Inside the Texas Business Courts: The Local Rules, the Mediation Wheel, and the 700-Word Discovery Letter

Transcript

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Brian Elliott: It sounds like if you're doing business in Texas and your legal team isn't already adapting to these changes, you're behind the ball. Welcome back to Y'all Street, Brian. We're here with some updates, checking in to see how things are going with the courts and things Texas business leaders need to hear about the new courts, the rules that are being developed, including local rules. I think as we've talked about before, Texas business courts launch is one of the biggest developments in the state's legal system for commercial disputes in a few years.

Chuck Kraus: And if you're a CEO or a founder or in-house counsel, this clearly affects you. So Brian, what is the latest on the Texas business courts? Yeah, thanks, Chuck. Yeah, I mean, look, this is a big development.

Brian Elliott: As we talked about previously, we had a lot of questions. The courts were launched in September, and there were, you know, really more questions than there were answers. And the early signal was, well, the courts will develop rules. We'll find out what the procedures are, but let's just get these launched.

Chuck Kraus: So right now, Texas business courts are alive and active in the five major metros, Dallas, Fort Worth, Austin, Houston, and San Antonio. And the most recent addition development is that in March, they promulgated or published the local rules for the Texas business courts. So now we have an idea of exactly what the procedures are going to be like. And there are a couple of, you know, interesting developments that I can go through in it.

Brian Elliott: But one of the issues is that, you know, we had this imbalance of cases that were filed. So the majority of the business court cases, when the courts first opened in September, until now, have been filed in Houston. And then there are these other areas, you know, Dallas and Austin and San Antonio that have relatively fewer cases. So the first thing that these rules address is something that the judges were doing anyway, which was, you know, flexible assignments within the business court division, because to understand it, it's one business court for the state.

Chuck Kraus: It's not several business courts. So if, even if the judge is, you know, physically sitting in Austin, they can take a case or hear, hear a motion that is for a case in Dallas or in Houston or vice versa. Right. So before that, the judge is appointed in Houston.

Brian Elliott: and we're getting effectively all the cases probably had a higher workload than anywhere else that's correct yeah so so the rule you know addressed that and said this is this is how we're going to do it it's not quite a central docket system like we have in travis county but it's a it's a flexible assignment where they can um you know back up each other and and spread the workload does that mean that clients um would then potentially need to travel if you if you are based in houston and you properly filed there you may need to travel to another jurisdiction to go to dallas no no very unlikely uh so if if the hearing is going to happen it would likely be a remote hearing in that case but um so no it it wouldn't um it shouldn't affect the clients but what the way it does affect clients though is that um in in a normal court situation like if you're in harris county in houston and you're assigned to a particular judge there uh you're and that judge is you know docket is full your case might get delayed because there's too much on that judge's calendar right this way it allows the business court to keep things moving at a quicker pace and we'll talk about some of those ideas because they can fill in for each other and pick up workload where and balance that so that that's a going to be a positive direction i think uh for these courts makes sense the the other thing is is that there you know we we talked about earlier chuck how there's you know there's the jurisdiction of the of the business court has to do with you know the dollar value of the of the business litigation right so you have to be at least five five million dollars uh at issue in order to you know get in as a jurisdictional limitation um but then there there is the idea of supplemental jurisdiction which is if you have a a dispute that meets the jurisdiction of the business law courts but there are also ancillary disputes can those also be heard by the same judge and and the the the way that the rules were originally um set out in the statute was that it was permissive that those those supplemental uh matters could come along the the rules as they were created in uh published in march um flip that and they make it presumed right so if if there is a case so let's say for example you have a um a business dispute that's in in excess of five million dollars you have business court jurisdiction but then there's also for example uh an employment law dispute that is related to that matter right that that employment law dispute will be presumed to be you know combined with and and have supplemental jurisdiction along with the main suit unless the parties opt out so it's a it's an opt-out mechanism now which is you know keep things going early so i think you know the other the other kind of you know changes that we we've seen or the the rules are spelling out are all dealing with efficiency and they have a lot of um parallels really with with The federal court rules, where there's a mandatory early scheduling order, right? So on a court-by-court basis, in the other Texas courts, scheduling orders might be permissible but not mandatory. Some judges require them, some don't. In the business court, you're going to have to do, within 30 days of appearance of the defendant appearing, you're going to have to submit a scheduling order.

Chuck Kraus: That's a good development, I think. And then also similar to the federal rules, there is a corporate disclosure requirement. So all the parties to the lawsuit have to disclose at the beginning of the lawsuit any related party, so anybody who has an interest, so that would be parent and subsidiary corporations, majority shareholders, and things of that nature, people who might have a vested interest in the outcome of the litigation have to be disclosed. Part of that is for conflicts on the bench and making sure that we don't have those, but it also is just a mimicking what the federal courts already do.

