When award-winning photographer Lynn Goldsmith snapped a portrait of the artist formerly known as Prince for Newsweek in 1981, she could not have predicted the cultural and legal impact the pop legend’s portrait would have. In 1984, Vanity Fair sought to license the photograph for an “artist reference” in a story about the musician. Goldsmith agreed to license a one-time use of the photograph with full attribution. Vanity Fair commissioned Andy Warhol to create a silkscreen using Goldsmith’s image and used Warhol’s piece in the magazine with attribution as promised. However, Andy Warhol would go on to create 15 additional works using the Goldsmith photograph, now known as the artist’s “Prince Series.” Although Warhol created the Prince Series nearly forty years ago and three years prior to Warhol’s death, it was not until 2016 when Condé Nast featured the “Orange Prince,” one of Warhol’s silkscreen prints, as part of its tribute to Prince’s passing that Goldsmith learned of the additional reproductions. Condé Nast paid the Andy Warhol Foundation for the Visual Arts, Inc. (“AWF”) $10,000 for the license, while Goldsmith received neither a license fee nor a source credit.

Upon failure to resolve the matter privately, AWF filed suit against Goldsmith, seeking a declaratory judgment that Warhol’s works did not infringe Goldsmith’s copyright in the original photograph, or, in the alternative, Warhol’s works constituted fair use of the subject photograph.[1] The Southern District of New York granted summary judgment to AWF on its claim of fair use, but the Second Circuit Court of Appeals reversed.

The Copyright Act motivates creativity by granting the author of an original creative work rights to reproduce their work, prepare derivatives works, and (in the case of pictorial or graphic works) display the copyrighted works publicly. This ownership interest in the creative work is balanced with the general public’s need to access the creative arts and exercise First Amendment rights. The fair use doctrine (the basis of AWF’s copyright infringement defense) allows use of a copyrighted work by persons other than the author for “purposes such as criticism, comment, news reporting, teaching . . ., scholarship, or research”[2] and is evaluated through multiple factors. On petition for writ of certiorari, AWF asked the Supreme Court to evaluate whether the Condé Nast licenses are fair use based on just the first fair use factor, “the purpose and character of the use, including whether such use is of a commercial nature or is for nonprofit educational purposes.”[3] On this issue, the Supreme Court agreed with the Second Circuit that the first factor of fair use favored Goldsmith. Because AWF did not dispute that the remaining fair use factors favored Goldsmith, the Court affirmed the Second Circuit’s finding of copyright infringement.

The first factor of fair use considers the nature of and reasons for a copier’s use of an original work.[4] “The larger the difference, the more likely the . . . factor weighs in favor of fair use. The smaller the difference, the less likely.”[5] When the original and the copy share a similar purpose, there is a concern that the copy will substitute for the original. Because the copyright owner has the exclusive right to prepare derivative works of their original—that is, recasts, transformations, or adaptations of the original work—the copy must be substantially transformative to have a different purpose or character than the original and that degree of transformation must also be balanced against any commercial nature of the use.

AWF argued that the Prince Series is sufficiently transformative of Goldsmith’s original photograph because the artworks convey a different meaning or message than her photograph. Yet, because the first use factor focuses on the degree in which the infringing use has a different purpose or character, the Court ultimately sided with Goldsmith. The majority found that AWF’s licensing of the “Orange Prince” copy to Condé Nast is not a substantially different purpose than Goldsmith’s photograph. Goldsmith took the original photograph and licensed it to Newsweek for use in an article about Prince, and then similarly licensed the work to Vanity Fair in association with an article about Prince. AWF licensed the “Orange Prince” to Condé Nast for an article about Prince. “As portraits of Prince used to depict Prince in magazine stories about Prince, the original photograph and AWF’s copying use of it share substantially the same purpose,” wrote Justice Sonia Sotomayor for the majority.

The majority opinion stresses that its opinion is limited to AWF’s license to Condé Nast: “Only . . . AWF’s commercial licensing of ‘Orange Prince’ to Condé Nast, is alleged to be infringing. We limit our analysis accordingly. In particular, the Court expresses no opinion as to the creation, display, or sale of any of the original Prince Series works.”[6] A concurrence written by Justice Neil Gorsuch (joined by Justice Ketanji Brown Jackson) further argued that the subsequent use (AWF’s licensing to Condé Nast) is the relevant inquiry rather than considering the original copier’s (Andy Warhol) intent in creating the “Orange Prince.” Conversely, Justice Elena Kagan’s (joined by Justice John Robert’s) condemnatory dissent sharply criticized the majority’s purported failure to appreciate how Warhol’s work differed from Goldsmith’s photograph. The dissent specifically cited to the Court’s decision just over two years ago in Google LLC v. Oracle America, Inc., where Warhol’s works were deemed the “perfect exemplar of a ‘copying use that adds something new and different.’”[7] The majority opinion dismisses the dissent as “a false equivalence between AWF’s commercial licensing and Warhol’s original creation” which results in “a series of misstatements and exaggerations, from the dissent’s very first sentence.”[8]

Most often in fair use inquiries, the dispute focuses on a copier’s use of the copyrighted work. It is not often a court is presented with the issue of a third party’s independent use (that is, use without the involvement of the copy’s creator) of the subsequent work. The majority opinion is narrow and focuses on one specific fair use factor in the context of one specific use. The Court’s decision cautions that the motivations behind the third party’s use must be considered on their own merit, rather than allowing the use and motivations of the original work to automatically transfer to the third party’s use.

Significant also to the finding of infringement is that the remaining fair use factors—including the fourth factor, “the effect of the use upon the potential market for or value of the copyrighted work”—was admitted to favor Goldsmith. In fact, that is precisely what occurred in this matter. Throughout her career, Goldsmith regularly photographed celebrities and licensed those photographs to magazines for articles about that celebrity. Condé Nast needed a picture of Prince for its 2016 memorial article about Prince, and it licensed the “Orange Prince” from AWF instead of Goldsmith’s photograph. This use “served the same essential purpose of depicting Prince in a magazine commemorating his life and career.”[9]

Despite the pains made by the majority to limit the opinion’s reach, this decision will likely have significant ramifications for the art world, particularly art markets and licensing. While here the original artist’s use itself is unaddressed, the decision may temper a creator’s ability to market new creative works that incorporate copyrighted works. The fair use doctrine’s intent is to protect use of copyrighted works in particular contexts and has particular importance in artistic criticism and parody. Though a creator may still be able to express themselves artistically using the copyrighted work, finding a gallery or dealer willing to accept the work may prove more challenging. For those willing to accept the work, expect strong warranties and artist indemnification contract clauses.

Read the Supreme Court’s opinion here.

Special thanks to William Wildman, Loyola University New Orleans College of Law, Class of 2023, for his assistance in the researching and drafting of this post.

[1] See Andy Warhol Found. for the Visual Arts, Inc. v. Goldsmith, 382 F.Supp. 3d 312 (S.D. N.Y. 2019).

[2] 17 U.S.C. § 107.

[3] Id.

[4] Andy Warhol Found. for the Visual Arts, Inc. v. Goldsmith, 598 U.S. ___ (2023).

[5] Id.

[6] Id. at ____ (slip op. 21).

[7] Id. at ____ (dissent op. 2).

[8] Id. at ____ (slip op. 22, n. 10).

[9] Id. at ___ (slip op. 23, n. 11).

On May 10, 2023, the Texas State Senate passed H.B. 4, titled the Texas Data Privacy and Security Act (“TDPSA”), sending the bill to Governor Abbott’s desk for final signature. If signed into law, Texas will join a growing contingency of states enforcing comprehensive data privacy laws for their residents.

This alert provides answers to some general questions about the TDPSA as it is currently written. Be on the lookout for additional updates about the Act once signed by Governor Abbott.

Who will be required to comply with the TDPSA?

The TDPSA will regulate persons and entities that: (a) conduct business in Texas or produce products or services consumed by Texas residents; (b) processes or engages in the sale of personal data; and (c) is not a small business as defined by the U.S. Small Business Administration, unless the small business is involved in the sale of sensitive personal information. This applicability standard is broader than many other state privacy laws previously enacted because it does not have a revenue threshold. Rather, the applicability is based on whether the business qualifies a “small business”, which is a variable, context-specific standard, the status of which can be undone by its affiliations.

If you are a small business, but you are selling Texas residents’ sensitive personal data, the TDPSA will require you to obtain the data subject’s consent prior to sale.

Does my business process or sell personal data under the TDPSA?

“Personal data” is defined as any information that is linked or reasonably linkable to an identified or identifiable individual. If you are processing personal data, that means that your business is collecting, using, storing, disclosing, analyzing, deleting, or modifying of personal data. “Sale” means the sharing, disclosing, or transferring of personal data for monetary or other valuable consideration to a third party. We have seen, particularly in California, that “sale” can have significantly broader applications than traditional notions of what constitutes a sale, such as receipt of analytic data. It has yet to be seen whether this Act would take a similar broad approach.

What rights would be granted to Texas residents?

Texas residents could soon have certain rights related to their personal data, including rights of access, correction, deletion, portability, the right to opt out of certain processing, and the right to appeal a controller’s decision regarding a rights request. The Act could also require data minimization, processing limitations, data security, non-discrimination, third-party contracting, and data protection assessments, as well as impose certain requirements directly on entities who process data on behalf of a party that makes decisions on how that data is used.

Which other states have comprehensive privacy laws?

