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ADMINISTRATIVE LAW: Extraordinary Relief by RON BEAL The issue of whether courts can grant extraordinary relief before a government agency begins an enforcement proceeding came to a head this year. It happened in the context of agency statements about the law’s meaning that are issued outside a contested-case proceeding or a notice-and-comment rulemaking proceeding. In Texas Department of Insurance v. Reconveyance Services Inc., decided by Austin’s 3rd Court of Appeals on Aug. 31, the 3rd Court held that the issuance of an informal legal opinion by an agency official that resulted from an e-mail inquiry created a justiciable controversy with sufficient ripeness to allow relief pursuant to the Uniform Declaratory Judgment Act (UDJA). This saga of the availability of declaratory relief started in 1999 when, in two opinions, the 3rd Court simultaneously held that two informal, written legal opinions issued by agency officials by letter and interoffice memorandum, respectively, both did and did not constitute rules under the Texas Administrative Procedures Act (APA). Thus, the 3rd Court decided in Brinkley v. Texas Lottery Commission and Texas Alcoholic Beverage Commission v. Amusement & Music Operators of Texas Inc. (AMONT), an interoffice memo was, but a letter was not, subject to pre-enforcement declaratory relief pursuant to the declaratory judgment action of �2001.038 of the APA. Courts have virtually ignored these contradictory holdings since then, but the 3rd Court of Appeals has held that, pursuant to the UDJA, agency statements issued outside the context of a contested-case or rulemaking proceeding are subject to declaratory relief without parties needing to exhaust their administrative remedies. In each case, the statements were generally applicable; they clearly stated that the agency intended to apply the law as interpreted to all similarly situated persons. In Reconveyance Services, the 3rd Court extended these holdings. It ruled that courts could determine a statutory-construction question raised by an informal-opinion e-mail question posed to an administrative agency. The agency issued its response solely to the party that requested it. The court found that the parties didn’t have to exhaust their administrative remedies, because the matter was a pure issue of law. The party in that case had also established ripeness merely by pleading that, if not for the position taken by the Texas Department of Insurance, the requestor could convince businesses in Texas to use its services. Such a broad reading of the availability of pre-enforcement declaratory relief potentially will result in a literal gutting of the exhaustion requirement, and/or it will require agencies simply to refuse to provide informal advice to avoid a lot of litigation. Finally, to guarantee this issue will arise again, the Texas Supreme Court, citing without explanation to the contradictory holdings in Brinkley and AMONT, held on Aug. 31 in El Paso Hospital District d/b/a R.E. Thomason General Hospital District, et al. v. Texas Health and Human Services Commission, et al. that both cases supported its holding that an informal agency statement issued outside the context of a contested case or rule-making proceeding constitutes a rule for purposes of the APA and was subject, not to the UDJA, but to �2001.038 APA pre-enforcement declaratory relief. Ron Beal has taught at Baylor Law School in Waco for 25 years. He is the author of a treatise titled “Texas Administrative Practice and Procedure.” He has written numerous law review articles on Texas administrative law and has an active private consulting practice that works with the top firms in the state. APPELLATE LAW: Making a Dent by S. SHAWN STEPHENS One of the most significant developments in appellate law is that the Texas Supreme Court has begun to clear some certified questions from its backlog of cases. Over the past eight years, the number of cases argued but not decided rose steadily. Many appellate lawyers attributed this increase to several factors, including turnover of justices during that period. This backlog included two significant insurance cases in which the 5th U.S. Circuit Court of Appeals certified questions to the Texas Supreme Court. The Texas Constitution and the Texas Rules of Appellate Procedure allow for this. The Texas Supreme Court has welcomed the opportunity to respond to certified questions from the 5th Circuit, generally choosing to answer them. The court finds certification helpful in building cooperative judicial federalism and useful in avoiding inconsistencies between state and federal decisions on questions of state law. However, in answering certified questions, the Supreme Court decides questions of law, leaving the application of the law to the facts for the certifying court. On Aug. 31, the court issued the first of two responses to certified questions from the 5th Circuit on insurance issues in Lamar Homes v. Mid-Continent Casualty Co. The court also responded to three certified questions that it had accepted in 2005. The justices dealt with whether an insurer owes a duty under a commercial general liability (CGL) policy to defend its insured, a homebuilder, against claims from a homebuyer for defective construction. The court’s response also resolved divisions among Texas intermediate courts of appeals about whether coverage is triggered by claims for faulty workmanship that injures the work of the general contractor. The court noted that, at the time of the opinion, six similar petitions for review presented similar CGL issues. The court held that claims for damages caused by an insured’s faulty workmanship may constitute an occurrence under a CGL policy when property damage is the unforeseen result of the insured’s negligent behavior, meaning that the insurer has a duty to defend these claims. This response also addressed conflicts in Texas law over whether the state’s prompt-payment statute is limited to first-party claims, because the court held that the prompt-payment statute applies to all claims personal to the insured. Thus, Lamar Homes’ right to a defense under the policy was a first-party claim and accrues when an insurer wrongfully refuses to promptly pay a defense benefit owed to the insured. Likewise, at the end of October in Mid-Continent Insurance Co. v. Liberty Mutual Insurance Co., the court responded to an additional three certified questions from the 5th Circuit, which lawyers had argued two years earlier. The first question, which the court found dispositive, was whether a CGL policy imposes a duty on an insurer that pays less than its proportionate share of a settlement sum to reimburse an overpaying co-primary insurer. The court held that co-primary insurers owe each other no common-law duty to reasonably exercise their rights under an insurance policy. Therefore, there was no right of reimbursement in this context. Justice Don Willett concurred, providing additional thoughts on why Texas law should not recognize a claim by one primary insurer against another in these circumstances, noting that federal courts frequently certify insurance questions to the Texas Supreme Court. Thus, with these two opinions, the court responded to six certified questions from the 5th Circuit, made a dent in its backlog and established important precedent in insurance cases. S. Shawn Stephens heads the appellate group at Baker & Hostetler in Houston and is board certified in appellate law by the Texas Board of Legal Specialization. She briefs and argues cases in the federal and state supreme and intermediate courts. BANKING LAW: The Great Mortgage Meltdown by WILLIAM T. LUEDKE IV The single most important topic affecting banking lawyers in 2007 was the credit-market turmoil prompted largely by the so-called mortgage meltdown. The credit- and stock-market reactions to escalating mortgage foreclosures profoundly affected bank mergers and acquisitions, capital markets for financial institutions and securitizations of all types. These events also triggered a call to arms among federal and state authorities that wield regulatory and enforcement powers over banking organizations. The stock market did not discriminate in its reaction to increased foreclosures, punishing all banks relatively equally. Even banks without large mortgage portfolios or any evidence of subprime lending experienced a drop in stock price. This made potential acquisitions difficult to price. Buyers were reluctant to give away shares at a reduced value. Sellers wondered if bank stocks had bottomed out fully. As a result, the number of financial-institution mergers and acquisitions is at the lowest level since 2002, according to an Oct. 23 report by investment bankers Keefe, Bruyette & Woods. Some observers believed that the release of third-quarter results would smoke out those financial institutions most severely impacted by the meltdown. While a number of financial institutions did take substantial hits to earnings to cover the actual and expected damage, significant skepticism remains as to whether all the lurking problems were identified during this go-around. The turmoil also disrupted financial institutions’ capital markets. The primary source of capital for growth or acquisitions for many banking organizations had been trust-preferred securities (a hybrid security with equity and debt-like qualities), which investment bankers pooled upon issuance and then sold into the secondary market. Attractive interest rates and the apparently insatiable market for these securities made them attractive to financial institutions in need of capital. Overnight, the market for these securities became scarce and pricey. Several acquisitions in which buyers relied on trust-preferred securities as a source of funding fell apart. Transactions involving any kind of pooling — such as mortgages and trust-preferred securities — also hit the wall. There were rumors that some large law firms that had hundreds of attorneys handling virtually nothing but securitization work were considering layoffs or, at a minimum, a rapid deployment of troops to the sounds of guns elsewhere in the firm. While M&A activity will pick up, capital markets will loosen up and securitizations will resuscitate, the most lasting impact from the mortgage meltdown may be the reaction from bank regulators. On the safety-and-soundness side, banks most certainly can expect tougher credit quality examinations. Comptroller of the Currency John Dugan has stated that banks will be held accountable for adhering to the same loan underwriting standards for loans held and loans sold into the secondary market, according to American Banker. On the compliance side, while most observers agree that the mortgage brokers, and not commercial banks, played the major role in not adequately explaining the terms of loans and potential consequences to unaware borrowers, the banks probably will bear the brunt of some of the expected consumer protection backlash. As of presstime, the House has passed mortgage reform legislation designed to rein in predatory lending practices, and a similar but reportedly stricter piece of legislation is expected be introduced in the Senate shortly. Whatever happens, it will be a summer that banking lawyers will always remember. William T. Luedke IV is the head of the financial services practice at Bracewell & Giuliani in Houston. BANKRUPTCY LAW: A Peculiar Matter by CAROL JENDRZEY Creditors may be more likely to pursue their claims against debtors, thanks to a 2007 U.S. Supreme Court decision that permits collection of attorneys’ fees. On March 20, the justices determined that an attorney may collect fees stemming