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Arbitration, Bench Trial, or Jury Trial?
STATE BAR LITIGATION SECTION REPORT the ADVOCATE Commercial Law Developments and Doctrine ✯ VOLUME 56 FALL 2011 STATE BAR LITIGATION SECTION REPORT the ADVOCATE COUNCIL MEMBERS 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 Edward C. Dawson Yetter & Warden, LLP. 221 West 6th Street, Suite 750 Austin, Texas 78701 Russell H all Russell W. Hall, P.C. Attorney at Law 6750 West Loop So. Ste. 500 Bellaire TX 77401-4117 University of Texas School of Law A llyson N. Ho A ssistant Editors Jeffrey M. Benton Morgan, Lewis & Bockius LLP 1000 Louisiana Street, Suite 4200 Houston, TX 77002 Locke Lord Bissell & Liddell LLP Cory C arlyle Law Office of Cory L. Carlyle Graphic Designer Janie A lderman [email protected] EDITORIAL BOARD Sofia A drogue’, P.C., LRM, P.C. Looper Reed & McGraw, P.C. 1300 Post Oak Boulevard, Suite 2000 Houston, Texas 77056 Jennifer Parker A insworth Wilson Law Firm 909 ESE Loop 323, Suite 400 Tyler, Texas 75701 W. Stephen Benesh Bracewell & Giuliani LLP 111 Congress Avenue, Suite 2300 Austin, Texas 78701-4061 Hon. Jane B oyle United States District Court, Northern District of Texas 1100 Commerce Street Room 1376 Dallas, Texas 75242-1003 Hon. Jeff Brown Fourteenth Court of Appeals 1307 San Jacinto, 11th Floor Houston, Texas 77002 C raig D. C herry Haley and Olson 510 N. Valley Mills Drive, Suite 600 Waco, Texas 76710 Hon. Tracy C hristopher Fourteenth Court of Appeals 1307 San Jacinto, 11th Floor Houston, Texas 77002 Thomas B. Cowart Wasoff & Cowart, PLLC 1440 One Lincoln Centre 5400 LBJ Freeway Dallas, Texas 75240 A listair Dawson Beck Redden & Secrest 1221 McKinney, Ste. 4500 Houston, TX 77010 Roger Wade Hughes Adams & Graham, L.L.P. PO Box 1429 222 E. Van Buren, West Tower Harlingen, TX 78550 A shley Johnson Gibson Dunn Associate Attorney 2100 McKinney Avenue Dallas Texas 75201-6912 K aren Gren Johnson Jones Day 2727 North Harwood Street Dallas, Texas 75201-1515 Erika K ane Assistant Attorney General General Litigation Division Office of the Attorney General P.O. Box 12548 Austin, Texas 78711 Thomas Kurth Haynes and Boone, LLP 2323 Victory Avenue, Suite 700 Dallas Texas 75219-7673 Hon. A nn McC lure Eighth Court of Appeals 500 E San Antonio Ave # 500 El Paso, TX 79901 K ennon P eterson Scott, Douglass & McConnico 600 Congress Avenue, Suite 1500 Austin, TX 78701-3234 A lan Waldrop 2011-2012 LITIGATION SECTION OFFICERS TERMS EXPIRE IN 2012 L inda S.McDonald, C hair Austin Langley & Banack Inc. Trinity Plaza II 745 E. Mulberry, Ste. 900 San Antonio, TX 78212-3166 M ichael C. Smith , C hair-elect Siebman, Reynolds, Burg, Phillips & Smith, LLP - Marshall 113 East Austin Avenue Marshall, Texas 75670 Cory L. C arlyle Law Office of Cory L. Carlyle P.O. Box 66093 Washington, DC 20035 Dallas Nina P erales San Antonio Hon. Rose G. R eyna Edinburg Enid A. Wade Temple Bain & Barkley 550 Fannin, Suite 1330 Beaumont, Texas 77701 TERMS EXPIRE IN 2013 Pat L ong W eaver , Treasurer Texarkana Stubbeman, McRae, Sealy, Laughlin & Browder, Inc. Two Fasken Center, Suite 800 550 West Texas Avenue Midland, TX 79701 Paul a H inton, Secretary Vinson & Elkins, LLP 1001 Fannin Street, Suite 2500 Houston, Texas 77002 Walker Friedman, Immediate Past C hair Jennifer H altom D oan V iol a G. G arza Pharr Federico “Fred” H inojosa McAllen Hon. X avier R odriguez San Antonio Hon. K en W ise Houston Friedman, Suder & Cooke 604 East 4th Street, Suite 200 Fort Worth, Texas 76102 TERMS EXPIRE IN 2014 CHAIR EMERITUS MEMBERS C arlos Eduardo C ardenas A listair Dawson Beck Redden & Secrest LLP 1221 McKinney, Ste. 4500 Houston, TX 77010 C ade W. Browning Abilene El Paso Wes Christian Houston Steve H ayes Elizabeth E. M ack Fort Worth Locke Lord Bissell & Liddell LLP 2200 Ross Ave., Suite 2200 Dallas, Texas 75201-6776 George P. Young Fred B owers LIAISONS/ADVISORS Bowers Law Office 1401 Texas Avenue Lubbock, Texas 79408-0327 Paul W. Green Fort Worth Supreme Court Liaison Austin Jeff Chandler Texas Young Lawyers Association Liaison San Angelo Assistant editors and members, ex officio: Locke Lord Bissell & Liddell LLP 2200 Ross Avenue Suite 2200 Dallas, Texas 75201 K aren Gren Johnson C hristy A muny, V ice- chair Locke Lord Bissell & Liddell 100 Congress Avenue, Suite 300 Austin, Texas 78701 Jeffrey M. Benton C raig T. Enoch Yvette Ostolaza ✯ VOLUME 56 FALL 2011 Board Advisor Dallas Jo A nn Merica Alternate Advisor Austin Tracy Nuckols State Bar of Texas Austin 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 FA L L 2 0 11, VO LU M E 5 6 E ditor ’ s C omments by L onny S. H offm an ............................................................. 3 C h air ’ s R eport by Linda S. McDonald...................................................................... 4 S ustaining M ember s of the L itigation S ection of the State B ar of Tex as ............ 6 SYMPOSIUM: COMMERCIAL L AW DE VELOPMENTS AND DOC TRINE PART I. DE VELOPMENTS IN THE FIELD L itigation in the 21 st C entury: The J ury Tri al , The Tr aining & The E xperts – M usings & Te achings from Dav id J. B eck , L isa B lue , M el anie G r ay & Stephen D. S usm an authored and edited by Sofia Adrogué & Hon. Caroline Baker.................................. 8 A lternativ e F ee A rr angements: Partnering with C lients Through L egal R isk S h aring by Trey Cox................................................................................................... 20 R oundtable : A lternativ e F ee A rr angements in L itigation panel: Ramon M. Cantu, Laura W. Doerre & Mark C. Schroeder.. .......................... 22 P reservation U ncertaint y R ev isited: A ddressing S poli ation by R ulem aking by Thomas Y. Allman...................................................................................... 25 A rbitr ation, B ench Tri al , or J ury Tri al ? A F unctional G uide for I n -H ouse C ounsel by David K. Bissinger & Trent T. McKenna.. ........................................................ 32 L itigator s N eeded to A dv ise Tr ansaction L aw y er s on L itigation P renups by Donald R. Philbin, Jr................................................................................... 36 PA R T I I . R E C E N T, L E A D I N G D O C T R I N A L D E V E L O P M E N T S D ev elopments in Dam ages L aw A pplic able to C ommerci al C ases by Gregory D. Smith........................................................................................ 54 P rivac y R ights of E mploy ees in an E lectronic World by Michael Kelsheimer & Travis Crabtree........................................................... 60 C h anges in the 2010 Pattern J ury C h arges by J. Brett Busby............................................................................................. 68 1 THE 2 Advocate Ta b l e of ✯ Fall 2011 C o n t e n t s , C o n t in ue d ADDITIONAL CONTRIBUTIONS E v idence & P rocedure U pdates by Luther H. Soules III & Robinson C. Ramsey.. ........ 76 F rom M y S ide O f The B ench by Judge Randy Wilson................................................ 84 THE RETURN TO TABLE OF CONTENTS Advocate ✯ Fall 2011 Editor’s Comments O Lonny S. Hoffman UR FOCUS IN THIS ISSUE IS ON COMMERCIAL LAW LITIGATION. We’ve divided the symposium into two main parts. The first looks at developments in the field, such as fees/billing trends in commercial litigation and options for alternative fee arrangements; what’s going on with commercial litigation trial work, and especially with training of young lawyers, in the era of the vanishing jury trial; and what developments are taking place with regard to the use and selection of experts in the second decade after Daubert. Two different articles collect a wide range of perspectives. General counsels and heads of litigation at several different companies share their inside views, while some of the leading commercial law trial lawyers provide their perspectives. Also included in this first part of the symposium on commercial law developments are additional articles on the important discovery issues relating to preservation of information/litigation hold/records retention, and we have several excellent papers that look at current trends in commercial law arbitration. The second part of the symposium then turns to leading recent commercial/business law cases, which are discussed in a series of three articles. We could not cover everything, of course, so the goal was to address thoughtfully some of the most current and challenging questions that have arisen. We are very fortunate to have so many talented and thoughtful people providing their analysis. As usual, we include another installment of the procedure and evidence update from Rob Ramsey and Luke Soules, and of “From My Side of the Bench” by the Hon. Randy Wilson. As always, I welcome your comments or questions about The A dvocate and this issue, in particular. My email address is [email protected]. Regards, Lonny Hoffman Editor in Chief 3 4 THE RETURN TO TABLE OF CONTENTS Advocate ✯ Fall 2011 Chair’s R eport “Equal justice under law is not merely a caption on the façade of the Supreme Court building, it is perhaps the most inspiring ideal of our society. It is one of the ends for which our entire legal system exists…it is fundamental that justice should be the same, in substance and availability, without regard to economic status.” – Lewis Powell, Jr., U.S. Supreme Court Justice L inda S. McDonald I N ADDITION TO OUR MANY OTHER MEMBER SERVICES, the Litigation Council has thought long and hard on how the Litigation Section can help improve equal access to justice throughout the State of Texas. Over the past years, we have given thousands of dollars in grants to groups providing legal services to the poor; however, we wondered how we could “get more boots on the ground” in this endeavor and, beginning in 2007, we began funding summer internships for law students with Legal Service providers throughout Texas. We now fund six to eight such internships a year and the response by both the interns and the Legal Service provider has been overwhelmingly positive. I quote from one intern’s recent letter, which warms my heart and lets me know that we are on the right track: Cheranda Robertson, Summer 2011 Intern, Lone Star Legal Aid My SBOT Litigation Section internship at Lone Star Legal Aid (LSLA) in the Housing and Consumer Units far exceeded my initial expectations. I not only learned an enormous amount about public interest law, real estate law, and bankruptcy law, but also learned several life lessons that cannot be taught in a classroom. Elizabeth Lockett, my supervising attorney for the internship, told me in the beginning of the summer that law school teaches students much about the law, but it does not necessarily teach students “how to be lawyers.” She was right. There were so many things that I learned while actually working on cases, attending court, and meeting with clients face-to-face. It was during these times that I learned first-hand about interacting with attorneys, colleagues, judges, and court personnel; relating to clients in both a professional and empathetic manner; and working in a team environment to get tasks accomplished and meet important deadlines. I know these skills will prove to be extremely valuable for years to come. As I leave LSLA to return to law school for my second year, it is a bittersweet transition. The summer passed with an uncanny speed, yet I have learned and experienced so much it seems as though I was here for a far longer period of time. I am so grateful for the opportunity to have THE RETURN RETURNTO TOTABLE TABLEOF OFCONTENTS CONTENTS Advocate ✯ Fall 2011 participated in the public interest forum (and to have received a stipend from the Litigation Section). My time at LSLA has only further fueled my passion for returning to this field and helping people (who would not otherwise be able to afford such legal representation) achieve justice and equality. Knowing that I helped Ms. Lockett save homes and change lives this summer is one of the most rewarding experiences of my life thus far, and I believe this summer was just the start to a hopefully very long road ahead that is devoted to helping people achieve justice. I am truly awed by the dedication and hard work of all the Council members, both past and present, as well as those who work tirelessly with the Council, such as Lonny Hoffman and his Board of Editors. I am honored to be Chair of the Litigation Section. We welcome feedback if anyone has an idea they wish to share; or if anyone would like to participate in any of our projects, please feel free to contact me at [email protected] or contact any of our Council members. Linda S. McDonald Chair, Litigation Section 5 6 THE RETURN RETURNTO TOTABLE TABLEOF OFCONTENTS CONTENTS Advocate ✯ Fall 2011 S ustaining M embers of the L itigation S ection of the S tate B ar of T exas (As of September 2011) Mr. Gilbert Adams Jr. Mr. Brock C. Akers Ms. Christy Amuny Mr. Paul E. Anderson Jr. Ms. Vanessa Patrice Bailey Mr. Charles Lee Barrera Mr. Chad Baruch Ms. Misti Lachelle Beanland Mr. Christopher R. Benson Mr. Daniel W. Bishop Mr. Jeff Blackburn Mr. Paul Talmage Boston Jr. Mr. Fred Bowers II Mr. Jerry G. Bradford Mr. Turner Williamson Branch Mr. D. Clinton Brasher Mr. Russell Scott Briggs Mr. Dennis P. Bujnoch Mr. Craig Caesar Mr. Carlos Eduardo Cardenas Mr. Edgar Leon Carter Ms. Sheryl Scott Chandler Mr. James Christian Mr. Lester Davis Cochran Mr. Wayne Donald Collins Mr. Philip D. Collins Mr. William Joseph Collins, III Mr. Paul J. Coselli Mr. Scott Wagner Cowan Mr. Thomas B. Cowart Mr. John T. Cox, III Mr. Jack R. Crews Mr. Jeffrey Stewart Davis Ms. Sara Renu De Groot Mr. Jacob De Leon Judge John J. Donovan Mr. Fredrick D. Dreiling Ms. Patricia Kay Dube Ms. Pamela R. Dunlop Ms. Carmen E. Eiker Mr. David Evans Ms. Jennifer Lynn Ferratt Mr. Walker C. Friedman Mr. Brian T. Gaddy Ms. Laura Benitez Geisler Mr. John Ralph Gilbert Ms. Beverly Bell Godbey Mr. Paul Nicholas Gold Mr. Rinaldo J. Gonzalez Mr. Ronald Brad Goodwin Mr. Andrew M. Greenwell Mr. Richard Alan Grigg Mr. William Davis Guidry Mr. Edmund Lee Haag, III Mr. Stephen M. Hackerman Mr. Douglas D. Haloftis Mr. Khalid Y. Hamideh Ms. Kelly Harvey Mr. Michael S. Hays Mr. James Martin Heidelberg, Jr Ms. Claire Henry Justice Federico G. Hinojosa, Jr. Mr. Floyd Honea, II Mr. R. W. Hope, Jr. Mr. William Craft Hughes Ms. Mary Ann Joerres Hon. Karen Gren Johnson Mr. Scott Jones Mr. Michael Andrew Josephson Mr. David E. Keltner Ms. Angelle Marie Kergosien Judge Patricia J. Kerrigan Ms. Gayle Klein Mr. Allen Haber Kline, Jr. Ms. Susan K. Knoll Mr. Michael Robin Krawzsenek Mr. J. Albert Kroemer Mr. Walter James Kronzer, III Mr. Thomas E. Kurth Mr. James Morris Lassiter, III Mr. James Russell Leahy Mr. Stephen T. Leas Mr. Jared Gregory Leblanc Mr. David Kenneth Line Mr. Victor Longo Mr. Jose Antonio Lopez Mr. Gregory Phillip Love Mr. Jeffrey Thomas Lucky Mr. Jeffrey Scott Lynch Ms. Elizabeth E. Mack Mr. Francis Majorie Mr. D. Nevill Manning Mr. Christopher Martin Ms. Linda S. McDonald Ms. Tahira Khan Merritt Mr. Richard W. Mithoff, Jr. Mr. Gregory Moore Mr. Marion Mitchell Moss Mr. James C. Mosser Ms. Susan Nelson Mr. John F. Nichols Mr. Nick C. Nichols Mr. William David Noel Mr. Rand Patrick Nolen Mr. Patrick Gregory O’Brien Justice Harriet O’Neill Mr. Rene Ordonez Mr. Dominic John Ovella Mr. Pete T. Patterson Mr. Andrew Payne Ms. Nina Perales Mr. Michael W. Perrin Mr. John W. Proctor Mr. William Kelly Puls Mr. John V. Rabel Mr. Kristopher Rabie Mr. Donato David Ramos Mr. Thomas E. Reddin Mr. Matthew Richard Rodgers Mr. Eduardo Rodriguez Mr. Michael R. Ross Mr. Jimmy Robert Ross Mr. Scott Jay Ryskoski Mr. David A. Schlueter Mr. Leonard Wayne Scott Mr. Randall Jack Shafer Mr. George Thomas Shipley Justice Rebecca Simmons Mr. John E. Simpson, III Ms. Clarissa Renee Skinner Ms. Michele Yennie Smith Mr. Richard A. Solomon Mr. Frank R. Southers Judge John J. Specia, Jr. Mr. Broadus A. Spivey Mr. Raymond Lyn Stevens Mr. Stephen L. Tatum Mr. Eric J. Taube Mr. Jack George Ternan Mr. Richard N. Thompson Mr. Andy Wade Tindel Mr. James Tracy, Jr. Mr. Dale L. Trimble Ms. Mary A. Van Kerrebrook Ms. Liza Michelle Vasquez Ms. Ruth Vernier Mr. Gabe Vick, III Mr. Wesley Ward Mr. Scott Ryan Wiehle Mr. Kirk Willis Ms. Terri Gaines Wilson Mr. William D. Wood Mr. Luis Guillermo Zambrano Mr. Richard Stephen Zembek RETURN RETURNTO TOTABLE TABLEOF OFCONTENTS CONTENTS STATE STATE BAR BAR LITIGATION LITIGATION SECTION SECTION REPORT REPORT the A DVOCATE PART I. DEVELOPMENTS IN THE FIELD Commercial Law Developments and Doctrine ✯ 7 8 THE RETURN RETURNTO TOTABLE TABLEOF OFCONTENTS CONTENTS Advocate ✯ Fall 2011 Litigation in the 21st C entury: The Jury Trial , The Training & The Experts M usings & Teachings from D avid J. Beck , Lisa Blue , M elanie Gray & S tephen D. Susman AUTHORED AND EDITED BY SOFIA ADROGUÉ & HON. CAROLINE BAKER L ITIGATION IN THE 21ST CENTURY HAS BEEN THE SUBJECT of vigorous substantive debate and commensurate study. Opinions are pointed and varied as to the state of litigation and whether systemic reform is truly needed. Commentators question whether the civil justice system is broken or simply “is in serious need of repair.”1 With institutions seeking a “roadmap for reform” in our 21st century civil justice system, issues of costs and length of time for resolution of matters are at the forefront of the debate.2 This paper will address three topics worthy of additional scrutiny and conversation: (i) commercial litigation trial work in the 21st century—the aftermath of the “vanishing trial”;3 (ii) lawyer training in this era where opportunities are scarce, “the price of justice is high,” and arguably “access is being compromised”4; and (iii) the use and selection of experts in the second decade after Daubert.5 I. Commercial Litigation in the 21st Century—the Aftermath of the “Vanishing Trial” Undoubtedly, “[j]ury trials have become the road less traveled.”6 Whether we are witnessing “the most profound change in our jurisprudence in the history of the Republic,” 7 as one respected U.S. District Judge has articulated, the decades-long decline in jury trials (both at the state and federal levels, civil and criminal) is documented and seemingly permanent. Members of the judiciary, academia and the bar have identified many causes for this decline—high costs of litigation in this information age, inundated dockets, escalation of alternative dispute resolution methods such as arbitration and mediation, unnecessary delays, and the unpredictability and arbitrary nature of the court system.8 Predicated with the inquiry “where have all the juries gone,”9 the statistics are startling and exemplify the “vanishing trial” mantra.10 Indeed, to many it appears that trial courts “are losing their business.”11 In the thirty-year period from 1970 through 1999, the total number of civil cases filed in federal courts increased by 152%. During that same period, the number of cases tried decreased by 20%.12 While traditionally only a de minimus percentage of cases are tried, the decline in the relative number of cases tried has changed from 12% in 1970 to 1.8% in 2002.13 While data on the status of state court trials is “more limited, harder to collect, and difficult to compare,” according to one study, “state courts appear to be experiencing a trend similar to what is occurring in the federal courts.”14 In Texas, in 2005 (excluding family cases) 0.46% of the civil law cases in Texas’s civil district courts were tried by jury. This number dropped to 0.36% by 2009.15 Morbidly stated by a prominent jurist, “[t]he American jury system is dying. It is dying faster in the federal courts than in the state courts. It is dying faster on the civil side than on the criminal side, but it is dying.”16 Commentators have coined the aftermath as the “ripples caused by the near cessation of trials.”17 Scholars ask, “Litigators in name only?” 18 Accordingly, some argue that a more apt definition of the 21st century litigator might be “‘one who uses the court system only as a last resort if a dispute cannot be resolved outside its bounds.’”19 II. Training Young Lawyers in an Era of Fewer Jury Trials A predictable consequence of the “vanishing trial” phenomenon is the conundrum of lawyer training in this 21st century reality. In these times of fewer jury trials and clients’ heightened sense that the stakes are too high in those cases that actually are tried, it is a challenge for young lawyers to get practical hands-on training. To address this gap in training, law schools and law firms have become creative in their training methods. Many law schools now have strong trial advocacy programs that include competitions in, among other things, client counseling, mediation, moot court, and mock trial. Several law schools also work with the local judges, allowing their students to attend mock summary judgment hearings so that the students get experience arguing a case in a real courthouse and in front of a real judge, albeit in a “pretend” case. Many firms now have their own “universi- THE RETURN RETURNTO TOTABLE TABLEOF OFCONTENTS CONTENTS Advocate ties” where associates are instructed on all aspects of a trial and then participate in a mock trial with extensive critique. Other firms have looked for opportunities outside the firm, such as with the District Attorney’s offices in Harris County (and other counties), for their associates to try misdemeanor cases so that they get some real time in front of a jury. Judges also contribute to young lawyer training by judging mock trials and mock hearings (as mentioned above), and by providing internships for law students so that they have an opportunity to get a bird’s eye view of the trial process. In essence, law firms and other institutions must explore innovative approaches to ensure that when their lawyers do appear in a trial, they are “trial ready.” III. The Use and Selection of Experts and the Effect of Daubert on Trial Work in the 21st Century Over a century ago, Judge Learned Hand astutely observed that “[n]o one will deny that the law should in some way effectively use expert knowledge wherever it will aid in settling disputes. The only question is as to how it can do so best.”20 The genesis of the dialogue about experts and ultimately of Daubert and its progeny has been the need and desire to find an efficient and effective methodology for the use of experts. Unfortunately, “[e]xperience has shown that opposite opinions of persons professing to be experts may be obtained to any amount…wasting the time and wearying the patience of both court and jury, and perplexing, instead of elucidating, the questions involved in the issue.”21 ✯ Fall 2011 9 stakes are high because expert opinions are important to almost every type of litigation and the exclusion of expert testimony can become outcome-determinative. 27 Today, extensive pretrial Daubert hearings are now almost de rigueur, with each side seeking to strike the other’s expert(s) in all types of cases. While legitimate challenges exist in many cases, occasionally such hearings do not resemble the challenge contemplated by the Daubert and Robinson28 courts, and more closely resemble a case of “my expert is better than your expert; therefore, your expert should be excluded.” IV. Musings and Teachings Four legendary trial lawyers share their insights about litigation, training and experts in the 21st century. As expected, the conversation is thoughtful, candid and proffers innovative suggestions and solutions. DAVID J. BECK The Court’s landmark 1993 ruling articulated standards for trial judges to assess whether expert testimony should be admitted, including determining whether the reasoning upon which the testimony is based is scientifically sound and whether the reasoning and methodology are relevant to the facts of a particular case.25 Commercial Litigation in the 21st Century— the Aftermath of the “Vanishing Trial” Much has been written about the “vanishing” jury trial, and rightfully so.29 There has been an overall decline in the number of cases tried to a jury both in state court and in federal court. The decline in Texas has been drastic—civil jury trials dropped 60% from 1986 to 2008.30 Even the number of non-jury trials has plummeted in both state and federal court. Today, less than 2% of federal cases are resolved by trial. In 2009, in Texas state courts, only 0.4% of civil cases were resolved by a jury or directed verdict.31 This “withering away”32 of the jury trial may be blamed on several things: increased use of mandatory arbitration clauses, tort reform, heightened pleading standards, heightened expert witness standards and the costs associated with expert testimony, and the increased granting of summary judgment, just to name a few. However, in my view, the escalating cost of discovery is one of the most significant factors in reducing the number of cases that proceed to trial. Matters of relatively low dollar amounts in dispute can generate substantial costs in depositions and even in discovering and producing only documentary evidence. Plainly, the potential enormous cost of litigation has contributed to the number of disputes that are resolved in some manner other than trial. In the decades since Daubert, the expert testimony jurisprudence has permanently impacted how lawyers and experts approach litigation. It is clear that “Daubert has changed the way many courts view technical evidence, because of the greater pretrial scrutiny that is required.” 26 Further, the But regardless of the cause of the drastic reduction in trials—and especially jury trials, its inexorable result has serious long-range consequences. Indeed, it would be easy enough to dismiss the warning calls about the vanishing jury trial as just the lamentations of self-interested trial lawyers The inquiry propounded by Judge Hand was squarely addressed 92 years later by the U.S. Supreme Court in Daubert v. Merrell Dow Pharmaceuticals, Inc., which spawned a new generation of expert examination —the “Daubert challenge.”22 Plagued with concerns that “[a]n expert can be found to testify to the truth of almost any theory, no matter how frivolous,”23 the U.S. Supreme Court proclaimed in Daubert the debut of a new era in judicial gatekeeping.24 10 THE RETURN RETURNTO TOTABLE TABLEOF OFCONTENTS CONTENTS Advocate looking to preserve their way of life. More importantly, however, this pattern of dwindling trials threatens one of the fundamental underpinnings of our society: a strong, vibrant, and independent judicial system. ✯ Fall 2011 motion practice. Many lawyers begin working on a case with the intent, or certainly the belief, that it will never get to trial, and they act accordingly. Two commentators have recently argued that because “clients of all types assume that litigators are trial lawyers and that trial experience is important,” the “lack of trial experience must be disclosed to prospective clients,” and that a failure to make such a disclosure should be actionable conduct against the lawyer.34 What are the practical consequences of the eroding away of the jury trial? Among other things, there are fewer jury verdicts upon which an attorney can form a solid basis for predicting the outcome of a particular dispute in the community, thereby making it exceedingly more difficult for an Training Young Lawyers in an Era of Fewer Jury Trials attorney to evaluate a case and to properly advise his or her The “vanishing trial” phenomenon certainly has had a huge client. Without a measurable number of jury (or judges’) impact on training new lawyers. Today, young lawyers face decisions on a similar dispute or type of claim, it will be a tougher time getting trial experience than did those of almost impossible to form a reasonable basis for predicting us who began our careers many years ago. Adding to the the outcome of a particular case or determining its value. The problem is the fact that today many of the cases that go to lack of development of the common law is another serious trial are high stakes, bet-the-company type of cases. These consequence. Fewer cases going to trial means that fewer are not the kind of cases on which young lawyers can develop jury verdicts are appealed to higher their skills and techniques in the courts. This, in turn, means that courtroom. Although every case is Distrust and skepticism about the there are fewer appellate decisions, important to the client, smaller matfairness of the judicial process, and the opinions that form the contours ters and lower-dollar disputes are of our common law. The inexorable the prime opportunities for young ignorance about its value, will serve by-product is uncertainty in the law, lawyers to gain the experience only to weaken the institution and unpredictability, and inconsistency needed to become an accomplished result in waning support for the in case outcomes. trial lawyer. Unfortunately, those judicial independence so necessary for opportunities are not as numerous our democratic form of government. Perhaps most significantly, the as they once were. diminishing number of jury trials means a decline in the public’s participation in our justice What can be done to provide the necessary training for our system. Most people who serve on a jury walk away believing young lawyers? Advocacy training and trial technique clinics strongly in the fairness of our system and the importance of are good ways for young attorneys to develop the skills they the jury in resolving disputes. Fewer members of the public will need when they do enter the courtroom. Our firm having the opportunity to perform their civic duty and serve utilizes in-house training classes as well as trial academies on a jury may result in a diminished trust in our judicial such as the one offered by the International Association of system. Distrust and skepticism about the fairness of the Defense Counsel. These classes and seminars offer our young judicial process, and ignorance about its value, will serve attorneys valuable trial skill training. Also, the lawyers in only to weaken the institution and result in waning support our firm actively participate in the bar’s pro bono initiative. for the judicial independence so necessary for our democratic One of the real benefits from our pro bono efforts—aside from form of government. the pride we feel in performing a valuable service to those in need—is that our young lawyers have the chance to get Finally, another unfortunate consequence is the lack of into the courtroom and develop their skills, and in return opportunity for attorneys to ply their trade and to hone the client receives great assistance and representation that their skills so that they are better prepared to represent the he or she would otherwise not be able to afford. One of our next client. No one becomes a great—or even good—trial first year associates, for example, recently accepted a pro advocate without having tried a significant number of cases. bono custody matter and tried the case to a successful jury Unfortunately, in this day those opportunities are difficult to verdict. The client received the relief she sought, the young come by. Indeed, we have seen a shift from the days of the attorney won because he gained valuable trial experience and “trial lawyer” to the days of the “litigator.” 33 With so many helped someone who would otherwise have gone without of today’s disputes terminating in a manner other than by representation. Our firm also benefited because we now a trial, the focus has turned to extensive pretrial work and have a first year lawyer who has some jury trial experience. THE RETURN RETURNTO TOTABLE TABLEOF OFCONTENTS CONTENTS Advocate Training today’s young lawyers is also different in other ways. To the extent the focus of litigation has moved from trial work to motion practice and discovery issues, young lawyers today are steeped in these issues early on. And although learning to navigate a courtroom, examine a witness, cross-examine an expert, or deliver a powerful closing argument is certainly important—indeed, it is essential—the complexity of today’s commercial litigation is such that a young attorney also must be an expert in the intricacies of document review, discovery and motion practice beyond that necessary so many years ago. Today’s complex commercial cases more than provide the facility for that experience. The Use and Selection of Experts and the Effect of Daubert on Trial Work in the 21st Century Expert testimony is now critical to almost every case. Daubert 35 and its Texas counterpart have had a significant impact on commercial litigation. Judges now have more control over expert evidence than they ever did before Daubert. Although according to the Advisory Committee Notes to Rule 702, “rejection of expert testimony is the exception rather than the rule,” there is no doubt that challenges to experts have increased significantly since the Court expanded Daubert’s reach to all types of experts in Kumho Tire v. Carmichael.36 Indeed, a recent study conducted by PricewaterhouseCoopers on the effect of Daubert and financial experts demonstrates that while challenges to experts have drastically increased, the success rate has remained relatively steady.37 Challenges to all types of experts rose over 340% from 2000 to 2009, but the percentage of all experts excluded in whole or in part has remained relatively consistent at around 45%, ranging from the highest of 50% in 2003 to the lowest of 41% in 2002.38 Interestingly, at least for challenges to financial experts, the Fifth Circuit heard the second most number of challenges of all federal circuits, behind only the Second Circuit.39 The study also showed that generally plaintiff’s experts are challenged more frequently—70% of the challenges are to financial experts—but that defendant’s experts are more frequently excluded.40 These numbers, of course, are not surprising given that the exclusion of expert testimony obviously affects plaintiffs more than it does defendants because in most cases if a plaintiff has no expert testimony he will be unable to prove a prima facie case.41 And a plaintiff is not likely to make a Daubert challenge of a defendant’s expert until he knows for sure that his case is going forward.42 Some argue that because of this, Daubert has made it more difficult for plaintiffs to successfully ✯ Fall 2011 11 litigate their cases.43 But, given that the exclusion rates have remained about the same since Kumho, it is difficult to say that is true. To be sure, Daubert and its exacting standards have had an effect on the costs of litigation, which in turn has probably contributed to the diminishing number of cases going to trial.44 If a plaintiff’s lawyer must hire multiple experts and fend off a Daubert challenge to avoid the experts’ testimony being stricken, he or she is likely to only take on cases with certain high-value potential. Consequently, lower value cases are left unprosecuted.45 Another likely effect of Daubert in many states has been to persuade plaintiffs—to the extent that they have a choice to file in state or federal court—to prefer state court, a forum in which they may believe they stand a better chance of surviving a challenge to their expert.46 While this is not of as much concern in states like Texas that have adopted or incorporated the Daubert elements into their expert evaluation standards, it is particularly true in states like North Carolina that have rejected Daubert.47 Courts have taken very seriously their Daubert “gatekeeper” role. Yet, there remains a debate about whether the Daubert elements that were intended to be flexible guidelines are, or can be, consistently applied by judges with little understanding of scientific methods or an unsophisticated view of complex scientific subjects.48 Nevertheless, I believe Daubert has at least provided us with an adequate framework with which to measure experts—for both the plaintiff and the defense—and the value of their opinions. Given that the factors are generally being applied by nonscientifically trained judges, it stands to reason that there will always be times when an otherwise qualified expert is excluded or where an expert opinion based on an obviously flawed scientific method is allowed. But all things considered, Daubert and its application, in my view, have significantly improved the way expert testimony is used in today’s litigation. The primary reason for exclusion of expert testimony is lack of reliability—the misuse of accepted methods, rather than the introduction or use of untested approaches, more often leads to exclusion.49 From a practical standpoint, this means that trial counsel must retain and use an expert who is well versed in the proper methodology or scientific approach that underlies his or her theory. In a case involving a battle of experts, the battle is often won by the party who secures the best expert in the field. 12 THE RETURN RETURNTO TOTABLE TABLEOF OFCONTENTS CONTENTS Advocate LISA BLUE Commercial Litigation in the 21st Century—the Aftermath of the “Vanishing Trial” “Justice denied anywhere diminishes justice everywhere.”50 The steep decline in the number of cases tried by juries has a substantial effect on the work of all litigators in the 21st century. Any hope of lessening this decline depends on investigating the cause of the trend. From my observation, the demise of the jury trial and the resulting difficulties that attorneys and their clients face can be linked to one main culprit: tort reform. Specifically, tort reform and the decline of the jury trial add a layer of difficulty that inhibits attorneys’ ability to advocate for clients in need of legal assistance. In the end, compromising the right to trial by jury—which is the cornerstone of justice—creates instability in the structure of our legal system. The effects of this decline may be disastrous for litigators and parties alike. Attorneys will be the first to experience the tremors created by the fall of the jury trial. These effects range from where an attorney practices law to how the attorney approaches a case. For example, case selection becomes more stringent when individual states and the federal government place a cap on pain and suffering and economic damages. Attorneys are unable to accept clients who may have strong claims but are barred from recovery due to limits imposed by tort reform. These difficulties force lawyers, especially those in Texas, to either switch areas of practice or go outside of that state to practice law. In the end, the client is deprived of a legal remedy and the purpose of our legal system is defeated. For these reasons, the right to trial by jury, what John Adams described as the “heart and lungs of liberty,” is in need of resuscitation. The uneven balance of bargaining power in favor of big business intensifies the difficulties created by tort reform. One way in which corporations are able to manipulate the process in which individuals receive justice is by incorporating mandatory arbitration clauses into form contracts. Thus, assuming the individual is aware of the clause, the remaining choice is accept to the contract “as is” or forfeit needed services. This poses a significant disadvantage to private individuals since businesses have more time and resources to devote to drafting these clauses. The jury waiver is another tool used against individuals by large corporations. Businesses seek to justify these one-sided agreements by claiming that individuals will still have their “day in court” with a judge ✯ Fall 2011 deciding the case. When businesses coerce individuals to give up fundamental rights, this is an inappropriate use of corporate power. Furthermore, these agreements interfere with the freedom of the individual to have the case heard by a jury and place a burden on the attorney to remedy the consequences and to ensure that individual rights are maintained. It is essential that the doors to the courthouse, specifically the jury room, remain open so justice may be preserved. Furthermore, proponents of tort reform often use their resources to prejudice the public before the case is ever heard in court. These tort reform groups attack the public perception of trial work by circulating rumors of a litigation crisis and implicating that people are becoming “sue crazy.” Despite the inaccuracy of the rumors,51 these assertions make it more difficult for trial attorneys to present their case to an unbiased jury. Because jurors are exposed to the tort reform publicity onslaught, they become more skeptical about the judicial system. Damage to the public perception is exacerbated by the fact that there are fewer opportunities to try cases in front of a jury. This leads to a more frustrating trial process since attorneys have less experience in preparing for and advocating during a jury trial. Corporations also seek to increase the difficulty in bringing class action lawsuits as another tool to strong-arm individual litigants. For example, although aimed at reducing class action lawsuit abuse, the Class Action Fairness Act of 2005 harms individuals with legitimate claims due to the increased difficulty in bringing class action lawsuits.52 This act makes it too difficult and expensive for a consumer to bring a class action lawsuit; thus, it is more difficult to hold the corporate giant in check. Class action suits are invaluable because they afford consumers the opportunity to bring collective claims against large corporations that would otherwise be too small to bring separately. Absent the deterrent effect of class action litigation, corporations can profit at the expense of vulnerable consumers. The perceived “advantages” of resolving disputes outside of the courtroom do not justify compromising the fairness of the process by forfeiting the right to trial by jury. The significant disadvantages imposed upon those who need legal assistance and the added layer of complication to trial work outweigh the time and money saved, if any, through these alternative processes. An attorney should put forth the same evidence, call the same witnesses, and spend the same amount of time preparing a case regardless of where the case is heard. For this reason, my approach to jury work remains the same regardless THE RETURN RETURNTO TOTABLE TABLEOF OFCONTENTS CONTENTS Advocate ✯ Fall 2011 13 of where the case is being heard. The goal is to extract as much information about those who will render the verdict, including their belief system and life experiences. Although this does not remedy all the negative effects of tort reform, it ensures that the attorney will fulfill his or her obligations to the client and act as an effective advocate. the young lawyers’ experience level or who may be unable to afford a more experienced attorney. Similarly, a mentoring program where law students are paired with older attorneys would be a practical benefit for both the young lawyer and the mentor since firms could utilize the training and skills of the student. Training Young Lawyers in an Era of Fewer Jury Trials There is no better experience for young attorneys than to practice in front of a jury. As a young litigator at the District Attorney’s Office, I tried over 125 cases. Each of those trials was an invaluable contribution to my development as an advocate. From those experiences, I have learned there is something very important about having twelve jurors decide whether the plaintiff deserves relief, as opposed to three arbitrators determining the result of the case. This is central to our system of justice, and the fairness provided through a jury trial forms the core foundation on which our county was built. Being in front of a jury is a profound experience, one I would desire for every young lawyer. It is my sincere regret that so few young attorneys will be able to take advantage of this critical educational opportunity. The Use and Selection of Experts and the Effect of Daubert on Trial Work in the 21st Century The Daubert decision has had a chilling effect on all civil litigation by requiring judges to encroach on the role of the jury and complicating the job of trial lawyers.53 Essentially, Daubert allows a judge to determine the credibility of scientific evidence and expert witnesses. Judges are becoming triers of fact and, thus, usurping a role that was traditionally reserved for the jury. The result is an increased and unbalanced burden of proof by requiring that the plaintiffs win twice: once in the Daubert proceeding and again at trial.54 This decision ultimately produces the following effects: (1) increases the cost of litigation for the plaintiff; (2) lowers the probability that a case will ever be filed in the first place; and (3) increases the chance that the judge will terminate the case. Daubert gives an enormous amount of power to judges, whose rulings in these motions can make or break a case. These effects hit especially hard in toxic tort law where science is the essential aspect of this type of litigation. For these reasons, it is important to train young lawyers to oppose arbitration and fight for the right of trial by jury. The first step in this process is to teach young lawyers how the system works. Through this understanding, I am confident that young attorneys will become engaged in the art of advocacy and work hard to protect their clients’ rights. In conducting this training there are a few words of advice that I would pass to every young lawyer. First, young lawyers should get a specialty. If attorneys choose the general practice of law, nothing will stand out about that person and he or she will blend into the backdrop of every other attorney looking for a job. Second, new attorneys should take as many bar exams as possible, especially those of states in which that attorney might want to practice. Being licensed in multiple states looks very desirable to employers. Taking this approach minimizes the negative effects of young lawyers’ limited opportunity to try cases before a jury. Law schools should also have an increased incentive to better prepare students before entering the workforce. I believe that the medical community sets a great example by requiring young professionals to complete an internship or residency before practicing on patients without supervision. In the same way, I would propose that law schools require internships so that young lawyers are prepared for practice from the moment they enter a firm. This reduces the risk of inadequate legal representation of a client who may not know The Daubert standard has affected my experience as a litigator by making case selection more difficult and adding a layer of complication to trial work. Cases that I would have taken ten years ago, I am unable to look at now because it is too difficult to get past the science. The standard set out in Daubert can be insurmountable and leaves many legitimate claims without a proper remedy. These concerns shift the focus of attorneys from what is important—like how bad the disease is or how negligent the defendant acted—to whether the case can get past Daubert standard. Furthermore, although Daubert sets out general criteria to guide a judge’s decision making, it leaves a lot of room for judicial discretion in applying the criteria. The