In the appellate world, 2019 was an interesting year, with key decisions from the Fifth Circuit and Texas Supreme Court resolving important questions of federal and state law, providing clarity on legal standards and raising new questions to be decided in the coming years.
The Fifth Circuit issued a variety of rulings in 2019 that are important to civil practitioners. These included ruling that the TCPA does not apply in federal diversity cases, effectively awarding mandamus relief even when the mandamus standards had not been satisfied, refusing to limit the scope of attorney immunity and expounding upon the detail required for findings of fact. The Fifth Circuit also addressed several hot topics of national interest, such as the applicability of Chevron and Auer deference, the constitutionality of the Affordable Care Act and Federal Housing Finance Agency, qualified immunity for police officers and compliance with the Voting Rights Act.
The Texas Supreme Court handed down several important business and contract-law cases in 2019 that provide guidance for lawyers drafting deal documents and those litigating them. Texas’ strong policy favoring freedom to contract, ordinary-meaning principles and context played important roles in these cases. The court also clarified the key principles governing attorneys’ fees claims – an issue near and dear to lawyers across a wide spectrum of practices.
Fifth Circuit Decisions
The TCPA does not apply in diversity cases.
Resolving an issue that had been lingering for several years, the Fifth Circuit held that Texas’ anti-SLAAP statute, the Texas Citizens Participation Act, does not apply in diversity suits filed in federal court. The court reasoned that the TCPA’s burden-shifting framework and heightened evidentiary standards for pre-trial dismissal conflicted with Rules 12 and 56 of the Federal Rules of Civil Procedure. In so holding, the Fifth Circuit ensured that the wave of TCPA dismissal motions currently burdening state court dockets would no longer impact Texas federal courts.
The case is Klocke v. Watson, No. 17-11320.
You can get mandamus relief even without satisfying mandamus standards.
In these cases, the Fifth Circuit effectively awarded mandamus relief even while finding that the mandamus standards had not been satisfied.
In a challenge to Louisiana’s legal framework for regulating abortion, the Fifth Circuit concluded that the district court clearly erred in its standing analysis because it failed to conduct an individual evaluation of standing for each challenged provision. It further explained why, in contrast to the typical denial of a 12(b)(1) dismissal, a later appeal would be inadequate. But, the court held, it should not exercise its discretion to award mandamus relief under the third prong of the mandamus test because the relief requested by the State of Louisiana was overbroad. Having provided guidance to the district court on some of the key jurisdictional questions, the Fifth Circuit denied the mandamus petition without prejudice, and retained jurisdiction over any subsequent permissive interlocutory appeal or mandamus petition.
The case is In re Rebekah Gee, No. 19-30353.
Similarly, the Fifth Circuit held that the district court erred in directing that 42,000 Chase employees receive notice that a Fair Labor Standards Act collective action had been certified, when a large percentage of the putative class had signed arbitration agreements that waived their right to proceed collectively. But this was not “clear and indisputable” error sufficient to support mandamus relief because the district court had followed the lead of other district courts in the circuit. Despite the formal denial of mandamus relief, the appellate court instructed the district court “to revisit its decision in light of this opinion, which is now binding precedent throughout the Fifth Circuit.” This decision is also notable because of the spat that erupted between the author of the opinion (Judge Jerry Smith) and the district court judge (Judge Keith Ellison). Judge Smith, in a footnote, warned Judge Ellison of the need to avoid the perception that he had prejudged the merits of the case, citing several specific examples. On remand, Judge Ellison accused Judge Smith of significantly mischaracterizing the trial record and urged the panel, in further stages of the case, to achieve “a higher degree of accuracy and candor.”
The case is In re JPMorgan Chase & Company, No. 18-20825.
Chevron and Auer deference do not apply when the statute and regulation are unambiguous.
