Court Procedure and Demeanor

 

From Tressie McKeon, in Fox Rothschild’s Dallas office:

Texas has long been one of the best locations to start a business, and a big reason for this is the liability protection afforded by the business-friendly Texas courts. Most business owners seek to limit their personal liability if something goes wrong with the business. This leads to one of the questions I get most often: Which business structure provides more liability protection to the business owner? The short answer is it depends on what happened.

I believe most owners are concerned with what is known as piercing the corporate veil.   “Piercing the corporate veil” is a legal term that means that the owners/members of a corporation or LLC lose the limited liability protection the business entity provided, thus the piercing of the veil of protection. When this happens, personal assets can be used to satisfy business debts and liabilities, not just corporate assets.  The result is that individuals start getting named in lawsuits, in addition to the LLC or corporation they own.

When we look at the Texas Business Organizations Code (TBOC) we see that the two most popular business structures, corporations and limited liability companies, have similar protections for owners. Both organization structures limit liability on contract issues, and absent actual fraud or unless some extraordinary circumstances exist, the veil will not be pierced on a contract action.

But it is a little easier to pierce the corporate veil when it comes to tort liability. Businesses get sued for all kinds of torts, like slip and falls, job site accidents, etc… The two prevailing theories used to pierce the veil in a tort action are the alter ego theory and the single business enterprise theory.

The alter ego theory boils down to looking at how the owners managed internal matters, how the financial interests were kept separated from personal interests and the degree of control the individual had over the company. Basically, was the LLC put in place as a shield to liability or were business formalities observed? The courts will look at everything from the existence of a corporate book to the payment of taxes in order to determine the degree the alter ego was employed.

The other theory used to pierce the veil is the single business enterprise theory. This is used to impute liability to companies that share resources and operate as if they were one entity. This is rarely used, but when it is it can considerably open up the pool of damages available to the plaintiff.

There are a number of other things to consider when analyzing business and personal liability when starting a business. For example, when starting a new business, an owner may need to personally guarantee a business loan. No piercing of the veil is necessary to hold the owner personally liability for the guaranteed debt. Oh, and it goes without saying, no business entity will insulate an owner from criminal liability or protect them if their personal actions cause an injury to someone.

 

 

In October, I wrote about How the Practice of Law is Like the NHL.  This article was about how rule changes in the practice of law, and changing skill sets in the NHL have made finesse and skill more important than brawling.  Recent experience has shown that this trend continues in law, and that Judges hate “gotcha games.”

Brett Myers and I recently sat through a trial docket call in County Court at Law No. 1 in Dallas County.  While waiting for our turn, we watched Judge Benson make two interesting rulings during a pre-trial hearing for the case ahead of us.

First, Judge Benson ruled that at trial, Defendant could not call as witnesses any of the twenty-three doctors it had recently disclosed.  Interestingly, Defendant’s attorney had added the doctors to Defendant’s disclosure responses forty-five days before trial, which is timely under the Texas Rules of Civil Procedure.  It did not come out during the hearing whether Defendant’s tardiness was a mistake or was intended as a “gotcha,” so as to not allow Plaintiff to conduct discovery on these witnesses.

Either way, the Judge sustained the Plaintiff’s objection to the witnesses, and held that this late disclosure caused unfair prejudice to Plaintiff.  In her commentary from the bench, Judge Benson said if there had been a timely supplementation of one or two witnesses, it would have been okay, but such a late disclosure of this amount of witnesses simply was not fair.

Second, in a turn of the tables, Judge Benson ruled against Plaintiff for similar reasons.  Defendant’s attorney had produced a video made by Defendant’s expert late according to the rules.  Although the video was produced late according to the technical letter of the law, it was produced eight months before trial.