result of this flexibility is that litigators face a lack of uniformity among different courts.55 For instance, in trying a Daubert case, I always look into how the particular judge has applied the standard in the past. Few wise lawyers will take a case if it cannot get past Daubert and, as a result, many people in need of a legal remedy will not receive a fair chance at trial. Assuming that the case gets through the heightened selection process, I then look at how the experts in the case will withstand the Daubert standard in both the trial and 14 THE RETURN RETURNTO TOTABLE TABLEOF OFCONTENTS CONTENTS Advocate appellate courts. Under Daubert, the selection of experts becomes indispensable. The job of the attorney at this phase is to make sure that the expert passes all parts of Daubert. However, finding experts who will testify in trial becomes more difficult because those experts do not want to risk the stigma of being struck as an expert by a judge who may have no scientific background. Furthermore, fears of having a witness struck are exacerbated by concerns that opposing counsel will use a former Daubert ruling to discredit the expert in subsequent trials. The jury should be able to judge the credibility of experts and we should trust the system that was created for that purpose. ✯ Fall 2011 advocacy skills. What is the difference between oral advocacy at trial and a blistering cross or a strategic direct examination of a witness in a deposition, a masterful argument at a Daubert hearing, or a compelling presentation of the strengths of your case to a mediator using the masterful storytelling techniques possessed by every great trial lawyer? In my view, two key differences are that a trial usually garners a larger audience (which strokes our egos) and we know that one side will win and the other will lose (which satisfies our competitive nature). Given our professional responsibilities, we should not want to go to trial to have our egos stroked or our competitive spirits sated. In the end, Daubert motions are overused, impose an unfair That said, if there are fewer trials today, will the future genexpense on plaintiffs, and give too much power to trial erations of lawyers be devoid of the legendary trial lawyers judges by putting them in the role of jury. The judge, as a of days gone by? First, let’s not kid ourselves—while there neutral decision-maker, wears a are many, many very good trial robe, which represents a separating lawyers, there have never been Good lawyers can become much veil between him and the litigants. that many great trial lawyers. For better the more they practice and This veil is torn and neutrality those who are extraordinary, I do experiment with their oral advocacy compromised when a judge is asked not think they are extraordinary skills, which is why it is so important to step in and interpret the facts. because they have done it over and The justice system was designed so over (although, I admit, experience to nurture the next generation with that the community interprets the doesn’t hurt), but because they are training and opportunity. facts and the judge applies the law wired a certain way that sets them to the facts in order to resolve the apart the very first time they step dispute. The jury represents the standard of fairness required into a courtroom. Nonetheless, good lawyers can become by this system, and justice cannot be served if the access to much better the more they practice and experiment with justice is denied. Sadly, fewer people will receive much needed their oral advocacy skills, which is why it is so important to assistance as a result of this insurmountable standard. nurture the next generation with training and opportunity. MELANIE GRAY Commercial Litigation in the 21st Century—the Aftermath of the “Vanishing Trial” Commercial trial lawyers often bemoan the fact that so few cases go to trial. I have practiced for over thirty years, and throughout that time, most large, complex commercial cases settled before trial, as well they should. Settlement often is in the client’s best interest because the client has more control over the outcome. At trial, either before a judge or a jury, the results are unpredictable and often affected by factors having little or nothing to do with the merits of the case. My recommendation to young lawyers who want to try cases: your best bet is to refocus your practice on the few areas where cases still go to trial or instead find fulfillment in all the other aspects of oral advocacy. Commercial litigation, whether in a court, an arbitration, or a mediation, is replete with opportunities to use our oral Training Young Lawyers in an Era of Fewer Jury Trials When commercial cases do go to trial, it is the sine qua non of what we do. As I noted before, it is critical that we invest ourselves in teaching our younger colleagues key advocacy skills and then open the doors of opportunity to them. Many firms have sophisticated training programs based upon the learning-by-doing technique. I find these programs the most effective, but only when the gifted, senior trial lawyers commit themselves to participating actively in them. Young lawyers that do not have access to in-house training programs can take advantage of the numerous advocacy CLEs sponsored by local bar associations or the State Bar of Texas. In addition, they can participate in advanced trial advocacy programs sponsored by local law schools or attend one of the national trial training programs, like those sponsored by the National Institute of Trial Attorneys. While these programs may carry hefty registration fees and a significant time commitment, the benefit to a young lawyer’s career is worth that investment now. THE RETURN RETURNTO TOTABLE TABLEOF OFCONTENTS CONTENTS Advocate However, no matter how good the training, if it cannot be put to use because opportunities are not provided, the learned skills can atrophy just like muscles that are not regularly exercised. This is where clients, judges, law firms, and senior attorneys can become more engaged. First, clients should insist that depositions, court appearances, and other presentations be assigned to the most junior level appropriate given the stakes involved. Unfortunately, when business is slow and those opportunities more scarce, senior attorneys seem less willing to share them - because they may then have less to do or because they may be less willing to take any risks with the client. As a profession, we do ourselves a disservice if we do not step aside and allow attorneys in their early years of practice to meaningfully experience each stage of a case leading up to, and including, trial. Second, judges can be more active in encouraging law firms to give their associates courtroom experience. I recently heard about a pilot program under consideration in which a court may require firms to send their junior lawyers to argue routine pretrial motions. Further, judges should actively encourage firms that accept habeas and other matters to allow the more junior attorneys to handle as much of the representation as possible (with appropriate supervision, of course). Third, just as clients should request that depositions, hearings, and presentations be assigned to more junior attorneys, law firms should not be shy about discussing the merits of involving junior attorneys with clients. By its nature, commercial litigation is, in large part, driven by businesses that hope to be around for a long time and they should be willing to provide as many opportunities as possible to the next generation of lawyers who may be called upon to represent them in the future. Law firms also should invest in pro bono matters that will provide trial experience. Not only is it the right thing to do, but also a very effective way for young lawyers to get “on their feet” experience. Finally, law firm management should hold senior lawyers accountable for providing opportunities to junior lawyers by requiring periodic reporting by the senior lawyers and by including such “training” as a factor in their compensation. The Use and Selection of Experts and the Effect of Daubert on Trial Work in the 21st Century With the proliferation of “experts” and the expert/consulting industry, Daubert hearings have become more prevalent. In the years since Daubert was decided, I believe less junk science has been presented to the fact-finder. Further, clients are becoming more vigilant in understanding whether the proposed expert or expert testimony will be subject to chal- ✯ Fall 2011 15 lenge and are increasingly resistant to spending the time and money on such an expert if it is a close call. While judges are more comfortable striking experts and their testimony, I believe more can be done. I am surprised by lawyers and clients who search for experts on just about every aspect of the case, believing that if there is an “expert” who testifies on each issue, their chances of winning increase. I often question this approach, as the very essence of a trial lawyer’s skill is translating complex issues (except those requiring clear technical or scientific expertise) into ordinary concepts by telling stories, drawing analogies, and relying on common sense. The more lawyers rely on experts to explain the case, the less they learn how to master their oral advocacy skills. Finally, as litigation continues to evolve, with judges either being pushed or mandated to dispose of cases earlier and earlier, I believe hearings that eliminate claims or limit the evidence will increase. These are also important opportunities to advance a trial lawyer’s skills. STEPHEN D. SUSMAN Commercial Litigation in the 21st Century—the Aftermath of the “Vanishing Trial” Most Americans, including lawyers and appellate judges, think that a jury trial in a civil case is something to be avoided because the result is too unpredictable and the pretrial discovery expense necessary to make it less so, is too burdensome. Judicial doctrines like Twombal,56 Daubert and Matsushita,57as well as expansive application of preemption and compulsory arbitration, are all reflections of an explicit distrust of jury verdicts. What can be done to make Americans regard the Seventh Amendment as at least as important as the Second Amendment? Simply put, we must reduce discovery expense and improve the perception of juror comprehension. In the mid-1990s, I served as the Chair of the Texas Supreme Court’s discovery rules committee. While Texas was one of the first states to expressly address e-discovery and deposition abuses, I found the rule-making process slow and frustrating for several reasons. First, the rules normally must accommodate all kinds of cases and all kinds of lawyers. Second, because they remain in place for a long time, everyone is fearful of experimentation. As an alternative, I began thinking about the possibility of persuading opposing counsel to agree to a set of rules that would govern a particular case and that would not require the court’s permission to adopt. Because I was blessed by being involved only in complex commercial cases and with good opposing counsel, I was able to develop 16 THE RETURN RETURNTO TOTABLE TABLEOF OFCONTENTS CONTENTS Advocate a set of Pretrial Agreements that my firm has been proposing to opposing counsel for over a decade. Some of these agreed rules already have been largely embodied in the federal rules, such as the inability to discover communications between counsel and expert witnesses or prior drafts of expert reports. Other suggested rules, such as the limitation of depositions to three hours and the elimination of expert depositions entirely, are “hot off the press.” The key to the efficacy of such a Pretrial Agreement has always been to attempt to reach agreement on as many of these items as possible before discovery begins. Once you are in the heat of battle, what appears to be good for one side is often deemed to be bad for the other; therefore, it is hard to reach agreement at that point. Some of my proposed pretrial agreements are always accepted and some are more controversial. To assist trial lawyers in this process, I have established a working website called TrialByAgreement58 where these agreements discussed above, as well as other suggested agreements, can be found and debated among trial lawyers. Because my Pretrial Agreements have worked so well, I have taken the concept a step further and have created a list of possible Trial Agreements, largely intended to improve juror comprehension. The start of discovery is not too early to begin discussing and trying to reach agreement on simple things like using a jury questionnaire, a juror notebook and pattern jury charges where they exist. These items seem like good ideas at the start of a case, but may not appear so benign on the eve of trial. I truly believe that Trial Agreements are worthy of full discussion among experienced trial lawyers and judges well in advance of pretrial. My attitude is to take whatever agreements I can get—the idea being that any such agreements advance the ball and make pretrial and trial more professional and efficient, not to mention making trial more understandable to the jury. Trial by Agreement is a way of reducing expense, stress and the uncertainty of pretrial rulings and a jury trial. In my experience, most judges welcome it and I speak at many continuing education programs to encourage them to urge lawyers to consider these type of agreements. I also am creating a website called WeThePeople, WeTheJury as a place where those who have served on state or federal juries can go to discuss their experiences, anonymously and without mentioning proper names. Nothing like this exists and I believe that jurors who go to such a website are likely to express satisfaction with the experience. I also believe that trial lawyers and judges can use these comments to improve how they conduct jury trials. ✯ Fall 2011 If trial lawyers are willing to cooperate, there is no inherent reason that JAMS or AAA should be winning the dispute resolution competition. Businesses can incorporate into their contracts agreements for arbitration-like discovery rules to govern preparation for a trial. Alternatively, good trial lawyers can agree to their own streamlined rules. Trials have other advantages over arbitration—no need to pay judges by the hour and the availability of appellate review of legal issues, to name a few. If a lawyer is paid by the hour, there is little incentive to reduce the time spent on pretrial discovery. Other than preaching the virtues of alternative fees that reward lawyers for results and not for effort, there is little we can do to get rid of this impediment to efficiency. However, we should reconsider the ethical ban on compensating testifying experts on a contingent fee basis. Expert expenses, along with the expense of reviewing electronic documents before they are produced, are probably the largest part of the cost of any trial or arbitration. Most jurors find that overall the experts cancel each other out and are not outcome determinative. If that is true, we should be asking ourselves why are we spending hundreds of thousands of dollars to hire them. Can we not trust the fact-finder, if fully informed of an expert’s compensation, to give the appropriate weight to his testimony? Training Young Lawyers in an Era of Fewer Jury Trials In this time of “vanishing” trials, I feel like an old dinosaur hunter. There is no need to teach those skills to youngsters if there are no dinosaurs around. That said, I do think there are many opportunities for young lawyers to practice their litigation skills by participating in mock trials. We also have a rule at our firm that any lawyer that works on a case is entitled to stand-up time at the trial. We can only teach by sharing the limited trial experiences that we have. Jurors love to see a young lawyer get opportunities to question witnesses. The Use and Selection of Experts and the Effect of Daubert on Trial Work in the 21st Century Trial lawyers tend to overuse experts because we find it a helpful way of getting non-expert evidence before the jury. I have heard many lawyers say that it is the best way to get the other side’s bad documents before the jury. I think we need to change the rules to allow for a more direct approach, e.g., for counsel to just display documents and use interim arguments to explain what they mean. But in a time-limited trial, getting the facts before the jury with some explanation by using an expert is just fine. I also find that Daubert motions are abused. They get filed in every case and greatly increase the cost of litigation. I believe that courts tolerate THE RETURN RETURNTO TOTABLE TABLEOF OFCONTENTS CONTENTS Advocate this because many do not trust juries. If we trusted juries, then what is the need for a gatekeeper? In my view, juries are fully capable of distinguishing the wheat from the chaff and I would only allow Daubert motions in those cases where the scientific theory is obviously voodoo. V. Final Observations A spirited debate about the cause(s) of the “vanishing trial” continues. However, there is no doubt that trials have decreased significantly and that the rising costs of discovery, among a litany of other considerations, are clearly a contributing factor. With the decline in jury trials, it is now, more than ever, a challenge for young lawyers to be able to “cut their teeth” in real trials. It requires creativity and a willingness on the part of the lawyers, clients and judges to give young lawyers opportunities to develop and hone their oral advocacy skills, whether in mediation, arbitration, hearings, or trials. There also seems to be consensus that the number of Daubert hearings has escalated with a wider range of experts being subjected to a challenge. As a result, such hearings are now costly and time consuming for all involved. Some litigators question putting the judge into a gatekeeping function to such an extent that the judge effectively becomes the jury, rather than proceeding with fewer experts; having the lawyer present the key documents to the jury; and trusting the jury to “make the call.” One thing is certain: trial lawyers, clients and judges alike should be invested in preserving the right to trial by jury and making the pretrial and trial process open, fair, and cost efficient to all. Sofia Adrogué, P.C. is a Partner in the Houston office of Looper, Reed & McGraw, P.C. She is a frequent CLE speaker (over 100 speeches to date) and publisher (over 70 articles to date) and has been locally and nationally recognized for her public service. Caroline Baker has served the citizens of Harris County as a state district judge for 13 years. Prior to the bench, she was a partner in the litigation firm of McFall, Sherwood & Sheehy. She has been elected to the American Board of Trial Advocates. David J. Beck, a Founding Partner of Beck, Redden & Secrest, L.L.P., is a Past President of the American College of Trial Lawyers as well as the Past President of the State Bar of Texas; he currently serves as Chair of the Center for American and International Law. Lisa Blue, Ph.D., J.D., with Baron and Blue in Dallas, Texas, is a nationally renowed trial lawyer whose accomplishments include being named one of the Top 50 Women Litigators in the U.S. by the National L aw Journal, Trial Lawyer of the Year by the Texas Chapter of the American Board of Trial Advocates and by ✯ Fall 2011 17 the Dallas Bar Association. Ms. Blue wishes to thank Courtney Boothe, Candidate for Juris Doctor, May 2013, SMU Dedman School of Law, for her assistance. Melanie Gray, a partner at Weil, Gotshal & Manges LLP, specializes in commercial and bankruptcy litigation. She served on the board of the Houston Bar Foundation and is a Founding Member of the Center on Women in Law at the University of Texas School of Law. Stephen D. Susman is the founding partner of Susman Godfrey, a 90-attorney commercial trial boutique with offices in Houston, Dallas, LA, Seattle and New York. O 1 Summary Comparison of Bar Association Submissions to the Duke Conference Regarding the Federal Rules of Civil Procedure (April 26, 2010) at iii available at http://civilconference.uscourts.gov/LotusQuickr/dcc/Main.nsf/$defa ultview/0F0CC2092ECAAEE2852577130049EBDD/$File/ABA%20 Section%20of%20Litigation,%20Comparison%20of%20Duke%20 Conference%20Recommendations.pdf?OpenElement. 2 See generally A m. Coll. of Trial L awyers Task Force on Discovery & Civil Justice & Inst. for the A dvancement of the A m. L egal Sys., 21st Century Civil Justice System A Roadmap for R eform, P ilot P roject Rules (2009) available at http:// www.du.edu/legalinstitute /pubs/pilot _ project _ rules. pdf. 3 See generally Marc Galanter, The Vanishing Trial: An Examination of Trials and Related Matters in Federal and State Courts, 3 J. Empirical L egal Stud. 459 (2004). 4 See A m. Coll. of Trial L awyers Task Force on Discovery & Civil Justice, supra note 2, at 1. 5 See Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579 (1993). 6 Tracy Walters McCormack & Christopher John Bodnar, Honesty is the Best Policy: It’s Time to Disclose Lack of Jury Trial Experience, 23 Geo. J. L egal Ethics 155, 200 (2010). 7 Hon. William G. Young, An Open Letter to U.S. District Judges, The Federal L awyer 30 , 30 (July 2003); Hon. William G. Young, Vanishing Trials, Vanishing Juries, Vanishing Constitution, 40 Suffolk U.L. R ev. 67, 92 (2006) (“The future, of course, is unpredictable. But this much I know is true: history will not deal kindly with that generation of jurists that allowed the American jury to fall into desuetude. Lincoln said it best: ‘we cannot escape history….[It] will light us down, in honor or dishonor, to the latest generation.’ How will history ‘light us’? I know not how the institutional judiciary will respond.”) (footnotes omitted). 8 Hon. Patrick E. Higginbotham, So Why Do We Call Them Trial Courts?, 55 SMU L. R ev. 1405, 1405-20 (2002); Sam Sparks & George Butts, Disappearing Juries and Jury Verdicts, 39 Tex. Tech L. R ev. 289, 295-97 (2007); A m. Coll.of Trial L awyers, The “Vanishing Trial:” The College, The P rofession, The Civil Justice 18 THE RETURN RETURNTO TOTABLE TABLEOF OFCONTENTS CONTENTS Advocate System 5 (2004), available at http://www.actl.com/AM/Template. cfm?Section=All_Publications& Template=/CM/ContentDisplay. cfm&ContentFileID=57. 9 See Sparks & Butts, supra note 8 at 295; see also Walters McCormack & Bodnar, supra note 6. 10 See generally Galanter, supra note 3. 11 See Higginbotham, supra note 8 at 1420. 12 Id. at 1408. 13 A m. Coll.of Trial L awyers, The “Vanishing Trial:” The College, The P rofession, The Civil Justice System 5 (2004), available at http://www.actl.com/AM/Template.cfm?Section=All_Publications& Template=/CM/ContentDisplay.cfm&ContentFileID=57; see also Higginbotham, supra note 8 at 1405-18. 14 Hon. Nathan L. Hecht, The Vanishing Civil Jury Trial: Trends in Texas Courts and an Uncertain Future, 47 S. Tex. L. R ev. 163, 164 (2005) (footnote omitted). 15 See David J. Beck, The Consequences of the Vanishing Trial: Does Anyone Really Care?, 1 HLRe 29, 41 (2010) available at http://www. houstonlawreview.org/archive/downloads/hlre/1_1/(3)Beck.pdf (citing Office of Court A dmin., A nnual R eport for the Texas Judiciary: Fiscal Year 2009, at 45 (2009), available at http:// www.courts.state.tx.us/pubs/ar2009/AR09.pdf ). 16 Hon. Joseph F. Anderson, Jr., Where Have You Gone, Spot Mozingo? A Trial Judge’s Lament over the Demise of the Civil Jury Trial, 4 Fed. Cts. L. R ev. 99, 99 (2010) (citing William G. Young, U.S. District Judge for the District of Mass., Address at the Florida Bar’s Annual Convention (June 28, 2007) at http://www.floridabar.org/DIVCOM/ JN/jnnews01.nsf/8c9f13012b96736985256aa900624829/5d3d1e6 1610d7e5c852573150051920d?OpenDocument). 17 Walters McCormack & Bodnar, supra note 6 at 200. 18 Id. at 161. 19 Id. at 163. 20 Learned Hand, Historical and Practical Considerations Regarding Expert Testimony, 15 H arv. L. R ev. 40, 40 (1901). See generally Sofia Adrogué & Alan Ratliff, Still Room for Improvement: Assisting the Trier-of-Fact in the Second Decade of Daubert, 1 HLRe 5 (2010), available at http://www.houstonlawreview.org/archive/downloads/ hlre/1_1/(2)Adrogue.pdf.; Sofia Adrogué & Alan Ratliff, The Care & Feeding of Experts: Accountants, Lawyers, Investment Bankers, and Other Non-Scientific Experts, 47 S. Tex. L. R ev. 881 (2006); Sofia Adrogué & Alan Ratliff, The Independent Expert Evolution: From the “Path of Least Resistance” to the “Road Less Traveled?”, 34 Tex. Tech L. R ev. 843 (2003); Sofia Adrogué & Alan Ratliff, Kicking the Tires After Kumho: The Bottom Line on Admitting Financial Expert Testimony, 37 Hous. L. R ev. 431 (2000). 21 Winans v. N.Y. & Erie R.R. Co., 62 U.S. (21 How.) 88, 101 (1858). 22 See Daubert v. Merrell Dow Pharmaceuticals., Inc., 509 U.S. 579 (1993). 23 Hon. Jack B. Weinstein, Improving Expert Testimony, 20 U. R ich. L. R ev. 473, 482 (1986). 24 See Sofia Adrogué & Alan Ratliff, Still Room for Improvement: Assisting the Trier-of-Fact in the Second Decade of Daubert, 1 HLRe 5, 7 (2010), available at http://www.houstonlawreview.org/archive/ ✯ Fall 2011 downloads/hlre/1_1/(2)Adrogue.pdf. 25 Daubert, 509 U.S. at 592-94. 26 Katerina M. Eftimoff, The Decade After Daubert Proves Tough on Expert Witnesses, Litig. News, July 2002, at 1, 1 (quoting U.S. District Judge Nancy Friedman Atlas, Houston, Co-Director of the Section of Litigation’s Division I –Administration); see also RAND Inst. for Civil Justice, RB-9037: Changes in the Standards for A dmitting Expert Evidence (2002), available at http://rand.org/ pubs/research_briefs/RB/RB9037/index1.html. 27 See, e.g., Weisgram v. Marley Co., 528 U.S. 440, 443, 456 (2000) (expert testimony found unreliable and therefore, inadmissible; judgment for plaintiff reversed and final take-nothing judgment rendered for defendant on appeal without new trial). 28 E.I. du Pont de Nemours and Co., Inc. v. Robinson, 923 S.W.2d 549 (Tex. 1995). 29 See, e.g., David J. Beck, The Consequences of the Vanishing Trial: Does Anyone Really Care?, 1 HLRe 29 (2010). 30 Office of Court A dmin., A nnual Statistical R eport for the Texas Judiciary: Fiscal year 2008, at 38 (2008), available at http://courts.state.tx.us/pubs/ar2008/AR08.pdf. 31 Fiscal Year, ending August 31, 2009. Office of Court A dmin., A nnual R eport for the Texas Judiciary: Fiscal Year 2009, at 41 (2009), available at http://www.courts.state.tx.us/pubs/ ar2009/AR09.pdf. 32 Hon. William G. Young, An Open Letter to U.S. District Court Judges, The Federal L awyer 30, 31 (July 2003). 33 See Tracy Walters McCormack & Christopher John Bodnar, Honesty is the Best Policy: It’s Time to Disclose Lack of Jury Trial Experience, 23 Geo. J. L egal Ethics 155, 200 (2010) (“We are just beginning to assess the ripples caused by the near cessation of trials. Most litigators, especially those practicing less than ten years, have little or no trial experience.”). 34 Id. at 200. 35 Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579 (1993). 36 Kumho Tire Co. v. Carmichael, 526 U.S. 137, 150 (1999). 37 Daubert Challenges to Financial Experts: A Ten-Year Study of Trends and Outcomes 2000–2009, PriceWatershouseCoopers (2010), available at http://www.pwc.com/us/en/forensic-services/ assets/2009-daubert-study.pdf 38 Id. 39 Id. 40 Id. 41 See Margaret A. Berger, What Has a Decade of Daubert Wrought?, 95 A m. J. P ub. Health S59, S64 (2005). 42 Id. 43 See id. 44 Id. 45 Id. at S65 (“The number of product liability cases filed in federal court has dropped precipitously. Daubert may be stifling access to the courts at the same time it is fueling demands for tort reform by escalating awards.”). 46 Id. 47 See Howerton v. Arai Helmet, Ltd., 597 S.E.2d 674, 693 (N.C. THE RETURN RETURNTO TOTABLE TABLEOF OFCONTENTS CONTENTS Advocate 2004) (“North Carolina is not, nor has it ever been, a Daubert jurisdiction.”). 48 See, e.g., Lucinda Finley, Guarding the Gates to the Courthouse: How Trial Judges Are Using Their Evidentiary Screening Role to Remake Tort Causation Rules, 49 DePaul L. R ev. 335, 341 (1999); David Crump, The Trouble with Daubert-Kumho: Reconsidering the Supreme Court’s Philosophy of Science, 68 Mo. L. R ev. 1, 40 (2003). 49 Daubert Challenges to Financial Experts: A Ten-Year Study of Trends and Outcomes 2000–2009, PriceWatershouseCoopers (2010), available at http://www.pwc.com/us/en/forensic-services/ assets/2009-daubert-study.pdf. 50 Martin Luther King, Jr. 51 See Carmel Sileo & David Ratcliff, The Myth of the Litigation Crisis, Trial, July 2006, available at http://www.justice.org/cps/rde/xchg/justice/hs.xsl/4757.htm. 52 AP-CLASS-LH 1, 2005 WL 2652584 (A.&P.L.H.). 53 Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579 (1993). 54 See George Lakoff, A Cognitive Scientist Looks at Daubert, 95 A m. J. P ub. Health S114 (2005). 55 Reliable Evaluation of Expert Testimony, 116 H arv. L. R ev. 2142 (2003). 56 Bell A. Corp. v. Twombly, 550 U.S. 544 (2007) and Ashcroft v. Iqbal, 129 S. Ct. 1937 (2009). 57 Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574 (1986). 58 See generally http://trialbyagreement.com. ✯ Fall 2011 19 20 THE RETURN RETURNTO TOTABLE TABLEOF OFCONTENTS CONTENTS Advocate ✯ Fall 2011 A lternative F ee A rrangements : P artnering with C lients Through Legal Risk Sharing BY TREY COX F OR SEVERAL YEARS NOW, LAW FIRMS OF ALL SIZES have been entering into legal risk-sharing arrangements with their clients. In the wake of the country’s recession, clients are increasingly looking for avenues to reduce costs across the board, giving rise to a growing interest in these types of arrangements designed to accommodate clients interested in a fee structures other than standard hourly billing. Why Do Clients Seek Alternative Fee Arrangements? Clients now recognize the inherent benefits in shifting some or all of the legal fee risk to law firms. First and foremost, shifting the fee risk to the law firm aligns the law firm’s incentives with the client’s, and reduces the risk to the client. In addition, clients who lack the financial resources to pursue important but expensive litigation are provided the opportunity to pursue Alternative or special fee such matters by having their law firm arrangements are agreements invest in the case alongside the client. In the absence of AFAs, such matters between a law firm and a client to might never be pursued. provide compensation based on a In return for investing some or all of standard fees in the client’s matter, or for taking on unusual fee or collection risk, clients and their attorneys structure other can come to an agreed upon fee based on a set of specified criteria, with both parties sharing in legal fee and legal outcome risk. Such arrangements, commonly called alternative fee arrangements or AFAs, are maintained in strict confidence, except when there is a disclosure requirement as a prerequisite to recovering attorneys’ fees as an element of damages. What are Alternative Fee Arrangements? Alternative or special fee arrangements are agreements between a law firm and a client to provide compensation based on a structure other than hourly billing. Such structures can take the form of contingency fees, fixed fees, value or success-based fees or other alternatives to hourly fees appropriate under the circumstances of a specific matter. Special fee arrangements can be hybrids in which the firm receives a percentage of its hourly rate, with the remainder contingent on the outcome of the matter. If there is an unfavorable result, no further fees are paid. If there is a positive outcome, the firm might receive a multiple of the fees it has at risk. In addition, special fee arrangements can span more than one case. Many firms are willing to negotiate special fee arrangements that provide a fixed contingency across a group of cases, or to handle a group of defense cases at a discount, in exchange for a contingency on plaintiffs’ cases that a client may have. than hourly billing. Clients also value AFAs because they can provide predictable cash flow and budgeting. An AFA with a fixed monthly fee or flat fee as an element is a prime example of a structure that guarantees certainty in legal expenditures. In surveying our clients, we have found that more and more clients are utilizing alternative fee arrangements and are looking to firms that regularly provide such arrangements. What Type of Clients Choose Risk-Sharing Arrangements? In today’s economic climate, a broad array of clients now prefer to negotiate AFAs instead of utilizing traditional hourly billing. Some of these clients lack the financial resources to pursue a particular case or matter, as is often the case in intellectual property litigation matters or litigation matters for smaller growth companies. Other clients favor the further alignment of interests inherent in certain risk-sharing arrangements where firms are only paid when a “win” has been secured for the client, such as contingent fee litigation matters. Still others prefer AFAs for their cash flow benefits or to bring certainty to budgeting. Whatever the motivation, many clients appreciate the flexibility and cooperation inherent with fair and appropriate AFA structures. What Structuring Options Are Available For Alternative Fee Arrangements? AFAs can be structured in a variety of scenarios that will best benefit the client as well as the firm. Typical structures can include pure contingent fee and partial contingent fee THE RETURN RETURNTO TOTABLE TABLEOF OFCONTENTS CONTENTS Advocate litigation matters, fixed fees, “hold backs” or any combination of risk/reward structures negotiated on a case-by-case basis with the client. With the changing needs of clients, firms must be prepared to discuss and pursue any reasonable risk-sharing fee structure that balances the relative investment and risk taken on by the firm with the client’s objectives for success in the matter. Specific examples of AFAs include: • Pure Contingency Fee. A pure contingency fee arrangement is the most traditional alternative fee arrangement. In this scenario, a firm receives a fixed or scaled percentage of any recoveries in a lawsuit brought on behalf of the client as a plaintiff. Typically, the contingency is approximately 33%, with the client covering litigation expenses; however, firms can also share part or all of the expense risk with clients. Pure contingency fees, which are usually negotiated at approximately 40%, can be useful structures in cases where the plaintiff is seeking monetary or monetizable damages. They are also often appropriate when the client is an individual, start up, or corporation with limited resources to finance its litigation. Even large clients, however, appreciate the budget certainty and risk-sharing inherent in a contingent fee arrangement. • Partial Contingency Fee. In a partial contingency fee arrangement, a firm receives a portion of its hourly rate plus a smaller percentage of any recoveries in the lawsuit. A common partial contingency fee is 60% of a normal hourly rates plus a 20% contingency. Partial contingency fees reduce the out of pocket cost of litigation to the client, while still aligning the firm’s incentives with the client and sharing the fee risk between law firm and client. Partial contingency fees are also most common in plaintiff cases seeking monetary or monetizable damages. Defense cases can also be structured as partial contingency fees with success contingent on agreed upon results or milestones being achieved. • Fixed Fee. Fixed fee or flat fee arrangements are typically arrangements whereby a firm agrees to handle a matter or group of matters for a sum certain or for a certain burn rate per month. Fixed fees can be subject to an overall cap paid up front, or they can be for a fixed amount per month without a cap. The specific nature of any fixed fee arrangement can be tailored to the nature of any given matter. Clients who desire budgeting certainty often find fixed fee arrangements attractive. • Holdback/Success Fee. A holdback/success fee arrange- ✯ Fall 2011 21 ment is similar to a partial contingency fee, in that a firm is paid a portion of its fees up front, but has a portion withheld contingent upon success in the matter. If the matter is concluded successfully, the firm receives a multiple of the holdback or an agreed upon success fee. This structure is often used in defense cases or when the result sought in the matter is not monetary. The holdback/success fee arrangement can be particularly beneficial in corporate transactions where success is the completion of an acquisition, sale or other transaction. It also lends itself well to patent cases where the outcome sought is a finding of validity or invalidity of a patent, or in litigation defense cases where the result sought is summary judgment or limiting damages below a certain quantum. • Multiple Matters. AFAs need not be limited to a single case or corporate matter. They can also be structured to involve clients that pool groups of plaintiffs’ cases on a contingent fee basis, as well as groups of defense cases on a fixed or flat fee basis. In addition, firms can handle a fixed pool of defense cases on a reduced hourly fee basis, in exchange for handling a group of plaintiff contingent fee cases for the client, or for receiving right of first refusal to handle all plaintiff contingent fee cases for the client for a period of time. • Appeals. Appellate matters are also well suited to AFAs, as they can be handled on a flat fee basis. Other appellate matters that are appropriate for these alternative fee structures involve cases where compensation rests, in whole or in part, on the success of the appeal. Conclusion The trend of alternative fee arrangements between law firms and clients will continue to gain momentum as the business world continues to evolve. All firms must be prepared to be increasingly flexible and willing to work with clients to structure these kinds of arrangements that can prove to be incredibly beneficial for firms looking to gain client loyalty and satisfaction. Trey Cox is a Partner at Lynn Tillotson Pinker & Cox, LLP. O 22 THE RETURN RETURNTO TOTABLE TABLEOF OFCONTENTS CONTENTS Advocate ✯ Fall 2011 Roundtable: A lternative F ee A rrangements in Litigation PANEL: RAMON M. CANTU, LAURA W. DOERRE & MARK C. SCHROEDER C LIENTS AND LAWYERS ARE INCREASINGLY EXPLORING alternatives to hourly billing as a way to decrease costs and improve efficiency in the delivery of legal services, as the billable hour has come in for substantial criticism. In this article, three high-ranking in-house lawyers from large Texas-based companies discuss their companies’ experience with alternative fees in litigation, their opinions about the advantages and drawbacks of alternative fee approaches, and their views about whether the market for legal services is experiencing an meaningful transition from the billable-hour system towards alternative-fee approaches. Mick Cantu: A yearly retainer may be something we would consider for routine EEOC or medical malpractice work. These arrangements can be hard to quantify for both the client and the lawyers. Laura W. Doerre: Flat fees (for work such as SEC filings & acquisitions); contingency fees in defense matters. Mark C. Schroeder: I’d like to explore contingent fees and performance-based fees for defense matters, e.g., quick resolution results in lump sum bonus, damages below “X dollars” results in bonus. QUESTION: What types of alternative fee arrangements has your company used for outside counsel (e.g., pure contingency, flat fee, hourly plus success bonus, yearly retainer)? Were these used in cases in which your company was a plaintiff, or in the position of a defendant? QUESTION: How much of your company’s legal work is covered by alternative fee arrangements (whether by number or percentage of hours, revenue, cases, or some other metric)? Mick Cantu: We have used flat fees and flat fees with a contingency based on outcomes. We consider discounted hourly arrangements as fees at applicable billable rates rather than alternative fee arrangements. Mick Cantu: Less than 20%. We tend to use a very limited number of Firms for litigation so we have close working relationships. This may be causing us not to explore alternative fee agreements very aggressively. Laura W. Doerre: We have used both pure contingency and blended contingency (1/2 hourly, 1/2 contingency) for plaintiff’s-side cases. Laura W. Doerre: A very small amount. One or two matters at any given time. Mark C. Schroeder: We have used pure contingency (plaintiff), yearly retainers (a routinized part of our legal work, such as regulatory compliance), flat fees (e.g., all SEC filings), and hourly plus success bonus (plaintiff), blended rates (e.g., partner at full rate, associates at half rate, in return for receiving all of certain type of litigation docket) (defending), and unit rates (e.g., labor arbitrations for a given year, number indeterminate, each billed at a flat rate). We do not consider hourly discounts to be a form of an “alternative fee arrangement”. QUESTION: Are there other types of alternative fee arrangements that you have not used but would consider using? Mark C. Schroeder: For my subsidiary, 75%. For CenterPoint Energy, Inc., overall, I believe our General Counsel, Scott Rozzell, has said it is probably in excess of 50%, maybe more nearly 60%. QUESTION: Are there particular types of cases (either by substantive area, or size) that are particularly well or ill-suited to alternative fee arrangements? Mick Cantu: Either high-dollar cases, which gives outside counsel incentive to take risk, or work that is predictable – EEOC work, for example. Laura W. Doerre: Small, non-recurring matters are best left to the hourly rate. The time and energy spent to figure THE RETURN RETURNTO TOTABLE TABLEOF OFCONTENTS CONTENTS Advocate out an appropriate balancing of risk/reward is not justified by the insignificance of the matter. Recurring “dockets” within companies are particularly conducive to alternative fee arrangements. Lump sums are well-suited for predictable corporate work. Mark C. Schroeder: I agree that small, non-recurring matters are best suited for the hourly rate, because they do not justify the effort to balance the risk and reward. Recurring “dockets” within companies, e.g., property claims, right-of-way encroachments, are particularly conducive to alternative fee arrangements. Lump sums for litigation are difficult, so we are trying to break litigation, in some cases, down to certain constituent parts, with alternative arrangements firmed up as we move to each new phase of the case. QUESTION: Do you require firms doing work for you under alternative fee arrangements to track and report their hours? Mick Cantu: Only if the hours are imputed in fee. ✯ Fall 2011 less incentive to bill hours and instead achievable particular results. To be clear, I am not saying these two things are mutually exclusive. Laura W. Doerre: I think the quality of work is unchanged, although I do believe it becomes more efficient under an alternative arrangement. I do think incentives are better aligned, although there is still (in some cases significant) divergence of interests when nonmonetary issues are interjected. Cost reduction, predictability and ease of management are certainly enhanced. Mark C. Schroeder: First, and foremost, quality of work never suffers. That is non-negotiable. Incentives are aligned better, and in some cases, a matter which is important to the business client, fees get paid when results are achieved, a “matching” of costs with revenues, rather than years of litigation invoices, based on hourly rates, and a large, lumpy revenue stream when a litigation “win” is finally, finalized. Although alternative fees are helpful in disincentivizing additional work and incentivizing efficient settlement of cases, the most significant pitfall is that the pendulum can swing too far in the other direction. – Laura W. Doerre Laura W. Doerre: Yes, to assess the effectiveness of using this type of arrangement, although I do believe an alternative fee arrangement changes (mostly for the better) the way in which a firm approaches a case, so the comparison is only partially effective. Mark C. Schroeder: No. In fact, we try to avoid ever referring back to how either we, or our firms, “might” have done if we’d billed by the hour. We try, instead, to ask, “did we get value for what we paid”, or “do we think we paid a fair price for what service we received?” We want our firms to ask themselves, “am I satisfied that this arrangement was profitable for my firm?”, and such “profits” may include, e.g., associate training, stabilized cash flows, balancing of risks and rewards. QUESTION: What advantages have you experienced that alternative fee arrangements offer over traditional billablehour engagements (e.g., in terms of quality of work, better alignment of incentives, cost reduction, cost predictability, or ease of management)? Mick Cantu: Better alignment of incentives. Firms have 23 QUESTION: What pitfalls (if any) have you experienced or are you careful to try to avoid with alternative fee arrangements (e.g., underallocation of lawyer resources, difficulty with defining “success,” misaligned incentives)? Mick Cantu: We have had experiences when assumptions or expectations were incorrect on the front end (with client or firm) and then we have to adjust later. Generally this has worked out fine but it takes a good relationship between client and firm (and an expectation of additional work on part of the firm). Laura W. Doerre: Although alternative fees are helpful in disincentivizing additional work and incentivizing efficient settlement of cases, the most significant pitfall is that the pendulum can swing too far in the other direction. The law firm can become incentivized to settle a case too quickly or for too much of a discount/premium because the cost/benefit break point is different for them than for the client. Again, there is almost an over-correction in some cases. Mark C. Schroeder: No firm that maintains high professional standards, or that would hope to keep our work, would underallocate resources due to an alternative fee arrangement. What both parties need to have a clear understanding on, is, how do we describe expectations upfront, so that if actual 24 THE RETURN RETURNTO TOTABLE TABLEOF OFCONTENTS CONTENTS Advocate experience changes during the course of the agreement, we can fix our arrangements. Our alternative fee arrangements are not designed to “punish” a law firm if there is a significant or material change in the parties expectations about what work was to be covered, nor should the client find that a matter was appreciably less work than expected, and pay orders of magnitude more for that work then they might have expected. QUESTION: What are your thoughts about the future of the billable hour system? How much do you anticipate using lawyers on a billable hour basis in the future? Are there aspects of the system that are inherently unsustainable? Do you think the “death of the billable hour” is at hand any time soon? Or is it more a case that the long talked about demise of the billable hour is “the wave of the future, and