Brian Elliott: That makes sense. I mean, coming back to the scheduling order, I think that's a great development that within 30 days, you need to propose that. Any sense on what those scheduling orders are going to look like in terms of, you know, initial discovery and first motions? Yeah, and sure.

Chuck Kraus: And there are, so the scheduling orders are going to be negotiated between the parties, so it's going to be on a case-by-case basis, right? But there are signals within the rules that tell us what the courts are going to be expecting. And one of the major changes is a change on the discovery dispute process, right? Which is a part of corporate litigation, business litigation, that really, you know, takes a lot of time, drives up costs, right?

Brian Elliott: Everybody is, you know, arguing about what should be produced and what didn't get produced and things like that. The way that the rules operate now is that no discovery motion can be filed in the business court unless you engage in a letter-writing campaign first. Now, we already do some of those things, but generally the way it goes now is you complain to the other side that they didn't give you what you wanted them to give you, and you use that as the exhibit A for your motion to compel discovery. The way that it's going to work in the business court, is that you need to submit a 700-word letter to the court explaining what the nature of the dispute is.

Chuck Kraus: The other side has a period of time to respond to that letter. Also 700 words, so you've got to be brief and efficient. Let's just lay out for the court exactly what the dispute is. And only after those letters are exchanged and you explain the efforts you've taken to resolve it, will the court grant the permission to file a discovery motion.

Brian Elliott: So- so The hope is that that's going to speed things up or keep things going and encourage cooperation. The other thing that goes along with that is a mandatory mediation. So the business courts are using what they call a mediation wheel. So if the parties are going to be encouraged to mediate their dispute, and if they can't decide on a mediator, the judge is going to spin the wheel and pick one.

Chuck Kraus: But there's going to be a slate of mediators that are going to be approved by the business court for this use. And you're going to be encouraged to have your dispute negotiated out at a mediation table rather than through the court. So that's an interesting development as well. That's fascinating to me as a transactional lawyer.

Brian Elliott: That sounds like a game show. Is that a novel process or is that an existing process? Well, I mean, slates of mediators are common. I think they just call it the mediation wheel, the mediator wheel.

Chuck Kraus: Spin the wheel and see what you get. But I think, look, it goes like this. And this is what I tell my clients all the time. I said, even if you have got all the facts on your side and the laws on your side and you've got a great case, you've got to take it to the table and see what you can negotiate because what you don't want is to leave all the chips in somebody else's hands so that somebody else decides your fate if you can get a fair and good deal.

Brian Elliott: And often you can do it much quicker through mediation. And especially if you do it early case mediation, you can probably just cut to the chase and get it over with. But the issue that litigants have is that they want their day in court. And I understand that, too, and there are reasons to do it.

Chuck Kraus: Generally, a day in court is what you really want to use the court for are the things that you can't get in a mediation. So as a transactional lawyer, you know, we negotiate deals all the time, right? That's our job, right? But we can't write an order compelling somebody to do something or compelling somebody not to do something.

Brian Elliott: That's what you need the court for, right? So if you've got those types of issues, great, right? If not, I think the Texas Business Court is sending a signal that Texas is open for business and we don't want business to be slowed down by a litigation process. So they're going to use all the tools that we have in order to, you know, be efficient, accelerate the litigation process, and then provide these mechanisms for parties to resolve their own disputes.

Chuck Kraus: Yeah, that sounds really good. I mean, the one thing you get in litigation is a result, right? You get an outcome, and that is guaranteed. But you have certainly less control over whether that's an outcome within the realm of what would be acceptable.

Brian Elliott: So certainly that's advice, you know, we give as transactional lawyers. can negotiate an outcome and have a higher degree of certainty of getting acceptable outcome. Just do that if you can. You know, also heard it said by a retiring justice very recently that, you know, most disputes would resolve themselves if both sides had full information.

Chuck Kraus: And I think that's probably what we're getting at with some of these rules to make sure that fuller information is available to both sides sooner. Yeah, that's right. No, it's like, we'll see how, you know, these rules play out in practice, but I think they make a lot of sense, right? One of the other rules, which I think you'll get a kick out of, is the rule on the use of artificial intelligence, right?

Brian Elliott: So the court is acknowledging that lawyers are going to do it. They do it already, and they're going to continue to do it, and we're going to always use the best tools we can. So basically the rule says that, you know, the use of AI is not prohibited, but the attorney who's filing the paper, just there's a caution. You're going to remain on the hook responsible for what it is that you file.

