Texas defense lawyers will have another arrow in their quivers in less than a month thanks to a bill passed during the 84th legislative session. Beginning with suits filed on or after September 1, 2015, defendants are getting an extra layer of protection for their financial information. Plaintiffs will no longer be able to obtain net worth information by making a discovery request; they instead have to file a motion for the information and show they have a “substantial likelihood” that their claim will be successful. Designed to promote settlement, it is almost a pseudo-trial on the sufficiency of the punitive damage case.
With SB 735, the Texas Legislature amended Section 41.001 of the Texas Civil Practice and Remedies Code, which provides the definitions to be used in the chapter, adding a definition for net worth to mean “the total assets of a person minus the total liabilities of the person on a date determined appropriate by the trial court.”
Currently, Section 41.011, entitled “Evidence Relating to Amount of Exemplary Damages,” states:
(a) In determining the amount of exemplary damages, the trier of fact shall consider evidence, if any, relating to:
(1) the nature of the wrong;
(2) the character of the conduct involved;
(3) the degree of culpability of the wrongdoer;
(4) the situation and sensibilities of the parties concerned;
(5) the extent to which such conduct offends a public sense of justice and propriety; and
(6) the net worth of the defendant.
(b) Evidence that is relevant only to the amount of exemplary damages that may be awarded is not admissible during the first phase of a bifurcated trial.
The Legislature determined to clarify and codify the discovery of net worth. To that end, it amended Section 41.011 of the Civil Practice and Remedies Code by adding the following:
Sec. 41.0115. Discovery of Evidence of Net Worth for Exemplary Damages Claim.
(a) On the motion of a party and after notice and a hearing, a trial court may authorize discovery of evidence of a defendant’s net worth if the court finds in a written order that the claimant has demonstrated a substantial likelihood of success on the merits of a claim for exemplary damages. Evidence submitted by a party to the court in support of or in opposition to a motion made under this subsection may be in the form of an affidavit or a response to discovery.
(b) If a trial court authorizes discovery under Subsection (a), the court’s order may only authorize use of the least burdensome method available to obtain the net worth evidence.
(c) When reviewing an order authorizing or denying discovery of net worth evidence under this section, the reviewing court may consider only the evidence submitted by the parties to the trial court in support of or in opposition to the motion described by Subsection (a).
(d) If a party requests net worth discovery under this section, the court shall presume that the requesting party has had adequate time for the discovery of facts relating to exemplary damages for purposes of allowing the party from whom net worth discovery is sought to move for summary judgment on the requesting party’s claim for exemplary damages under Rule 166a(i), Texas Rules of Civil Procedure.
New Method to Obtain Net Worth
For lawsuits filed on or after September 1, 2015, the new law requires that plaintiffs file a motion to obtain net worth. Notice and hearing are required to follow. Either party may support its argument by affidavit or other discovery responses. The court is limited to considering only the evidence presented in the motion, response, or at the hearing.
There will be a presumption that adequate time for discovery has elapsed. The statute defines “adequate time” as enough discovery that the defendant has sufficient information to prepare facts for a no-evidence motion for summary judgment on the plaintiff’s exemplary damage claim. A simple response to argue against the motion for net worth discovery is that the defendant does not have enough discovery to file a plausible no-evidence summary judgment motion. “Adequate time for discovery” has not been defined and is left to the trial court’s discretion. (Carter v. MacFadyen, noting that “local dockets, scheduling practices, disruptive weather, the assumptions of the bar, and a myriad of other factors” must be considered in determining “adequate time for discovery.” Also see McClure v. Attebury, adopting abuse-of-discretion standard in part because of trial court’s broad powers over discovery matters.)
If the trial court determines net worth discovery is needed, it is mandated to order only the “least burdensome” method. This could include tax returns, financial statements, or Securities and Exchange Commission filings. A public company’s worth (its total value) is its market capitalization (“market cap”) and is represented by the company’s stock price. Market cap is equal to the stock price multiplied by the number of shares outstanding. For a public company, the stock price and number of outstanding shares are public knowledge. For public companies, an argument could be made that their 10-K and 10-Q filings are public record. Therefore, the defendant could object to the request because the information requested is equally available to both parties. Under the Rules of Civil Procedure, such documents equally available to both parties do not have to be produced. If the moving party can get the desired documents or information without resorting to discovery, good cause does not exist for producing the same.
