5 (or more) RECENT TEXAS CASESYOU NEED TO KNOW ABOUT

2015 Texas Lawyer In-House SummitHouston, Texas

May 21, 2015

WRIGHT & CLOSE, LLPOne Riverway, Suite 2200

Houston, Texas 77056www.wrightclose.com

What’s new from the Texas courts?

In recent months, the Texas Supreme Court handed down several important decisions on a variety of topics that affect businesses:• Challenging arbitration awards.• Liability for defamation claims by employees.• Whether claims sound in tort or in contract,

or are governed by a newly expanded statute.• Limiting imposition of sanctions for

spoliation.• The evidence required to prove lost profits.

Litigation vs. Arbitration?

Unlike a jury verdict, in general, it is very difficult to overturn arbitration awards.

Judicial review of such awards is “exceedingly narrow.” East Tex. Salt Water Disposal Co. v. Werline (Tex. 2010)

Mistakes of fact or law are not enough. Absent statutory or common law

grounds to vacate or modify, reviewing courts lack jurisdiction to review most complaints, including evidentiary sufficiency.

What is the standard courts apply?

Campbell Harrison & Dagley v. Hill, (5th Cir. 2015).

“Every reasonable presumption must be indulged to uphold the arbitrator’s decision.” Awards may not be vacated “even if there is a mistake of fact or law.”

Under the TAA, must show corruption or fraud.

Under the common law, must show a manifest disregard of the law, a gross mistake, or a violation of public policy.

Court of appeals reversed district court and reinstated $35M arbitration award.

How can you challenge an award?

Both TAA and FAA require vacatur of awards upon proof that –• “the rights of a party were

prejudiced by evident partiality of an arbitrator.” Tex. Civ. Prac. & Rem. Code § 171.088(a). (TAA)

• “there was evident partiality or corruption in the arbitrators.” 9 U.S.C. § 10(a). (FAA)

The focus is on the arbitrators.

Cases try to strike a balance between the desire for arbitrators with experience (and likely some prior dealings with one side or the other) and the desire for the process to be impartial.

Prior contacts are not per se disqualifying.

Disclosures meant to help parties evaluate potential bias at the outset, rather than after spending time and money on arbitration.

What is the test?

“In short, the standard for evident partiality requires vacating an award if an arbitrator fails to disclose facts which might, to an objective observer, create a reasonable impression of the arbitrator’s partiality …”

Tenaska Energy v. Ponderosa (Tex. 2014)

Tenaska Energy

Parties agreed to conduct a “baseball” arbitration before 3 neutral arbitrators under FAA rules. Result was $125M award to Ponderosa (2-1 decision).

Tenaska challenged the award on grounds of evident partiality by one arbitrator with relationships to Ponderosa’s counsel.

Tenaska Energy (cont’d)

Trial court vacated the award, finding arbitrator intentionally failed to disclose –• Contacts with specific lawyers for

Ponderosa.• Owning stock in litigation services

company pursuing business with firm.• Serving as company’s president and

trying to solicit business from the firm.• Allowing Ponderosa’s counsel to edit

his disclosures.

Tenaska Energy (cont’d)

Court of appeals reversed, and reinstated the arbitration award.

Texas Supreme Court (9-0) held – • Failure to disclose the withheld

information might create a reasonable impression of partiality to an objective observer, and

• Tenaska did not waive an objection because it was unaware of the undisclosed information.

Tenaska Energy (cont’d)

Court did not hold arbitrator was actually biased. “A party need not prove actual bias to demonstrate evident partiality.”

“Requiring full disclosure minimizes the role of the courts and, if faithfully adhered to, will ultimately lead to fewer post-decision challenges” rather than more.

One more recent case . . .

Karlseng v. Cooke, 346 S.W.3d 85 (Tex. App.—Dallas 2011, no pet.).

Arbitration resulting in $28M award.

Losing party challenged award on grounds of partiality of arbitrator.

Arbitrator never disclosed personal relationship with other party’s counsel.

Karlseng (cont’d)

Trial court reviewed emails between the attorney and the arbitrator and their spouses, and subpoenaed testimony.

Evidence showed longstanding personal relationship (dinners, sporting events).

But at arbitration, counsel and arbitrator “introduced” themselves.

