No Implied Ratification Where Contract Required Express Written Consent

BPX Operating Company v. Strickhausen
Supreme Court of Texas, No. 19-0567 (June 11, 2021)
Justice Blacklock (opinion available here)
Justice Boyd Dissent (available here)
        Ms. Strickhausen’s mineral lease with BPX prohibited pooling her tract with others without her “express written consent.” Nevertheless, BPX pooled several tracts, including Strickhausen’s property, to create a 320-acre unit. Unlike Strickhausen’s lease, her neighbors’ leases permitted pooling. BPX attempted to obtain Strickhausen’s written consent or ratification of the pooling, but Strickhausen consistently refused and repeatedly objected to BPX’s activity. As the parties continued to communicate and discuss a settlement or other resolution, BPX began paying Strickhausen pooled royalties rather than on a “tract participation basis.” When Strickhausen finally sued BPX for breach of contract, BPX alleged Strickhausen had ratified the pooling by cashing her royalty checks. The trial court granted summary judgment in favor of BPX, but the San Antonio Court of Appeals reversed.

        In a 5-4 decision, the SCOTX sided with the appellate court and Strickhausen. The Court acknowledged that acceptance of royalty checks can, in some circumstances, constitute implied ratification. But it noted that Strickhausen—unlike her neighboring lessors and the lessors in prior cases—bargained for a lease that strictly prohibited pooling “under any circumstances” without her “express written consent.” “[A]ll her subsequent actions should be examined in light of both parties’ knowledge of this element of their agreement. A party armed with a lease prohibiting pooling without express, written consent should have less reason to worry about mistakenly giving her implied, unwritten consent than does a party not protected by such a clause.” The communications between the parties also demonstrated that Strickhausen was not consenting to the pooling and was actively trying to reach a settlement agreement with BPX. Strickhausen’s acceptance of royalty checks held less weight than it might in other cases because Strichhausen was entitled to significant royalties with or without pooling. The Court held she reasonably could have viewed the checks as payment towards what she believed she was owed without pooling.

        The majority brushed off the dissent’s conclusion that “actions may speak louder than words,” holding that, on questions of contractual intent, “words matter a great deal—especially words in a written agreement that disavows implied unwritten agreements.”

        The dissent disagreed. It would have held that Strickhausen’s actions in accepting royalty payments that she should have known were calculated based on production from the pooled unit spoke louder than her words, despite the language of the contract and her prior protests.

Dallas Court Affirms 9-Figure Judgment Against Toyota Even Though Toyota Complied With All Applicable Safety Regulations

Toyota Motor Sales, U.S.A., Inc. v. Reavis
Dallas Court of Appeals, No. 05-19-00075-CV (June 3, 2021)
Justices Partida-Kipness and Nowell (opinion available here); Justice Schenck dissenting (here)
The Reavis family was involved in a violent car accident in their Lexus, which resulted in the parents being propelled into the back seat, where they crashed into their small children, who suffered skull fractures and traumatic brain injuries as a result. The family sued Toyota, asserting design and marketing defects. Even though the vehicle complied with all applicable safety standards, the jury found against Toyota, awarding $242 million in damages, including $144 million in exemplary damages. Toyota appealed.

        Section 82.008(a) of the CPRC provides a rebuttable presumption that a product manufacturer is not liable for injury caused by a product that complied with federal mandatory safety standards. The presumption can be rebutted under § 82.008(b) if the plaintiff proves that the federal standards are “inadequate to protect the public from unreasonable risk of injury” or that the manufacturer withheld or misrepresented information relevant to the federal government’s determination of adequacy of the safety standards or regulations at issue.

        Toyota first argued that § 82.008(b) is preempted by federal law because it allows a jury to reject a federal agency’s determination of safety standards, but the Court held Toyota had waived that defense in the trial court.

