Wednesday, June 21, 2023

DOJ Weighs in on Laufer and says Laufer loses

Before getting started on the blog for the week, I wanted to let everyone know that the ABA Law Practice Today just published my article entitled AI and Persons with Disabilities: the Good and the Bad. It can be found here.

 

Last week, we discussed Acheson Hotels brief in the Laufer case. Also last week, DOJ weighed in with their view. Their Amicus brief, here, supports neither side. However, it does say that Laufer loses, but the more extreme arguments put forward by the hotel should be rejected. As usual, the blog entry divided into categories and they are: Laufer loses on standing grounds; some of the arguments of Acheson Hotels go too far, and thought/takeaways. Of course, the reader is free to read any or all of the categories.

 

I

Laufer Loses on Standing Grounds

 

  1. In adopting the ADA, Congress recognized that disability discrimination includes both intentional exclusion and the failure to make modification to existing facilities and practices in order to afford equal access to individuals with disabilities.
  2. The Reservation Rule was formulated by DOJ to carry out title III’s provision governing public accommodations.
  3. The reason behind the Rule was that individuals with disabilities who have reserved accessible hotel rooms often discovered upon arrival, that the room they reserved was either not available or not accessible (happens quite frequently to me).
  4. The Reservation Rule requires a hotel to identify and describe accessible features in the hotels and guest rooms offered through its reservation service in enough detail to reasonably permit individuals with disabilities to assess independently whether a given hotel or guest room meets their accessibility needs.
  5. The Supreme Court has long held that an individual suffering in violation of the statutory right to be free from discrimination has standing to sue even if she voluntarily subjects herself to discrimination in order to test the defendant’s compliance with the law.
  6. In Havens Realty, the Supreme Court said that testers had standing because the tester suffered an injury in precisely the form the statute was intended to guard against.
  7. Courts have applied Havens Realty to hold that testers suffering violations of statutory rights to be free from discrimination have standing to sue under a variety of other laws, including title III of the ADA.
  8. Tester suits provide an essential complement to the federal government’s limited enforcement resources-as Congress has specifically recognized by funding private tester enforcement of the Fair Housing Act (FHA).
  9. The Reservation Rule unlike the provision in Havens Realty, does not provide a freestanding right to information. Therefore, an individual who merely views a hotel’s online reservation service without intending to use the service to make or consider making a reservation does not have standing because she has not suffered any injury within the meaning of title III and the Reservation Rule.
  10. Concrete injuries are not limited to traditional tangible harms such as physical harms and monetary harms. That is, various intangible harms can also be concrete.
  11. The Supreme Court has held that Congress can elevate to the status of legally cognizable injury concrete, de facto injuries that were previously inadequate in the law.
  12. In TransUnion, the Supreme Court identified discriminatory treatment as the classic example of the harm that Congress can elevate into a cognizable injury, which was the case in Havens Realty.
  13. Havens Realty granted standing even where a person subjected themselves to the violation in order to test the defendant’s compliance with the law.
  14. A suit based upon the violation of a statutory right to be free from discrimination constitutes one circumstance in which a plaintiff need not alleged any additional harm beyond the one Congress has identified.
  15. Since Havens Realty, federal courts have consistently held that testers have article III standing to sue under various provisions of the FHA. Similarly, courts have recognized the approval of tester standing to title II of the ADA and to title III of the ADA.
  16. With respect to title III of the ADA, courts have uniformly recognized that a plaintiff encountering an architectural barrier at a place of public accommodation has suffered a concrete injury even if she visited only to test for compliance with title III.
  17. The right to be free from discrimination does not depend upon the motive behind a plaintiff’s attempt to enjoy the facilities of a particular place of public accommodation. Therefore, anyone suffering an invasion of the legal interest protected by title III has standing, regardless of his or her motivation in encountering that invasion.
  18. In the title III context, a plaintiff’s mere awareness of an ADA violation at a place of public accommodation that she had neither visited nor intend to visit does not suffice for standing. Similarly, a plaintiff does not have standing to seek an injunction merely because he or she previously encountered a barrier to accessibility. Instead, the plaintiff must establish a sufficient likelihood that he or she will be affected by the allegedly unlawful conduct in the future.
  19. A plaintiff can establish standing by showing that she is currently deterred from patronizing a place of public accommodation.
  20. Private litigation is essential to effective enforcement of the ADA because it would be impossible to secure broad compliance with antidiscrimination laws absent suits by individuals experiencing discrimination. Testers are a key component of vast system of private enforcement.
  21. Testers are critical to the effective enforcement of the FHA. Most housing discrimination is covert, and testers play an essential role in uncovering and remedying racial steering and other unlawful practices.
  22. Testers are critical for enforcement of title III. The unavailability of damages reduces or removes the incentive for most persons with disabilities injured by inaccessible places of public accommodation to bring suit under the ADA. Therefore, testers play an important role in ensuring that the statute yields its promise of equal access.
  23. Title III and the Reservation Rule do not create any freestanding informational right. Instead, they give individuals with disabilities the right of equal access to a hotel’s reservation services. Accordingly, Laufer lacked standing because she has not suffered an injury in the form the statute was intended to guard against.
  24. The Reservation Rule’s requirements focus on the reservation process and requires a hotel to hold accessible rooms for individuals with disabilities, to allow those rooms to be reserved in advance, and to ensure that, once reserved, those rooms will actually be available upon check-in.
  25. While the Reservation Rule requires a bunch of things, it does not confer an informational right upon every individual with a disability who merely visits the hotel’s website without using or attempting to use the reservation service.
  26. The Rule interprets the statutory requirement that public accommodations make reasonable modifications in policies, practices, or procedures, when such modifications are necessary to afford their services to individuals with disabilities. The particular service the Rule addresses is the ability to review and reserve available rooms through websites or other means. A plaintiff with a disability prevented from using that service because of a lack of accessibility information suffers a violation of the right secured by the statute and has standing to sue.
  27. Laufer has no genuine plan to make a reservation and also disclaimed any intent to travel to Maine. Further, she has not alleged that she used, attempted to use, or plan to use the hotel’s reservation service. Instead, she only alleged that she viewed the website and the third-party booking sites to discover that they violated the Reservation Rule and felt frustration and humiliation as a result. This sort of allegation is not sufficient to satisfy article III.
  28. Laufer was not denied equal access to the service because she was not attempting to use it at all.
  29. While two individuals driving by a restaurant and seeing that the wheelchair accessibility is lousy would have the same experience, it is only the individual prevented from visiting the restaurant that would have article III standing to sue because it is only that individual that suffered the denial of rights secured by title III.
  30. Laufer lacked standing to assert any injury to the rights created by title III and the Reservation rule because none of the rights identified in her suit actually belong to her.

