ARBITRATION: Pondering Disclosure

by HARPER ESTES

The biggest development in arbitration in 2012 may be what failed to develop in the continuing debate over how much disclosure by a potential arbitrator is enough to avoid a post-arbitration claim of evident partiality.

Appellate opinions discussing this issue tend to be decided on a case-by-case, fact-intensive basis; however, a few guiding principles seem obvious. The 5th Court of Appeals in Dallas’ decision in Karlseng v. Cook (2011)appeared to open the door to post-arbitration litigation on a large scale, but the 5th Court soon narrowed that opening in its 2012 holding in Ponderosa Pine Energy v. Tenaska Energy Inc. Now, a challenger’s zeal should be tempered so long as some disclosure — enough to put a party on notice — is made.

While disclosure sounds easy, it is often tricky business. Arbitrators, sought for their depth of knowledge and breadth of experience in an area, necessarily have deep and broad contacts within an industry and among lawyers who practice in that industry. What the arbitrator intends to disclose clearly may well escape an advocate’s attention. So, the question remains: How much disclosure is enough?

This evident truth should guide a potential arbitrator: Disclose as much as reasonably possible. First and foremost, one must disclose the big things. The potential arbitrator also should disclose little things that he or she can recall or locate with reasonable diligence.

In describing relationships, it is best to be specific. For instance, “We are only professional acquaintances,” “We refer cases to one another,” or “We worked on a bar committee.” When in doubt, err on the side of disclosure.

It is critical to note relationships with not only the lawyer involved but others in that lawyer’s firm. The potential arbitrator also should make a statement as to whether he recalls meeting a specific attorney. These types of disclosures are necessarily general, but they should provide sufficient detail to allow a party or its counsel to follow up with more specific inquiries.

Finally, disclosure is a continuing duty. The need to supplement a disclosure is often obvious, such as the addition of a party or a supplemental witness list. The more uncomfortable situation transpires when one does not recognize a name, but, instead, recognition occurs upon seeing an individual. Even then, the best course is immediate and full disclosure.

Counsel for parties immediately should investigate disclosures to the client’s satisfaction. Further, counsel should warn the client that a lack of investigation could constitute waiver of objections to the arbitrator. In short, ask all questions and apprise the panel or case administrator if and when facts develop warranting a new disclosure inquiry.

Third-party administration is very useful in the disclosure process. The case manager will push disclosure and regularly remind everyone of the duty to supplement. Moreover, it facilitates open communication. While a party may hesitate to present a potential arbitrator with a concern directly, it is easy to accomplish this confrontation via a case manager.

Arbitrators’ and counsel’s early and regular attention to disclosure should address most situations. Failure to take disclosure seriously can lead to unfortunate and often dire consequences.

Harper Estes is a shareholder in Lynch, Chappell & Alsup in Midland. In addition to his trial practice, he regularly serves as a mediator and arbitrator.

BUSINESS LAW: No Cash, No Fees

by CHARLES W. SCHWARTZ and DANIEL E. BOLIA

The most important development in business law in 2012 may have been Dallas’ 5th Court of Appeals’ opinion in Rocker v. Centex Corp., et al. Rocker was a merger-related case in which the court denied class counsel’s application for attorney fees (despite the defendants’ agreement not to oppose the fees) based on a Texas rule prohibiting an award of cash fees if counsel did not obtain a cash recovery for the class.

Rocker could significantly curtail M&A litigation in Texas, which has spiked dramatically in recent years. As many attorneys are no doubt aware, virtually every corporate merger involving a publicly traded company now invites a suit from shareholders, who claim that the target corporation’s board of directors breached its fiduciary duty by agreeing to sell the company for an unfair price through a tainted process.

The real focus of the litigation, however, has become the claim that the defendants violated the Delaware common-law duty to disclose by issuing a materially false or misleading proxy statement in connection with the proposed transaction.

In essence, disclosure claims have become the new toll tax for companies contemplating a merger. Faced with the risk that a court will enjoin a multibillion-dollar transaction based on inadequate disclosures — plus the sheer cost of litigation and disruption coming when a company needs the undivided attention of the board and management — many corporate defendants choose to issue amended disclosures to their shareholders in exchange for a settlement and the agreement to pay class counsel hundreds of thousands, or even millions, of dollars in attorney fees.

As Delaware courts moved to curb fee awards in these cases, class counsel have taken to filing parallel cases in the state where the target corporation maintains its headquarters. The hope seems to be that local courts, less familiar with Delaware corporate law, will defer to the parties’ settlement and will approve a higher fee award.

Rocker has changed that calculus in Texas. In that case, notes the 5th Court’s opinion, Centex shareholders challenged the company’s proposed acquisition by Pulte Homes Inc. on the usual grounds. After a few months of discovery, the parties eventually settled, with Centex agreeing to issue supplemental disclosures. Centex also agreed not to oppose an award of attorney fees to class counsel. The merger went through, and the trial court ultimately approved the settlement over the objection of Daniel J. Rocker, a Centex shareholder, awarding class counsel $1.1 million in fees.

