The Texas Supreme Court and the Fifth Circuit transitioned to remote arguments and kept busy dockets in 2020. The federal appellate court handed down key decisions offering guidance to businesses and commercial litigators regarding judgment finality, jurisdiction and removals. The state Supreme Court issued 32 emergency pandemic-related orders, clarified the high standard for sanctions under the court’s inherent authority and resolved a longstanding conflict on an issue of appellate procedure. The appellate experts at Haynes and Boone have the details.
2020 was an extraordinary year in many respects, and the operations of the appellate courts were no exception.
While being forced to rapidly transition to virtual oral arguments and remote work environments, the Texas Supreme Court issued 32 emergency pandemic-related orders, decided numerous disputes arising from the pandemic and the election on an expedited basis and endured a vicious ransomware attack. Notwithstanding these challenges, the court cleared its opinion docket in June and issued a number of significant decisions in business cases. The court also clarified the high standard for sanctions under the court’s inherent authority and resolved a longstanding conflict on an issue of appellate procedure.
The Fifth Circuit faced many of the same challenges – and like the Texas Supreme Court – remained focused on its work. The court conducted virtual oral arguments, maintained an active en banc docket and resolved numerous expedited cases involving pandemic and election issues. Yet the Fifth Circuit also handed down key decisions offering guidance to businesses and commercial litigators regarding judgment finality, jurisdiction and removals. And, next week, the court is set to hear a major en banc case involving SEC judges.
We review some of the most important commercial opinions for Texas litigants decided in 2020.
Texas Supreme Court
Parties may negate formation of a partnership under the statute through contractual conditions precedent.
In two opinions involving commercial disputes, the Texas Supreme Court continued to affirm Texas’ strong policy favoring freedom of contract. The first case was a closely watched dispute over whether a partnership was formed in connection with a pipeline project.
While negotiating a potential joint venture, ETP and Enterprise signed a letter agreement stating that no obligation would arise for either party unless both parties received board approvals and executed a definitive agreement. When disputes arose, ETP sued Enterprise for breach of loyalty, arguing that the parties had formed a partnership to market and pursue a pipeline under the totality-of-the-circumstances test in Texas Business Organizations Code section 152.052. Enterprise argued that conditions precedent in the contract precluded partnership formation.
The court sided with Enterprise, holding “that parties can conclusively negate the formation of a partnership under Chapter 152 of the TBOC through contractual conditions precedent” and finding there was no evidence that Enterprise disavowed the agreements that required board-of-directors-approved contracts.
The case is Energy Transfer Partners, L.P. v. Enterprise Products Partners, L.P., No. 17-0862.
“In Texas, a deal is, of course, a deal.”
In another opinion resting on “Texas’s strong public policy favoring freedom of contact,” the court considered “whether an email exchange reflected the meeting of minds required for a contract, given the nature of the transaction and the parties’ expressed contemplations.” The court found that no contract had been formed due to a no-obligation clause in a data-room confidentiality agreement. The court held that “[b]y including the No Obligation Clause in the Confidentiality Agreement, Chalker and LNO agreed that a definitive agreement was a condition precedent to contract formation.” Because the parties did not execute and deliver the required definitive agreement, no contract or fact issue regarding contract formation arose. The court also held that the emails, which were subject to the same confidentiality agreement and referred to a future definitive agreement, did not show waiver of the condition by the defendant as a matter of law.
The case is Chalker Energy Partners III, LLC v. Le Norman Operating LLC, No. 18-0352.
An error, without evidence of bad faith, does not warrant sanctions.
In a widely anticipated opinion concerning sanctions entered against attorney Bill Brewer, the court held that a finding of bad faith is required to support sanctions imposed under a court’s inherent authority. Brewer was sanctioned $177,000 after he conducted a “push poll” in the county of suit shortly before trial. No rule, statute or order prohibited or specifically constrained Brewer’s survey, but several of its attributes were concerning and thought to improperly influence a potential jury pool. Emphasizing the need for restraint in exercising a court’s inherent powers, the Texas Supreme Court held that “sanctions issued pursuant to a court’s inherent powers are permissible only to the extent necessary to deter, alleviate, and counteract bad-faith abuse of the judicial process.”
