The Voting Rights Act of 1965

The 1965 Enactment

By 1965, concerted efforts to break the grip of voter disfranchisement in certain states had been under way for some time, but had achieved only modest success overall and in some areas had proved almost entirely ineffectual. The murder of voting-rights activists in Philadelphia, Mississippi, gained national attention, along with numerous other acts of violence and terrorism. Finally, the unprovoked attack on March 7, 1965, by state troopers on peaceful marchers crossing the Edmund Pettus Bridge in Selma, Alabama, en route to the state capitol in Montgomery, persuaded President Johnson and Congress to overcome Southern legislators’ resistance to effective voting rights legislation. President Johnson issued a call for a strong voting rights law and hearings began soon thereafter on the bill that would become the Voting Rights Act.

Congress determined that the existing federal anti-discrimination laws were not sufficient to overcome the resistance by state officials to enforcement of the 15th Amendment. The legislative hearings showed that the U.S. Department of Justice’s efforts to eliminate discriminatory election practices by litigation on a case-by-case basis had been unsuccessful in opening up the registration process; as soon as one discriminatory practice or procedure was proven to be unconstitutional and enjoined, a new one would be substituted in its place and litigation would have to commence anew.

President Johnson signed the resulting legislation into law on August 6, 1965. Section 2 of the Act, which closely followed the language of the 15th amendment, applied a nationwide prohibition against the denial or abridgment of the right to vote on the literacy tests on a nationwide basis. Among its other provisions, the Act contained special enforcement provisions targeted at those areas of the country where Congress believed the potential for discrimination to be the greatest. Under Section 5, jurisdictions covered by these special provisions could not implement any change affecting voting until the Attorney General or the United States District Court for the District of Columbia determined that the change did not have a discriminatory purpose and would not have a discriminatory effect. In addition, the Attorney General could designate a county covered by these special provisions for the appointment of a federal examiner to review the qualifications of persons who wanted to register to vote. Further, in those counties where a federal examiner was serving, the Attorney General could request that federal observers monitor activities within the county’s polling place.

The Voting Rights Act had not included a provision prohibiting poll taxes, but had directed the Attorney General to challenge its use. In Harper v. Virginia State Board of Elections, 383 U.S. 663 (1966), the Supreme Court held Virginia’s poll tax to be unconstitutional under the 14th Amendment. Between 1965 and 1969 the Supreme Court also issued several key decisions upholding the constitutionality of Section 5 and affirming the broad range of voting practices that required Section 5 review. As the Supreme Court put it in its 1966 decision upholding the constitutionality of the Act:

Congress had found that case-by-case litigation was inadequate to combat wide-spread and persistent discrimination in voting, because of the inordinate amount of time and energy required to overcome the obstructionist tactics invariably encountered in these lawsuits. After enduring nearly a century of systematic resistance to the Fifteenth Amendment, Congress might well decide to shift the advantage of time and inertia from the perpetrators of the evil to its victims. South Carolina v. Katzenbach, 383 U.S. 301, 327-28 (1966).

The 1970 and 1975 Amendments

Congress extended Section 5 for five years in 1970 and for seven years in 1975. With these extensions Congress validated the Supreme Court’s broad interpretation of the scope of Section 5. During the hearings on these extensions Congress heard extensive testimony concerning the ways in which voting electorates were manipulated through gerrymandering, annexations, adoption of at-large elections, and other structural changes to prevent newly-registered black voters from effectively using the ballot. Congress also heard extensive testimony about voting discrimination that had been suffered by Hispanic, Asian and Native American citizens, and the 1975 amendments added protections from voting discrimination for language minority citizens.

In 1973, the Supreme Court held certain legislative multi-member districts unconstitutional under the 14th Amendment on the ground that they systematically diluted the voting strength of minority citizens in Bexar County, Texas. This decision in White v. Regester, 412 U.S. 755 (1973), strongly shaped litigation through the 1970s against at-large systems and gerrymandered redistricting plans. In Mobile v. Bolden, 446 U.S. 55 (1980), however, the Supreme Court required that any constitutional claim of minority vote dilution must include proof of a racially discriminatory purpose, a requirement that was widely seen as making such claims far more difficult to prove.

The 1982 Amendments

Congress renewed in 1982 the special provisions of the Act, triggered by coverage under Section 4 for twenty-five years. Congress also adopted a new standard, which went into effect in 1985, providing how jurisdictions could terminate (or “bail out” from) coverage under the provisions of Section 4. Furthermore, after extensive hearings, Congress amended Section 2 to provide that a plaintiff could establish a violation of the Section without having to prove discriminatory purpose.

What is Discrimination?

In plain English, to “discriminate” means to distinguish, single out, or make a distinction. In everyday life, when faced with more than one option, we discriminate in arriving at almost every decision we make. But in the context of civil rights law, unlawful discrimination refers to unfair or unequal treatment of an individual (or group) based on certain characteristics, including:

  • Age
  • Disability
  • Ethnicity
  • Gender
  • Marital status
  • National origin
  • Race,
  • Religion, and
  • Sexual orientation.

Lawful vs. Unlawful Discrimination

Not all types of discrimination will violate federal and/or state laws that prohibit discrimination. Some types of unequal treatment are perfectly legal, and cannot form the basis for a civil rights case alleging discrimination. The examples below illustrate the difference between lawful and unlawful discrimination.

Example 1: Applicant 1, an owner of two dogs, fills out an application to lease an apartment from Landlord. Upon learning that Applicant 1 is a dog owner, Landlord refuses to lease the apartment to her, because he does not want dogs in his building. Here, Landlord has not committed a civil rights violation by discriminating against Applicant 1 based solely on her status as a pet owner. Landlord is free to reject apartment applicants who own pets.

Example 2: Applicant 2, an African-American man, fills out an application to lease an apartment from Landlord. Upon learning that Applicant 2 is an African-American, Landlord refuses to lease the apartment to him, because he prefers to have Caucasian tenants in his building. Here, Landlord has committed a civil rights violation by discriminating against Applicant 2 based solely on his race. Under federal and state fair housing and anti-discrimination laws, Landlord may not reject apartment applicants because of their race.

Where Can Discrimination Occur?