 

II

Some of the Arguments by Acheson Hotels Go too Far

 

  1. The argument that a regulation is involved rather than a statute goes too far because the Rule is an interpretation of title III’s requirement that hotels make reasonable modifications to afford individuals with disabilities equal access to their services. So, the Reservation Rule does not go beyond what title III authorizes.
  2. Title III of the ADA applies to services, including those offered on the web.
  3. The Reservation Rule ensures that a hotel’s reservation services comply with the requirements of title III.
  4. Title III of the ADA provides that failure to make reasonable modifications in order to afford equal access to individuals with disabilities is discrimination. 42 U.S.C. §12182(b)(2)(A)(ii).
  5. For an injury to be particularized, it must affect the plaintiff in a personal and individual way even if the person experiences that violation over the Internet.
  6. TransUnion did not overrule Havens Realty or any other precedent and it did not address tester standing at all.
  7. In TransUnion, the Supreme Court observed that Congress may validly recognize otherwise insufficient harms as being sufficient for standing and it particularly referred to the example of discriminatory treatment. Therefore, no further showing is required to establish standing.
  8. The harms accompanying discrimination in public accommodations are sufficiently analogous to injury traditionally forming the basis for such suits and American courts.
  9. Title III of the ADA provides a cause of action only to individuals subject to real-world harm of discrimination and not to the public in general.
  10. TransUnion did not overrule the Sunshine law cases.
  11. Discriminatory action results in downstream consequences long recognized by Congress and the courts.
  12. That the injury is self-inflicted does not defeat article III standing. Havens Realty held as much.
  13. The case is now moot because the hotel’s website has been updated to supply the information Laufer alleges the Reservation Rule requires. That is, the website has been updated to explain that the hotel was not equipped at this time to provide ADA compliant lodging. Laufer has not disputed that this information is sufficient to allow her to assess independently whether the hotel meets or accessibility needs. Therefore, her claim is moot.
  14. While the mootness question is more difficult with respect to third-party services that have not been similarly updated, the Supreme Court could very well conclude that any remaining controversy is simply too insignificant to justify resolving the standing question on which it granted certiorari.
  15. The hotel website has been updated by new owners who state they are taking ADA compliance seriously and the website contains no indication that accessibility information will be removed in the future. Courts have held that a defendant’s changes to its website may moot a Reservation Rule claim in analogous circumstances.
  16. The Reservation Rule is such that it is very unclear whether the hotel providing accessibility information to third-party services was likely to address any future injury.
  17. Regardless of mootness, circumstances have changed so as to greatly diminish the practical significance of the dispute between the parties. So, the Supreme Court could simply say that events have so overtaken things that the anticipated benefits of a remedial decree no longer justifies the trouble of deciding the case on the merits.

 

III

Thoughts/Takeaways

 

  1. As mentioned last week, there are important distinctions between the FHA and the ADA in terms of the injuries the statute specifically refers to. In the FHA, emotional injuries are clearly implied in the statute. However, with title III of the ADA that is simply not the case with respect to the remedies as only injunctive relief and attorney fees are available to private litigants.
  2. If a statute does not encompass anything for emotional injuries, how is suffering frustration and humiliation something that gives a person standing?
  3. Saying that disability discrimination includes both intentional exclusion and the failure to make modifications is a huge indicator that DOJ may argue in the future that failure to accommodate (if it is prosecuting a title I claim against a nonfederal governmental entity), or the failure to reasonably modify a nonfederal governmental entity’s programs, benefits, activities, and services (title II), do not require an adverse action beyond the failure to accommodate/modify.
  4. To my mind, a real argument exists whether Laufer has subjected herself to an injury in precisely the form the statute was intended to guard against.
  5. Open question to my mind as to whether the Reservation Rule is one of those regulations where a court would decide a cause of action exists for violating that rule.
  6. It is really hard to believe that Laufer is going to prevail, especially now with DOJ weighing in against her.
  7. The DOJ says that self-harm doesn’t matter with respect to standing in a case like this. The hotel says otherwise. The FHA and the ADA are different enough statutorily that it will be interesting to follow where the Supreme Court goes with this argument.
  8. The architectural barrier cases are a completely different kettle of fish than Laufer’s. In the architectural barrier cases, a person is actually showing up to the particular physical site in most cases.
  9. The DOJ brief talks about how most housing discrimination is covert. My question is whether most disability discrimination is covert. I am not entirely sure about the answer to that question if my own experience is any indication. That distinction might matter.
  10. The economics of practicing law are such that it simply may not be financially doable to prosecute cases if a tester is not involved.
  11. With respect to my experience as a deaf (small d intentional), person, I don’t think the Reservation Rule necessarily works very well. I personally have gone on to websites that have said they have rooms that are accessible to the Deaf, deaf, and hard of hearing only to find out that is not the case when I call and get the details of what that means. It also happens all the time with respect to calling the hotel to make the reservation. I can tell you that if a hotel says on their Internet site that they are accessible to the hearing loss community, I don’t believe it. Part of the problem is that the hotels are very focused on structural concerns and much of what a person in the hearing loss community needs doesn’t have much to do with the built-in environment necessarily. The architectural guidelines are also very mobility centric and blind/visually impaired centric with the hearing loss community getting lost in the shuffle. Finally, I am often surprised how often hearing accessible rooms are not available for purchase considering the Reservation Rule’s mandate to ensure availability. It is hard for me to believe that the demand for such rooms is that high at the hotels I frequent.
  12. The DOJ in their brief flat out says that title III of the ADA applies services offered on the web and that a person could have standing if only a website is involved.
  13. With respect to the DOJ statement, that discrimination has been elevated to be analogous to injury that have traditionally formed the basis for suits and American courts, Cummings, which we discussed here, very much says otherwise.
  14. As noted last week, makes sense that the website would be updated to say essentially persons with disabilities need not come because the facility is not accessible. However, there are two problems with that. First, why couldn’t the facility be made accessible to a person in the hearing loss community? Such an individual could have an accessible room without any structural modifications at all if a kit was provided. Second, the statement on the website would be enough to deter an individual from actually visiting the hotel and therefore would give that individual standing providing that individual could show that they had an intent to return to that hotel should it become accessible. So, the website helps them win this particular case and goes a long way to having them lose a case involving a person with a disability that would actually be interested in staying at the hotel.