from an underlying contract dispute but incurred while litigating issues peculiar to bankruptcy in Travelers Casualty & Surety Company of America v. Pacific Gas & Electric Co. Pacific Gas and Electric Co. filed for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code. Prior to PG&E’s bankruptcy, Travelers had issued a $100 million surety bond to the California Department of Industrial Relationships on PG&E’s behalf. PG&E also entered into various indemnity agreements with Travelers. The terms of the indemnity agreements provided that PG&E not only would be responsible for any loss Travelers incurred but also any attorneys’ fees Travelers incurred pursuing, protecting or litigating its rights under the bonds. PG&E agreed to include language in its Plan of Reorganization and Disclosure Statement that was intended to protect Travelers’ right to indemnity and subrogation should there be a default by PG&E. Thereafter, a dispute arose between Travelers and PG&E over the language inserted in the plan. Travelers and PG&E eventually resolved the dispute and entered into a stipulation, which among other things provided that Travelers could file an unsecured claim for attorneys’ fees it incurred litigating over the language in the plan, but PG&E had a right to object to the claim. Travelers then filed its claim for attorneys’ fees, and PG&E objected on the grounds that Travelers could not recover attorneys’ fees incurred for litigating bankruptcy law issues. The lower courts agreed with PG&E. The U.S. Supreme Court took up the issue, because there was a split among the circuits. Justice Samuel A. Alito Jr., writing for the Supreme Court, focused on the 9th U.S. Circuit Court of Appeals’ holding that a party may not recover attorneys’ fees that are incurred litigating issues peculiar to federal bankruptcy law. Alito approached the issue by first analyzing the relevant section of the U.S. Bankruptcy Code that addresses the disallowance of claims. He opined that there is a longstanding acknowledgment that the basic federal rule in bankruptcy is that state law governs the substance of claims. Thus, Alito relied on the Bankruptcy Code’s definition of the term “claim,” in part, as a right to payment recognized under state law. He then concluded that the Bankruptcy Code did not prohibit such a claim for attorneys’ fees. Accordingly, Alito held that bankruptcy courts cannot disallow the fees merely because the fees were accrued litigating issues of bankruptcy law. This decision is important, because attorneys commonly accrue fees litigating issues related to their clients’ contract claims that arise from issues peculiar to bankruptcies. Thus, the decision may offer creditors additional protections and the opportunity to be made whole in a bankruptcy setting, making even unsecured creditors able to pursue their claims, undeterred by the barrier of attorneys’ fees. Carol E. Jendrzey is a shareholder in the creditors’ rights, corporate restructuring and bankruptcy department of Cox Smith Matthews in San Antonio. BUSINESS LAW: Pay Up by JOHN C. ALE Entities doing business in Texas in 2007 soon will feel the bite of the new margin tax. While the Legislature adopted this tax in 2006, doing away with the old franchise tax and expanding coverage not only to corporations and limited liability companies but also most partnerships, the first returns are due this coming spring for the 2007 tax year. Texas long has imposed a franchise tax on corporations and limited liability companies formed or doing business in Texas. This tax equaled 4.5 percent of federal taxable income tax — or, if lower, 0.25 percent of taxable capital — proportionately reduced based on the percentage of the entity’s gross receipts from Texas versus other sources. The franchise tax did not apply to unincorporated entities, such as limited or general partnerships, prompting many businesses to choose these legal forms over corporations and limited liability companies. To raise funds to address the school finance crisis, the 2006 special session of the Legislature completely rewrote Chapter 171 of the Texas Tax Code. Lawmakers adopted a new and different tax called the margin tax and applied it to almost all entities, incorporated or not, formed or doing business in Texas. With slight revisions adopted in 2007, the tax will apply beginning with returns filed in 2008 for the 2007 tax year. The calculation of the new margin tax differs dramatically from the former income-based franchise tax. First, the entity takes its gross receipts and deducts either compensation or cost of goods sold, whichever produces the lower tax base. This tax base is then apportioned to Texas based on the ratio of Texas’ gross receipts to aggregate global gross receipts. A tax rate of 1 percent is applied to the result (0.5 percent for certain retail and wholesale businesses). The resulting tax may not exceed 70 percent of the business’s total revenues, however. Various provisions require affiliated companies to elect consistent methods of calculation. Because the tax base calculation deducts only certain costs from revenues, an entity may owe a Texas margin tax when its federal taxable income is zero or negative. As important as the completely new method of calculating the tax is its expansion to cover almost all business entities. Previously, businesses doing business in Texas could limit the franchise (i.e., income) tax simply by organizing themselves or their Texas operating subsidiaries as general or limited partnerships. By the same token, Texas businesses often chose not to be limited liability companies, despite that form of entity’s great flexibility in governance and economic matters while providing limited liability. The new margin tax applies to any taxable entity, which generally includes any partnership, corporation, limited liability company, business trust or other legal entity. A taxable entity excludes, however, a sole proprietorship; a general partnership composed solely of natural persons, other than a registered limited liability partnership; and certain passive entities, such as family limited partnerships, real estate investment trusts and other investment vehicles meeting standards in the statute. Now the advantage of choosing a partnership has been eliminated in most cases. This permits simplifying past partnership structures, but it also means that many businesses must plan to pay taxes based on 2007 revenues when previously they paid little or no franchise tax. Partner John C. Ale leads the Houston office of Skadden, Arps, Slate, Meagher & Flom. His practice focuses on energy and project finance. He is the immediate past chairman of the Business Law Section of the State Bar of Texas. CONSTITUTIONAL LAW: Punitives and Process by JAMES C. HO The appointments of John G. Roberts Jr. and Samuel A. Alito Jr. to the U.S. Supreme Court have profoundly impacted a broad range of constitutional issues. But the most important development this year is that the two new justices parted company from Justices Antonin Scalia and Clarence Thomas in an area of constitutional law of particular importance to the business community: due process clause protections against arbitrary and excessive punitive damage awards. This development impacts plaintiffs and businesses in Texas and across the country. Although the Texas Legislature has enacted substantial civil justice reforms in recent years, federal constitutional law continues to play a significant role in Texas civil courts. Just last December, in Tony Gullo Motors v. Chapa, the Texas Supreme Court reaffirmed that the due process clause requires all state courts to perform a federal constitutional check on any punitive damage award issued by a Texas jury. Due process requires fair notice of the law, including the legal consequences of unlawful conduct. Over the past decade, the U.S. Supreme Court has furthered this principle by crafting robust new protections against punitive damages in a series of closely divided rulings. In BMW v. Gore (1996) and State Farm v. Campbell (2003), the court articulated specific tests for determining whether a particular award is unconstitutionally excessive. Scalia and Thomas dissented, consistent with their narrower approach to due process, as did Justice Ruth Bader Ginsburg. This past term, in Philip Morris USA v. Williams, all eyes were on the two new justices to see if they might join Scalia, Thomas and Ginsburg, and reverse the court’s punitive damages jurisprudence. They did not. By a 5-4 vote, the court vacated a $79.5 million verdict in favor of the spouse of a deceased smoker. However, rather than apply BMW and State Farm to determine whether the award was unconstitutionally excessive, the majority instead held that the trial judge had erred by failing to instruct the jury not to consider harm to nonparties — millions of other Oregon smokers — in determining the amount of the award. This is an important ruling. First, it signals a possible new direction in federal punitive damages law: focusing on the use of jury instructions and other procedural devices against arbitrary awards before they are imposed, rather than on scrutinizing the size of verdicts after their announcement as required under BMW and State Farm. Second, the new justices parted company not only with Scalia and Thomas but also Justice John Paul Stevens, who authored BMW but had no objection to the imposition of punitive damage awards based on harm to nonparties. The court continues to demonstrate interest in punitive damages. It recently granted certiorari in Exxon Shipping Co. v. Baker to review a $2.5 billion award involving the Exxon Valdez oil spill. Notably, the court already has limited that review to federal statutory questions only and thus will refrain from addressing the BMW issue in that case, too. James C. Ho is of counsel at the appellate and constitutional law practice group of Gibson, Dunn & Crutcher in Dallas. He has litigated punitive damagecases and other constitutional issues on behalf ofbusinesses in Texas and across the country, including representing the defendants in post-trial and appellate proceedings against the largest punitive damage awards ever issued in the states of Oregon and Tennessee. He is a former law clerk to Justice Clarence Thomas and former chief counsel to 