Federal and state laws prohibit discrimination against members of protected groups (identified above) in a number of settings, including:

  • Education
  • Employment
  • Housing
  • Government benefits and services
  • Health care services
  • Land use / zoning
  • Lending and credit
  • Public accommodations (Access to buildings and businesses)
  • Transportation
  • Voting

Anti-Discrimination Laws

Most laws prohibiting discrimination, and many legal definitions of “discriminatory” acts, originated at the federal level through either:

  • Federal legislation, like the Civil Rights Act of 1964 and the Americans with Disabilities Act of 1992. Other federal acts (supplemented by court decisions) prohibit discrimination in voting rights, housing, extension of credit, public education, and access to public facilities.

OR

  • Federal court decisions, like the U.S. Supreme Court case Brown v. Board of Education, which was the impetus for nationwide racial desegregation of public schools. Other Supreme Court cases have shaped the definition of discriminatory acts like sexual harassment, and the legality of anti-discrimination remedies such as affirmative action programs.

Today, most states have anti-discrimination laws of their own which mirror those at the federal level. For example, in the state of Texas, Title 2 Chapter 21 of the Labor Code prohibits employment discrimination. Many of the mandates in this Texas law are based on Title VII of the Civil Rights Act of 1964, the federal law making employment discrimination unlawful.

Municipalities within states (such as cities, counties, and towns) can create their own anti-discrimination laws or ordinances, which may or may not resemble the laws of the state itself. For example, a city may pass legislation requiring domestic partner benefits for city employees and their same-sex partners, even though no such law exists at the state level.

Discrimination: Getting a Lawyer’s Help

If you believe you have suffered a civil rights violation such as discrimination, the best place to start is to speak with an experienced Discrimination Attorney. Important decisions related to your case can be complicated — including which laws apply to your situation, and who is responsible for the discrimination and any harm you suffered. A Discrimination Attorney will evaluate all aspects of your case and explain all options available to you, in order to ensure the best possible outcome for your case.

Texas Court of Appeals Rules Retroactive Application of Certain Minimum Medical Criteria Unconstitutional in Asbestos Case

On June 30, Texas’s First Court of Appeals ruled that retroactive application of a provision of state legislation establishing minimum medical criteria for asbestos claimants violates the Texas Constitution. Union Carbide Corp. v. Synatzske, et al., No. 01-09-01141-CV, slip op., 2011 Tex. App. LEXIS 4934 (Tex. App.-Houston [1st Dist.] June 30, 2011, no pet. h.). In doing so, the court upheld the Texas Asbestos Multidistrict Litigation (MDL) pretrial court’s order denying Union Carbide Corporation‘s (Union Carbide’s) motion to dismiss, and remanded the plaintiffs’ wrongful death claims based on the alleged asbestos exposure of Joseph Emmite, a former worker at Union Carbide’s Texas City facility.

Background

Effective September 1, 2005, Chapter 90 of the Texas Civil Practice and Remedies Code established minimum medical criteria standards applicable to asbestos claimants. The purpose of the statute was to curb the onslaught of cases litigated in Texas courts for nonmalignant, unimpaired claims that hindered the ability of seriously ill claimants to fairly and efficiently pursue their claims for compensation.

Under Chapter 90, the plaintiffs in Union Carbide were required to timely serve a medical report that complied with all applicable provisions of Chapter 90 in order to proceed with their wrongful death claim for Mr. Emmite’s pulmonary asbestosis. Union Carbide filed a motion to dismiss for failure to meet those requirements. To avoid dismissal, the plaintiffs had to comply with section 90.010(f)(1)(B)(ii), which required them to serve a report that verified that pulmonary function testing was performed on Mr. Emmite and that the physician making the report interpreted the pulmonary function test. This testing was not performed before Mr. Emmite’s death.

The plaintiffs instead proffered reports explaining such testing could not be performed due to Mr. Emmite’s extraordinary physical condition at the time of treatment and was not necessary because Mr. Emmite’s asbestosis diagnosis and asbestos-related impairment had been sufficiently confirmed by other medical means. Union Carbide maintained that meeting the requirements of section 90.010(f)(1)(B)(ii) was mandatory for the plaintiffs to proceed with their wrongful death claim. Unable to comply, the plaintiffs, on appeal, argued that at the time of Mr. Emmite’s death, on June 15, 2005, when the wrongful death claim vested, pulmonary function testing was not required to bring an asbestos claim in Texas; consequently, application of section 90.010(f)(1)(B)(ii) to their claim would violate the Texas Constitution’s prohibition on retroactive laws.

Court’s Analysis and Conclusion

To determine the constitutionality of Chapter 90 as applied to the plaintiffs’ wrongful death claim, the court applied the Texas Supreme Court‘s three-prong test for whether retroactive application of a statute violates article I, section 16 of the Texas Constitution: (1) the nature and strength of the public interest served by the statute as evidenced by the legislature’s factual findings, (2) the nature of the prior right impaired by the statute, and (3) the extent of the impairment. The court further considered the “ultimate test,” i.e., whether the statute has the effect of either establishing or eliminating tort liability for conduct that occurred before the enactment of the statute.

To guide its analysis, the court looked to the fundamental objectives of the prohibition against retroactive laws:

(1) it protects “settled expectations” which “‘should not be lightly disrupted,'” i.e. “the rules should not change after the game has been played,” and (2) it protects against “abuses of legislative power” which “‘offer[s] special opportunities for the powerful to obtain special and improper legislative benefits.'”

Statutes that thwart these fundamental objectives by “act[ing] on things which are past,” disrupting “settled expectations” and “chang[ing] the [tort liability] rules after the game has been played” are strictly forbidden by the Texas Constitution.

The court reasoned that the pulmonary function testing requirement of section 90.010(f)(1)(B)(ii) impermissibly extinguishes the rights of the plaintiffs to bring a well-established, factually substantiated claim for an asbestos-related injury (failing prongs 2 and 3) and serves no public interest (failing prong 1); rather, it turns the Texas legislature’s intent on its head by preventing “the right of people with impairing” asbestos-related injuries “to pursue their claims for compensation in a fair and efficient manner.” As a result, the court held that under the “ultimate test” for determining whether a statute is unconstitutionally retroactive, section 90.010(f)(1)(B)(ii) only serves to save Union Carbide from tort liability for conduct that took place before the statute was enacted.