        The Court upheld the jury’s determination that the federal standards are inadequate to protect the public, particularly the standard regarding seat-back strength. It noted that all automakers greatly exceed the mandatory standard—in fact, the Toyota seats at issue exceeded the standard by over 700%—so the standard must be inadequate. The Court also held there was evidence to support a finding that Toyota withheld or misrepresented information relevant to the adequacy of the safety standard. In particular, the Court noted a letter from Toyota to two senators in 2016 in which it stated that Toyota had a “long and robust safety culture.” The Court found this statement misleading in light of a deferred prosecution agreement Toyota had entered into in 2014 over misrepresentations made with regard to sudden unintended acceleration in some of its vehicles. The Court also held the jury could have rationally concluded that Toyota was misleading in claiming that the NHTSA was an “effective regulator” in light of Toyota’s extensive lobbying efforts with the agency. With the § 82.008(a) presumption rebutted, the Court held the evidence was sufficient for the jury to conclude that Toyota’s design was unreasonably dangerous.

        The Court also upheld the jury’s finding that Toyota failed to warn of the car’s dangers. Although the owner’s manual “strongly recommended” that children be placed in the rear seat, it did not warn of the danger that front seat occupants might be propelled into the back seat, injuring the children, in a rear-end collision.

        Justice Schenck filed a dissent, noting that “the record reflects no evidence of any automobile that has been marketed with both the seatback strength necessary to avoid the injuries here and the proposed seatbelt changes that would protect front seat occupants.” He expressed skepticism that “every car ever marketed and sold to this point could be ‘defective’ and that their manufacturers could all be subject to exemplary damages on this basis.” He also took issue with the Court’s affirmance of a design defect without evidence that fewer injuries and deaths would result from an alternative design taking into account all potential crash scenarios, not just the rear-end collision at issue in this case. He noted that additional protections for rear-end crashes could cause additional injuries in front-end crashes. Justice Schenck would have held the plaintiffs failed to rebut the §82.008(a) presumption of no liability. He characterized the Court’s conclusion that the federal standards were inadequate as ipse dixit and noted that Toyota’s alleged misrepresentations to regulators were unrelated to seatback strength or seatbelt function and so were not relevant to the “safety standards or regulations at issue in the action” under §82.008(b)(2).

        With the money at stake and the importance of the § 82.008(a) presumption to auto manufacturers like Toyota, expect this one to go to the Supreme Court of Texas.

The Weather Is Not a “Person” for Allocating Responsibility

Panameno v. Williams
Dallas Court of Appeals, No. 05-19-01496-CV (June 1, 2021)
Chief Justice Burns and Justices Reichek and Carlyle (Opinion linked here)
           It was a dark and stormy night. Two cars collided. The defendant in a lawsuit about the accident testified that he “hit a large puddle of water, hydroplaned, and spun into a car in which Mr. Panameno was a passenger.” The defendant denied he was negligent, insisting he acted reasonably given the poor road conditions and bad weather. The district court defined “Act of God” and asked the jury to assign percentages of responsibility to the defendant and “Weather/Road Conditions.” The jury found plaintiff’s damages were $8,350 and allocated 25% to the defendant and 75% to the weather and road conditions. Accordingly, the trial court reduced plaintiff’s damages by 75%. Plaintiff appealed.

            The Dallas Court of Appeals reversed the judgment and remanded for a new trial, based on the text of the proportionate-responsibility statute, which requires the jury to determine the culpable persons and assign percentages of responsibility for “(1) each claimant; (2) each defendant; (3) each settling person; and (4) each responsible third party who has been designated.” TEX. CIV. PRAC. & REM. CODE § 33.003(a). The Court held “Weather/Road Conditions” was not “a person or party whose negligence was found to be a proximate cause” of plaintiff’s damages, so should not have been included in the proportionate-responsibility question. Any consideration of weather and road conditions is subsumed in assessing the parties’ negligence.

ARBITRATION AGREEMENT ENFORCED DESPITE EMPLOYEES’ SWORN DENIAL OF AGREEMENT AND E-SIGNATURES

Aerotek, Inc. v. Boyd
Supreme Court of Texas, No. 20-0290 (May 28, 2021)
Chief Justice Hecht (Opinion, linked here); Justice Boyd Dissenting (linked here)
In Aerotek, the Texas Supreme Court overturned the decisions of a trial court and court of appeals that refused to compel arbitration between the company and certain of its employees. In the process, the Court significantly bolstered parties’ ability to rely on electronic signatures and digital contracts.