As of this writing, seven states have signed comprehensive data privacy laws. California was the first state with the California Consumer Privacy Act (“CCPA”), effective as of January 2020. California’s amendments to the CCPA and the Virginia’s Consumer Data Protection Act (“VCDPA”) became effective January 1, 2023. Colorado and Connecticut’s laws will go into effect on July 1, 2023, while Iowa and Indiana’s will go into effect in 2025 and 2026, respectively. Similar laws from Montana and Tennessee are also awaiting final signature.

When will the TDPSA be effective?

If signed, the TDPSA will be effective on March 1, 2024.

Who is responsible for enforcement? Is there a private right of action?

The TDPA does not contain a private right of action. Rather, all enforcement will be through the Texas Attorney General, but the AG can make a civil investigative demand following a consumer request.

What is the penalty for violations?

The penalty is $7,500 per violation plus attorney fees and investigation costs incurred by the AG. Once the final act is signed, Kean Miller will provide additional resources regarding compliance with this Act. If you want to discuss this possible new Act in further detail, contact your privacy counsel.

I. Introduction

Attorneys experienced in defending depositions know the importance of witness preparation. A key component of this process requires counsel to sift through large amounts of produced discovery to identify specific documents ripe for examination by opposing counsel. An interesting issue unfolds when an examining attorney asks a witness during the deposition to recount a list of the documents provided by the defending attorney for the witness’s review prior to the deposition. Specifically, does the work product doctrine protect against such a disclosure?

The argument against disclosure is rooted in the work product doctrine as interpreted by the landmark case Sporck v. Peil, 759 F.2d 312 (3d Cir. 1985). In Sporck, the Third Circuit held that deposing counsel could not compel the disclosure of a list of documents already produced in discovery that defending counsel used to prepare a witness for his deposition. The court reasoned that an attorney’s compilation of discovery documents strategically selected for deposition preparation constitutes opinion work product as it inherently reveals the attorney’s mental impressions, opinions, and legal theories.

In the absence of United States Supreme Court guidance, several circuit courts adopted the Sporck approach.[1] The Fifth Circuit, however, has yet to take a stance. Moreover, district courts within the Fifth Circuit have faced this exact issue on several occasions and failed to reach a uniform consensus. Nonetheless, despite such seeming ambiguity, this coveted list is likely protected under the work product doctrine in the Fifth Circuit.

II. Fifth Circuit District Court Cases Where the Work Product Doctrine Applied

The Southern District of Texas, Brownsville Division was the first inner circuit district court to analyze the work product doctrine in this context. In ASARCO LLC v. Americas Mining Corporation, No. 1:07-CV-00018, 2007 WL 9736101 (S.D. Tex. Nov. 27, 2007) (unreported), the defendant’s employee testified that he reviewed documents to prepare for the deposition. After the defendant’s attorney instructed the employee not to divulge which documents he reviewed pursuant to the work product privilege, plaintiff’s counsel filed a motion to compel counsel’s disclosure. The ASARCO court, citing Sporck, ultimately applied the work product doctrine to protect the list of documents reasoning that counsel’s strategic selection and compilation of documents for a witness’s review inevitably reflects mental impressions, opinions, and legal theories. Importantly, the court noted that Federal Rule of Civil Procedure 612 – the rule requiring disclosure of a writing used to refresh a witness’s memory before testifying “if justice so requires” – could conceivably trump the work product doctrine. However, the court declined to apply this Rule 612 caveat given plaintiff counsel’s failure to lay a proper foundation establishing that (1) the witness used a document to refresh his memory and (2) justice required disclosure of the document.[2]

Similarly, in Hanover Ins. Co. v. Plaquemines Parish Government, 304 F.R.D. 494 (E.D. La. 2015), a former employee met with the defendant’s counsel to prepare for an upcoming deposition. Prior to this deposition, the defendant’s attorney selected documents produced in discovery for the former employee to review. Plaintiff’s counsel asked the former employee to identify the documents shown to him by defendant’s counsel during the deposition. Defendant’s counsel instructed the former employee not to answer the question based on the work product doctrine. Plaintiff’s counsel argued that Rule 612 mandated disclosure. In support thereof, plaintiff’s counsel reasoned that justice compelled disclosure to determine when the former employee learned of the facts to which he testified. The Eastern District of Louisiana found this argument unavailing and instead concluded that the work product doctrine protected the information. Relying on a case from the Fourth Circuit which adopted the Sporck doctrine, In re Allen, 106 F.3d 582, 608 (4th Cir. 1997), the court reasoned that when an attorney sorts through a large volume of documents produced in discovery and recognizes a select collection as important to the litigation, that compilation of documents necessarily reveals the attorney’s opinions regarding the litigation.

III. Fifth Circuit District Court Cases Where the Work Product Doctrine did not Apply

In Fisher v. Halliburton, No. CIV.A. H-05-1731, 2009 WL 483890 (S.D. Tex. Feb. 25, 2009) (unreported), defendant’s counsel prepared one of its former employees for an upcoming deposition with specific documents produced in discovery. Plaintiff’s counsel asked the witness to identify these documents during the deposition, but the defendant’s counsel objected relying on the work product doctrine. Though the facts aligned perfectly with ASARCO, the Southern District of Texas, Houston Division found, in a rather conclusory manner, that the work product doctrine did not apply. To support its holding, the court cited (1) dicta from In re Int’l Sys. & Controls Corp. Sec. Litig., 693 F.2d 1235, 1240 (5th Cir. 1982) – a factually dissimilar case where the Fifth Circuit found that an audit committee’s compilation of materials for a binder in response to an SEC request did not constitute work product – and (2) the oft-quoted rationale that “to imbue every compilation of documents reviewed by a witness before testifying at trial or at deposition with work product privilege protection would all but write Rule 612 of the Federal Rules of Evidence out of existence.”

Likewise, in In re Xarelto Prod. Liab. Litig., 314 F.R.D. 397 (E.D. La. 2016), plaintiff’s counsel requested a status conference to determine the discoverability of a list of documents that defendant’s counsel provided to a witness for his review prior to the deposition. Defendant’s counsel objected arguing the Sporck rationale. In contrast, plaintiff’s counsel relied on Rule 612 and Fisher to support its argument in favor of disclosure. The court acknowledged the integrity of the Sporck and Hanover rationales but nonetheless held that “either party should know what documents or material the witness reviewed before the deposition so that counsel can be prepared to efficiently examine the witness on these documents.” The court’s reasoning, without reliance on any inner circuit authority, rested on practicality and judicial economy. The court explained that, without this holding, deposing counsel would have to show the witness each document, one at a time, and ask “if he or she reviewed Document 1, Document 2, and so on until reaching the vicinity of Document 3,000,000,” an outcome the court categorized as “impractical” and “unworkable.”

IV. Predicted Outcome in Fifth Circuit District Courts

The foregoing cases seemingly display an even divide within the Fifth Circuit. However, there is both a strong qualitative and quantitative argument favoring protection of a list revealing defense counsel’s deposition preparation material in the Fifth Circuit. As to the former, the Fisher court, and by extension the In re Xarelto Products Liability Litigation court, relied on cases that were factually distinguishable and outside the Fifth Circuit. Both courts also failed to appreciate the legislatures’ intention that Rule 612 and the work product doctrine co-exist as evidenced by Notes of Committee on the Judiciary, House Report No. 93–650 which provides that “[t]he Committee intends that nothing in the Rule be construed as barring the assertion of a privilege with respect to writings used by a witness to refresh his memory.” As to the latter, a majority of Fifth Circuit district courts[3] and all circuit appellate courts[4] that have considered this issue approve of the Sporck rationale in this specific context. Considering both arguments, defense counsel facing this issue in the Fifth Circuit today is likely safe from an order requiring disclosure of such a list pursuant to the work product doctrine.

[1] Shelton v. Am. Motors Corp., 805 F.2d 1323, 1329 (8th Cir. 1986) (adopting Sporck approach); Gould Inc. v. Mitsui Min. & Smelting Co., 825 F.2d 676, 680 (2d Cir. 1987) (same); Matter of Grand Jury Subpoenas Dated Oct. 22, 1991, & Nov. 1, 1991, 959 F.2d 1158, 1166 (2d Cir. 1992) (same); In re San Juan Dupont Plaza Hotel Fire Litig., 859 F.2d 1007, 1018 (1st Cir. 1988) (compelling disclosure because facts did not align with those in Sprock); In re Allen, 106 F.3d 582, 608 (4th Cir. 1997) (adopting Sporck approach).

[2] ASARCO LLC v. Americas Mining Corp., No. 1:07-CV-00018, 2007 WL 9736101, at *1 (S.D. Tex. Nov. 27, 2007) (unreported) (noting that despite the work product doctrine generally protecting a list of deposition prep materials, “[u]nder Rule 612, if a party establishes that a witness used a writing before he testified to refresh his memory for the purpose of testifying, and if the court determines it to be necessary in the interest of justice, then the party is entitled to have this document produced, to inspect it, and to cross-examine the witness with it”).

[3] Janvey v. Greenberg Traurig, LLP, No. 3:12-CV-4641-N-BQ, 2019 WL 13175533, at *5 (N.D. Tex. Feb. 12, 2019) (slip copy); Benevis, LLC V. Mauze & Bagby, PLLC, No. 5:12-CV-36, 2015 WL 12763537, at *16 (S.D. Tex. Dec. 14, 2015); Klein v. Fed. Ins. Co., No. 7:03-CV-102-D, 2014 WL 3408355, at *4 (N.D. Tex. July 14, 2014) (unreported); S.E.C. v. Brady, 238 F.R.D. 429, 443 (N.D. Tex. 2006); Thomas v. Gen. Motors Corp., 174 F.R.D. 386, 388 (E.D. Tex. 1997).