Further, the court concluded that section 90.010(f)(1)(B)(ii) violates the fundamental principles to act on “things which are past,” disrupt “settled expectations,” and “change the rules [of tort liability] after the game has been played.” Therefore, the court affirmed the order of the MDL pretrial court denying Union Carbide’s motion to dismiss.

As a result of the court’s holding that the pulmonary function testing provision of Chapter 90 is unconstitutional in circumstances where tort liability is established or eliminated for conduct that occurred before the enactment of the statute, the future of the Texas asbestos inactive docket is unclear-but the Texas MDL pretrial court will likely have the opportunity to consider the ramifications of this opinion in the near future.

Texas Legislature Amends Statute on Choice of Law

On May 27, 2011, the Governor of the State of Texas signed into law amendments to the Texas choice-of-law statute that, effective September 1, 2011, will afford parties greater flexibility when choosing a governing law for many transactions involving at least $1,000,000.

The amendments expand and clarify existing statutory rules and include, among other things, an important change for syndicated loan and other multi-lender transactions, in that the amendments permit parties to a loan transaction to choose, as the governing law for the transaction, the law of any jurisdiction in the United States where a party to the transaction has an office, so long as the transaction also involves at least $25,000,000 of credit extended by at least three lenders.

These changes are contained in H.B. No. 2991, which amends the choice-of-law statute adopted by the Texas Legislature in 1993, later recodified in what is now Chapter 271 of the Texas Business and Commerce Code.  Under the statute, parties to a transaction involving at least $1,000,000 may, with certain exceptions, agree in writing that their agreements will be governed by the laws of a particular jurisdiction if the transaction bears a reasonable relation to the chosen jurisdiction. Since its original passage, the statute has set out five safe-harbor factors as to what ─ under Texas law ─ constitutes a reasonable and enforceable choice of governing law.  These safe harbors have never applied to certain types of transactions, such as those involving transfers of title to real property, methods of foreclosure, marriage, adoption and matters of inheritance, and H.B. No. 2991 does not change any of these exclusions from the coverage of the statute.

H.B. No. 2991 is intended to reflect modern business practice by adding to, and clarifying, the list of statutory safe harbors. In addition to the new safe harbor for multi-lender loan transactions noted above, H.B. No. 2991:

  • amends an existing safe harbor ─ in recognition of the fact that negotiations are often conducted by telephone and e-mail without in-person meetings ─ to clarify that the parties to a transaction may choose the law of a particular jurisdiction to govern their transaction if a substantial part of the negotiations relating to the transaction occurs in or from that jurisdiction and an agreement relating to the transaction is signed in that same jurisdiction by one of the parties,
  • clarifies that the statutory list of safe-harbor contacts is a non-exclusive list so that parties to transactions covered by Chapter 271 of the Texas Business and Commerce Code may also rely on other choice-of-law rules, such as those found in the Restatement (Second) of the Law of Conflict of Laws,
  • expressly authorizes parties to choose the law of the jurisdiction of formation of an entity to govern any transaction involving at least $1,000,000 that relates to the governing documents or internal affairs of that entity, such as a transaction involving:
    • a shareholder or other agreement among members or owners of the entity,
    • an agreement or option to acquire a membership or ownership interest in the entity,
    • the conversion of debt or other securities into an ownership interest in the entity, or
    • any other matter relating to rights or obligations with respect to the entity’s membership or ownership interests, and
  • clarifies that a choice of law may continue to apply to a transaction, notwithstanding changes in facts and circumstances (including changes in parties and amendments or restatements of agreements relating to the transaction), if the chosen law was reasonably related at the outset of the transaction.

H.B. No. 2991 leaves unchanged the following additional safe harbors contained in existing Chapter 271 for determining when a transaction bears a reasonable relation to a particular jurisdiction:

  • a party to the transaction is a resident of that jurisdiction,
  • a party to the transaction has the party’s place of business or, if that party has more than one place of business, the party’s chief executive office or an office from which the party conducts a substantial part of the negotiations relating to the transaction, in that jurisdiction,
  • all or part of the subject matter of the transaction is located in that jurisdiction, or
  • a party to the transaction is required to perform in that jurisdiction a substantial part of the party’s obligations relating to the transaction, such as delivering payments.

These amendments were part of a legislative package sponsored by the Texas Business Law Foundation, a non-profit organization founded in 1988 to support a favorable business climate in the State of Texas. The Foundation is currently chaired by Gail Merel, a partner of the Firm who also worked on drafting these amendments. Mike Jewesson, Counsel in the Firm’s Dallas office, serves as Secretary-Treasurer of the Foundation.

Combining Disclosed Technology Can Be a Protectable Trade Secret

The U.S. Court of Appeals for the Fifth Circuit has held that, under Texas law, unique combinations of previously disclosed elements can constitute a trade secretTewari De-Ox Sys., Inc. v. Mountain States/Rosen, L.L.C., Case No.  10-50137 (5th Cir., Apr. 5, 2011) (Prado, J.).

Plaintiff Tewari developed a “zero oxygen” meat-packing method and disclosed the technology involved in multiple 2004 patent applications.  In 2005, defendant Mountain States/Rosen (MTSR) signed a non-disclosure agreement with Tewari in efforts to determine if the plaintiff’s method could increase the shelf-life of MTSR’s case-ready cuts of lamb.  Tewari claimed that it revealed trade secrets to MTSR during the demonstration of his method and that  MTSR later misappropriated those trade secrets.

The district court initially rejected the defendant’s argument that the prior disclosure in the 2004 patent application destroyed the secret, on the ground that a patent application does not disclose a trade secret.   However, on a motion for reconsideration, the court ruled that any information disclosed in the 2004 patent applications were no longer trade secrets when the NDA was signed in March 2005, relying on Group One v. Hallmark, and granted summary judgment to MTSR.  The district court determined that the difference between what was disclosed in the 2004 patent applications and the 2005 meeting with the defendant was “merely a customization” based on MTSR’s needs and using MTAR’s equipment, and therefore Tewari had no trade secret to protect.

The 5th Circuit, sitting de novo, agreed with the district court that any information disclosed in the 2004 patent applications were no longer trade secrets.  However, the court determined that the district court incorrectly ruled that Tewari’s unique combinations of previously disclosed elements could not constitute trade secrets.