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Texas Data Privacy and Security Act

Privacy Plus+

Privacy, Technology and Perspective

Texas Data Privacy and Security Act.  Let’s consider the Texas Data Privacy and Security Act (“TDPSA”), which has just been signed into law.  A link to the text of the TDPSA follows:

https://capitol.texas.gov/tlodocs/88R/billtext/pdf/HB00004F.pdf#navpanes=0

We’ll offer this summary:

Who is required to comply?

Section 541.002 of the TDPSA provides that the law will apply to any person (inside or outside of Texas) that:

  • –      conducts business in Texas or produces a product or service consumed by Texas residents;

  • –       processes or engages in the sale of personal data; and

  • –       is not a small business defined by the U.S. Small Business Administration (SBA) (though Section 541.107 does require small businesses to receive consent from consumers before selling consumers’ sensitive data). The SBA’s Office of Advocacy generally defines a small business as “an independent business having fewer than 500 employees,” and the SBA also has industry-level small business size standards used in government programs and contracting. A link to the current SBA’s Office of Advocacy guidance follows:

  • https://advocacy.sba.gov/wp-content/uploads/2023/03/Frequently-Asked-Questions-About-Small-Business-March-2023-508c.pdf

Relevant definitions: Section 541.001 of the TDPSA contains the definitions.  Under subsection (19), “personal data” is “any information, including sensitive data, that is linked or reasonably linkable to an identified or identifiable individual.  The term includes pseudonymous data when the data is used by a controller or processor in conjunction with additional information that reasonably links the data to an identified or identifiable individual.  The term does not include deidentified data or publicly available information.” Under subsection (8), “controllers” are individuals or other persons that, alone or jointly with others, determine the purpose and means of processing personal data.  Under subsection (22), an organization “processes” (or is a processor of) personal data if it collects, uses, stores, discloses, analyzes, deletes, or modifies such data.  With several exceptions, under subsection (28), an organization engages in the “sale of personal data” if it shares, discloses, or transfers such data for monetary or other valuable consideration to a third party.

Who is exempted?

The TDPSA exempts certain organizations. Exempted entities, which don’t have to comply, include:

  • –       nonprofit organizations,

  • –       state agencies,

  • –       political subdivisions,

  • –       financial institutions subject to the Gramm-Leach-Bliley Act (“GLBA”),

  • –       covered entities or business associates governed by the Health Insurance Portability and Accountability Act (“HIPAA”),

  • –       institutions of higher education, and

  • –       electric utilities.

What information is exempted?:

The TDPSA, which generally covers “personal data,” exempts certain information from its scope.  Exempted information includes:

  • –       employee/applicant personal data to the extent the data is collected within the context of employment or recruitment and several other related types of data,

  • –       Protected Health Information under HIPAA, health records, patient identifying information, and

  • –       personal data regulated by other federal laws, including the Fair Credit Reporting Act (“FCRA”), the Driver’s Privacy Protection Act (DPPA), the Family Educational Rights and Privacy Act (“FERPA”), and the Farm Credit Act.

New Consumer Rights for Texas Residents:

Section 541.051 of the TDPSA gives consumers the following personal data rights concerning their personal data:

  • –       Right to have a controller confirm whether it is processing a consumer’s personal data;

  • –       Right to correct inaccuracies in the personal data;

  • –       Right to delete personal data;

  • –       Right to access,

  • –       Right to portability, and

  • –       Right to opt out of sales, targeted advertising, and certain profiling activities.

What Obligations Do Controllers Have?:

Under TDPSA, controllers have certain obligations related to their collection and processing of “personal data.” These obligations include:

  • –       Data minimization – Section 541.101(a)(1) – Limiting the collection of personal data to what is adequate, relevant and reasonably necessary for the purpose they’ve disclosed to consumers in their privacy notices.

  • –      Data Security – Section 541.101(a)(2) – Establishing, implementing, and maintaining reasonable administrative, technical, and physical data security practices, which should be appropriate for the amount and native of the data they have.

  • –       Purpose limitation – Section 541.101(b)(1) – Not processing personal data for purposes they’ve disclosed to consumers in their privacy notices, absent consent;

  • –       Non-discrimination – Section 541.101(b)(2)-(3) – Not processing personal data in violation of state and federal laws that prohibit unlawful discrimination against consumers and may not discriminate against consumers for exercising any of their rights under the TDPSA.

  • –      Consent to process sensitive data – Section 541.101(b)(4) – Obtaining consent from consumers to process sensitive data and children’s data, if not processed in accordance with the Children’s Online Privacy Protection Act (“COPPA”). “Sensitive data” includes:

    • + personal data revealing racial or ethnic origin, religious beliefs, mental or physical health diagnosis, or citizenship or immigration status;

    • + genetic or biometric data that is processed for the purpose of uniquely identifying an individual (the term, “biometric data” includes a fingerprint, voiceprint, eye retina or iris, or other unique biological pattern or characteristic that is used to identify a specific individual. The term does not include a physical or digital photograph or data generated from a physical or digital photograph, a video or audio recording or data generated from a video or audio recording, or information collected, used, or stored for health care treatment, payment, or operations under HIPAA).

    • + personal data collected from a known child (younger than 13 years of age); or

    • + precise geolocation data (within a radius of 1,750 feet and not connected to a utility).

  • –       Privacy Notice – Section 541.101(a) – Providing consumers with a reasonably accessible and clear privacy notice that includes: (1) the categories of personal data and sensitive data processed by the controller, (2) the purposes for processing personal data, (3) how consumers may exercise their rights, (4) the categories of personal data shared with third parties, (5) the categories of third parties with whom the controller shares personal data, and (6) a description of the methods for submitting requests to exercise consumer rights under the TDPSA.