Trial court confirmed the award, but court of appeals vacated it.

Lessons?

Dislose everything. Don’t draft the arbitrator’s

disclosures. Consider “worst case” scenario –• Loss of award and cost of a “do-

over”• Loss of client’s confidence.• People will discuss your case at a

CLE.

Communications with the Government

Sometimes litigation can arise resulting from communications between companies and the agencies or branches of the federal government.

Investigations into allegations of violations of Foreign Corrupt Practices Act.

Shell Oil Co. v. Writt, No. 13-0552 (Tex. 2015) Can co-operating with a DOJ investigation

open your company up to a defamation claim?

Two Types of Privilege

Absolute Communications

made preliminary to or as part of a judicial proceeding.

Privilege extends to quasi-judicial proceedings and where the public benefits of communication outweigh the potential harm to an individual.

Absolute immunity.

Qualified / Conditional Arises when a false statement

is published and there is a reasonable belief that the information: • affects a sufficiently

important public interest and

• it is relayed to a public officer or private citizen authorized to take action if statement is true.

No absolute immunity. Not privileged if actor knows

the communication is false or does not act for the purpose of protecting the interest for which the privilege exists.

Shell Oil Co. v. Writt

In 2007, a Shell contractor pleaded guilty to violations of the Foreign Corrupt Practices Act (FCPA) concerning bribes to Nigerian custom officials made through Panalpina (importer of equipment for a deepwater project).

Shell receives inquiry from the DOJ regarding possible FCPA violations, and agrees to perform an internal investigation and report the results, with an understanding that the findings will be confidential.

Shell finalizes its report to the DOJ stating, among other things, that Writt (a Shell contractor) was “aware of several red flags” concerning Panalpina and provided inconsistent information.

Writt is terminated, and he sues Shell for defamation.

Shell Oil Co. v. Writt

Trial Court – absolutely privileged The defamation suit is based on Shell’s

report to the DOJ. Writt claims Shell’s report falsely accused him of approving and participating in illegal conduct.

Shell moves for summary judgment based on absolute privilege. The trial court grants the motion, holding Shell was absolutely privileged to provide the report to the DOJ.

The case goes to trial only on the wrongful termination claim, and the jury finds for Shell.

Writt appeals the decision on his defamation

claims.

Appellate Court – not absolutely privileged.

Court of Appeals reverses the summary judgment, holding the report was not absolutely privileged because, at the time Shell provided the report to the DOJ, “a criminal proceeding against either Shell or Writt was ongoing, actually contemplated, or under serious consideration…”

Holding: The privilege was conditional only. Dissent: Would have held the report was absolutely

privileged, emphasizing the public policy reasons for the privilege—

• The need to encourage cooperation (aiding enforcement efforts),

• The precarious position of corporations involved in questioned transactions, and

• Difference between solicited v. unsolicited communications.

Shell Oil Co. v. Writt

Shell Oil Co. v. Writt

Texas Supreme Court – absolutely privileged

Reversed lower court and upheld judgment in favor of Shell.

Shell was a target of the DOJ’s investigation and absolute privilege applies to quasi-judicial proceedings.

Shell acted with “serious contemplation of the possibility that it might be prosecuted.” Why?• FCPA enforcement actions have increased

dramatically. Most uncooperative companies are subjected to substantially greater punishment if the DOJ prosecution is successful.

• A former Shell contractor pleaded guilty to FCPA violations before the DOJ approached Shell.

Takeaway? No longer between a rock and a hard place.

The Economic Loss Rule

What is it? According to commentators and courts—• “One of the most confusing doctrines

of tort law.”• “Obscure” and “A confusing morass.”

According to the Texas Supreme Court? It is “a constellation of somewhat

similar doctrines.” LAN/STV v. Martin K. Eby Construction Co. (Tex. 2014).

The Economic Loss Rule

Essentially means that, to bring a claim for any type of negligence, a party must show it suffered physical harm to itself or to its property.

Cannot bring negligence claims solely for “an economic loss” absent some physical damage.

Otherwise, the claim sounds in contract, or warranty, or UCC.

Example – where a defective product damages only itself, there is no negligence claim.

The Economic Loss Rule

Some exceptions— where a defendant’s conduct, such as

burning down a house, would give rise to liability independent of the fact that a contract exists between the parties, the injured party’s claim may also sound in tort.