The plaintiff has a clear and convincing burden “on the ultimate issue for gross negligence and exemplary damages.” However, legislative history, in the form of an exchange between Reps. Clardy and King, reveals that the phrase “substantial likelihood is not intended to be the same as the clear and convincing standard” nor is it even a “preponderance standard.” The intent is that, for the “the plaintiff to be entitled to net worth discovery, it’s only necessary that the claimant present a prima facie case, but not to demonstrate that he is certain to win.” The plaintiff need only raise “questions on the merits to make them fair ground for more deliberative investigation.”
Suggested Objections to Discovery Requests
For cases filed after September 1, 2015, here are suggested objection samples when plaintiffs request net worth through interrogatories or RFPs:
Short Form Objection:
Defendant objects to this request on the basis that it requests information via an improper procedure. See, e.g., Tex. R. Civ. P. 192.6, 193.2, 193.2(b) & comment 2, and 194; Tex. Civ. Prac. & Rem. Code §§ 41.011(7-a), .0115. Defendant objects to this request as being outside the scope of discovery afforded by the Texas Rules of Civil Procedure and Texas Civil Practice and Remedies Code §§ 41.011(7-a), .0115.
Long Form Objection—General:
A party seeking discovery of net worth must demonstrate with a substantial likelihood of success on the merits of a claim that a specific defendant is liable for exemplary damages prior to obtaining discovery of a party’s net worth. Tex. Civ. Prac. & Rem. Code § 41.0115(a) (2015), as added by Tex. S.B. 735, 84th Leg., R.S., ch. 507, 2015 Tex. Sess. Law Serv. (West) (effective Sept. 1, 2015.) Net worth is not a relevant subject matter, has no probative value, and is not discoverable until a case for exemplary damages is made. Al Parker Buick Co. v. Touchy, 788 S.W.2d 129 (Tex. App.—Houston [1st Dist.] 1999); Wal-Mart Stores, Inc. v. Cordova, 856 S.W.2d 768 (Tex. App.—El Paso, 1993, writ den.).
Furthermore, defendant objects to this request on the basis that it requests information via an improper procedure. See, e.g., Tex. R. Civ. P. 192.6, 193.2, 193.2(b) & comment 2, and 194; Tex. Civ. Prac. & Rem. Code §§ 41.011(7-a), .0115. Defendant objects to this request as being outside the scope of discovery afforded by the Texas Rules of Civil Procedure and Texas Civil Practice and Remedies Code §§ 41.011(7-a), .0115.
Long Form Objection—Premature:
Discovery is ongoing. Defendant objects to this request on the basis that it is a premature request. Loftin v. Martin, 776 S.W.2d 145, 147 (Tex. 1989). Defendant has not had adequate time for discovery to determine the merits and facts for defendant to prepare and move for summary judgment on the requesting party’s claim for exemplary damages under Rule 166a(i) of the Texas Rules of Civil Procedure. See Tex. Civ. Prac. & Rem. Code § 41.0115 (2015), as added by Tex. S.B. 735, 84th Leg., R.S., ch. 507, 2015 Tex. Sess. Law Serv. (West) (effective Sept. 1, 2015).
Furthermore, defendant objects to this request on the basis that it requests information via an improper procedure. See, e.g., Tex. R. Civ. P. 192.6, 193.2, 193.2(b) & comment 2, and 194; Tex. Civ. Prac. & Rem. Code §§ 41.011(7-a), .0115. Defendant objects to this request as being outside the scope of discovery afforded by the Texas Rules of Civil Procedure and Texas Civil Practice and Remedies Code §§ 41.011(7-a), .0115.
Takeaways
The new law is going to make plaintiffs’ jobs harder. They will have to file a motion and prove that they are entitled to net worth because there is a “substantial likelihood” that they are going to prevail on their claim for punitive damages. Plaintiffs can expect defendants to file more partial summary judgment motions on punitive damages.
Rachel Ambler practices civil litigation in West Texas. She is a cum laude graduate of St. Mary’s University School of Law. She may be reached at Rachel@RachelAmbler.com and RAmbler@ShaferFirm.com.