Rather than taking any action to remedy the tardiness issue, Plaintiff’s attorney waited until a week before trial to object to the video – a clear attempt at a “gotcha.”  The Judge denied Plaintiff’s motion to exclude the video, and allowed Defendant’s expert to use the video.  Judge Benson stated that Plaintiff’s attorney had been in the possession of the video for so long that Plaintiff could not have been prejudiced, and that if Plaintiff felt it was prejudiced, it should have taken action during the intervening time period.

I think there are two lessons to be learned from this experience: 1) Supplement your discovery responses early and often; and 2) If you have a problem, take it up with the Court as soon as possible and do not sit back to try to wait on a “gotcha” ruling from the Court, because you may not get it.

I get questions all the time about the enforceability of noncompetes in Texas.  I have to respond in the most-irritating lawyer-like way possible: I say that the enforceability of any particular noncompete all depends on the language of the noncompete and the facts of the case.  That response predictably results in a long period of silence.

There is ample Texas case law enforcing noncompetes against former employees to prevent former employees from competing.  In these cases the employers successfully have demonstrated that there is a threat to the employers’ business interests through the disclosure of confidential information or damage to company good will.  There also is a lot of seemingly irreconcilable Texas case law where the courts have refused to enforce noncompetes to prevent former employees from competing where the employers offered proof that former employees had confidential information and were in a position to use the confidential information to the employers’ detriment.

Legally speaking, Texas has a statute that allows an employer to enforce a noncompete when what would otherwise be a restraint on trade is necessary to protect a legitimate interest of the employer.  In Texas, a legitimate interest of the employer could be (1) preventing the disclosure of confidential or proprietary information; or (2) protecting company good will.  Contrary to what a lot of people believe, the enforceability of a noncompete is not dependent on the employer paying the employee compensation that is tied to the noncompete, and is independent from the reason that the employee’s relationship with the employer ended.

In my practical experience I have found that judges in general do not like noncompetes.  They do not like the idea of putting a person out of work, unless the facts particularly justify the extraordinary step of entering a injunction.  You can get a sense of the courts’ uneasiness with noncompetes in the Dallas Court of Appeals recent decision affirming a trial court’s denial of the employer’s request for a temporary injunction in BM Medical Management Service, LLC v. Turner.

Turner had a one-year noncompete that prohibited him from working in a competing business, soliciting BM Medical’s clients, recruiting or hiring BM Medical’s employees, or disclosing BM Medical’s confidential information.  BM Medical fired Turner, and a month later he went to work for a competitor.  Despite having access to BM Medical’s client list of over 1600 customers, the trial court denied BM Medical’s request for a temporary injunction to prevent Turner from soliciting BM Medical’s clients.  The court found that BM Medical failed to prove that Turner “possessed, used or disclosed any confidential information and if failed to prove that Turner was soliciting its clients.”  One BM Medical client did follow Turner to his new employer, but the Dallas Court of Appeals noted that this single client was a “good friend of Turner’s whom Turner had known before he went to work for BM Medical.”

Notably, BM Medical only sought to prevent Turner from contacting BM Medical’s clients (and not enforcement of the outright ban on any competition), and from disclosing BM Medical’s confidential information. But even limiting its request for relief was not enough to satisfy the court.  Presumably the result would have been different if BM Medical had established that Turner actually solicited BM Medical’s clients, or if BM Medical had shown that the information that Turner had was particularly sensitive to BM Medical’s business interests.

Based on the court’s conclusion, I get the impression that neither the trial court nor the court of appeals thought that Turner was a threat to BM Medical’s business interests.  So if you want to enforce a noncompete in Texas, here are some important considerations to maximize your chances of having the judge agree with you:

