policy of insurance pursuant to the terms of this Agreement.” Dale argued that the phrase “attempt to replace business . . . by soliciting or offering competing policies of insurance” limited the duration of covenant to the duration of the current policy held by each insured client. He also argued that the phrase “any policyholder to which Agent sold any policy of insurance pursuant to the terms of this Agreement” limited the geographical area to that of existing policyholders. The Court of Appeals nonetheless found this covenant not to compete unenforceable for lack of reasonable time and geographical restrictions because a relationship between an agency and its clients could continue indefinitely and that the restriction on the solicitation of clients does not alone suffice as a reasonable geographical limitation under Texas law. A covenant not to compete with no time or geographical limitation whatsoever is an unreasonable restraint of trade. Present-Tense Language Can Limit Covenant Not to Compete Three former Alliantgroup employees formed a competing enterprise called Paradigm and were sued by Alliantgroup. In 2007, the parties settled and entered into a Settlement Agreement, which provided that Paradigm would not knowingly initiate contact with any individual or entity who was actually known by it or the Individual Defendants to be a client of Alliantgroup. Two years later, Alliantgroup sued Paradigm, claiming it breached the 2007 Settlement Agreement. The Court held that the Settlement Agreement’s use of present tense language meant that it only covered entities who were its clients at the time the Settlement Agreement was reached. Since Alliantgroup’s evidence did not demonstrate violations as to clients who existed at the time of the Settlement Agreement, it failed to prove its case. Alliantgroup, L.P. v. Solanji, No. 01-12-00798-CV, 2014 Tex. App. LEXIS 2961 (Tex. App.— Houston [1st Dist.] Mar. 18, 2014, no pet.). Limitations on Declaratory Judgments Merritt Hawkins sued former employees, alleging one, Bowden, violated his non-interference provision by recruiting another, Gresham, to work for a competitor. The suit also claimed that Gresham downloaded hundreds of files from the Company’s network prior to leaving. Previously, both employees had signed agreements containing non-competition, non-disclosure and non-interference provisions. The defendants filed counterclaims under the Declaratory Judgment Act. The Court dismissed the declaratory RETURN TO TABLE OF CONTENTS judgment claims because they did not raise an issue beyond the scope of Plaintiff’s claims. Merritt Hawkins & Assocs., LLC v. Gresham, No. 3:13-CV-00312-P, 2014 U.S. Dist. LEXIS 26213 (N.D. Tex. Feb. 21, 2014). Waiver of Complaint and Reformation Sentinel sued Olson (its former employee), Mistras (the company that hired Olson), and Roberts (Olson’s contact at Mistras) over Olson’s alleged violation of his covenant not to compete. Prior to trial, Sentinel agreed that its covenant was geographically overbroad and needed to be reformed. Among the findings of the jury was that Sentinel knew the covenant was too broad and—after having Olson sign it–sought to enforce it to a greater extent than necessary to protect its business interests. The Court found that, by seeking damages instead of a legal ruling on the enforceability of the covenant, Sentinel waived its complaint. However, the trial court failed to make a finding on this issue. Moreover, Sentinel failed to seek a ruling on reformation and, therefore, waived its complaint that the court failed to reform the covenant. Sentinel also argued that the issue of attorneys’ fees was a question of law and the court erred in allowing or advising the jury to determine the issue. Because the jury was asked the predict factual questions required for attorneys’ fees recovery under Sec. 15.51(c) and the court made the ultimate determination, there was no error. Sentinel Integrity Solutions, Inc. v. Mistras Group, Inc., 414 S.W.3d 911 (Tex. App.—Houston [1st Dist.] 2013, pet. filed). Proof Required to Enforce Covenant Not to Compete In Rodriguez, an employment agreement between Martha Rodriguez and Republic Services contained a non-compete clause stating that for a period of 12 months after her termination, Rodriguez would not “approach, contact, cause to be contacted, or communicate with any customer or account, for whom Company performed services at any office where Employee performed any duties during the two years immediately preceding Employee's termination of employment with Company” or “own any interest in, be an employee of, be an officer or director of, be a consultant to, or be associated in any way with a competitor of the Company within the county, or counties, where Employee worked while employed hereunder,” among other things. When Rodriguez went to work for a competitor, Republic sought to enforce this agreement and filed suit against Rodriguez and her new employer, alleging breach of the noncompete. The lower court found the non-compete clause unenforceable and granted summary judgment for the defendants. The appellate court reversed the decision, finding that the defendants were not entitled to summary judgment because they failed to show that the non-compete clause was unenforceable. In doing so, the Court noted that a covenant not to compete is enforceable under Tex. Bus. & Com. Code. § 15.50(a) “if it is (1) ‘ancillary to or part of an otherwise enforceable agreement at the time the agreement is made,’ and (2) ‘contains limitations as to time, geographical area, and scope of activity to be restrained that are reasonable and do not impose a greater restraint than is necessary to protect the goodwill or other business interest of the promisee.’” First, the Court found that an “otherwise enforceable agreement” did exist between Republic and Rodriguez. The Court emphasized that promises to disclose confidential information or provide access to goodwill to an employee are reasonably related to interests worthy of protection and will constitute sufficient consideration. Moreover, such information or access need not be received by the employee at or before the agreement is executed. Republic provided proof that it did provide Rodriguez access to confidential information and goodwill after the agreement was executed in the form of training on specific software, access to prior invoices and the ability to develop customer contacts. Thus, the defendants’ argument that the consideration for the non-compete was insufficient failed. Second, the Court found that the non-compete clause was not unreasonable. It reasoned that, contrary to the defendants’ arguments otherwise, the clause did not impose an industry-wide restriction on Rodriguez’s future employment. Rather, Republic’s evidence describing specific companies in the county who were not considered “competitors” but who were in the same industry was sufficient to demonstrate that its noncompete restrictions were not unreasonable. Republic Services, Inc. v. Martha E. Rodriguez and Custom Copying Solutions, LP, No. 14-12-10154-CV, 2014 WL 2936172 (Tex. App. — Houston [14th Dist.] June 26, 2014, no pet.) (mem. op.). Specificity Required for Injunction Among other causes of action in Ramirez, the plaintiff alleged that the defendants, former employees, violated their non-competition and non-solicitation clauses. The trial court granted a temporary injunction and appellates’ appealed. The defendants argued that paragraph 7(f) of the temporary injunction was improper because it was not specific and detailed RETURN TO TABLE OF CONTENTS enough to satisfy TEX. R. CIV. P. 683. The Court found that a prohibition from possessing, disclosing or using “proprietary informations/trade secrets” was not specific and detailed enough to satisfy Rule 683. The paragraph did not define “proprietary informatons/trade secrets” with enough specificity to give defendants adequate notice of the acts they would be restrained from doing. Ramirez v. Ignite Holdings, LTD, No. 05-12-01024CV, 2013 Tex. App. LEXIS 10775 (Tex. App.— Dallas Aug. 26, 2013, no pet.) (mem. op.). Confidential Information as Adequate Consideration Tranter involved an appeal from a denial of a temporary injunction. The lower court found the covenant not to compete was unenforceable, due to a lack of consideration and a lack of geographic limitations. A promise of continued employment is insufficient consideration to support a covenant not to compete. On appeal, the Court nevertheless found the consideration requirement was met when Tranter gave Liss confidential information in exchange for Liss’ implied promise to keep the information confidential. When a court finds a non-compete unreasonable for lack of consideration it is required to reform it, but it may not award damages until after reformation. As a part of the reformation discussion, the Court rejected the argument that it could not reform the covenant because it contained no geographic restrictions. As a result, the trial court abused its discretion in failing to grant the injunction. Tranter, Inc. v. Liss, No. 02-13-00167-CV, 2014 Tex. App. LEXIS 3398 (Tex. App.—Fort Worth Mar. 27, 2014, no pet.)(mem. op.). Injunctions and Necessary Parties Down Time-South involved an appeal from the denial of a temporary injunction. The Court held that the trial court did not abuse its discretion in failing to grant the injunction because the former employee’s current employer, a necessary party, was not a part of the suit. Down Time-South Tex., LLC v. Elps, No. 13-13-00495CV, 2014 Tex. App. LEXIS 3047 (Tex. App.—Corpus Christi Mar. 20, 2014, no pet.)(mem. op.). The Pervasiveness of Knowledge of Trade Secrets and Other Confidential Information In Daily Instruments, the covenant not to compete at issue was ancillary to an otherwise enforceable agreement due to Heidt’s access to confidential information. Heidt was a high-level sales manager at Daily with direct sales responsibilities for large portions of the United States and Canada, for all of Europe, and all of Russia. Additionally, Heidt had access to Daily’s confidential information regarding its clients and sales world-wide. Heidt’s knowledge of Daily’s confidential information was so extensive that Heidt, after resigning, was able to share with Daily’s competitors detailed information—confidential and otherwise—regarding Daily’s customers, sales strategies, pricing, margins, and other data. Daily proved that Heidt breached its covenant not to compete by accepting employment at a competitor of Daily in Singapore, a country where Daily does business. Heidt willingly divulged many of Daily’s trade secrets to his new employer. Courts have held that an employee, who possesses trade secrets and accepts employment with a former employer’s competitor, will have difficulty preventing that knowledge from infiltrating his or her work—even if he or she is acting in good faith. As a result, the Court granted a preliminary and permanent injunction, summarized as follows: For two years (or the conclusion of the trial on the merits), Heidt is enjoined from employment with any competitor of Daily’s that does business in any country Daily does business and from performing for, advising, or assisting any of those competitors. Furthermore, Heidt shall cease and desist from soliciting or inducing Daily employees to leave Daily for other employment opportunities, from soliciting Daily customers for business, and from disclosing Daily’s confidential, proprietary, and trade secret information. Lastly, WIKA Process, Gaesco, and all persons in WIKA Group must return all documents in their possession that contain any of Daily’s confidential, proprietary, or trade secret information, as well as anything else of Daily’s that they acquired directly or indirectly from Heidt. In addition, they are enjoined from destroying or modifying any documents they have that relate, in any manner, to Daily’s claims— unless Daily gives prior and express written approval. Daily Instruments Corp. v. Heidt, No. H-13-2189, 2014 U.S. Dist. LEXIS 21766 (S.D. Tex. Feb. 21, 2014). Attorneys’ Fees In Franlink, the Court affirmed the trial court’s decision to deny Link Staffing Services’ request for attorneys’ fees under Tex. Civ. Prac. & Rem. Code Ann. §38.001(8) after Link sought and obtained injunctive relief against its former franchisees. On appeal, the Court held that the lower court did not err because the Tex. Bus. & Com. Code Ann. § 15.51(c) only provides RETURN TO TABLE OF CONTENTS for attorneys’ fees in a single context—where a promisor meets evidentiary requirements in defending against the enforcement of an unreasonable covenant in a personal-services agreement. A promisee, like Link, seeking to enforce an unreasonable covenant not to compete (that required judicial reformation) is not similarly provided for in § 15.51(c). Notably, the Court held that § 15.51(c) controlled over the more general §38.001(8) because allowing fees under §38.001(8) would be counter to the plain meaning of § 15.51(c)— which prohibits an award of attorneys’ fees when a promisee seeks to enforce a covenant that requires reformation. Franlink, Inc. v. Gjms Unlimited, Inc., 401 S.W.3d 705 (Tex. App.—Houston [14th Dist.] 2013, pet. denied). Injunctive Relief when Injury Includes Business Disruption On appeal, the Court held in Correa that the information regarding customer preferences that HSAS, Inc. shared with appellants could count as confidential information and, therefore, satisfied the consideration requirement of the Covenant Not to Compete Act. Furthermore, the contract between the two parties was not breached (and did not excuse Appellants from their noncompetition covenants) because there was an alleged delay in the former employees termination pay. Because there was no specific deadline for termination pay stated in the contract, the lower court determined that a “reasonable time” standard would apply. On appeal, the Court held there was no error at the lower level because that there was some evidence (such as general paperwork and payroll delays) that HSAS paid Correa within a reasonable time. In determining whether or not there was the requisite injury to grant the injunction, the Court stated that granting a temporary injunction when conduct threatens to disrupt an ongoing business is not an abuse of discretion. Overall, the Court found that the trial court did not abuse its discretion by granting the injunction—which was tailored to prevent appellants from having a unfairly-derived competitive advantage and appropriately limited—and by determining that doing so would cause less harm to the appellants than the greater harm caused to HSAS if the appellants continued to breach their covenants. Correa v. Houston Surgical Assistant Servs., No. 1412-01050-CV, 2013 Tex. App. LEXIS 9397 (Tex. App.—Houston [14th Dist.] July 30, 2013, no pet.)(mem. op.). Specificity Requirements to Obtain Injunctive Relief In Dickerson, a former employee of Acadian went to work selling lumber supplies for a competitor of Acadian and later admitted that he knowingly sold or solicited sales from Acadian customers. The trial court rendered an order granting temporary injunctive relief. While the Court, on appeal, stated the order sufficiently explained the lower court’s reasoning for determining the former employee breached the noncompete agreement, it found the trial court’s injunction order to be insufficient under TEX. R. CIV. P. 683 for many reasons. For example, there were no time and geographical limitations, and there was not an instructive definition regarding who would be Acadian’s current clients. In addition, it was unclear as to what would count as the use or disclosure of Acadian’s confidential information, and there was generally vague paragraph in the order that prohibited “direct or indirect involvement” with business that was in direct competition with Acadian’s “particular business lines.” For the abovementioned reasons, the Court held that the injunction order did not comply with the requirements of Rule 683 because it was not specific enough, and it failed to describe the acts it intended to retrain in reasonable detail. Parties, it concluded, could be misled by the scope of the order while attempting to comply in good faith. Therefore, the Court reversed the order, dissolved the temporary injunction, and remanded the case to the trial court so it could refine the order. Dickerson v. Acadian Cypress & Hardwoods, Inc., No. 09-13-00299-CV, 2014 Tex. App. LEXIS 3889 (Tex. App.--Beaumont Apr. 10, 2014, no pet. h.)(mem. op.). Permanent Injunction Upheld to Enforce NonCompete Aspen Technology (Aspen) filed suit against Tekin Kunt (Kunt) for violating a non-compete clause in his employment agreement and against M3 Technology (M3), Kunt’s new employer, for misappropriation of trade secrets, tortious interference with a contract, and copyright infringement. Aspen and M3 competed directly in scheduling, blending, and distribution of software for chemical and petrochemical companies. M3 did not begin competing in those areas until the founders of M3’s, former Aspen employees, non-competition agreements with Aspen had run. After Aspen had filed suit and during trial it was evidenced that Kunt and M3 employees engaged in various acts of discovery misconduct including the concealing of confidential Aspen software and property. At the close of trial, M3 moved for judgment RETURN TO TABLE OF CONTENTS as a matter for law based on the claim that the statute of limitations had run on the misappropriation and infringement claims and, in the alternative, the claims were not based on legally sufficient evidence. The judge denied the motion and the jury found in Aspen’s favor. The district court judge entered a permanent injunction against the two defendants. M3 submitted the appeal arguing that the district court erred by not granting its motion for judgment as a matter of law and for the damages award including the permanent injunction. First, the Fifth Circuit began with the statute of limitations issue asserted by M3. The court found that the jury had sufficient evidence to determine that Aspen could not have discovered that Kunt and M3 had misappropriated the information until after the suit against Kunt was filed. Second, court then addressed whether there was legally sufficient evidence for a misappropriation of trade secrets claim. It found that there was sufficient evidence to support the jury’s finding that the materials—including pricing calculators, two “product development road maps,” and Aspen’s source code—in possession by M3 were trade secrets that were improperly used, improperly acquired, and used without authorization. Therefore, M3 was not entitled to a judgment as a matter of law. Third, the court addressed M3’s contention that there was insufficient evidence to establish “ownership” and “copying” for an infringement claim. The court denied M3’s assertions that only Aspen’s derivative work was copyrighted and subject to an infringement claim because, as a matter of law, preexisting material is also protected. The court next addressed whether the “copying” of the material was legally actionable. The court found that it could not decipher as a matter of law whether the jury was incorrect in determining that Aspen’s comparison expert was lacking because the jury was the ultimate fact-finder that had the opportunity to hear both Aspen and M3’s account. Fourth, the court affirmed the damages awarded by the jury because it was not unreasonable. Aspen properly presented testimony and evidence of damages models that accurately calculated the losses that Aspen suffered. Additionally, the damages awards were not “stacked” to create double recovery. Regarding the copyright claim, it was legally proper and there was sufficient evidence to establish recovery on both lost profits and unjust enrichment. Fifth, M3 argues that as a matter of law Aspen should not have been allotted attorneys’ fees. The court reasoned that neither statute nor a contract between the parties provided for attorneys’ fees. Also, Aspen could not recover attorneys’ fees spent in litigating against Kunt “prior to the stage of litigation.” Therefore, the court held that the district court should reduce the award by the amount of attorneys’ fees that had been awarded to Aspen. Lastly, M3 objected to the district court’s granting of the permanent injunction. The court upheld the injunction because Aspen would “suffer irreparable harm,” it was not unreasonable that M3 must discontinue selling their products because it contained Aspen’s source code, and it would be against public policy to allow M3 to sell its product when it derived from improper use of trade secrets. Aspen Tech., Inc. v. M3 Tech., Inc., 12-20388, 2014 WL 2210691 (5th Cir. May 29, 2014) (per curiam). Perpetual and Permanent Injunction Due to Creation of Product Halliburton brought a misappropriation of trade secrets action against Axis and its former employee Brian Wilkinson (Wilkinson). Wilkinson was a technician responsible for the manufacturing and designing of “wellbore plugs” and was given access to highly confidential information and trade secrets. Wilkinson signed and agreed to a “Patent Agreement” that prohibited the divulging of trade secrets, required Wilkinson to disclose any inventions he created that related to Halliburton’s business, and required Wilkinson to turn in any documents that related to the inventing of parts concerning the business. Three months prior to Wilkinson leaving Halliburton, he disclosed documents and trade secrets to his new employer, Axis. Wilkinson used this information to create “wellbore plugs” for Axis, which resulted in over $2 million in revenues and $500,000 in profits. After trial, the jury found in favor of Halliburton on all its claims and awarded it monetary damages. However, the trial court did not grant a permanent injunction against the defendants nor did it render declaratory relief for Halliburton. Halliburton filed this appeal arguing that the trial court erred in not granting a permanent and perpetual injunction against Axis and Wilkinson and that the trial court failed in not rendering a declaratory judgment stating that Halliburton was the owner the “wellbore plugs.” The court first analyzed Halliburton’s injunction relief claim for the misappropriation of trade secrets. Because neither Axis nor Wilkinson appealed the jury’s findings, the court was limited to reviewing the issue based on whether the jury was unreasonable in its findings. In denying the appellees argument, the court found that granting a limited time injunction would be misplaced given that Axis relied on the information that it wrongfully misappropriated from Halliburton to create “wellbore plugs.” The court also found that granting a permanent injunction would not prevent Axis from creating its own legitimate and competitive RETURN TO TABLE OF CONTENTS “wellbore plugs.” Therefore, the trial court abused its discretion in not granting an enjoined and perpetual injunction against Axis and Wilkinson because it would not have protected Halliburton’s legal rights against misappropriation. Regarding the Halliburton’s declaratory judgment argument, the court found that because it was undisputed Wilkinson created the “wellbore plugs” while employed at Halliburton and used the designs and related materials owned by Halliburton, Wilkinson violated his employment contract and Halliburton was therefore entitled to ownership of the “wellbore plugs.” Additionally the court ordered that the appellees must destroy all of the electronic materials in their possession. As such, the court reasoned in favor of Halliburton and modified the trial court’s judgment in accordance with its findings. Halliburton Energy Servs., Inc. v. Axis Technologies, LLC, No. 05-13-00854-CV, 2014 WL 4291478 (Tex. App.—Dallas Aug. 21, 2014). Absence of Buy-Out Provision Renders Covenant Not to Compete Unenforceable In this case, an ophthalmologist (Mattioli) entered into an agreement with his employer (LasikPlus), which contained both a notice of termination clause and a covenant not to compete. Years later, Mattioli notified his employer that he would be terminating his employment the next month and would be opening a new clinic for laser procedures less than two miles away from LasikPlus. LasikPlus brought this lawsuit in response, alleging violations of both the covenant not to compete and the notice of termination clause and requesting a temporary restraining order (TRO), a temporary injunction, and a permanent injunction. Because the agreement did not contain the physician buy-out provision required by the Texas Covenants Not to Compete Act, the trial court dissolved the TRO and denied the temporary injunction. First, the Court determined that the trial court did not err in considering the effects of Section 15.50 when denying LasikPlus request for a temporary injunction because—even though the analysis of temporary injunctions is not governed by section 15.50— “caselaw clearly supports the position that the dictates of section 15.50 can be considered when assessing the likelihood of success on the merits, an integral part of the determination of whether a temporary injunction should be granted.” Therefore, the Court found the trial court was right to factor in the lack of a physician buyout provision into its determination of LasikPlus’ likelihood of success on the merits. The trial court simply “made an assessment of the probable outcome based on the evidence and argument presented”, not a ruling on the ultimate merits of the case. Next, the Court considered the question of whether an arbitrator has the authority to reform the argument in order to cure the defect of not having a buy-out provision, and found that an arbitrator did not have such reformation authority. In fact, an arbitrator is only contemplated in the Act regarding the determination of a reasonable buy-out price. “[It does not suggest a court or arbitrator could add a buy-out clause” where one does not exist and, in fact, the section provides a physician’s noncompete covenant is unenforceable where such clause does not exist. The Court then rejected the argument that, in the alternative, Mattioli’s violation of the termination notice clause could act as basis for the temporary injunction. First, LasikPlus only pursued a temporary injunction on the alleged violation of the noncompete covenant portion of the agreement, and (moreover) “an alleged breach of an agreement does not automatically entitle a plaintiff to a temporary injunction pending trial.” The damages from the notice violation, the Court found, were sustained firmly in the past and would not satisfy the requisite showing of “probable, imminent, and irreparable injury in the interim.” The Court of Appeals affirmed the trial courts denial of the temporary injunction. LasikPlus of Texas, P.C. v. Mattioli, 418 S.W.3d 210 (Tex. App.—Houston [14th Dist.] 2013, no pet.). Forfeiture Clause in Non-Contributory ProfitSharing Plan is Not an Enforceable Covenant Not to Compete William Drennen worked as a geologist for Exxon Mobil (“Exxon”) for over thirty-one years. During his tenure, he received several forms of incentive compensation which included bonus awards, restricted stock options where Drennen received 50% of the shares seven years after the grant, and earnings bonus units. Drennen received the compensation under the terms of Exxon’s 1993 and 2003 Incentive Programs which contained forfeiture provisions in the event Drennen engaged in “detrimental activity”, left Exxon by terminating before the standard retirement plan without written approval, or initiated an early retirement. The 1993 Incentive Program defined “detrimental activity” as “activity that is determined in individual cases by the administrative authority to be detrimental to the interest of the Corporation of any affiliate.” The 2003 Incentive Program defined “detrimental activity” as the “ acceptance…of duties to a third party under circumstances that create a material conflict of interest…[including] when a grantee becomes employed…by an entity that regulates, deals with, or competes with the Corporation or an affiliate.” Both Incentive Program agreements contained a New York choice of law provision. RETURN TO TABLE OF CONTENTS In December 2006, Drennen alleged that his supervisor informed him he would be replaced by a younger employee and that Exxon was trying to find another position for him. In March 2007, Drennen resigned with 57,200 shares of Exxon stock still in the restricted period. In July 2007 Drennen took a job with Hess Corporation, another energy company. Shortly thereafter, Exxon cancelled Drennen’s restricted shares of Exxon stock alleging that Drennen engaged in “detrimental activity” because he took a job with a direct competitor of Exxon. Drennen sued Exxon to recover the restricted stock. Drennen sought a declaratory judgment that the “detrimental activity” provisions in the Incentive Program agreements were not covenants not to compete and unenforceable because they were not limited as to time, geographic areas, or scope of activity. The trial court rejected Drennen’s arguments on the declaratory judgment action. Drennen appealed and the court of appeals reversed and ordered the trial court to render a declaratory judgment for Drennen. The court of appeals held that the “forfeiture conditions were unreasonable covenants not to compete, which are unenforceable under Texas law as a matter of public policy” and applying conflicts of law analysis “refused to apply New York law because the result would be against Texas fundamental policy.” Exxon appealed arguing that the choice-of-law provisions were enforceable and that the “detrimental activity” provisions should be enforced under New York law. The Texas Supreme Court held that under Texas law, the forfeiture provisions were not covenants not to compete because the provisions did not place limits on Drennen’s professional mobility or restrict Drennen’s solicitation of Exxon’s customers and employees. Instead the court found the forfeiture clause was conditioned on loyalty and rewarded employees for continued employment. The court noted that unlike a covenant not to compete which allows an employer to bring a breach of contract suit to enforce the clause, a former employer does not need to take legal action to enforce a forfeiture provision. Further, the court found the New York choice-of-law provision enforceable and that, under New York law, Exxon lawfully terminated Drennen’s outstanding stock upon his breach of the Incentive Programs. Exxon Mobil v. Drennen, No. 12-0621, 2014 WL 4782974 (Tex. Aug. 29, 2014). Electronic Restricted Stock Agreement May Constitute Enforceable Non-Compete Agreement Cameron Int’l Corp. had awarded former employee Jeremy Guillory shares of its restricted stock during the course of his employment, which Guillory then accepted through a website. Upon acceptance of the shares, he electronically executed the terms of a restricted stock agreement that contained a noncompetition provision. When Guillory did leave for a competitor, Cameron filed for injunctive relief. The Houston Court of Appeals upheld Cameron’s application for temporary injunction and found the noncompete enforceable. Applying Delaware law, the Court found that under Delaware’s adoption of the Uniform Electronic Transactions Act, electronic records or signatures are not to be denied legal effect or enforceability solely because of electronic form. It noted that Texas has likewise adopted a state version of the UETA (the Texas Uniform Electronic Transactions Act). Moreover, Guillory’s failure to read the electronic restricted stock agreement in detail did not render it unenforceable, nor did Cameron ever misrepresent its contents. Thus, an electronic signature or acceptance may suffice to allow an employer to enforce a noncompete. Cameron Int’l Corp. v. Guillory, No. 2014 WL 4776274, (Tex. App. — Houston [1st Dist.] Sept. 25, 2014). SECTION 7 OF THE NLRA RELEVANT NLRB MEMORANDA Excerpts from National Labor Relations Board Office of the General Counsel Memorandum OM 11-74 (August 18, 2011) (on Social Media): Employee’s Facebook Postings Were Part of Protected Concerted Conduct Related to Concerns Over Commissions 1 In this case, we concluded that the Employer--a luxury automobile dealership--violated Section 8(a)(1) when it discharged an employee--a salesperson--for posting on his Facebook page photographs and commentary that criticized a sales event held by the Employer. We concluded that the employee’s postings were part of a course of protected, concerted conduct related to employees’ concerns over commissions and were not disparaging of the Employer’s product or so “egregious” as to lose the Act’s protection. In early June 2010, the employee was at work when someone in a vehicle at a dealership across the street, which was also owned by the Employer, accidently drove into a pond in front of the dealership. The employee joined his coworkers in watching the commotion, and he took some photographs. That same week, the Employer was hosting an allday event to introduce a new car model. Clients registered for this event, and the corporate office provided professional drivers to drive the cars with clients. Shortly before the event, around June 6, the 1 Discussing Karl Knauz, referenced below. RETURN TO TABLE OF CONTENTS Employer’s General Sales Manager met with the salespeople to discuss the event. He explained that the Employer would serve hot dogs, cookies and snacks from a warehouse club, and water. The salespeople remarked about the choice in food, and at least one asked why the Employer was not serving more substantial refreshments. After the meeting, the salespeople discussed their disappointment with the way the Employer was handling the event. They were concerned that the inexpensive food and beverages would send the wrong message to their clients and negatively affect their sales and commissions. During the sales event, the employee took photographs of the food and beverages served, of his coworkers posing with the food, and of a large promotional banner advertising the new car model. The following week, while at home, the employee posted on his Facebook page the photographs of the vehicle in the pond and of the sales event. In an introduction to the sales event photographs, he remarked that he was happy to see that the Employer had gone all out for the important car launch by providing small bags of chips, inexpensive cookies from the warehouse club, semi-fresh fruit, and a hot dog cart where clients could get overcooked hot dogs and stale buns. The photographs included one of a coworker holding a water bottle, kneeling next to a cooler with ice and water bottles; several of the cookie and snack table; one of a coworker near the hot dog cart, and one of the promotional banner. The employee included comments along with the photographs, reflecting his critical opinion of the inexpensive food and beverages provided. The following week, the Employer received a call from another dealer who commented about the photographs of the car in the pond. A part-time coworker, who was Facebook “friend” with the employee, had also seen the posting and had mentioned it to her supervisor. This prompted the Employer to look at the employee’s Facebook page and to print out the photographs and comments related to the pond incident and the sales event. The Employer’s General Sales Manager called the employee at home and told him to remove the photographs and comments from his Facebook page; he immediately complied. When the employee went to work on June 16, he was called into a meeting with managers. The Employer tossed the printout of the sales event photographs at him, asked him what he was thinking, and said they were embarrassing to the dealership and its founder and CEO. The Employer sent him home while it considered a final decision regarding his employment. Shortly after, the employee was terminated. Several months later, the Employer claimed that the real reason for the employee’s discharge was his posting of the photographs of the car in the pond because he had made light of a serious accident. We concluded that the employee was engaged in concerted activity, under the Meyers cases discussed above, when he posted the comments and photographs regarding the sales event on his Facebook page. As noted, before the event, several employees were displeased with the planned food choices, and after the meeting, the employees discussed this frustration among themselves. At the event, the employee took photographs to document the event and capture his coworker’s frustration. He told his coworkers that he would put the photographs on Facebook, and in doing so, expressed the sentiment of the group. The Facebook activity was a direct outgrowth of the earlier discussion among the salespeople that followed the meeting with management. Although the employee posted the photographs on Facebook and wrote the comments himself, we concluded that this type of activity was clearly concerted. We found that he was vocalizing the sentiments of his coworkers and continuing the course of concerted activity that began when the salespeople raised their concerns at the staff meeting. Further, we concluded that this concerted activity clearly was related to the employees’ terms and conditions of employment. Since the employees worked entirely on commission, they were concerned about the impact the Employer’s choice of refreshments would have on sales, and therefore, their commissions. We found that the Employer knew of the concerted nature of the employee’s conduct and that it could not meet its burden under Wright Line of demonstrating that it would have discharged the employee, even in the absence of the protected activity, because of his postings regarding the incident with the car in the pond. We also concluded that the employee’s activity did not lose the protection of the Act under either Atlantic Steel or under NLRB v. Electrical Workers Local 1229 (Jefferson Standard), 346 U.S. 464 (1953). As noted above, Atlantic Steel is generally applied to an employee who has made public outbursts against a supervisor, while Jefferson Standard is usually applied where an employee has made allegedly disparaging comments about an employer or its product in the context of appeals to outside or third parties. Applying Atlantic Steel, we found that the employee’s Facebook postings regarding the sales event were not so opprobrious as to lose the Act’s protection. The activity concerned a subject matter protected under Section 7. Further, although the activity was not provoked by any unfair labor practice RETURN TO TABLE OF CONTENTS committed by the Employer, the nature of the outburst was much less offensive than other behavior found protected by the Board. We found it unnecessary to rule on the place of the discussion factor because, on balance, the conduct clearly retained the Act’s protection. Under Jefferson Standard, the inquiry is whether the communication is related to an ongoing labor dispute and whether it is not so disloyal, reckless, or maliciously untrue as to lose the Act’s protection. Here, the employee’s postings were neither disparaging of the Employer’s product nor disloyal. The postings merely expressed frustration with the Employer’s choice of food at the sales event. They did not refer to the quality of the cars or the performance of the dealership and did not criticize the Employer’s management. We found it irrelevant that the postings did not clearly indicate that they were related to a labor dispute given that they were neither disparaging nor disloyal. […] Employees’ Facebook Postings About Tax Withholding Practices Were Protected Concerted Activity We also considered a case in which the Employer—a sports bar and restaurant--discharged and threatened to sue two employees who participated in a Facebook conversation initiated by a former coworker about the Employer’s tax withholding practices. This case also raised issues concerning the Employer’s internet/blogging policy that prohibited “inappropriate discussions.” We found that the discharges, threats of legal action, and the internet policy were unlawful. In early 2011, several of the Employer’s former and current employees discovered that they owed state income taxes for 2010, related to earnings at the Employer. After this discovery, at least one employee brought the issue to the Employer’s attention and requested that the matter be placed on the agenda for discussion at an upcoming management meeting with employees. Thereafter, on February 1, a former employee posted on her Facebook page a statement, including a short-hand expletive, that expressed dissatisfaction with the fact that she now owed money. She also asserted that the Employer’s owners could not even do paperwork correctly. One employee--Charging Party A-responded to this posting by clicking “Like.” That same day, a series of statements related to the initial posting followed. Two other employees commented that they had never owed money before, and one of them referred to telling the Employer that we will discuss this at the meeting. Two of the Employer’s customers joined in the conversation, as did Charging Party B, who asserted that she also owed money and referred to one of the Employer’s owners as “[s]uch an asshole.” The Charging Parties were not working on the day of the Facebook conversation. When Charging Party B reported back towork on February 2, she was told that her employment was terminated due to her Facebook posting and because she was not “loyal enough” to work for the Employer anymore. The following day, Charging Party A reported to work and was confronted by the Employer about the Facebook conversation. He was terminated and told that he would be hearing from the Employer’s attorney. Thereafter, Charging Party B received a letter dated February 5 from the Employer’s attorney stating that legal action would be initiated against her unless she retracted her “defamatory” statements regarding the Employer and its principals published to the general public on Facebook. As noted, under the Meyers cases, the Board’s test for concerted activity is whether activity is “engaged in with or on the authority of other employees, and not solely by and on behalf of the employee himself.” Concerted activity also includes “circumstances where individual employees seek to initiate or to induce or to prepare for group action” and where individual employees bring “truly group complaints” to management’s attention. Meyers II, 281 NLRB at 887. Here, the February 1 conversation on Facebook related to employees’ shared concerns about a term and condition of employment--the Employer’s administration of income tax withholdings. Moreover, prior to the Facebook conversation, this shared concern had been brought to the Employer’s attention by at least one employee who specifically noted on Facebook that she had requested it be discussed at an upcoming management meeting with employees. Thus, the conversation that transpired on Facebook not only embodied “truly group complaints” but also contemplated future group activity. We found that the Charging Parties’ statements did not lose protection either under Atlantic Steel or, as the Employer asserted, because they were defamatory. Applying Atlantic Steel, we found that three of the four factors weighed in favor of the Charging Parties’ retaining the protection of the Act. As noted, the Charging Parties’ statements related to a core concern protected under Section 7. Moreover, the comments were initiated outside of the workplace during the Charging Parties’ nonworking time, and neither disrupted operations nor undermined supervisory authority. Furthermore, although the activity was not provoked by any unfair labor practice committed by the Employer, the nature of the Charging Parties’ postings was much less offensive than other behavior found protected by the Board. RETURN TO TABLE OF CONTENTS With regard to the Employer’s allegation of defamation, an alleged defamatory statement will not lose its protected status unless it is not only false but maliciously false. Here, Charging Party A merely indicated that he “liked” the initial Facebook posting by his former coworker, which accused the Employer’s owners of not being able to do paperwork correctly. Charging Party B’s posting was limited to a factually correct statement that she had an outstanding tax obligation, and her opinion that one of the Employer’s owners was “[s]uch an asshole.” The Charging Parties’ Facebook postings, to the extent that they constituted statements of fact that could be alleged as defamatory, were not even false, much less maliciously false under the Board’s standard. We also concluded that the Employer’s threats to sue the Charging Parties for engaging in protected concerted activity violated Section 8(a)(1). It is well established that an employer’s threat to sue employees for engaging in Section 7 activity violates the Act because it would reasonably tend to interfere with the exercise of Section 7 rights. The Board has historically distinguished the threat of a lawsuit from the actual filing of a lawsuit and has rejected employers’ attempts to extend the First Amendment protection accorded to lawsuits to threats to sue where those threats, as here, were not incidental to the actual filing of a suit. Thus, we found that the Employer’s threats to sue the Charging Parties were unlawful, even if there was a reasonable basis for potential legal action. We also considered the lawfulness of the Employer’s internet/blogging policy. This policy, included in the Employer’s employee handbook, provided that the employer supported the free exchange of information and camaraderie among employees. The policy went on to state that when internet blogging, chat room discussions, e-mail, text messages, or other forms of communication extend to employees revealing confidential and proprietary information about the employer, or engaging in inappropriate discussions about the company, management, and/or coworkers, the employee may be violating the law and is subject to disciplinary action, up to and including termination. An employer violates Section 8(a)(1) of the Act through the maintenance of a work rule if that rule would “reasonably tend to chill employees in the exercise of their Section 7 rights.” Lafayette Park Hotel, 326 NLRB 824, 825 (1998), enfd. 203 F.3d 52 (D.C. Cir. 1999). The Board uses a two-step inquiry to determine if a work rule would have such an effect. Lutheran Heritage Village–Livonia, 343 NLRB 646, 647 (2004). First, a rule is unlawful if it explicitly restricts Section 7 activities. If the rule does not explicitly restrict protected activities, it is unlawful only upon a showing that: (1) employees would reasonably construe the language to prohibit Section 7 activity; (2) the rule was promulgated in response to union activity; or (3) the rule has been applied to restrict the exercise of Section 7 rights. Applying these standards here, we concluded that the provision of the Employer’s policy stating that employees are subject to discipline for engaging in “inappropriate discussions” about the company, management, and/or coworkers could reasonably be interpreted to restrain Section 7 activity. This policy utilized broad terms that would commonly apply to protected criticism of the Employer’s labor policies, treatment of employees, and terms and conditions of employment. Moreover, the policy did not define what was encompassed by the broad term “inappropriate discussions” by specific examples or limit it in any way that would exclude Section 7 activity. Absent such limitations or examples of what was covered, we concluded that employees would reasonably interpret the rule to prohibit their discussion of terms and conditions of employment among themselves or with third parties. […] Bartender Who Posted Facebook Message About Employer’s Tipping Policy Was Not Engaged in Concerted Activity This case concerned an employee--a bartender-who was discharged for posting a message on his Facebook page that referenced the Employer’s tipping policy, in response to a question from a nonemployee. We found that the employee was not engaged in concerted activity. The Employer operates a restaurant and bar. It maintains an unwritten policy that waitresses do not share their tips with the bartenders even though the bartenders help the waitresses serve food. Sometime in the fall of 2010, the employee had a conversation with a fellow bartender about this tipping policy. He complained about the policy, and she agreed that it “sucked.” However, neither they nor any other bartender ever raised the issue with management. In February 2011, the employee had a conversation on Facebook with a relative. Responding to her query as to how his night at work had gone, he complained that he hadn’t had a raise in five years and that he was doing the waitresses’ work without tips. He also called the Employer’s customers “rednecks” and stated that he hoped they choked on glass as they drove home drunk. He did not discuss his posting with any of his coworkers, and none of them responded to it. About a week later, the Employer’s night manager told the employee that he was probably going to be fired over it. In May, the employee received a RETURN TO TABLE OF CONTENTS Facebook message from the Employer’s owner informing him that his services were no longer required, and the next day, the Employer’s day manager left him a voice message stating that he was fired for his Facebook posting about the Employer’s customers. As noted above, under the Meyers cases, the Board’s test for concerted activity is whether activity is “engaged in with or on the authority of other employees, and not solely by and on behalf of the employee himself.” We found no evidence of concerted activity here. Although the employee’s Facebook posting addressed his terms and conditions of employment, he did not discuss the posting with his coworkers, and none of them responded to the posting. There had been no employee meetings or any attempt to initiate group action concerning the tipping policy or raises. We also found that this internet “conversation” did not grow out of the employee’s conversation with a fellow bartender months earlier about the tipping policy. Excerpts from Office of the General Counsel, National Labor Relations Board, Memorandum OM 12-59 (May 30, 2012) (on Social Media): does not restrict Section 7 rights, are unlawful. See University Medical Center, 335 NLRB 1318, 13201322 (2001), enf. denied in pertinent part 335 F.3d 1079 (D.C. Cir. 2003). In contrast, rules that clarify and restrict their scope by including examples of clearly illegal or unprotected conduct, such that they would not reasonably be construed to cover protected activity, are not unlawful. See Tradesmen International, 338 NLRB 460, 460-462 (2002). The Employer in this case operates retail stores nationwide. Its social media policy, set forth in a section of its handbook titled “Information Security,” provides in relevant part: Use technology appropriately ***** If you enjoy blogging or using online social networking sites such as Facebook and YouTube, (otherwise known as Consumer Generated Media, or CGM) please note that there are guidelines to follow if you plan to mention [Employer] or your employment with [Employer] in these online vehicles. . . • Rules on Using Social Media Technology and on Communicating Confidential Information Are Overbroad In this case, we addressed the Employer’s rules governing the use of social media and the communication of confidential information. We found these rules unlawful as they would reasonably be construed to chill the exercise of Section 7 rights in violation of the Act. As explained in my previous reports, an employer violates Section 8(a)(1) of the Act through the maintenance of a work rule if that rule “would reasonably tend to chill employees in the exercise of their Section 7 rights.” Lafayette Park Hotel, 326 NLRB 824, 825 (1998), enfd. 203 F.3d 52 (D.C. Cir. 1999). The Board uses a two-step inquiry to determine if a work rule would have such an effect. Lutheran Heritage Village–Livonia, 343 NLRB 646, 647 (2004). First, a rule is clearly unlawful if it explicitly restricts Section 7 protected activities. If the rule does not explicitly restrict protected activities, it will only violate Section 8(a)(1) upon a showing that: (1) employees would reasonably construe the language to prohibit Section 7 activity; (2) the rule was promulgated in response to union activity; or (3) the rule has been applied to restrict the exercise of Section 7 rights. Rules that are ambiguous as to their application to Section 7 activity, and contain no limiting language or context that would clarify to employees that the rule Don’t release confidential guest, team member or company information. . . . We found this section of the handbook to be unlawful. Its instruction that employees not “release confidential guest, team member or company information” would reasonably be interpreted as prohibiting employees from discussing and disclosing information regarding their own conditions of employment, as well as the conditions of employment of employees other than themselves--activities that are clearly protected by Section 7. The Board has long recognized that employees have a right to discuss wages and conditions of employment with third parties as well as each other and that rules prohibiting the communication of confidential information without exempting Section 7 activity inhibit this right because employees would reasonably interpret such prohibitions to include information concerning terms and conditions of employment. See, e.g., Cintas Corp., 344 NLRB 943, 943 (2005), enfd. 482 F.3d 463 (D.C. Cir. 2007). […] Several Policy Provisions Are Overbroad, Including Those on ‘Non-Public Information’ and ‘Friending Co-Workers’ In this case, we again found that certain portions of the Employer’s policy governing the use of social RETURN TO TABLE OF CONTENTS media would reasonably be construed to chill the exercise of Section 7 rights in violation of the Act. The Employer--a motor vehicle manufacturer-maintains a social media policy that includes the following: USE GOOD JUDGMENT ABOUT WHAT YOU SHARE AND HOW YOU SHARE If you engage in a discussion related to [Employer], in addition to disclosing that you work for [Employer] and that your views are personal, you must also be sure that your posts are completely accurate and not misleading and that they do not reveal nonpublic company information on any public site. If you are in doubt, review the [Employer’s media] site. If you are still in doubt, don’t post. Non-public information includes: • • • • • • • • • • • Any topic related to the financial performance of the company; Information directly or indirectly related to the safety performance of [Employer] systems or components for vehicles; [Employer] Secret, Confidential or AttorneyClient Privileged information; Information that has not already been disclosed by authorized persons in a public forum; and Personal information about another [Employer] employee, such as his or her medical condition, performance, compensation or status in the company. When in doubt about whether the information you are considering sharing falls into one of the above categories, DO NOT POST. Check with [Employer]. Communications or [Employer] Legal to see if it’s a good idea. Failure to stay within these guidelines may lead to disciplinary action. Respect proprietary information and content, confidentiality, and the brand, trademark and copyright rights of others. Always cite, and obtain permission, when quoting someone else. Make sure that any photos, music, video or other content you are sharing is legally sharable or that you have the owner’s permission. If you are unsure, you should not use. Get permission before posting photos, video, quotes or personal information of anyone other than you online. Do not incorporate [Employer] logos, trademarks or other assets in your posts. We found various provisions in the above section to be unlawful. Initially, employees are instructed to be sure that their posts are “completely accurate and not misleading and that they do not reveal non-public information on any public site.” The term “completely accurate and not misleading” is overbroad because it would reasonably be interpreted to apply to discussions about, or criticism of, the Employer’s labor policies and its treatment of employees that would be protected by the Act so long as they are not maliciously false. Moreover, the policy does not provide any guidance as to the meaning of this term by specific examples or limit the term in any way that would exclude Section 7 activity. We further found unlawful the portion of this provision that instructs employees not to “reveal nonpublic company information on any public site” and then explains that nonpublic information encompasses “[a]ny topic related to the financial performance of the company”; “[i]nformation that has not already been disclosed by authorized persons in a public forum”; and “[p]ersonal information about another [Employer] employee, such as . . . performance, compensation or status in the company.” Because this explanation specifically encompasses topics related to Section 7 activities, employees would reasonably construe the policy as precluding them from discussing terms and conditions of employment among themselves or with non-employees. The section of the policy that cautions employees that “[w]hen in doubt about whether the information you are considering sharing falls into one of the [prohibited] categories, DO NOT POST. Check with [Employer] Communications or [Employer] Legal to see if it’s a good idea[,]” is also unlawful. The Board has long held that any rule that requires employees to secure permission from an employer as a precondition to engaging in Section 7 activities violates the Act. See Brunswick Corp., 282 NLRB 794, 794-795 (1987). The Employer’s policy also unlawfully prohibits employees from posting photos, music, videos, and the quotes and personal information of others without obtaining the owner’s permission and ensuring that the content can be legally shared, and from using the Employer’s logos and trademarks. Thus, in the absence of any further explanation, employees would reasonably interpret these provisions as proscribing the use of photos and videos of employees engaging in Section 7 activities, including photos of picket signs containing the Employer’s logo. Although the Employer has a proprietary interest in its trademarks, including its logo if trademarked, we found that employees’ non-commercial use of the Employer’s logo or trademarks while engaging in Section 7 activities would not infringe on that interest. We found lawful, however, this section’s bulleted prohibitions on discussing information related to the “safety performance of [Employer] systems or RETURN TO TABLE OF CONTENTS components for vehicles” and “Secret, Confidential or Attorney-Client Privileged information.” Neither of these provisions refers to employees, and employees would reasonably read the safety provision as applying to the safety performance of the Employer’s automobile systems and components, not to the safety of the workplace. The provision addressing secret, confidential, or attorney-client privileged information is clearly intended to protect the Employer’s legitimate interest in safeguarding its confidential proprietary and privileged information. We also looked at the following provisions: TREAT EVERYONE WITH RESPECT Offensive, demeaning, abusive or inappropriate remarks are as out of place online as they are offline, even if they are unintentional. We expect you to abide by the same standards of behavior both in the workplace and in your social media communications. OTHER [EMPLOYER] POLICIES THAT APPLY Think carefully about ‘friending’ co-workers . . . on external social media sites. Communications with coworkers on such sites that would be inappropriate in the workplace are also inappropriate online, and what you say in your personal social media channels could become a concern in the workplace. [Employer], like other employers, is making internal social media tools available to share workplace information within [Employer]. All employees and representatives who use these social media tools must also adhere to the following: • Report any unusual or inappropriate internal social media activity to the system administrator. [Employer’s] Social Media Policy will be administered in compliance with applicable laws and regulations (including Section 7 of the National Labor Relations Act). As to these provisions, we found unlawful the instruction that “[o]ffensive, demeaning, abusive or inappropriate remarks are as out of place online as they are offline.” Like the provisions discussed above, this provision proscribes a broad spectrum of communications that would include protected criticisms of the Employer’s labor policies or treatment of employees. Similarly, the instruction to be aware that “[c]ommunications with coworkers . . . that would be inappropriate in the workplace are also inappropriate online” does not specify which communications the Employer would deem inappropriate at work and, thus, is ambiguous as to its application to Section 7. The provision of the Employer’s social media policy instructing employees to “[t]hink carefully about ‘friending’ co-workers” is unlawfully overbroad because it would discourage communications among co-workers, and thus it necessarily interferes with Section 7 activity. Moreover, there is no limiting language clarifying for employees that it does not restrict Section 7 activity. We also found unlawful the policy’s instruction that employees “[r]eport any unusual or inappropriate internal social media activity.” An employer violates the Act by encouraging employees to report to management the union activities of other employees. See generally Greenfield Die & Mfg. Corp., 327 NLRB 237, 238 (1998) and cases cited at n.6. Such statements are unlawful because they have the potential to discourage employees from engaging in protected activities. Here, the Employer’s instruction would reasonably be construed by employees as applying to its social media policy. Because certain provisions of that policy are unlawful, as set forth above, the reporting requirement is also unlawful. Finally, we concluded that the policy’s “savings clause,” under which the Employer’s “Social Media Policy will be administered in compliance with applicable laws and regulations (including Section 7 of the National Labor Relations Act),” does not cure the ambiguities in the policy’s overbroad rules. [General Motors, Case 07-CA053570] […] EMPLOYER’S ENTIRE REVISED SOCIAL MEDIA POLICY—WITH EXAMPLES OF PROHIBITED CONDUCT--IS LAWFUL In this case, we concluded that the Employer’s entire revised social media policy, as attached in full, is lawful. We thus found it unnecessary to rule on the Employer’s social media policy that was initially alleged to be unlawful. As explained above, rules that are ambiguous as to their application to Section 7 activity and that contain no limiting language or context to clarify that the rules do not restrict Section 7 rights are unlawful. In contrast, rules that clarify and restrict their scope by including examples of clearly illegal or unprotected conduct, such that they could not reasonably be construed to cover protected activity, are not unlawful. RECENT CASES REGARDING SECTION 7 Confidentiality Provisions and Wage Information Generally This case arrived at the Fifth Circuit after the National Labor Relations Board (NLRB) affirmed the administrative law judge’s (ALJ) ruling that Flex Frac’s confidentiality clause violated the National Labor Relations Act (NLRA) because—while there was no explicit reference to wages—the clause was RETURN TO TABLE OF CONTENTS “overly broad and contained language employees could reasonably interpret as restricting the exercise of their Section 7 rights.” Flex Frac required each new employee to sign an agreement with a confidentiality clause, which includes the aforementioned provision. The Court considered the NLRB’s ruling that the clause violated Section 8 of the NLRA, restating the standard from NLRB v. Brookshire Grocery Co. that “a workplace rule that forbids the discussion of confidential wage information between employees…patently violates section 8(a)(1).” To make this determination, the Court utilized a two-tier test. First, the Court had to decide whether the clause “explicitly [restricted] activities protected by Section 7.” Because the rule at issue did not make an explicit restriction of Section 7 activities, the Court moved to the second-tier determination of whether the rule falls in one of the following categories: “(1) employees would reasonable construe the language to prohibit Section 7 activity; (2) the rule was promulgated in response to union activity; or (3) the rule has been applied to restrict the exercise of Section 7 rights.” Focusing on the employees’ reasonable construction of the clause, the Court found no indication in the clause that employee wages were not included in “personnel information.” It further found that “by specifically identifying ‘personnel information’ as a prohibited category, Flex Frac has implicitly included wage information in its list, especially in light of its prohibition against disclosing [‘costs’].” The Court additionally found that Flex Frac provided no limiting or distinctive language for “personnel information” that would prevent the “chilling effect” of Section 7 rights that the NLRA aims to avoid. Therefore, the policy could cause employees to reasonably conclude that they were prohibited from discussing wages. The Fifth Circuit thus denied Flex Frac’s petition for review and enforced the order of the NLRB. Flex Frac Logistics, L.L.C. v. NLRB., 746 F.3d 205 (5th Cir. 2014). Social Media and Employer Anti-Harassment & Anti-Bullying Policies In Hispanics United, one employee, Lydia CruzMoore, often criticized other employees’ work performance. Cruz-Moore also expressed to one such employee, Marianna Cole-Rivera, that she intended to discuss her concerns with management. Cole-Rivera, in turn, posted a message on her Facebook page stating, “Lydia Cruz, a coworker feels that we don’t help our clients enough […]. I about had it! My fellow coworkers how do u feel?” Cole-Rivera made the post from her home, using her personal computer. Other employees responded to the post in kind, objecting to Cruz-Moore’s alleged criticisms of them. Cole-Rivera was terminated by their employer for violating a “zero tolerance” bullying and harassment policy. The NLRB found that the termination violated Section 8(a)(1) of the NLRA. Even though the Facebook post gave no obvious indication that the employees were considering group action, the activity was nonetheless “concerted activity” that the employees engaged in for the “purpose of mutual aid or protection”—it was a first step towards the employees’ defending themselves against accusations they reasonably believed Cruz-Moore would make to management. The activity therefore fell within the protections of Section 7 of the NLRA. Moreover, even if the employer was concerned with workplace bullying or harassment and the Facebook post constituted either, any such policy discouraging the free exercise of Section 7 rights by imposing discipline on the basis of subjective reaction to the exercise of those rights would also violate Section 8(a)(1). Hispanics United of Buffalo Inc., 359 NLRB No. 37 (2012). Employer Online Communications Policies and Prohibitions on General Inappropriateness In Costco Wholesale, the employer maintained a policy that prohibited “unauthorized posting, distribution, removal or alteration of any material on Company property”; employees’ discussion of “private matters of members and other employees . . . includ[ing] topics such as, but not limited to, sick calls, leaves of absence, FMLA call-outs, ADA accommodations, workers' compensation injuries, personal health information, etc.”; the sharing, transmission or storage of “[s]ensitive information such as membership, payroll, confidential financial, credit card numbers, social security numbers, or employee personal health information”; the sharing of "confidential" information, such as employees' names, addresses, telephone numbers, and email addresses; and electronically posting statements that "damage the Company, defame any individual or damage any person's reputation." It also maintained a policy requiring that employees use “appropriate business decorum” in their communications with others. The NLRB found that these policies violated Section 8(a)(1) of the NLRA. They tended to chill employees in the exercise of their Section 7 rights because such policies could reasonably be read as prohibiting concerted communications that criticized the employer or its working conditions. RETURN TO TABLE OF CONTENTS Costco Wholesale Corp., 358 NLRB No. 106 (2012). Employer “Courtesy” Policies In Karl Knauz, the employer maintained a “courtesy policy” stating: “Courtesy is the responsibility of every employee. Everyone is expected to be courteous, polite and friendly to our customers, vendors and suppliers, as well as to their fellow employees. No one should be disrespectful or use profanity or any other language which injured the image or reputation of the Dealership.” Such a policy tended to chill employees in the exercise of their Section 7 rights because employees would reasonably construe its prohibitions to include statements among and by employees objecting to their work conditions and seeking support in improving those conditions. Moreover, nothing in the policy communicated to employees that Section 7 activities were not prohibited by it. It therefore violated Section 8(a)(1) of the NLRA. Karl Knauz Motors, Inc., 358 NLRB No. 164 (2013). Confidentiality Provisions Regarding HR Investigations In Banner Health System, the employer asked an employee not to discuss with coworkers an ongoing human resources investigation. In fact, each time an HR representative interviewed an employee as part of an internal investigation, the employee would always be instructed not to discuss the ongoing investigation with other employees. The NLRB found that this prohibition had a “reasonable tendency to coerce employees” and thus acted as an unlawful restraint on Section7 rights, including the right to discuss ongoing investigations. Moreover, such a prohibition was not justified by an alleged need to protect the integrity of the employer’s investigations, as such justification alone did not outweigh these rights. “Rather, in order the minimize the impact on Section 7 rights, it was the [employer’s] burden ‘to first determine whether in any give[n] investigation witnesses need[ed] protection, evidence [was] in danger of being destroyed, testimony [was] in danger of being fabricated, or there [was] a need to prevent a cover up.’” Banner Health System, 358 NLRB No. 93 (2012). Media & Confidentiality Policies In DirecTV, the employer’s handbook contained provisions that prohibited employees from contacting the media generally; contacting the media about the employer without its permission; speaking with law enforcement agencies directly regarding other employees; and from discussiong “confidential” information with others, including other employees, about one’s job, business, work projects, customers, employees or employee records. The employer also maintained policies that prohibited employees from blogging, entering chat rooms, posting messages on websites or otherwise discussing company information not already disclosed as public record. The NLRB found that these provisions and policies violated Section 8(a)(1) of the NLRA. First, the NLRB emphasized that communications by employees with the press about labor disputes are protected by Section 7 of the NLRA. In addition, employees cannot be required to secure permission from their employer as a precondition to engaging in Section 7 activity. Thus, the policies prohibiting employees from contacting the media about the employer, whether at all or without first obtaining the employer’s permission, would reasonably lead employees to conclude that these policies applied to communications with the media regarding labor disputes — the very type of communications protected by Section 7. Moreover, discussion by employees about their wages and other terms and conditions of their employment is protected by Section 7. Without exemptions for communications with union representatives, NLRB agents, or other government agencies about workplace matters, employees would reasonably interpret the employer’s broad prohibition on discussion about job details, company business, work projects and employee records as prohibiting such communications. Finally, and similarly, the broad prohibition against electronic disclosure of “company information,” without express exemption for activity protected by Section 7, would cause employees to reasonably interpret the policy as barring protected activity. DirecTV U.S. DirecTV Holdings, LLC, 359 NLRB No. 37 (2013). Prohibitions on “Negativity or Gossip” In Hills and Dales, the employer’s policy required that employees “represent [the employer] in the community in a positive and professional manner in every opportunity” and prohibited engagement in “negativity or gossip,” among other things. The NLRB found that the policy that employees represent the employer “in the community in a positive and professional manner” did not prohibit Section 7 activities, and that it could not be read as such. Instead, it was simply a “call for employees to maintain a high standard of professionalism with potential (or actual) customers.” It thus did not violate Section 8(a)(1) of the NLRA. RETURN TO TABLE OF CONTENTS It also found, however, that the prohibition on “negativity or gossip” did violate Section 8(a)(1). Although prohibitions on “gossip” alone were not ordinarily construed as prohibiting Section 7 activity, the prohibition on “negativity” was so “ambiguous, imprecise and overbroad” that a reasonable employee would construe it as prohibiting protected communications about working conditions and terms of employment. Hills and Dales General Hosp., 360 NLRB No. 70 (2014). Prohibitions on “Poor Work Habits” and General Inappropriateness In First Transit, the employer’s policy prohibited, among other things, “discourteous or inappropriate attitude or behavior toward passengers, other employees or members of the public.” The NLRB found that this prohibition was “unlawfully overbroad” and violated Section 8(a)(1) of the NLRA. A reasonable employee could interpret the prohibition as a restriction on communications concerning employment, including those falling under the protections of Section 7. (On the other hand, the employer’s prohibition against “[p]rofane or abusive language where the language used is uncivil, insulting, contemptuous, vicious or malicious” could not be construed as an unlawful restriction on Section 7 activities. It was not overly ambiguous or overbroad, and a reasonable employee would read it as an expectation of general civility.) First Transit, Inc., 360 NLRB No. 72 (2014). Off-Duty Access In J.W. Marriott, the employer hotel’s policy prohibited off-duty access by restricting employees from entering the interior areas of the hotel more than fifteen minutes before or after a work shift, but permitted such entrance with prior approval from a manager. The policy expressly did not apply to the exterior of the hotel or its parking lot. The NLRB found that the policy unlawfully restricted Section 7 activity and was invalid under the three-part analysis of Tri-County Medical Center, 222 NLRB 1089 (1976). Under Tri-County, a rule restricting off-duty access is valid “only if it (1) limits access solely with respect to the interior of the plant and other working areas; (2) is clearly disseminated to all employees; and (3) applies to off-duty employees seeking access to the plant for any purpose and not just to those employees engaging in union activity.” Id. at 1089. The exception in the policy providing for entry in unspecified circumstances with a manager’s “prior approval” provided the employer with unlimited discretion to decide when and why an employee could enter the hotel off-duty. With such unfettered discretion, management could restrict or discourage Section 7 activity by denying off-duty access to those engaged in it. Moreover, in order to access the premises off-duty, an employee would necessarily have to disclose the reason he or she sought access when seeking prior permission to do so, chilling the exercise of Section 7 rights. An employee could thus reasonably interpret the provision as a prohibition on Section 7 activity. The policy’s failure to adequately define the circumstances in which off-duty access would be permitted ultimately rendered it unlawful. J.W. Marriott, 359 NLRB No. 8 (2012). Off-Duty Access — a Change in Direction? In Sodexo, the employer hospital’s policy prohibited off-duty employees from entering workplace or any work area, with exceptions for visiting a patient, receiving medical care or conducting “hospital-related business,” defined as “the pursuit of the employee’s normal duties or duties as specifically directed by management.” Employees were also occasionally permitting to enter the workplace to pick up a paycheck. When employees otherwise entered the workplace when off duty, they were disciplined. Contrary to a 2012 board ruling in the matter, in November of 2014, the NLRB found that this policy did not violate Section 8(a)(1) of the NLRA (or TriCounty). The exceptions to the policy for patient visitation and medical care did not render it unlawful. Nor did the “hospital related business” exception or the definitive language permitting for off-duty access for business “as specifically directed by management” (originally held to be overbroad). The NLRB noted that “this provision is not really an exception at all, but a clarification that employees who are not on their regular shifts, but are nevertheless performing their duties as employees under the direction of management, may access the facility.” The policy was ultimately deemed reasonable. Sodexo America LLC, 358 NLRB No. 79 (2014). Mandatory Class Arbitration Agreements — Fifth Circuit vs. NLRB Last year, the NLBR issued an eye-opening decision in D.R. Horton, Inc., 357 NLRB No. 184 (2012). In that case, the NLRB held that Section 7 of the NLRA prohibits employers from maintaining a mandatory arbitration policy that waives employees’ rights to participate in class or collective proceedings. RETURN TO TABLE OF CONTENTS D.R. Horton appealed the decision to the Fifth Circuit. D.R. Horton, Inc. v. NLRB, 737 F.3d 344 (5th Cir. 2013). On December 3, 2013, the Fifth Circuit held that the D.R. Horton decision by the NLRB violated the Federal Arbitration Act (“FAA”). In other words, the Court held that a federal agency’s interpretation of one federal law violated another federal law. In D.R. Horton, a home-builder, required employees to sign an arbitration agreement that limited disputes to individual claims and waived the employees’ rights to bring class and collective claims. The NLRB held that the waiver interfered with employee rights under Section 7, reasoning that “employees who join together to bring employmentrelated claims on a class-wide or collective basis in court or before an arbitrator are exercising rights protected by Section 7 of the NLRA.” The Fifth Circuit rejected the NLRB’s approach based on the FAA, which generally requires courts to enforce arbitration agreements. The Court first considered the NLRB’s argument that the FAA “savings clause” justified its decision because D.R. Horton’s arbitration agreement violated the collective action provisions of the NLRA. (The FAA savings clause allows courts to refuse to enforce arbitration agreements on the same grounds that apply to any other contract.) Relying on the U.S. Supreme Court decision in AT&T Mobility v. Concepcion, 131 S. Ct. 1740 (2011), however, the Fifth Circuit found that the NLRB’s decision discouraged the use of arbitration agreements, that the NLRB ruling was inconsistent with the FAA, and that the FAA savings clause therefore did not apply. Next, the Court considered whether the NLRA contains a congressional command to override the FAA and found that there was nothing in the NLRA to even suggest that Congress intended to override the FAA. The Court noted that collective actions were prohibited under other statutes, so there was no mandate that the NLRA grants employees a substantive right to file class actions. The Fifth Circuit’s decision is a major victory for employers seeking to include class action waivers in arbitration agreements. This decision, along with important decisions by the U.S. Supreme Court and Texas Supreme Court over the past decade, reinforces the viability of compelling resolution of employment disputes in arbitration instead of in court. The wisdom of using mandatory arbitration agreements is a complex decision, however, that may vary from one geographic location to another, from industry to industry, and that should be carefully considered from the specific employer’s circumstances and location. Arbitration Agreements and Employees’ Rights to Collective Class Actions — NLRB View The NLRB recently reaffirmed its position in its D.R. Horton Inc. decision that arbitration agreements that waived employee’s rights to bring class or collective actions are invalid. Murphy Oil, a retail fueling station, required each of its job applicants and employees to sign a “Binding Arbitration Agreement and Waiver of Jury Trial.” Disregarding the agreement, four employees filed a collective action against Murphy Oil in federal district court. As provided by the agreement, Murphy Oil filed a motion to compel arbitration. In response to Murphy Oil’s motion, the named plaintiff filed a formal unfair labor practice complaint with the NLRB. Murphy Oil subsequently rewrote its arbitration agreement to allow employees to file collective actions with the NLRA; however, Murphy Oil still sought dismissal of the claims under the Federal Arbitration Act (FAA). The federal district court granted Murphy Oil’s motion to compel the arbitration, while the NLRB subsequently found in a 32 decision that Murphy Oil violated the NLRA by requiring employees to sign the arbitration agreement and then seeking to enforce it in court. Although the NLRB D.R. Horton Inc. decision has been rejected by several courts, including the Second, Eighth, and Fifth Circuit, which heavily relied on Supreme Court precedent, the NLRB reasoned that mandatory arbitration agreements that bar employees from joining and then bringing class or collective actions violates employees’ right to concerted action for protection under Section 7 of the NLRA. Additionally, agreements that require employees to file complaints against employers individually violate Section 7 of NLRA. The NLRB stated that finding arbitration agreements unlawful under the NLRA for prohibiting employees from being class or collective claims does not conflict with the FAA. The NLRB heavily criticized the Fifth Circuit’s reasoning in D.R. Horton, Inc. v. N.L.R.B., 737 F.3d 344 (5th Cir. 2013). The NLRB was not persuaded by the Fifth Circuit’s reasoning that acting in concert was only an employee’s procedural right that was subject to waiver; rather, the NLRB found that it was an employee’s substantive right. In addition, the NLRB criticized the Fifth Circuit for finding that the NLRA would cede to the FAA when the two statutes conflicted. As the two dissents and the large amount of pending matters before courts demonstrate, it is likely that this issue will be before the Supreme Court for interpretation. D.R. Horton, Inc. v. N.L.R.B., 737 F.3d 344 (5th Cir. 2013). Murphy Oil USA, Inc., 361 NLRB No. 72 (2014). RETURN TO TABLE OF CONTENTS Severance Agreements In Pratt, eleven employees were laid off due to union activity. When they were terminated, in order to obtain severance pay, these former employees were required to sign a severance agreement containing confidential and nondisparagement clauses. The confidentiality clause stated, in part: “Employee will keep the fact and terms of this Agreement completely confidential and not disclose its contents to anyone except, on a confidential basis, to his/her spouse, tax accountant, financial advisor, or attorney.” The nondisparagement clause stated: “Employee agrees that he/she will not make any oral or written statement or engage in conduct that either directly or indirectly disparages, criticizes, defames, or otherwise casts a negative characterization upon Pratt and/or any Pratt Entity, nor will he/she encourage or assist anyone else to do so. Nothing in this section is intended to prevent Employee from testifying truthfully in any legal proceeding or complying with any lawful subpoena or court order.” The NLRB adopted the administrate law judge’s finding (made among a number findings of Section 8(a)(1) violations by the employer) that such provisions violated Section 8(a)(1) of the NLRA. The provisions were “too broad” and “clearly prohibit[ed] employees from engaging in activity protected by Section 7 of the Act, including taking concerted action with fellow employees, or even talking to them, union representatives, or agents of the National Labor Relations Board with respect to the agreement.” The provisions also prohibited employees from engaging in other Section 7 activity, such as criticizing their employer for its unlawful conduct in terminating them. Pratt (Corrugated Logistics), LLC, 360 NLRB No. 48 (2014). RETURN TO TABLE OF CONTENTS Chapter 3 Noncompetition Covenants 3-1 History and Background of Noncompetition Covenants in Texas Texas courts consistently hold that noncompetition covenants limit competition and are restraints of trade. Therefore, they are presumed to be invalid unless specifically authorized by statute.1 The Texas Legislature passed the Covenant Not To Compete Act in 1989 (the “Act”). It was amended in 1993 and 1999. Currently, it allows the enforceability of noncompetition covenants in certain instances and provides, as a general rule: Notwithstanding Section 15.05 of this code, and subject to any applicable provision of Subsection (b), a covenant not to compete is enforceable if it is ancillary to or part of an otherwise enforceable agreement at the time the agreement is made to the extent that it contains limitations as to time, geographical area, and scope of activity to be restrained that are reasonable and do not impose a greater restraint than is necessary to protect the goodwill or other business interest of the promisee.2 1. See Hill v. Mobile Auto Trim, Inc., 725 S.W.2d 168, 172 (Tex. 1987) (“covenants not to compete which are primarily designed to limit competition or restrain the right to engage in a common calling are not enforceable.”). 