Chuck Kraus: So if you file hallucinated case sites, then that's going to be on you. So don't think that that, you know, you can't use the, you know, my AI fooled me excuse. Like you're on notice that you have to verify everything. Yeah, exactly.

Brian Elliott: They acknowledge the way that modern practice is evolving and really building these mechanisms to, to resolve disputes and push them along. So I think that's a, it's a, it's a, it's a very good development, but we're still, you know, we're, we're less than a year into the business court experiment. and we'll uh we'll see how these rules get and the rules just were implemented in in march so uh they're brand new really so super helpful for practitioners uh and we're happy to happy to describe those for other practitioners but you know clients uh i think some could care less about the procedural rules what what do businesses really need to know about the business courts in terms of making day-to-day real real life decisions yeah sure like you know a lot of a lot of our clients are are used to you know the speed of of the district courts and the state courts you know not going very quickly right so at the business courts if you're if you're there you got to expect to go much quicker it's more much more like like a federal court you're going to have a fixed schedule you're going to expect to make deadlines and and things are going to move quite rapidly so that's going to be the big thing is is prepare early if you're if you're going to be a plaintiff you know make sure you've got everything prepared before you file suit uh because you're going to be behind you know you're going to be held to a strict uh schedule um the other thing is that you know it the process encourages um openness and transparency right so you know they they're hopefully right they'll be less hiding the ball and less gamesmanship and more let's understand what the facts are and try to resolve these disputes right so that's a it's a it's a it's a it's a it's a shift in in the in the idea of of how to use the courts and and what they can be used for i think one of the biggest things obviously right is are these judges they they know business law right they they've got a they've got a handle on on these issues uh you know i was i was in uh a texas court which i i won't name you know a little while ago and we had a a case it wasn't it wasn't that complicated it was a you know dealt with real estate finance and uh it wasn't even a you know a highly structured finance deal but it just had you know several there were several parties that were involved and the um and there was a receiver involved and the the judge who was hearing the case had uh you know their background was in family law and criminal law right and the judge said it during my presentation i really don't understand all these concepts you know you have to go slower for me and that's fine and you know we can do it but but that's what you're up against in and that's one of the reasons why these these courts were created so so you can take these high dollar value disputes business disputes and put them in front of judges who do this every day you know hopefully right and and have that background and skill set that um you know they can get to the heart of those issues quicker um and um and i think there's gonna be a net benefit really yeah it's fascinating it almost sounds a little bit like the civil law tradition of you know the judge seizing uh the case and kind of doing their own investigation we clearly don't have that here in the common law jurisdiction, but as you're describing it, it does have a little bit of a shadow of that, particularly where we have a judge who knows the ins and outs of a commercial dispute, knows the ins and outs of a merger agreement, what would be typical, and can interpret those provisions with the benefit of years of experience. You know, it can cut both ways, right?

Chuck Kraus: Because the more experienced jurists can then bring, you know, can read into or imply things that maybe aren't part of your, you know, be too smart for the situation. Yeah, if I had been representing the defendant, I would have done it this way. Exactly, right? But look, I think on balance, you know, this is a very good step in the right direction, and it's certainly a, you know, a step that Texas, being one of the largest economies in the world, needed to have, and we've got it now, right?

Brian Elliott: So there will be some bumps in the road, getting this all set up and moving through its paces, but I think that, you know, we should expect, you know, at least, if nothing else, you know, faster timelines, more efficient, you know, litigation filings, you know, more strategic use of mediation, early case resolutions. I think that, you know, it's up to us to help our clients take advantage of this new forum. Do you think now is the time to advise clients to reassess, you know, forum clauses, for example, and expressly say this dispute will be handled in the Texas business courts exclusively? Yeah, I mean, certainly if the underlying agreement otherwise meets the jurisdictional requirements, then I would say 100%, right?

Chuck Kraus: Like, let's just make that sure that's obvious up front. You can't, you can't, if your dispute is less than $5 million, you're not a publicly traded company, you don't meet the other requirements, you can't agree with the other party to go to the business court. But if you're otherwise going to meet those jurisdictional requirements anyway, absolutely, I would make sure that it's not a question. Yeah, you could say any, any dispute that otherwise meets the minimum requirements will, you know, the parties do elect and will not, will not object to Texas business courts.

Brian Elliott: Yeah. Yeah. Good. Well, that's the, that's the update.

Chuck Kraus: Well, that's great, Brian. Thank you very much. It sounds like if you're, if you're doing a business in Texas and your legal team isn't already adapting to these changes, uh, you're behind the ball, um, uh, I'm still, I'm going to have the image of the mediator wheel in my head and someone spinning it, uh, fascinating stuff. And we'll, we'll check back for another update, uh, shortly.

Brian Elliott: Excellent. Thanks, Chuck. .