it always will be”? Mick Cantu: It is not so much the hourly fee arrangement as the fees that are the issue. Clients are under increasing pressure to reduce costs. Outside legal fees do not get a free pass in this regard. Firms will be pressed more and more to justify their fees (or rates). Alternative fee agreements may be one way to address both sides getting a fair return for their money and time. Mark C. Schroeder: It will remain for some matters, but it is on the wane. 10% of my legal budget by 2013. Charging $300/hour for first-year associates is unsustainable for most work. The value is simply not there, and the figure alone is unpalatable to clients. If nothing else, alternative fee arrangements at least provide firms a way to make their high junior associate rates opaque, and leave it to the law firm to figure out how they will train young associates, and maintain a high average hourly margin. It is here and now for CenterPoint. The big firms were less nimble and slower to come around to alternative fee arrangements, but now that they have figured out how to recognize their partners through their compensation systems for alternative fee arrangements, I think the last barrier to alternative fee arrangements’ penetration into the marketplace has evaporated. Laura W. Doerre: There is definitely a trend against the billable hour. Even outside lawyers are saying they see a return to the old days of value billing. I think that would be a mistake because in those days the amount was arrived at after the fact and had more potential for creating conflict, as opposed to today’s approach of making those decisions jointly and at the inception of the representation. We are looking ✯ Fall 2011 at ways to significantly decrease it. Picking up on Mark’s comment about junior-associate rates, equally as problematic is the $1000/hour partner. Again, that value is rarely there. We are looking at an approach that forces the firm’s hands into increasing efficiencies. This may not mean clients will be going completely to alternative fees, but I’d say the death of the billable hour as we know it is imminent. Ramon M. Cantu is Chief Legal Officer for The Methodist Hospital System. Laura W. Doerre is Vice President and General Counsel for Nabors Industries. Mark C. Schroeder is Senior Vice President, General Counsel & Chief Compliance Officer (FERC) for the Pipelines & Field Services Division of CenterPoint Energy. O THE RETURN RETURNTO TOTABLE TABLEOF OFCONTENTS CONTENTS Advocate ✯ Fall 2011 25 P reservation U ncertainty Revisited : A ddressing Spoliation by Rulemaking BY THOMAS Y. ALLMAN I. Introduction As a result of considerable angst about compliance with the duty to preserve, particularly prior to the onset of litigation,1 the Civil Rules Advisory Committee of the United States Judicial Conference (the “Rules Committee”) is evaluating the efficacy of replacing the current system by rules which address preservation and spoliation. This paper evaluates the rule exemplars2 developed by the Committee to evaluate the “real-life dynamics” involved.3 If a decision is reached to proceed with rulemaking, the Committee hopes to develop a final proposal by the time of its April 2012 Committee Meeting. A key issue, of course, is whether any rules can, in fact, provide improved predictability for litigants (and still retain sufficient flexibility for courts) as opposed to current approach. This involves practical concerns about the scope and fairness of the methods selected to achieve the certainty sought. II. The Problem Many preservation decisions must be made - by both plaintiffs and defendants - long before formal discovery commences and often before litigation begins. This can be a daunting task. Wrong guesses can have serious consequences. In many federal Circuits, including the Fifth Circuit, there must be a showing of “bad faith” for serious spoliation sanctions, because “mere negligence is not enough, for it does not sustain an inference of consciousness of a weak case.”4 In other Circuits, however, “negligent destruction of evidence [suffices for sanctions] because each party should bear the risk of its own negligence.”5 When spoliation motions are filed, they can involve “wasteful and time-consuming satellite litigation.”6 There has been a dramatic upsurge in sanction requests. Over 485 written sanction opinions involving e-discovery alone – the vast majority from District Judges and Magistrate Judges – were identified in a 2010 study.7 Thus, parties often find they must choose between conforming preparations to the most demanding requirements among the reported decisions or risk sanctions.8 Advocacy groups contend that the net result of this dilemma is that some litigants have, as a result, spent “millions of dollars to address an unquantifiable risk.”9 III. Background In May, 2010, the Rules Committee convened a Conference on Civil Litigation at the Duke Law School (the “Duke Conference”) to address concerns about discovery costs and the impact of the 2006 E-Discovery Amendments (the “2006 Amendments”). An E-Discovery Panel composed of jurists and counsel,10 reported their unanimous consensus that “a rule addressing preservation (spoliation) would be a valuable addition to the Federal Rules.” The Panel listed “elements” for consideration in such an effort, including a suggestion that compliance with any rule should “insulate” a responding party from sanctions for failure to preserve.11 The Duke Panel was not writing on a clean slate. In 2001, the author identified an “urgent need” for the Rules Committee to adopt uniform standards limiting sanctions for failure to preserve, with evidence of undertaking reasonable steps to preserve constituting prima facie evidence of compliance.12 In early 2004, the Rules Committee presented rule exemplars for discussion at a Conference of jurists and practitioners at Fordham law school.13 Ultimately, the Rules Committee concluded that “the difficulties in drafting a good rule would be so great” that it mooted the issue of whether it was an “authorized or wise exercise of Enabling Act Authority.”14 Instead, the 2006 Amendments placed preservation on the agenda for early discussion in order to encourage party agreements and added a limited preservation ‘safe harbor’ as Fed.R.Civ.P 37(f) [now Rule 37(e)]. The latter provision is confined to sanctions for losses of electronically stored information (“ESI”) from “routine, good faith” operations.15 Variants of Rule 37(e) have been adopted by most of states16 which have modeled their e-discovery rules on the 2006 Amendments.17 Texas did not include a safe harbor provision 26 THE RETURN RETURNTO TOTABLE TABLEOF OFCONTENTS CONTENTS Advocate in its more limited approach to e-discovery enacted as part of its 1999 discovery reform.18 IV. The Proposals The task of developing possible rules was assigned to the Discovery Subcommittee of the Rules Committee shortly after the Duke Conference. Since then, the Subcommittee has identified two distinct categories of rules for purposes of discussion in its Report incorporated into the April 2011 Committee Report to the Standing Committee.19 The primary difference is that one group - Categories One and Two - involve “front end” preservation rules while the other Category 3 - involves a “back end solution” dealing primarily with sanctions. Thus, Category 1 and 2 proposals specify conditions for the trigger and implementation of preservation in new Rule 26.1 and authorize use of existing Rule 37 sanctions.20 The subcommittee anticipates that this approach would eliminate the need for use of inherent sanctioning power.21 The Category 3 proposal, on the other hand, provides Rule 37(g) which deals with sanctions,22 impacting preservation, if at all, only by virtue of its “backwards shadow.”23 It is also expected to “make reliance on inherent authority [to sanction] unimportant.”24 V. Authority to Act The rulemaking authority of the Supreme Court is limited, by the Rules Enabling Act,25 “to making rules governing conduct within the four walls of the courthouse.”26 Fed.R.Civ. P. 1, for example, provides that the rules govern civil actions and proceedings “in the United States Courts.” (emphasis added). The preservation rule considered during the 2006 Amendment cycle applied only after commencement of litigation,27 thus avoiding direct regulation of pre-litigation conduct.28 That is not the case with respect to the current proposals, as to which the Subcommittee sees a “significant rulemaking challenge.”29 The Subcommittee addresses the issue by limiting Rule 26.1 to persons who are or reasonably expect to be a party to an action cognizable in a United States court.30 This arguably makes the rule sufficiently related to the litigation process, as is the case with Fed.R.Civ. P. 27.31 The Supreme Court has already upheld Rule 11, which imposes a duty of “reasonable inquiry” prior to instituting litigation.32 A challenge to authority can only succeed, after all, only “if the Advisory Committee, [the Supreme Court], and Congress [err] in their prima facie judgment” of appropriateness during rule-making.33 ✯ Fall 2011 The sanction proposals do not present the same difficulties.34 They apply only during the litigation process, and by that time “there is no big problem with the authority of a federal court to address the problem.”35 Commentators support that rules governing sanctions for pre-litigation conduct 36 by analogy to the current use of inherent sanctioning power to accomplish that task.37 The author is concerned, however, about the intrusive nature of some of the Subcommittee alternatives, such as the proposal to trigger a duty to preserve once “the person’s own retention program” is implicated.38 Rules purporting to impose excessive preservation requirements, unrelated to pending litigation, surely run afoul of statutory and constitutional limits.39 VI. Evaluation We evaluate the current Proposals in terms of the three primary elements on the table—the onset or “trigger” of the duty, its content and the sanctions or other remedies which may follow from any deficiencies. Trigger Under the common law,40 preservation obligations arise when a party is reasonably charged with knowledge that evidence in its possession or control is potentially subject to discovery. In the pre-litigation context, the litigation must be “reasonably foreseeable.” The problem with this was dramatically illustrated in the Rambus litigation, however, where two lower courts reached different conclusions about foreseeability based on the same evidence of record. It took many years and a set of strained appellate opinions to ultimately bring closure to the issue—at untoward expense and disruption.41 The Subcommittee seeks to address this issue in Rule 26.1 by including a series of benchmarks to indicate when a reasonable person would expect to become a party to litigation in federal court.42 This includes service of a pleading asserting a claim, receipt of a notice of claim or communication indicating an intent to serve a claim; or, in the case of a third party, service of a subpoena or similar demand for information. When the shoe is on the other foot—i.e., when a party may initiate litigation or assert a counterclaim—other exclusive benchmarks apply, such as evidence of retention of counsel, retention of an expert witness, testing of materials, discussions of compromises of claims or taking other actions in anticipation of litigation. THE RETURN RETURNTO TOTABLE TABLEOF OFCONTENTS CONTENTS Advocate ✯ Fall 2011 27 These benchmarks largely reflect “plain vanilla” case law. They ignore the ambiguous cases basing trigger on imputed knowledge about employee dissatisfaction; on what others in an industry “know” about problems years before suits are filed or whether mere discussions about the possibility of litigation trigger obligations. authored by the former Chair of the Standing Committee, emphasizes that “[w]hether preservation or discovery conduct is acceptable in a case depends on what is reasonable, and that in turn depends on whether what was done - or not done - was proportional to that case and consistent with clearly established applicable standards.” (emphasis in original).53 It would appear that this ambiguity was identified by the Subcommittee. The Subcommittee proposes, as an alternative (supplement), a “catch-all” trigger obligation when a party becomes aware of “circumstances which “would make a reasonable person aware of the need to preserve information.”43 Such a rule dissipates the limiting impact of any specific benchmark and restores the existing uncertainty.44 Thus, while the benchmarks in Rule 26.1 may serve to educate, they will not reduce the uncertainty in planning or adjudication, which will still be governed by the common law.45 Accordingly, proposed Rule 26.1(c)(Scope of the Duty to Preserve) provides that: A person whose duty to preserve discoverable information has been triggered under Rule 26.1(b) must take actions that are reasonable under the circumstances to preserve discoverable information in regard to the potential claim of which the person is or should be aware taking into account the proportionality criteria of Rule 26(b)(2)(C).54 Professor Martin Redish once suggested that the only way to A rule like the above is needed to offset the rigid adherence to establish certainty would be to pick a fixed point unrelated mere process adopted by some courts.55 The author has made 46 to subjective intent, such as the onset of discovery requests. a similar suggestion.56 There is also support in the Seventh The author’s observation is that parties rarely plan for preCircuit Pilot project guidelines,57 Sedona Principle 5,58 the litigation preservation until they are New York City Bar proposals for the forced to do by the onset of litigation State of New York59 and suggestions Under the common law view, or explicit preservation demands. by the American College at the time a party must preserve “what However, as vividly demonstrated of the 2006 Amendment process.60 by Texas v. City of Frisco, there is no it knows, or reasonably should option to seek early court guidance Rule 26.1 also requires that inforknow” to be relevant to when disputes arise.47 mation be “routinely accessed in potential discovery in current or the usual course of business” and foreseeable litigation. Professor Spencer, in his insightful presumptively exempts some forms of paper on pre-litigation preservation, ephemeral ESI from the scope. This takes that observation one step further and suggests enactis augmented by limitations on the number of key custodians ment of a formal ex parte pre-litigation judicial process.48 This whose information must be preserved and by limits on the suggestion has obvious drawbacks and can be enormously time frames and ongoing nature of the duty.61 disruptive, as the author can personally testify from experience as a General Counsel in the early e-discovery era. Collectively, these specifics can provide useful guideposts for well-funded large organizations with sufficient amounts Duty & Scope of repetitive litigation to justify adopting formal systems and Under the common law view, a party must preserve “what it advance planning. Unfortunately, pre-litigation issues often knows, or reasonably should know” to be relevant to potential involve parties lacking those elements. discovery in current or foreseeable litigation.49 Parties must make tough calls as to the scope of the effort to preserve, Another value of specific benchmarks is for parties able to which can be time-consuming and expensive. engage in meaningful early discussions about preservation. This is a more difficult task in states without mandatory Emerging case law has coalesced, however, around prinprocesses or, if in federal court, in the case of smaller entities cipled doctrines. Much of the evolution has been due to the and individuals or those unable to commit the resources increased understanding of the role that “proportionality” to the process. In those cases, lonely decisions, applying plays in preservation.50 While there are dissenters,51 the proportionality by necessity and bearing some risk, are far landmark decision in Rimkus Consulting v. Cammarata,52 more typical. 28 THE RETURN RETURNTO TOTABLE TABLEOF OFCONTENTS CONTENTS Advocate However, specificity about technology in rules can be problematic. The author’s 2003 suggestion for a limited safe harbor for disaster recovery backup tapes62 serves as a cautionary tale. The distinctions between “disaster recovery” and other forms of ESI storage have long since blurred, but the need for a viable safe harbor remains. Moreover, other simplistic proposals of that era – such as requiring that once litigation commences, a party need retain a “full set of inaccessible materials that it stores for disaster recovery” but “need not preserve [other] materials”63 – are equally outdated. Sanctions Under current case law, courts impose spoliation sanctions in reliance on their inherent powers, buoyed by Chambers v. NASCO, where the Supreme Court spoke approvingly of the inherent power “to fashion an appropriate sanction for conduct which abuses the judicial process.”64 Fed. R.Civ. P. 37(e), originally intended to reassure parties that inadvertent or merely negligent conduct would not be severely sanctioned, has been rendered “toothless.”65 As the Subcommittee noted, “the standard for severe sanctions is unpredictable and inconsistent across the nation.”66 The Subcommittee has floated two distinctly different approaches to sanctions. First, if a preservation rule is adopted, a revised Rule 37(e) would require that the court take into account the “harm caused” and the “level of culpability,” with the goal of choosing the least severe sanction appropriate. An alternative approach would bar sanctions completely if “good faith” conduct was involved.67 Yet another alternative would require the party seeking sanctions to show that the party to be sanctioned acted with a specified culpability.68 The second approach - the “back end” approach in Rule 37(g)69 - would provide “that absent extraordinary circumstances [irreparable prejudice], a court may not impose any of the sanctions listed in [the Rules] or give an adverse inference jury instruction unless the failure to preserve discoverable information was willful or in bad faith and caused [substantial] prejudice in the litigation.”70 It would also authorize remedial measures.71 The author has attempted to “match up” both proposals against the fact patterns of recent spoliation cases. By and large, with notable exception of those instances where varying culpability standards among the circuits impact the results, the outcomes under the proposals do not vary much from those under the common law. Unfortunately, as the Subcommittee concedes, some courts may simply interpret the sanction provisions “in keeping with the existing (and ✯ Fall 2011 seemingly inconsistent) precedents” now in existence.72 Unless clearly excluded, courts may feel empowered to utilize their inherent sanctioning powers.73 There is reason to be skeptical. In Chambers,74 while the Supreme Court noted that “the exercise of the inherent power of lower federal courts can be limited by statute and rule,”75 it went out of its way to describe a sanction rule adopted “to obviate dependence upon inherent power”76 as merely providing “an additional tool,” not indicating intent to “displace the inherent power” to act.77 Accordingly, the real issue, it would seem, is whether the rules would actually reduce the anxiety—and the costly excess—even if courts might still resort to use of inherent sanctioning power under some circumstances. This is a question that, hopefully, will be at the center of the September Mini-Conference. VII. Conclusion Hopefully, input from practitioners, commentators, advocacy groups and interested groups such as the Sedona Conference® will help the Rules Committee assess the difficult and complex series of questions about rulemaking raised by the Subcommittee.78 Without prejudging the outcome of this further input, the ncorporation of a general standard of care for meeting preservation obligations, tempered by considerations of proportionality, seems advisable, especially if coupled with a carefully drawn “back end” sanctions limitation acknowledging the role of a lack of culpability.79 Over time, this could help reduce the inter-Circuit conflicts and dissuade lower courts bent on applying rigid process oriented case law and encourage parties seeking to plan compliance. Thomas Y. Allman is the former General Counsel, Chair Emeritus of Sedona Conference® Working Group One and one of the Editors of the PLI Electronic Discovery Deskbook. O 1 Gregory P. Joseph, Sanctions: The Federal L aw of LitigaA buse, 1-9 Sanc. Supp. To §59 (2010)(“[p]rospective litigants are at serious risk of committing spoliation - passively, actively, [or] unintentionally – before litigation commences (if it ever does) because they have no codified benchmarks to which to conform their behavior”). 2 See Memorandum, “Information Items: A. Discovery: Preservation and Spoliation,” included in Report of the Civil Rules Advisory Committee, May 2, 2011, at 188-273 (internal pages 25-51), (hereinafter “Rules Comm. Memo, ___”), copy at http://www.lfcj. tion THE RETURN RETURNTO TOTABLE TABLEOF OFCONTENTS CONTENTS Advocate digidoq.com/BLAP/Federal%20Rules%20of%20Civil%20Procedure/ Tab%205%20A-F,%20June%202011.pdf. 3 Rules Comm. Memo, 26 (“the reasons for the huge [preservation] expenses, and the components of them, are less clear, as are the nature of measures that would relieve these pressures”). 4 Vick v. Texas Employment Comm., 514 F.2d 734, 737 (5th Cir. 1975)(quoting McCormick, Evidence § 273 at 660-61 (1972)). 5 Residential Funding Corp. v. DeGeorge Financial Corp., 306 F. 3d 99, 107, 108-109 (2nd Cir. 2002)(culpable state of mind includes negligent destruction of information). Under Zubulake v. UBS Warburg, 220 F.R.D. 212, 220 (S.D. N.Y. Oct. 22, 2003)(Zubulake IV), “once a duty to preserve attaches, any destruction of documents is, as a minimum, negligent” ); but compare Douglas L. Rogers, A Search for Balance In the Discovery of ESI Since December 1, 2006, 14 Rich. J. Law & Tech. 1, 8 at ¶9 (Spring 2008)(“it is simply not fair to assume that a loss of ESI necessarily equates to intent to destroy evidence”). 6 A. Benjamin Spencer, The Preservation Obligation: Regulating and Sanctioning Pre-Litigation Spoliation in Federal Court, 79 Fordham L. Rev. 2005, 2019 (2011)( hereinafter “Spencer, PreLitigation Spoliation in Federal Court”). 7 Dan H. Willougby, Jr., et al, Sanctions for E-Discovery Violations By the Numbers, 60 Duke L. J. 789, 796 (2010). 8 Victor Stanley v. Creative Pipe, 269 F.R.D. 497, 523 (D. Md. Sept. 9, 2010)(“the only ‘safe’ way to [design a national approach to preservation] is to design one that complies with the most demanding requirements of the toughest court to have spoken on the issue”). 9 Lawyers for Civil Justice, Preservation - Moving the Paradigm to Rule Text (April 1, 2011)(“LCJ Comment on Preservation (2001), __”), 2, copy at http://lfcj.digidoq.com/BLAP/E%20Discovery/E%20 Discovery%20Official%20Comments/FRCP%20Preservation%20 Rule%20Comment%20Corrected%20040311%20_2_.pdf. 10 The Panel consisted of two Federal Judges (the Hon. Shira Sheindlin and the Hon. John Facciola), plaintiff and defense counsel (Mssrs. D. Willoughby, J. Barkett and J. Garrison), the author and, as moderator, Greg Joseph, then the President Elect of the American College of Trial Lawyers. 11 Element of a Preservation Rule, ¶7(c)(2010), copy reproduced at http://civilconference.uscourts.gov/ (Scroll to Papers, then to E-discovery Panel). 12 Thomas Y. Allman, The Need for Federal Standards Regarding Electronic Discovery, 68 Def. Counsel. J. 206 (2001)(also suggesting modeling discovery limitations involving ESI on Texas Civil Rule 196.4). 13 See Fordham Conference Materials, at 35 -37, available at http://www.uscourts.gov/uscourts/RulesAndPolicies/rules/EDiscovery_Conf_Agenda_Materials.pdf. 14 Minutes, Civil Rules Advisory Committee Mtg, April 14-15, 2005, lns 1685-1687, copy at http://www.uscourts.gov/uscourts/ RulesAndPolicies/rules/Minutes/CRAC0405.pdf. See also R eport of Rules Committee, May 17, 2010, 12 (the suggestions were “put aside, apart from the protection against sanctions included in Rule 37(e),” even though “[m]any requests were made for an express ✯ Fall 2011 29 preservation rule.”), copy at http://www.uscourts.gov/uscourts/ RulesAndPolicies/rules/Reports/CV05-2010.pdf. 15 Fed.R.Civ.P. 37(e)(Failure to Provide Electronically Stored Information)(“Absent exceptional circumstances, a court may not impose sanctions under these rules on a party for failing to provide electronically stored information lost as a result of the routine, good-faith operation of an electronic information system”). 16 Of the thirty-two states (including the District of Columbia) which have passed or are considering passage of the 2006 Amendments, only Nebraska, New Hampshire, New Mexico and Virginia did not include a counterpart to Rule 37(e). 17 The twenty-eight states that have already adopted variants of the 2006 Amendments include Alabama, Alaska, Arizona, Arkansas, California, Indiana, Iowa, Kansas, Louisiana, Maine, Maryland, Michigan, Minnesota, Montana, Nebraska, New Hampshire, New Jersey, New Mexico, North Dakota, Ohio, Oklahoma, South Carolina, Tennessee, Utah, Vermont, Virginia, Wisconsin and Wyoming. Connecticut, Massachusetts and North Carolina are at various stages of enactment, as is the District of Columbus. See Thomas Y. Allman, An Update on State Rulemaking (2011), copy downloadable at http:// www.fiosinc.com/lp/whitepaper/state-rulemaking/newsletter.aspx 18 See Tex. R.Civ. P. 196.4 (Electronic or Magnetic Data)(specifying process for requesting data or information not reasonably available to a party in its ordinary course of business). See generally, Nathan L. Hecht and Robert H. Pemberton, A Guide to the 1999 Texas Discovery Rule Revisions (Nov. 1998), copy at http://www.adrr. com/law1/rules.htm. 19 Rules Comm. M emo, supra. 20 Rules Comm. M emo, 30-32. The distinction between the two proposed forms of Rule 26.1 is merely one of quantity of detail; the sanction provisions in proposed Rule 37(e) are identical in Category 1 and 2. The Lawyers for Civil proposal closely tracks the Category 1 formulation. See LCJ Comment on Preservation (2011), supra. 21 Rules Comm. Memo, 40 at n. 38 (suggesting that in light of the detail provided, there “should no longer be occasion for courts to rely on inherent authority to support sanctions”). 22 Rules Comm. M emo, 50-51. Existing Rule 37(e) deals with a “failure to provide” ESI as the “result” of the operation of a system, not a “failure to preserve.” The unspoken implication of adding Rule 37(g) is, to the author, at least, that existing Fed.R.Civ. P. 37(e) may survive “as is” if the “back end” approach is taken. 23 Rules Comm. Memo, 51 (listing factors that a court is authorized to consider in determining if the prerequisites of the preservation rule has been met). 24 Rules Comm. M emo, 49. 25 28 U.S.C. § 2072 (a-b)(The Supreme court shall have the power to prescribe “general rules of practice and procedure” provided they do not modify “substantive” rights). 26 Howard M. Wasserman, Jurisdiction, Merits, and Procedure: Thoughts on Dodson’s Trichotomy, 102 Nw. U. L. R ev. 215, 224 (2008). 27 See Fordham Conference Materials, supra, 35-37 (“Upon [notice of] commencement of an action, all parties must preserve documents 30 THE RETURN RETURNTO TOTABLE TABLEOF OFCONTENTS CONTENTS Advocate and tangible things that may be required to be produced pursuant to Rule [26]”). 28 Id., at 35 (“This approach does not address preservation obligations that may arise before the beginning of a civil action, because the Civil Rules only address pending actions.”). 29 Rules Comm. Memo, 26. The Memo is vague, citing only concerns about intruding “too far into pre-litigation preservation decisions” and describing the topic as “somewhat uncertain.” Id. 30 Rules Comm. M emo, 30 & 45. 31 Fed.R.Civ.P. 27 provides for perpetuation of testimony prior to trial by filing a petition by a person who expects be named a party “but cannot presently bring it or cause it to be brought.” 32 Business Guides, Inc. v. Chromatic Communications Enterprises, 498 U.S. 533 (1991). 33 Id., 552. 34 Rules Comm. M emo, 26 (referring specifically to the “back end” approach). 35 Rules Comm. M emo, 39 at n. 35. 36 See Proposed Rule 37(e) at Spencer, supra, Pre-Litigation Spoliation in Federal Courts, 79 Fordham L. Rev. 2005, 2023 (a court may order sanctions for a failure to produce where the failure is due to spoliation at a time when the party had notice of commencement of the action or could reasonably anticipate the action and the court may impose reasonable expenses, inform the jury of the failure or any other sanctions including those listed in Rule 37(b)(2)(A)). 37 Id., 2031 – 2033. 38 Rules Comm. M emo, 32, 46 and ns. 13 & 55 (suggesting that preservation duties apply to all items contained in internal corporate records retention schedules). 39 See generally Larsen, Evaluating the Proposed Changes to Federal Rule of Civil Procedure 37: Spoliation, Routine Operation and the Rules Enabling Act, 4 Nw. J. Tech. & Intell. Prop. 212, at *24 - 47 (2006)(criticizing rules relating to configuration of information systems as “not related to the fair and efficient administration of the courtroom”); see also Martino v. Wal-Mart Stores, 908 So. 2d 342, 347-350 (S.C. Fla. 2005)(citing “very serious constitutional and practical concerns” about pre-litigation preservation doctrines with excessive requirements)( Concurring Opinion). 40 See Fed.R.Civ. P. 37(f) Committee Note 2006)(preservation obligation “may arise from many sources, including common law, statutes, regulations or a court order in the case”). 41 See Micron Technology, Inc., v. Rambus Inc., _ F.3d _, 2011 WL 1815975, at *6 (C.A. Fed. (Del.) May 13, 2011) and Hynix Semiconductor Inc. v. Rambus Inc., _ F.3d _, 2011 WL 1815978, at *17, n 1 (C.A. Fed. (Cal.) May 13, 2011)(conforming results in two appeals over objection that the divergent outcomes below “may have been based on equally reasonable resolutions of doubt as to the probative strength of the evidence”). 42 Rule 26.1(b), Rules Comm. Memo, 30-32 (Category 1)(“The duty . . . arises only [if a person becomes aware] of one of the following facts or circumstances”)(emphasis added); cf. Rule 26.1, id. at 45-46 (Category 2)(omitting exclusivity language in alternative 2); but see LCJ Comment on Preservation (2011), supra, at 4-5 (the duty should apply only if the facts and circumstances “create the ✯ Fall 2011 reasonable expectation of the certainty of litigation”). 43 The proposal applies only to Category 1, not category 2. Cf. Rules Comm. Memo, at 32 with the equivalent paragraph at 46 (omitting the proposed language). 44 Something like it serves as the sole “trigger” mechanism for use in a proposed preservation rule for the State of New York. See Report, New York City Bar Ass. (2009)(“circumstances which would lead a reasonable person to believe future litigation is likely”), 12 ; copy at http://www.abcny.org/pdf/report/uploads/20071732-ExplosionofElectronicDiscovery.pdf 45 Rule 37(g), casting its light on trigger by its “backwards shadow” suggests that courts should consider the extent of notice of litigation and the treatment of any requests for preservation. Rules Comm. Memo, 50-51 (“whether the party received a request that information be preserved, the clarity and reasonableness of the request, and – if a request was made – whether the person who made the request or the party [in receipt of it] offered to engage in good-faith consultation regarding the scope of preservation”). 46 Martin H. Redish, 51 Duke L.J. 561, 623-624 (2001)(“For purposes of determining when the duty to preserve is triggered, the question should turn on whether the responding party chooses to object to a particular discovery request” since “an absolute strict liability retention standard, triggered by the mere potential of suit, would severely threaten attainment” of values such as efficiency, the preservation of the procedural-substantive balance and “the need to provide predictable standards of primary behavior”). 47 2008 WL 828055, at *8 (E.D. Tex. March 27, 2008)(refusing to adjudicate preservation dispute involving State of Texas after blanket demand by City of Frisco for preservation of highway planning materials). The judicial “hands-off” often continues even after suits are filed. See, e.g., Kemper Mortgage v. Russell, 2006 WL 2319858, at *2 (S.D. Ohio April 18, 2006)(denying request “for instructions on [scope of] a litigation hold” due to lack of authority); cf. Rules Comm. Memo, 51 at n. 61 (“Do we need anything more than a Committee Note to recognize that it is difficult to seek guidance from a court before there is a pending action?”). 48 Spencer, supra, Pre-Litigation Spoliation in Federal Court, 79 Fordham L. Rev. at 2023-2024 (proposing a revised Rule 37(e) which would provide for “Pre-Action Preservation Orders” of limited duration upon petition of party who expects to bring an action in a United States court). 49 Wm T. Thompson Co. v. GNC, 593 F. Supp. 1443 (C.D. Cal. Sept. 28, 1984). 50 See Guideline 1 and discussion, Sedona Conference® Commentary on Proportionality in Electronic Discovery, 11 Sedona Conf. J. 289 (2010)(“The burdens and costs of preservation of potentially relevant information should be weighed against the potential value and uniqueness of the information when determining the appropriate scope of preservation.”). 51 Orbit One Communications v. Numerex Corp., 271 F.R.D 429, 436 at n. 10 (S.D.N.Y. Oct. 26, 2010)(cautioning that it “seems unlikely” that a court would excuse destruction of evidence “merely because the monetary value of anticipated litigation was low”). 52 THE RETURN RETURNTO TOTABLE TABLEOF OFCONTENTS CONTENTS Advocate 2010 WL 645353 (S.D. Tex. Feb. 19, 2010). Id., at *6. 54 Rules Comm. M emo, at 32-33 (Category 1) and 46 (Category 2). An alternative approach would include proportionality elements in the rule itself. 55 In Merck Eprova AG v. Gnosis S.P.A., 2010 WL 1631519, at *4 (S.D. N.Y. April 20, 2010), for example, a court issued a fine of $25,000 “to deter future misconduct” solely because of a failure to issue a written litigation hold, despite the fact that no prejudice was established. 56 Thomas Y. Allman, Preservation Rulemaking After the 2010 Litigation Conference, 11 Sedona Conf. J. 217, 225 (2010)(“Parties with actual or constructive knowledge of the likelihood that relevant and discoverable evidence will be sought in discovery shall undertake reasonable and proportionate efforts to preserve any such evidence within its possession, custody or control subject to the considerations of Rule 26(b)(2)(C) and Rule 37(e).”). 57 Principle 2.04 (Scope of Preservation), 7th Cir. P ilot P rogram, 14, copy at http://www.7thcircuitbar.org/associations/1507/files/ Statement%20-%20Phase%20One.pdf (requiring “reasonable and proportionate steps to preserve”). 58 Sedona Conference® Principles, Principle 5 (2nd Ed. 2007) (requiring “ reasonable and good faith efforts”). 59 Report, New York City Bar Association (2009)(requiring “reasonable and good faith efforts” based on the nature of the issues, and other factors), 17; copy at http://www.abcny.org/pdf/report/uploads/20071732-ExplosionofElectronicDiscovery.pdf 60 Letter, Robert L. Byman, Chairman, ACTL, to Peter G. McCabe, Secretary, January 25, 2005, 3 (the Rules should “state a standard of care for production and preservation - which we think should be reasonableness.”), copy available at http://www.uscourts.gov/ uscourts/RulesAndPolicies/rules/e-discovery/04-CV-109.pdf; accord Dale A. Oesterle, A Private Litigants Remedies For An Opponent’s Inappropriate Destruction of Relevant Documents, 61 Tex. L. Rev. 1185, 1239 (1983)(advocating rule requiring “exercise due care in preserving documents and other tangible things”). See also Rules Comm. Memo, 50-51(listing factors in Proposed Rule 37(g) such as proportionality and reasonableness). 61 See generally Rules Comm. M emo, 35-39. 62 See Thomas Y. Allman, The Need For Federal Standards Regarding Electronic Discovery, 70 Def. Counsel J. 417, 423 (2003) (suggesting a safe harbor limited to barring sanctions for failure to retain “electronic backup or other disaster recovery or document retention systems”). 63 See Noyes, supra, Is E-Discovery So Different That It Requires New Discovery Rules? 71 Tenn. L. Rev. 585, 650-651 (Summer, 2004). 64 501 U.S. 32, 44-45 (1991). 65 Panel Discussion, Sanctions in Electronic Discovery Cases: Views from the Judges, 78 Fordham L. R ev.1, 30-31 (October, 2009) (“what this toothless thing [Rule 37(e) really tells you is the flip side of a safe harbor. It says if you don’t put in a litigation hold when 53 ✯ Fall 2011 31 you should there’s going to be no excuse if you lose information.”) (Comment by Scheindlin, J). 66 Rules Comm. M emo, 26. 67 See Rule 37(e)(2)[Alternative 2],Rules Comm. M emo, 44 & 48 (“the court must not impose a sanction if the party to be sanctioned establishes that it acted in good faith in relation to the violation of Rule 26.1). 68 See Rule 37(e)(2)[Alternative 1],Rules Comm. M emo, 43-44 & 47-48 (no sanctions unless the party seeking sanctions establishes that the party to be sanctioned violated Rule 26.1 [negligently] {due to gross negligence}[willfully] {in bad faith} [intending to prevent use of the lost information as evidence]). The Memorandum raises the issue of discussing the “significance of a litigation hold” in this alternative or in a committee Note. Id., 44 at n. 45. 69 See Rule 37(g), Rules Comm. M emo, 49-51. 70 Rules Comm. M emo, 50. 71 It would also provide that in determining “whether the failure was willful or in bad faith,” the court could consider “all relevant factors,” listing some examples. See Rules Comm. Memo, 50-51. 72 Rules Comm. M emo, 51. 73 Spencer, supra, Pre-Litigation Spoliation, 79 Fordham at 2025, n. 95 (“courts will always be free, to some extent, to go beyond these constraints if they impose sanctions not under the rule but under their inherent authority [unless] “the exclusivity of the proposed rule” is such that the rule “is interpreted as precluding any other bases” for acting). 74 Chambers v. NASCO, 501 U. S. 32 (1991). 75 Id., at 48. 76 Rule 16, Committee Note, Subdivision (f)(1983)(dealing with sanctions for failure to comply with Rule 16). 77 Id. at 49, n. 13. 78 See, e.g, Rules Comm. M emo, footnotes 55 through 61, covering issues of intent, detail about trigger, scope of search, including custodians, clarity versus reasonableness of efforts, proof of sophistications as reflected in preservation standards, shared obligations to preserve, the need for pre-ligation guidance. 79 Exceptions for adjustments due to extreme prejudice – an “extraordinary circumstances” exception - could help, as would acknowledgement of the role of remedial remedies short of sanctions for instances of lesser culpability. 32 THE RETURN RETURNTO TOTABLE TABLEOF OFCONTENTS CONTENTS Advocate ✯ Fall 2011 A rbitration , B ench Trial , or Jury Trial ? A F unctional Guide for In-H ouse C ounsel BY DAVID K. BISSINGER & TRENT T. MCKENNA 1. Introduction Over two decades ago, the then-president of the American Arbitration Association touted arbitration as “an idea whose time has come” because, according to him, arbitration gave parties “speedy and inexpensive justice” that was otherwise “hard to come by in American courts.”1 The U.S. Supreme Court reflected this view in decisions like Shearson/American Express v. McMahon, 2 which abandoned the “mistrust” that the Court had expressed in earlier decisions such as Wilko v. Swan.3 arbitration or choose one type of arbitration over another. We also remind the reader that the choice of dispute resolution, while important, cannot replace the core consideration of whether the transaction makes sense in the first place. 2. What Are the Choices? Parties to a commercial contract have at least three broad choices as to dispute resolution: (a) jury trial (the default option); (b) bench trial; (c) arbitration under the American Arbitration Association or other arbitral entity, as well as ad hoc arbitration and “baseball” style arbitration. Today, lawyers representing both plaintiffs and defendants a. Jury Trial: The Default Option have begun to question the suitability of arbitration for Corporations shy away from jury trials. Many corporate many disputes. As leading arbitration scholar Gary Born lawyers share the view of Dean Erwin Griswold of Harvard, has observed, lawyers often criticize arbitration as “both who observed that “[t]he jury slow and expensive” because of trial is the apotheosis of the expensive administration costs, Many corporate lawyers and executives amateur. Why should anyone arbitrator fees, and difficulties in 4 give little weight to the large number of think that 12 persons brought scheduling, among other things. mediocre verdicts, let alone the large in from the street, selected in various ways, for their lack of The 1980s trend toward arbitranumber of trial-court cases that result in general ability, should have any tion reflected a faith that arbitradefense verdicts or settle confidentially special capacity for deciding tion would help reduce not only (for reasonable, not dramatic, sums) controversies between persons?”6 costs, but also uncertainty in before a jury decides them. dispute resolution. That faith Another source of corporate failed to account for the inherent anxiety about jurors comes from the media. Because large flaws in any process for dispute resolution. As Judge Jerome verdicts receive the majority of media attention, corporate Frank observes in his book Courts on Trial, any process executives, like most other people, often overestimate for resolving disputes “is, and always will be, human, and the proportion of large verdicts. The problem of sotherefore fallible. It can never be a completely scientific 5 called “silent evidence” skews our perception of the trial investigation for the discovery of the true facts.” process by consistently underreporting the vast majority of verdicts and judgments that award far less dramatic In truth, the value of arbitration versus court litigation depends sums than the mainstream media suggests. Indeed, on the case, the facts, and the parties. Moreover, parties typijournalists are “industrial producers” of the distortion.7 cally must decide to arbitrate at a contract’s inception, when Courthouses abound with the silent evidence of juries that the parties generally expect that their deal will succeed, not award small awards or nothing at all. Many corporate fail. Indeed, the parties preparing the contract predominately lawyers and executives give little weight to the large use transactional lawyers, not litigators. As a result, the number of mediocre verdicts, let alone the large number parties and the lawyers documenting the deal may lack trial of trial-court cases that result in defense verdicts or settle experience that could help make an informed decision. In confidentially (for reasonable, not dramatic, sums) before this article, we provide an overview of different instances in a jury decides them. which parties entering into a contract may decide to forgo THE RETURN RETURNTO TOTABLE TABLEOF OFCONTENTS CONTENTS Advocate ✯ Fall 2011 33 Consider the example of Fred Bartlit’s defense of Dun & Bradstreet against an antitrust claim brought by a competitor, National Business Lists. In defending the case, Bartlit contended not only that Dun & Brandstreet never violated the antitrust laws, he counterclaimed against NBL for copyright infringement because NBL for decades had used D&B’s books for NBL’s own competing products. Bartlit relied on D&B executives to testify, whom he had discovered were not arrogant high-flyers, but rather modest and approachable. In the end, Bartlit and D&B prevailed, defeating NBL’s antitrust claim and obtaining a $7.7 million verdict on D&B’s copyright counterclaim. Summing up the experience, Bartlit observed that “[a]s usual, the jury was more interested in these three or four main points and in the ‘bad guy-good guy’ material than in the nuances. . . . Simplicity w[ins] the day.”8 experience in his classic My Life in Court: Some corporate counsel might take Bartlit’s observation and insist on arbitration on the grounds that arbitrators are more nuanced and less prone to emotional appeals than a jury. That belief may exaggerate the differences between arbitrators and jurors. More than a century ago, Francis Wellman, in his classic The Art of Cross Examination, noted the sophistication of juries that applies equally to arbitrators: “Present day juries, especially in large cities, are composed of practical business men accustomed to think for themselves, experienced in the ways of life, capable of forming estimates and making nice distinctions, unmoved by the passions and prejudices to which court oratory is nearly always directed.”9 Corporate lawyers should bear Nizer’s advice in mind: no method of dispute resolution can insulate itself from human nature and the morality play that underlies any case. Although juror composition has changed in the past century, Wellman’s perspective is not much different than Bartlit’s: civil juries tend to come to far more practical and commonsense results than many observers give them credit for. Runaway verdicts are the exception, not the rule. b. Bench Trials Many commercial parties include jury trial waivers in their contracts and assign the fact-finding function to a sitting judge. Again, corporate lawyers may overestimate the difference in outcomes between jury trials and bench trials. As one study showed, reviewing four thousand civil trials, in 47% of all cases both judge and jury found in favor of the plaintiff and in 31% they found in favor of the defendant. When there was disagreement, 10% of the time the judge favored the plaintiff and 12% of the time the judge believed the defendant should have won although the jury chose for the plaintiff.10 The anecdotal evidence also indicates little difference in outcomes. Famed trial lawyer Louis Nizer explained his Although jurors are extraordinarily right in their conclusion, it is usually based upon common sense ‘instincts’ about right and wrong, and not on sophisticated evaluations of complicated testimony. On the other hand, a judge, trying a case without a jury, may believe that his decision is based on weighing of the evidence; but . . . he, too, has an over-all, almost compulsive ‘feeling’ about who is right and who is wrong and then supports this conclusion with legal technology. Because judges, sometimes, consciously reject this layman’s approach of who is right or wrong and restrict themselves to the precise legal weights, they come out wrong more often than the juries.11 c. Arbitration As the reader may suspect by now, the authors are skeptical that arbitration provides a panacea from the imperfections in the trial process. Within the general category of arbitration, commercial parties generally choose among (i) traditional arbitration before the American Arbitration Association or other arbitration authority; (ii) ad hoc arbitration that the parties organize outside of arbitration; including (iii) expedited “baseball” style arbitration. Each has its merits and its flaws. (i) Traditional Arbitration Despite the prediction that AAA arbitration would give parties “speedy and inexpensive justice,”12 many trial lawyers – for both plaintiffs and defendants – have lost faith in full-scale AAA-sponsored arbitration. The most common criticism of AAA-sponsored arbitration is the cost. Good arbitrators charge fees comparable to the fees that large-firm lawyers charge. The AAA requires, in most cases, that the parties to the arbitration make a deposit for arbitrator fees that will compensate the arbitrators through the final hearing (trial). This figure often exceeds $30,000.13 Take, for example, the Second Circuit’s decision in Blue Tee Corp. v. Koehring Co. 14 That case involved a dispute over a garden-variety asset-purchase agreement. But because the transaction involved two separate contracts containing different arbitration provisions, the parties’ dispute became mired not only in the commercial issues, but also in the threshold procedural questions of which arbitration provision 34 THE RETURN RETURNTO TOTABLE TABLEOF OFCONTENTS CONTENTS Advocate governed. That question then led to further disputes about whether the court or the arbitrators had the power to decide these threshold issues. Without question, the presence of arbitration provisions complicated, rather than simplified, the case. As the Second Circuit observed, “[t]his appeal . . . makes one wonder about the alleged speed and economy of arbitration in resolving commercial disputes.”15 The Second Circuit observed in another case almost seventy years ago: “The more enthusiastic of [its] sponsors have thought of arbitration as a universal panacea. We doubt whether it will cure corns or bring general beatitude. Few panaceas work as well as advertised.”16 Yet for many disputes, arbitration probably is the lesser of many evils. This includes international arbitration, construction arbitration, and other complex cases. (ii) Ad hoc Arbitration Many parties choose to opt out of AAA arbitration and instead employ arbitrators outside of the AAA structure. This reduces administrative fees, which can be considerable, and in the experience of many lawyers, the AAA adds little to the process besides access to its roster of neutrals. Further, the AAA has no online filing database comparable to the PACER or statecourt equivalents, and combined with inherent scheduling complexities, sometimes inefficient administration, and all parties, including the fact-finders, billing by the hour, can quickly become too expensive. ✯ Fall 2011 transactions that have reasonably predictable outcomes. A common example arises in mergers or acquisitions in which the final closing price remains subject to adjustments or in an agreement requiring a future appraisal of value. There, the final closing price may depend on the target’s performance or the future appraisal of value, which in turn depend on macroeconomic factors. In situations like this, baseball arbitration for certain provisions within the contract increases the predictability of the range of outcomes should a dispute arise. If both sides are generally sophisticated and reasonable parties, including baseball arbitration forces them to enter into the dispute with a reasonable position and keeps them from the temptation of swinging for the fences. 