2. Tex. Bus. & Com. Code § 15.50(a). TX_Litigator's_Guide_Fullbook.indb 43 TX Departing Employee Cases 43 10/1/14 4:51:30 PM Chapter 3 Noncompetition Covenants The notion of what is “ancillary to” an otherwise enforceable agreement is the subject of much litigation and will be discussed in detail below. The Act provides for monetary damages and injunctive relief.3 The Act’s 1993 amendments made clear that the Act is exclusive as to remedies, and courts may no longer rely on common law theories in addition to the Act to analyze noncompetition covenants. So, for all intents and purposes, the Act is the exclusive source for enforcement of noncompetition covenants. After the Act’s passage in 1989, there was tension between the courts and legislature about enforcing noncompetition covenants. This tension was, in part, the reason for the additional amendments. The Texas Supreme Court evolved slightly regarding its interpretation of the Act. For example, in 1994, the court in Light provided a two-pronged test for meeting the “otherwise enforceable agreement” requirement in the context of at-will employees: (1) The consideration given by the employer in the otherwise enforceable agreement must give rise to the employer’s interest in restraining the employee from competing; and (2) The covenant must be designed to enforce the employee’s consideration or return promise in the otherwise enforceable agreement.4 This test required a relationship between the agreement and necessity for the restraint on trade. In Light, the court determined that the promises given by the former employee (14 days’ notice and an inventory of her property at the time she left employ) had no relationship to the covenant.5 The court also confirmed that enforceability of a noncompetition covenant is a question of law.6 Light was the law of Texas until Texas’s Supreme Court in Sheshunoff decided to overrule Light’s holding that a unilateral contract could not comply with the Act because the contract was Tex. Bus. & Com. Code § 15.50(a). Light v. Centel Cellular Co. of Tex., 883 S.W.2d 642, 647 (Tex. 1994). 5. Light v. Centel Cellular Co. of Tex., 883 S.W.2d 642, 649 (Tex. 1994). 6. Light v. Centel Cellular Co. of Tex., 883 S.W.2d 642, 644 (Tex. 1994). 3. 4. 44 TX Departing Employee Cases TX_Litigator's_Guide_Fullbook.indb 44 10/1/14 4:51:31 PM History and Background of Noncompetition Covenants in Texas 3-1 not enforceable at the time it was made.7 Instead, the court in Sheshunoff found that a unilateral contract becomes enforceable once it is performed, mainly by providing the contemplated consideration at a later time.8 In doing also, the court stated, “We now conclude, contrary to Light, that the covenant need only be ‘ancillary to or part of ’ the agreement at the time the agreement is made.9 Accordingly, a unilateral contract formed when the employer performs a promise, which was illusory when made, can satisfy the requirements of the Act.” Then, Mann Frankfort10 took most of the teeth out of Light. In Mann Frankfort, the court explained that, if the nature of employment required an employer to furnish the employee with confidential information, there was an implied promise to provide confidential information.11 In Mann Frankfort, there was no express promise to provide access to confidential information, although the former employee had promised not to disclose confidential information. The court held that “[w]hen the nature of the work the employee is hired to perform requires confidential information to be provided for the work to be performed by the employee, the employer impliedly promises confidential information will be provided.”12 The court explained, “[w]hen it is clear that performance expressly promised by one party is such that it cannot be accomplished until a second party has first performed, the law will deem the second party to have impliedly promised to perform the necessary action.”13 Next, in a significant shift in attitude, the Texas Supreme Court in Marsh explained that the Act was intended to expand, rather than restrict, the enforceability of noncompetition agreements.14 Then, the court diluted the “ancillary to” requirement to only require that a covenant be “supplementary” to the agreement (and Alex Sheshunoff, Mgmt. Servs. v. Johnson, 209 S.W.3d 644, 646 (Tex. 2006). Alex Sheshunoff, Mgmt. Servs. v. Johnson, 209 S.W.3d 644, 651 (Tex. 2006). 9. Alex Sheshunoff, Mgmt. Servs. v. Johnson, 209 S.W.3d 644, 651 (Tex. 2006). 10. Mann Frankfort Stein & Lipp Advisors, Inc. v. Fielding, 289 S.W.3d 844, 848-49 (Tex. 2009). 11. Mann Frankfort Stein & Lipp Advisors, Inc. v. Fielding, 289 S.W.3d 844, 850 (Tex. 2009). 12. Mann Frankfort Stein & Lipp Advisors, Inc. v. Fielding, 289 S.W.3d 844, 850 (Tex. 2009). 13. Mann Frankfort Stein & Lipp Advisors, Inc. v. Fielding, 289 S.W.3d 844, 851 (Tex. 2009). 14. Marsh USA Inc. v. Cook, 354 S.W.3d 764, 775 (Tex. 2011). 7. 8. TX_Litigator's_Guide_Fullbook.indb 45 TX Departing Employee Cases 45 10/1/14 4:51:31 PM Chapter 3 Noncompetition Covenants the consideration given) and need not actually “give rise” to the interest in restraining the individual from competing. Instead, the covenant need only be “reasonably related” to the interest.15 In Marsh, the “ancillary” requirement was met “because the business interest being protected (goodwill) [was] reasonably related to the consideration given (stock options). Section 15.50 requires that there be a nexus between the covenant not to compete and the interest being protected.”16 Moreover, Texas law does not require “that the employee receive consideration for the noncompete agreement prior to the time the employer’s interest in protecting its goodwill arises.”17 The court found that awarding stock options to purchase the employer’s stock at a discount price “provided the required statutory nexus between the noncompete” and the employer’s interest in protecting its goodwill.18 3-2 Elements of a Claim To enforce a noncompetition covenant, a movant must prove: 1. A personal services contract that supports the covenant;19 2. The covenant was ancillary to or part of an otherwise enforceable agreement;20 3. The covenant’s limitations are reasonable as to time, geographic area, and scope of activity to be restrained;21 4. The covenant does not impose a greater restraint than necessary to protect the employer’s business interest;22 and 5. Breach of the covenant.23 Marsh USA Inc. v. Cook, 354 S.W.3d 764, 774-75 (Tex. 2011). Marsh USA Inc. v. Cook, 354 S.W.3d 764, 780 (Tex. 2011). 17. Marsh USA Inc. v. Cook, 354 S.W.3d 764, 778 (Tex. 2011). 18. Marsh USA Inc. v. Cook, 354 S.W.3d 764, 777 (Tex. 2011). 19. See Tex. Bus. & Com. Code § 15.51(b). 20. Marsh USA Inc. v. Cook, 354 S.W.3d 764, 771 (Tex. 2011). 21. Marsh USA Inc. v. Cook, 354 S.W.3d 764, 771 (Tex. 2011). 22. Marsh USA Inc. v. Cook, 354 S.W.3d 764, 777 (Tex. 2011). 23. Shoreline Gas, Inc. v. McGaughey, 2008 Tex. App. LEXIS 2760, at *34 (Tex. App.— Corpus Christi Apr. 17, 2008, no pet.) (mem. op.) (Employer “produced no evidence that 15. 16. 46 TX Departing Employee Cases TX_Litigator's_Guide_Fullbook.indb 46 10/1/14 4:51:31 PM Elements of a Claim 3-2 Enforcement of a covenant not to compete is a question of law.24 The Act makes a distinction between a contract for personal services and one that is not. Specifically, Section 15.51(b) states: If the primary purpose of the agreement to which the covenant is ancillary is to obligate the promisor to render personal services, for a term or at will, the promisee has the burden of establishing that the covenant meets the criteria specified by Section 15.50 of this code. If the agreement has a different primary purpose, the promisor has the burden of establishing that the covenant does not meet those criteria. For the purposes of this subsection, the “burden of establishing” a fact means the burden of persuading the triers of fact that the existence of the fact is more probable than its nonexistence. 3-2:1Personal Services Generally, when a contract’s primary purpose is not to render personal service, that contract involves a sale of a business. This provision, although worded a bit oddly, was seemingly written to make it easier to enforce a covenant given in connection with the sale of a business. For example, in Heritage Operating, LLP v. Rhine Bros., LLC, a company’s owners sold the company to another company; the sellers-owners, as part of the sale, signed a noncompetition agreement covering seventy-five miles within prohibited cities for a ten-year period.25 An appellate court found the ten-year period was not unreasonable when ancillary to a contract for the sale of a business.26 This case provides an example of courts enforcing and giving deference to covenants connected [defendant] had actually breached or violated any covenant or undertaking contained in the Agreement, or even that [defendant] had threatened to breach or violate any such undertakings.” The court noted that the employer’s “fear or apprehension of the possibility of injury” was “insufficient to establish a probability of irreparable injury as would support a temporary injunction.”). 24. Mann Frankfort Stein & Lipp Advisors, Inc. v. Fielding, 289 S.W.3d 844, 849 (Tex. 2009); Martin v. Credit Prot. Ass’n, Inc., 793 S.W.2d 667, 668-69 (Tex. 1990). 25. Heritage Operating, L.P. v. Rhine Bros., LLC, 2012 Tex. App. LEXIS 4939, at *2-3 (Tex. App.—Fort Worth 2012, no pet.) (mem. op.). 26. Heritage Operating, L.P. v. Rhine Bros., LLC, 2012 Tex. App. LEXIS 4939, at *18 (Tex. App.—Fort Worth 2012, no pet.) (mem. op.). TX_Litigator's_Guide_Fullbook.indb 47 TX Departing Employee Cases 47 10/1/14 4:51:31 PM Chapter 3 Noncompetition Covenants with the sale of a business, whereas courts would be highly unlikely to enforce a covenant with similar restrictions in a personal services contract. 3-2:2Ancillary To The concept of “otherwise enforceable agreements” has troubled courts. They have particularly struggled with the illusory nature of employment contracts that are at will.27 Sheshunoff makes clear that an at-will employment agreement can be enforced when there is a unilateral contract that later becomes binding.28 To be ancillary to an otherwise enforceable agreement, the consideration must be reasonably related to an interest worthy of protection and the covenant must be designed to enforce the employee’s consideration for the promise(s) found in the agreement.29 The term “reasonably related” shows a shift in Texas law. In 2012, the Texas Supreme Court “revisited Light [v. Centel Cellular Co. of Tex., 883 S.W.2d 642 (Tex. 1994)] and clarified that there is no requirement that ‘consideration for the otherwise enforceable agreement give rise to the interest in restraining the employee from competing. Rather, ‘[c]onsideration for a noncompete that is reasonably related to an interest worthy of protection, such as trade secrets, confidential information or goodwill, satisfies the statutory nexus.’”30 The notion of protectable interest is still at issue after Marsh. Examples of interests that are not protectable include general skills and knowledge developed during the course of the employment;31 personal goodwill;32 and professional referrals.33 Examples of 27. See Travel Masters, Inc. v. Star Tours, Inc., 827 S.W.2d 830, 832 (Tex. 1991) (where no other promise made, a contract for at will relationship is illusory). 28. Alex Sheshunoff, Mgmt. Servs. v. Johnson, 209 S.W.3d 644, 649-56 (Tex. 2006). 29. Marsh USA Inc. v. Cook, 354 S.W.3d 764, 777 (Tex. 2011). 30. CDX Holdings, Inc. v. Heddon, 2012 U.S. Dist. LEXIS 86041, *20 (N.D. Tex. Mar. 2, 2012) (explaining Marsh USA, Inc. v. Cook, 354 S.W.3d 764, 771 (Tex. 2011)) (restrictive covenants were ancillary to; “stock options, which were consideration for the noncompetition and non-solicitation covenants, were reasonably related to [plaintiff] interest in protecting its goodwill.”). 31. See Evan’s World Travel, Inc. v. Adams, 978 S.W.2d 225, 231 (Tex. App—Texarkana 1998, no pet.). 32. Hill v. Mobile Auto Trim, 725 S.W.2d 168, 171-72 (Tex. 1987). 33. Phillip H. Hunke, D.D.S., M.S.D., Inc. v. Wilcox, 815 S.W.2d 855, 858 (Tex. App.— Corpus Christi 1991, writ denied.). 48 TX Departing Employee Cases TX_Litigator's_Guide_Fullbook.indb 48 10/1/14 4:51:31 PM Elements of a Claim 3-2 interests that are protectable include: trade secrets;34 confidential or proprietary information;35 business goodwill;36 and customer information and customer lists.37 In summary, courts from Light to present held that a promise based upon contingent employment is illusory.38 This holding may be compared with Marsh, where stock options to support goodwill are enforceable,39 and also with an employment contract that provides for 30 days’ written notice prior to termination.40 Similarly, in 31-W Insulation Company, Inc. v. Dickey, the court held that an employer’s promise to give an employee two-weeks’ notice of termination and to compensate him during that twoweek period were not promises that gave rise to “an interest worthy DeSantis v. Wackenhunt Corp., 793 S.W.2d 670, 682 (Tex. 1990). Gallagher Healthcare Ins. Servs. v. Vogelsang, 312 S.W.3d 640, 647 (Tex. App.— Houston 2009, pet. denied). 36. Marsh USA Inc. v. Cook, 354 S.W.3d 764, 777 (Tex. 2011); Alex Sheshunoff Mgmt. Servs., LP v. Johnson, 209 S.W.3d 644, 649 (Tex. 2006). 37. Reliant Hosp. Partners, LLC v. Cornerstone Healthcare Group Holdings, Inc., 374 S.W.3d 488, 499 (Tex. App.—Dallas 2012, pet. filed) (“Customer lists, pricing information, client information, customer preferences, buyer contacts, blueprints, market strategies, and drawings have all been recognized as trade secrets.”) (citing T-N-T Motorsports, Inc. v. Hennessey Motorsports, Inc., 965 S.W.2d 18, 22 (Tex. App.—Houston [1st Dist.] 1998, pet. dism’d)). 38. Donahue v. Bowles, Troy, Donahue, Johnson, Inc., 949 S.W.2d 746, 750-51 (Tex. App.— Dallas 1997, writ denied). 39. Marsh USA, Inc. v. Cook, 354 S.W.3d 764, 766 (Tex. 2011). 40. TMC Worldwide, L.P. v. Gray, 178 S.W.3d 29, 37 (Tex. App.—Houston [1st Dist.] 2005, no pet.) (“a promise of a raise in wages to an at-will employee is illusory because it is dependent upon some period of continued employment; the employer could fire the employee and be under no obligation to perform the promise. In contrast, a promise to give 14-days written notice to terminate employment, or to provide an inventory upon termination, would not be “illusory” because it binds the promisor even though employment ends.”) (citations omitted); but c.f., Strickland v. Medtronic, Inc., 97 S.W.3d 835, 838 (Tex. App.—Dallas 2003, pet. dism’d) (“In order to alter the presumption of at-will employment, there must be an agreement that limits the employer’s right to terminate the employee in a meaningful and special way. Evan’s World Travel, Inc. v. Adams, 978 S.W.2d 225, 229 (Tex. App.—Texarkana 1998, no pet.). The termination provision in the Medtronic employment agreement specified ‘the employment shall continue at the will of Medtronic and the Employee and may be terminated either with or without reason or cause, provided: (a) Medtronic shall not terminate the employment on less than ninety (90) days’ notice except with reasonable cause.’ Contrary to Medtronic’s contentions, the contract does not purport to set a term of employment or limit its right to terminate Strickland without cause. The contract makes clear that Strickland can be terminated even if she was doing a good job should Medtronic decide to do so. Medtronic simply had to provide ninety days’ notice. Similarly, the provision indicating the noncompete clause would not be enforced if Strickland was terminated without cause does not limit Medtronic’s ability to terminate Strickland in any meaningful way. We therefore hold the employee agreement created an at-will employment relationship.”). 34. 35. TX_Litigator's_Guide_Fullbook.indb 49 TX Departing Employee Cases 49 10/1/14 4:51:31 PM Chapter 3 Noncompetition Covenants of protection by a covenant not to compete.”41 That case should be compared to Pearson v. Visual Innovations Company, Inc., where the court rejected Pearson’s argument that he was merely an at-will employee.42 There, the employer could not terminate the employee for six months unless it was determined, in the company’s “sole discretion” that his performance was unsatisfactory. Pearson was also supplied confidential information, specialized training, stock options, and other considerations.43 3-2:3Reasonableness A covenant’s reasonableness is a question of law.44 3-2:3.1Geography The Act requires that the “geographical area” specified within the covenant must be reasonable.45 Often, noncompetition covenants do not contain specific geographic restrictions. For example, a covenant may simply state that the former employee may not solicit former customers that he dealt with. Is this covenant void because it does not contain a specific geography restriction and, therefore, does not meet the requirements of the Act? If so, can the covenant be blue penciled?46 41. 31-W Insulation Co. v. Dickey, 144 S.W.3d 153, 159 (Tex. App.—Fort Worth 2004, no pet.). 42. Pearson v. Visual Innovations Company, Inc., No. 03-04-00563-CV, 2006 Tex. App. LEXIS 2795, at *14-18 (Tex. App.—Austin Apr. 6, 2006, pet. denied) (mem. op.). 43. Pearson v. Visual Innovations Company, Inc., No. 03-04-00563-CV, 2006 Tex. App. LEXIS 2795, at *18 (Tex. App.—Austin Apr. 6, 2006, pet. denied). 44. See DeSantis v. Wackenhunt Corp., 793 S.W.2d 670 (Tex. 1990). 45. Tex. Bus. & Com. Code § 15.50(a). 46. See Tex. Bus. & Com. Code Ann. § 15.51(c) (Vernon 2002) (The Act’s Section 15.51 “also contains a “blue pencil” provision, allowing courts to change some, but not all, of a covenant’s defects to make the agreement enforceable.); Marsh United States, Inc. v. Cook, 354 S.W.3d 764, 786-787 (Tex. 2011) (“In 2011, overbroad restrictions can strain the gears of an economic engine that has propelled this country so well, and so far. In 2011, terms too severe to be enforced can also escape challenge altogether, instead acting in terrorem to freeze an untold number of employees in place rather than allowing human capital to find its highest and best use and thus augment economic and technological growth.”) (citing Cynthia L. Estlund, Between Rights and Contract: Arbitration Agreements and NonCompete Covenants as a Hybrid Form of Employment Law, 155 U. Pa. L. Rev. 379, 406 (2006) (“An overbroad non-compete—one that lasts too long or that covers activities that do not threaten the employer’s legitimate interests—may deter the employee from quitting and competing even when she has a right to do so, or it may deter a competitor from hiring the employee.”). The in terrorem effect is magnified in jurisdictions like Texas, where judges simply “blue pencil” overbroad noncompetes to make them enforceable. See Tex. Bus. & Com. Code § 15.51(c); e.g., Prod. Action Int’l, Inc. v. Mero, 277 F. Supp. 2d 919, 931 (S.D. 50 TX Departing Employee Cases TX_Litigator's_Guide_Fullbook.indb 50 10/1/14 4:51:31 PM Elements of a Claim 3-2 Assuming a geographic territory is specified, courts generally enforce the geographic limitation if it bears a reasonable relationship to the area where the employee worked while employed.47 Thus, in Curtis v. Ziff Energy Group, the court noted the general rule: Generally, a reasonable area for purposes of a covenant not to compete is considered to be the territory in which the employee worked while in the employment of his employer.48 The court found a reasonable relationship between a former employee’s job description and the limitations in the covenant that restricted him from working for any oil and gas company in North America. This outcome may be compared to Rimkus Consulting Group, Inc. v. Cammarata where an employment agreement’s noncompetition covenant covered multiple counties in Texas, Mississippi, Alabama, and Florida, it was broader geographically than necessary where the employer worked primarily in Louisiana.49 Similarly to Rimkus, a Houston Court of Appeals held that a covenant not to compete covering the entire state of Texas was broader than necessary to protect Morrell’s business interests because Morrell’s provided no evidence that the former employee had worked for Morrell in any other city besides Houston and Beaumont and, moreover, no evidence that Morrell itself conducted business beyond San Antonio, Houston, and Beaumont.50 Usually, an indefinite or unlimited geographic restriction will be considered unreasonable.51 But Sheshunoff held that a covenant that Ind. 2003) (“A current employee may be frozen in his or her job by an unreasonably broad covenant. Even if the employee believes the covenant is too broad, she may be able to test that proposition only through expensive and risky litigation.”); Richard P. Rita Pers. Servs. Int’l., Inc. v. Kot, 229 Ga. 314, 191 S.E.2d 79, 81 (Ga. 1972) (“If severance is generally applied, employers can fashion truly ominous covenants with confidence that they will be pared down and enforced when the facts of a particular case are not unreasonable.”)”). 47. Property Tax Assocs. v. Staffelt, 800 S.W.2d 349, 351 (Tex. App.—El Paso 1990, writ denied); see Curtis v. Ziff Energy Group, Ltd., 12 S.W.3d 114, 119 (Tex. App.—Houston [14th Dist.] 1999, no pet.); see also Zep Mfg. Co. v. Harthcock, 824 S.W.2d 654, 660-61 (Tex. App.—Dallas 1992, no writ). 48. Curtis v. Ziff Energy Group, 12 S.W.3d 114, 119 (Tex. App.—Houston [14th Dist.] 1999, no pet.) (citing Zep Mfg. Co. v. Harthcock, 824 S.W.2d 654, 1992 Tex. App. LEXIS 447 (Tex. App.—Dallas 1992)). 49. Rimkus Consulting Group, Inc. v. Cammarata, 255 F.R.D. 417, 436, (S.D. Tex. 2008). 50. Morrell Masonry Supply, Inc. v. Coddou, No. 01-13-00446-CV, 2014 Tex. App. LEXIS 4730, at *11-12 (Tex. App.—Houston [1st Dist.] May 1, 2014, no pet.) (mem. op.). 51. Juliet Fowler Homes, Inc. v. Welch Assocs, Inc., 793 S.W.2d 660, 663 (Tex. 1990). TX_Litigator's_Guide_Fullbook.indb 51 TX Departing Employee Cases 51 10/1/14 4:51:31 PM Chapter 3 Noncompetition Covenants had an unrestricted area was reasonable,52 and Weed Eater found that an unrestricted area was reasonable because the company’s product was sold throughout the United States.53 In another case, language such as “existing market area” and “future marketing area of the employer during the employment” was too indefinite to be enforceable;54 in another case, a covenant prohibiting employees from entering into a services contract with an employer’s clients wherever they are located was unreasonable.55 Yet another example of a covenant that was overbroad and unenforceable was in Cobb v. Caye Publishing, where the covenant covered areas where the employee never worked for the employer.56 Significantly, a Houston appellate court explained that a “number of courts have held that a non-compete covenant that is limited to the employee’s clients is a reasonable alternative to a geographical limit.”57 3-2:3.2Time The Act requires time limitations to be reasonable.58 Generally, an analysis of “time” requires a balancing of burdens—the interest to be protected versus the hardship to be imposed. Courts are reluctant to prevent people from making a living, so courts often balance broader restrictions with shorter time periods. Typically, courts will not enforce a noncompetition covenant beyond two years. As stated earlier, a restraint’s period of time in a territory is an important factor when determining reasonableness.59 However, the lack of a fixed time limitation cannot in and of itself render a covenant unreasonable.60 Alex Sheshunoff, Mgmt. Servs. LP v. Johnson, 209 S.W.3d 644, 667 (Tex. 2006). Weed Eater, Inc. v. Dowling, 562 S.W.2d 898, 902 (Tex. App.—Houston [1st Dist.] 1978, writ ref’d n.r.e.). 54. Gomez v. Zamora, 814 S.W.2d 114, 117-18 (Tex. App.—Corpus Christi 1991, no writ.). 55. Juliet Fowler Homes, Inc. v. Welch Assocs, Inc., 793 S.W.2d 660, 663 (Tex. 1990). 56. Cobb v. Caye Publ’g Group, Inc., 322 S.W.3d 780, 784 (Tex. App.—Fort Worth 2010, no pet.). 57. Gallagher Healthcare Ins. Servs. v. Vogelsang, 312 S.W.3d 640, 654-55 (Tex. App.— Houston [1st Dist.] 2009, pet. denied). 58. Tex. Bus. & Com. Code § 15.50(c). 59. Butler v. Arrow Mirror & Glass, Inc., 51 S.W.3d 787, 793 (Tex. App.—Houston [1st Dist.] 2001, no pet.). 60. Butler v. Arrow Mirror & Glass, Inc., 51 S.W.3d 787, 793 (Tex. App.—Houston [1st Dist.] 2001, no pet.). 52. 53. 52 TX Departing Employee Cases TX_Litigator's_Guide_Fullbook.indb 52 10/1/14 4:51:31 PM Elements of a Claim 3-2 A Houston appellate court held that “a two year restraint is not unreasonable because the evidence showed that insurance contracts lasted for a year.”61 Clearly, the time period allowed is situational and will be decided on a case-by-case basis. Time restrictions will always be analyzed in the context of how long an employer’s interests need protection and the hardship placed on the employee by enforcing the restrictions. Courts have upheld one year restrictions,62 two year restrictions,63 three year restrictions,64 and even five year restrictions,65 but other cases have struck down shorter periods of time.66 3-2:3.3Scope of Activity Courts routinely review a covenant’s scope of activity through the prism of what the former employee’s duties were during prior employment: a “restrictive covenant must bear some relation to the activities of the employee.”67 For example, in Wright v. Sport Supply Group, Inc., the court explained “a restrictive covenant is unreasonable unless it bears some relation to the activities of the employee. A covenant not to compete that contains an industry-wide exclusion from subsequent employment is unenforceable. Further, a covenant not to compete that extends to clients with whom a salesman had no dealings during his employment is unenforceable.”68 In another case, a covenant prohibiting employees from engaging in a similar business in any area in which the company may enter in the future was unreasonable.69 In contrast, a covenant prohibiting an employee with knowledge of a former employer’s trade secrets 61. Gallagher Healthcare Ins. Servs. v. Vogelsang, 312 S.W.3d 640, 655 (Tex. App.— Houston [1st Dist.] 2009, pet. denied). 62. Investors Diversified Servs., Inc. v. McElroy, 635 S.W.2d 338, 339 (Tex. App.—Corpus Christi 1982, no writ). 63. Gallagher Healthcare Ins. Servs. v. Vogelsang, 312 S.W.3d 640, 655 (Tex. App.— Houston [1st Dist.] 2009, pet denied.). 64. Elec. Data Sys., Corp. v. Powell, 508 S.W.2d 137, 138-39 (Tex. App.—Dallas 1974, no writ). 65. Chandler v. Mastercraft Dental Corp. of Tex., Inc., 739 S.W.2d 460, 464-65 (Tex. App.—Fort Worth 1987, writ denied). 66. Bob Pagan Ford, Inc. v. Smith, 638 S.W.2d 176, 178-79 (Tex. App.—Houston [1st Dist.] 1982, no writ) (three-year covenant was greater restraint than necessary). 67. Peat Marwick Main & Co. v. Haass, 818 S.W.2d 381, 386 (Tex. 1991). 68. Wright v. Sport Supply Group, Inc., 137 S.W.3d 289, 298 (Tex. App.—Beaumont 2004, no pet.) (citations omitted). 69. Weatherford Oil Tool Co. v. Campbell, 340 S.W.2d 950, 952 (Tex. 1960). TX_Litigator's_Guide_Fullbook.indb 53 TX Departing Employee Cases 53 10/1/14 4:51:32 PM Chapter 3 Noncompetition Covenants from working for the former employer’s direct competitors was reasonable.70 And a limitation against soliciting customers with whom employee had personal contact during employment is usually reasonable.71 Typically, whether a solicitation restriction relating to existing customers is reasonable depends on whether the former employee had contacts with those customers.72 3-2:3.4Restraint Not Greater than Necessary As clearly stated in the Act, the reasonableness of time, geographic area, and scope of activity are determined by whether or not the restraint is greater than necessary. Indeed, to prove a breach of a covenant not to compete, a movant must meet the Act’s requirements.73 Accordingly, even if the covenant is ancillary to an enforceable agreement, if it is broader than necessary, it will be deemed unreasonable. Such a covenant will not be invalidated, but instead the court must reform the covenant to make the restraint reasonable.74 Additionally, damages may not be awarded until after the covenant is reformed.75 However, when the covenant is not necessary to protect the employer’s legitimate business interest, the covenant cannot be reformed.76 The “restraint greater than necessary” argument is often a useful tool to defend against a covenant that is otherwise enforceable. 3-2:3.5Breach Typically, breach is not listed as an element of a claim. Rather, it is presumed. But of course, it is a necessary part in a covenant 70. Weed Eater, Inc. v. Dowling, 562 S.W.2d 898, 902 (Tex. App.—Houston [1st Dist.] 1978, writ ref’d n.r.e.). 71. Investors Diversified Servs., Inc. v. McElroy, 635 S.W.2d 338, 339 (Tex. App.—Corpus Christi 1982, no writ). 72. See EMS USA Inc. v. Sharry, 309 S.W.3d 653, 660 (Tex. App.—Houston [14th Dist.] 2010, no pet.). 73. Tex. Bus. & Com. Code § 15.50(a). 74. Tex. Bus. & Com. Code § 15.51(c). 75. Tranter, Inc. v. Liss, No. 02-13-00167-CV, 2014 Tex. App. LEXIS 3398, at *16 (Tex. App.—Fort Worth Mar. 27, 2014, no pet.) (mem. op.). 76. Daytona Group of Tex., Inc. v. Smith, 800 S.W.2d 285, 290 (Tex. App.—Corpus Christi 1990, writ denied). 54 TX Departing Employee Cases TX_Litigator's_Guide_Fullbook.indb 54 10/1/14 4:51:32 PM Elements of a Claim 3-2 not to compete action. Often such proof is simple, because a party has somewhat notoriously breached the covenant as worded. The question becomes whether the aspect of breach is enforceable, or whether it is covered by a reform covenant (if that is what the court chooses to do). Sometimes, the question of breach is contested, particularly if the covenant is not well drafted. This issue calls to attention the advice we always give to our clients: do not draft a covenant any broader than necessary to protect your business interest. The wisdom of this advice can be seen not only from the prior discussions in this chapter, but also the fact that courts tend to resolve any ambiguity in the covenant against the drafter, particularly where the person seeking to enforce the covenant is seeking to restrain trade. There is often an issue of whether a court will (1) accept parol evidence of parties’ intent when the covenant was entered into, or (2) use “surrounding circumstances” (or either terms of art), common usage and/or meaning of terms in a particular trade may also come into play.77 Covenants may also prohibit not only breach but also “threatened breach” or “future breach.” Courts have generally held that injunctive relief against threatened breach or future breach is not appropriate.78 3-2:3.6Remedies 3-2:3.6aSection 15.52 The Act’s Section 15.52 discusses preemptive provisions and essentially states that the Act provides exclusive remedy for all breaches of a valid noncompetition covenant.79 This provision is interpreted in several cases: 1. Attorneys’ Fees. Courts generally hold that recovery of attorneys’ fees is governed by Section 15.52.80 77. A discussion of parol evidence, terms of art, and other similar contract interpretation issues is beyond the scope of this work. 78. See Shoreline Gas, Inc. v. McGaughey, 2008 Tex. App. LEXIS 2760, at *33-36 (Tex. App.—Corpus Christi 2008, no pet. h.) but compare In re Electro-Motion, Inc., 390 B.R. 859 (Bankr. E. D. TX. 2008). 79. Tex. Bus. & Com. Code § 15.52. 80. See Light v. Centel Cellular Co. of Tex., 883 S.W.2d 642 (Tex. 1994) (the Act was passed to largely supplant common-law). TX_Litigator's_Guide_Fullbook.indb 55 TX Departing Employee Cases 55 10/1/14 4:51:32 PM Chapter 3 Noncompetition Covenants For example, in Perez v. Texas Disposal,81 the court held that Section 15.52 controls attorneys’ fees awards and preempts all other statutes including the general Texas contract attorneys’ fees statute. Therefore, the claimant was not entitled to fees under Section 38.002.82 This case may be compared to Gage Van Horn & Associates v. Tatom,83 which held that the claimant could obtain attorneys’ fees under the declaratory judgment act. On the other hand, Butler v. Arrow Mirror and Glass, Inc. did allow attorneys’ fees under section 38.001(a); however, section 15.52 was not raised as a defense, so the case is somewhat suspect.84 2. Injunctive Relief. Section 15.51 governs permanent injunctions. It does not present the common law requirements for a temporary restraining order or a temporary injunction. For further discussion of injunctions, see Chapter 2.85 3. Release. Evidently, the Act does not preempt the affirmative defense of release.86 3-2:3.6bAttorneys’ Fees to Employee As stated above, normally attorneys’ fees in prosecution of noncompetition covenant actions are not recoverable. It is possible for an employee to recover attorneys’ fees and other costs incurred in defending a suit to enforce an overbroad 81. Perez v. Tex. Disposal Sys., Inc., 103 S.W.3d 591 (Tex. App.—San Antonio 2003, pet. denied); accord Sadler Clinic Ass’n, P.A. v. Hart, 403 S.W.3d 891, 899-900 (Tex. App.— Beaumont 2013, pet. denied); Sentinel Integrity Solutions, Inc. v. Mistras Group, Inc., 414 S.W.3d 911, 931 (Tex. App.—Houston [1st Dist.] 2013, pet. filed). 82. Tex. Civ. Prac. & Rem. Code § 38.001. 83. Gage Van Horn & Assocs., Inc. v. Tatom, 26 S.W.3d 730 (Tex. App.—Eastland 2000, pet. granted, review denied). 84. Butler v. Arrow Mirror and Glass, Inc., 51 S.W.3d 787 (Tex. App.—Houston [1st Dist.] 2001, no pet.). 85. NMTC Corp. v. Conarroe, 99 S.W.3d 865, 867-68 (Tex. App.—Beaumont 2003, no pet.) 86. Nat’l Cafe Servs., Ltd. v. Podaras, 148 S.W.3d 194 (Tex. App.—Waco 2004, pet. denied). 56 TX Departing Employee Cases TX_Litigator's_Guide_Fullbook.indb 56 10/1/14 4:51:32 PM Elements of a Claim 3-2 covenant,87 except as specifically provided in the statute.88 The Act’s proof requirements are difficult. First, employees must prove that when the agreement was executed their employer knew that the covenant’s limitations as to time, geographic area, or scope of activity were not reasonable, and that the limitation imposed greater restraint than necessary to protect the goodwill or other business interests of the employer.89 In Sentinel Integrity Solutions, Inc. v. Mistras Group, Inc., the court found there was sufficient evidence to support an award of attorneys’ fees where testimony demonstrated the employer attempting to enforce such a covenant purposefully made the geographic area broad , where the covenant’s wording revealed a reliance on reformation instead of proper attempts to tailor the non-compete, and where an email response from the employer to the former employee demonstrated the employer’s knowledge of the unreasonableness of the time limitation.90 In addition, employees must prove that their employer tried to enforce the covenant to a greater extent than necessary to protect its goodwill or other business interests. 3-2:3.6cMonetary Damages Employers may recover damages that are proximately caused by a breach of a covenant.91 The Act does not define the type or measure of damages. Therefore, any provable damages may be recovered. Typically, the recovery is for lost profits.92 Another measure of damages might include costs associated with remedying a breach, such as lower prices due to competition. Exemplary damages are not available under the Act. Consequently, a separate intentional tort must be alleged and proved to recover punitive damages.93 Tex. Bus. & Com. Code § 15.51(c). Perez v. Tex. Disposal Sys., Inc., 103 S.W.3d 591 (Tex. App.—San Antonio 2003, pet. denied). 89. Tex. Bus. & Com. Code § 15.51(c); see Evan’s World Travel, Inc. v. Adams, 978 S.W.2d 225, 234 (Tex. App.—Texarkana 1998, no pet.). 90. Sentinel Integrity Solutions, Inc. v. Mistras Group, Inc., 414 S.W.3d 911, 924-27 (Tex. App.—Houston [1st Dist.] 2013, pet. filed). 91. Strain v. Gansle, 768 S.W.2d 345, 346-47 (Tex. App.—Corpus Christi 1989, writ denied.). 92. Butts Retail, Inc. v. Diversa Foods, Inc., 840 S.W.2d 770, 773 (Tex. App.—Beaumont 1992, writ denied.). 93. City Products v. Burman, 610 S.W.2d 446, 450 (Tex. 1980). 87. 88. TX_Litigator's_Guide_Fullbook.indb 57 TX Departing Employee Cases 57 10/1/14 4:51:32 PM Chapter 3 Noncompetition Covenants Damages are often difficult to prove in these types of cases. Your client should understand that even if it obtains equitable relief it may not receive economic damages commensurate with its litigation costs. 3-2:3.6dEquitable Relief – Remedies As stated above, an employer enforcing a noncompetition covenant may seek a TRO, a temporary injunction, or a permanent injunction. Section 15.51 governs permanent injunctions, but TROs and temporary injunctions are governed by common law.94 Consequently, requirements to obtain a permanent injunction are simpler. Employers need only show that a covenant complies with Section 15.50.95 By contrast, employers seeking temporary injunctions must prove that common law elements such as irreparable injury, no adequate remedy, and a probable right to recover for the injury.96 Before a court may reform a noncompetition covenant, it must be ancillary to an otherwise enforceable agreement. Then, if the court determines that the covenant’s limitations as to time, geography, or scope of activity impose a greater restraint than necessary, the court must reform the covenant to make the restraints reasonable.97 Reformation is also available as an equitable remedy.98 Courts have broad discretion to reform covenants.99 Once reformed, the court must enforce the covenant as reformed.100 Either the employer or the employee may seek reformation in a specific request. Failure to request reformation is a waiver.101 Employers cannot recover actual 94. Tex. Bus. & Com. Code, §§ 15.51-52; EMSL Analytical Inc. v. Younker, 154 S.W.3d 693, 695 (Tex. App.—Houston [14th Dist.] 2004, no pet.); Cardinal Health Staffing Network, Inc. v. Bowen, 106 S.W.3d 230, 238-39 (Tex. App.—Houston [1st Dist.] 2003, no pet. h.). 95. Tex. Bus. & Com. Code § 15.50; Cardinal Health Staffing Network v. Bowen, 106 S.W.3d 230, 239 (Tex. App.—Houston [1st Dist.] 2007, no pet. h.). 96. Vaughn v. Intrepid Directional Drilling Specialists LTD, 288 S.W.3d 931, 936 (Tex. App.—Eastland 2009, no pet.). 97. Hardy v. Mann Frankfort Stein & Lipp Advisors, Inc., 263 S.W.3d 232, 250-51 (Tex. App.—Houston [1st Dist.] 2007) rev’d on other grounds Mann Frankfort Stein & Lipp Advisors, Inc. v. Fielding, 289 S.W.3d 844 (Tex. 2009). 98. Tex. Bus. & Com. Code § 15.51(c). 99. See Am. Nat’l Ins. Co. v. Cannon, 86 S.W.3d 801 (Tex. App.—Beaumont, Sept. 16, 2002, no pet.). 100. Tex. Bus. & Com. Code § 15.51(c). 101. Emergicare Sys. Corp. v. Bourdon, 942 S.W.2d 201, 204 (Tex. App.—Eastland 1997, no writ). 58 TX Departing Employee Cases TX_Litigator's_Guide_Fullbook.indb 58 10/1/14 4:51:32 PM Elements of a Claim 3-2 damages until after a covenant is reformed.102 When reformation occurs is not always clear. For example, a court may choose to enforce portions of a covenant in response to a TRO application. Similarly, a court may, after hearing substantially more evidence, choose to enforce the covenant differently after a temporary injunction hearing. In each case, the court has not specifically “reformed the covenant” but instead made judgments as to what portion of the covenant should be subject of injunctive relief. The courts, in those instances, “reformed” covenants such that upon a final trial on the merits, employers are not entitled to damages.103 3-2:3.6eLiquidated Damages Apparently, liquidated damages provisions are enforceable to the extent the covenant is enforceable, and to the extent that the common law requirements for enforcement of liquidated damages provisions are met.104 3-2:3.6fDefenses Typically, “defenses” to suits on noncompetition covenants actually amount to negating an employer’s ability to prove the elements of its claims. Consequently, employees defensively challenge whether (1) a covenant is ancillary to an otherwise enforceable agreement, (2) the interest of the employer is worthy of protection, and/or (3) whether there are reasonable limitations as to time, geographic area, and scope, and whether the restraint sought is greater than is necessary. Limitations for a noncompetition covenant are four years since the covenant is part of a contractual agreement.105 Tex. Bus. & Com. Code § 15.51(c). In this author’s experience as an arbitrator and advocate, the question of whether a reformation occurs appears to be most likely at issue in arbitration. Many employers have arbitration clauses requiring all disputes to go to arbitration. Those arbitration clauses often also have a “carve out” for injunctive relief. So, the district court decides the TRO and temporary injunction and the arbitrator then decides damages and permanent relief, assuming that the court grants some, but not all, of the requested injunctive relief (which almost always occurs). Should the arbitrator find that the covenant has been reformed by the trial court if the injunctive order does not specifically so state? 104. Pete Marwick Main & Co. v. Haass, 818 S.W.2d 381, 382 (1991); Hardy v. Mann Frankfort Stein & Lipp Advisors, Inc., 263 S.W.3d 232, 242 (Tex. App.—Houston [1st Dist.] 2007, pet. granted). 105. Tex. Civ. Prac. & Rem. Code § 16.004. 102. 103. TX_Litigator's_Guide_Fullbook.indb 59 TX Departing Employee Cases 59 10/1/14 4:51:32 PM Chapter 3 Noncompetition Covenants Typical breach of contract defenses are available in noncompetition covenants actions.106 Employees often assert the defense of the employer’s “unclean hands.”107 Usually, employees point to a breach of an employment agreement containing the covenant. Examples of employees utilizing this defense may occur when employers discharge an employee without cause,108 fail to pay wages,109 sexually harass,110 or commit other inequitable conduct that is injurious to the employee.111 3-2:3.6gIllegality Employers can assert the defense of illegality.112 3-3 Other Issues Involving Noncompetition Covenants 3-3:1Choice of Law Courts do not look favorably on choice of law provisions.113 When faced with a choice of law provision, courts can apply Texas DeSantis v. Wackenhut, 793, S.W.2d 670, 681 n. 6 (Tex. 1990). See Norris of Houston, Inc. v. Gafas, 562 S.W.2d 894, 896-97 (Tex. App.—Houston [1st Dist.] 1978, writ ref’d, n.r.e.). 108. See Chapman Air Conditioning, Inc. v. Franks, 732 S.W.2d 737, 740 (Tex. App.—Dallas 1987, no writ) (employer cannot wrongfully breach a provision of an employment contract that is favorable to the employee, such as reducing wages without consent and without contractual authority to do so, and then go into a court of equity to secure, by injunction, the enforcement of another provision favorable to it.). 109. See Vaughan v. Kizer, 400 S.W.2d 586, 590 (Tex. Civ. App.—Waco 1966, writ ref’d n.r.e.) (employer’s “action in reducing [employees’] expense accounts was . . . such wrongful conduct as to render [employer] without clean hands, and precludes him from obtaining injunctive relief against [employees] in a court of equity.”). 110. See Norris of Houston, Inc. v. Gafas, 562 S.W.2d 894, 896 (Tex. Civ. App.—Houston [1st Dist.] 1978, writ ref’d n.r.e) (“Although we have found no Texas cases holding that intolerable working conditions make a non-competition covenant unenforceable, that result might obtain if the conditions imposed by management amounted to a breach of the employee’s contract or to a wrong done to the employee. We cannot say from the facts in our case, even when taken in the light most favorable to the trial court’s order, that [employee’s] working conditions amounted to a wrong done to her by the appellants.”) (emphasis added). 111. See National Chemsearch Corp. v. Frazier, 488 S.W.2d 545, 547-48 (Tex. Civ. App.— Waco 1972, no writ) (employee raised disputes regarding other salesman assigned to his territory and unpaid sales commission; “employer may be denied enforcement by injunction of an agreement by an employee not to engage in post-employment competition where the employer has been guilty of a breach of the contract, or other inequitable conduct, that was injurious to the employee.”). 112. Travel Masters Inc. v. Star Tours, Inc., 827 S.W.2d 830, 833 n. 3 (Tex. 1991). 113. DeSantis v. Wackenhut Corps. 793 S.W.2d 670, 677 (Tex. 1990). 106. 107. 60 TX Departing Employee Cases TX_Litigator's_Guide_Fullbook.indb 60 10/1/14 4:51:32 PM Other Issues Involving Noncompetition Covenants 3-3 law to the covenant (even in face of a choice of law provision from another state) if: 1. Texas has a more significant relationship to the parties and the transaction; 2. 3. Texas has a materially greater interest in enforcing the covenant than the other state does; and Application of the other state’s law would be contrary to the fundamental policy of Texas.114 3-3:2Choice of Venue Typically, choice of venue provisions containing mandatory forum clauses are enforced.115 Consequently, more and more contracts contain a mandatory choice of venue clause that serves to circumvent Texas’s hostility to applying other states’ laws. Although it seems obvious, an employee may immediately compete against a former employee, once his employment ends, absent a valid noncompetition covenant. Of course, the employee may not violate other duties, such as the duty of loyalty, (e.g., solicit the customers or fellow employees while still employed),116 or take trade secrets117 or confidential information118. 3-3:2.1Dependent vs. Independent Covenants Courts occasionally determine whether noncompetition covenants are dependent or independent of other promises.119 “Whether covenants are mutually dependent is determined by the intent of the parties at the time the contract was formed, as evidenced by the language of the contract.”120 When covenants are “such an indispensable part of what both parties intended that the contract 114. DeSantis v. Wackenhut Corps. 793 S.W.2d 670, 678 (Tex. 1990); Drennan v. ExxonMobile Corp., 367 S.W.3d 288, 296-97 (Tex. App.—Houston [14th Dist.] 2012, pet. filed). 115. In re AutoNation, Inc., 228 S.W.3d 663, 669 (Tex. 2007). 116. See discussion infra 5-7. 117. See generally discussion infra 5. 118. See discussion supra 2-3. 119. See John R. Ray & Sons v. Stroman, 923 S.W.2d 80, 86 (Tex. App.—Houston [14th Dist.] 1996, writ denied). 120. See John R. Ray & Sons v. Stroman, 923 S.W.2d 80, 86 (Tex. App.—Houston [14th Dist.] 1996, writ denied) (When such intent is unclear, courts “presume the promises are dependent rather than independent.”) TX_Litigator's_Guide_Fullbook.indb 61 TX Departing Employee Cases 61 10/1/14 4:51:32 PM Chapter 3 Noncompetition Covenants would not have been made without the covenant, they are mutual conditions and dependent, in the absence of clear indications to the contrary.”121 Courts determine severability as a matter of law.122 Courts have held that, in the context of an at will agreement, consideration cannot be dependent on a period of continued employment because such a promise would be illusory.123 For example, in a contract that was at will—and lacked recitation of consideration; identification of confidential, proprietary, or trade secret information to be divulged; and any goodwill or specialized training to be provided the employees in consideration for signing the contracts—the only implied consideration (at will employment) was illusory.124 At will agreements may include promises (e.g., illusory promises that act as an offer) that support an enforceable agreement.125 In a case where employment was at will—and the employee promised not to disclose the employer’s confidential information—the “employee’s promise not to disclose [the employer’s] confidential information, though not enforceable when made, constituted an offer for a unilateral contract which [the employer] had the option to accept.”126 By supplying confidential information, the employer performed and thus, “a unilateral contract was formed under which [the employee] became bound by his promise not to disclose 121. See John R. Ray & Sons v. Stroman, 923 S.W.2d 80, 86 (Tex. App.—Houston [14th Dist.] 1996, writ denied) (“relevant inquiry is whether or not the parties would have entered into the agreement absent the unenforceable part”). 122. See John R. Ray & Sons v. Stroman, 923 S.W.2d 80, 86 (Tex. App.—Houston [14th Dist.] 1996, writ denied) (“relevant inquiry is whether or not the parties would have entered into the agreement absent the unenforceable part”). 123. Shoreline Gas, Inc. v. McGaughey, 2008 Tex. App. LEXIS 2760, at *13-14 (Tex. App.—Corpus Christi 2008, no pet.) (mem. op.) (citing Light v. Centel Cellular Co. of Tex., 883 S.W.2d 642, 645 (Tex. 1994)) (promise would be illusory in that it would fail to bind the promisor, who always retains the option of discontinuing employment in lieu of performance); see also Lazer Spot, Inc. v. Hiring Partners, Inc., 387 S.W.3d 40, 49 (Tex. App.—Texarkana 2012, pet. denied) (“Because the restrictive covenants here were not supported by consideration independent of the simple act of hiring under an at-will agreement, they are not “ancillary to or part of ” an otherwise enforceable agreement under Section 15.50. Tex. Bus. & Com. Code Ann. § 15.50(a).”). 124. Lazer Spot, Inc. v. Hiring Partners, Inc., 387 S.W.3d 40, 47 (Tex. App.—Texarkana 2012, pet. denied). 125. Shoreline Gas, Inc. v. McGaughey, 2008 Tex. App. LEXIS 2760, at *14 (Tex. App.— Corpus Christi 2008, no pet.) (mem. op.). 126. Shoreline Gas, Inc. v. McGaughey, 2008 Tex. App. LEXIS 2760, at *16-17 (Tex. App.—Corpus Christi 2008, no pet.) (mem. op.). 62 TX Departing Employee Cases TX_Litigator's_Guide_Fullbook.indb 62 10/1/14 4:51:32 PM Other Issues Involving Noncompetition Covenants 3-3 that information.”127 Similarly, in another case, an employer’s consideration was its promise to share trade secrets listed in a contract with its employee; her consideration was a promise not to disclose or use the trade secrets during or after employment.128 Courts may distinguish such consideration when employers delay delivery of confidential information.129 3-3:2.2Equitable Extensions Equitable extensions of covenants not to compete do not conflict with Texas public policy.130 The Fifth Circuit has held that an equitable extension was permissible because of a delay in litigation,131 and (in a similar case) another Texas court held that covenants can be equitably extended, even though it did not decide to extend the covenant in that particular case.132 In Nationsbuilders Ins. Servs. v. Houston Int’l Ins. Group, the court (relying on the Fifth Circuit’s approval of the public policy justification) held that an arbitrator “did not exceed his powers by awarding an equitable extension of the restricted period.”133 On the other hand, a court recently declined to grant an equitable extension of the restricted period where the parties demonstrated anticipation of litigation 127. Shoreline Gas, Inc. v. McGaughey, 2008 Tex. App. LEXIS 2760, at *16-17 (Tex. App.—Corpus Christi 2008, no pet.) (mem. op.). 128. Ireland v. Franklin, 950 S.W.2d 155, 158 (Tex. App.—San Antonio 1997, no writ). 129. TMC Worldwide, L.P. v. Gray, 178 S.W.3d 29, 38-39 (Tex. App.—Houston [1st Dist.] 2005, no pet.) (In support of its argument, TMC relies on the holdings in Ireland v. Franklin, 950 S.W.2d 155 (Tex. App.—San Antonio 1997, no writ) and Curtis v. Ziff Energy Group, Ltd., 12 S.W.3d 114 (Tex. App.—Houston [14th Dist.] 1999, no pet.). (This reliance is misplaced because neither opinion discusses the issue of whether and to what extent the employer’s delay in complying with a promise to deliver confidential information will render the promise illusory. To the extent that these opinions can be read to hold that, in an at-will employment relationship, there is no requirement that the consideration be contemporaneously exchanged to make a promise to provide confidential information not illusory, we decline to follow these opinions.”). 130. Nationsbuilders Ins. Servs. v. Houston Int’l Ins. Group, No. 05-12-01103-CV, 2013 Tex. App. LEXIS 8182, at *17-18 (Tex. App.—Dallas July 3, 2013, no pet.). 131. Nationsbuilders Ins. Servs. v. Houston Int’l Ins. Group, No. 05-12-01103-CV, 2013 Tex. App. LEXIS 8182, at *18 (Tex. App.—Dallas July 3, 2013, no pet.) (citing Guy Carpenter & Co. V. Provenzale, 334 F. 3d 459, 464 (5th Cir. Tex. 2003)). 132. Nationsbuilders Ins. Servs. v. Houston Int’l Ins. Group, No. 05-12-01103-CV, 2013 Tex. App. LEXIS 8182, at *18 (Tex. App.—Dallas July 3, 2013, no pet.). 133. Nationsbuilders Ins. Servs. v. Houston Int’l Ins. Group, No. 05-12-01103-CV, 2013 Tex. App. LEXIS 8182, at *19 (Tex. App.—Dallas July 3, 2013, no pet.). TX_Litigator's_Guide_Fullbook.indb 63 TX Departing Employee Cases 63 10/1/14 4:51:33 PM Chapter 3 Noncompetition Covenants delays by equipping the contract with a maximum tolling period of no more than 18 months.134 3-3:3 Provisions Preventing Solicitation of Employees There is a substantial difference between a contract limiting a former employee’s competitive activity and an agreement keeping that former employee from soliciting former co-employees. At least one court of appeals has held that a non-recruitment covenant is not a contract in restraint of trade or commerce.135 And in this author’s previous experience courts routinely enforce reasonable employee non-solicitation provisions without requiring them to comply with the Covenants Not to Compete Act. However, a recent Texas Court of Appeals cited Marsh and held that a covenant not to solicit employees was analyzed under the Covenant Not to Compete Act.136 Ultimately, the court concluded that the nonsolicitation covenant was unenforceable because it unreasonable in scope—going beyond what was necessary to protect the goodwill and business interests of the former employer.137 The prudent practitioner should consider this development when seeking to enforce a covenant not to solicit employees. 3-3:4Covenants Involving Physicians Noncompetition covenants involving physicians are addressed separately in the Act.138 Thus, Section 15.50 provides special limits on the restrictions in noncompetition covenants that affect physicians. These include: 134. Sadler Clinic Ass’n, P.A. v. Hart, 403 S.W.3d 891, 898-99 (Tex. App.—Beaumont 2013, pet. denied). 135. Totino v. Alexander & Assocs., Inc., No. 01-97-01204-CV, 1998 Tex. App. LEXIS 5295, at *29-37 (Tex. App.—Houston [1st Dist.] Aug. 20, 1998, no pet.) (not designated for publication); see also Nova Consulting Group, Inc. v. Engineering Consulting Servs., Ltd., 2005 WL 2708811 (W.D. Tex. 2005); see also Beasley v. Hub-City Tex., L.P., No. 01-03-00287-CV, 2003 Tex. App. LEXIS 8550 (Tex. App.—Houston [1st Dist.] Sep. 29, 2003, no pet.) (mem. op.). 136. Ally Fin., Inc. v. Gutierrez, No. 02-13-00108-CV, 2014 Tex. App. LEXIS 792 (Tex. App.—Fort Worth Jan. 23, 2014, no pet.) (mem. op.). 137. Ally Fin., Inc. v. Gutierrez, No. 02-13-00108-CV, 2014 Tex. App. LEXIS 792, at *24-26 (Tex. App.—Fort Worth Jan. 23, 2014, no pet.) (mem. op.). 138. Tex. Bus. & Com. Code § 15.50(b). 64 TX Departing Employee Cases TX_Litigator's_Guide_Fullbook.indb 64 10/1/14 4:51:33 PM Other Issues Involving Noncompetition Covenants 1. Medical records. The physician must have access to a patient’s medical records if authorized by the patient.139 2. Patient lists. The physician may not be denied access to a list of patients that the physician has seen or treated within one year of termination of the employment.140 3. Patient records. The physician must be allowed to obtain patient records for a reasonable fee.141 The format of the records must be in the same format as they are usually maintained.142 4. Buy-out provision. The covenant must allow the physician to buy out the covenant for a reasonable fee.143 5. Continuing care. The physician must be allowed to provide continuing care to a patient during an acute illness after the employment is terminated.144 6. Note that special public policy concerns exist in small communities145 3-3 Tex. Bus. & Com. Code § 15.50(b)(1)(B). Tex. Bus. & Com. Code § 150.50(b)(1)(A). 141. Tex. Bus. & Com. Code § 15.50(b)(1)(B). 142. Tex. Bus. & Com. Code § 15.50(b)(1)(C). 143. Tex. Bus. & Com. Code § 15.50(b)(2); Novamed Surgery Ctr. Of Tyler, L.P. v. Bochow, No. 12-13-00159-CV, 2013 Tex. App. LEXIS 7160 (Tex. App.—Tyler June 12, 2013, no pet.) (mem. op.). 144. Tex. Bus. & Com. Code § 15.50(b)(3). 145. See Nacogdoches Heart Clinic, P.A. v. Pokala, 2013 Tex. App. LEXIS 1066 (Tex. App.—Tyler, Feb. 6, 2013, pet. filed) (mem. op.) (Appellate court upheld trial court’s ruling that noncompetition agreement was unenforceable) (“The trial court determined that the covenant not to compete adversely affects the interest of the public and is therefore unreasonable and unenforceable. The court explained that “we’re a small community” and “the public interest would be adversely affected, and that being, access to cardiac care.” He noted that [Defendant] testified that he gets up to six calls a night and works eighteen hour days. Noting that the population is aging, the court explained that, unlike large cities where there are “dozens and dozens of cardiologists,” there is a need for cardiologists in “this small community.” Further, “for one doctor to be taken out of the equation hurts the medical care of the people.” The judge also explained that he was considering the fact that Paragraph 19 prohibits [Defendant] from practicing any medicine at all, not just cardiology. Based on the testimony, the court found that the covenant not to compete is unreasonable and therefore unenforceable. ) (“An inquiry into the public interest in medical care is not concerned with any damage provision in the covenant. If [the plaintiffmedical clinic] did not want to bear financial consequences from a potential violation of 139. 140. TX_Litigator's_Guide_Fullbook.indb 65 TX Departing Employee Cases 65 10/1/14 4:51:33 PM Chapter 3 Noncompetition Covenants A Texas Court of Appeals recently held that the statute requires that the reasonableness of the price in the buy-out provision must (if challenged by either party) be resolved in binding arbitration.146 Furthermore, arbitration is not precluded even if there is no express reference to arbitration in the covenant because the court presumes the parties knew about the statute’s arbitration provision at the time they contracted.147 However, another court recently held that an arbitrator’s role is plainly limited by statute to the reasonable price issue, and he cannot create a buyout provision where one is lacking to cure the defect.148 Tex. Bus. & Com. Code § 15.50(b), the court held, states that the absence of a buy-out provision renders the non-compete covenant unenforceable.149 the covenant not to compete, it was incumbent upon it to draft a covenant that did not violate public policy.”). 146. Sadler Clinic Ass’n, P.A. v. Hart, 403 S.W.3d 891, 898 (Tex. App.—Beaumont 2013, pet. denied). 147. Sadler Clinic Ass’n, P.A. v. Hart, 403 S.W.3d 891, 897 (Tex. App.—Beaumont 2013, pet. denied). 148. LasikPlus of Texas, P.C. v. Mattioli, 418 S.W.3d 210, 220 (Tex. App.—Houston [14th Dist.] 2013, no pet.). 149. LasikPlus of Texas, P.C. v. Mattioli, 418 S.W.3d 210, 220 (Tex. App.—Houston [14th Dist.] 2013, no pet.). 66 TX Departing Employee Cases TX_Litigator's_Guide_Fullbook.indb 66 10/1/14 4:51:33 PM EMPLOYMENT LAW UPDATE KATRINA GRIDER Katrina Grider & Associates 14227 Prospect Point Drive Cypress, Texas 77429 (281) 256-9311 (Office) (281) 256-9312 (Fax) (888) ASK-4KAT (Toll Free Office) [email protected] State Bar of Texas 31st ANNUAL LITIGATION UPDATE INSTITUTE January 15-16, 2015 San Antonio CHAPTER 13.2 RETURN TO TABLE OF CONTENTS TABLE OF CONTENTS APPENDIX 1: Federal Employment Laws and Regulations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1-5 APPENDIX 2: When the Feds Come Knocking: EEOC, DOL and NLRB Investigations for Employers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6-52 APPENDIX 3: Staub v. Procter: The Cat’s Paw Theory Explained. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46-55 APPENDIX 4: FMLA Best Practices Checklist.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56-61 APPENDIX 5: EEOC Fact Sheet on Retaliation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62-63 APPENDIX 6: DOL Fact Sheet #77A: FLSA Retaliation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64 APPENDIX 7: Identifying Applicant Skills: 50 Great Interview Questions. . . . . . . . . . . . . . . . . . . . . . . . 65-66 APPENDIX 8: Interview Myths and Mayhem: 50 Off-Limits Interview Questions. . . . . . . . . . . . . . . . . . 67-68 APPENDIX 9: Checklist - Counseling and Disciplinary Issues. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69-70 APPENDIX 10: Harassment Investigation Checklist. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71-73 APPENDIX 11: Sample Workplace Harassment Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74-76 APPENDIX 12: Can I Google Applicants? NO!!. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77-79 APPENDIX 13: Managing Social Media at Work: Employer Tips and Strategies. . . . . . . . . . . . . . . . . . . . 80-85 APPENDIX 14: NLRB Fact Sheet on Social Media. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86-87 APPENDIX 15: Sample Social Media Policy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88-89 RETURN TO TABLE OF CONTENTS APPENDIX 1 FEDERAL EMPLOYMENT LAWS AND REGULATIONS FEDERAL LAW ENFORCEMENT AGENCY COVERED EMPLOYERS SUMMARY OF LAW 1 Age Discrimination in Employment Act (ADEA) Equal Employment Opportunity Commission (EEOC) 20 or more employees Prohibits discrimination in all terms, conditions and privileges of employment on the basis of age. Applies to individuals age 40 and older. 2 Americans with Disabilities Act of 1990 (ADA) EEOC 15 or more employees Prohibits discrimination in all terms, conditions and privileges of employment on the basis of an individual’s physical or mental disability. 3 ADA Amendments Act of 2008 (ADAAA) EEOC 15 or more employees Liberalizes the interpretation of the ADA and instructs employers to adopt a broad standard when determining whether or not an individual is considered to be disabled. 4 Civil Rights Act of 1991 EEOC 15 or more employees Amends Title VII and the ADA to give parties complaining of intentional discrimination the right to a jury trial. Also authorizes the award of punitive and compensatory damages. 5 Consolidated Omnibus Reconciliation Act (COBRA) Internal Revenue Service 20 or more employees Employers must extend the option of continued health insurance to employee, spouse and dependants who otherwise would lose such coverage as a consequence of the employee’s termination or some other qualifying event. 6 Consumer Credit Protection Act, Title III Department of Labor (DOL) (Wage and Hour Division) All employers (regardless of size) Protects employees from being discharged by their employers because their wages have been garnished for any one debt and limits the amount of employees' earnings which may be garnished in any one week. Restricts garnishment withholding to 25% of disposable income. Limits employer actions with respect to discharge. 7 Davis Bacon Act DOL (Wage and Hour Division) Employers with contracts in federally financed construction in excess of $2,000 Employer must pay specified minimum hourly rates. 8 Driver’s Privacy Protection Act of 1994 Department of Justice (DOJ) All employers Regulates third-party access to individual driving record information. 9 Employee Polygraph Protection Act of 1988 (EPPA) DOL (Wage and Hour Division) All employers except those in security of pharmaceutical industries Prohibits employers from using lie detector tests either for preemployment screening or during the course of employment. Testing is permitted only in extremely limited circumstances. 10 Employee Retirement Income Security Act of 1974 (ERISA) DOL (Office of LaborManagement & Welfare Pension Reports) All employers Requires extensive pension and welfare plan information, plus disclosure of information to plan participants. Gives protection and guarantees to employees covered by private pension and welfare plans. Sets standards for employee participation, funding methods and establishes fiduciary responsibilities. 11 Equal Pay Act of 1963 EEOC All employers subject to the FLSA Prohibits pay differentials on the basis of sex. This means that employers must pay equal wages for work that requires equal skill, effort, and responsibility and is performed under similar working conditions. 1 RETURN TO TABLE OF CONTENTS FEDERAL EMPLOYMENT LAWS AND REGULATIONS FEDERAL LAW ENFORCEMENT AGENCY COVERED EMPLOYERS SUMMARY OF LAW 12 Executive Order 11246 DOL (Office of Federal Contract Compliance Programs) Employers with governments contracts in excess of $50,000 and over 50 employees Prohibits discrimination in all terms, conditions and privileges of employment against applicants and employees. Requires affirmative action to ensure equal employment opportunities without regard to race, sex, color, religion or national origin. 13 Fair Credit Reporting Act Federal Trade Commission All employers Employer must comply with all of the notice, disclosure and consent requirements in order to obtain and use investigative consumer credit reports in making an employment decision. 14 Fair Labor Standards Act (FLSA) DOL(Wage and Hour Division) All employers Employer must pay prevailing minimum wage and overtime 15 Family and Medical Leave Act (FMLA) DOL (Wage and Hour Division) 50 or more employees Eligible employees are entitled to take up to 12 weeks of unpaid leave. Employers must continue health benefits during the leave and restore employee to same or equivalent position upon return from leave. PLUS: FMLA Military Leave Amendments of 2008 Eligible employees are entitled to take up to 12 weeks of leave for a “qualifying exigency”; and up to 26 weeks of leave for serious injury incurred during active military duty. 16 Federal Insurance Contributions Act (FICA) Internal Revenue Service (IRS); Social Security Administration (SSA) All employers Requires that taxes be collected from both employers and employees to fund the Social Security program. 17 Federal Mine Safety and Health Act of 1977 (Mine Act) DOL (Mine Safety and Health Administration (MSHA) All employees who work on mine property Holds mine operators responsible for the safety and health of miners; provides for the setting of mandatory safety and health standards, mandates miners' training requirements; prescribes penalties for violations; and enables inspectors to close dangerous mines. The safety and health standards address numerous hazards including roof falls, flammable and explosive gases, fire, electricity, equipment rollovers and maintenance, airborne contaminants, noise, and respirable dust. 18 Federal Protection of Juror’s Employment Act U.S. District Court All employers Prohibits employers from discharging employees from taking time off from work to serve on a jury. 19 Genetic Information Nondiscrimination Act of 2008 EEOC 15 or more employers, health insurers and group health plans Restricts the collection, use or disclosure of genetic information. 20 Health Insurance Portability ad Accountability Act (HIPAA) Health and Human Services (HHS) Office for Civil Rights Most health plans, clearinghouses, and providers that conduct certain transactions electronically Creates national standards to protect individuals' medical records and other personal health information and gives patients more control over their health information. 2 RETURN TO TABLE OF CONTENTS FEDERAL EMPLOYMENT LAWS AND REGULATIONS 21 FEDERAL LAW ENFORCEMENT AGENCY COVERED EMPLOYERS SUMMARY OF LAW Immigration Reform and Control Act of 1986 (IRCA) Department of Justice (Office of Special Counsel) Verification requirements apply to employers of 1 or more employees. Employer must verify the employment authorization of newly hired employees. Two types of documentation are required: 1) proof of eligibility to work in the U.S.; and 2) proof of identity Anti-discrimination provisions apply to employers of more than 3 employees. Prohibits discrimination in on the basis of national origin or citizenship status. 22 Labor Management Relations Act (LMRA) National Labor Relations Board (NLRB) All employers engaged in interstate commerce Forbids jurisdictional strikes, wildcat strikes, solidarity strikes, secondary boycotts, picketing, closed and union shops, and donations by unions to federal political campaigns. 23 Lily Ledbetter Fair Pay Act of 2009 EEOC 15 or more employees Restarts the statute of limitations for claims of discrimination in compensation each time wages or benefits are paid, when an individual is affected by a previous discriminatory decision or practice. Retroactive to May 28, 2007. 24 Mental Health Parity Act (MHPA) Department of Labor (DOL), Health and Human Services (HHS), and Department of Treasury 50 or more employees Prohibits most group health plans with more than 50 workers from imposing annual or lifetime dollar limits on mental health benefits that are lower--less favorable--than the annual or lifetime dollar limits for medical and surgical benefits offered under the plan. 25 National Labor Relations Act (NLRA) National Labor Relations Board (NLRB) All employers Employer is required to recognize and deal with union desired by a majority of employees in bargaining unit. Unfair labor practices prohibited. 26 Newborn’s and Mother’s Health Protection Act Department of Labor (DOL), Health and Human Services (HHS), and Department of Treasury Group health plans, insurance companies and health maintenance organizations (HMO’s) Requires health-insurance plans to cover post delivery hospitalization for at least 48 hours following a normal delivery and 96 hours following a cesarean section. 27 Older Workers Benefit Protection Act of 1990 Equal Employment Opportunity Commission (EEOC) 20 or more employees Ensures that age-based reductions in employee benefit plans are justified by significant cost considerations; also sets stringent standards for all releases and settlement of ADEA claims. 28 Occupational Safety and Health Act (OSHA) DOL (Occupational Safety and Health Review Commission) All employers engaged in interstate commerce Establishes duty of employer to furnish place of employment free from recognized hazards likely to cause death or serious physical harm; requires compliance with applicable standards promulgated by the Secretary of Labor; prohibits retaliation for exercising rights under OSHA. 29 Personal Responsibility and Work Opportunity Reconciliation Act (PRWORA) of 1996 Department of Health and Human Services (HHS) All employers Requires every state to operate a child support enforcement program. Employers must report each newly hired worker to a state "directory of new hires" within 20 days of hiring by submitting the employee's W-4 form or equivalent document containing the worker's name, address, and Social Security number 3 RETURN TO TABLE OF CONTENTS FEDERAL EMPLOYMENT LAWS AND REGULATIONS FEDERAL LAW ENFORCEMENT AGENCY COVERED EMPLOYERS SUMMARY OF LAW 30 Pregnancy Discrimination Act Equal Employment Opportunity Commission (EEOC) 15 or more employees Women affected by pregnancy, childbirth, or related medical conditions must be treated the same for all employment-related purposes, including receipt of fringe benefits, as other persons not similarly affected. 31 Rehabilitation Act of 1973, Section 503 DOL (Office of Federal Contract Compliance Programs) Employers with government contracts in excess of $2,500 Prohibits discrimination against individuals with disabilities. Employers with 50 or more employees and contracts of $50,000 or more must have a written affirmative action program. 32 Sarbanes-Oxley Act of 2002 (SOX) Securities and Exchange Commission (SEC) Entities covered under Sarbanes-Oxley include not only those companies whose stocks trade publicly, but also all registered foreign companies and all non-public companies whose debt securities are publicly traded, whose equity or debt securities are registered under the Securities Exchange Act, who are required to file reports under that Act, or who have filed a statement for a public offering under that Act. Coverage also extends to any officer, employee, contractor, subcontractor or agent of a covered entity. As a result, non-public companies who are contractors or subcontractors of a public company, are “covered entities” subject to SOX obligations and proceedings. Requires notices of 401(k) blackout periods, bars directors and executives from trading employer stock during blackout periods, and increases the criminal penalties for ERISA violations. 33 Title VII of the Civil Rights Act of 1964 EEOC Employers with 15 or more employees Prohibits discrimination in all terms, conditions and privileges of employment on the basis of race, color, national origin, religion and sex. 34 Uniformed Services Employment and Reemployment Rights Act DOL (Veterans' Employment and Training Service (VETS)) All employers Ensures that certain persons who serve in the armed forces have a right to reemployment with the employer they were with when they entered service. This includes those called up from the reserves or National Guard. 35 Vietnam Era Veteran’s Readjustment Assistance Act of 1974 (VEVRAA) DOL(Office of Federal Contract Compliance Programs) Employers with government contracts in excess of $10,000 Requires employers to undertake affirmative action to employ and advance in employment qualified veterans and veterans of the Vietnam era. Employers with 50 or more employees and contracts of $50,000 or more must have a written affirmative action program. 36 Walsh-Healey Public Contracts Act DOL(Wage and Hour Division) Employers with government contracts in excess of $10,000 Employer must pay prevailing minimum wage and overtime 37 Worker Adjustment and Retraining Notification Act (WARN) Private action in U.S. District Court 100 or more (excluding part-time) OR 100 or more (including part-timers) working at least 4000+ hours (nonovertime) per week. Offers protection to workers, their families and communities by requiring employers to provide notice 60 days in advance of covered plant closings and covered mass layoffs. This notice must be provided to either affected workers or their representatives (e.g., a labor union); to the State dislocated worker unit; and to the appropriate unit of local government. 4 RETURN TO TABLE OF CONTENTS APPENDIX 2 When the Feds Come Knocking: EEOC, DOL and NLRB Investigations for Employers 5 RETURN TO TABLE OF CONTENTS When the Feds Come Knocking: EEOC, DOL and NLRB Investigations for Employers TABLE OF CONTENTS I. THE FEDS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 A. DOL: Department of Labor. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 1. Affordable Care Act (ACA). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 a. Play or Pay Requirements.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 b. Pending Legislation: The Forty Hours Is Full Time Act of 2013. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 c. Definitions of Temporary and Contract Employees: Variable Hour Employee. . . . . . . . . . . . . . . . . . 10 d. Notices to Employees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 (1) Required Notices to Employees (10/01/13 Deadline).. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 (2) Model Notices in Spanish. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 2. EBSA Enforcement Activity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 3. FMLA: Family and Medical Leave Act. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 a. DOL Interpretation Letter: Care for Adult Children. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 b. DOL Issues Final FMLA Regulations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 c. Miscellaneous. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 4. Handling DOL Investigations and Audits: 8 Tips. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 5. DOL Investigations–Bridge to Justice. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 6. DOL Investigations–Coordination with IRS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 EEOC: Equal Employment Opportunity Commission. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. EEOC Strategic Enforcement Plan. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. EEOC Issues Enforcement Guidance: Use of Conviction and Arrest Records by Employers. . . . . . . . . . . 3. EEOC Adopts Final Rules. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a. Reasonable Factors Other then Age (ADEA) Final Rule.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4. New Online Information Available. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a. EEOC Makes State Charge Data Available Online. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b. EEOC Appellate Briefs Now Online. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . c. EEOC Issues Updated Guidance Regarding Disability Discrimination.. . . . . . . . . . . . . . . . . . . . . . . . d. EEOC Issues Revised Publications on Employment of Veterans with Disabilities.. . . . . . . . . . . . . . . 