On appeal, Rocker claimed that Texas Rule of Civil Procedure 42(i)(2) barred an award of cash fees to counsel where Centex’s shareholders did not receive a cash recovery. This rule, which became known as the “coupon rule,” was adopted in the wake of 2003 tort-reform legislation in an effort to eliminate instances where class members received a coupon or some other non-monetary award, but their lawyers recovered significant cash awards.

Rocker filed a petition for review in the Texas Supreme Court on other grounds, and the case eventually settled. Pursuant to the settlement, the Supreme Court set aside the judgment of the 5th Court of Appeals but left the opinion intact.

As it stands now, Rocker is the only case in Texas that has applied Rule 42 to bar a fee award in a merger-related disclosure case. But at least two other cases are pending in the Houston appellate courts; in one of them, Dynegy, Inc. v. Witmer in the 1st Court of Appeals, we represent Dynegy. And, anecdotally, we already are seeing fewer filings in Texas for the deals that have been announced since Rocker. We expect that those cases that are filed in Texas may be more heavily litigated, as class counsel will have no incentive to settle unless they can secure a monetary recovery for the shareholders. Finally, some plaintiffs who would have filed in Texas state courts may choose instead to sue in federal court in Texas. Unless the Texas Supreme Court eventually rules the other way, Rocker likely will have a dramatic impact on M&A litigation in Texas for a long time to come.

Charles W. Schwartz is the office leader in the Houston office of Skadden, Arps, Slate, Meagher & Flom and heads that office’s litigation practice. Daniel E. Bolia is an associate in the same office. The views in this article are their own.

ENERGY LAW: Weighing Water Rights

by JAMES W. ADAMS JR.

The year 2012 brought many important developments in energy law. But my vote for the most important is the Texas Supreme Court’s decision on Feb. 24 in Edwards Aquifer Authority v. Day. For the first time in the state’s history, the state’s highest court has determined the ownership of groundwater.

In its pro-landowner decision, the Texas Supreme Court wrote, “Whether groundwater can be owned in place is an issue we have never decided. But we held long ago that oil and gas are owned in place, and we find no reason to treat groundwater differently.”

Why does a Texas Supreme Court groundwater decision so heavily impact energy law? One word: hydrofracturing.

What exactly is “groundwater”? Texas Water Code §35.002(5) defines groundwater as “water percolating below the surface of the earth.” The code also recognizes that the character of water can change. Storm water or floodwater (usually state-owned), when put or allowed to sink into the ground, loses its character and classification and is considered percolating groundwater.

Landowners always have been able to pump as much groundwater to the surface as they want under the legal rule of capture, which the Texas Supreme Court adopted in Houston & T.C. Railway v. East (1904). But the state’s many groundwater conservation districts (96 in all, covering all or parts of 173 of the state’s 254 counties) often require landowners to obtain a permit prior to drilling a well or even prior to modifying a pre-existing well. Additionally, the permitting process may cause delay, and permits may limit the amount of water that can be pumped. Even more confusing, due to district jurisdictional lines, some conservation districts may adopt conflicting rules for the same aquifer.

Turning to hydrofracturing, if one oil and gas well can use up to five million gallons of water in a week of drilling, the amount of water available to an oil and gas operator is a critical determining factor for shale field operations. And for Texas counties that have suffered drought conditions in the past (and likely will in the future), using millions of gallons of water for the oil patch directly conflicts with using it for ranching, agriculture, schools and neighborhoods. As Justice Nathan Hecht put it in Day, “To differentiate between groundwater and oil and gas in terms of importance to modern life would be difficult. Drinking water is essential for life, but fuel for heat and power, at least in this society, is also indispensable.”

In deciding that groundwater is owned in place by the landowner, oil patch operators are able to acquire these “water rights” from landowners and apparently use as much groundwater as they can produce from their land for hydrofracturing purposes. Moreover, a “taking” by a conservation district that does not provide fair market value now violates the Texas Constitution.

And those state groundwater conservation districts? “The Authority warns that if its groundwater regulation can result in a compensable taking, the consequences will be nothing short of disastrous,” wrote the court. But the Supreme Court had an interesting answer: “We decide in this case whether land ownership includes an interest in groundwater in place that cannot be taken for public use without adequate compensation guaranteed by article I, section 17(a) of the Texas Constitution. We hold that it does.”

James W. Adams Jr. is senior counsel practicing energy law with Lugenbuhl, Wheaton, Peck, Rankin & Hubbard in Houston. His email address is jadams@lawla.com.

FAMILY LAW: Battle Over Forms

by BRAD M. LAMORGESE

It was an unusual year for family lawyers. The biggest development in family law for 2012 was not a landmark new case or the application of a statute, or even an interesting trend in family law in general. The biggest development in family law was the battle raging over family law forms for low-income pro se litigants.