When four Aerotek employees sued the company for discrimination and retaliation, Aerotek moved to compel arbitration of the dispute, relying on an arbitration agreement that it alleged was part of the employees’ digital “onboarding process.” Aerotek presented evidence that each of the employees had electronically signed both (1) the arbitration agreement and (2) an “Electronic Disclosure Agreement” by which the employee consented to be bound by Aerotek’s electronic hiring documents as though they had been signed manually and in person. Aerotek’s witnesses explained the security and reliability of its digital process, including that the protocol required the employees to have electronically “signed” the arbitration agreement before they could proceed with the rest of the “onboarding” procedures or submit their employment applications to Aerotek. An Aerotek employee further testified that the company could not alter the application and agreements once they had been submitted. Each of the plaintiff employees agreed he consented to the Electronic Disclosure Agreement, but expressly denied having electronically signed the arbitration agreement. Each asserted that the arbitration agreement was not even included among the materials displayed to him during the onboarding process. The trial court denied the motion to compel, and a divided court of appeals affirmed.

Applying the Texas Uniform Electronic Transactions Act, the Supreme Court held that, “once Aerotek proved its security procedures, the burden shifted to the Employees to demonstrate how their electronic signatures could have wound up on the [arbitration agreements] without their having placed them there themselves,” and most importantly, that “mere denials do not suffice” to sustain that burden. To contest an electronic signature, a party may “offer evidence that security procedures lack integrity or effectiveness and therefore cannot reliably be used to connect a computer record to a particular person,” the Court said, “but that attribution cannot be cast into doubt merely by denying the result that reliable procedures generate.”

Justice Boyd dissented. Relying on a 90-year-old decision of the Commission of Appeals, Ward v. Weaver, Justice Boyd would have held that “the employees’ sworn denials constitute legally sufficient evidence to create a fact issue” and that the Supreme Court “has no constitutional or other authority to weigh conflicting evidence” and resolve this case by crediting only the testimony presented by Aerotek and giving no weight to the employees’ sworn denials.

From a practical perspective, the Court’s decision enhances businesses’ ability to rely on electronic processes to prove agreements, further facilitating the state’s growing e-commerce economy. But the decision makes it more difficult for the average individual, with no expertise in the inner workings of such computer processes, to contest electronic records of transactions that he or she genuinely disputes.

NON-PARTY MEDICAL PROVIDERS REQUIRED TO GIVE DISCOVERY IN PERSONAL INJURY CASES ABOUT NEGOTIATED RATES AND COSTS

In re K & L Auto Crushers, LLC
Supreme Court of Texas, No. 19-1022 (May 28, 2021)
Justice Boyd (Opinion, linked here), Justice Huddle Dissenting (linked here)
In 2018, the Texas Supreme Court ruled in In re North Cypress Medical Center that “the negotiated rates a medical provider charged to patients’ private insurers and public-entity payors [like Medicare and Medicaid] were relevant and discoverable on the issue of the reasonableness of the ‘full’ rates the provider charged to an uninsured patient for the same services.” That ruling came in the context of a lawsuit between an uninsured patient and a provider, regarding a medical lien for payment of invoices priced at those “full,” non-negotiated rates.

In K & L Auto Crushers, the Supreme Court extended that rule to personal-injury cases, holding that the same reasoning applies where a defendant seeks discovery of negotiated rates to test the reasonableness of the amounts charged to the plaintiff for medical care for which that plaintiff seeks to recover. The Court rejected arguments that such discovery could lead to a windfall for defendants and less than full recovery for plaintiffs who are contractually obligated to pay the “full” rates for his or her treatment, rather than the rates negotiated with insurers or public payors. So, even where a medical provider is not a party to a personal-injury case—unlike the situation in a medical-lien case like North Cypress, where the provider is a party—a defendant who contests the reasonableness of the medical expenses sought by the plaintiff, based on the provider’s actual charges to the plaintiff, may be able to secure discovery from the plaintiff’s medical provider regarding its negotiated rates for the same services, as well as its actual costs for those services.

The Court cautioned that the benefits of such discovery and the burdens on third-party medical providers will have to be carefully weighed in each case. Such rate and cost discovery should be allowed only if it is “proportional” to the case at hand. The Supreme Court noted, however, that “where a responding [provider’s] own conscious, discretionary decision, such as how it chooses to store and organize its materials, causes discovery to be burdensome, the burden is not considered ‘undue.’” Because the plaintiff in K & L Auto Crushers sought more than a million dollars in medical expenses, the Court had little difficulty concluding that appropriately tailored discovery requests, modeled on its North Cypress opinion, were proportional.