5. EEOC’s Transgender Discrimination Decision.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6. Responding to EEOC Complaints and Investigations: 10 Tips. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 18 19 21 21 25 25 25 25 26 26 26 C. ICE: Immigration and Customs Enforcement. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Electronic I-9 Forms. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Updated I-9 Forms (effective 05/07/13).. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. I-9 Investigations and Audits: 8 Tips. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 28 28 28 D. NLRB: National Labor Relations Board. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Board Stuff .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a. Board Members. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b. New Election Rules. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . c. NLRB Posting Notice. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . d. NLRB Website for Non-Union Employees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . e. Quorum Special Procedures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . f. Case Procedures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1) Representation Case Procedures.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2) Arbitration Deferral.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 29 29 30 30 31 31 31 31 31 B. 6 RETURN TO TABLE OF CONTENTS TABLE OF CONTENTS–CON’T. Arbitration Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Employer/Employee Communications. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a. Employee Workplace Discussions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b. Employer Confidentiality Rules. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Employment Handbooks and At-Will Statements.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a. Design Technology Group, L.L.C., 359 N.L.R.B. 96 (2013).. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b. Quicken Loans, Inc., 359 N.L.R.B. 141 (2013). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Social Media and Facebook Postings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a. NLRB Report on Social Media. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1) OM 12-59. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2) The Early ALJ Decisions, With More to Come. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (a) Hispanics United of Buffalo, Inc., 359 N.L.R.B. 37 (2012). . . . . . . . . . . . . . . . . . . . . . . . . . (b) Weyerhaeuser Co., 359 N.L.R.B. 138 (2013).. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3) Tips for Drafting Social Media Policies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b. U.S. Chamber of Commerce Publishes Survey of Social Media Issues Before the NLRB. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 31 32 32 32 32 33 33 33 33 34 35 35 35 E. OFFCP: Office of Federal Contract Compliance Programs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Coordination Between OFCCP and EEOC. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Proposed Regulations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Pay Discrimination.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4. Hiring Discrimination. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5. Newly Revised Compliance Manual.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 36 37 37 37 37 F. OSHA: Occupational Health and Safety Administration. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Workplace Safety. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Whistleblower Enforcement. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Revised Hazard Communication Standard and Employee Training Requirements (12/01/13). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4. Representation of Union and Non Union Employees.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5. OSHA Inspections: How to Prepare, How to Respond. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 38 38 2. 3. 4. 5. 36 39 39 39 II. STATE LEGISLATION: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 A. Texas Law: HB 1188. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Coverage. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Prohibitions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Exceptions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 41 41 41 Social Media Password Protection Laws. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. What conduct by employers do these laws generally prohibit?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. What are the exceptions to the general prohibition?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. What remedies are available under these laws?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4. What should employers do in response?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 B. 7 RETURN TO TABLE OF CONTENTS 43 43 44 44 When the Feds Come Knocking: EEOC, DOL and NLRB Investigations for Employers I. services for the employer where the employer controls what will be done, and how it will be done. THE FEDS A. DOL: Department of Labor (4) Who is a “Full-Time” Employee? 1. a. Affordable Care Act (ACA) A full-time employee is an employee who was employed on average at least 30 hours per week, which the proposed regulations equate to 130 hours per month. An employee’s hours of service include: (1) each hour for which an employee is paid, or entitled to payment, to perform duties for the employer; and (2) each hour of paid leave. Generally, only the hours of service performed in the U.S. are included in the calculation. Play or Pay Requirements Beginning in 2014, the Affordable Care Act (ACA) requires “large” employers to offer their full-time employees healthcare coverage that meets certain standards or pay a penalty. Whether an employer opts to “play-or-pay” is a critical business decision that impacts both their benefits and workforce strategies. With the effective date of the ACA play-or-pay penalty just months away, employers must understand how the mandate works and what it means for their business. The following are key questions employers must ask to make sure they are prepared for the dramatic changes ahead. Employers can use a “look back” method for determining the full-time status of ongoing, as well as new variable hour and seasonal employees. C Ongoing employees: For ongoing employees, an employer would determine each employee’s full-time status by looking back at a defined measurement period of three to 12 months to determine full-time status for a subsequent “stability period.” If an employee worked an average of 30 hours per week during the standard measurement period, the employer would treat the employee as full-time during the subsequent stability period, the duration of which would be at least the greater of six consecutive calendar months or the length of the standard measurement period. If an employee did not work an average of 30 hours per week during the standard measurement period, the employer would treat the employee as not full-time during the subsequent stability period, which may be no longer than the associated standard measurement period. Employers may use administration periods of up to 90 days between the measurement period and stability period. C New employees: An employer is not subject to the play-or-pay penalty for failing to offer new full-time employees coverage for the first three months of employment. For new variable hour employees and seasonal employees, an employer may use an initial measurement period of between three and 12 months that begins on any date between the employee’s start date and the first day of the first calendar month following the employee’s start date. Although through at least 2014 employers are permitted to use a reasonable, good faith interpretation of the term (1) Are All Employers Subject to the ACA Play-or-Pay Penalty? No, only applicable large employers are subject to the employer play-or-pay requirement. The ACA defines an applicable large employer as an employer that, during the prior calendar year, employed an average of at least 50 full-time employees. To calculate the number of full-time employees for this purpose, an employer must look at: (1) actual full-time employees; and (2) the number of full-time equivalent employees (FTEs) represented by the employer’s part-time employees. The statute defines a full-time employee as one working 30 or more hours per week, calculated monthly. (2) Is the Company Part of a Controlled-Group Under Common Ownership? Companies under common control are combined together to determine whether they employ at least 50 full-time employees (or an equivalent combination of full-time and part-time employees). (3) Who is an “Employee” for Purposes of the Play-or-Pay Penalty? The IRS will use the common law standard to define an employee. Generally, an employee is someone performing 8 RETURN TO TABLE OF CONTENTS “seasonal employee,” the IRS notes that final regulations may provide a specific definition. (8) When Does the Play-or-Pay Penalty Become Effective? (5) How Much is the Play-or-Pay Penalty? It becomes effective January 1, 2014. However, employers maintaining fiscal year plans as of December 27, 2012 may not be subject to the play-or-pay penalty until the first day of the 2014 plan year if certain conditions are met. Applicable large employers that fail to offer “minimum essential” health coverage to at least 95% of their full-time employees (and their children) will pay the penalty if any full-time employee receives a federal subsidy to purchase insurance through a health exchange. This penalty will be $2,000 per year for each full-time employee in excess of 30 employees. (9) Are There Special Rules for Union Plans? Employers participating in multiemployer plans face many unique considerations that the law does not address. However, the IRS provides transition relief that such employers may use in 2014. Employers that offer minimum essential coverage, but fail to provide minimum value (i.e., the plan’s share of the total allowed costs of benefits provided under the plan is not at least 60% of those costs) or provide coverage deemed unaffordable, will pay the lesser of $2,000 per year for each full-time employee (minus 30) or $3,000 for each full-time employee who receives a premium tax credit to purchase coverage through a health insurance exchange. The tax credit is generally available to those employees who cannot buy affordable or minimum value coverage if their family income is below 400% of the Federal Poverty Level. (10) What Does This Mean for Employers? Employers must contend with significant administrative burdens and make key strategic decisions in the months ahead. The cost of penalties can be significant, as can the cost of providing sufficient healthcare coverage to full-time employees. However, the decision of whether to play-or-pay involves more than just weighing the cost of the penalty versus the cost of coverage. It involves evaluating workforce and benefit structures and business needs. Employers must evaluate all of the employment, labor and benefits law implications of the ACA and its play-or-pay mandate to determine the optimal strategy for their business. (6) When is Healthcare Coverage Deemed to be Affordable? Employers may take advantage of one of three safe harbors to determine whether their plan is “affordable.” A plan is deemed affordable if the employee’s required contribution for the calendar year for the employer’s lowest cost, self-only coverage that provides minimum value during the entire calendar year (excluding COBRA or other continuation coverage) does not exceed 9.5 percent of: (1) the employee’s W-2 wages from the employer for the calendar year, (2) the employee’s rate of pay, or (3) the federal poverty level. b. Pending Legislation: The Forty Hours Is Full Time Act of 2013 Bipartisan legislation was recently introduced in the Senate would increase the number of hours an employee would need to work to be considered "full-time" under the Affordable Care Act's (ACA) employer responsibility provisions. Under the healthcare law's employer responsibility requirements–commonly known as the "pay-or-play" provisions–an employer with 50 or more full-time or full-time equivalent employees will be required to provide health insurance that meets certain ACA standards to at least 95% of their full-time employees starting in 2014, or pay a penalty. (7) Does the Healthcare Coverage Provide Minimum Value? The Department of Health and Human Services (DHHS) has provided a minimum value calculator to determine if the plan is deemed to pay for at least 60% of the benefits. Alternatively, the regulators will publish safe harbor plan designs that are deemed to provide minimum value. Plans with nonstandard features may use a certified actuary. The statute and accompanying regulations currently define "full-time" as working 30 or more hours per week, calculated monthly. The Forty Hours is Full Time Act of 2013 (H.R. 2575, S. 1188) introduced by Sens. Susan Collins (R-ME) and Joe Donnelly (D-IN) would increase this threshold to 40 hours per week. In addition, the bill would increase the number of hours used to calculate a "full-time equivalent" employee to 174 hours per month. 9 RETURN TO TABLE OF CONTENTS respect to, among others, new "variable hour" employees. Employees determined to be full-time during a measurement period must be offered coverage during a corresponding "stability period" of generally the same length even if their hours drop below full-time, provided they remain employed. In a press release, Sen. Collins said: The new health care law creates a perverse incentive for businesses to cut their employees' hours so they are no longer considered 'full time.' If its definition of a full-time worker as someone who works only 30 hours a week is allowed to go into effect, millions of American workers could find their hours, and their earnings, reduced. This simply doesn't make sense. The look-back approach should greatly benefit employers whose employees work on a part-time or temporary basis; but it also poses significant compliance and enforcement challenges, especially for temporary staffing firms. In particular, how the rules apply to new variable hour employees of staffing firms has been the subject of much recent confusion and misinformation. This advisory examines how the rules governing variable hour employees will apply both in 2014 and beyond. This measure has been referred to the Senate Finance Committee. c. Definitions of Temporary and Contract Employees: Variable Hour Employee (1) Expected termination before end of look-back is not relevant to variable hour status The Affordable Care Act's employer shared responsibility rules will require large employers (50 or more full-time and full-time equivalent employees) to make an offer of minimum essential coverage to at least 95% of their full-time employees or pay a non-deductible excise tax on all their full-time employees. These so-called "pay-or-play" rules become effective on January 1, 2014.1 Because the excise tax payments are determined month-by-month, it is not possible to know for certain whether coverage must be offered to any particular employee because of his or her full-time status until the end of a month. Recognizing that this presents something of a Catch-22, the regulators have proposed an alternative means of determining full-time status of certain employees called the "look-back measurement period method." The proposed look-back measurement period rules were formally issued by the Treasury Department and the Internal Revenue Service on December 28, 2012 and published in the Federal Register on Jan. 2, 2013. See 78 FED. REG. 218 (Jan. 2, 2013). For newly hired employees (as distinguished from "ongoing" employees who have already completed at least one standard measurement period) the look-back method for determining full-time status applies only to new "variable hour" and "new seasonal" employees. A new employee who is hired into a position that is full-time, and who does not qualify as variable hour or seasonal, must be offered coverage within 90 days in order to avoid the prospect of an assessable payment. Under the look-back method, employers are permitted to determine an employee's full-time status based on a measurement period established by the employer of up to 12 consecutive months. During the measurement period, an employer is not subject to an excise tax payment with The proposed rules define an employee as variable hour if, based on the facts and circumstances at the employee's start date, the employer — "cannot determine whether the employee is reasonably expected to be employed on average at least 30 hours of service per week during the initial measurement period because the employee's hours are variable or otherwise uncertain." Id. at 242. 1 Minimum essential coverage generally includes coverage under an employer-sponsored group health plan. In the case of large fully-insured plans and self-funded plans, the plan need only provide "medical care" to qualify. This is a low threshold and potentially could be met by a plan with the slimmest of benefits. Recognizing this, the law allows employees who want and need better coverage to obtain it through a public health insurance exchange (marketplace). In addition, employees who meet certain income requirements can get tax assistance to help them buy coverage in the exchange if the employer's plan does not provide "minimum value" (i.e., the actuarial value of the plan's benefits is less than 60%) or is unaffordable (i.e., the employee's share of single-only premium coverage exceeds 9.5% of the employee's income). If an employee qualifies for tax assistance and opts for marketplace coverage, the employer is subject to a penalty. In making variable hour determinations, the proposed rules say that employers "may not take into account the likelihood that the employee may terminate employment with the employer before the end of their initial measurement period." Id. This language has been the subject of some confusion. Application of this standard has, therefore, been delayed until January 1, 2015. But even in 2014, the proposed rules provide that, while an employee's expected tenure may be considered in making variable hour determinations, the determinations must be based on "objective facts and 10 RETURN TO TABLE OF CONTENTS circumstances specific to the newly-hired employee at the start date and cannot be based on the expected aggregate turnover of the employer's work force as a whole." Id. at 239. will vary, and that [the employee] will not necessarily be available for all assignments." The examples don't specifically define "short-term" or "few months" but the preamble to the regulations refers to assignment lengths "each generally lasting no more than two or three months"7 and, at another point, describes short-term as "4 or 5 months." Id. at 229. (2) Special rules for determining variable hour status of temporary employees employed by staffing firms The provision barring employer reliance after 2014 on expected employee tenure in making variable hour decisions does not mean, as some commentators have suggested, that beginning in 2015, newly-hired temporary employees who are offered full-time assignments on their start date cannot be treated as variable hour employees and must be offered health benefits within 90 days. This ignores the specific examples provided in the proposed regulations for determining the variable hour status of temporary employees assigned by staffing firms. The examples make clear that, in 2014 and in the years following, staffing firms can use up to a full 12-month look-back period for temporary employees as long as they are properly classified as variable hour employees based on those examples. The following is a brief summary of the relevant examples2: C In one example, a staffing firm expects, on the employee's start date, that the employee will be offered "short-term" assignments with "several different clients" with "significant gaps" in between, that the assignments will differ in average weekly hours, and that the number and duration of assignments offered and accepted, the gaps between, and the weekly hours, are all uncertain. C In the other example, an employee is hired on an hourly basis to "fill in for employees who are absent and to provide additional staffing at peak times." In that example, the employer expects the employee to work "full-time for the first few months of employment, while assigned to a specific project, but also reasonably expects that the assignments will be of unpredictable duration, that there will be gaps of unpredictable duration between assignments, that the hours per week required by subsequent assignments The examples used in the proposed regulations to illustrate how the variable hour definition will be applied to employees assigned by temporary staffing firms are typical of what most staffing firms do and fairly represent the work patterns of the majority of temporary employees assigned in the U.S. The examples reflect Treasury and IRS's recognition that temporary employees, when they do work, generally work full-time work weeks. Hence, the mere fact that temporary employee assignments are full-time at the start does not preclude a determination of variable hour status.3 (3) Longer-term employees may not qualify as variable hour While employees who are expected to work on relatively short-term, intermittent assignments clearly will qualify for variable hour status under the proposed examples, it is not clear at what point the length of an expected assignment will not qualify as variable hour—in which case the look-back approach would not apply. The Treasury Department and the IRS rejected an approach under which all employees assigned by temporary staffing firms be considered to be inherently variable hour, saying that a blanket presumption would not be appropriate for all staffing firm employees, "especially employees on longer-term assignments with predictable requests for hours of service, as may be the case, for example, with particularly high-skilled technical or professional workers." 78 FED. REG. at 230. The regulators also expressed concern that special rules for short-term employees could create "the potential for abuse and manipulation" that might "outweigh the churning and inefficiency associated with offering coverage to such workers." Similarly, special rules for high turnover employees "could provide an incentive for employers to 2 The full text of the examples is set forth in the proposed regulations as Examples 12 and 13 (78 FED. REG. at 248). Example 12 specifically refers to an employer "in the trade or business of providing temporary workers to numerous clients that are unrelated to [the] employer...and to one another." Example 13 does not specifically refer to a staffing firm, but the fact pattern used in the example is typical of many temporary employee assignments. 3 Some commentators have also reported that employees will not be considered variable hour if they replace employees who were previously full-time or are assigned to fill positions that are normally full-time. Treasury and IRS are "considering whether such factors are appropriate" but no such ruling has been made. See 78 FED. REG. at 227. 11 RETURN TO TABLE OF CONTENTS terminate employees to ensure that the position remains a high-turnover position under whatever standard was used to make that determination." Nevertheless, they invited further comment on how these situations could be addressed without creating perverse incentives or avoidance situations. Id. at 229. new marketplace coverage option. While the marketplaces will not open until fall, and the coverage they offer will not start until January 1, 2014, the DOL has announced that notices for current employees must be provided by October 1, 2013, a fairly short time frame given the potential complexity of preparing the notice and the limited methods of delivery permitted. In response to this invitation, the American Staffing Association (ASA) has submitted comments urging the adoption of a special safe harbor rule for employers with unusually high historical employee turnover. Under the proposal, employees of firms, such as temporary staffing firms, with historical (not expected) annual employee turnover of at least 100% would be presumed to be variable hour employees. ASA asserted that staffing firms need such a provision because of the large volume of temporary employees, the often urgent client need for such workers, and the need for a reliable way to determine variable hour status "without having to make a time-consuming, confusing, and possibly inconclusive facts and circumstances analysis before each employee starts work."4 (a) The DOL's New Guidance on the Notice of Coverage Options The Affordable Care Act added new § 18B to the Fair Labor Standards Act ("FLSA"), requiring all employers who are otherwise subject to the FLSA to provide a one-time written notice about health insurance marketplaces to all of their current employees before the marketplaces open, as well as written notice to all new employees upon hire. On May 8, 2013, the DOL issued Technical Release 2013-02 ("Release"), which provides employers with temporary guidance on the required timing and content of the notices. The Release also gives employers guidance on updating election notices for employees who experience a COBRA-qualifying event. The presumption of variable hour status under the ASA proposal would not apply to employees who, on their start date, are reasonably expected to work full-time for at least 6 consecutive months or more. Such employees would be presumed to be non-variable hour employees and therefore and would not be eligible for look-back treatment. (b) Which Employers Must Provide Notice of Coverage Options to Employees? All employers covered by the FLSA must provide a notice of coverage options to their employees. In general, the FLSA covers employers that have at least $500,000 in annual dollar volume of business—based on its gross receipts from sales over a 12-month period—and that engage in, or produce goods for, interstate commerce. An employer engages in interstate commerce if it has any regular contact with interstate commerce, no matter how small. Only employers that engage in purely isolated local activity may be said to be uninvolved in interstate commerce. In addition, hospitals, certain non-acute care and residential facilities, schools, and federal and state governments, among others, are covered by the notice requirement. Even if the administration does not accept the staffing industry's safe harbor recommendation, the examples provided in the proposed regulations should provide a basis for treating most new temporary employees employed by staffing firms as variable hour. d. Notices to Employees (1) Required Notices to Employees (10/01/13 Deadline) The Affordable Care Act (ACA) provides employees who are not offered health coverage by their employers with the option of purchasing health coverage through new health insurance marketplaces (also known as health insurance exchanges) that will operate in every state. Even employees who are offered coverage by their employers have the choice of taking that coverage or purchasing coverage from a health insurance marketplace instead. The ACA requires employers to provide employees with written notice of the (c) Which Employees Must Receive a Notice of Coverage Options? The employer must provide a notice of coverage options to all employees, regardless of whether they are full- or part-time employees or whether the employees currently participate in any employer-provided health plan. Employers do not have to provide notice to employees' dependents nor to retirees. But an employer's obligation to provide notice may extend to its independent contractors, and contract and leased workers, depending on the nature of 4 ASA's safe harbor proposal can be viewed at http://www.americanstaffing.net/healthcarereform/docs/ASACo mments-IRS_REG-138006-12.pdf 12 RETURN TO TABLE OF CONTENTS their relationship with the employer as determined under the FLSA's "economic reality" test. Part A of the notice provides the first five items of information required under § 18B. Part B provides the sixth item—information about whether any health plan the employer may offer will affect the employee's eligibility for a premium tax credit. If an employer offers an employee a health plan that provides what is called "minimum value" and has an affordable premium for self-only coverage, then the employee is not eligible for a premium tax credit. (d) What Information Must Employers Include in the Notice of Coverage Options? The notice of coverage options must be in writing and be written in a manner calculated to be understood by the average employee. FLSA § 18B requires the notice of coverage options to provide employees with information about: C The existence of health insurance marketplaces; C Services provided by health insurance marketplaces; C How to contact a health insurance marketplace for assistance; C The possibility that employees may lose the employer contribution to any employer-provided health plan if they purchase a plan through a health insurance marketplace; C The possibility that employees may lose the ability to exclude employer and employee contributions from their income for federal income tax purposes if they purchase a plan through a health insurance marketplace; and C Whether employees may be eligible for a premium tax credit if they purchase a qualified health plan through a health insurance marketplace. The model notice for employers that offer health coverage also includes an optional section where the employer can provide information that employees will need if they seek financial assistance when purchasing coverage through a marketplace. Employers may provide current employees with one of the model notices or create their own version that includes the mandatory items listed above. The language in the model notices may be helpful to employers because they provide general information about marketplaces and refer employees to a web site with contact information for the marketplace in their particular states. Providing this general information may minimize employee questions and is far simpler than creating different notices with information specific to the marketplaces in each state. An employer may want to consider adjustments or additions to the model notices that take into account the employer's particular workforce, what information is appropriate to provide to help employees understand their coverage options, and potential questions employees face in making health coverage decisions that effectively did not exist before the advent of the marketplaces. (e) When Must Employers Provide Notices of Coverage Options? The DOL has provided employers with two model notices: one version for employers that offer health coverage to some or all employees, which is available at http://www.dol.gov/ebsa/pdf/FLSAwithplans.pdf, and another version for employers that do not offer health care coverage, which is available at http://www.dol.gov/ebsa/pdf/FLSAwithoutplans.pdf. Current Employees: Employers must provide each current employee with a notice of coverage options by October 1, 2013. New Hires: Employers must provide a notice of coverage options to employees hired after October 1, 2013 through December 31, 2014 within 14 days of the start of their employment. The DOL may change the timing requirements for new hires who come on board in 2015 or later. Each model notice includes a Part A with general information about the marketplaces and the tax and economic consequences of declining employer-provided coverage, and a Part B that the employer completes with specific identifying information and answers to questions about any health coverage it may offer. Rather than including extensive eligibility information in the notice, employers may wish to cross-reference existing eligibility descriptions, either in the employer's summary plan description or in the enrollment materials. (f) How Can Employers Send Notices of Coverage Options to Employees? An employer can provide notice of coverage options by first-class mail or electronically. To provide the notice electronically, an employer must meet the same requirements for electronic distribution of ERISA plan 13 RETURN TO TABLE OF CONTENTS (2) Model Notices in Spanish disclosures. In general, this means that notices can be distributed electronically only to (a) those employees who use a computer as part of their normal job function or (b) those employees who have consented to electronic delivery in a manner that demonstrates they can effectively receive the electronic delivery. The DOL's Employee Benefits Security Administration (EBSA) has made available Spanish language versions of model notices to employees of health coverage options. The Affordable Care Act (ACA) requires employers to provide employees with a notice of their health insurance coverage options available through the future health insurance exchanges by October 1, 2013. Last month, the EBSA issued guidance on this obligation and model notices in English. The new notices posted on the EBSA's website include a model notice for employers who offer a health plan to some or all employees in Spanish and a model notice for employers who do not offer a health plan in Spanish. There is no prohibition on sending the notice with other items. Thus, employers may wish to consider including it with their new hire packets, annual enrollment materials, or other existing communications. However, these items will have to be delivered in the manner and time frame required for the notices. (g) Will the Notice of Coverage Options Requirements Change After 2013? 2. The DOL promised employers that they may rely on the guidance in the Release for notices they are required to provide to current employees by October 1, 2013. They may also rely on the Release for new employees they hire during 2013 and through 2014. According to the Release, any changes to the requirements will come in future regulations or guidance that will provide adequate time to comply with any such changes. Future regulations should also clarify the consequences for noncompliance with the notice of coverage options requirement. EBSA Enforcement Activity The DOL's Employee Benefits Security Administration (EBSA) has been busy issuing pronouncements regarding the Affordable Care Act (see discussion above). EBSA's responsibilities also include protecting funds held for workers in retirement plans or health plans governed by the Employee Retirement Income Security Act (ERISA). Under ERISA, the DOL has the authority to conduct civil and criminal investigations to protect employee benefit programs and the assets set aside to pay benefits to workers and their families. The enforcement cases pursued by the DOL include civil cases filed in federal district courts across the country to protect the contributions made by employees and matching contributions promised by their employers. (h) Updated COBRA Election Notice In general, COBRA allows employees covered by an employer's health plan to elect continuation coverage after a qualifying event, such as termination of employment or reduction in hours that results in a loss of coverage under the employer's plan. These employees must be given an election notice explaining their right to continuation coverage under COBRA. Although the Affordable Care Act did not require any changes to the COBRA election notice, the DOL revised its model COBRA election notice to provide employees who are eligible for COBRA continuation coverage with information regarding health coverage alternatives offered through the marketplaces, as well as to eliminate stale references to preexisting condition limitation rules that have been substantially revised by the Affordable Care Act. Employers should work with their COBRA administrators to appropriately update notices. There is no fixed deadline for doing so, but it makes sense for the COBRA notices to be updated for qualifying events occurring in late 2013, so that COBRA-qualifying beneficiaries are aware of health coverage options other than COBRA that are available to them effective January 1, 2014. In most enforcement cases, workers had contributions to their pension or health plans withheld from their paychecks, but the employers did not deposit those contributions in the plans. Instead, the employers kept the workers' contributions and used them for their own purposes or other purposes unrelated to the plans. In these kinds of civil cases, the DOL is represented by its solicitor of labor. In the criminal arena, EBSA works with U.S. attorneys as well as state and local law enforcement agencies nationwide to bring criminal cases under ERISA that protect workers' contributions. EBSA's Contributory Plans Criminal Project is the agency's first criminal national enforcement project targeting persons who commit fraud and abuse against participants and beneficiaries of contributory employee benefit plans, including 401(k)s and contributory health plans. Recently EBSA has filed a number of lawsuits to recover losses suffered by employee participants in Employee Stock Ownership Plans, known as ESOPs. An ESOP is a type of 14 RETURN TO TABLE OF CONTENTS plan that invests some or all of its assets in the employer's stock. The recent lawsuits involve situations where company owners or executives allegedly sold their company stock to the ESOP for an inflated price, receiving a windfall and inflicting losses upon employee participants. practical matter, this new DOL guidance means that many more employees will be entitled to take FMLA leave to care for their adult children. Employers should expect an uptick in these requests and train their personnel accordingly. See DOL FMLA 2013-1 at http://www.dol.gov/whd/ opinion/adminIntrprtn/FMLA/2013/FMLAAI2013 _1.htm Company owners tempted to abuse their fiduciary positions should certainly take note of EBSA's enforcement initiatives. However, even the most conscientious employers may be committing technical violations relating to retirement and health plan contributions. EBSA considers it a violation if there is more than a few days' delay between the withholding of a plan contribution from an employee's paycheck and the deposit of that contribution, and any promised match, into the plan. Such delays can occur inadvertently, especially among smaller employers who administer their own benefit plans. Other issues that may lead to EBSA scrutiny include unusually high administrative expenses, and conflicts of interest among the parties who manage and invest plan money. b. On February 5, 2013, less than a month after issuing its interpretive guidance, the DOL published new FMLA regulations which took effect March 8, 2013. These regulations implement a series of recent changes to the FMLA regarding military leave and airline flight crews. The regulations also clarify the DOL's position concerning the calculation of intermittent leave and remind employers of their obligation to comply with the confidentiality requirements of the Genetic Information Nondiscrimination Act of 2008 (GINA). The most significant changes in the regulations are summarized below. EBSA's fact sheet regarding contributions to employee retirement plans is located at http://www.dol.gov/ebsa/ newsroom/fsecp.html. 3. FMLA: Family and Medical Leave Act a. DOL Interpretation Letter: Care for Adult Children DOL Issues Final FMLA Regulations On January 14, 2013, the DOL issued an official administrative interpretation regarding FMLA leave to care for an adult son or daughter with a serious health condition who is incapable of self-care because of a physical or mental disability. The DOL clarified that the child's age at the onset of the disability is irrelevant and, in fact, onset may occur after the age of 18. C Military Exigency Leave: The regulations add a new category of exigency leave for "parental care" (similar to the existing child care provision, this new category of leave will allow employees to take time off to arrange for care for parents who are incapable of self-care when the need arises as a result of active duty or a call to active duty). The regulations also increase the maximum number of days for "rest and recuperation" leave from 5 days to 15 days. C Military Caregiver Leave: The regulations clarify that caregiver leave has been expanded to include leave for "covered veterans" who are undergoing medical treatment, recuperation or therapy for a serious injury or illness ("covered veterans" include individuals who left military service--under conditions other than dishonorable--in the five-year period preceding the first day of military caregiver leave). The regulations also clarify that the definition of "serious injury of illness" has been expanded to include pre-existing injuries that were aggravated during military service. Finally, the regulations state that any health care provider may provide a certification to support military caregiver leave (not just those affiliated with the Department of Defense). C Calculating Intermittent Leave: The regulations provide helpful guidance on one of the most troubling aspects of FMLA administration - calculation of intermittent leave. For example, the FMLA provides It further clarified that whether a child has a physical or mental disability is defined by the expansive definition of "disability" set forth in the Americans with Disabilities Act Amendments Act of 2008 (ADAAA). The DOL stated that it will follow the ADAAA's regulations and construe the definition of disability "in favor of broad coverage." The DOL noted that many impairments will satisfy both the ADAAA's definition of disability and the FMLA's definition of serious health condition. The interpretation emphasized that whether an adult child is "incapable of self-care" is a fact specific inquiry, as is the question of whether a parent is "needed to care" for the adult child. The DOL specifically stated that the phrase "needed to care" includes providing psychological comfort and reassurance that would be beneficial to the child. As a 15 RETURN TO TABLE OF CONTENTS that when calculating intermittent FMLA leave, employers must use the shortest increment of time that the employer uses to track other forms of leave, provided it is not greater than an hour. The regulations clarify that this does not mean FMLA can always be tracked in one-hour increments. Rather, if an employer allows employees to take vacation or sick leave in 15-minute increments, it must allow employees to take FMLA leave in 15-minute increments as well. of requests to care for adult children with disabilities and the expanded definition of military leave) so that FMLA requests will be recognized and handled appropriately. In a similar vein, the regulations clarify that employers may only charge employees for leave that is actually taken, and not for time worked. For example, if an employee arrives at work half an hour late because he/she is returning from an FMLA qualifying leave (e.g. a doctor's appointment), and the employer decides to allow the employee to start work immediately, despite its general rule that all leave be taken in one-hour increments, the regulations state that only the amount of leave actually taken (half an hour) may be counted against the employee's allotment. The employer cannot charge the employee for one-hour of leave, even though its policy says that leave must be taken in one-hour increments. C C c. Miscellaneous C Effective March 8, 2013, the DOL issued a new FMLA poster, which can be downloaded from the DOL web site: http://www.dol.gov/whd/regs/ compliance/posters/fmla.htm. The updated poster incorporates provisions of the Flight Crew Technical Corrections Act and the expanded military caregiver provisions in the National Defense Authorization Act of 2010. Among other things, the 2010 law expanded military caregiver leave so that it applies to veterans as well as current members of the armed forces. Airline Flight Crew Eligibility: The regulations provide that an airline flight crew employee will meet the hours-of-service eligibility requirement if he/she has worked or been paid for not less than 60% of the applicable total monthly guarantee or the equivalent and has worked for been paid for not less than 504 hours during the previous 12 months (exclusive of commute time, vacation, medical or sick leave). Recordkeeping Requirements and FMLA Forms: The new regulations also remind employers of their confidentiality obligations under GINA, to the extent that documents created for FMLA purposes contain family medical history or genetic information. In addition to the regulations, the DOL has published a series of updated forms, including a new FMLA poster. Employers should be sure to replace their current FMLA posters with the revised version, available on the DOL's website. Fortunately, unless you are in the airline business, the new regulations will not require sweeping revisions to existing policies that are already compliant with the recent FMLA statutory amendments. That being said, employers should review current policies, forms, and posters, and update them, as necessary, to conform to the new regulations. It is also a good time to train your HR and managerial staff on these new developments(particularly the expanded definition of "son or daughter" in the context C New FMLA regulations also became effective March 8, 2013, and a side-by-side comparison of the old and new regulations is available online: http://www.dol.gov/whd/fmla/2013rule/comparison. htm. C The DOL has also published a helpful plain-language booklet, "Need Time? The Employee's Guide to the Family and Medical Leave Act." This 16-page booklet is available in English and Spanish, and has flow charts that are helpful for attorneys and HR professionals as well as for employees requesting leave. The booklet is available online: http://www.dol.gov/whd/fmla/employeeguide.htm. 4. Handling DOL Investigations and Audits: 8 Tips Suppose an employee has complained to the DOL about possible wage-and-hour or overtime violations in the workplace. Once the employer has been notified that an auditor is coming, it should get prepared by conducting its own audit. DOL auditors have plenty of latitude to inspect records and interview employees. Therefore, an employer should ensure that it has done everything possible to discover and correct any compliance problems as well as gather documents to defend its decisions. If faced with an audit, an employer should: Tip #1: Review the differences between state and federal laws to ensure compliance with the stricter of the 16 RETURN TO TABLE OF CONTENTS two. For example, many states have family leave laws that are more comprehensive and generous that the federal Family and Medical Leave Act. Committee on Lawyer Referral and Information Service (ABA LRIS). The DOL is contacted by approximately 35,000 workers each year regarding possible FLSA and FMLA claims, and the agency cannot process all of those claims. Some claims are declined at the outset, and others are suspended after the investigation phase, if the employer refuses to pay back wages and the DOL chooses not to litigate. The referral program connects claimants with private attorneys willing to pursue these types of claims. Tip #2: Reread the job descriptions of any positions that might be in question. Interview people in those jobs and their supervisors to ensure their job descriptions are accurate. Find out what the workers actually do, and check timekeeping records. Promptly correct any errors. On its web page regarding the "Bridge to Justice" program, the DOL describes its enforcement priorities as follows: Tip #3: Interview exempt employees to find out how much time they spend on duties typically done by hourly employees. If it is more than 20% (or in retail, 40% ), consider reclassifying the employee as nonexempt. (There is no liability in classifying too many people as nonexempt; it is the opposite that plunges companies into hot water.) Given the Wage and Hour Division's resources limitations, it has to set enforcement priorities in a way that will make the biggest impact for the greatest number of workers. Although specific initiatives will vary from year to year and from region to region, generally the Wage and Hour Division prioritizes cases involving minimum wage and overtime violations against low wage and vulnerable workers, child labor, recidivist employers, retaliation or discrimination, or criminal violations. In addition, as described in the Department's Strategic Plan for Fiscal Years 2011-2016, the Wage and Hour Division is targeting 'fissured' industries -- those sectors that increasing rely on a wide variety of organizational methods that have redefined employment relationships: subcontracting; third-party management; franchising; independent contracting; and other contractual forms that alter who is the employer of record or make the worker-employer relationship tenuous and less transparent. These industries include the agricultural, construction, janitorial, and hotel/motel industries." Tip #4: Check to see that employees are performing the job as assigned and working the hours designated by management. If they are not, insist they start doing so. Tip #5: Train supervisors and managers on how to determine who is exempt and who is not. Tip #6: Check overtime records. If an employer discovers unpaid overtime, pay it immediately—even if the overtime was not approved. Tip #7: Review policy manuals with an experienced employment attorney to make sure it is complete and in line with the law. Tip #8: Enlist help with all this from a consultant or attorney. Many of the regulations are difficult to interpret, and the wrong call could cost a company plenty. 5. 6. DOL Investigations–Coordination with IRS On September 19, 2011, The Secretary of Labor and the IRS Commissioner signed a memorandum of understanding to improve the two agencies' coordination on employee misclassification compliance and education. Eleven state agency leaders also signed the memorandum and agreed to assist in eliminating employee misclassification. The coordination effort arose from the DOL's Misclassification Initiative, which strives to restore employee rights and benefits to workers who have erroneously been misclassified as independent contractors. DOL Investigations–Bridge to Justice The DOL does not have the resources to litigate all cases that remain unresolved after an investigation. If the DOL does not file suit, employees who may be owed back wages receive so-called "16(b) letters" informing them of their rights. These letters now have a lawyer referral component, increasing the chances that an affected employee will take action. Effective December 13, 2010, the DOL implemented the "Bridge to Justice" program, a lawyer referral program involving the American Bar Association Standing IRS Commissioner Doug Shulman stated in a press release that "[t]his agreement takes the partnership between the IRS 17 RETURN TO TABLE OF CONTENTS and the Department of Labor to a new level." A few days later, the IRS launched a new Voluntary Classification Settlement Program (VCSP) that allows employers to resolve past worker classification issues by paying a reduced amount of back taxes and reclassifying the workers as employees. Information regarding the VCSP is online at: http://www.irs.gov/Businesses/Small-Businesses-&-SelfEmployed/Voluntary-Classification-Settlement-Program. Employers have been somewhat wary of the VCSP, but have generally gotten the message that misclassification is not worth the risk, and that when in doubt, treat the worker as an employee. B. EEOC: Equal Employment Opportunity Commission 1. EEOC Strategic Enforcement Plan lawyers cooperating in enforcement actions. Third, the EEOC seeks to establish clear expectations for those charged with implementing the plan and provide for regular and meaningful communication among the various entities to ensure strategic, integrated, and consistent enforcement. The EEOC identified the following areas for national enforcement: (1) issues that have a broad impact because of the number of individuals and employers or practices affected; (2) issues involving developing areas of the law; (3) issues affecting workers who may lack awareness of their legal rights or are reluctant to exercise those rights; (4) issues involving discriminatory practices that impede or impair full enforcement of the antidiscrimination laws; and (5) issues that are best addressed by government enforcement because of the EEOC's access to information, data, and research. As the first quarter of 2013 has come to a close, employers have begun to notice the Equal Employment Opportunity Commission's (EEOC) efforts at increased enforcement in line with its Strategic Enforcement Plan (SEP). In adopting a set of priorities for its SEP for years 2013-2016, the EEOC establishes three objectives: 1. Combat employment discrimination through strategic law enforcement; 2. Prevent employment discrimination through education and outreach; and 3. Deliver excellent and consistent service through a skilled and diverse workforce and effective systems. The EEOC's six national priorities under the SEP are as follows: The SEP then integrates the agency's investigation, conciliation, and litigation responsibilities in the private and public sectors. The Commission's announced guiding principles for implementing the SEP include a targeted approach with focused attention on the identified set of priorities. First, the Commission's priorities will receive a greater share of agency time and resources. The agency recognizes that a focused effort should have a broad and lasting impact and should more effectively advance the agency's mission and the public interest. Second, the SEP adopts an integrative approach. According to the EEOC, this will ensure the full use of communications, outreach, education training, research, and technology as tools to advance the agency's overall mission in concert with administrative enforcement and legal enforcement. Employers have witnessed this integrated approach with the EEOC, the Department of Justice, the Department of Labor, and other Fair Employment Practices agencies, as well as with private 1. Eliminating barriers in recruitment and hiring. The EEOC is targeting both class-based recruitment and facially neutral recruitment in hiring practices that discriminate against racial, ethnic, religious groups; older workers; women, and people with disabilities. 2. Protecting immigrant, migrant, and other vulnerable workers by targeting disparate pay, job segregation, harassment, trafficking, and other discriminatory practices and policies that impact vulnerable workers who are often unaware of their rights under the laws or who are reluctant or unable to exercise those rights. 3. Addressing emerging and developing issues, including the Americans with Disabilities Act Amendments Act (ADAAA) and issues involving reasonable accommodation, qualification standards, undue hardship, direct threat, and accommodating pregnancy-related limitations under the ADAAA and the Pregnancy Discrimination Act. This priority also targets coverage of lesbian, gay, bisexual, and transgender individuals under Title VII. 4. Enforcing equal pay laws by targeting compensation systems and practices that discriminate based upon gender. 5. Preserving access to the legal system. 6. Preventing harassment through a systematic enforcement and targeted outreach. Harassment 18 RETURN TO TABLE OF CONTENTS continues to be one of the most frequent complaints raised in the workforce. particular race or national origin (“disparate impact discrimination”). If the employer does not show that such an exclusion is “job related and consistent with business necessity” for the position in question, the exclusion is unlawful under Title VII. Statistics show that the EEOC has stepped up its investigations and become more aggressive in the establishment of its enforcement goals. In 2012 the agency obtained $36.2 million in settlements, which is a fourfold increase over the $8.6 million in settlements it obtained in 2011. The EEOC also plans on litigating more cases and devoting a greater percentage of its resources to the new priorities. While recognizing that it is not able to litigate every meritorious case that fails in conciliation, the EEOC intends to establish a minimum percentage of cases that it will litigate to address systemic discrimination issues. 2. No. Title VII does not regulate the acquisition of criminal history information. However, another federal law, the Fair Credit Reporting Act, 15 U.S.C. § 1681 et seq. (FCRA), does establish several procedures for employers to follow when they obtain criminal history information from third-party consumer reporting agencies. In addition, some state laws provide protections to individuals related to criminal history inquiries by employers. At the same time the EEOC will continue its emphasis on dispute resolution programs, which have become critical components of its enforcement program. Resolution of charges through mediation comprised 91 percent of all administrative settlements by the agency in fiscal year 2012. Seventy-six percent of the 11,380 charges filed proceeded to mediation in 2012, and most parties who participated in mediation viewed it favorably, with 98 percent reporting confidence in the mediation program. 2. 3. Is it a new idea to apply Title VII to the use of criminal history information? No. The Commission has investigated and decided Title VII charges from individuals challenging the discriminatory use of criminal history information since at least 1969, and several federal courts have analyzed Title VII as applied to criminal record exclusions over the past thirty years. Moreover, the EEOC issued three policy statements on this issue in 1987 and 1990, and also referenced it in its 2006 Race and Color Discrimination Compliance Manual Chapter. Finally, in 2008, the Commission’s E-RACE (Eradicating Racism and Colorism from Employment) Initiative identified criminal record exclusions as one of the employment barriers that are linked to race and color discrimination in the workplace. Thus, applying Title VII analysis to the use of criminal history information in employment decisions is well-established. EEOC Issues Enforcement Guidance: Use of Conviction and Arrest Records by Employers On April 25, 2012, the EEOC issued its Enforcement Guidance on the Consideration of Arrest and Conviction Records in Employment Decisions Under Title VII of the Civil Rights Act of 1964, as amended, 42 U.S.C. § 2000e. The Guidance consolidates and supersedes the Commission’s 1987 and 1990 policy statements on this issue as well as the discussion on this issue in § VI.B.2 of the Race & Color Discrimination Compliance Manual Chapter. It is designed to be a resource for employers, employment agencies, and unions covered by Title VII; for applicants and employees; and for EEOC enforcement staff. 1. Does Title VII prohibit employers from obtaining criminal background reports about job applicants or employees? 4. How is Title VII relevant to the use of criminal history information? Why did the EEOC decide to update its policy statements on this issue? In the twenty years since the Commission issued its three policy statements, the Civil Rights Act of 1991 codified Title VII disparate impact analysis, and technology made criminal history information much more accessible to employers. There are two ways in which an employer’s use of criminal history information may violate Title VII (“disparate treatment discrimination”). First, Title VII prohibits employers from treating job applicants with the same criminal records differently because of their race, color, religion, sex, or national origin. The Commission also began to re-evaluate its three policy statements after the Third Circuit Court of Appeals noted in its 2007 El v. Southeastern Pa. Trans. Auth., 479 F.3d 232 (3d Cir. 2007), decision that the Commission should provide in-depth legal analysis and updated research on this issue. Since then, the Commission has examined social Second, even where employers apply criminal record exclusions uniformly, the exclusions may still operate to disproportionately and unjustifiably exclude people of a 19 RETURN TO TABLE OF CONTENTS science and criminological research, court decisions, and information about various state and federal laws, among other information, to further assess the impact of using criminal records in employment decisions. 5. therefore will violate Title VII, unless it is required by federal law. 7. Did the Commission receive input from its stakeholders on this topic? The Enforcement Guidance provides more in-depth analysis compared to the 1987 and 1990 policy documents in several respects. Yes. The Commission held public meetings in November 2008 and July 2011 on the use of criminal history information in employment decisions at which witnesses representing employers, individuals with criminal records, and other federal agencies testified. The Commission received and reviewed approximately 300 public comments that responded to topics discussed during the July 2011 meeting. Prominent organizational commenters included the NAACP, the U.S. Chamber of Commerce, the Society for Human Resources Management, the Leadership Conference on Civil and Human Rights, the American Insurance Association, the Retail Industry Leaders Association, the Public Defender Service for the District of Columbia, the National Association of Professional Background Screeners, and the D.C. Prisoners’ Project. 6. Is the Commission changing its fundamental positions on Title VII and criminal record exclusions with this Enforcement Guidance? No. The Commission will continue its longstanding policy approach in this area: • The fact of an arrest does not establish that criminal conduct has occurred. Arrest records are not probative of criminal conduct, as stated in the Commission’s 1990 policy statement on Arrest Records. However, an employer may act based on evidence of conduct that disqualifies an individual for a particular position. • Convictions are considered reliable evidence that the underlying criminal conduct occurred, as noted in the Commission’s 1987 policy statement on Conviction Records. • National data supports a finding that criminal record exclusions have a disparate impact based on race and national origin. The national data provides a basis for the Commission to investigate Title VII disparate impact charges challenging criminal record exclusions. • How does the Enforcement Guidance differ from the EEOC’s earlier policy statements? • The Enforcement Guidance discusses disparate treatment analysis in more detail, and gives examples of situations where applicants with the same qualifications and criminal records are treated differently because of their race or national origin in violation of Title VII. • The Enforcement Guidance explains the legal origin of disparate impact analysis, starting with the 1971 Supreme Court decision in Griggs v. Duke Power Co., 401 U.S. 424 (1971), continuing to subsequent Supreme Court decisions, the Civil Rights Act of 1991 (codifying disparate impact), and the Eighth and Third Circuit Court of Appeals’ decisions applying disparate impact analysis to criminal record exclusions. • The Enforcement Guidance explains how the EEOC analyzes the “job related and consistent with business necessity” standard for criminal record exclusions, and provides hypothetical examples interpreting the standard. P There are two circumstances in which the Commission believes employers may consistently meet the “job related and consistent with business necessity” defense: R The employer validates the criminal conduct exclusion for the position in question in light of the Uniform Guidelines on Employee Selection Procedures (if there is data or analysis about criminal conduct as related to subsequent work performance or behaviors); or R The employer develops a targeted screen considering at least the nature of the crime, the time elapsed, and the nature of the job (the three factors identified by the court in Green v. Mo. Pac. R.R., 549 F.2d 1158 (8th Cir. 1977)). The employer’s policy then provides an opportunity for an individualized A policy or practice that excludes everyone with a criminal record from employment will not be job related and consistent with business necessity and 20 RETURN TO TABLE OF CONTENTS assessment for those people identified by the screen, to determine if the policy as applied is job related and consistent with business necessity. (Although Title VII does not require individualized assessment in all circumstances, the use of a screen that does not include individualized assessment is more likely to violate Title VII.). The following questions and answers explain the EEOC’s final rule: 1. The purpose of the ADEA is to prohibit employment discrimination against people who are 40 years of age or older. Congress enacted the ADEA in 1967 because of its concern that older workers were disadvantaged in retaining and regaining employment. The ADEA also addressed concerns that older workers were barred from employment by some common employment practices that were not intended to exclude older workers, but that had the effect of doing so and were unrelated to job performance. The Enforcement Guidance states that federal laws and regulations that restrict or prohibit employing individuals with certain criminal records provide a defense to a Title VII claim. • • The Enforcement Guidance says that state and local laws or regulations are preempted by Title VII if they "purport to require or permit the doing of any act which would be an unlawful employment practice" under Title VII. 42 U.S.C. § 2000e-7. 2. See http://www.eeoc.gov/laws/guidance/arrest_ conviction.cfm EEOC Adopts Final Rules a. Reasonable Factors Other then Age (ADEA) Final Rule What does the ADEA do? It prohibits discrimination against workers because of their older age with respect to any aspect of employment. In addition to prohibiting intentional discrimination against older workers (known as “disparate treatment”), the ADEA prohibits practices that, although facially neutral with regard to age, have the effect of harming older workers more than younger workers (known as “disparate impact”), unless the employer can show that the practice is based on an RFOA. This rule concerns only disparate impact discrimination and the Reasonable Factors Other than Age defense to such claims. The Enforcement Guidance provides best practices for employers to consider when making employment decisions based on criminal records. 3. What are the purposes of the ADEA related to this rule? 3. On March 29, 2012, the EEOC issued the “Final Regulation on Disparate Impact and Reasonable Factors Other than Age” (RFOA) under the Age Discrimination in Employment Act of 1967 (ADEA). The final rule clarifies that the ADEA prohibits policies and practices that have the effect of harming older individuals more than younger individuals, unless the employer can show that the policy or practice is based on a reasonable factor other than age. The rule explains the meaning of the RFOA defense to employees, employers, and courts, and makes EEOC’s regulations consistent with Supreme Court case law. The rule applies to private employers with 20 or more employees, state and local government employers, employment agencies, and labor organizations. The final rule strikes the appropriate balance between protecting older workers from discriminatory, unreasonable business decisions and preserving an employer’s ability to make reasonable business decisions. What is the purpose of the rule? The rule responds to two Supreme Court decisions (Smith v. City of Jackson, 544 U.S. 228 (2005); and Meacham v. Knolls Atomic Power Lab., 554 U.S. 84 (2008)) in which the Supreme Court criticized one part of the Commission’s existing ADEA regulations. The Court upheld EEOC’s longstanding position that the ADEA prohibits policies and practices that have the effect of harming older individuals more than younger individuals, even if the harm was not intentional. However, it disagreed with the part of the regulations which said that, if an employee proved in court that an employment practice disproportionately harmed older workers, the employer had to justify it as a “business necessity.” The Court said that, in an ADEA disparate impact case, the employer did not have to prove business necessity; it need only prove that the practice was based on an RFOA. The Court also said that the RFOA defense is easier to prove than the business necessity defense but did not otherwise explain RFOA. 21 RETURN TO TABLE OF CONTENTS The rule does two things: • • 4. 8. It makes the existing regulation consistent with the Supreme Court’s holding that the defense to an ADEA disparate impact claim is RFOA, and not business necessity; and An employment practice is based on an RFOA when it was reasonably designed and administered to achieve a legitimate business purpose in light of the circumstances, including its potential harm to older workers. It explains the meaning of the RFOA defense to employees, employers, and those who enforce and implement the ADEA. Example 1: If a police department decided to require applicants for patrol positions to pass a physical fitness test to be sure that the officers were physically able to pursue and apprehend suspects, it should know that such a test might exclude older workers more than younger ones. Nevertheless, the department’s actions would likely be based on an RFOA if it reasonably believed that the test measured the speed and strength appropriate to the job, and if it did not know, or should not have known, of steps that it could have taken to reduce harm to older workers without unduly burdening the department. Who is required to follow the rule? The rule applies to all private employers with 20 or more employees, state and local government employers, employment agencies, and labor organizations. Although the ADEA applies to the federal government as an employer, the rule does not apply to federal employers by virtue of § 633a(f) of the ADEA. 5. Does the rule apply to all employment practices? No. The rule applies to only a few kinds of employment practices. Specifically, it applies only to practices that are neutral on their face, that might harm older workers more than younger workers, and that apply to groups of people. For instance, it applies to tests used to screen employees or to some procedures used to identify persons to be laid off in a broad reduction-in-force (“RIF”). 6. The rule emphasizes the need for an individualized consideration of the facts and circumstances surrounding the particular situation. It includes the following list of considerations relevant to assessing reasonableness: When does an employer have to show that its practice was based on an RFOA? • The extent to which the factor is related to the employer’s stated business purpose; • The extent to which the employer defined the factor accurately and applied the factor fairly and accurately, including the extent to which managers and supervisors were given guidance or training about how to apply the factor and avoid discrimination; • The extent to which the employer limited supervisors’ discretion to assess employees subjectively, particularly where the criteria that the supervisors were asked to evaluate are known to be subject to negative age-based stereotypes; • The extent to which the employer assessed the adverse impact of its employment practice on older workers; and • The degree of the harm to individuals within the protected age group, in terms of both the extent of injury and the numbers of persons adversely affected, and the extent to which the employer took steps to An employer would be required to prove the defense only after an employee has identified a specific employment policy or practice, and established that the practice harmed older workers substantially more than younger workers. 7. What determines whether an employment practice is based on Reasonable Factors Other than Age? Do other statutory defenses apply to disparate impact claims? RFOA is the standard defense to ADEA impact claims. The final rule revises § 1625.7 of the regulations, which only addresses the RFOA defense, and does not change other regulatory sections that apply to the ADEA’s other affirmative defenses. However, the rule does not preclude an employer from asserting another statutory provision in response to a particular claim. For example, if an employee alleged that a practice required by a seniority system had a disparate impact, the employer could defend the claim by relying on § 4(f)(2) of the ADEA, which precludes using disparate impact analysis to challenge the provisions of a seniority system. 22 RETURN TO TABLE OF CONTENTS Example 2: reduce the harm, in light of the burden of undertaking such steps. 9. A nursing home decided to reduce costs by terminating its highest paid and least productive employees. To ensure that supervisors accurately assessed productivity and did not base evaluations on stereotypes, the employer instructed supervisors to evaluate productivity in light of objective factors such as the number of patients served, errors attributed to the employee, and patient outcomes. Even if the practice did have a disparate impact on older employees, the employer could show that the practice was based on an RFOA because it was reasonably designed and administered to serve the goal of accurately assessing productivity while decreasing the potential impact on older workers. Must employers show that they used each of the considerations listed in the EEOC’s regulation to establish the defense? No. The considerations merely describe the most common characteristics of reasonable practices. The rule makes clear that the defense could be established absent one or more of the considerations, and that there could even be a situation in which the defense is met absent any of the considerations. Similarly, the defense is not automatically established merely because one or more of the considerations are present. 10. Consideration 1625.7(e)(2)(I) refers to the extent to which the factor is related to the employer’s stated business purpose. What is a “stated business purpose”? Example 3: The same employer asked managers to identify the least productive employees without providing any guidance about how to do so. As a result, older workers were disproportionately rated as least productive. The design and administration of the practice was not reasonable because it decreased the likelihood that the employer’s stated goal would be achieved and increased the likelihood that older workers would be disadvantaged. Moreover, accuracy could have been improved and unfair harm decreased by taking a few steps, such as those discussed in Example 2, above. The “stated business purpose” is the business reason articulated by the employer for adopting, or implementing, the employment practice in question. “Stated” does not mean that the purpose must be written. Note that consideration 1625.7(e)(2)(I) focuses on the method that the employer used to achieve its purpose, rather than the purpose itself. For example, if a police department is concerned about losing its employees to neighboring departments and decides to raise police officer salaries to match those in surrounding communities, the goal of retaining officers is not relevant to the determination of reasonableness. On the other hand, the extent to which the chosen method (raising salaries for certain employees) relates to the purpose (retaining staff) is relevant to the determination of reasonableness. 12. Does considering the extent to which the employer defined and applied the factor fairly and accurately mean that an employer must validate a test or other selection criterion as it would under Title VII? No. If a particular employment practice disproportionately harms applicants or employees based on race, color, religion, sex, or national origin, Title VII requires the employer to demonstrate that the practice is “job related for the position in question” and “consistent with business necessity.” For example: 11. Consideration 1625.7(e)(2)(ii) is “[t]he extent to which the employer defined the factor accurately and applied the factor fairly and accurately, including the extent to which managers and supervisors were given guidance or training about how to apply the factor and avoid discrimination.” How would an employer show that it defined and applied the factor fairly and accurately? • The extent to which the employer defined and applied the factor fairly and accurately refers to the steps the employer took to make sure that the practice was designed and applied to achieve the employer’s intended goal while taking into account potential harm to older workers. The following examples illustrate the point: Title VII’s business necessity defense would typically require an employer that gave a physical fitness test that disproportionately excluded women to produce a validation study in accordance with the Uniform Guidelines on Employee Selection Procedures, 29 C.F.R. Part 1607, showing that the test accurately measures safe and efficient job performance. 23 RETURN TO TABLE OF CONTENTS • In contrast, the ADEA’s RFOA defense does not require employers to formally validate tests or other selection criteria. Instead, employers are required to demonstrate only that their choices were reasonable. The extent to which a practice measures skills related to a job informs the reasonableness of the practice. to reduce possible harm to older workers by instructing managers to look specifically at objective measures of the specific skills that are actually used on the job. 15. Consideration 1625.7(e)(2)(iv) is “[t]he extent to which the employer assessed the adverse impact of its employment practice on older workers.” Does this consideration require an employer to perform an adverse impact analysis of its employment practices? 13. Does the reference in consideration 1625.7(e)(2)(ii) to “the extent to which managers and supervisors were given guidance or training about how to apply the factor and avoid discrimination” require employers to train their supervisors or provide a certain type of training? No. The extent to which the employer assessed the adverse impact of its employment practice on older workers is simply one way of determining whether the employer considered the potential harm to older workers. No. As noted, the considerations are not requirements, and many employer practices will necessitate little, if any, guidance. However, showing that it provided guidance or training in appropriate circumstances will help the employer establish that its actions were reasonable. In many cases, the employer will not need to assess whether the practice disproportionately harmed older workers, because the practice is not a neutral practice that affects more than one person. For example, terminations for cause and voluntary separations generally are not the kinds of neutral practices that could have a disparate impact. Moreover, the rule’s reference to “guidance or training” recognizes that the manner in which employers convey their expectations to managers will vary depending on the circumstances. For example, a smaller employer might reasonably rely entirely on brief, informal, oral instruction. Where an assessment of impact is warranted, the appropriate method will depend on the circumstances, including the employer’s resources and the number of employees affected by the practice. For example, a large employer that routinely uses sophisticated software to monitor its practices for race- and sex-based disparate impact may be acting unreasonably if it does not similarly monitor for age-based impact. Other employers, lacking the resources or expertise to perform sophisticated monitoring, may show that they acted reasonably by using informal methods of assessing impact. 14. Consideration 1625.7(e)(2)(iii) is “[t]he extent to which the employer limited supervisors’ discretion to assess employees subjectively, particularly where the criteria that the supervisors were asked to evaluate are known to be subject to negative age-based stereotypes.” Does this consideration mean that it is unreasonable to use subjective decisionmaking? No. In many cases, it may be crucial for an employer to assess employee or applicant qualities such as flexibility and willingness to learn -- qualities that are often assessed subjectively. The rule does not say that employers may not seek these qualities in its workforce, or that they are not valuable. 