  • Spell out for the judge the actual threat that the former employee poses to the business interests of the employer.  The degree to which an employer wants to restrict a former employee from competing is directly related to the actual threat that the former employee poses to the business’s legitimate business interests. For example, a sales employee who is terminated for poor performance probably does not pose an actual threat to the employer’s existing sales.
  • Explain to the judge what relief you need to address the actual threat posed by the former employee.  The restrictions that the employer seeks to enforce against a former employee must be tied closely to the actual threat to the employer’s legitimate business interests.  An employer’s desire to restrain all competition is not a legitimate business interest, and an outright ban on all competition everywhere rarely is closely tied to the actual threat posed by the former employee to the employer’s legitimate business interests.
  • Judges do not like noncompetes.  When asking for temporary relief, give the judge way to overcome this dislike of noncompetes by asking for the bare minimum of what you need to address the actual threat.  If you can ask for relief that allows the former employee to continue to work, even better.  As an example, courts seem more willing to restrict a former employee from soliciting actual clients with whom the former employee had contact as a result of the employer, but not so willing to restrict a former employee from soliciting any and all of the company’s customers regardless of whether the former employee knew about the customers.

And if you ask me if noncompetes are enforceable in Texas, I will probably say “It depends…”

 

I have been writing on this blog about how Dallas County juries have shifted over the years from pro-defense to pro-plaintiff, or at least to a point where most prospective jurors in Dallas County don’t necessarily consider lawsuits a bad thing.  In the era of tort reform, this attitude among prospective jurors in Dallas County is very interesting.  My previous posts are here, here, and here.

But why do we care about juries anyway?  There are the constitutional reasons, and the traditions in our legal system that are tied inextricably to the jury trial process.  There are the defenders of the jury trial as the last line of defense against oppression.  And these are good reasons to care about the juries.

But my focus on why juries matter is more practical.  In Texas, juries matter because once a jury renders a verdict it is extraordinarily rare for the jury’s verdict to be overturned.  It happens, but not very often.  This is because legal and factual sufficiency challenges to a jury verdict are judged against very high standards.

The Dallas Court of Appeals just released a decision in Adams v. Bellas affirming a jury verdict where the court went through the standards for legal and factual sufficiency challenges to a jury verdict.

To overturn a jury verdict on legal sufficiency grounds, the court must first credit any evidence favoring the jury verdict if reasonable jurors could disregard contrary evidence if reasonable jurors could not.  If more than a scintilla of evidence supports the jury’s verdict, then the court has to uphold the verdict.  There is no weighing of the evidence on one side or the other.  The court simply looks at whether there is some evidence that would “enable reasonable and fair-minded people to reach the verdict under review.”

To overturn a jury verdict on factual sufficiency grounds, the jury’s verdict must be against the great weigh and preponderance of the evidence.  This means that the jury verdict will be set aside “only if it is so contrary to the overwhelming weigh of the evidence as to be clearly wrong and manifestly unjust.”

Taken together, the high standards for legal and factual sufficiency protect the philosophical value that we place on the role of the jury in our legal system. We have assigned the jury the role of weighing the evidence and resolving any conflicts or inconsistencies in the evidence.  We then shield the jury’s verdict from second-guessing by creating high standards for overturning the jury’s verdict.

So why do juries matter?  Because under our system, once the jury delivers its verdict it is procedurally and practically very difficult to overturn the verdict.  Oh, and also for all those constitutional reasons and tightly-held traditions long associated with our legal system.

Previously I posted about Dallas County juries here and hereLast week a federal jury ordered Johnson & Johnson to pay $1.041 billion to six plaintiffs who received defectively-designed hip implants.   Of the total verdict, $32 million was for compensatory damages, and the rest was for punitive damages. The federal jury that ordered Johnson & Johnson to pay a billion dollars was made up of jurors from the Northern District of Texas, which includes more than just Dallas County.  But Dallas County is the largest county in the Northern District of Texas, and I believe that the jury’s verdict is further proof that Dallas County jurors believe that civil lawsuits are an appropriate way to monitor and police large corporations.