Although no post-2000 Texas case directly addresses whether a published patent application destroys the secrecy of its contents for trade secret purposes, the 5th Circuit relied on the weight of authority from the other jurisdictions.  A published patent application is not “secret.”   The plaintiff’s 2004 applications were published a year prior to the meeting with MTSR, and any contents disclosed would no longer qualify as trade secrets.

Tewari, in an affidavit, defined multiple trade secrets that it argued were not disclosed in the 2004 applications.   They involved combinations of the disclosed information as well as new adaptations.  The 5th Circuit, relying on its opinion in Water Services, explained that a trade secret can exist in a combination of characteristics and components, each of which, by itself, is in the public domain, but the unified process, design or operation of which in unique combination, affords a competitive advantage and is a protectable secret.  Even though the district court rejected Tewari’s alleged trade secrets as “customization” or “trial-and-error” processes, the 5th Circuit cited to Ventura Manufacturing, which specifically granted trade-secret protections to a trial-and-error process.  As such, Tewari created a fact dispute as to whether it had trade secrets that it disclosed to the defendant.

Because the district court incorrectly defined Tewari’s trade secrets and failed to consider that a unique combination of previously disclosed elements constituted protectable trade secrets, the 5th Circuit reversed the summary judgment on the plaintiff’s trade secret misappropriation and breach of fiduciary duty claims and remanded the case.

Supreme Court Limits Bankruptcy Court Jurisdiction – Stern v. Marshall

In a decision that may create serious problems for bankruptcy case administration, the Supreme Court this morning invalidated part of the Bankruptcy Court jurisdictional scheme. Stern v. Marshall, No. 10-179, 564 U.S. ___ (June 23, 2011). Specifically, the Court held that the Bankruptcy Courts cannot issue final judgments on garden variety state law claims that are asserted as counterclaims by the debtor or trustee against creditors who have filed proofs of claim in the bankruptcy case.

Thus, while the Bankruptcy Court could issue a final order resolving the creditor’s claim against the estate, it could issue only a proposed ruling with respect to the counterclaim. Final judgment on the counterclaim could only be issued by the District Judge after de novo review of any matters to which a party objects. See 28 U.S.C. § 157(c).

In a five-to-four opinion by Chief Justice Roberts, the Court affirmed the Ninth Circuit Court of Appeals decision that had reversed an $88 million judgment in favor of Vickie Lynn Marshall (a/k/a Anna Nicole Smith) against E. Pierce Marshall for tortious interference with Vickie’s expectancy of a gift from her late husband J. Howard Marshall, Pierce’s father and one of the richest people in Texas.

The Court’s decision was based on constitutional principles defining the limits of Article III of the U.S. Constitution. Thus, it is likely to have implications that reach far beyond the narrow issue resolved in the instant case. The majority relies on the “public rights” doctrine to define the class of judicial matters that can be resolved by non-Article III tribunals like the Bankruptcy Courts. However, it adopts a narrower view of what constitutes “public rights” than was generally understood prior to this decision.

In addition, although earlier cases could be read to adopt a flexible pragmatic approach to Article III that focused only on significant threats to the Judiciary, Chief Justice Roberts takes a very firm approach, stating, “We cannot compromise the integrity of the system of separated powers and the role of the Judiciary in that system, even with respect to challenges that may seem innocuous at first blush.” Of particular interest, this case focuses on the nature of the Bankruptcy Judge as a non-Article III judge (i.e., no life tenure and no salary protection) and rejects the view that the Bankruptcy Courts are merely “adjuncts” of the Article III District Courts. Note that the “adjunct” construct was one of the foundations of the 1984 Act’s post-Northern Pipeline jurisdictional fix that created the core/non-core distinction. See Northern Pipeline Co. v. Marathon Pipe Line Co., 458 U.S. 50 (1982).

The narrow holding is that Bankruptcy Judges, as non-Article III judges, lack constitutional authority to hear and “determine” counterclaims to proofs of claim if the counterclaim involves issues that are not essential to the allowance or disallowance of the claim. Here, although the counterclaim was a compulsory counterclaim, it was a garden variety state law tort claim and did not constitute a defense to the proof of claim. Contrast this with the preference claim involved in Langenkamp v. Culp, 498 U.S. 42 (1990). The receipt of such an unreturned preference is a bar to the allowance of the claim. See 11 U.S.C. 502(d). The opinion also distinguishes Langenkamp (and the earlier pre-Code case of Katchen v. Landy, 382 U.S. 323 (1966)) on the ground that the preference counterclaims in those cases were created by federal bankruptcy law. It is unclear whether that reference establishes a second condition to Bankruptcy Court resolution of counterclaims — i.e., that the counterclaim be based on bankruptcy law in addition to its resolution being essential to claim allowance.

The Court begins its opinion by interpreting the “core” jurisdictional grant of 28 U.S.C. 157(b)(1). The Court finds the provision ambiguous, but rejects the view of the Ninth Circuit that the Bankruptcy Court’s jurisdiction to determine matters involves a two-step process of deciding both whether the matter is “core” and whether it “arises under” the Bankruptcy Code or “arises in” the bankruptcy case. The Court states that such a view incorrectly assumes there are “core” matters that are merely “related to” the bankruptcy case (and which cannot be “determined” by the Bankruptcy Court). The Court states that core proceedings are those that arise in a bankruptcy case or arise under bankruptcy law and that noncore is synonymous with “related.” Thus, since counterclaims to proofs of claim are listed as core in the statute, the Bankruptcy Court has statutory authority to enter final judgment. (Note that the opinion does not explain how a tort claim that arose before the bankruptcy and that was based on non-bankruptcy state law could be a claim “arising in” the bankruptcy case or “arising under” bankruptcy law. Possibly the fact that procedurally it arises as a counterclaim is sufficient to convert a “related” claim into an “arising in” or “arising under” claim. Cf. Langenkamp.)

The Court also rejects the argument that the personal injury tort provision of 28 U.S.C. 157(b)(5) deprives the Bankruptcy Court of jurisdiction to resolve the counterclaim. The Court holds that section 157(b)(5) is not jurisdictional and thus the objection was waived.