16. Consideration 1625.7(e)(2)(v) is “[t]he degree of harm to individuals within the protected age group, in terms of both the extent of injury and the numbers of persons adversely affected, and the extent to which the employer took steps to reduce the harm, in light of the burden of undertaking such steps.” What does the consideration require? However, consideration 1625.7(e)(2)(iii) does recognize that giving supervisors unconstrained discretion to evaluate employees or applicants using subjective criteria may result in disproportionate harm to older workers, because it allows supervisors’ biases and stereotypes to infect the decisionmaking. Therefore, it is particularly useful to provide guidance when asking supervisors to evaluate subjective criteria that are subject to age-based stereotypes, such as productivity, flexibility, willingness to learn, and technological skills. For example, an employer that wants its supervisors to evaluate technological skills might attempt Again, this is a consideration, not a requirement. The consideration reflects the fact that an employer can increase its ability to defend against a claim of age-based disparate impact if it can show that it balanced the potential harm to older workers against the cost and difficulty of taking steps that would still accomplish its business goal but reduce the harm on older workers. For instance, where the impact of an employment practice on older workers is minimal, the fact that an employer 24 RETURN TO TABLE OF CONTENTS failed to take multiple steps to reduce harm would not mean that its chosen method is unreasonable. However, the greater the potential harm, the more likely that an employer would be expected to avail itself of available options that would reduce the harm without unduly burdening the business. s_by_state.cfm. The EEOC will update the state data when new charge statistics are available each fiscal year. b. EEOC Appellate Briefs Now Online Appellate court and amicus briefs available in searchable database on EEOC website 17. Does consideration 1625.7(e)(2)(v) require an employer to search for and use the least discriminatory method for achieving its purpose? On June 20, 2012, the EEOC announced that it has put its appellate and amicus briefs going back to 2000 on its external website. These briefs from the EEOC’s Appellate Services Division represent litigation in the U.S. Circuit Courts of Appeals in which the Commission was a party, or briefs filed as a ‘friend of the court’ (amicus curiae) in those courts, as well as in U.S. district courts and state courts. No. The rule does not require an employer to search for options and use the one that has the least severe impact on older individuals. However, an employer’s efforts to reduce the harm to older individuals are not irrelevant. There may be circumstances in which the employer knew, or should have known, of a way to noticeably reduce harm to older workers without sacrificing cost or effectiveness; in these circumstances, it could be unreasonable for the employer to fail to use such an option. The new database allows full text searches for key words or phrases, such as “reasonable accommodation diabetes” or “race harassment nooses,” as well as searches by case name, court, statutes involved, basis and type of brief. New briefs will be added within several weeks of being filed in court. The database does not include briefs filed in the Supreme Court, either as party or amicus. Those particular briefs are available from the Office of the Solicitor General at the Department of Justice. Briefs from the EEOC filed before 2000 are available from the clerks’ offices of the various courts in which they were filed. 18. Must an employer keep special documentation to prove that it reasonably designed and administered the practice to achieve a legitimate business purpose in light of potential harm to older workers? No. If disparate impact is established, the employer can support an RFOA defense with evidence that would be admissible in court, including testimony. The rule does not change existing recordkeeping requirements under the ADEA (see 29 C.F.R. Part 1627); it does not require, and should not prompt, documentation other than that which an employer would make as part of its normal business operations. However, being able to document the reasons for the design and administration of a practice can help an employer establish the RFOA defense. 4. New Online Information Available This new database is consistent with the spirit of the Open Government Initiative, which aims to make government data more accessible to the public. Additionally, the EEOC has created a new page on its website explaining the scope of its amicus curiae program. This page includes a new email box where counsel may suggest cases that fall within the Commission’s amicus curiae guidelines: [email protected].; see also http://www1.eeoc.gov/eeoc/ litigation/ briefs.cfm?redirected=http://www.eeoc.gov/ eeoc/newsroom/release/6-20-12b.cfm a. EEOC Makes State Charge Data Available Online c. Tables present employment discrimination statistics in user-friendly format EEOC Issues Updated Guidance Regarding Disability Discrimination On May 15, 2013, the EEOC released updated guidance on protections against disability discrimination for employees and job applicants with cancer, diabetes, epilepsy, and intellectual disabilities. The guidance reflects changes to the definition of disability made by the Americans with Disabilities Amendments Act, which made it easier for an individual to establish that he or she had a disability and was entitled to protection against workplace discrimination. On May 14, 2012, the EEOC announced the availability of private sector workplace discrimination charge statistics for each of the nation’s 50 states and U.S. Territories for fiscal years 2009-2011. These data provide a look at EEOC charge receipts, broken down by the basis of discrimination, as well as the percent of total state and national charges. The state data tables are available online at http://www1.eeoc.gov/eeoc/statistics/enforcement/charge 25 RETURN TO TABLE OF CONTENTS The updated "Questions & Answers" documents address when employers may obtain medical information from applicants and employees, what accommodations individuals with these conditions may need, how to handle safety concerns, and what employers can do to prevent and remedy disability-based harassment. d. protections they are entitled to when they seek to return to their former jobs or look for civilian jobs. The publication also explains the kinds of accommodations that may be necessary to help veterans with disabilities obtain and successfully maintain employment. EEOC Chair Jacqueline A. Berrien stated, “we want veterans with disabilities to know that the EEOC has resources to assist them as they transition to, or move within the civilian workforce. The release of these publications demonstrates our commitment to ensuring that veterans with disabilities receive the full protection of the laws we enforce, and that employers understand how to comply with those laws.” EEOC Issues Revised Publications on Employment of Veterans with Disabilities User-friendly documents clarify impact of ADAAA; Commission will participate in employment conference sponsored by U.S. Army Wounded Warrior Program On February 28, 2012, the EEOC issued two revised publications addressing veterans with disabilities and the Americans with Disabilities Act (ADA). Both documents are available on the agency’s website at www.eeoc.gov. Over the past decade three million veterans have returned from military service and another one million are expected to return to civilian life over the course of the next five years with the anticipated draw down of operations in the Middle East. According to an October report from the Bureau of Labor Statistics, unemployment for post-9/11 era veterans hovers around 12 percent, which is more than three percentage points higher than the overall unemployment rate. The revised guides reflect changes to the law stemming from the ADA Amendments Act of 2008, which make it easier for veterans with a wide range of impairments – including those that are often not well understood–such as traumatic brain injuries (TBI) and post-traumatic stress disorder (PTSD), to get needed reasonable accommodations that will enable them to work successfully. [Prior to the ADA Amendments Act, the ADA’s definition of the term “disability” had been construed narrowly, significantly limiting the law’s protections.] 5. EEOC’s Transgender Discrimination Decision On April 20, 2012, the EEOC unanimously held that "intentional discrimination against a transgender individual because that person is transgender is, by definition, discrimination 'based on … sex'" and violates Title VII. The revised documents are also an outgrowth of a public meeting the EEOC held on Nov. 16, 2011, and entitled “Overcoming Barriers to the Employment of Veterans with Disabilities.” In that meeting, the Commission heard testimony from a panel of experts on the unique needs of veterans with disabilities transitioning to civilian employment. The particular challenges faced by veterans with disabilities in obtaining employment has been the subject of increased attention in recent months, as large numbers of veterans return from service in Iraq and Afghanistan. The case involved a transgender woman who claims she was denied a job by the federal Bureau of Alcohol, Tobacco, Firearms, and Explosives (ATF) because of her transgender status. 6. Responding to EEOC Complaints and Investigations: 10 Tips Because administrative charges can be precursors to discrimination lawsuits, it is critical for employers to handle them properly. These 10 tips will help companies prepare to respond: The Guide for Employers explains how protections for veterans with service-connected disabilities differ under the Americans with Disabilities Act (ADA) and the Uniformed Services Employment and Reemployment Rights Act (USERRA), and how employers can prevent disability-based discrimination and provide reasonable accommodations. Tip #1: Tell the Whole Story Often, an EEOC charge contains just one or two paragraphs, containing little more than conclusory allegations of discrimination. Resist the temptation to put minimal effort into the response. It is usually advisable to provide a comprehensive response, detailing the circumstances surrounding the employment relationship and the reasons The Guide for Wounded Veterans answers questions that veterans with service-related disabilities may have about the 26 RETURN TO TABLE OF CONTENTS for adverse employment actions. Try to nip the claim in the bud by giving the agency all the facts. Demonstrate that there were legitimate business reasons for the employer’s actions. Tip #6: Maintain Confidentiality Tip #2: Use Documentation If the company knows that EEOC investigators will contact employees, couch the message in terms like this: “While we do not feel there is any merit to the allegations, we respect Employee X’s right to bring this charge. If you are contacted by the agency, you should cooperate and be completely honest with the investigator.” Information about the charge should be on a need-to-know basis, especially if the charging party is still employed. If the employer has have documents supporting its version of events, consider including them in the employer’s response. Documentation dating from the time of the adverse employment action can be the best way of discrediting the allegations. Attendance records, sales reports and e-mail messages can all help prove that events happened as you say they did, and that the company’s concerns were bona fide. Tip #7: Be Prompt and Cooperative Do not put off preparing a response. Anti-discrimination agencies are less inclined to provide extensions than they once were. Failure to respond to a charge in a timely way can result in an adverse determination. Tip #3: Verify the Response’s Accuracy Attorneys love catching an employer in a lie. Since the information submitted by the company could be used in later legal proceedings, make sure everyone involved reviews the response and verifies the accuracy of every statement. Tip #8: Work with Legal Counsel Because a discrimination charge can be the first step in a chain of legal actions, employers must protect the company’s interests. Many employers ask their attorneys to investigate and prepare the response. At the very least, have an attorney review a draft before submitting it to the EEOC. Tip #4: Highlight Consistent Past Decisions One of the best ways to demonstrate that a decision was not motivated by unlawful discrimination is to point to the same actions being taken against similarly situated employees who are not members of the charging party’s protected class. Tip #9: Contact the Insurer Insurance policies require insured parties to provide prompt notice of claims. Many employment-practices liability policies define claims to include discrimination charges. Failing to apprise the insurer of a charge could result in denial of coverage, not only for the charge but all subsequent legal claims. For example, if the charging party alleges that her termination was motivated by discrimination against women, tell the agency of instances when the company terminated men for the same misconduct. Tip #10: Preserve All Documents Tip #5: Remember, the Agency Doesn’t Know the Company’s Business Courts are increasingly imposing harsh sanctions on companies that fail to adequately preserve relevant evidence. When a company receives an administrative charge, collect and preserve all documents that could be relevant. The company may also want to suspend any routine practices that might result in the destruction of relevant records, particularly electronic information like e-mails, voice mails and Internet usage records. In telling the employer’s version of the events, share details about the business that will help the agency understand the company’s actions. Think about why the charging party’s performance concerned the company. Would that be readily apparent to an outsider? For example, if a company is legally required to have a certain number of staff on hand at all times, explaining this will emphasize why poor attendance would be a significant problem in that particular workplace. Final Note: Taking the charge process seriously, and defending against the allegations at this stage can increase the likelihood of a favorable determination and help prevent further legal actions. 27 RETURN TO TABLE OF CONTENTS http://www.uscis.gov/files/form/i-9.pdf C. ICE: Immigration and Customs Enforcement 1. Electronic I-9 Forms In general, the updated Form I-9 contains several revisions that USCIS states are "designed to minimize errors in form completion." Such revisions include a) adding data fields; b) improving the form's instructions; and c) revising the layout of the form and expanding the core form from one to two pages. In April 2013, representatives from Immigration and Custom Enforcement's ("ICE") Homeland Security Investigation Worksite Enforcement Unit announced a critical change in policy regarding electronic I-9 software that now prohibits employers from pre-populating Section 1 of electronic Form I-9s, even if the employer also completes the preparer/translator certificate. The most common question we anticipate from the new Form I-9 is, "For whom do I need to complete this updated Form I-9?" As stated above, all employers must use the updated Form I-9 going forward for all new hires and re-verifications. Although the term "new hires" is self-explanatory, there may be some confusion regarding re-verifications. As a threshold matter, employees who are U.S. citizens never need re-verification. For all other employees, the employment authorization must be re-verified upon the expiration of their employment authorization and/or immigration status. Thus, while employers must remain cognizant of the expiration dates of these documents, they also should be careful not to seek or require unnecessary re-verifications, because such action could lead to claims of race or national origin discrimination. Section 1 of the Form I-9 is entitled "Employee Information and Attestation" and specifically requires that the employee sign and complete the section prior to the end of his or her first day of employment. Prior to the policy change, ICE had taken the position that employers could pre-populate § 1 of electronic Form I-9s from information already provided by the employee, so long as the employee reviewed and signed the section, and the employer also completed the preparer/translator certificate located immediately below § 1. This practice promoted efficiency in the on-boarding process as electronic I-9 software is often integrated with other HR systems, and eliminated the need for the employee to re-enter information already submitted to the employer. For further information, review the Notice from the Federal Register regarding the updated Form I-9 at http://www.gpo.gov/fdsys/pkg/FR-2013-03-08/pdf/2013-0 5327.pdf; and the USCIS' Guidance for Completing Form I-9 at http://www.uscis.gov/files/form/m-274.pdf In light of ICE's new stance on the pre-population of § 1, employers should be aware that use of software that pre-populates § 1 is risky and could expose employers to liability in the event of an ICE-initiated I-9 audit. Employers should take steps now to ensure that their electronic I-9 software no longer pre-populates § 1. Employers must now require employees to fill out § 1 entirely on their own, unless a preparer or translator is needed for other reasons. 2. 3. I-9 Investigations and Audits: 8 Tips ICE continues to issue Form I-9 Notices of Inspection to businesses across the nation. In fiscal year 2012, ICE served 3,004 Notices of Inspection to businesses, totaling over $12 million in fines. Additionally, ICE made 520 criminal arrests tied to worksite enforcement investigations. These criminal arrests involved 240 individuals who were owners, managers, supervisors or human resources employees. Updated I-9 Forms (effective 05/07/13) All employers, including nonprofit organizations, are required to verify the identity and employment authorization of individuals hired to work in the United States, citizens and noncitizens alike, within three business days of the first date of active employment. An employer satisfies this requirement by completing Employment Eligibility Verification Form I-9 (Form I-9), as provided by the Department of Homeland Security's U.S. Citizenship and Immigration Services (USCIS). Earlier this year, USCIS published an updated Form I-9 that employers were required to use commencing on May 7, 2013. The Notices of Inspection require employers to allow ICE to inspect their I-9 forms to determine compliance with employment eligibility verification laws. Once the Notice of Inspection has been issued, the targeted employer has three days to provide ICE with the company’s I-9 forms to be reviewed. In addition to I-9 forms for current and recently terminated employees, employers will be asked to turn over payroll records, list of current employees, and information about the company’s ownership. Note: Prior versions of Form I-9 no longer can be used for new hires or necessary re-verifications, and failure to use the updated Form I-9 could subject an employer to monetary penalties. The new Form I-9 is available at 28 RETURN TO TABLE OF CONTENTS Civil penalties for errors on the I-9 form can range from $110 to $1,100 per violation. Civil penalties for knowingly hiring and continuing to employ unauthorized workers range from $375 to $3,200 per violation for first time violations. In determining penalty amounts, ICE considers five factors: size of the business, good faith effort to comply, seriousness of violation, whether the violation involved unauthorized workers and history of previous violations. Tip #8: If ICE appears to review your I-9 forms and conduct an audit, insist on a written Notice of Inspection and your right to have three business days before you turn over your original I-9 forms. D. NLRB: National Labor Relations Board Here are a few tips to help protect companies and limit exposure for I-9 violations: Board Stuff a. Board Members Noel Canning v. N.L.R.B., 705 F.3d 490 (D.C. Cir 2013). Tip #1: Ensure that you are using the correct version of the I-9 form. U.S. Citizenship and Immigration Services recently released a new version of the I-9 form. Beginning May 7, 2013 only the 03/08/13 version of the I-9 form will be accepted. NLRB "recess" appointments were unconstitutional; Board lacked a quorum. In late January, the Circuit Court of Appeals for the District of Columbia kicked off the year with the bombshell Noel Canning decision. The D.C. Circuit invalidated President Obama’s January 4, 2012 recess appointments of Sharon Block, Terrence Flynn, and Richard Griffin to the Board. The court held that the purported recess appointments of these members were invalid because the appointments had not taken place during a period in which the Senate was in “recess.” Additionally, two judges on the panel held that the appointments were invalid because the appointments were made to vacancies on the Board that existed before a congressional recess—an outcome which these judges read to be prohibited by the recess appointments clause contained in the United States Constitution. The NLRB promptly announced its intention to forgo en banc review in the D.C. Circuit and instead file a petition for writ of certiorari with the Supreme Court. Tip #2: When completing the I-9 form for a new hire, the employee must complete § 1 before starting work on the first day and you must complete § 2 and the Certification by the end of the third business day. Tip #3: Do not engage in discrimination or document abuse when completing the I-9 process by requiring the employee to provide specific documents or more documents than minimally required. Tip #4: Do not accept any document with an expiration date that has expired. Tip #5: Timely re-verify expiring work authorization documents before they expire and do not allow an employee to continue to work after his or her work authorization document expires. While the Supreme Court will likely have the final say in Noel Canning, the case’s implications in the near term are vast and significant. First, and most importantly, the D.C. Circuit’s decision that the appointments of Block, Flynn, and Griffin were invalid means that after January 4, 2012, the Board was operating with only two validly appointed Members (Pearce and Hayes). Accordingly, the Board lacked the quorum necessary to lawfully exercise its authority under the Supreme Court’s decision in New Process Steel. Do not re-verify U.S. passports or passport cards, Permanent Resident Cards or List B Identity documents. Tip #6: Keep I-9 forms in a separate binder for current employees and another for terminated employees. Do not keep I-9 forms in employee personnel files. Tip #7: 1. Nearly two hundred decisions issued by the Board since January 4, 2012, including many of those discussed below, are potentially invalid. Numerous parties seeking federal appellate review of decisions issued by the Board during this period are already citing Noel Canning as grounds to deny enforcement of the Board’s decision. In addition to past cases, the Noel Canning decision also casts doubt on Regularly conduct self-audits. Correctable errors on the I-9 form should be fixed, the change should be initialed and dated, and the words “Per Self Audit” should be placed beside the correction. 29 RETURN TO TABLE OF CONTENTS the validity of any future decisions issued by the Board until additional members are appointed or until the Supreme Court addresses the Noel Canning case. b. Commerce sued the NLRB and sought to enjoin implementation of the NLRB's new rule on elections. The Chamber claimed that the rule exceeded the Board's statutory authority and violated the first and fifth amendments. New Election Rules The NLRB adopted its controversial new rule designed "to reduce unnecessary litigation and delays." The rule was published in the Federal Register on December 22, 2011, and took effect on April 30, 2012. A copy of the final rule may be found at: Two of the Board's three members voted in favor of adopting the final rule. The third member of the Board, Brian Hayes, did not cast a vote. As the court put it, "The NLRB's claim that Hayes was part of the quorum that adopted the final rule, then, is based only on the fact that he was a member of the Board at the time the rule was circulated and thus was sent a notification that it had been called for a vote." "Two members of the Board participated in the decision to adopt the final rule; and two is simply not enough. Member Hayes cannot be counted toward the quorum merely because he held office, and his participation in earlier decisions relating to the drafting of the rule does not suffice. He need not necessarily have voted, but he had to at least show up. At the end of the day, while the Court's decision may seem unduly technical, the quorum requirement, as the Supreme Court has made clear, is no trifle." http://www.nlrb.gov/sites/default/files/documents/3240/nf rmfinal_0.pdf. The rule had the following main features. (1) Authorize hearing officers to limit the evidence introduced at the pre-election hearing to that relevant to a genuine issue of fact material to whether a question of representation exists. Currently, parties can challenge the scope of the unit and raise issues as to whether potential voters are supervisors or confidential employee. These issues would now be resolved after the election is held. (2) Eliminate the parties' right to file post-hearing briefs, giving hearing officers discretion to either allow or disallow them. (3) Eliminate parties' right to seek Board review of regional director's pre-election rulings while allowing parties to seek post-election review of all such rulings that have not been rendered moot by the election. (4) Eliminate the policy that the regional director normally will not schedule an election until a date 25 days after the direction of election in order to permit the Board to rule on any request for review. (5) Make Board review of a regional director's or judge's disposition of post-election disputes discretionary after both stipulated and directed elections. UPDATE: The court did not rule on any of the substantive arguments raised by the plaintiffs. As a result of this ruling, the NLRB announced today that it temporarily suspended the implementation of changes to its representation case process, which took effect on April 30, 2012. c. NLRB Posting Notice Nat’l Ass’n of Mfr. v. N.L.R.B., 846 F. Supp. 2d 34 (D.C. Cir. 2013) The National Association of Manufacturers (NAM) and others have successfully challenged the promulgation of the NLRB's rule requiring employers post notice of employees' rights under the National Labor Relations Act (NLRA). The trial court ruled the that the NLRB had authority under § 6 of the NLRA to promulgate the rule and that the failure to post could be considered as evidence of improper motive; the trial court ruled that the NLRB did not have authority to make failure to post an unfair labor practice or to toll the § 10(b) limitations period; and the trial court ruled the posting requirement was upheld. See Chamber of Commerce v. N.L.R.B., 879 F. Supp. 2d 18 (D.D.C. 2012). The D.C. Circuit invalidated the entire rule, including the posting requirement. On May 14, 2012, the U.S. District Court for the District of Columbia ruled that the NLRB Final Rule was invalid because the Board did not satisfy the statutory quorum requirement in adopting the rule. The U.S. Chamber of NAM alleged the rule violated the NLRA and the First Amendment of the Constitution. NLRA § 8c provides "The expression of any views, ... or the dissemination thereof, ... 30 RETURN TO TABLE OF CONTENTS shall not constitute or be evidence of an unfair labor practice under any of the provisions of this [Act], if such expression contains no threat of reprisal... ." Referencing cases that the First Amendment prevented the government from compelling speech, the court found that § 8c precluded the NLRB from finding noncoercive employer speech to be an unfair labor practice, or evidence of an unfair labor practice, here the NLRB's rule did both. The court found that the equitable tolling of § 10(b) by the NLRB's rule was unenforceable, because it was not tied to any authority suggesting that the 1947 Congress intended to allow § 10(b) to be modified in the manner of the promulgated rule. Because the NLRB would not have issued a posting rule that depended solely on voluntary compliance, Subpart A (text of Employee Notice) was not severable and must fall along with the rest of the posting rule. The concurring opinion would also have held the NLRB did not have authority to promulgate the rule under § 6 of the NLRA. d. more along the lines of a personal gripe, which is not protected? (3) Is it carried out in a way that causes it to lose protection? Reckless or malicious behavior, such as sabotaging equipment, threatening violence, spreading lies about a product, or revealing trade secrets, may cause concerted activity to lose its protection. e. Quorum Special Procedures The NLRB has adopted a final rule governing the consideration of certain pleadings that ordinarily require action by a quorum of at least three Board Members. The revisions are being adopted to facilitate, insofar as it is possible, the normal functioning of the Agency during periods when the number of Board members falls below three, the number required to establish a quorum of the Board. The effect of the revisions is to provide the public with avenues for resolving certain issues, while deferring full review by the Board until a quorum has been restored. NLRB Website for Non-Union Employees The NLRB has a new web page that is directed at informing employees, "even if they are not in a union," of their § 7 rights under the NLRA. The webpage contains a map. Click on the map and read stories of recent cases involving § 7 protected concerted activity. The website address is: www.http://nlrb.gov/concerted-activity f. Case Procedures (1) Representation Case Procedures The following statement is on the first page of the website: The NLRB's Acting General Counsel has issued a memo outlining how regional offices will implement new representation case procedures that took effect on April 30, 2012. The General Counsel's office also issued a set of Frequently Asked Questions explaining the Board's revised rules and the procedures that will be followed by regions in implementing those rules in an effort to provide guidance in this area to the regional staffs, practitioners and all members of the general public. Information about these documents may be found at: http://mynlrb.nlrb.gov (Memo); and http://www.nlrb.gov/faq/election-procedures (Questions). Whether or not concerted activity is protected depends on the facts of the case. If you have questions, please contact an Information Officer at your nearest NLRB Regional Office, which you can find on this page or by calling 1-866-667-NLRB. The Information Officer will focus on three questions: (1) Is the activity concerted? Generally, this requires two or more employees acting together to improve wages or working conditions, but the action of a single employee may be considered concerted if he or she involves co-workers before acting, or acts on behalf of others. (2) Arbitration Deferral The NLRB's acting General Counsel is recommending a change in the NLRB's policy on deferral to arbitration. If unfair labor charges under §§ 8(a)(1) and (3) will not be resolved or arbitrated within a year, the General Counsel would urge that the Board not defer the case, but rather decide the case on the merits. (2) Does it seek to benefit other employees? Will the improvements sought – whether in pay, hours, safety, workload, or other terms of employment – benefit more than just the employee taking action? Or is the action See GUIDELINE MEMORANDUM CONCERNING COLLYER DEFERRAL WHERE GRIEVANCE-RESOLUTION PROCESS IS S U B J E C T T O S E R I O U S D ELAY (01 / 2 0 / 2 01 2 ) , 31 RETURN TO TABLE OF CONTENTS http://mynlrb.nlrb.gov/link/document.aspx/09031d45807c 05ed 2. 3. Employer/Employee Communications a. Employee Workplace Discussions Arbitration Agreements Sabo, Inc. d/b/a Hoodview Vending Co., 359 N.L.R.B. 36 (2012). D.R. Horton, Inc., 357 N.L.R.B. 184 (2012). The Board found that the employer, a home building company, violated § 8(a)(1) of the Act by maintaining a mandatory arbitration agreement that did not allow its employees to file joint, class, or collective employment-related claims in any forum, arbitral or judicial. The employer required its employees to sign the agreement as a condition of employment, and, based on the agreement, had rejected employees' requests for class arbitration of claims under the FLSA. The Board found that the employer violated the Act by discharging an employee for discussing job security with another employee. In the conversation at issue, the employees discussed whether an internet job posting meant that one of the employer's employees would be discharged. Although the conversation did not contemplate future activity, the Board found that the conversation constituted protected concerted activity because conversations about job security, like conversations about wages, are inherently concerted. The Board also found that the employer had not shown that it would have discharged the employee in the absence of the conversation. Dissenting, Member Hayes would have found that the conversation was not concerted, would not have extended the inherently concerted doctrine to discussions of job security, and called for overruling the inherently concerted doctrine. The Board found that by requiring only individual arbitration of employment-related claims and excluding access to any forum for collective claims, the employer interfered with employees' § 7 right to engage in "concerted activities for the purpose of collective bargaining or other mutual aid or protection." The collective pursuit of workplace grievances through litigation or arbitration is conduct protected by § 7 and the right under the NLRA to freedom of association. Applying its test for unlawful workplace policies in Lutheran Heritage Village-Livonia, 343 N.L.R.B. 646 (2004), the Board found the mandatory arbitration agreement unlawful because it contains an explicit restriction on protected activity, and because employees could reasonably construe it to prohibit filing charges with the Board. b. Employer Confidentiality Rules An NLRB Advice Memo (01/29/13), opined that an employer's confidentiality rule unlawfully interferes with employees' § 7 rights by precluding employees from disclosing information about ongoing investigations into employee misconduct. The opinion stated that the employer's rule was "unlawfully overbroad.” As part of the Memo, the NLRB Division of Advice provided language that the employer could lawfully use. Thus, this language could become a safe harbor for employers' confidentiality rules. See NLRB ADVICE MEMORANDUM, Case 30-CA089350 (Jan. 29, 2013). The Board found that its violation finding did not present a conflict between the NLRA and the Federal Arbitration Act's (FAA) policy favoring the enforcement of arbitration agreements because the FAA was not intended to disturb substantive rights. The Board further found that even if there were a conflict, its finding accommodates the policies of the two statutes and is consonant with the Supreme Court's FAA jurisprudence. The decision requires Horton to rescind the agreement or revise it to make clear to employees that they are not waiving their right to pursue a class or collective action in all forums. 4. Employment Handbooks and At-Will Statements a. Design Technology Group, L.L.C., 359 N.L.R.B. 96 (2013). The Board found that the employer violated the Act by maintaining a Wage and Salary Disclosure rule in its handbook prohibiting the disclosure of wages or compensation to any third party or other employee. Member Block further found that an additional handbook rule, the Confidential Information Security rule, not alleged in the complaint to be unlawful, also violated the Act. In addition, the Board found that the employer violated the Act by discharging three employees for engaging in protected concerted activity related to Facebook posting. PRACTICE POINT: It is noteworthy that this decision will apply to private sector employers whether or not they are unionized. 32 RETURN TO TABLE OF CONTENTS communicate with each other or third parties regarding wages, hours, and working conditions. The Board also granted tax compensation and Social Security reporting remedies, and ordered a company-wide notice posting for the handbook rule violation. b. In fact, of the 20 policies reviewed in his three reports, the AGC has found only four to be lawful. Quicken Loans, Inc., 359 N.L.R.B. 141 (2013). The Board found that the employer violated § 8(a)(1) of the Act by maintaining an unlawful non-disparagement handbook rule, as well as a proprietary/confidential information handbook rule to the extent that it unlawfully prohibited disclosure of certain personnel information. 5. a. P The AGC's numerous challenges to social media policies have met mixed success in litigation before ALJs of the NLRB, with one ALJ rejecting, just last week, some of the AGC's challenges to an employer's social media policy while finding other parts of the policy unlawful. P Based upon the AGC's enforcement guidance, employers must carefully draft their social media policies to avoid broad language that employees could reasonably construe to prohibit protected activities, and employers must incorporate specific examples of prohibited conduct to make clear that the policies do not cover § 7 activities. Including a disclaimer in the policy—simply stating that the policy does not apply to or prohibit § 7 activities—is clearly not enough, in the AGC's view, to cure a defectively overbroad social media policy. Social Media and Facebook Postings NLRB Report on Social Media For the third time in less than a year, the NLRB Acting Ge n e ral Co u n s e l ( " AGC" ) h a s i s s u e d a n Operations-Management Memorandum providing enforcement guidance on employees' use of social media and employers' social media policies. In the latest report issued on May 30, 2012, the AGC offered the clearest glimpse so far of what constitutes a lawful social media policy under the NLRA in full one policy that the AGC deems lawful and, at the same time, finding six other policies unlawful. See NLRB, OPERATIONS MEMORANDUM 12-59 (May 30, 2012) ("OM 12-59"), available at http://www.nlrb.gov/publications/operations-management -memos. This latest Operations-Management Memorandum underscores the importance of having properly drafted social media policies in both unionized and non-union workplaces, since the same rules apply to all employers subject to the NLRA whether they are unionized or not. OM 12-59, together with the AGC's two prior reports and recent Administrative Law Judge ("ALJ") decisions on social media policies, makes several themes clear: Although OM 12-59 does not constitute binding precedent, it provides useful guidance for employers that have implemented or are considering implementation of rules governing employee use of social media. To date, the NLRB has yet to provide any significant guidance on social media issues, as the handful of Board decisions that discuss social media have not established any guidelines on employee rights with respect to social media activity. However, the AGC has pursued several social media cases that have been or will be appealed to the Board, and employers can expect these cases to be decided in the near future. P (1) OM 12-59 P The AGC continues to consider social media issues an enforcement priority, having acted on numerous cases since his April 2011 directive requiring that all "[c]ases involving employer rules prohibiting, or discipline of employees for engaging in, protected concerted activity using social media, such as Facebook or Twitter" be submitted to the NLRB's Division of Advice. NLRB GENERAL COUNSEL MEMORANDUM 11-11 (Apr. 12, 2011) at 2. In an effort to "provide additional guidance" regarding social media issues, the AGC's latest Operations-Management Memorandum focuses exclusively on the lawfulness of social media policies. The AGC breaks no new ground on the basic legal standards, continuing to apply the Board's decision in Lutheran Heritage Village-Livonia, 343 N.L.R.B. 646 (2004). In Lutheran, the Board reaffirmed that a rule is unlawful if it "reasonably tends to chill employees in the exercise of their § 7 rights." Id. at 646. To make that determination, the Board follows a two-step inquiry. First, a rule is unlawful if it explicitly restricts activities that § 7 of the NLRA protects. The AGC continues to find most employer social media policies overbroad and unlawful under the NLRA on the basis that employees could "reasonably construe" them as restricting employees' § 7 rights to 33 RETURN TO TABLE OF CONTENTS Second, "[i]f the rule does not explicitly restrict activity protected by § 7," it is still unlawful if "(1) employees would reasonably construe the language to prohibit § 7 activity; (2) the rule was promulgated in response to union activity; or (3) the rule has been applied to restrict the exercise of § 7 rights." Id. at 647. In conducting this analysis, the Board "must refrain from reading particular phrases in isolation, and it must not presume improper interference with employee rights." Id. at 646. While finding the above-listed provisions unlawful in context, the AGC found that similar restrictions in another policy were lawful, citing the employer's use of examples to provide context for the prohibited communications. To underscore the point, the AGC published this lawful policy, in its entirety, and highlighted the importance of "provid[ing] sufficient examples of prohibited conduct so that, in context, employees would not reasonably read the rules to prohibit § 7 activity." Id. at 20. On that basis, the AGC found the following provisions in this particular policy to be lawful: In his two prior Operations-Management Memoranda, the AGC reviewed 13 social media policies, finding 10 of those policies unlawfully overbroad. In OM 12-59, the AGC reviewed seven more policies and found six of them unlawful in part. In the AGC's view, employees could reasonably construe the following provisions, among others, to prohibit § 7 activities: P Restrictions on releasing "confidential information" about coworkers and "company information," as well as restrictions on sharing confidential information with coworkers. OM 12-59, at 3-5. P Instructions to ensure that posts are "completely accurate and not misleading and that they do not reveal non-public company information on any public site." Id. at 6-7. P Prohibitions on posting photos, music, videos, quotes, and personal information without the owner's permission, and using the company's logo, in the absence of any explanation of the scope of those restrictions. Id. at 7. P Instructions that "offensive, demeaning, abusive or inappropriate remarks are as out of place online as they are offline," without examples eliminating ambiguity. Id. at 8-9. P Prohibitions against posting personal information about other employees and contingent workers, commenting on "legal matters," picking fights, engaging in controversial discussions, and airing complaints online. Id. at 9-12. P Prohibition against "inappropriate postings that may include discriminatory remarks, harassment and threats of violence or similar inappropriate or unlawful conduct." Id. P Requirement that employees be "'fair and courteous' in the posting of comments, complaints, photographs or videos" where the policy lists, as examples, posts that could be "viewed as malicious, obscene, threatening or intimidating," that could amount to "harassment or bullying," or that could create a hostile or discriminatory work environment. Id. P Requirement that employees maintain the confidentiality of the employer's trade secrets and confidential information, where the employer provided examples of prohibited disclosures that did not include protected communications. Id. (2) The Early ALJ Decisions, With More to Come While the AGC has considered most social media policies to be unlawful, the views of the AGC have met with mixed success in litigation before NLRB ALJs. On the same day that the AGC issued his third social media report—an ALJ issued a decision rejecting some, but not all, of the AGC's challenges to one of the policies discussed in the report. See General Motors, L.L.C., No. 07-CA-53570 (N.L.R.B. Div. of Judges, May 30, 2012) (Sandron, ALJ). Other ALJs in 2012 have rejected some of the AGC's positions on the lawfulness of social media policies. See Triple Play Sports Bar & Grille, Nos. 34-CA-12915 & 12926 (N.L.R.B. Div. of Judges, Jan. 3, 2012) (Esposito, ALJ) (rejecting argument that social media policy prohibiting "inappropriate" communications was unlawful); G4S Secure Solutions (USA) Inc., No. 28-CA-23380 (N.L.R.B. Div. of Judges, Mar. 29, 2012) (Laws, ALJ) (finding parts of social media policy unlawful but upholding restriction on posting photos of uniformed employees based on employer privacy concerns). In addition, OM 12-59 makes clear that the AGC does not consider general disclaimers in social media policies—stating, for example, that they "will not be construed or applied in a manner that improperly interferes with employees' rights under the [NLRA]," id. at 12—to be effective in curing the defects in overbroad policies. In the AGC's views, employees "would not understand from this disclaimer that protected activities are in fact permitted." Id. 34 RETURN TO TABLE OF CONTENTS In General Motors, ALJ Ira Sandron concluded that a number of prohibitions in the employer's social media policy did not violate the NLRA. In particular, the ALJ held that restrictions on the use of the employer's logo were lawful, finding that the employer had articulated a legitimate business reason for limiting use of its logo online, namely to prevent confusion about official communications, and had not adopted the rule to ban its use during protected union activities. The ALJ also upheld a provision stating that "offensive, demeaning, abusive or inappropriate remarks are as out of place online as they are offline," finding that these "descriptive adjectives" rendered the restriction permissible. General Motors, L.L.C., No. 07-CA-53570, at 7-8. required by § 7 of the Act. Therefore, he would have dismissed the complaint. (b) Weyerhaeuser Co., 359 N.L.R.B. 138 (2013). The Board adopted the Administrative Law Judge's conclusion that the employer, a manufacturer of pulp and paper, did not violate the Act by maintaining its electronic media use policy, which restricted employee use of its electronic media to "business purposes only." The Board also adopted the ALJ's conclusion that the employer violated the Act by maintaining its Company informational notice, which prohibited employee union representatives from using the employer's email system to send "protracted dissertations." The Board found that the Company informational notice was facially discriminatory and therefore unlawful. Because the Board found the Company informational notice to be unlawfully discriminatory, it also agreed with the ALJ that the employer violated the Act by disciplining an employee pursuant to that rule. On the other hand, the ALJ agreed with the AGC that employees could "reasonably construe" certain other provisions as restricting their § 7 rights, including provisions prohibiting disclosure of "nonpublic company information" and "personal information" about coworkers relating to "performance, compensation, or status in the company"; requiring posts to be "completely accurate" and "not misleading"; requiring employees to ask permission before posting information if they were "in doubt"; and prohibiting employees from posting photos, music, videos, quotes, or personal information without the owner's permission. Id. at 5-6. The ALJ found that these provisions could be construed to restrict communications about wages, require permission to engage in protected activities, and restrict protected activities like handbilling. Id. (3) Tips for Drafting Social Media Policies The AGC's latest report certainly provides employers with the clearest guidance yet for drafting and revising their social media policies. While challenged policies continue to work their way through the Board's adjudicative processes, employers should take appropriate steps to update their policies to reflect OM 12-59's guidance, especially heeding its emphasis on providing examples and context. Employers should consult with counsel to draft social media policies that, among other things: While the policy contained a disclaimer stating that the employer would administer the policy in compliance with § 7, the ALJ agreed with the AGC that this savings clause did not cure the policy's defects. He concluded that "employees cannot be expected to know what conduct is protected under the Act." Id. at 9. (a) Hispanics United of Buffalo, Inc., 359 N.L.R.B. 37 (2012). The decision by the Board majority found, in agreement with the administrative law judge, that five employees engaged in protected concerted activity by posting comments on Facebook that responded to a co-worker's criticism of their job performance. Accordingly, the Board adopted the judge's finding that the respondent violated § 8(a)(1) of the Act by discharging the employees based on their Facebook comments. Member Hayes dissented. He found that the employees' Facebook postings constituted mere "venting to one another" and that their actions were not undertaken for their "mutual aid and protection" as P Clearly articulate the employer's business purposes for the policy and the employer's business interests in imposing appropriate restrictions on social media postings; P Explain that employees are free to express their views in social media but are responsible for what they post and thus should use good judgment and common sense; P Define, with specific examples, the types of communications that the policy restricts and explain the business reasons for the restrictions (e.g., personal health information, competitor or client information); P Define, with specific examples, the types of confidential information that cannot be disclosed for business or legal reasons (e.g., trade secrets, FDA information, FTC restrictions, attorney-client 35 RETURN TO TABLE OF CONTENTS privileged information), but do not restrict communications on wages or working conditions; E. P Define, with specific examples, restrictions on "offensive" communications and link them to policies against, e.g., harassment, discrimination, and bullying; and P Include a carve-out explicitly stating, in understandable terms, that the policy should not be construed, and will not be applied, to restrict employees' rights to engage in protected activities. The DOL's Office of Federal Contract Compliance Programs (OFCCP) is the sub-agency that enforces Executive Order 11246, Section 503 of the Rehabilitation Act of 1973 and the Vietnam Era Veterans' Readjustment Assistance Act of 1974. These laws contain affirmative action provisions and prohibit employment discrimination by federal contractors. 1. Coordination Between OFCCP and EEOC In the EEOC's Strategic Enforcement Plan for 2013-2016, the Commission has prioritized and committed to enhanced enforcement of equal pay laws to eliminate compensation systems and practices that discriminate based on gender. On April 9, 2013, "Equal Pay Day", the EEOC reported that in Fiscal Year 2012, the EEOC received over 4,100 charges of gender-based wage discrimination, and obtained over $24 million in relief for victims of gender-based wage discrimination through administrative enforcement efforts and litigation. Stay tuned as more ALJs decide social media cases and as these cases move to the Board—and eventually the courts—for decision. If the recent ALJ decisions are any indication, employers can expect continued litigation over social media policies, with success for employers tied to how carefully they draft their policies and how clearly they define, with explicit examples, impermissible communications that do not implicate employees' § 7 rights. b. OFFCP: Office of Federal Contract Compliance Programs U.S. Chamber of Commerce Publishes Survey of Social Media Issues Before the NLRB Both the EEOC and the Office of Federal Contract Compliance Programs (OFCCP) serve on President Obama's National Equal Pay Enforcement Task Force, a federal government initiative focused on ending the gender pay gap. The OFCCP monitors federal contractors and subcontractors to ensure their compliance with Title VII and other anti-discrimination provisions in federal contracts. The U.S. Chamber of Commerce has published a 36-page "Survey of Social Media Issues Before the NLRB." This survey of publicly available materials indicates that the NLRB has reviewed more than 129 cases involving social media in some way. While most of these cases are at the very initial stage, and may not be meritorious at all, some are more advanced. At least two Board decisions have social media components, as do another two decisions by administrative law judges. There are at least seven settlement agreements involving social media cases and the Board's General Counsel has issued complaints in an additional four cases. The General Counsel has also issued ten memoranda involving social media, eight of which are opinions from the Division of Advice. On February 28, the OFCCP issued a directive providing information regarding its practices for reviewing contractor compensation systems and practices during a compliance evaluation. Directive 307 can be found at http://www.dol.gov/ofccp/regs/compliance/directives/dir3 07.htm (Feb. 28, 2013). Although the OFCCP's authority is limited to federal contractors and subcontractors, the guidance provided is a good reminder to all employees of the need to conduct a self-audit to compare the wages of employees to ensure that the company's compensation practices do not result in pay differentials based on race, gender or ethnicity. "The issues most commonly raised in the cases before the Board allege that an employer has overbroad policies restricting employee use of social media or that an employer unlawfully discharged or disciplined one or more employees over contents of social media posts." When the OFCCP audits a contractor, the employer is asked to provide annual compensation data by salary range, rate, grade or level, showing the total number of employees by race and gender, and the total compensation by race and gender. The OFCCP then conducts a preliminary analysis of the size of the overall average pay difference based on race and gender; the size of the largest average pay difference See http://www.uschamber.com/sites/default/ files/reports/NLRB%20Social%20Media%20Survey.pdf 36 RETURN TO TABLE OF CONTENTS within the job groups, or the contractor's existing salary band or pay grade system; the number of job groups or grades where average pay differences based on race or gender exceed a certain threshold; or the number of employees affected by race-based or gender-based average pay differences within job groups or grades. The OFCCP may also consider other factors such as past compliance history, EEOC or OFCCP complaints, anecdotal evidence, and potential violations involving other employment practices. OFCCP collected comments to the proposed regulations last year, and its latest regulatory agenda estimated that final regulations would be issued in April 2013. As of this writing the final regulations have not been issued. If the final regulations are similar to the proposed regulations, compliance will be a major new burden for federal contractors. Incidentally, a different sub-agency of DOL has created a useful tool for employers seeking to hire disabled workers. DOL's Office of Disability Employment Policy (ODEP), in conjunction with the U.S. Department of Defense Office of Diversity Management & Equal Opportunity, has created the Workforce Recruitment Program, www.wrp.gov. This web site offers a searchable database of candidates with disabilities, recruited by ODEP from college campuses and military veteran groups. If concerns exist following the preliminary analysis, the OFCCP may request additional information from the employer to conduct an assessment of individual employee-level data. At this stage, the OFCCP will determine whether there is a measurable difference in compensation on the basis of race, sex or ethnicity between employees in comparable jobs, and, if so, whether there is a legitimate, non-discriminatory reason for the difference. In addition to assessing pay rates, the OFCCP will investigate other variables that may have an impact on compensation such as the access to additional compensation through overtime, higher commissions, and better sales territories. In some cases, a statistical analysis may also be used to assess the impact of wage practices on larger groups of employees. 3. The OFCCP has rescinded its 2006 guidance on evaluating federal contractors' compensation practices for pay discrimination. In its place, OFCCP has issued Directive 307, which emphasizes a more flexible and case-specific approach: www.dol.gov/ofccp/regs/ compliance/CompGuidance/ In light of this administration's focus on pay discrimination, employers are encouraged to conduct self-audits to determine whether a disparity in pay associated with gender or race can be detected, and if so, the reason for the disparity. 2. Pay Discrimination Unfortunately, Directive 307 provides very little certainty or reassurance for federal contractors. The directive indicates that, in its efforts to uncover pay discrimination, OFCCP may conduct comparative analyses of very small groups, or even individuals. OFCCP's fact sheet states that the agency will "work with statisticians and attorneys to determine the appropriate analytical methods to use in a particular investigation," and "will evaluate, on a case-by-case basis, information from the contractor regarding the factors the contractor used in making compensation decisions." Proposed Regulations On April 26, 2011, OFCCP issued proposed regulations that would strengthen the affirmative action requirements for military veterans. The proposed regulations would require that federal contractors engage in specific types of outreach and recruitment that target veterans, and evaluate their progress annually. OFCCP's proposal also requires contractors to establish annual hiring benchmarks based on availability data and other relevant information. 4. Hiring Discrimination Another one of OFCCP's priorities is to combat discrimination in hiring. For example, in March 2012, OFCCP reached an agreement with FedEx Ground Package System Inc. and FedEx SmartPost Inc. to resolve allegations of hiring discrimination against specific groups of workers identified at 23 facilities in 15 states. This is the largest single financial settlement negotiated by OFCCP since 2004. Under the terms of the agreement, the companies will pay a total of $3 million in back wages and interest to 21,635 applicants who were rejected for entry-level package handler and parcel assistant positions at 22 FedEx Ground facilities and one FedEx SmartPost facility. FedEx also On December 9, 2011, OFCCP issued proposed regulations that would require federal contractors to set a hiring goal of having 7% disabled workers in each job group. The proposed regulations also have new requirements regarding the recruitment and training of individuals with disabilities, formal accommodation policies and procedures, and recordkeeping and data collection to track disabled applicants and new hires. 37 RETURN TO TABLE OF CONTENTS agreed to extend job offers to 1,703 of the affected workers as positions become available. Houston company with a history of OSHA citations. Alleged willful violations included the failure to guard seven band saws, and the failure to lock out six pieces of equipment before maintenance. Like the EEOC, OFCCP has issued a pronouncement regarding the use of arrest and conviction records in employment decisions. OFCCP's Directive 306 warns that the use of such information may result in disparate impact based on race and may violate Title VII and Executive Order 11246. The use of conviction records is permissible if job-related, and the same analysis used by the EEOC (and described in above) is applied. 5. In addition to complying with workplace safety requirements, employers must avoid any retaliation against workers who report safety violations. On December 12, 2011, OSHA ordered payment of more than $300,000 and immediate reinstatement of an employee who was terminated by Union Pacific Railroad soon after notifying the company of a work-related injury and safety violation. Newly Revised Compliance Manual 2. OFCCP announced the publication and implementation of its newly revised Federal Contract Compliance Manual (FCCM). The OFCCP stated that “the revised FCCM provides OFCCP staff with the procedural framework for executing quality and timely compliance evaluations and complaint investigations.” Although it seems like an awkward fit, OSHA is the DOL sub-agency tasked with enforcing the whistleblower provisions of twenty-two federal laws with anti-retaliation provisions. These statutes cover employees in the health care, food, finance, air travel, pipeline, transit, rail and other industries. It is a clearly and plainly written manual reflecting the current state of the law. The revisions to the FCCM help to ensure quality and consistency by creating uniformity in investigative procedures nationwide. It also provides transparency in the way compliance evaluations and complaint investigations are conducted. The newly revised FCCM is easy to navigate and provides effective guidance to both OFCCP compliance officers and federal contractors. The higher-profile statutes include the Sarbanes-Oxley Act (SOX), and the Affordable Care Act (ACA). The DOL maintains a separate web site section for whistleblower issues at www.whistleblowers.gov. OSHA received 2,787 whistleblower complaints in fiscal year 2012. More than half (1706 complaints) involved workplace safety. The next most common types of complaints arose under the Federal Railway Safety Act (353 complaints) and the Surface Transportation Assistance Act (334 complaints). To view or download the revised FCCM, please visit the Laws & Related Materials section at http://www.dol.gov/ofccp/. F. OSHA: Occupational Health and Safety Administration 1. Workplace Safety Whistleblower Enforcement In fiscal year 2012 there were only 164 whistleblower complaints filed under SOX, which have steadily declined from a high of 291 in 2005. The new ACA resulted in 14 complaints in both fiscal year 2011 and 2012. Like other DOL sub-agencies, OSHA remains busy. OSHA's news releases show constant enforcement activities and initiatives for workplace safety. On December 13, 2012, the DOL announced the formation of a Whistleblower Protection Advisory Committee. The committee is expected to issue recommendations to help OSHA strengthen and improve its whistleblower protection program. On January 8, 2013, OSHA announced that at least 1,260 randomly selected workplaces will be inspected as part of the agency's 2012 site-specific targeting (SST) program. The inspections will be conducted over the next year and will target employers with 20 or more employees and higher than average injury/illness rates. OSHA's current regulatory agenda includes updates to the procedures for handling whistleblower complaints under various federal laws. Regarding SOX, interim final rules were published on November 3, 2011, implementing the provisions of the Dodd-Frank Act, which extended the statutory filing period for retaliation claims to 180 days (originally 90 days). The new regulations allow complaints Repeat offenders fare particularly poorly with OSHA. For example, on December 28, 2011, OSHA assessed more than $1 million in fines to Piping Technology and Products, a 38 RETURN TO TABLE OF CONTENTS to be made orally, eliminating the prior requirement that complaints be made in writing. National Fire Protection Association (NFPA) use the opposite (5 = most severe and 1 = least severe). OSHA has issued a fact sheet regarding the filing of whistleblower complaints under SOX: www.osha.gov/Publications/osha-factsheet-sox-act.pdf SOX generally applies to publicly traded companies and their subsidiaries. It protects employees from retaliation for reporting securities, mail, bank or wire fraud; violations of SEC rules or regulations; or violation of any federal law relating to fraud against shareholders. (4) Employers must complete the training for their employees on the new label elements and the SDSs by Dec. 1, 2013. When new updated SDSs are received from chemical manufacturers, employers may be required to update their hazard communication programs if new hazards are identified. 3. Chemical manufacturers, importers and distributors must comply with new hazard classifications and the classifications of chemical mixtures on their labels by June 1, 2015. Distributors may ship chemicals labeled by manufacturers under the old systems until Dec. 1, 2015. During the transition period, chemical manufacturers may use either labeling system and that is why employers are required to train their employees to recognize the new labels and SDS documents. Revised Hazard Communication Standard and Employee Training Requirements (12/01/13) OSHA's revised Hazard Communication Standard (HCS) requires sweeping mandatory training for most employers across the country on the new requirements for chemical labeling as well as the new Safety Data Sheets by Dec. 1, 2013. a. Hazard Communication has been one of the most frequently cited standards by OSHA for years. In fact, in fiscal year 2012, it was the most frequently cited standard for general industry. Given this fact, employers are advised to consult competent legal counsel regarding compliance with the revised regulations. Background OSHA's revised Hazard Communication Standard (HCS) took effect May 25, 2012. It was revised to align it with the internationally accepted Globally Harmonized System of Classification and Labeling of Chemicals (GHS). Any employer that uses hazardous chemicals in its workplace is subject to the communication and training requirements of the HCS. OSHA estimates that this revised standard will affect more than 5 million workplaces across the country employing more than 43 million workers. The revised HCS imposes new obligations on chemical manufacturers and importers as well but some of those requirements do not become effective until 2015. b. 4. Representation of Union and Non Union Employees In a letter opinion, OSHA takes the position that: (1) one or more workers may designate a person who is affiliated with a union without a collective bargaining agreement at their workplace or with a community organization to act as their "personal representative" for OSHA purposes; and (2) workers at a worksite without a collective bargaining agreement may designate a person affiliated with a union or a community organization to act on their behalf as a walkaround representative. Major Training Issues For Employers (1) Labels – Employers must train employees on new labeling elements including: product identifiers, signal words and precautionary statements; and See OSHA OP. (Feb. 21, 2013) at https://www.osha.gov/ pls/oshaweb/owadisp.show_document?p_table=INTERP RETATIONS&p_id=28604 (2) Safety Data Sheets (SDS) – Employers must train employees on the new standardized format of SDS (formerly known as Material Safety Data Sheets (MSDS)). These will cover everything from potential hazards of the chemicals, first aid measures as well as how to deal with it during an accidental release or fire. 5. OSHA Inspections: How to Prepare, How to Respond An unexpected OSHA visit is often unwelcome—and unsettling, too. If you have taken the time to prepare for an OSHA inspection, however, it need not be traumatic. (3) Confusing New format for categorizing hazards – The new system rates the severity of hazards on a 5-point scale (5 = least severe and 1 = most severe). The old Hazard Materials Identification System (HMIS) and Advance planning and preparation not only make the inspection proceed without difficulty, but also allow you to 39 RETURN TO TABLE OF CONTENTS be in control. Plus, being prepared may make a good impression on the inspector, which could lead to being cited for fewer violations. C If an inspection is nonprogrammed, a company may have experienced a serious event (such as a fire or explosion) or a workplace fatality. Or, OSHA may have received complaints or referrals regarding the work site. b. Passing Inspection OSHA inspectors typically want to review several documents that you may be required to keep at your facility: C The company’s Injury and Illness Prevention Plan and all supporting documentation C OSHA Log 300 C Lockout/Tagout Procedures C Emergency and Fire plans C Respiratory Protection Plan C Hearing Conservation Program C Hazard Communication Program C Material Safety Data Sheets Follow these steps to increase the odds of a successful inspection: Step #1: Designate one person who is fully trained on the company’s safety and health procedures to talk with the inspector and escort him or her around the facility. Make it company policy that only the designated person may conduct such a tour. Step #2: Gather the required OSHA documents in an area isolated from proprietary or confidential information. Present them in a form that is convenient for the inspector. Step #3: Anticipate safety and health issues if possible, and have a response prepared. Not all are required at every workplace—companies must determine which apply to the organization. a. Step #4: Control the route the inspector takes through the facility, and how information is communicated to the inspector. What Triggers an Inspection? Many inspections result directly from employee complaints or in response to reported accidents. Step #5: Be proactive. Inquire about the inspector’s concerns during the inspection. If possible, correct deficiencies immediately. When appropriate, explain why an apparent deficiency does not deserve a formal citation. The inspector will typically hold a closing conference with the company before leaving. This is an opportunity to discuss potential citations and try to resolve them then and there. Before 1996, a workplace would likely be the target of an inspection based solely upon the nature of its business (e.g., steel manufacturing). Since 1996, OSHA has been using different criteria to determine which workplaces will be inspected. That is when OSHA established the Data Collection Initiative (DCI) to gather data from more than 80,000 employers in select industry classifications. OSHA requested injury and illness information from such employers, which it then used as justification to target industries with higher than usual numbers of employee injuries and illnesses. Step #6: Do not be pressured. If the inspector asks a question or requests a document that the company is unsure of or uncomfortable about, stop and take the time to consult a superior—or an attorney. Step #7: Do not feel like the company always has provide an instant response. It does not. As a result, OSHA developed two categories of inspections: programmed and nonprogrammed. C Step #8: Do not volunteer or admit noncompliance. The company should, however, cooperate with the inspector. If the inspection is deemed a programmed inspection, it probably means that OSHA is inspecting the work site on the basis of the company (or company industry’s) answers to the DCI survey. 40 RETURN TO TABLE OF CONTENTS c. 1. The Inspection Process The coverage of the new Texas law is expansive. "Employee" means a person other than an independent contractor6 who, for compensation, performs services for an employer under a written or oral contract for hire, whether express or implied. OSHA inspectors have the right to inspect any part of the facility and request copies of any OSHA-required documents. They have the authority to interview employees without any member of management present. It is wise to: C C C Coverage Choose a route that exposes the least amount possible to inspection (if the inspector is there to see a specific area) Although the law does not define or incorporate a definition for "employer," it broadly limits liability for employers and related entities.7 Know which documents are required of your facility and keep them separate from other documents 2. Prohibitions Subject to the exceptions listed below, the new Texas law prohibits a cause of action against an employer solely for negligently hiring or failing to adequately supervise an employee based on evidence that the employee was convicted of an offense. Establish and maintain the best possible working relationship with OSHA representatives An employer has the right to refuse access to the facility and demand an administrative search warrant, but this is rarely recommended. In deference to the agency and in the interest of worker (and public) safety, such a warrant will not be difficult to obtain. 3. Exceptions It is generally best to cooperate with OSHA while remembering that the company does have rights and it can refuse certain requests. The new Texas law does not protect an employer who "knew or should have known" of a prior conviction from a claim for negligent hiring or failing to provide adequate supervision, if the employee was convicted of: II. STATE LEGISLATION: C A. Texas Law: HB 1188 New Texas Law Protects Employers From Negligent Hiring And Supervision Claims On June 14, 2013, Governor Perry signed H.B. 1188 to limit liability for negligent hiring and supervision of employees with criminal convictions. The new Texas law insulates employers and others from such claims, except where the employer knew or should have known that an employee had been convicted of a crime while performing duties substantially similar to those required in the current position, or had been convicted of one of several crimes enumerated in the statute. To assist employers in understanding the new Texas law, which takes effect immediately.5 an offense committed while performing duties substantially similar to those reasonably expected to be performed in the employment, or under conditions substantially similar to those reasonably expected to be encountered in the employment, taking into 6 The new Texas law incorporates by reference the TEX. LAB. CODE's definition of "independent contractor," i.e., a person who contracts to perform work or provide a service for the benefit of another and who is: (i) paid by the job, not by the hour or some other time-measured basis; (ii) free to hire as many helpers as the person desires and to determine what each helper will be paid; and (iii) free to work for other contractors, or to send helpers to work for other contractors, while under contract to the hiring employer. 5 7 The new Texas law only applies to a cause of action accruing on or after the effective date. In addition to employers, the law covers general contractors, premise owners and other third parties. 41 RETURN TO TABLE OF CONTENTS consideration the factors listed in §§ 53.0228 and 53.023(a)9 of the Occupations Code, or C use or exhibition of a deadly weapon;10 or a sexually violent offense,11 murder; capital murder; indecency with a child; aggravated kidnaping; aggravated sexual assault; aggravated robbery; certain health and safety code violations; sexual assault; certain felonies involving B. Social Media Password Protection Laws Making Sense Of The Complex Patchwork Created By Nearly One Dozen New Social Media Password Protection Laws12 The legislative torrent has been virtually unprecedented in the area of workplace privacy. In a single season, spring 2013, seven states enacted social media password protection legislation, bringing the total number of states to 11 since Maryland enacted the first such law in May 2012. Bills are pending in more than 20 other states. The current roster of states, dominated by the Rocky Mountain Region and the Far West, is as follows: Arkansas, California, Colorado, Illinois, Maryland, Michigan, Nevada, New Mexico, Oregon, Utah and Washington. New Jersey appears poised to join this group as the state's legislature amends a bill conditionally vetoed by Governor Christie in May. 8 Section 53.022 has required a licensing authority to consider the following factors to determine whether a conviction relates to an occupation: (1) the nature and seriousness of the crime; (2) the relationship of the crime to the purposes of the license sought; (3) the extent to which a position might offer an opportunity to engage in further criminal activity of the same type as that in which the person previously had been involved; and The 11 states have created an unwieldy legislative patchwork that will leave many multi-state employers struggling to create a uniform policy. Nonetheless, a thorough review of the legislative hodgepodge does lead to several useful conclusions for employers. These conclusions will be described in detail below. (4) the relationship of the crime to the ability, capacity, or fitness required to perform the duties and discharge the responsibilities of the licensed occupation. 9 Section 53.023(a) has required a licensing facility to consider the following factors, in addition to those listed in § 53.022: (1) the extent and nature of the person's past criminal activity; (2) the age of the person when the crime was committed; (3) t he amount of time that has elapsed since the person's last criminal activity; 10 The legislation excludes offenses listed in § 3g, Article 42.12, TEX. CODE OF CRIM. P. 11 "Sexually violent offense" is defined in Article 62.001 of the TEX. CODE OF CRIM. P. to include any of the following offenses committed by a person 17 years of age or older: continuous sexual abuse of a young child or children; indecency with a child; sexual assault; aggravated sexual assault; sexual performance by a child; aggravated kidnaping (if the defendant committed the offense with intent to violate or abuse the victim sexually); certain burglary offenses; or an offense under the laws of another state, federal law, the laws of a foreign country, or the UNIFORM CODE OF MILITARY JUSTICE that contains elements substantially similar to the elements of one of the listed crimes. (4) the conduct and work activity of the person before and after the criminal activity; (5) evidence of the person's rehabilitation or rehabilitative effort while incarcerated or after release; and (6) other evidence of the person's fitness, including letters of recommendation from: (A) prosecutors and law enforcement and correctional officers who prosecuted, arrested, or had custodial responsibility for the person; 12 The following article was written by Philip L. Gordon and Joon Hwang, Littler Mendelson (July 3, 2013) at http://www.mondaq.com/unitedstates/x/248314/employee+right s+labour+relations/Making+Sense+Of+The+Complex+Patchwo rk+Created+By+Nearly+One&email_access=on (B) the sheriff or chief of police in the community where the person resides; and (C) any other person in contact with the convicted person. 42 RETURN TO TABLE OF CONTENTS 1. What conduct by employers do these laws generally prohibit? obtain access to the restricted social media content of a co-worker. One of the only points of uniformity is the basic prohibition: all of these laws prohibit employers from requesting or requiring that applicants or employees disclose their user name, password, or other information needed to access a personal social media account. The notable exception is New Mexico, which applies the prohibition only to applicants. 