U.S. Sen. John Cornyn, R-Texas. CORPORATE GOVERNANCE: Prosecutors and Privileges by JEFFREY GOLDFARB This was the first year corporate leaders had the benefit of the U.S. Department of Justice’s McNulty Memorandum, issued at the end of 2006. Those responsible for corporate governance witnessed a shift in the DOJ’s stated policies for criminal investigation and enforcement practice. Two of the most basic functions of corporate leaders are keeping the organization on the right side of the law and investigating and taking remedial measures when the business steps over the line. The DOJ’s revised policies can affect how corporate managers lead their companies through the storm of an investigation. The McNulty Memo provided new instructions and guidelines relating to the prosecution of corporations and the handling of attorney-client privileged and work product materials. In recent years, corporate leaders who retained legal counsel to conduct internal investigations into potential fraudulent or criminal conduct have been forced to contend with subsequent demands by prosecutors to waive privilege and turn over the results of these investigations. Faced with these potential requests, corporate counsel had to weigh the pros and cons of developing extensive written documentation to assist corporate officers and directors, understanding that they could be called upon to disclose these materials to prosecutors. Prosecutors now operate under new instructions and procedures that they must follow before asking corporations to disclose privileged communications and attorney work product. Specifically, the McNulty Memo set forth a two-tiered classification of information subject to government requests for wavier and disclosure. The McNulty Memo not only recognized the basic principles behind the attorney-client privilege, it also noted the policies behind promoting sound corporate governance and self-policing. The shift in policy stated that it recognizes the value of encouraging corporations to investigate and regulate their own conduct. The McNulty Memo marked a departure from the DOJ’s Thompson Memorandum, which explained how prosecutors would interpret a corporation’s decision to waive or stand on the attorney-client privilege. The Thompson Memo favored prosecutorial interests in obtaining cooperation and information. In 2007, corporate leaders were also given relief from prior prosecution policies relating to the reimbursement of defense costs for employees under investigation and prosecution. The McNulty Memo’s recognition of corporate law statutes and practices governing indemnification of employees’ legal fees involved another departure from the Justice Department’s prior policy statement, which advised that providing assistance to employees might be interpreted negatively by the government. The change in policy is particularly important to individual employees in view of the daunting costs of defense that individuals charged with offenses must face. The full extent and impact of the McNulty Memo will be determined over time. Practitioners who confront these issues on a day-to-day basis must still interface with prosecutors who are accustomed to and expect cooperation from the corporations they investigate. Similarly, outside investigatory counsel must adapt their investigation practices to the current DOJ policies and the possibility that those policies could change again. Those responsible for conducting internal investigations and taking responsive action also must consider the consequences of the potential disclosure of work product and privileged information. When conducting investigations, corporations and their counsel understand that any written reports and presentations might lose privilege protection and be subject to disclosure to the government, and potentially other third parties, including private-party litigants. Jeffrey Goldfarb is a partner in the Dallas litigation section of DLA Piper US. He frequently advises clients on corporate governance issues and disputes and represents clients in litigation involving director and officer liability, complex civil litigation and intellectual property disputes. CRIMINAL DEFENSE: Life and Death by ROBERT N. UDASHEN Victories for the state are really not all that unusual in the Texas Court of Criminal Appeals. It is hard for a defendant even to get a petition for discretionary review granted by the CCA, much less win a case on the merits. That is why it was not much of a surprise when, on Sept. 25, the CCA closed promptly at 5 p.m. rather than remain open late so that attorneys for Michael Wayne Richard could file a request for a stay of execution. What is significant is that the public outcry forced the CCA to enact a new rule allowing emergency filing of pleadings by e-mail. On Sept. 25, the U.S. Supreme Court announced that it would review a Kentucky case, Baze v. Rees, and address the constitutionality of the three-drug cocktail used in lethal injections in Kentucky. The same three-drug cocktail is used in lethal injections in Texas. Richard was scheduled to be executed that night. Richard’s lawyers began preparing a request for a stay of execution pending a U.S. Supreme Court decision on the issue. At the time, the CCA’s rules required that all pleadings be filed in original form with the clerk of the court. Shortly before 5 p.m., Richard’s lawyers, who were having computer problems, say they contacted the court and asked if pleadings requesting a stay of execution could be filed after 5 p.m. The CCA allegedly slammed the door in the face of Richard’s volunteer legal team. Richard was executed that night. He was unable to obtain a stay in federal court, arguably because the highest state criminal court had not first reviewed his request for a stay. Since Richard’s execution the U.S. Supreme Court has blocked several executions pending a decision on whether lethal injections violate the constitutional ban on cruel and unusual punishment. In effect, the high court has created a moratorium on executions until it decides the lethal injection issue. Richard should have benefited from this moratorium. He did not because of the CCA requirement, at the time, that pleadings be filed in original form with the court clerk during normal business hours. Now, because of the Richard fiasco, emergency motions, such as a request for a stay of execution, may be filed by e-mail. This is a much-needed procedural improvement at the CCA. It does not mean that the CCA will grant an e-mail filed stay of execution. But it does mean that a condemned person will not be turned away by the federal courts, because his lawyers physically could not make it to the CCA before the close of business. This is huge in matters of life and death. Robert N. Udashen is a partner in Sorrels, Udashen & Anton in Dallas, where he handles state and federal criminal trials and appeals. He is an adjunct professor of Texas criminal procedure at Southern Methodist University Dedman School of Law and president of the Dallas Criminal Defense Lawyers Association. He is board certified in criminal law by the Texas Board of Legal Specialization. CRIMINAL PROSECUTION: Target: Repeat Offenders by TANYA S. DOHONEY Two significant criminal-law innovations in 2007 imposed tougher penalties on repeat offenders. They target recidivist driving-while-intoxicated offenders who kill someone and child molesters who continually perpetrate their abuse. On the intoxication-crime stage, several counties — including Tarrant County, where I work — spearheaded prosecuting certain DWI recidivists for felony murder instead of intoxication manslaughter when they kill someone in a crash. Typically, driving while intoxicated and killing people in a wreck results in an intoxication-manslaughter prosecution. That’s a second-degree felony carrying only a 20-year maximum sentence, regardless of whether the offender’s conduct constituted his first or 15th time getting caught driving after over-imbibing. On the other hand, felony murder — a first-degree crime — authorizes punishment up to 99 years or life. Felony murder is a unique crime that involves prosecuting a person who commits some felony and, during the process, kills someone. Differing from most murder cases, it lacks a specific intent to kill. Prosecutors believe it disproportionate to subject repeat-DWI offenders who kill someone to the same 20-year maximum that applies to someone with no prior DWIs. But the Texas Penal Code’s intoxication-offense framework fails to account for the multiple aggravating factors such scenarios present. Felony murder authorizes higher sentences for committing felony DWI and, during that crime, causing someone’s death. On June 27, the Texas Court of Criminal Appeals affirmed the first of these innovative prosecutions in Lomax v. State. With two prior DWIs, Mark Wayne Lomax again chose to drink and drive, ultimately crashing and killing a 5-year-old girl. Harris County jurors convicted him of felony murder and meted out a 55-year sentence. Other counties such as Tarrant, Andrews and Williamson followed suit and successfully sought felony murder convictions of repeat DWI offenders who killed someone. Intermediate appellate courts have affirmed each case. Also in 2007, the Texas Legislature targeted perpetrators who commit repeated sexual crimes against children. Spurred to act by a jurist’s recommendation, the Legislature closed a loophole found in cases involving the repeated commission of sexual acts against children. Such cases routinely involve an authority figure repeatedly molesting a young child. Unfortunately, a child’s limited cognition often thwarts proving one instance of sexual conduct at one discrete moment in time. Yet, bedrock criminal procedure protections require such specificity for jury unanimity. Accordingly, the imprecision of child-witness testimony repeatedly leads to lack-of-unanimity reversals. In 2006′s Dixon v. State, Judge Cathy Cochran’s concurring opinion beseeched the Legislature to fix this problem. Taking her cue, the Legislature enacted a completely new type of child-sex offense: Continuous Sexual Abuse of Young Child or Children. Texas Penal Code �21.02 now proscribes a continuous-course-of-conduct offense and only requires jurors unanimously to agree that a perpetrator committed at least two sexual acts over a 30-day (or more) time period. This provision accommodates the legal problems presented when children generically describe long-term abusive conduct. The statute also elevates the first-degree minimum penalty to 25 years with a range that includes confinement for 99 years or life. Second offenses automatically result in life without parole. Child molesters, beware. Tarrant County Assistant Criminal District Attorney Tanya S. Dohoney is the appellate liaison to the misdemeanor division. She is board certified in criminal law by the Texas Board of Legal Specialization. She is a senior appellate attorney with a 17-year tenure in Tarrant County, who has prosecuted many of the office’s state appeals in which the state initiates an appeal of an adverse pretrial ruling. She is a former law clerk in the staff attorneys’ office at the Texas Court of Criminal Appeals. ENERGY LAW: Coal Controversy by RICHARD F. BROWN The oil and gas industry remains at the forefront of importance in Texas energy law, but the most significant development in 2007 involved coal plants, and it took place outside the usual corridors of power. The scene was set last year. In April 2006, TXU Corp. announced that it would build 11 coal-fired power plants in Texas. This announcement came after record heat caused demand for power that resulted in rolling blackouts throughout North Texas. The power plants were supposed to help meet the increasing need for power. While coal, natural gas, nuclear power and wind all can generate electricity, coal is less expensive and plentiful in Texas. After workers and machines clean coal and process it to remove impurities, trains transport it to a power plant where machines crush the coal into a powder that fans blow into a furnace. The furnace heats water, creating steam. The steam turns a generator, sending electricity to transmission lines. This process is more environmentally friendly than it has been in the past, but burning coal still emits harmful chemicals into the air. Environmentalists argued that the 11 proposed TXU coal-fired power plants would significantly damage air quality and exacerbate global warming. According to news releases on the TXU Web site, on Sept. 7, TXU shareholders approved a merger with Texas Energy Future Holdings Limited Partnership (TEF). Prior to the merger, TEF had committed to several environmental groups that once the merger occurred it would not build eight of the proposed 11 coal-fired power plants. Following the merger, TEF withdrew eight applications for permits. TEF’s announcement delighted many environmentalists, but it may have created long-term energy problems in Texas. The state’s population is predicted to grow 20 percent over the next 10 years, according to a March article in The New York Times, which also