[4] Shelton v. Am. Motors Corp., 805 F.2d 1323, 1329 (8th Cir. 1986) (adopting Sporck approach); Gould Inc. v. Mitsui Min. & Smelting Co., 825 F.2d 676, 680 (2d Cir. 1987) (same); Matter of Grand Jury Subpoenas Dated Oct. 22, 1991, & Nov. 1, 1991, 959 F.2d 1158, 1166 (2d Cir. 1992) (same); In re San Juan Dupont Plaza Hotel Fire Litig., 859 F.2d 1007, 1018 (1st Cir. 1988) (compelling disclosure because facts did not align with those in Sprock); In re Allen, 106 F.3d 582, 608 (4th Cir. 1997) (adopting Sporck approach).

I. INTRODUCTION

Premises owners of commercial establishments have relied on Chapter 95 of the Texas Civil Practice and Remedies Code (“Chapter 95”) to defend against negligence actions brought by independent contractors since its advent in 1996. Chapter 95 affords premises owners complete immunity against claims (1) based on the personal injury, death, or property damage to co-owners, contractors, subcontractors, or employees of the same (2) that resulted from “the condition or use of an improvement to real property where the contractor or subcontractor constructs, repairs, renovates, or modifies the improvement.”[1] This immunity is only thwarted upon proof that:

(A) the property owner exercised or retained some control over the manner in which the work was performed, other than the right to order the work to start or stop or to inspect progress or receive reports; and

(B) the property owner had actual knowledge of the danger or condition resulting in the personal injury, death, or property damage and failed to adequately warn.[2]

Chapter 95 language seems ambiguous on its face to many, particularly in the context of understanding what the statute contemplates insofar as the “same improvement” requirement, a premises owner’s control, or an agent’s actual knowledge of the dangerous condition. Fortunately, the Texas Supreme Court provides great insight as to its application. This article compiles, summarizes, and highlights the key components of all eight Texas Supreme Court Chapter 95 cases in an effort to assist practitioners and premises owners alike in efficiently and effectively determining the viability of a Chapter 95 defense for their own claims.

II. CASE LAW

1. Abutahoun v. Dow Chem. Co., 463 S.W.3d 42 (Tex. 2015)

The Court’s first encountered Chapter 95 in Abutahoun v. Dow Chem. Co. The Abutahoun Court established Chapter 95’s applicability to claims rooted in a property owner’s contemporaneous acts of negligence. In Abutahoun, defendant Dow Chemical Company (“Dow”) hired a contractor to install pipelines at its facility in Texas. Dow’s employees, along with the contractor’s employees, performed the installation work on the site. The plaintiff, an employee of the contractor, alleged injuries from asbestos exposure resulting from both his and the other Dow employees’ pipeline work. Dow moved for summary judgment based on Chapter 95 immunity.

On appeal, the Texas Supreme Court considered whether Chapter 95 applies to negligence claims based on the property owner’s negligence – as opposed to the contractor’s negligence. Reasoning that “the Legislature did not distinguish between negligence claims based on contemporaneous activity or otherwise, and neither shall we,” the Court found that it did. Chapter 95 accordingly applied to the plaintiff’s claim based on the contemporaneous acts of negligence promulgated by the Dow employees, and because the plaintiff did not argue the exceptions to Chapter 95 immunity, the Court affirmed the appellate court’s reversal of the trial court’s judgment and issued a take-nothing judgment in Dow’s favor.

Importantly, the Court also took this opportunity to outline its appreciation for the statutory phrase “condition or use of the real property” in dicta. Emphasizing the disjunctive conjunction in “condition or use,” the Court clarified that Chapter 95 protects against claims for negligence based on both an improvement’s (1) use – pursuant to respondeat superior theory of liability – or its (2) condition – rooted in premises defect liability.

Key Take-Aways:

  • Chapter 95 applies to negligence claims resulting from the contemporaneous acts of a property owner’s direct employees.
  • Chapter 95 encompasses negligence based on both a respondeat superior and premise defect theory of liability.

2. First Texas Bank v. Carpenter, 491 S.W.3d 729 (Tex. 2016)

In First Texas Bank v. Carpenter, the Court elaborated on the nature of work subject to Chapter 95 immunity, namely construction, repairs, renovations, or modifications of improvements. In Carpenter, First Texas Bank (“Bank”) tasked its “go-to” maintenance man, the plaintiff, with inspecting its roof for a suspected leak. After the plaintiff reported hail damage on the roof, the bank asked the plaintiff to show it to an adjuster in hopes of securing financial assistance with the repairs. The plaintiff sustained injuries after falling off the Bank’s ladder during this presentation. The plaintiff sued the Bank for injuries, and the Bank moved for Chapter 95 immunity in defense. The Texas Supreme Court examined two issues on appeal, namely (1) whether proof of an executed contract is necessary to qualify as a Chapter 95 contractor and (2) whether the nature of plaintiff’s work at the time of the injury implicates Chapter 95.

The Court found that a contract between the premises owner and its contractors is not necessary to establish a worker’s status as a Chapter 95 contractor. Rather, the Court explained that a Chapter 95 contractor is merely “someone who makes improvements to real property.” Nonetheless, the Court noted that Chapter 95 does not apply to all contract work on improvements – only those involving construction, repairs, renovations, or modifications to real property. Here, the Carpenter record did not evidence a mutual understanding by both the plaintiff and the Bank that the plaintiff would in fact make the repairs to the roof, with or without the adjuster’s approval to assist with the payment. The Court accordingly affirmed the appellate court’s reversal of the trial court’s judgment in favor of the Bank as Chapter 95 could not apply without proof that the Bank in fact hired the plaintiff to repair the roof and the plaintiff merely presented the damage to the adjuster as a preliminary step in rendering the repairs.

Key Take-Aways:

  • A Chapter 95 contractor is one who, regardless of a formal contract, makes improvements to real property.
  • Chapter 95 does not apply to all contract work to improvements; it only covers contract work involving the construction, repair, renovation, or modification of an improvement.

3. Ineos USA, LLC v. Elmgren, 505 S.W.3d 555 (Tex. 2016)

In Ineos USA, LLC v. Elmgren, the Court (1) determined that a premises owner’s employee cannot successfully claim Chapter 95 protection; (2) expanded the application of the “same improvement” statutory language and (3) heightened the showing of actual knowledge required to defeat Chapter 95 immunity. In Ineos, Ineos USA LLC (“Ineos”) hired a contractor to replace the valves for one furnace that served as a one component within a larger processing system at the facility. Prior the valve replacement, Ineos and the contractor’s employees shut down the furnace connected to the valve to be replaced as required. However, a furnace 200 feet away leaked and caused an explosion which injured the plaintiff, the contractor’s employee. The plaintiff sued Ineos and one of its direct employees on a negligence theory. Both Ineos and its employee moved for summary judgment on a Chapter 95 basis. The Texas Supreme Court granted the defendants’ petitions to review to determine whether (1) a direct employee qualifies for Chapter 95 immunity, (2) different pieces of connected equipment can constitute the same improvement under Chapter 95, and (3) the premises owner’s actual knowledge necessary to destroy Chapter 95 immunity must be specific.

The Court first held that a premises owner’s employee cannot claim Chapter 95 immunity. However, importantly, the Court noted that if an employee is found liable and the premises owner is subject to vicarious liability for the same, the premises owner may still invoke Chapter 95 immunity. The Court accordingly affirmed the appellate court’s reversal of the lower court’s judgment granting the defendant-employee’s motion for summary judgment.

As to the second issue, the plaintiff argued that Chapter 95 immunity could not protect Ineos here as the improvement which caused the injury was not the same improvement subject to the plaintiff’s work “because although the furnaces were interconnected, they were not so integrated as to be an indivisible improvement.” The Court rejected this argument explicitly favoring a broad definition of improvement under Chapter 95. The Court reasoned that “the valves and furnaces, though perhaps ‘separate’ in a most technical sense, were all part of a single processing system within a single plant on Ineos’s property.”

Finally, the plaintiff argued that Ineos could not enjoy Chapter 95 immunity based on Ineos’s actual knowledge of the dangerous condition. The plaintiff only presented evidence that Ineos knew of the dangerous condition of having explosive gases and hydrocarbons in the plant as a whole. The Court condemned this relaxed interpretation of the actual knowledge exception and explained the importance of identifying the specific dangerous condition which caused an injury. Only evidence of actual knowledge as to the specific dangerous condition that caused the injury challenges Chapter 95 immunity. Here, the plaintiff misidentified the dangerous condition – his injuries did not result from the presence of gas at the plant itself, but rather from the presence of gas in the pipe on which he was working. For these reasons, the Court affirmed the summary judgment in Ineos’s favor based on Chapter 95 immunity.

Key Take-Aways:

  • A premises owner’s employee cannot claim Chapter 95 immunity, but a premises owner may claim Chapter 95 immunity when its employee’s negligence is imputed to it.
  • Chapter 95’s “same improvement” requirement is interpreted broadly to account for individual pieces of equipment within an overall system.
  • Chapter 95’s actual knowledge requirement is specific to the dangerous condition which caused the injury.