2. What are the exceptions to the general prohibition? The range of exceptions to the general prohibition is even more dizzying than the range of prohibitions. All states, except for Illinois, expressly provide that employers can demand that employees provide log-in credentials to non-personal accounts that are used for the employer's business purposes. The precise formulation of these exceptions varies, but the gist of most of them is that if the employer creates or pays for the account, the general prohibition does not apply. Utah's law takes the exception one step further by permitting employers to request the log-in credentials for a personal social media account that the employee uses to conduct the employer's business. The states with the most expansive legislation — Illinois, Michigan and Washington — also prohibit employers from requiring that applicants or employees (a) accept a request, such as a Facebook "friend request," that would permit access to restricted content; (b) permit the employer to observe their restricted social media content after they have logged in, i.e., "shoulder surfing"; and © change their privacy settings in a manner that would permit the employer to access their restricted social media content. Arkansas and Colorado do not expressly prohibit shoulder surfing. California, Michigan and Oregon do not expressly prohibit requiring an applicant or employee to change privacy settings to permit employer access to restricted social media content. It remains an open question whether state courts will read these slightly narrower statutes and those statutes that prohibit only compelled disclosure of log-in credentials to encompass other methods for circumventing user-created restrictions on access to personal social media. The uniformity of the "non-personal account" exception evaporates with respect to workplace investigations. On this topic, the states break down into three evenly divided camps. Three states — Illinois, Nevada and New Mexico — have no exception for workplace investigations. Four states — Arkansas, California, Michigan and Utah — have what could be characterized as a broad exception. California's exception, for example, reads as follows: "Nothing in this section shall affect an employer's existing rights and obligations to request an employee to divulge personal social media reasonably believed to be relevant to an investigation of allegations of employee misconduct or employee violation of applicable laws and regulations, provided that the social media is used solely for purposes of that investigation or a related proceeding." The remaining four states — Colorado, Maryland, Oregon and Washington — have relatively narrow exceptions for workplace investigations. The Colorado and Maryland laws, for example, permit requests for access to employees' personal social media content only when necessary to investigate violations of securities laws or regulations or potential misappropriation of trade secrets. Notably, the states with a workplace investigation exception appear to permit the employer to require the disclosure only of social media content, not the employee's log-in credentials. A majority of states expand on their access prohibition by applying it not only to social media but also to any personal online account. For example, the most recently enacted law (Nevada) defines "social media account" to mean "any electronic service or account or electronic content, including, without limitation, videos, photographs, blogs, video blogs, podcasts, instant and text messages, electronic mail programs or services, online services or Internet website profiles." The states that most broadly define social media are Arkansas, California, Colorado, Maryland, Michigan, Nevada and Utah. By contrast, Illinois, New Mexico, Oregon, and Washington appear to apply their password protection laws only to social media accounts, excluding other personal online services from their laws' purview. These password protection laws could interfere with the ability of broker-dealers and other employers to comply with statutory or regulatory requirements to monitor business-related posts by employees regardless of whether the account used to post is personal or employer-provided. Consequently, six states have adopted language championed by the securities industry that appears to allow employers to request log-in credentials when required to comply with legal obligations or the rules of a self-regulatory The legislative patchwork also presents material differences regarding the target of an access request. In virtually all states, an employer is prohibited from seeking access to an applicant's or employee's own restricted social media content. California's law appears to go one step further by prohibiting employers from asking an employee to help 43 RETURN TO TABLE OF CONTENTS organization such as the Financial Industry Regulatory Authority's (FINRA) rules on the supervision of online communications. These states include Arkansas, Michigan, Nevada, Oregon, Utah and Washington. Washington law, for example, provides as follows: "This section does not prevent an employer from complying with the requirements of state or federal statutes, rules or regulations, case law, or rules of self-regulatory organizations." As noted above, two states — Colorado and Maryland — have adopted narrower exceptions that appear to permit requests for social media content to investigate compliance with securities laws or regulations. employees' personal social media content for a range of legitimate business purposes, including evaluating applicants' job qualifications, conducting workplace investigations and complying with legal requirements. At the same time, as demonstrated above, employers (especially multi-state employers) seeking to establish a uniform policy on access to applicants' and employees' personal social media content are faced with a legislative patchwork that can leave them scratching their heads. The legislative framework will likely become only more variable with more than 20 additional states currently considering social media password protection laws. These 11 password protection laws have several other variations. First, half of the states — Arkansas, Illinois, Michigan, New Mexico, Oregon and Utah — expressly state that it is not unlawful for employers to access publicly available social media content. While the remaining five states do not speak to this issue, there does not appear to be any viable basis for an applicant or employee to complain about an employer's access to publicly available social media content. Second, three states — Arkansas, Oregon and Washington — expressly state that employers do not engage in prohibited conduct if they inadvertently acquire social media log-in credentials while monitoring corporate electronic resources as long as the employer does not use the information to access an employee's personal social media. Finally, three states — Michigan, Oregon and Utah — confer on employers immunity from claims based on their failure to request or require that an applicant or employee provide access to restricted, personal social media content. Despite these challenges, several guidelines for employers are discernible: 3. Publicly available social media content is fair game. Nothing in the password protection laws purports to regulate an employer's access to publicly available social media content. Employers do need to consider other factors when relying on publicly available social media content, such as whether the content is true and whether the content contains information on which an employer cannot lawfully rely for employment purposes. C Employers can use restricted social media content voluntarily provided to the employer. Employees routinely report voluntarily to HR about troubling social media content posted by co-workers. Nothing in the social media password protection laws restricts an employer's ability to accept and act on this information, even if the employee has restricted access to his or her social media content. C Document the source of all social media content that will be used to justify adverse employment action. In the event an applicant or employee alleges that an employer obtained restricted social media content in violation of a password protection law, the employer should be in a position to prove that it did not compel the applicant or employee to permit access by prohibited means. The employer can best avoid a "he-said-she-said" battle by producing documents showing the lawful means by which the employer obtained the social media content. C Establish in writing that all accounts used to conduct the employer's business are not personal accounts. As businesses rely increasingly on social media to attract new business and interact with customers, their employees are creating social media content and making connections that add substantial What remedies are available under these laws? The remedial schemes for violation of these laws vary even more substantially than the prohibitions and exceptions. In three states — Arkansas, Nevada and New Mexico — the statutes do not include a remedial provision and do not expressly incorporate one by reference. Two states — California and Colorado — provide no private right of action. The remaining states provide a private right of action with varying caps: Utah and Washington ($500); Michigan ($1,000); Illinois and Maryland (no cap); Oregon (unclear). Four states — California, Colorado, Illinois, and Oregon — expressly create administrative remedies; the other states do not. 4. C What should employers do in response? Given the prevalence of social media and the increased melding of work and personal life, employers unquestionably will need access to applicants' and 44 RETURN TO TABLE OF CONTENTS value to the business. To preserve that value and avoid losing it to a competitor when the employee leaves, employers must take steps to ensure on-going access to these accounts, including the ability to access the accounts at any time by maintaining a record of the log-in credentials. To that end, employers should obtain an employee's agreement, in writing, that the account is not personal when the employee is first assigned responsibility for the account. In this way, the employer eliminates the risk of liability for requiring the employee to disclose his or her log-in credentials and for firing an employee who refuses to cooperate. C media content of registered representatives. Unfortunately, the password protection laws contain so many variations, nuances and ambiguities that employers will likely need the assistance of legal counsel to reduce the risk of a violation when accessing an employee's restricted social media content for these purposes. Establish a policy that prohibits employees from storing the employer's confidential information in a personal online account. Under some of the password protection laws, employers arguably could not gain access to the employer's own confidential information stored in an employee's personal, online account, such as a Dropbox account, so that the employer could delete the information or observe the employee deleting the information. Employers can mitigate this risk by establishing a policy which prohibits such storage of the employer's confidential information. In addition, such a policy would provide the basis for the employer to invoke the workplace investigation exception in any password protection law that has this exception when the employer has reason to believe the employee is storing the employer's confidential information in a personal online account in violation of the policy. C Do not ask applicants for their log-in credentials and consult legal counsel before using other means, such as shoulder surfing, to access applicants' restricted social media content. While the password protection laws have a range of exceptions applicable to requests for an employee's log-in credentials, these exceptions, such as the exception for workplace investigations, do not apply in the context of the hiring process. Consequently, as a general rule, employers should not seek access to applicants' restricted social media content. Notably, very few private employers currently seek such access. C Consult legal counsel before accessing an employee's restricted social media content. State legislators have recognized that employers can have legitimate reasons to access an employee's restricted social media content — for example, to conduct a workplace investigation or to comply with applicable law, such as FINRA's rules on supervising the social C Train supervisors and in-house investigators to be cautious about seeking access to restricted social media content. Given the newness of the password protection laws, supervisors and in-house investigators may not even be aware that these laws exist. At a minimum, employers should inform supervisors and in-house investigators that (a) access to restricted social media content potentially raises a red flag, and (b) they should consult with the organization's legal department or outside counsel before seeking access to such information. C Support federal password protection legislation that preempts state laws and get involved in the state legislative process. At this point, the only cure for the tangle of state law restrictions on access to social media content would be a federal law that preempts all of the state laws. However, that solution is nowhere on the horizon. The one federal bill addressing restrictions on employers' access to employees' and applicants' restricted social media content does not mention preemption. Given that, and the fact that bills addressing password protection are pending in many more states, employers should try to influence the legislative debate in an effort to obtain more balanced and uniform legislation that takes employers' interests into account. 45 RETURN TO TABLE OF CONTENTS APPENDIX 3 Staub v. Procter: The Cat’s Paw Theory Explained Of Cat's Paws and Courts The “cat’s paw” theory gets its name from a French fable penned by Jean de LaFontaine (1621-1695) titled “The Monkey and the Cat,” in which a clever but unscrupulous monkey persuades a cat to pull chestnuts from a fire for the monkey to eat. The cat burns its paws, while the monkey enjoys the chestnuts. This marriage of French literature and employment law is now used to explain what happens when someone manipulates a decision-maker to commit discrimination, harassment or retaliation. I. a uniformed service and provides liability of an employer if that person’s uniformed service membership is a motivating factor in the employer’s action. THE CAT’S PAW EMPLOYMENT CASE The cat’s paw theory of liability developed by the U.S. Supreme Court in Staub v. Proctor Hosp., 131 S. Ct. 1186 (2011) is gaining ground in employment discrimination cases. Today the cat’s paw theory of liability refers to one used by another to accomplish his purposes. All HR managers should understand that if they make a decision to fire someone based upon the facts provided to them from another manager, if that manager had a discriminatory bias, the employer can be liable for an employment discrimination case even though the HR managers had no such biases. The jury found Proctor liable at trial and awarded Staub damages, but the Seventh Circuit Court of Appeals reversed holding that Proctor Hospital was entitled to judgment as a matter of law because the decision maker, the V.P. of Human Resources, had relied on more than the two supervisors’ advice in making her decision. The Supreme Court found that under the cat’s paw theory of liability that since the supervisors were hostile to Staub’s military obligations, Proctor Hospital was liable under the USERRA because that hostility towards Staub’s obligations was a motivating factor in the decision to fire him. From the Supreme Court decision, it appears there might have been a different result had the Vice President of Human Resources not taken at face value the supervisors’ comments, but did her own investigation. Therefore, if HR managers take those statements at face value without doing their own investigation and as a result fire an employee, the fired employee may have valid employment discrimination claims against the company. In Staub v. Proctor Hosp., Staub was employed as an angiograpy technician by Proctor Hospital while being a member of the United States Army Reserve. Both Staub’s immediate supervisor and that supervisor’s supervisor were hostile to Staub’s military obligations. Proctor’s V.P. of Human Resources, after having heard complaints from those supervisors, fired Staub. Staub sued under the Uniformed Services Employment and Reemployment Rights Act of 1994 (“USERRA”) which forbids an employer to deny reemployment, retention in employment, promotion, or any benefit of employment based upon a person’s membership in or obligation to perform services in II. THE KEY LESSONS FROM STAUB A. Practice Points 1. The “cat’s paw” doctrine can be thought of as an application of the “motivating factor” doctrine; the monkey’s malevolent intent is imputed to the employer. So if the employer can’t show that the monkey’s supervisor, who did the actual firing (or took some other adverse employment action), had a lawful 46 RETURN TO TABLE OF CONTENTS motive uncontaminated by the monkey that would have led the supervisor to fire the employee even without the monkey’s interference, the employee is entitled to damages. 2. 3. 4. When deciding whether to terminate an employee, HR needs to conduct more than a cursory review of an employee’s personnel file. HR must thoroughly and impartially review the employee’s performance and job history before making an employment decision adverse to the employee. Include a review process to ensure that neutral decision-makers aren’t simply rubber-stamping improper recommendations. 5. Completely document neutral decision-makers’ independent reviews and the factors they weighed when making their decisions. It is critical that decision makers avoid "rubber-stamping" decisions rather than conducting independent investigations into the underlying facts and motivation. This is especially important in companies with off-site human resource departments where decision makers may be completely unfamiliar with not only the individual employees but also the supervisors evaluating them. In McKenna v. City of Philadelphia, 649 F.3d 171 (3d Cir. 2011), cert. denied, 2012 U.S. App. LEXIS 1136 (2012), the Third Circuit had its first opportunity to address the cat's paw theory of employer liability for discrimination and/or retaliation under circumstances where an adverse employment action was influenced, but not ultimately made, by an employee with discriminatory or retaliatory animus. The Third Circuit held that, where the plaintiff seeks to hold an employer liable for the improper motives of a non-decisionmaker, the burden shifts from the plaintiff to the employer to prove that the decision was not substantially caused or influenced by the biased non-decisionmaker. In a Cat's Paw Scenario, Third Circuit Effectively Puts Burden on Employer to Prove Decisionmaker Was "Independent" of the Biased Supervisor, and that the Decision Was Not Substantially Caused by the Biased Supervisor A. Background Raymond Carnation, a terminated police officer, filed a Title VII claim against the City of Philadelphia, arguing that his discharge was in retaliation for protesting the discriminatory treatment afforded his African American colleagues. At trial, the plaintiff produced evidence that he had complained to his supervisor about racial tensions within his squad. When his supervisor failed to respond to that issue to his satisfaction, the plaintiff complained to his supervisor's manager that his supervisor was condoning racism by failing to address the issue. How to Reduce 'Cat's Paw' Liability Here’s what HR can do to reduce the risk that it will be burned by “cat’s paw” liability: 2. 4. III. THE THIRD CIRCUIT’S ROAD MAP However, employers can win cat’s paw cases—if they can prove that the employment decision was based on a thorough and independent evaluation. If they can do that, courts may decide that the decision wasn’t tainted by the malicious party’s bias. And that means no unlawful discrimination or retaliation took place. 1. Have somebody who is neutral independently evaluate any reports or recommendations that will be the basis for employment decisions. The message to employers is that they will need to evaluate carefully the practices they employ in making termination decisions and conducting investigations. Employers must be careful to look at the process leading up to each termination including who provided input into the decision and what their motivation might be. Cat’s paw cases put employers in a bind. Courts often let such cases go to trial, trusting a jury to sort out whether the employer should be held liable for retaliation or discrimination. B. 3. Review employee/supervisor relationships. Be alert for any history of potential adversarial dealings between employees and their bosses. According to the plaintiff, the manager reacted to his protests by assigning him to dangerous and unpleasant duties, and warned that any complaint to the Equal Employment Opportunity Commission would lead him to make the plaintiff's life "a living nightmare." After the plaintiff continued to complain about his supervisor's failure Avoid relying on recommendations from anyone who may harbor potentially improper motives. 47 RETURN TO TABLE OF CONTENTS to take action to resolve the issues plaguing his squad, the manager ordered the plaintiff not to call his supervisor to discuss the matter again. Despite the manager's order, the plaintiff called his supervisor the following day and, in fact, resolved many of his concerns. non-decisionmaker's discrimination, instead reasoning that liability may not attach where the employer's investigation leads to a termination for reasons unrelated to the supervisor's original, biased action, but that liability may exist where the decision to terminate is based on the original discriminatory report. When the plaintiff informed the manager of his discussion with his supervisor and requested a meeting with his superiors to discuss any remaining issues, the manager responded by filing charges against the plaintiff for insubordination and neglect of duty. The manager submitted the charges to the Police Board of Inquiry ("the PBI"), a three-person panel that receives written and testimonial evidence from both the employee and the party submitting charges. Based on the evidence received, the PBI then recommends an appropriate sanction for the employee to the Commissioner of Police, who would make the ultimate decision as to whether the sanction should be imposed. The question posed in McKenna was this: on which side of the dividing line did the PBI's investigation and recommendation to terminate fall? The Third Circuit began its analysis by defining proximate cause in relation to complaints of discrimination and a subsequent adverse action. Although the plaintiff had the burden to establish that his termination was motivated by retaliatory animus, the Third Circuit effectively imposed an even heavier burden on the City, requiring it to come forward with evidence showing that: (1) the decision to take the adverse action was made by an independent, unbiased decisionmaker; and (2) the adverse action was taken for reasons unrelated to a single actor's retaliatory animus. After a three-hour hearing, during which the plaintiff was represented by counsel and both the plaintiff and the manager testified, the PBI found the plaintiff guilty of the charges submitted, as well as an additional charge that the PBI added for conduct unbecoming an officer. The PBI recommended the plaintiff's dismissal. Shortly thereafter, the Commissioner gave the plaintiff notice of the City's intent to terminate his employment. In examining the district court's denial of the City's motion for judgment as a matter of law, the Third Circuit observed the lack of factual evidence in the record to support the City's motion. For example, the record at trial failed to show the extent to which the PBI truly employed quasi-judicial features, such as whether the plaintiff could have freely called witnesses on his own behalf or cross-examined the City's witnesses. At the trial of the plaintiff's Title VII claim, the jury concluded that the plaintiff's termination was an act of retaliation for his protests at the treatment of African American officers and/or for raising a complaint of discrimination. The City sought judgment notwithstanding the verdict. The City argued that, although the plaintiff was discharged as a result of disciplinary proceedings begun by the manager, the recommendation to terminate was made by the PBI and the ultimate decision to terminate was made by the Commissioner. As such, the City contended that the independent decision-making of the PBI and the Commissioner severed the causal connection between the termination decision and the manager's improper animus. The district court denied the City's motion, concluding that a reasonable jury could find that the manager's retaliatory motive played a substantial role in the decision to terminate the plaintiff's employment. B. Even more importantly, the record at trial did not reflect the basis and weight of the PBI's recommendation to terminate, nor did the record reflect what the ultimate decisionmaker, the Commissioner of Police, saw or relied upon when making the decision to terminate. Rather, the evidence demonstrated only that "[the manager] retaliated against Carnation by referring the [charges] against him, the PBI affirmed those charges, and the Commissioner then terminated Carnation." Under those circumstances, the Third Circuit concluded that the jury was entitled to conclude that the plaintiff's termination was caused by the manager's decision to retaliate against him. C. Practical Implications for Employers Although the outcome in McKenna was unfavorable to the employer, the Third Circuit has provided employers with a roadmap to insulate themselves against liability in "cat's paw" scenarios. In light of McKenna, employers contemplating a termination should bear in mind the following considerations and take the following steps. The Third Circuit’s Decision On appeal, the Third Circuit had its first opportunity to apply Staub. In Staub, the Supreme Court declined to adopt a bright-line rule that a decisionmaker's independent investigation would negate the effect of a 48 RETURN TO TABLE OF CONTENTS 1. When asserting a lack-of-causation defense, an employer must remember that it has the burden to prove that the ultimate decision was made by an "independent" decisionmaker whose decision was not caused, or unfairly influenced, by a supervisor's retaliatory animus. C diagnosed as having "homicidal tendencies" toward his superior(s). Had this been appropriately investigated and later documented as a basis for the PBI's recommendation and the Commissioner's decision, this may have severed the causal connection with the manager's bias and justified the decision to terminate the plaintiff's employment. To meet that burden, an employer should begin by identifying the independent decisionmaker and clearly defining his or her role in the decision-making process. 2. The outcome in McKenna may be explained, in part, by the record's lack of clarity as to whether the manager, the PBI, or the Commissioner was the driving force behind the decision to terminate. 3. One lesson from McKenna is that, in the absence of such clarity, the employer loses. 8. Where an employer is considering an adverse action against an employee without a clear record of the legitimate, non-discriminatory and non-retaliatory reasons for the decision, or the decision does not include the involvement of an independent, unbiased decisionmaker, employers should seek legal advice before proceeding with any adverse action. IV. POST-STAUB CASE SURVEY 4. 5. A. Appellate Decisions 1. The record must also be clear about what that decisionmaker saw, heard, or relied upon in making the decision. To prove that the decisionmaker was, indeed, independent, and based his decision on untainted information, the employer must be able to point to what information informed the decision. Adamczyk v. New York Dep't of Correctional Serv., 474 Fed. Appx. 23 (2nd Cir. 2012). Sworn testimony given by a biased individual may give rise to cat’s paw liability. The record must establish that the employee was not subject to an unfair process. The McKenna panel's focus on procedural protections, or lack thereof, afforded to the plaintiff suggests that employers need to examine their fact-finding methods in conducting investigations into complaints of discrimination and retaliation. Adverse testimony offered in an arbitration proceeding by a biased individual–if motivated by discriminatory animus, intended by him to bring about an adverse employment action, if such testimony is a proximate cause of the ultimate employment action–may create liability for the biased individual's employer notwithstanding the fact that the ultimate decision was made by an otherwise unbiased arbitrator. Id. at *3. C 2. Such methods include taking statements from not only the employee and the allegedly biased supervisor, but also any other witnesses identified by the complainant and supervisor with unbiased knowledge of the facts prior to making any final employment decisions. 6. Finally, employers should always have a clear record of the grounds on which any termination or other adverse action is based. Part of what doomed the City's position in McKenna was that it was unclear what formed the basis of the ultimate decision to terminate the plaintiff. 7. If the record reflected a non-retaliatory rationale independent of the manager's bias, the outcome might have been different. For example, there was some evidence in the record that the plaintiff had been Blasdel v. Northwestern Univ., 687 F.3d 813 (7th Cir. 2012). In Blasdel, the Seventh Circuit held cat's paw evidence would be sufficient if Blasdel's department chair, "actuated by a desire to maintain the physiology department as a male bastion, falsely charged Blasdel with plagiarism and the falsity was not discovered until after she was denied tenure." Citing Staub, the Court said that such "fraud would be imputed to his employer, the university." 49 RETURN TO TABLE OF CONTENTS 3. Chattman v. Toho Tenax America, Inc., 686 F.3d 339 (6th Cir. 2012). make the ultimate adverse employment decision. The court found the report merely discussed the employer's potential exposure to lawsuits based upon failure to enforce its policies on a consistent basis, without regard to race; and concluded the report was insufficient to show the requisite discriminatory animus. The court agreed with the trial court that Crowe failed to present evidence of pretext regarding either the discrimination claim or the retaliation claim. Employee established evidence supporting cat's-paw theory of liability. The Sixth Circuit noted that Staub's causation analysis was not contrary to the cat's paw case law already existing in the circuit. Following an extensive description of Staub, and a discussion of existing Sixth Circuit case law, the court reversed summary judgment, finding a triable question of material fact as to whether the supervisor’s actions were a proximate cause of Chattman's discipline and in light of the fact that there was some circumstantial evidence of the supervisor’s racial animus. 4. 6. Employee asserting state law disability discrimination claim produced insufficient evidence in support of "cat's paw" theory. Cook v. IPC Int’l. Corp., 673 F.3d 625 (7th Cir. 2012). Diaz sued the employer, asserting a disability discrimination claim under the Iowa Civil Rights Act (ICRA). The trial court granted summary judgment in favor of the employer. The Eighth Circuit affirmed, rejecting Diaz' "cat's paw" theory that he was discharged by an unwitting decisionmaker based on the discriminatory animus of the decisionmaker's biased subordinate. Diaz' claim was based on the allegation that he was discharged because he sought accommodation for a disabled subordinate. The court concluded that Diaz failed to produce sufficient evidence that 1) the allegedly biased subordinate was motivated by retaliatory animus, and 2) the decisionmaker's decision was tainted by discriminatory animus. Trial court unnecessarily complicated matters by injecting the "cat's paw" doctrine and "sole decisionmaker" jury instruction into Title VII case. Cook sued the employer, asserting Title VII claims for retaliation and gender discrimination. The employer prevailed after a jury trial. The Seventh Circuit reversed. The court concluded that the jury was incorrectly instructed that Cook had to establish her supervisor as the "sole decision maker" in order to prevail on her claims. The court found that the trial court unnecessarily complicated matters by injecting the "cat's paw" doctrine and "sole decisionmaker" jury instruction into the case. 7. The court noted, "[t]his is all a dreadful muddle, for which we appellate judges must accept some blame because doctrine stated as metaphor, such as the ‘cat's paw' theory of liability….can be a judicial attractive nuisance" and "[j]urors are unlikely to understand legal concepts that judges have difficulty understanding." 5. Diaz v. Tyson Fresh Meats, 643 F.3d 1149 (8th Cir. 2011). Guimaraes v. SuperValu Inc., 674 F.3d 962 (8th Cir 2012). Supervisor's feigned inability to understand employee, coupled with supervisor's statement that she wanted to prevent employee from getting a "green card," was insufficient evidence of national origin discrimination to survive summary judgment (cat’s paw theory rejected). Crowe v. ADT Security Serv. Inc., 649 F.3d 1189 (10th Cir. 2011). Guimaraes sued the employer, asserting Title VII and state law claims for national origin discrimination and retaliation. The trial court granted summary judgment in favor of the employer. The Eighth Circuit affirmed. "Cat's paw" liability was not established by report recommending discharge. Guimaraes, who was a native of Brazil and spoke with an accent, produced evidence that her supervisor engaged in a practice of pretending not to understand her – constantly asking her to repeat herself. Guimaraes also produced evidence that no other employee expressed any difficulty understanding her. Guimaraes produced additional evidence that the supervisor admitted to another employee that she was trying to cause Guimaraes to be discharged, and to interfere with Guimaraes' attempt to obtain a "green card." Crowe sued the employer for wrongful discharge in violation of Title VII alleging race discrimination and retaliation. The trial court granted the employer's motion for summary judgment. The Tenth Circuit affirmed. Relying on Staub v. Proctor Hosp., 131 S. Ct. 1186 (2011), Crowe argued that an employee, with discriminatory animus, wrote a report urging his dismissal, but did not 50 RETURN TO TABLE OF CONTENTS 10. Jajeh v. County of Cook, 678 F.3d 560 (7th Cir. 2012). Guimaraes argued that this evidence supported the inference that her supervisor was motivated by national origin-based discriminatory animus, and that Guimaraes' discharge was attributable to the supervisor's discriminatory animus under the "cat's paw" theory. The court rejected this argument. Dr. Jajeh claimed that Dr. Lad had initiated an administrative hearing in retaliation for his numerous complaints. The hearing, in turn, lowered his performance evaluation score and Dr. Jajeh was ultimately fired for receiving a lower total evaluation score than two other physicians in his department. Thus, he argued, Dr. Lad's retaliatory animus caused his discharge. The court concluded that the "green card" statement related to citizenship or immigration status, rather than national origin. The court noted that the Supreme Court held in Espinoza v. Farah Mfg. Co., 414 U.S. 86 (1973) that Title VII does not prohibit discrimination "on the basis of citizenship or alienage." With respect to the supervisor's feigned inability to understand Guimaraes, the court observed that "comment ridiculing an employee's accent may be relevant evidence of national-origin animus." The court concluded, however, that "without more evidence, no reasonable jury could find [the supervisor's] alleged behavior raises an inference of national-origin discrimination." Based on this analysis, the court affirmed. 8. The Seventh Circuit disagreed, though, for the simple reason that Dr. Jajeh still would have scored the lowest (by far, actually) even if he hadn't lost points due to the administrative hearing. 11. Marcus v. PQ Corp., 458 Fed. Appx. 207 (3rd Cir. 2012) (unpublished opinion). Multi-million dollar ADEA verdict affirmed. Hicks v. Forest Preserve Dist. of Cook County, 677 F.3d 781 (7th Cir. 2012). A jury ruled in favor of two former employees on their claims under the Age Discrimination in Employment Act (ADEA). One award was for $1,335,806 in lost wages plus $1,500,000 for emotional distress (remitted to $50,000); the other was for $566,636 in lost wages plus $2,000,000 for emotional distress (remitted to $100,000). Direct evidence of retaliatory animus obviated the need for evidence of temporal proximity in Title VII case. Hicks sued the employer, asserting a Title VII claim for retaliation. Hicks prevailed after a jury trial. The Seventh Circuit affirmed, concluding that: 1) Hicks produced sufficient evidence that he was involuntarily demoted and thus subjected to a materially adverse employment action; 2) Hicks' direct evidence of retaliatory animus obviated the need for evidence of temporal proximity; and 3) the trial court did not err in order Hicks' reinstatement. 9. The Third Circuit affirmed the verdict, finding no error in the trial court's jury instructions on "but-for" causation and no error in the instruction on cat's paw theory. The court remanded for reconsideration of the trial court's refusal to grant pre-judgment interest and an adjustment to account for negative tax consequences. 12. Marez v. Saint-Gobain Containers, Inc., 688 F.3d 958 (8th Cir. 2012). Holliday v. Commonwealth Brands, Inc., 2012 WL 3176316 (5th Cir., August 2, 2012). Cat's paw evidence can support a finding of willfulness for FMLA liquidated damages purposes. The Fifth Circuit questions whether existing circuit precedent remains good law This case involved claims of gender discrimination and FMLA retaliation. When Marez took FMLA leave in mid2007, an HR manager told Marez that her immediate supervisor, Cook, would be irritated. Indeed, Cook expressed displeasure directly to Marez about the fact of the leave. On July 28, 2008, Marez told Cook of her need for a second FMLA leave, this time for her husband's pending but yet-unscheduled surgery. Marez told Cook about this on July 28, 2008. Two days later, Marez was called into work on her day off and terminated. The Fifth Circuit noted that it was "entirely unclear" whether its cat's paw theory of liability under the ADEA remained good law in the wake of Gross v. FBL Financial Serv., 557 U.S. 167 (2009), and Staub v. Proctor Hosp., 131 S. Ct. 1186 (2011). The court stated, "Because the "motivating factor" phrase is not in the ADEA, and because the Court construed that phrase in recognizing "cat's paw" liability under USERRA, and finally, because the Court has focused closely on the text of the antidiscrmination statutes in authorizing theories of liability, it could very well be that our prior recognition of "cat's paw" liability under the ADEA was incorrect." Id. at *4 n.2 Saint-Gobain contended that she was fired for several failures to follow plant procedures. Yet, the trial evidence 51 RETURN TO TABLE OF CONTENTS established that Marez was fired only after Cook 'discovered' Marez's failure to record equipment malfunction, assembled the relevant paperwork, and then delivered this neat package to Meade, the plant's operations manager. Cook and Meade, in turn, then advised HR and Franzoi, the plant manager. This group together then decided collectively to terminate Marez. earlier, which resulted in a guilty plea to assault. The court agreed with the trial court, albeit on different grounds, that the forgery of Nagle's signature, even if criminal, had no practical significance to the general public. With respect to the abuse report, First Amendment protections were not conditioned on adherence to school protocols nor on how long ago the protected speech occurred. Marez presented substantial evidence that Saint-Gobain's excuses were pretextual, and the judgment included more than $400,000 in damages and liquidated damages. Discussing whether there was a sufficient basis under the FMLA to award liquidated damage–i.e.–whether SaintGobain had proved its FMLA violation was done in good faith or that it reasonably believed its action did not violated the statute–the Eighth Circuit held that awards of FMLA liquidated damages may be premised upon a cat's-paw theory: The court concluded that Nagle showed a temporal proximity sufficient to make out a prima facie First Amendment retaliation claim with respect to the abuse report; the question of causation turned on unresolved factual disputes. The court could not find as a matter of law that the school superintendent would have denied tenure irrespective of the abuse report, where there was no pattern of bad evaluations, complaints, warnings, no specific instance of misconduct, and no documentation of the decision-making process prior to learning of the abuse report. "'Were we to accept the proposition that the cat'spaw theory applies to determining liability and lost wages, but not to liquidated damages, that would have the result of treating less favorably for purposes of damages calculations plaintiffs who utilize the cat's paw theory than those who do not. We see no basis in the statute for such a result.'" The individual defendants were not subject to qualified immunity from Nagle's suit, the court stating that they knew or should have known that retaliation for protected speech would violate an employee's First Amendment rights and they had no reason to think that speech protected in Virginia in 2004 would not be protected in New York in 2007. The court deemed it advisable to remand the question of the school district's liability, which was not briefed and for which the Second Circuit had neither accepted nor rejected the cat's paw approach. Marez, 688 F.3d at 965, quoting Rasic v. City of Northlake, 2010 WL 3365918, *14 (N.D. Ill., August 24, 2010). The court concluded: "Because we impute Cook's bad faith to Saint-Gobain for purposes of liability, we see no reason to decline to impute her bad faith to Saint-Gobain for purposes of awarding liquidated damages." Marez, 688 F.3d at 965. 14. Romans v. Mich. Dept. Human Serv., 668 F.3d 826 (6th Cir. 2012). 13. Nagle v. Marron, 663 F.3d 100 (2nd Cir. 2011). Romans, a white male, alleged violations of Title VII by race discrimination, and of the Family and Medical Leave Act (FMLA) by interference and retaliation. The trial court granted the employer's motion for summary judgment. The Sixth Circuit affirmed in part on the Title VII claim and reversed in part on the FMLA claim. Summary judgment properly granted on Title VII claim; genuine issue of material fact remained on FMLA claim. Court reversed summary judgment in Section 1983 First Amendment retaliation claim; trial court to consider school district's liability under cat's paw approach. Nagle sued the employer and named individuals pursuant to 42 U.S.C. § 1983 alleging retaliatory denial of tenure for exercise of her First Amendment rights. The trial court granted the employer's and named individuals' motions for summary judgment. The Second Circuit reversed. The court found that Romans failed to provide direct evidence of discriminatory animus and could not show direct evidence of discrimination through the cat's paw theory. The court concluded that Romans failed to demonstrate any specific way in which he was treated differently than a similarly situated non-white employee, thus, he could not satisfy the fourth prong of the prima facie test. Nagle had reported her signature was forged on her teaching observation report, which ultimately resulted in an assistant principal's resignation; and Nagle had reported student abuse by a teacher in another school district four years 52 RETURN TO TABLE OF CONTENTS Romans argued that his situation - in which he sought leave to go to the hospital in order to make a decision with his sister regarding whether his mother should continue on life support - was supported by FMLA regulations (29 C.F.R. § 825.116(b)) requiring an employee must be "needed to care for" the family member in order to be entitled to FMLA leave. The court agreed. Romans created a genuine issue of material fact on both the interference and retaliation claims based on testimony he had a volunteer available to take over his position at work. causing Smith's discharge, there was no evidence that she did so because he had complained about discrimination. With respect to Bray's participation in Smith's discharge, the court stated, on a question of first impression, the issue was whether the subordinate (Bray) with a retaliatory motive could be individually liable under Section 1981 for causing the employer to retaliate against another employee. The court answered yes; in general, the same standards governed intentional discrimination claims under Title VII, Section 1981, and Section 1983, while recognizing individual cat's paw liability under Section 1981 was consistent with this circuit's parallel approaches to those statutes. Applying the theory to the facts that Bray was substantially involved at every stage of Smith's workplace controversies, the court found that Smith presented enough evidence to create a genuine issue of fact as to whether Bray intentionally helped cause the adverse employment action against him. 15. Simmons v. Sykes Enter., 647 F.3d 943 (10th Cir. 2011). Simmons sued the employer for wrongful discharge in violation of the Age Discrimination in Employment Act (ADEA). The trial court granted the employer's motion for summary judgment. The Tenth Circuit affirmed. One issue was the application of subordinate bias, or cat's paw, liability in Staub v. Proctor Hosp., 131 S. Ct. 1186 (2011) to ADEA cases. The court noted that in Title VII or USERRA actions for discrimination, the acts of discrimination need only be the motivating cause of the employment action; but under the ADEA the acts of age discrimination must be the "but-for" cause of the employment action. Gross v. FBL Fin. Servs., Inc., 129 S. Ct. 2343 (2009). The court agreed with the trial court that there was not enough admissible evidence showing that Bray acted with a retaliatory motive. The court noted that in summary judgment practice a problem arose when the moving party asserts in the reply brief that the opposing party was relying on inadmissible evidence. The court suggested an opposing party's surreply brief, a hearing after briefing on summary judgment motions, or the court stated "[i]f a district court does not provide an opportunity to be heard, our doors will be open to consider those arguments." The court concluded that applying Staub directly to an age-discrimination case would result in application of a lesser standard of proof for subordinate bias liability (motivating factor v. but-for cause). The court required in ADEA cases of subordinate bias that animus be the "but-for" cause of the adverse employment action. The court stated the undisputed facts permitted only the inference that the employer would have discharged Simmons for violating company policy and for lack of trust with confidential information. 17. Haire v. Bd. of Supervisors of Louisiana State Univ. Agricultural and Mechanical College, ___ F.3d ___, 2013 WL 2211656 (5th Cir., May 21, 2013) Subordinate’s stated wish for Plaintiff’s termination coupled with stated expressions of gender-based animus could be imputed to decisionmaker if the subordinate “played a role” in the ultimate decision. 16. Smith v. Bray, 681 F.3d 888 (7th Cir. 2012). Martha Haire was a long-time LSU police officer. When the campus Police Chief retired, Haire–believing herself qualified to replace him–applied for the job. LSU policy “strongly encouraged” internal promotions, and also stated that affirmative efforts should be made to identify female and minority candidates for interim appointments. LSU never responded to her application, and it instead appointed a man, Durham, as interim Chief. The permanent position remained unfilled for another two years while LSU’s new Chancellor, Martin, searched for a replacement. A biased subordinate may be individually liable under § 1981 for causing an employer to retaliate against another employee. Smith sued Bray, the human resources manager, pursuant to 42 U.S.C. § 1981 for retaliation in contractual relationship. The trial court granted Bray's motion for summary judgment. The Seventh Circuit affirmed. The trial court did not find sufficient evidence that Bray had participated in Smith's discharge; and, even if Bray had contributed to 53 RETURN TO TABLE OF CONTENTS During this time, Haire began facing hostility from Lawrence Rabalais, an LSU Police Department major, and rival for the Chief position. The evidence established that Rabelais told another co-worker that he wanted “to get rid of” Haire and that, “if a woman was appointed to the position of Chief, Rabalais would quit.” B. Other Decisions 1. Lentine v. State of Alaska, 282 P.3d 369 (Alaska 2012). Cat’s pay theory did not apply; employer did not violate the implied covenant of good faith and fair dealing in discharging employee. The Chancellor thereafter named Rabalais as interim Chief in place of Durham, despite the fact that Rabalais lacked an undergraduate degree the position required. Haire sued, claiming gender discrimination, among other things. After discharge and exhausting the collective bargaining agreement (CBA) grievance procedure, Lentine sued the public employer for violation of the implied covenant of good faith and fair dealing alleging: (1) a biased supervisor was involved in the discharge; (2) the employer's investigation was conducted unfairly; and (3) disparate treatment. The trial court ruled in favor of the employer. LSU moved for summary judgment, arguing among other things that Haire could not show that her gender was a motivating factor as to the failure to promote her to Chief of Police. The trial court granted the motion, Haire appealed, and the Fifth Circuit reversed. The Alaska Supreme Court affirmed. The court concluded the trial court did not err in finding Lentine did not prove a subjective breach of the implied covenant: (1) Lentine had not shown that employee Thomson was actually motivated by bad faith and (2) that Thomson played a significant role in the decision to dismiss her. Nor did the trial court err in finding Lentine did not prove an objective breach of the implied covenant: (1) Lentine did not establish that there was confusion about the scope of the investigation and (2) the comparator did not commit the same infraction as Lentine - falsifying information on a timesheet. The court noted that the "cats paw" doctrine did not apply where Lentine did not allege any discriminatory motive, only personal animus. Because LSU argued that the decisions were made by Chancellor Martin, and Haire had no proof of his bias, the Fifth Circuit considered the question under the Staub standard: As the district court and LSU point out, the ultimate decision to hire someone other than Haire was made by Chancellor Martin, not Rabalais, and the record does not indicate that Martin directly engaged in any discrimination or made any remarks regarding Haire’s gender. Under the “cat’s paw” theory of liability, however, it is possible that Rabalais’s remarks that he wanted “to get ride of” Haire and that he would resign if a female were appointed Chief may be imputed to Martin, the formal decisionmaker, if Rabalais played a role in the ultimate selection. 2. Walsh v. Town of Millinocket, 2011 ME 99, 28 A.3d 610 (Maine 2011). Walsh sued the employer (town council) for wrongful discharge by elimination of her position in violation of the Maine Whistleblower Protection Act (WPA). The jury found in favor of Walsh. The Maine Supreme Judicial Court affirmed. The issue was whether a change in a plaintiff's burden of pleading or proof was required when it was alleged that a discriminatory act or discriminatory animus of one or a minority of members of a multi-member decision-making body was a motivating factor for an adverse employment action. The court answered no. Hair, 2013 WL 2211656 at *6 (footnote omitted). Because the evidence did in fact establish “that Rabalais, a party demonstrating discriminatory animus, ‘had influence . . . over the official decisionmaker’, the controlling case law made it proper to impute Rabalais’s discriminatory attitudes to the formal decisionmaker. Id., quoting Russell v. McKinney Hosp. Venture, 235 F.3d 219, 226 (5th Cir. 2000) (emphasis added by Haire court). “Consequently, the district court erred by holding that Rabalais’s discriminatory animus cannot be imputed to Martin for the purpose of creating an issue of disputed fact. Relying primarily on Staub v. Proctor Hosp., 131 S. Ct. 1186 (2011), the court stated that a causal link between the protected activity and the adverse employment action could be established under the "cat's-paw" theory of liability if the plaintiff demonstrated that an improper motive or discriminatory animus of one member of a multi-member 54 RETURN TO TABLE OF CONTENTS council or commission was a motivating factor or a substantial cause for the adverse employment action. The court concluded the evidence in the record supported the jury's verdict. 55 RETURN TO TABLE OF CONTENTS APPENDIX 4 FMLA BEST PRACTICES CHECKLIST A. EMPLOYER COMPLIANCE Make certain that the FMLA leave plan is coordinated with and does not violate the applicable laws of each state or local government which has an FMLA leave statute. Be prepared to provide the explanation of rights and obligations under the FMLA to employees taking leave. Establish the 12-month period for measuring FMLA leave entitlement and communicate it to employees. Any of the following measurements may be applied to the 12-month period: Review and update employee handbooks, personnel manuals and policies, and insurance policies, so that they refer to the plan and are in compliance with the Act. Bear in mind that the Act will complicate COBRA compliance. Pay special attention to COBRA issues involving employees who take family or medical leave. If the employer has an ERISA-covered employee benefit plan providing health care coverage, summaries of material modifications relating to the Act's required continuation of benefits must be filed with the Department of Labor and distributed to participants and beneficiaries within 210 days after the end of the plan year in which the modification occurred. Determine whether or not you are a covered employer. If you are a covered employer, post the required Department of Labor’s (DOL) notice at each worksite. The notice must be posted in a conspicuous and prominent place where it can be readily seen by employees and applicants. Include an explanation of the FMLA, including employees’ right and employers’ responsibilities, in the employee handbook. If you do not have an employee handbook, prepare an information sheet to give to employees (the DOL’s Fact Sheet can be used for this purpose). the calendar year; • any fixed 12-month “leave year” such as a fiscal year, a year required by state law, or a year starting on the employee’s “anniversary” date; • the 12-month period measured forward from the date any employee’s first FMLA leave begins; or • a “rolling” 12-month period measured backward from the date an employee uses FMLA leave. NOTE: The recommended method for measuring leave is the rolling period. Be sure to establish a different 12-month period for Servicemember caregiver leave. Training in the requirements imposed by the Act should be provided to all HR staff , managers and supervisors. • Review all of the employment policies and procedures to ensure compatibility with the law. If not already accomplished, employers should adopt a family leave policy tailored to their own workplace practices and, perhaps most importantly, it is critical that this policy be communicated to employees. Employees can not be bound by procedures of which they have no knowledge. # Are you providing the updated FMLA policy to all new hires? # Have you provided the FMLA policy to employees in the language they will best understand? 56 RETURN TO TABLE OF CONTENTS # # Have you posted the new DOL FMLA poster in the language employees will best understand? Employee has: • At least 12 months cumulative service over the past seven years • Worked at least 1250 hours in prior 12 months Make certain that your recordkeeping system can accommodate a family leave designation. < Is the individual an employee, as opposed to an independent contractor? Determine when, and under what circumstances, employees will be required to substitute available paid leave for FMLA leave. < Is there a possible joint employment relationship with another company regarding this individual? Ensure that your benefit plans can be administered in a way that complies with the FMLA. Company had at least 50 employees within a 75 mile radius. Establish a procedure for collecting premiums or other payroll deductions while an employee is on leave. If the employee fails to pay his/her share of the premium, the employer must provide written notice stating that coverage will be canceled unless the premium is paid by a specified date. This notice must be given at least 15 days prior to cancellation of coverage. Is employee eligible for FMLA leave? YES ___________ NO _____________ Keep medical information, including all DOL FMLA Forms, separate from the employee’s regular personnel file in a place where it will remain confidential. B. Have you posted the new DOL FMLA poster in all work sites, whether or not there are eligible employees at a work site? If NO, give employee the Notice of Eligibility and Rights & Responsibilities (WH-381) form indicating the basis for ineligibility. If YES, continue through the checklist. Has this employee used FMLA leave during this 12 month period? YES _________ NO ________ FMLA TRIGGERING EVENTS The employee requests leave: If YES, when did the leave begin? ___________________________ 30 days notice is required when the need for leave is foreseeable. When advance notice is not possible, the employee must provide notice as soon as practical. º OR » The employee has called in sick three days and/or requires time off work due to serious health condition for self or immediate family member. º OR » The employer is “on notice” that an employee’s absences may be for an FMLA qualifying reason. Remaining entitlement for FMLA lave: _________ weeks. (Remember that the full 26-weeks is available for a request for Servicemember Family Leave when it is first requested.) Requested Start Date for FMLA ___________________________ Reason(s) for Leave: G G G C. DETERMINATION OF ELIGIBILITY FMLA leave is normally limited to 12 weeks in a 12-month period (or 26 weeks if Servicemember Family Leave). Leave 57 RETURN TO TABLE OF CONTENTS pregnancy; to care for a newborn; to care for a newly adopted child, or a child recently placed into employee’s foster care. < If so, the employee must plan to take leave all at once and within 12 months of the event, unless a different leave is mutually agreed to with the company. Employee is told: G G < G G G G G Does the employee's spouse also work for the company? If so, they can be required to split the total amount of FMLA leave for this reason between them. They are not both eligible for the full amount of available leave. As soon as possible, and within five (5) days of receiving notice that an employee has requested FMLA leave or may have an FMLA qualifying condition, issue to the employee the Employee Information Packet, which contains: FMLA Notice of Eligibility and Rights and Responsibilities (completed by the employer) (DOL Form WH-381); and FMLA Certification of Health Care Provider form for Employee’s Serious Health Condition (WH-380E); or Employee’s Serious Health Condition (DOL Form WH-380E): The employee completes Section II of DOL Form WH-380E and gives it to HR. HR and the employee should discuss at that time the use of accrued paid leave and timekeeping. Any use of paid leave should be consistent with existing leave policy guidelines. An employee will not be denied FMLA leave, if otherwise eligible, based upon failure to submit the FMLA forms. HR completes Section I of DOL Form WH380E and provides a copy to the employee. HR must staple a copy of the employee’s current job description to the form. The employee then has the treating physician or health care provider complete the Section III of DOL Form WH380E. The employee must Form WH-380E to HR within 15 calendar days of the request for certification. employee’s own serious health condition (other than pregnancy); to care for a child, spouse, or parent with a serious health condition to attend to a qualifying exigency to care for a covered service member Other: ___________________________________ ___________________________________ 1. 2. FMLA Certification of Health Care Provider for Family Member’s Serious Health Condition Form (WH-380F); or The employee can call Human Resources to discuss FMLA leave. The employee can keep the FMLA Notice of Eligibility and Rights and Responsibilities. Serious Health Condition of Employee’s Family Member (DOL Form WH-380F): Employee Information Packet provided to employee on ___________(date). By: _______________(initials of staff member) The employee completes Section II of DOL Form WH-380F and gives it to HR. HR and the employee should discuss at that time the use of accrued paid leave and timekeeping. Any use of paid leave should be consistent with existing leave policy guidelines. An employee will not be denied FMLA leave, if otherwise eligible, based upon failure to submit the FMLA forms. HR completes Section I of DOL Form WH380F and provides a copy to the employee. Method: In Person ________ Certified Mail _________ Email ___________ The employee then has the family member’s treating physician or health care provider complete the Section III of FMLA Certification of Qualifying Exigency form (WH-384); or FMLA Certification for Serious Injury or Illness of Covered Service member form (WH-385) 58 RETURN TO TABLE OF CONTENTS DOL Form WH-380F. The employee must submit Form WH-380F to HR within 15 calendar days of the request for certification. 3. Military Qualifying Exigency (DOL Form WH384): The employee completes Section II of DOL Form WH-384 and gives it to HR. If the leave is requested for a qualifying exigency, the employee will need to provide the basis for the qualifying exigency leave request. If the qualifying exigency involves meeting with a third party, the employee will need to provide sufficient information to enable the employer to verify the meeting at its discretion. Copies of military orders or other documents supporting the basis for the request should be attached to the certification form. HR completes Section I of DOL Form (WH384) and provides a copy to the employee. Are you permitting the spouse, children, or parents of a servicemember (in the National Guard or Reserves) called to active duty up to 12 weeks of FMLA active duty leave in the following circumstances: G • • • • • C If you are unable to make certain of the military-related determinations contained below in Part B, you are permitted to rely upon determinations from an authorized DOD representative (such as a DOD recovery care coordinator). Are you permitting the spouse, child, parent or "next of kin" to take up to 26 weeks in a single 12 month period of unpaid FMLA leave to care for a seriously ill or injured servicemember? Are you defining "next of kin" for the purposes of caregiver leave as the servicemember's nearest blood relative, then ranked in order of siblings, grandparents, aunts and uncles, and first cousins. Are you seeking to determine whether a servicemember has designated in writing another blood relative who should be considered "next of kin." short notice deployment; C 4. Health Care Provider or a Health Care Provider who is either: (1) a U.S. Dept. of Veterans Affairs (“VA”) health care provider; (2) a DOD TRICARE network authorized private health care provider; or (3) a DOD non-network TRICARE authorized private health care provider. military events and related activities; childcare and school activities; financial and life arrangements; counseling; rest and recuperation; post-deployment activities; and other activities agreed to by the employer and employee. D. DESIGNATION OF FMLA LEAVE (DOL FORM WH-382) Serious Injury or Illness of Covered Servicemember (DOL Form WH-385): The employee and/or the covered servicemembers for whom the employee is requesting leave completes Section I of DOL Form WH-385 and gives it to HR. Section II of DOL Form Wh-385 must be completed by U.S. Dept. of Defense (“DOD”) If a servicemember has not designated in writing the "next of kin" are you defining "next of kin" in the order of priority as set forth in the regulations? Upon receipt of the employee’s documentation, HR should confirm that the certification has been returned within 15 days from the date of the request. If FMLA is denied because certification was late, be sure the employee was clearly notified of time frame and the consequences for failure to return certification on time. If certification is not late, evaluate whether the leave requested is protected by the FMLA. The employee, his or her supervisor and the payroll/benefits dept. will be notified if the request is approved, provisionally approved, or denied, in writing within five (5) days after receipt of the certification. 59 RETURN TO TABLE OF CONTENTS HR will only tell the supervisor that the employee has been approved for FMLA leave for a designated time period and/or intermittently. HR will not and should not tell the supervisor any information regarding the underlying medical reasons why leave was granted. If the certification is approved, the FMLA Designation Notice (completed by the employer) (DOL WH-382) should be sent to employee’s home address via certified mail. G G If the certification is incomplete or insufficient, the employer shall state in writing what additional information is necessary to make the certification complete and sufficient. The employer must provide the employee with seven (7) calendar days (unless not practicable under the particular circumstances despite the employee's diligent good faith efforts) to cure any such deficiency. If the deficiencies specified by the employer are not cured in the resubmitted certification, the employer may deny the taking of FMLA leave. • • • E. A certification is considered incomplete if the employer receives a certification, but one or more of the applicable entries have not been completed. G Consult with legal counsel prior to taking any disciplinary action. G Note: the 15-day follow-up letter is not required by law, but may show that the employer engaged in good faith compliance efforts, if the employee later files an FMLA claim. ADMINISTRATION OF FMLA LEAVE Are you telling employees that they must comply with the company's customary call in procedures if they are absent for reasons that may be FMLA qualifying (unless unusual circumstances exist)? Are you treating all forms of paid leave the same for FMLA purposes? Are you taking into account employees' FMLA absences when determining perfect attendance or other similar performance bonuses if you also do so for non-FMLA related absences? The employee begins approved FMLA leave. Create an FMLA log and track the hours used by the employee for approved FMLA leave. If necessary, create an intermittent FMLA log and track the hours used by the employee. A certification is considered insufficient if the employer receives a complete certification, but the information provided is vague, ambiguous, or non-responsive. # A certification that is not returned to the employer is not considered incomplete or insufficient, but constitutes a failure to provide certification. If employee fails to return the Certification of Health Care Provider within 15 days from the date of the request, HR Resources should send a 15-day follow-up letter, giving the employee another opportunity to provide the certification. If the medical certification is not produced, the absences should be denied under the Family and Medical Leave policies and may be considered unapproved. Are you tracking intermittent or reduced schedule FMLA leave using an increment no greater than the shortest period of time that the company uses to account for other forms of leave, provided that amount is not greater than one hour? Conversion to Leave without Pay: If employee exhausts paid leave, then designate leave as unpaid, or the equivalent of ”Leave Without Pay” in the payroll system. HR will send a per pay period billing statement to the employee’s home regarding the employee's portion of insurance premiums & some elected voluntary benefits during unpaid status. Payments will need to be submitted to [insert company or benefits entity]. 60 RETURN TO TABLE OF CONTENTS F. Depending on the length of FMLA leave, employee may require periodic recertification. Use the FMLA Certification forms for all recertifications. Update the FMLA log and send the employee a notification each month as to how many hours of FMLA have been used, and how many remain. Employees should be told, in writing, their absences are being counted as FMLA. All FMLA supporting documentation will be maintained as confidential medical records in a secure file separate from the employee's personnel file. Human Resources will maintain FMLA records for at least three (3) years. Check with legal counsel to determine any accommodation obligations under the ADA and ADAAA. FMLA RETURN TO WORK Are you considering whether to require a fitness-for-duty examination specifically to address an employee's an ability to perform the essential functions of the job prior to an employee's return to work after FMLA leave? If you have job safety concerns, are you requiring a fitness-for-duty certification before permitting an employee on intermittent leave to return to work? The employee returns to work. If required, collect and evaluate Return to Work Certification immediately upon employee's return to work. HR must provide the employee with a copy of his/her current job description. The employee must provide the job description to the health care provider along with the Return to Work Certification. If the employee is certified to return to work with limited or light duty restrictions, determine availability prior to the employee’s return to duties. If FMLA leave is not expired, a certified request for reduced hours must be granted. G Are you ensuring that light duty work is not counted against an employee's FMLA entitlement? G Are you ensuring that an employee's job restoration rights are held in abeyance while he or she is performing light duty work? 61 RETURN TO TABLE OF CONTENTS APPENDIX 5 EEOC FACT SHEET ON RETALIATION http://www1.eeoc.gov/laws/types/facts-retal.cfm?renderforprint=1 U.S. Equal Employment Opportunity Commission C Facts About Retaliation An employer may not fire, demote, harass or otherwise "retaliate" against an individual for filing a charge of discrimination, participating in a discrimination proceeding, or otherwise opposing discrimination. The same laws that prohibit discrimination based on race, color, sex, religion, national origin, age, and disability, as well as wage differences between men and women performing substantially equal work, also prohibit retaliation against individuals who oppose unlawful discrimination or participate in an employment discrimination proceeding. Adverse actions do not include petty slights and annoyances, such as stray negative comments in an otherwise positive or neutral evaluation, "snubbing" a colleague, or negative comments that are justified by an employee's poor work performance or history. Even if the prior protected activity alleged wrongdoing by a different employer, retaliatory adverse actions are unlawful. For example, it is unlawful for a worker's current employer to retaliate against him for pursuing an EEO charge against a former employer. In addition to the protections against retaliation that are included in all of the laws enforced by EEOC, the Americans with Disabilities Act (ADA) also protects individuals from coercion, intimidation, threat, harassment, or interference in their exercise of their own rights or their encouragement of someone else's exercise of rights granted by the ADA. Of course, employees are not excused from continuing to perform their jobs or follow their company's legitimate workplace rules just because they have filed a complaint with the EEOC or opposed discrimination. For more information about adverse actions, see EEOC's Compliance Manual Section 8, Chapter II, Part D. There are three main terms that are used to describe retaliation. Retaliation occurs when an employer, employment agency, or labor organization takes an adverse action against a covered individual because he or she engaged in a protected activity. These three terms are described below. Covered Individuals Covered individuals are people who have opposed unlawful practices, participated in proceedings, or requested accommodations related to employment discrimination based on race, color, sex, religion, national origin, age, or disability. Individuals who have a close association with someone who has engaged in such protected activity also are covered individuals. For example, it is illegal to terminate an employee because his spouse participated in employment discrimination litigation. Adverse Action An adverse action is an action taken to try to keep someone from opposing a discriminatory practice, or from participating in an employment discrimination proceeding. Examples of adverse actions include: C C any other action such as an assault or unfounded civil or criminal charges that are likely to deter reasonable people from pursuing their rights. employment actions such as termination, refusal to hire, and denial of promotion, Individuals who have brought attention to violations of law other than employment discrimination are NOT covered individuals for purposes of anti-discrimination retaliation laws. For example,"whistleblowers" who raise ethical, financial, or other concerns unrelated to employment other actions affecting employment such as threats, unjustified negative evaluations, unjustified negative references, or increased surveillance, and 62 RETURN TO TABLE OF CONTENTS C discrimination are not protected by the EEOC enforced laws. Serving as a witness in an EEO investigation or litigation. A protected activity can also include requesting a reasonable accommodation based on religion or disability. Protected Activity Protected activity includes: For more information about Protected Activities, see EEOC's Compliance Manual, Section 8, Chapter II, Part B - Opposition and Part C - Participation. Opposition to a practice believed to be unlawful discrimination: Opposition is informing an employer that you believe that he/she is engaging in prohibited discrimination. Opposition is protected from retaliation as long as it is based on a reasonable, good-faith belief that the complained of practice violates anti-discrimination law; and the manner of the opposition is reasonable. Examples of protected opposition include: C Complaining to anyone about alleged discrimination against oneself or others; C Threatening to file a charge of discrimination; C Picketing in opposition to discrimination; or C Refusing to obey an order reasonably believed to be discriminatory. Examples of activities that are NOT protected opposition include: C C Actions that interfere with job performance so as to render the employee ineffective; or Unlawful activities such as acts or threats of violence. Participation in an employment discrimination proceeding. Participation means taking part in an employment discrimination proceeding. Participation is protected activity even if the proceeding involved claims that ultimately were found to be invalid. Examples of participation include: C Filing a charge discrimination; C Cooperating with an internal investigation of alleged discriminatory practices; or of employment 63 RETURN TO TABLE OF CONTENTS APPENDIX 6 DOL FACT SHEET #77A: FLSA RETALIATION http://www.dol.gov/whd/regs/compliance/whdfs77a.htm U.S. Department of Labor Wage and Hour Division December 2011 Fact Sheet # 77A: Prohibiting Retaliation Under the Fair Labor Standards Act (FLSA) which the employee’s work and the employer are not covered by the FLSA. This fact sheet provides general information concerning the FLSA’s prohibition of retaliating against any employee who has filed a complaint or cooperated in an investigation. For additional information on FLSA Coverage, please visit Fact Sheet 14 at http://www.dol.gov/whd/regs/ compliance/whdfs14.htm The Wage and Hour Division of the Department of Labor administers and enforces the FLSA, the federal law of most general application concerning wages and hours of work. All covered nonexempt employees must be paid not less than the current federal minimum wage for all hours worked and overtime pay, at time and one half the regular rate, for all hours worked over 40 in a workweek. The Wage and Hour Division investigates FLSA violations through its complaint-based and directed investigation programs. Section 15(a)(3) also applies in situations where there is no current employment relationship between the parties; for example, it protects an employee from retaliation by a former employer. Enforcement Any employee who is “discharged or in any other manner discriminated against” because, for instance, he or she has filed a complaint or cooperated in an investigation, may file a retaliation complaint with the Wage and Hour Division or may file a private cause of action seeking appropriate remedies including, but not limited to, employment, reinstatement, lost wages and an additional equal amount as liquidated damages. Prohibitions Section 15(a)(3) of the FLSA states that it is a violation for any person to “discharge or in any other manner discriminate against any employee because such employee has filed any complaint or instituted or caused to be instituted any proceeding under or related to this Act, or has testified or is about to testify in any such proceeding, or has served or is about to serve on an industry committee.” Where to Obtain Additional Information For additional information, visit our Wage and Hour Division Website: http://www.wagehour.dol.gov and/or call our toll-free information and helpline, available 8 a.m. to 5 p.m. in your time zone, 1-866-4USWAGE (1-866-487-9243). Employees are protected regardless of whether the complaint is made orally or in writing. Complaints made to the Wage and Hour Division are protected, and most courts have ruled that internal complaints to an employer are also protected. This publication is for general information and is not to be considered in the same light as official statements of position contained in the regulations. Coverage U.S. Department of Labor Frances Perkins Building 200 Constitution Avenue, NW Washington, DC 20210 Because section 15(a)(3) prohibits “any person” from retaliating against “any employee”, the protection applies to all employees of an employer even in those instances in 64 RETURN TO TABLE OF CONTENTS 1-866-4-USWAGE TTY: 1-866-487-9243 APPENDIX 7 IDENTIFYING APPLICANT SKILLS: 50 GREAT INTERVIEW QUESTIONS In addition to giving job-specific tests, the best way to tell if applicants carry the skills to perform specific tasks is to ask very direct questions about how they have used each skill in the past. Here are some sample questions hiring managers can use to spot whether these 10 important “soft” skills are present: 12. Did you ever have to deal with a co-worker who wasn’t pulling his/her weight? What did you do about it? E. 13. Have you ever had to introduce a new idea or process at work? What approach did you take to gain cooperation? A. INITIATIVE 1. Give me an example of a time you did more than was required in your job. 2. What have you done to make your job easier or more rewarding? 3. Describe a situation where you found you had a serious problem. What did you do to solve it? 4. What do you do differently than other people in your occupation? 14. Tell me about a time you had to gain the cooperation of a group over which you had little authority. How effective were you? 15. Describe how you helped someone solve a problem. What did you do? F. 5. B. LEADERSHIP PERSUASIVENESS 16. What was the best idea you’ve ever sold to a superior? How did you do it? Tell me about an idea you generated. How did it work out? 17. What was the best idea you ever failed to sell? What was the problem? DECISION-MAKING 6. What was the toughest decision you made recently? Why? 7. Describe a work-related problem you had to face recently. What procedures did you use to deal with it? 18. What strategies have you found work best when trying to sway someone to your point of view? G. PLANNING/TIME MANAGEMENT 19. Describe a typical workweek. How did you plan the week’s activities? 20. How do you determine which activities have top priorities on your time? C. COMMUNICATION SKILLS 8. 9. Describe when you had to pitch a proposal. How did you do … and why do you think it went that way? 21. How do you develop short-range plans for your organization? Long-range? Have you ever given instructions and then learned he or she did it wrong? Why did that happen? 22. How many hours a week do you find it critical to get your job done? 10. Have you ever done any public speaking? How did it work out? H. SALES SKILLS 23. Describe the primary types of people to whom you sell. What approach do you use for each group? D. INTEGRITY 11. Do you feel some rules should be obeyed more stringently than others? 65 RETURN TO TABLE OF CONTENTS 24. What’s the best method you’ve found to obtain new prospects? K. OTHER GOOD GENERAL QUESTIONS 41. What skills do you enjoy using? I. 25. How do your selling techniques differ from those of others you know? 42. What is your greatest strength? 26. Describe your toughest sales experiences. Did you make the sale? 43. What’s the greatest asset you currently bring to your company? 27. Describe a typical sales encounter. Exactly what would you say to convince a customer to buy? 44. What is your greatest weakness, and what have you done to overcome it? 28. Define your closing style. 45. Why should I hire you? SUPERVISION 46. What makes you stand out? 29. What have you done to make your group work more efficiently? 47. If you started tomorrow, how could you contribute right away? 30. What is the No. 1 thing that distinguishes a superior employee from a typical one? 48. Are you familiar with our corporate culture? How would you fit in? 31. How do you stay in the information loop and monitor your staff’s performance? 49. How would you spend day #1? 50. What do you feel an employer owes its employees ... and vice versa? 32. How do you confront subordinates when results are unacceptable? 33. Give me an example of your ability to facilitate progressive change within your organization. J. TECHNICAL SKILLS 34. How did you gain the technical knowledge you need to do your job? 35. Give me an example of an especially difficult assignment or project. What was your role? What did you do? 36. Have you received any commendations for your performance? 37. What is the most important development in your field today? What impact do you think it will have? 38. How do you keep informed about what’s happening in your field? 39. To what job-related organizations do you belong? What seminars have you attended? 40. What job-related publications do you normally read? 66 RETURN TO TABLE OF CONTENTS APPENDIX 8 INTERVIEW MYTHS AND MAYHEM: 50 OFF-LIMITS INTERVIEW QUESTIONS Job interviews present a minefield of legal problems. One wrong question could spark a discrimination lawsuit. That is why you should never "wing it" during interviews. Instead, create a list of interview questions and make sure every question asks for job-related information that will help in the selection process. 10. Do you have any debts? 11. Do you belong to any social or political groups? 