reports that, unless the state increases its installed energy production capacity, Texas energy production will fall below recommended reserves by 2009. However, renewable energy sources, such as wind energy, may be able to provide Texans with some of the power needed. Last July, the Public Utilities Commission approved construction of additional transmission capacity to wind-rich areas in Texas. These additional transmission lines could drastically increase the amounts of renewable power used in Texas. But because of the high initial costs associated with renewable power, many experts believe it cannot be developed quickly enough to satisfy the state’s increasing needs. These experts have speculated that additional coal plants will likely be the short-term solution to the state’s power needs, while wind energy will provide part of the long-term solution. The utilization of wind energy is rapidly growing. In dealing with this emerging industry, practitioners will be able to draw on their experiences in oil and gas, which has many parallels with the wind industry. However, it is almost certain that courts and practitioners will see unique legal issues arise in the near future. Richard F. Brown, co-founder of Brown & Fortunato in Amarillo, focuses a significant portion of his practice on oil and gas and energy law. He is board certified in oil, gas and mineral law by the Texas Board of Legal Specialization. His e-mail address is [email protected] ENVIRONMENTAL LAW: Coal-ition Politics by SUSAN POTTS and JENNY L. WALBERG The most significant legal development regarding Texas environmental law did not occur in the courtroom this year but instead played out in the Texas Legislature. When TXU’s $45 billion proposed merger became public in February, efforts to oversee the purchase consumed the Texas Legislature, the Public Utility Commission and the Electric Reliability Council of Texas. Perhaps most important, though, Texas turned a corner on global warming and carbon dioxide emissions — not through legislation passed or vetoed but through the business negotiations between TXU, Texas Energy Future Holdings Limited Partnership (the holding group created for Texas Pacific Group/Kohlberg Kravis Roberts & Co), and environmental groups such as Environmental Defense and the Natural Resources Defense Council. Without the deal these groups negotiated, proposed legislation that would have regulated TXU and its business decisions would have probably led to legal precedent in the courtroom. These private businesses and environmental groups brokered a deal to dissolve plans for eight of the 11 coal-fired power plants TXU had intended to build. In a February press release, Environmental Defense President Fred Krupp stated that “the 11 coal-fired plants would spew 78 million tons of global warming pollution.” From the start of 2007, legislators introduced bills calling for a coal plant moratorium (House Concurrent Resolution 43, H.B. 2320 and H.B. 2521) in committee, but they stalled. Lawmakers did not pass proposed legislation, at least in part due to the agreement from TXU to dissolve plans for eight coal plants in exchange for the environmental groups’ withdrawing their opposition to the merger, according to a May 2 article in The Dallas Morning News. The ceasefire by TXU squelches 57 million tons of carbon dioxide per year. The legislation proposed fizzled, as parties outside the Legislature and the courts hammered out a resolution to the dispute. The willingness of business to regulate itself rather than wait for rules and legislation should allow for win-win negotiations between lawyers for big business and environmental groups. With enough breathing room, environmentally sound business decisions become standards in their own right and lead to great innovation. The commitment to renewable and clean fuels is essential for Texas if the state hopes to cure or even aid in the struggle with air pollution. Because of the significance of air pollution as a major pollution dilemma in Texas, the efforts by Environmental Defense and the Natural Resources Defense Council played a more than significant role in the purchase of TXU. The decision to terminate plans for eight coal plants was a business and environmental victory in Texas and has actually spurred further environmental success due to an agreement for TXU to halt coal plant expansions in other states, according to a May 27 article in the Morning News. Halting the expansion of coal plants in turn opens the door for clean energy. It should be noted that, according to an April 26 article in the Houston Chronicle, TXU has already proposed two nuclear power plants. Perhaps next year, we will discuss the safety procedures regarding the rebirth of nuclear energy. Susan Potts is a partner in Potts & Reilly in Austin. She is a native Texan and represents political subdivisions, companies and individuals before theTexas Commission on Environmental Quality andthe Texas Legislature, as well as in state and federal courts on waste and 
water issues. Her e-mail address is [email protected] Jenny L. Walbergis a paralegal with Potts & Reilly. She holds her J.D. from South Texas College of Law and provides legal expertise regarding legislation and general administrative law. Her e-mail address is [email protected] FAMILY LAW: The Year of Child Support by MARY JOHANNA McCURLEY and BRAD M. LaMORGESE The 2007 session of the Texas Legislature is most notable for what did not happen. The Texas Family Code remained largely intact and without any major new problems. The 2007 legislative year, if anything, could be called the Year of Child Support. Child support changed in four major ways: 1. a court can accelerate future child support if the person paying support dies; 2. the credit to a person paying child support for the cost of health insurance for a child is adjusted depending on the number of persons on that plan who are before the court; 3. the child support net resources cap rose from $6,000 to $7,500; and 4. child support may be redirected to a person caring for a child, rather than a person with the court-ordered right to receive support. The first major addition to the Family Code was new �154.015; it accelerates a child support obligation if the person paying support dies. A person receiving child support now has a claim against the estate of the person owing child support for the present value of the total child support payments and health insurance required to be paid by the deceased in the future under a child support order. A court must consider any benefits going to the child — such as insurance proceeds, trust distributions and Social Security benefits — to determine if those benefits can satisfy the child support obligation. If not, then the person receiving support may collect against the estate. The second significant revision to the Family Code, �154.062, adjusted the credit that a person paying support receives by paying for health insurance for a child. Under the old rule, a person received a deduction from net resources used to calculate monthly child support for the total cost of health insurance for the person’s child who was before the court — even if other children not before the court were part of the cost of the insurance. Many times, however, the cost of insuring one child is no different than insuring several children. Given that so many families are blended, this often resulted in an inflated credit when the person paying support was also insuring other children who were not before the court. The Legislature adjusted the credit to a percentage of the total cost reflective of the children before the court. For example, fictional Mr. Smith has one child with his ex-wife Mrs. Jones-Smith but later has two more children with Mrs. Anderson-Smith. He pays child support to Mrs. Jones-Smith and also carries health insurance for the child. He insures his two other children on the same plan, but the cost of insuring one child is no different than insuring all three. Under the new rule, if the cost of health insurance for Mr. Smith’s children is $300 per month, then the credit equals $100 against Mr. Smith’s net resources. In the third major addition, the Legislature raised the net resources cap, also known as the child support cap, from $6,000 to $7,500 in Family Code �154.126. This effectively raises child support for high wage earners for the first time in many years. For example, a person who had more than $6,000 in monthly net resources (gross monthly wages minus certain tax deductions set out in the Family Code) under the old law would pay child support under the guidelines of $1,200 for one child, $1,500 for two children, $1,800 for three children, $2,100 for four children, and $2,400 for five children or more, with certain adjustments. This was true even if the person had $20,000 in monthly net resources. Now, that same $20,000 person would pay guideline child support of $1,500 for one child, $1,875 for two children, $2,250 for three children, $2,625 for four children, and $3,000 for five children or more. The cap automatically adjusts in six years based on inflation and the consumer price index. The final major addition to the Family Code deals with a fairly common question: Who gets child support payments when the child doesn’t actually live with the person named in the court order as the recipient of child support? Often, the person physically caring for the child is different from the person with the court-ordered right to receive child support. New Family Code �156.409 addresses to whom a parent must pay support in that situation. Under the old law, a court was required to direct the support to the person named in the order. Under the new law, support should be redirected to the person who physically cares for a child for six months, rather than the person named in an order. In sum, nothing bad happened to the Family Code this past Legislative session and the Legislature made some needed changes to child support. Both developments were welcome changes from sessions past. Mary Johanna McCurley is a partner in and Brad M. LaMorgese is an associate with McCurley, Orsinger, McCurley, Nelson & Downing in Dallas. Both are board certified in family law by the Texas Board of Legal Specialization. McCurley has served as chairwoman of the State Bar of Texas Family Law Section and as the national vice president and state president of the American Association of Matrimonial Lawyers. LaMorgese practices family and appellate law. HEALTH LAW: Stark Choices by LEW LEFKO In 2007, the Stark law, 42 U.S.C. �1395nn, which governs physician self-referrals, provided a basis for a number of enforcement actions and new rulemaking activities. Statutory and regulatory changes and case law interpreting this physician self-referral law affect joint ventures, medical directors, professional services and management agreements, equipment and space leases, physician ownership of hospitals and other health-care facilities, and physician recruitment. Rule changes were made in 2007 affecting determination of fair market value compensation for agreements between hospitals and physicians and impacting analysis of arrangements when the contracting party is the physician group and not the individual physician. In enforcement activities, federal regulatory agencies and prosecutors demonstrated their commitment to protecting the integrity of the Medicare program through preventing and punishing improper financial relationships between hospitals and physicians. Below-market leases, “sham” medical director contracts, and false attestations on claims, cost reports and compliance reports produced suits and settlements alleging false or fraudulent claims. The