2022 was another year of major commercial and business cases in the Fifth Circuit and Texas Supreme Court.
This year the Fifth Circuit issued important precedents that clarified the standard for a conditional-refusal-to-deal theory under Section 2 of the Sherman Act, established that arbitration rules incorporated into an arbitration agreement control the question of whether arbitration happened, sent a clear signal that the Seventh Amendment attaches to traditionally common-law prosecutions, defined a class of workers exempt from the Federal Arbitration Act and clarified the standards for enforcing forum-selection clauses.
The Texas Supreme Court likewise issued important precedents on business issues. Those decisions include guidance on the scope of a waiver of claims in a settlement agreement, a decision under the Texas equivalent of Section 1 of the Sherman Act, clarification regarding substantial compliance with contractual notice provisions, rejection of informal fiduciary duties to an individual shareholder in a closely held corporation and a narrowing of the availability of consequential damages.
We briefly review these decisions below.
A new standard for conditional-refusal-to-deal theories under Section 2 of the Sherman Act
Louisiana State University’s medical school hired a company to operate its Shreveport hospital. That operator alleged that the dominant healthcare provider in Shreveport issued anticompetitive threats to LSU to end its cooperation with the hospital operator after the dominant healthcare provider bailed the LSU hospital out of budget crisis with a donation. The Fifth Circuit treated the hospital operator’s Section 2 claim as asserting a conditional-refusal-to-deal theory. The court then explained that conditional refusals to deal “and exclusive dealing” are “synonymous for doctrinal purposes,” adopting that rule from an Eleventh Circuit decision.
The Fifth Circuit then explained that “[s]ubstantial foreclosure is a prerequisite for every exclusive-dealing Section 2 claim.” And the court required the plaintiff to state all three elements of substantial foreclosure to prove its conditional-refusal-to-deal theory. The court held that the plaintiff failed to establish the third element: “that the competition foreclosed by the arrangement constitutes a substantial share of the relevant market.” Collapsing conditional refusals to deal and exclusive dealing theories might simplify antitrust law. But a pending petition for certiorari argues that the court’s application of substantial foreclosure to the plaintiff’s conditional-refusal-to-deal theory narrows the availability of Section 2 liability in a way inconsistent with precedents of other circuits and of the Supreme Court.
The case is BRFHH Shreveport, LLC v. Willis-Knighton Medical Center, 49 F.4th 520 (5th Cir. 2022).
Agreed-to rules for arbitration control whether arbitration happened
The Fifth Circuit added to its growing body of arbitration law by expanding the matters that can be governed by arbitration rules that the parties agreed to in an arbitration agreement.
The court explained that “arbitration has been had” when an arbitration organization “terminated the arbitration proceeding following [the party’s] nonpayment” because, under that organization’s rules, which were called for by the arbitration agreement, arbitration had occurred. This holding means that arbitration rules incorporated into an arbitration agreement control whether an arbitration has occurred, and the Fifth Circuit will not independently determine whether arbitration occurred.
The case is Noble Capital Fund Management, L.L.C. v. US Capital Global Investment Manager, L.L.C., 31 F.4th 333 (5th Cir. 2022).
The Fifth Circuit enforces the Seventh Amendment
In a pair of decisions, the Fifth Circuit made clear that it will require a jury trial when “actions brought to enforce statutory rights are analogous to common-law causes of action ordinarily decided in English law courts in the late 18th century.” The first explained that an SEC enforcement action for securities fraud was akin to a traditional action at law to which the jury right attaches, so it could not be adjudicated by the SEC as a public right. The second explained both that the government’s recoupment claim under the Oil Pollution Act of 1990 was essentially a tort action and that the Seventh Amendment attached because tort claimants traditionally sued tortfeasors for monetary compensation in an action triable to juries.
These cases represent an important emerging trend narrowing the circumstances in which the government may adjudicate a claim before an administrative agency.
The cases are Jarkesy v. SEC, 34 F.4th 446 (5th Cir. 2022) and United States v. ERR, LLC, 35 F.4th 405 (5th Cir. 2022).
Local delivery drivers are not exempt from the Federal Arbitration Act
The Federal Arbitration Act exempts “contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce.” And the Supreme Court has explained that “any other class of workers” means “contracts of employment of transportation workers.” A local delivery driver argued that he was exempt from the FAA under this provision.
The Fifth Circuit held that local delivery drivers are not exempt because they do not engage in interstate commerce under the FAA. The court explained that when a worker does not have “a direct and necessary role in the transportation of goods across borders,” the worker cannot qualify for the exemption from the FAA. This case clarifies that a large class of employees are not exempt from arbitration and reiterates that the residual exemption clause in section 1 of the FAA is a narrow exemption.
The case is Lopez v. Cintas Corporation, 47 F.4th 428 (5th Cir. 2022).