12. How much and what kinds of insurance do you have? 13. Where you born? Where were your parent’s born? Federal and state laws prohibit discrimination on the basis of an applicant's race, color, national origin, religion, sex, age or disability. Some state laws also prohibit discrimination based on factors such as marital status or sexual orientation. If you ask a job applicant a question specifically relating to one of those characteristics, you're subject to being sued. 14. What is your native language? 15. What is your race or ethnicity? Are you biracial or mixed? 16. Does your religion prevent you from working weekends or holidays? Every question you ask should somehow relate to this central theme: "How are you qualified to perform the job you are applying for?" Managers usually land in trouble when they ask for information that's irrelevant to a candidate's ability to do the job. 17. Do you attend church regularly? 18. Have you ever been arrested? 19. Have you ever filed for bankruptcy? The hiring process is time-consuming, exhausting and distracting. Yet if you make a mistake, the consequences could be damaging … professionally and financially. 20. I need a list of all the organizations, clubs, societies, and lodges to which you belong. To avoid the appearance of discrimination during interviews, do not ask the following questions: The following questions could result in a post employment retaliation claim: 1. Are you married? Divorced? 21. Have you ever been fired because you filed a Title VII claim? 2. What is your maiden name? 3. If you're single, are you living with anyone? 4. How old are you? What is your birthday? 5. Could you work for someone who is younger than you? 22. Have you ever filed a Title VII discrimination charge? 23. Have you ever filed a discrimination lawsuit? 24. Have you ever filed a worker's compensation claim? 6. 7. 25. Have you ever filed a claim with the Department of Labor? When did you graduate from high school? College? Graduate school? 26. Have you ever filed a grievance? grievance? Do you have children? If so, how many and how old are they? 8. Do you own or rent your home? 9. What church do you attend? Filed a union 27. Have you ever been a union member? The following questions could result in an ADA, ADAAA, FMLA or GINA lawsuit: 28. Do you suffer from an illness or disability? 67 RETURN TO TABLE OF CONTENTS 29. Have you ever had or been treated for any of these conditions or diseases? (followed by a checklist) 48. Are you likely to take time off under the Family and Medical Leave Act? 30. Have you been hospitalized? What for? 49. Are you planning on getting pregnant anytime soon? 31. Have you ever been treated by a psychiatrist or psychologist? 50. Are you pregnant? Final point: If a job candidate reveals information that you're not allowed to ask, don't pursue the topic further. The "she brought it up" excuse won't fly in court, so change the subject right away. 32. Have you had a major illness recently? 33. How many days of work did you miss last year because of illness? 34. Do you have any disabilities or impairments that might affect your performance in this job? 35. Are you taking any prescribed drugs? 36. Have you ever been treated for drug addiction or alcoholism? 37. Has anyone in your family ever been diagnosed with cancer? Or any other serious diseases? 38. Do have any sick children or parents to take care of? 39. Do you suffer from or have ever been diagnosed with any mental illnesses? 40. Do you drink? How much and how often? 41. Have you taken any FMLA in the last year? How much? Many companies ask female applicants questions they don't ask males. Not smart. Here are some questions to avoid with female applicants: 42. Do you plan to get married? 43. Do you intend to start a family? 44. What are your day care plans? 45. Are you comfortable supervising men? 46. What would you do if your husband were transferred? 47. Do you think you could perform the job as well as a man? 68 RETURN TO TABLE OF CONTENTS APPENDIX 9 CHECKLIST: COUNSELING AND DISCIPLINARY ISSUES On occasion, an employee's performance may be impacted by absenteeism, a single incident (such as reported sexual harassment) or poor interpersonal relationships on the job. Corrective actions may range from simply counseling the employee to formal disciplinary procedures. 15. Has your organization enforced rules and production standards consistently? A. CONSIDERATIONS: 17. Has the employee been referred to an Employee Assistance Program, if appropriate? 1. What are the facts surrounding the episode? 2. How serious is the infraction? 3. Was the employee informed of the work rules in advance? 4. Has there been adequate warning about the inappropriate behavior? 18. Does the discipline under consideration fit the infraction? 5. Have there been similar discipline problems in the past by this employee? 6. Has the employee been made aware of the consequences of this behavior? 7. Does the employee's behavior hamper the day-to-day operation of the organization? 8. What has the history of the employee been with your organization? Has he/she been an otherwise satisfactory employee, or have there been previous documented problems or infractions of company rules? 9. 16. Have you remained uninvolved emotionally during this process? 19. Is the employee aware of appeal procedures? Have you allowed the employee to tell his or her account of the infraction? (Take clear notes). B. COUNSELING THE EMPLOYEE - DO'S AND DON'TS 1. Do not reprimand employees in the presence of others or in a public place. 2. Determine the appropriate time and place for a disciplinary meeting. 3. Investigate an incident or infraction thoroughly regardless of how the situation appears at first glance. 4. Allow the employee a chance to respond and explain the infraction. 5. Disciplinary actions should always be documented in detail. The documentation should include: • who, what, when, where, and how • the effect of the conduct as it relates to performance, job related behavior or company interest • what action will be taken because of the incident • what action will be taken in the future if another infraction occurs • the employee's recourse (if any) if he/she is in disagreement with the action 6. Evaluate the objectiveness of the disciplinary action. 10. Has the employee been provoked in any manner? 11. Have you thoroughly investigated the issue or infraction? 12. Have you obtained enough evidence to prove that the employee displayed inappropriate behavior or violated the company's policies or rules? 13. Has the investigation been fair and objective? 14. Has the investigation been timely? 69 RETURN TO TABLE OF CONTENTS 7. Evaluate the legal issues surrounding the disciplinary action. 8. Allow a third person to review the facts and proposed discipline. 9. Present the disciplinary action in a slow calm manner. 10. Listen critically and take notes. 11. Conclude the discussion and determine what will happen from that point. 12. Monitor the employee's performance and progress. 70 RETURN TO TABLE OF CONTENTS APPENDIX 10 HARASSMENT INVESTIGATION CHECKLIST CONDUCTING SEXUAL/GENERAL HARASSMENT INVESTIGATIONS: A CHECKLIST FOR EMPLOYERS 1. PRE-INVESTIGATION a. b. 2. Don’t wait for a formal complaint. If you suspect or have informal knowledge that harassment is occurring, initiate an investigation. THE INVESTIGATION a. Select the investigator carefully. C C At the preliminary/pre-investigation stage, consider a mini-investigation to determine whether to: C C Place accused on immediate leave. C Temporarily transfer employees. C Change supervisory responsibilities. C Be concerned about a safety issue. c. Identify potential witnesses. d. Do a preliminary search of available records. e. Consult current and former supervisors. f. Prepare a strategy for the investigation. C Include a timeline. C Include a chronology of witness interviews. C Schedule sufficient time for note taking between interviews. Consider someone from outside of the involved department. Be sensitive to issues about the gender of the investigator. Consider a team which includes both a male and a female. The investigator must have a reputation for trustworthiness. b. Consider including an investigator’s witness in all interviews. c. Keep contemporaneous notes throughout. d. The complainant interview: C Identify a location that allows for privacy and security. C Ask if the complainant has experienced any retaliation for filing the complaint. C Reiterate the company’s commitment to neutrality and impartiality in the investigation. C Do not promise confidentiality, but state that information will be distributed only on a need-to-know basis. g. Prepare an outline of questions. C Ask open-ended questions. h. Consult company policy and any union or arbitration agreements for possible restrictions or specific procedures. C Ask for additional witness names. C Pay attention to gestures and other nonverbal clues. C Be creative. For example, consider walking the premises where the alleged act occurred. C Find out if the alleged harasser was told that the behavior was unwelcome. i. Consider consulting with a labor and employment law attorney. 71 RETURN TO TABLE OF CONTENTS e. C Promise nothing, but clarify what the complainant expects from the investigative process. C Advise that no judgments have been made about the validity of the complaint. C Repeat the story understanding. C If the alleged harasser expresses anger, let time pass before encouraging a response to questions. Anger is a natural response. C Document the facts. Do not document your opinions. C Give full opportunity for a response to each accusation. C Don’t store the investigative notes in the personnel file. Keep in the permanent, confidential investigatory file. C If you suspect that the witness is lying, use fact-based questions to get back on track. C Ask for additional witness names. C Reiterate that retaliation against complainant or others is prohibited. to confirm your Witness interviews: C C Advise witnesses that it is a sexual/general harassment investigation required by law/company policy. 3. Review your company’s sexual/general harassment policy. CLOSING THE INVESTIGATION a. Analyze the results of the investigation. C C In reviewing the notes, ask yourself: Advise that no judgments have been made about the validity of the complaint. (1) Were the witnesses credible? C Do not promise confidentiality. – Do you know what happened based on what you’ve learned? C You may choose to keep the complainant’s name confidential. Be prepared for the witness attempting to identify the complainant. Be prepared with a response. – How do you balance the complaint a ga i n s t t he p o s s i b i l i t y t h a t sexual/general harassment did not occur? C Ask open-ended questions. b. C f. the If you suspect that the witness is lying, use fact-based questions to get back on track. C Tell the witness not to discuss the interview with others. C Reiterate that retaliation against complainant or others is prohibited. Determine the outcome: C If sexual/general harassment occurred: (1) Assess the severity. (2) At a minimum, communicate strong disapproval. the (3) Follow labor agreements and policy handbooks. Interviewing the alleged harasser: C State that this is a sexual/general harassment investigation required by law/company policy. (4) Ensure that the discipline chosen is consistent with past company practices and/or policies. C Review your company’s sexual/general harassment policy. (5) Document the disciplinary actions taken. 72 RETURN TO TABLE OF CONTENTS (6) Return to the victim for closure. (7) Return to the harasser for closure. c. d. 4. If sexual/general harassment did not occur: C Tell both the complainant and the alleged harasser (separately) that the investigation does not substantiate the complaint. C Reiterate company policy sexual/general harassment. C Remind them that retaliation is prohibited. C Encourage future reports of sexual/general harassment. prohibiting If the investigative results are unclear: C Reiterate with the principle parties the definition of sexual/general harassment and review company policy. C Continue to monitor the workplace. C Encourage future reports of sexual/general harassment. AFTER THE INVESTIGATION a. Document the results of the investigation. b. Consider redistributing the sexual/general harassment policy. c. Consider more employee training. d. If there was a suspension and the alleged harasser returns to work, advise the complainant in advance. e. Keep incident files current with wrap-up information on the investigation and subsequent activity. company’s 73 RETURN TO TABLE OF CONTENTS APPENDIX 11 SAMPLE WORKPLACE HARASSMENT POLICY 1. WORKPLACE HARASSMENT (1) Submission to or rejection of the conduct is used or is threatened to be used as a condition of employment; As a matter of policy, _______ provides a workplace and environment that is free from discrimination, harassment or retaliation based on race, color, religion, sex, national origin, age, veteran status, disability or sexual orientation or preference. (2) Submission to or rejection of the conduct is used or is threatened to be used as the basis for employment decisions; Employees are expected to maintain a productive work environment that is free from harassing or disruptive activity. No form of harassment will be tolerated. (3) The conduct has the purpose or effect of unreasonably interfering with an individual's work performance; or Each supervisor and manager has a responsibility to keep the workplace free of any form of harassment, in particular, sexual harassment. No supervisor or manager is to threaten or insinuate, either explicitly or implicitly, that an employee’s refusal or willingness to submit to sexual advances will affect the employee’s terms or conditions of employment. a. (4) The conduct has the purpose or effect of creating an intimidating, hostile or offensive working environment. Depending upon the circumstances, improper conduct also can include vulgar or offensive conversation or jokes, commenting about an employee’s physical appearance, conversation about your own or someone else’s sex life, or teasing or other conduct directed toward a person because of his or her gender which is sufficiently severe or pervasive to create an unprofessional and hostile working environment. Sexual Harassment Sexual harassment is unacceptable and will not be permitted at _______. Sexual harassment is a form of employee misconduct that includes, but is not limited to: C Unwanted physical contact or conduct of any kind, including sexual flirtations, touching, advances, or propositions; C Verbal harassment of a sexual nature, such as lewd comments, innuendos, sexual jokes or references, and offensive personal references; C Demeaning, insulting, intimidating, or sexually suggestive comments about an individual; C The display in the workplace of demeaning, insulting, intimidating, or sexually suggestive objects, pictures, graffiti, cartoons, magazines, calendars, posters, pictures, or photographs; C C b. Other Forms of Prohibited Harassment Discrimination, harassment or retaliation based on race, color, religion, national origin, age, veteran status, disability, citizenship status, sexual orientation or preference is unacceptable and will not be permitted at ______. Other forms of prohibited harassment includes, but is not limited to, discriminatory intimidation, insult, and ridicule, offensive comments, jokes, innuendoes, unwelcome touching, graffiti, offensive objects, pictures, emails, IM’s, text messages, voice mails, cartoons or other graphic material, where: (1) The conduct has the purpose or effect of creating an intimidating, hostile, or offensive work environment; Demeaning, insulting, intimidating, or sexually suggestive written, recorded, or electronically transmitted messages, voice mails, emails, IM’s, text messages, chat room and blog messages; and (2) The conduct has the purpose or effect of unreasonably interfering with an individual's work performance; or Other verbal and physical conduct of a sexual nature where: 74 RETURN TO TABLE OF CONTENTS (3) The conduct otherwise adversely affects an individual's employment opportunities. Experience has shown that most complaints can be settled by a frank discussion of the facts. Your manager or supervisor will respond to your problem during your initial discussion or submit an answer to you within seven (7) days. If the manager or supervisor is personally involved, you may begin with Step No. 2. Depending upon the circumstances, improper conduct also can include racial, ethnic and off-color joking, or offensive conversation or jokes, commenting about an employee's race or national origin, disability or perceived disability, sexual orientation or preference, physical appearance, conversation about your own or someone else's personal lifestyle or habits, or teasing or other conduct directed toward a person because of his or her race, race, color, religion, citizenship status, national origin, age, veteran status, disability, sexual orientation or preference which is sufficiently severe or pervasive to create an unprofessional and hostile working environment. c. Step 2: Talk with your manager or supervisor's immediate superior. Should the complaint fail to be settled in the first step or if the complaint involves your manager or supervisor, you should discuss the matter with your manager or supervisor's immediate superior or the Director - Human Resources within fourteen (14) days of the incident. All facts will be carefully re-examined and evaluated in an effort to settle the complaint. The second level manager or supervisor will attempt to respond within seven (7) days. Prohibited Harassment of or by Third Parties Step 3: Carry the complaint further. Any regular employee, temporary employee, independent contractor or other third-party performing work for ______ who is found to have violated the Company’s Workplace Harassment Policy shall be subject to appropriate disciplinary action up to and including termination. If you believe you have been the subject of discriminatory harassment or retaliation, you should immediately notify ________ using the Complaint Procedure set forth below. d. If no solution is reached in Step 2, continue to carry the complaint to higher levels of management or to the Director - Human Resources. An employee who is not satisfied with the result of his/her complaint may continue to present the matter to the next level of management. Each level of management will attempt to give you an answer within seven (7) days of your meeting. If your complaint is found to have merit, it will be resolved. Your Responsibilities Every report of perceived discrimination, harassment or retaliation will be fully investigated and corrective action will be taken where appropriate. Violation of this policy will result in disciplinary action up to and including termination. All complaints will be kept confidential to the extent possible, but confidentiality cannot be guaranteed. Employees who make complaints in bad faith may be subject to disciplinary action up to and including termination. Any employee who feels that he or she had been subjected to discrimination, harassment or retaliation of any kind or form has the following responsibilities: C Tell the person who is bothering you to stop. C Make a record of the incident and any witnesses. C Report the incident immediately to your supervisor, the Director - Human Resources, [insert others], the President, or any other member of _________ management. e. f. Retaliation Is Strictly Prohibited ___________ prohibits retaliation of any kind against any individual who reports: 1) discrimination; 2) harassment; 3) other inappropriate, unprofessional or unethical conduct; 4) or who participates in an investigation of such reports. Retaliation against an individual for: 1) reporting harassment, discrimination, or other inappropriate, unprofessional or unethical conduct; or 2) for participating in an investigation of a claim of harassment, discrimination or other inappropriate, unprofessional or unethical conduct is a serious violation of this policy and, like harassment, discrimination or other inappropriate, unprofessional or How to Make a Complaint The following procedures give you guidance on how to make a complaint. Step One: Talk with your manager or supervisor. If you have a complaint, within five days of the incident, present the situation to your manager or supervisor. 75 RETURN TO TABLE OF CONTENTS unethical conduct itself, will be subject to disciplinary action, up to and including immediate termination. 76 RETURN TO TABLE OF CONTENTS APPENDIX 12 CAN I GOOGLE APPLICANTS? NO!! 1. activities or other concerted and protected activities. The bottom line is that employers may obtain information during an internet search that applicants might later assume is the basis for harassment, discrimination, retaliation or another adverse employment action. The Short and Practical Answer is NO. Why? The liability risks far outweigh the minimal benefits of obtaining any particularly relevant, accurate or jobrelated information. A good best practice to follow is this: if you cannot ask about it an interview, then you cannot find out about it via social media or online search engines. 3. The critical problem is this: once the employer knows the personal information, it cannot “unring the bell.” This potential liability is why HR professionals are very concerned about these issues. In the context of pre-employment inquiries, an “internet applicant search” is defined as the use of such social media and online search engines as: Google, Bing, Safari, Facebook, LinkedIn, MySpace, Friendster, Twitter, YouTube, blogs, weblogs, texts, instant messaging, email, Skype, online commentary, and chat rooms to conduct background checks and references. There are several compelling reasons why employers should be wary of internet applicant searches. 2. Everybody Else is NOT Doing It In 2011, the Society for Human Resource Management (SHRM) conducted a study finding that, contrary to popular belief, only 26% of companies used online search engines to screen applicants; and only 18% of companies used social networking sites for that purpose.3 The study also indicated that employers listed the following reasons (among others) for not screening applicants on the internet: Discrimination Concerns First, internet searches often reveal information about an applicant’s protected status, e.g, race, sex, national origin, age, disability or handicap, sexual orientation or preference, veteran status, religion, and pregnancy simply because many people leave their social media profiles public and do not restrict access to photos and other self-identifying information. Title VII, ADA, ADAAA, ADEA, and many states (including Texas) prohibit employers from making pre-employment inquiries that are designed to reveal or disclose such protected status or information.1 C Legal risks due to concerns about discovering protected status information (66%) C Information found is unreliable (48%) C Information is not job-related (45%) The study further stated that of the small percentage of companies that use information from online search engines (26%) or social networking websites (18%) to screen candidates, few have actually used this information to disqualify job candidates. Only 15% of this group indicated that they used online search engine information to disqualify job candidates, while 30% used social networking website information to disqualify job candidates. Furthermore, FMLA, GINA, and HIPAA prohibit employers from unlawfully obtaining information about an applicant’s medical history or condition, sick leave use or other confidential health information via an internet search.2 4. Finally, the NLRA prohibits employers from finding out about an applicant’s union membership, organizing Inaccurate and Misleading Information Second, while it appears that employers have unlimited access to internet information, employers must understand 1 Title VII: Title VII of the Civil Rights Act of 1964; ADA: Americans with Disabilities Act; ADAAA: Americans with Disabilities Act Amendments; ADEA: Age Discrimination in Employment Act. 3 SHRM, SHRM Survey Findings: The Use of Social Networking Websites and Online Search Engines in Screening Job Candidates (Aug. 25, 2011), at http://www.shrm.org/ Research/ Survey Findings/Articles/Pages/TheUseofSocial NetworkingWebsitesandOnlineSearchEnginesinScreeningJobCa ndidates.aspx. 2 FMLA: Family and Medical Leave Act; GINA: Genetic Information and Nondiscrimination Act; HIPAA; Health Insurance Portability and Accountability Act. 77 RETURN TO TABLE OF CONTENTS that these alleged internet “treasure troves” often contain information that is inaccurate, misleading, out of context, and flat-out wrong. something comes up during a Google search, it is not protected by the SCA. As to GINA, the regulations prohibit any questions that can get at someone's genetic information. GINA can be implicated, therefore, if on someone's Facebook page, he or she begins talking about health information. For example, Facebook recently reported that approximately 83 million (8.7%) out of its 955 million user accounts are duplicate, misclassified and “undesirable” account profiles.4 In addition, most people today have “computer twins”, i.e., people online with the same name and date of birth. Employers cannot always be sure that what they see online actually refers to the applicant in question or is even close to being true. 5. 7. At common law, "privacy" is the legal right to be left alone. There are various forms of this right, but the one most implicated by use of social media is the "intrusion upon seclusion." One who intentionally intrudes physically or otherwise upon the solitude or seclusion of another or his private affairs or concerns is subject to liability to the other for invasion of privacy if the intrusion would be highly offensive to a reasonable person. FCRA Issues Third, social media online searches and inquiries clearly meet the definition of “third party investigative consumer reports” under the Fair Credit Reporting Act (FCRA) which is enforced by the Federal Trade Commission (FTC). In a recent blog, the FTC stated that background checks using information obtained through either online search engines or social media sites must follow the same FCRA rules that apply to the more traditional information that employers have used in the past.5 This means that employers must have the applicant’s written consent, and must provide express FCRA disclosures before such online inquiries are initiated. 6. Common Law Privacy Principles Is use of social media a protected privacy interest? It's only a matter of time before a court says it is not private, because of how many people can access most postings. Common-law privacy is "context-specific." Employees have as much privacy as you let them think they have. Privacy is a contractual right, which an employee can bargain away. 8. Best Practices for Employers Selective enforcement dooms even the best social media polices. Accordingly, employers should: Privacy Laws Governing Social Media The laws that may impact on workplace use of social media include the Stored Communications Act ("SCA"), and the Genetic Information Nondiscrimination Act ("GINA"). The SCA protects the privacy of electronic communications while they are being transmitted. So, for example, you cannot listen in on an employee's phone calls or access unopened e-mail. However, the law allows interception of communications with the employee's consent, either actual or implied. Furthermore, the SCA is not violated if someone intentionally accesses an electronic communication that is readily accessible to the general public. This means that if C Enforce social media policies consistently and fairly C Understand the discrimination, harassment and retaliation issues regarding the use of social media C Document all disciplinary actions C Justify exceptions to the rules C Abide by company rules regarding post-employment references; and C Train all managers and employees on the policy. 9. Don’t Ask for Facebook Passwords 4 Heather Kelly, 83 million Facebook accounts are fakes and dupes, CNNTECH (2012), at http://www.cnn.com/ 2012/ 08/02/tech/social-media/facebook-fake-accounts/ index.html. Finally, employers should not, under any circumstances, ask applicants for their Facebook passwords. Such requests violate privacy laws as well as the SCA and Computer Fraud Abuse Act (CFAA). The SCA prohibits unauthorized intentional access to electronic information, and the CFAA prohibits unauthorized intentional access to a computer to 5 FTC Business Center Blog, The Fair Credit Reporting Act & Social Media: What Businesses Should Know (June 23, 2011), at http://business.ftc.gov/blog/2011/06 /fair-credit-reporting-act-social-media-what-businesses-should-k now. 78 RETURN TO TABLE OF CONTENTS obtain information. Congress currently is considering legislation that would prohibit employers from soliciting social media account passwords. A number of states have passed or are considering laws that prohibit an employer from requiring a consumer social networking password, or to insist on “shoulder surfing,” meaning the applicant goes online and the employer examines a website site over the applicant’s shoulder. For example, in 2012, Maryland, Illinois, and California were the first states in the country to pass legislation barring employers from seeking certain personal electronic account information, including social media passwords. Since then, several other states (including Arkansas, Colorado, Michigan, Nevada, New Jersey, New Mexico, Oregon, Utah, and Washington) have passed laws, and similar legislation is pending or has been proposed in more states. A current list of social media password privacy legislation in the U.S. is available on the National Conference of State Legislatures (NCSL) website at http://www.ncsl. org/research/telecommunications -and-information-technology/employer-access-to-social-m edia-passwords-2013.aspx. 79 RETURN TO TABLE OF CONTENTS APPENDIX 13 Managing Social Media at Work: Employer Tips and Strategies C Tip #1: Be Familiar with the NLRA and the NLRB 1. The National Labor Relations Act (NLRA) Congress enacted the NLRA in 1935 to protect the rights of employees and employers and curtail certain private-sector labor and management practices that can harm the general welfare of workers, businesses, and the economy. The NLRA affords certain rights to employees to join together to improve wages and working conditions, and provides that covered employees have the right to engage in certain protected activities. The NLRA applies regardless of whether employees are members of a union. 2. Protected activities on social media could include also include the following. Tip #2: Understand the Difference Between Protected and Unprotected Social Media Activity Certain employee activities are protected against employer retaliation in the United States. Generally speaking, employee activity, including online activity, is protected when two or more employees act together to improve their terms and conditions of employment. However, not all employee social media activity is protected under the NLRA. posts protesting supervisory activities; C posts/statements relating to employee staffing levels implicating working conditions; C communications to the public related to an ongoing labor dispute; C social media exchanges with reporters about wages and other terms of employment; C posts regarding complaints and criticism about a supervisor's attitude and performance; C use of an employer's name and logo to communicate with fellow employees or the public about a labor dispute; or C engagement in protected activities on the employer's premises during non-work time and in non-work areas. 2. Unprotected Social Media Activity An employee's social media activity is not protected under the NLRA if it does not seek to involve other employees, does not relate to the shared terms and conditions of employment, or is an activity that is otherwise carried out in a reckless or malicious manner. Protected Social Media Activity Social media activity that is not protected could include the following: Section 7 of the NLRA affords employees the right to discuss their wages and other terms and conditions of employment, both among themselves and with non-employees. Section 7 applies equally to traditional offline communications and conversations via the Internet or social media, including the following. C C The National Labor Relations Board (NLRB) The NLRB enforces the NLRA. Because the NLRB has "statutory authority over private-sector employers whose activity in interstate commerce exceeds a minimal level," most employees and private-sector employers, including nonprofits, employee-owned businesses, labor organizations, non-union businesses, and businesses in states with "Right to Work" laws, are subject to the jurisdiction of the NLRB. There are certain employees who are not subject to NLRB jurisdiction, and specifically excluded under the NLRA. 1. For example, an employee who sends a Facebook message to her colleagues about the employer's working conditions may be afforded the same protection as a group of employees who discuss corporate wage issues during the workplace lunch hour. blog posts, tweets, Facebook comments, and other forms of social networking. C communications unrelated to the terms and conditions of employment; C posts protesting the quality of services provided by an employer that are only tangentially related to employee terms and conditions of employment, or 80 RETURN TO TABLE OF CONTENTS C expressions of an individual gripe. 3. When Does Social Media Activity Lose Protection? C posts expressing frustration regarding his individual dispute; and C discussions expressing his individual discontent about his employer where fellow employees "like" the post or comment merely to express their support for his well-being. An employee's protected social media activity can lose its protected status under the NLRA if the employee engages in egregious conduct, such as disparaging attacks, malicious defamation, or opprobrious conduct. Tip #4: Carefully Draft Social Media Policies The employer shoulders a heavy burden in persuading the NLRB that the employee's conduct was so reprehensible that it should no longer be protected. In fact, the NLRB's three social media memoranda lacked a single instance where an employee's alleged disparaging attack, defamatory statement, or opprobrious conduct lost protection of the NLRA. Although there are several concerns to balance, the key points to consider when drafting a social media policy include: C Understand your employees' rights to use social media under the NLRA.The National Labor Relations Board (NLRB) says that employees have the right to discuss work conditions on social media sites without retribution from their employers. The NLRB has released a series of memoranda in August 2011, January 2012, and May 2012 that address the general dos and don'ts for employers in regulating employee social media use. These memoranda provide a good starting point for the creation and administration of social media policies and can be accessed at http://mynlrb.gov. C Focus on restricting employee behavior that is not protected under the NLRA. For example: instruct employees not to disclose trade secrets; forbid postings that contain offensive language; and instruct employees not to post harassing or disparaging comments about other employees that could lead to discrimination claims (such as comments related to sex, race, disability or religion). C Avoid drafting overbroad or ambiguous policies. Poorly drafted policies could be construed as infringing on employees' rights under the NLRA. Social media policies should be drafted with specificity and include examples of the types of behavior that violate the policy. C Advise employees that all forms of communication on company-owned property may be monitored. Notify employees in advance of this monitoring so there is no reasonable expectation of privacy in their use of company-owned equipment. Require employee signatures to acknowledge their receipt and understanding of the policy and retain these signed acknowledgments. Tip #3: Be Aware of Concerted Social Media Activities 1. What is Concerted Activity? A single employee may engage in protected concerted activity if she is acting on the authority of other employees, bringing group complaints to the employer's attention, trying to induce group action, or seeking to prepare for group action. In certain circumstances, a single employee's activities could be deemed concerted activity if the activity is an indispensable preliminary step to employee self-organization, even if it does not include a current plan to act to address the employees' concerns. A single employee's activity could be deemed concerted when it involves posting a comment expressly including the topic of collective action, or posting a comment that seeks to initiate or induce group action. 2. What is Not Concerted Activity? When an employee expresses his concerns on social media without seeking to induce group action, the activity may not be protected, even if it is published to fellow employees. Social media activities that may not be deemed concerted include the following. C an employee's posts complaining about the terms and conditions of employment that contain no language suggesting that he seeks to initiate or induce coworkers to engage in group action; 81 RETURN TO TABLE OF CONTENTS C C C C 1. Include a provision that allows modification of the policy at any time. Due to the amorphous nature of social media, it is imperative that a social media policy include a provision that allows it to be modified at any time and in the employer's sole discretion. Notify employees when there has been an update to the policy and require employees to familiarize themselves with the updated policy. Employers Can Discipline Employees for Behavior Not Protected under the Act. In certain situations, the task of disciplining an employee for comments made on a social media website will not be difficult. If an employee’s behavior is not protected under the National Labor Relations Act, an employer is free to terminate the employee for his violative activity. Under Section 7 of the NLRA, employees are protected if they use social media to engage in “concerted activities for the purpose of collective bargaining or other mutual aid or protection.” The NLRB has construed this to protect employees if they engage in any of the following kinds of activity via social media: Train employees on the policy. Clear communication from management is essential to the success of a social media policy. Employers should ensure that employees understand what the policy says and how it applies to their jobs. Employees also should understand the risks associated with social media as well as the benefits of appropriate use. Employers should conduct periodic re training to update employees about policy modifications. Enforce the policy. The policy should create or incorporate disciplinary actions from other employment policies. Courts are likely to evaluate the policy's validity based on equal enforcement, so all activity should be treated equally. This may require collaboration among the human resources, IT and legal departments. Be prepared for discovery. Employers must anticipate that content on social media sites will be relevant in employment litigation. A social media policy should address discovery issues associated with requesting content from these sites and counsel must be prepared to discuss these issues with opposing counsel. C Bring group management; C Initiate a discussion with a group of employees about a term or condition of employment; C Discuss shared employee concerns about the terms and conditions of employment; C Honestly criticize an employee’s job performance and discuss this with other co-workers;; C Honestly criticize a supervisor’s job performance; or C Generally complain about a term or condition of his or her employment complaints to the attention of Therefore, the employee who uses his social media account to threaten another employee, or make racist or sexist comments about another employee can (and often should) be terminated. Likewise, the employee who uses his social media account to merely gripe about his personal, malicious views of a fellow co-worker can also be properly disciplined or terminated. Tip #5: Be Careful When Disciplining Employees for Social Media Activity Arguably, the most difficult task for employers monitoring their employees’ social media activity is the job of disciplining employees. Although employers would like nothing more than to be able to rely on a stringent, deliberately drafted social media policy to regulate their employees’ social media posts, this is obviously not enough, and discipline is often necessary. Unlike discipline for other employment infractions, however, disciplining an employee for violating a social media policy is a delicate undertaking that should only occur after careful investigation and, where possible, conferring with outside counsel. 2. Employers must Carefully Analyze Whether Activity Could Be Deemed Protected. The problem arises for employers when the question of whether an employee’s activity falls under the protection of the Act’s umbrella is not as clear. Take, for example, the following situations: C An employee engages in a “conversation” on her Facebook wall with two of her Facebook friends that are not co-workers in which she makes light of her 82 RETURN TO TABLE OF CONTENTS experiences during her night shift and jokes about her mentally disabled clients’ behavior. C An employee posts a comment on her Facebook wall threatening that she and other employees will quit if the “tyranny” at the store does not end, and refers to her supervisor as a “super mega puta.” Several of the employee’s co-workers respond to her comment. C An employee regularly posts complaints on his Facebook page about his workplace issues with his co-workers and his manager, even after his employer asks him to stop. The employee goes on to post comments suggesting that two of his co-workers are receiving preferential treatment. Regulating employees’ social media usage is not an easy task, but it is one that employers cannot afford to disregard. As the number of people using social media continues to grow exponentially, employers must be prepared to deal with the relocation of “water cooler” talk and workplace gossip to the web. By carefully using information that is publicly available on the web to vet potential employees, crafting a social media policy that is not overly broad or ambiguous and focuses on restricting activity that is not protected under the NLRA, and taking action against employees who stray afar of the NLRA’s protections, employers will be able to effectively, and legally, contain their employees’ social media activities. Remember, an employer violates Section 8(a)(1) of the NLRA if it interferes, restrains, or coerces employees in the exercise of their rights guaranteed in Section 7. An employer may unlawfully interfere with its employees' Section 7 rights by disciplining or terminating an employee for engaging in Section 7 activities; threatening to sue employees for engaging in protected activities; or discharging an employee to prevent future discussions of terms and conditions of employment. The employees in each of these situations discussed or complained about a term or condition of their employment, and in two situations this led to other employees posting comments in response. Nonetheless, the NLRB upheld the employers’ disciplinary actions. In each case the NLRB held that the employees did not engage in concerted activity but, instead, merely complained or expressed an individual complaint. Employers confronted by potentially problematic social media postings should similarly focus on this distinction between concerted activity and mere personal griping, and ensure that they do not discipline an employee for engaging in protected activity. By understanding the fundamental, underlying protection afforded to employees under the Act—the right to engage in “concerted activity”— employers will be better equipped to ensure that they properly handle problematic social media postings. Finally, if an employer terminates or disciplines an employee for engaging in protected social media activity, the employee may file an unfair labor charge against the employer. Should it be determined that an employer committed an unfair labor practice by interfering with an employee's Section 7 rights, the NLRB may impose various statutory remedies, including reinstatement of the employee, seniority and/or status readjustment, reinstatement of benefits, expungement of any disciplinary action or termination, and/or back pay. Employers Should Thoroughly Investigate the Facts Surrounding Any Problematic Social Media Post. Tip #6: Train Employees About the Consequences of Inappropriate Social Media Posts Like any other workplace complaint, employers must ensure that they begin by thoroughly investigating the facts underlying a problematic social media post, regardless of whether the employer has access to the post. Employers should look to answer such questions as why the employee made the comment, whether the employee’s post concerns wages, hours, benefits or other terms and conditions of employment, and whether the employee’s comments led to an online discussion with co-employees. All of these questions will help answer whether the activity is indeed protected. Lastly, employers often should exclude any supervisors who were the subject of the comments from the decision making process. For employers, ill-conceived social media posts by employees can cause a multitude of business and legal issues, including insulting customers, libeling a competitor, disseminating confidential company, product, or customer information, or inviting workplace harassment or violence. 3. One way you can attempt to prevent employees from tweeting comments that cause these issues is through training. This is as true for millennials who are new to the workforce yet proficient with social media as it is for more experienced employees who are relatively uninformed about how social “social media” is. Such training should include specific examples of the business and employment issues caused by inappropriate 83 RETURN TO TABLE OF CONTENTS tweets and other social media posts. Usually, the idea of losing a job over a social media post is enough to make responsible employees consider their social media activity more carefully. However, the training should be specific in the types of social media posts you consider inappropriate, such as: C Photos of individuals either without clothes or scantily clad; C Photos of employees in inebriated states or drinking alcohol; C Photos of employees doing illegal drugs (smoking weed, snorting cocaine, etc.) C Photos of employees engaged in any sort of illegal activity (including pranks or vandalism); C Disclosure of confidential information about the company, its products, and its customers; C Unauthorized posts in the company’s name; C Negative or derogatory comments about the company’s competitors; Comments about coworkers that could be viewed as insensitive, bullying, or harassing; and C C violate Section 7 because of broad prohibitions against general categories of prohibited activities. To address the NLRB’s concerns in this area, you should make social media policies as clear and specific as reasonably possible in terms of prohibited employee actions. You also should include a statement that communications protected by federal labor laws are excluded from the policy. Another provision you should include is a prohibition of posting on social media during work time. Employees don’t have the right to engage in union activities while they are on the clock. This provision must exclude employee activity during breaks from work (even if paid) and other nonworking hours an employee may be on your premises. Tip #7: Train Managers About the Consequences of Casual References and Endorsements on Social Media 1. Casual References Managers must be trained to understand that casual references on LinkedIn or other professional social media sites pose legal risks: C Defamation (if they are negative and untrue). Any comments that imply workplace violence. C Misrepresentation (if they are positive and untrue). C Evidence of pretext in EEO claim (if you terminate for poor performance but you've written a glowing recommendation on LinkedIn). The more examples you can provide the better this training will be for employees. In training, make clear to managers that: You also should have a social media policy that spells out specifically what is permitted and what isn’t in social media posts that relate to the employer or coworkers. The policy should identify the consequences of inappropriate posts. It also should remind employees that their social media posts may be viewable by the public in general or reposted or printed by others even if their personal social media sites are private or restricted to specific individuals. The policy and training can highlight this aspect of social media as well as the fact that social media posts that have been deleted may be recoverable from the social media sites’ servers or from the computers of those who viewed and downloaded the posts. C The "no reference" rule applies to social media. C Potential exceptions, if any, must be approved by HR 2. Endorsements What about "endorsements" on LinkedIn? An endorsement equals a recommendation Plus, there are trade secret considerations. Endorsement is inconsistent with the trade secret status of the identity of the customer or client. Give guidance to sales people on whether and how to seek endorsements. As discussed above, social media policies have come under repeated scrutiny by the NLRB. Thus, a tweet about pay or the working conditions under a specific manager could be “protected concerted activity” under Section 7. The NLRB has ruled that several companies’ social media policies 3. Friending Personnel Subordinates and Non-supervisory Managers need to be warned that they are going to find out information they don't want or need to know–particularly 84 RETURN TO TABLE OF CONTENTS when that information is about illegal and other conduct of potential concern. For example: C Illegal conduct-illicit drug use C Dangerous-excessive drinking C Protected status (race, sex, national origin, sexual preference, age, disability, pregnancy, genetic information) C Religious beliefs C Medical treatment (FMLA, ADA, ADAAA and workers compensation C Domestic partner At that point, silence may be seen as condoning illegal or dangerous conduct (but getting involved is potentially problematic too). And, again, knowledge of EEO information may be seen as the basis for an adverse employment action (even when it is not). The best practice is to tell managers they should “unfriend” any employees that they directly or indirectly supervise. Managers can simply provide the following explanation: "I have made a conscious decision that I won't friend people at work. I wanted to tell all my colleagues; please do not take offense." 85 RETURN TO TABLE OF CONTENTS APPENDIX 14 NLRB FACT SHEET ON SOCIAL MEDIA The following is a verbatim reproduction of the NLRB Fact Sheet entitled “The NLRB and Social Media.” The Fact Sheet may be accessed and downloaded at http://www.nlrb.gov/news-outreach/fact-sheets/nlrb-and-social-media. The second report, issued Jan 25, 2012, also looked at 14 cases, half of which involved questions about employer policies. Five of those policies were found to be unlawfully broad, one was lawful, and one was found to be lawful after it was revised. The remaining cases involved discharges of employees after they posted comments to Facebook. Several discharges were found to be unlawful because they flowed from unlawful policies. But in one case, the discharge was upheld despite an unlawful policy because the employee’s posting was not work-related. The report underscored two main points regarding the NLRB and social media: The NLRB and Social Media The National Labor Relations Act protects the rights of employees to act together to address conditions at work, with or without a union. This protection extends to certain work-related conversations conducted on social media, such as Facebook and Twitter. In 2010, the National Labor Relations Board, an independent federal agency that enforces the Act, began receiving charges in its regional offices related to employer social media policies and to specific instances of discipline for Facebook postings. Following investigations, the agency found reasonable cause to believe that some policies and disciplinary actions violated federal labor law, and the NLRB Office of General Counsel issued complaints against employers alleging unlawful conduct. In other cases, investigations found that the communications were not protected and so disciplinary actions did not violate the Act. 1. Employer policies should not be so sweeping that they prohibit the kinds of activity protected by federal labor law, such as the discussion of wages or working conditions among employees. 2. An employee’s comments on social media are generally not protected if they are mere gripes not made in relation to group activity among employees. General Counsel memos The third report, issued May 30, 2012, examined seven employer policies governing the use of social media by employees. In six cases, the General Counsel’s office found some provisions of the employer’s social media policy to be lawful and others to be unlawful. In the seventh case, the entire policy was found to be lawful. Provisions were found to be unlawful when they interfered with the rights of employees under the National Labor Relations Act, such as the right to discuss wages and working conditions with co-workers. To ensure consistent enforcement actions, and in response to requests from employers for guidance in this developing area, Acting General Counsel Lafe Solomon released three memos in 2011 and 2012 detailing the results of investigations in dozens of social media cases. The first report, issued on August 18, 2011, described 14 cases. In four cases involving employees’ use of Facebook, the Office of General Counsel found that the employees were engaged in "protected concerted activity" because they were discussing terms and conditions of employment with fellow employees. In five other cases involving Facebook or Twitter posts, the activity was found to be unprotected. In one case, it was determined that a union engaged in unlawful coercive conduct when it videotaped interviews with employees at a nonunion jobsite about their immigration status and posted an edited version on YouTube and the Local Union’s Facebook page. In five cases, some provisions of employers’ social media policies were found to be overly-broad. A final case involved an employer’s lawful policy restricting its employees’ contact with the media. Some of the early social media cases were settled by agreement between the parties. Others proceeded to trial before the agency’s Administrative Law Judges. Several parties then appealed those decisions to the Board in Washington D.C. Board Decisions In the fall of 2012, the Board began to issue decisions in cases involving discipline for social media postings. Board decisions are significant because they establish precedent in novel cases such as these. 86 RETURN TO TABLE OF CONTENTS In the first such decision, issued on September 28, 2012, the Board found that the firing of a BMW salesman for photos and comments posted to his Facebook page did not violate federal labor law. The question came down to whether the salesman was fired exclusively for posting photos of an embarrassing accident at an adjacent Land Rover dealership, which did not involve fellow employees, or for posting mocking comments and photos with co-workers about serving hot dogs at a luxury BMW car event. Both sets of photos were posted to Facebook on the same day; a week later, the salesman was fired. The Board agreed with the Administrative Law Judge that the salesman was fired solely for the photos he posted of a Land Rover incident, which was not concerted activity and so was not protected. In the second decision, issued December 14, 2012, the Board found that it was unlawful for a non-profit organization to fire five employees who participated in Facebook postings about a coworker who intended to complain to management about their work performance. In its analysis, the Board majority applied settled Board law to social media and found that the Facebook conversation was concerted activity and was protected by the National Labor Relations Act. 87 RETURN TO TABLE OF CONTENTS APPENDIX 15 SAMPLE SOCIAL MEDIA POLICY purposes are responsible for complying with all Company policies. [COMPANY NAME] recognizes that Social Networking (such as personal web sites, blogs, Facebook, MySpace, Twitter, online group discussions, text messaging, message boards, chat rooms, etc.) can be used by employees for personal as well as business purposes. The Company also understands how the use of Internet social network sites and blogs can shape the way the public views our products, employees, vendors, partners and customers. The Company respects the right of any employee to maintain a blog or post a comment on social networking sites. However, the Company is also committed to ensuring that the use of such communications serves the needs of our business by maintaining the Company’s identity, integrity, and reputation in a manner consistent with our values and policies. Therefore, [COMPANY NAME] has established the following rules and guidelines for communicating Company-related information via social networking forums whether used in or outside the workplace: d. Disclaimer Any employee who mentions the Company on a personal blog or social networking account must include a disclaimer that specifically states that the opinions and attitudes expressed are those of the employee alone and may not be aligned with those of the Company. The employee must make it clear that he or she is speaking for himself or herself and not on behalf of the organization. e. Restriction on Customers, Clients, Vendors, Products and Services Employees are prohibited from soliciting Company customers, vendors, or clients to be “friends” or contacts on any social or professional networking site except when the contact has also been divulged to the company or in cases where there is a pre-established relationship outside the company, which has been disclosed to and approved by the [JOB TITLE] at the time of employment or institution of this policy. Employees are not to advertise or sell any of Company’s products or services on any website or social network. a. Personal Blogging or Social Networking on Company Time Employees may not post on a personal blog or web page or participate in a personal social networking site during working time or at any time with Company equipment or property. Working time is your scheduled time of work, not including lunch hour, breaks or time prior to or after your shift. [OR] [Company allows limited and occasional use of social networking sites during working time as long as such use is not excessive or does not interfere with work responsibilities or otherwise violate the Company’s Code of Conduct]. f. Proprietary and Confidential Information All other Company rules and policies regarding disclosure of sensitive, proprietary, financial or confidential information apply in full to blogs and social networking sites. This includes, but is not limited to, information about trademarks, upcoming product releases, finances, products sold, company strategies and any other information not previously publicly released by the Company. Company logos and trademarks may not be used without express written permission from the Company. To ensure that [COMPANY NAME], its customers, vendors and employees are not defamed or injured through use of blogs and Social Networking sites, [COMPANY NAME] takes a strong stance against employee blogs or social network sites containing false information or false accusations. b. Authorization Employees must get written authorization before commenting about the Company’s services or products on blogs or social networking sites. If authorization is given, the employee must clearly and conspicuously disclose his or her employment relationship with the Company when posting a comment regarding our services or products. c. Legitimate Business Purposes Any employee engaging in Social Networking or Blogging for legitimate business purposes (an employer-sponsored blog or media site) must get express approval of all content with the appropriate supervisor before posting. Employees engaged in blogging or networking for legitimate business g. Discrimination and Harassment All other Company rules and policies regarding discrimination, harassment, and retaliation apply in full force to logs and social networking sites. The Company is 88 RETURN TO TABLE OF CONTENTS firmly committed to its equal employment opportunity policies and does not condone or tolerate discrimination. The Company also prohibits all forms of unlawful discrimination, harassment, and retaliation. Employees are prohibited from engaging in any conduct, activities, communication or postings which violate Company policies regarding discrimination, harassment, and retaliation. No messages with derogatory or inflammatory remarks about any legally protected characteristic (including but not limited to: race, color, national origin, sex, disability, age, religion, veteran status, sexual orientation or preference, shall be transmitted or retrieved. Any conduct which is impermissible under the law if expressed in any other form or forum is also impermissible if expressed through blogs, social networks, text messages or other electronic means. prosecution, reimbursement of expenses incurred as a result of the violation, and additional legal action. l. Employee Rights This policy is not intended to restrict an employee’s right to discuss wages, hours and working conditions with coworkers, or in any way to limit an employee’s exercise of rights under the National Labor Relations Act (“NLRA”). A summary of employees’ rights under the NLRA is posted in [INSERT ALL LOCATIONS] and is available on the Company’s website. Employees will not be disciplined or retaliated against for engaging in activities protected under the NLRA. Employees who have concerns or questions regarding their rights under the NLRA should contact [INSERT NAME AND JOB TITLE]. h. Media Contacts Media contacts made through blogs or social networking sites regarding the Company, its products, employees, partners, vendors, customers or competitors should be referred for coordination and guidance to the [JOB TITLE]. i. Right to Monitor The Company reserves the right to monitor all public blogs and social networking forums for the purpose of protecting its interests and monitoring compliance with Company policies. If activity is found to be compromising or insubordinate, the Company may require cessation and removal of any detrimental commentary or postings. The Company reserves the right to access any Company computers and electronic communication devices to monitor blogs and online websites. Employees should not maintain any expectation of privacy with respect to information transmitted over, received by, or posted on such sites. j. Reporting If an employee believes that a blog or other online communication violates any Company policy, the employee should immediately report the blog or online communication to the [Job Title]. The Company [will] [may] investigate the matter, determine whether such blog, posting, website, or communication violates Company policies, and take appropriate action. k. Violations of Policy Any employee who violates this policy may be subject to disciplinary action, up to and including termination. Additionally, violations of this policy may result in criminal 89 RETURN TO TABLE OF CONTENTS U.S. SUPREME COURT/5TH CIRCUIT UPDATE JUDGE ROYAL FURGESON, Dallas Retired Senior U.S District Judge Dean, UNT Dallas Collage of Law JESSICA HASELTINE JENNIFER WONDRACEK State Bar of Texas 31st ANNUAL LITIGATION UPDATE INSTITUTE January 15-16, 2015 San Antonio CHAPTER 14 RETURN TO TABLE OF CONTENTS This paper provides a selective update of jurisprudence in the U.S. Supreme Court and the Fifth Circuit. It focuses on all Supreme Court decisions and the most cited and popular decisions from the Court of Appeals. While it is not exhaustive, it provides a well-rounded look at the last year in the U.S. Supreme Court and the Fifth Circuit. RETURN TO TABLE OF CONTENTS Wm. Royal Furgeson, Jr. UNT Dallas College of Law Founding Dean Wm. Royal Furgeson, Jr., retired United States District Judge, Northern District of Texas, was named as the founding Dean of the UNT Dallas College of Law in January 2012. He assumed his position as Dean in June 2013, after stepping down from the federal district bench. From 1994 to 2013, Judge Furgeson served as a U.S. District Judge both in the Western District and Northern District of Texas. Prior to taking Senior Status, he served in the El Paso, Midland, and San Antonio Divisions of the Western District of Texas. He served as a federal judge for nineteen years. A native of Lubbock, Judge Furgeson graduated from Texas Tech University with a Bachelor of Arts in English and earned his law degree at the University Of Texas School Of Law, where he was an Associate Editor of the Texas Law Review. After law school, he served the U.S. Army for two years, attaining the rank of Captain. Following a tour in Vietnam, he returned to Lubbock as law clerk to the Honorable Halbert O. Woodward. Before taking the bench, he was a practicing lawyer for twenty-four years with the Kemp Smith firm in El Paso, Texas. He is a fellow of the American College of Trial Lawyers, a member of the American Law Institute, and Board Certified by the Texas Board of Legal Specialization in Civil Trial Law. While in private practice, he was general campaign chair and president of the El Paso United Way, president of the El Paso chapter of the American Board of Trial Advocates, and president of the El Paso Bar Association. During his time on the bench, in addition to his ongoing district court obligations, he was a panel judge on the Judicial Panel on Multidistrict Litigation, President of the Federal Judges Association, and a member of the Judicial Branch Committee of the Judicial Conference of the United States. He has also served as chair of the Judicial Resources Committee of the Judicial Conference of the United States. He has been honored on numerous occasions, including the 2007 Distinguished Alumnus Award by the Texas Tech Alumni Association, the 2013 West Texas Legal Legend Award by the Texas Tech University School of Law, the 2004 Jurist of the Year by the Texas Chapter of the American Board of Trial Advocates, the 2011 Luke Soules Award by the State Bar of Texas Litigation Section, the 2001 Leon Green Award by the Texas Law Review, and the 1983 Faculty Award by the University of Texas School of Law. RETURN TO TABLE OF CONTENTS TABLE OF CONTENTS I. ATTORNEYS .................................................................................................................................................... 1 A. Supreme Court ........................................................................................................................................... 1 B. 5th Circuit................................................................................................................................................... 1 II. BANKRUPTCY................................................................................................................................................. 2 A. Supreme Court ........................................................................................................................................... 2 B. 5th Circuit................................................................................................................................................... 2 III. CIVIL PROCEDURE ........................................................................................................................................ 2 A. Supreme Court ........................................................................................................................................... 2 B. 5th Circuit................................................................................................................................................... 3 IV. CONSTITUTIONAL LAW ............................................................................................................................... 5 A. Supreme Court ........................................................................................................................................... 5 B. 5th Circuit................................................................................................................................................... 6 V. CONTRACT LAW ............................................................................................................................................ 6 A. 5th Circuit................................................................................................................................................... 6 VI. CRIMINAL LAW .............................................................................................................................................. 7 A. Supreme Court ........................................................................................................................................... 7 B. 5th Circuit................................................................................................................................................... 7 VII. CRIMINAL PROCEDURE ............................................................................................................................... 8 A. Supreme Court ........................................................................................................................................... 8 B. 5th Circuit................................................................................................................................................... 8 VIII. ELECTION LAW ............................................................................................................................................ 10 A. Supreme Court ......................................................................................................................................... 10 B. 5th Circuit................................................................................................................................................. 10 IX. EMPLOYMENT LAW .................................................................................................................................... 10 A. Supreme Court ......................................................................................................................................... 10 B. 5th Circuit................................................................................................................................................. 10 X. ENVIRONMENTAL LAW ............................................................................................................................. 11 A. Supreme Court ......................................................................................................................................... 11 B. 5th Circuit................................................................................................................................................. 11 XI. IMMUNITY ..................................................................................................................................................... 11 A. Supreme Court ......................................................................................................................................... 11 B. 5th Circuit................................................................................................................................................. 12 XII. INTELLECTUAL PROPERTY LAW ........................................................................................................... 12 A. Supreme Court ......................................................................................................................................... 12 XIII. INTERNATIONAL LAW ............................................................................................................................... 13 A. Supreme Court ......................................................................................................................................... 13 XIV. WOMEN'S RIGHTS ........................................................................................................................................ 13 A. 5th Circuit................................................................................................................................................. 13 XV. MISCELLANEOUS ....................................................................................................................................... 13 A. Supreme Court ......................................................................................................................................... 13 B. 5th Circuit................................................................................................................................................. 