A famed politician once remarked: “If I let you write the substance and you let me write the procedure, I’ll [beat] you every time.” And, in nearly 20 years of litigating contracts, I’ve seen those words repeatedly proven true. Forum selection clauses. Arbitration and dispute resolution provisions. Choice of law requirements. These procedural provisions, once enforced by a court, often make the greatest difference in a case’s outcome.
Most litigators who have practiced for even just a few years can probably regale you with war stories on this score — if you let them. They can tell you about parties who abandoned their whole case after being compelled to arbitration under an arbitration clause. They’ll probably describe the thrill they felt after getting a case dismissed without prejudice by one court under a forum selection clause and then with prejudice by the second court after the case was grudgingly refiled in the proper jurisdiction the plaintiff originally tried to avoid. They might also brag about how they were able to leverage a settlement demand (up or down) after prevailing on a choice of law provision. But none of these litigators would have anything to brag about without the help of the attorney who drafted the contract that included these difference-making procedural provisions at a time when no one thought they’d matter and likely hoped they wouldn’t. Well, the time has come for contract-drafting lawyers to consider adding a new procedural and likely difference-making provision to the list — business court provisions.
Many people know that Texas’s new system of business courts opens in September. What they may not know is how, er, nuanced business court jurisdiction is. Unlike most state district courts, Texas’s business courts are courts of limited jurisdiction. Only cases that meet specific subject-matter and amount-in-controversy requirements may be filed or removed there. (Note: the amount-in-controversy requirement may not apply for certain cases involving publicly traded companies.)
In the coming months, litigators and courts will spill lots of ink trying to define the limits of the business courts’ limited jurisdiction. When, for example, will a claim against an “organization,” a defined term, arise under “trade regulation law,” a seemingly broad but frustratingly undefined term? Time will tell. Other jurisdictional nuances will likely include whether an action “arises out of the Business Organizations Code” and thus gives rise to business court jurisdiction, and when the Business Organizations Code is merely incidental to the case and thus doesn’t. (Note: the federal question doctrine and well-pleaded complaint rule may provide a framework for deciding that issue.) These and other nuances embedded in the statute that defines the business court’s jurisdiction — Texas Gov’t Code Section 24A.004 — create lots of uncertainty about how much business Texas’ business courts may decide.
There are, however, two steps every company may take now to ensure they may invoke business court jurisdiction later. Of course, anyone wishing to avoid business court jurisdiction should simply apply Costanza’s razor and “do the opposite.”
Forum selection clauses are the first step companies may take to ensure they may be eligible later for business court jurisdiction. Only Texas’s largest metropolitan areas currently have business courts (Austin, Dallas, Fort Worth, Houston, San Antonio). Accordingly, contracts that make Travis, Dallas, Tarrant, Harris or Bexar counties the agreed forum are eligible for business court jurisdiction.
If one of those counties isn’t an option as the venue of choice, but a nearby county is, be careful. Eligibility for business court jurisdiction is not tied to appellate districts (like the Fifth District Court of Appeals). It’s tied instead to lesser-known administrative judicial regions (see map here). That means Williamson and Fort Bend counties are eligible while Bastrop and Montgomery counties aren’t, even though those counties are in the same respective appellate districts. So for clients who are outside an eligible county but want in on business courts, consider whether the other party’s location is eligible and using that location instead to achieve a client’s goals.
The second way contracts may help secure business court jurisdiction is through specific business court provisions where the parties expressly agree that business courts have jurisdiction over any dispute arising out of or relating to the contract or the transaction at issue. Under Section 24A.004(d), an agreement (but not an insurance agreement) containing such a provision secures business court jurisdiction in any case where the amount in controversy exceeds $10 million and falls within that section’s broad subject-matter categories.
But where a business court provision is likely to have its greatest impact is in mitigating or eliminating the risk of bifurcation under Section 25A.004(f)’s supplemental jurisdiction provision, i.e., jurisdiction over claims that are merely “related to a case or controversy within the court’s jurisdiction that forms part of the same case or controversy.” There is a laundry list of claims in the business courts statute over which business courts have only supplemental and not original jurisdiction: state antitrust claims; claims arising under the Deceptive Trade Practices Act; claims relating to consumer transactions as defined by Texas Business & Commerce Code Section 601.001; among others. Business courts may never exercise jurisdiction over certain claims, even if related, including personal injury claims.
