SCOTx: Agreeing to Arbitrate According to the AAA Rules Constitutes “Clear and Unmistakable” Agreement to Delegate Questions of Arbitrability to the Arbitrator

TotalEnergies E&P USA, Inc. v. MP Gulf of Mexico, LLC

Supreme Court of Texas, No. 21-0028 (April 14, 2023)

Opinion by Justice Boyd (linked here), Concurrence by Justice Bland (here), Dissent by Justice Busby (here)

Ken Carroll

AAA Commercial Rule 7(a) provides that an arbitrator “shall have the power to rule on his or her own jurisdiction, including any objections with respect to the existence, scope, or validity of the arbitration agreement or to the arbitrability of any claim or counterclaim.” Relying on that passage, the Supreme Court of Texas confirmed what most of us thought we already knew, holding that, “as a general rule, an agreement to arbitrate in accordance with the AAA or similar rules constitutes a clear and unmistakable agreement that the arbitrator,” not a court, “must decide whether the parties’ disputes must be resolved through arbitration”—i.e., questions of arbitrability. The Court buttressed its pronouncement with a comprehensive review of other courts’ decisions on the issue, which revealed that “the vast majority of federal circuit courts and other state supreme courts have reached this same conclusion.”

But the TotalEnergies arbitration agreement came with a wrinkle. It said:

If any dispute or controversy arises between the parties out of this Agreement, the alleged breach thereof, or any tort in connection therewith, … the same shall be submitted to arbitration . . . in accordance with the rules of the AAA and the provisions in this Article.

Justice Busby contended in dissent that the “if” took the agreement out of the “general rule” recognized by the majority. “As a matter of text and logic,” he argued, “the ‘if’ clause is a substantive condition precedent to arbitrators acquiring the power to decide anything at all .…, including any issues … regarding [their] jurisdiction.” At the very least, he concluded, this “if” precondition precluded a determination that the parties had “clearly and unmistakably” agreed to delegate questions of arbitrability to the arbitrators unless and until a court first found the precondition to have been met. And, as both he and the majority acknowledged, it appears the Second and Fifth Circuits agree with that analysis.

The majority, however, rejected that argument. Just as an arbitration provision is “severable” and to be evaluated separately from the overall contract in which it appears, so also, the Court said, should a delegation clause be considered severable and evaluated separately from the overall arbitration agreement. Viewed through this lens, the delegation clause here—incorporating the AAA rules—was absolute and not subject to the “if” precondition. Consequently, the Court held, even under the language of the TotalEnergies arbitration agreement, the parties “clearly and unmistakably” delegated questions of arbitrability to the arbitrator.

SCOTx Holds Academy Sports Immune from Suit for Selling Assault Rifle Used in Sutherland Springs Mass Shooting

In re Academy, Ltd.

Supreme Court of Texas, No. 19-0497 (June 25, 2021)

Justice Lehrmann (Opinion, linked here), Justice Boyd Concurring (linked here)

Ken Carroll

        In November 2017, Devin Kelley shot 25 people to death, and wounded 20 more, in the First Baptist Church in Sutherland Springs, Texas. Kelley wielded a semi-automatic assault rifle he purchased from an Academy Sports store in San Antonio. Academy sold the rifle as part of a pre-packaged unit that included a 30-round large-capacity magazine (“LCM”), with a single SKU number and a single price for all components in the package. Kelley should not have been able to purchase the rifle, because he had been convicted of domestic assault in a military court-martial. But the Air Force failed to have that disqualifying conviction information entered on the Criminal Background Check System, and so that system green-lighted the sale when Academy ran the required check. The survivors and families of the victims of the shooting argued the sale shouldn’t have happened for a second reason: Kelley was a Colorado resident, and Colorado prohibits LCMs like that sold as part of the package bought by Kelley. In fact, another retailer—Dick’s Sporting Goods—had previously refused to sell to Kelley. But Academy interpreted the laws to allow this sale in Texas. So, Kelley got his gun. Survivors and families of victims sued the government in federal court for failing to enter the shooter’s conviction information on the background-check system. Holcombe v. United States, No. 5:18-cv-00555-XR (W.D. Tex.). And they sued Academy in state court for selling the gun-and-LCM package to the shooter, an out-of-state resident.

