SCOTX—DEFAMATION AND BUSINESS DISPARAGEMENT ARE NOT THE SAME!

Innovative Block of South Texas, Ltd. v. Valley Builders Supply, Inc.

Supreme Court of Texas, No. 18-1211 (June 25, 2020)

Justice Devine (opinion available here)

Kelli Hinson

The Supreme Court reversed a $2.7 million defamation verdict entered in favor of Valley Builders Supply, concluding it was “not a case of defamation but rather of business disparagement—a cause of action not submitted to the jury.” The case involved two building-supply companies that manufactured and sold concrete blocks and pavers in the Rio Grande Valley. Valley went out of business several years after Innovative entered the market. It sued Innovative for disparagement and defamation, claiming that Innovative disparaged the quality of Valley’s concrete blocks and falsely accused Valley of using “bad” aggregates in its manufacturing process. Ultimately, Valley only went to the jury on the defamation claim, and the trial court entered a judgment against Innovative for $1.8 million in actual damages and $937,000 in exemplary damages based on the jury’s verdict. The judgment was affirmed on appeal.

Valley did not fare so well at the Supreme Court. The threshold issue for the Court was whether Valley’s allegations and proof supported an action for defamation, business disparagement, or both. The torts of defamation and business disparagement are alike in that “both involve harm from the publication of false information.” But there are important differences between the two, largely explained by the interests the respective torts seek to protect. Defamation serves to protect one’s interest in character and reputation (“dignity harm”), whereas disparagement protects economic interests by providing a remedy for pecuniary losses from slurs affecting the marketability of goods and services (“commercial harm”). In other words, “defamatory communications about a corporation’s reputation are those directed at the character of the owner rather than the underlying business.” To support its defamation claim, then, Valley had to show actual injury to reputation.

Valley attempted to provide that evidence through the testimony of its expert, Kenneth Lehrer. Lehrer used a “Quasi-Monte Carlo method” to quantify the possible harm done to Valley’s reputation. A Monte Carlo simulation can be used to predict a range of values when a precise value is difficult to calculate. It “essentially requires a computer to run millions of possible, randomized scenarios to produce a range of likely values for the number in question.” It is typically used to answer questions for which a massive amount of data is available—for example, the number, intensity, and location of all forest fires in the United States for a given year. A “Quasi-Monte Carlo method” can be used to address questions smaller in scope, like whether a forest fire will happen within a particular county.

Essentially, Lehrer took Valley’s total estimated lost profits over the years in question and multiplied that figure by eight random percentages, allegedly representing the portion of lost profits caused by Innovative’s statements. But the percentages used in the model “had no basis in any underlying data from the case.” He then arbitrarily assigned a “percentage of probability” to each of the eight percentages. Again, the percentages were not derived from any data or evidence in the case. He then averaged these calculations to come up with his range of damages. The Court rejected this alleged expert opinion, finding that it was “largely unmoored from the facts,” and that it should have been excluded by the trial court.

Valley also argued that Innovative’s comments resulted in the loss of a specific customer’s business, which could support an award of special damages. The customer testified at trial that she had been told Valley received a load of bad aggregate and thereafter moved her business from Valley to Innovative. Another expert then calculated Valley’s alleged lost profits from that customer. But such damages could only be damages for business disparagement, not defamation, because the “receipt of bad aggregate does not imply reprehensible conduct or lack of integrity on Valley’s part.”

Without proof of harm to Valley’s reputation, as opposed to its business, Valley’s defamation claim failed.

RULE 91a DISMISSAL: AFFIRMATIVE DEFENSE OF ATTORNEY IMMUNITY

Cherlyn Bethel v. Quilling, Selander, Lownds, Winslett & Moser, P.C.
Supreme Court of Texas, No. 18-0595 (February 21, 2020)
Opinion by Justice Devine (linked here)

Neil R. Burger

Can the affirmative defense of attorney immunity be used to dismiss a case under Rule 91a? Yes, says the Supreme Court of Texas, affirming the ruling of the Dallas Court of Appeals.

The plaintiff’s husband was killed in a car accident while towing a trailer. She first sued the trailer’s manufacturer, alleging that the brakes were faulty. The law firm representing the manufacturer, Quilling Selander, took possession of the trailer and performed testing on the brakes in conjunction with its hired expert. The testing resulted in the disassembly and ultimate destruction of allegedly key evidence against the manufacturer. The plaintiff then sued Quilling Selander under various tort theories for destruction of another’s property, the trailer.

Quilling Selander moved to dismiss under Rule 91a, arguing that all the claims were barred by the attorney-immunity doctrine because all actions it took were in connection with representing a client. The trial court granted the motion and the Dallas Court of Appeals affirmed.