4. Endeavor Energy Res., L.P. v. Cuevas, 593 S.W.3d 307 (Tex. 2019)

In Endeavor Energy Res., L.P. v. Cuevas, the Texas Supreme Court found that Chapter 95 applies to a claim against a premises owner for negligent hiring. The defendant and premises owner, Endeavor Energy Resources (“Endeavor”), hired a contractor to drill a well on its premises. An employee for the contractor died after striking his head while working on the job. The survivors of the employee filed suit against Endeavor claiming, inter alia, negligent hiring of the contractor. Endeavor moved for summary judgment on a Chapter 95 basis. The Court granted Endeavor’s petition for review to determine whether Chapter 95 applies to a negligent hiring claim.

On appeal, the employee’s survivors argued that Chapter 95 cannot apply here as an action for negligent hiring does not “arise from the condition or use of an improvement to real property.” The Court disagreed finding that Chapter 95 does in fact apply to negligent hiring claims. The Court reasoned that a negligent-hiring claim is twofold as it hinges on the negligence of both the hiring party, the premises owner, and the hired party, the contractor. Notably, “the statute’s plain language requires only that the claim arise from the use of an improvement to the property, not that the property owner’s negligence involve the use of the improvement, or that the use of the improvement be the only cause of the injury.” Thus, the Court concluded that negligent hiring claims afford Chapter 95 protection because the decedent must still establish the contractor acted negligently with respect to the improvement. The Court therefore reversed the appellate court’s judgment accordingly.

Key Take-Aways:

  • A premises owner can claim Chapter 95 immunity against a claim for negligent hiring when the contractor for which the premises owner is sued for negligently hiring nonetheless negligently used the improvement to real property causing the injury.

5. Los Compadres Pescadores, L.L.C. v. Valdez, 622 S.W.3d 771 (Tex. 2021), reh’g denied (June 11, 2021)

In Los Compadres Pescadores, L.L.C. v. Valdez, the Court explained when a dangerous condition amongst workplace constitutes a dangerous condition of a specific improvement – i.e., when the dangerous condition, by reason of its proximity to the improvement, creates a probability of harm to the contractor working on the improvement in an ordinary manner. The Court solidified an example as to what constitutes sufficient evidence of a premises owners’ actual knowledge of a danger condition. The defendant-premises owner, Los Compadres Pescadores (“Los Compadres”), hired plaintiffs, employees for Paredes Power Drilling, to construct a concrete foundation into the ground to support buildings it intended to construct thereafter. Los Compadres hired an individual named Torres to manage and supervise the project. Before preforming their duties, the plaintiffs voiced concerns to Torres regarding the proximity of AEP Texas Central Company’s (“AEP”) power lines which hung over Los Compadres’s property and requested that he do something to remedy the situation. Despite the plaintiffs’ request, the power line remained in place, and Torres instructed the plaintiffs to continue with the work. The plaintiffs ultimately made contact with the power lines while attempting to place a piece of rebarb into the concrete foundation. The plaintiffs sued Los Compadres, and a jury found Los Compadres “knew or should have known about an unreasonably dangerous condition yet failed to adequately warn the plaintiffs of the condition or make the condition reasonably safe.”

On appeal to the Court, Los Compadres claimed Chapter 95 immunity. In response, plaintiffs refuted Chapter 95 application here on the basis that their injuries did not “arise from the condition or use of an improvement to real property where the contractor or subcontractor constructs, repairs, renovates, or modifies the improvement.” The Court clarified that the inquiry is not whether the power line acted as a dangerous condition of the premises or workplace as a whole, but rather whether it served as a dangerous condition of the improvement subject to the Chapter 95 work. To assist in making this distinction, the Court explained that “if a dangerous condition, by reason of its proximity to an improvement, creates a probability of harm to one who constructs, repairs, renovates, or modifies the improvement in an ordinary manner, it constitutes a condition of the improvement itself” and not merely to the workplace as a whole. Here, the Court found that the power line – a dangerous condition on the land itself – yielded a dangerous condition in the improvement subject to the contractors’ work.

Given Chapter 95’s application, the plaintiffs needed to show that Los Compadres possessed actual knowledge of this danger but failed to warn the plaintiffs nonetheless. The Court found that the record conclusively satisfied this burden. The Court pointed to the conversation prior to the plaintiffs’ job where they communicated to Torres the issue with the power lines and requested a remedy for the same, but he told the plaintiffs to continue despite the power lines remaining unmoved and energized. Imputing Torres’s knowledge to Los Compadres, the Court found this sufficient to constitute actual knowledge. In a last ditch effort, Los Compadres attempted to argue that the open and obvious nature of the dangerous condition negated any need for a warning, but the Court rejected this defense as the energized nature of the power line – unlike its presence – was not in fact open and obvious. The Court accordingly affirmed the jury verdict.

Key Take-Aways:

  • If a dangerous workplace condition, by reason of its proximity to an improvement, creates a probability of harm to the contractor constructing, repairing, renovating, or modifying the improvement in an ordinary manner, then the dangerous condition is imputed to the improvement.
  • Courts impute the actual knowledge of an agent to its principal – the premises owner.

6. Energen Res. Corp. v. Wallace, 642 S.W.3d 502 (Tex. 2022)

In Energen Res. Corp. v. Wallace, the Court held that Chapter 95 can apply to a negligence claim that arises from the condition or use of multiple improvements, only one of which need be the “same improvement.” The Court further demonstrated the Court’s seeming reluctance to find a premises owner exercised control sufficient to oppose Chapter 95 immunity. In Wallace, Energen Resources Corporation (“Energen”) hired a contractor to drill water wells on its land to facilitate the drilling of simultaneous oil well constructions done by separate contractors. The contractor ultimately contracted with a subcontractor to complete construction of the water wells. While on the job, an unexpected “gas kick” occurred at the oil well, and three days later, gas from the water well caught fire and exploded burning a subcontractor’s employee and damaging its equipment. The subcontractor and its employee sued Energen. Energen claimed Chapter 95 immunity on summary judgment. The Texas Supreme Court granted the subcontractor’s petition for review to analyze Chapter 95’s “same improvement” requirement and a premises owner’s control exception in application here.

On appeal, the plaintiffs rejected Chapter 95’s applicability on the basis of the “same improvement” requirement arguing that their injuries resulted from both the oil well and the water well and not just the water well which was the subject of their Chapter 95 work. The Court for the first time in a Chapter 95 context looked to the allegations in plaintiffs’ petition as evidence that the water well caused their injuries, at least in part. Furthermore, the Court clarified that that the negligent condition of the oil well did not negate the negligent condition of the water well. In other words, the Court clarified that a separate improvement’s contribution to a contractor’s injuries does not affect Chapter 95 applicability where the same improvement caused the contractor’s injuries.

Upon the Court finding Chapter 95 applied, the plaintiffs attempted to demonstrate Energen’s control by citing to a recommendation by Energen’s senior geologist regarding the depth of the water wells. However, the Court found this argument unpersuasive noting “merely making suggestions or recommendations which need not necessarily be followed, or prescribing alterations and deviations does not establish control.” Instead, the Court found Energen lacked any control detrimental to its Chapter 95 immunity by way of the fact that (1) the general contractor, not Energen, contracted with the subcontractor, and (2) the subcontractor’s manager testified that he never talked with or received information from anyone at Energen. The Court accordingly reversed the court of appeals’ judgment and reinstated the trial court’s take-nothing judgment.

Key Take-Aways:

  • Chapter 95 can apply to a negligence claim that arises from the condition or use of the same improvement notwithstanding additional negligence elsewhere attributable elsewhere.
  • Allegations made by plaintiffs within their pleadings can support a judgment in favor of a premises owner based on Chapter 95.
  • Evidence of suggestions or recommendations as to the contractor’s work do not constitute control as contemplated by Chapter 95.

7. SandRidge Energy, Inc. v. Barfield, 642 S.W.3d 560 (Tex. 2022)

In SandRidge Energy, Inc. v. Barfield, the Court applied the open and obvious doctrine to protect a premises owner in the context of Chapter 95. In Barfield, SandRidge Energy (“SandRidge”) contracted with OTI Energy Services (“OTI”) to modify lines connecting its oil and gas operations. Plaintiff, an employee for OTI tasked with connecting neutral lines to existing energized poles, sustained injuries after coming in contact with the energized pole. SandRidge moved for summary judgment under Chapter 95 and argued that the plaintiff could not demonstrate its duty to warn OTI of the energized pole given the danger it posed was open and obvious.

For the first time, the Texas Supreme Court found a premises owner did not maintain a duty to warn a contractor’s employees of a specific dangerous condition in a Chapter 95 context given the condition’s open and obvious nature. The Court applied the open and obvious defense here reasoning that the employee (1) admittedly knew the line was energized and dangerous, (2) was attempting to de-energize the pole prior to attaching the lines in accordance with his routine practice in the past, and (3) could not have obtained a more refined understanding of the danger posed via a warning from SandRidge. Notably, the Court declined to decide whether the necessary-use exception also applies to Chapter 95 cases as it did not even arguably apply here. The Court reinstated the trial court’s granted summary judgment accordingly.

Key Take-Aways:

  • Chapter 95 proponents may argue the open and obvious doctrine to demonstrate a lack of failure to warn of a dangerous condition.
  • The Court is undecided as to whether the necessary-use exception applies in a Chapter 95 context.