Recently-appointed Justice Rebeca Huddle filed a concurring opinion, joined by Justices Guzman and Bland, “to emphasize that the nonparty discovery the Court authorizes today will not be appropriate in every personal-injury case—or even as to every provider in a particular personal-injury case.” If trial courts fail to carefully and actively apply the “proportionality” requirement acknowledged by the majority, Huddle warned, “the potential systemic cost to health care providers [from this newly authorized discovery] becomes eye-popping.”

As confirmed by the numerous amicus submissions in this case, whether North Cypress would be extended to personal injury cases was much anticipated—or dreaded—by both sides of the personal-injury bar and by medical providers. Under the newly effective federal Hospital Price Transparency rules, 45 C.F.R. Part 180, many providers (but not all) are now required to retain and publicly disclose much of the pricing information sought in K & L Auto Crushers and North Cypress. Parties requesting such pricing data may well be required to look to such publicly available information before seeking it via discovery from nonparty providers. And that may take some of the sting out of the K & L ruling at least for providers and information subject to that new rule. On the whole, now that the Supreme Court has expressly extended North Cypress to personal-injury cases, the main discovery battleground between defendants and plaintiffs and their nonparty medical providers likely will be the “proportionality” of the requested discovery in each individual case and with respect to each individual provider.

SCOTX CLARIFIES IMMUNITY AND PRIVILEGE ISSUES FOR ATTORNEYS

Haynes and Boone, LLP v. NFTD, LLC
Supreme Court of Texas, No. 20-0066 (May 21, 2021)
Justice Bland (opinion available here)

Landry’s, Inc. v. Animal Legal Defense Fund
Supreme Court of Texas, No. 19-0036 (May 21, 2021)
Justice Blacklock (opinion available here)
The SCOTX issued two long-awaited decisions clarifying the scope of important immunity protections for attorneys—attorney immunity and the judicial-proceedings privilege.

First, in Haynes and Boone v. NFTD, the Court expressly confirmed for the first time that the attorney-immunity doctrine applies outside the context of litigation. The doctrine, previously outlined and applied to litigation and “quasi-litigation” matters in Cantey Hanger v. Byrd and other cases, immunizes lawyers from claims by non-client third parties based on actions those lawyers take on behalf of their clients. In clarifying the scope of the doctrine, the Court has now held it operates “in all adversarial contexts in which an attorney has a duty to zealously and loyally represent a client, including a business-transactional context,” assuming the conduct at issue is the kind of conduct the doctrine is intended to protect—that is, “the provision of ‘legal’ services involving the unique office, professional skill, training, and authority of an attorney.”

The Court’s ruling was not unexpected, but will provide welcome certainty among non-litigation attorneys regarding the scope of their immunity. Questions remain, however, about whether the lawyer’s particular conduct on which a claim is based is the “kind of conduct” the doctrine should protect. The Court remanded the NFTD case for the court of appeals to consider whether any of the lawyer’s conduct at issue there was non-lawyerly in nature, so as to remove it from the scope of immunity in light of the other opinion issued by the Court on the same day, Landry’s v. Animal Legal Defense Fund.

In Landry’s, the Court analyzed the scope of attorney conduct subject to protection and held that the attorney-immunity doctrine and the “judicial-proceedings privilege” do not apply to or protect lawyers’ statements to the media about a pending or potential case, or to lawyers’ social media posts about those matters. There, the plaintiff’s counsel delivered a “60-day notice of intended suit” to the opposing party, as required by the applicable statute. But the attorney and his client went further, providing the pre-suit notice letter to the media and issuing a press release and social media posts about it. When Landry’s sued, alleging defamation and other claims, the trial court dismissed. But the Supreme Court reversed.