Centers for Medicare & Medicaid Services (CMS) used the publication laying out the proposed 2008 Medicare Physician Fee Schedule (MPFS) in July to issue proposed changes to the Stark rules and to seek comments on topics that it may address in future rules. CMS believes these proposed changes will “close loopholes that have made the Medicare program vulnerable to abuse.” The proposed rules would prohibit 1. per unit-of-service rental fees on space and equipment leases when the referring physician is the lessor and the hospital is the lessee; 2. percentage-based compensation fees in leases, management service agreements and other agreements not involving a physician’s personally performed professional services; and 3. the furnishing of outpatient services to hospitals by a vendor owned by referring physicians. However, CMS postponed finalizing the Stark rule changes in the final 2008 MPFS, except for expanding Medicare’s anti-markup provisions for diagnostic tests claims. The revised anti-markup rule prohibits a billing physician or supplier from marking up the diagnostic test or its interpretation if the test or interpretation is purchased outright from an outside supplier or is performed in space other than the office of the billing physician or supplier. Lew Lefko is a partner in Haynes and Boone in Dallas, practicing health law. He represents hospitals, physicians and other health-care providers in transactional, regulatory and compliance matters. IMMIGRATION LAW: No-Match Letters Blocked by MAGALI S. CANDLER, KAREN KATZ FELDMAN and ASHIMA DUGGAL 2007 was the year that so much happened in immigration law, and yet so much that should have happened failed to materialize. Among all that transpired, the U.S. Department of Homeland Security’s rule on Social Security no-match letters could have had the most pervasive effect — and may still next year. On Aug. 15, DHS published a final rule expanding the definition of an employer’s constructive knowledge of an employee’s undocumented immigration status to include receipt of a Social Security Administration no-match letter. Constructive knowledge can mean liability for the employer who does not terminate the employee. The rule provides employers a safe harbor if they follow procedures within the regulation, including verifying the number with the Social Security Administration and reverification on Form I-9. SSA has been sending no-match letters for years. It sends letters when the information on W-2 forms does not match SSA’s records. The purpose is to notify employers and employees of proper credit for earnings. According to the SSA, typographical errors, incomplete information and name changes can result in mismatches. Receipt of a letter does not necessarily indicate an employee’s undocumented status. Of the estimated 17.8 million errors in SSA’s database, more than 70 percent pertain to native-born U.S. citizens, according to the National Immigration Law Center’s Web site. On Sept. 4, SSA planned to send letters to nearly 140,000 employers, affecting 8 million employees. However, on Aug. 29, the AFL-CIO, assisted by the American Civil Liberties Union Immigrants’ Rights Project, and other plaintiffs, filed suit in the U.S. District Court for the Northern District of California, arguing that DHS lacks the legal authority to implement the regulation and that it encroaches on Congress’ power to regulate immigration. On Oct. 10, U.S. District Judge Charles Breyer granted the plaintiffs’ request for a preliminary injunction, blocking DHS from implementing the rule. The judge wrote in his order that mailing the no-match letter with the DHS guidance letter would result in “irreparable harm to innocent workers and employers.” However, SSA can continue to send letters as it has historically done, and DHS can still find that an employer has constructive knowledge of an employee’s undocumented status. Additionally, employers cannot avail themselves of a safe harbor if the regulation is not implemented. Though plaintiffs successfully challenged the DHS regulation, other major issues stand unresolved, including the proverbial white elephant: the 12 million-plus undocumented workers who are an integral part of the U.S. economy. Is reform that could provide relief to essential workers and a practical solution to employers’ labor needs a reality? Will the DREAM Act, legislation that would allow 60,000-plus university and high-school students who are unlawfully in the United States to start the process of legalization, be resurrected? Finally, Congress failed to increase the number of H-1B visas, which are key to ensuring U.S. global competitiveness. Only 65,000 H-1B visas for high-shortage professionals such as engineers, nurses and teachers are available yearly. On April 2 — the first day possible — employers sought 125,000 visas. Rather than seeing resolution of these issues, employers in 2007 witnessed instead an intensification of worksite enforcement raids. Also, in the absence of federal law addressing immigration policy shortcomings, all 50 states introduced immigration legislation (often in conflict with federal law) in 2007, according to the National Conference of State Legislatures’ Web site. Last, a major step in the right direction in 2007 was the U.S. Department of State’s elimination of long backlogs for legal workers who had been waiting to apply for permanent residency. Magali S. Candler is a shareholder in, Karen Katz Feldman is a senior attorney at and Ashima Duggal is an associate with Tindall & Foster in Houston. Candler heads the firm’s litigation and I-9 enforcement sections, and she and Feldman are board certified in immigration and nationality law by the Texas Board of Legal Specialization. Feldman’s practice focuses on employment immigration, litigation and I-9 enforcement. Duggal’s practice focuses on all aspects of immigration law, including employment, family and I-9 enforcement. INSURANCE LAW: A Significant Occurrence by DAVID S. WHITE In a watershed opinion, the Texas Supreme Court decided two significant insurance coverage issues in 2007 that will expand insurers’ duty to defend in most cases, particularly construction litigation. In Lamar Homes Inc. v. Mid-Continent Casualty Co., the court on Aug. 31 determined first that a commercial general liability (CGL) insurer should have to defend a homebuyer’s suit alleging foundation damage caused by the builder’s faulty construction, because the suit alleged both an occurrence and property damage. Second, the court held that the Prompt Payment of Claims Act in Texas Insurance Code Article 21.55 (now �542) applied to an insurer’s breach of its duty to defend. The court summarized Mid-Continent’s position as follows: Mid-Continent argued that CGL policies cover only torts, not contract claims. Because faulty construction is the foreseeable result of deliberate business decisions, it is not a covered accident. Moreover, damage to the contractor’s own work, as distinguished from other property, is a form of economic loss, not property damage. The court disagreed, holding that CGL policies are not restricted to covering torts, because a deliberate act can be performed negligently even under a contract, and Mid-Continent’s economic-loss rule argument is a damages theory that has no place in insurance jurisprudence. The court also resolved a seven-year controversy by holding that the prompt-payment act applies to a liability insurer’s failure to pay defense costs. The act allows policyholders to exact damages of 18 percent per annum if insurers miss specific deadlines involving first-party claims, those payable directly to the insured or beneficiary. Insurers have argued that the act applies only to first-party insurance, such as fire or collision coverage, and has no application under third-party policies that pay settlements or judgments on behalf of the insureds to third parties. The court construed the act liberally, as instructed by the Legislature, and agreed that the act should apply to the wrongful refusal to defend, which was a first-party obligation. After Lamar Homes, CGL insurers no doubt will agree to defend more suits, particularly in the construction arena. Insurers no longer will be justified in denying a duty to defend merely because the suit sounds in contract or alleges a con-tort (tort damages sought in a contract action). Now even foreseeable damages may result from a covered occurrence. Also, liability insurers have a greater incentive to defend first and argue coverage second, because they will owe an 18 percent per annum penalty tacked onto the insured’s defense fees if a court finds they wrongfully refused to defend. Perhaps most important, this decision may mark a more centrist approach in the Supreme Court’s insurance coverage decisions. David S. White is senior counsel at Thompson & Knight in Dallas, focusing on insurance coverage law and commercial litigation. He represents insurance professionals and policyholder clients in coverage and bad-faith litigation, and he counsels corporations, corporate directors and individuals on strategies to strengthen risk management programs through insurance and contractual indemnification arrangements. INTELLECTUAL PROPERTY: Determining Obviousness by EUGENIA S. HANSEN 
and D. SCOTT HEMINGWAY Court challenges to the validity of issued patents usually include an allegation that the patent is obvious. Obviousness determinations long have been at the epicenter of controversy and debate in the U.S. Patent and Trademark Office, courts and the intellectual property bar. But it was the U.S. Supreme Court that provided the latest chapter in this debate: Its April 30 decision in KSR International Co. v. Teleflex Inc., which is the most significant intellectual property law development in 2007. While some speculate that KSR merely reaffirms the standards previously applied in obviousness determinations, others fear that the decision puts the validity of many issued patents in jeopardy by making it easier to prove the invention obvious and thus not subject to patent protection. Many inventions can be viewed as combinations of known elements. These known elements may be combined in a manner previously unknown to the public. For example, consider the quintessential pioneering invention � the light bulb. Confronted by a patent on the light bulb, a defendants’ counsel could argue that Thomas Edison combined the known elements of a vacuum tube, tungsten filaments and electricity to make his pioneer invention, the light bulb. To that end, the defense would be raised that such a combination was obvious and thereby not deserving of a patent. The novelty criterion of the patentability-validity analysis is satisfied if the combination was previously unknown. However, the question as to whether it is non-obvious to combine known elements has been difficult to resolve. The Federal U.S. Circuit Court of Appeals, in developing a body of law specific to patentabilty and validity, had ruled in many prior cases, including 2000′s Winner International Royalty Corp. v. Wang, that there must be a teaching, suggestion or motivation (TSM) in the prior art that shows the new combination is obvious. The TSM test provided some measure of objectivity to the sole subjective requirement for patentabilty: non-obviousness. In KSR the Supreme Court stated that restricting the test for obviousness to a TSM analysis was contrary to the precedent it set in 1966′s Graham v. John Deere. That case, said the KSR court, allows a broad inquiry, opining that a combination of known elements is likely to be obvious when it merely involves the predictable use of prior art elements according to their established functions. The court added that a trial