Although the statute authorized the Bankruptcy Court to determine the counterclaim, the Court holds that grant violates Article III. The Court rejects the view that the Article III problem was resolved by placing the Bankruptcy Judges in the judicial branch as an “adjunct” to the District Court. The Court focuses on the liberty aspect of Article III and its requirement of judges who are protected by life tenure and salary guarantees. After outlining the extensive jurisdiction of Bankruptcy Judges over matters at law and in equity and their power to issue enforceable orders, the Court states “a court exercising such broad powers is no mere adjunct of anyone.”

The Court then uses the “public rights” doctrine as the test for which matters can be delegated to a non-Article III tribunal. Although Granfinanciera v. Nordberg, 492 U.S. 33 (1989), suggested a balancing test that considered both how closely a matter was related to a federal scheme and the degree of District Court supervision (a test that arguably supports the Bankruptcy Court’s entry of a judgment on a compulsory counterclaim), the Court settles on a new test for public rights limited to “cases in which resolution of the claim at issue derives from a federal regulatory scheme, or in which resolution of the claim by an expert government agency is deemed essential to a limited regulatory objective within the agency’s authority.” The state common law tort counterclaim asserted here does not meet that test. Instead, adjudication of this claim “involves the most prototypical exercise of judicial power.”

Interpreted in the most restrictive fashion, this ruling might create serious problems for case administration. In proof of claim matters, the Bankruptcy Court would be limited to proposed findings on most counterclaims, with the District Court entering the final order after de novo review. Query whether the majority’s limited view of “public rights” would prevent the Bankruptcy Judge from entering final judgment in other disputes that involve the non-bankruptcy rights of non-debtor parties. Bankruptcy Courts regularly resolve inter-creditor disputes and resolve disputes regarding the non-bankruptcy rights of parties to the bankruptcy case in contexts other than claim allowance. Whether the Bankruptcy Court’s exercise of this power is constitutional may turn on how broadly the courts interpret the “cases in which resolution of the claim at issue derives from a federal regulatory scheme” prong of the “public rights” test.

Discovery in the Digital Age: Meeting the Challenges of Electronically Stored Information

Anyone who has been involved in a lawsuit understands that the discovery phase is critical. During discovery, each party investigates the claims of its opponents and requires them to produce all documents that support their respective positions. Traditionally, each responding party would produce a box or two containing paper documents that it intended to offer as evidence at trial. Today, with the advent of electronically stored information (ESI), the thought of examining a few hundred pages of documents seems quaint.

Most businesses now create and store all of their information electronically. E-mail, for example, is routinely stored in multiple locations: on the sender’s hard drive, on central and backup servers, and on the recipients’ computers and servers. Many of those servers are periodically backed up to tape. In addition, both the sender and recipients may review, edit and forward an e-mail or attachment from their personal laptops, tablets and smartphones. That original e-mail has now been stored and perhaps modified in multiple locations. If some or all recipients reply to the sender, the process swiftly multiplies.

It is not uncommon for millions of digital images to be produced in discovery in a single lawsuit. To complicate matters further, when a paper document is shredded, the document is irretrievable—end of story. Not so with ESI. Deleting an electronically stored e-mail, spreadsheet or other document simply means that space is available on the computer for overwriting. Until a file is actually overwritten, that deleted document can easily be recovered. Conversely, ESI can intentionally be destroyed if the hard drive or server containing the information is reformatted.

In recent years, courts have developed standards for preserving and collecting ESI. Judges frequently issue opinions regarding the duty of parties to ensure that relevant information is preserved and produced in a timely, efficient and cost-effective manner. If a party does not fulfill its ESI obligations, the consequences can be severe. In the Texas case of Green v. Blitz U.S.A., Inc., when a federal district court judge learned that the corporate defendant failed to produce certain electronically stored documents and preserve other information while the case was pending, he imposed sanctions of $250,000—a full year after the case settled. In imposing the sanction award, the judge said the company “made little, if any effort to discharge its electronic discovery obligations.”

In response to these trends, Much Shelist has established an e-discovery task force that is monitoring developments in ESI and is ready to guide our clients in all aspects of the process, including the following:

  • Preserving all information potentially relevant to a claim or lawsuit;
  • Collecting information in an organized, efficient manner;
  • Determining the scope of ESI to request from opposing parties and implementing appropriate steps to ensure compliance;
  • Addressing privacy concerns associated with information stored by Facebook, Twitter and other social media websites;
  • Evaluating the applicability of the attorney-client privilege;
  • Analyzing metadata and other information hidden in ESI;
  • Rebutting potential claims that evidence has been improperly withheld or destroyed; and
  • Working with opposing counsel, the courts and outside vendors to reduce the cost of responding to requests for ESI.

The days of examining a handful of paper documents produced in discovery are over. Lawyers and clients alike must be prepared to meet the legal and technological challenges of ESI head on. If you are contemplating filing a lawsuit or have reason to believe your business may become involved in litigation, the best time to discuss your ESI obligations with counsel is before the case is filed.

Here Comes the Appraisal Clause, Here Comes the Appraisal Clause

On May 6, 2011, the Texas Supreme Court addressed the issue of whether a showing of prejudice is required in order to establish waiver of the right to demand an appraisal under an insurance policy.

Grubbs Infiniti made a claim for hail damage under its property coverage with Universal Underwriters of Texas, and after Universal made some payments, a dispute arose as to the extent of the damage. Months later, Grubbs claimed underpayment and sued for breach of contract and bad faith. In response, Universal invoked the policy’s appraisal clause seeking an appraisal of the loss. Grubbs claimed that Universal had waived its right to an appraisal by not invoking it sooner, so Universal moved to compel an appraisal and to abate all proceedings during the interim.

After the trial court denied the motion, Universal petitioned the Supreme Court for mandamus relief. The Court held that mere delay is insufficient to establish waiver of an appraisal clause; the party claiming waiver must also show prejudice. In Re Universal Underwriters of Texas Insurance Company, 54 Tex.Sup.Ct.J. 931 (Tex. 2011) (the Court also declared that mandamus relief is appropriate to enforce an appraisal clause).

Once again the Texas Supreme Court has required a showing of prejudice by a party claiming forfeiture of rights and benefits under an insurance policy, expanding the prejudice rule for the first time to appraisal clauses, stating that “Our failure to explicitly require prejudice is more a function of the paucity of cases in which we have addressed waiver of appraisal than its inapplicability to the doctrine.”