The court clarified that bad faith can exist with or without violating a rule, statute, order or ethical standard and need not be proven with direct evidence. An error, however, without more, is no evidence of improper motive unless the conduct could not have occurred without conscious wrongdoing. In Brewer’s case, the record contained no evidence indicating that Brewer developed or employed the survey for an improper purpose. The court thus vacated the sanctions order. One justice would have concluded that some evidence showed Brewer acted in bad faith.
The case is Brewer v. Lennox Hearth Products, LLC, No. 18-0426.
Where legal damages were calculable, an equitable recovery of $211 million could not stand.
This case arose from a failed Las Vegas real estate project in which lenders sought to recover their $250 million investment under various legal theories. After obtaining a fraud verdict of $40 million, the trial court awarded an additional $211 million in “equitable damages,” effectively refunding Claymore’s entire investment loss. Claymore urged the court to reject review because New York law governed the case; thus, it was not important to the jurisprudence of Texas. The court, however, accepted review and reversed the trial court’s “kitchen sink” award of $211 million in equitable relief. The court affirmed the jury’s $40 million fraud verdict.
The court concluded that, because the jury awarded legal damages for fraud, the value of which was reasonably calculable by a damages model accepted by both parties, the further award of equitable remedies was erroneous under New York law. The court also rejected Claymore’s election of remedy argument because “the power to elect a remedy as between multiple legal theories is not the power to elect a recovery as between law and equity. Equitable relief is available only if legal damages cannot be calculated.” The court remanded to the court of appeals to determine various open issues, including the availability of prejudgment interest and the application of settlement credits.
The case is Credit Suisse AG v. Claymore Holdings, No. 18-0403
A party does not waive its challenge to an interlocutory ruling by opting not to take a permissive interlocutory appeal from that ruling.
The court resolved a split among the intermediate appellate courts and held that a party’s failure to take a permissive interlocutory appeal does not deprive a court of appeals of jurisdiction to consider the ruling after final judgment. The general rule that interlocutory orders merge into – and can be appealed from – final judgments is not altered by statutes providing that parties “may appeal” from certain interlocutory orders. Although doctrines like mootness, estoppel and waiver by conduct limit which orders will be reviewed after final judgment, such doctrines reflect policy considerations and do not inform the pertinent statutes or impact a court’s jurisdiction.
Citing various policy considerations, three dissenting justices would have held that failure to take a permissive interlocutory appeal from an order denying arbitration deprives the courts of appeals of jurisdiction to consider the order after final judgment.
The case is Bonsmara Natural Beef Co. v. Hart of Texas Cattle Feeders, LLC, No. 19-0263.
Fifth Circuit
“Snap” removals by out-of-state defendants are permissible.
The Fifth Circuit—joining the Second, Third and Sixth Circuits – held that federal law permits “snap removals” in which a nonforum defendant removes a case to federal court before any forum state co-defendant has been served. The court reasoned that the forum-defendant rule in 28 U.S.C. § 1441(b)(2) prohibits removal when a forum state defendant is “properly joined and served,” so it does not come into play until a forum-state defendant has been served. The court did not decide whether snap removals by forum state defendants are permitted. After Texas Brine, however, district courts have held in two cases that, under the statute’s plain language, snap removal by a forum defendant is permissible.
The case is Texas Brine Co. v. American Arbitration Association, No. 18-31184.
En banc court addresses the “finality trap.”
Addressing the so-called “finality trap,” the en banc Fifth Circuit reversed a previous panel decision by holding that a district court can enter a partial final judgment under Federal Rule of Civil Procedure 54(b) when a plaintiff litigates its case to conclusion against some defendants and then voluntarily dismisses the remaining defendants under rule 41(a).
Tarsia and Breck Williams sued 24 defendants, several of which obtained summary judgment against them. The Williamses moved under rule 41(a) to dismiss those remaining, and the district court granted the Williamses’ motion but did not specify whether the dismissals were with prejudice. The Williamses attempted to appeal from the summary judgments, but the Fifth Circuit dismissed their appeal for want of a “final decision,” concluding the rule 41(a) dismissals were without prejudice. Seeking their missing decision, the Williamses obtained a partial final judgment under rule 54(b) as to the summary judgment winners.
Reversing a panel that had previously held that the district court lacked power to enter a partial final judgment under rule 54(b), the en banc Fifth Circuit concluded that rule 54(b) does permit district courts to enter “a final judgment as to one or more, but fewer than all, claims or parties” when “there is no just reason for delay.” Because the Williamses obtained a partial final judgment as to the summary judgment winners, the court held that they preserved their right to appeal.
