Year two of the pandemic brought a gradual return to “normal” operations at the Texas Supreme Court and Fifth Circuit. Virtual arguments – in many cases – transitioned to in-person oral arguments. Both courts issued major commercial and business decisions and opinions that will greatly impact how commercial litigators practice in state and federal court.
The Fifth Circuit issued important guidance on certifying Fair Labor Standards Act collective actions; rejected the so-called fraudulent misjoinder doctrine; clarified standards for federal jurisdiction in the arbitration context; established the standards for intervention; and criticized the rampant practice of sealing court records.
For its part, the Texas Supreme Court issued key contract formation cases; refined the standards for determining when courts and agencies have jurisdiction to decide tort claims in the electric-power context; provided guidance on key procedural questions under the Texas Citizens’ Participation Act; and ruled on a novel products-liability question impacting online sales.
We review these decisions below.
Fifth Circuit
A new standard for FLSA collective actions
Relying on the text of the Fair Labor Standards Act, the Fifth Circuit shed light on a previously shadowy standard. Under the FLSA, employees can bring collective actions against employers so long as they are “similarly situated.” The FLSA does not define this phrase and, before this case, neither had any circuit court. Facing the issue, the Fifth Circuit examined “[h]ow rigorously, and how promptly, should a district court probe whether potential members are ‘similarly situated’ and thus entitled to court-approved notice of a pending collective action.”
After rejecting several district courts’ approaches, the Fifth Circuit held that district courts “must rigorously scrutinize the realm of ‘similarly situated’ workers, and must do so from the outset of the case, not after a lenient, step-one ‘conditional certification.’” This may require preliminary discovery and briefing. Only then can the district court notify other potential plaintiffs of the case. Although this standard leaves district courts much discretion, compared to the prior practice, plaintiffs will now find bringing an FLSA collective action more difficult.
The case is Swales v. KLLM Transportation Services, L.L.C., No. 19-60847.
“Fraudulent Misjoinder” doctrine rejected in removal procedure
A complicated set of facts birthed a simple rule: The Fifth Circuit looks “at jurisdiction at the time of removal, not after a federal court severance.” In this case, the plaintiff sued a local defendant and a diverse defendant. Despite the lack of complete diversity, the diverse defendant removed the case. The diverse defendant argued that, under federal joinder rules, the two defendants’ claims were “improperly and egregiously misjoined” and should be severed. The district court agreed, severed the claims and remanded the case against the local defendant. The case against the diverse defendant proceeded and resulted in a dismissal. The plaintiff appealed.
Without reaching the appeal’s merits, the Fifth Circuit reversed because the district court lacked jurisdiction and erred by relying on the doctrine of “fraudulent misjoinder.” Although other circuits and district courts have applied the “fraudulent misjoinder” doctrine to sever a jurisdiction-destroying party after removal, the court rejected the doctrine. Jurisdiction is determined at the time of removal. Here, jurisdiction did not exist at the time of removal. Striving for a simple rule, the court held that jurisdiction was determined by “substantive viability – not procedural questions like party joinder.”
Here is the takeaway: If you want to remove a case but an improperly joined local defendant destroys diversity, then seek the severance in state court. After the severance, you can then remove the case.
The case is Williams v. Homeland Ins. Co. of N.Y., No. 20-30196.
When determining arbitration jurisdiction, courts “look through” the complaint to the substance of the dispute.
If diversity jurisdiction is lacking, can a party compel arbitration in federal court? Clarifying the workings of the Federal Arbitration Act’s “look through” jurisdiction, the Fifth Circuit answered “yes” when a federal question “animate[s] the underlying dispute. …” Under the FAA – which does not itself bestow federal jurisdiction – the underlying dispute must have an independent federal jurisdiction basis. Unlike the normal federal-question analysis, courts do not determine that independent federal basis by the “well pleaded complaint.” Instead, courts “look through” the petition to compel arbitration and “determine whether [the dispute] is predicated on an action that ‘arises under’ federal law. …” If the underlying dispute “could have been brought in federal court, then federal jurisdiction lies over the FAA petition.”
The case is Polyflow, L.L.C. v. Specialty RTP, L.L.C., No. 20-20416.
What is a “timely” motion, when moving to intervene?
In any motion to intervene, Rule 24 requires the motion be “timely.” Although the factors for determining a motion’s timeliness have been around for decades, this case clarifies the meaning of the factors and shows how courts analyze them. The factors are as follows: (1) the length of time the movant waited to file, (2) the prejudice to the existing parties from any delay– the most important factor, (3) the prejudice to the movant if intervention is denied, and (4) any unusual circumstances. These same factors apply to both mandatory and permissive motions to intervene, but courts evaluate timeliness under a mandatory motion more leniently than under a permissive intervention. This case will control any analysis of Rule 24’s timeliness for decades to come.
The case is Rotstain v. Mendez, No. 19-11131.
Law 101 calls for a court’s records to be public.
This appeal concerned a run-of-the-mill employment dispute, but the Fifth Circuit added a “peripheral-yet-essential point: Judicial records are public records. And public records, by definition, presume public access.” In this case, the litigants agreed, and the court allowed, for the parties to file 73 percent of the records under a permanent seal. This case was decided on summary judgment, so the sealing order hid the very basis for the court’s judgment. The court acknowledge this practice was common and, in this case, “neither party fret[ed] that 73 percent of the record is sealed.” This, the Fifth Circuit could not abide.