Whether a claim falls within a business court’s core or supplemental jurisdiction carries serious consequences. As Section 25A.004(f) states, “A claim within the business court’s supplemental jurisdiction may proceed in the business court only on the agreement of all parties to the claim and a judge of the division of the court before which the action is pending.” In other words, if a plaintiff sues a publicly traded company for a claim under “trade regulation law” (over which original or core jurisdiction exists under Section 25A.004(b)(3)), and includes a claim under the DTPA related to the same transaction (over which only supplemental jurisdiction may exist), the business court cannot exercise jurisdiction over the entire case unless the parties and the court agree to the business court’s jurisdiction as to the DTPA claim. If there is no agreement, bifurcation is required: The supplemental claim “proceeds in a court of original jurisdiction [(e.g., district court)] concurrently with any related claims proceeding in the business court.” Let the parade of horribles begin!
It’s hardly a stretch to think that parties forced into business court, whether by filing a petition or through removal to business court, may be disinclined to aid their adversary and agree to the business court’s jurisdiction. And once that happens and the case is mandatorily bifurcated, what happens if, say, one court decides the supplemental claims before the business court decides the core claims or vice versa? Will claim or issue preclusion apply to the undecided claims, since they’re necessarily “related”?
And what about counterclaims? Even if compulsory, unless their subject matter falls squarely within Section 24A.004’s enumerated categories of subject-matter jurisdiction, they are supplemental at best. Think here about federal supplemental jurisdiction where, absent diversity jurisdiction, courts may exercise only supplemental jurisdiction over counterclaims a defendant asserts under state law. But how many parties will agree during active litigation to the assertion of counterclaims against them? It may depend on whether they favor their chances in business court or “a court of original jurisdiction.” And, if the latter, the battle will ensue in two courts.
And what about discovery for these “related” and bifurcated claims? May discovery be consolidated between the two actions for efficiency’s sake and consistent with Texas Rule of Civil Procedure 1? I sure hope so. But, if so, which court will preside over the consolidated proceedings? Or, worse still, what happens if one court (the business court) consolidates the proceedings but the other court (the court of original jurisdiction) refuses to let the case go? It’s unclear how a business court could order a district court to give the case up. Mandamus and delay may be the only remedy.
This is hardly the end of the parade. If, for example, the final judgment a business court enters after granting summary judgment is preclusive of the related and bifurcated claims, and the district court presiding over those claims enters judgment over the claimant’s objection, will there be two appeals in two different appellate courts (since business courts have their own appellate court)? It’s hard to see how there won’t be. But what if the district court finds the related claims are not precluded by the business court’s final judgment? By all accounts, the prevailing party in the business court will be forced to continue litigating in the district court. Theoretically, a permissive interlocutory appeal or mandamus relief could end the bifurcated case. But the former is granted sparingly and the success of the latter in this context is uncertain, maybe even unavailable. These concerns, among still others, are why any company wanting to use business courts should start including business court provisions in their contracts now so they may skip the parade later.
True, the business court must also agree to assume supplemental jurisdiction over the supplemental claims. But, at least in the early going, most businesses can expect business courts to agree (consistent with their business purpose). Where, however, persuasion may be needed, bankruptcy courts and their multifactor equitable remand doctrine may be a good analog on which to draw — with appropriate adaptation. (Aetna Life Ins. v. Kollmeyer outlines the 14 factors bankruptcy courts examine when deciding whether to remand to state court a case that was removed to federal court under “related to” bankruptcy jurisdiction, such as the extent to which core issues predominate over related ones, feasibility of severance, burden on the court’s docket, etc.) After all, without the parties’ agreement, the court’s agreement won’t matter. Best to secure the parties’ agreement before a dispute arises than when the parties couldn’t be more adverse.
Business court provisions are likely to be as pivotal as any other procedural contract provision. The significant risk of bifurcation of supplemental and “core” claims proves that point emphatically. Start revising those form contracts now (or not)!
Joshua J. Bennett is a partner and litigator at Carter Arnett Bennett & Perez PLLC where he has led high-stakes and complex cases at all stages in state and federal courts across Texas.