3. Concluding Thoughts: Tailor the Choice to the Type of Contract As Yogi Berra reportedly said, it’s hard to make predictions, especially about the future. Choosing among jury trial, bench trial, or type of arbitration requires a case-by-case judgment. No one-size-fits-all solution exists for corporate counsel. Another way corporate counsel might consider the decision about whether to contract out of a jury trial would include consideration about whether to do the deal at all. Warren Buffett observes: “We’ve never succeeded in making a good deal with a bad person.”20 In the authors’ collective experience, If both sides are generally Buffett’s advice is sound. But (iii)“Baseball” style-arbitration sophisticated and reasonable parties, Buffett also reminds us why we Baseball arbitration may take several including baseball arbitration forces or our clients want to do deals, forms. Most commonly, the parties sometimes bad deals, in the first restrict the arbitrator’s choices to them to enter into the dispute place: “Dealmaking beats working. one of two proposed awards: one with a reasonable position and Dealmaking is exciting and fun, from the claimant or plaintiff, and keeps them from the temptation of and working is grubby. . . . That’s the other from the respondent or swinging for the fences. why you have deals that make no defendant. The arbitrator has no sense.”21 other choices, even if the arbitrator believes another choice would produce a fairer or more just In short, although the type of dispute resolution provision that outcome. “The arbitrator, in other words may not ‘split the the parties put into a contract may have a significant impact baby.’”17 “Night baseball arbitration” provides another version on a potential case, corporate counsel and other executives under which the arbitrator never learns the parties’ final offers. involved in the dealmaking process should keep in mind that The arbitrator enters a decision and the party that has made the differences among types of dispute resolution procedures its (undisclosed) offer closer to the arbitrator’s final award may not be as great as they think. From our experience in wins and that parties’ offer becomes the award.18 seeing such matters fall into dispute, the dealmakers should put the merits of the deal first, and then, after considering the Baseball arbitration, at least according to theory, encourlikely type of outcomes possible, tailor the dispute resolution ages parties to adopt compromise positions and, perhaps, provision accordingly. Most importantly, no dealmaker or simply to settle their disputes.19 In commercial transactions, advisor should ever depend on a dispute resolution clause, no baseball arbitration works well in single-event or one-time THE RETURN RETURNTO TOTABLE TABLEOF OFCONTENTS CONTENTS Advocate matter how expertly crafted, to protect against an otherwise bad deal. David K. Bissinger is a partner at Siegmyer, Oshman & Bissinger LLP in Houston. He is a graduate of Vanderbilt Law School. Mr. Bissinger’s practice focuses on commercial litigation, securities litigation, and intellectual property litigation. Trent T. McKenna is the Vice President, General Counsel, and Secretary of Comfort Systems USA, Inc. He is a graduate of Duke University School of Law. Prior to joining Comfort Systems, Mr. McKenna was focused on complex commercial litigation at Akin Gump Strauss Hauer & Feld, LLP. O 1 “Arbitration Offers Speedy Alternative to Costly Litigation,” Deseret News, Jan. 21, 1990. 2 Shearson/American Express v. McMahon, 482 U.S. 220 (1987). 3 Wilko v. Swan, 346 U.S. 427 (1953). 4 Gary Born, International Commercial Arbitration: Commentary and Materials 9-10 (2d ed. 2001). 5 Jerome Frank, Courts on Trial, quoted in Ephraim London, The Law as Literature 731, 750 (1960) 6 Erwin Griswold, Harvard Law School’s Dean’s Report (1963). 7 Nassim Nicholas Taleb, The Black Swan 102 (2007). 8 Emily Couric, The Trial Lawyers 38 (1988) 9 Francis Wellman, The Art of Cross Examination 21 (1903) 10 H. Kalven, The Dignity of the Civil Jury, 50 Virginia Law Review 1055-1075 (1964), cited in Valerie Hans & Neil Vidmar, Judging the Jury 117 (1986). 11 Louis Nizer, My Life in Court 359 (1978) 12 “Arbitration Offers Speedy Alternative to Costly Litigation,” Deseret News, Jan. 21, 1990. 13 Kerr, International Arbitration v. Litigation, 1980 J. Bus. L. 164, 164-65 175-78 (“Arbitral tribunals have to be paid, whereas court fees are often negligible. In important cases, three arbitrators, or two and an umpire, are usually preferred to a single arbitrator, and greatly adds to the costs and complexities. If the arbitrators are busy men, as they usually are, arbitration can be much more protracted than litigation….”), quoted in Born, supra note 4, at 10. 14 Blue Tee Corp. v. Koehring Co., 999 F.2d 633 (2d Cir. 1993). 15 Id. 16 Kulukundis Shipping Co. v. Amtorg Trading Corp., 126 F.2d 978, 987 n.32 (2d Cir. 1942). 17 Abraham J. Gafni, “Baseball Arbitration” and the Trial of Socrates, The Legal Intelligencer, Feb. 28, 2011, reprinted in Texas Lawyer, Feb. 28, 2011. 18 Id. 19 See id. 20 Warren E. Buffett, The Essays of Warren Buffett: Lessons for Corporate America 99 (1st rev. ed. 2001). 21 Id. at 164. ✯ Fall 2011 35 36 THE RETURN RETURNTO TOTABLE TABLEOF OFCONTENTS CONTENTS Advocate ✯ Fall 2011 Litigators Needed to A dvise Transaction Lawyers on L itigation P renups BY DONALD R. PHILBIN, JR. E VEN BEFORE THE U.S. AND TEXAS SUPREME COURTS handed down AT&T v. Concepcion1 and NAFTA Traders, Inc. v. Quinn,2 dispute resolution options needed to be thin-sliced to effectuate the ends of a deal. What began with Chief Justice Warren Burger’s call to the National Conference on the Causes of Popular Dissatisfaction with the Administration of Justice and Professor Frank Sander’s “multi-door courthouse”3 keynote in 1976 (“Pound Conference”) has developed into a wide range of dispute resolution options,4 each with strengths and weaknesses. Deal lawyers would benefit from the nuanced advice of trial lawyers as they tailor litigation prenups to specific transactions. Conference that may help inform the choices embedded in such clauses. Arbitration: A Short History Commercial arbitration dates back to at least the thirteenth century and predated the American Revolution in New York and several other colonies.9 George Washington included an arbitration provision in his will10 and the Texas Constitution of 1845 recognized it.11 By 1927, the American Arbitration Association’s (“AAA”) Yearbook of Commercial Arbitration listed over 1,000 trade associations that had systems of arbitration.12 Arbitration is the preferred dispute resolution mechanism in international disputes primarily because non-resident parties distrust the legal systems of foreign countries and the New York Convention actually makes arbitration awards more enforceable than the judgments of domestic courts across national borders.13 In AT&T v. Concepcion, the U.S. Supreme Court held that California state contract law, which deems class-action waivers in arbitration agreements unenforceable when certain criteria are met, is preempted by the Federal Arbitration Act After Concepcion, commentators (“FAA”) because the law stands as began to wonder aloud if attorneys an obstacle to the accomplishment But not all states took the same view and execution of the full purposes of arbitration. “Historically, Anglowould be committing malpractice and objectives of Congress.5 After American courts refused to enforce not to advise business clients to Concepcion, commentators began arbitration agreements, jealously include class action arbitration to wonder aloud if attorneys would guarding their dispute resolution waivers in all consumer contracts. be committing malpractice not to monopoly.”14 Merchants and lawyers advise business clients to include were successful, particularly in New class action arbitration waivers in all consumer contracts.6 York, in enacting legislation requiring courts to defer to The Texas Supreme Court may have addressed the most arbitration. Parallel efforts established New York not only frequent complaint about arbitration – the lack of meanas a financial center, but as the preferred source of comingful judicial review after the U.S. Supreme Court’s Hall mercial law. According to Cornell Law Professor Theodore Street Associates v. Mattel, Inc.7 case – by going a different Eisenberg, who has done empirical work around litigation,15 direction under the Texas Arbitration Act (“TAA”) in NAFTA arbitration,16 and choice of law17 for at least a decade, “New Traders, Inc. v. Quinn. Particularly in bet-the-company York has openly sought to be an adjudication center for cases, “[p]reserving the right to appeal was the only factor substantial business arrangements” and recent receptivity to cited by a majority of [general counsel] as discouraging forum selections has only advanced that effort.18 In response arbitration (63%).8 to “widespread judicial hostility to arbitration agreements,”19 Congress resolved inconsistent treatment of arbitration proviWhile these cases highlight the need to periodically audit sions across state lines in 1925 by adopting the New York dispute resolution procedures, there are a number of factors approach in the FAA. The FAA supplies the substantive rules impacting how these clauses are designed. The focus of for deciding whether to uphold an arbitration agreement, stay this article is on empirical data collected since the Pound judicial proceedings, compel arbitration, and confirm, vacate THE RETURN RETURNTO TOTABLE TABLEOF OFCONTENTS CONTENTS Advocate or alter the award.20 “The ‘principal purpose’ of the FAA is to ‘ensur[e] that private arbitration agreements are enforced according to their terms.’”21 By 1984, the U.S. Supreme Court had formally announced a “new arbitrability regime.”22 Though the Court had already required fraudulent inducement allegations to be directed to the arbitrator unless those allegations solely attacked the arbitration clause, rather than the larger contract containing it (Prima Paint “separability doctrine”), it wasn’t until 1984 that the Court finished what Congress had started by preempting inconsistent state substantive law23 with what many had thought to be a procedural statute.24 The Court further held that Congress invoked the full preemptive power of the Commerce Clause,25 stated a “national policy favoring arbitration,”26 and resolved “any doubts concerning the scope of arbitrable issues” in favor of arbitration.27 This national policy favoring arbitration later extended into statutory claims, including Truth in Lending,28 Age Discrimination in Employment Act,29 securities,30 and anti-trust.31 It has also been held to cover fraudulent inducement,32 tortious interference and intentional infliction of emotional distress,33 defamation and the Texas Deceptive Trade Practices Act,34 breach of fiduciary duty and conversion,35 personal injury/ wrongful death,36 and wrongful discharge (Sabine Pilot).37 “Employment arbitration grew dramatically in the wake of the Court’s 1991 Gilmer 38 decision.”39 In fact, one commentator estimates that the number of workers covered by nonunion arbitration procedures now exceeds those covered by union representation.40 So, “in a few short decades we have gone from a ‘suspicion of arbitration as a method of weakening the protections afforded in the substantive law’ to a ‘strong endorsement of the federal statutes favoring this method of resolving disputes.’”41 The result has been a “massive shift from in-court adjudication to arbitration” during a period that roughly parallels various critiques of discovery related costs.42 For instance, in 1989 Judge Frank Easterbrook suggested “abandoning notice pleading” in order to put “some preliminary assessment of the merits ahead of the decision about discovery” in his Discovery As Abuse article.43 The Supreme Court cited that article in raising the pleading bar in Bell Atlantic Corp. v. Twombly44 in 2007. Other recent efforts to address civil justice issues in litigation and arbitration have been convened under high sounding titles: The Future of Civil Litigation at the Sedona Conference,45 American Justice as a Crossroads: A Public and Private Crisis at Pepperdine Law,46 and the 2010 Civil Litigation Conference convened by the Judicial Conference Advisory Committee on Civil Rules at Duke Law (“Duke Symposium”).47 A number ✯ Fall 2011 37 of studies were prepared in the run up to these conferences by the American Bar Association Litigation Section (ABA Litigation),48 the Federal Judicial Center (FJC),49 the RAND Institute for Civil Justice,50 Lawyers for Civil Justice (LJC),51 the National Employment Lawyers Association (NELA), the American College of Trial Lawyers (ACTL) and the Institute for the Advancement of the American Legal System (IAALS).52 With the exception of mediation, which has benefited from dissatisfaction with both litigation and arbitration, no method of resolving disputes escaped criticism. So arbitration is included in a wider variety of contracts than at any time, and, yet, it has “never been subject to wider criticism.”53 By the twenty-first century, arbitration had become a “wide-ranging surrogate for trial in a public courtroom” and “arbitration procedures [had] become more and more like the civil procedures they were designed to supplant, including pre-hearing discovery and motion practice.”54 The fair-haired child of the post-Pound era had “grown into a troubled teenager.”55 In fact, long-time arbitration guru Tom Stipanowich notes that “criticism of American arbitration is at a crescendo.”56 That criticism comes from several quarters, but our focus here is on the commercial context. “Much of this criticism stems from standard arbitration procedures that have taken on the trappings of litigation – extensive discovery and motion practice, highly contentious advocacy, long cycle time and high cost.”57 As one general counsel explained: “[I]f you simply provide for arbitration under [standard rules] without specifying in more detail . . . how discovery will be handled . . . you will end up with a proceeding similar to litigation.”58 Professor Stipanowich notes that the latest edition of the American Institute of Architects construction forms eliminates binding arbitration as the default procedure, as have other form contracts.59 Parties now have to opt-in to arbitration with a check-box rather than it appearing as the default. And Stipanowich and others note that “‘e-discovery’ looms as the ultimate test for arbitration as an alternative to court.”60 Of course, e-discovery hovers over litigation to such an extent that one distinguished Federal District Judge, Royal Furgeson, observed after Twombly and Ashcroft v. Iqbal61 that “Discovery has become such an over-riding issue with federal judges that it is having a spillover effect on the rest of the civil justice system, and especially on pleading. Both Twombly and Iqbal illustrate this. If trial lawyers and magistrate and district judges do not deal better with discovery, I predict that the appellate courts will eventually become so concerned that they will dictate additional changes to the civil justice system, perhaps even more problematic than Twombly and Iqbal. The time to act is now.”62 38 THE RETURN RETURNTO TOTABLE TABLEOF OFCONTENTS CONTENTS Advocate Modern Transformations The RAND survey of general counsel found that “arbitration is becoming increasingly like litigation.”63 In the international context, this is often called the Americanization of arbitration, allegedly importing “brass knuckle” techniques “that are so alarmingly familiar in American courts.”64 That metamorphosis imbued arbitration with the “style, technique, and training” of these lawyers,65 who often made tactical use of discovery, choice of law, venue, and other variables. One commentator has tied American influence on international arbitration to the “meteoric rise of the American law firm in the global market place.”66 Whatever its cause, this view was prominent enough by 2003 that Ohio State Law convened a symposium on The Americanization of International Dispute Resolution.67 ✯ Fall 2011 and Seeber found that most respondents believed that businesses used arbitration clauses to save both time (68.5%) and money (68.6%).74 Indeed, the U.S. Supreme Court found that arbitration is cheaper than litigation75 by turning to Congressional declarations in the Patent and Trademark Office appropriations bill of 1982: “The advantages of arbitration are many: it is usually cheaper and faster than litigation; it can have simpler procedural and evidentiary rules; it normally minimizes hostility and is less disruptive of ongoing and future business dealings among the parties; it is often more flexible in regard to scheduling of times and places of hearings and discovery devices; and, arbitrators are frequently better versed than judges and juries in the area of trade customs and the technologies involved in these disputes.”76 These observations may be showing their age given the changes in arbitration practice. Concepcion was decided in the consumer class action context where at least one third of major consumer transactions are In their employment case study, Eisenberg and Hill found covered by arbitration clauses.68 And while companies have that the time to final hearing was about three times faster in the past inserted unconscionable arbitration provisions into in arbitration than in court.77 Lower pay employees average form contracts, they now seem to be rushing to make them time to award on civil rights claims (262 days) was faster fair in an effort to withstand scrutiny. than higher pay employees (383 days) Pace Professor Jill Gross has asked her and both were significantly faster than While companies have in the ADR class to bring their consumer or time to trial in state (818 days) and past inserted unconscionable employment agreements to class to federal (709 days) court.78 Non-civil arbitration provisions into form discuss the provisions. Historically, rights cases were also disposed of they had no problem locating unfair, three times more quickly in arbitracontracts, they now seem to be unreasonable, or arguably uncontion with lower pay employees (233 rushing to make them fair in an scionable provisions in at least one days) and higher pay employees (271 effort to withstand scrutiny. of the agreements. “This year, for the days) than they were in the state court first time,” she reported, “no student basket of cases (723 days).79 Colvin’s in my class (31) could identify an arguably unconscionable more recent study found that arbitration was only twice as provision in a pre-dispute arbitration clause.”69 The clauses fast as litigation, because the mean time to disposition had “contained 30 day opt-out provisions, references to due increased to 361.5 days, but 59.1% settled pre-hearing at the process protocols, mechanisms to choose consumer-friendly 284.4 day mark.80 The RAND survey of general counsel with venues for arbitration hearings, and remedy-preserving significant litigation experience and less arbitration experience terms.”70 Nebraska Professor Kristen Blankley reports similar (25% had never attended an arbitration) found that arbitration findings, with the exception of a rise in class action waivers is somewhat better than litigation in the business-to-business within the arbitration clause. The AT&T clause at issue in context (52%), saves money relative to litigation (60%), and Concepcion provided for procedures to keep costs very low saves time compared to litigation (59%).81 and even guaranteed claimants a $7,500 minimum recovery if the arbitrator’s award was greater than AT&T’s last written Interestingly, the removal of an arbitration clause never (51%) settlement offer. Gross attributes these changes to “judicial or rarely (39%) affected the price charged to a customer.82 71 policing of the one-sided arbitration clause.” And, though changes to an arbitration clause could be mate�� rial under Section 2-207 of the Uniform Commercial Code, Faster, Simpler, and Cheaper? the Second Circuit held that “the inclusion of an arbitration Proponents have long claimed that arbitration is faster (74%), provision in a contract did not constitute a material alterasimpler (63%), and cheaper (51%) than litigation.72 Only eight tion.”83 If arbitration is in fact cheaper than litigation, one percent reported that arbitration was more expensive than would expect the removal of such a clause to be material and litigation in the Harris survey.73 In a 1998 survey, Lipsky result in a price adjustment.84 All of which led Eisenberg THE RETURN RETURNTO TOTABLE TABLEOF OFCONTENTS CONTENTS Advocate to conclude that corporate defendants are “less concerned about, and in need of less protection from, litigation than the Supreme Court’s Twombly and Iqbal decisions suggest.”85 RAND also identified a perception that arbitration is a more just process.86 Harris also found that arbitration participants were satisfied with the fairness of the process (75%) and outcome (72%).87 Lipsky and Seeber found that 60% believed arbitration provided a more satisfactory process than litigation.88 But there are persistent questions about whether corporate users really buy into these broad perceptions. Eisenberg found much higher use of mandatory arbitration clauses in consumer contracts (76.9%) than in “material” contracts disclosed to the Securities and Exchange Commission (6.1%).89 And while mandatory arbitration was the dispute resolution mechanism of choice in employment matters generally (79-92.9%),90 arbitration clauses were less prevalent in individually negotiated CEO employment contracts (42%).91 Eisenberg has repeatedly shown that corporations inject arbitration clauses into their contracts with consumers and lower pay employees much more frequently than they do with their executives and other sophisticated businesses. For employees who earn less than $60,000 per year, “arbitration, not litigation, is their only realistic dispute resolution option” due to employer imposed clauses.92 But that could be a benefit, if arbitration were in fact procedurally less daunting than litigation, because lower pay employees may not have access to counsel according to the ACTL and ABA Litigation studies finding an economic floor for litigation generally at $100,000. Eisenberg and Hill’s findings are consistent: “[l]ower pay employees may be unable to attract the counsel necessary for meaningful access to court.”93 But if that were the case, employees would elect arbitration post-dispute and there would be no need for take-it-or-leave-it clauses pre-dispute. Eisenberg contends that the “systematic eschewing of arbitration clauses in business-to-business contracts also casts doubt on the corporations’ asserted beliefs in the superior fairness and efficiency of arbitration clauses.”94 A commentator at the Duke Symposium argued that the Supreme Court has used procedural law to “weaken the ability of citizens to enforce [substantive] laws enacted to protect them from business misconduct.”95 There are moves in Congress to reverse many of those decisions, and the new Consumer Financial Protection Bureau may attempt to ameliorate others.96 Several studies have compared win rates and damage awards in arbitration and litigation. Since we can’t run the same ✯ Fall 2011 39 case through both the litigation and arbitration systems, these studies inherently compare apples with oranges and the relatively small data samples add wrinkles. Some studies suggest that employee win rates are higher in arbitration. Maltby reported that “employees prevailed in 63% of arbitrations compared to 14.9% of court cases.”97 Using 1,430 federal court, 160 state court, and 297 AAA arbitration matters alleging employment discrimination, Eisenberg and Hill found “little evidence that arbitrated outcomes materially differ from trial outcomes for higher paid employees.98 But the data is not uniform and the results are not as strong for lower pay employees who were more likely to assert discrimination or other statutory causes of action rather than the breach of contract claims arising out of the executives’ individually negotiated agreements. In civil rights claims, Eisenberg and Hill found higher pay employees prevailed in arbitration more (40%) than lower pay employees (24.3%).99 Considering the sample size, those figures may be within the margin of error compared to composite employee success rates in state (43.8%) and federal (36.4%) discrimination litigation.100 In non-civil rights claims, where the sample size was more statistically relevant, the lower pay employee win rate (39.9%) was at the state and federal discrimination win rate, while the higher pay employees bested those rates in arbitration (64.9%).101 In a 2011 published study of 3,945 AAA administered employment cases, Colvin found an employee win rate of 21.4%, which is below the earlier court win rate.102 And the court win rate probably falls when motions to dismiss and for summary judgment are factored into the results.103 The dollar amount of the awards also reflected the pay and claim type differentials. Higher paid employees received higher arbitration awards on their non-civil rights claims ($211,720), presumably breach of contract, and lower paid employees obtained higher arbitration awards on their civil rights claims ($259,795).104 Average civil rights arbitration awards for lower ($259,795) and higher ($32,500) pay workers were lower than the basket of state ($478,488) and federal ($336,291) claim judgments the authors used for comparison.105 Non-civil rights claims inverted. Higher pay employees did better ($211,720) in this category than lower pay employees ($30,782), but both did worse than the state court basket ($462,307).106 Colvin later found the mean employment arbitration award to be $109,858, below the federal and California averages in his study.107As with Eisenberg’s studies, Colvin found that higher pay workers won higher awards ($165,671) more often (42.9%) than lower pay workers (22.7% and $19,069, respectively).108 Workers in Colvin’s middle band ($100K - $250K), fell in between (31.4% and $64,895, respectively).109 Delikat and Kleiner’s study of 40 THE RETURN RETURNTO TOTABLE TABLEOF OFCONTENTS CONTENTS Advocate securities industry employment outcomes showed that the median arbitration award ($100,000) was roughly comparable to the mean federal court trial judgments ($95,554).110 Outside of the employment context, there were no differences in awards between arbitration and litigation. Eisenberg and Hill concluded that “[a]rbitrator-juror comparisons in non-employment contexts provide no empirical evidence of systematic juror-arbitrator differences.”111 Anecdotally, we can easily recall cases that deviate from statistics showing similar results in arbitration and litigation. For instance, in Perry Homes v. Cull,112 the owner of a $242,759 home was awarded $800,000 in arbitration over serious structural and drainage issues.113 Indignant that an arbitrator could award more than three times the purchase price of the home, Perry Homes sought and obtained vacatur from the Texas Supreme Court on a waiver theory. A Tarrant County jury then awarded the homeowner $58 million.114 On the other hand, after Senator Al Franken passed an anti-arbitration amendment to the Department of Defense Appropriations Act of 2009 in honor of Jamie Leigh Jones and the Fifth Circuit exempted certain claims from the arbitration provision in her employment contract,115 Ms. Jones lost a Houston jury trial.116 The statistical and anecdotal results highlight one reason general counsel tend to favor arbitration with its flaws – tighter standard deviations. The state court basket of cases and the lower pay employee civil rights recoveries had very high standard deviations – exactly what the general counsel in the RAND survey aimed to limit with the use of arbitration. According to RAND, “corporate counsel may essentially be weighing the benefits of confidentiality and experienced decisionmakers against the costs of a potentially smaller award – even if that cost is not real.”117 Whether in litigation or arbitration, there is a concern that repeat players not gain advantage relative to one-shot participants. These concerns are heightened in the employment context because employers are systematically more likely to be repeat players – individuals have few employers but employers have many employees.118 Lisa Bingham began to identify a repeat player effect in a series of studies in the 1990s. Using relatively small AAA samples, she found some evidence that employers participating in multiple arbitrations either got good at it or arbitrators tried to curry favor with the repeat players through their awards.119 Other commentators criticized those studies noting that there were several reasons repeat play improves performance – other than arbitrator bias. They divide into two groups. The practice-makes-perfect group that includes more resources, greater expertise, better policies ✯ Fall 2011 informed by lots of experience, and the adoption of internal grievance procedures to address claims before they escalate to filed matters. The other group suggests that arbitrators are either biased because they hope to be selected in future cases or that employers know more about the arbitrators through repeat play than do the one shot players.120 These concerns are often ameliorated by strict disclosure requirements. Colvin sliced and diced the data several different ways, and others will take issue with his assumptions, to show that the employee win rate with repeat employers (16.9% and 12.0%) was roughly half what it was with single shot employers (31.6% and 23.4%).121 He further found that average damage awards dropped from $27,039 to $7,451 in cases with repeat play employers.122 With dismissals and summary judgments trending up in federal practice, some wonder if there is a structural impediment to similar results in arbitration. The RAND survey noted that “arbitrators have low incentive to control the amount of discovery or time spent on pre-hearing disputes because they are paid by the hour.”123 Other interviewees thought the parties might be “extending the process because arbitration awards generally cannot be appealed.”124 The tension, of course, is with due process and vacatur. As Stipanowich puts it, “since arbitrators are subject to vacatur for refusal to admit relevant and material evidence,125 some may draw the inference – not established by law – that a failure to grant court-like discovery is an inherent ground for vacatur.”126 Though the FAA controls in most instances, the “finality” of arbitration awards varies “considerably among jurisdictions.”127 During a 2004 survey of federal and state vacatur opinions, Mills found that federal courts granted only six of sixty-one motions, but the courts of California, New York, and Connecticut vacated awards about one-third of the time. Texas, on the other hand, was in a group of nine states that granted only one vacatur during the nine months sampled.128 The most common successful ground for vacatur was “exceeded powers” (20.8%), and only two of 52 (3.8%) were granted for manifest disregard, which some now suggest is a subset of “exceeding powers” after Hall Street.129 Of course, counsel can agree upon a discovery plan – often with general counsel making cost / benefit tradeoffs. There is a persistent perception that arbitrators tend to “split the baby,” trying to “give each side a partial victory (and therefore partial defeat),” rather than make a strong ruling for fear of alienating one of the parties.130 Seventy-one percent of the general counsel recently surveyed by RAND held this view, though respondents who used arbitration clauses most THE RETURN RETURNTO TOTABLE TABLEOF OFCONTENTS CONTENTS Advocate frequently disagreed.131 And this may well be a case where cognitive shortcuts highlight the most memorable cases even if empirical research shows a different trend in larger data sets. Keer and Naimark did find the mean arbitration award to be 50.53% of the amount demanded, but it was because the results were bimodal – the largest percentage of awards clustered at the ends (barbell graph) because most arbitrators either granted or denied the requested relief in total.132 The AAA analyzed 111 of its awards in 2009 to see if it could confirm this broadly held perception. It found that: • • • 7% awarded approximately half (41 – 60%) of what was claimed 41% awarded more than 80% of the claimed amount 19% denied the claims completely133 One of the biggest reasons general counsel favored contractual arbitration in the RAND survey was confidentiality (59%).134 Not only does confidentiality reduce publicity over the dispute and its outcome, it reduces the risk of divulging trade secrets or other commercially sensitive information. 135 Of course, parties desiring confidentiality must contract for it.136 One RAND respondent went so far as to say that “they accept the risk of spending potentially larger amounts of money on arbitrators and outside counsel to keep the details of a commercial dispute secret.”137 There are statutory and practical exceptions to confidentiality, however. California state law, for instance, requires organizations that provide arbitration services to report “the name of the employer; the name of the arbitrator; filing and disposition dates; amounts of claims; amounts awarded; and fees charged” for cases nationally.138 Colvin and others argue that more data ought to be available to help researchers and policy makers.139 Even with confidentiality clauses, however, the record of individual arbitrations have been laid bare in vacatur attempts in court. Limiting bad publicity ties back into general counsels’ concerns about predictability, and most view arbitration as more predictable – even if they unevenly seek that predictability. RAND notes that “predictability is an overarching concern of business – in terms of both the dispute’s outcome and the indirect effects of potentially bad publicity.”140 Confidentiality comes with social costs – a loss of transparency and a reduction of common law precedent. University of Houston Law Professor Richard Alderman notes that courts have developed doctrines like the warranty of good and workmanlike performance.141 Today’s mobile home contract, he observes, would contain an arbitration clause. Some arbitrator would apply existing law, perhaps in secret. But ✯ Fall 2011 41 new doctrine would not be court pronounced like it was in Melody Home Manufacturing Co. v. Barnes.142 Indeed, arbitrators might exceed their powers by relying on arbitral common law unless the contract permits them to do so.143 But the vast majority of arbitration matters, like their court counterparts, would probably not contribute to common law development anyway. The most recent Fifth Circuit statistics show that only 400 of 3,210 opinions in 2010 were published (12%).144 And that’s the tip of the iceberg since so few trial court cases are appealed: “In 2006 the [federal] trial courts terminated 198,646 cases, but parties commenced only 32,201” appeals, of which 12,338 were decided on the merits (6.2%).145 As the writers put it, “notwithstanding the tremendous mass of litigation oozing up from below, the courts of appeal reversed or remanded a mere 1,891 cases.”146 If 1,891 of 198,646 (1%) district court terminations are reversed or remanded, and only three percent of all district court orders were found to be fully reasoned,147 a number that would be lower in state trial courts where publication rates vary, one might fairly argue that common law is already being developed by exception rather than statistical pool. And a much smaller percentage of the publishable opinions garner publicity. In fact, few of the U.S. Supreme Court’s 80 or so opinions each term are widely reported, and two-thirds are decided by a 7-2 margin or better.148 Of course, the main concern is that egregious cases will be shielded from public view and that several of the one-percent or fewer matters that could set precedent are being quietly determined in a conference room. Perhaps the biggest objection to arbitration is the lack of judicial review of awards. In the RAND survey, “[p]reserving the right to appeal was the only factor cited by a majority of respondents as discouraging arbitration (63%).149 Professor Rau attributes the use of expanded review provisions to a “desire to ensure predictability in the application of legal standards, a desire to guard against a ‘rogue tribunal,’ or against the distortions of judgment that can often result from the dynamics of tripartite arbitration.”150 This is of particular concern in “bet-the-company” cases.151 Until recently, the Fifth Circuit recognized manifest disregard as a non-statutory ground for vacatur.152 In Hall Street Associates v. Mattel, Inc., the U.S. Supreme Court held that parties cannot by contract expand the grounds for review under the FAA.153 But Hall Street did not foreclose the possibility that parties may be able to utilize other means of obtaining expanded review (arbitral panels)154 or that state statutes or judicial decisions could not provide safe harbors for such activities.155 While other circuits have since held that manifest disregard of the law is subsumed within §10(a)(4) of the FAA (vacatur available where arbitrators exceed their powers), a panel of the Fifth 42 THE RETURN RETURNTO TOTABLE TABLEOF OFCONTENTS CONTENTS Advocate Circuit went the other way by holding that since manifest disregard of the law had been defined as a non-statutory ground in the Fifth Circuit it could not survive Hall Street.156 ✯ Fall 2011 competing interests at play. One contract formation theory suggests that drafting is a simple matter of economics – “the more time the parties spend negotiating and drafting the contract, the lower the probability that a dispute over The Texas Supreme Court, however, recently joined three meaning will arise, because more of the possible contingencies other states (California, Connecticut, and New Jersey) will be covered by explicit contractual language.”166 While in interpreting state arbitration elegant theory, perhaps necessity acts (the TAA157 is based on the is more often the cause: “Whether Assuming there is no panacea but a Uniform Arbitration Act) differa dispute arises depends largely variety of options with strengths and ently than the Supreme Court on whether one or both parties interpreted the FAA, even though weaknesses, the challenge becomes becomes unhappy in a relationship, the provisions are similar. In which often turns on the world how to advise dealmakers when they NAFTA Traders, Inc. v. Quinn,158 the changing in the way the parties are drafting litigation prenups in the Court acknowledged that while it did not expressly anticipate.”167 So rush to consummate a deal. must follow Hall Street in applying the idea that parties agree on what the FAA, it was free to reach its they can at contract formation and own judgment with regard to the TAA.159 In doing so, it imperfect dispute resolution alternatives force them to work noted that arbitration is first a creature of contract. And if out later disputes seems logical: “Deliberate ambiguity may the parties contracted for judicial review for reversible error, be a necessary condition of making the contract; the parties that could not be inconsistent with the TAA. In Quinn, the may be unable to agree on certain points yet be content to take arbitrator had applied federal law to sex discrimination claims their chances on being able to resolve them, with or without brought solely under the Texas Commission on Human judicial intervention, should the need arise.”168 160 Rights Act. Noting that the Supreme Court did not discuss FAA §10(a)(4), which like TAA § 171.088(a)(3)(A) provides Forum Selection for vacatur “where the arbitrators exceed their powers,” the Forum is the best determinant of claim value. “Forum is Texas Supreme Court held that when the parties agree that worth fighting over because outcome often turns on forum,” the arbitrator should not reach a decision based on reversible according to Clermont and Eisenberg.169 The plaintiff obvi161 error, the arbitrator exceeds her powers by doing so. So it ously gets the first crack at forum selection. If that choice is reversed a decision based on the TAA where the arbitration upset by removal, however, plaintiff win rates are “very low, agreement clearly involved interstate commerce and held that compared to state court cases and cases originating in federal its decision was not preempted because the “lesson of Volt is court.”170 Win rates in original diversity cases (71%) were that the FAA does not preempt all state-law impediments to double win rates in removed diversity cases (34%).171 The arbitration; it preempts state-law impediments to arbitration effect is more pronounced in venue transfer cases. “Plaintiff’s agreements.”162 win rate in all federal civil cases drops from 58%, calculated for cases in which there is no transfer, to 29% in transferred So the biggest complaint about arbitration may have been cases.”172 Empiricists prove what litigators instinctively cured in Texas when “an agreement specifically states that know – forum matters. it is to be governed by the” TAA.163 Of course, there are potential downsides to such a provision,164 and it may be Venue in Texas is often tied to the place of performance or preempted. Several arbitration providers have also responded designated in “Major Transactions.”173 As David Harrell notes, to this criticism by establishing appellate procedures and “if the arbitration is to occur in a particular county, there needs appellate tribunals for those seeking review.165 With such to be some other performance in that county.”174 He goes on appellate procedures, parties trade some speed and finality to note that this does not “restrict parties’ ability to employ a for the protection of a second-look. forum selection clause to agree to the jurisdiction and venue of another state.”175 According to another commentator, “U.S. Drafting Considerations courts have typically indicated that contracts of adhesion with Assuming there is no panacea but a variety of options with consumers are not automatically unenforceable but will be strengths and weaknesses, the challenge becomes how to scrutinized for compliance with existing contract law and advise dealmakers when they are drafting litigation prenups with notions of fundamental fairness and reasonableness.”176 in the rush to consummate a deal. And, of course, there are THE RETURN RETURNTO TOTABLE TABLEOF OFCONTENTS CONTENTS Advocate � Choice of Law Choice of law also matters to empiricists. There are states who have distinguished themselves in certain substantive areas – New York in financial transactions, Delaware in corporate governance, etc. But the practitioner knows how difficult it is to the get the forum state court to apply the law of another state – and that might lead some to include an arbitration provision. It turns out that choice of law is inversely correlated with the decision to incorporate an arbitration clause. Eisenberg and Miller suggest that if the parties believe a particular “state’s law is highly efficient, that might be viewed as reducing the costs of litigation and providing a reason not to include an arbitration clause.”177 Among the material contracts they studied, New York (47%), Delaware (14%), and California (7%) had the highest choice of law concentrations.178 Not surprisingly, “New York law was overwhelmingly favored for financing contracts, but also preferred for most other types of contracts.” New York law (45.69%) was chosen thirteen times more often than Texas law (3.35%). And forum tended to follow choice of law, with New York (41%) and Delaware (11%) chosen as the forum in the 39% of those material contracts specifying a litigation forum.179 Since Texas Supreme Court has held that a general choice-of-law provision does not preclude application of the FAA,180 it would be better practice to designate whether the FAA or TAA is the governing arbitration law, even though parties may not generally confer jurisdiction by agreement.181 If state law is perceived to be highly efficient, arbitration clause usage falls. Only 4% of the contracts that chose New York law also chose arbitration, while 24% of those selecting California law did the same.182 When the company had a Texas place of business, arbitration clauses were used in employment contracts (57.1%) and merger agreements (26.1%) at higher rates than when the same types of contracts involved a California place of business.183 Contract subject matter also correlates with choice of law. Where arbitration clause usage is higher (settlements, employment contracts, and licensing agreements), choice of law concentrations were found to be low.184 Arbitration usage also correlates with the “supposed unpredictability and unfairness of adjudication.”185 Eisenberg and Miller plot the Chamber of Commerce rank of each state against arbitration clause usage.186 Low numerical ratings by the Chamber corresponded to favorably-ranked state liability systems. At the time of the study (2002 data), Texas had the second highest Chamber score (behind Louisiana and only slightly worse than California). Arbitration clause usage was lower than Louisiana, but also lower than California, which had a slightly better Chamber score.187 Of course, other factors could impact these results. Crowded dockets, for instance, ✯ Fall 2011 43 may result in higher arbitration utilization. States and countries compete to attract business with their laws, including their arbitration statutes. The New York precursor of the FAA was part of a concerted effort to make New York a financial center. “New York’s highest court has held that awarding punitive damages in an arbitration proceeding violated public policy,” but California and most other jurisdictions went the other way even before the Supreme Court held that the New York position was preempted by the FAA.188 The English Arbitration Act of 1979 was overtly designed to make the U.K. a friendly forum to arbitration. During its parliamentary debate, Lord Cullen asserted, “that a new arbitration law might attract to England as much as ₤500 million per year of ‘invisible exports,’ in the form of fees for arbitrators, barristers, solicitors, and expert witnesses.’”189 Many have fretted that the Arbitration Fairness Act, recently reintroduced by Senator Al Franken, would have the opposite effect in the United States.190 � Subject Specific Not only does arbitration clause usage vary based on forum and law choices, it varies by dispute. Drahozol’s review of arbitration literature led him to identify “several types of disputes for which parties might well prefer litigation to arbitration: high stakes (“bet-the-company”) disputes, in which the parties may fear an aberrational arbitration award subject only to limited judicial review; disputes in which the parties anticipate needing emergency relief, which arbitration is ill-suited to provide; and disputes in areas with clear and well developed law and contract terms, because the industry expertise of arbitrators is of less value and the limited judicial review in arbitration is more problematic.”191 Although arbitration providers have made provisions for emergency relief, it is often carved out of arbitration agreements.192 �� Jury and Class Waiver Arbitration “super” clauses are often critiqued as nothing more than jury waivers shrouded in federal preemption. Particularly in national contracts, drafters will opt for the single standard of the FAA rather than perform a state-by-state jury waiver analysis.193 As a result, pre-dispute arbitration clauses have become common in consumer contracts, especially in the telecommunications and financial services industries.194 Jury trials are also more frequently waived in consumer and employment disputes than in material business-to-business (“B2B”) contracts.195 This is consistent with RAND’s finding that the risk of “excessive or emotionally driven jury awards encourages including arbitration clauses in B2B contracts (75%).196 Yet, by constitutional dictate, juries decide the 44 THE RETURN RETURNTO TOTABLE TABLEOF OFCONTENTS CONTENTS Advocate most complex cases – whether someone shall live or die in a capital case.197 Perhaps class waivers are even more important to contract drafters. Even before Concepcion, Sherwin noted that “[e]very consumer contract with a mandatory arbitration clause also included a waiver of the right to participate in class-wide arbitration, and 60 percent of consumer contracts with mandatory arbitration clauses provided that in the event of class arbitration, the arbitration clause would no longer be effective.”198 So the drafters only wanted arbitration if it precluded class relief. This data, according to the authors, lent “support to the argument that a significant motive for mandatory arbitration clauses in consumer contracts is to prevent aggregation of consumers’ claims.”199 As Eisenberg concluded from another study, “Our data suggests that the frequent use of arbitration clauses in the same firms’ consumer contracts may be an effort to preclude aggregate consumer action rather than, as often claimed, an effort to promote fair and efficient dispute resolution.”200 Since arbitration “superclauses” are protected by a strong federal policy, these waiver clauses seemed like calculated bets that paid off in Concepcion. In AT&T Mobility LLC v. Concepcion, the Concepcions entered into a contract for the sale and servicing of cellular telephones with AT&T. That contract “provided for arbitration of all disputes between the parties, but required that claims be brought in the parties’ ‘individual capacity, and not as a plaintiff or class member in any purported class or representative proceeding.” 