When family businesses are run as closely held corporations, can a shareholder bring a derivative suit more easily than could a shareholder in a public company? And does organizing a family's business into different layers of subsidiaries insulate some actions from review?

This derivative suit was brought by the 24% owner of a closely held corporation, against the wishes of that corporation's board. The suit was prompted by a bad business deal that was actually entered, not by that corporation but instead by a wholly owned subsidiary focused on a specific line of business (making this a so-called "double-derivative claim").

The trial court dismissed for lack of standing. The court of appeals reversed, concluding that the controlling Texas statute does not impose the same hurdles to bringing a derivative suit for closely held corporations.

The Texas Supreme Court agreed with the court of appeals, remanding to the trial court for the claim to move forward.

Standing: The defendants argued that the deference generally shown to corporate boards in the form of the business-judgment rule should extend to a board decision whether to pursue a claim and, thus, a shareholder lacks standing to bring a claim of which the board disapproves.

The Court acknowledged that the business-judgment rule does indeed apply to protect the general decisions of boards, even boards of closely held corporations. But it rejected the argument that this created a shield against derivative claims.

The Court rested that analysis on the statute governing derivative suits, in which it found a Legislative decision that stakeholders in closely held corporations should have more ready access to derivative suits. The specific provision is former Article 5.14(L),¹ which excluded closely held corporations from some of the particular formalities of bringing such suits — including requirements that the potential derivative claims first be presented to the board and giving the board the opportunity to bring them itself. Because the Legislature carved closely held corporations out of those requirements, the Court reasoned, using the business-judgment rule to create a barrier to derivative claims would would contravene the Legislature's intent.

The Court also rejected the argument that a shareholder must plead and prove particular conduct that violates the business-judgment rule in order to have standing. It noted the longstanding concern in Texas law with carefully distinguishing between the jurisdictional concept of standing (which, among other things, cannot be waived) and the more substantive aspects of whether a particular plaintiff's claim might be legally valid. In the context of shareholder suits, the Court noted that any "confusion is understandable" because the statute (and the literature about derivative claims) often speak about the substantive aspect of a plaintiff's claim using the term "standing."

Double-derivative claims: The plaintiff here was a sharehodler in a parent corporation and sued over a busines deal entered by its wholly owned subsidiary. In doing so, the plaintiff was asserting the corporation's right to, in turn, step into the shoes of its subsidiary. This type of claim has been dubbed a double-derivative suit.

The question before the Court was whether Texas should permit such a claim.

On this issue, too, the Court's analysis proceeds from Article 5.14 of the statute, this time focuding on the article's expansion of the term "shareholder" to also "include[] a beneficial owner whose shares are held in a voting trust or by a nominee on the beneficial owner's behalf." Tex. Bus. Corp. Act art. 5.14(A)(2). Placing particular emphasis on the word "includes," the Court declined to treat this list as exclusive. Instead, the Court viewed this as opening the door to more general concepts of equitable or beneficial ownership, such as a shareholder's indirect interest in property held by the corporation itself. The Court thus held that Texas law does permit a double-derivative suit.

There is one notable contrast between this statutory analysis and the Court's analysis of standing: This definition in Article 5.14(A) is not, structurally, limited to closely held corporations. The same definition of "shareholder" appears, by the text, to apply to all derivative suits.² Nonetheless, the Court tells us in footnote 14 that it does not (yet, at least) intend its holding to reach beyond the very limited context here:

We limit our holding to the situation presented in this case in which a shareholder of a closely held parent corporation asserts double-derivative standing to assert a cause of action on behalf of a wholly owned subsidiary.

What is clear is that the Court's immediate concern is with the special problems of closely held corporations. It draws support for its understanding of the word "shareholder" in Article 5.14(A) from the Legislature's decision to exempt closely held corporations from certain procedural requirements for derivative suits. ("Our holding is once again buttressed by the fact that the Legislature made the statutory standing provisions of article 5.14(B) inapplicable to closely held corporations."). And it frames the policy concerns in terms of the impact on closely held corporations: "Were we to hold otherwise, the directors of a closely held holding corporation could create a wholly owned subsidiary to circumvent the Legislature’s intent to make it easier for shareholders to assert derivative claims on behalf of closely held corporations."

In this suit, a surgeon who specialized in robotic heart surgery alleges that his former hospital destroyed his professional reputation and dried up his referral sources in an effort to stave off competition from a new hospital. He brought claims for defamation, business disparagement, antitrust, and tortious interference with prospective business relations.

The question before the Court was whether his former hospital could shield certain documents from discovery under the a medical committee privilege.

The Court focused its analysis on an exception in the statute:

If a judge makes a preliminary finding that a proceeding or record of a medical peer review committee or a communication made to the committee is relevant to an anticompetitive action, or to a civil rights proceeding brought under 42 U.S.C. Section 1983, the proceeding, record, or communication is not confidential to the extent it is considered relevant. — Tex. Occ. Code §160.007(b).