The scope of Chevron and Auer judicial deference to an administrative agency’s interpretation of a statute or regulation continues to be a hot topic, but it is important to remember that neither doctrine applies when the statute and regulation are unambiguous. The Fifth Circuit made this clear when it held that the district court erred in giving deference to the Department of Health and Human Services’ interpretation of a Medicaid statute and regulation because they were textually unambiguous. “And when legal texts are unambiguous,” the Fifth Circuit stated, “courts should stand firm and decide, not tiptoe lightly and defer.”
Soon afterward, in a different case that some anticipated would be the death knell for Auer deference altogether, the U.S. Supreme Court in Kisor v. Wilkie upheld Auer. However, like the Fifth Circuit, the Supreme Court “reinforce[d]” and “clear[ed] up some mixed messages”: The possibility of deference can only arise if the regulation is genuinely ambiguous, “[a]nd when we use that term, we mean it – genuinely ambiguous, even after a court has resorted to all the standard tools of interpretation.”
The case is Forrest General Hospital v. Azar, No. 18-60227.
Findings of fact must satisfy the basis-of-decision rule – not the implicit-finding rule.
The Fifth Circuit addressed an inconsistency in precedent about the level of detail required for findings of fact after a bench trial. The court retained the basis-of-decision rule and “jettisoned” the alternative implicit-finding rule that had “crept into” precedent. Under the controlling basis-of-decision rule, subsidiary factual findings must be set forth with enough detail to give a clear understanding of how the district court reached the ultimate factual conclusion. Under the rejected implicit-finding rule, if district court failed to make a specific finding on a particular fact, the appellate court could assume that the district court impliedly made a finding consistent with its general holding so long as the implied finding was supported by the evidence.
The case is Eni US Operating Co. v. Transocean Offshore Deepwater Drilling, Inc., No. 18-20115.
En banc cases decided in 2019.
The Fifth Circuit decided two en banc cases of interest to civil practitioners.
An 9-7 majority opinion, authored by Judge Willett, held that the Federal Housing Finance Agency is unconstitutional under the separation-of-powers doctrine because the agency’s sole director cannot be fired without cause and thus was insufficiently accountable to the president. This holding also implicates the constitutionality of similarly-structured federal agencies like the Consumer Financial Protection Bureau. A different 9-7 majority rejected the remedy requested by the plaintiffs that would have invalidated action taken by the FHFA in 2012. That majority, led by Judge Haynes, instead held that the appropriate remedy was to sever the statutory provision that insulates the FHFA’s director for being replaced without good cause. These issues are likely to be addressed by the United States Supreme Court this term in Seila Law LLC v. Consumer Financial Protection Bureau, a case involving a constitutional challenge to the CFPB.
The case is Collins v. Mnunchin, No. 17-20364.
In a case on remand from the U.S. Supreme Court, the Fifth Circuit again held that a jury must decide whether the defendant police officers were entitled to qualified immunity on the excessive-force claim because of fact issues. The 11-7 majority opinion, joined by all the nine former trial judges regardless of political-party affiliation, was vigorously opposed by five separate dissenting opinions. The splintered decision reflects an ongoing national debate about the durability of the qualified immunity defense and shows that even the judges who share an overarching conservative judicial philosophy are not a monolith.
The case is Cole v. Carson, No. 14-10228.
En banc cases ahead in 2020.
Several other significant 2019 decisions will be reconsidered en banc in January 2020.
In September 2019, a split panel affirmed the district court’s ruling that a Mississippi State Senate District violated Section 2 of the Voting Rights Act by diluting the votes of African Americans and preventing them from electing their candidate of choice.
The case is Thomas v. Bryant, No. 19-60133.
The en banc court will also consider the issue of the “finality trap.” The panel held, following precedent, that a plaintiff cannot make an interlocutory order disposing of the claims against one defendant final and appealable by seeking and obtaining the dismissal of the other defendants without prejudice. The plaintiff tried to fix the problem by asking the district court, via Rule 54, to rule that the defendants previously dismissed without prejudice should now be dismissed with prejudice. The panel held such relief could not be granted because the case against those defendants was no longer pending in the district court. In a concurrence, Judge Haynes called the “finality trap” precedents “wrong and illogical” and called for en banc review to “correct this egregious mess.” The full court heard her plea and is set to revisit the issue in January.