  • –      Posting a Notice Alerting of the Sale of Sensitive Data – Sections 541.101(b) and (c) – Posting a particular notice if the controller engages in the sale of sensitive data or the sale of biometric personal data.

  • –       Disclosing the Sale of Personal Data / Processing for Targeted Advertising – Section 541.103 – Clearly and conspicuously disclosing such sale and the method by which a consumer may exercise the right to opt out.

  • –       Data Protection Assessments – Section 541.105 – Conducting and documenting a data protection assessment concerning the following types of processing activities: (1) targeted advertising; (2) sale of personal data; (3) profiling that presents a reasonably foreseeable risk of unfair or deceptive treatment or unlawful disparate impact, financial, physical or reputational injury, intrusion upon seclusion or private affairs and concern, or other substantial injury; (4) processing of sensitive data and (5) any processing activities involving personal data that present a heightened risk of
    harm to consumers.

  • –       Responding to consumer requests Under Section 541.052(b), controllers must respond within 45 days of receipt of a consumer request, which may be extended for an additional 45 days when “reasonably necessary,” so long as the controller notifies the consumer of the extension within the initial 45-day period.

  • –      Consumer right to appeal Under Section 541.053, controllers must establish a process for consumers to appeal the refusal to take action on a request, make that appeals process “conspicuously available,” and respond within 60 days of receipt of an appeal.

  • See also Contracting Requirements, below.

What Obligations Do Processors Have?:

A “Processor” is a person that processes personal data on behalf of a controller. Under TDPSA, processors have this obligation:

  • –     Instructions and Assistance – Section 541.104(a) – Adhering to the controller’s instructions for processing personal data and assisting the controller in meeting its obligations, including responding to consumer requests, securing personal data, and providing necessary information for data protection assessments.

Contracting Requirements:

 Like many other privacy laws, Section 541.104(b) of the TDPSA requires a contract between a controller and a processor governing the processor’s data processing procedures.  The contract must include the following: (1) clear instructions for processing data; (2) the nature and purpose of processing; (3) the type of data subject to processing; (4) the duration of the processing; (5) the rights and obligations of both parties; and (6) obligations on the processor to:

  • –       Ensure that each person processing personal data is subject to a duty of confidentiality;

  • –       Delete or return all personal data to the controller, at the controller’s discretion, at the end of the provision of services, unless retention is required by law;

  • –       Make available to the controller upon request all information in the processor’s possession necessary to demonstrate the processor’s TDPSA compliance;

  • –       Cooperate with reasonable assessments by the controller or the controller’s designated assessor; and

  • –       Enter into a written contract with any subcontractor to meet the requirements of the processor with respect to personal data.

Enforcement
Unlike under the CCPA, as amended by CPRA, which contains a limited private right of action for data breaches, there is no private right of action under the TDPRA. The Texas Attorney General will have exclusive authority to enforce the TDPSA, subject to
its 30-day cure period (Section 541.154). If the controller or processor fails to cure violations of the statute, the Texas Attorney General may bring an action and seek an injunction to restrain any violations, with civil penalties of up to $7,500 for each violation.

Effective Date:

Most of the TDPSA will take effect on July 1, 2024, though its provision under subsection 541.055(e) related to opt-out mechanisms on websites won’t take effect until January 1, 2025.

Hosch & Morris, PLLC is a boutique law firm dedicated to data privacy and protection, cybersecurity, the Internet and technology. Open the Future℠.



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Awkward Sanctionable

TicketNetwork, an online ticket marketplace, sued CEATS, a non-practicing IP company, for declarations that Ticket’s business did not violate CEATS’s patents or a related license agreement.

CEATS won at trial, and while its claim for attorneys fees was pending, obtained an order allowing it to see a list of Ticket’s website affiliates. That order restricted access to certain designated in-house representatives.

CEATS’s CEO, who was not supposed to see the list, then sent Ticket’s CEO a settlement demand–attaching the list. After significant proceedings, the district court awarded (1) a 30-month injunction against any dealings with the companies on the list and (2) $500,000 against CEATS, its CEO, and two litigation consultants.

The Fifth Circuit, inter alia:

  • Vacated the award against the individuals: “The Individuals did not receive notice that monetary sanctions were pending against them, and they did not receive a pre-deprivation opportunity to defend themselves at a hearing. By the time the district court heard their response, it had already decided against them. That was an abuse of discretion.”
  • Vacated the injunction: “We also agree with CEATS that the district court did not make the bad-faith finding that is a prerequisite to litigation-ending sanctions under [Fed. R. Civ. P.] 37(b). Instead, the district court found that CEATS acted recklessly, and then it equated recklessness with bad faith. We have rejected that equivalence.”
  • Vacated the fee award: “[T]here was a significant disparity between the rates that the first court approved when it awarded attorney fees to CEATS (at an earlier stage of litigation) versus the rates that it approved when it awarded attorney fees to Ticket (as part of the sanction against CEATS).”

CEATS, Inc. v. TicketNetwork, Inc., No. 21-40705 (June 19, 2023). The Court aptly summarized: “We AFFIRM in (small) part, VACATE in (large) part, and REMAND for further proceedings.”

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Friday, June 16, 2023

Potential Consequences of Unlawful DTC Shipments to Texas Residents

The following discussion only concerns alcoholic beverage sales consummated over the internet, which are shipped Direct to Consumer (“DTC”) through a common carrier (such as UPS and FedEX). Local delivery of alcohol from a retailer is a separate and distinct concept with a different set of regulations, and outside the scope of the discussion.

DTC shipping of alcoholic beverage products to Texas residents is prohibited except for wine sold by in-state and out-of-state wineries holding proper permits with the Texas Alcoholic Beverage Commission (“TABC”). DTC shipment of spirits, malt beverage and beer products to Texas residents is illegal. See, Tex. Alco. Bev. Code § 11.01(c). This is because any activity not expressly authorized under the Code is prohibited. Any seller who ships spirits, malt beverage and beer products through a common carrier could be subject to civil and criminal action.

Wine manufacturers holding a Winery (G) permit or Out of State Winery Direct Shipper’s (DS) permit may ship wine to a Texas consumer through a common carrier. Any seller shipping wine without a TABC permit could be subject to civil and criminal action.