Over the course of the year, the Texas Supreme Court, the Texas Access to Justice Commission and the Uniform Forms Task Force sought to create a set of forms that would, in theory, make it easier for persons who could not afford a lawyer to represent themselves pro se in a family law case. These forms would allow a low-income litigant a way to navigate the legal process in family court in a relatively uncontested case for little to no cost.

What looked like a noble undertaking on its face caused a massive controversy. Several family law groups and the State Bar of Texas vigorously opposed the creation of forms.

The idea of forms for pro se litigants in family law cases is certainly not a new one. Those who view the forms as a good idea have argued that pro se litigants clog the courthouse libraries and district clerk offices and need help to be able to represent themselves. Given the cost of legal services, many litigants cannot afford a lawyer. Having a set of forms would, it is argued, streamline the process for the courts and the litigants and cause less backlog. Advocates for the forms also argue that many Texans who qualify for legal aid do not get help because of a lack of lawyers to represent them.

The crux of the opposition to the new forms is that old forms already exist for pro se litigants. But having a preapproved Texas Supreme Court form would allow all litigants, regardless of whether they could afford legal services, to use those one-size-fits-all forms and essentially practice law on their own behalf. Rather than decreasing the amount of pro se litigants navigating the courts, the criticism is that the forms actually will increase the amount of pro se litigants fighting it out in family court. Those litigants would still have no help understanding the complexities of the family courts and would be left, for example, to fight on their own for something as important as custody of their children. Moreover, opponents argue that forms will not solve the problem of access to justice for the poor and that other remedies should be put in place.

The battle raged quite heatedly, but in mid-November the Texas Supreme Court issued the pro se forms for indigent couples with no children and no real property. The court will accept public comments about the forms through Feb. 1, 2013. Only time will tell whether the forms actually help low-income litigants, or if some other solution will be necessary.

Brad LaMorgese is board-certified in family law by the Texas Board of Legal Specialization. He is a partner in McCurley Orsinger McCurley Nelson & Downing in Dallas. He is a member of the State Bar of Texas family law section, which opposed the forms. Some of his partners are members of the State Bar of Texas Family Law Foundation, which also opposed the forms.

PERSONAL-INJURY LAW: Drugs, Docs and Ads

by MARK J. COURTOIS and NICHOLAS OSTROW

Technology and the information age dramatically have impacted the medical industry. One example is direct-to-consumer (DTC) advertising of prescription drugs, which has courts across the country reconsidering products-liability rules and the physician-patient relationship when personal-injury plaintiffs sue for damages allegedly caused by inadequate drug warnings.

Because of DTC advertising, a few states have taken dramatic steps in limiting or throwing out entirely the learned-intermediary defense in cases involving prescription drug warnings. Most states that have considered the issue have navigated toward familiar theoretical waters, relying on the traditional physician-patient relationship.

The Texas Supreme Court’s recent decision in Centocor Inc. v. Hamilton (2012) in many ways exemplifies this trend. The decision formally applied the learned-intermediary doctrine to personal-injury claims against prescription-drug manufacturers in Texas in a way that greatly minimizes manufacturers’ exposure to such liability.

In Centocor, the high court overturned a verdict against a drug maker for allegedly failing to warn of possible risks associated with a particular advertised drug. The court held that a drug maker satisfies its duty to warn consumers of potential risks by providing adequate warnings to the prescribing physician, the “learned intermediary.” Once the drug maker fulfills that duty, it has no further duty.

However, the court did not rule out the possibility of carving out drug-maker liability as an exception to the learned-intermediary doctrine in some future case based on DTC advertising.

In Centacor, the court found it dispositive that the drug maker provided a warning to the plaintiff’s prescribing doctor that included the same side effect at issue in the case and that the plaintiff already had visited with her prescribing doctor and decided to take the drug before viewing any of the DTC advertising.

Perhaps, factually, this wasn’t the best DTC advertising case to test the outer limits of the physician-patient relationship in Texas. But it highlighted the court’s view of the ever-important role of and burden on prescribing physicians in Texas. The decision invited consideration of future cases where the DTC advertising plays a more key role in the patient’s treatment.

To paraphrase the fictional (M)ad man, Don Draper, advertising is the reassurance that everything you are doing in your life is OK. DTC-advertised drug-warning cases are no exception. Historically, society left the responsibility of assessing and warning patients regarding prescription drugs to the exclusive purview of prescribing physicians.

The Centocor court embraced this. It analyzed concerns over DTC’s theoretical potential to alter (if not marginalize) the doctor’s important legal role in the patient’s use of prescription drugs. But it did not see a justification in this case to abandon or alter the traditional physician-patient relationship — at least not just yet.

In this regard, Centocor didn’t rock the boat so much as it prepared for the possibility of changing currents in this developing area. For the foreseeable future, Texas consumers injured by prescription drugs essentially have one less big defendant from which to seek redress for warning.

Mark J. Courtois is the managing partner in Funderburk Funderburk Courtois in Houston. Nicholas Ostrow is an associate with the firm.