In the court’s view, these secret proceedings rot the judiciary’s integrity and legitimacy. To build and protect trust in the independent judicial branch, the public must have access to the court’s records. And “Americans cannot keep a watchful eye, either in capitols or in courthouses, if they are wearing blindfolds.”
So when can records be filed under seal? It depends on the case’s stage. During discovery, it only requires a finding of good cause. “But at the adjudicative stage, when materials enter the court record, the standard for shielding records from public view is far more arduous.” Working from a presumption that records should not be sealed, courts must employ a strict balancing test, undertaking a “case-by-case, document-by-document, line-by-line balancing of the public’s common law right of access against the interests favoring nondisclosure.” If the court decides portions should be sealed, then it must enter an order explaining itself at “a level of detail that will allow for this Court’s review.”
Given the ubiquitous nature of these issues in modern litigation, this case is sure to impact every lawyer who practices in federal courts.
The case is Le v. Exeter Financial Corp., No. 20-10377.
Texas Supreme Court
When are e-commerce platforms “sellers” of third-party products?
Traditional principles of product liability sometimes fall short in today’s burgeoning e-commerce world. When an individual purchases a product from a third party sold on a platform like Amazon, eBay, Alibaba, and the like, when can that platform be liable for defective products? Only when it holds title to the third-party’s products –,that’s when.
Under the common law, sellers of defective products could be held strictly liable for damage caused by defective products. Chapter 82 of the Civil Practice and Remedies Code, however, limits that liability. It retains liability for certain “sellers” of products but provides that nonmanufacturing sellers of defective products are not liable for harm caused by a product unless one of the statute’s exceptions applies. The question presented was whether nonmanufacturing third-party platforms like Amazon are sellers under the statute. Looking to the Restatement for guidance, the court said “no.” “Sellers” include those who relinquish title to a product along the chain of distribution, not merely those who “physically convey[] or transfer[] products within the sales process.” Nonmanufacturing platforms like Amazon are thus not “sellers” when they provide e-commerce and delivery services.
The case is Amazon.com v. McMillan, No. 20-0979.
If I didn’t sign an arbitration clause, am I bound to it?
Some may be surprised to learn that the obligation to arbitrate does not bind only direct signatories to a contract containing an arbitration provision. It can also bind nonsignatories through theories of incorporation by reference, assumption, agency, alter ego, equitable estoppel or third-party beneficiary. The issue for the court this term was assumption: Did one of many assignees who “assume[d] and agree[d]” to perform a percentage of “all obligations imposed upon” its assignor also agree to be bound by its assignor’s agreement to arbitrate? The court concluded it did. “All obligations” means all obligations, including the obligation to arbitrate.
The case is Wagner v. Apache Corp., No. 19-0243.
Validity of e-signatures.
In another dispute involving contract formation, the court held that evidence that employees could not have signed an employment contract without also agreeing to an arbitration agreement was sufficient to establish formation of an electronic arbitration contract under the Texas Uniform Electronic Transactions Act. Although the employees submitted sworn denials stating they never signed, the denials could not explain how their electronic signatures could have ended up on the arbitration contract otherwise. Absent additional evidence showing the employer’s system was fallible, which the employees did not seek or present, they were bound to the agreement.
The case is Aerotek, Inc. v. Boyd, No. 20-0290.
Courts decide common-law disputes in the electric-power context.
Following this year’s “ice-pocalypse,” disputes involving electric utilities rose to the forefront of many Texans’ minds. The Supreme Court was poised already to consider a number of important issues in this area – among those, the extent of the exclusive jurisdiction vested in the Public Utilities Commission.
The Public Utility Regulatory Act grants the PUC “exclusive original jurisdiction over the rates, operations, and services of an electric utility” and permits it to adjudicate certain related disputes. But how broad is this jurisdiction, exactly? The court answered: Not broad enough to encompass traditional common-law tort claims, unless the claim complains about the utility’s rates or provision of electrical service.
The cases are In re Oncor Electric Delivery Co., No. 19-0662; In re CenterPoint Energy Houston Electric, LLC, No. 19-0777; In re Texas-New Mexico Power Co., No. 19-0656.
When does an amended petition restart the time to seek TCPA dismissal?
The Texas Citizens Participation Act provides a useful tool in a litigant’s toolbox when a legal action it faces involves the exercise of the First Amendment. The TCPA provides that, absent extension by agreement or good cause, a party seeking dismissal of a claim on TCPA grounds must file a motion within 60 days after the party is served with the legal action. But if that action is amended or supplemented, does the clock restart?
The court concluded that it does – to a certain extent. If an amended or supplemental pleading adds a new party or parties, alleges new essential facts to support previously asserted claims, or asserts new claims or theories involving different elements than the claims or theories previously asserted, the new pleading triggers a new 60-day period as to those new parties, facts or claims. As to everything else, the original 60-day deadline applies.
The case is Montelongo v. Abrea, No. 19-1112.
Ben Mesches is a partner in Haynes and Boone’s appellate practice and chairs the firm’s litigation department. Brian Singleterry and Alicia Pitts are associates in the firm’s litigation department.