The judicial-proceedings privilege protects “communications in the due course of a judicial proceeding,” including communications “in serious contemplation of such a proceeding.” Providing the 60-day notice letter to the prospective defendant, as required by statute, therefore is fine and was protected, even if that letter contained defamatory statements. Repeating the allegations to the press and on Facebook, however, is not protected. Similarly, the Court held that providing the notice letter to the media and publicizing it through press releases and social media posts are not covered by the attorney-immunity doctrine either, because that is not the “kind of conduct” the doctrine was meant to protect. That is, “such statements, while sometimes made by lawyers, do not partake of ‘the office, professional training, skill, and authority of an attorney.’” If a publicist and a lawyer issue identical public statements to the press or on social media, why should the publicist be subject to a defamation claim, but not the lawyer? Even though many lawyers do resort to publicity, thinking it will aid their client’s cause, such conduct is not unique to lawyers or a product of legal training or skill. So, they are not protected in doing so by the attorney-immunity doctrine after Landry’s.

The Supreme Court noted that its ruling today falls in line with “the widely adopted rule in other American jurisdictions.” But not all Texas courts, much less all practitioners and commentators, shared that view up to now. The Landry’s ruling likely will prompt many attorneys to revisit their tactics in publicizing allegations made in lawsuits—or at least to think twice before taking to Twitter or Facebook.

SCoTx HOLDS A SECOND PART OF THE EXPUNCTION STATUTE TO BE “OFFENSE-BASED” RATHER THAN “ARREST-BASED”

Ex parte R.P.G.P.
Supreme Court of Texas, No. 19-1051 (May 14, 2021)
Justice Guzman (Opinion, linked here), Justice Bland Dissenting (Opinion linked here)
Expunction is a statutory civil remedy that, when applicable, largely erases the record of an individual's arrest. It allows one who has been arrested to “deny the occurrence of the arrest and [deny even] the existence of the expunction order” itself, except in a criminal proceeding. It also prohibits governmental and private entities named in the expunction order from maintaining, disseminating, or using the expunged records “for any purpose.” A court will issue an expunction order if the prerequisites and conditions specified in the statute are met. See Tex. Code Crim. Pro. art. 55.01. The statute, however, is not a model of clarity. The Supreme Court of Texas describes it as “linguistically complex and present[ing] a statutory construction challenge that courts at all levels have grappled with.”

One particularly vexing problem arises when an individual is arrested on multiple charges, one or more of which later would qualify for expunction if viewed in isolation, while others would not. Until fairly recently, most Texas courts facing that situation had held the test for expunction to be “arrest-based” rather than “offense-based”—that is, if any of the multiple offenses for which the petitioner was arrested did not qualify for expunction, then none covered by that same arrest could be expunged. In 2018, however, the Supreme Court held that Article 55.01(a)(1)—which authorizes expunction on the basis of acquittal or pardon—is “offense-based” rather than “arrest-based,” such that an individual arrested on multiple charges could obtain “partial expunction” and redaction of arrest records for the charges on which he was acquitted or pardoned, even if other charges entailed in the same arrest did not qualify for that relief. State v. T.S.N., 547 S.W.3d 617 (Tex. 2018).

In R.P.G.P., the Court dropped the second shoe, answering a question left open in T.S.N. R.P.G.P. deals with Article 55.01(a)(2), which concerns potential expunction in the context of dismissals and plea bargains. Although that provision has different requirements and conditions than Article 55.01(a)(1), addressed in T.S.N., the Supreme Court reached the same conclusion as in T.S.N., guided by that prior decision—an intricate analysis of the language of the statute compels the determination that “Article 55.01(a)(2) is an offense-based expunction provision and with respect to misdemeanor offenses, the proviso [or condition] in Article 55.01(a)(2)(A) is also offense-based.” Said another way, “the statute recognizes that [a single] arrest for multiple offenses is the functional equivalent of individual arrests for each individual offense,” each of which should be evaluated on its own for expunction purposes under Article 55.01(a)(2).

NO IMPLIED LIFTING OF ABATEMENT

Cruz v. Hernandez
Dallas Court of Appeals, No. 05-19-00956-CV (April 23, 2021)
Justices Schenck (Opinion, linked here), Smith, and Garcia
In 2012, Cruz was appointed guardian ad litem for three minors in a personal injury case. In 2015, the trial court issued an order abating the case pending resolution of a separate lawsuit against an underinsured-motorist insurance carrier. After the case had lain dormant for about three years, the trial court set a status conference. When Cruz didn’t appear for the conference, the trial court removed him and appointed a new guardian. Months later, in May 2019, Cruz applied for compensation for his services as guardian and, two days later, the trial court signed a final judgment in the case. On Cruz’s motion, the trial court then signed an amended judgment that, among other things, awarded fees both to Cruz and to the new guardian ad litem. Cruz appealed, arguing the trial court erred in the fees it awarded to him, in appointing the new guardian, and in entering judgment—all while the case was still abated. Perhaps surprisingly, the Court of Appeals agreed.