The case is Williams v. Taylor Seidenbach, Inc., No. 18-31448.
Affordable Care Act litigation continues.
As 2019 drew to a close, the Fifth Circuit made national news by holding that the Affordable Care Act’s individual mandate is unconstitutional because it can no longer be read as a tax, as a result of the 2017 law that reduced the IRS payment for not complying with the mandate to $0. The panel (2-1) did not adopt the district court’s judgment striking down the entire ACA on the theory that the unconstitutional mandate could not be severed from the rest of the ACA. Instead, the panel criticized the district court’s severability analysis and remanded the case to the district court to take another crack at it, ensuring continued litigation on the issue well into the future.
The case is Texas v. United States, No. 19-10011.
Texas Supreme Court Decisions
Context matters when interpreting a contract.
In an insurance coverage dispute arising out of the Deepwater Horizon explosion, the Texas Supreme Court considered whether insurance policy underwriters were obligated to reimburse Anadarko for defense expenses up to the $150 million excess limit. Although the case presented a dispute about the meaning of a joint venture provision in an “energy package” insurance policy, the decision provides important lessons for contract interpretation cases of all kinds.
The underwriters argued that the joint venture provision limited their coverage obligations to liability based on the percentage of Anadarko’s ownership interest in the venture operating the Deepwater Horizon – 25%. Anadarko read the policy language differently: This limitation did not apply to defenses expenditures but to third-party claims.
The court agreed with Anadarko, focusing on the term “liability.” And that is where this decision has much to say about contract interpretation more generally. The court began with the broad dictionary definition of liability – meaning, any debt or obligation. But the court did not stop there.
Emphasizing that “context matters,” the court based its interpretation of the provision on “how the policy uses the term at issue.” So, the court looked at the policy as a whole, the use of the term “liability” throughout the policy, the policy’s coverage provision and how liability is commonly used. Using these contextual tools, the court concluded that the term liability did not refer to defenses expense and that the ownership-percentage limit did not apply. The key takeaway: Text plus context guides the interpretation of contractual language.
The case is Anadarko v. HCC, No. 16-1013.
The power of contractual provisions in business tort cases.
In a series of business tort cases, the Texas Supreme Court enforced contractual provisions that limited or – in some cases – extinguished claims.
First, the court was asked to decide the enforceability of a limitation-of-liability provision barring the recovery of punitive damages. Emphasizing the strong public policy favoring freedom of contract and the clear contractual language, the court enforced the provision and held that the plaintiff could not recover punitive damages even though the conduct at issue was “reprehensible.”
Here are a few takeaways. First, the parties were sophisticated, represented by counsel and engaged in arms-length negotiations resulting in a bargained-for limitation-of-liability clause. Second, the court explicitly considered the fraud context of the case but ultimately concluded that it was obligated to enforce the contract terms and hold the parties to their bargain. Finally, the court left open “whether a breach of fiduciary duty for fraudulent conduct would affect the validity of a limitation of liability clause.”
The case is Bombardier Aerospace Corporation v. SPEP Aircraft Holdings, LLC, No. 17-0578.
A second case involved a commercial fraud claim, specifically the justifiable reliance element. A Mercedes-Benz franchisee sued Mercedes, claiming that it was fraudulently induced to purchase assets of a previous dealer in Harlingen, Texas, on the belief that it could eventually relocate the dealership to McAllen. But the franchisee alleged that Mercedes was actively negotiating with another franchisee for a McAllen dealership.
The question in this case was whether the franchisee’s belief that it could move to McAllen was justified in light of contractual provisions stating that the franchisee had no right to a particular “area of interest” and that Mercedes could add dealers or relocate dealers into the franchisee’s “area of interest.” The court concluded that these provisions contradicted the franchisee’s belief that it could move to McAllen, defeating the fraud claim.