Also exceptions for fraud and tortious interference with contracts.

Some special relationships can create exceptions, such as claims against accountants, fiduciaries, and attorneys.

LAN/STV v. Eby

Project for building and expanding DART.• LAN/STV – architects• Martin K. Eby Construction Co. – builder

LAN/STV provided the plans. Eby claimed $14M in delay damages it said were caused by errors in the plans. But Eby’s contract with DART excluded delay damages.

Eby sued DART for breach of contract and LAN/STV for “negligent misrepresentation.”

LAN/STV v. Eby (cont’d)

Is “negligent misrepresentation” an exception to the economic loss rule? • The Restatement of Law says “yes.”

Are architects in a “special relationship” like accountants or attorneys?

The Texas Supreme Court said . . . It depends.

The rule applies “according to its underlying principles” and “depends on an analysis of its rationales in a particular situation.”

LAN/STV v. Eby (cont’d)

What are these underlying principles? “An inhibition against liability in negligence

for economic harm not resulting from . . . physical damage to property in which the claimant has a proprietary interest.”

Negligent misrepresentation is not an exception, and design professionals are not in a special relationship.

Takeway? All the parties contracted with each other, and could protect themselves through agreements and bargaining.

Spoliation developments

Brookshire Bros. v. Aldridge, 438 S.W.3d 9 (Tex. 2014)

Texas Supreme Court’s most important spoliation opinion yet – several new holdings clarify Texas law about when a spoliation instruction is appropriate:

• The trial court, not the jury, determines whether evidence was spoliated.

• No evidence solely related to spoliation should be admitted at trial.

• Evidence must prove a spoliating party had a duty to preserve evidence, which arises when the party knows (or has reason to know) of a substantial likelihood that a claim will be filed.

Evidence must also prove the spoliating party breached its duty to preserve evidence.

A party can spoliate evidence either intentionally or negligently. But if merely negligent, the court should not give a spoliation instruction – unless it finds the spoliation “irreparably” prevented the other party from having a “meaningful opportunity” to present a claim or defense.

To conclude a party intentionally spoliated evidence, a court must find it “acted with the subjective purpose of concealing or destroying discoverable evidence.”• Includes acting in bad faith, willful spoliation, and

“willful blindness” – defined as when “a party does not directly destroy evidence known to be relevant and discoverable, but nonetheless ‘allows for its destruction.’”

Brookshire Bros. (cont’d)

Regardless of type of spoliation (negligent or intentional), the court must determine (i) the prejudice incurred by the nonspoliating party and (ii) that no lesser remedy would be sufficient before giving any spoliation instruction to the jury.

At least two issues remaining after Brookshire Bros.

Do you need to object when an opponent attempts to introduce evidence at trial that relates solely to spoliation?

• Spoliation evidence was introduced in Brookshire Bros., but the Court did not say whether any objection was raised; it simply held a court must not admit evidence of spoliation.

• Safer course is to object. But if no objection is made, can you argue it isn’t necessary because Court was clear that such evidence should not be admitted before a jury? Not clear.

Brookshire Bros. (cont’d)

What constitutes willful blindness? Left undefined.

In Brookshire Bros., the company was asked to preserve videos of the accident. An employee reviewed the video and saved the part showing the plaintiff enter the store, fall, and shortly after, but did not look at any other parts of the video. Because he did not know what was on it, he had no “subjective purpose” of destroying relevant evidence when it was erased.

Takeaway? Whether willful blindness occurs will be litigated in the future, as in the context of document retention protocols.

“We are in no way suggesting that parties may immunize themselves from the consequences of evidence spoliation by hiding behind unreasonable limited-duration retention policies. Our opinion today does not address the reasonableness of Brookshire Brothers’ policy, which is not challenged.”

Brookshire Bros. (cont’d)

Claims by Independent Contractors

What duties are owed to independent contactors (and their employees) performing work on your company premises?

Generally, a property owner’s duty to keep its premises in a safe condition may subject it to liability for negligence in situations arising from: (1) a premises defect, or (2) negligent activity.

Redinger v. Living, Inc. (Tex 1985). The Legislature changed this somewhat in

1996, as to claims against property owners.