Forum-selection clauses are enforced according to their letter
“Any dispute arising out of or under this Agreement shall be brought before the district courts of Harris County Texas, situated in the city of Houston.” Does that forum-selection clause make the Texas state district courts in Harris County the exclusive fora for disputes under the agreement? Does it waive the parties’ right to remove to federal court in a diversity case? The Fifth Circuit answered both questions in the affirmative.
The court explained that the use of the word “shall” to specify where disputes must be brought means that the agreement intended Harris County district courts to be the exclusive venue subject to two contractual exceptions. And the court explained that “of Harris County” did not include federal district courts in Harris County because modifier “of” meant to restrict the set of courts “to courts created under” Harris County’s “authority.” The court also explained that even though there was not an express waiver of the right of removal, the forum selection clause prohibited actions from being “brought before” federal district courts, and the court explained that to remove to federal district court involves bringing a case before federal district court. The upshot? Forum-selection clauses will be meticulously enforced by the Fifth Circuit.
The case is Dynamic CRM Recruiting Solutions, L.L.C. v. UMA Education, Inc., 31 F.4th 914 (5th Cir. 2022).
Texas Supreme Court
Settlement agreements that include waivers of rights will be enforced
One party to a large settlement agreement might have breached its fiduciary duty to the other party during negotiations by engaging in fraud and bribes. The Texas Supreme Court explained that was not a ground to attack the settlement agreement because the agreement had a broad waiver of claims based on the parties conduct before the effective date of the settlement. The Texas Supreme Court also rejected an argument that the party committed fraud and made negligent misrepresentations because the settlement agreement contained an enforceable reliance disclaimer. The upshot is that after-the-fact attacks on settlement agreements with broad waiver provisions are an uphill battle in Texas.
The case is Transcor Astra Group S.A. v. Petrobas America, Inc., 650 S.W.3d 462 (Tex. 2022).
Texas Antitrust Act continues to adopt federal law
In considering an antitrust suit brought under Section 15.05(a) of the Texas Free Enterprise and Antitrust Act, the Texas Supreme Court treated Texas antitrust law as identical to federal law, at least in the Section 1 context. The Texas Antitrust Act states that “to the extent consistent” with “maintain[ing] and promot[ing] economic competition in trade and commerce” the Act should “be construed in harmony with federal judicial interpretations of comparable federal antitrust statutes.”
The Texas Supreme Court applied federal law throughout the opinion. So it is safe to assume both that the Texas Supreme Court understands federal antitrust law to be consistent with the policy of promoting competition and that the court will continue to apply federal law when interpreting equivalent antitrust provisions in state law cases.
The case is AMC Entertainment Holdings, Inc. v. iPic-Gold Class Entertainment, LLC, 638 S.W.3d 198 (Tex. 2022).
Written notice means written notice
In a case turning on whether a party complied with a contractual notice provision, the jury found that there was substantial compliance with a contractual written notice provision based on oral notice. But the Texas Supreme Court held that a written notice provision cannot be substantially complied with unless there is a writing or a waiver of the writing requirement. Oral notice cannot substantially comply with a written notice provision in Texas.
The case is James Construction Group, LLC v. Westlake Chemical Corporation, 650 S.W.3d 392 (Tex. 2022).
No informal fiduciary duties to individual shareholders
A corporation has two shareholders. The controlling shareholder dies, but before his death he issued new shares and took other actions that may not have been to the benefit of the second shareholder. The second shareholder alleges in probate that the actions breached informal fiduciary owed duties to him.
The Texas Supreme Court held that there are no informal fiduciary duties in Texas to any individual shareholder in the context of the operation or management of a corporation. This clarifies that informal fiduciary duties to individual shareholders are not enforced in Texas, even in very closely held corporations.
The case is Matter of Estate of Poe, 648 S.W.3d 277 (Tex. 2022)
Narrowing the availability of consequential damages
Companies A and B have a deal. Company B breached that contract. Company A says that Company B’s breach caused Company C to abandon a deal to buy Company A for $42 million. Company A sues Company B alleging that it was entitled to consequential damages of $42 million because Company A’s “company value” declined to zero and alleging that it was entitled to consequential damages of $12 million for the decline of Company A’s “book value.” The jury awarded $56 million.
The Texas Supreme Court held that neither theory of consequential damages was valid. The court explained that it has always been the rule that “consequential damages are not recoverable unless the parties contemplated at the time they made the contract that such damages would be a probable result of the breach.” Consequential damages must be “proved with reasonable certainty.” And the court held that neither theory of consequential damages could satisfy those requirements.
The case is Signature Industrial Services, LLC v. International Paper Company, 638 S.W.3d 179 (Tex. 2022).
Ben Mesches is a partner in Haynes Boone’s appellate practice and serves on the firm’s board of directors. Chance Fletcher is an associate in the firm’s appellate practice.