201 The Concepcions later filed a complaint in the Northern District of California alleging false advertising and fraud because AT&T charged sales tax on a “free” phone. That action was consolidated into a putative class action. AT&T moved to compel arbitration. Relying on California’s Discover Bank rule, the trial court found that “the arbitration provision was unconscionable because AT&T had not shown that bilateral arbitration adequately substituted for the deterrent effects of class actions.” 202 The Ninth Circuit also found the class waiver in the arbitration provision to be unconscionable under Discover Bank. Finding, again, that the FAA was “designed to promote arbitration,” embodied a “national policy favoring arbitration,” and a “liberal federal policy favoring arbitration agreements,” 203 the Supreme Court found that Discover Bank interfered with the FAA. So the Court held that the FAA preempted it. In doing so, the Court found that “the times in which consumer contracts were anything but adhesion are long past.” 204 The dissent argued that Discover Bank “‘applies equally to class action litigation waivers in contracts without arbitration agreements as ✯ Fall 2011 it does to class arbitration waivers’” and, therefore, does not discriminate against arbitration or offend the FAA.205 � Subject Matter Complexity Subject matter complexity in B2B contracts encourages general counsel to use arbitration (59%).206 But while Eisenberg and Miller found that the subject matter of the contract does correlate with ex ante use of arbitration clauses, that decision did not turn on contract complexity.207 Employment (37%) and licensing (33%) bested even international contract (20%) usage and use in settlement agreements (17%), and merger agreements (19%) topped the average (11%) in the material contracts they studied.208 In another study, almost 90% of international joint venture contracts included arbitration clauses.209 “[O]ver three-quarters of consumer agreements provided for mandatory arbitration but less than 10% of the firms’ material non-consumer, non-employment contracts included arbitration clauses,” in another Eisenberg study.210 � Rise of Specialized (Often Business) Courts Some states are developing specialized courts that deal with complex matters. Federal courts are also trying specialized courts, like H.R. 628 that allowed the Administrative Office to approve referral of patent disputes to certain judges in the Northern and Eastern Districts of Texas.211 As arbitration has become arbigation, “business courts illustrate the opposite trend – they provide an example of litigation become more like arbitration, what might be called the “arbitralization” of litigation.”212 Business courts are typically divisions of larger courts, “presided over by only a few specialist judges,” with an “emphasis on aggressive case management and the use of alternative dispute resolution.”213 In 1997, an ad hoc committee of the ABA recommended that all states consider adopting some form of business court: “the movement toward specialized business courts” is “gaining strength,” and “that there appears thus far to be no criticisms in jurisdictions where business courts have been established.”214 The number of states with business or complex litigation courts went from one in 1992 to 19 in 2008.215 Studies of those courts have found that “creation of a business court tends to reduce how long it takes to resolve disputes.”216 Drahozol concludes that the “future of arbitration depends not only on arbitration but also on its competitors – the public courts, including business courts.”217 While he would expect business courts to make litigation more attractive, the empirical evidence available at the time did not “show any significant move away from arbitration to business courts.”218 New York has created a commercial division to compete with Delaware Chancery Courts. “Chief Judge Judith Kaye explained that the purpose THE RETURN RETURNTO TOTABLE TABLEOF OFCONTENTS CONTENTS Advocate ✯ Fall 2011 45 of the commercial division is to give the New York business community a level of judicial service ‘commensurate with its status as the world financial capital.’”219 a matter.”226 Striking a familiar cord, Stipanowich claims that the most notable “trial-like approach in arbitration involves discovery.”227 Gap Between Arbitration Expectations and Experience Markers favoring arbitration create high expectations, which are tough to meet. Professor Stipanowich has studied the criticisms of arbitration and authored the College of Commercial Arbitrators’s Protocols for dealing with them. In two award winning articles, he explores what arbitration providers and users can do to bring arbitration back from the precipice.220 Several of the reasons he finds for the separation between expectations and experience can be closed with nuanced advice from litigators during deal formation. Stipanowich observes that most companies are reactive and ad hoc in dealing with conflict and, therefore, miss the opportunity to manage it before the contract is negotiated and drafted. He further notes that “many transaction lawyers have little experience in mediation, arbitration, or other forms of dispute resolution” and that may factor into the drafting effort.221 Harrell observes that “parties rarely give sufficient consideration to how that arbitration will work. Their image of arbitration as a non-litigation panacea that will save time and money in the event of future disputes is often shattered when they realize that they put too little thought into how to shape resolution of those future disputes. That lack of planning often causes arbitration to cost more than, and take longer than, the default litigation would have required.”222 The antidote then is to seek nuanced advice – often from litigators – that fits the forum to the fuss. Stipanowich calls it moving beyond “one-size-fits-all arbitration” to “fit the process to priorities”: “no single set of commercial arbitration procedures can effectuate all of the goals that are important to business users in different kinds of cases.”228 With increased frequency, a component of that advice is the inclusion of mediation in a step-clause (negotiation, mediation, and then binding arbitration).229 Stipanowich offers a number of successful examples in his lengthy articles. Of course, it’s always hard to focus on how a divorce would be conducted in the middle of courtship. So “parties intent on sealing a deal are reluctant to dwell on the subject of relational conflict.”223 The easy answer, then, is plugging the standard clauses of various arbitration providers into the contract, which unsurprisingly adopt their procedural rules, and reduces the likelihood of friction with the other side during negotiation – but not later. “But while drafters seeking guidance from the websites of institutions sponsoring arbitration have a seemingly wide variety of choices, few readily available and reliable guideposts exist that dependably link specific process alternatives to the varying goals and expectations parties may bring to arbitration.”224 Stipanowich notes that in light of concerns about discovery and finality, providers are offering clauses for expedited case handling and appellate tribunal review.225 The problem is often magnified when a dispute arises under general clauses. According to the general counsel of FMC Technologies, “Arbitration is often unsatisfactory because litigators have been given the keys . . . and they run it exactly like a piece of litigation. It’s the corporate counsel’s fault [for] simply turning over the keys to Choice of Arbitration Provider All arbitration providers are sensitive to these criticisms and are repeatedly holding training sessions for their arbitrators. They are also modifying rules and adding commentaries, like this one in the CPR Rules: Arbitration is not for the litigator who will ‘leave no stone unturned.’ Unlimited discovery is incompatible with the goals of efficiency and economy. The Federal Rules of Civil Procedure are not applicable. Discovery should be limited to those items [for] which a party has a substantial, demonstrable need.230 It matters whether an arbitration is administered by a provider or self-administered by arbitrators selected from a panel. Both models include fees for the arbitrators. Administered cases also include administrative fees for the arbitral institution, which often scale based on the amount of the claim.231 Other models do not include up-front filing fees, but charge arbitrators a percentage of their hourly fee.232 The fees charged by some providers and arbitrators are a frequent source of criticism, especially relative to subsidized courts.233 Colvin found the average fee resulting from AAA administered employment cases to be $11,070, though AAA shifts the bulk of those costs to employers using its services.234 Administrative fees in construction cases can run high and have been repeatedly tested by homeowners.235 And Drahozol found “dissatisfaction with the rules and costs of the AAA” among franchisors.236 Therefore, it matters which, if any, provider is selected and, like litigation, the individual arbitrators form the process.237 � Control Arbitrator Qualifications A super-majority of RAND “respondents indicated that the ability to control the arbitrator’s qualifications encouraged the use of contractual arbitration (69%).238 While that is consis- 46 THE RETURN RETURNTO TOTABLE TABLEOF OFCONTENTS CONTENTS Advocate tent with the history of arbitration in the merchant context, some of the interviewees threaded this marker back through the jury waiver component: “companies do not want juries to try to interpret complex contracts in the course of reaching a verdict, so arbitrators with experience in contract law are better equipped to rule correctly.”239 Some interviewees said that “industry knowledge is a more important qualification because of the technical nature of disputes.”240Another study of FINRA arbitrations concludes that “arbitrators who represent brokerage firms or brokers in other arbitrations award significantly less compensation to investor-claimants than do other arbitrators.”241 Yet, they found “no significant effect for attorney-arbitrators who represent investors or both investors and brokerage firms.”242 � Active Management of Cases In response to the criticisms above, arbitration providers are encouraging more comprehensive early status conferences with party representatives in attendance. There, if not before by agreement, choices are made between more process, and its expense, or more carefully tailored proceedings. As Harrell notes, “discovery is the area in arbitration where parties can exercise the greatest cost savings.”243 He goes on to offer some specific items that parties can limit or define in their arbitration agreements, or after the fact in status conference agreements, that are adapted here: 1. Mediation. Some providers will incorporate mediation into the process. Parties also write mediation into Step-Clauses that require that step prior to filing an arbitration demand. 2. Disclosure. Federal-type disclosures (parties, persons with knowledge, documents, damages). 3. Documents. Documents to be exchanged and timing for exchange. In some instances, parties must provide documents upon making a demand for arbitration and in responding to that demand. 4. Depositions. The number and length of depositions, types of depositions (individuals, third-parties, or corporate representatives), and the total time for depositions. 5. Written Discovery. Other forms of written discovery, such as interrogatories or requests for admissions. 6. Experts. The use of experts, including the time for designation and number of experts. 7. Timing. Specific deadlines to respond to the claimant’s demand, engage in discovery, select a neutral or panel, file motions and have them heard, and hold hearings and issue awards. 8. Evidence. Since arbitration awards can be vacated ✯ Fall 2011 for failure to hear evidence, its often futile to attempt to restrict or define the types of evidence admitted at an arbitration hearing. 9. Remedies. Is the arbitrator prohibited from issuing injunctive relief or allowed to make such an award? Does seeking injunctive relief in court waive arbitration? What about punitive damage and trebling awards? Would limiting the remedies otherwise available in court tip the unconscionability scales? What quality and level of evidence would be required? Can the panel award attorneys’ fees? 10. Award Type. What type of award do the parties want? A simple award would resemble a final judgment while a reasoned award would require findings and conclusions. 11. Appellate Review. What, if any, appellate remedies are available? Judicial review under the TAA to the full extent of the court’s power? Abuse of discretion? Appellate arbitral panel? Providers are training arbitrators to streamline cases, much as the federal courts have done through the case management changes. Surveys show support for increased case management from an early stage.244 Bench Trials Several commentators have wondered why parties do not just waive a jury and proceed with a bench trial in lieu of litigating arbitration and then arbitrating or not. Harrell notes the advantages of selecting a forum and waiving a jury: it preserves an appeal, reduces costs, fixes venue, minimizes pre-dispute litigation, and preserves ancillary relief.245 CPR, a New York-based ADR think-tank that maintains a roster of neutrals but does not administer arbitrations, has published “The Model Civil Litigation Prenup” in an effort to allow streamlined bench trials.246 The Economical Litigation Agreement provides a nice list of drafting considerations, including discovery that scales with the size of the dispute, for any dispute resolution clause. �� Mediation Mediation has benefited from dissatisfaction with arbitration and litigation. Mediation provides a high degree of control to the parties and counsel over process and product, and that control translates into creative solutions that a court might not even be able to fashion as a remedy. Stipanowich calls “mediation the equivalent of a multi-functional Swiss-Army knife” among dispute resolution options.247 One general counsel, when asked why her company had turned from arbitration to mediation, responded: “Speed, cost, and THE RETURN RETURNTO TOTABLE TABLEOF OFCONTENTS CONTENTS Advocate control.”248 Lament about the public and private dispute resolutions systems has translated into an “explosion of mediation.”249 Survey “respondents strongly believed that mediation lowered cost and time to resolution, and either increased the likelihood of a fair outcome or made no difference as to fairness.”250 Lipsky and Seeber found that companies use mediation because it saves time (80.1%), money (89.1%), and preserves good relationships (58.7%).251 And Professor Gross’s class found that companies had required or strongly incentivized mediation prior to arbitration or litigation.252 As a result, many arbitration providers are enhancing their mediation panels and encouraging mediation during the pre-hearing conference. � Settlement Counsel It’s often tough to be the zealous advocate and be tasked with settlement. In fact, peace is rarely negotiated among the generals conducting the war. Some have advocated similarly separating duties in litigation or arbitration.253 By separating the functions, much like solicitors and barristers in the United Kingdom, one corporate representative noted that perhaps we “would reach a wiser decision if we had one lawyer develop the case for litigation and a different lawyer press on us the case for settlement.”254 Conclusion – Dispute Resolution is About Choice Not that long ago, we had one choice in telephones – black – and one choice in service providers. The same was true of dispute resolution in the same era. Now there are lots of choices and users can thin-slice their options. Choosing arbitration is no longer the end of the inquiry. There are a variety of different providers, rules, panels, and options. Just as litigation has venue and law selection, jury waivers, and motions for summary adjudication, parties can tailor procedures to business goals and priorities – almost like choosing lunch items off of a menu. Contract drafters now have the option of how much discovery they want, how many arbitrators will hear the matter in the first instance, and how many, if any, will review that award and by what standard. Some of us prefer flip phones and others need smart phones. But then there’s platform and apps. So, too, with dispute resolution system design. Why wouldn’t the lawyers drafting the deals that might become tomorrow’s disputes seek the advice of the pros who do that every day as they put their deals together? Don Philbin, J.D., M.B.A., LL.M., is an AV-rated attorneymediator, arbitrator, negotiation consultant, and software publisher. He is an adjunct professor at Pepperdine Law’s Straus Institute for Dispute Resolution and an elected Fellow ✯ Fall 2011 47 of the A merican Academy of Civil Trial Mediators, the International Academy of M ediators, and the National Academy of Distinguished Neutrals. O 1 AT&T v. Concepcion, 131 S.Ct. 1740 (Apr. 27, 2011). NAFTA Traders, Inc. v. Quinn, 339 S.W.3d 84 (Tex., May 13, 2011). 3 Harvard Professor Frank A.E. Sander proposed a “multi-door courthouse” where disputants would not all have to stand in the same line for litigation, but would be offered a range of alternatives from mediation to arbitration (binding or non-binding) to case evaluations or summary jury and mini-trials. Frank A.E. Sander, Varieties of Dispute Processing, 70 F.R.D. 111 (1976). 4 For a figure depicting dispute resolution options, see Donald R. Philbin, Jr., The One Minute Manager Prepares for Mediation: A Multidisciplinary Approach to Negotiation Preparation, 13 H arv. Negot. L. R ev. 249, 308 (2008), updated at Donald R. Philbin, Jr., ADR Decision Tree: Fit The Forum to the Specific Fuss, http://www. adrtoolbox.com/decision-resources/adr-decision-tree/ (last visited on Jul. 17, 2011). 5 SCOTUS blog (Apr. 27, 2011), http://www.scotusblog.com/ case-files/cases/att-mobility-v-concepcion/ (last visited on July 17, 2011). 6 Paul Krigis, Supreme Court Allows Companies to Opt Out of Class Actions, http://www.indisputably.org/?p=2313 (last visited on Jul. 17, 2011); Sarah Cole, Continuing the Discussion of the AT&T v. Concepcion Decision: Implications for the future, http://www.indisputably. org/?p=2312 (last visited on Jul. 17, 2011). For a nuanced discussion of drafting tips following these cases, see State Bar of Texas CLE, Arbitration Clause Drafting and Practice in the Wake of AT&T Mobility v. Concepcion (webcast), available at http://www.texasbarcle.com/ CLE/AALEGALSPANTRANSFER.ASP?lEventID=10677&Semina rID=10677&lContactID=116062&sStatus=OOO%20Title=. (last visited on Jul. 17, 2011). 7 Hall Street Associates v. Mattel, Inc., 552 U.S. 576 (2008). 8 Douglas Shontz, Fred Kipperman & Vanessa Soma, Businessto-Business Arbitration in the United States, RAND (2011), available at http://www.rand.org/content/dam/rand/pubs/technical_reports/2011/RAND_TR781.pdf, at 20. 9 S.B. Goldberg, F.E.A. Sander & N.H. Rogers, A rbitration, Dispute R esolution: Negotiation, Mediation, and Other P rocesses 233 (3rd ed. 1991). 10 Donald R. Philbin, Jr., Trends in Litigating Arbitration: Using Motions to Compel Arbitration and Motions to Vacate Arbitration Awards, 76 Def. Couns. J. 338, 338 (2009). 11 Tex. Const. of 1845, art. VII, § 15 (“It shall be the duty of the Legislature, to pass such laws as may be necessary and proper, to decide differences by arbitration, when the parties shall elect that method of trial.”). 12 Alternative Dispute Resolution Section of the State Bar of Texas, White Paper on Arbitration 1, available at http://www.texasadr.org/ pdf/white_paper_arbitration_adr_sectin.pdf (2008). 13 Theodore Eisenberg & Geoffrey P. Miller, The Flight from Arbitration: An Empirical Study of Ex Ante Arbitration Clauses in the Contracts 2 48 THE RETURN RETURNTO TOTABLE TABLEOF OFCONTENTS CONTENTS Advocate of Publicly Held Companies, 56 DePaul L. R ev. 335, 341-42 (2007). 14 Jeffrey W. Stemple, A Better Approach to Arbitrability, 65 Tul. L. R ev. 1377, 1380 (1991). 15 Kevin M. Clermont & Theodore Eisenberg, Litigation Realities, 88 Cornell L. R ev. 119 (2003); Kevin M. Clermont, Litigation Realities Redux, 84 Notre Dame L. R ev. 1919 (2009). It’s worth noting that the highly respected Journal of Empirical L egal Studies is housed at Cornell, where Eisenberg serves as its editor. 16 Theodore Eisenberg & Elizabeth T. Hill, Employment Arbitration and Litigation: An Empirical Comparison (NYU Law School, Public Law Research Paper No. 65, 2003; Cornell Law School Working Paper, 2003), available at http://ssrn.com/abstract=389780 or DOI: 10.2139/ ssrn.389780 (2003); Eisenberg & Miller, supra note 14; Theodore Eisenberg, Geoffrey P. Miller & Emily Sherwin, Mandatory Arbitration for Customers But Not Peers: A Study of Arbitration Clauses in Consumer and Non-Consumer Contracts, 92 Judicature 118 (2009); Theodore Eisenberg, Geoffrey P. Miller & Emily Sherwin, Arbitration’s Summer Soldiers: An Empirical Study of Arbitration Clauses in Consumer and Nonconsumer Contracts, 41 U. Mich. J.L. R eform 871 (2008). 17 Theodore Eisenberg & Geoffrey P. Miller, The Flight to New York: An Empirical Study of Choice of Law and Choice of Forum Clauses in Publicly-Held Companies’ Contracts, 30 C ardozo L. R ev. 1475 (2009). 18 Id. at 1482-83. 19 AT&T v. Concepcion, 131 S.Ct. 1740, 1745 (Apr. 27, 2011). 20 Stemple, supra note 15, at 1381. 21 Concepcion, 131 S.Ct. at 1748, quoting Volt Info. Scis. v. Bd. of Trs., 489 U.S. 468, 478 (1989). 22 Jeffrey W. Stemple, Arbitration, Unconscionability, and Equilibrium: The Return of Unconscionability Analysis as a Counterweight to Arbitration Formalism, 19 Ohio St. J. Disp. R esol. 757, 760 (2004). 23 Southland v. Keating 465 U.S. 1 (1984). Roger P. Alford, The American Influence on International Arbitration, 19 Ohio St. J. Disp. R esol. 69, 85 (2004). 24 Moses H. Cone Mem’l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24 (1983); Justice O’Connor dissented in Southland (the legislative history of the FAA “establishes conclusively that the 1925 Congress viewed the FAA as a procedural statute”, Southland, 465 U.S. at 25) and Justices Scalia and Thomas dissenting in Allied-Bruce Terminix Co., Inc. v. Dobson, 513 U.S. 265, 286 (1995) (“Whether an agreement for arbitration shall be enforced or not is a question of procedure . . . and not one of substantive law”). 25 Southland, 465 U.S. at 12; Allied-Bruce, 513 U.S. at 272 & 277; Preston v. Ferrer, 552 U.S. 346, 349 (2008); see also Philbin, supra note 11, at 338-39. 26 Southland, 465 U.S. at 10. 27 Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 626 (1985). 28 Green Tree Fin. Corp. v. Randolph, 531 U.S. 79, 88-92 (2000). 29 Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20, 29 (1991). 30 Rodriguez de Quijas v. Shearson/Am. Express, Inc., 490 U.S. 477, 479-86 (1989) and Shearson Am. Express, Inc. v. McMahon, 482 U.S. 220, 227-40 (1987). 31 Mitsubishi Motors, 473 U.S. at 628-40. ✯ Fall 2011 32 Prima Paint Corp. v. Flood and Conklin Mfg. Co., 388 U.S. 395, 398 (1967). 33 American Employers Ins. Co. v. Aiken, 942 S.W.2d 156 (Tex. App. – Fort Worth 1997, no writ). 34 Prudential Securities, Inc. v. Marshall, 909 S.W.2d 896 (Tex. 1995). 35 In re Sun Communications, Inc., 86 S.W.3d 313 (Tex. App. – Austin 2002, orig. proceeding). 36 In re Labatt Food Serv., L.P., 279 S.W.3d 640 (Tex. 2009) (agreement contained within employee benefits plan); In re Jindal Saw Ltd., 289 S.W.3d 827 (Tex. 2009). 37 In re NEXT Financial Group, 271 S.W.3d 263, 270 (Tex. 2008). 38 Gilmer v. Interstate/Johnson Lane, 500 U.S. 20 (1991). 39 Alexander J.S. Colvin, An Empirical Study of Employment Arbitration: Case Outcomes and Processes, 8 J. Empir. L egal Stud. 1 (2011). 40 Id. 41 Alford, supra note 24, at 86. 42 Eisenberg & Hill, Employment Arbitration and Litigation, supra note 17, at 1. 43 Frank H. Easterbrook, Discovery As Abuse, 69 B.U. L. R ev. 635, 645 (1989). 44 Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007). 45 The Sedona Conference, Complex Litigation XII – The Future of Civil Litigation: Legislative and Behavioral Changes, http://www. thesedonaconference.org/conferences/20100408 (last visited May 5, 2011). 46 Proceedings reported in the Special Symposium Issue: American Justice as a Crossroads: A Public and Private Crisis, 11 P epp. Disp. R esol. L.J. 1 (2010). 47 United States Courts, May Conference to Be First of Its Kind to Look at Civil Litigation in Federal Courts, http://www.uscourts. gov/news/NewsView/10-04-12/May_Conference_to_Be_First_of_ Its_Kind_to_Look_at_Civil_Litigation_in_Federal_Courts.aspx (last visited on May 2, 2011), proceedings reported in the Special Symposium Issue: 2010 Civil Litigation Review Conference, Volume 60, Number 3 of the Duke L.J. (2010). 48 American Bar Association Litigation Section, ABA Section of Litigation Member Survey on Civil Practice: Detailed Report, 159 (2009), http://www.abanet.org/litigation/survey/docs/detail-aba-report.pdf. 49 EMERY G. LEE III & THOMAS E. WILLGING, FED. JUDICIAL CTR., NATIONAL, CASEBASED CIVIL RULES SURVEY: PRELIMINARY REPORT TO THE JUDICIAL CONFERENCE ADVISORY COMMITTEE ON CIVIL RULES (2009), available at http://www.fjc.gov/public/pdf.nsf/lookup/dissurv1.pdf/$file/dissurv1.pdf (last visited on May 3, 2011); see also EMERY G. LEE III & THOMAS E. WILLGING, FED. JUDICIAL CTR., LITIGATION COSTS IN CIVIL CASES: MULTIVARIATE ANALYSIS: REPORT TO THE JUDICIAL CONFERENCE ADVISORY COMMITTEE ON CIVIL RULES 2–4 (2010)], available at http:// www.fjc.gov/public/pdf.nsf/lookup/costciv1.pdf/$file/costciv1.pdf (last visited on May 3, 2011); THOMAS E. WILLGING & EMERY G. LEE III, FED. JUDICIAL CTR., IN THEIR WORDS: ATTORNEY VIEWS ABOUT COSTS AND PROCEDURES IN FEDERAL CIVIL THE RETURN RETURNTO TOTABLE TABLEOF OFCONTENTS CONTENTS Advocate LITIGATION 1–2 (2010), available at http://www.fjc.gov/public/ pdf.nsf/lookup/costciv3.pdf/$file/costciv3.pdf (last visited on May 3, 2011). 50 JAMES N. DERTOUZOS, NICHOLAS M. PACE & ROBERT H. ANDERSON, RAND INST. FOR CIVIL JUSTICE, THE LEGAL AND ECONOMIC IMPLICATIONS OF ELECTRONIC DISCOVERY: OPTIONS FOR FUTURE RESEARCH 3 (2008), available at http:// www.rand.org/content/dam/rand/pubs/occasional_papers/2008/ RAND_OP183.pdf. 51 LAWYERS FOR CIVIL JUSTICE, CIVIL JUSTICE REFORM GRP. & U.S. CHAMBER INST. FOR LEGAL REFORM, LITIGATION COST SURVEY OF MAJOR COMPANIES 6–7 (2010), available at http:// civilconference.uscourts.gov/LotusQuickr/dcc/Main.nsf/$defaultvi ew/33A2682A2D4EF700852577190060E4B5/$File/Litigation%20 Cost%20Survey%20of%20Major%20Companies.pdf. 52 See AM. COLL. OF TRIAL LAWYERS & INST. FOR THE ADVANCEMENT OF THE AM. LEGAL SYS., FINAL REPORT ON THE JOINT PROJECT OF THE AMERICAN COLLEGE OF TRIAL LAWYERS TASK FORCE ON DISCOVERY AND THE INSTITUTE FOR THE ADVANCEMENT OF THE AMERICAN LEGAL SYSTEM 9–10 (2009), available at http://www.actl.com/ AM/Template.cfm?Section=Home&template=/CM/ContentDisplay. cfm&ContentID=4008 (last visited on May 3, 2011). 53 Thomas J. Stipanowich, Arbitration: The “New Litigation”, 2010 U. Ill. L. R ev. 1, 1 (2009). 54 Id. 55 Christopher R. Drahozal & Quintin R. Wittrock, Is There a Flight From Arbitration?, 37 Hofstra L. R ev. 71, 71 (2009). 56 Thomas J. Stipanowich, Arbitration and Choice: Taking Charge of the “New Litigation,” 7 DePaul Bus. & Comm. L.J. 383 (2009). 57 Id. at 384-85. 58 Stipanowich, supra note 54, at 1. 59 Id. at 4. 60 Id. at 1. 61 129 S.Ct. 1937 (2009). 62 The Honorable Royal Furgeson, email to author, dated May 1, 2011. 63 Douglas Shontz et al., supra note 9, at 25. 64 Alford, supra note 24, at 8. 65 Id. at 70 . 66 Id. 67 Proceedings reported at 19 Ohio St. J. Disp. R esol. 1 (2003). 68 Alternative Dispute Resolution Section of the State Bar of Texas, White Paper on Arbitration, available at http://www.texasadr.org/ pdf/white_paper_arbitration_adr_sectin.pdf, at p. 17 (2008). 69 Jill Gross, The decline of unconscionable arbitration provisions?, Indisputably, available at http://www.indisputably.org/?p=1900 (Dec. 8, 2010). 70 Id. 71 Id. 72 Harris Interactive Inc., A rbitration: Simpler, Cheaper, and Faster Than Litigation, A H arris Interactive Survey, conducted for the U.S. Chamber Institute for Legal Reform, April 2005 at p. ✯ Fall 2011 49 5; Thomas J. Stipanowich, Rethinking American Arbitration, 63 Ind. L.J. 425, 429 (1988). 73 Harris Interactive Inc., supra note 72, at 21. 74 David B. Lipsky and Ronald L. Seeber, The Appropriate Resolution of Corporate Disputes: A Report on the Growing Use of ADR by U.S. Corporations, http://digitalcommons.ilr.cornell.edu/ cgi/viewcontent.cgi?article=1003&context=icrpubs at 17. 75 Allied-Bruce Terminix Co., Inc. v. Dobson, 513 U.S. 265, 280 (1995); Gilmer v. Interstate/Johnson Lane, 500 U.S. 20, 31 (1991). 76 Allied-Bruce, 513 U.S. at 280, quoting H.R.R ep. No. 97-542, p. 13 (1982). 77 Theodore Eisenberg & Elizabeth Hill, Arbitration and Litigation of Employment Claims: An Empirical Comparison, Disp. R esol. J., Nov. 2003-Jan. 2004, at 51. 78 Eisenberg & Hill, Employment Arbitration and Litigation, supra note 17, at 20. 79 Id. 80 Colvin, supra note 40, at 8. 81 Douglas Shontz et al., supra note 9, at 7-10; see also Sarah R. Cole & Kristen M. Blankley, Empirical Research on Consumer Arbitration: What the Data Reveals, 113 P enn. St. L. R ev. 1051 (2009). 82 Nancy S. Kim & Chii-Dean Lin, Arbitration’s Summer Soldiers Marching Into Fall: Another Look at Eisenberg, Miller, and Sherwin’s Empirical Study of Arbitration Clauses in Consumer and Nonconsumer Contracts, 34 Vt. L. R ev. 597, 611 (2010). 83 Id. at 612. 84 Claire A. Hill, Bargaining in the Shadow of the Lawsuit, A Social Norms Theory of Incomplete Contracts, 34 Del. J. Corp. L. 191, 207 (2009). 85 Miller [Duke] at 13, fn 41, citing Has the Supreme Court Limited Americans’ Access to Courts?: Hearing Before the S. Comm. on the Judiciary, 111th Cong. 158-59 (2009) (statement of Theodore Eisenberg, Henry Allen Mark Professor of Law and Adjunct Professor of Statistical Sciences, Cornell University). 86 Douglas Shontz et al., supra note 9. 87 Harris Interactive Inc., supra note 72, at 24. 88 Lipsky & Seeber, supra note 75, at 17. 89 Theodore Eisenberg et al., Mandatory Arbitration for Customers But Not Peers, supra note 17, at 120. 90 Randall Thomas, Erin O’Hara, and Kenneth Martin, Arbitration Clauses in CEO Employment Contracts: An Empirical and Theoretical Analysis, 63 Vand. L. Rev. 959, 968 (2010) (79%); Theodore Eisenberg et al., Mandatory Arbitration for Customers But Not Peers, supra note 17, at 120 (92.9%). 91 Id. at 968. 92 Sarah Rudolph Cole, Let The Grand Experiment Begin: Pyett Authorizes Arbitration of Unionized Employees’ Statutory Discrimination Claims, 14 L ewis & Clark L. R ev. 861, 894 (2010). 93 Eisenberg & Hill, Employment Arbitration and Litigation, supra note 17, at 24. 94 Eisenberg at al., Arbitration’s Summer Soldiers, supra note 17, at 876. 95 Paul D. Carrington, Politics and Civil Procedure Rulemaking: Reflections on Experience, 60 Duke L.J. 597, 597 & 568 (2010) (“The 50 THE RETURN RETURNTO TOTABLE TABLEOF OFCONTENTS CONTENTS Advocate Supreme Court’s decisions rewriting the Federal Rules of Civil Procedure – in disregard of the role of other branches of government and to protect business interests from the costs associated with effective private enforcement of public law – should not be viewed in isolation. While the Court was rewriting Rule 56 and then Rule 8 (texts that it had promulgated in 1938) to ease the concerns of business interests, it was pursuing the same political objective in its rewriting of the Federal Arbitration Act of 1925 (FAA).”). 96 Line of Communications, Fighting on Two Fronts, 46-APR Trial 38 (2010) (“The affirmative agenda centers on access-to-justice issues like forced arbitration, and the U.S. Supreme Court decisions in Riegel v. Medtronic and Iqbal/Twombly.”); The Pop Tort.com, Concepcion v. AT&T – Here’s the Good News, http://www.thepoptort.com/2011/04/ concepcion-v-att-heres-the-good-news.html (last visited on Apr. 29, 2011). 97 Eisenberg & Hill, Employment Arbitration and Litigation, supra note 17, at 3-4, citing Lewis L. Maltby, Private Justice: Employment Arbitration and Civil Rights, 30 Colum. Hum. Rts. L. R ev. 29, 31 (1998). 98 Eisenberg & Hill, Employment Arbitration and Litigation, supra note 17. 99 Id. at 14. 100 Id. 101 Id. 102 Colvin, supra note 40, at 6. 103 Alternative Dispute Resolution Section of the State Bar of Texas, White Paper on Arbitration, available at http://www.texasadr.org/ pdf/white_paper_arbitration_adr_sectin.pdf, at p. 15 (2008). 104 Eisenberg & Hill, Employment Arbitration and Litigation, supra note 17, at 18. 105 Id. 106 Id. 107 Colvin, supra note 40, at 7. 108 Id. at 11. 109 Id. 110 Id. at 6. 111 Eisenberg & Hill, Employment Arbitration and Litigation, supra note 17, at 4. 112 Perry Homes v. Cull , 258 S.W.3d 580 (Tex. 2007). 113 Id. at 585. 114 Sandra Baker, Jury Awards $58 million to Mansfield couple in home builder lawsuit, Fort Worth Star Telegram (Mar. 3, 2010), available at http://www.star-telegram.com/2010/03/02/2009758/ jury-awards-58-million-to-mansfield.html. 115 Al Franken, Jamie Leigh Jones Amendment, U.S. Senate, available at http://franken.senate.gov/?p=issue&id=211 (last visited Jul. 17, 2011). 116 Michael Graczyk, Texas woman loses Iraq rape case against KBR, AP (Jul. 8, 2011), available at http://www.google.com/hostednews/ ap/article/ALeqM5iSQK-HiUKlfcp84B7pOOtXjiBE8w?docId=4d4 7787e929444ef8e39b0412b5d0dc1; see also Jones v. Halliburton Co, 583 F.3d 228 (5th Cir. 2009). 117 Douglas Shontz et al., supra note 9, at 26. 118 Colvin, supra note 40, at 11. ✯ Fall 2011 119 Id. Id. at 12. 121 Id. at 13-14. 122 Id. at 14. 123 Douglas Shontz et al., supra note 9, at 8. 124 Id. 125 9 U.S.C. § 10(a). 126 Stipanowich, supra note 57, at 433. 127 Stipanowich, supra note 54, at 18. 128 Lawrence R. Mills, et al., Vacating Arbitration Awards, Disp. R es. M ag., Summer 2005, at 23. 129 Id. at 26. 130 Richard A. Posner, Judicial Behavior and Performance: An Economic Approach, 32 Fla. St. U. L. R ev. 1260-61 (2005). 131 Douglas Shontz et al., supra note 9, at 11. 132 Christopher R. Drahozal, Busting Arbitration Myths, 56 U. K an. L. R ev. 663, 675-76 (graphs) 2008), citing Stephanie E. Keer & Richard W. Naimark, Arbitrators Do Not “Split the Baby”: Empirical Evidence from International Business Arbitrations, 18 J. Int’l A rb. 573 (2001). 133 Douglas Shontz et al., supra note 9, at 11. 134 Id. at 18-19. 135 Id. at 19; AT&T v. Concepcion, 131 S.Ct. 1740, 1749 (Apr. 27, 2011). 136 Stipanowich, supra note 57, at 442. 137 Douglas Shontz et al., supra note 9, at 19. 138 Colvin, supra note 40, at 3. 139 Colvin, supra note 40, at 22. 140 Douglas Shontz et al., supra note 9, at x. 141 Richard M. Alderman, The Future of Consumer Law in the United States – Hello Arbitration, Bye-Bye Courts, So-Long Consumer Protection, in The Yearbook of Consumer L aw (Deborah Parry et al. eds., 2009), available at http://papers.ssrn.com/sol3/papers. cfm?abstract_id=1015517. 142 Manufacturing Co. v. Barnes, 741 S.W.2d 349 (Tex. 1987). 143 Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp., 130 S.Ct. 1758 (2010). 144 United States Court of Appeals for the Fifth Circuit, Judicial Workload Statistics (2009-10), available at http://www.ca5. uscourts.gov/clerk/docs/arstats.pdf at 9-10. 145 David A. Hoffman, Alan J. Izenman, and Jeffrey R. Lidicker, Docketology, District Courts, and Doctrine, 85 Wash. U. L. R ev. 681, 702 (2007-2008); 146 Id. at 702. 147 Id. at 682; see also Allan D. Vestal, Reported Opinions of the Federal District Courts: Analysis and Suggestions, 52 Iowa L. R ev. 379 (1966); Allan D. Vestal, Reported Federal District Court Opinions: Fiscal 1962, 4 Hous. L. R ev. 185 (1966); Allan D. Vestal, A Survey of Federal District Court Opinions: West Publishing Company Reports, 20 Sw. L.J. 63 (1966); Allan D. Vestal, Publishing District Court Opinions in the 1970s, 17 Loy. L. R ev. 673 (1970). 148 SCOTUSblog Stat Pack, October Term 2010, at 3 (Jun. 28, 2011), available at http://sblog.s3.amazonaws.com/wp-content/ uploads/2011/06/SB_OT10_stat_pack_final.pdf. 120 149 THE RETURN RETURNTO TOTABLE TABLEOF OFCONTENTS CONTENTS Advocate Douglas Shontz et al., supra note 9, at 20. Alan Scott Rau, Contracting Out of the Arbitration Act, 8 A m. R ev. Int’l A rb. 225, 245 (1997). 151 Drahozal & Wittrock, supra note 56, at 79-80. 152 Gateway Technologies, Inc. v. MCI Telecommunications Corp., 64 F.3d 993, 996 (5th Cir. 1995). 153 Hall Street Associates v. Mattel, Inc., 128 S. Ct. 1396 (2008). 154 Id. at 1405-08. 155 Stipanowich, supra note 57, at 447. 156 Citigroup Global Markets, Inc. v. Bacon, 562 F.3d 349, 355 (5th Cir. 2009). 157 Tex. Civ. P rac. & R em. Code §§ 171.001-.098. 158 NAFTA Traders, Inc. v. Quinn, 339 S.W.3d 84 (Tex., May 13, 2011). 159 Id. at 9. 160 Id. at 2. 161 Id. at10-11. 162 Id. at 19-22. 163 Olshan Foundation at 899 (“When an agreement specifically states that it is to be governed by the Texas General Arbitration Act, we hold that it will be governed by the Act . . . .). 164 Tex. Civ. P rac. & R em. Code § 171.002(a)(2). 165 Douglas Shontz et al., supra note 9, at 20-21; Stipanowich, supra note 57; see also CPR Arbitration Appeal Procedure and Commentary, http://www.cpradr.org/Resources/ALLCPRArticles/ tabid/265/ArticleType/ArticleView/ArticleID/604/Default.aspx; JAMS Optional Arbitration Appeal Procedure, http://www.jamsadr.com/ rules-optional-appeal-procedure/, AAA Appeal, http://www.adr. org/si.asp?id=4125. 166 Richard A. Posner, The Law and Economics of Contract Interpretation, 83 Tex. L. R ev. 1581, 1608 (2005). 167 Hill, supra note 85, at 217. 168 Posner, supra note 167, at 1583. 169 Clermont & Eisenberg, supra note 16, at 121. 170 Id. at 122 (2002-2003), citing Kevin M. Clermont & Theodore Eisenberg, Do Case Outcomes Really Reveal Anything About the Legal System? Win Rates and Removal Jurisdiction, 83 Cornell L. R ev. 581 (1998). 171 Clermont & Eisenberg, supra note 16, at 123. 172 Clermont, supra note 16, at 1927. 173 David E. Harrell, Jr., Developing Alternative Dispute Resolution Programs, State Bar of Texas A dvanced Business L aw Seminar at 10 (Jul. 14, 2011), citing Tex. Civ. P rac. & R em. Code A nn. § 15.020(b). 174 Id. 175 Id. 176 Lucille M. Ponte, Boosting Confidence in E-Business: Recommendations for Establishing Fair and Effective Dispute Resolution Programs for B2C Online Transactions, 12 A lb. L.J. Sci. & Tech. 441, 450 (2002). 177 Eisenberg & Miller, supra note 14, at 358. 178 Id. at 354. 179 Eisenberg & Miller, supra note 18, at 1475-76. 180 In re L & L Kempwood Associates, L.P., 9 S.W.3d 125, 127-28 (Tex. 1999). 150 ✯ Fall 2011 181 51 Harrell, supra note 174, at 10, citing J.M. Davidson, Inc. v. Webster, 49 S.W.3d 507, 515 (Tex. App. – Corpus Christi 2011). 182 Eisenberg & Miller, supra note 14, at 358-59. 183 Id. at 362. 184 Id. at 355. 185 Id. at 369. 186 Id. at 370-71. 187 Id. 188 Id. at 344; Mastrobuono v. Shearson Lehman Hutton, Inc., 514 U.S. 52, 63-64 (1995). 189 Drahozal, supra note 133, at 667. 190 Edna Sussman, The Unintended Consequences of the Proposed Arbitration Fairness Act, 56-M ay Fed. L aw. 48, 57 (2009); see also Jeffrey Adams, The Assault of Jamie Leigh Jones: How One Woman’s Horror Story is Changing Arbitration in America, 11 P epp. Disp. R esol. L.J. 253 (2011). 191 Christopher R. Drahozal & Stephen J. Ware, Why Do Businesses Use (or Not Use) Arbitration Clauses?, 25 Ohio St. J. Disp. R esol. 433, 436 (2010). 192 For the rare case in which invoking the judicial process amounts to waiver of arbitration, see Perry Homes v. Cull, 258 S.W.3d 580 (Tex. 2008). 193 See, e.g., In re Bank of America, N.A., 278 S.W.3d 342 (Tex. 2009). 194 Douglas Shontz et al., supra note 9, at 2. 195 Theodore Eisenberg et al., Mandatory Arbitration for Customers But Not Peers, supra note 17, at 122. 196 Douglas Shontz et al., supra note 9, at 15. 197 Eisenberg & Hill, Employment Arbitration and Litigation, supra note 17, at 1. 198 Theodore Eisenberg et al., Mandatory Arbitration for Customers But Not Peers, supra note 17, at 121. 199 Id. at 122. 200 Eisenberg at al., Arbitration’s Summer Soldiers, supra note 17, at 871. 201 AT&T v. Concepcion, 131 S.Ct. 1740, 1744 (Apr. 27, 2011). 202 Id. at 1745. 203 Id. at 1749. 204 Id. at 1750. 205 Id. at 1757. 206 Douglas Shontz et al., supra note 9, at 19. 207 Eisenberg & Miller, supra note 14, at 350. 208 Id. at 350-51. 209 Christopher R. Drahozal & Richard W. Naimark, Towards A Science of International A rbitration: Collected Empirical R esearch 59 (2005). 210 Eisenberg at al., Arbitration’s Summer Soldiers, supra note 17, at 871 & 876. 