Potential consequences include seizure of illicit beverages, see Tex. Alco. Bev. Code § 103 et seq, injunctive actions in State and Federal Court under the Texas Alcoholic Beverage Code, see Tex. Alco. Bev. Code § 101.01, Texas Deceptive Trade Practices Act (“DTPA”), see Tex. Bus. Comm. Code §§ 17.46(b)(2) and (b)(5) and 17.47, 21st Amendment Enforcement Act, see 27 USC § 122a, substantial civil penalties under the DTPA, see Tex. Bus. Comm. Code § 17.46(c), as well as criminal prosecution for a litany offenses, such as unlawful shipment of alcohol, see Tex. Alco. Bev. Code § 11.01(c), deceptive business practices, see Tex. Penal Code § 32.42(b)(12), money laundering, see Tex. Penal Code § 34.02, and organized criminal activity, see Tex. Penal Code § 71.02(10).

The seriousness of potential remedies cannot be overstated. Each unlawful shipment of alcohol is a potential violation of the DTPA, which carries a maximum penalty of $10,000. Tex. Bus. Comm. Code § 17.46(c). Furthermore, money laundering and organized criminal activity, which go hand in hand with illegal shipping operation are also felonies. Felony criminal offenses can carry maximum penalties of 5 years to 99 years in prison and $10,000 fine, depending on the dollar amount of proceeds derived from the illegal scheme. See, Tex. Penal Code §§ 12 et seq, 34.02(e), and 71.02(b).

Unlawful shipment of alcohol is an area of concern for TABC, according to June 12, 2023 National Conference of State Liquor Administrators (“NCSLA”) presentation by TABC Executive Director Thomas Graham. The Commission estimated that 57% of wine was shipped illegally to the State last year alone. To automate detection and identification of bad actors, the Commission has implemented recent technological measures.

Consultation with a licensed Texas attorney experience in liquor law is strongly recommend before shipping any alcoholic beverage product to a Texas resident, regardless of where a participant is involved in the transaction, e.g. third party e-commerce site, industry member, or common carrier. Additionally, a Texas liquor law attorney may be able to help identify other permit designations, which would allow for local delivery of wine, spirits and beer to Texas residents located in areas that are wet for those categories of beverages.



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Wednesday, June 14, 2023

Beyond Bankruptcy Jurisdiction

The Fifth Circuit was unwilling to extend a bankruptcy court’s “core” or “related-to” jurisdiction to reach a settlement agreement when:

[T]he settlements contradict the plan. Whereas the plan discharged debts unless a timely proof of claim was filed, the settlements require Chesapeake to pay the non-filing lessors a portion of their royalty claims far higher than other creditors’ timely filed general unsecured claims. Whereas the plan assumed that Chesapeake’s leases would ride through bankruptcy unaffected, the settlement requires a mandatory alteration in the terms of thousands of Pennsylvania leases. Far from merely enforcing the plan, the settlement accomplished a self-described ‘fundamental reset of Chesapeake’s relationship with its Pennsylvania lessors.’”

No. 21-20232 (June 8, 2023).

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JOA Cross-Netting Question Almost Answered

Co-author Emily Morris *

One of the questions raised in 1776 Energy Partners, LLC v. Marathon Oil EF, LLC was whether Marathon as operator could apply revenues owed to non-operator 1776 under one joint operating agreement to satisfy unpaid debts owed on another. Unfortunately, we don’t have an answer. (FWIW, this is the same “1776” from a recent post, whiffing at the plate again with runners in scoring position.)

The litigants were parties to the Culberson, Longhorn and Bordovsky JOAs. 1776 stopped paying its share of expenses under the Culberson and Longhorn JOAs and advised it was going to drill a well on Bordovsky, in which it was the operator. Marathon questioned how 1776 could fund a new well when it owed millions on other wells. 1776 responded that the new well would be funded by outside investors.

Marathon began cross-netting revenues against expenses and sent an AFE proposing three wells under the Culberson JOA along with a $9.4 million cash call. 1776 had 30 days to elect whether to participate and if it elected to participate, 15 days to pay the cash call or it would be deemed non-consent.

1776 elected to participate in the new wells but would not pay the cash call. The parties engaged in a series of complicated negotiations over two years in an attempt to resolve the situation. The negotiations failed.

Practice tip

One tactic that probably should have been avoided was an employee of 1776 responding to Marathon’s notice of default by emailing a picture of a man pulling out empty pants pockets.

Litigation ensued. Witnesses at trial disagreed on pretty much everything, including, for example, whether a certain phone call ever even happened.

The court entered a final judgment for Marathon based on the summary judgment order and evidence presented at trial showing principal and interest owed under the Bordovsky JOA and credits owed on the Culberson and Longhorn JOAs.

What about cross-netting?

The trial court declared that the Culberson JOA did not require 1776 to pay debts under other JOA’s in order to participate in the drilling of the three proposed wells under that JOA. This was based on Marathon’s refusal to assure 1776 and its outside funders that it would not cross-net the new wells’ cash call under one JOA against debts on the others.  The court of appeals agreed with Marathon that the ruling resolved a hypothetical question rather than a live controversy. It was an advisory opinion because 1776 never paid the Culberson cash call.

1776 had one last bottom-of-the-ninth opportunity on cross-netting. After partial summary judgment in favor of Marathon for $1.9 million plus interest for breach of the Culberson and Longhorn JOAs, 1776 moved to amend its counterclaim to assert that Marathon’s cross-netting was a repudiation and anticipatory breach of the Culberson JOA and to seek a declaration that cross-netting was not allowed. The trial court denied the amendment on the basis that it was not timely filed. That ruling was upheld on appeal.  Result: No answer to the cross-netting question.  

Procedural issues

In addition to reversing 1776’s declaratory judgment, the court of appeals overruled challenges by 1776 to the final judgment on issues including admissiblity of expert testimony, the jury charge, fraud by nondisclosure, calculation of damages, the effect of an “alternative judgment”, and segregation of attorneys’ fees.

Your musical interlude. Our regretfully tardy remembrance of D-Day!

*Emily is a rising 3L at University of Texas Law School and a Gray Reed summer associate.