The case is Mercedes-Benz USA, LLC v. Carduco, Inc., No. 16-0544.
The third case in this group is, like Mercedes, a fraud case. The issue here was whether the plaintiff contractually disclaimed reliance on the defendant’s fraudulent representations. The court concluded yes because two contractual provisions stated that the plaintiff “is not relying upon any representation made by or on behalf of IBM” not specified in the agreement or a document called Statement of Work. In enforcing these provisions, the court observed that contractual provisions that “clearly and unequivocally express[] the party’s intent to disclaim reliance on the specific representation at issue” generally bar fraud claims and that the claimed representations were not specified in either document.
The lesson for litigators and transactional lawyers from this trio of cases is clear: Freedom of contract remains a strong public policy, and the court will rely on this principle to enforce contractual provisions that limit commercial tort claims and remedies.
The case is IBM v. Lufkin Industries, No. 17-066.
The “surrounding circumstances” doctrine is limited.
The Texas Supreme Court also clarified a doctrine that has vexed courts and litigants alike – surrounding circumstances. In the case, the question was whether a consent-to-assign provision in an oil and gas farmout agreement provided an unqualified right to refuse consent. The court answered yes based on the agreement’s unambiguous text: Consent must be express and in writing.
The court also addressed when surrounding facts and circumstances can be used in construing a contract. In the lower courts, the party objecting to assignment pointed to substantive negotiation history as evidence of an unqualified consent-refusal right. But it was not proper to consider that evidence because the parol evidence rule bars evidence of the substantive negotiations.
The court, however, has previously held that surrounding facts and circumstances can be consulted to inform the meaning of contractual language. In this case, the court explained that the reach of the surrounding-circumstances doctrine is limited. The fact that negotiations took place between sophisticated parties familiar with the oil and gas industry is fair game; thus, the court concluded that “the surrounding circumstances establish that the consent-to-assign provision was a bargained-for exchange between the parties.” But the court declined to go any further with the surrounding circumstances. The court, for example, did not give weight to industry custom and usage (some of which suggested that consent-refusal rights are often governed by a reasonableness standard) because such evidence would have added to, altered or changed the agreement’s plain terms. Again invoking Texas’s strong policy favoring freedom of contract, the court observed that the parties were free to contract into and around industry custom and usage. Of note: A dissenting opinion came out the other way on the industry-usage question.
The case is Barrow-Shaver Resources Company v. Carrizon Oil & Gas, Inc., No. 17-0332.
The “lodestar” method for evaluating attorneys’ fees is a shorthand version of the Arthur Andersen factors.
In an exhaustive opinion on the standards governing attorneys’ fees recovery, the Texas Supreme Court addressed confusion among practitioners and courts about “two seemingly different methods for evaluating claims for attorney’s fees.” For many years, the court has applied a nonexclusive list of factors, commonly referred to as the Arthur Andersen factors. But in recent years, the court introduced the “lodestar” method, which focuses on whether the lawyer expended a reasonable number of hours at reasonable rates. Multiplying hours and rates creates a presumptively reasonable base figure, or lodestar. Courts and juries can then adjust the lodestar up or down based on the circumstances.
The court made clear that the “lodestar” method is simply a “short hand version” of the Arthur Andersen factors. They are not separate tests. The court then set out to “clarify the law governing recovery of attorneys’ fees in Texas courts.” In providing this clarification, the court again emphasized that “billing records are strongly encouraged to prove the reasonableness and necessity” of fees.
The case is Rohrmoos Venture v. UTSW DVA Healthcare, LLP, No. 16-0006.
Ben Mesches, of Dallas, is chair of the Litigation Department at Haynes and Boone. Mark Trachtenberg is a litigation partner at the firm. Natasha Breaux is a Haynes and Boone litigation associate. Both Trachtenberg and Breaux are based in Houston.