8. Weekley Homes, LLC v. Paniagua, 646 S.W.3d 821 (Tex. 2022)

In Weekley Homes, LLC v. Paniagua,  the Texas Supreme Court confirmed that judicial admissions in an opposing party’s pleadings may provide competent summary-judgment evidence under Chapter 95. In Paniagua, Weekly Homes LLC (“Weekly”) hired a contractor to construct townhomes on its land. Each townhome plot contained both a concrete driveway and a temporary electricity pole. While on the job, two of the contractor’s employees sustained injuries after lightning struck the temporary electricity pole which was conducted by water that accumulated on the driveway. The employees sued Weekly for negligence, and Weekly pled Chapter 95 immunity on summary judgment. In support of his contention that the employees’ injuries arose from the condition or use of the “same improvement,” Weekly pointed to the plaintiffs’ petition which claimed they “were working” at the driveway and “working at” the townhome construction site when the accident occurred. The Texas Supreme Court granted Weekly’s petition for review to determine whether a defendant can properly rely on the allegations within a plaintiff’s petition as Chapter 95 summary judgment evidence.

On appeal, the Court recognized that generally pleadings are not in fact competent summary-judgment evidence; however, the Court emphasized that courts may properly grant summary judgment based on deficiencies in an opposing party’s pleadings or allegations which serve as truthful judicial admissions in a petition. The Court cited to Energen Res. Corp. v. Wallace to support its ultimate conclusion that defendants may rely on the plaintiffs’ allegations within the pleading to demonstrate Chapter 95 applicability. The Court therefore reversed and remanded.

Key Take-Aways:

  • Courts permit premises owners to rely on plaintiffs’ allegations within pleadings to demonstrate the applicability of Chapter 95 in a summary judgment proceeding.

III. CONCLUSION

The Texas Supreme Court has molded Chapter 95 case law in a direction more favorable to premises owners with each passing case. It stands to reason that this trend will continue in the Court’s review of Chapter 95 cases for 2023. Until then, with the benefit of eight Texas Supreme Court cases from the last decade, practitioners and premises owners alike are well equipped with resources to gauge the prospects of success of a Chapter 95 defense.

[1] Tex. Civ. Prac. & Rem. Code Ann. § 95.002 (West).

[2] Tex. Civ. Prac. & Rem. Code Ann. § 95.003 (West) (internal punctuation omitted).

The exception swallowed the rule. The Fifth Circuit essentially overruled the judicially-created voluntary-involuntary limitation to remove a case post-suit based on federal diversity jurisdiction in Advanced Indicator and Manufacturing, Inc. v. Acadia, 50 F.4th 469, 474 (5th Cir. 2022). Accordingly, this means that if you represent a diverse defendant in a state court case, be on the look-out for opportunities to make the case removable and timely remove the case to federal court.

I. Background of the Voluntary-Involuntary Rule

A defendant may remove a suit to federal court if diversity of citizenship exists, as long as none of the parties in interest properly joined and served are citizens of the State in which action is brought. See 28 U.S.C. § 1441. However, courts have created a voluntary-involuntary rule:  when the case is not removable because of joinder of in-state defendant(s), only the plaintiff’s voluntary dismissal of defendant(s) or nonsuit will make the case removable. See Hoyt v. Lane Construction Corp., 927 F.3d 287, 295 (5th Cir. 2019). In other words, “an action nonremovable when commenced may become removable thereafter only by voluntary act of the plaintiff.” See Advanced Indicator and Manufacturing, Inc. v. Acadia, 50 F.4th at 474 (5th Cir. Oct. 3, 2022) (citing Weems v. Louis Dreyfus Corp., 380 F.2d 545, 547 (5th Cir. 1967)).

In 1949, Congress amended Section 1446 to allow removal within thirty (30) days after receipt “of a copy of an amended pleading, motion, order, or other paper from which it may first be ascertained that the case is one which is or has become removable.” See 28 U.S.C. § 1446(b)(3), (c)(1). Then, the Fifth Circuit held that Section 1446(b) did not abrogate the voluntary-involuntary rule. See Hoyt, 927 F.3d at 295; Weems v. Louis Dreyfus Corp., 380 F.2d 545, 547-48 (5th Cir. 1967). Courts have interpreted the Weems holding to establish that the pleading or other paper referenced in Section 1446(b) must be from “some voluntary act of the plaintiff.” See, e.g., Hernandez v. United Parcel Serv., Inc., No. 09-CV-427-KC, 2009 WL 10700077, at *3 (W.D. Tex. Dec. 10, 2009); Joiner v. Mississippi AG Co., No. CIVA 306CV337WHBJCS, 2006 WL 2884523, at *2 (S.D. Miss. Oct. 10, 2006).

II. Improper Joinder Exception to the Voluntary-Involuntary Rule

Nonetheless, the voluntary-involuntary rule is itself subject to a judicially created exception for improper joinder. Hoyt, 927 F.3d at 295; Crockett v. R.J. Reynolds Tobacco Co., 436 F.3d 529, 533 (5th Cir. 2006). As noted by the Fifth Circuit in Crockett, the text of 28 U.S.C. § 1441(b) blocks removal only where “properly joined” defendants are citizens of the state in which it is brought. See 28 U.S.C. § 1441(b); Crockett, 436 F.3d at 533, n.7 (noting that the statutory language supports removal where defendants were improperly joined such that the voluntary-involuntary rule was inapplicable).

A defendant may establish improper joinder either by: (1) “actual fraud in the pleading of jurisdictional facts;” or (2) “inability of the plaintiff to establish a cause of action against the non-diverse party in state court.” See Acadia, 50 F.4th at 473. In assessing a plaintiff’s ability to establish a cause of action against a non-diverse defendant, the inquiry depends on whether the state court has already ruled on the plaintiff’s claim. See Hoyt, 927 F.3d at 296. If the state court has not ruled yet, the federal court asks if “there is any reasonable possibility that a state court would rule against the non-diverse defendant.” Id. (citation omitted) If the state court has made a judgment, the federal court asks whether “there is any reasonable possibility that the judgment will be reversed on appeal.” Id. (citation omitted).

Generally, to determine whether the plaintiff has any possibility of recovery against the non-diverse defendant(s), the court may “conduct a Rule 12(b)(6)-type analysis, looking initially at the allegations of the complaint to determine whether the complaint states a claim under state law against the in-state defendant.” Ticer v. Imperium Ins. Co., 20 F.4th 1040, 1046 (5th Cir. 2021); Flagg, 819 F.3d at 136–37. However, when a plaintiff’s complaint has “misstated or omitted discrete facts that would determine the propriety of joinder,” the court may in its discretion “pierce the pleadings and conduct a summary inquiry.” Ticer, 20 F.4th at 1046; Flagg, 819 F.3d at 136–37. Such a summary inquiry “is appropriate only to identify the presence of discrete and undisputed facts that would preclude plaintiff’s recovery against the in-state defendant.” Ticer, 20 F.4th at 1046; Flagg, 819 F.3d at 136–37.

III. Improper Joinder Overtakes the Voluntary-Involuntary Rule

Although the Fifth Circuit held in Weems that the voluntary-involuntary rule survived the enactment of 28 U.S.C. § 1446(b), the Fifth Circuit’s recent holding in Advanced Indicator and Manufacturing, Inc. v. Acadia extends the improper joinder exception already broadened by its holdings in Crockett v. R.J. Reynolds Tobacco Co., and Flagg v. Stryker Corp. to effectively overrule the voluntary-involuntary rule. See Acadia, 50 F.4th at 478 (J. Engelhardt concurring); Crockett, 436 F.3d at 533 (holding that when a state court order creates diversity jurisdiction, and that order cannot be reversed on appeal, the voluntary-involuntary rule is inapplicable); Flagg v. Stryker Corp., 819 F.3d 132, 137 (5th Cir. 2016) (en banc) (holding the time to determine improper joinder is the time of removal).

In Acadia, the plaintiff sued the insurance company, Acadia (an out-of-state resident) and the adjuster (an in-state resident) in state court. Acadia, 50 F.4th at 472-73. A few weeks later, Acadia elected to accept responsibility for the adjuster under the Texas Insurance Code, and the next day, removed the case to federal court. Id. at 472. One week later, the adjuster filed a motion to dismiss stating that plaintiff could no longer state a claim against him. Id. The plaintiff filed a motion to remand, and the district court denied it based on improper joinder. Id. The Fifth Circuit upheld the district court’s decision, holding that the time of removal is the pertinent moment to determine whether a non-diverse party is improperly joined, making the voluntary-involuntary rule inapplicable. Id. at 473-74. The Fifth Circuit expressly ruled that a district court must examine the plaintiff’s possibility of recovery against the in-state defendant(s) at the time of removal. Id. Importantly, the Fifth Circuit upheld the district court’s decision even though the defendant, Acadia, was the party who took the action to trigger the improper joinder exception. See id. at 473-74, 478-79.  As a result, a post-lawsuit, pre-removal action of a defendant may mandate removal as long as a defendant establishes improper joinder at the time of removal.

IV. Implications of the New Fifth Circuit Ruling in Acadia

What does the Fifth Circuit’s ruling in Acadia mean for defendants who discover the case is removable based on their own action or an action of other defendants rather than a voluntary act of the plaintiff?