The hospital argued that this exception did not apply to the documents here because the committee was not just a "peer review" committee but also a "medical committee" under Section 161.031, which does not permit a similar exception ("are confidential and are not subject to court subpoena."). The Supreme Court disagreed, noting that the exception in Section 160.007(b) had been enacted later and was more specific. Because there was no dispute that the committee was also a "peer review" committee, the Court held that the exception applies.

Regarding the scope of the exception, the Court held:

• The exception applies to not just to pure antitrust actions but also to other claims challenging what the Court calls "conduct that could substantially lessen competition in a particular market."

• The exception asks the trial judge to make a preliminary finding, but it does not place a burden to produce evidence (such as expert reports) on the plaintiff.

• The exception is narrowly drawn to focus on documents that are themselves "considered relevant," not merely calculated to lead to discoverable evidence.

As applied here, the Court noted that the conduct at the heart of the doctor's claim was about anticompetitive conduct. Whether or not he could ultimately meet all the statutory requirements for a formal antitrust claim, his claim for tortious interference targeted the same conduct and thus qualified for the same exception.

The Court rejected the argument that the doctor seeking disclosure needed to already have evidence of anticompetitive conduct (or expert reports to that effect). It noted that the statute does not place such a burden on the party seeking discovery and that doing so would be a trap, "condition[ing] access to documents that could substantiate a plaintiff's claim on the plaintiff's ability to substantiate his claim without the documents' aid."

When it turned to reviewing the disputed documents, the Court observed that some of them (including affidavits prepared for the lawsuit and the committee's own bylaws) were not properly covered by the privilege at all. As for the other documents, the Court identified certain other pages that were relevant to the doctor's claims.¹

Shell conducted an internal investigation into some allegations of violations of the Foreign Corrupt Practices Act (FCPA), which pinned blame on the plaintiff here, among others. When sued for defamation, the company asserted that the statement was entitled to absolute privilege because it was made as part of a criminal proceeding.

The trial court agreed. The court of appeals reversed, concluding that Shell had not sufficiently proven that this privilege applied. (( The privilege was presented by traditional summary judgment, so the defendant had to establish it by conclusive evidence. ))

The Texas Supreme Court held that this record did, conclusively, establish a privilege that defeated any defamation claim. The analysis focused on the circumstances under which the report was made. As the Court summarized it, "Shell met with the DOJ, agreed to perform an internal investigation and report the results to the DOJ, and then did so."

This case's holding may be narrower than it first appears. The Court was careful to say that it was adhering to, and applying, the legal framework from Hurlbut v. Gulf Atlantic Life Insurance Co., 749 S.W.2d 762 (Tex. 1987), where it held a company official's voluntary statement to law enforcement made prior to that company being investigated was not afforded this same privilege.

The Court distinguished Hurlbut because, here, Shell actually was a target of a law-enforcement investigation at the time it made this report. The Court also emphasized that, while the company official's statement in Hurlbut had been made voluntarily, Shell making a report to the DOJ was "practically speaking, compelled." The Court noted the realities of being prosecuted under the Foreign Corrupt Practices Act (FCPA), under which the DOJ more harshly penalizes companies that do not cooperate. Because this internal-investigation report was provided to the DOJ in "serious contemplation of the possibility" of a prosecution, Shell was entitled to absolute privilege against defamation claims.

A visitor to a hospital slipped and fell in the lobby. When she sued, the hospital moved to dismiss on the ground that she had failed to timely submit an expert report as would be required for a health-care liability claim.

The trial court agreed, dismissing the claim. The court of appeals affirmed, concluding that under TEXAS WEST OAKS HOSPITAL, LP AND TEXAS HOSPITAL HOLDINGS, LLC v. FREDERICK WILLIAMS, No. 10-0603 there need not be a connection between the safety standard in question and the actual provision of health care.

The Texas Supreme Court granted review and, now, reverses, holding that:

for a safety standards-based claim to be an HCLC there must be a substantive nexus between the safety standards allegedly violated and the provision of health care. And that nexus must be more than a "but for” relationship. That is, the fact that Ross, a visitor and not a patient, would not have been injured but for her falling inside the hospital is not a sufficient relationship .... The pivotal issue in a safety standards-based claim is whether the standards on which the claim is based implicate the defendant’s duties as a health care provider, including its duties to provide for patient safety.

The Court rooted this holding in doctrines of statutory construction that look ot the overall structure of the law ("the purpose of the statute, the context of the language at issue"). It noted, in particular, that the reading urged by the hospital would result in a situation where defendants had "a special procedural advantage [in all suits] in the guise of requiring plaintiffs to file expert reports." The Court declined to read the statute as conferring benefits based on the identity of the defendant, rather than the nature of the duty. ("We do not believe the Legislature intended the statute to have such arbitrary results.")

As for how to apply this construction, the Court listed seven "non-exclusive considerations":

1. Did the alleged negligence of the defendant occur in the course of the defendant’s performing tasks with the purpose of protecting patients from harm;
2. Did the injuries occur in a place where patients might be during the time they were receiving care, so that the obligation of the provider to protect persons who require special, medical care was implicated;
3. At the time of the injury was the claimant in the process of seeking or receiving health care;
4. At the time of the injury was the claimant providing or assisting in providing health care;
5. Is the alleged negligence based on safety standards arising from professional duties owed by the health care provider;
6. If an instrumentality was involved in the defendant’s alleged negligence, was it a type used in providing health care; or
7. Did the alleged negligence occur in the course of the defendant’s taking action or failing to take action necessary to comply with safety-related requirements set for health care providers by governmental or accrediting agencies?