        In the state court case, Academy moved for summary judgment under the federal Protection of Lawful Commerce in Arms Act (“PLCAA”), which protects firearms retailers and manufacturers from certain claims arising out of the criminal conduct of gun purchasers. The trial court denied summary judgment, and the Fourth Court of Appeals refused to disturb that ruling. But the Texas Supreme Court granted mandamus and overturned that decision, finding the PLCAA did in fact bar the plaintiffs’ lawsuit against Academy.

        The Court rejected the plaintiffs’ arguments that their case fell within either of two exceptions to the PLCAA. First, the Court held the sale did not run afoul of the federal Gun Control Act, violation of which would fall within the “predicate exception” to the PLCAA. The Gun Control Act prohibits sales to out-of-state buyers unless “the sale, delivery, and receipt fully comply with the legal conditions of sale in both such States,” i.e., the state of sale and the state of the purchaser’s residence. There was no dispute it would not have been legal in Colorado for Kelley to buy the package he bought from Academy, containing the 30-round LCM. The Supreme Court, however, ruled that the Gun Control Act addressed only sales of “firearms” but not LCMs—even though, in this instance, the pre-packaged unit bought by the shooter contained both, and there could have been no “sale” of the “firearm” without the LCM. Second, it rejected application of the PLCAA exception for “negligent entrustment” claims, ruling that Texas does not recognize a claim for negligent entrustment based on the sale of a chattel, as opposed to temporary entrustment where the owner retains ultimate control. Finally, the Court concluded mandamus was appropriate because the PLCAA protected gun retailers and manufacturers from being subjected to lawsuits, rather than merely providing them a defense from liability—something that could have been addressed on appeal from a final judgment, rather by mandamus.

        For those disappointed Academy claimants who are also plaintiffs in the Holcombe lawsuit against the government, there may be a small silver lining in the Supreme Court’s decision. The government has designated Academy a “responsible third party” in that case, seeking to have the court allocate some of the responsibility for the shooting to Academy, based on the government’s contention that Academy did in fact violate federal and Colorado gun laws. If such responsibility were assigned to Academy, that would reduce the government’s own liability to the plaintiffs and, with it, the plaintiffs’ potential recovery. Now, however, there’s a chance the trial court in Holcombe will strike the designation of Academy as a responsible third party, based on the Texas Supreme Court’s decision. That, however, remains to be seen.

SCOT Holds Amazon Not Liable for Defective Products It Markets for Other Vendors

Amazon.com, Inc. v. McMillan

Supreme Court of Texas, No. 20-0979 (June 25, 2021)

Opinion by Justice Busby (linked here)

Dissent by Justice Boyd (linked here)

Lyndon Bittle

        Answering a question certified by the Fifth Circuit, the Texas Supreme Court held Amazon is not a “seller” under Texas product liability law when it does not hold title to the product but controls the process of the transaction and delivery through the “Fulfillment by Amazon” program.

        As discussed in a previous Sua Sponte post, the McMillan plaintiffs allege injuries to a 19-month-old child who swallowed a battery from a TV remote purchased on Amazon’s website. The listed seller was “USA Shopping 7693,” which Amazon traced to a vendor account owned by Hu Xi Jie—an individual or company that neither Amazon nor plaintiffs have been able to contact or serve. Amazon’s potential liability for the child’s injuries turns on whether it is a “seller” of the product under the Texas Products Liability Act, chapter 82 of the Civil Practice and Remedies Code. A federal district court held Amazon was a seller, i.e., “engaged in the business of distributing or otherwise placing” the product in the stream of commerce. The court certified its order for interlocutory appeal under 28 U.S.C. § 1292(b), and the Fifth Circuit submitted the issue to the Texas Supreme Court in January 2021.

        Fifth Circuit Judge (and former Texas Supreme Court Justice) Don Willett authored the opinion certifying the question, noting the Supreme Court’s “track record of resolving cases promptly.” Justice Busby’s opinion acknowledges the Fifth Circuit’s comment and responds in a footnote, “Challenge accepted.”