The two questions presented to the Court were: (1) Can a court consider an affirmative defense in deciding a Rule 91a motion when the rule limits a court’s consideration only to “the pleading of a cause of action,” and (2) Is alleged criminal conduct categorically exempt from attorney immunity?

Rule 91a permits the dismissal of a cause of action that “has no basis in law or fact.” But, in considering the motion, the rule states the court may only consider the cause of action as pleaded, without any additional evidence. The plaintiff argued that this standard excluded the attorney-immunity doctrine from the court’s purview because such an affirmative defense was outside the “cause of action” pleaded in the petition.

The Court disagreed, making a distinction between the factual scope of the court’s consideration and the legal theories it may apply. Although the court is limited to the “allegations” supporting the cause of action, Rule 91a did not restrain the “universe of legal theories by which the movant may show the claimant is not entitled to relief based on the facts as alleged.”

After ruling that a properly pleaded affirmative defense can be considered, the Court then considered whether the trial court properly dismissed the claims based on the allegedly criminal conduct of the law firm. In Cantey Hanger, LLP v. Byrd, the Court declined to recognize fraud as an exception to the attorney immunity defense, stressing that the inquiry concerned the “kind” of conduct alleged, not the “wrongfulness” of the actions.

The same was true as to conduct alleged to be criminal in nature. The proper question to ask was: Does the attorney’s conduct involve providing legal services to represent a client? The plaintiff’s labelling of such actions as criminal was irrelevant.

Therefore, while an attorney who punches an opposing counsel would not have immunity, when Quilling Selander “examined and tested evidence during discovery” in representing its client, the law firm was immune from its opposing party’s tort claims.

LEGAL MALPRACTICE CLAIMS AGAINST CRIMINAL-DEFENSE ATTORNEYS: SCOTX CLARIFIES LIMITATIONS AND THE “EXONERATION” REQUIREMENT OF PEELER v. HUGHES & LUCE

Gray v. Skelton
Supreme Court of Texas, No. 18-0386 (February 21, 2019)
Opinion by Justice Devine (linked here), dissent by Justice Blacklock (linked here)

Ken Carroll

About 25 years ago, a plurality of the Supreme Court of Texas declared in Peeler v. Hughes & Luce that a party who had been convicted of a criminal offense had to be “exonerated” on direct appeal or otherwise in order to bring a malpractice claim against the attorney who represented that party in the criminal case. But what did it mean to be “exonerated”? “Legal” innocence—i.e., just having the conviction set aside? “Actual” innocence? For more than two decades, the Court did not revisit the issue. Or specify how and when such a party could obtain or demonstrate “exoneration.” Or explain how the statute of limitations operates with respect to such a malpractice claim. In its 6-3 decision in Gray v. Skelton, the Court reaffirmed and solidified Peeler and answered those questions, providing needed clarification but likely expanding the prospect for legal malpractice claims to be brought against criminal-defense attorneys.

When Skelton, an estate planning attorney, found the original of a client’s will to be water-damaged and illegible, she printed a new copy from her electronic files and then cut and pasted onto that copy the signature portions of the water-damaged original, made a copy, and filed that copy with the probate court. For that, she was convicted of criminal forgery in 2007. Her appeal failed. Meanwhile, in a will contest in probate court, a jury found the composite will filed by Skelton was an accurate copy of the original and also found she did not intend to defraud or harm anyone by the filing of that composite. In the wake of these findings, Skelton sought to have her conviction set aside through habeas corpus, based in part on the ineffective assistance of Gray, her lawyer in her criminal case. The Fourth Court of Appeals granted Skelton the requested habeas relief, vacating her conviction because “the fundamental fairness of her trial was tainted by the ineffective assistance of her trial counsel,” without addressing her “actual” guilt or innocence.

Skelton then filed a legal malpractice lawsuit against Gray. The trial court dismissed Skelton’s claim, finding she had not proven “exoneration” as required by Peeler—apparently because she had not secured a ruling that she was “actually innocent” rather than “legally innocent” of the charge on which she had been convicted. The Fourth Court of Appeals, however, reversed that dismissal. It held that, because Skelton’s conviction had been vacated by the time she sued Gray, Peeler simply did not apply. And it went on to rule that her claim was not barred by limitations, which had been tolled until her conviction was vacated on habeas appeal (because it would have been barred by Peeler until then), and remanded the case for trial.