court can take account of the inferences and creative steps that a person of ordinary skill in the art would employ. Specific statements of teaching, suggestion or motivation are not necessarily required. Some believe KSR has reintroduced subjectivity at every level with respect to obtaining and enforcing patents. Others believe it does nothing more than restore the classic analysis of John Deere and that advocates will continue to be able to shape the argument of obviousness or non-obviousness to best represent their clients. The real impact of KSR may be felt, however, in the fact that the Supreme Court issued several major decisions in 2006-2007 concerning patents. After years of allowing the Federal Circuit to be the de facto court of last resort for patent disputes, the Supreme Court has stepped in and clearly reasserted its presence in the patent arena. The court’s recent patent law cases have rattled time-revered precepts. In 2006′s eBay Inc. v. MercExchange LLC, the court ruled that patentees who prove infringement in a court of law are not necessarily entitled to injunctive relief. In Medimmune Inc. v. Genentech Inc., it ruled on Jan. 9 that patent licensees need not repudiate a license prior to suing the patent holder. Time will tell whether American corporations’ regard for patents will change radically in response to the Supreme Court’s increased activity in the patent law area and whether the court has clarified the law or indeed disturbed unnecessarily the Federal Circuit’s efforts to make patent law more certain. Eugenia S. Hansen and D. Scott Hemingway are the founders of Hemingway & Hansen, a Dallas intellectual property and complex litigation boutique. Both spent a number of years at international law firms before founding their firm. Hansen has served as chair of the State Bar of Texas Intellectual Property Law Section and on the board of directors of the American Intellectual Property Law Association. Hemingway is a past president of theDallas-Fort Worth Intellectual Property Law Association and life fellow of the Texas Bar Foundation. INTERNATIONAL LAW: Venezuela’s Oil Revolution by CARLOS TREISTMAN In 1976, Venezuela, the world’s fifth largest exporter of oil, nationalized its oil industry. With the enactment of the Hydrocarbons Nationalization Law, the country created Petroleos de Venezuela, S.A. (PDVSA). The oil boom of this period allowed Venezuela to close its doors to foreign oil producers perceived to be a threat to its sovereignty. Since 1976, numerous major oil companies entered into concession agreements with Venezuela and have invested substantial amounts of capital developing Venezuela’s oil fields. Today, with soaring oil prices, history repeats itself, demonstrating, yet again, a direct correlation between price of oil, political rhetoric and nationalization of oil resources. For major oil producers and the Texas lawyers who represent them — and for most of the world — President Hugo Chavez’s partial nationalization of the country’s oil industry is one of the most significant international legal events of 2007. After Chavez’s election in 1999 and the enactment of a new constitution, the Venezuelan Congress ratified enabling laws that allowed Chavez to legislate without congressional approval. In 2000, a new enabling law allowed Chavez oversight for temporary legislation in a broad number of areas, including infrastructure and economy. Under the powers of this law, Chavez endorsed the Hydrocarbons Law, which reserved for the Venezuelan government a 50 percent participation in all oil projects and increased oil production royalties payable by foreign investors from 16.7 percent to 30 percent. In January 2007, the Venezuelan Congress passed a new enabling law. For 18 months, the president could issue decrees in 11 areas of government policy. Under this new law, Chavez implemented his nationalization plans and reformed different sectors of the economy. The new legal framework laid the foundation for Chavez’s long-announced plan to create a 21st century form of socialism. On Feb. 26, he issued a decree and essentially nationalized the last remaining oil projects under foreign control located in the Orinoco River belt, one of the world’s largest reserves of extra-heavy oil. Under the decree, PDVSA would increase its ownership interest in joint ventures to a minimum of 60 percent. Chavez’s decree forced foreign oil companies to negotiate the terms under which, by June 2007, they would transfer their majority stake to PDVSA. All but ExxonMobil Corp. and ConocoPhillips Co. agreed to Chavez’s terms. On Oct. 10, the International Centre for Settlement of Investment Disputes in Washington, D.C., registered ExxonMobil’s request for arbitration against Venezuela. Despite ConocoPhillips’ current negotiations with the Venezuelan government, an arbitral tribunal may eventually hear this dispute. Venezuela is the fourth largest oil supplier to the United States, and its oil reserves are among the top 10 in the world. Consequently, despite the partial nationalization of Venezuelan oil and Chavez’s anti-foreign-investor rhetoric, many energy companies still find it lucrative to invest in Venezuela and remain committed to the future success of exploration and production of oil and gas in this country. Carlos Treistman is a partner in King & Spalding in Houston, a member of the firm’s global transactions practice group and co-head of its Latin American practice. His work focuses on international business transactions, including international mergers, acquisitions, dispositions, joint ventures, private equity, infrastructure development projects, privatizations, and maquila and PITEX cross-border manufacturing programs. He has extensive experience in cross-border transactions, particularly in Latin America. LABOR AND EMPLOYMENT: Tech-Toy Trouble by AUDREY MROSS What has employers losing sleep in 2007? Perhaps it’s the technology that vendors sold to them as a way to cut costs and become more efficient. Instead, these tech toys led to loss of productivity, increased litigation and a backlash of privacy legislation. Lawyers will remember 2007 as the year that courts, agencies and lawmakers worked to address the effects of technology use in the workplace. But the bottom line is that employees received more privacy protections this year, governing many of the major workplace technology tools. Consider the following: 1. E-mail: On March 15, the 4th U.S. Circuit Court of Appeals agreed with the National Labor Relations Board in Media General Operations Inc. v. NLRB that an employer’s selective enforcement of its policy banning nonbusiness use of e-mail constituted an unfair labor practice, where some employees used the e-mail system for personal purposes but employees serving as union officers were banned from using the system to discuss union business. 2. Databases of personal information: At least 38 states, including Texas, have enacted laws to combat identity theft by requiring businesses that lose personal identifiers, such as Social Security numbers or credit card information, to notify affected individuals. Some states require self-reporting to the state agency charged with enforcement. With the changed e-discovery rules, businesses must think about limiting the amount and types of information collected and kept. In addition, California, New Jersey, Michigan, Pennsylvania, Nebraska, Maryland and New York have enacted laws limiting employers’ ability to use some or all of employees’ Social Security numbers as employee identifiers. 3. Disposal of personal information: The Texas attorney general sued seven Texas businesses in 2007, based on their alleged failure to properly dispose of media containing customers’ and employees’ personal identifiers. 4. Electronic time clocks: Electronic timekeeping technology that allows employees to clock in upon arrival or as scheduled led to claims of unpaid work off the clock. Other suits attack the manager-override feature of automated systems, which allow managers to change employees’ recorded hours, and improper rounding practices. Some states, including Texas, tried to prohibit use of biometrics, such as hand vein patterns and scans of fingerprints, retinas or voices. Such bans would eliminate some employers’ security and timekeeping systems. Who should handle the trouble that tech toys cause? Information technology, human resources and legal departments should form a trinity to deal with these issues. IT knows how to access employees’ unopened e-mail, not realizing access could violate federal or state privacy laws. HR keeps personal identifiers that are at risk for disclosure. Legal understands record-keeping requirements, including litigation holds, but may not know what data exists or where it is kept. Together, all three can take steps to move the babes in tech-toyland into adolescence. That’s an improvement, right? Audrey Mross is a shareholder in Munck Butrus Carter in Dallas and leads the labor and employment section of the firm. She is employment relations committee chairwoman for the Texas Association of Business, Dallas chapter, and is on the TAB’s board of directors. She is a frequently 
requested speaker/trainer and authors a monthly newsletter, Legal Briefs for HR. LEGAL MALPRACTICE: Recovering Attorneys’ Fees by RANDY JOHNSTON With a decision that affects damages in legal malpractice cases in two different ways, the 5th Court of Appeals in Dallas gets the nod for most significant development in legal malpractice for 2007. In Akin Gump Strauss Hauer & Feld v. National Development Research Corp. and Robert E. Tang, the 5th Court on Aug. 29 reaffirmed and clarified a position it has maintained for some time: Attorneys’ fees incurred in prior litigation may not be recovered as damages in a later legal malpractice case. The court also addressed a question of first impression, ruling that damages in a legal malpractice case are not to be reduced by any contingent fee applicable to the underlying case. In its plainest statement to date, the 5th Court again ruled that litigation attorneys’ fees caused by a lawyer’s malpractice are not recoverable as damages against the lawyer. To its credit, the 5th Court acknowledged that this issue is subject to “wide debate” among the intermediate courts of appeals and referenced decisions of several other courts of appeals that have reached the opposite conclusion. The breadth of this ruling cannot be overstated: It affects virtually every legal malpractice case. Imagine, for example, that a lawyer is negligent in drafting a promissory note, resulting in the debtor asserting an otherwise unavailable defense to the note and refusing to pay. After years of resulting litigation and attorneys’ fees of $100,000, the Texas Supreme Court rules that, notwithstanding the lawyer’s mistake, the note is enforceable. Even in the face of clear negligence by the lawyer and compelling proof that the lawyer’s mistake caused the litigation, the client cannot recover the $100,000 she had to pay in attorneys’ fees under the 5th Court’s ruling. The 5th Court’s second refinement to the damage calculation in a legal malpractice case deals with a smaller but equally important subset of cases: claims against lawyers working on a contingent fee. The question before the court was simple: Is a successful legal malpractice plaintiff entitled to recover the full amount lost in the underlying case, or can the plaintiff’s damages be reduced by any contingent fee the client would have had to pay in the underlying suit? The lawyer’s side of this argument is simple: If the client had won the first trial, the client would have paid a contingent fee, so the client should not be allowed to sue the lawyer