When I first started practicing law in Dallas in the early 1990s, the prevailing sense around the campfire was that Dallas County was a pro-defense venue.  Over the years there have been some huge verdicts out of Dallas County in business disputes and commercial matters, but it seemed to most observers that personal injury plaintiffs did not fair as well in Dallas County.  In my earlier posts I gave my two-cent opinion that Dallas County was no longer pro-defense, or even neutral, because of the increasing frequency of eye-popping verdicts in personal injury cases.  In September, Bloom Strategic Consulting published a report of a survey that it conducted of 1000 prospective Dallas County jurors.  I wrote about the survey’s results in my first post about Dallas County jurors, and I believe that this report should be required reading for any lawyer with a case pending in Dallas County.  Based on what I have been seeing lately, I think that Dallas County is pro-plaintiff.

For Johnson & Johnson, I expect that the federal judge will reduce the punitive damages award to confirm with Texas’ cap on punitive damages, especially considering that the award of compensatory damages ($32 million) is approximately three percent of the overall verdict.  However, the fact that Johnson & Johnson may never have to pay a billion dollars to the plaintiffs from last week’s verdict should not be confused with the message that the jury seemed to send to Johnson & Johnson, and what that message says about Dallas County juries.

From Tressie McKeon in our Dallas office comes the following guest post:

Contracts are important and “the devil is in the details.” Too often I see business owners and experienced entrepreneurs come to me as first time clients with a serious problem. But when we go to review the contract that is at the heart of the issue, I often find that the contract was not professionally drafted, does not address many issues that should have been addressed or simply does not make sense in the context of the transaction.

Unfortunately, once a problem arises, it is almost always after the ink is dry and the writing is on the wall so to speak. In short, you’re stuck trying to enforce, or defending against, a contract that simply does not say what your new client thought that it said.

I recently had a new client come to me with a problem. He had invested hundreds of thousands of dollars into the purchase of a business. This client is an experienced entrepreneur with numerous successful business ventures. However, he did not have an attorney review the purchase documents prior to closing. The client sheepishly admitted that it was because he thought he would save himself some money in legal fees. In short, after the deal closed, the client learned that the business he had purchased was not worth even close to what he had invested in it.

While not a handshake deal, my client had trusted the people that he was dealing with to be forthcoming and truthful. Unfortunately, that was simply not the case. To add insult to injury, the contract documents were extremely vague and one sided in favor of the seller—not my client.

In this situation, if the client had invested roughly $3,000-5,000.00 in legal fees on the front end, it could have saved him hundreds of thousands of dollars. Unfortunately, this client’s story is not unique. Many investors and entrepreneurs avoid hiring an attorney to review their agreements related to their business transactions to save time and money. Similarly, many businesses are working with old outdated contracts.

If you are entering into a new business venture, or contract of any kind, have an attorney review the documents. A small investment now may save you a great deal of time, money and heartache later.

 

I recently had a trial that caused me to think long and hard about what is the best evidence at trial.  I concluded that documents, photos and videos beat witness testimony hands down. I believe that a case built around documentary evidence is stronger than a case build on witness testimony.

I think the reason is simple.  With documentary evidence, jurors can look at documents and form their own opinions about what the documents say and mean.  Jurors are savvy enough nowadays to suspect that the lawyers in the case will try to bamboozle the jurors into concluding that the documents say something that the documents don’t say.  If the jurors’ conclusions about the documents are consistent with the trial lawyer’s arguments, the jurors will form other conclusions consistent with the trial lawyer’s argument.  If the jurors’ conclusions about the documents conflict with the trial lawyer’s arguments, then the jurors will conclude that the lawyer is trying to trick them and they will be suspicious of the lawyer for the rest of the trial. I believe that jurors form conclusions about the documents, photos, and videos in the case, and then evaluate the witnesses and lawyers against those conclusions.