The Supreme Court affirmed, with a twist. It reaffirmed Peeler’s requirement that a former criminal defendant must be “exonerated” before he or she can recover against his or her criminal-defense attorney for legal malpractice. The Court then filled in the gap left by Peeler, explaining that “exoneration” has two parts. First, the former criminal defendant must have his or her conviction vacated on appeal or otherwise, e.g., through a habeas petition. But then, second, the former criminal defendant must also establish his or her “actual innocence”—not merely “legal innocence” (i.e., having the conviction vacated). This second criterion can be satisfied in the criminal appeal or habeas proceeding, if the conviction is set aside on grounds of actual innocence. But the Court rejected arguments both (1) that the presumption of innocence alone, restored after a conviction is vacated suffices to prove “actual innocence,” and (2) that actual innocence must be established in the criminal or habeas proceeding, before the claimant can initiate a malpractice lawsuit. Instead, the Court said, former criminal defendants may commence their malpractice lawsuits once their convictions are set aside, but “must obtain a finding of their innocence as a predicate of the submission of their legal malpractice claim.” That is, “[s]ubmission of the traditional elements of legal malpractice to the factfinder should … be conditioned on an affirmative finding that the malpractice plaintiffs are innocent of the crime of which they were formerly convicted.” The Court placed the burden on the claimant to prove innocence by a preponderance of evidence. This, of course, is the opposite of the situation in the criminal case, where the State had to prove guilt beyond a reasonable doubt, and it diverges from the approach taken by some other states that allow the criminal-defense lawyer to raise the former client’s guilt as a defense, thereby placing the burden for this issue on the lawyer rather than the claimant.

The Supreme Court also held the two-year statute of limitations for malpractice claims would not bar Skelton’s lawsuit. The Court ruled that under the “Hughes tolling rule”—which tolls limitations on legal malpractice claims until all appeals have ended in the case in which the alleged malpractice occurred—limitations for malpractice claims of this sort are to be tolled during all direct appeals and during the pendency of all habeas proceedings (sort of a “chess-clock” approach, where the limitations clock stops during the direct appeals, starts again when those appeals end, then stops again during any habeas proceeding(s)).

Justice Blacklock, joined by Justices Green and Bland, dissented on the limitations issue, finding the extension of the Hughes tolling rule to include habeas proceedings to be an unwise expansion of this judge-made doctrine. The dissent noted that, because a criminal defendant may file multiple habeas petitions in both state and federal courts, “a litigious convict can keep the habeas corpus ball in the air almost indefinitely, leaving criminal defense lawyers under the shadow of potential malpractice claims for many years beyond the two-year period envisioned by the Legislature.” Because the dissenting justices would have reversed on limitations grounds, they expressly declined to address the “exoneration” issue and procedures.

In sum, Skelton has satisfied the first prong of the “exoneration” requirement and will now have the chance to try to meet the second, actual-innocence prong, and then perhaps to pursue her legal malpractice claim on the merits

THUS SAYETH THE TEXAS SUPREME COURT: LIMITATIONS FOR CONSPIRACY GOVERNED BY LIMITATIONS FOR THE UNDERLYING TORT

Agar Corp. v. Electro Circuits International, LLC
Supreme Court of Texas, No. 17-0630 (April 5, 2019)
Opinion by Justice Devine (linked here)

Ken Carroll

Dirty Harry Callahan famously warned, “A man’s got to know his limitations.” Well, thanks to the Supreme Court’s decision in Agar v. Electro Circuits, we now know our limitations with respect to civil conspiracy claims here in Texas. The Supreme Court held that “civil conspiracy is a derivative claim that takes the limitations period of the underlying tort that is the object of the conspiracy.” “Having determined that civil conspiracy is not an independent tort,” the Court said, “it follows that the claim does not have its own statute of limitations.” Instead, “a civil conspiracy claim is connected to the underlying tort and survives or fails alongside it.”

As a corollary, the Court also held a conspiracy claim accrues and limitations begin to run along with the underlying tort; it rejected a separate last-overt-act accrual rule for conspiracy. If the claimant alleges conspiracy to commit multiple torts, the claim accrues and limitations run separately with respect to each such underlying tort.

The ruling brings Texas into line with the majority of other jurisdictions throughout the country. But reaching this conclusion required the Court to disapprove the decisions of all Texas intermediate courts of appeals to have addressed the issue, because they had held conspiracy to be governed by the two-year statute of limitations in TEX. CIV. PRAC. & REM. CODE § 16.003. Invoking that previously unbroken chain of Texas precedent, Electro protested that the Court “should not overturn the court of appeals’ decades-long uniform application of the two-year limitations period to civil conspiracy.” But the Supreme Court demurred, observing that “a long history of mistaken application alone is insufficient to counsel against correcting the error.”