The case is Williams v. Taylor Seidenbach, Inc., No. 18-31159.
Price-fixing judgment for $438 million affirmed.
In one of the largest cases to reach the Fifth Circuit in 2020, Hewlett-Packard sued Quanta Storage for illegally fixing the prices of optical disk drives and secured a $438 million treble-damages judgment. The district court also issued an order requiring Quanta to turn over the entire company. On appeal, Quanta challenged both remedies.
As to damages, Quanta argued the evidence was insufficient to support the jury’s $176 million damages award. The Fifth Circuit rejected Quanta’s challenge and affirmed. First, the court ruled that HP’s damages expert properly relied on sales data that might otherwise be considered inadmissible hearsay in forming her opinion. Second, the court rejected what it characterized as Quanta’s “misrepresentation of the record” regarding a witness’s understanding of which HP entity made certain optical disk drive procurements. If foreign entities purchased the drives, as Quanta claimed, then the verdict would be legally insupportable under federal antitrust law. But, at most, the witness was uncertain, and this uncertainty did not render the testimony insufficient. Finally, the court easily dispatched with Quanta’s various arguments that unspecified portions of the record required judgment as a matter of law.
Before addressing Quanta’s challenge to the turnover orders, the Fifth Circuit paused to examine its jurisdiction, concluding it had jurisdiction to review the turnover orders because they were final, appealable judgments under 29 U.S.C. § 1291 requiring Quanta to turn over all its property. On the merits, the court rejected Quanta’s arguments that the orders violated Taiwanese law and international comity and were too vague to be enforced. But the court did agree to modify the turnover orders after concluding that an expedited May 1 turnover deadline was too fast and would not permit Quanta to complete the steps necessary to comply.
The case is Hewlett-Packard Co. v. Quant Storage, Inc., No. 19-20799 consolidated with No. 20-20235
Case involving LLC remanded to evaluate diversity jurisdiction.
In December, the Fifth Circuit remanded a case between LLCs to the district court because the live pleading did not sufficiently allege diversity jurisdiction. As a reminder, the citizenship of an LLC is determined by the citizenship of all its members, so determining an LLC’s citizenship – particularly in LLCs with complex, private ownership structures – can be a challenge. “For individuals, citizenship has the same meaning as domicile and requires not only residence in fact but also the purpose to make the place of residence one’s home.” An individual member’s residency alone is not dispositive.
Here, the pleading was insufficient because it alleged only the LLC’s state of organization and principal place of business. It did not identify the citizenship of each LLC member. This “basic” mistake was not picked up until the case reached the Fifth Circuit. But instead of dismissing the case outright, the court remanded the case to the district court so that the plaintiff could amend its diversity allegations, as there was reason to believe that jurisdiction existed.
The case is Accordant Communications, L.L.C. v. Sayers Construction, L.L.C., No. 20-50513.
En banc court to consider constitutional challenge to SEC’s judges.
In 2021, the en banc court will consider whether federal courts can decide the constitutionality of removal protections for the SEC’s administrative law judges in the first instance.
In 2017, an SEC judge determined that Michelle Cochran violated federal accounting regulations. Before the judge’s order was finalized, however, the United States Supreme Court decided Lucia v. SEC, holding that SEC judges are “inferior officers” subject to the Appointments Clause. After the SEC responded by ratifying its judges’ previous appointments and remanding Cochran’s case to a new ALJ, Cochran moved to dismiss the administrative proceeding and sued the SEC in federal district court. In both proceedings, Cochran argued the judges’ ratifications raised new problems: namely, that SEC judges are unconstitutionally insulated from presidential control because they are protected by multiple layers of for-cause removal restrictions. The Supreme Court declined to address this issue in Lucia.
A split panel held in August that Cochran was required to raise her constitutional concerns before the SEC before bringing them to court. The court granted rehearing en banc in October and will hear argument Jan. 20.
The case is Cochran v. SEC, No. 19-10396.
Anne Johnson is a litigation partner and serves on the Executive Committee at Haynes and Boone. Ben Mesches is chair of the firm’s Litigation Department. Alicia Pitts is a Haynes and Boone litigation associate. All three are based in Dallas.