for more than she would have recovered but for the lawyer’s negligence. The 5th Court rejected this approach with a two-pronged argument. The contingent fee was not earned, because of the loss at trial; and reducing damages by the contingent fee ignores the attorneys’ fees being paid by the client to pursue the malpractice case. Both sides have filed a petition for review of the 5th Court’s decision with the Texas Supreme Court. It is, therefore, possible that we have not heard the last word on these two important subjects. Randy Johnston is a partner in Johnston Tobey in Dallas. He attended Brigham Young University and the University of Texas School of Law, graduating with honors in 1974. His practice concentrates on legal malpractice and issues of professional liability. He is a member of the American Board of Trial Advocates and the Texas Trial Lawyers Association, and he has served as presidentof the Dallas chapter of the American Board of Trial Advocates and the Dallas Trial Lawyers Association. MARITIME LAW: Change of Venue by JULIA ADAMS and SHANNON THORNE The most interesting development of 2007 in maritime law is the enactment of Texas’ new venue statute for Jones Act suits. Previously, any Jones Act seaman who lived in Texas when he was injured could file his Jones Act suit in the county where he resided when he was injured, no matter where the injury occurred. Resulting advantages to seamen included local juries, local doctors and the ability to stay close to family during trial. But new legislation signed by Gov. Rick Perry modified the venue option for Jones Act seamen injured inland, onshore or in dredging activities. It did so by adding Texas Civil Practice & Remedies Code �15.0181, a mandatory venue statute for suits filed on or after May 24 under the Jones Act, 46 U.S.C. �688. The drive behind �15.0181 was a perceived increase in Jones Act filings in four South Texas counties against out-of-state dredging companies, according to the summer 2007 issue of Texans for Lawsuit Reform’s TLR Advocate. Under the newly added �15.0181, there are special venue provisions for Jones Act seamen injured in Texas. If all or a substantial part of the events or omissions giving rise to a claim occurred in Texas inland waters, onshore in Texas or during the course of an erosion response project (a dredging project) in Texas, there are two venue options: the county where all or a substantial part of the events giving rise to the claim occurred, or the county where the defendant maintains its principal Texas office. Furthermore, if the injury occurs in any inland waters outside of Texas, or onshore or during an erosion response project in a Gulf Coast state, then four venue options exist: 1. the county where the defendant’s principal Texas office is located, if the office is in a coastal county; 2. Harris County, unless the plaintiff resided in Galveston when the cause of action accrued; 3. Galveston County, unless the plaintiff lived in Harris County when the cause of action accrued; or 4. the county where the plaintiff resided when the cause of action accrued, but only if the defendant does not have a principal office in a Texas coastal county. The law defines Gulf Coast states as Texas, Louisiana, Alabama, Mississippi and Florida. It defines a coastal county as a county having a U.S. Customs port through which waterborne freight is transported. The application of �15.0181 to future Jones Act suits in Texas has been perceived as a significant positive development for dredging companies. Julia Adams is a partner in and Shannon Thorne is an associate with Sedgwick Detert Moran & Arnoldin Houston. They handle maritime and energy litigation, including collisions, hurricane losses, the defense of personal injury and death actions, contract and lien claims, dock and stevedore liabilities, and subrogation matters. Their expertise further includes claims arising from onshore and offshore drilling, business interruption, vessel and dock operations, marine construction and offshore wind facilities. PERSONAL INJURY: Corporate Immunity by NELSON J. ROACH In the 1980s the tort reform movement began as a push to bring parity and predictability to a civil justice system that proponents said unjustly favored claimants who were either not injured or not seriously injured. After achieving that parity, the focus shifted to creating near-immunity for corporations that wrongfully kill and maim innocent citizens. Having received more than they could have imagined from the Legislature in 2003, the corporate amnesty movement has shifted its efforts to the courts. In 2007, the Texas Supreme Court handed the movement its most significant decision of the year. Since its inception at the turn of the 20th century, workers’ compensation insurance has provided employers immunity from tort liability in exchange for providing no-fault insurance coverage for work-related injuries. Historically, because of the unique legal rights and responsibilities between employee and employer, this trade-off did not extend to third parties. In 1983, to allow flexibility in hiring subcontractors on construction projects, the Legislature extended the immunity to a general contractor who purchased workers’ compensation insurance for its subcontractors. This immunity, however, did not extend to premises owners, such as oil refineries, chemical plants and manufacturing interests. If premises owners wanted the immunity of workers’ comp, they were required to hire those workers and accept the rights and responsibilities of an employer-employee relationship. In 1989, and on several occasions thereafter, the Legislature has rejected proposals to extend this immunity to premises owners. In fact, in 2005, then-Rep. Joe Nixon first sponsored a bill granting immunity to premises owners and withdrew the bill after the British Petroleum Refinery explosion in Texas City that killed 15 people and injured scores of others. Notwithstanding this clear legislative history, in Entergy Gulf States Inc. v. Summers, the Texas Supreme Court on Aug. 31 ruled that a premises owner can qualify as a “general contractor” and receive the liability shield extended to employers that purchase workers’ comp protection. According to the court, purchasing an owner-controlled insurance program absolves premises owners of their duty to protect the health and safety of the workers it welcomes on its plant. Not only is Entergy important because of the way in which the court ignores clear legislative history, but also because it creates new immunity for corporate wrongdoing. Entergy is part of a broader trend of both the Legislature and the courts to grant partial, de facto and express immunities to interests that kill, maim and defraud innocent people. Nelson J. Roach is a partner in Nix, Patterson & Roach, a 25-lawyer firm with offices in Daingerfield, Texarkana, Irving and Austin. He earned his undergraduate and law degrees from Baylor University. After serving as a briefing attorney for the Texas Supreme Court, he has practiced law in Daingerfield for 23 years. REAL ESTATE LAW: The Party’s Over by IRENE HOSFORD Aggressive pricing of equity and debt products has spoiled investors in commercial real estate for the past several years. Low interest rates fueled the flow of funds into capital markets, including funds derived from the sale of mortgage-backed securities of all kinds, and commercial real estate benefited from money chasing deals. That resulted in transactions with attractive features such as 10-year interest-only debt, highly leveraged deals, debt service coverage calculated optimistically on future rents, no reserves for commissions and improvements except the reserves mandated by statutes covering conduit lenders, and readily available mezzanine debt to bridge the spread between first lien debt and purchase price. Lawyers negotiated purchase and sale agreements that required quick due diligence and quick closes, and they drafted loan documents that were light on covenants and included little personal recourse. This year, the aggressive pricing stopped, and the flow of funds into real estate slowed down considerably. Why? Substantial defaults on residential subprime mortgages and billions in option adjustable-rate mortgages set to adjust to higher rates over the next couple of years, rapid loss in value of collateralized debt obligations tied to those subprime mortgages, resetting the value of overpriced investments to current market value, and increased scrutiny of and by rating agencies. This happened at the same time as some significant sales — such as the sale of Equity Office Properties Trust to The Blackstone Group, Crescent Real Estate Equities LP to Morgan Stanley, and TXU Corp. to an entity related to Texas Energy Future Holdings LP — ate up a lot of available capital. Legislators and regulators are now chattering about bail-outs of hapless residential borrowers, new good-faith and fair-dealing duty standards for lenders, Internal Revenue Service investigations into underreporting of income by conduit investors, and investigations into securities irregularities. Once-aggressive lenders, investors and rating agencies suddenly are risk-averse. At the commercial level, there hasn’t been a lot of litigation or much more than talk from Congress or Texas legislators. However, there is new federal regulatory guidance on nontraditional mortgages and a new statement on subprime lending. The recent voluntary agreement among major lenders brokered by Treasury Secretary Henry M. Paulson Jr. may help some residential borrowers, and Congress continues to debate possible solutions, focused on residential lending practices. The legal lessons for commercial real estate thus far are in negotiating, drafting and counseling. Deal-making lawyers are fast finding ways to help their clients learn or re-learn lessons in risk management, thoughtful problem-solving and careful document drafting — all legal-counseling fundamentals. Deals now require more equity, so lawyers must carefully adjust legal relationships and practical expectations. Rating agencies are valuing collateral more conservatively, so lenders are increasing their collateral requirements. Credit tenants will have more leverage, which their lawyers will use to advantage in lease negotiations. Lawyers must carefully negotiate the expanded representations, warranties and covenants in loan and deal documents to limit their clients’ liability. Securitized lenders are pulling back, so lawyers must help their clients understand the different risk horizons of banks and life insurance companies. Internally, firms are seizing opportunity by setting up new practice groups that include practitioners in commercial real estate law, securities law, bankruptcy law and white-collar criminal law. The impact of the liquidity crisis touched off by subprime mortgage market problems affects real estate clients across the capital markets spectrum: banks, corporate trustees, corporate real estate departments, hedge funds, underwriters, mortgage brokers, servicers, insurance companies, appraisers, real estate investment trusts, mortgage REITs, developers, pension fund managers, buyers and sellers. There’s uncertainty in the markets and a lot of talk about legal repercussions. But the key legal challenge in commercial real estate this year is, as always, the challenge to understand clients’ needs and to give practical legal advice attuned to changing circumstances. Irene Hosford, a partner in the commercial real estate practice group at Brown, McCarroll in Dallas, counsels clients on managing risk, finding practical solutions to real estate problems and taking advantage of business opportunities. Her e-mail