“An abatement is a present suspension of all proceedings in a suit.” “During abatement,” the appeals court explained, “the court and the parties are prohibited from proceeding in any manner[, and] unless otherwise specified in the abatement order, any action taken by the court or the parties during the abatement is a legal nullity.” Prior decisions from the Dallas Court required that, “to end an abatement, … an order of reinstatement must be entered.” Contrary to what one might expect, the Court’s precedent “rejected implied cessation of abatement by the court’s or the parties’ conduct, such as entering a judgment or otherwise proceeding with the case.”

Because no “order of reinstatement” had been entered in this case, all the actions of the parties and the trial court after the 2015 abatement order were “a legal nullity”—even though Cruz had sought or participated in several of those actions and even though the actions logically reflected an understanding by the parties and trial court that the abatement was no longer in effect. Although it acknowledged the waste and delay entailed in its ruling, the Court of Appeals, bound by its own prior decisions, had no choice but to reverse and remand the case to the trial court.

COURT REINS IN RUNAWAY INJUNCTION

Retail Services WIS Corp. d/b/a Product Connections v. Crossmark, Inc.
Dallas Court of Appeals, No. 05-20-00937-CV (May 4, 2021)
Justices Schenck, Reichek, and Carlyle (Opinion linked here)

The Dallas Court of Appeals vacated for lack of specificity several provisions of a temporary injunction against a company’s former employees and its competitor (their new employer). The court affirmed other provisions of the order, and remanded to the trial court.

Crossmark and Product Connections compete for business providing “in-store consumer experience” services to large retailers. In a familiar scenario, Crossmark sued Product Connections and three former Crossmark employees for misappropriating trade secrets and improperly soliciting Crossmark employees and clients. Following an evidentiary hearing, the trial court entered a temporary injunction with nineteen separate provisions (in twelve paragraphs) prohibiting certain conduct and a “Device Turnover Order” (DTO) requiring defendants to produce all laptops and other digital storage devices to Crossmark’s counsel for forensic inspection. Defendants filed an accelerated interlocutory appeal.

The appeals court first rejected appellants’ arguments that Crossmark had not established a probable right to relief or irreparable injury. The court found Crossmark adduced sufficient evidence “to raise a bona fide issue as to its right to ultimate relief” and noted the misuse of confidential information “has been described as ‘the epitome of irreparable injury.’”

Turning to the specific relief granted by the order, the court applied the requirements of Texas Rule of Civil Procedure 683 that a temporary injunction “state the reasons for its issuance, be specific in terms, and describe in reasonable detail … the act or acts sought to be restrained.” The court concluded the order adequately explained the reasons underlying the prohibitive provisions, but did not justify the mandatory DTO.

The court then reviewed each of the prohibitions and found that eleven of the nineteen provisions failed to satisfy Rule 683’s specificity requirements, primarily because some material terms were not defined. For example, while the order adequately defined Crossmark’s “Confidential Information and Trade Secrets” for some provisions, other provisions enjoined conduct using terms that were not clearly defined, such as “confidential,” “proprietary,” and “business information.” Nor did the order adequately identify “Covered Clients and Customers.”

The DTO likewise failed the specificity test by failing to define “Crossmark information” or “other digital storage devices,” which gave another ground for reversing that part of the order. The court rejected, however, appellants’ argument that ordering turnover of digital devices without following the procedures governing pretrial discovery of “electronic or magnetic data” is always improper because it circumvents the protections provided by Rules 192-196 and In re Weekley Homes, 295 S.W.3d 311 (Tex. 2005). According to the court, neither the discovery rules nor Weekley precludes an injunction mandating turnover of electronic devices—provided the order complies with Rule 683.

SCOTx HOLDS STOWERS REQUIRES EXCESS LIABILITY BUT BREACH OF CONTRACT DOES NOT

In re Farmers Texas County Mutual Insurance Co.
Supreme Court of Texas, No. 19-0701 (April 23, 2021)
Opinion by Justice Busby linked here.
Partial Dissent by Chief Justice Hecht linked here.
The Texas Supreme Court held an insurer cannot be liable under Stowers when a case settles within policy limits, but requiring the insured to contribute to the settlement might be a breach of contract.