14 RETURN TO TABLE OF CONTENTS U.S. SUPREME COURT/5TH CIRCUIT UPDATE I. ATTORNEYS A. Supreme Court Burt v. Titlow, 571 U.S. ___, 134 S.Ct. 10 (2013). Docket No. 12-414, decided 11/5/2013 The Antiterrorism and Effective Death Penalty Act requires a "doubly-deferential" standard for setting aside sentences due to ineffective counsel. A defendant can't use his own testimony to prove he would have followed a better attorney's advice. http://goo.gl/hSjsKz Hinton v. Alabama, 571 U.S. ___, 134 S.Ct. 1081 (2014). Docket No. 13-6440, decided 2/24/2014 By failing to request additional funds to hire an adequate expert witness, an attorney provided ineffective counsel which prejudiced the defendant. http://goo.gl/6NIueN B. 5th Circuit Black v. Settlepou, P.C., 732 F.3d 492 (5th Cir., 2013) Decided 10/11/2013 FLSA Misclassification case where court determined which method of calculating overtime premiums should be used. The court also discussed calculating attorney's fees based on the lodestar method, and while the court may consider the success of the claim as a factor for enhancing or reducing fees, the court cannot base a reduction solely on a low damages result. http://goo.gl/Dbp0MH Frazin v. Haynes (In re Frazin), 732 F.3d 313 (5th Cir., 2013) Decided 10/1/2013 Court reviewed whether malpractice, breach of fiduciary duty, and Deceptive Trade Practices Act claims were "core proceedings" over which the Bankruptcy court had jurisdiction, or mere related items, which should have been referred to the district court. Court determined malpractice and breach of fiduciary claims were core proceedings, but DTPA claim was not. http://goo.gl/qZE3hw In re ASARCO, LLC, 751 F.3d 291 (5th Cir., 2014) Decided 4/30/2014 Upon reviewing a bankruptcy case, the court held that attorneys cannot get compensated for the times when they are defending/arguing for their own attorney's fees and costs applications. Petition for cert. to SCOTUS granted. http://goo.gl/TBtoja Lawyers Title Insurance Co. v. Doubletree Partners, LLP, 739 F.3d 848 (5th Cir., 2014) Decided 1/14/2014 Insurance policy is interpreted as written, unless ambiguous and then adopt the interpretation that favors the insured for purposes of summary judgment. The case also discusses attorney's fees for bad faith conduct and sanctions. http://goo.gl/nBfLNj Moore v. Citgo Refining & Chemicals Co., 735 F.3d 309 (5th Cir., 2013) Decided 11/12/2013 FLSA case that hinges on dismissal based on discovery sanctions. Court also notes that reduction of attorneys’ fees due to wealth differential between parties is not permissible. http://goo.gl/hxkKyl NCDR, L.L.C. v. Mauze & Bagby, P.L.L.C., 745 F.3d 742 (5th Cir., 2014) Decided 3/11/2014 Interlocutory appeal where Law firm ads and website seeking clients for action against dental company falls under Commercial Speech exclusion of the Texas Citizen's Participation Act, an anti-SLAPP statute. http://goo.gl/uRbd3H United States v. Nelson, 732 F.3d 504 (5th Cir., 2013) Decided 10/14/2013 Mayoral corruption case which discusses entrapment with specific focus on element of predisposition. Attorney testifying in criminal trial about the circumstances surrounding a former client's signing of a plea agreement is a violation of attorney-client privilege, but may be considered a harmless error. Sentencing calculation discussion with regards to determining valuation of bribery. http://goo.gl/Fgkwem United States v. Poole, 735 F.3d 269 (5th Cir., 2013) Decided 11/11/2013 Prosecutorial misconduct is not automatically a reason to grant a new trial. http://goo.gl/bL3cym United States v. Urias-Marrufo, 744 F.3d 361 (5th Cir., 2014) Decided 2/28/2014 In a case where a guilty plea to a drug charge would result in the deportation of a noncitizen defendant, and the defendant attempted to withdraw the plea before sentencing, the circuit court has the authority to hear and decide the issue of ineffective assistance of counsel on direct appeal rather than on collateral attack because the district court addressed the issue and/or the record was complete enough to "address the merits on appeal." RETURN TO TABLE OF CONTENTS http://goo.gl/AZrcUg II. BANKRUPTCY A. Supreme Court Clark v. Rameker, 573 U.S. ___, 134 S.Ct. 2242 (2014). Docket No. 13-299, decided 6/12/2014 Retirement accounts inherited from someone other than the inheritee's spouse do not qualify for the retirement account exemption from creditor claims in bankruptcy. http://goo.gl/nyddRv Exec. Benefits Ins. Agency v. Arkison, 573 U.S. ___, 134 S.Ct. 2165 (2014). Docket No. 12-1200, decided 6/9/2014 Bankruptcy courts can provide district courts with findings and recommendations on "non-core" issues, even if they can only render final decisions on "core" issues. http://goo.gl/IFDNZw Law v. Siegel, 571 U.S. ___, 134 S.Ct. 1188 (2014). Docket No. 12-5196, decided 3/4/2014 Once a debtor establishes a homestead exemption, the Bankruptcy Court may not award the amount of the exemption to anyone, even if costs were incurred by the dishonesty of the debtor. http://goo.gl/hpQxyk B. 5th Circuit BP RE, L.P. v. RML Waxahachie Dodge, L.L.C. (In re BP Re, L.P.), 735 F.3d 279 (5th Cir., 2013) Decided 11/11/2013 While bankruptcy courts normally submit findings of fact and conclusions of law to the district court for non-core proceedings, with the consent of the parties, the bankruptcy court can make final decisions on noncore proceedings. However, only Article III judges may hear and decide Article III issues; waiver and consent by parties to hear and decide non-Article III issues is not permissible. http://goo.gl/QHZkd1 CHS, Inc. v. Plaquemines Holdings, L.L.C., 735 F.3d 231 (5th Cir., 2013) Decided 11/5/2013 Under Louisiana law, there exists a right in certain cases to challenge and redeem for cost plus interest the sale or assignment of a litigious right. This right does not apply in a bankruptcy case where the property in question was subject to a judicial sale order. http://goo.gl/7OdyK9 Frazin v. Haynes (In re Frazin), 732 F.3d 313 (5th Cir., 2013) Decided 10/1/2013 Court reviewed whether malpractice, breach of fiduciary duty, and Deceptive Trade Practices Act claims were "core proceedings" over which the Bankruptcy court had jurisdiction, or mere related items, which should have been referred to the district court. Court determined malpractice and breach of fiduciary claims were core proceedings, but DTPA claim was not. http://goo.gl/qZE3hw In re Flugence, 738 F.3d 126 (5th Cir., 2013) Decided 11/22/2013 Bankruptcy petitioner has a responsibility to disclose all assets acquired post-petition to bankruptcy court, including new personal injury claims. Failure to disclose resulted in judicial estopment of petitioner's personal injury claim, but bankruptcy trustee was not estopped from pursuing claim for the benefit of petitioner's creditors. http://goo.gl/k0iYMr In re: Green Hills Development Co., LLC, 741 F.3d 651 (5th Cir., 2014) Decided 2/3/2014 Involuntary Bankruptcy case focusing on whether the claim was "subject to a bona fide dispute," and thus the claimant would not have standing. Motion for sanctions for frivolous appeal denied. http://goo.gl/4tHVcP III. CIVIL PROCEDURE A. Supreme Court Atlantic Marine Constr. Co. v. U.S. Dist. Court for the W. Dist. of Tex., 571 U.S. ___, 134 S.Ct. 568 (2013). Docket No. 12-929, decided 12/3/2013 Forum selection clause violations can only be supported or enforced by a court when exceptional factors are at work, which is on the burden of the clause-violating party to prove. http://goo.gl/Xqdrqa BG Group PLC v. Argentina, 572 U.S. ___, 134 S.Ct. 1198 (2014). Docket No. 12-138, decided 3/5/2014 When determining whether pre-arbitration requirements have been met, the decision rests with the arbitrator and not the court. http://goo.gl/UJ9L1S DaimlerChrysler AG v. Bauman, 571 U.S. ___, 134 S.Ct. 746 (2014). Docket No. 11-965, decided 1/14/2014 The placement of products in stream of commerce in California by a German corporation is not sufficient to establish general jurisdiction in California over the German company. http://goo.gl/ZbBv36 RETURN TO TABLE OF CONTENTS Halliburton Co. v. Erica P. John Fund, Inc., 573 U.S. ___, 134 S.Ct. 2398 (2014). Docket No. 13-317, decided 6/23/2014 A corporation may provide evidence to rebut the "fraud on the market" presumption when fighting the class certification of its shareholders. http://goo.gl/VCoq2Z Heimeshoff v. Hartford Life & Accident Ins. Co., 571 U.S. ___, 134 S.Ct. 604 (2013). Docket No. 12-729, decided 12/16/2013 Contractual statutes of limitations on seeking judicial review of long-term disability benefits are valid. http://goo.gl/snmcXb Highmark v. Allcare Management Systems, 572 U.S. ___, 134 S.Ct. 1744 (2014). Docket No. 12-1163, decided 4/29/2014 When reviewing a district court's decision regarding the frivolity of a lawsuit, the appellate court should give deference to the district court and review the decision for abuse of discretion. http://goo.gl/m6WB3H Lozano v. Alvarez, 572 U.S. ___, 134 S.Ct. 1224 (2014). Docket No. 12-820, decided 3/5/2014 The policy behind equitable tolling of a statute of limitations does not apply to the one-year limitation on the petition to return an abducted child under the Hague Convention, because not all signatories of the treaty apply equitable tolling and thus the policy is not a part of statutory intent. http://goo.gl/IdGtFR Mississippi, ex rel. Hood v. AU Optronics Corp., 571 U.S. ___, 134 S.Ct. 736 (2014). Docket No. 12-1036, decided 1/14/2014 Suit filed by a state wasn't removable under Class Action Fairness Act because CAFA's language implied "100 or more" plaintiffs, not "100 or more" unnamed individuals with potential interest in the suit. http://goo.gl/PghMsV Ray Haluch Gravel Co. v. Central Pension Fund, 571 U.S. ___, 134 S.Ct. 773 (2014). Docket No. 12-992, decided 1/15/2014 A final merit judgment is not affected by a pending ruling on award for fees and costs, so the determination of whether an appeal was timely is based on the date of the original judgment and not the date of the ruling on fees and costs. http://goo.gl/HTsvYK Sprint Commc'ns Co. v. Jacobs, 571 U.S. ___, 134 S.Ct. 584 (2013). Docket No. 12-815, decided 12/10/2013 The Younger doctrine applies to specific circumstances only and does not necessarily prevent federal courts from hearing cases on same subject matter as a pending state proceeding. http://goo.gl/X7Gr3S Susan B. Anthony List v. Driehaus, 573 U.S. ___, 134 S.Ct. 2334 (2014). Docket No. 13-193, decided 6/16/2014 When challenging a state law prior to the enforcement of the law, showing a "credible threat of prosecution" satisfies the requirement that the plaintiff must allege a sufficiently imminent injury. http://goo.gl/WKT76I United States v. Clarke, 573 U.S. ___, 134 S.Ct. 2361 (2014). Docket No. 13-301, decided 6/19/2014 Without further support of facts or circumstances, the mere allegation that summons were issued by the IRS for an improper purpose does not entitle the taxpayer to a hearing regarding the validity of the summons before the summons can be enforced. http://goo.gl/U2SOZV United States v. Woods, 571 U.S. ___, 134 S.Ct. 557 (2013). Docket No. 12-562, decided 12/3/2013 District courts can review the imposition of the "gross valuation misstatement" penalty as determined by the Internal Revenue Service. http://goo.gl/K2q6Rz Walden v. Fiore, 571 U.S. ___, 134 S.Ct. 1115 (2013). Docket No. 12-574, decided 2/25/2014 Showing that a party had knowledge of the effect of the party's actions on someone with contacts to a state is not necessarily sufficient to establish personal jurisdiction over the party in that state. http://goo.gl/hbQIhg B. 5th Circuit BP RE, L.P. v. RML Waxahachie Dodge, L.L.C. (In re BP Re, L.P.), 735 F.3d 279 (5th Cir., 2013) Decided 11/11/2013 While bankruptcy courts normally submit findings of fact and conclusions of law to the district court for non-core proceedings, with the consent of the parties, the bankruptcy court can make final decisions on noncore proceedings. However, only Article III judges may hear and decide Article III issues; waiver and consent by parties to hear and decide non-Article III issues is not permissible. http://goo.gl/QHZkd1 CamSoft Data Services, Inc. v. Southern Electronics Supply, Inc., 756 F.3d 327 (5th Cir., 2014) RETURN TO TABLE OF CONTENTS Decided 6/19/2014 When the issue of inventorship with regards to a pending or unissued patent is raised, the federal courts do not have the authority to review the issue; rather, the Patent and Trademark Office is the only one with the authority to conduct such a review. Remand to state court is proper when one party meritoriously but unsuccessfully challenged the removal to federal court immediately, even if they later add federal claims, which were never tried on the merits. http://goo.gl/CLAJ6z Crawford Professional Drugs, Inc. v. CVS Caremark Corp., 748 F.3d 249 (5th Cir., 2014) Decided 4/3/2014 Federal Arbitration Act case where the Fifth circuit changed its interpretation of nonparty arbitration requirements under the FAA to align itself with Arthur Andersen LLP v. Carlisle, 556 U.S. 624 (2009). http://goo.gl/wiDKVP Delahoussaye ex rel. Delahoussaye v. Performance Energy Servs., L.L.C., 734 F.3d 389 (5th Cir., 2013) Decided 10/24/2013 Personal injury case which affirmed allocation of fault and discussed damage calculations, remitting damage award to lower amount. http://goo.gl/nVimx1 Duarte ex rel. Duarte v. City of Lewisville, 759 F.3d 514 (5th Cir., 2014) Decided 7/22/2014 Sex offender & family have standing to challenge an ordinance preventing sex offenders from residing in certain areas of town because sex offender was targeted by that ordinance and it did affect his ability to locate alternate housing arrangements. http://goo.gl/Y0wW55 Farkas v. GMAC Mortgage. LLC, 737 F.3d 338 (5th Cir., 2013) Decided 12/2/2013 Mortgage foreclosure case. Court affirms that lower court had diversity jurisdiction, stating that amount in controversy is the value of the property. Court further affirmed lower court’s decision using quasi-estoppel, even though this legal theory was not discussed by the lower court; this was justified with "Even though the district court did not address the estoppel argument, we may affirm summary judgment 'on any grounds supported by the record' (citations omitted)." at 343. http://goo.gl/MKzcBI Filgueira v. US Bank Nat'l Ass'n, 734 F.3d 420 (5th Cir., 2013) Decided 11/1/2013 Foreclosure case where court affirmed denial to amend the complaint. http://goo.gl/3OmhWj In re Chinese Manufactured Drywall Products Liability Litigation, 742 F.3d 576 (5th Cir., 2014) Decided 1/28/2014 Products liability case that challenges personal jurisdiction over a foreign company. Challenges the 5th Circuit's Asahi Brennan Stream-of-Commerce test v. the 4th Circuit's Asahi O'Connor Stream-of-Commerce-plus test. Court decided that it didn't matter because jurisdiction existed under both methods. http://goo.gl/3ChJfG In re: Deepwater Horizon, 739 F.3d 279 (5th Cir., 2014) Decided 1/10/2014 Interlocutory appeal. Affirmed DC's order certifying class over BP's objections that not all class members were injured. http://goo.gl/UiJNxu In re: Deepwater Horizon, 732 F.3d 326 (5th Cir., 2013) Decided 10/2/2013 Settlement interpretation on acceptable methods of accounting for determining economic loss claims. Only plaintiffs with a colorable claim may become part of a class. Courts cannot create new causes of action and allow plaintiff's into a class on that basis. http://goo.gl/sXRbSU In re: Green Hills Development Co., LLC, 741 F.3d 651 (5th Cir., 2014) Decided 2/3/2014 Involuntary Bankruptcy case focusing on whether the claim was "subject to a bona fide dispute," and thus the claimant would not have standing. Motion for sanctions for frivolous appeal denied. http://goo.gl/4tHVcP McBride v. Estis Well Serv., L.L.C., 731 F.3d 505 (5th Cir., 2013) Decided 10/2/2013 In a case where several seamen were injured and one killed, an interlocutory appeal was brought to determine if punitive damages were available; the court held that "punitive damages remain available to seamen as a remedy for the general maritime law claim of unseaworthiness." The court them reversed and remanded the case. http://goo.gl/a5IZXj McBride v. Estis Well Serv., L.L.C., 768 F.3d 382 (5th Cir., 2014) Decided 9/24/2014 After full trial was held and appealed, court determined that under the Jones Act, plaintiffs with these claims and injuries cannot collect punitive damages. http://goo.gl/whVq72 McKay v. Novartis Pharmaceutical Corp., 751 F.3d 694 (5th Cir., 2014) Decided 5/27/2014 In prescription drug failure to warn of adverse effects case, state law RETURN TO TABLE OF CONTENTS was preempted by federal law, and plaintiff's failure to perform discovery in reasonable time resulted in grant of motion to dismiss for defendant. http://goo.gl/tCIJNS Moore v. Citgo Refining & Chemicals Co., 735 F.3d 309 (5th Cir., 2013) Decided 11/12/2013 FLSA case that hinges on dismissal based on discovery sanctions. Court also notes that reduction of attorneys’ fees due to wealth differential between parties is not permissible. http://goo.gl/hxkKyl Moore v. Manns, 732 F.3d 454 (5th Cir., 2013) Decided 10/8/2013 Court affirms where in personal injury case, lower court dismissed motion to amend complaint when plaintiff attempted to add new defendants, and there was no likely chance of recovery against them, but the addition would destroy diversity jurisdiction. http://goo.gl/12BPru Serna v. Law Office of Joseph Onwuteaka, P.C., 732 F.3d 440 (5th Cir., 2013) Decided 10/7/2013 In claim under Federal Fair Dept Collection Practices Act, one year limitation to challenge debt collection practice begins on the date plaintiff was served, not the date the defendant filed suit, thus, plaintiff's suit was timely and case was reversed and remanded. http://goo.gl/iLqIVT Simmons v. Sabine River Auth. State, 732 F.3d 469 (5th Cir., 2013) Decided 10/9/2013 The Federal Power Act preempts state law property damage claims. http://goo.gl/jyjtlQ United States ex rel. Spicer v. Westbrook, 751 F.3d 354(5th Cir., 2014) Decided5/5/2014 Court considers who of those involved in a bankruptcy proceeding has the right to bring a False Claims Act claim of making false statements to the federal government; the bankruptcy estate trustee has the right to pursue the claim, although in the instant case, he failed to properly make a FCA claim. http://goo.gl/aqWVhL IV. CONSTITUTIONAL LAW A. Supreme Court Bond v. United States, 572 U.S. ___, 134 S.Ct. 2077 (2014). Docket No.12-158, decided6/2/2014 While Congress can create legislation to enforce a treaty, it cannot add requirements to the treaty that infringe upon traditional state rights, and treaty language should be read narrowly to avoid infringement. http://goo.gl/JiOyYg Burwell v. Hobby Lobby Stores, 573 U.S. ___, 134 S.Ct. 2751 (2014). Docket No. 13-354, decided 6/30/2014 The Religious Freedom Restoration Act of 1993 allows for-profit corporations to claim the same DHHS exemptions as non-profit religious organizations, as applied to the contraceptive mandate of the Affordable Care Act. http://goo.gl/NEk4hJ Harris v. Quinn, 573 U.S. ___, 134 S.Ct. 2618 (2014). Docket No.11-681, decided 6/30/2014 Requiring a "fair share" fee from employees who are not full public sector employees, and for whom the union only provided a single CBA negotiation, violates the employees' rights to freedom of speech and freedom of association. http://goo.gl/9PSRyo Lane v. Franks, 573 U.S. ___, 134 S.Ct. 2369 (2014). Docket No.13-483, decided 6/19/2014 The First Amendment protects a public employee's sworn testimony given outside the scope of his employment, even if the content of the testimony is related to the employment. http://goo.gl/WZGjJ5 McCullen v. Coakley, 573 U.S. ___, 134 S.Ct. 2518 (2014). Docket No.12-1168, decided 6/26/2014 Massachusetts’s statutory "buffer zone" of 35 feet around abortion clinics was unconstitutional under the First Amendment. Despite being facially contentneutral, the statute was not narrowly tailored enough and overburdened the petitioners. http://goo.gl/lpZHOQ Schuette v. Coalition to Defend Affirmative Action, Integration and Immigrant Rights and Fight for Equality By Any Means Necessary (BAMN), 572 U.S. ___, 134 S.Ct. 1623 (2014). Docket No. 12-682, decided 4/22/2014 A state statute prohibiting the application of race- or gender-based preferences in governmental decisions does not violate the Equal Protection Clause of the Fourteenth Amendment. http://goo.gl/UCqffe Town of Greece v. Galloway, 572 U.S. ___, 134 S.Ct. 1811 (2014). Docket No.12-696, decided 5/5/2014 A lack of significant variety in the denominational content of pre-legislative session prayers does not violate the Establishment Clause when there is no showing of intentional discrimination against nonmajority faiths. http://goo.gl/0ZOjQD RETURN TO TABLE OF CONTENTS B. 5th Circuit Fisher v. University of Texas at Austin, 758 F.3d 633 (5th Cir., 2014) Decided 7/15/2014 After remand from the Supreme Court, the fifth circuit reviewed the UT at Austin's race-conscious admissions policy to determining is it was narrowly tailored. http://goo.gl/XRbEYj Kagan, et. Al. v. City of New Orleans, 753 F.3d 560 (5th Cir., 2014) Decided 6/2/2014 The court affirmed that there is no violation of First Amendment rights where a city requires tour guides to take a history test and pass background check in order to get a tour guide license because the ordinance is content-neutral. http://goo.gl/jDHfzP NCDR, L.L.C. v. Mauze & Bagby, P.L.L.C., 745 F.3d 742 (5th Cir., 2014) Decided 3/11/2014 Interlocutory appeal where Law firm ads and website seeking clients for action against dental company falls under Commercial Speech exclusion of the Texas Citizen's Participation Act, an anti-SLAPP statute. http://goo.gl/uRbd3H Tagore v. United States, 735 F.3d 324 (5th Cir., 2013) Decided 11/13/2013 Religious discrimination case focusing on whether the government can prevent articles of religious faith, such as Sikh's kirpans, from entering federal buildings without participating in religious discrimination. New Federal Protective Service policies on restricted items resulted in remand for further analysis. http://goo.gl/WLuYCO United States v. Richards, 755 F.3d 269 (5th Cir., 2014) Decided 6/13/2014 18 USC § 48, forbidding creation and distribution of animal crush videos that are obscene, was held to be narrowly-tailored and thus constitutional and not a violation of First Amendment free speech rights. http://goo.gl/ztgGTb V. CONTRACT LAW A. 5th Circuit Carl E. Woodward, LLC v. Acceptance Indemnity Insurance Co., 743 F.3d 91 (5th Cir., 2014) Decided 2/11/2014 Construction defects and resulting breach of contracts and the liability for such can only be determined once the project is completed. In a Commercial General liability policy acquired by a subcontractor which covers the general contractor for ongoing operations, while a claim can be brought after the operations are complete, the reason for the claim cannot be due to completed operations. http://goo.gl/JqrtsR City of Coll. Station v. Star Ins. Co., 735 F.3d 332 (5th Cir., 2013) Decided 11/14/2013 Under the eight corners theory of liability for insurance contracts, if a claim raised in the most recent complaint alleges an action that is covered within the four corners of an insurance policy which has a duty to defend clause, then the insurance company is liable for defending the insured or reimbursing defense costs, even if the claims are frivolous or groundless. Reversed and remanded. http://goo.gl/gG9nqt Dallas Gas Partners, L.P. v. Prospect Energy Corp. , 733 F.3d 148 (5th Cir., 2013) Decided 10/17/2013 Interpretation of several agreements, which included a covenant not to sue, and the breach of that covenant. Additional interpretation of New York law regarding awarding attorney's fees and joint and several liability. http://goo.gl/gj90bu In re: Deepwater Horizon, 732 F.3d 326 (5th Cir., 2013) Decided 10/2/2013 Settlement interpretation on acceptable methods of accounting for determining economic loss claims. Only plaintiffs with a colorable claim may become part of a class. Courts cannot create new causes of action and allow plaintiff's into a class on that basis. http://goo.gl/sXRbSU In re: Deepwater Horizon, 744 F.3d 370 (5th Cir., 2014) Decided 3/3/2104 Contract/Settlement agreement interpretation that requires plaintiff to hold to the four corners of the document. Claim payment injunction vacated. http://goo.gl/cUiw8Z Johnston & Johnston v. Conseco Life Ins. Co., 732 F.3d 555 (5th Cir., 2013) Decided 10/17/2013 Using Louisiana's strict scrutiny requirements for forfeiture and insurance policy statutes, the court determined that the district court used the wrong date to determine the notice issues for a lapsed life insurance contract. http://goo.gl/IBU6wr Lawyers Title Insurance Co. v. Doubletree Partners, LLP, 739 F.3d 848 (5th Cir., 2014) RETURN TO TABLE OF CONTENTS Decided 1/14/2014 Insurance policy is interpreted as written, unless ambiguous and then adopt the interpretation that favors the insured for purposes of summary judgment. The case also discusses attorney's fees for bad faith conduct and sanctions. http://goo.gl/nBfLNj Mclane Foodservice, Inc. v. Table Rock Rests., L.L.C., 736 F.3d 375 (5th Cir., 2013) Decided 11/15/2013 Plaintiff attempted to retrieve debts after a bankruptcy case left him with an almost $500,000 debt, but court through contract interpretation, court determined that defendant was not related to bankrupt company and plaintiff could not seek personal damages from him. http://goo.gl/zX4E8b Reinagel v. Deutsche Bank Nat'l Trust Co., 735 F.3d 220 (5th Cir., 2013) Decided 10/29/2013 Mortgagor whose property was being foreclosed upon challenged assignee's ability to foreclose, claiming that assignment of their mortgage was void due to technical issues in transfer, but court determined that assignment was merely voidable, and not one that mortgagor could affect, only the assignor. http://goo.gl/c9PLlS VI. CRIMINAL LAW A. Supreme Court Abramski v. United States, 573 U.S. ___, 134 S.Ct. 2259 (2014). Docket No. 12-1493, decided 6/16/2014 Intent to sell a firearm to another is a material fact requiring disclosure under the firearm disclosure statute, and federally licensed firearms dealers are required to keep that information on file. http://goo.gl/gdT65e Burrage v. United States, 571 U.S. ___, 134 S.Ct. 881 (2014). Docket No. 12-7515, decided 1/27/2014 For a defendant to receive a penalty enhancement for causing death by distributing drugs, the victim's drug use must be an independently sufficient cause or butfor cause of death. http://goo.gl/Rhzdae Loughrin v. United States, 573 U.S. ___, 134 S.Ct. 2384 (2014). Docket No. 13-316, decided 6/23/2014 Prosecutors do not need to prove that a defendant had the intent to defraud a bank to prove him guilty of bank fraud, as long as the defendant intended to obtain property under control of the bank and his false statement "naturally induced" the acquisition of the bank's property. http://goo.gl/6myNPv Paroline v. United States, 572 U.S. ___, 134 S.Ct. 1710 (2014). Docket No. 12-8561, decided 4/23/2014 To recover restitution for a victim's harm or damages in child pornography cases, the government must prove that the defendant's actions be the proximate cause, but not necessarily the direct cause, of the harm or damages. Proximate cause can include participation in a larger process that created the harm, but damages are limited to the defendant's role in the process. http://goo.gl/zoM9DP Robers v. United States, 572 U.S. ___, 134 S.Ct. 1854 (2014). Docket No. 12-9012, decided 5/5/2014 Under the Mandatory Victim Restitution Act, "any part of the property that is returned" refers to the actual return of money, not to the value of loan collateral taken (but not yet sold) by the victim. http://goo.gl/JSI0QP Rosemond v. United States, 572 U.S. ___, 134 S.Ct. 1240 (2014). Docket No. 12-895, decided 3/5/2014 To prove that a defendant aided and abetted the use of a firearm during a drug trafficking crime, the government must show that the defendant had advance knowledge that his or her confederate would use or carry a firearm during the commission of the crime. http://goo.gl/BMfQm9 United States v. Castleman, 572 U.S. ___, 134 S.Ct. 1405 (2014). Docket No. 12-1371, decided 3/26/2014 Possessing a firearm after a misdemeanor conviction of domestic assault under state law violates the federal statute prohibiting the possession of a firearm after being convicted of a misdemeanor crime of domestic violence, when the state law includes an element regarding the use of physical force. http://goo.gl/SMvQro B. 5th Circuit United States v. Akins, 746 F.3d 590 (5th Cir., 2014) Decided 3/24/2014 Seven co-defendants' appeals for felony drug and conspiracy convictions were affirmed. http://goo.gl/9e5YMk United States v. Alcantar, 733 F.3d 143 (5th Cir., 2013) Decided 10/7/2013 Statute 18 U.S.C. §§ 922(g)(1), Convicted Felon in RETURN TO TABLE OF CONTENTS Possession of a Firearm, does not exceed Congress's authority under the Commerce Clause, and is not unconstitutional. http://goo.gl/2Mfiqd probable cause necessary to seize forfeitable assets, despite defendant's claim that assets are necessary to hire defense counsel. http://goo.gl/0vINSZ United States v. Isgar, 739 F.3d 829 (5th Cir., 2014) Decided 1/13/2014 Mortgage fraud case where defendants challenge their convictions, all of which were confirmed. One defendant also claimed ineffective assistance of counsel claims, which is not heard on direct appeal unless a rare exception occurs where there is enough evidence in the record to review the merits of the claim. http://goo.gl/jqmbbB Kansas v. Cheever, 571 U.S. ___, 134 S.Ct. 596 (2013). Docket No. 12-609, decided 12/11/2013 Prosecutors can use evidence from a court-ordered mental evaluation to rebut expert testimony. http://goo.gl/QgI0g0 United States v. Simpson, 741 F.3d 539 (5th Cir., 2014) Decided 1/15/2014 Two defendants challenge convictions for conspiracy, violation of the CAN-SPAM Act, obstruction of justice, and false registration of a domain name. CANSPAM Act § 1037 is not overly broad or vague and is constitutional. http://goo.gl/FlCc7X United States v. Thompson, 735 F.3d 291 (5th Cir., 2013) Decided 11/18/2013 Criminal defendant challenges his conviction, with emphasis on a claim of racial discrimination in voir dire. http://goo.gl/MBgk0q VII. CRIMINAL PROCEDURE A. Supreme Court Fernandez v. California, 571 U.S. ___, 134 S.Ct. 1126 (2014). Docket No. 12-7822, decided 2/25/2014 When a defendant is removed from his or her residence due to arrest, his or her previous objection to a search is nullified by the consent of the other person living in the residence. http://goo.gl/yDV9oS Hall v. Florida, 572 U.S. ___, 134 S.Ct. 1986 (2014). Docket No. 12-10882, decided 5/27/2014 Under the Eighth Amendment, in determining whether a defendant is intellectually disabled (and thus cannot be executed), state statutes must consider more than a numerical IQ cutoff. http://goo.gl/JFkT1a Kaley v. United States, 571 U.S. ___, 134 S.Ct. 1090 (2014). Docket No. 12-464, decided 2/25/2014 A grand jury's indictment provides evidence of the Martinez v. Illinois, 572 U.S. ___, 134 S.Ct. 2070 (2014). Docket No. 13-5967, decided 5/27/2014 For the purposes of determining double jeopardy, jeopardy attaches when the jury is sworn in, whether or not the state actually participates in the trial. http://goo.gl/sQYqPN Navarette v. California, 572 U.S. ___, 134 S.Ct. 1683 (2014). Docket No. 12-9490, decided 4/22/2014 As long as an officer has reason to believe the information in an anonymous tip is accurate, he or she does not need to independently corroborate the information before acting on reasonable suspicion. http://goo.gl/asouVU Riley v. California, 573 U.S. ___, 134 S.Ct. 2473 (2014). Docket No. 13-132, decided 6/25/2014 The warrantless search exception to the Fourth Amendment following an arrest does not generally apply to searching the content of electronic devices, since the content is not a threat to officers and can be preserved. The Court allowed that the exception might apply if the government's interests are compelling enough to make such a search reasonable. http://goo.gl/QZccEB White v. Woodall, 572 U.S. ___, 134 S.Ct. 1697 (2014). Docket No. 12-794, decided 4/23/2014 When a defendant in a capital punishment case pleads guilty, he or she is not entitled to a "no adverse inference" jury instruction regarding his or her decision not to testify. http://goo.gl/Xun1BH B. 5th Circuit Charles v. Stephens, 736 F.3d 380 (5th Cir., 2013) Decided 11/18/2013 Utilizing well established federal law, court affirmed denial of federal habeas petition for death row inmate who had previously sought state habeas. http://goo.gl/ItWIjg RETURN TO TABLE OF CONTENTS In re Campbell, 750 F.3d 523 (5th Cir., 2014), Decided 5/13/2014 Stayed execution of Texas inmate due to intellectual disabilities. Granted permission to file a new habeas petition. http://goo.gl/cDYCml Noatex Corp. v. King Constr. Of Hous., L.L.C., 732 F.3d 479 (5th Cir., 2013) Decided 10/10/2013 Mississippi's Stop Notice statute is facially unconstitutional because it deprives entities of their properties without due process or procedural safeguards. http://goo.gl/rwI2dF Pitonyak v. Stephens, 732 F.3d 525 (5th Cir., 2013) Decided 10/16/2013 Habeas petition that examined whether a prosecutor should have disclosed a jail mental health professional's note that co-defendant claimed responsibility for murder of which defendant was convicted was denied. http://goo.gl/0zaWY2 Reed v. Stephens, 739 F.3d 753 (5th Cir., 2014) Decided 1/10/2014 Request for Certificate of Appealability for denial of habeas relief in death penalty case denied. http://goo.gl/pgm7Gs United States v. Jones, 733 F.3d 574 (5th Cir., 2013) Decided 10/28/2013 Defendants challenged their Medicare fraud charges under double jeopardy and a refusal to substitute counsel, both of which were denied by the court. http://goo.gl/SpOznl United States v. Moore, 733 F.3d 161 (5th Cir., 2013) Decided 10/23/2013 In a case of mail theft, Federal Sentencing Guidelines Application Note 4 to § 2B1.1 states that you can presume at least 50 victims, but it is not 50 victims per mail repository; thus a 4 level sentencing enhancement is proper. http://goo.gl/LcKxCw United States v. Nelson, 732 F.3d 504 (5th Cir., 2013) Decided 10/14/2013 Mayoral corruption case which discusses entrapment with specific focus on element of predisposition. Attorney testifying in criminal trial about the circumstances surrounding a former client's signing of a plea agreement is a violation of attorney-client privilege, but may be considered a harmless error. Sentencing calculation discussion with regards to determining valuation of bribery. http://goo.gl/Fgkwem United States v. Palacios, 756 F.3d 325 (5th Cir., 2014) Decided 5/21/2014 After Sentencing Guidelines were amended to clarify the issue, the court determined that the lower court could not refuse to give defendant a one-level sentence reduction for accepting responsibility of crime because defendant refused to waive his right to appeal. http://goo.gl/ewIyjN United States v. Poole, 735 F.3d 269 (5th Cir., 2013) Decided 11/11/2013 Prosecutorial misconduct is not automatically a reason to grant a new trial. http://goo.gl/bL3cym United States v. Powell, 732 F.3d 361 (5th Cir., 2013) Decided 10/3/2013 Drug dealers were convicted after they were stopped in their car due to an informant telling police that they were carrying drugs. Defendants’ appeals are based on search and seizure issues, 6th Amendment’s right to confront witnesses, use of a non-testifying codefendant’s statements, and sentencing enhancements based on presence of a minor during a pre-planned crime. http://goo.gl/6dJjEX United States v. Robinson, 741 F.3d 588 (5th Cir., 2014) Decided 1/24/2014 Child pornography case where court held that a "court's failure to recognize its discretion to consider a defendant's cooperation under § 3553(a)(1) is a significant procedural error;" sentencing error was not harmless, so remanded for resentencing. http://goo.gl/EclP1a United States v. St. Junius, 739 F.3d 193 (5th Cir., 2013) Decided 2/18/2013 Four defendants appeal their Medicare fraud charges and sentencing, which were affirmed, with the exception of excessive restitution. http://goo.gl/aahFqg United States v. Tuma, 738 F.3d 681 (5th Cir., 2013) Decided 12/23/2013 Criminal violations of the Clean Water Act with challenges to sentencing. http://goo.gl/YugK8b United States v. Urias-Marrufo, 744 F.3d 361 (5th Cir., 2014) Decided 2/28/2014 In a case where a guilty plea to a drug charge would RETURN TO TABLE OF CONTENTS result in the deportation of a noncitizen defendant, and the defendant attempted to withdraw the plea before sentencing, the circuit court has the authority to hear and decide the issue of ineffective assistance of counsel on direct appeal rather than on collateral attack because the district court addressed the issue and/or the record was complete enough to "address the merits on appeal." http://goo.gl/AZrcUg United States v. Walters, 732 F.3d 489 (5th Cir., 2013) Decided 10/10/2013 Defendant who traded his right to appeal his conviction and sentence in exchange for removing a sentence enhancement cannot seek appeal. http://goo.gl/RTFgtI Whitaker v. Livingston, 732 F. 3d 465 (5th Cir., 2013) Decided 10/8/2013 Texas death row inmates claim use of pentobarbital from compounding pharmacies violates the 8th Amendment and request injunction and one a stay of execution. No violation of the 8th amendment. http://goo.gl/xgtG43 VIII. ELECTION LAW A. Supreme Court McCutcheon v. Fed. Election Comm'n, 572 U.S. ___, 134 S.Ct. 1434 (2014). Docket No. 12-536, decided 4/2/2014 The two-year aggregate campaign contribution limit created by the Bipartisan Campaign Reform Act violated the First Amendment, as it was not "closely drawn" due to the mismatch between the goal of preventing corruption and the statute itself. http://goo.gl/O5e1Nr B. 5th Circuit Texans for Free Enter. V. Tex. Ethics Comm'n, 732 F.3d 535 (5th Cir., 2013) Decided 10/16/2013 The Texas Election Code prevents the Texans for Free Enterprise, an incorporated political committee, from accepting political contributions, which it uses to make statements for or against particular candidates; Claiming that this is a suppression of their freedom of speech rights, FTE requested a preliminary injunction, which the courts agreed with and ordered the injunction. http://goo.gl/ujVrZF Veasey v. Perry, 769 F.3d 890 (5th Cir., 2014) Decided 10/14/2014 Court considered how disruptive changing the election process would be to various precincts with only 9 days left before early voting begins, and determined that due to the risk that voters would be treated differently in different locations due to lack of training and printed materials, along with the other factors weighing in favor of a stay, the State's request to strike down the injunction preventing the Texas Voter ID Law from being utilized was granted. http://goo.gl/vdMqZq Voting for Am., Inc. v. Steen, 732 F.3d 382 (5th Cir., 2013) Decided 10/3/2013 Challenge of the Texas election laws that regulate volunteer deputy registrars under the First Amendment and National Voter Registration Act. Lower court found validity in claims and issued preliminary injunction, but 5th Circuit reversed and remanded. http://goo.gl/rsSV7Z IX. EMPLOYMENT LAW A. Supreme Court Harris v. Quinn, 573 U.S. ___, 134 S.Ct. 2618 (2014). Docket No. 11-681, decided 6/30/2014 Requiring a "fair share" fee from employees who are not full public sector employees, and for whom the union only provided a single CBA negotiation, violates the employees' rights to freedom of speech and freedom of association. http://goo.gl/9PSRyo Lawson and Zang v. FMR, LLC, 572 U.S. ___, 134 S.Ct. 1158 (2014). Docket No. 12-3, decided 3/4/2014 Employees of privately-held contractor or subcontractor of a public company are protected from retaliation by the whistleblower provision of the Sarbanes-Oxley Act, just as employees of the public company are. http://goo.gl/rNW7AN Sandifer v. United States Steel Corp., 571 U.S. ___, 134 S.Ct. 870 (2014). Docket No. 12-417, decided 1/27/2014 When protective gear is necessary for a job, the time an employee spends putting it on and taking it off should be compensated by the employer. http://goo.gl/iYGgia B. 5th Circuit Black v. Settlepou, P.C., 732 F.3d 492 (5th Cir., 2013) Decided 10/11/2013 FLSA Misclassification case where court determined which method of calculating overtime premiums should be used. The court also discussed calculating attorney's fees based on the lodestar method, and while the court may consider the success of the claim as a factor for enhancing or reducing fees, the court cannot base a reduction solely on a low damages result. http://goo.gl/Dbp0MH RETURN TO TABLE OF CONTENTS Bradberry v. Jefferson Cnty, 732 F.3d 540 (5th Cir., 2013) Decided 10/17/2013 Interlocutory appeal in discrimination against military service case. Collateral estoppel did not apply because the ALJ's opinion did not reach all of the issues. State statutes which limit the courts which can hear a case applies to the state court structure, but does not bar supplemental jurisdiction in federal courts. http://goo.gl/LsIGJM D.R. Horton v. NLRB, 737 F.3d 344 (5th Cir., 2013) Decided 12/3/2013 Court refused to take sides in a circuit split regarding the constitutionality of recess appointments to the NLRB within a Congressional session. The court also consider technical claims about the NLRB board's authority, including the de facto officer doctrine and the mechanics of the delegation of the three-person panel, all of which failed. Fifth circuit refused to create a circuit split regarding the enforceability of arbitration agreements containing class waivers, narrowly interpreting the issue. The arbitration agreement may not prohibit employees from pursuing regulatory claims with the NLRB. http://goo.gl/NOfh6l Royal v. CCC& R Tres Arboles, LLC, 736 F.3d 396 (5th Cir., 2013) Decided 11/21/2013 Plaintiff met the requirements for a prima facia claim of retaliation, including showing a dispute of material facts surrounding hostile working environment and a relation to termination. http://goo.gl/DBM6pH Williams-causal v. Denton County, Tex., 741 F.3d 635 (5th Cir., 2014) Decided 1/31/2014 Claim of hostile work environment due to race-based comments was reversed because employer took "prompt remedial action calculated to halt the harassment." Defendant claimed qualified immunity defense, and court affirmed motion to dismiss because plaintiff did not plead "facts, which, if true, would overcome" the qualified immunity defense. http://goo.gl/vcsQoF Willis v. Cleco Corp., 749 F.3d 314 (5th Cir., 2014) Decided 5/8/2014 Racial retaliation and discrimination employment case with assertion of wrongful termination, part of which was remanded because there is a genuine issue of material fact. http://goo.gl/scny7Z X. ENVIRONMENTAL LAW A. Supreme Court CTS Corp. v. Waldburger, 573 U.S. ___, 134 S.Ct. 2175 (2014). Docket No. 13-339, decided 6/9/2014 CERCLA's preemption of state statutes of limitation only applies to true statutes of limitation, which are based on discovery of harm, and not statutes of repose, which are independent of the plaintiff's awareness of harm. http://goo.gl/kvGLJR Envt'l Prot. Agency v. EME Homer City Generation, 572 U.S. ___, 134 S.Ct. 1584 (2014). Docket No. 12-1182, decided 4/29/2014 Under the Transport Rule, the EPA can set guidelines for "upwind" states without providing quantified metrics about the upwind state's contribution to pollution in downwind states. http://goo.gl/iLwMeZ Utility Air Regulatory Group v. Envtl Prot. Agency, 573 U.S. ___, 134 S.Ct. 2427 (2014). Docket No. 12-1146, decided 6/23/2014 The EPA cannot interpret the Clean Air Act's "Prevention of Significant Deterioration" provisions to apply generally to greenhouse gas emissions, instead of the more limited emission of "air pollutants." However, the EPA can require "best available control technology" regarding greenhouse gas emissions when the source would already be subject to the PSD provisions based on air pollutants. http://goo.gl/o47KlO B. 5th Circuit In re: Deepwater Horizon, 745 F.3d 157 (5th Cir., 2014) 2/24/2014 Louisiana State environmental laws are preempted by the Outer Continental Shelf Lands Act, the Clean Water Act, and the Oil Pollution Act regarding an oil spill on the Outer Continental Shelf. http://goo.gl/WmEZUf XI. IMMUNITY A. Supreme Court Air Wisconsin Airlines Corp. v. Hoeper, 571 U.S. ___, 134 S.Ct. 852 (2014). Docket No. 12-315, decided 1/27/2014 Federal immunity to defamation claims applies unless the statements were "materially false" and thus would have had a different mental or emotional impact on the reader than the actual truth. http://goo.gl/582ruJ Michigan v. Bay Mills Indian Cmty, 572 U.S. ___, 134 S.Ct. 2024 (2014). Docket No. 12-515, decided 5/27/2014 RETURN TO TABLE OF CONTENTS Only Congress can revoke tribal sovereign immunity, and under the Indian Gaming Regulatory Act, immunity is only waived so far as regulating gambling activity on tribal lands. Therefore, sovereign immunity prevents a state from suing a tribe based on gambling activity outside of tribal lands. http://goo.gl/8EeYI0 Plumhoff v. Rickard, 572 U.S. ___, 134 S.Ct. 2012 (2014). Docket No. 12-1117, decided 5/27/2014 Rulings on summary judgment motions regarding qualified immunity are appealable final decisions. Qualified immunity is based on whether an officer violated "clearly established" law at the time of his or her actions. Officer behavior must be evaluated from the perspective of a "reasonable officer on the scene," and if an officer is justified in shooting to prevent a public threat, the officer is justified in continuing to shoot until the threat is neutralized. http://goo.gl/Ga26zM Stanton v. Sims, 5713 U.S. ___, 134 S.Ct. 3 (2013). Docket No. 12-1217, decided 11/4/2013 Qualified immunity exists unless an officer's actions violate clearly established constitutional provisions. When an officer is in pursuit of a suspect and commits warrantless entry on private property (at the time of the officer's actions, such behavior was a grey area of law in that jurisdiction), the officer retains his or her qualified immunity. http://goo.gl/VrdboZ Wood v. Moss, 572 U.S. ___, 134 S.Ct. 2056 (2014). Docket No. 13-115, decided 5/27/2014 The Secret Service is immune from suit when the Service's actions were reasonable and based on security concerns, despite those actions having a nonviewpoint-neutral effect. http://goo.gl/SBLSyr B. 5th Circuit Williams-Boldware v. Denton County, Tex., 741 F.3d 635 (5th Cir., 2014) Decided 1/31/2014 Claim of hostile work environment due to race-based comments was reversed because employer took "prompt remedial action calculated to halt the harassment." Defendant claimed qualified immunity defense, and court affirmed motion to dismiss because plaintiff did not plead "facts, which, if true, would overcome" the qualified immunity defense. http://goo.gl/vcsQoF XII. INTELLECTUAL PROPERTY LAW A. Supreme Court Alice Corporation v. CLS Bank International, 573 U.S. ___, 134 S.Ct. 2347 (2014). Docket No. 13-298, decided 6/19/2014 Abstract ideas are not patentable, even when the claim requires a computer to take various basic computing steps to implement the abstract idea. http://goo.gl/lUQcbG American Broadcasting Companies, Inc. v. Aereo, Inc., 573 U.S. ___, 134 S.Ct. 2498 (2014). Docket No. 13-461, decided 6/25/2014 Transmitting a program over the internet to paid subscribers is a "public performance" under the Copyright Act. http://goo.gl/BjrHw0 Lexmark Int'l v. Static Control Components, 572 U.S. ___, 134 S.Ct. 1377 (2014). Docket No. 12-873, decided 3/25/2014 In determining whether a plaintiff has standing under the false advertising provision of the Lanham Act, courts should apply the "zone of interest" test and proximate cause requirement. http://goo.gl/nXj2Qg Limelight Networks v. Akamai Technologies, 572 U.S. ___, 134 S.Ct. 2111 (2014). Docket No. 12-786, decided 6/2/2014 If no single entity performed all the steps to infringe a patent, and thus there was no direct infringement on the patent, no one can be held liable for inducing infringement of the patent. http://goo.gl/ove5w2 Medtronic, Inc. v. Mirowski Family Ventures, LLC, 571 U.S. ___, 134 S.Ct. 843 (2014). Docket No. 12-1128, decided 1/22/2014 Jurisdiction over a declaratory judgment is based on the jurisdiction of the likely suit if the seeker acted as he or she desired. The burden of proving infringement is still on patentee, even during the declaratory judgment stage. http://goo.gl/63GGw1 Nautilus, Inc. v. Biosig Instruments, Inc., 572 U.S. ___, 134 S.Ct. 2120 (2014). Docket No. 13-369, decided 6/2/2014 Though absolute clarity is not required for patent claims, claims are invalid for indefiniteness if, when reviewing the claim in light of the entire patent, prosecution history, and amendments, the claim does not define the invention's scope with reasonable certainty to those skilled in the art. http://goo.gl/eBMCSb RETURN TO TABLE OF CONTENTS Octane Fitness v. ICON Health & Fitness, 572 U.S. ___, 134 S.Ct. 1749 (2014). Docket No. 12-1184, decided 4/29/2014 The patent law attorneys’ fees statutory requirement that suits be "exceptional" before attorneys’ fees are awarded should be interpreted to include "frivolous" suits. http://goo.gl/nivLaf Petrella v. MGM, Inc., 572 U.S. ___, 134 S.Ct. 1962 (2014). Docket No. 12-1315, decided 5/19/2014 When copyright suits are within the three-year statute of limitations provided by the Copyright Act, the doctrine of laches cannot be applied to prevent the suit. http://goo.gl/YdrSPx Pom Wonderful, LLC v. The Coca-Cola Company, 573 U.S. ___, 134 S.Ct. 2228 (2013). Docket No. 12-761, decided 6/12/2014 The Federal Food, Drug, and Cosmetic Act does not bar claims of false advertising under the Lanham Act, even when those claims are based on the labeling of items covered by the FDCA. http://goo.gl/v0zc3O XIII. INTERNATIONAL LAW A. Supreme Court Argentina v. NML Capital, Ltd., 573 U.S. ___, 134 S.Ct. 2250 (2014). Docket No. 12-842, decided 6/16/2014 Requiring a bank to disclose asset information of a foreign state via subpoena does not violate the Foreign Sovereign Immunities Act. http://goo.gl/rm44gF BG Group PLC v. Argentina, 572 U.S. ___, 134 S.Ct. 1198 (2014). Docket No. 12-138, decided 3/5/2014 When determining whether pre-arbitration requirements have been met, the decision rests with the arbitrator and not the court. http://goo.gl/UJ9L1S DaimlerChrysler AG v. Bauman, 571 U.S. ___, 134 S.Ct. 746 (2014). Docket No. 11-965, decided 1/14/2014 The placement of products in stream of commerce in California by a German corporation is not sufficient to establish general jurisdiction in California over the German company. http://goo.gl/ZbBv36 Lozano v. Alvarez, 572 U.S. ___, 134 S.Ct. 1224 (2014). Docket No. 12-820, decided 3/5/2014 The policy behind equitable tolling of a statute of limitations does not apply to the one-year limitation on the petition to return an abducted child under the Hague Convention, because not all signatories of the treaty apply equitable tolling and thus the policy is not a part of statutory intent. http://goo.gl/IdGtFR XIV. WOMEN'S RIGHTS A. 5th Circuit Jackson Women's Health Organization v. Currier, 760 F.3d 448 (5th Cir., 2014) Decided 7/29/2014 Mississippi cannot "impose a regulation that will effectively close its only abortion clinic," shifting the burden of providing abortions to surrounding states. http://goo.gl/hVNwZl Planned Parenthood of Greater Tex. Surgical Health Servs. v. Abbott, 734 F.3d 406 (5th Cir., 2013) Decided 10/31/2013 Lower court's stay on statute requiring doctors have admitting privileges at a hospital within 30 miles of where they performed abortions was reversed because the State met its burden of showing that it is likely to prevail on the merits and the other three factors necessary to grant a stay pending appeal. http://goo.gl/g0W5nI Planned Parenthood of Greater Tex. Surgical Health Servs. v. Abbott, 748 F.3d 583 (5th Cir., 2014) Decided 3/27/2014 Court reviewed whether a statute that required doctors to have admitting privileges at a hospital within 30 miles of the facility at which they perform abortions and that the doctor follow the FDA approved procedures for administering medications involved in abortion were constitutional. Utilizing the rational basis standard, the court found that both restrictions were not unduly burdensome and are constitutional. http://goo.gl/rY3c25 XV. MISCELLANEOUS A. Supreme Court Brandt Revocable Trust v. United States, 572 U.S. ___, 134 S.Ct. 1257 (2014). Docket No. 12-1173, decided 3/10/2014 When the United States grants land underlying a rightof-way to a private party, the right-of-way reverts to an easement and is subject to abandonment as any other easement. http://goo.gl/07s8iz Chadbourne and Parke LLP v. Troice, 571 U.S. ___, 134 S.Ct. 1058 (2014). Docket No. 12-79, decided 2/26/2014 The Securities Litigation Uniform Standards Act does not apply to the sale of securities other than those RETURN TO TABLE OF CONTENTS explicitly covered by the Act, even when those noncovered securities were misrepresented as covered securities. http://goo.gl/GXIiFA Fifth Third Bancorp v. Dudenhoeffer, 573 U.S. ___, 134 S.Ct. 2459 (2014). Docket No. 12-751, decided 6/25/2014 Though ESOPs do not have the same prudential requirement to diversify as other retirement plans, ERISA does not allow ESOPs to move for dismissal under a presumption of prudence when the ESOP invests in the company's own stock. http://goo.gl/dBhmQB Nat'l Labor Relations Bd v. Noel Canning, 573 U.S. ___, 134 S.Ct. 2550 (2014). Docket No. 12-1281, decided 6/26/2014 Under the Recess Appointments Clause, the president may only appoint sans confirmation when the Senate is in recess for at least ten days, and when the vacancy either occurs during the recess or still exists at the time of the recess. http://goo.gl/2A6VKK Northwest, Inc. v. Ginsberg, 572 U.S. ___, 134 S.Ct. 1422 (2014). Docket No. 12-462, decided 4/2/2014 The Airline Deregulation Act prevents states from regulating the price, route, or services of airlines, but it also pre-empts private claims based on state law that seek to enlarge the original contractual obligations between an airline and the other party to the contract. http://goo.gl/EiEwc6 Scialabba v. De Osorio, 573 U.S. ___, 134 S.Ct. 2191 (2014). Docket No. 12-930, decided 6/9/2014 When aliens apply for immigration as children, and then subsequently age out and reapply as adults, the Immigration and Nationality Act does not allow the aliens to retain the original date of the child application. http://goo.gl/V1mzf1 United States v. Apel, 571 U.S. ___, 134 S.Ct. 1144 (2013). Docket No. 12-1038, decided 2/26/2014 A "military…installation" includes any area over which a commanding officer has responsibility, regardless of a lack of exclusive use, possession, or control. http://goo.gl/5Ez3t4 United States v. Quality Stores, 572 U.S. ___, 134 S.Ct. 1395 (2014). Docket No. 12-1408, decided 3/25/2014 Under the Federal Insurance Contributions Act, severance payments are taxable as wages. http://goo.gl/gF20lP B. 5th Circuit Estate of Lance v. Lewisville Independent School District, 743 F.3d 982 (5th Cir., 2014) Decided 2/28/2014 Disability discrimination suit brought after fourth grade special needs student committed suicide. Court found no discrimination under the Rehabilitation Act, IDEA, or ADA. http://goo.gl/R2dUts Estate of Sanders v. United States, 736 F.3d 430 (5th Cir., 2013) Decided 11/21/2013 Federal Tort Claims Act Medical malpractice case which was affirmed based on an inadequate expert witness report submitted by the plaintiff. http://goo.gl/Fk9hFt Inclusive Communities Project, Inc. v. Texas Dept. of Housing and Community Affairs, 747 F.3d 275 (5th Cir., 2014) Decided 3/24/2014 In a disparate impact discrimination claim under the Fair Housing Act, the Fifth Circuit expressly adopted new HUD regulations which places the initial burden of proving a discriminatory effect on the plaintiff; if the plaintiff does so, the defendant then has to prove that their "practice is necessary to achieve one or more substantial, legitimate, nondiscriminatory interests of the defendant;" If the defendant meets their burden, then the plaintiff has to prove that the "substantial, legitimate, nondiscriminatory interest" can be met in a less discriminatory way. Cert to SCOTUS granted in part. http://goo.gl/UAiBVm Lashley v. Pfizer, Inc., 750 F.3d 470 (5th Cir., 2014) Decided 2/21/2014 Federal law preempts state drug labeling laws. Generic drug labels must be the same as brand name labels, thus generic manufacturers cannot take unilateral action to change labels or issue communications. Under state law claims, brand name manufacturers cannot be held liable for products which they did not create. http://goo.gl/qBh5bh Neely v. PSEG Tex., Ltd., 735 F. 3d 242 (5th Cir., 2013) Decided 11/6/2013 Although the ADAAA has lower requirements for proving a disability for ADA purposes, the claimant RETURN TO TABLE OF CONTENTS must still prove that he or she is a "qualified individual with a disability." http://goo.gl/3tbLXL RETURN TO TABLE OF CONTENTS INSURANCE LAW UPDATE: IT’S NOT JUST FOR THE OTHER GUY AMY ELIZABETH STEWART Amy Stewart PC Mockingbird Station 5307 E. Mockingbird Lane, Suite 425 Dallas, Texas 75206 State Bar of Texas 31st ANNUAL LITIGATION UPDATE INSTITUTE January 15-16, 2015 San Antonio CHAPTER 16 RETURN TO TABLE OF CONTENTS AMY ELIZABETH STEWART Shareholder Amy Elizabeth Stewart is the managing principal of the insurance coverage boutique firm, Amy Stewart PC, where she and the firm’s other lawyers devote 100% of their practice to representing policyholders in disputes with their insurance companies. While the firm handles all types of coverage litigation, Amy focuses primarily on disputes arising from specialty liability policies, including directors and officers liability, fiduciary liability, cyber, errors and omissions, employment practices liability, and other professional liability policies. She also regularly advises clients on insurance and coverage issues, including policy procurement and renewal, policy interpretation, claim handling, and resolution strategies. Amy’s commitment to excellence in the practice of law has been widely recognized in the legal community. In 2013, Amy was elected to the American College of Coverage and Extracontractual Counsel (ACCEC). She is rated AV® Preeminent™ 5.0 out of 5 (Peer Review Rating) by Martindale-Hubbell®, was named one of the Best Lawyers in Dallas 2013 and 2014 by D Magazine, and has been listed as a Super Lawyer® in the area of insurance coverage by Thomson Reuters 2009-2013. She is also a Fellow with the Texas Bar Foundation. 214 347 9394 direct 214 316 2623 cell [email protected] Amy Stewart PC Mockingbird Station 5307 E. Mockingbird Lane Suite 425 Dallas, Texas 75206 214 233 7076 main 214 975 2806 fax amystewartlaw.com Amy’s book, Texas Insurance Coverage Litigation, the Litigator’s Practice Guide, is published annually by Texas Lawyer Books and ALM. Amy writes frequently for a number of publications, including the American Bar Association’s Coverage publication and the Dallas Bar Association’s Headnotes. Amy speaks regularly on insurance issues at conferences and seminars, and enjoys presenting her State Bar of Texas accredited course, Insurance 101: The Fundamentals of Insurance for In-House Counsel. Amy is a member of the litigation and insurance sections of the State Bar of Texas, the American Bar Association, and the Dallas Bar Association. Amy is also a member of the Professional Liability Underwriting Society and The Claims and Litigation Management (CLM) Alliance. For many years, Amy has been a sustaining member of Attorneys Serving the Community, frequently serving as co-chair of various committees. She was honored to serve as the organization’s lead chair for 2012-13 and is currently chair of the Charity Selection Committee. She also serves on the board of directors of Heart House Dallas. In 2008, Amy founded the Dallas women’s networking group, ConnectHer. Amy graduated magna cum laude from Liberty University, then earned her juris doctorate from the University of Virginia, School of Law. She and her husband live in east Dallas with their two children. *AV® Preeminent ™ and BV® Distinguished™ are certification marks of Reed Elsevier Properties Inc., used in accordance with the Martindale-Hubbell® certification procedures, standards and policies. RETURN TO TABLE OF CONTENTS TABLE OF CONTENTS I. INSURANCE POLICIES COMMONLY APPLICABLE TO CIVIL LITIGATION ............................................ 1 A. Commercial General Liability Insurance ........................................................................................................ 1 1. Risks Insured ........................................................................................................................................... 1 2. Insuring Agreements................................................................................................................................ 1 3. Coverage Trigger ..................................................................................................................................... 2 4. Damage During Multiple Policy Periods................................................................................................. 2 5. Common Exclusions ................................................................................................................................ 3 B. Directors and Officers Liability Insurance ...................................................................................................... 4 1. Risks Insured ........................................................................................................................................... 4 2. Insuring Agreements................................................................................................................................ 5 3. Claims-Made Coverage ........................................................................................................................... 5 4. Common Exclusions ................................................................................................................................ 5 C. Cyber and Privacy Liability Insurance ............................................................................................................ 5 1. Risks Insured ........................................................................................................................................... 5 2. Insuring Agreements................................................................................................................................ 5 3. Common Exclusions ................................................................................................................................ 6 D. Professional Liability Insurance ...................................................................................................................... 6 1. Risks Insured ........................................................................................................................................... 6 2. Claims-Made Coverage ........................................................................................................................... 7 3. Common Exclusions ................................................................................................................................ 7 4. Insured’s Consent to Settle ...................................................................................................................... 8 II. THE INSURED’S RESPONSIBILITIES IN EVENT OF A CLAIM .................................................................... 8 A. Notice to the Insurer ........................................................................................................................................ 8 1. Notice Clauses ......................................................................................................................................... 8 2. Notice of Potential Claims ....................................................................................................................... 8 3. Late Notice .............................................................................................................................................. 9 B. Cooperation and Consent ................................................................................................................................ 9 1. Cooperation and Consent Clauses ........................................................................................................... 9 2. Prejudice .................................................................................................................................................. 9 III. THE INSURER’S OBLIGATIONS IN EVENT OF A CLAIM........................................................................... 10 A. Duties Imposed by Contract .......................................................................................................................... 10 1. Duty to Defend ...................................................................................................................................... 11 2. Duty to Indemnify ................................................................................................................................. 12 B. Statutory Duties ............................................................................................................................................. 13 C. The Stowers Duty .......................................................................................................................................... 13 IV. MISCELLANEOUS ISSUES—RECENT CASES .............................................................................................. 14 A. Additional Insureds—Deepwater Horizon .................................................................................................... 14 B. Assignments, Settlements, and Stowers ........................................................................................................ 15 RETURN TO TABLE OF CONTENTS Insurance Law Update: It’s Not Just for the Other Guy Chapter 16 Table of Authorities Cases Am Physicians. Exch. v. Garcia, 876 S.W.2d 842 (Tex. 1994) .................................................................................. 2, 3 Am. Auto. Ins. Co. v. Grimes, 2004 U.S. Dist. LEXIS 1696 ........................................................................................... 6 Am. States Ins. Co. v. Bailey, 133 F.3d 363 (5th Cir. 1998) ......................................................................................... 11 Barnett v. Aetna Life Ins. Co., 723 S.W.2d 663 (Tex. 1987) .......................................................................................... 2 Columbia Cas. Co. v. CP Nat., Inc., 175 S.W.3d 339 (Tex. App.—Houston [1st Dist.] 2004, pet. denied) ..................................................................................................................................................................... 7 Comsys Info. Tech. Servs., Inc. v. Twin City Fire Ins. Co., 130 S.W.3d 181 (Tex. App.—Houston [14th Dist.], 2003, pet denied)................................................................................................................................. 7 Cruz v. Liberty Mut. Ins. Co., 853 S.W.2d 714 (Tex. App.—Texarkana 1993), rev’d on other grounds, 883 S.W.2d 164 (Tex. 1993) .................................................................................................................... 8 D.R. Horton-Texas, Ltd. v. Markel Int’l Ins. Co., 300 S.W.3d 740 (Tex. 2009) .................................................... 12, 13 Don’s Bldg. Supply, Inc. v. OneBeacon Ins. Co., 267 S.W.3d 20, 32 n. 45 (Tex. 2008) ................................................ 2 Downhole Navigator, L.L.C. v. Nautilus Ins. Co., 686 F.3d (5th Cir. 2012) ................................................................. 12 E & L Chipping Co. v. Hanover Ins. Co.,962 S.W.2d 272 (Tex. App.—Beaumont 1998, no pet.) ............................... 9 Evanston Ins. Co. v. ATOFINA Petrochemicals, Inc., 256 S.W.3d 660 (Tex. 2008) ............................................. 14, 15 Ewing Constr. Co. v. Amerisure Ins. Co., 420 S.W.3d 30 (Tex. 2014) ...................................................................... 3, 4 F.D.I.C. v. Mijalis, 15 F.3d 1314 (5th Cir. 1994) ........................................................................................................... 5 Farmers Tex. County Mut. Ins. Co. v. Wilkinson, 601 S.W.2d 520 (Tex. Civ. App.—Austin 1980, writ ref’d n.r.e.) ..................................................................................................................................................... 12 G. A. Stowers Furniture Co. v. Am. Indem. Co., 15 S.W.2d 544 (Tex. Comm’n. App. 1929) ............................... 13, 14 Gregg & Valby, L.L.P. v. Great Am. Ins. Co., 316 F. Supp. 2d 505 (S.D. Tex. 2004) ................................................... 6 GuideOne Elite Ins. Co. v. Fielder Rd. Baptist Church, 197 S.W.3d 305 (Tex. 2006) ................................................ 11 Harken Exploration Co. v. Sphere Drake Ins. PLC, 261 F.3d 466 (5th Cir. 2001) ...................................................... 11 Hernandez v. Gulf Group Lloyds, 875 S.W.2d 691, 692-94 (Tex. 1994). ...................................................................... 9 Hous. Auth. of the City of Dallas, Tex. v. Northland Ins. Co., 333 F. Supp. 2d 595 (N.D. Tex. 2004) ........................ 12 In re Deepwater Horizon, 710 F.3d 338 (5th Cir. 2013)................................................................................................ 14 Jarvis Christian Coll. v. Nat’l Union Fire Ins. Co. of Pittsburgh, PA., 197 F.3d 742 (5th Cir. 1999) ........................... 7 KLN Steel Products Co., Ltd. v. CNA Ins. Cos., 278 S.W.3d 429 (Tex. App.—San Antonio 2008, pet. denied) ..................................................................................................................................................................... 2 Lafarge Corp. v. Hartford Casualty Ins. Co., 61 F.3d 389 (5th Cir. Tex. 1995) ............................................................ 9 Lamar Homes Inc. v. Mid-Continent Cas. Co., 242 S.W.3d 1 (Tex. 2007) ...................................................... 1, 4, 8, 13 Lennar Corp. v. Markel Am. Ins. Co., 413 S.W.3d 750 (Tex. 2013) .................................................................... 2, 3, 10 Liberty Mut. Ins. Co. v. Graham, 473 F.3d 596 (5th Cir. 2006) ................................................................................... 11 McCullough v. Fidelity & Deposit Company, 2 F.3d 110 (5th Cir. 1993) ...................................................................... 9 Mid-Continent Casualty Co. v. Krolczyk 408 S.W.3d 896 (Tex. App.—Houston [1st Dist.] 2013, pet. denied) ..................................................................................................................................................................... 3 Mid-Continent Ins. Co. v. Liberty Mut. Ins. Co., 236 S.W.3d 765 (Tex. 2007) ............................................................ 13 N. Cnty. Mut. Ins. Co. v. Davalos, 140 S.W.3d 685 (Tex. 2004) ............................................................................ 11, 12 Nast v. State Farm Fire & Cas. Co., 82 S.W.3d 114 (Tex. App.—San Antonio 2002, no pet.) .................................... 6 Nat’l Union Fire Ins. Co. of Pittsburgh v. Willis, 139 F. Supp. 2d 827 (S.D. Tex. 2001), aff’d sub nom. Nat’l Union Fire Ins. co. of Pittsburgh, PA v. Willis, 296 F. 3d 336 (5th Cir. 2002) .................................... 5 Nat’l Union Fire Ins. Co. v. Merchs. Fast Motor Lines, Inc., 939 S.W.2d 139 (Tex. 1997) ........................................ 11 National Union Fire Ins. Co. of Pittsburgh, Pa. v. Hudson Energy Co., 811 S.W.2d 552 (Tex. 1991) ......................... 2 Northfield Ins. Co. v. Loving Home Care, Inc., 363 F.3d 523 (5th Cir. 2004) ............................................................. 11 Pac. Indem. Co. v. Acel Delivery Serv., Inc., 485 F.2d 1169 (5th Cir. 1973) ............................................................... 12 PAJ, Inc. v. Hanover Ins. Co., 243 S.W.3d 630 (Tex. 2008) .......................................................................................... 9 Partain v. Mid-Continent Specialty Ins. Services, 2012 U.S. Dist. LEXIS 19020 (S.D. Tex. 2012, no pet.).................................................................................................................................................................... 9, 10 Pin Oak Ctr., Ltd. v. Travelers Lloyds Ins. Co., 2006 Tex. App. LEXIS 2572 (Tex. App.—Houston [1st Dist.] Mar. 30, 2006, no pet.) ........................................................................................................................... 4 Prodigy Commc’ns Corp. v. Agric. Excess & Surplus Ins. Co., 288 S.W.3d 374 (Tex. 2009)................................... 5, 9 Provident Life & Accident Ins. Co. v. Knott, 128 S.W.3d 211 (Tex. 2003) .................................................................... 6 ii OF CONTENTS RETURN TO TABLE Insurance Law Update: It’s Not Just for the Other Guy Chapter 16 Rangers Ins., Ltd. v. Transocean Offshore Drilling, Inc. (In Re Deepwater Horizon), 728 F.3d 491 (5th Cir. Aug. 29, 2013) ......................................................................................................................................... 14 Retherford v. Castro, 378 S.W.3d 29 (Tex. App.—Waco 2012, pet. denied) ................................................................ 6 Rx.com, Inc. v. Hartford Fire Ins. Co., 426 F. Supp. 2d 546 (S.D. Tex. 2006) ............................................................ 12 St. Paul Insurance Co. v. Texas Department of Transportation, 999 S.W.2d 881 (Tex. App. - Austin 1999, pet. denied) .................................................................................................................................................. 11 State Farm Fire & Cas. Co. v. Gandy, 925 S.W.2d 696 (Tex. 1996) ........................................................................... 15 State Farm Mut. Auto. Ins. Co. v. Traver, 980 S.W.2d 625 (Tex. 1998) ...................................................................... 11 Tex. Farmers Ins. Co. v. McGuire, 744 S.W.2d 601 (Tex. 1988) ................................................................................. 12 Ulico Cas. Co. v. Allied Pilots Ass’n, 262 S.W.3d 773 (Tex. 2008) ............................................................................. 12 Warrantech Corp. v. Steadfast Ins. Co., 210 S.W.3d 760 (Tex. App.—Fort Worth, 2006, pet. denied)........................ 7 Yorkshire Ins. Co., Ltd. v. Seger, 407 S.W.3d 435 (Tex. App.—Amarillo 2013, pet. denied) ..................................... 15 Statutes Tex. Ins. Code Ann. § 541 ............................................................................................................................................ 13 Tex. Ins. Code Ann. § 542 ........................................................................................................................................ 8, 13 Other Authorities Lawrence J. Trautman & Kara Altenbaumer-Price, The Board's Responsibility for Information Technology Governance, 28 JOHN MARSHALL J. COMPUTER & INFO. L. 313, 337-38 (2011)............................... 5 iii OF CONTENTS RETURN TO TABLE INSURANCE LAW UPDATE: IT’S NOT JUST FOR THE OTHER GUY Litigants on both sides of the docket share a common interest in maximizing the insurance coverage applicable to their lawsuit. Plaintiffs’ lawyers naturally have an interest in ensuring that the judgments they secure will be paid. If the defendants have paid premiums for liability insurance, they seek to obtain the full benefit available under their policies. Because insurers may pay claims slowly, incompletely, or not at all, plaintiffs’ counsel and defense counsel alike will want to understand the types of insurance policies that may be applicable to the lawsuit and should stay abreast of key developments in Texas insurance law. This paper provides an overview of various thirdparty liability policies that may provide protection to the policyholder for specified exposure to injured plaintiffs. To protect themselves against certain types of liability to third parties, nearly every business maintains commercial general liability (CGL) insurance. Depending on the size and complexity of the business, the defendant may also have purchased one or more specialized liability insurance policies tailored to the particular risks it faces—directors and officers (D&O) liability, fiduciary liability, cyber and privacy liability, employment practices liability, and professional liability insurance are among the most prevalent liability policies. 1 Business insurance programs may also include various levels of excess and umbrella insurance. These policies cover specific risks and liabilities, overlapping in certain areas and leaving particular gaps. This paper is designed to help you identify and navigate the insurance issues confronting your clients in conjunction with the litigation they have entrusted to you. I. INSURANCE POLICIES COMMONLY APPLICABLE TO CIVIL LITIGATION A. Commercial General Liability Insurance CGL insurance is maintained by practically every business that can afford insurance, making it one of the most frequently obtained business liability policies. General liability insurance may be written as a standalone policy or can be included as one component of a package policy that provides several types of coverage. 1 Due to space constraints, this article focuses on business insurance policies, excluding commercial automobile policies. If questions arise regarding personal lines policies (auto and homeowners) or commercial automobile policies, please contact the author. 1. Risks Insured CGL policies generally insure businesses against certain kinds of claims arising from common exposures. Specifically, CGL insurance covers, subject to the policy’s terms, the insured’s liability to others arising from: a. b. c. d. property damage; bodily injury; advertising injury; and personal injury. Claims that can trigger CGL insurance may include: premises liability claims—e.g., for slip-and-fall injuries; claims alleging damage to tangible property caused by the insured’s operations; invasion of privacy causes of action; and claims for defamation, libel, and slander. Some CGL policies provide such broad advertising injury coverage that copyright infringement or other intellectual property claims are covered, depending on the terms of the policy and the scope of pertinent exclusions. Because CGL policies are often written on standardized, industry-promulgated forms, significant similarities exist from policy to policy. Keep in mind, though, that the endorsements can alter the coverage significantly. Make sure you analyze the complete policy, with all pertinent endorsements attached, in connection with potential coverage for a lawsuit. If you represent defendants, the renewal process is important. Your clients should discuss with their insurance brokers the precise scope of coverage afforded by both the expiring policy and the proposed renewal policy, without making assumptions based on prior policies or claims. 2. Insuring Agreements In a CGL policy, the insuring agreement for Coverage A is generally triggered by bodily injury or property damage caused by an “occurrence”—often defined in the policy as “an accident, including continuous or repeated exposure to substantially the same general harmful condition.” An accident is understood to mean a “fortuitous, unexpected, and unintended event.” 2 Although coverage for intentional injury is expressly excluded, a deliberate act that is performed negligently may be an “accident” if the “effect is not the intended or expected result.”3 Bodily injury and property damage are defined terms in most CGL policies. Keep in mind that standard CGL policies typically do not provide coverage for damage to intangible property. 2 Lamar Homes Inc. v. Mid-Continent Cas. Co., 242 S.W.3d 1, 8 (Tex. 2007). 3 Id. RETURN TO TABLE OF CONTENTS Coverage B—personal injury and advertising injury typically applies to an “offense” that occurs during the policy period. Unlike Coverage A, Coverage B may extend to intentional torts, including: (a) false arrest, detention or imprisonment; (b) malicious prosecution; (c) wrongful eviction from, wrongful entry into, or invasion of the right of private occupancy; (d) oral or written publication of material that slanders or libels a person or organization or disparages a person’s or organization’s goods, products or services; (e) oral or written publication of material that violates a person’s right of privacy; (f) the use of another’s advertising idea in your advertisement; or (g) infringing upon another’s copyright, trade dress or slogan in your advertisement. “Advertisement” is commonly defined to mean “a notice that is broadcast or published to the general public or specific market segments about your goods, products or services for the purpose of attracting customers or supporters.” 4 Coverage B can differ from policy to policy. Read the definitions carefully and always review the policy’s endorsements, which can make sweeping changes to the coverage. If an endorsement adds coverage that is excluded in the main policy form, the inconsistency may create an ambiguity in the policy. If the policy is determined to be ambiguous (susceptible of more than one reasonable interpretation), the insured’s interpretation prevails—even if the insurer has proffered a “more reasonable” interpretation.5 3. Coverage Trigger Most CGL policies are issued on an “occurrence” (rather than claims-made) basis, meaning that the policy in effect when accident or offense takes place applies, not the policy in effect when the demand is made or suit is filed. In this context, disputes may surface regarding the coverage-trigger date, particularly with respect to occurrences that take place over a long period of time and multiple policy periods.6 Typical risks falling into this category often include bodily injury and/or property damage caused by pollution, pesticides, construction defects, faulty work, asbestos, or other long-term exposures to toxic substances or dangerous conditions. Personal and advertising injury is triggered by the date of the offense, not the date of injury. Claims for disparagement, defamation, and copyright or trade dress infringement may trigger multiple policies to the extent the offense occurs over multiple policy periods. Subject to distinctions in policy wording that might dictate a different outcome, Don’s Building Supply, Inc. v. OneBeacon Insurance Co. sets forth the actual injury or injury-in-fact approach followed by Texas courts since 2008. 7 In that case, various Texas homeowners brought claims against the distributor of synthetic stucco products, alleging that the products allowed moisture to seep into the wall cavities causing wood rot and other damages. The Texas Supreme Court applied the “actual injury” or “injury-in-fact” approach, and concluded that “property damage under [the] policy occurred when actual physical damage to the property occurred.” Notably, it was irrelevant when the damage is or could have been discovered. The court cautioned that this is not a universal rule for all policies; rather, the trigger for any policy will depend on the precise policy wording. 4. Damage During Multiple Policy Periods When a single occurrence triggers more than one policy, the insurers on all triggered policies typically contribute to both defense and indemnity expenses up to the limit during the policy period in which the limit was highest. 8 If, however, a single policy is triggered for an occurrence that causes damage during the policy period, the insurer may be obligated to pay all loss associated with the damage—not just the loss incurred during the policy period.9 In August 2013, the Texas Supreme Court addressed this issue in Lennar Corporation v. Markel American Insurance Company, 10 ruling that the insurer was obligated to pay the total damages incurred by the insured homebuilder as a result of property damage that began before the policy incepted and continued after it expired. In the 1990s, Lennar Corporation (Lennar) constructed an estimated 800 homes using an exterior insulation and finish system (EFIS), then a popular replacement for conventional stucco. The homebuilder discontinued its use of EFIS in 1998. In 1999, Dateline NBC exposed widespread problems with EFIS used in residential construction, including water damage that worsens over time. The report triggered a flood of homeowner complaints and Lennar investigated, learning that the problems associated with EFIS were frequent and substantial. Property damage typically 4 KLN Steel Products Co., Ltd. v. CNA Ins. Cos., 278 S.W.3d 429, 436 (Tex. App.—San Antonio 2008, pet. denied) 5 National Union Fire Ins. Co. of Pittsburgh, Pa. v. Hudson Energy Co., 811 S.W.2d 552, 555 (Tex. 1991) (citing Barnett v. Aetna Life Ins. Co., 723 S.W.2d 663, 667 (Tex. 1987). 6 Don’s Bldg. Supply, Inc. v. OneBeacon Ins. Co., 267 S.W.3d 20, 32 n. 45 (Tex. 2008). 7 267 S.W.3d 20 (Tex. 2008). Am Physicians. Exch. v. Garcia, 876 S.W.2d 842, 855 (Tex. 1994) (rejecting the insured’s argument that limits for all triggered years should be stacked). 9 Lennar Corp. v. Markel Am. Ins. Co., 413 S.W.3d 750 (Tex. 2013). 10 Id. at 758. 8 RETURN TO TABLE OF CONTENTS began six to twelve months after EFIS was installed, progressed more or less, depending on the proximity of water due to rain and irrigation, and continued until the EFIS was removed. Lennar made the responsible decision to contact all of its homeowners, offering to remove the EFIS and replace it with conventional stucco. The remediation program began in 1999 and concluded in 2003. Most of the homeowners accepted Lennar’s offer to remediate. A few received cash settlements; only three sued and all of those lawsuits settled. After the insurers refused to participate in the homebuilder’s proactive efforts, Lennar initiated coverage litigation and established that two policies were triggered by the property damage. Markel argued, inter alia, that it should not be required to pay Lennar’s remediation costs because it was only obligated to pay for property damage that occurred during its policy period and Lennar failed to allocate those damages. The Lennar court rejected the insurer’s argument that it should be responsible only for its pro rata share of the total loss. Instead, the court affirmed the rule articulated in American Physicians Exchange v. Garcia, which allows the insured to identify the policy period triggered with the highest limit. Applying this rule to the facts in Lennar, the court determined that Markel was required to pay the “total amount” of the insured’s loss as the result of property damage that began before the policy incepted, occurred during the policy period, and continued after it expired. 11 5. Common Exclusions Because the CGL insuring agreement is so broad, it is often said that the coverage is defined by its exclusions, which may exist in the policy form or an endorsement. Standard Coverage A exclusions include (with certain exceptions, set forth in the policy): (1) bodily injury or property damage expected or intended from the standpoint of the insured; (2) liability assumed by the insured in a contract or agreement (although there are exceptions—and the exclusion does not apply if the insured would have the liability in the absence of the contract); (3) bodily injury or property damage arising from the ownership, maintenance, use or entrustment to others of aircraft, autos, or watercraft—other policies should apply to this type of liability; (4) damage to the insured’s own property—property policies should be procured to protect the insured from damage to its own property; (5) damage or impairment to the insured’s own work 12 11 Id. at 758-759. Mid-Continent Casualty Co. v. Krolczyk recently underscored the narrow application of exclusions j(5) and j(6) based on limiting language that precludes coverage only for “that particular part” of the insured’s work that was 12 or product as the result of a defect, deficiency, inadequacy, or dangerous condition, or as the result of the insured’s delay in performance; (6) recall of the insured’s products or work; (7) personal and advertising injury—covered under Coverage B; (8) damage arising from the loss, loss of use, damage to, corruption of, inability to access or manipulate electronic data; 13 and (9) injury or damage arising from violation of certain statutes. In what may have been its most significant liability insurance decision of 2015, the Texas Supreme Court ruled unanimously in Ewing Construction Company v. Amerisure Insurance Company 14 that construction defect lawsuits alleging faulty workmanship are generally covered under a commercial general liability. Specifically, the Texas high court concluded that the contractual liability exclusion does not preclude coverage for defective work claims, except in situations where the insured contractually assumed liability above and beyond its common law obligations. The decision followed the trend in the majority of jurisdictions, declining to apply the contractual liability exclusion to defective construction lawsuits against builders and other contractors who agreed to perform work in a good and workmanlike matter in the absence of specific provisions enlarging the standard under which the construction work would be performed. Not surprisingly, property owners and contractors alike breathed a collective sigh of relief knowing that liability insurance purchased to cover such claims will provide the expected protection. Ewing arose from the allegedly faulty construction by Ewing of school district tennis courts. Shortly after construction was completed, the school district complained that the courts were flaking, crumbling, and cracking, making them unusable for competitive tennis events. The district sued Ewing for faulty construction, asserting causes of action for breach of contract and negligence. Ewing tendered the lawsuit to its commercial general liability insurer, who denied coverage based on the contractual liability exclusion. This prompted Ewing to initiate coverage litigation in federal court in Texas. Notwithstanding concurrent allegations of negligence, the district court concluded that the underlying claims were contractual in nature, such that Ewing’s “assumption of liability” in the contract defective.” 