Chapter 95

Texas Civil Practice & Remedies Code It defines “claim” as “a claim for

damages caused by negligence.” What claims?

Specifically applies to a “claim”—• Against a property owner, contractor, or

subcontractor that “arises from the condition or use of an improvement to real property” where

• The contractor or subcontractor constructs, repairs, renovates, or modifies the improvement.

Chapter 95

But where the statute applies, a claimant must prove —• The property owner exercised or

retained some control over the manner in which the work was performed (other than when to start/stop, etc.) AND

• The property owner had actual knowledge of the danger or condition resulting in the personal injury, death, or property damage and failed to adequately warn.

Texas courts of appeal had divided over whether Chapter 95 applies only to premises claims.

Abutahoun v. Dow Chemical Co.

Case of “first impression.” Robert Henderson was a pipeline

insulation worker for an independent contractor.

Henderson helped insulate pipes with asbestos-containing material, and he later contracted and died from mesothelioma.

He worked at a Dow facility, within 5 to 10’ of Dow employees installing, sawing, and removing asbestos insulation.

Abutahoun v. Dow Chem. (cont’d)

Henderson sued Dow for the contemporaneous and allegedly negligent activity of its employees.

Argued Chapter 95 did not apply, and did not attempt to meet its requirements.

Jury found for Henderson; judgment of $3M.

Court of Appeals reversed, holding that Chapter 95 applied to Henderson’s claims.

Texas Supreme Court affirmed.

Abutahoun v. Dow Chem. (cont’d)

“The sole issue is whether Chapter 95 applies to an independent contractor’s negligence claims against a property owner when the claims are based on injuries arising out of the property owner’s negligent activities.” Answer? YES.

“Chapter 95 applies to all independent contractor claims for damages caused by a property owner’s negligence.” Not just for premises claims.

Takeways? Chapter 95 applies to all negligence claims where the other requirements are met.

How do you prove the market value of a lost investment interest?

In the case of lost profits, a party must show the amount with “reasonable certainty.”

This is a fact-intensive determination, and requires objective facts, figures, and data.

Some recent developments present challenges to the traditional approaches to proving damages – innovative technologies, new kinds of investments, emerging markets.

These situations present a problem – how do you show the value of a lost opportunity?

Phillips v. Carlton Energy

Phillips v. Carlton Energy Group (Tex. 2015) Background involved disputes over

potential for investment in a Bulgarian coalbed methane exploration prospect.

CBM (the rights holder) needed investors and contacted Carlton. Carlton also needed investors, and negotiated with Phillips.

One expert, Dr. Crinchlow, estimated the project had potential revenues into the billions.

Phillips v. Carlton (cont’d)

Phillips withdrew from his contract with Carlton, and negotiated directly with CBM.

CBM found Carlton in default, and awarded Phillips 60% ownership of the project. CBM also refunded Carlton its investment.

Carlton later sued Phillips for tortious interference with its contract with CBM.

The issue – how to prove its value?

Phillips v. Carlton (cont’d)

Jury awarded Carlton $66.5M as the fair market value of its 38% interest in the project before the interference.

A central issue was whether the proof of lost profits was too speculative to support the damages model.

The standard requires reasonable certainty, measured by relevant metrics supported by the business market that invests in such interests. Here, it required the same proof.

Phillips v. Carlton (cont’d)

Held: No evidence supported the jury award of $66.5M.

The jury heard expert opinions, but there was no basis for determining the reliability of their volume predictions. And no history of coalbed methane production in Bulgaria.

The Court focused on what other investors actually paid for a piece of this project.

Phillips v. Carlton (cont’d)

However, courts draw a distinction between uncertainty as to the fact of damages and uncertainty as to the amount of damages.

Here, evidence supported some damages, just not the amount the jury awarded. Rev’d/Remanded

Carlton argued its interest was worth nearly $12B. But based on what other investors paid, value of its 38% ranged from $60,000 to $5.2m to $31M.

Case sent back to court of appeals to consider.

Why use appellate counsel?

We can assist and support your trial team.• Legal motions, challenges to experts, trial

briefs, the jury charge, error preservation, etc. We can help your trial team navigate

new developments in the law and tailor the strategy, evidence, and trial presentation to meet these new standards.

We can evaluate your appellate chances sooner.

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