 



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Writing in Threes

The power, the magic, and the charm of three

Anecdotal evidence suggests that when trying to persuade, presenting three concepts is better than presenting two. Or four. Or more. We see examples of memorable, powerful threes in advertising, in literature, and even in the Declaration of Independence:

  • snap, crackle, and pop
  • I came; I saw; I conquered
  • life, liberty, and the pursuit of happiness

Yes, I just gave three examples.

Do you have a sense of the importance of three in writing? Did you ever learn to write a “five-paragraph essay”? You present an introduction and a conclusion, but in between you write the first point, the second point, and the third point. The power of three.

When creating lists, when presenting claims, or when organizing arguments, writing in threes is common advice from legal-writing experts. Patrick Barry says, “Judges use the Rule of Three. Practitioners use the Rule of Three. And so do all manner of legal academics.”[1] Diana Simon advises that when possible, “distill your arguments down to three main points … and, if possible, eliminate arguments after that point .…”[2] And Bryan Garner reports that “A mathematician once told me that there are really only four numbers in the world: one, two, three, and many.[3]

But is the persuasive power of three anything more than good advice? Yes. Empirical studies validate the “magic of three,” as Diana Simon summarized in a recent article.”[4]

In one study, subjects learning a new word were better able to understand and apply the word’s meaning after being given three examples.[5] Similar research suggests that we consider evidence and examples to establish a pattern or a “streak” once they hit three.[6]

In another study, subjects described getting back together with an ex-partner, and the descriptions had from one to six reasons that the renewed relationship was good. In one scenario, the person described the ex-partner with four words: “intelligent, kind, funny, and cute.” Researchers noticed that the fourth word provoked skepticism in listeners, and overall, those who heard three positive traits were more likely to approve of the relationship than those who heard four.[7] The authors of that and other studies concluded that “the optimal number of claims is three ….”[8]

In the real world, you can’t always force legal standards into threes. After all, premises liability in Texas has four elements. But if one element is beyond dispute or if one has been waived or stipulated, your memo, motion, or brief can present the three remaining elements. Or maybe for the fourth element is supported by three arguments or three key pieces of evidence.

Would using some examples help you present your position? If so, consider using one or three, but not two—and definitely not four: remember the power of three. And when constructing sentences, if you have the opportunity to present parallel ideas, phrases, or clauses, see if you can reasonably present them in threes. So this:

  • The employer’s responses were hasty, terse, superficial, and disrespectful.

Is likely not as powerful as this:

  • The employer’s responses were hasty, terse, and superficial.

When you can, take advantage of the power of three.

_____

[1] Patrick Barry, The Rule of Three, 15 Legal Comm. & Rhetoric 247, 247–48 (2018).

[2] Diana J. Simon, The Power of Connectivity: The Science and Art of Transitions, 18 Leg. Comm. & Rhetoric: JALWD 65, 80 (2021).

[3] Bryan A. Garner, Good Headings Show You’ve Thought Out Your Arguments Well in Advance, ABA J. (2015), https://www.abajournal.com/magazine/article/good_​headings_​show_​youve_​thought_​out_​your_​arguments_​well_​in_​advance/

[4] Simon, The Power of Connectivity, at 76-77.

[5] Simon, The Power of Connectivity, at 77 citing Suzanne B. Shu & Kurt A. Carlson, When Three Charms but Four Alarms: Identifying the Optimal Number of Claims in Persuasion Settings, 78 J. Marketing 127, 137 (2014) citing J.B. Tenenbaum & F. Xu, Word Learning as Bayesian Inference, Psychol. Rev., 114(2), 245–72 (2000).

[6] Kurt A. Carlson & Suzanne B. Shu, The Rule of Three: How the Third Event Signals the Emergence of a Streak, 104(1) Org. Behav. & Hum. Decision Processes 113 (2007).

[7] Shu & Carlson, When Three Charms, as reported in Susannah Jacob, The Power of Three, N.Y. Times (Jan. 3, 2014), https://ift.tt/IjaAE6U

[8] Id. at 138.



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Monday, June 12, 2023

Green Materials May Lead to a Rise in Construction Defect Litigation

The green building boom has increased the possibilities available to contractors to construct environmentally friendly projects, both in accordance with new government standards and their customers’ wishes. However, along with progress also comes uncertainty. Some of the newer environmentally advanced construction materials may not have much of a track record for safety. While there are no new definite risks that are currently known, the coming years will determine whether environmental advances in building materials will also be safe or have similar useful lives.

There are many variables within the green building boom that could affect the insurance market, both for the structures once they are built and for the professionals designing and building them.

Green Building Poses an Uncertain Future for Insurance Premiums

It is impossible to say at this point in time whether newer green building materials have increased or decreased risks of construction defects or other legal issues. They are too new to have acquired any sort of track record yet. However, insurance companies will be active in the space given the expanding activity in the green construction sector.

One example is with LEED certification, where the uncertainty varies by level of certification. At the basic level, LEED certification may not involve too much of a departure from traditional building methods. Many, contractors have been building to standards that would qualify for basic LEED certification for years, and there has been no known spike in construction defects. The risks arise when customers wish to have a project built to gold or platinum certification. At that point, the contractor may be asked to use more untried building methods, equipment and/or materials in the design and build process. As innovative as these methods may be, no one quite knows yet how such will perform throughout the life of the project. New technology does not automatically mean increased risk, but we’re still too early in the green movement to know exactly where this increased risk exists, if at all.

How Specific Green Technologies Could Impact Premiums

One example of a new technology that may raise questions is wind turbines. Some customers have taken to requesting mini wind turbines on the roof of a new project. However, there could be a risk that the building’s roof may not be properly designed to withstand the weight or movement of the turbines. Although these fears could turn out to be unfounded, it may take years to know whether there are any potential issues caused by wind turbines on a roof.

Another new technology about which there is little safety data is fuel cells. Some new projects have resulted in the installation of fuel cells directly outside a building’s property. These cells produce electricity by converting a source fuel into an electrical current and water. This conversion process can generate intense heat. There is always a possibility that this intense heat could result in increased fire risk. These technologies are too new to have generated any patterns or issues which would appear in their safety records, but the lack of incidents does not guarantee there won’t be any in the future.

There is one new green technology that has already resulted in an increase in insurance claims. Some projects have featured a vegetative roof. In some cases, buildings with these roofs have suffered water damage because drains on the roofs become clogged, are improperly installed and/or improperly specified drains. Additionally, membranes on the roof have become pierced, leading to water damage to the floors below.