Witness testimony is inherently unreliable.  Countless studies show that two witnesses can view the exact same incident and come away with two different versions of what happened.  Jurors already know this.  Neither witness is lying, but unlike documentary evidence that does not change, inconsistency in witness testimony means that the jurors will have to decide which witnesses’ testimony is consistent with the jurors’ own perceptions of what happened.  Also, witnesses are subject to cross examination.  If the jurors trust the lawyer, then an effective cross examination can be brutal.  If the jurors do not trust the lawyer, then cross examination can generate juror sympathy for the witness.  Witness testimony comes to the jurors through the questions and answers provided by the lawyers and the witnesses.  In the end jurors have to evaluate the witnesses’ testimony against other witnesses, the lawyers, and the jurors’ conclusions drawn directly from the documents.

Documents, photos and videos that are entered into evidence go back to the jury room and jurors are encouraged to review all the evidence during deliberations.  Live testimony depends on the ability of the jurors to recall what was said among several witnesses and at times several days ago.  Like everyone else, two jurors may not remember the testimony the same way, and now the jurors must resolve the their own  inconsistent memories.  I believe that instead of resolving these inconsistencies, jurors tend to focus on the documentary evidence that they have with them in the jury room.

So back to my recent trial.  In that case, there were emails that on their face were not good for my client’s case.  We knew that we could explain our side of the emails, and we had great witnesses to do just that.  The other side had witnesses who testified consistently with the emails.  After the trial the judge permitted us to talk to the jurors.  All 12 of the jurors told us that they liked our witnesses, but that the jurors felt that the emails told the story.  There was no mention of the other side’s witnesses.  Our witnesses were good, but not good enough to overcome the jurors’ conclusions about the emails.

What is the best evidence at trial?  Documents.  Jurors can touch them, look at them, and reach their own conclusions about them.

I recently posted about the recent survey of prospective Dallas County jurors’ opinions and beliefs here.  Based on the survey’s results and my own observations, I felt that Dallas County had changed from neutral to plaintiff-friendly in terms of likely jury panels.  Assuming that blue leans more plaintiff-friendly, the recent election results support my conclusion.  Dallas County voted for Hillary Clinton over Donald Trump by a margin of 61% to 35%. By comparison, Collin County went in favor of Trump, 56% to 39%. Tarrant County went for Trump, 52% to 43%. Also around Texas, Bexar (San Antonio), Travis (Austin), and Harris (Houston) Counties all went blue, as did the counties in the Rio Grande Valley.  But overall, Texas was predictably red, with the exceptions of the larger metropolitan areas and the counties on the border with Mexico.

 

For better or for worse, I think most would agree that this has been one of strangest and most contentious presidential elections in recent memory. Whichever way the election turns out, history will be made. If Ms. Clinton wins, she will, of course, be the first female President of the United States. It is well documented that if Mr. Trump wins, he will be the oldest President ever to take office.

51559645 - presidential election voting poster set. vector illustration.
Copyright: elfivetrov / 123RF Stock Photo

What seems to have gone unnoticed this election year is the amount of Texas judicial seats up for re-election. According to Ballotpedia, three Texas Supreme Court seats, three Texas Court of Criminal Appeals seats, and twenty seats in the fourteen district courts of appeal are on the ballot for Election Day. The Texas Supreme Court is the highest court in Texas for all civil matters, and the Texas Court of Criminal appeals is the highest court for all criminal matters.

Each of the three Republican incumbents up for re-election in the Supreme Court (Debra LehrmannPaul Green, and Eva Guzman) have drawn Democratic, Libertarian, and Green party challengers. Again according to Ballotpedia.org, all nine current Supreme Court Justices are Republican. If two or three of the incumbents lose, this could signal a significant shift in the historically conservative Supreme Court.

In the Court of Criminal Appeals, eight of the nine sitting Judges are Republican, with Judge Lawrence Meyers being the lone Democrat on the Court. Judge Meyers is running for reelection, as is Republican Judge Michael Keasler. Republican Judge Cheryl Johnson is not running for reelection, and her seat on the Court of Criminal Appeals has drawn candidates from all four parties.