Acadia opens a whole new world of opportunities for removal to federal court. Prior to Acadia, courts have interpreted 28 U.S.C. § 1446(b)(3) broadly, to include letters with settlement terms, demand letters, deposition answers, and discovery documents within the ambit of “other papers.” See, e.g., Addo v. Globe Life & Acc. Ins. Co., 230 F.3d 759, 761 (5th Cir. 2000); Hobson v. Chase Home Fin., LLC, No. CIVA5:08CV288DCBJMR, 2009 WL 2849591, at *1 (S.D. Miss. Sept. 1, 2009) (explaining that Plaintiff’s summary judgment motion sufficed as a pleading to ascertain whether the case was removable). However, these broad interpretations had been subject to the voluntary-involuntary rule. See Addo, 230 F.3d at 761. After Acadia, any action or pleading of a defendant may implicate that the case is removable. See generally Acadia, 50 F.4th 469; 28 U.S.C. § 1446(b)(3).

While this broadens the possibility of removal after a case is filed, it also results in a quick thirty-day deadline from receipt of any document from either a plaintiff or a defendant where removability may be ascertained. See Acadia, 50 F.4th at 472-74; 28 U.S.C. § 1446(b)(3); see Addo, 230 F.3d at 761 (holding that removal was improper where the defendant failed to remove the case within thirty days of receiving a letter from the plaintiff notifying defendant of the changed circumstances which supported federal jurisdiction). After Acadia, any paper or communication in all aspects of the litigation may implicate removability and begin the thirty-day clock. See Acadia, 50 F.4th at 472-74; 28 U.S.C. § 1446(b)(3); see Addo, 230 F.3d at 761. Accordingly, a diverse defendant must thoroughly analyze any paper received in a case that is potentially removable in order to decipher whether diversity jurisdiction may apply and file a notice of appeal within thirty days of receipt.

The Acadia ruling is consistent with the express statutory language of 28 U.S.C. § 1446(b)(3) and promotes the very purpose of the removal statute, encouraging prompt resort to federal court when a defendant first learns that the federal court has subject-matter jurisdiction. See 28 U.S.C. § 1446(b)(3); Addo, 230 F.3d at 762. However, it remains to be seen whether the Fifth Circuit will extend its ruling to cases in which federal question jurisdiction may be ascertained post-suit. Denson v. LPL Fin., LLC, No. 1:17-CV-215, 2017 WL 10154237, at *6 (E.D. Tex. July 31, 2017) (refusing to dispense of the voluntary-involuntary rule in a federal question case based on lack of binding precedent and discussing lower court cases applying the voluntary-involuntary rule to removals under federal question jurisdiction.).

V. How does Acadia Affect the One-Year Limitation for Removal of Diversity Actions Under 28 U.S.C. § 1446(c)(1)?

It does not change the one-year limitation for removals of diversity actions. If a diverse defendant waits more than one year after the suit is filed, the defendant will have to prove bad faith, an analysis separate and apart from improper joinder. See Hoyt, 927 F.3d at 293. To determine improper joinder, the question of whether the plaintiff is able to establish a cause of action against the non-diverse party focuses on what the plaintiff might prove in the future. See Hoyt, 927 F.3d at 293. Contrastingly, to determine bad faith, the question of whether plaintiff’s litigation conduct meant to prevent removal of the suit focuses on what motivated the plaintiff in the past. See id. A determination of bad faith is subject to a high burden, but “conduct rises to the level of bad faith when a party makes a transparent attempt to avoid federal jurisdiction.” Boney v. Lowe’s Home Centers LLC, No. 3:19-CV-1211-S, 2019 WL 5579206, at *2 (N.D. Tex. Oct. 29, 2019); see also TK Trailer Parts, LLC v. Long, No. 4:20-CV-2864, 2020 WL 6747987, at *6 (S.D. Tex. Nov. 2, 2020), report and recommendation adopted, No. 4:20-CV-2864, 2020 WL 6743738 (S.D. Tex. Nov. 17, 2020) (discussing cases where courts have found bad faith).

Conclusion: Now that the voluntary-involuntary rule is essentially abrogated in diversity jurisdiction cases, diverse defendants who wish to remove their cases to federal court should be diligent in all aspects of the litigation to ascertain whether and when the case is or has become removable.

The Longshore and Harbor Workers’ Compensation Act (“LHWCA”) and the Jones Act are the two statutory recovery schemes available to injured maritime workers. Under the Jones Act, a “seaman” is entitled to recover certain damages from his Jones Act employer. Under the LHWCA, a “longshoreman” recovers under a federally managed workers’ compensation program. The Jones Act employer remedy and the LHWCA workers’ compensation structure are a maritime employee’s only avenues to recovery against his or her employer. In addition to being the exclusive remedies available for seamen and longshoremen, the Jones Act and LHWCA remedies are mutually exclusive. Thus, accurately characterizing a worker as a seaman or a longshoreman is a vitally important initial step in both risk management planning and litigation response. Unfortunately, this important task is not always cut and dry.

The Supreme Court’s Jones Act Test

Three Supreme Court cases form the foundation of the Jones Act seaman status test. First, in McDermott Int’l, Inc. v. Wilander, the Court instructed that “[t]he key to seaman status is employment-related connection to a vessel in navigation.”[i] Next, in Chandris, Inc. v. Latsis, the Supreme Court refined the Wilander “substantial connection” test, adding two requirements for seaman status:

  • an employee’s duties must contribute to the function of the vessel or to the accomplishment of its mission; and
  • a seaman must have a connection to a vessel in navigation (or to an identifiable group of such vessels) that is substantial in terms of both duration and nature.[ii]

Finally, in Harbor Tug and Barge Co. v. Papai, the Supreme Court further developed the second Chandris prong, highlighting the distinction between land-based and sea-based employees, and instructing that “the inquiry into the nature of an employee’s connection to the vessel must concentrate on whether the employee’s duties take him to sea.”[iii]

The Fifth Circuit, which oversees federal courts in Texas, Louisiana, and Mississippi has held that the first Chandris prong is “relatively easy” to satisfy, requiring only that the worker seeking seaman status show that he “does the ship’s work.”[iv] This “requirement is very broad, encompassing all who work at sea in the service of a ship.”[v] Generally, this merely requires looking to the vessel’s primary mission, and evaluating whether or not the putative seaman’s work furthers that mission. Importantly, contribution to the function or mission of the vessel does not require a worker to be involved in operation or navigation of the vessel.

While the first Chandris prong is relatively easy, the second prong has proven far more nuanced. Until recently, courts have focused on whether a worker faces the “perils of the sea” in answering the substantial connection prong.

Fifth Circuit Issues Sanchez

In 2021, the Fifth Circuit sought to add clarity to Chandris’ “substantial connection” prong, issuing its opinion in Sanchez v. Smart Fabricators of Texas, LLC.[vi]  The Sanchez Court took a deep dive into Supreme Court precedence on Jones Act seaman status, concluding that the “perils of the sea” test was alone insufficient to determine whether a substantial connection existed. The Sanchez Court then distilled down various factual considerations from Supreme Court precedence into three inquiries that must be satisfied in addition to considering whether the worker was subject to the perils of the sea:

  1. Does the worker owe his allegiance to the vessel, rather than simply to a shoreside employer?
  2. Is the work sea-based or involve seagoing activity?
  3. Is the worker’s assignment to a vessel limited to performance of a discrete task after which the worker’s connection to the vessel ends, or does the worker’s assignment include sailing with the vessel from port to port?[vii]

Applying these inquires to its own facts, the Sanchez Court found that Mr. Sanchez was not a seaman because he “was not engaged in sea-based work that satisfied the requirement that he be substantially connected to a fleet of vessels in terms of the nature of his work.” In reaching that conclusion, the Sanchez Court evaluated the two separate jobs on which Mr. Sanchez was assigned to work as a welder on offshore oil rigs.

In one instance, the rig on which Mr. Sanchez worked was in port, “jacked-up with the barge deck level with the dock and a gangplank away from shore.”[viii] This work did not take Mr. Sanchez to sea or constitute work of a seagoing nature. Further, Mr. Sanchez’s work was discrete and transitory because he was not going to sail with the vessel after his work was completed.

In the second instance, the rig on which Mr. Sanchez worked was on the outer continental shelf awaiting repairs. Despite the fact that the vessel was offshore, the Sanchez Court held that because Mr. Sanchez was on the vessel to perform a discrete, individual job, and because there was no evidence suggesting that he planned to remain aboard after the job was completed, his tasks were merely transitory and did not qualify him for seaman status.[ix]

Texas Interpretation of Sanchez an Open Question

Though designed to clarify Fifth Circuit precedence on Jones Act seaman status, the Sanchez factors may have inadvertently muddied the waters. As pointed out by one Louisiana court applying Sanchez, it remains unclear whether the Sanchez inquiries are “mandatory elements” or merely “intended to be treated as indicia or factors to be weighed.”[x] Texas practitioners, like their Louisiana peers, have no clear answer either, as to date no Texas federal court has published an opinion applying Sanchez. Thus, to the extent helpful, Texas litigators should look to the analysis provided by Louisiana federal courts in crafting their arguments on seaman status. While litigators seeking to determine an injured worker’s seaman status can use the newly delineated factors to frame their arguments in novel ways, it will take time to see whether Sanchez’s goal of clarifying Jones Act seaman status was accomplished.

* For additional commentary on Louisiana federal courts’ interpretation of Sanchez, see our forthcoming post on the Kean Miller Louisiana Law Blog.

To learn more about Kean Miller’s extensive maritime experience and view contact information for our maritime attorneys, visit our Admiralty and Maritime services page.

[i] 498 U.S. 337, 355 (1991).

[ii] 515 U.S. 347, 368 (1995).

[iii] 520 U.S. 548, 555 (1997).

[iv] Becker v. Tidewater, Inc., 335 F.3d 376, 387-88 (5th Cir. 2003).

[v] Id. at 388.