        The case focuses on a specific (albeit large) subset of Amazon transactions—products listed on the product-description and order-confirmation pages as “sold by” a vendor other than Amazon and delivered from Amazon warehouses through the “Fulfillment by Amazon” (FBA) program. These transactions differ from other purchases, including products listed as “sold by” and delivered by Amazon, products listed as “sold by” third parties and shipped directly to customers by the vendor, and products sold through other websites or stores and delivered through the FBA program.

        The Supreme Court’s construction of the Product Liability Act’s definition of “seller” is grounded in the presumption that “the Legislature uses statutory language with complete knowledge of the existing law and with reference to it.” (Quotation omitted.) Because the statutory definition is virtually identical to that of section 402A of the Second Restatement of Torts and Texas cases applying it, the Court concludes the statute “does not expand liability for those not considered sellers under common law.” Accordingly, the Court holds “Amazon is not a ‘seller’ under Texas law when it does not hold or relinquish title to an allegedly defective product.” It cannot, therefore, be liable as a non-manufacturing seller under the Product Liability Act.

        Justice Boyd, joined by Justice Devine, dissented, and would have answered the certified question “by holding that Amazon.com is a seller under [the statute] when it ‘controls the process of the transaction and delivery’ of a product through its FBA program, regardless of whether it ever holds title to the product.” This construction is compelled, said the dissent, by the plain meaning of the statute’s language when it was enacted in 1993. The dissent acknowledged the presumption that the Legislature was aware of case law when enacting a similar definition, but insisted “we may not presume that it was aware of what we would hold twenty-eight years later.”

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)

Kelli Hinson

        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.

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)

Ken Carroll

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)

Ken Carroll

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.

TEXAS LOTTERY OPERATOR NOT IMMUNE FROM FRAUD CLAIMS

Nettles v. GTECH Corp. (consolidated with GTECH Corp. v. Steele)

Supreme Court of Texas (June 12, 2020)

Opinion by Justice Busby (linked here)

Concurrence and dissent by Chief Justice Hecht (linked here)

Concurrence and dissent by Justice Boyd (linked here)

Lyndon Bittle

In two cases from different appeals courts that were consolidated for argument, a splintered Supreme Court of Texas sent fraud claims against GTECH Corp., which operates the Texas Lottery under a contract with the Lottery Commission, back to trial courts in Dallas and Austin, holding GTECH was not protected from suit by “derivative sovereign immunity.”

The cases involved fraud claims by lottery participants based on misleading instructions on the tickets describing the criteria for winning the “Fun 5” scratch-off game. See Nettles v. GTECH Corp., 581 S.W.2d 234 (Tex. App.—Dallas 2017) (affirming trial court’s granting GTECH’s plea to the jurisdiction); GTECH Corp. v. Steele, 549 S.W.3d 768 (Tex. App.—Austin 2018) (affirming denial of jurisdictional plea on fraud claims, but reversing on conspiracy claims). The misleading language was apparently the result of changes requested, and ultimately approved, by the Commission. The two courts, applying the Supreme Court’s reasoning in Brown & Gay Engineering, Inc. v. Olivares, 461 S.W.3d 117, 127 (Tex. 2015), agreed that GTECH would have derivative immunity “to the extent … Plaintiffs are substantively attacking actions and underlying decisions or directives of [the Commission] and not GTECH’s discretionary actions.” The Dallas Court in Nettles held the fraud claims against GTECH failed that test, but the Austin Court in Steele disagreed.

The Texas Supreme Court was sharply divided in addressing the doctrine of derivative sovereign immunity. The “opinion of the Court,” authored by Justice Busby and joined by only three other justices, noted the Court had not—in Brown & Gay or any other case—adopted the doctrine of derivative immunity, but held GTECH wouldn’t be immune to fraud claims even if the court were to adopt the “control standard” discussed in Brown & Gay. The opinion held, however, that GTECH was immune from claims of conspiracy and aiding and abetting fraud by the Lottery Commission, because such claims “are wholly derivative of an alleged underlying fraud by the Commission alone,” which is not a viable underlying tort on which conspiracy could be predicated.