The lawsuit arose from an auto accident involving Cassandra Longoria (Farmers’ insured) and Gary Gibson. Farmers appointed its in-house counsel to defend Longoria. Gibson offered to settle the lawsuit for $350,000, well within Longoria’s $500,000 liability policy limit. Longoria urged Farmers to accept the offer, expressing concerns that the risk of an excess verdict was heightened by defense counsel’s failure to timely designate expert witnesses. Farmers refused to pay more than $250,000. Longoria contributed $100,000 to close the settlement, and retained her right to seek recovery from Farmers. Longoria then sued Farmers, asserting breach of contract as well as negligent failure to settle under Stowers.

Farmers responded to the suit with a motion to dismiss under Texas Rule 91a, on the grounds that Longoria’s claims had “no basis in law.” A motion under that rule must be decided based solely on the facts alleged in the plaintiff’s petition. The trial court denied the motion on all counts. The San Antonio Court of Appeals denied Farmers’ request for mandamus on the Stowers claim, but granted mandamus on the contract claim, holding Longoria’s petition did not state a viable claim that the insurer breached its contractual duty to “settle or defend.”

Farmers sought mandamus from the Supreme Court, arguing that both lower courts had abused their discretion in ruling on the Stowers claim and that it had no adequate remedy on appeal. Farmers’ mandamus petition posited a bright-line rule: “[T]here can be no Stowers claim in the absence of an excess judgment against the insured.” It relied on several previous decisions, including those holding that (i) risk of exposure to an excess judgment is a key consideration in assessing the reasonableness of a settlement demand, American Physicians Ins. Exch. v. Garcia, 876 S.W.2d 842, 849 (Tex. 1994), and (ii) that the “injury producing event [in a Stowers case] is the underlying judgment in excess of policy limits,” Murray v. San Jacinto Agency, Inc., 800 S.W.2d 826, 829 (Tex. 1990).

Longoria filed a counter-petition for mandamus, arguing that the appeals court erred by dismissing the breach of contract claim for having no basis in law, “when the petition alleged that Farmers breached the insuring contract by mishandling her defense and withholding payments for a covered loss.” Longoria relied on cases holding that an insured may assert “rights granted under Stowers together with rights under the contract of insurance.” State Farm Mut. Auto Ins. Co. v. Traver, 980 S.W.2d 625, 629 (Tex. 1998). To refute Farmers’ “bright-line rule” on the Stowers claim, Longoria cited the holding in American Centennial Insurance Co. v. Canal Insurance Co., 843 S.W.2d 480, 482 (Tex.1992), that an excess carrier may sue a primary insurer to recover settlement payments, through equitable subrogation of the insured’s Stowers rights.

The Court granted both mandamus petitions in part and overruled the appellate court on both claims. First, it adopted a variation of Farmers’ bright-line Stowers rule: the insured cannot sue “for negligent failure to settle because her liability did not exceed policy limits.” Reconciling the lines of authority cited by the parties, the Court held liability exceeding policy limits can be based on either a judgment or settlement.

As for breach of contract, the Court held “Longoria has not alleged a viable claim for breach of Farmers’ contractual obligation to defend, but she has alleged a breach of its indemnity obligation.” Farmers could not be held vicariously liable for counsel’s alleged failure to timely designate experts, and Longoria did not allege any other recognized ground for finding a breach of the duty to defend. On the other hand, the allegations that Farmers withheld $100,000 in settlement funds and insisted Longoria contribute that amount to a reasonable settlement stated a potential claim for breach of the insurer’s duty to indemnify. The Court rejected Farmers’ (and the Dissent’s) argument that no duty to indemnify arose because Longoria was not “legally obligated to pay” the amount she paid to close the settlement.

Finally, the Court devoted several pages to potential grounds on which Farmers might or might not be required to reimburse Longoria, noting it could not reach the merits of those grounds in reviewing a Rule 91a order. Those issues and others require an evidentiary record and determinations in the trial court.

Chief Justice Hecht, joined by Justices Boyd and Blacklock, agreed that Longoria could not state a claim under Stowers, but would also have barred recovery under the policy.

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