[vi] 997 F.3d 564, 573 (5th Cir. 2021).

[vii] Id.

[viii] Id. at 575.

[ix] Id. at 576.

[x] Sanchez v. American Pollution Control Corp., 542 F.Supp.3d 446, 457 (E.D. La. 2021).

The oil tanker Riverside allided with a loading dock after a failed maneuver during its attempted exit of Corpus Christi Bay.

An allision occurs when a vessel in navigation strikes a stationary object, like a dock or a bridge. In the maritime world, allisions differ from collisions in that collisions involve two vessels striking each other. Except in limited circumstances, such as where the fixed object impedes navigation, longstanding judicial precedence applies a presumption of negligence against the vessel in allisions. This presumption is called the Oregon Rule and is explained by the Fifth Circuit this way: “The presumption presupposes that had the vessel not been mismanaged, the accident would not have occurred.”

Given the presumption of negligence, vessel owners and operators must sort out the root cause of any allision and take care in preventing future incidents to limit potential liability. The National Transportation and Safety Board’s investigation into an allision involving the vessel Riverside provides an interesting example of how the NTSB assigns blame and how fine the line often is between mechanical and human failure.

On March 15, 2021 at 1302 local time, Riverside, an 820-foot-long oil tanker was outbound from Corpus Christi Bay to Lisbon, Portugal laden with 717,554 barrels of crude oil. Due to the vessel’s size, two pilots were required for the transit through the Corpus Christi Ship Channel. The first pilot, Captain Ben Watson directed Riverside from the Epic oil dock through the Harbor Bridge. After an uneventful transit under the Harbor Bridge, the second pilot, Captain Justin Anderson, took the conn for the remaining transit to open water.

As they approached beacons 55/56, Captain Anderson radioed the pilot of Nordic Aquarius, which was preparing to depart from Moda Ingleside Energy Center dock number 4, roughly four miles in front of Riverside’s current position. After discussion, Captain Anderson agreed to let the Nordic Aquarius enter the channel in front of Riverside. To provide Nordic Aquarius sufficient space to maneuver into the channel, Captain Anderson began ordering Riverside to reduce speed around beacons 49/50.

[NOAA Chart NOAA Chart – 11309_Public]

By beacons 43/44, Riverside was progressing at dead slow ahead. Unfortunately, as the vessel slowed, the rudder became ineffective, causing the helm to lose control and Riverside to drift off course. To regain control, Captain Anderson briefly increased speed to slow ahead as Riverside began approaching the port channel bend just east of beacons 43/44. Satisfied that they had reestablished course, Captain Anderson again ordered dead slow ahead to keep speed down and provide Nordic Aquarius adequate maneuvering room. As Nordic Aquarius continued its entry into the channel, Captain Anderson realized Riverside was still approaching too quickly and ordered the engine stopped.

Having now slowed Riverside to 6 or 7 knots and given Nordic Aquarius time to clear the channel, Captain Anderson again ordered dead slow ahead to ensure effective steering through the approaching channel bend. Unfortunately, the engine failed to start. As recounted by Captain Anderson:

I noticed that the helmsman has been holding 25° starboard rudder with no effect. I ordered hard starboard. At that point, we have not yet received the dead slow engine command. I noticed the captain playing with the engine controls and asked him if we had a problem. He informed me that we had lost the main engine.

Having lost propulsion, Riverside was unable to correct course and continued to veer toward Moda dock 4. Captain Anderson immediately radioed nearby tugboats that had just finished assisting Nordic Aquarius depart the dock. One tug remaining on scene attempted to push Riverside’s port bow off of Moda dock 4. Unfortunately, the single tug was not able to redirect Riverside back into the channel before it had to bail out in order to avoid being pinched between Riverside and the dock.

[NTSB Report graphic showing phases of the incident Contact of Tanker Riverside with Moda Ingleside Energy Center No. 4 Loading Dock (ntsb.gov)]

With no engine, no steering, and no available tug assist, Riverside’s port bow hit Moda dock 4. Moda’s Operations Manager initially reported that Riverside struck “the first end of the finger pier causing approximately 50’ of the pier to break off, including the dolphins [and] lighting.” NTSB’s estimate placed property damage at roughly $7,000,000.

Riverside sustained damage to her port fore peak tank, water ballast tank, and void fore space. Fortunately, despite the heavy deformation noted by the surveyor, no cracks were observed and there was no threat of pollution from the oil on board. According to NTSB’s estimate, Riverside’s damage amounted to roughly $550,000.

[NTSB Report damage photos citing USCG as source Contact of Tanker Riverside with Moda Ingleside Energy Center No. 4 Loading Dock (ntsb.gov)]

NTSB investigated the incident and determined that the engine failure was caused by a dirty “air start actuator valve within the starting air distributor.” Further investigation revealed that Riverside’s engineers had trouble starting the main engine on March 12—just days prior—as they awaited permission to enter Corpus Christi Bay.  Neither the Coast Guard nor the pilot navigating Riverside on March 12 were informed of the engine start failure and Riverside proceeded to the Epic oil dock assuming any problem was repaired.

Despite initial trouble starting the engine on March 12, the captain and crew onboard Riverside did not believe there was a long-term issue. In fact, the engine was stopped and started twice without incident while maneuvering to the Epic oil dock. However, NTSB’s investigation determined that what Riverside’s engineers believed to be the solution to their problem (introducing more fuel into the engine at start-up) actually had no effect on the system. Instead, whether the engine would start despite the stuck air valve depended on where the valve was in the starting sequence. If the stuck valve was late in the sequence as the engine turned over, sufficient air would already have been introduced to permit the engine to start.

Though Riverside’s engineers believed they had come up with a solution, they entirely failed to accurately determine the problem’s root cause: the stuck valve. Although the inability to start the engine aboard Riverside was traced to the stuck valve—a mechanical problem—NTSB’s probable cause statement ultimately blames the “ineffective evaluation and incorrect solution for a main engine start issue,” putting human error once again front and center in a marine incident report.

Considering the legal presumption of negligence against the alliding vessel and the NTSB’s findings assigning blame to a vessel’s crew, owners and operators are advised to be vigilant when it comes to vessel maintenance and crew training. This vigilance becomes all the more important when a vessel is operating inshore or nearshore under its own power.

Russia’s unprovoked attack on the Ukraine has not been restricted to land. Ukrainian tech resources have been hit by cyber-attacks, particularly against its government and banking systems in a coordinated effort by Russia’s military intelligence unit.[1] Several websites of Ukrainian government departments and banks were hit with distributed denial of service attacks (DDoS), which is a form of attack where threat actors overwhelm a website with traffic until it crashes. While the conflict has not yet spread to western countries, U.S. businesses may still feel the impact due to their reliance on Ukrainian IT services and from potential retaliatory attacks from Russia due to significant U.S. sanctions.

Though not having a physical presence in the Ukraine, many U.S. companies use outsourced Ukrainian IT services. According to the Ukraine’s Ministry of Foreign Affairs, 1 in 5 Fortune 500 companies rely on the Ukraine’s IT outsourcing sector.[2]  Ukraine’s tech workers support banking, insurance, and financial operation services around the world. To mitigate potential impacts, software and technology providers are working to move services and workers elsewhere. For example, SAP SE has closed its office in Kyiv and website development platform Wix.com Ltd. moved its workers to Poland and Turkey last week.[3] However, technology resources such as code, designs, and documentation may still be vulnerable.

The Department of Homeland security has yet not advised of any specific or credible threats to the U.S. homeland, but the Cybersecurity & Infrastructure Security Agency (CISA) published a “Shields Up” memo advising U.S. businesses to prepare to respond to disruptive cyber activity.[4] Though Russia’s cyber attack efforts have primarily targeted the Ukrainian government and critical infrastructure, growing support for Ukraine in the US and other NATO countries increases the likelihood of Russian cyber-attacks against businesses, governments, and critical infrastructure of those allies. Attacks are also a possibility as a retaliation for the heavy sanctions being levied against Russia by the U.S., with direct targets being critical infrastructure.

All businesses, large and small, should remain vigilant during this time of heighted risk and vulnerability. As part of its support of U.S. businesses, CISA has compiled a catalog of free cybersecurity services and tools, which include very helpful resources and up to date information about the latest attack and defense strategies. Certain additional steps recommended by CISA and industry leaders can help shore up vulnerabilities and lower the risk of a cyber incident, as well as renew the commitment as a business to maintaining a strong cybersecurity program. These steps include but are not limited to:

  1. Hope for the best, plan for the worst. It is near certain that all U.S. businesses will be the victim of an attempted cyber-attack at some point (whether that be from Russia or other threat actors); what is in question is the level of success. Businesses should check with their cloud providers to ensure all protections are enabled, even if there is increased cost. Ensure that data is being regularly backed up to minimize business interruption from an encryption event or if data is wiped. If it has been a while since you have updated your cyber incident response plan, review the plan to ensure it is up to date and conduct tabletop exercises to run through how a cyber event will be handled.
  2. Take proactive steps to reduce the likelihood of a cyber event. Review policies regarding remote access, authentication requirements, and secure controls to ensure they are up to date and consistent with best practices. Ensure that all software is updated to the latest version, and that IT has disabled ports and protocols that are not essential for a business purpose. Particularly if your organization or your critical service providers work with Ukrainian organizations, take extra care to monitor, inspect, and isolate traffic from those organizations. IT should also take additional care to monitor unexpected traffic from overseas.
  3. Conduct trainings with employees. Regular cyber security trainings with employees should already be a part of your business’ practices for employees with access to company networks and data. However, the heightened risk presented today merits additional reminder trainings, as well as targeted trainings about how to best protect business computer systems by employees with significant access.