The Court acknowledged that "the line between a safety standards-based claim that is not a[ health-care liability claim] and one that is ... may not always be clear." On this record, as it turns out, all seven of those considerations favored the plaintiff.

The opinion of the Court does not offer explicit guidance about how lower courts should deal with a situation in which these considerations point in different directions. The concurring opinion (written by Justice Lehrmann and joined by Justice Devine) argues that, when such a situation arises, two of the considerations (the third and fifth) should be viewed as more important than the others because they focus most directly on the relationship between patient and doctor.

An injured employee, absent from work, was classified by his employer as being on FMLA leave. According to the employer’s company policy, that type of family and medical leave cannot last longer than 12 weeks. When the employee did not return at the end of that period, the employer immediately fired them.

When the employee sued for retaliatory discharge under Chapter 451 of the workers’ compensation law, the employer argued that its company leave-of-absence policy was uniformly applied and, thus, legally barred a claim for retaliatory discharge. Alternatively, the employer argued that the jury hearing that retaliation claim should have been asked about this defense or given an instruction about the legal effect of its leave-of-absence policy.

The trial court sided with the employee. The court of appeals affirmed, holding that the company’s leave-of-absence policy did not create a legal presumption. The Supreme Court has granted the employer’s petition and will consider the issue.

The case involves a tow truck that was rendered a total loss by a vehicle accident. The truck was the sole vehicle used by a small towing company. The towing company reached a settlement with the other driver that would compensate it for the market value of the lost truck, but that driver’s policy limits ($25,000) did not permit recovery for additional damages. The towing company then sued its own insurance carrier, arguing that its uninsured/underinsured motorist protection should also cover the company’s damages from loss-of-use of the truck.

The district court ruled in favor of the towing company, rendering a judgment of $22,500 in additional damages. The court of appeals reversed, concluding that Texas law bars any recovery for this type of consequential loss-of-use damages when a piece of property is damaged beyond repair.

The towing company filed a petition for review, arguing that there is a split in Texas law on this question. The Texas Supreme Court has now granted the petition.

A summary will be added in the next few days

In the past decade, it only seemed that the Texas Supreme Court had already decided every permutation of health-care liability claim and every challenge to an arbitration clause. What happens when one case presents both — a challenge to the Texas law that restricts doctors and other health-care providers who might try to insert arbitration clauses in their contracts?

The Texas statute is Section 74.451 of the CIvil Practice and Remedies Code, which imposes some strict requirements on any arbitration clause between a health-care provider and a patient. There was no dispute in this case that the defendant nursing home (Fredericksburg) failed to meet those requirements, so if the Texas law applied, the arbitration clause it demanded of patients would be unenforceable. On its side, the Federal Arbitration Act generally preempts state laws such as this one that impose heightened requirements on the validity of arbitration clauses, at least for contracts involving interstate commerce.¹

The wrinkle here is that Congress has generally permitted states, not the federal government, to take the lead in regulating insurance. Within the upside-down world of insurance, the doctrine of federal preemption yields (by virtue of the McCarran-Ferguson Act or "MFA") so that insurance-specific state laws can, in that limited sphere, be supreme over a generally applicable federal law.

The Texas Supreme Court's opinion focused, therefore, on whether Section 74.451 was a law that fit within the MFA. The question is whether it was a "law enacted by [the] State for the purpose of regulating the business of insurance." 15 U.S.C. §1012(b). If so, it could survive preemption. If not, it would be preempted.

The bulk of the Court's analysis focuses on legislative "purpose." Looking at the statute as a whole, the Court concluded that its purpose is not direclty related to the relationship between insurance companies and their insureds ("the business of insurance"). The Court acknowledged that one of the broader goals was to lower health-care costs by, among other things, lower premiums for malpractice insurance. But the Court concluded that was too attenuated to satisfy the U.S. Supreme Court's test. (The U.S. Supreme Court has distinguished the "business of insurance" from the "business of insurance companies," which basically asks whether the regulation is about paperwork or profits. If the goal is to reduce an insurer's costs and maybe get a trickle-down reduction in premiums, then it's the latter category and too attenuated.) And even zooming to focus just on Section 74.451, the picture would be the same. That provision says nothing about insurance directly but instead talks about the relationship between doctor and patient.

Section 74.451 is, the Court held, preempted by the Federal Arbitration Act for any health-care contracts that affect interstate commerce.

So, does a health-care provider now have to choose between demanding arbitration and the procedural protections they fought so hard for in 2003 (with mandatory expert reports and interlocutory appeals)? Maybe not. With this new hybrid category of arbitration and health-care liabilty appeals, a whole new world of permutations beckons. Who will be the first defendant to wait for the expert report deadline, file an interlocutory appeal challenging its adequacy, and after losing that appeal, demand arbitration — perhaps triggering a second interlocutory appeal?