Three justices, in an opinion authored by Chief Justice Hecht, dissented from the rejection of GTECH’s immunity from fraud claims in these cases, but joined in extending immunity to the conspiracy claims. Justice Boyd, on the other hand, believed the court should reject the doctrine of derivative immunity altogether, and “reach the simple, logical conclusion that sovereign immunity only protects the sovereign.” He thus joined Justice Busby’s opinion in denying GTECH immunity on the fraud claims, but dissented from finding GTECH immune from the conspiracy claims. Justice Guzman did not participate in the decision.

Importantly, all the participating justices agree GTECH can assert a government-contractor defense to avoid liability for actions taken at the Lottery Commission’s direction, alleging “any fraud was solely the result of the Commission’s representations.” It is not, however, immune from suit on those claims.

SCOTX VACATES SANCTIONS AGAINST BREWER, FINDING NO BAD FAITH

Brewer v. Lennox Hearth Products, LLC
Supreme Court of Texas, No. 18-0426 (April 24, 2020)
Justice Guzman (opinion available here)
Justice Boyd, concurring and dissenting (available here)

Kelli Hinson

The Supreme Court of Texas reversed an attorney sanctions award of over $133,000, holding there was no evidence of bad faith by the sanctioned attorney. The movants alleged that attorney Bill Brewer, as counsel for the plaintiffs in a serious personal injury matter, conducted a “push poll” shortly before trial with the intention of influencing the potential jury pool. After seven days of evidentiary hearings, the trial court did not find that Brewer violated any disciplinary rules or other applicable authority, but instead concluded that Brewer’s conduct “taken in its entirety,” including actions of his agents and subordinates, was “an abusive litigation practice that harms the integrity of the justice system and the jury trial process” and was “intentional[,] in bad faith[,] and abusive of the legal system and the judicial process specifically.” The trial court also found Brewer’s attitude in response to the sanctions motion “concerning” due to his (1) “nonchalant and uncaring” demeanor and (2) allegedly “repeatedly evasive” responses to questioning.

The Amarillo Court of Appeals affirmed, holding that the trial court had the authority to impose the sanctions and that the record supported the trial court’s “perce[ption] [that] Brewer’s ‘intentional and bad faith’ conduct in connection with the telephone survey” imperiled the court’s core judicial functions of “empanel[ing] an impartial jury and try[ing] a case with unintimidated witnesses.”

But the Supreme Court disagreed. First, it concluded that a court’s inherent power to sanction attorney conduct requires a finding of bad faith. It defined “bad faith” as “not just intentional conduct but intent to engage in conduct for an impermissible reason, willful noncompliance, or willful ignorance of the facts.” “Errors in judgment, lack of diligence, unreasonableness, negligence, or even gross negligence—without more—do not equate to bad faith.” Next, although the Court agreed that certain aspects of the survey were “reasonably disconcerting to the trial court,” it found “no evidence of bad faith in the attorney’s choice to conduct a pretrial survey or in the manner and means of its execution.” The Court focused on the common use of surveys in pre-trial preparation; the lack of guidelines or rules in the particular jurisdiction concerning the proper use of surveys; the use of third-party professionals in the drafting and execution of the survey; and Brewer’s limited involvement in drafting the survey questions and selecting the potential survey participants.

Finally, the Court considered whether Brewer’s demeanor and attitude during the sanctions hearing could provide an alternate basis for the sanctions. It concluded it did not, finding no evidence in the record that Brewer’s behavior interfered with the administration of justice, detracted from the trial court’s dignity and integrity, or even prolonged the hearing to any measurable degree. The Court therefore vacated the sanctions order.

In his concurring and dissenting opinion, Justice Boyd questioned how the Court could find “no evidence” of bad faith given that the “trial court entered specific fact findings after conducting a hearing over the course of seven days, and three distinguished appellate jurists—after making ‘an independent inquiry of the entire record,’ including ‘the evidence, arguments of counsel, written discovery on file, and the circumstances surrounding the party’s sanctionable conduct’—unanimously agree that some evidence supports the trial court’s findings.” But, he found it “far more important and concerning” that the Court’s requirement of “bad faith” in order for a trial court to exercise its inherent authority to sanction “unnecessarily handcuffs our state’s trial courts and undermines the very reason they possess inherent authority in the first place.”