211 http://w w w.law.com /jsp/t x / P ubA r ticleT X.jsp?hu b t y p e =Tx C a s e A l e r t & i d =1 2024 9 6 6 81762 & s r c= E MC Email&et=editorial&bu=Texas%20Law yer&pt=Texas%20 Daily%20Case%20Alert&cn=Daily%20News%20and%20Case%20Alert%2C%20June%209%2C%202011&kw=Eastern%20 and%20Northern%20Districts%20of%20Texas%20to%20Par- 52 THE RETURN RETURNTO TOTABLE TABLEOF OFCONTENTS CONTENTS Advocate ticipate%20in%20Patent%20Suit%20Pilot%20Program&slreturn=1&hbxlogin=1 212 Christopher R. Drahozal, Business Courts and the Future of Arbitration, 10 Cardozo J. Conflict Resol. 491, 492 (2008-2009). 213 Id. at 494. 214 Benjamin F. Tennille, Lee Applebaum & Anne Tucker Nees, Getting to Yes in Specialized Courts: The Unique Role of ADR in Business Court Cases, 11 P epp. Disp. R esol. L.J. 35, 38 n.10 (2010). 215 Drahozal, supra note 213, at 495. 216 Id. at 498. 217 Id. at 507. 218 Id. 219 Eisenberg & Miller, supra note 18, at 1486. 220 Stipanowich, supra note 57, at 406-11. 221 Id. at 407. 222 Harrell, supra note 174, at 1. 223 Stipanowich, supra note 57, at 408. 224 Id. at 409. 225 Id. 226 Id. 227 Id. 228 Stipanowich, supra note 57, at 418-19. 229 Stipanowich, supra note 54, at 32. 230 Stipanowich, supra note 57, at 433. 231 George R. Jurch III, Mark I. Wallach & Molly A. Drake, The Alternative to Alternative Dispute Resolution, ACC Docket (Jul./Aug. 2010). 232 For instance, Conflict Solutions of Texas charges “no filing or administrative fees; compensation for case management activities are provided through the panel member’s hourly rate, which are known to clients prior to the selection process.” Welcome to a faster, lighter brand of resolution, http://www.csoftx.com/different.php (last visited Jul. 17, 2011). 233 Jurch et al., supra note 232. 234 Colvin, supra note 40, at 9. 235 See, In re Olshan Foundation Repair Co., LLC, 328 S.W.3d 883 (Tex. 2010). 236 Drahozal & Wittrock, supra note 56, at 75, citing Lynne Marek, As Franchises Take Off, So Do Lawsuits, Nat’l L.J., Aug. 13, 2007, at 8, 9, and Edward Wood Dunham & Michael J. Lockerby, Shall We Arbitrate? The Pros and Cons of Arbitrating Franchise Disputes (Oct. 19-21, 2005) at 12. 237 Stipanowich, supra note 57, at 450. 238 Douglas Shontz et al., supra note 9, at 16. 239 Id. at 17. 240 Id. 241 Stephen J. Choi, Jill E. Fisch, and A.C. Prichard, Attorneys as Arbitrators, 39 J. Legal Stud. 109, 109 (January 2010). 242 Id. at 109. 243 Harrell, supra note 174, at 12. 244 Rebecca Love Kourlis, Keynote Address, American Justice at a Crossroads, 11 P epp. Disp. R esol. L.J. 3, 16 (2010). 245 Harrell, supra note 174, at 14. 246 International Institute for Conflict Prevention & Resolution, ✯ Fall 2011 I ntroduction: Economical L itigation Agreement (2010 ed.), available at http://cpradr.org/Resources/ADRTools/ EconomicalLitigationAgreement.aspx. 247 Stipanowich, supra note 54, at 30. 248 Id. 249 Id. at 8. 250 Id. at 32. 251 Lipsky & Seeber, supra note 75, at 17. 252 Gross, supra note 70. 253 William F. Coyne, Jr., Using Settlement Counsel for Early Dispute Resolution, 15 Negot. J. 11 (1999). 254 Roger Fisher, He Who Pays The Piper, H arv. Bus. R ev., M ar.A pr. 1985, at 150, 154. RETURN RETURNTO TOTABLE TABLEOF OFCONTENTS CONTENTS STATE BAR LITIGATION SECTION REPORT the A DVOCATE PART II. R E C E N T, L E A D I N G DOC TRINAL DEVELOPMENTS Commercial Law Developments and Doctrine ✯ 53 54 THE RETURN RETURNTO TOTABLE TABLEOF OFCONTENTS CONTENTS Advocate ✯ Fall 2011 D evelopments in D amages Law A pplicable to C ommercial C ases BY GREGORY D. SMITH T EXAS LAW OF DAMAGES HAS SEEN TWO RECENT developments material to commercial cases. One such development broadens the availability of equitable forfeiture, while the other explores the constitutional and statutory ratio “caps” that govern punitive-damage awards. fee forfeiture, to the consideration received for the sale of a business interest.5 The combination of ERI and prior law appears to be two-fold: Disgorgement or forfeiture may be ordered to remedy a breach of fiduciary duty, in appropriate circumstances and subject to certain limitations, even though no actual damages have been sustained. And the amounts forfeited may encompass not only fees but contractual consideration. I. Equitable Forfeiture in Fiduciary-Duty Cases – Revisited and Broadened Because the fiduciary duty is an exacting one, it is not surAfter noting that “courts may disgorge all ill-gotten profits prising that a variety of remedies would be available to the from a fiduciary when a fiduciary agent usurps an opportunity plaintiff who proves a breach of fiduciary duty. The standard properly belonging to a principal, or competes with a prinremedies – actual damages, lost profits, incidental and consecipal,” the ERI court found forfeiture of the consideration paid quential damages – are of course available. But these standard to Swinnea potentially available.6 Yet the court was careful measures may not always be adequate to the circumstances. to cabin its holding to those situations “where willful actions In such cases, the courts have sometimes invoked additional, constituting breach of fiduciary duty also amount to frauduequitable remedies – such as constructive trusts, forfeiture, lent inducement.”7 And the court and disgorgement – to rectify further limited the availability and the breach, make the beneficiary To establish a cause of action for extent of such forfeiture according whole, and deter future breaches. breach of fiduciary duty, the claimant to “certain limiting principles.”8 generally must show not only the To establish a cause of action For ten years, Swinnea and Larry for breach of fiduciary duty, the existence and breach of a fiduciary Snodgrass each owned one half claimant generally must show not duty but must also prove either injury of the stock in ERI, an environonly the existence and breach of a to the beneficiary or an unjust, illicit mental engineering and confiduciary duty but must also prove benefit to the defendant. sulting company. They likewise either injury to the beneficiary shared ownership in a limited or an unjust, illicit benefit to the 1 partnership (Malmeba) that owned and leased to ERI the defendant. Thus, even absent actual damages, the benefibuilding that housed ERI’s corporate office facility. Swinnea ciary may be able to invoke equitable remedies to recover a 2 sold his interest in the engineering company to Snodgrass, defendant’s “ill-gotten gains.” receiving a sum of cash and the other owner’s interest in Malmeba. Swinnea remained at the engineering company as Ever since the decision in Burrow v. Arce, a breaching fiduciary an employee under a six-year employment contract including has been subject to potentially forfeiting some or all of any 3 a noncompetition agreement. ERI signed a six-year lease on fee earned in serving the beneficiary. The circumstances Malmeba’s building.9 in which a fiduciary breach will justify a forfeiture remedy recently have expanded. Meanwhile, a month before the buyout closed, Swinnea’s wife and the wife of another ERI employee formed AQA, an Forfeiture of contractual consideration: the decision in environmental remediation contractor. The ownership of this ERI Consulting Engineers 4 new company was not disclosed to ERI. AQA began to bid In ERI Consulting Engineers, Inc. v. Swinnea, the Texas Supreme as a contractor on ERI-administered remediation projects. Court concluded that equitable forfeiture can apply beyond THE RETURN RETURNTO TOTABLE TABLEOF OFCONTENTS CONTENTS Advocate Although not an employee of AQA, Swinnea was named to its board of directors. This new company began bidding to obtain ERI-administered contracts, and eventually one of ERI’s best customers (to whom the new contractor was now a competitor) discovered the wives’ ownership of AQA, reported it to Snodgrass, refusing to continue bidding on ERI projects unless ERI excluded AQA from the bidding. A short time later, Mrs. Swinnea sold her interest in AQA; her husband continued to work for ERI. Eventually – three years after the buyout – Snodgrass fired Swinnea and sued him for breach of fiduciary duty, fraud, and fraud in a stock transaction. At trial, Snodgrass contended that following the buyout Swinnea’s productivity had dropped substantially.10 The district court, after a bench trial, found against Swinnea on all theories, determining that Swinnea had committed fraud, had breached the noncompetition agreement, and had breached fiduciary duties both to his co-owner and to ERI. Among the remedies, the district court ordered Swinnea to forfeit the bulk of the proceeds received in the sale of his business interest, plus all monies paid by ERI to Malmeba for lease of its office facility. The court apparently did not attempt to discern how the terms of the sale were affected by Swinnea’s conduct, if at all, or how Swinnea benefitted from the conduct, if at all.11 The court of appeals reversed and rendered judgment holding that equitable forfeiture was not available in the circumstances of the case, in part because there was no fee paid to Swinnea to be forfeited and in part because ERI failed to prove that Swinnea obtained any ill-gotten gains subject to disgorgement. The court of appeals further held that no evidence supported the trial court’s actual damages award and that ERI and Snodgrass failed to prove that Swinnea had obtained any ill-gotten gains that would be subject to disgorgement. The supreme court principally addressed the question whether forfeiture of contractual consideration might be an available remedy against Swinnea, albeit the court did not determine whether any contractual consideration would actually be forfeited in this particular case or, if so, in what amount. The holding was simply that where willful actions constituting breach of fiduciary duty also amount to fraudulent inducement, contractual consideration received by the fiduciary can be subject to forfeiture. But whether it is forfeited should depend upon further equitable factors, presumably including the extent to which the consideration actually can be characterized as ill-gotten gain. Indeed, it is important to distinguish between the holding that ERI need not have sustained actual damages in order to support forfeiture and ✯ Fall 2011 55 the much different matter of whether and to what extent the consideration received by Swinnea – paid for his half interest in a prosperous business that he had nurtured for ten years previous – might constitute ill-gotten gain that could or should be forfeited. No doubt aware of the remedy’s clear potential for misuse, the court opined that it must be tailored to fit the circumstances and in this regard commended the Burrow fee-forfeiture factors, which include: • • • • • the gravity and timing of the breach, the level of intent or fault, the benefit, if any, the transaction may have conferred on the fiduciary’s principal, the centrality of the breach to the particular fiduciary relationship, and any harm to the principal, whether threatened or actual.12 In addition, the court discussed other, overlapping factors bearing upon the decision whether to award forfeiture and in what amount, including some borrowed from the Restatement of the Law Governing Lawyers, such as (1) whether the fiduciary acted in good faith; (2) whether the breach of trust was intentional, negligent, or without fault; (3) whether the breach related to the management of the whole trust or related only to a part of the trust property; (4) whether the breach of trust occasioned any loss; and (5) whether the trustee’s services were of value to the trust.13 Because the district court failed to apply these equitable criteria, the forfeiture award was reversed and the cause remanded for further proceedings in the district court. The court remanded for a trial-court determination as to whether, in light of such principles, the remedy of forfeiture would further the goal of protecting relationships of trust in the particular scenario. II. The Statutory and Constitutional Excessiveness of Punitive Damages: Principally a Matter of Ratios The Required Constitutional Analysis In Bennett v. Reynolds, a case addressing cattle theft, the Court considered whether exemplary damages of $1,250,000 could be constitutionally justified when the actual damages were only about $5,000.14 Bennett holds that a constitutional ratio analysis is required even where the statutory scheme in Chapter 41 of the Texas Civil Practice and Remedies Code would allow a larger award owing to the criminality of the 56 THE RETURN RETURNTO TOTABLE TABLEOF OFCONTENTS CONTENTS Advocate defendant’s conduct. (The statutory cap is lifted when the conduct at issue constitutes a violation of certain enumerated criminal offenses.15) Until Bennett, at least some appellate courts had concluded that compliance with Chapter 41 sufficed to avoid further scrutiny of the punitive-damage amount – statutory or constitutional. That is what the court of appeals in Bennett had concluded.16 Bennett was the president of co-defendant James B. Bonham Corporation. Bonham’s cattle ranch sat on one bank of the Colorado River, across from the rival Reynolds ranch. When the river ran low in a drought, some of Reynolds’s cattle found their way onto the Bonham property. Bennett directed Bonham’s ranch hands to round up the strays and sell them at a local livestock auction – even though those same ranch hands had told Bennett the cattle were Reynolds’ livestock. In all, thirteen head of Reynolds’s cattle were sold, with Bennett pocketing the proceeds (a little over $5,000).17 ✯ Fall 2011 Reprehensibility Analysis. Applying U.S. Supreme Court precedent, the Bennett court reiterated that a grossly excessive punitive-damage award offends due process, principally because it “constitutes an arbitrary deprivation of property.”20 Then, it endorsed the three-part framework reflected in the U. S. Supreme Court’s State Farm opinion, under which the court looks to: (1) the reprehensibility of the defendant’s conduct, (2) the disparity between actual or potential harm and the punitive-damages award, and (3) the difference between the punitive damages award and the potential civil penalties available in similar cases.21 Further, the court concluded, this analysis required consideration of the nonexclusive factors set out in BMW v. Gore: (1) whether the harm was physical or economic, (2) whether the defendant’s conduct reflected indifference to or reckless disregard for others’ health or safety, (3) whether the victim was financially vulnerable, (4) whether the defendant’s conduct involved repeated actions, and (5) whether the harm resulted from malice, trickery or deceit.22 Meanwhile, one of Bonham’s ranch hands had photographed Observing that evidence of only one such factor may be sufthe cattle showing that they were ficient to sustain punitive damages, branded with Reynolds’ brand. the court found the first four Gore As important leavening, the court When Bennett discovered the factors to be “essentially absent.”23 noted that punitive damages photos, he encouraged the ranch In focusing on the fifth factor, the hand to lie, and even tried to court determined that it could are intended to address the bribe him with a better job. When venture beyond the tort itself to take reprehensibility of the act at that failed, Bennett had another account of surrounding conduct issue as opposed to the possible employee threaten to hurt the ranch and circumstances that relate to reprehensibility of the person hand. Bennett in a further attempt the wrongdoing and exacerbate the committing it. at intimidation even sued the ranch resulting harm. Bennett’s attempts at hand for slander. And there was witness intimidation and evidence testimony that Bennett sought to tamper with the photos.18 tampering satisfied both criteria. Thus those facts would “properly inform the reprehensibility analysis.”24 As important Reynolds sued Bennett and Bonham for conversion. In leavening, the court noted that punitive damages are intended the course of the lawsuit, Bennett was accused of witness to address the reprehensibility of the act at issue as opposed tampering and perjury. The jury returned a verdict for to the possible reprehensibility of the person committing it. Reynolds, finding conversion, assessing actual damages in the amount of the livestock auction proceeds, and assessing The Ratio Analysis. The Bennett court seems to have quite far greater exemplary damages – $1,000,000 against Bonham correctly concluded that the courts’ gatekeeper function and $250,000 against Bennett, individually. On appeal, in the punitive-damages context at bottom implies a ratio Bennett and Bonham argued that the exemplary damage analysis. As for the ratio of punitive damages to actual damamounts were unconstitutionally excessive.19 Bonham also ages, the court adopted the analysis that the U. S. Supreme contended that no exemplary damages should be imputed to Court applied in State Farm, which the court held had to be the corporation. The court of appeals affirmed the uncapped “assiduously followed,” especially given that only one of Gore’s awards. On further appeal, the supreme court affirmed five reprehensibility factors was present.25 As in its prior the determination to award exemplary damages – against jurisprudence, the court “stressed State Farm’s admonition that both Bennett and the corporation. But because it found the any ratio above 4:1 ‘may be close to the line of constitutional exemplary-damage amounts to be constitutionally excessive, impropriety.’”26 the court remanded for a proper ratio analysis. Like the U. S. Supreme court, the Bennett court noted THE RETURN RETURNTO TOTABLE TABLEOF OFCONTENTS CONTENTS Advocate the “necessarily unscientific” nature of the constitutional constraints upon punitive damages. To this end, the court conceded, ratios exceeding 4:1 might comport with due process when “a particularly egregious act has resulted in only a small amount of economic damages.” But any such exception is to be invoked sparingly, because “a freewheeling reprehensibility exception would subvert the constraining power of the ratio guidepost.”27 In Bennett, of course, the guidepost ratio was well exceeded; in fact, the jury’s punitive-damage awards when taken together stood at 235 times the actual damages.28 Not only was this case not an appropriate one for the egregious-act/ small-damages exception, but even a 4:1 ratio in this case – with no physical injury – would be a stretch, and should be avoided for prudential reasons. [O]n 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.29 The result is that, with truly rare exceptions, the greatest conceivable punitive-damage recovery even in the most egregious case ordinarily will lie be somewhere around four times actual damages. Those punitive-damage awards that are subject to a statutory cap will be limited to the lower of the statutory cap or a roughly 4:1 constitutional ratio. The interplay of statutory and de facto constitutional caps The statutory cap on punitive damages stated in Civil Practice and Remedies Code Section 41.008 (two times economic damages plus an amount equaling non-economic actual damages), when it governs, would seem to place statutorily-capped awards within constitutional muster.30 And this is so when the statute in fact sets punitive damages as a ratio of actual damages. But Section 41.008 does not always impose a ratio. Rather, the legislature in Section 41.008 afforded an alternative cap governing cases of small actual-damage awards. Indeed, any time that the sum of two times economic damages plus noneconomic damages is under $200,000, the statute would allow a punitive-damage award of $200,000.31 Hence, under Section 41.008, if actual damages were $5,000, the statutorily permissible maximum punitive-damage award would be $200,000. The approximate constitutional ratio (about 4:1) would appear to supersede the $200,000 statutory cap. That is the result implied in Bennett. ✯ Fall 2011 57 Section 41.008 appears also to be superseded by constitutional analysis in any case in which Section 41.008 would result in no statutory cap being applied. This includes all cases governed by Subsections 41.008(c), which effectively waives the statutory cap in cases involving conduct described as a felony in certain enumerated Penal Code sections.32 In this circumstance, the constitution, not chapter 41, sets the controlling level of scrutiny afforded such punitive-damage awards.33 Corporate liability for punitive damages bootstrapped Bennett not only was the one whose conduct was being punished, but it was Bennett’s conduct, as president of Bonham, that justified imputing punitive damage liability to the corporation. The jury had imposed punitive damages based on a jury charge tracking Section 41.005 of the Civil Practice and Remedies Code. Specifically, he jury charge advised the jurors that “In an action arising out of a criminal act committed by an employee, the employer may be liable for punitive damages but only if: (1) the principal authorized the doing and the manner of the act; . . .”.34 The supreme court decided the evidence was legally sufficient to uphold punitive damages under this provision because Bennett was a vice-principal, and the acts of a vice principal are deemed to be the acts of the corporation. Relying on prior case law, the court reaffirmed that a vice-principal includes anyone falling within four classes of agents: • • • • corporate officers; those who have authority to hire, direct, and fire workers; those engaged in the principal’s nondelegable or absolute duties; and those to whom the principal has confided the management of a department or business division.35 Here, Bennett was such a vice principal, based on the facts that: he was Bonham’s highest corporate officer, who exercised complete de facto control of Bonham’s ranching activities.36 The corporate charter, bylaws, and a shareholder resolution afforded him broad authority. He directed Bonham’s operations generally. In committing the cattle theft, he directed corporate employees, on company time and using company equipment, to sell the cattle. And while Bennett personally received the proceeds of the cattle sale, this was facilitated by his cattle lease on the corporation’s land, which was his compensation for serving as corporate president. In all, the court determined, Bennett was acting in a corporate capacity 58 THE RETURN RETURNTO TOTABLE TABLEOF OFCONTENTS CONTENTS Advocate in converting the cattle precisely because he used corporate authority over corporate employees, corporate equipment, and corporate land. Thus, the court held, the corporation – through Bennett himself as a vice-principal – had “authorized the doing and the manner of the act” from the get go.37 Mandatory re-application of punitive-damage caps on remand A punitive-damage award that is constitutionally and statutorily compliant in comparison with initially awarded actual damages may cease to be such when actual damages are reduced as a consequence of an appeal. When an appellate court’s decision results in a reduced actual-damage award, it is now clear that the reduction requires the lower court to make any reduction in punitive damages that the statutory cap in Section 41.008 would command. The punitive-damage amount must comply with the statutory cap as the latter applies to the reduced compensatory-damage amount.38 This is so even though the appellate court’s opinion and judgment omit to discuss the matter, as the decision in In re Columbia Medical Center of Las Colinas makes plain. There, in the underlying case, the Texas Supreme Court had reduced the compensatory damage amount but had not addressed the amount of punitive damages.39 After an appeal had resulted in a reduced actual-damage award against it, Columbia Medical Center made a tender of payment seeking to discharge its judgment liability.40 To compute the tender amount, the medical center subtracted not only the amount of the compensatory damages that had been reversed, but it also proportionately reduced the amount of tendered punitive damages, by applying the formula of Section 41.008.41 When the plaintiffs rejected the reduced tender, the medical center asked the trial court to enter a modified final judgment that not only would reduce the compensatory damages per the appellate mandate but also would proportionally reduce the punitivedamage amount.42 When the trial court refused to do so, the medical center sought mandamus relief. In a per curiam opinion, the supreme court concluded that the trial court could give full effect to the supreme court’s earlier judgment (vacating in part the compensatory damages) only by reducing punitive damages commensurately, in accord with the statutory cap.43 Further, this was required even if no appellate court opinion happened to address the revision of punitive damages, because a trial court always “must give effect to statutory caps on damages when the parties raise the issue.”44 ✯ Fall 2011 Presumably, the equally mandatory constitutional ratio analysis also would apply to the reduced compensatorydamage amount on remand. Gregory D. Smith is a shareholder at Ramey & Flock, P.C., where his practice focuses on civil appeals. He is board certified in civil appellate law. O 1 See Navigant Consulting, Inc. v. Wilkinson, 508 F.3d 277, 283 (5th Cir. 2007). 2 Id. 3 Burrow v. Arce, 997 S.W.2d 229, 241-44 (Tex. 1999). 4 318 S.W.3d 867 (Tex. 2010). 5 Id. at 870. 6 Id. at 873. 7 Id. 8 Id. 9 Id. at 871. 10 Id. 11 Id. at 871-72. 12 Burrow v. Arce, 997 S.W.2d 229 (Tex. 1999). 13 Id. at 874-75. 14 Bennett v. Reynolds, 315 S.W.3d 867, 869 (Tex. 2010). 15 Tex. Civ. P rac. & R em. Code A nn. §41.008 (Vernon 2003); see Signal Peak of Enterprises, Inc. v. Bettina Inv., Inc., 138 S.W.3d 915, 927 (Tex. App.—Dallas 2004). 16 Bennett v. Reynolds, 242 S.W.3d 866, 901-05 (Tex. App.—Austin 2007, reversed) (concluding that the jury’s million dollar punitive damages award against the corporate defendant did not violate due process because the jury found felony theft, which under Section 41.008(c)(13) avoids the statutory cap, notwithstanding that the actual damages (a little over $5,000) were minuscule in comparison). 17 315 S.W.3d at 869-71. 18 Id. at 876-77. 19 Id. at 873. 20 Id. 21 See State Farm Mutual Automobile Insurance Company v. Campbell, 538 U.S. 408 (2003). 22 315 S.W.3d at 874. 23 Id. at 877. 24 Id. at 875. 25 Id. at 877. 26 Id. at 876, citing Tony Gullo Motors I, L.P. v. Chapa, 212 S.W.3d 299 (Tex. 2006). 27 Id. at 880. 28 Id. at 869. 29 Id. at 878. 30 Tex. Civ. P rac. & R em. Code A nn. §41.008(b). 31 Id. (stating that “exemplary damages awarded against a defendant may not exceed an amount equal to the greater of: (1)(A) two times the amount of economic damages; plus (B) an amount equal to any noneconomic damages found by the jury, not to exceed $750,000; or (2) $200,000.”). 32 THE RETURN RETURNTO TOTABLE TABLEOF OFCONTENTS CONTENTS Advocate Tex. Civ. P rac. & R em. Code A nn. §41.008(c). See Harris v. Archer, 134 S.W.3d 411 (Tex. App.—Amarillo 2004, pet. denied) (compiling factors to be considered according to the U.S. Supreme Court’s opinions in BMW North America, Inc. v. Gore, 517 U.S. 559 (1996), Cooper Ind., Inc. v. Leatherman Tool Grp., 532 U.S. 424 (2001), and State Farm Mut. Auto. Ins. Co. v. Campbell, 538 U.S. 408 (2003)). 34 Bennett, 315. S.W.3d at 883. 35 Id. at 884. 36 Id. 37 Id. 38 In re Columbia Med. Ctr. of Las Colinas, 306 S.W.3d 246, 247 (Tex. 2010) (orig. proceeding, per curiam). 39 Id. 40 Id. at 247. 41 Id. 42 Id. 43 Id. at 248. 44 Id. 33 ✯ Fall 2011 59 60 THE RETURN RETURNTO TOTABLE TABLEOF OFCONTENTS CONTENTS Advocate ✯ Fall 2011 P rivacy Rights of Employees in an Electronic World BY MICHAEL KELSHEIMER & TRAVIS CRABTREE I. History of Privacy in the Workplace Privacy has come a long way since the U.S. Supreme Court outlined its penumbrae in Griswold v. Connecticut. Citizens have been wrapped in a cloak of protection from government intrusion into their private lives. While this cloak follows public sector employees into the workplace, private sector employees must disrobe at the door to the office, and, in some cases, before entering the parking lot of their employer. What sparse protections private sector employees receive arise from common law privacy protections accepted by the Texas Supreme Court. But these protections, too, are essentially surrendered in the workplace where the desire to remain employed causes employees to relinquish what few privacy protections they have. Only where employers permit an expectation of privacy to exist, do employees have any chance of preventing an employer from examining their private property at work. Privacy Act (“ECPA”) and Stored Communications Act (“SCA”) discussed in much detail below. In 1988, the U.S. legislature passed the Employee Polygraph Protection Act of 1988 which prevents employers from using polygraph examinations except in certain limited circumstances.5 Subsequently, in 1996, Congress again acted by passing the Health Insurance Portability and Accountability Act which provides protections from dissemination of employee health information.6 Finally, in 2003, the Texas legislature passed a law prohibiting employers from transmitting an employee’s social security number by mail.7 Fortunately, or unfortunately, depending on your perspective, employee attempts to drag these common law rights through their employer’s door have been universally rejected by Texas courts. With the exception of term contract employees whose rights are governed by written agreement, “at-will” employment remains a unilateral contract modifiable on a going forward basis by either party.3 If an employee dislikes a proposed change to the relationship, such as adding a drug testing policy, that employee can mark their dissent by quitting.4 Courts have instead deferred to the U.S. and Texas legislatures to protect employees. The legislatures, in turn, have taken only few notable steps. In 1986, the U.S. legislature passed tandem the Electronic Communications Since the Trotti decision, employers have commonly included provisions in their employee handbooks indicating that all locations within the workplace are subject to search, required employees to consent to searches of all property at the time of employment, and maintained separate access to any private space designated to an employee such as a locked drawer or locker. Following these simple requisites, employers are generally free of the concerns presented by Trotti. While acting with these few constraints, employers are generally free to infringe upon the claimed privacy of their employee; however, employers must be vigilant to avoid inadvertently creating an expectation of privacy among their employees. In K-Mart Corp. Store No. 7441 v. Trotti, an employee’s work locker was opened by her employer in a search for stolen Three privacy causes of action exist in If an employee dislikes a merchandise which the employee did not Texas for a private citizen. They include proposed change to the have.8 Employer representatives rifled claims for unreasonable intrusions upon relationship, such as adding through the employee’s purse and other the seclusion or private affairs of another; a drug testing policy, that property.9 A jury awarded damages to the unreasonable publicity given to an aspect employee for an invasion of privacy claim employee can mark their of a person’s private life in which the and K-Mart appealed.10 On appeal, the public has no legitimate concern; and dissent by quitting. Houston Court held there was sufficient unwarranted appropriation of one’s name evidence to support a jury finding that or likeness.1 These protections, however, K-Mart created an expectation of privacy in the locker because have been eroded over time. Communication of even embarthe employee was permitted to provide her own lock, to which rassing, intimate facts is permitted if the publication is of K-Mart did not have a key.11 legitimate public concern.2 Technology presents the new wrinkle in employee privacy considerations in the workplace. Office phones, cell phones, email and, more recently, social media may blur the distinctions so easily discerned with employee physical property. THE RETURN RETURNTO TOTABLE TABLEOF OFCONTENTS CONTENTS Advocate II. Office Phones An employer who wants to monitor calls on an office phone is subject to the privacy right considerations discussed above for physical property, but layered over them is the protection of the federal ECPA and Chapter 123 of the Tex. Civ. Prac. & R em Code (“Chapter 123”). The ECPA is a modified version of the former Omnibus Crime Control and Safe Streets Act of 1968, which applied only to telephone communications. It extends the prohibition against intercepting communications to other forms of electronic communication including emails and voicemail.12 While the ECPA sounds formidable, two exceptions limit its effectiveness on employers. Acting as a backstop, Chapter 123 then removes one of the two ECPA exceptions in Texas. Both laws permit interception with consent. The ECPA consent exception permits interception of communications where “one of the parties to the communication has given prior consent.”13 Under the ECPA, consent may be implied, but courts have been reluctant to do so, suggesting implied consent may not be casually inferred.14 Determining implied consent is case specific, but generally requires language or acts that tend to show a party knows of and assents to encroachment upon call privacy.15 Following the ECPA, simply knowing that your employer is capable of monitoring employees is also insufficient.16 Under Chapter 123, intercepting communication is a violation if made “without the consent of a party to the communication . . .”17 Unfortunately, there are few cases interpreting Chapter 123 and while implied consent may someday be upheld, Texas courts follow their federal brethren in holding that knowledge someone might be intercepting your communication is insufficient.18 The “business use” exception under the ECPA excludes from coverage “any telephone . . . instrument, equipment, or facility furnished to the subscriber or user . . . in the ordinary course of its business and being used by the subscriber or user in the ordinary course of its business.”19, 20 Divided into two elements, the exception requires that: (1) the telephone company provide the telephone or device which intercepted the communication for use in the ordinary course of business, and (2) that the device was used in the ordinary course of business.21 With respect to the first element, courts agree about interception of live calls, but there does appear to be a divergence regarding the use of a recorder to tape calls.22 For the second element, the key question is the business nature of the call. Courts seem to agree that a purely personal call is not within ✯ Fall 2011 61 the ordinary course of business regardless of an employer’s attempted justification.23 To avoid liability under the ECPA, employers may listen to the beginning of a call to determine its purpose and must terminate the surveillance if the call is personal.24 Because the business use exception is not available in Texas due to the greater limitation imposed by Chapter 123, employers here must obtain written consents from their staff with reference to each of these laws. III. Cell Phones Available for almost forty years, cell phones really came into their own in the 1990s. Since then, they have become a musthave business tool with the added benefit of internet connections and texting capability. While voicemails, call histories, and text messages are each different, the different mediums do not affect the analysis regarding privacy. Ownership of the device is the key. Cell phones are sometimes provided and paid for by the employer, but in other instances employers reimburse employees a portion of their cell phone bill, or the employee receives no reimbursement but only occasionally uses their private phone for work. These different levels of interconnectivity between work and private use do potentially affect the employee’s privacy rights in the information stored. The ECPA does not play a significant role in protecting privacy with respect to cell phones. This is because it applies only to contemporaneous interception of communication and it is virtually impossible for an employer to intercept a live cell phone call. 25 Rather, its sister statute the SCA, which governs access of stored communications, occupies the field.26 The SCA protects against direct access of protected communication. Specifically, it prevents an employer from intentionally accessing a facility or cell phone through which electronic communication service is provided, without consent.27, 28 Where employers might then think of accessing the information directly from the cell service provider, they will again run into a wall – even for phones they provide to employees for their use.29 Worse still, the SCA does not incorporate the business use exception granted by the ECPA. Employers are left with only the option to obtain consent from the employee to gain access to stored communications.30, 31 Employers may, however, obtain “customer records” regarding a phone it provides to the extent providing the information is “incident to the rendition of the services by the provider.”32 Customer records may include transactional records, account logs, 62 THE RETURN RETURNTO TOTABLE TABLEOF OFCONTENTS CONTENTS Advocate usage, email addresses, visited internet sites, addresses, and phone numbers called, but it is unclear how much of this information an employer can obtain from the service provider without consent.33 Courts have not explained what more than a billing statement the subscriber, or employer, is entitled to without consent of the employee. Conversely, for accounts which are maintained by the employee and reimbursed by the employer, no information is available without consent under the SCA because the employer does not even stand in the place of subscriber. Court interpretation of Chapter 123’s language and meaning is woefully behind the SCA and inadequate in consideration of today’s cell phone usage. By definition, Chapter 123 applies only to the “aural acquisition” of content, presumably rendering it ineffective against review of text messages and raising the question whether it applies to voicemails which were not originally intercepted aurally, or “live.”34 Other questions arise about Chapter 123’s application to “content” of communication.35 Will this term be interpreted in the same manner it is under the SCA or will it include what the SCA defines as “customer records” relating to information about the content? If it is broadly construed, Chapter 123 will strip away even the limited information an employer may obtain regarding “customer records” under the SCA. Until these issues are resolved, the only safe maneuver for employers is to obtain clear consent with respect to both the federal and state laws. Because the SCA prevents employers from obtaining almost all information regarding employee cell phone use, the only area in which common law privacy expectation may come into play relates to video and photographs taken by the employee that reside on a cell phone. If the image or video was received by the employee, the SCA applies and prevents access, but the SCA does not have jurisdiction over video and images which an employee has made.36 Regardless of whether the employee has sent the images to another person, they originated on that employee’s phone. The recently decided U.S. Supreme Court case of City of Ontario v. Quon provides insight on this point.37 In Quon, the city police department issued alphanumeric text pagers to members of its SWAT team for police business only.38 Team members were required to sign a written policy making it clear that the city reserved the right to monitor and log text messages sent on the pagers.39 When Quon and other team members started incurring large overages against their allotted messages, their supervisor threatened to audit the messages to determine if the pagers were being used for personal ✯ Fall 2011 purposes.40 The supervisor then offered not to audit the accounts if Quon and others would pay any overages.41 After months of continued overages, Quon’s supervisor decided to audit accounts to determine if the department should purchase more messaging time.42 Quon’s messages for two months were pulled and reviewed.43 The messages revealed that the vast majority of his communications were personal, sexually explicit, and directed toward another department officer with whom he was having a relationship.44 The records were turned over to internal affairs and Quon was investigated for possible disciplinary action.45 Quon filed suit against the wireless provider for violations of the SCA and against the department for violating his Fourth Amendment rights as a public sector employee.46 When the matter reached the Supreme Court, it reasoned that Quon had an expectation of privacy in the messages despite the explicit department directive because his supervisor had created an expectation of privacy by altering the policy to allow Quon to pay for overages.47 While the case does not have direct application in the private sector, it does reiterate the message of Trotti. Creating an expectation of privacy can lead the employer down a precarious path. In both cases, the creation was unintentional. K-Mart ran out of company issued locks and allowed Trotti to purchase her own lock for which the company did not maintain access.48 The City of Ontario committed to a position distinct from its written requirement by allowing Quon to pay for overages. An employee would not likely have an expectation of privacy in a company phone. For that reason, the employer should be permitted to examine pictures and video taken by the employee without hesitation. That said, it is easy to compromise the employer’s right without even realizing the consequence. Employers should institute written policies regarding ownership of all company property and the right to examine every nook and cranny of the company’s facilities at any time. Additionally, employers should institute a consent to be searched and for the company to have access to all records on company cell phones under Titles I and II of the ECPA and Chapter 123 of the Tex. Civ. Prac. & R em. Code. IV. Email The development of email has eased corporate communications but also presented a bevy of privacy issues as it relates to employees. Most companies have policies in place making it clear that emails received and sent on the company account are subject to review, belong to the company and there is therefore no expectation of privacy. The more difficult issue arises from personal web-based email systems accessed by THE RETURN RETURNTO TOTABLE TABLEOF OFCONTENTS CONTENTS Advocate employees on company accounts and other non-work related behaviors. A. The ECPA and SCA As noted above, ECPA49 and SCA 50 are equally important sister statutes. Generally speaking, the ECPA, often called the Wiretap Act, applies to electronic communications51 in transit and the SCA applies to communications stored on servers. While most of the cases deal with stored communications, the ECPA still creeps into the workplace when dealing with emails. For example, the Seventh Circuit was forced to examine whether auto-forwarding emails in the workplace violated the Wiretap Act. In U.S. v. Szymuszkiewicz,52 an IRS revenue officer secretly adjusted his boss’s Outlook program to forward all emails. The subordinate was convicted of a federal crime and appealed to the Seventh Circuit. On appeal, the court denied the subordinate’s argument that the interception had to be “contemporaneous” with the “transmission” under the Wiretap Act. In other words, under the traditional phone tap, the interception is made while the call is being conducted and the voice transmission is in route. Once the email hits the Outlook account, it is technically completed and only then did the program forward it to the defendant’s account. Upholding the conviction, the court determined the interception of the message was “contemporaneous by any standard.” Getting into the technological details, the court claimed the evidence showed the Outlook rules operated on the server and to auto-forward, a copy needed to be immediately made at the server at the time of delivery and then forwarded to the defendant. A plaintiff under the Wiretap Act can recover a minimum award of $10,000 or $100 per day of violation—whichever is greater, or, actual damages, plus punitive damages, attorneys’ fees and costs.53 To avoid any confusion, employers should include the right to review and monitor emails and all electronic communications at any time in any form in their standard computer use policies. After all, auto-forward is a standard operating procedure to use when a departed employee leaves so the company can address customer concerns emailed to that employee. Obtaining consent at the time of hire is much easier than asking if the leaving employee minds as he walks out the door. The SCA meanwhile, makes it illegal for anyone to “intentionally access[] without authorization a facility through which ✯ Fall 2011 63 an electronic communication service is provided or . . . intentionally exceeds an authorization to access that facility; and thereby obtains, alters, or prevents authorize access to a wire or electronic communication while it is in electronic storage in such system.”54 In plain English, it is illegal to access someone’s Hotmail account without their authorization and read their emails because those emails are stored on Hotmail’s servers and not the company’s. The main litigated issues are, therefore, whether a communication is covered by the SCA and consent. The SCA covers “electronic communication services” which is defined as “…any service which provides to users thereof the ability to send or receive wire or electronic communications.”55 When employees access web-based email accounts, for example, a company’s server or computer may store passwords and certain communications. When employees leave for a competitor, companies are tempted to not only search the work-issued emails stored on the servers, but also check what duplicitous communications may be gathered through the departed employees’ personal accounts. That is where the SCA and other laws come in to play. One court has specifically ruled that personal emails that are stored on a company laptop are not protected by the SCA. In Thompson v. Ross,56 a Pennsylvania district court was forced to determine whether messages from AOL and Yahoo accounts already saved on a laptop computer were in “electronic storage” as defined by the SCA. In the Thompson case, the plaintiff’s ex-girlfriend kept the plaintiff’s laptop after a break-up.57 The ex-girlfriend let two of her co-workers see the email messages stored on the existing computer. Under the SCA, electronic storage is defined as “any storage of such communication by an electronic communication service for purposes of backup protection of such communication.”58 The messages on the laptop were not stored by AOL or Yahoo, but were saved to the laptop. The court rejected the notion that saving the messages to the laptop