408 S.W.3d 896 (Tex. App.—Houston [1st Dist.] 2013, pet. denied). 13 This exclusion may prompt commercial policyholders to consider cyber insurance. 14 Ewing Constr. Co. v. Amerisure Ins. Co., 420 S.W.3d 30 (Tex. 2014). RETURN TO TABLE OF CONTENTS triggered the policy’s contractual liability exclusion. The district court granted summary judgment for the insurer and the Fifth Circuit affirmed. Following a barrage of protests from the construction industry, however, the Fifth Circuit withdrew its opinion and punted to the Texas Supreme Court. Opting for a more narrow application, the Ewing court held that a contractual agreement to perform work in a good and workmanlike manner is not an assumption of liability, reasoning that “a general contractor who agrees to perform its construction work in a good and workmanlike manner, without more, . . . does not ‘assume liability’ for damages arising out of its defective work so as to trigger the [c]ontractual [l]iability [e]xclusion.” Rather, an “assumption of liability” occurs when an “insured has assumed a liability for damages that exceeds the liability it would have under general law.” Allegations that Ewing failed to perform its contract in a good and workmanlike manner are the same as allegations that Ewing failed to use ordinary care, which do not reflect the assumption of duties beyond the “general law.” Perhaps most importantly, Ewing clarified— and restricted—the scope of the Texas Supreme Court’s opinion in Gilbert Texas Construction, L.P. v. Underwriters at Lloyd’s, London, 327 S.W.3d 118 (Tex. 2010), confining Gilbert to the narrow facts of that case. In Gilbert, the insured “undertook a specific contractual obligation to repair or pay for damage to third-party property” resulting from the insured’s work. It was the obligation to repair or pay for damage to third-party property, not the duty to exercise reasonable care in performing the contract, that triggered the contractual liability exclusion in Gilbert. Coverage B exclusions include: (1) knowing violation of the rights of another; (2) material published with knowledge of its falsity; (3) criminal acts (such as conversion or trespass); (4) liability assumed in a contract or agreement (except liability for damages that the insured would have in the absence of the contract or agreement; (5) breach of contract (except for an implied contract to use another’s advertising idea in your “advertisement”); (6) wrong description of prices; (7) infringement of copyright, patent, trademark or trade secret (may contain an exception for infringement of copyright, trade dress or slogan contained in the insured’s advertisement); 15 (8) media and internet liability; 16 and (9) distribution of material in violation of anti-spam statutes. CGL policies also exclude exposures that are typically insured under other policies, such as worker’s compensation or related injuries, employer’s liability, employment-related practices, pollution, and liquor liability. 17 Many of these exceptions can be added by endorsement or purchased as a separate policy for additional premium. CGL policies issued to businesses that provide specialized or technical services may expressly exclude coverage for claims arising from professional negligence. If the lawsuit involves claims arising from services of a technical or specialized nature, it is important to cross-reference any professional liability or errors and omissions policies that may apply. B. Directors and Officers Liability Insurance D&O policies protect the directors and officers of the insured organization from liability for acts, errors, and omissions committed by them in their official capacities. Some D&O policies define “wrongful acts” to include only negligent conduct; these policies do not extend coverage to reckless or intentional misconduct, although defense costs may still be covered. 1. Risks Insured The types of lawsuits that may trigger a D&O policy run a wide gamut. The directors and officers of a corporation can be sued by the corporation itself, by the corporation’s trustee in bankruptcy, successors of the corporation, or shareholders in shareholder derivative actions. Claims covered by a D&O policy can also be brought by the company’s investors, lenders, customers, vendors, suppliers, consumer groups, competitors and regulators or enforcement agencies. In addition to executives, D&O policies may cover, based on the express terms of the policy, managers, non-executive officers, and employees of the company in connection with the same types of risks. D&O policies often extend coverage to the entity itself, typically for an additional premium. Public company D&O policies usually cover the entity for securities claims only. Private company or not-forprofit D&O policies may extend to a wider range of exposures, approaching the breadth of coverage provided to insured individuals. 16 15 These exclusions vary widely. Note, in addition, that a narrowly drafted copyright infringement exclusion may be ineffective if the policy expressly covers claims arising from allegations of piracy, misappropriation or plagiarism, which encompass the same kind of liability. This exclusion prompts many companies engaged in advertising, broadcasting, publishing, technology, or Internet sales to purchase separate media liability and/or cyber and privacy liability insurance. 17 Lamar Homes, 242 S.W.3d at 10; Pin Oak Ctr., Ltd. v. Travelers Lloyds Ins. Co., 2006 Tex. App. LEXIS 2572 (Tex. App.—Houston [1st Dist.] Mar. 30, 2006, no pet.). RETURN TO TABLE OF CONTENTS 2. Insuring Agreements D&O policies typically contain three insuring agreements. Coverage A or “Side A” coverage applies to loss incurred by individual directors and officers of the insured company that is not, or cannot be, indemnified by the company. 18 Side A coverage usually protects the individual directors and officers without a deductible. Coverage B or “Side B” corporate reimbursement coverage applies to losses incurred in connection with claims against directors and officers when the corporation is providing indemnification to its directors and officers. “Side B” coverage usually insures any obligation of the corporate entity to indemnify its directors and officers, often by reimbursing amounts paid by the corporation on behalf of directors and officers. Since Side B coverage protects the entity, a deductible or retention typically applies to claims covered under the Side B insuring agreement. Even though the corporation benefits from the coverage, the Side B insuring agreement does not insure the corporation against claims brought against the entity. Rather, it pays only for losses incurred by directors and officers that are indemnified by the corporate entity. Finally, if purchased, Coverage C or “Side C” coverage applies to claims against the insured entity itself. Some, but not all, D&O policies contain entity coverage and the coverage may be limited to defense costs or restricted to securities claims for public companies. Private company D&O policies tend to provide broader coverage, similar to the coverage provided to the directors and officers. C. Cyber and Privacy Liability Insurance Although technology companies, health care providers, and financial institutions have required data and privacy coverage for some time, cyber policies are relatively new to other insureds. Retailers with an online presence are among the businesses with the greatest need for cyber coverage, but recent events highlight the widespread nature of cyber risks in the digital age. In the absence of standardization, the coverage provided by one policy may vary substantially from other policies. As cyber risks continue to evolve and as insurers seek to address the ever-changing exposures, the market offers a variety of options, which can be customized to the needs of the policyholder. 3. 1. Claims-Made Coverage D&O policies are written on a claims-made or claims-made-and-reported basis, providing coverage subject to the policy terms for claims first made against the insured while the policy is in effect or during any extended reporting period, rather than when the wrongful acts occurred. 19 Like other claims-made policies, D&O policies typically require the insured to provide notice of the claim to the insurer “as soon as practicable” or within a particular time period while the policy is in effect. 20 4. Common Exclusions Typical exclusions in a D&O policy preclude coverage for, among other things: (1) intentional fraud or dishonesty (usually subject to a final adjudication of the excluded conduct); (2) personal profit or ill-gotten gains (often subject to a final adjudication); (3) claims brought by insureds; and (4) claims arising from breach of contract. D&O policies also generally exclude from coverage claims alleging bodily injury, employment practices liability, violations of ERISA, liability arising from the rendition of professional services and other risks intended to be covered under other types of policies—respectively, CGL, employment practices liability, fiduciary liability, and errors and omissions or professional liability policies. Risks Insured “Cyber liability” has been broadly defined as “liability associated with e-business; the Internet; computer networks; the use of computer technology; privacy issues; computer virus transmission; and other means by which compromised data is passed to a third party.” 21 Cyber liability insurance protects the insured from actual or potential liability to a third party as the result of a cyber-event, such as damages arising from the theft of personal identification information, identity theft, third-party network interruption, third-party security failures, and cyber extortion. The third-party coverage may also provide the insured with a defense. 2. 18 Nat’l Union Fire Ins. Co. of Pittsburgh v. Willis, 139 F. Supp. 2d 827, 829-31 (S.D. Tex. 2001), aff’d sub nom. Nat’l Union Fire Ins. co. of Pittsburgh, PA v. Willis, 296 F. 3d 336 (5th Cir. 2002). 19 Prodigy Commc’ns Corp. v. Agric. Excess & Surplus Ins. Co., 288 S.W.3d 374, 380 (Tex. 2009); F.D.I.C. v. Mijalis, 15 F.3d 1314, 1330 (5th Cir. 1994). 20 Mijalis, 15 F.3d at 1330. Insuring Agreements Cyber and privacy liability coverage may be contained in a cyber policy, identified as such. The same coverages may also appear in a media liability, 21 Lawrence J. Trautman & Kara Altenbaumer-Price, The Board’s Responsibility for Information Technology Governance, 28 JOHN MARSHALL J. COMPUTER & INFO. L. 313, 337-38 (2011). RETURN TO TABLE OF CONTENTS specialty professional liability, or other specialized liability policy. Common insuring agreements for cyber liability may include coverage for: (1) liability to others because of unauthorized disclosure of personal or private information; (2) reputational injury because of disparagement, libel, slander, invasion of privacy or violation of the right to publicity; (3) infringement of trademark, trademarked name, service mark, or copyright; (4) damage to or impairment of a computer network system resulting from a cyber-attack or unauthorized access; or (5) injury sustained as a result of a customer’s impaired access to the insured’s system. 3. Common Exclusions Although the terms may vary widely, cyber liability policies may contain such common exclusions as: (1) claims arising from violations of ERISA; (2) criminal, fraudulent, or dishonest acts by an insured; (3) breach of contract; (4) violations of ERISA; (5) claims brought by insureds; (6) patent infringement; and (7) bodily injury. D. Professional Liability Insurance Professional liability insurance, sometimes called malpractice insurance or errors and omissions (E&O) insurance, “insure[s] members of a particular professional group” from liability arising from the rendition of professional services.22 For professional service providers, professional liability or E&O insurance fills a “gap” in coverage left by CGL policies, nearly all of which exclude coverage for liability arising from the rendition of professional services. In addition, CGL policies limit coverage to specified types of damages—bodily injury, property damage, advertising injury, and personal injury. By contrast, professional liability policies generally cover damages caused by “wrongful acts” in the rendition of professional services. Unlike a CGL policy, where the policies of different carriers contain identical provisions based on standardized forms, there are no standard forms for professional liability coverage. Professional liability policies generally include similar basic provisions—an insuring agreement that covers liability for acts, errors and omissions and exclusions that eliminate overlap with other standard coverages. Because E&O policies are more customized, however, the specific language of the policy at issue is critical to the scope of coverage. A case interpreting a particular provision in one policy may be inapposite to the interpretation of a similar but non-identical provision in another policy based on slight differences in the wording. 22 Am. Auto. Ins. Co. v. Grimes, 2004 U.S. Dist. LEXIS 1696. 1. Risks Insured Professional liability policies are typically drafted to provide insurance coverage for misconduct alleged to have occurred during the rendition of professional services by an insured. Providers of technical or professional services commonly purchase E&O coverage to protect themselves and their firms against liability for acts, errors, and omissions in providing services to others. Lawyers, accountants, physicians, hospitals, and other healthcare providers, investment bankers and stockbrokers, architects, engineers, and other providers of professional, specialized, or technical services often maintain E&O insurance. Common perceptions and expectations notwithstanding, the terms of the policy control the scope of coverage. 23 Defined terms mean what the policy says they mean, even if they have a different meaning in the industry or in plain English. Central to the coverage provided by an E&O policy are the definitions of two key terms—“wrongful acts” and “professional services.” A “wrongful act” is commonly defined in an E&O policy as an “act, error or omission, misstatement or misleading statement” arising from the rendering or failure to render professional services. “Professional services,” then, is typically a separate defined term that establishes the scope of coverage. With these terms in mind, most professional liability policies obligate the carrier to pay on behalf of the insured all sums the insured becomes legally obligated to pay as damages resulting from a claim first made and reported to the insurer during the policy period arising from the rendering or failure to render professional services. Alternatively, the insuring agreement might tie coverage to a claim arising from a wrongful act, which in turn is defined in terms of professional services. Professional services typically arise “out of acts particular to the individual’s specialized vocation.”24 Generally, an act is not a professional service merely because it is performed by a professional; rather, it must be “necessary for the professional to use his specialized knowledge or training” when performing the service. 25 In determining whether a particular act is a “professional service,” courts focus on the nature of the conduct at issue, not the title, position, or character of the party performing the act.26 The issue of what 23 Provident Life & Accident Ins. Co. v. Knott, 128 S.W.3d 211, 219 (Tex. 2003) (“when terms are defined in an insurance policy, those definitions are controlling”). 24 Nast v. State Farm Fire & Cas. Co., 82 S.W.3d 114, 122 (Tex. App.—San Antonio 2002, no pet.). 25 Retherford v. Castro, 378 S.W.3d 29, 33 (Tex. App.— Waco 2012,pet. denied). 26 Gregg & Valby, L.L.P. v. Great Am. Ins. Co., 316 F. Supp. 2d 505, 513 (S.D. Tex. 2004). RETURN TO TABLE OF CONTENTS constitutes a professional service is often litigated because the definitions of “professional services” are limitless and usually central to the scope of coverage. Endorsements to a professional liability policy often modify the definition of professional services and therefore the scope of coverage. In many policies, the definition in the main policy form is just the starting point for defining the boundaries of the coverage. From there, the insurer and insured may negotiate a scope of coverage that is more closely tailored to the needs of the insured based on the nature of the services typically performed by the insured. Some policies define professional services only by endorsement; there may be more than one definition, contained in multiple endorsements. Conflicting endorsements lead to competing, inconsistent interpretations, and ambiguity regarding the scope of coverage. The question of whether the insured’s liability arose from the rendition of “professional services” is also a commonly litigated issue that is governed by the specific language of the policy and the nature of the professional services at issue in the claim. Professional liability coverage issues are particular susceptible to creative arguments that can effectively impact the scope of coverage in favor of the insured. 2. Claims-Made Coverage Unlike CGL policies, E&O policies are usually written on a claims-made basis. A claims-made policy provides coverage for acts that have occurred prior to or during the policy period (subject to any retroactive date), as long as the claim is made during the policy period. The insured generally must give notice to the insurer of any claims asserted against the insured during the policy period. 27 With respect to claimsmade coverage for professional liability, the policy is triggered by a claim made against the insured and reported to the insurer, alleging negligence in the rendition of professional services. 28 Coverage is not triggered by the error itself. Accordingly, the fact that a negligent act, error, or omission may have been committed during policy period will not trigger a claims-made E&O policy. 3. Common Exclusions As with any type of insurance policy, E&O policies typically contain several common exclusionary provisions, many of which preclude coverage for risks covered by other types of policies—such as personal injury, bodily injury, property damage, employment liability, securities violations, products liability, and ERISA fiduciary liability. Three E&O exclusions that 27 Columbia Cas. Co. v. CP Nat., Inc., 175 S.W.3d 339, 345 (Tex. App.—Houston [1st Dist.] 2004, pet. denied). 28 Id.. seem to surface frequently in coverage disputes are the crime/fraud exclusion, the known claims or circumstances exclusion, and the personal gain exclusion. a. Crime/Fraud Exclusion Professional liability policies can be expected to exclude coverage for dishonest, fraudulent, criminal or malicious acts, errors, or omissions. Importantly, the standard for knowing misconduct in the insurance coverage context does not mean “merely that a person knows what he is doing; rather, it means that a person knows that what he is doing is false, deceptive, or unfair.” 29 Although a claim against an insured arising from knowingly dishonest, criminal or fraudulent conduct will be excluded, the policy may require the insurer to provide a defense until an adjudication in fact imposes liability on the insured. b. Known Claims or Circumstances Since insurance policies are designed to protect the insured against unknown risks, many policies contain exclusions applicable to claims about which the insured knew or should have known when the policy incepted. If the insured has actual knowledge, before the beginning of the policy period, that a claim has been or will be brought against him in his professional capacity, the exclusion will apply. “[I]nsurance is designed to protect against unknown, fortuitous risks, and fortuity is a requirement of all policies of insurance.” 30 In Texas, this “fortuity doctrine” precludes coverage for losses the insured knows or should know are ongoing at the time the policy is issued. 31 c. Personal Profit Exclusion The personal profit exclusion bars coverage for claims resulting from an insured having gained in fact any personal profit or advantage to which he was not legally entitled. For example, a member of the board of trustees of a community college convinced the board to invest in a small business, in which he was a part owner, but failed to disclose his affiliation with the business. 32 After the board of trustees invested $2 million, the business failed and the board learned of the member’s ownership interest in the business. The college sued the board member to recover its 29 Comsys Info. Tech. Servs., Inc. v. Twin City Fire Ins. Co., 130 S.W.3d 181, 197 (Tex. App.—Houston [14th Dist.], 2003, pet denied). 30 Warrantech Corp. v. Steadfast Ins. Co., 210 S.W.3d 760, 766 (Tex. App.—Fort Worth 2006, pet. denied). 31 Id. at 767. 32 Jarvis Christian Coll. v. Nat’l Union Fire Ins. Co. of Pittsburgh, PA., 197 F.3d 742 (5th Cir. 1999). RETURN TO TABLE OF CONTENTS investment. The insurer denied coverage based on the personal profit exclusion and the court agreed. Because the board member undisputedly realized a personal gain to which he was not entitled when the college invested money in his business, he was not entitled to coverage. 4. Insured’s Consent to Settle Recognizing that the settlement of a disputed claim may impact a professional’s reputation, many professional liability or E&O policies require the insurer to have the insured’s consent to settle a claim. Often, the insured’s right to consent is coupled with a provision—commonly called a “hammer clause”— designed to incentivize the insured to provide consent when a settlement can be achieved. The hammer clause typically provides that, if the insured elects to continue defending the lawsuit rather than enter into a settlement, he must fund the defense himself and the insurer’s liability for any subsequent settlement or judgment will be capped at the amount for which the claim could have been settled at the time the insured refused consent. II. THE INSURED’S RESPONSIBILITIES IN EVENT OF A CLAIM This section pertains primarily to defense counsel, seeking to assist her client in maximizing the available coverage while avoiding common pitfalls. Armed with a basic understanding of the various types of insurance policies that may provide coverage for a business dispute, ask your client to gather for review all of the potentially applicable insurance policies. Remember to distinguish between claims-made policies and occurrence-based policies. Claims-made policies, like most D&O and professional liability policies, are triggered when a claim is made against an insured. Occurrence-based policies, like CGL, are triggered when the actual injury occurred, generally before you received a demand letter or service of suit. A. Notice to the Insurer Coverage disputes arising from late notice are common. Defense counsel should direct his client to take the time necessary to identify all potentially pertinent policies as the first order of business after receiving a new lawsuit. The insured’s broker(s) can help, or consult coverage counsel. Review the notice provisions contained in those policies and ensure that your client has provided notice to each insurer in compliance with the particular terms of each policy. Occasionally, reasons may exist for not giving notice under multiple potentially triggered policies, particularly if coverage is less likely under a particular policy, but that decision should be weighed carefully against the risk of compromising coverage by not giving timely notice. Once notice is late under a particular policy, the consequences can be significant, even if the insurer is not permitted to deny coverage outright. 1. Notice Clauses In a claims-made policy, the insured’s obligation to provide notice is typically tied to receipt or knowledge of a claim. Certain policies, like management liability policies, tie the notice obligation to knowledge by particular members of senior management or the risk manager. Some notice provisions require reporting to the insurer within a specified timeframe; others require notice “as soon as practicable.” An occurrence-based policy may also require notice of an “occurrence” or “offense,” in addition to notice of claims. The insurer’s obligations to acknowledge the claim, begin an investigation, and defend are triggered when the insured properly notifies the insurer of a potentially covered claim or lawsuit.33 Once the insured provides written notification to the insurer describing the facts relating to the claim, the insurer must notify the claimant in writing of the acceptance or rejection of their claim. Acceptance or rejection must be provided within fifteen business days after the date the insurer receives all items, statements, and forms required to secure final proof of loss. 34 Notably, subject to the provisions of the particular policy, it may not be necessary for the insured to demand specifically that the insurer defend the claim in order to place the insurer on notice of its obligation to provide a defense.35 Forwarding the suit papers in a potentially covered lawsuit is sufficient under Texas law to trigger the insurer’s duty to defend. 36 2. Notice of Potential Claims Claims-made policies often contain a provision giving the insured the right or option to report to the insurer circumstances that have not yet ripened into a claim, but may in the future lead to a claim. Such a provision is commonly called a “notice of potential claim” provision. The effect of the provision is generally that notice to the insurer of circumstances that may result in a claim require the insurer to treat a subsequent claim relating to the notice as if it were made at the time the notice was given. Pay close attention to and comply with the precise requirements of the provision to ensure that your notice is effective. 33 Tex. Ins. Code Ann. § 542.051. Tex. Ins. Code Ann. § 542.056. 35 Lamar Homes, 242 S.W.3d at 6. 36 See Cruz v. Liberty Mut. Ins. Co., 853 S.W.2d 714, 717 n.1 (Tex. App.—Texarkana 1993), rev’d on other grounds, 883 S.W.2d 164 (Tex. 1993). 34 RETURN TO TABLE OF CONTENTS Notice that does not provide the particular information required by the policy may fail to preserve coverage. In McCullough v. Fidelity & Deposit Company, for example, the insured bank provided notice to the insurer of its declining financial condition, but failed to identify “any act, error, or omission which may subsequently give rise to a claim being made against the Directors and Officers . . . for a specified Wrongful Act.” 37 The court’s analysis involved whether the insured objectively complied with the notice provision listed in the policy language, not whether the insurer was able to infer from the information submitted that a claim must subsequently be made. Because the insured had not given the requisite notice of “specified Wrongful Acts” at issue, the court concluded that the notice provided failed to trigger the notice of potential claim provisions. 3. Late Notice What happens when the insured fails to provide notice as required by the policy? Under Texas law, the answer depends on the particular wording of the notice provision. In most instances, the insurer must show that it was prejudiced by the untimely notice in order to avoid coverage on that basis. 38 If, for example, an insured reports a loss after the policy or extended reporting period expires, when no coverage exists, the insured’s breach may be material, relieving the insurer of its coverage obligations. 39 By contrast, a notice provision requiring the claim to be made during the policy period or within some specific time thereafter may be treated differently. The insured’s failure to comply with specific notice and reporting provisions may relieve the insurer of the requirement to show prejudice. Even if the insurer is unable to deny coverage, pre-tender defense costs (fees, costs, and expenses incurred before the insured provides notice) may not be reimbursable. 40 37 McCullough v. Fidelity & Deposit Company, 2 F.3d 110, 112 (5th Cir. 1993). 38 PAJ, Inc. v. Hanover Ins. Co., 243 S.W.3d 630, 632 (Tex. 2008) ) (late notice under an occurrence-based CGL policy does not defeat coverage unless insurer demonstrates it was prejudiced); Prodigy Commc’ns Corp. v. Agric. Excess & Surplus Ins. Co., 288 S.W.3d 374, 380-81 (Tex. 2009) (extending the rule articulated in PAJ to claims-made policies, concluding that notice “as soon as practicable” was not an essential part of the bargained-for exchange under the claims-made policy at issue. 39 Prodigy, 288 S.W.3d at 380-81. 40 Lafarge Corp. v. Hartford Casualty Ins. Co., 61 F.3d 389, 398 (5th Cir. Tex. 1995); E & L Chipping Co. v. Hanover Ins. Co.,962 S.W.2d 272, 278 (Tex. App.—Beaumont 1998, no pet.). B. Cooperation and Consent Most, if not all, liability insurance policies contain provisions requiring the insured’s cooperation in the insurer’s defense of the claim or requiring the insured to obtain the insurer’s consent to incur any obligation or expense. The particular requirements imposed by these provisions may differ from policy to policy. 1. Cooperation and Consent Clauses A simple cooperation clause might mandate only that the insured give the insurer “such assistance and cooperation as the insurer reasonably requires.” Other provisions provide more detailed direction, as well as prohibitions on actions taken by the insured. Often, for example, the insured is precluded from assuming financial obligations or settling a claim without insurer consent. Consistent with the fundamental principles of contract construction, the insured’s responsibility to cooperate with the insured in the defense of the case is governed by the actual policy terms and is not a limitless, boundless mandate of abject compliance with every request made by the insurer. When an insurer and its insured are adverse on coverage issues, the insured’s duty to cooperate does not extend to the coverage dispute. Careful consideration should also be given to privileged communications and work product. 2. Prejudice If the insured breaches a cooperation or consent clause, the insurer must demonstrate that it was prejudiced by the breach in order to avoid its obligations under the policy. 41 In Partain v. Mid-Continent Specialty Ins. Services, 42 the district court considered whether MidContinent was prejudiced by the insured’s rejection of a qualified defense where the evidence showed there was not a valid conflict of interest to warrant independent counsel. Mid-Continent argued that it was prejudiced by its inability to participate in the defense of the underlying suit for over two years and that the insured’s refusal to provide information relating to the underlying lawsuit reasonably requested by the insurer was prejudice as a matter of law. Mid-Continent argued that the insured’s breach of the policy’s requirements cost the insurer its substantive right to defend the litigation, including selecting counsel, investigating, conducting discovery, and pursuing earlier or more favorable defense strategies or settlement negotiations. The court outlined the evidence necessary to show prejudice as follows: 41 Hernandez v. Gulf Group Lloyds, 875 S.W.2d 691, 692-94 (Tex. 1994). 42 2012 U.S. Dist. LEXIS 19020 (S.D. Tex. 2012, no pet.) RETURN TO TABLE OF CONTENTS In determining whether an insurer has shown prejudice, courts consider factors such as: (1) the extent to which the nonbreaching party will be deprived of the benefit that it could have reasonably anticipated from full performance, (2) the extent to which the injured party can be adequately compensated for the part of that benefit of which he will be deprived, (3) the likelihood that the party failing to perform will suffer forfeiture, (4) the likelihood that the non-performing party will cure his failure, and (5) the extent to which the behavior of the party failing to perform comports with standards of good faith and fair dealing. Citing Texas law, the Fifth Circuit has instructed that “‘[p]rejudice’ is the loss of a valuable right or benefit,” and that prejudice occurs when the insurer suffers a material adverse change in position due to the breach. To demonstrate actual prejudice, the Fifth Circuit explains, the insurer must demonstrate “the precise manner in which its interests have suffered.” 43 The prejudice requirement was recently affirmed in the Lennar EFIS coverage litigation, in connection with a consent-to-settle provision. 44 Following an investigation in 1999, the insured homebuilder determined that EFIS installed on woodframe walls typical of single-family homes traps water inside, causing widespread damage—rot and structural damage, mold and mildew, and termite infestations. The homebuilder decided to contact the nearly 800 homeowners with EFIS constructions, offering to remove and replace the EFIS with conventional stucco. Early in the process, the homebuilder notified its insurers it would seek indemnification for the remediation costs. The insurers refused to participate in the insured’s proactive settlement efforts and denied coverage. In the coverage litigation that ensued, insurer Markel argued that it was prejudiced by the homebuilder’s violation of the consent-to-settlement provision in Condition E of the policy, which stated in part: “it is a requirement of this policy that … no insured, except at their own cost, voluntarily make any payment, assume any obligation, or incur any expense … without [the insurer’s] consent.” 45 At trial, the homebuilder offered evidence that the extent of water damage to a home could not be determined without removing all of the EFIS— although once the EFIS was removed, some homes had limited damage or none at all. The builder offered evidence of its remediation costs for 465 homes that had some water damage, but included costs for removing and replacing all of the EFIS even if only part of the home was damaged. 46 The insurer argued that the builder’s settlements were prejudicial, largely because remediation was offered to homeowners who would never have sought redress had the builder not offered a remedy. As the Texas Supreme Court noted in Lennar, the jury disagreed. The jury did not find [the insurer’s] position convincing or conclude that [the builder’s] remediation program was anything other than a reasonable approach to a serious problem. The jury was entitled to credit evidence that, had [the builder] not proceeded as it did, the damages would have worsened and the remediation costs increased. 47 The court also rejected the insurer’s argument that it suffered prejudice as a matter of law. “[The insurer’s] argument boils down to this—had [the builder] stonewalled the homeowners, fewer repairs would have been made. On this record, that is a question of fact, not of law, which the jury resolved in [the builder’s] favor.” 48 Absent prejudice to the insurer, the court determined, the builder’s settlements with the homeowners “establish both its legal liability for the property damages and the basis for determining the amount of loss.” 49 III. THE INSURER’S OBLIGATIONS IN EVENT OF A CLAIM Litigants on both sides of the “v.” benefit from understanding the liability insurer’s obligations under Texas law. When a claim is made against its insured, an insurer must act in accordance with: (1) the contractual obligations imposed upon it by the policy; (2) the statutory mandates of the Texas Insurance Code; and (3) with respect to settlement opportunities, the Stowers duty. A. Duties Imposed by Contract Liability policies commonly impose on the insurer two primary duties—the duty to defend in the underlying third-party lawsuit and the duty to 46 43 Id. at *9-10 (citations omitted). 44 Lennar, 413 S.W.3d at 755-756 45 Id. at 754. Id. at 755. Id. 48 Id. at 756 49 Id. at 757 47 RETURN TO TABLE OF CONTENTS indemnify the insured for sums paid to settle the lawsuit (typically with insurer consent) or to pay a judgment against the insured for covered damages. While the duty to defend has little impact on the plaintiff, both sides have a keen interest in understanding the parameters of an insurer’s obligation to pay a settlement or judgment. The duty to defend and the duty to indemnify are separate and distinct, independent of one another. Importantly, the duty to defend is broader than the duty to indemnify. 50 An insurer’s duty to defend may be triggered in any case that is even potentially covered by the policy. Under these standards, the insurer will be required to defend cases that may result in no covered liability that triggers the insurer’s duty to indemnify. 1. Duty to Defend The phrase “duty to defend” refers to the insurer’s obligation to provide a defense for its insured in a lawsuit that potentially falls within the coverage provided by the policy. After an insured gives notice to its insurer that a lawsuit has been filed against it, the insurer’s duty to defend is governed in Texas by the “eight-corners” or “complaint allegation” rule. Under this rule, the courts analyze the allegations in the petition or complaint in the lawsuit against the insured (the first “four-corners”) alongside the terms of the insurance policy (the second “four-corners”) to determine if the insurer’s duty to defend is triggered. a. Eight-Corners Rule Under the eight-corners rule, determining the duty to defend requires an artificial analysis in a sense, because the factual allegations in the pleading must be accepted, without regard to their truth or falsity. 51 The inquiry focuses on the facts alleged in the lawsuit, not on the causes of action or legal theories asserted. Courts will give the facts alleged a liberal interpretation, resolving all doubts about the insurer’s duty to defend in favor of the insured. If, on the other hand, the petition does not allege a single fact even potentially within the scope of coverage, an insurer is not required to defend. In analyzing the petition, the court may not read facts into the pleadings, look outside the pleadings or “imagine factual scenarios that might trigger coverage.” 52 An 50 Am. States Ins. Co. v. Bailey, 133 F.3d 363, 368 (5th Cir. 1998) (applying Texas law). 51 GuideOne Elite Ins. Co. v. Fielder Rd. Baptist Church, 197 S.W.3d 305, 307 (Tex. 2006). See Nat’l Union Fire Ins. Co. v. Merchs. Fast Motor Lines, Inc., 939 S.W.2d 139, 141 (Tex. 1997); Liberty Mut. Ins. Co. v. Graham, 473 F.3d 596, 599-600 (5th Cir. 2006) (applying Texas law). 52 Merchs. Fast Motor Lines, 939 S.W.2d at 141. insurer is absolved of the duty to defend if it is shown, within the confines of the eight-corners rule, “that the plain language of a policy exclusion or limitation allows the insurer to avoid coverage of all claims.” 53 b. Duty to Defend Entire Case Most often, insurers discharge the duty to defend by appointing defense counsel to represent the insured in the pending litigation. When the insurer has a duty to defend, it typically has the right to select an attorney and control the defense. 54 As discussed below, however, there are circumstances in which the insurer loses the right to control the defense—such as “when the facts to be adjudicated in the liability lawsuit are the same facts upon which coverage depends.” 55 Civil lawsuits frequently assert claims that are covered by the insured’s policy, alongside claims that may not be covered. Negligence claims, for example, often trigger insurance policies. Breach of contract, fraud, and patent infringement, on the other hand, are common examples of claims that might not be covered, depending on the policy or policies maintained by the insured. In Texas (and absent policy provisions to the contrary), “[i]f an insurer has a duty to defend any portion of a suit, the insurer must defend the entire suit.” 56 c. Reservation of Rights If the insurer has a basis for denying coverage that it wants to preserve, it must, before undertaking its insured’s defense, issue a reservation of rights letter. Commonly called an “ROR” in the insurance industry, the reservation letter explains to the insured the various exclusions or other policy defenses the insurer may rely upon in denying coverage at a later time. When an insurer defends the insured under a reservation of its right to deny coverage on enumerated grounds, the 53 Northfield Ins. Co. v. Loving Home Care, Inc., 363 F.3d 523,528 (5th Cir. 2004). 54 N. Cnty. Mut. Ins. Co. v. Davalos, 140 S.W.3d 685, 689 (Tex. 2004) (citing State Farm Mut. Auto. Ins. Co. v. Traver, 980 S.W.2d 625, 627 (Tex. 1998)). 55 Davalos, 140 S.W.3d at 689. 56 See St. Paul Insurance Co. v. Texas Department of Transportation, 999 S.W.2d 881, 884 (Tex. App.—Austin 1999, pet. denied) (“[o]nce coverage is found for any portion of a suit, an insurer must defend the entire suit”); Harken Exploration Co. v. Sphere Drake Ins. PLC, 261 F.3d 466, 474 (5th Cir. 2001) (holding that the insurer “must defend [the insured] against the entire suit including causes of action that would not alone trigger the duty to defend, regardless whether the complaint is pled in the alternative or not because the [underlying plaintiffs’] factual allegations of negligence are sufficient to trigger the duty to defend”). RETURN TO TABLE OF CONTENTS policy defenses are preserved in the event of an adverse finding against the insured.57 If an insurer has knowledge of facts indicating a lack of coverage and assumes the insured’s defense without providing a reservation of rights or obtaining a non-waiver agreement, the insurer waives all policy defenses, including defenses of non-coverage, or the insurer may be estopped from asserting such defenses. 58 This rule is based on the “apparent conflict of interest that might arise when the insurer represents the insured in a lawsuit against the insured and simultaneously formulates its defense against the insured for noncoverage.” 59 Finally, the reservation of rights should be clearly stated. An ambiguous reservation of rights may be construed strictly against the insurer and liberally in favor of the insured. 60 If the insured relies to its detriment on the insurer’s statements, the insurer may be estopped to deny coverage for reasons not clearly set forth in the ROR. Not every reservation of rights creates a conflict of interest allowing an insured to select independent counsel. 63 For example, as in Davalos, the insured’s disagreement regarding the insurer’s decision regarding whether to challenge venue does not raise a conflict. If every dispute regarding the conduct of the defense created a conflict of interest, the insured, not the insurer, could control the defense by merely disagreeing with the insurer’s proposed actions.64 As such, a conflict of interest does not arise unless the outcome of the coverage issue can be controlled by counsel retained by the insurer for the defense of the underlying claim. 65 If the issue on which coverage turns is independent of the issues in the underlying case, the reservation of rights itself does not create a disqualifying conflict (although other grounds for independent counsel may exist). d. 2. Control of the Defense In a lawsuit alleging both covered and noncovered claims, the insurer’s interests may not be aligned with the interests of its insured. Consider, for example, a lawsuit alleging negligent design of a building and copyright infringement in preparation of the plans. Negligence may be covered; copyright infringement may be excluded. The insurer might have an incentive to eliminate the covered negligence claim in order to leave only the excluded copyright cause of action. Or the insurer might be tempted to shift the focus of the case to the excluded claim in order to reduce its own exposure. In Northern County Mutual Insurance Co. v. Davalos, 61 the Texas Supreme Court recognized the existence of a disqualifying conflict of interest where the insurer’s reservation of rights overlaps with the issues in the underlying lawsuit. In the typical coverage dispute, an insurer will issue a reservation of rights letter, which creates a potential conflict of interest. And when the facts to be adjudicated in the liability lawsuit are the same facts upon which coverage depends, the conflict of 57 See Ulico Cas. Co. v. Allied Pilots Ass’n, 262 S.W.3d 773, 781 (Tex. 2008). 58 Farmers Tex. County Mut. Ins. Co. v. Wilkinson, 601 S.W.2d 520, 521-22 (Tex. Civ. App.—Austin 1980, writ ref’d n.r.e.). See Tex. Farmers Ins. Co. v. McGuire, 744 S.W.2d 601, 603 n.1 (Tex. 1988). 59 McGuire, 744 S.W.2d at 603 n.1 (quoting Pac. Indem. Co. v. Acel Delivery Serv., Inc., 485 F.2d 1169 (5th Cir. 1973)). 60 Wilkinson, 601 S.W.2d at 523. 61 140 S.W.3d 685. interest will prevent the insurer from conducting the defense. 62 Duty to Indemnify The duty to indemnify refers to an insurer’s obligation under the policy “to pay all covered claims and judgments against an insured.” 66 While the duty to defend is determined at the outset of the lawsuit based solely on the allegations in the lawsuit, the duty to indemnify is determined at the conclusion of the underlying lawsuit. And unlike the duty to defend, the 62 Davalos, 140 S.W.3d at 689. See Hous. Auth. of the City of Dallas, Tex. v. Northland Ins. Co., 333 F. Supp. 2d 595, 602 (N.D. Tex. 2004) (“Because the liability facts and coverage facts were the same and because a potential conflict of interest was created by the issuance of the reservation of rights letter, a disqualifying conflict existed; therefore [the insurer] could not conduct the defense of the [underlying] lawsuit.”). See also Downhole Navigator, 686 F.3d (5th Cir. 2012). 63 Rx.com, Inc. v. Hartford Fire Ins. Co., 426 F. Supp. 2d 546, 559-560 (S.D. Tex. 2006) (rejecting insured’s contention that an insured may choose its own counsel at the insurer’s expense any time the insurer agrees to defend subject to a reservation of rights). 64 Davalos, 140 S.W.3d at 689. See Rx.com, 426 F. Supp. 2d at 559 (citing Davalos for the proposition that “[a] conflict of interest does not arise unless the outcome of the coverage issue can be controlled by counsel retained by the insurer for the defense of the underlying claim”); Partain, 2012 U.S. Dist. LEXIS 7530 at *15 (interpreting Davalos to stand for the proposition that “[i]n order for a disqualifying interest to exist . . . it must be apparent that facts upon which coverage depends will be ruled upon judicially in the Underlying Suit”). 65 Rx.com, 426 F. Supp. 2d at 559; Davalos, 140 S.W.3d at 689. 66 D.R. Horton-Texas, Ltd. v. Markel Int’l Ins. Co., 300 S.W.3d 740, 743 (Tex. 2009). RETURN TO TABLE OF CONTENTS existence of an insurer’s duty to indemnify the insured turns on the facts actually proven and “whether the damages caused by the actions or omissions proven are covered by the terms of the policy.” 67 B. Statutory Duties In addition to its obligations under the insurance contract, an insurer’s conduct vis-à-vis the insured is governed by the Texas Insurance Code. Section 541 of the code contains several laundry lists of prohibitions against unfair and deceptive acts or practices. 68 For example, Section 541.060 focuses on unfair settlement practices and prohibits an insurer from engaging in acts and practices that would be considered “bad faith” in many jurisdictions, such as: misrepresentations regarding policy provisions relating to the coverage applicable to claim, failing “to attempt in good faith” to implement an appropriate settlement when the insurer’s liability is reasonably clear, failing to explain the basis for a denial of coverage or compromise settlement offer, failing to affirm or deny coverage or reserve rights within a reasonable time, failing to conduct a reasonable investigation, and attempting to secure a full and final release when only partial payment has been made (unless in settlement of a coverage dispute). Section 542 imposes various deadlines designed to ensure a carrier’s responsiveness when a claim is made. 69 Although Section 542 does not apply to a liability insurer’s indemnity obligations, it does apply to defense costs. 70 Under Section 542.058: “Except as otherwise provided, if an insurer, after receiving all items, statements, and forms reasonably requested and required under Section 542.055, delays payment of the claim . . . for more than 60 days, the insurer shall pay damages and other items as provided by Section 542.060.” 71 Section 542.060 imposes an 18% penalty on claims not timely paid: If an insurer that is liable for a claim under an insurance policy is not in compliance with this subchapter, the insurer is liable to pay the holder of the policy or the beneficiary making the claim under the policy, in addition to the amount of the claim, interest on the amount of the claim at the rate of 18 percent a year as damages, together with reasonable attorney’s fees. 72 With respect to an insurer’s duty to defend, the prompt payment statute requires that the insured submit a written notice of claim, triggering the insurer’s duties to investigate and acknowledge the claim. 73 After receiving notice of the claim, the insurer has fifteen days to: (1) acknowledge receipt; (2) commence an investigation; and (3) “request from the claimant all items, statements and forms that the insurer reasonably believes, at that time, will be required from the claimant.” 74 The statutory deadlines for accepting and paying the claim do not begin to run until the insurer has “receive[d] all items, statements, and forms required by the insurer to secure final proof of loss.” 75 Applying these provisions to an insurer’s duty to defend its insured in a lawsuit, the Texas Supreme Court observed (in dicta) that an insured should submit its attorneys’ fee statements to perfect its rights under the prompt payment statute. When the insurer who owes a defense fails to pay within the statutory deadline, “the insured matures its right to reasonable attorney’s fees and the eighteen percent interest rate specified by the statute.” C. The Stowers Duty Although a third-party liability carrier’s obligations are defined primarily in the policy and in the Texas Insurance Code, insurers also have a common-law obligation to act reasonably when confronted with an opportunity to settle a covered claim. This extra-contractual duty—called the “Stowers” duty—is outlined in G.A. Stowers Furniture Co. v. Am. Indemnity Co. 76 Under Texas law, “Stowers is the only common law tort duty in the context of third-party insurers responding to settlement demands.” 77 The Stowers duty involves a duty to protect the insured by accepting reasonable settlement offers that are within policy limits. An insurer’s Stowers obligations are triggered when: (1) the claim against the insured is within the scope of coverage; (2) the demand for settlement is within the policy limits; and (3) the terms of the demand are such that an ordinarily prudent insurer would accept it, when considering the likelihood and degree of the insured’s potential exposure to an excess 67 D.R. Horton-Texas, 300 S.W.3d at 744. Tex. Ins. Code Ann. § 541.051, et seq. (formerly Tex. Ins. Code Ann. art. 21.21). 69 Tex. Ins. Code Ann. §§ 542.051-.061 (formerly Tex. Ins. Code Ann. art. 21.55). 70 Lamar Homes, 242 S.W.3d 1 (the Texas prompt-payment statute applies to a third-party insurer’s breach of the duty to defend under liability policies). 71 Tex. Ins. Code Ann. §§ 542.051-.061. 68 72 Tex. Ins. Code Ann. § 542.060. Tex. Ins. Code Ann. §§542.051(4), 542.055. 74 Tex. Ins. Code Ann. §542.055. 75 Tex. Ins. Code Ann. §§542.056(a), 542.058. 76 15 S.W.2d 544, 548 (Tex. Comm’n App. 1929). 77 Mid-Continent Ins. Co. v. Liberty Mut. Ins. Co., 236 S.W.3d 765, 776 (Tex. 2007). 73 RETURN TO TABLE OF CONTENTS judgment. 78 The insurer must exercise the degree of care and diligence that an ordinarily prudent person would exercise in managing his own business affairs. If the insurer breaches its Stowers duty by failing to settle a lawsuit against the insured when these conditions are met, the insurer will be liable for any subsequent judgment against the insured even if the judgment exceeds the policy’s limit of liability. IV. MISCELLANEOUS ISSUES—RECENT CASES A. Additional Insureds—Deepwater Horizon In situations involving inadequate policy proceeds (among others), the scope of coverage accessible to an additional insured coverage can become a focal point. In a unanimous decision on rehearing, the Fifth Circuit last month withdrew its March 1, 2013 opinion in the Deepwater Horizon coverage litigation, which held that BP PLC (“BP”) had unlimited access to coverage as an additional insured on policies issued to the company that owned the offshore drilling unit. 79 Transocean Holdings, Inc. (“Transocean”) owned the Deepwater Horizon, a semi-submersible, mobile offshore drilling unit. In April 2010, the unit sank into the Gulf of Mexico after burning for two days following an onboard explosion. At the time, the Deepwater Horizon was engaged in exploratory drilling activities pursuant to a drilling contract with BP. The contract required Transocean to maintain specified minimum insurance coverages for the benefit of BP. The extent to which these policies covered BP’s pollution-related liabilities arising from the Deepwater Horizon explosion is the subject of the case. Transocean’s liability insurance program was comprised of a $50 million primary policy and excess policies providing an additional $700 million in general liability coverage. Pertinent to the question certified by the Fifth Circuit, the drilling contract obligated Transocean to “maintain insurance coverage covering the operations to be performed under [the contract].” Pursuant to the drilling contract, Transocean assumed responsibility for and indemnified BP against all liability “for pollution or contamination, including control and removal thereof, originating on or above the surface of the land or water, from spills, leaks, or discharges of” various pollutants. BP assumed responsibility for and indemnified Transocean against liability for “pollution or contamination arising out of or connected with operations” under the contract and not assumed by Transocean. The district court determined that the drilling contract required Transocean to name BP as an 78 79 Stowers, 15 S.W.2d at 545. In re Deepwater Horizon, 710 F.3d 338 (5th Cir. 2013). additional insured for those liabilities explicitly assumed by Transocean under the contract. Because Transocean had not assumed responsibility for or undertaken to indemnify BP against the Deepwater Horizon incident (the spill originated below the surface of the water), the district court concluded that the policies did not extend coverage to BP for the Deepwater Horizon spill. In its original opinion on appeal, the Fifth Circuit reversed the district court’s decision, concluding that the insurance policy, not the indemnity agreement in the drilling contract, controlled the scope of coverage for an additional insured—where the insurance procurement and indemnity provisions are “separate and independent.” 80 The Transocean policies did not incorporate the limitations set forth in the drilling contract or otherwise limit the additional insured coverage to the scope of contractual liability in the drilling contract. As such, the Fifth Circuit initially concluded that BP was directly entitled to full coverage as an additional insured under the Transocean policies, not the more limited coverage Transocean was obligated to provide. On rehearing, the panel withdrew this initial determination, concluding that it could not determine with certainty how the Texas Supreme Court would decide the case under ATOFINA given particular factual distinctions. Accordingly, the court certified the following questions: 1. 2. Whether ATOFINA compels a finding that BP is covered for the damages at issue because the language of the umbrella policies alone determines the extent of BP’s coverage as an additional insured if, and so long as, the additional insured and indemnity provisions of the [drilling contract] are “separate and independent”? Whether the doctrine of applies to the interpretation of the insurance coverage provision of the [drilling contract] under ATOFINA given the facts of the case?81 The Texas Supreme Court’s ruling on these issues will have a significant impact on the way policies are endorsed to provide coverage for additional insureds. 80 Id., citing Evanston Insurance Co. v. ATOFINA Petrochemicals, Inc., 256 S.W.3d 660 (Tex. 2008). 81 Rangers Ins., Ltd. v. Transocean Offshore Drilling, Inc. (In Re Deepwater Horizon), 728 F.3d 491 (5th Cir. Aug. 29, 2013). Briefing appears to be complete and the case has been scheduled for oral argument on September 16, 2014. RETURN TO TABLE OF CONTENTS Assignments, Settlements, and Stowers In Evanston v. ATOFINA, 82 the Texas Supreme Court determined that an insurer that wrongfully denied coverage may not challenge the reasonableness of a settlement of the underlying lawsuit reached by the insured. Preventing insurers from litigating the settlement’s reasonableness has the effect of shortening the duration of the dispute, the Court found, and poses no risk of distorting litigation or settlement motives where the insured does not know whether or not coverage exists. Notably, in ATOFINA, there was no assignment and no Gandy 83 concerns were present. 84 In Yorkshire v. Seger, 85 the Amarillo Court of Appeals concerned whether a different outcome is warranted under different facts. In Seger, the insurer denied coverage and ignored Stowers demands that could have resolved the case within policy limits. The case went to trial and the judgment was entered against the defendant for $15 million. The insured’s participation in its own defense at trial, however, was “so minimal” that the court could not “conclude that the underlying judgment was the result of a fully adversarial trial.” 86 The insured defendant assigned its claims against the insurer to the plaintiff. In subsequent coverage litigation, the plaintiff relied upon the underlying judgment as the only evidence of the damages arising from the insurer’s failure to act reasonably in settling the lawsuit. Because the underlying judgment was not the result of a “fully adversarial trial,” the court of appeals determined that the Segers’ claims against the insured were not fairly determined in that proceeding. As such, the judgment was inconclusive and inadmissible as evidence of damages in the coverage lawsuit. 87 While ATOFINA permits an insured to settle its own dispute and steer clear of Gandy’s requirements (assuming the insurer wrongfully denied coverage), an underlying judgment reached in any proceeding that does not constitute a fully adversarial trial is ineffective to establish the damages stemming from an insurer’s failure to act reasonably in settling a covered claim, particularly where the insured assigned its claims against the insurer to the plaintiff and failed to participate in its own defense. B. 82 Evanston Ins. Co. v. ATOFINA Petrochemicals, Inc., 256 S.W.3d 660 (Tex. 2008). 83 State Farm Fire & Cas. Co. v. Gandy, 925 S.W.2d 696 (Tex. 1996). 84 See Yorkshire Ins. Co., Ltd. v. Seger, 407 S.W.3d 435 (Tex. App.—Amarillo 2013, pet. denied) (analyzing concerns addressed in and scope of holding in Gandy). 85 Id. 86 Id. at 442. 87 Id. at 443. RETURN TO TABLE OF CONTENTS CURRENT ISSUES AND TRENDS IN BUSINESS DIVORCE LITIGATION LADD A. HIRSCH JASON FULTON Diamond Mccarthy LLP 1201 Elm Street, 34th Floor Dallas, Texas 75270 Ph. 214.389.5300 Fax: 214.389.5399 [email protected] [email protected] www.diamondmccarthy.com State Bar of Texas 31st ANNUAL LITIGATION UPDATE INSTITUTE January 15-16, 2015 San Antonio CHAPTER 17 RETURN TO TABLE OF CONTENTS LADD HIRSCH Partner (214) 389-5323 [email protected] Location Dallas, Texas Education Cornell University (J.D., cum laude, 1983) Finalist, Sutherland Cup Moot Court Board of Barristers University of Missouri (B.J. in News/Editorial, 1980) Graduated sixth in class Areas of Practice: Complex & High-Stakes Litigation Business Divorce Matters - Shareholder Oppression Claims, Partnership Litigation, and Private Company Transactions Bankruptcy, Third Party & Professional Liability Intellectual Property Energy & Ladd Hirsch is a business-oriented, highly successful trial attorney with 30 years experience representing clients in complex business litigation matters and arbitration proceedings. Ladd joined Diamond McCarthy as a partner in 2006. Previously, Ladd was a founding partner of a Dallas-based litigation boutique. Before starting his own firm, Ladd practiced for almost 20 years with Haynes and Boone, LLP, a full-service law firm, where Ladd headed up its Business Litigation Practice Group in Dallas. Ladd's practice is characterized by his tenacity and creativity in handling the prosecution and defense of significant multi-party business litigation matters. Ladd has had extensive experience handling complex business disputes presenting claims for breach of contract, fraud, minority shareholder oppression, violations of fiduciary duties, breach of non-compete covenants, theft of trade secrets and business defamation. He has litigated claims arising in all of the following industries: manufacturing, commercial lending and financing, construction, computer software, insurance, real estate, beer distribution, retail sales, health care, food service, and video games. Ladd represents both plaintiffs and defendants in business cases under hourly, contingent and hybrid fee arrangements. Ladd has also been retained in a number of matters by other attorneys to serve as an expert witness on the subject of recoverable legal fees. Since the late 1990's, Ladd has focused a significant portion of his practice handling Business Divorce matters and related litigation for majority owners and minority investors in private Texas companies. In these matters, Ladd prosecutes and defends claims against fiduciaries (officers, directors and private trustees), including claims for shareholder oppression, breach of fiduciary duty and shareholder derivative claims. Ladd has been named a Super Lawyer annually from 2003-2012, and he was listed as a 2010 Top 100 Dallas/Fort Worth Texas Super Lawyer by Super Lawyers, an annual publication by Thomson Reuters. In addition, D Magazine, a monthly publication of D Magazine Partners LP, listed Ladd one of the Best Lawyers in Dallas: Business Litigation from 2011-2013. Ladd has tried cases to judgment in both state and federal courts, including federal courts located in New York and Chicago, and he has argued cases on appeal at both RETURN TO TABLE OF CONTENTS Environmental Admitted to Practice: Federal District Courts in Texas Texas U.S. Court of Appeals, 5th Circuit the state and federal levels in Texas. Representative Cases Represented a co-founder and 47% owner of ARGO Data Resources based in Dallas. After a six-week jury trial for the minority owner in State District Court in Dallas County, the firm secured a court-ordered, mandatory dividend of $85 million to the Company’s two shareholders based on jury findings that the majority owner had engaged in fraud, minority shareholder oppression and improper withholding of dividends. On appeal of the trial court’s judgment, the Dallas Court of Appeals reversed the judgment and ordered that the minority shareholder take nothing on his claims. The minority shareholder then filed a petition with the Supreme Court challenging the appellate court’s ruling, and the Court has requested a response to the petition from ARGO and the majority shareholder. Shagrithaya v. Martin, et al., Cause No. 07-15149-I Filed suit on behalf of three limited partners in a privately owned Texas beer distributorship alleging that they had been deprived of their fair share of the substantial proceeds from the sale of the business. The firm secured a confidential settlement of all claims for the minority owners before trial. Joseph Polichino, et al. v. Hillman International Brands, Ltd., et al. Cause No. 2004-346878 Secured a substantial pre-trial buyout of the minority owner’s 49% interest in a family business after filing a lawsuit and conducting substantial discovery in the litigation. This settlement was achieved for the minority owner after the State District Court entered a summary judgment on the client’s behalf holding that the Defendant/General Partner and Trustee had breached his fiduciary duties. Pickens v. Pickens, et al., Cause No. 02-01105 Represented a minority shareholder in drilling equipment manufacturing company who contended that he was the subject of a squeeze out by the majority shareholder. Diamond McCarthy filed the case in State District Court in Midland, Texas and then secured a confidential settlement for the client before trial. Solansky v. Solansky, et al., Cause No. CV48169 Memberships ABA Section of Litigation Business Torts Committee (Programs Subcommittee Chair) Trial Practice Committee Dallas Bar Association Council for Business Litigation Section Cornell Law School Alumni Board Member President Elect of American Jewish Committee - Dallas Region Vice-President and Member of Temple Emanu-El Board of Trustees RETURN TO TABLE OF CONTENTS diamondmccarthy.com JASON FULTON Partner (214) 389-5325 [email protected] Jason Fulton is a litigation partner in the Dallas office of Diamond McCarthy. He handles all types of commercial disputes for plaintiffs and defendants in state court, federal court and arbitration, and has particular experience in representing partners and shareholders in disputes related to real estate and other closely held businesses. Location Dallas, Texas Education The University of Texas School of Law (J.D., with high honors, 2003) Order of the Coif, Texas Law Review 2001-2003 University of Pennsylvania (B.A. in Economics and Political Science, 1997) Areas of Practice: Complex & High-Stakes Litigation Bankruptcy, Third Party & Professional Liability Antitrust Class Actions Energy & Environmental Intellectual Property Securities & Regulatory Admitted to Practice: Texas Jason was co-counsel for the plaintiff in a six-week trial that resulted in a jury awarding a $65 million dividend to the shareholders and more than $2 million in additional damages to the minority shareholder. In a case pending in the U.S. District Court for the District of Puerto Rico, he provides ongoing representation of a real estate development company in an action against a bank for fraud and breach of contract. Jason joined Diamond McCarthy in 2008 after working in the Dallas office of a national commercial litigation firm. Prior to becoming an attorney, he worked on the options floor of the Philadelphia Exchange and the Pacific Exchange, and in commercial paper for a major issuer, giving him insight into securities, derivatives products and debt instruments. Jason is licensed to practice law in Texas and is also admitted to practice before the Northern, Southern, Eastern and Western Districts of Texas, the 5th Circuit, and the U.S. District Court for the District of Columbia. Representative Cases Co-counsel for Plaintiff in a six week trial that resulted in a jury finding awarding a $65 million dividend to the shareholders and more than $2 million in additional damages to the minority shareholder. The case was brought on behalf of a minority shareholder against the majority shareholder and the corporation for claims of shareholder oppression, fraud, breach of fiduciary duty, and breach of contract. The jury found Diamond McCarthy's client entitled to a substantial dividend, back pay, and attorney's fees. See Jury sides with Dallas businessman in ARGO Data case. Dallas Morning News, October 30, 2009. Ongoing representation of a real estate development company in an action against a bank for fraud and breach of contract, pending in the United States District Court for the District of Puerto Rico. RETURN TO TABLE OF CONTENTS U.S. Court of Appeals, 5th Circuit U.S. District Court for the District of Columbia U.S. District Courts for the Eastern District of Texas U.S. District Courts for the Northern District of Texas U.S. District Courts for the Southern District of Texas Represented national real estate developer of apartments and condominiums in partnership dispute with co-developer over obligations related to two buildings in Victory Park in Dallas, Texas. Defended a national homebuilder against fraud and misrepresentation claims in a mass action arbitration lasting seven weeks. Obtaining a favorable settlement for a hedge fund in NASD arbitration against a global financial services firm for trading errors. Represented a class of cable subscribers in an antitrust suit against a national cable company. Represented a medical device maker in an antitrust suit against a global healthcare products company. Represented relators and defendants in whistleblower suits brought under the False Claims Act. U.S. District Courts for the Western District of Texas RETURN TO TABLE OF CONTENTS diamondmccarthy.com TABLE OF CONTENTS I. TEXAS SUPREME COURT REJECTS COURT-ORDERED BUYOUT OF MINORITY SHAREHOLDER AS REMEDY FOR OPPRESSION .............................................................................................................................. 1 A. Review of pre-Ritchie Texas Law Regarding Claims by Minority Shareholders ........................................... 1 B. Minority Shareholder Rights After Rupe v. Ritchie ........................................................................................ 3 II. MINORITY SHAREHOLDER CLAIMS STILL AVAILABLE AFTER RITCHIE ............................................. 4 A. Shareholder Derivative Actions ...................................................................................................................... 4 1. Derivative Actions (Generally)................................................................................................................ 4 2. Corporations with more than 35 shareholders ......................................................................................... 4 3. Close Corporations with fewer than 35 shareholders .............................................................................. 4 4. Damages in close corporation suits can be paid directly to the minority shareholder ............................. 4 5. Derivate Action (“Formal” Fiduciary Duty to Company) ....................................................................... 5 6. Breach of “Informal” Fiduciary Duty (Duty Owed to Shareholder) ....................................................... 5 7. Recovery of legal fees in derivative actions ............................................................................................ 6 B. Wrongful Suppression of Dividends ............................................................................................................... 6 C. Appointment of a Receiver (With Uncertain Powers)..................................................................................... 7 D. Fraudulent Inducement Claims........................................................................................................................ 7 III. RECENT COVERAGE OF FIDUCIARY DUTY LAW IN TEXAS..................................................................... 7 RETURN TO TABLE OF CONTENTS CURRENT ISSUES AND TRENDS IN BUSINESS DIVORCE LITIGATION The summer of 2014 was an unsettling one for minority investors in private Texas companies due to a series of three decisions the Texas Supreme Court issued in June, which dramatically altered the legal landscape in a manner unfavorable to the interests of minority investors. For more than two decades, minority shareholders in Texas private companies could obtain court-ordered buyouts of their stock by the company’s majority owners if the minority shareholders could plead and prove a claim for minority shareholder oppression. Minority owners could prove oppression by showing that their reasonable economic expectations had been frustrated by the majority owners or by showing that the majority owners had engaged in burdensome, harsh or wrongful conduct. In its decisions this past June, however, the Supreme Court largely jettisoned the claim for shareholder oppression by: (i) imposing a stricter legal standard for minority shareholders to establish they had been oppressed, (ii) limiting the remedy for oppression solely to the appointment of a rehabilitative receiver and (iii) holding that the oppression claim does not exist in Texas common law. See in Ritchie v. Rupe, — S.W.3d — , 57 Tex. Sup. Ct. J. 771, 2014 WL 2788335 (Tex. June 20, 2014). TEXAS SUPREME COURT REJECTS COURT-ORDERED BUYOUT OF MINORITY SHAREHOLDER AS REMEDY FOR OPPRESSION This article reviews the impact of the Texas Supreme Court’s holdings in Ritchie and two other cases regarding minority shareholder oppression claims the Court also decided in June. Before addressing these new cases, it is helpful to look back at the claims that existed for minority investors before these decisions altered Texas law governing the rights of minority shareholders in Texas private companies. company to be liquidated when there is a showing of “illegal, oppressive or fraudulent” conduct by the “governing persons” of the business entity. Id. § 11.404(a)(1)(C). These remedies of court-ordered receiverships and liquidation were often viewed as too harsh by trial judges, and as a result, they were disfavored and rarely applied. Before appointing a receiver, court’s interpreted the statute as empowering the trial court to consider whether “all other available legal and equitable remedies . . . are inadequate.” Id. at §11.404(b)(3). For that reason, trial courts had crafted “equitable” remedies perceived to be less harsh than receivership to address oppressive conduct by majority owners, including awarding dividends, issuing preliminary injunctions to preserve the status quo until trial, and most commonly, court ordered buyouts of the minority’s ownership interest. Before the Supreme Court’s decisions in June 2014, a minority shareholder in a Texas private company could file and prevail in a lawsuit alleging oppression by the majority owners if the minority investor could present facts meeting either one of two definitions of oppression as set forth below: 1) I. A. Review of pre-Ritchie Texas Law Regarding Claims by Minority Shareholders As far back as 1995, the Texas Legislature had enacted statutes that addressed “illegal, oppressive, or fraudulent” actions by controlling shareholders in closely-held corporations. 1 This Texas “oppression statute” is now codified in Section 11.404, of the Business Organizations Code. The statute authorizes Texas trial courts to appoint a receiver, or to order the 2) the majority shareholder’s conduct substantially defeated the minority’s expectations that, objectively viewed, were reasonable under the circumstances and also central to the minority shareholder’s decision to join the venture; or the majority owner’s conduct was burdensome, harsh and wrongful and reflected a lack of probity and fair dealing in the company’s affairs to the prejudice of some members; or a visible departure from the standards of fair dealing and a violation of fair play on which each shareholder is entitled to rely. 2 This two-part oppression test came from a seminal Texas case, Davis v. Sheerin, 3 which relied on language from Section 11.404 of the Texas Business Organizations Code discussed above. Davis adopted the doctrine of minority shareholder oppression and held that the Texas statute authorizes court-ordered 2 Davis, 754 S.W.2d at 381-82; see also Gimpel v. Bolstein, 477 N.Y.S.2d 1014, 1017-18 (N.Y. Sup. 1984). 3 1 The original oppression statute was codified in Articles 7.05 and 7.06 of the Texas Business Corporations Act and, as discussed above, it is currently found in section 11.404 of the Texas Business Organizations Code. 754 S.W.2d at 382-83. The Davis court crafted a courtordered buy-out of the plaintiff’s stock at fair value, as an acceptable “less harsh” remedy to the statutorily authorized liquidation, available to the court under its “general equity powers” when “oppressive conduct” had occurred. Id. at 378, 380, 382-83. RETURN TO TABLE OF CONTENTS equitable remedies. In Davis, the appellate court upheld a jury verdict of oppressive conduct, based on: i) findings of a conspiracy by the majority shareholders to deprive the plaintiff of his ownership interest in the corporation, ii) findings that the majority shareholders wasted corporate funds and received dividends that were withheld from the plaintiff, and iii) undisputed evidence that the plaintiff would be denied any future voice in the corporation’s management. Davis and its progeny remained valid Texas law among Texas state trial and appellate courts for more than 25 years before the Texas Supreme Court directly considered claims for minority shareholder oppression in Ritchie. The Court’s holding in Ritchie and two other cases the Court also decided in June are summarized below and radically altered the rights of minority shareholders in private Texas companies. The Texas Supreme Court’s three recent decisions are summarized as follows: • Ritchie v. Rupe, — S.W.3d — , 2014 WL 2788335 (Tex. June 20, 2014). The trial and appellate courts in Ritchie held that the company’s majority owners had oppressed the minority shareholder by, among other things, refusing to meet with potential buyers of the minority owner’s stock. In a 6-3 decision, the Supreme Court majority reversed the lower court’s buy-out order and made three primary holdings: 1) 2) 3) the only statutory remedy for “oppressive” actions is a rehabilitative receivership and a buy-out remedy is not available under the Texas statute; “oppressive” actions as defined in the statute requires minority shareholders to defeat the business judgment rule to prevail on their claims; and there is no common-law cause of action for shareholder oppression in Texas. The Ritchie appeal had been pending for more than three years before the Supreme Court and involved a claim by Ms. Rupe, a minority shareholder who inherited her stock in a family business from her deceased husband. When tensions in the family mounted, she attempted to sell her minority stock interest to third parties — but the majority owners refused to meet with prospective buyers. With no public market for her stock, Ms. Rupe filed suit claiming she had been oppressed because the majority owners had refused to meet with potential purchasers of her stock, refused to provide her access to company records and offered only a low ball price for her shares. The jury concluded at trial that the majority owners had engaged in oppressive conduct and the trial court ordered a buyout of Ms. Rupe’s interest for $7.3 million. The Dallas Court of Appeals upheld the oppression finding, but remanded the case for a new trial regarding the buyout price because the jury had been instructed not to consider discounts that often apply in valuing a minority interest in a private company (for lack of marketability and control). A six-member majority of the Supreme Court reversed the lower court’s decision in a 54-page opinion radically altering the status quo between majority owners and minority investors. The majority’s rejection of the shareholder oppression claim resulted in a sharp dissent by Justice Eva Guzman in a 30-page opinion joined by two other justices. The majority tossed out the jury verdict, disregarded the trial court judgment and appellate court opinion, and gave short shrift to extensive Texas appellate precedent from the past quarter century. Indeed, the majority opinion left a gap in the law, which the majority opinion acknowledged was harmful to minority shareholders, but which the Court declined to fix. • • Cardiac Perfusion Servs., Inc. v. Hughes, — S.W.3d —, 2014 WL 2896002 (Tex. June 27, 2014) (per curiam). After Ritchie, the Supreme Court reversed the lower court decisions that had approved a buy-out of the minority owner’s stock based on a finding that the majority owner had committed multiple acts constituting shareholder oppression. The Cardiac Perfusion Court reversed the decision based on its rejection of the oppression buy-out remedy, it also remanded the case (in the interests of justice) to allow the minority shareholder to pursue a derivative suit under Section 21.563(c) of the Texas Business Organizations Code. Argo Data Resource Corp. v. Shagrithaya, 380 S.W.3d 249 (Tex. App.—Dallas 2012, pet. denied). Without opinion, the Supreme Court denied the minority shareholder’s petition for review of the Dallas appellate court decision holding that: a) b) the majority shareholder’s actions did not constitute shareholder oppression; and the majority shareholder did not breach his fiduciary duty to the corporation. RETURN TO TABLE OF CONTENTS B. Minority Shareholder Rights After Rupe v. Ritchie The Ritchie decision has been hailed in some quarters as a victory for business owners, but it has been decried in others as a holding that is bad for both minority investors and private businesses because the Supreme Court’s rejection of private investor claims will make it more difficult for non-public ompanies to attract private investment capital. Some key aspects of the Ritchie opinion are discussed below. In Ritchie, the Court’s majority examined the definition of “oppressive” conduct in the T