Supreme Court of Texas Update: SCOTX Statutes-O-Rama

This recent homily in the Texas Lawyer mentioned how and why the Texas Supreme Court tends to grant statutory cases. This week’s new opinions surely reflect that statutory bias. They are wall-to-wall statutory cases.

  • Travis Central Appraisal District v. Norman involves whether the Legislature’s amendment to the Labor Code undid the Supreme Court’s prior construction of the act in City of LaPorte v. Barfield. Answer: yes. The Court had previously held that the Labor Code waived immunity of political subdivisions as against retaliatory discharge/workers comp claims.  After the amendment, the Appraisal District now had immunity. Justice Medina wrote the opinion.
  •  Loftin v. Lee involved the application of the Texas Equine Activity Limitation of Liability Act (yes, there is one), which limits liability for the inherent risks of equine activity–e.g., horse back riding. Justice Hecht, writing for the Court, broadly applied the act to risks that, in their general character, are associated with activities involving equine animals, and also held that the failure to fully assess a rider’s skill is no basis for liability if that failure did not cause the injury.
  • Roccaforte v. Jefferson County involved the question of whether personal service of notice of a claim on the county judge and county or district attorney was good enough, even though Section 89.0041 of the Local Government Code required registered or certified mail. Chief Justice Jefferson, writing for the majority, said it was. Justice Willett would have held that it was not, but concurred in the result, finding waiver because the County had engaged in litigation for two years and waited for limitations to expire before complaining.
  • On denial of rehearing in Turtle Health Care v. Linan, the Judge Per Curiam construed the Texas Medical Liability Act to the effect that claims complaining about the failure of a ventilator without properly charged batteries could not be brought outside the Act and its requirements for expert reports.

But just to keep Mr. Smarty Pants Blogger in his place, the Court granted a non-statutory petition for review, Texas Electric Utility Construction v. Infrasource Underground Construction Services, positing the question of whether attorneys fees can be recovered as damages for conversion when the unauthorized use of the converted property results in an injury and a lawsuit that the owner winds up defending.

Next week, we’ll have another very special guest expert on the blog, this time on the issue of how to write for screen readers.

Texas Supreme Court: A Liability Insurer’s Duty to Indemnify May Exist Even Though the Duty to Defend May Not Initially Attach

The Texas Supreme Court recently ruled that a liability insurer’s duty to indemnify its insured for settlements or judgments is determined by the evidence, not merely the pleadings, and may be invoked even when the duty to defend did not initially appear to attach. In short, the court recognized that there are instances when an insurer may have an obligation to indemnify an insured against a third-party claim even if the insurer were not initially ruled to have an obligation to defend. The Burlington Northern and Santa Fe Railway Company f/k/a The Atchinson, Topeka and Santa Fe Railway Company v. National Union Fire Insurance Company of Pittsburgh, Pa., No. 10-0064 (Tex. Feb. 25, 2011). This decision clarifies a previously ambiguous point of law in Texas, where insurers frequently argued-and some courts agreed-that “no duty to defend equals no duty to indemnify,” regardless of extrinsic evidence.

Background

Standard-form liability insurance policies typically require an insurer both to defend the insured against a third-party claim and to indemnify the insured in the event of a settlement or judgment. These two fundamental duties are subject to different legal standards as to when and how they are triggered. There are also varying standards for these duties among jurisdictions. Under most jurisdictions’ laws, the duty to defend is typically determined by comparing the allegations in the third-party claim (typically a complaint or petition) to the basic coverage provided by the insurance policy; if this comparison reveals at least a potential or possibility of coverage, then the insurer has an obligation to defend its insured, at least until the possibility of coverage has been conclusively negated. The duty to indemnify, however, is determined based on the actual facts and evidence. If the facts and evidence establish that there actually is coverage under the insurance policy, then the insurer must provide coverage.

In Burlington Northern, the allegations in the third-party claim revealed no apparent potential for coverage under the applicable policy. However, the actual facts developed in the course of the underlying litigation indicated that a potential for coverage did exist. The court then had to address the quixotic question: If the insurer initially appeared to have no duty to defend based on pleading allegations, did the insurer also, per se, have no duty to indemnify? In a well-reasoned decision, the Texas Supreme Court held that an insurer is not automatically relieved of its duty to indemnify.

The Texas Supreme Court Decision

Burlington Northern operated trains, and hired SSI Mobley (Mobley) to control vegetation along certain areas of Burlington Northern’s rights-of-way under a contract with a term of “1994 through 1996.” In August 1995, a Burlington Northern train collided with a car, killing the car’s driver and one passenger. Survivors of the deceased filed suit, alleging in part that Mobley failed to use reasonable care to control weeds, and because of its improper timing and application of chemical weed control, there was excessive vegetation that caused the collision.

Burlington Northern tendered the claims to National Union, which had issued a policy to Mobley that also insured Burlington Northern. National Union denied coverage. Burlington Northern filed a declaratory judgment action, and after some procedural maneuvering, the trial court granted summary judgment in National Union’s favor, holding that National Union had no duty to defend and therefore no duty to indemnify.

The trial court relied on an exclusion in the National Union policy for injury taking place away from Mobley’s premises and arising out of Mobley’s product or work. The exclusion contained a carve-out, however, for work that “has not yet been completed or abandoned.” This meant that the policy did provide coverage for claims arising out of work that was not completed or was abandoned. The policy provided that Mobley’s work would be “deemed completed” when, among other things, all of the work called for in the contract was completed, all of the work done at a site was completed, or part of the work at a site had been put to its intended use. The policy also stated that work that may need service, maintenance, or certain upkeep, but otherwise was complete, would be considered “completed.” The third-party complaint alleged that Mobley’s work took place in the past, thus apparently implicating the exclusion for work that had already been completed and negating National Union’s duty to defend.