“EXPRESS WRITTEN CONSENT” MEANS EXPRESS WRITTEN CONSENT—NO MORE, NO LESS

Barrow-Shaver Resources Co. v. Carrizo Oil & Gas, Inc.
Supreme Court of Texas, No. 17-0332 (June 28, 2019)
Opinion by Justice Green (linked here); Concurring and dissenting opinion by Justice Guzman (linked here); Dissenting opinion by Justice Boyd (linked here)

Derrick Ward

Last Friday, the Supreme Court of Texas delivered a reminder that when drafting contracts, you should say what you mean and mean what you say. The Court also reaffirmed that reliance on oral representations directly contrary to the terms of a written agreement between sophisticated parties is not justifiable.

The case considered a farmout contract between Barrow-Shaver Resources Company and Carrizo Oil & Gas for Barrow-Shaver to build a well on a lease held by Carrizo in exchange for an interest in the mineral rights. The contract contained a consent-to-assign provision prohibiting Barrow-Shaver from assigning its rights under the agreement “without the express written consent of Carrizo.” During negotiations, Barrow-Shaver reportedly raised concerns about the consent-to-assign provision and sought to add language that would prohibit Carrizo from withholding consent unreasonably. But Barrow-Shaver relented when Carrizo’s representative in the negotiations allegedly offered assurances that Carrizo would work cooperatively with Barrow-Shaver in the event assignment became an issue.

Assignment did become an issue, and when Barrow-Shaver approached Carrizo about assigning its rights to another company, Carrizo refused and instead offered to allow Barrow-Shaver to buy its rights to the lease for $5 million, thereby removing the need to have its consent. Barrow-Shaver sued, claiming fraud, breach of contract, and tortious interference, and ultimately obtained a $26-million-dollar jury verdict. The Court of Appeals relied on evidence of contract negotiations excluded by the trial court to conclude that Carrizo was within its rights to withhold consent as a matter of law, because the consent-to-assign provision was unambiguous. The court also rejected Barrow-Shaver’s fraud claim on the basis that oral promises could not justifiably be relied upon when the parties had a written agreement. A divided Texas Supreme Court affirmed that result.

Considering the breach-of-contract claim first, the Supreme Court read the term “consent” as it is traditionally defined, to mean simply “approval.” It rejected Barrow-Shaver’s argument that Carrizo’s right to withhold that approval or consent was somehow qualified or constrained.

The Court then distinguished between material terms to a contract, which might be supplemented or made more precise to ensure enforceability, and immaterial terms, which may not. The Court found all material terms in both the farmout agreement and the consent-to-assign provision were present and sufficiently definite to determine the parties’ rights and obligations. With respect to the consent-to-assign provision specifically, the Court viewed the obligations of each party as clear: “Barrow-Shaver has the right to assign its rights under the farmout agreement, but Barrow-Shaver must first satisfy its obligation to obtain Carrizo’s express and written consent; Carrizo has no obligation.” In the Court’s view, terms related to withholding consent did not require supplementation.

Both parties also sought to have extrinsic evidence considered alongside the language of the contract. Carrizo urged consideration of the prior drafts, which showed that a limitation on Carrizo’s ability to withhold consent had been considered and rejected. Barrow-Shaver proffered expert testimony on industry usage and custom, which it argued could explain the contract’s silence regarding circumstances in which consent could and could not be withheld. Citing the parol evidence rule, the Court declined to consider the earlier drafts of the contract because it found the agreement was unambiguous. The Court also declined to consider the expert testimony regarding industry usage because ‘“express written consent’ within a contract is clear, is not susceptible to more than one meaning, and is not industry or vocation specific.” It further explained that allowing a jury to consider such testimony would invite the creation of ambiguity where none exists.

Because the Court ultimately concluded the consent-to-assign provision “unambiguously allowed Carrizo to refuse its consent for any reason,” Carrizo’s refusal to consent to the assignment could not constitute a breach of contract as a matter of law.

Rejecting Barrow-Shaver’s fraud claim, the Court found Barrow-Shaver was not justified in relying on the oral statements of Carrizo’s contract negotiator. The Court cited long-standing principles requiring that a party take reasonable diligence in protecting his affairs and interests, as well as precedent holding that reliance on oral promises that are directly contradicted by an unambiguous written agreement is not reasonable as a matter of law. The Court viewed Carrizo’s agent’s promises that Carrizo would provide consent to be directly contradicted by the plain language of the consent-to-assign provision, such that Barrow-Shaver could not have reasonably relied upon them.