[1] Ryan Browne, “The world is bracing for a global cyberwar as Russia invades Ukraine”, CNBC (Feb. 25, 2022) (https://www.cnbc.com/2022/02/25/will-the-russia-ukraine-crisis-lead-to-a-global-cyber-war.html).

[2] Edward Segal, “Why The Impact of Russian Cyberattacks On Ukraine Could Be Felt Around the World”, Forbes (Feb. 23, 2022) (https://www.forbes.com/sites/edwardsegal/2022/02/23/the-impact-of-russian-cyberattacks-in-ukraine-could-be-felt-around-the-world/?sh=649680cb56b2).

[3] Isabelle Bousquette and Suman Bhattacharyya, “Ukraine’s Booming Tech Outsourcing Sector at Risk After Russian Invasion,” The Wall Street Journal (Feb. 24, 2022) (https://www.wsj.com/articles/ukraines-booming-tech-outsourcing-sector-at-risk-after-russian-invasion-11645749755).

[4] “Shields Up”, CISA (last accessed Feb. 25, 2022) (https://www.cisa.gov/shields-up).

The Texas Legislature recently repealed the Texas First Purchaser Statute (Tex. Bus. & Com. Code § 9.343) and replaced it with the Texas First Purchaser Lien Act (now Tex. Prop. Code § 67.002), effective September 1, 2021. This change is designed to give mineral interest owners in Texas assets the same kind of automatically perfected and bankruptcy-resistant first-purchaser protections that interest owners in Oklahoma assets have enjoyed for many years. The importance of this change for interest owners is highlighted by a memorandum opinion by United States Bankruptcy Judge Craig T. Goldblatt of the District of Delaware in the case of In re MTD Holdings, LLC, et al.[1]

The now-deleted Texas First Purchaser Statute granted a security interest “in favor of interest owners, as secured parties, to secure the obligations of the first purchase of oil and gas production, as debtor, to pay the purchase price.” The issue presented in MTD Holdings, LLC was whether the lessors and royalty interest holders’ claims in the bankruptcy case were secured claims. The Court, relying on Section 9.343, held that they were not. The Court interpreted the now-deleted First Purchaser Statute to provide a lien only for interest owners who are entitled to and elect to be paid their royalty “in kind” (i.e., delivery of oil and gas products, instead of cash proceeds). And none of the creditors demonstrated that they had elected to be paid their royalties in kind. Accordingly, the Court determined that none of the creditors held claims secured by a lien.

The newly-enacted Texas First Purchaser Lien Act repealed Section 9.343 in its entirety and created a new statute in the Texas Property Code that grants more expansive lien rights to interest owners. The revised language grants to each interest owner a lien to secure that interest owner’s oil and gas rights that attaches to oil and gas before severance and continues to apply to oil and gas after severance and to all proceeds from the sale of the oil and gas. See Tex. Prop. Code § 67.002. Under this new statute, whether the minerals are severed, paid in kind, or sold to a third party, the interest owner will have an automatically perfected lien to secure its rights to payment.

This revision moves Texas more in line with states like Oklahoma, which revised its own First Purchaser Statute in 2010 to similarly provide that a lien attaches to an owner’s interest in the oil and gas property in lieu of a security interest tied to production.

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[1] Case No. 19-12269, United States Bankruptcy Court for the District of Delaware.

 

The federal Fair Labor Standards Act (“FLSA”) provides for the payment of overtime at the rate of one and a half times an employee’s regular rate of pay for each hour worked in excess of 40 during a 7-day workweek.  There are a number of exemptions to the FLSA’s overtime pay requirements, the details of which are specified in regulations issued by the U.S. Department of Labor.  The most common are the so-called “white collar exemptions” that are available with respect to certain professional (4 year-degreed), executive (supervisor) and certain administrative employees (who must exercise discretion and independent judgment regarding matters of significance related to the management of the employer’s business).  To qualify for the “white collar” exemptions, the FLSA requires that the employee: (i.) satisfy the applicable duties test for the exemption; (ii.) be paid at least $684 per week; and (iii.) (in most cases) that such minimum pay be made to the employee on a guaranteed “salary basis.”  The Department of Labor regulations also provide for a relaxed “duties” test with respect to certain “highly compensated” employees who are paid total annual compensation of $107,432 or more.

The Department of Labor regulations provide that the FLSA overtime exemptions are to be narrowly applied, and that it is the employer’s burden to show that each of the elements required for the exemption are satisfied.  In the recent case of Hewitt v. Helix Energy Solutions Group, Inc. et al.  (No. 19-20023) (5th Cir.  9/9/2021), the Fifth Circuit Court of Appeals reinforced these strict construction principles and held that the FLSA executive overtime exemption will not be allowed if the salary basis payment requirements are not met, even in the case of highly compensated employees.

Michael Hewitt worked for Helix as a Tool Pusher and was responsible for supervising other employees in this position.  Hewitt worked offshore on a rotational “hitch” basis and frequently worked more than 40 hours per week.  There was no dispute that Hewitt’s primary duties were supervisory in nature, such that he met the “duties” test for the FLSA executive overtime pay exemption.  Likewise, his earnings far exceeded the $684 per week minimum earnings threshold.  However, Hewitt was not paid on a salaried basis – but was instead paid on a flat “day rate” of $963 per day worked.  Based on his high rate of pay and the number of days he worked, Hewitt earned well in excess of $200,000 per year.

Despite his high rate of pay, Hewitt filed suit on behalf of himself and other similarly situated employees contending that overtime premium pay was owed by the employer under the FLSA. The federal district granted Helix’s motion for summary judgment and dismissed Hewitt’s claim on the basis that he was a “highly compensated” employee.  Hewitt appealed.  In a contentious 2 to 1 decision (in which the majority and the dissent exchanged barbed quotes from Shakespeare’s Macbeth and Talladega Nights: the Ballad of Ricky Bobby), a three-judge panel of the Fifth Circuit reversed and found that the executive overtime pay exemption did not apply because Hewitt (although highly compensated) did not receive a guaranteed weekly salary.  Helix requested en banc review of the panel decision, which the Fifth Circuit granted.  On September 9, 2021, the Fifth Circuit (by a vote of 12 to 6) issued an en banc decision reversing the district court’s ruling for the employer and held that the FLSA executive overtime pay exemption could not be applied to Hewitt.  The case was remanded to the district court for further proceedings.

In reaching this result, the Fifth Circuit majority relied on a textual application of the FLSA (and relevant Department of Labor regulations).  The Court found that payment of Hewitt on a day rate basis did not satisfy the FLSA salary basis payment requirement because he was not guaranteed the required minimum salary without regard to the number of days or hours he worked.  The majority acknowledged that a Department of Labor regulation (29 C.F.R. 541.604(b)) allows an employer to compensate its exempt employees on a day rate basis (as an alternative to a weekly salary), but only if the pay arrangement also included a minimum weekly pay guarantee without regard to the days and hours worked and the guarantee bears a “reasonable relationship” to the employee’s usual weekly earnings.  The Court explained that an employer cannot meet this alternative requirement by guaranteeing a weekly payment substantially lower than the employee’s regular earnings because that would render the salary “illusory” (the majority reasoned that Helix could have met this requirement on these facts by guaranteeing Hewitt $4,000 per week).  In this case, no weekly wage guarantee was provided by the employer.  Therefore, the majority concluded that this Department of Labor regulation did not apply, and the day rate compensation method used by the employer did not satisfy the executive employee exemption.  Accordingly, Hewitt could not be treated as an overtime exempt employee.

Notwithstanding the harsh results for the employer on the facts of this case, the Court rejected the employer’s arguments that a highly compensated employee like Hewitt should not be entitled to overtime pay – without regard to the salary basis requirement:

“Our job is to follow the text—not to bend the text to avoid perceived negative consequences for the business community. That is not because industry concerns are unimportant. It is because those concerns belong in the political branches, not the courts. ‘We will not alter the text in order to satisfy the policy preferences’ of any person or industry. Barnhart v. Sigmon Coal Co., 534 U.S. 438, 462 (2002). ‘These are battles that should be fought among the political branches and the industry.’ Id.”

The Court also explained that its literal application of the FLSA to highly compensated energy industry workers is consistent with the approach taken by the Sixth and Eighth Circuit Court of Appeals, as well as a growing number of federal district courts considering these issues.  The fact that 8 of the 12 Fifth Circuit Judges who voted in Hewitt’s favor were Republican appointees, including the author of the majority opinion, Judge Ho (a 2018 Trump appointee), makes clear that this decision is not an anomaly in what is considered one of the most conservative, employer friendly Circuit Courts in the country, and that employers cannot rely on a high level of employee compensation as a substitute for technical FLSA compliance.  An amicus brief filed in support of Helix’s position estimated that Hewitt might be owed at least $52,000 per year in unpaid overtime.

Under the FLSA, an employee can recover the amount of overtime pay owed (for a period of up to 3 years), an equal amount of “liquidated damages” and attorney’s fees.  FLSA claims are often pursued on a collective action basis (a form of opt in class action – in which current and former employees can join).  The exposure presented by FLSA claims is significant, and underscores the importance of employers carefully reviewing their pay practices for FLSA compliance – and to strongly consider whether highly compensated employees who they intend to treat as overtime exempt should be paid on a salaried basis.