The issue addressed by the Texas Supreme Court arose from the fact that both the trial and appellate courts found that National Union did not have a duty to indemnify without considering any of the actual facts developed in the underlying third-party suits. In its ruling, the Texas Supreme Court noted that the duty to defend and the duty to indemnify “enjoy a degree of independence from each other.” The duty to defend arises before litigation is completed; the duty to indemnify is determined “based on the facts actually established in the underlying suit.” Because the contract between Burlington Northern and Mobley had a term that extended through 1996, it was possible that the facts in the underlying suit established that Mobley’s vegetation control operations in fact were not “completed,” but extended to 1996. It thus was error for the trial and appellate courts not to consider all evidence presented by the parties in determining National Union’s coverage obligations.

Implications

The Texas Supreme Court’s holding finding that an insurer is not automatically relieved of its duty to indemnify is a reminder to policyholders that claims for coverage can be pursued even if the insurer appears to have no duty to defend. As shown in Burlington Northern, there are instances when a complaint may negate a duty to defend, but the facts that develop during the underlying suit establish that coverage actually does exist under the relevant insurance policy. These facts should be tendered to the insurer for review and reconsideration of any denial of a defense and/or indemnification obligation. In the event of a disputed claim that arises in similar circumstances, it may be necessary to involve experienced coverage counsel to parse through these nuanced factors.

Updates on Transfers in the Eastern District of Texas

1. Microsoft: Transferred from Texas to Washington State 

In November 2010, the Federal Circuit ordered a case transferred out of the Eastern District of Texas in In re Microsoft Corporation, No. 2010-M944 (Fed. Cir. Nov. 8, 2010). This is one of a line of cases attempting to transfer lawsuits out of one of the most frequently selected forums for patent infringement claims.

Over the course of the last two years, the Federal Circuit has redefined the landscape for cases brought before the U.S. District Court for the Eastern District of Texas by nonpracticing entities (NPEs—sometimes referred to as “patent trolls”). Specifically, since the Fifth Circuit issued its en banc decision providing new guidance on the standard for transferring cases in In re Volkswagen of America, Inc., 545 F.3d 304 (5th Cir. 2008) (en banc), the Federal Circuit has found ample opportunity to interpret that case and apply its holdings to patent infringement actions in the Eastern District of Texas. Based on the Volkswagen case, the Federal Circuit has granted numerous mandamus petitions forcing the Eastern District of Texas courts to transfer cases out of that district.1  The Federal Circuit in In re Microsoft Corporation rejected another argument that plaintiffs have relied on to keep their cases in the Eastern District of Texas.

In the underlying district court case, plaintiff Allvoice Developments (Allvoice) filed a patent infringement action against Microsoft Corporation in the Eastern District of Texas alleging infringement of patented speech recognition technology based on functionality found in certain Microsoft operating systems. Allvoice incorporated its company in Texas just 16 days before filing the suit against Microsoft and maintains a physical office in Tyler, Texas (located in the Eastern District). However, Allvoice has no employees at its Tyler office or anywhere in the United States. Microsoft sought transfer to the Western District of Washington, where Microsoft’s headquarters and a substantial number of employees are located. Microsoft indicated that all of its witnesses knowledgeable with the sales, marketing, and product direction for its accused products reside in the Western District of Washington, and all of the relevant documents and evidence relating to the marketing, development, and design of the accused products are also in that district.

The district court denied transfer based in large part on the fact that Allvoice was incorporated under the laws of Texas and maintained an office in Tyler, Texas. The district court also held that third-party witnesses located in New York, Massachusetts, and Florida would find Texas more convenient thanWashington, and that access to documents only slightly favored transfer because Allvoice’s documents were at its offices in the Eastern District of Texas.

The Federal Circuit disagreed and ordered the case to be transferred to the state of Washington. The Federal Circuit found that Allvoice’s alleged ties to Texas and the Eastern District forum, including incorporating under the laws of Texas just before bringing suit, were clearly in anticipation of litigation and were nothing more than an attempt to manipulate venue. In reaching its conclusion to order transfer to the Western District of Washington, the Federal Circuit again stressed that “courts [should] ensure that the purposes of jurisdictional and venue laws are not frustrated by a party’s attempt at manipulation.” The Federal Circuit again recounted its recent mandamus decisions that help define the boundaries for bringing—and keeping—cases in a particular district, ultimately deciding that the facts in this case favored transfer.

The Microsoft case is another point of reference for companies that find themselves defending patent infringement cases in the Eastern District of Texas. When the plaintiff has no legitimate ties to that district, but attempts to create ties to that district to manipulate a tie to the Texas venue, there is a higher probability that the case can be successfully transferred to a more convenient forum.

A copy of the opinion can be found at:

http://www.cafc.uscourts.gov/images/stories/opinions-orders/2010-m944.11-8-10.1.pdf

2. Vistaprint: No Transfer Out of Texas

In December 2010, after ordering the Microsoft case transferred out of Texas in the In re Microsoft Corporation case (discussed above), the Federal Circuit allowed the pendulum to swing back and declined to transfer a case out of the Eastern District of Texas. In the case of In re Vistaprint Limited and Officemax Inc., No. 954 (Dec. 15, 2010), the Federal Circuit clarified the judicial economy standard set out in the earlier case In re Zimmer Holdings, Inc., 609 F.3d 1378 (Fed. Cir. 2010).

The Federal Circuit held that denying a transfer in the Vistaprint case was warranted based in part on “more than negligible” gains in judicial economy. In the Vistaprint case, the district court had substantial experience with the patent based on a prior litigation and had issued a lengthy claim construction opinion; there was also a second co-pending case before the court involving the same patent. Therefore, based on the judicial economy and an individualized consideration of all factors, the Federal Circuit agreed that the case should remain in the Eastern District of Texas.

The Federal Circuit also noted that, oftentimes, a transfer analysis may dictate only one correct outcome, and in those cases (e.g., In re Microsoft), transfer may be appropriate. However, in other cases, the transfer analysis may create a reasonable range of choices. And, “[u]nder such circumstances, it is entirely within the district court’s discretion to conclude that in a given case the . . . factors of public interest or judicial economy can be of ‘paramount consideration,’ and as long as there is plausible support of record for that conclusion we will not second guess such a determination, even if the convenience factors call for a different result” (citation omitted). Such was the case in the case of In re Vistaprint.

However, the Federal Circuit also cautioned that its holding is not intended to give patent owners a free pass to maintain all future litigations involving the same asserted patent(s) in the same venue. Instead, a lower court’s decision to deny transfer will be upheld where there are sufficient gains in judicial economy and when the lower court performs a detailed analysis of the other factors explaining why the case should not be transferred.