constituted “backup storage” because the court determined the statute was not supposed to be interpreted that broadly. While not absolutely failsafe given the lack of mature developed law, the general rule of thumb is that if someone’s personal email is, for whatever reason, saved to the company’s server or saved to a company laptop, the company can generally review and use it assuming there is a broad computer use policy. Accessing additional emails on their personal account because you happen to have access to the password 64 THE RETURN RETURNTO TOTABLE TABLEOF OFCONTENTS CONTENTS Advocate or through other means without the employee’s knowing consent, however, raises serious concerns under the SCA. B. The Computer Fraud and Abuse Act In addition to the ECPA, employers need to consider the Computer Fraud and Abuse Act (the “CFAA”).59 The CFAA makes it illegal to access a data base without proper authority or to exceed one’s authority.60 The primary focus of the law is on hackers, but it is becoming the add-on violation of choice for trade secret and noncompetition fights between companies and former employees. The most common application comes when an employee leaves to go to a competitor and downloads trade secrets from her former employee’s database. A perfect example comes from Andritz, Inc. v. Southern Maintenance Contractor, LLC.61 Defendants Pettit and Harper left plaintiff Andritz, Inc., after they allegedly accessed proprietary information from their company-issued laptops and gave it to their new employer. ✯ Fall 2011 When the employee accessing the data violates a fiduciary duty by doing so, the result may be different. In U.S. v. Nosal,64 a former employer sued the former employee claiming the latter accessed proprietary information and destroyed important data prior to his departure. Trying to dismiss the claim, the defendant argued the complaint failed to establish that access to the work computer was without authorization because defendant’s access, while employed, was never restricted. Creatively, the plaintiff claimed the defendant’s access violated the fiduciary duty the employee owed the employer. That claim was enough at the pleading stage to show the defendant exceeded his authorization to access the company computer. Because the employee destroyed the actual data, the company also pleaded the necessary loss. V. Social Media As if web-based email was not enough to muddy the waters, social media only complicates matters further. While it is clear companies have the right to restrict the use of social media While it is clear companies have the at the worksite, the law is still right to restrict the use of social wrestling with the rights of both media at the worksite, the law is employees and employers when still wrestling with the rights of both it comes to social media activities of employees on their own time. employees and employers when it Although the plaintiff company may have been able to show improper access to the database, the court dismissed the claim because the plaintiff failed to show the type of “loss” or “damage” required by the statute.62 The plaintiff claimed it lost the prerequisite amount because comes to social media activities of A. Taking Action for Employee’s defendants accessed information to employees on their own time. Social Media Conduct poach customers which caused a A manager of a Houston’s restauloss. The CFAA, however, requires rant discovered his employees created a closed MySpace forum there be an impairment of the computer system or data 65 The manager allegedly complaining about the restaurant. accessed. Because the plaintiff “still had access to the data coerced the hostess to give him the password to her account. just as it had before [d]efendants’ actions,” there was no After reviewing the site, he fired two of the employees who violation of the CFAA. created the group. The two employees sued the restaurant. In the case of ShareLee v. PMSI, Inc.,63 the outcome was the The jury’s verdict that the restaurant violated the SCA was same although the roles were reversed. In ShareLee, the upheld by the federal district judge in New Jersey. The court former employee started the litigation with a pregnancy disalso upheld the jury’s verdict that Houston’s acted maliciously crimination allegation. The company, counterclaimed under authorizing exemplary damages. the CFAA claiming the former employee used the company resources to access Facebook and check her personal email. The MySpace group, called “Spec-Tator” was maintained The company claimed they lost the necessary amount because by one of the employees during non-work hours. It of the loss of productivity. was a closed group meaning an invitation from the two plaintiffs and a password was needed before any of the The court dismissed the claim because there was no damage messages could be seen. The group was labeled as private to the company’s computer system. Moreover, the employee and described as a forum where employees could vent only accessed her own data on Facebook and the web-based on “crap/drama/and gossip” related to their workplace. email account and not the data of the company. Management was not invited. The plaintiffs claimed THE RETURN RETURNTO TOTABLE TABLEOF OFCONTENTS CONTENTS Advocate no one accessed the site during work hours or on work computers. There was disputed evidence as to whether one of the group members who worked as a hostess voluntarily provided management with her password to allow management to access the site or whether she was coerced into doing so. Nevertheless, two managers accessed the site using someone else’s password several times and terminated the employees who managed the chat group. On a motion for new trial, the federal district court found there was sufficient evidence the company “knowingly, intentionally, or purposefully,” accessed an otherwise private chat room without authorization in violation of the SCA. Had management simply been provided the password to view the chat room without putting any pressure on the hostess, the outcome may have been different because there would have likely been the necessary consent. Interestingly, the jury determined the company did not violate the employees’ common law right to privacy and that part of the ruling was therefore not part of the district court’s opinion. B. The National Labor Relations Board Not only do employers need to be concerned about lawsuits from employees, the National Labor Relations Board has recently taken action against employees who crack down on employees engaged in social media. On October 27, 2010, the NLRB issued a complaint against American Medical Response of Connecticut, Inc.66 The company fired the employee when it discovered negative comments on Facebook. Under the National Labor Relations Act, employees may discuss the terms and conditions of their employment with co-workers and others as a protected activity—even if it is on Facebook. The NLRB claimed the company had an overly restrictive policy about employee blogging and Internet posting infringing on their rights to discuss working conditions with each other. Probably even more problematic, the company denied union representation to the employee during an investigatory interview shortly before the employee posted the negative comments on Facebook. The NLRB settled with the company in February 2011.67 As part of the settlement, the company agreed to broaden its policies to allow employees to discuss their working conditions with each other. The company also promised that employee requests for union representation would not be denied and that no adverse actions would be taken against employees who ✯ Fall 2011 65 make such a request. The settlement between the employee and the company was separate from the NLRB’s settlement and was confidential. While this development caused many employers to re-examine their social media policies, a subsequent NLRB decision may decrease the concern. The NLRB more recently held that a newspaper had the right to fire a newspaper reporter over his “tweets” on the micro-blogging site Twitter.68 The Arizona Daily Star reporter had already been warned more than once about the content of his tweets that identified him as a reporter and linked to the newspaper’s website. One of the first questioned tweets criticized one of the newspaper’s headlines. The paper’s human resource department encouraged the reporter to address his concerns internally rather than on Twitter. Subsequently, the reporter’s managing editor told the reporter he should not make comments damaging to the newspaper’s reputation via social media. According to the NLRB decision, the paper encouraged the reporters to use Twitter, but had no written policy about it. The reporter stopped tweeting about the paper, but still found himself in trouble. The reporter tweeted various comments about Tucson’s homicide rates. Some of his tweets included: • August 27 - “You stay homicidal, Tucson. See Star Net for the bloody deets.” • August 30 - “What?!?!? No overnight homicide? WTF? You’re slacking Tucson.” • September 10 - “Suggestion for new Tucson-area theme song: Droening [sic] pool’s ‘let the bodies hit the floor’.” • September 10 - “I’d root for daily death if it always happened in close proximity to Gus Balon’s.” • September 10 - “Hope everyone’s having a good Homicide Friday, as one Tucson police officer called it.” • September 19 - “My discovery of the Red Zone channel is like an adolescent boy’s discovery of h...let’s just hope I don’t end up going blind.” The reporter also retweeted a local television news station post, noting a misspelled word. The television station’s tweet said: “Drug smuggler tries to peddle his way into the U.S.” The newspaper reporter retweeted the post and added: “Um, I believe that’s PEDAL. Stupid TV people.” When the television station complained to the newspaper, the managing editor told the reporter to stop tweeting until a senior management meeting. Rather than stopping, the reporter changed his screen name and removed some of his 66 THE RETURN RETURNTO TOTABLE TABLEOF OFCONTENTS CONTENTS Advocate supervisors as followers. The reporter also protected his tweets so only people with his approval could view them. The reporter was fired later that month. The NLRB wrote: “In this case, even if the employer implemented an unlawful rule, the charging party was terminated for posting inappropriate and unprofessional tweets, after having been warned not to do so. The charging party’s conduct was not protected and concerted: it did not relate to the terms and conditions of his employment or seek to involve other employees in issues related to employment.”69 Conclusion If there is a common thread among the legal issues presented by the introduction of mobile phones, email, and social media into employee privacy, it is the universal need for employers to set expectations and obtain written acknowledgement of those expectations from employees. Consent, and vigilant avoidance of exceptions to the policies created, will carry an employer through the largest portion of the minefield. A basic understanding of some of the applicable laws and statutes will also help when issues not addressed in the policies inevitably arise. Venturing, then, into social media employers must be wary of using an employee’s public complaints about the conditions of his or her work as a basis for discipline or termination. As communication tools evolve and blur the line between company and private communications, companies will struggle to maintain the proper balance. The employers are not the only ones. The law is struggling to keep pace as well. Travis Crabtree is a Member of the law firm of Looper Reed & McGraw, P.C. in Houston who focuses on Internet law and commercial litigation. He authors the blog www.emedialaw.com where he discusses the latest on these and many other similar issues. Michael Kelsheimer is a Shareholder of the firm of Looper Reed & McGraw, P.C. in Dallas, practicing employment law. Michael maintains the website www.texasemployerhandbook.com and authors a monthly guide called the The Employer Handbook. O 1 Billings v. Atkinson, 489 S.W.2d 858, 860 (Tex. 1973). Indus. Found. of the S. v. Tex. Indus. Accident Bd., 540 S.W. 668, 680 (Tex. 1976), cert denied 430 U.S. 934 (1977). 3 Jennings v. Minco Technology Labs, Inc., 765 S.W.2d 497, 499 (Tex. App.—Austin, 1989); cf., Farrington v. Sysco Food Serv’s, Inc., 865 S.W.2d 247 (Tex. App.—Houston [1st Dist.] 1993). 4 Id. 5 29 U.S.C. § 2002 (2010). 6 45 CFR § Part 160; 45 CFR Part 164, Subpart A & E. 2 ✯ Fall 2011 7 Tex. Bus. & Comm. Code § 501.001 (2010). K-Mart Corp. Store No. 7441 v. Trotti, 677 S.W.2d 632, 634 (Tex. App.—Houston [1st Dist] 1984). 9 Id. 10 Id. 11 Id. at 637-638. 12 18 U.S.C. § 2509, et seq. (2010). 13 18 U.S.C. § 2511(2)(d) (2010). 14 U.S. v. Amen, 831 F.2d 373, 378 (2nd Cir. 1987); Williams v. Poulos, 11 F.3d 271, 281 (1st Cir. 1993)(quoting Griggs-Ryan v. Smith, 904 F.2d 112, 116-17 (1st Cir. 1990). 15 Griggs-Ryan, 904 F.2d at 117. 16 Deal v. Spears, 980 F.2d 1153, 1157 (8th Cir. 1992). 17 Tex. Civ. P rac. & R em. Code § 123.001(2) (2010). 18 Collins v. Collins, 904 S.W.2d 792 (Tex.App.—Houston [1st Dist.] 1995). 19 18 U.S.C. § 2510(5)(a) (2010). 20 There is a dearth of case law interpreting the business use exception under the ECPA. Many of the cited cases were decided before the statutes were recast, but remain applicable due to the use of the same language. 21 Deal, 980 F.2d at 1157. 22 Id. at 1157-58 (determining that recorder was instrument rather than phone and since the recorder was not provided by the phone company, exception not applicable); cf., Epps v. St. Mary’s Hosp. of Athens, Inc., 802 F.2d 412, 415-16 (11th Cir. 1986)(holding interception device was dispatch device to recorder). 23 Watkins, 704 F.2d at 582-83; Briggs v. American Air Filter Co., Inc., 630 F.2d 414, 420 (5th Cir. 1980). 24 Id. at 583-584. 25 See United States v. Steiger, 318 F.3d 1039, 1048-49 (11th Cir. 2003); Konop v. Hawaiian Airlines, Inc., 302 F.3d 868 (9th Cir. 2002); Steve Jackson Games, Inc. v. U.S. Secret Serv., 36 F.3d 457 (5th Cir. 1994); see also Wesley Coll. v. Pitts, 974 F. Supp. 375 (D.Del. 1997), summarily aff’d, 172 F.3d 861 (3d Cir. 1998). 26 See 18 U.S.C. §§ 2701–2711 (2010); Note, the SCA has been given various names by commentators including: (1) the “Electronic Communications Privacy Act” or “ECPA” because it was first enacted as part of that statute; (2) the “Stored Wired and Electronic Communications and Transactional Records Access” statute or “SWECTRA” because that is the formal title given to Chapter 121 in Title 18; (3) Stored Communication Act, by the United States Supreme Court in City of Ontario v. Quon, and (4) “Title II” because it was enacted as the second title of ECPA. The SCA is technically part of the ECPA and not a stand-alone act. For ease of reference, this article will refer to Title I of the ECPA, sometimes referred to as the “Wiretap Act” as the ECPA and Title II as the SCA. 27 18 U.S.C. § 2701(a)(1) (2010). 28 Cell phone and text messaging services are each an “electronic communication service” within the meaning of the SCA. 18 U.S.C. § 2711(1) (2010)(incorporating definitions from Title I at 18 USC § 2510(12) and (15)); see also Crispin v. Christian Audigier, Inc., 717 F.Supp.2d 965, 979 (C.D. Cal. 2010) citing Jayne v. Sprint PCS, No. CIV S-07-2522 LKK GGH P, 2009 WL 426117, *6 (E.D.Cal. Feb. 20, 8 THE RETURN RETURNTO TOTABLE TABLEOF OFCONTENTS CONTENTS Advocate 2009)(cell service); In re Applications of U.S. for Orders Pursuant to Title 18, U.S.Code § 2703(d), 509 F.Supp.2d 76, 79 (D. Mass. 2007) (cell service); Quon v. Archstone Wireless, 529 F.3d 892, 900-03 (9th Cir. 2008), reversed on other grounds by City of Ontario v. Quon, 560 U.S. ----, ---- - ----, 130 S.Ct. 2619, 2629-31, 177 L.Ed.2d 216 (2010)(text service). 29 18 U.S.C. § 2702(a)(1) (2010). 30 18 U.S.C. § 2701(c)(1)(content and user information) and 2702(b) (3)(as to content of voicemails or texts). 31 There is small chance an employer may claim rightful access to content of communications for company issued cell phones under 18 U.S.C. § 2702(b)(1) if the employer can successfully argue that it is the “addressee” or an “agent” for the recipient. This point does not appear to have been raised in a case and was glossed over in Quon v. Archstone Wireless, 529 F.3d at 900. 32 18 U.S.C. § 2702(c)(3) (2010). 33 “Customer records” include “record[s] . . . pertaining to a subscriber” include transactional records, such as account logs that record account usage; cell-site data for cellular telephone calls; and email addresses of other individuals with whom the account holder has corresponded. See H.R. Rep. No. 103-827, at 10, 17, 31 (1994), reprinted in 1994 U.S.C.C.A.N. 3489, 3490, 3497, 3511; see also Hill v. MCI WorldCom Commc’ns, Inc., 120 F. Supp. 2d 1194, 1195-96 (S.D. Iowa 2000) (names, addresses, and phone numbers of persons called”); United States v. Allen, 53 M.J. 402, 409 (C.A.A.F. 2000) (log providing date, time, user, and detailed internet addresses); In re Application of United States, 509 F. Supp. at 80 (historical cell-site information). 34 Tex. Civ. P rac. & R em. Code § 123.001(2) (2010). 35 Id. 36 18 U.S.C. § 2711(1) (2010) (incorporating the definition of “electronic communication” from 18 U.S.C. § 2510 (12)). 37 560 U.S. ----, ---- - ----, 130 S.Ct. 2619, 2629-31, 177 L.Ed.2d 216 (2010). 38 Id. at 2625. 39 Id. 40 Id. at 2626. 41 Id. 42 Id. 43 Id. 44 Id. 45 Id. 46 Id. 47 Id. at 2630-33; note that certiorari was denied regarding the lower court’s decision against the cell service provider under the SCA. 48 Trotti, 677 S.W.2d at 634-35. 49 18 U.S.C. § 2510. 50 18 U.S.C. §§ 2701-12. 51 ‘Electronic communication’ means any transfer of signs, signals, writing, images, sounds, data, or intelligence of any nature transmitted in whole or in part by a wire, radio, electromagnetic, photoelectronic or photooptical system that affects interstate or foreign commerce.” 18 U.S.C. § 2510(12) . ✯ Fall 2011 52 67 __ F.3d __, 2010 WL3503506 (7th Cir. Sept. 9, 2010). 18 U.S.C. § 2520(b). 54 18 U.S.C. § 2701. 55 18 U.S.C. § 2510(15). 56 2010 WL 3896533 (W.D. Pa. Sept. 30, 2010). 57 Interestingly, family law cases raise an equal amount of issues concerning what can and cannot be done with data on laptops and password-protected Internet email or social networking accounts. 58 18 U.S.C. § 2510(17)(B). 59 18 U.S.C. § 1030. 60 18 U.S.C. § 1030(a)(1). 61 2009 WL 48187 (M.D. Ga. Jan. 7, 2008). 62 Damage is defined as “impairment to the integrity or availability of data, a program, a system, or information.” 18 U.S.C. § 1030(e) (8). “Loss” is “any reasonable cost to any victim, including the cost of responding to an offense, conducting damage assessment, and any revenue lost, cost incurred, or other consequential damages incurred because of interruption of service.” Id. at § 1030(e)(11). Through 18 U.S.C. § 1030(a)(4) liability is premised on there being at least $5,000 in losses in any one-year period. 63 2011 WL1742028 (M.D.Fla. May 6, 2011). 64 __ F.3d __, 2011 WL1585600 (9th Cir. 2011). 65 Pietrylo v. Hillstone Restaurant Group d/b/a Houston’s, D.N.J., No. 06-5754, unpublished, Sept. 25, 2009. 66 NLRB Case No. 34-RC-002401. For details, see the February 11, 2011 NLRB Press Release available at www.nrlb.gov/news-media/ news-releases/archive-news (last visited June 14, 2011). 67 Id. 68 Lee Enterprises, Inc., d/b/a Arizona Daily Star, NLRB Dir. of Advice, No. 28-CA-23267 (April 21, 2011 [released May 10, 2011]). 69 Id. 53 68 THE RETURN RETURNTO TOTABLE TABLEOF OFCONTENTS CONTENTS Advocate ✯ Fall 2011 C hanges in the 2010 Pattern Jury C harges BY J. BRETT BUSBY I. Introduction The Texas Pattern Jury Charges (the PJCs) are revised every two years. A different committee is responsible for reviewing and revising each volume, and an Oversight Committee reviews all of the volumes and resolves any conflicts between them. The committees meet frequently to try to provide the best pattern charges for the bar. The members of each committee are appointed by the State Bar’s president, who strives for diversity in the appointments so that each committee includes practitioners who bring both plaintiff and defense perspectives, as well as trial and appellate judges from around the state. In this article, I focus on the significant changes made in the 2010 editions of the General Negligence & Intentional Personal Torts (Negligence) volume, the Malpractice, Premises, & Products (Malpractice) volume, and the Business, Consumer, Insurance, and Employment (Business) volume. I also address revisions to the general instructions in Tex. R. Civ. P. 226a that were issued after the 2010 editions were published.1 II. Issues for All Volumes A few significant changes apply to all three of the civil litigation volumes. The same instruction is often repeated in each volume. A. General Instructions All volumes of the Pattern Jury Charge contain general or “boilerplate” instructions that include the instructions to the jury panel before voir dire examination, instructions to the jury after jury selection and the charge of the court. These instructions come from Rule 226a of the Texas Rules of Civil Procedure. The volumes contain a version of these instructions that is now outdated. The Supreme Court has now revised these instructions, effective April 1, 2011.2 Proposed changes to Rule 226a were drafted initially by the Oversight Committee, reviewed by the Supreme Court Advisory Committee, and ultimately approved by the Texas Supreme Court with some modifications. The purpose of the changes was to make the instructions clearer for the jury. They also include some new safeguards concerning jurors’ use of the internet and note-taking. The changes accomplish the following: • Remind the jurors not to communicate about the case via phone, text, email, Facebook, Twitter, etc. or photograph the proceedings. • Remind the jurors not to research anything about the case via the internet. • Instruct jurors about the proper use of notes during trial and during deliberation. • Provide for the destruction of notes after the trial. • Add the following language to the definition of preponderance of the evidence: “A preponderance of the evidence is not measured by the number of witnesses or by the number of documents admitted in evidence. For a fact to be proved by a preponderance of the evidence, you must find that the fact is more likely true than not true.” • Revise the instructions to the jury on a 10-2 or 11-1 verdict and include an instruction that “all jurors should continue to deliberate on every question. You may end up with all 12 of you agreeing on some answers while only 10 of you agree on other answers. But when you sign the verdict, only those 10 who agree on every answer will sign the verdict.” • Provide a new verdict form. B. Proximate Cause By far the most discussed change to the PJCs was the change to the definition of proximate cause. The individual committees voted 2-1 to include the concept of “substantial factor” in the definition. Given this split, the Oversight Committee discussed the issue, considered input from the individual committees, and voted to make the same change in all three volumes. Many committee members felt that the definition of proximate cause should have changed in the 2008 volumes in light of Ford Motor Co. v. Ledesma, 242 S.W.3d 32 (Tex. 2007), which addressed the meaning of producing cause. As a result of the Ledesma opinion, the 2008 pattern jury charges redefined “producing cause” as “a cause that was a substantial factor in bringing about the [occurrence or injury] and without which the [occurrence or injury] would not have occurred. There may be more than one producing cause.” E.g., Malpractice PJC 70.1 (2008). THE RETURN RETURNTO TOTABLE TABLEOF OFCONTENTS CONTENTS Advocate Then, in 2010, the supreme court reversed a judgment in which the jury was instructed under the old definition of producing cause. Transcon. Ins. Co. v. Crump, 330 S.W.3d 211 (Tex. 2010). In Crump, the court explained, “‘The two elements of proximate cause are cause in fact (or substantial factor) and foreseeability . . . . Cause in fact is established when the act or omission was a substantial factor in bringing about the injuries, and without it, the harm would not have occurred.’” Id. at 222–23 (quoting IHS Cedars Treatment Ctr. v. Mason, 143 S.W.3d 794, 798–99 (Tex. 2004)). The court then held that the trial court submitted an erroneous jury charge by failing to include the “substantial factor” language in the definition of producing cause. Id. at 225. In light of this holding, the Oversight Committee felt that the definition of “proximate cause” in the Pattern Jury Charges had to be changed. In the below-the-line comments to the new and independent cause instructions, the Committees have also added the phrase “unbroken by any new and independent cause” to the proximate cause definition. This corrects an inadvertent omission in the 2008 edition. C. Exemplary Damages In recent years, the various pattern jury charge committees have tried to standardize their treatment of exemplary damages. The Business volume still differs from the Malpractice and Negligence volumes in the imputation of gross negligence to a corporation. Compare Business PJC 115.38B with Negligence PJC 10.14C and Malpractice PJC 85.2C. A subcommittee with members from all of the volumes is meeting this year to attempt to resolve the differences. ✯ Fall 2011 69 As a result, the Committee added some “ands” to the Joint Enterprise question in PJC 7.11 to clarify that all of the listed elements must be satisfied for the question to be answered affirmatively. It now reads like this: A “joint enterprise” exists if the persons concerned have (1) an agreement, either express or implied, with respect to the enterprise or endeavor; and (2) a common purpose; and (3) a community of pecuniary interest in [the common purpose of the enterprise], among the members [of the group]; and (4) an equal right to a voice in the direction of the enterprise, which gives an equal right of control. Likewise, the Committee added an extra “or” to the Assault and Battery question in PJC 6.6 to clarify that the defendant need commit only one of three acts listed to be liable for assault. It now reads as follows: A person commits an assault if he (1) intentionally, knowingly, or recklessly causes bodily injury to another; or (2) intentionally or knowingly threatens another with imminent bodily injury; or (3) intentionally or knowingly causes physical contact with another when he or she knows or should reasonably believe that the other will regard the contact as offensive or provocative. Similar additions of “and” and “or” have been made throughout all volumes. III. Negligence Volume – Green Cover If the plaintiff seeks recovery of uncapped exemplary damages based on conduct described as a felony in certain sections of the Penal Code, the Business volume notes at least one decision holding that the instruction must inform the jury that the alleged fraud must have caused the plaintiff’s injuries. See Business PJC 115.39-.45 (comment on “When to use”); Service Corp. Int’l v. Guerra, No. 13-07-707-CV, 2009 WL 3210940, at *9-10 (Tex. App.—Corpus Christi Oct. 8, 2009), rev’d on other grounds, 2011 WL 2420208 (Tex. June 17, 2011). D. “Or” and “And” Each volume has changed the way that multi-part instructions use the words “or” and “and”. These changes grew out of a project by the Oversight Committee, which included a survey of trial judges and a study with mock jurors. The Committee found that when “and” was used only between the last two elements in a list, mock jurors did not understand that they had to find that all of the elements were satisfied. A. Revisions to the Damages Chapters 1. Injuries of Minor Child. The Negligence Volume Committee has made several changes to PJC 8.4, which is the damages question to be used in a case involving injuries to a minor child. The first change is to the basic question itself. The old version charged the jury with determining the cash award that “would fairly and reasonably compensate Paul Payne, Jr. for his injuries, if any,” that resulted from the occurrence in question. The new version instead seeks the award that “would provide fair and reasonable compensation for Paul Payne, Jr.’s injuries, if any.” The proposed comment accompanying this change explains it fairly plainly: This question differs from prior versions as well as from most other damage questions in that it does not ask the jury to determine the amount that would “compensate Paul Payne, Jr. for his injuries, 70 THE RETURN RETURNTO TOTABLE TABLEOF OFCONTENTS CONTENTS Advocate if any . . . .” Because 8.4 includes elements of damage (e.g., loss of earning capacity and medical care expenses incurred prior to the age of majority) that reflect injuries to the minor, but that are not recoverable by the minor, the Committee felt that a revision was necessary to remove any reference to the person being compensated. Rather, a more accurate question, given the potentially differing rights to recovery, is one that asks the jury to value the injuries themselves, without regard to who is to be compensated for those injuries. The Committee has also changed the individually listed damages elements in PJC 8.4. The new version separates those damages incurred before the minor reaches majority and those that in reasonable probability the minor will incur after turning 18. Thus, the damage element of “loss of earning capacity” is now divided into three parts: (1) “loss of earning capacity sustained in the past;” (2) “loss of earning capacity that, in reasonable probability, will be sustained from the time of trial until Paul Payne, Jr. reaches the age of eighteen years;” and (3) “loss of earning capacity that, in reasonable probability, will be sustained in the future after Paul Payne, Jr. reaches the age of eighteen years.” Similarly, the damage element of “medical care expenses” is divided into three parts. The Committee added comments to PJC 8.4 explaining the reason for this change and how to submit the elements when the child reaches majority before the case goes to trial. 2. Parents’ Loss of Services of Minor Child. The Committee also added language to its comment following PJC 8.5 to aid the practitioner dealing with the parents’ loss of services of a minor child as a damages element. The new language follows: Texas law permits a parent to recover damages for the loss of services of a minor child. The following types of services are examples from the case law: running errands, doing yard work, washing dishes, sweeping floors, mopping, dusting, washing windows, making minor repairs, cutting hay, feeding animals, washing laundry, performing farm work, shining shoes, ironing clothes, caddying, harvesting watermelons, and generally helping around the house. See, e.g., Green v. Hale, 590 S.W.2d 231, 235-36 (Tex. Civ. App.—Tyler 1979, no writ); Gonzalez v. Hansen, 505 S.W.2d 613, 615 (Tex. Civ. App.—San Antonio 1974, no writ). “The monetary value of a child’s lost services is not akin to and cannot be measured with the ✯ Fall 2011 mathematical precision of lost wages,” Pojar v. Cifre, 199 S.W.3d 317, 347 (Tex. App.—Corpus Christi 2006, pet. denied); but the plaintiff must present some evidence of the performance and value of lost services and must also establish that the injury at issue precludes performance of such services. Pojar, 199 S.W.3d at 347); Gonzalez, 505 S.W.2d at 615. 3. Exclusionary Instruction for Other Condition. The Committee has rephrased PJC 8.7, an exclusionary instruction meant to prevent awards for conditions not caused by occurrence giving rise to the lawsuit. The old instruction charged the jury not to “include any amount for any condition not resulting from the occurrence in question.” The new instruction—an attempt at clarification—tells the jury not to “include any amount that did not result from the occurrence in question.” B. Negligent Entrustment In light of a recent Texas Supreme Court opinion addressing liability for negligent entrustment, the Committee altered the comment to PJC 7.12 concerning proximate cause. The Comment in the 2008 volume provides that “[n]egligent entrustment is considered a proximate cause of the collision if the negligence of the driver to whom the vehicle was entrusted was a proximate cause of the collision.” The cases cited for this proposition are a Fourteenth Court of Appeals case from 1968 and a Texas Supreme Court case from 1951. The new comment, citing the new case, reads as follows: Proximate cause of entrustor. Negligent entrustment is considered a proximate cause of the collision if the risk that caused the entrustment to be negligent caused the accident at issue. TXI Transportation Co., Inc. v. Hughes, 306 S.W.3d 230, 240-41 (Tex. 2010) (neither the driver’s status as an illegal alien nor the fact that he had used a fake Social Security number to obtain his commercial driver’s license was a proximate cause of the accident). C. New Limitations PJC The biggest change made by the Negligence Volume Committee is the addition PJC 14.1 on limitations. The Committee added this question to address cases in which a plaintiff files suit within the limitations period but does not serve the defendant until after the statute has run, and the defendant pleads the affirmative defense of limitations. Sometimes trial courts can dispose of such questions on summary judgment, such as when it can be shown as a matter of law that the plaintiff was not diligent in seeking to effect service. But often such accusations are questions of fact. This PJC provides trial courts THE RETURN RETURNTO TOTABLE TABLEOF OFCONTENTS CONTENTS Advocate with a ready method to submit the issue to the jury hearing the merits of the case. The new PJC is fairly straightforward: Did Paul Payne, or someone acting on his behalf, exercise diligence to have Don Davis served? The standard of diligence required is that diligence to procure service which an ordinarily prudent person would have used under the same or similar circumstances. The duty to use diligence continues from the time suit was filed against Don Davis on [date] until Don Davis was served on [date]. Answer: “Yes” or “No.” Answer: IV. Malpractice Volume – Red Cover ✯ Fall 2011 71 cases to use the word “reasonable” instead of “ordinary” to describe the applicable standard of care. Although the phrase “ordinary care” has been used in the PJC for many years, the Committee was concerned that it had no precedential support and tended to suggest a lower and more forgiving standard of care—i.e., that the defendant only had to be “ordinary.” 3. Responsible third party. In PJC 51.2, 61.2, 66.2, and 71.2, the Committee added a sentence to the “responsible third party” comment informing practitioners that at least one Texas court has held that it is “only upon the trial court’s granting of a motion for leave to designate a person as a responsible third party that the designation becomes effective.” Valverde v. Biela’s Glass & Aluminum Prods., 293 S.W.3d 751, 754-55 (Tex. App.—San Antonio 2009, pet. denied); see also Ruiz v. Guerra, 293 S.W.3d 706, 714-15 (Tex. App.—San Antonio 2009, no pet.). 4. Emergency care. On the subject of emergency care, the 2010 A. Revisions to the Malpractice Chapter edition deletes the comment about “when to omit Question 1. Lost chance of survival. Based on the Texas Supreme Court’s 2” from PJC 51.18A, 51.18B, and 51.18C. After considerable opinion in Columbia Rio Grande Healthcare v. Hawley, 284 discussion, the Committee concluded that this comment S.W.3d 851, 860-61 (Tex. 2009), the Malpractice Volume was confusing and potentially misleading, particularly in Committee included a comment and a proposed instruction suggesting that the emergency care in PJC 50.1-.3 about the “lost chance of question presented an “affirmative survival.” The comment explains that Although the phrase “ordinary defense.” The Committee also added “an instruction for lost chance of surcare” has been used in the PJC a comment to PJC 51.18C explaining vival should be submitted only when for many years, the Committee that the four “relevant factors” the plaintiff suffers from a particular was concerned that it had no regarding whether the medical care medical condition, such as cancer, or treatment was rendered with precedential support and tended that places the proximate cause of the willful or wanton negligence should plaintiff’s death or impending death to suggest a lower and more be omitted if any of the three characinto question.” The comment further forgiving standard of care—i.e., teristics specified in Tex. Civ. Prac. explains that “when evidence demonthat the defendant only had to be & R em. Code § 74.154(b)(1)-(3) strates that such a medical condition “ordinary.” apply. Thus, if the medical care or pre-exists the alleged negligence of treatment (1) occurs after the patient the defendant, and at the time of the is stabilized and is capable of receiving medical treatment alleged negligence, the medical condition resulted in the as a nonemergency, (2) is unrelated to the original medical plaintiff having a 50% or less chance of survival, the [lost emergency, or (3) is related to an emergency caused in whole chance of survival] instruction is proper.” The proposed or in part by the negligence of the defendant, then the jury instruction states: should not be instructed about the four factors that bear on whether the defendant may have rendered the medical care You are instructed that Paul Payne must have had a “with willful or wanton negligence.” greater than fifty percent (50%) chance of survival if reasonable medical care had been provided on or B. Revisions to the Premises Chapter around [the time of the alleged negligence] for the 1. Right to control. The Committee continually discusses, negligence of Dr. Davis to be a proximate cause of debates, and revises the “right to control” question and comthe [injury] to Paul Payne. ment in PJC 66.3. The 2010 edition is no exception. Based on a comment from a practitioner, the Committee added a 2. Reasonable care. PJC 50.1 includes a new comment sug“caveat” noting the distinction between a contractual retention gesting that it may be appropriate in certain malpractice 72 THE RETURN RETURNTO TOTABLE TABLEOF OFCONTENTS CONTENTS Advocate of the right to control and the actual exercise of control, and explaining how this distinction may affect the submission or phrasing of a right to control question. The Committee also added a note explaining that Tex. Civ. Prac. & R em. Code § 95.003 is the source of the phrase “some control” that is included in the proposed question. 2. Easement holders. The Committee added a comment to PJC 66.4, 66.5, 66.6, and 66.9 explaining how the status of a plaintiff (as invitee, licensee, or trespasser) should be determined when the defendant is either an exclusive easement holder or a non-exclusive easement holder of the premises in question. If the defendant is an exclusive easement holder, the jury should look to the plaintiff’s status in relation to the easement holder. If the defendant is a non-exclusive easement holder, however, the jury should look to the plaintiff’s status in relation to the landowner. C. Revisions to the Products Chapter. 1. Negligence in products cases. Based on requests from both the bench and bar, the Committee included in the 2010 edition a new question, PJC 71.7, showing how to submit a negligence theory in a products liability case. The accompanying comment explains that a negligence theory in a products case may be premised on a negligent design, negligent manufacturing, or negligent marketing; as a result, the question incorporates the appropriate definitions from those theories, in addition to the traditional definitions of “negligence,” “ordinary care,” and “proximate cause.” The Committee also included a comment in this and other PJC sections cautioning against the submission of strict liability, negligence, and implied warranty theories in the same case because the risk of conflicting answers may require a new trial. 2. Negligent undertaking. Based on a comment received from a practitioner, the Committee revised the existing question and comment on negligent undertaking (PJC 71.8). The question formerly defined element 3 of negligent undertaking as follows: 3. either [someone] relied on Don Davis’s performance or Don Davis’s performance increased Paul Payne’s risk of harm. The comment then discussed the use of “someone” to cover situations in which “[t]he person relying on the performance of the conduct in question [is] not the plaintiff or anyone in privity with the plaintiff.” The revised question redefines element 3 to state: ✯ Fall 2011 3. either [Paul Payne] relied on Don Davis’s performance or Don Davis’s performance increased Paul Payne’s risk of harm. The revised comment replaces the previous “use of someone” comment, instead providing a “caveat to paragraph 3” of the question. This caveat discusses the two types of negligent undertaking that will dictate whether to use the name of the plaintiff or someone else in the paragraph. The plaintiff’s name should be used if the negligent undertaking involves the rendition of services to the plaintiff. See R estatement (Second) of Torts § 323. But the name of a third party should be used if the negligent undertaking involves the rendition of services to another, which the defendant should recognize as necessary for the protection of a third party. See R estatement (Second) of Torts § 323A. The second type of negligent undertaking was involved in Torrington Co. v. Stutzman, 46 S.W.3d 829, 838-39 (Tex. 2000), which is the case that originally gave rise to PJC 71.8. 3. Breach of warranty. During the Committee’s routine review of PJC 71.10 (breach of implied warranty of merchantability under Tex. UCC § 2.314(b)(1)-(2), (4)-(6)), it discovered that the “conditioning” instruction between the first and second question was wrong because it erroneously instructed the jury to answer question two (on proximate cause) only if the answer to question one (on merchantability) was “yes,” (instead of “no,” as it should have read). That discovery, in turn, revealed further deficiencies in the existing version of PJC 71.10. As a result, the Committee completely rewrote PJC 71.10, and then made substantial revisions to the related PJC 71.9 (breach of implied warranty of merchantability under Tex. UCC § 2.314(b)(3)) and PJC 71.11 (breach of implied warranty of fitness for a particular purpose). The revised questions in PJC 71.9, 71.10, and 71.11 faithfully track the elements of the UCC and hopefully will be more useful to the bench and bar than the previous versions. D. Revisions to the Damages Chapter 1. Damages for injury to a minor. The Committee modified the question and comments to PJC 80.5 (personal injury damages — injury of minor child) to reflect that personal injury damages generally are not recoverable by a minor. Thus, the revised question asks the jury to value the injuries themselves, without regard to who is ultimately going to be compensated for those injuries. In addition, revised PJC 80.5 includes several subparts for loss of earnings and medical care expenses that can be used when the minor turns 18 before trial. Finally, PJC 80.6 (personal injury damages — parents’ loss of services of minor child) expands the existing comment that describes THE RETURN RETURNTO TOTABLE TABLEOF OFCONTENTS CONTENTS Advocate the types of services by a minor for which the parents may recover damages. 2. Economic damages in legal malpractice cases. Inspired by the Business Volume’s effort to delineate the types of damages available in DTPA and breach of contract cases, the Malpractice Volume added a new PJC 84.4 that gives several hypothetical examples of how instructions may be worded to submit various measures of damages in legal malpractice cases. These examples include: Sample A—Value of the original suit The amount, if any, that Paul Payne would have recovered and collected if his original suit against Tom Taylor had been properly prosecuted by Don Davis. Sample B—Loss to the value of the original suit The difference, if any, between the amount that Paul Payne [recovered] [settled for] and collected in his original suit against Tom Taylor and the amount he would have [recovered] [settled for] and collected if the original suit had been properly prosecuted by Don Davis. Sample C—The increase in damages assessed against Paul Payne in the original suit The increase, if any, in damages assessed against Paul Payne in his original suit with Tom Taylor caused by the failure of Don Davis to properly defend the lawsuit. ✯ Fall 2011 Committee is the addition of new questions and instructions regarding violations of the Texas Securities Act. The Committee concluded that the law had become sufficiently settled on many issues under the Securities Act to allow reliable patterns to be drafted. These new pattern questions and instructions appear in the fraud chapter as PJC 105.12 through 105.18. 1. Liability for factual misrepresentation or omission. The main question and instruction regarding whether a factual misrepresentation or omission violates the Texas Securities Act is PJC 105.12. That question and instruction, as well as selected portions of the comment, are reprinted below. This section also contains an instruction regarding when a prediction, projection, or other statement of belief constitutes an untrue statement of material fact (PJC 105.13), as well as questions submitting the defenses that the plaintiff knew of the untruth or omission (PJC 105.14) or that the defendant did not know of it (PJC 105.15). PJC 105.12 Did Don Davis commit a securities law violation against Paul Payne? A securities law violation occurs when— 1. V. Business Volume – Blue Cover A. Revisions to the Fraud Chapter: New Questions and Instructions on Texas Securities Act Violations The most significant change by the Business Volume a person [sells or offers to sell / buys or offers to buy] a security by means of either a. an untrue statement of a material fact; or Sample D—Additional attorney’s fees incurred Reasonable and necessary attorney’s fees incurred by Paul Payne for legal services proximately caused by the negligence of Don Davis. Do not include any attorney’s fees incurred for the prosecution of this claim against Don Davis. The accompanying comments provide the legal support for these sample instructions, including the Texas Supreme Court’s recent opinion in Akin, Gump, Strauss, Hauer & Feld, L.L.P. v. Nat’l Dev. & Res. Corp., 299 S.W.3d 106, 113-14 (Tex. 2009). The Committee invites the bench and bar to comment on these samples and to provide any additional ones that may be appropriate for inclusion in the next edition. 73 b. an omission to state a material fact necessary to make the statements made, in light of the circumstances under which they are made, not misleading; and 2. the other person [purchases the security from / sells the security to] him; and 3. the other person suffers injury. A fact is “material” if there is a substantial likelihood that a reasonable investor would consider it important in deciding whether to [purchase / sell] a security, because it would significantly alter the total mix of information made available. 