One common way that a building technology becomes “green” is by materials and components being created out of recycled material. When a material is described as being made of recycled material, the origins may be unknown. A common follow-up question is, “Recycled from what?” Insurance companies ask this same question. Just because material is made of recycled material does not automatically mean it is safe or quality.

The unknown risk potential of new green technologies could also result in increased insurance costs while underwriters learn more about the technologies. To protect themselves, underwriters may be inclined to raise premiums while they do their due diligence regarding the safety of new technologies.

Green Buildings Could Become More Expensive to Insure

There is one reason why green building technologies will definitely raise insurance premiums. The emerging technologies cost more to build. Thus, an overall insurance policy will be for a higher amount, requiring higher payments. If green building materials prove to be riskier than traditional construction materials, the insurance premiums will be even higher. However, some insurance companies may offer discounts for green buildings.

That said, there are other reasons why premiums may not increase too much. Companies that invest in green technologies often have a track record of creating a culture of safety. They are more interested in the maintenance of their buildings and safe operation. These safety and preventative maintenance-conscious policyholders could lead to a small number of claims over time and potentially lower premiums.

Builders and Engineers May Need Their Own Insurance

Another potential area of liability is for builders. Companies are looking to hire contractors who can build a structure that would help them achieve certain green benefits, including LEED certification. Sometimes, a green building can fail to live up to its environmental targets even when there are no overt building defects. In one lawsuit, Southern Builders v. Shaw Development, the building’s owner (Shaw Development) sued its builder because, among other things, the “green” building allegedly failed to achieve certification in a timely manner, which allegedly cost the owner $635,000 in state tax credits. The case settled outside of court.

As more companies opt for green building technologies, litigation between developers and owners on one hand, and builders on the other, will increase. From a contractor’s perspective, they need to be careful about making any specific warranties and representations regarding their work. Architects and engineers may need to be specifically insured against any professional liability claims resulting from the environmental underperformance of their buildings.

In general, insurance premiums are a reflection of the risk taken on by an insurer to insure something or someone. Right now, there is not enough yet known about green buildings to reasonably predict what the future holds for construction defect litigation involving those buildings, and the cost of insuring them or the projects that helped make them green. For more information on construction litigation matters, contact MehaffyWeber.

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Statute of Frauds, not satisfied

An alleged requirements contract for a supply of auto parts did not satisfy the statute of frauds, when it did not say in writing that it was a requirements contract or otherwise establish a quantity, when:

  • The email in question referenced a $10,000 credit limit (“Our credit manager is on the conservative side. He has given you a credit limit of $10K until he sees a credit history pattern. Your terms are net 30 days.t had a $10,000.”) The Fifth Circuit held: “The $10,000 figure is a credit limit; it is not a ‘specif[ication of] a quantity’ of goods that Wesden would buy from ITW.”
  • The email attached a price list. The Court held: “Wesden contends that the attachment satisfies the quantity-term requirement because it shows that the parties agreed to an ‘”‘unlimited” quantity in writing, which is very specific.’ But this is not so. The attachment is an empty order form listing the per-unit price for each Auto Magic product. There is no quantity or exclusivity term in the price list.”

Wesdem LLC v. Illinois Tool Works, Inc., No. 22-50769 (June 9, 2023).

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Friday, June 9, 2023

SCOTUS Keeps Trademark Law Simple

Jack Daniel’s v. VIP presented the question whether a dog toy, with the general appearance of a Jack Daniel’s bottle, infringed the Jack Daniel’s trademarks. The matter reached the Supreme Court because of a dispute over whether to (a) apply the customary likelihood-of-confusion factors under the Lanham Act, or (b) before applying those factors, apply “the Rogers test” that focuses on a First Amendent issue. The Supreme Court chose the simpler path and went straight to the factors:

Without deciding whether Rogers has merit in other contexts, we hold that it does not when an alleged infringer uses a trademark in the way the Lanham Act most cares about: as a designation of source for the infringer’s own goods. VIP used the marks derived from Jack Daniel’s in that way, so the infringement claim here rises or falls on likelihood of confusion. But that inquiry is not blind to the expressive aspect of the Bad Spaniels toy that the Ninth Circuit highlighted.

No. 22-148 (U.S. June 8, 2023) (citation omitted).

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Thursday, June 8, 2023

Planning For When Your Mind Fades

As our population ages, age-related diseases, such as Alzheimer’s and other forms of dementia, will afflict an increasing number of people. Although irreversible and incurable, those diagnosed with these diseases can live for prolonged periods of time with treatment.

In the early stages of the disease, individuals with dementia can maintain a good quality of life. However, as the disease progresses, that changes. They lose their ability to recognize family members, become increasingly fearful and agitated, and are unable to take care of themselves.

If you receive a dementia diagnosis, what type of treatment would you want? Would your wishes change as the disease progresses?

Living Will: The Texas Directive to Physicians

A Texas Directive to Physicians allows you to specify what kind of life-sustaining treatment should be administered or withheld if your physicians diagnose you with:

  1. A terminal condition from which you are expected to die within six months, even with available life‑sustaining treatment provided in accordance with prevailing standards of medical care; or
  2. An irreversible condition that prevents you from caring for yourself or making decisions for yourself and will result in your death without life‑sustaining treatment provided in accordance with prevailing standards of care.

The statute defines a terminal condition as an incurable condition caused by injury, disease, or illness that according to reasonable medical judgment will produce death within six months, even with available life-sustaining treatment provided in accordance with the prevailing standard of medical care.

The statute defines an irreversible condition as a condition, injury or illness that may be treated, but:

  • is never cured or eliminated,
  • leaves a person unable to care for or make decisions for himself, and
  • is fatal without life sustaining treatment provided in accordance with the prevailing standard of care.

The document gives individuals the option of indicating whether doctors should administer or withhold treatment depending on whether the patient is suffering from a terminal or irreversible condition.

It works well for acute situations, such as an accident or a stroke, but not for degenerative conditions where quality of life diminishes over time.