address is [email protected] SECURITIES LAW: Internal Control Assessments by JOHN R. FAHY The U.S. Securities and Exchange Commission had a busy rule–making year in 2007. The rule changes with the broadest scope relate to management and auditor internal-control assessments for public companies. The 2002 Sarbanes-Oxley Act mandated that the SEC issue rules requiring annual, publicly reported assessments of the effectiveness of internal controls and auditor attestation to and reporting on the issuer’s internal control assessment. In 2003, the SEC issued a general definition of internal controls and the scope of management’s internal control assessments, and it required that the auditor attest to the company’s internal controls assessment. In 2004, the Public Company Accounting Oversight Board (PCAOB), an agency created by SOX to oversee and set standards for public company auditors, issued Auditing Standard No. 2, which contained detailed requirements and procedures for auditors to follow before attesting to a company’s internal control assessment. Last year, the SEC and PCAOB determined that auditor internal control attestations dictated management internal controls processes. Companies spent too much time, effort and money chasing down processes without material impact on financial reporting, “ultimately leading to the identification, documentation, and testing of an excessive number of controls,” according to a July 11, 2006, SEC release. As a result, in June the SEC issued new rules and interpretive guidance 1. requiring management to make a top-down, risk-based assessment of internal controls, such that management is reasonably assured of their adequacy, with the intended effect of keeping leaders from getting bogged down in immaterial internal-control rabbit trails; 2. formally defining what “material weakness” means in the context of internal controls; and 3. requiring auditors to attest to the actual effectiveness of the company’s internal controls rather than a company’s published internal controls assessment. The latter rule means that, for auditor attestation purposes, auditors should be concerned with whether the company has effective internal controls rather than how the company got there. Likewise, in July the SEC approved replacing Auditing Standard No. 2 with PCAOB’s Auditing Standard No. 5, which requires that auditors attesting to internal controls focus on those areas with the highest risk of internal control failures that could materially impact financial statements. AS No. 5 also eliminates the requirement that auditors evaluate management’s internal control evaluation process and permits the auditor to adjust controls testing to meet audit goals. Finally, AS No. 5 provides guidance on how to apply its principles to smaller public companies. Smaller public companies are required to publish assessments of their internal controls starting with annual reports for fiscal years ending after Dec. 15. So, these new rules and standards will allow these initial internal control assessments to be focused, risk-based, and cost- and time-efficient. Larger public companies already have their internal control and evaluation systems in place, because they previously published internal control assessments and were subject to auditor attestations. But, if these companies go through material business changes or otherwise re-evaluate their internal controls, further internal control assessments and attestations will now go through the new risk-based, results-oriented internal control evaluation model created by the recent changes rather than the one-size-fits-all approach the previous rule and standard engendered. John R. Fahy is a securities associate with Whitaker Chalk in Fort Worth. He previously served on the staff of the SEC’s Fort Worth office, managed the Texas State Securities Board’s Houston office and served as general counsel for two securities broker-dealers. He earned his law and master’s degrees from the University of Texas and his undergraduate degree from Yale University. His e-mail address is [email protected] TAX LAW: Patenting Tax Strategies by STEPHEN C. COEN This year, the Internal Revenue Service and Congress moved to address the use of tax-strategy patents (TSPs). In State Street Bank & Trust Co. v. Signature Financial Group Inc., the Federal U.S. Circuit Court of Appeals held in 1998 that there is no per se rule against patenting methods of doing business. This controversial holding opened the floodgates for business-method patent applications, including TSPs. The U.S. Patent and Trademark Office has issued at least 60 TSPs, and more than 80 are pending. U.S. Supreme Court Justices Stephen Breyer, Anthony Kennedy, David Souter and John Paul Stevens have criticized State Street in dicta. In eBay Inc. v. MercExhange LLC (2006), Kennedy noted “the potential vagueness and suspect validity” of some of “the burgeoning number of patents over business methods.” Breyer, in dissent from 2006′s Laboratory Corp. of America Holdings dba LabCorp. v. Metabolite Laboratories Inc., et al. questioned the holding in State Street that “a process is patentable if it produces a �useful, concrete and tangible result’ ” noting that “ this Court has never made such a statement.” Reacting to concerns that tax shelter promoters could use TSPs to avoid the disclosure of reportable transactions, the IRS recently issued Proposed Reg. 1.6011-4(b)(7), establishing a new category of reportable transactions, the “patented transaction,” effective Sept. 26. Congress is on a path to address TSP concerns decisively. The House passed H.R. 1908, the Patent Reform Act of 2007, on Sept. 7, and the bill was placed on the Senate legislative calendar. An identical bill, S. 1145, was introduced in the Senate on April 18. On July 19, the Committee on the Judiciary ordered it reported with amendments favorably. The patent reform bills do not affect tax preparation software but preclude patents, as H.R. 1908 notes, for “a plan, strategy, technique or scheme designed to reduce, minimize or defer . . . a taxpayer’s tax liability.” Then, on Nov. 15, several senators introduced another bill, S. 2369, which was referred to the Committee on the Judiciary. There are a number of concerns raised by those opposed to the granting of TSPs. 1. Aggressive marketing of a tax strategy as patented or patent pending will mislead unsophisticated investors to believe that the granting of a patent means that the strategy will work or has IRS approval. 2. Businesses may use a TSP to obtain a cost advantage over competitors by lowering taxes for themselves but refusing to license the patented strategy to their competitors. 3. Politically motivated groups could use patents to achieve tax policy goals outside of the legislative process by obtaining a patent on a tax strategy beneficial to a targeted group, then refusing to grant a license. 4. TSPs would usurp legal methods of tax compliance, in effect setting up toll booths in the Internal Revenue Code. 5. Tax shelter promoters may use patent protection as a means of circumventing rules that require taxpayers who participate in reportable transactions — including transactions where the taxpayer has signed a tax strategy confidentiality agreement — to attach a disclosure statement to their returns. A TSP would enable the tax adviser to protect the strategy without the confidentiality agreement and thus avoid providing the IRS with a disclosure statement. 6. The existence of TSPs adds a patent search due-diligence requirement for attorneys who could find themselves liable for patent infringement inducement and face malpractice exposure for providing tax advice covered by a TSP. 7. The tremendous expense of defending a patent infringement suit will have a chilling effect on the use of tax strategies that arguably approach a patented tax strategy. If Congress does act decisively, it will remove the cloud of uncertainty regarding tax advice. Stephen C. Coen is a sole practitioner in Arlington. He is a 1986 graduate of Texas Tech University School of Law and a former IRS attorney. TRUSTS AND ESTATES: Tough Times for FLPs by RONALD A. FOXMAN This was not a good year for taxpayers in estate-tax cases involving a transfer of property to a family limited partnership (FLP), a type of transfer popular among Texas estate planning lawyers. Under Internal Revenue Code �2036(a), the value of a decedent’s gross estate includes the value of property transferred by the decedent when he has retained the possession or enjoyment of, or the right to the income from, the property for his life (or for any period not ascertainable without reference to his death or for any period that does not in fact end before his death). The Internal Revenue Service has successfully used this section to attack the transfer of property to an FLP. Section 2036(a) does not apply if the decedent transferred the asset in a bona fide sale for an adequate and full consideration “in money or money’s worth.” On Sept. 14, the 9th U.S. Circuit Court of Appeals decided Bigelow v. Commissioner. Even though Texas is in the 5th Circuit, Bigelow is important, because it offers additional guidelines in an area where there has not been much uniformity in approach by the courts. In Bigelow, the 9th Circuit affirmed a U.S. Tax Court finding that the decedent retained an economic benefit from property transferred to an FLP because: 1. the transferred property continued to secure debt for which the decedent was personally liable; 2. the FLP paid the decedent’s monthly loan payments; 3. partnership formalities were not observed; and 4. without the contributed property, the decedent would have been impoverished and unequipped to meet her financial needs. In support of its decision, the Tax Court analogized the facts to those in Thompson v. Commissioner (2004) decided by the 3rd U.S. Circuit Court of Appeals and to those in Korby v. Commissioner (2006) decided by the 8th U.S. Circuit Court of Appeals. Bigelow also held that the exception for a bona fide sale for an adequate and full consideration did not apply to the transfer of the property to the FLP, because the transfer of the property to the FLP was not executed in good faith on the grounds that the transfer resulted in the impoverishment of the decedent, the FLP did not honor partnership formalities and the transfer did not create a potential nontax benefit for the decedent. In evaluating whether the FLP had nontax-related benefits, the Tax Court stated it was doing so “through the heightened scrutiny of intra-family transactions.” It found no evidentiary support for the taxpayer’s asserted nontax purposes: protection from creditors, protection from a partition sale, facilitation of management and facilitation of gifting. Bigelow concluded by stating that the transfer of the property to the FLP “was not executed for any legitimate, significant non-tax-related business purpose based on objective criteria that would have informed the partners . . . if they had been operating at arms length.” The result, which is not surprising given the taxpayer’s unfavorable facts, was that the transferred property was included in the decedent’s gross estate. The 9th Circuit decided Bigelow after the U.S. Tax Court issued two other cases involving the transfer of properties to an FLP earlier this year, Erickson v. Commissioner and Gore v. Commissioner. Those decisions reached a similar negative outcome for FLPs and provide guidance to Texas estate planning lawyers. Ronald A. Foxman is a shareholder in Higier Allen & Lautin in Addison. He is board certified in estate planning and probate law by the Texas Board of Legal Specialization.

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