74 THE RETURN RETURNTO TOTABLE TABLEOF OFCONTENTS CONTENTS Advocate COMMENT (selected portions) When to use. PJC 105.12 is based on Tex. Rev. Civ. Stat. Ann. art. 581-33A(2) and 33B, which applies only to fraud in a transaction involving the sale or purchase of a security. In a case involving an alleged registration violation of Tex. Rev. Civ. Stat. Ann. art. 581-33A(1) or 33 C, parts a and b of this instruction should be modified as necessary to reflect the statutory elements of such a violation. Sells or offers to sell. The Texas Securities Act broadly defines “sell,” as well as “sale” and “offer for sale,” in Tex. Rev. Civ. Stat. Ann. art. 581-4(E). See In re Enron Corp. Secs., Deriv. & ERISA Litig., 258 F. Supp.2d 586, 603-04 (S.D. Tex. 2003). If there is a dispute about whether a sale occurred or an offer was made, additional instructions may be necessary. If the person who allegedly committed fraud sold the security, then “sells or offers to sell” should be used in part a of this instruction, and “purchases the security from” should be used in part b. If the person who allegedly committed fraud bought the security, then “buys or offers to buy” should be used in part a, and “sells the security to” should be used in part b. The italicized word him in part b may be replaced with “her” or “it” depending on the defendant that allegedly committed the violation. Security. Whether something constitutes a “security” under the Texas Securities Act will usually be a question of law for the court. See Grotjohn Precise Connexiones Int’l, S.A. v. JEM Fin., Inc., 12 S.W.3d 859, 868; Campbell v. Payne, 894 S.W.2d 411, 417-18 (Tex. App.—Amarillo 1995, pet. denied). However, in some cases there may be predicate factual disputes for the jury to resolve regarding whether something is a security under the TSA. For example, the TSA lists an “investment contract” as a security, but the definition of “investment contract” includes multiple elements that may raise a factual dispute. See Anderson v. Vinson Exploration, Inc., 832 S.W.2d 657, 662 (Tex. App.—El Paso 1992, no writ). Damages. PJC 115.19, which addresses direct damages in fraud cases, may be modified to submit damages resulting from a securities law violation. ✯ Fall 2011 The comment to PJC 115.19 explains the necessary modifications and also addresses the remedy of rescission. 2. Liability as a control person or aider. In addition to the primary liability discussed above, the Texas Securities Act imposes liability on those who control a party that violates the Act or aid in a violation. The Committee decided that the law of control person liability was not sufficiently clear to allow a pattern question to be drafted, so it provided an extensive comment instead (PJC 105.16). The comment identifies the different tests for control person liability adopted by Texas courts. The Committee also drafted a question that submits the defendant’s lack of knowledge defense to control person liability (PJC 105.17). Finally, the Committee included a question and instruction on liability for materially aiding a securities law violation (PJC 105.18). B. Revisions to the Fiduciary Duty Chapter PJC 104.1 submits the question whether an informal fiduciary relationship exists but does not address formal fiduciary relationships. The Committee added a comment stating that a question should also be submitted when the existence of a formal fiduciary relationship is disputed. PJC 104.2 places the burden on the fiduciary to prove that there was no breach of fiduciary duty. It formerly included a comment advising that the instruction should be modified in cases where the burden does not shift to the fiduciary. To ensure that the proper modifications are made, the Committee has replaced this comment with a new question and instruction (PJC 104.3) that places the burden on the plaintiff to prove a breach of fiduciary duty in appropriate cases. C. Revisions to the Tortious Interference Chapter PJC 106.3 submits the justification defense to a tortious interference claim. The question previously asked: “Did Don Davis interfere because he had a good-faith belief that he had a right to do so?” To make clear that the trial court decides whether a legal right is colorable, while the jury finds whether the defendant had a good-faith belief in the right, the Committee rewrote the question to ask: “Did Don Davis have a good-faith belief that [describe colorable legal right]?” This new question also avoids asking the jury to consider the defendant’s motive for interfering, which the Supreme Court has held is irrelevant. Tex. Beef Cattle Co. v. Green, 921 S.W.2d 203, 211 (Tex. 1996). THE RETURN RETURNTO TOTABLE TABLEOF OFCONTENTS CONTENTS Advocate D. Revisions to the Civil Conspiracy Chapter Based on a recent case from the Austin Court of Appeals, the Committee added a comment to the conspiracy question (PJC 109.1) suggesting that when there is evidence of divisible damages from multiple underlying torts, and there is a dispute about which torts were the subject of a conspiracy, the court should consider asking the jury to find the torts that were the subject of any conspiracy. See THPD, Inc. v. Continental Imports, Inc., 206 S.W.3d 593, 604-05 (Tex. App.—Austin 2008, no pet.). VI. New Issues It takes an enormous amount of time and energy to create new issues. Some areas of the law are still unclear as to what exactly would be asked of the jury. Some areas of law arise too infrequently and do not merit the time needed to prepare a pattern jury charge. Some areas of the law are too fact-specific to be captured adequately by a pattern. Feel free to contact the chairs of the various committees if you have ideas for new issues. If you have drafted a unique jury charge, send it to the chairs. This might be the starting point for getting a new issue into the PJC. VII. General Tips Consult the PJCs early in the development of your cases. They can be a blueprint for your original petition. And they can pinpoint defenses that you need to plead. But be aware of any new case law or statutory law in your area. You should also know the elements of damage that you must prove and know the types of damages that follow each cause of action. Review the other volumes to see if any instructions are applicable to your case. For example, mitigation of damages in the Negligence volume is limited to the treatment of personal injuries. See PJC 8.9. A more generic mitigation instruction can be found in the Business volume and could be useful for other elements of damages. See PJC 110.7. If you have a cause of action to which the discovery rule applies and need a statute of limitations issue, the Business volume is the only volume with that issue. See PJC 102.23. J. Brett Busby is a partner in the appellate group at Bracewell & Giuliani LLP in Houston. He serves as Chair of the Committee on Pattern Jury Charges: Business, Consumer, Insurance, and Employment. O ✯ Fall 2011 1 75 I would like to thank Justice Tracy Christopher, Fourteenth Court of Appeals, Justice Jeff Brown, Fourteenth Court of Appeals, and Jeffrey S. Levinger, Hankinson Levinger LLP, for their contributions to an earlier version of this article that was presented at the State Bar’s 2010 Advanced Civil Appellate Practice Course. 2 See Amendments to Texas Rules of Civil Procedure 281 and 284 and to the Jury Instructions under Texas Rule of Civil Procedure 226a, No. 11-9047 (Tex. Mar. 15, 2011), available at http://www. supreme.courts.state.tx.us/miscdocket/11/11904700.pdf. RETURN RETURNTO TOTABLE TABLEOF OFCONTENTS CONTENTS 76 STATE STATE BAR BAR LITIGATION LITIGATION SECTION SECTION REPORT REPORT the A DVOCATE EVIDENCE & PROCEDURE UPDATES U PDATES ON CASE LAW pertaining to procedure and evidence as compiled by Luther H. Soules III, of Soules & Wallace and Robinson C. Ramsey, of Langley & Banack, Inc. Commercial Law Developments and Doctrine ✯ THE RETURN RETURNTO TOTABLE TABLEOF OFCONTENTS CONTENTS Advocate ✯ Fall 2011 77 Evidence Update BY LUTHER H. SOULES III & ROBINSON C. RAMSEY � SUPREME COURT OF TEXAS RULE 103: PRESERVATION OF ERROR Serv. Corp. Intern. v. Guerra, No. 09-0941, 2011 WL 2420208, at *9 (Tex. June 17, 2011) In this suit against a cemetery owner for moving a body from one burial plot to another without the family’s permission, the cemetery owner complained of the admission of evidence of other lawsuits against it. The family countered that the cemetery owner had waived error because although it “first raised objections to evidence of other suits, verdicts, and judgments by a motion in limine and objected when the evidence was introduced, [it] did not object when the [family]’s attorney referred to the matters during jury selection and opening statement.” The Supreme Court disagreed. The cemetery owner was “not seeking a mistrial or complaining about matters that occurred during the jury selection process and to which it did not object,” the Court pointed out, “it is complaining about the admission of evidence during trial, to which it timely objected. Error is preserved with regard to a ruling that admits evidence if the opponent of the evidence makes a timely, specific objection and obtains a ruling.” Therefore, “[t]he failure to object to an attorney’s statements during voir dire of the jury panel, without more, does not waive a later objection to evidence offered during trial, because statements by lawyers during the jury selection process are not evidence.” Here, the cemetery owner preserved error because it “timely objected when evidence of other lawsuits was introduced.” The family also argued that the cemetery owner “waived error by referring to the other lawsuits in its own opening statement,” thereby “opening the door” by “effectively inviting a response.” But the attorney for the family, not the cemetery owner, “was the first to allude to other lawsuits in opening statements. The response of [the cemetery owner]’s attorney was not inappropriate in manner or substance: he acknowledged that other suits had taken place, but maintained that the trial should be about the … family’s claims and the facts underlying those claims.” Therefore, the cemetery owner’s attorney “did not exceed the boundaries of the [family]’s attorney’s statements or introduce new matters into the proceedings so that he invited a response.” As a result, the cemetery owner “did not open the door or waive error.” RULE 404: PRIOR WRONGFUL ACTS Serv. Corp. Intern. v. Guerra, No. 09-0941, 2011 WL 2420208, at *10–11 (Tex. June 17, 2011) “Evidence of other wrongs or acts is not admissible to prove character in order to show ‘action in conformity therewith.’ But it is admissible to show a party’s intent, if material, provided the prior acts are ‘so connected with the transaction at issue that they may all be parts of a system, scheme or plan.’ This can be shown through evidence of similar acts temporally relevant and of the same substantive basis.’” In this suit by a decedent’s family against a cemetery operator for changing burial sites without the family’s permission, the Supreme Court held that the family “failed to demonstrate sufficient connection between the events in this case and the alleged actions in other lawsuits to show the other suits were admissible.” The family argued that this evidence was admissible “because the other suits involved similar facts to those underlying their claim—double sale of a plot or moving a body without the family’s permission.” But they “presented no evidence” that the prior suits “involving allegations that plots that had already been purchased and were sold a second time to someone else … were so connected to the events here that they were all part of a system, scheme, or plan.” One of the resale-of-plot cases occurred “in a different cemetery before it was owned by [the defendant] and nearly twenty years before the events in this case. There was no evidence that any of the same employees were involved in … the [previous] case and … that the events were somehow connected, or that circumstances surrounding the sales were similar.” Furthermore, they “presented few details about the other cases they alleged involved sales of plots that already belonged to someone else. To the extent details were provided, they showed that the sales were at different cemeteries and each took place at least two years before the events underlying [this] case.” The family urged that “the other cases were relevant to show a pattern of indifference amounting to a common scheme 78 THE RETURN RETURNTO TOTABLE TABLEOF OFCONTENTS CONTENTS Advocate and show that [the cemetery owner] took no action to avoid recurrences of misconduct. But without evidence of the actual facts and circumstances involved, the evidence [did] not show a sufficient connection to the events at issue to support their being relevant.” Under these circumstances, the Supreme Court concluded that “the trial court erred by admitting irrelevant evidence of other lawsuits, verdicts, and judgments.” COURTS OF APPEALS RULE 403: EXCLUSION OF RELEVANT EVIDENCE In re D.O., 338 S.W.3d 29, 37 (Tex. App.—Eastland 2011, no pet.) In this termination-of-parental-rights case, the mother complained that the trial court erroneously admitted testimony from the child’s foster mother that the child had “placed a swastika on one of his textbooks.” The mother argued that “the swastika evidence was not relevant to the issues to be decided by the jury and that, even if the evidence was relevant, its probative value was outweighed by its prejudicial effect,” but the trial court overruled her objection. “Evidence is relevant if it has any tendency to make the existence of any fact that is of consequence to the determination of the action more or less probable.’” Here, the Department of Family and Protective Services “had to prove that at least one statutory ground for termination occurred and that termination was in the best interest of the children. Therefore, any evidence that [the mother] engaged in conduct constituting a ground for termination or that related to the best interest of the children [was] relevant. The fact that [the child] placed a ‘Nazi symbol’ on his book [was] relevant to determining whether [the mother] endangered [the child]’s physical or emotional well-being and also to evaluating [the child]’s best interest.” “Relevant evidence may nonetheless be excluded ‘if its probative value is substantially outweighed by the danger of unfair prejudice.’ Rule 403 favors the admission of relevant evidence and carries a presumption that relevant evidence will be more probative than prejudicial. Excluding evidence under Rule 403 is an extraordinary remedy that must be used sparingly.” Here, the court of appeals concluded that the mother did not demonstrate “that the admission of the ‘Nazi symbol’ evidence unfairly prejudiced her.” Therefore, it held that the trial court “did not abuse its discretion in admitting the evidence.” Republic Waste Services, Ltd. v. Martinez, 335 S.W.3d 401, ✯ Fall 2011 408, 409–10, 411 (Tex. App.—Houston [1st Dist.] 2011, no pet.) “Although relevant, a trial court may exclude evidence if its probative value is substantially outweighed by the danger of unfair prejudice, confusion of the issues, or misleading the jury.” In this wrongful death and survival action, the trial court sustained the plaintiffs’ objection to the admission of evidence that the decedent was an illegal immigrant on the ground that it was “highly prejudicial.” “The probative value of evidence showing only that the plaintiff is an illegal immigrant, who could possibly be deported, is slight,” the court of appeals observed, “because of the highly speculative nature of such evidence. Without a showing that a plaintiff will likely be deported in his working lifetime, the jury is invited to engage in conjecture and speculation regarding whether he will be deported, when he will be deported, and, if deported, whether he will return to the United States to work. As a result, the probative value of evidence concerning a plaintiff’s illegal immigrant status is low, while the prejudicial effect of this evidence is high.” The appellants argued that their offer of proof “contained evidence showing more than a possibility that [the decedent] would have been deported; that is, they assert[ed] that they offered evidence beyond [the decedent]’s simple status as an illegal immigrant.” In this regard, they pointed to the portion of their offer of proof that “described the federal immigration ICE raid conducted two weeks after [the decedent]’s death.” This testimony, they contended, “was evidence from which the jury could have reasonably inferred that [the decedent] would have been deported in the near future.” The court of appeals disagreed. “The probative value of [the] bill of exception testimony was slight because of its speculative nature,” the court concluded. “At the same time, the prejudicial effect of the evidence was great. As a result, the trial court could have properly concluded that [the] bill of exception testimony did not survive the balancing test under Rule 403.” Therefore, although the evidence of the decedent’s illegal status was “of some relevance to the determination of [his] lost future income,” its probative value “was slight given the speculative nature of the evidence sought to be admitted and the ample evidence that was admitted about [his] immigration status. Simply put, the usefulness of the evidence was limited given what other evidence was, and was not, admitted in this case.” “Had the illegal immigrant status evidence been admitted, the jury would have been required to essentially guess whether [the decedent] would ever have been deported. THE RETURN RETURNTO TOTABLE TABLEOF OFCONTENTS CONTENTS Advocate Simultaneously, the prejudicial effect of revealing that [he] was an illegal immigrant would be great and outweigh[ed] the probative value of the evidence. In short, the record support[ed] the trial court’s determination that the illegal status evidence was inadmissible under Rule 403.4.” “In the end,” the court of appeals explained “we come back to the principle that the decision to admit or to exclude evidence is committed to the trial court’s sound discretion. The trial court is left to exercise that discretion by applying the law to the evidence presented in each case before it. Although the rules of evidence always govern, the evidentiary decisions made after applying those rules will vary from case to case.” Considering the circumstances of this case, the court of appeals concluded that “it was within the trial court’s discretion to exclude the evidence concerning [the decedent]’s illegal immigrant status.” ✯ Fall 2011 79 Luther H. Soules III at Soules & Wallace, P. O. Box 15588, San Antonio, Texas 78212, 210-224-9144, email l.souleslaw@swbell net. Robinson C. Ramsey is a shareholder with Langley & Banack, Inc. in San Antonio. Board-certified in Civil Appellate Law and Family Law, he has written and spoken on the topics of evidence and civil procedure for periodicals and seminars including: the Texas Bar Journal; the State Bar of Texas Litigation Update Course; the State Bar of Texas Advanced Courses in Civil Appellate, Civil Trial, Expert Witness, and Personal Injury Law; the State Bar Ten-Minute Mentor Series; and the University of Houston Law Center’s Evidence/Discovery and Litigation/Trial Tactics Series. He has also authored and co-authored books on evidence and appellate procedure, and is one of the authors for Thomson Reuters’ “Inside the Minds” series of nationally published books on the future of the legal profession. O 80 THE RETURN RETURNTO TOTABLE TABLEOF OFCONTENTS CONTENTS Advocate ✯ Fall 2011 Procedure Update BY LUTHER H. SOULES III & ROBINSON C. RAMSEY SUPREME COURT OF TEXAS JURY CHARGE Serv. Corp. Intern. v. Guerra, No. 09-0941, 2011 WL 2420208, at *3–4 (Tex. June 17, 2011) “When an element of a claim is omitted from the jury charge without objection and no written findings are made by the trial court on that element then the omitted element is deemed to have been found by the court in such manner as to support the judgment.” In this suit for reburying a body in a different cemetery plot without the family’s permission, “the actors’ status as employees was an element of the [plaintiff]’s negligence claim. …[T]here was no objection to the charge on the basis that it omitted the element nor did the trial court make findings on it, so there [was] a deemed finding in support of the judgment. But just as with any other finding, there must be evidence to support a deemed finding.” Here, the Court concluded that the evidence was legally insufficient to support the deemed finding. COURTS OF APPEALS CITATION Holmes v. Texas Mut. Ins. Co., 335 S.W.3d 738, 741–43 (Tex. App.—El Paso 2011, pet. abated) “When a plaintiff files his petition within the limitations period but does not serve the defendant until after the period expires, the plaintiff must exercise diligence in serving citation to interrupt the running of limitations. Indeed, a timely filed suit does not interrupt the applicable statute of limitations unless the plaintiff ‘exercises due diligence in the issuance and service of citation.’ If the plaintiff diligently effects service after the limitation period expired, the date of service relates back to the date of filing.” “The plaintiff bears the burden to prove diligence when a defendant affirmatively pleads limitations and shows that service was not timely. Diligence is determined by whether the plaintiff acted as an ordinarily prudent person would under the same or similar circumstance and whether the plaintiff acted diligently up until the time the defendant was served. An unexplained delay in effecting service constitutes a lack of diligence as a matter of law.” Here, the defendant “was never served with the original peti- tion, nor is there any evidence in the record that [it] was ever aware that [the plaintiff] filed suit against it in district court. Rather, their first notice of the suit was five-and-a-half years later when [the plaintiff] filed his First Amended Petition.” The plaintiff offered “no explanation for the delay in serving [the defendant], much less that he was doing anything in furthering his case against [the defendant].” The court of appeals held that “[s]uch an unexplained, lengthy delay in effecting service was certainly unreasonable and constitutes a lack of due diligence as a matter of law.” Nevertheless, the plaintiff urged that “he did all that he was required to do by filing the petition and asking that the Clerk mail it to [the defendant].” In rejecting this argument, the court of appeals pointed out that “[a]lthough the Clerk of the Court has the duty, upon request by the plaintiff, to issue and deliver the citation as directed … and although a party ‘may ordinarily rely on the clerk to perform his duty within a reasonable time, the ultimate responsibility to ensure that citation was had to the defendant still falls to the plaintiff.’” As a result, if the plaintiff “learns, or by the exercise of diligence should have learned, that the citation was not issued or served on the defendant, it is still incumbent upon him to ensure that the job gets done.” Here, “the burden to ensure that service was had fell to [the plaintiff] despite his request to the District Clerk.” But the plaintiff did not point out “any undertakings on his part in determining whether service was completed in over five years.” Furthermore, even though he was aware that the defendant “may not have been served,” the plaintiff “still made no inquiries into whether service was ever had.” The court of appeals believed that “an ordinarily prudent person would check whether the original citation was actually served when the defendant failed to file an answer within a reasonable amount of time.” Because the plaintiff did not do so, he did not interrupt the running of limitations, and the summary judgment against him was affirmed. PLEADINGS Ritchie v. Rupe, 339 S.W.3d 275, 305–07 (Tex. App.—Dallas 2011, pet. denied) “After the time for filing amended pleadings has passed, the trial court abuses its discretion in denying leave to file an amended pleading unless (1) the THE RETURN RETURNTO TOTABLE TABLEOF OFCONTENTS CONTENTS Advocate party opposing the amendment presents evidence of surprise or prejudice, or (2) the amendment asserts a new cause of action or defense, and thus is prejudicial on its face, and the opposing party objects to the amendment. An amendment that is prejudicial on its face has three defining characteristics: (1) it asserts a new substantive matter that reshapes the nature of trial itself; (2) the opposing party could not have anticipated the new matter in light of the development of the case up to the time the amendment was requested; and (3) the amendment would detrimentally affect the opposing party’s presentation of its case. The decision to allow or deny the amendment rests with the sound discretion of the trial court, and the trial court’s decision will not be overturned unless it constitutes a clear abuse of discretion. The burden of showing surprise or prejudice rests on the party opposing the amendment.” Here, after the close of all evidence, the defendants moved for a directed verdict on the ground that “they were not liable in their individual capacity.” In response, the plaintiff asked for leave to amend the petition to allege that the defendants were liable “in their representative capacities.” At the hearing to determine whether the defendants were “prejudiced and surprised by the amendment,” the defendants’ attorney stated that they “were prejudiced by the amendment because it left them with insufficient time to investigate various trialrelated issues arising with the trusts included as defendants, including limitations, proportionate responsibility, contribution, and whether to present expert testimony about trusts and trustees.” The plaintiff countered that the defendants “had not shown actual prejudice but only assertions that they might have proceeded differently.” After the defendants stated that they did not want a continuance, the trial court granted the trial amendment. The defendants complained on appeal that the trial amendment “was prejudicial on its face and that they presented substantial evidence of surprise and prejudice.” But the court of appeals concluded that “based on the record before it, the trial court could have reasonably concluded that the amendment did not reshape the nature of the trial itself, that appellants anticipated the new matter in light of the case, and that the amendment did not detrimentally affect appellants’ presentation of their case.” Therefore, it held that the trial court “did not abuse its discretion in granting [the plaintiff] leave to amend her petition.” Taylor v. Taylor, 337 S.W.3d 398, 401–02 (Tex. App.—Fort Worth 2011, no pet.) “Texas follows a ‘fair notice’ standard for pleading. Generally, a pleading provides fair notice of a ✯ Fall 2011 81 claim when an opposing attorney of reasonable competence can examine the pleadings and ascertain the nature and basic issues of the controversy and the relevant testimony. In the absence of special exceptions, the petition should be construed liberally in favor of the pleader.” In this divorce case, the wife’s original petition asked the trial court to order the husband “to make payments for the support of the child” and also sought “a temporary order for ‘child support ... while this case is pending.’” The court of appeals held that this pleading provided the husband “with fair notice of [the wife]’s request for child support during the pendency of the case.” The court further found that “there can be no dispute that [the husband] had specific notice that [the wife] sought retroactive child support” because the parties “announced to the trial court that they had agreed to all issues concerning ‘division of property, assignment of liabilities, current child support, health insurance, conservatorship, rights, duties, and responsibilities’ and that [the wife] had reserved the issue of retroactive child support to be litigated after the parties testified about the matters to which they agreed.” Therefore, the trial court “abused its discretion by refusing to hear evidence concerning child support from the date of [the wife]’s original petition through the date of judgment.” Beyond that, the wife contended that the trial court “abused its discretion by refusing to hear evidence concerning child support from the date of separation through the date of her original petition.” Her petition, however, did not “mention or even refer to a request for child support for that period of time.” She argued that the husband “waived any complaint concerning the sufficiency of her pleading by failing to specially except,” but her “only relevant requests for child support” were that the husband “be ordered to make payments for the support of the child” and that “the trial court should make a temporary order requiring [the husband] to pay ‘child support, health insurance premiums for coverage on the child, and 50 percent of the child’s uninsured medical expenses while this case is pending.’ Nothing in her pleading even hint[ed] that she sought child support for dates prior to the date of her original petition.” The court of appeals held that the husband was “not required to except to the petition and ask whether there are other theories that [the wife] want[ed] to allege.” Although her petition provided him “with fair notice of her request for child support during the pendency of the case, nothing in [the] petition suggest[ed] that she sought child support from the date of separation through the date she filed her original petition. Requiring [the husband] to specially except to [the] petition 82 THE RETURN RETURNTO TOTABLE TABLEOF OFCONTENTS CONTENTS Advocate to determine whether [the wife] sought child support prior to the date of her original petition would be akin to requiring a defendant to specially except to a plaintiff’s pleading because other theories or causes of action are available but not included in the plaintiffs pleading.” Therefore, the court concluded that the wife’s original petition “did not provide [the husband] with fair notice of her request for retroactive child support from the date of separation through the date of [the] original petition and that [the husband] did not waive his complaint concerning the sufficiency of [the] pleading for retroactive child support from the date of separation through the date of her original petition by failing to specially except.” In re Spooner, 333 S.W.3d 759, 764–65 (Tex. App.—Houston [1st Dist.] 2010, orig. proceeding) “Assertions of fact, not pleaded in the alternative, in the live pleadings of a party are regarded as formal judicial admissions. A judicially admitted fact is established as a matter of law, and the admitting party may not dispute it or introduce evidence contrary to it. This rule is based on the public policy that it would be absurd and manifestly unjust to permit a party to recover after he has sworn himself out of court by a clear and unequivocal statement.” Nevertheless, a judicial admission “must be clear, deliberate, and unequivocal.” In this medical malpractice case, the defendants generally denied liability and also affirmatively pled the statute of limitations. In motions for summary judgment, they pointed out that although the plaintiff had begun to experience chronic pelvic pain immediately after her tubal ligation surgery, she did not file her lawsuit until over two years later. The plaintiff argued that by making these statements the defendants had “judicially admitted that they had left the sponge within [her] and that the sponge had caused her injury.” The court of appeals disagreed. “When read in context,” the court concluded, “the passages cited by [the plaintiff] from each motion for summary judgment are not clear, unequivocal, and deliberate statements admitting that the sponge was retained in the … tubal ligation or that retained sponge caused [the plaintiff] to suffer chronic pelvic pain for nine years to ten years. …The subject statements were offered to support [the defendants]’ affirmative defense of limitations; they were not offered to disavow or otherwise abandon [their] general denial of liability.” The record revealed that, “in addition to asserting the affirmative defense of limitations, [the defedants] have denied, and continue to deny in other filings, [the plaintiff]’s allegations supporting her claims.” Therefore, the court of appeals held that the trial court correctly ruled that these statements did not constitute judicial admissions. ✯ Fall 2011 SANCTIONS D Design Holdings, L.P. v. MMP Corp., 339 S.W.3d 195, 203–04 (Tex. App.—Dallas 2011, no pet. h.) “Rule 13 provides for sanctions against a party or attorney who signs a pleading, motion, or other paper that is ‘groundless and brought in bad faith or groundless and brought for the purpose of harassment.’” “Groundless” means “no basis in law or fact and not warranted by a good faith argument for the extension, modification, or reversal of existing law.” Bad faith “is not simply bad judgment or negligence, but means the conscious doing of a wrong for dishonest, discriminatory, or malicious purposes.” “Harass” is used “in a variety of legal contexts to describe words, gestures, and actions that tend to annoy, alarm, and verbally abuse another person.” Courts generally “presume that pleadings and other papers are filed in good faith,” and the party seeking sanctions “bears the burden of overcoming this presumption of good faith.” Rule 13 requires the trial court “to hold an evidentiary hearing to make the necessary factual determinations about the motives and credibility of the person signing the allegedly groundless pleading.” Here, the trial court’s order denying the appellees’ motion for sanctions made “no mention of a hearing or any evidence considered, and the appellees stated in their brief that “[t]here were no evidentiary hearings below.” Furthermore, the record did not show “any objection by appellees to the lack of the required evidentiary hearing.” Therefore, the court of appeals could not conclude that “the trial court’s denial of appellees’ motion for sanctions was an abuse of discretion.” SUMMARY JUDGMENT Arellano v. Americanos USA, LLC, 334 S.W.3d 326, 329–30 (Tex. App.—El Paso 2010, no pet.) “Failure to obtain written rulings on objections to summary judgment evidence waives the issue, unless the record reflects an implicit ruling by the trial court. For there to be an implicit ruling, the record must contain something indicating that the trial court ruled on the objections, other than the mere granting of a motion for summary judgment. Here, there was “no indication that [the appellees]’ objection to [the appellant]’s affidavit was ruled upon either explicitly or implicitly. As such, the company’s objection [was] waived, and the objected-to summary judgment evidence remain[ed] a part of the summary judgment record.” Therefore, the court of appeals considered the affidavit in its review of the merits of the appeal. DISCOVERY Dyer v. Cotton, 333 S.W.3d 703, 717–18 (Tex. App.—Houston [1st Dist.] 2010, no pet.) “A party may request disclosure THE RETURN RETURNTO TOTABLE TABLEOF OFCONTENTS CONTENTS Advocate of the name, address, and telephone number of any person with knowledge of relevant facts. Parties have a duty to amend or supplement incomplete or incorrect responses to written discovery. If a party fails to timely make, amend, or supplement a discovery response, that party may not offer the testimony of a witness who was not timely identified unless the trial court finds that (1) good cause exists for the failure to timely make, amend, or supplement the response, or (2) the failure will not unfairly surprise or prejudice the other parties. This rule is mandatory, and the only permissible sanction for a violation—exclusion of the testimony—is automatic, unless the trial court finds good cause or lack of surprise or prejudice. The party seeking to call the witness bears the burden of establishing good cause or the lack of unfair surprise or prejudice, and although the trial court has discretion in determining whether good cause or lack of unfair surprise exists, the trial court’s finding must be supported by the record.” Here, the appellee responded to the appellant’s initial request for disclosure by identifying a person as “a person with knowledge of relevant facts and a potential witness, but reported his address and telephone number as ‘unknown.’” In response to the appellant’s objection to the appellee’s calling this person as a witness for failing to list his address, the appellee’s attorney explained that at the time of the designation he did not have the address. He then described “various efforts” he made to find the person, including “hiring an investigator to investigate [the witness]’s whereabouts.” Shortly before trial, the appellee’s attorney learned that the witness’s business “took him out of the state for much of the time” and that the witness “had been absent for most of the last several years doing title work out of the state,” and that he “had only returned to the area about a month before trial began.” So the situation was this: (1) the appellee “timely identified” the witness as a person with knowledge of relevant facts; (2) the witness was aware of facts that were relevant to the plaintiff’s claim; and (3) the appellant “who was a business acquaintance of [the witness], was equally able to investigate and ascertain [his] whereabouts.” Under these circumstances, the court of appeals determined that trial court did not abuse its discretion in allowing this testimony because “the trial court properly could conclude that [the appellee] made a goodfaith effort to locate [the witness] and that [his] testimony would not surprise or unfairly prejudice [the appellant].” JUDGMENT SLT Dealer Group, Ltd. v. AmeriCredit Fin. Services, Inc., 336 S.W.3d 822, 831–32 (Tex. App.—Houston [1st Dist.] ✯ Fall 2011 83 2011, no pet.) In this breach-of-contract case, the appellant complained that “the trial court’s order granting the First Amended Motion to Modify is a nullity because it violates the rule prohibiting more than one final judgment.” The trial court’s order granting the motion to modify and the first amended judgment were both signed “well within the court’s plenary power,” which had been extended by the appellee’s timely filing a motion to modify the judgment to include an award of appellate attorney’s fees. The appellant acknowledged that “a trial court can modify a final judgment while it retains plenary power, but assert[ed] that the ‘entry of a second judgment in the same case does not automatically vacate the first judgment, and if there is nothing in the record to show that the first judgment was vacated, the second judgment is a nullity.’” “Any change in a judgment made during the trial court’s plenary power is treated as a modified or reformed judgment that implicitly vacates and supersedes the prior judgment, unless the record indicates a contrary intent.” Nothing in the record here indicated that the trial court “did not intend that its second judgment supersede the first.” Furthermore, the language of the order granting the motion to modify, which stated that the judgment “will be modified,” considered in conjunction with “the inclusion of the word ‘Amended’ in the title of the second judgment,” indicated that the trial court intended “that the second judgment replace the first.” Therefore, the court of appeals concluded that this modified judgment, which “contained substantively all the same terms” as the original judgment “and added an award of attorney’s fees,” was “not a nullity.” Luther H. Soules III at Soules & Wallace, P. O. Box 15588, San Antonio, Texas 78212, 210-224-9144, email l.souleslaw@swbell net. Robinson C. Ramsey is a shareholder with Langley & Banack, Inc. in San Antonio. Board-certified in Civil Appellate Law and Family Law, he has written and spoken on the topics of evidence and civil procedure for periodicals and seminars including: the Texas Bar Journal; the State Bar of Texas Litigation Update Course; the State Bar of Texas Advanced Courses in Civil Appellate, Civil Trial, Expert Witness, and Personal Injury Law; the State Bar Ten-Minute Mentor Series; and the University of Houston Law Center’s Evidence/Discovery and Litigation/Trial Tactics Series. He has also authored and co-authored books on evidence and appellate procedure, and is one of the authors for Thomson Reuters’ “Inside the Minds” series of nationally published books on the future of the legal profession. O RETURN RETURNTO TOTABLE TABLEOF OFCONTENTS CONTENTS 84 STATE STATE STATE BAR BAR BAR LITIGATION LITIGATION LITIGATION SECTION SECTION SECTION REPORT REPORT REPORT the the A DVOCATE FROM MY SIDE OF THE BENCH The Closing by Hon. Randy Wilson 157th District Court, Harris County, Texas Commercial Law Developments and Doctrine ✯ THE RETURN RETURNTO TOTABLE TABLEOF OFCONTENTS CONTENTS Advocate ✯ Fall 2011 85 F rom M y Side Of The Bench The Closing BY HON. RANDY WILSON O NE OF THE TRUE PLEASURES OF BEING A DISTRICT JUDGE Write it down. My experience is that about half the jurors is that I get to get to watch closing arguments. This will write down the answers that are suggested by the lawyer is advocacy at its best; lawyers displaying their skills that a juror may be favoring. Jurors want to make sure they and fighting for their clients. The closing argument is both get the answers right. emotional and logical. Yet, some of the most eloquent and Third, tell the jurors what will and will not go back to the gut wrenching closing arguments fail to achieve the desired jury room. For example, tell them that the exhibits will be goal—arming the jury with the tools they need to answer sent to the jury room and that they will be able to take their the questions your way. notes back but that certain demonstratives were not admitted in evidence and they won’t have them in the jury room. If Let’s set the stage. By closing argument, the jury has heard there is a particular demonstrative that lists a lot of dates or all the evidence and many have made up their minds. They numbers or other data that was referred to frequently during are sitting there with a copy of the charge in their hands.1 the trial, invite the jury to jot down on their notes things They probably have a pen and paper since they may have that they want to remember. been taking notes during the trial. Indeed, pursuant to a rules amendFourth, and most important, you ment effective April 1, 2011, jurors Simply put, one of the most should use the closing argument to are allowed to take their notes arm your favorable jurors with the effective things you can do during back to the jury room.2 Bottom ammunition they will need during closing is to carefully and specifically line—they’re sitting there poised to deliberations. While you might identify the exhibits and evidence write what you say. Unfortunately, be tempted to give a bombastic that supports your conclusion to a many lawyers squander that golden and emotional closing, such an particular question. opportunity. Here are my suggesargument may sound good at the tions. time but by the time deliberations begin, those emotional points will First, always argue from the charge. While it would seem be a distant memory. Rather, you need to provide not just that this suggestion would be unnecessary, I see far too the specific evidence, but also the reasons why a vote should many closings where the lawyers give a long speech and be a certain way. The jury may have already made logical either never get to the charge or hurriedly rush through the conclusions, but some may need reasoning in addition to charge almost as an afterthought. The charge should not the specific evidence. Tell them, for example that there are be a mere add-on to be discussed at the end of the closing. five reasons why a particular question should be answered Rather, the charge should be the core of your argument and a certain way. Then, list the reasons and the evidence that the outline for your presentation. The charge enables you supports each reason. A lawyer once said during closing, to focus your argument on the specific causes of action and “When you get to this question during your deliberations, the elements for each. you should focus on Exhibits 3, 12 and 24. You might even want to make a note of those exhibit numbers so that when Second, never hesitate to suggest and write proposed answers you get to that question, you can go right to the key exhibits.” to each question. While I would like to think that the questions in the jury charge are well drafted, I have to confess Simply put, one of the most effective things you can do during that sometimes even the pattern jury charge questions are closing is to carefully and specifically identify the exhibits sometimes less than perfect and could be confusing. Don’t and evidence that supports your conclusion to a particular assume that the jury knows what answer favors your client. question. Jury deliberations usually last many hours or even 86 THE RETURN RETURNTO TOTABLE TABLEOF OFCONTENTS CONTENTS Advocate days. As deliberations wear on, the jury will long forget some of the emotional appeal in your closing. However, their notes, with your specific listing of favorable facts will be with them throughout deliberations. This will provide the roadmap for your favorable jurors to persuade the others to your side. Of course, a plaintiff gets a rebuttal. The opening argument should be based on the charge and a listing of the favorable evidence. The rebuttal argument, however, is the time to let loose and give your emotional arguments. Finally, don’t get bogged down in minutia. Don’t feel compelled to respond to each and every point the other side makes. This is not a collegiate debate where you are judged on whether you have answered each and every opposing point. Rather, this is persuasion at the highest level. Pick your key points and don’t get distracted by each and every opposing argument. Far too often, I see lawyers get derailed by rising to the bait of their opponents by trying to answer each and every point. Am I suggesting that a closing argument should be devoid of emotional appeal? Of course not. You have to make the jury want to vote for you. But you can’t or shouldn’t stop there. In addition to emotional appeal, you must give them the tools they will need to persuade other jurors during deliberations. Judge Randy Wilson is judge of the 157th District Court in Harris County, Texas. Judge Wilson tried cases at Susman Godfrey for 27 years and taught young lawyers at that firm before joining the bench. He now offers his suggestions of how lawyers can improve now that he has moved to a different perspective. O 1 Tex.R.Civ.P. 226a now requires that “[b]efore closing arguments begin, the court must give to each member of the jury a copy of the charge.” 2 Tex.R.Civ.P. 281. ✯ Fall 2011