A copy of the opinion can be found at:

http://www.cafc.uscourts.gov/images/stories/opinions-orders/10-m954o.pdf.

3. Aliphcom: Transferred from California to Texas

In February 2011, just a few months after denying a transfer in the case of In re Vistaprint (discussed above) based on judicial economy, the Federal Circuit refused to vacate an order transferring a case into the Eastern District of Texas from California based on similar reasoning. See In re Aliphcom, No. 971 (Feb. 9, 2011).

In May 2010, Aliphcom received a letter indicating that some of its products were infringing two patents owned by patentee Wi-LAN. One week later, Aliphcom filed a declaratory judgment action in the Northern District of California seeking declarations of invalidity and noninfringement of the Wi-LAN patents. Wi-LAN then requested a transfer of the declaratory judgment action to the Eastern District of Texas where it was currently litigating two previously filed suits involving the same patents.

The district judge in the Northern District of California agreed with Wi-LAN and ordered the case to be transferred to the Eastern District of Texas, finding that although certain factors counseled in favor of keeping the case in California, “the risk of inconsistent judgments and waste of judicial resources must outweigh the equitable concerns of Aliphcom’s convenience in litigating its claims.” Aliphcom petitioned the Federal Circuit to order the judge in the Northern District of California to vacate the transfer order and keep the case in California.

The Federal Circuit agreed with the California district court and allowed the transfer of the case to the Eastern District of Texas. In the wake of Vistaprint, it was no surprise that the Federal Circuit reiterated its analysis regarding judicial economy as a factor in determining whether a transfer should be granted.  In particular, the Federal Circuit stated that “having the same . . . judge handle this and the co-pending case involving the same patent would be more efficient than requiring another magistrate or trial judge to start from scratch.” Therefore, the Federal Circuit ruled that the California district court did not clearly and indisputably abuse its discretion transferring the declaratory judgment case to Texas.

A copy of the opinion can be found at:

http://www.cafc.uscourts.gov/images/stories/opinions-orders/2011-m971.2-9-11.1.pdf

Fifth Circuit Update: Trade Secrets, Fiduciaries in Bankruptcy and Mass Tort Class Actions

Here is the Murphy’s Law of the blogosphere: courts will let fly with all kinds of new opinions when the blogger lacks time to keep up with them.

Lest I fall too far behind, here are three from the mighty Fifth Circuit’s output in the last week that may be of interest to the civil practitioner.

The opinions run the gamut from:

Texas Trade Secrets Composed Of Publicly Available Components

Tewari De-Ox Systems v. Mountain States involved claims of misappropriation of trade secrets under Texas law. The interesting part of the case arose because aspects of the “secrets” weren’t secret at all because they had been part of a patent application which became public 18 months later under the terms of the Intellectual Property and Communications Omnibus Reform Act of 1999, 35 U.S.C. § 122(b)(1)(A). But the Fifth Circuit revived the trade secret claims because

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a trade secret can exist in a combination of characteristics and components each of which, by itself, is in the public domain, but the unified process, design and operation of which in unique combination, affords a competitive advantage and is a protectible secret.

Judge Prado wrote the court’s opinion.

Bankruptcy: Officer Of General Partner Also Acting As Fiduciary To Limited Partnership 

FNFS v. Harwood principally involved the question of whether the debtor had committed fraud or defalcation while acting in a fiduciary capacity such that his debts to a limited partnership were not discharged in bankruptcy under11 U.S.C. § 523(a)(4). The debtor was an officer and director of a company that acted as general partner of a limited partnership to which the money was owed. He argued that while he was a fiduciary to the general partner company, he was not a fiduciary of the limited partnership. Looking to the substance of the business relationship,  the control he exercised and the confidence reposed in him, the court ruled that he was “acting in a fiduciary capacity” to the limited partner.  Some of the key language:

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We conclude that an officer of a corporate general partner who is entrusted with the management of the limited partnership and who exercises control over the limited partnership . . . owes a fiduciary duty to the partnership that satisfies Section 523(a)(4). We emphasize that it is not only the control that the officer actually exerts over the partnership, but also the confidence and trust placed in the hands of the controlling officer, that leads us to find that a fiduciary relationship exists sufficient for the purposes of Section 523(a)(4).

Here, the test was satisfied because, as a factual matter, there was evidence that the debtor had exercised near-complete control over both tiers of the entity until a few months prior to his termination, and the general partner’s board entrusted the debtor with the sole and plenary authority over the day-to-day management of the partnership enterprise. Judge King wrote the court’s opinion.

Mass Tort: No Class Certification Without A Trial Plan To Deal With Individual Issues

Finally, Madison v. Chalmette Refining represents another attempt to certify a class of plaintiffs claiming injury from a mass accident, here the emission of petroleum coke dust from a refiner. According to the Fifth Circuit, the trial court had not done the “rigorous analysis” and “close look” that is necessary before determining that common issues predominate and the case would not degenerate into mini-trials.

The court reversed the district court’s class certification order and cast some doubt on its pre-Amchem mass-tort precedents in language indicating (as in Texas state court) importance of a trial plan for dealing with individualized issues:

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Whether Watson has survived later developments in class action law–embodied in Amchem and its progeny–is an open question, but even in Watson, the district court had “issued orders detailing a four-phase plan for trial.”. . . . In Turner v. Murphy Oil USA, Inc., . . .  [c]ritical to the court’s predominance inquiry was the fact that “Plaintiffs submitted a proposed trial plan to the Court. The plan provides for a three-phase trial.”  * * *

We must reverse because, “[i]n its certification order, the [district] court did not indicate that it [had] seriously considered the administration of the trial. Instead, it appears to have adopted a figure-it-out-as-we-go-along approach . . . By failing to adequately analyze and balance the common issues against the individualized issues, the district court abused its discretion in determining that common issues predominated and in certifying the class. We do not suggest that class treatment is necessarily inappropriate. As Chalmette Refining acknowledged at oral argument, class treatment on the common issue of liability may indeed be appropriate. But our precedent demands a far more rigorous analysis than the district court conducted.

Judge Clement wrote the court’s opinion.