Justice Guzman, writing for herself, Justice Hecht, and Justice Busby, dissented from the court’s holding on the breach of contract claim and argued forcefully that use of trade usage and custom evidence considered by the jury was appropriate and that the majority was wrong to reject it and the conclusions the jury reached from hearing it. The three Justices would have reached the same outcome on the fraud claim, but for different reasons. Justice Boyd dissented to argue for the inclusion of both custom and usage evidence and evidence of the contract negotiations and would have remanded for a new trial including both types of evidence.

While this case arose in an oil and gas context, the Supreme Court’s opinion underscores the importance of insuring that any agreement reflects the actual intent of the parties. As Barrow-Shaver found out the hard way, often if it isn’t in the written contract, it isn’t part of the deal.

DFW AIRPORT IMMUNE FROM SUIT FOR ALLEGED BREACH OF “GOOD-FAITH-EFFORTS” AGREEMENT

Dallas/Fort Worth International Airport Board v. Vizant Technologies, LLC
Supreme Court of Texas, No. 18-0059 (May 17, 2019)
Opinion by Justice Boyd (linked here)

Lyndon Bittle

This case explores two key issues: (1) the distinction between “governmental” and “proprietary” functions of a “special purpose governmental entity” like the DFW Airport Board, which determines whether the entity is protected by governmental immunity; and (2) whether a “good-faith-efforts” clause is an enforceable agreement subject to the waiver of immunity provided by Local Government Code § 271.152.

Vizant Technologies entered into a consulting contract with the Airport under which Vizant would receive a specified percentage of any resulting savings in the Airport’s payment-processing costs. Upon completion of its work, Vizant asserted the agreed formula entitled it to be paid over $300,000. The contract, however, required Airport Board approval for any amount over $50,000, and promised a “good faith effort to receive board authorization to increase the compensation.” Vizant was paid $50,000, but the board denied the request to amend the contract to increase the compensation. Vizant sued for breach of contract (as well as various torts).

The district court denied the Airport’s plea to the jurisdiction, holding that governmental immunity did not bar Vizant’s claims because the Airport’s management of payment-processing costs is a proprietary, not a governmental, function. The court based its holding on its interpretation of Wasson Interests v. City of Jacksonville, 559 S.W.3d 142 (Tex. 2018), in which the Texas Tort Claims Act’s governmental/proprietary dichotomy was applied to contract disputes.

On the Airport’s interlocutory appeal, the Dallas Court of Appeals held the contract involved airport operations, which are statutorily defined as a governmental function and thus trigger immunity against both contract and tort claims. The court held, however, the Airport’s immunity was waived for contract claims by Local Government Code § 271.152, as construed by the Texas Supreme Court in Zachry Construction Corp. v. Port of Houston Authority, 449 S.W.3d 98 (Tex. 2014). It therefore affirmed the trial court’s ruling on the contract claim and remanded for trial on the merits of that claim.

The Airport sought review by the Texas Supreme Court on whether the alleged breach of contract was subject to section 271.152 of the Local Government Code, which waives immunity for certain contract claims, and whether any waiver was negated because the alleged damages were barred by section 271.153. Vizant argued the Airport breached the “good-faith-efforts” provision of the contract, causing damages that were not barred by the statute. Vizant also argued the appellate court’s judgment could be upheld by reversing that court’s holding that the contract involved the Airport’s governmental, rather than proprietary, functions.

The Texas Supreme Court reversed and rendered a take-nothing judgment against Vizant. The Court agreed with the appellate court that the contract involved the Airport’s governmental functions of “maintenance, operation, [and] regulation” of an airport, so immunity applied unless waived. But the Court disagreed with the lower court’s application of chapter 271’s waiver provisions. First, it held the good-faith-efforts clause did not “state the essential terms of a legally enforceable agreement” under section 271.151(2), so chapter 271 did not apply. Second, even if the contract were enforceable, the Court held the damages sought by Vizant were consequential damages that were not recoverable under section 271.153(b). The statute therefore did not waive the Airport’s governmental immunity against Vizant’s claims.