Living Will for Dementia

Dr. Barak Gaster, an internist at the University of Washington School of Medicine, believes that most advance directives are not appropriate for diseases that progress gradually because they do not adequately account for the fact that treatment wishes may change as the disease advances. So he worked with others to create a dementia-specific advance directive that allows those diagnosed with the disease to better express their wishes.

The Health Care Directive for Dementia provides information about the symptoms of mild, moderate, and severe dementia, and allows individuals to specify their treatment goals depending on the course of their disease. For example, someone could specify he would like to receive all treatment that prolongs his life, including rescusitation if his heart stopped beating, if his dementia is mild. However, that same person could also direct that all care to prolong his life should not continue when his dementia becomes severe.

The New York Times recently featured Dr. Gaster and one of his patients in an article titled: One Day Your Mind May Fade. At Least You’ll Have a Plan.

Many thanks to my friend, Kay Allen, a certified financial planner in Colleyville, Texas, for bringing this article to my attention.

This article was originally published on February 26, 2018, and updated on June 6, 2023.

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Arbitration: Where’s the Agreement with the Plaintiff?

Fox v. The Rehabilitation & Wellness Centre of Dallas, LLC, et al.

Dallas Court of Appeals, No. 05-21-00904-CV (June 5, 2023)
Justices Molberg (Opinion), Partida-Kipness, and Carlyle

Roger Fox brought wrongful death and survivor claims on behalf of his deceased wife, Karen. Defendants moved to compel arbitration based on an agreement signed by Roger—not Karen. The trial court granted Defendants’ motion to compel arbitration and dismissed all claims.

The issue before the Court was simple: Did Defendants “meet their initial evidentiary burden to prove the existence of a valid, enforceable arbitration agreement?” No, they did not.
The Court noted that the trial court did not hold an evidentiary hearing, did not consider any affidavits, and did not admit any evidence into the record. Instead, the only items before it were unauthenticated documents attached to the filings. Although the parties apparently ignored this evidentiary problem in both the trial court and on appeal, which would have been dispositive had he raised it, the Court recognized another fundamental problem: there was no evidence that Roger signed the agreement on Karen’s behalf. Therefore, even assuming the contract had been authenticated and admitted, Defendants did not meet their burden under principles of contract law and agency, which require the agent’s (Roger’s) authority to be established through the principal’s (Karen’s) conduct. Roger’s signature, accompanied by language in the agreement purportedly stating Roger was acting as Karen’s agent, did not suffice.
The Court thus reversed the order compelling arbitration and remanded the case to the trial court for further proceedings.


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Tuesday, June 6, 2023

Rule 91a: “Just the Facts Pleadings, Ma’am” … Even if It’s Not Briefed?

Davis v. Homeowners of American Insurance Co.

Dallas Court of Appeals, No. 05-21-00092-CV (May 31, 2023)
Justices Molberg (Opinion, linked here), Pedersen (Dissent, linked here), and Kennedy

A defendant insurer successfully moved to dismiss the plaintiff’s claims under Rule 91a, based on limitations. But the Dallas Court of Appeals reversed, 2-1. The problem? The insurer’s motion to dismiss relied heavily on a variety of documents submitted with that motion to establish the limitations point. Rule 91a, however, expressly provides that a “court may not consider evidence in ruling on the motion and must decide the motion based solely on the pleading of the cause of action.” “In the Rule 91a context, only the non-movant’s pleading may be looked to when determining whether the cause of action pleaded has a basis in law.” A Rule 91a motion to dismiss, the Court explained, “is not a substitute for … summary judgment,” and so “the court may not resort to evidence proffered by the movant, such as through affidavits, transcribed testimony, or documents.” The majority therefore reversed the Rule 91a dismissal, but cautioned that it was not addressing the merits of the limitations argument, which might yet succeed on summary judgment.

Seems straightforward, right? So, why a dissent? Well, said Justice Pedersen, the plaintiff did not preserve error in the trial court. More specifically, the plaintiff did not object to the trial court’s considering the movant-insurer’s proffered documentary evidence, choosing instead to argue the merits of the insurer’s argument and the “evidentiary value” of the documents on which it relied. “Issues not timely preserved for appeal are waived,” and the procedural misstep identified by the majority wasn’t objected to or otherwise preserved in the trial court here.
Compounding the problem, the plaintiff-appellant did not raise the Rule 91a pleadings/evidence issue on appeal. That, argued Justice Pedersen, also should have precluded the majority’s decision. Per the Texas Supreme Court in Pike v. Texas EMC Management, “Our adversary system of justice generally depends ‘on the parties to frame the issues for decision and assign[s] to courts the role of neutral arbiter of matters the parties present.’” 610 S.W.3d 763, 782 (Tex. 2020) (quoting Greenlaw v. United States, 554 U.S. 237, 243 (2008) (discussing the “party presentation principle”)). “A court of appeals may not reverse a trial court judgment on a ground not raised” on appeal. Id. “Accordingly,” said Justice Pedersen, “this Court’s precedent … prohibits our panels from reversing trial court judgments on unassigned, nonfundamental error”—as he contended the majority did here.
Curiously, the majority opinion does not respond to the dissent’s preservation and waiver arguments.


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Thursday, June 1, 2023

Preservation of “Legal Issue” Grounds

In Ortiz v. Jordan, 562 U.S. 180 (2011), the Supreme Court “held that an order denying summary judgment on sufficiency of the evidence grounds is not apealable after a trial …. a party who wants to preserve a sufficiency challenge for appeal must raise it anew in a post-trial motion.”

In Dupree v. Younger, No. 22-210 (May 25, 2023): “The question presented in this case is whether this preservation requirement extends to a purely legal issue resolved at summary judgment. The answer is no.

That distinction makes sense and should help avoid unnecessary disputes about preservation. There will, however, be disputes about “sufficiency” questions that turn on points of law; as illustrated by the longstanding definition of a “no evidence” appeal issue in Texas state practice:

“No evidence” points must, and may only, be sustained when the record discloses one of the following situations: (a) a complete absence of evidence of a vital fact; (b) the court is barred by rules of law or of evidence from giving weight to the only evidence offered to prove a vital fact; (c) the evidence offered to prove a vital fact is no more than a mere scintilla; (d) the evidence establishes conclusively the opposite of the vital fact.

City of Keller v. Wilson, 168 S.W.3d 802 (Tex. 2005).

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