The Fifth District Court of Appeals, which hears both civil and criminal appeals from the Dallas, Collin, Grayson, Hunt, Kaufman, and Rockwall county district and criminal courts, also has the potential for some change this election. Republican incumbent Justice Lana Myers is being challenged by Democrat Judge Gena Slaughter, the current sitting Judge for the 191st District Court in Dallas County. Republican incumbent Justice David Schenck is being challenged by Democrat Judge Dennise Garcia, the current sitting Judge in the 303rd Family District Court in Dallas County.

Currently, all thirteen sitting Justices on Fifth District Court of Appeals are Republicans. Thus, even if both Judge Slaughter and Judge Garcia win seats, the impact upon the Court as a whole may be small, but the impact upon the parties appearing before the Court may be big. Appeals usually are heard in three-judge panels.  Therefore, rather than facing three Republican Justices for any one case, a party potentially could face a panel containing one or two Democrats.

40701102 - statue of justice
Copyright: sebra / 123RF Stock Photo

Locally, in Dallas County, incumbent Democratic Judge Eric Moye’ is being challenged by Republican Barry Johnson for his spot as Judge of the 14th District Court.  Also, Republican Greg Gorman and Democrat Maricela Moore are battling it out for the 162nd District Court after former Judge Phyllis Lister-Brown passed away.

There are, of course, many more judicial races — too many to cover in this blog post.  But after all is said and done, the question that remains is what difference does it make whether a Judge is a Republican or Democrat?  Or whether a particular Court is dominated by Judges of a particular politicial affiliation?

The answers to these questions could be and probably are the subject of many articles and books.  To the extent one can make generalizations, the quick answer is many believe Republican Judges tend to favor business and Democrat Judges tend to favor individuals.  Republicans tend to favor defendants and Democrats tend to favor plaintiffs. This is far from being universally true, and just like in law school, there are exceptions to every rule and exceptions to the exceptions.

But no matter what you believe, Election Day 2016 no doubt will prove to be interesting on both a national and a local level.

Copyright: redrockerz / 123RF Stock Photo
Copyright: redrockerz / 123RF Stock Photo

Few things in the course of litigation can come back to bite you with the ferocity of a spoliation instruction. Even the threat of one can cause seasoned litigators to lose sleep and ponder the extent to which their case can be damaged, despite the months or years of hard work in building a defense. Worse yet, these fiascos tend to catch lawyers off-guard, as they seemingly come out of nowhere when opposing counsel inquires about the location of a certain document.

Up until a few years ago, there was a lack of clarity among the courts as to what type of culpability was required in order to warrant a spoliation instruction. Some courts went so far as to punish a defendant even when the destruction of evidence was unintentional. However, in 2014 the Texas Supreme Court issued a decision in Brookshire Brothers, Ltd. v. Aldridge that (somewhat) clarified the landscape of this area of law. The Court held that a party must act intentionally in the destruction of evidence in order to have a spoliation instruction issued against them. Further, a party’s negligent destruction of evidence can only be punishable when it deprives the requesting party of any meaningful ability to present its claim.

On the surface, this sounds like good news for defendants since it seems to take negligent destruction out of play. But it doesn’t take a stretch of the imagination to envision a movant arguing that the destruction of evidence, even if accidental, deprived them of the smoking gun they needed to prove their claim. These smoking guns are now more aptly described as needles in a haystack given today’s massive exchange of electronic data during a lawsuit. And it only takes one needle to give rise to a spoliation instruction.

Therefore, the takeaway from Brookshire Brothers is that clients should be just as diligent in preserving evidence as they have always been. Reasonable document retention policies must be maintained at all times, and lawyers should be in constant communication with their clients about the types of information that will be discoverable in a case and the best efforts to preserve that information. A few years from now we should have more guidance from the courts as to what type of unintentional actions are worthy of punishment. But until then, it is better to be safe than sorry.