THL_July/August_2011

Sporting Events: Ticket to a Lawsuit?

Contort vs. Tort: Are We There Yet? Swimming in Unsettled Waters: Fiduciary Duties and Limited Liability Companies A Landlord’s Duty to Mitigate in Texas: What If You Build It, and They Don’t Come?

An Interview with the New HBA President

lawyer

THE HOUSTON

inside...

Volume 49 – Number 1

July/August 2011

Denise Scofield 2011-2012 President Houston Bar Association

contents Volume 49 Number 1

July/August 2011

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16

FEATURES Events: 10 Sporting Ticket to a Lawsuit?

By Scott D. Marrs and Sean P. Milligan

vs. Tort: 16 Contort Are We There Yet?

By Erin Hopkins

in Unsettled Waters: 22 Swimming Fiduciary Duties and Limited Liability Companies

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26

By Debra Hatter and Rikiya Thomas

Duty to Mitigate 26 Ain Landlord’s Texas: What If You Build It, and They Don’t Come?

By Kent Altsuler

Ties 30 Family Interview with new president Denise Scofield

Takes Office as 34 Scofield HBA President

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34

35 50-Year Lawyers Awards and 37 President’s Special Recognition

The Houston Lawyer

Cover Photo: Kevin McGowan Photography The Houston Lawyer (ISSN 0439-660X, U.S.P.S 008-175) is published bimonthly by The Houston Bar Association, 1300 First City Tower, 1001 Fannin St., Houston, TX 77002-6715.

Periodical postage paid at Houston, Texas. Subscription rate: $12 for members. $25.00 non-members. POSTMASTER: Send address changes to: The Houston Lawyer, 1300 First City Tower, 1001 Fannin, Houston, TX 77002. Telephone: 713-759-1133. All editorial inquiries should be addressed to The Houston Lawyer at the above address. All advertising inquiries should be addressed to: Quantum/SUR, 12818 Willow Centre Dr., Ste. B, Houston, TX 77066, 281-955-2449 ext 16, www.thehoustonlawyer.com, e-mail: leo@quantumsur.com Views expressed in The Houston Lawyer are those of the authors and do not necessarily reflect the views of the editors or the Houston Bar Association. Publishing of an advertisement does not imply endorsement of any product or service offered. ©The Houston Bar Association, 2011. All rights reserved.

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July/August 2011

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contents Volume 49 Number1

July/August 2011

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41

departments Message 6 President’s Find Your Project

By Denise Scofield the Editor 8 From Are You Ready for Some THL?

By Tamara Stiner Toomer in Professionalism: 40 ATheProfile Honorable Mark Davidson MDL Judge and Judge, 11th District Court (Retired)

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43

Spotlight 41 Committee The Senior Lawyers Committee

By Caroline Pace Reviews 42 Media HIPAA for the General Practitioner Reviewed by Al Harrison the Record 43 OffLindsay Lambert:

Firefighter, Woodworker

By Tara Shockley

Trends 44 Legal The Mark THUMBDRIVE

Granted Principal Trademark Registration Status

By Al Harrison

The Houston Lawyer

47 Placement Service 48 Litigation MarketPlace

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president’s message

By Denise Scofield Morgan, Lewis & Bockius LLP

Find Your Project

The Houston Lawyer

O

ur bar association – an entirely voluntary organization – is comprised of over 11,400 member attorneys who are committed to serving the legal profession and the community. Our members contribute more than 45,000 volunteer hours to HBA-sponsored community service projects annually. Many of those service projects enjoy long histories in Houston. For instance, our volunteer lawyer program, the HVLP, turns 30 this year. Our Campaign for the Homeless Coat and Warm Clothing Drive celebrates 20 years. Professionalism Day and the Mentor/Protégé Program are 15 years old. These long-standing programs are a source of great pride for our members.

Each year, we evaluate the programs offered by the HBA and ways by which we can enhance the services we provide, either by adding new projects or by improving existing ones. As part of this process, I have been considering how to best continue to attract and interest our volunteers. It struck me that I have most enjoyed performing volunteer work during those times in which I have included my children, and the opportunity to work with my kids on a project has made me more inclined to volunteer. In addition to enjoying being together, I have seen other benefits – my children really understand how fortunate they are, exhibit empathy about the plights of others who are less fortunate, and are more comfortable with people from all walks of life. Studies confirm that children with 6

July/August 2011

thehoustonlawyer.com

one which will take on both new projects parents who model volunteering and and examine existing ones this year. Our community service behaviors and who great state of Texas celebrates its 175th encourage their children to donate their anniversary this year, time to help others and we will mark the are more likely to “Each year, we evaluate anniversary by renewdemonstrate such the programs offered by ing our commitment behavior and attithe HBA and ways by to know and preserve tudes as they grow which we can enhance the our own history. Over older. the course of this bar This spring, the services we provide, either year, the Houston Bar HBA will afford by adding new projects or Bulletin will include a our members with by improving existing series of articles about an opportunity to ones. As part of this how specific Houston spend a Saturday lawyers have shaped morning volunteerprocess, I have been Texas history. The ing with their famiconsidering how to September-October lies. Children from best continue to attract issue of The Houston toddlers to teens and interest our volunteers.

Lawyer will focus on will be welcome It struck me that I have legal history. We come to participate in full circle on a major age-appropriate acmost enjoyed performing project that was first tivities designed to volunteer work during those highlighted in our serve others in ten times in which I have most recent historilocations throughincluded my children, cal issue from 2008 – out the city. Some of the renovation of the the projects we perand the opportunity to 1910 Courthouse. Reform together will work with my kids on a opening festivities for be familiar to us — project has made me more the new home to the sorting clothes for inclined to volunteer.”

First and Fourteenth the Campaign for Courts of Appeals will the Homeless, for take place in late August 2011. The HBA instance; others will be new. By volunwill continue to seek funds to underwrite teering with your kids, not only will you the historical display cases placed in the have an enjoyable morning with your 1910 Courthouse, and we will appreciate family, but you will leave a lasting imyour contribution. pression on your children while helping Several years ago, Harris County, in others. Please watch for more details this partnership with the Houston Bar Founfall. dation, took the lead state-wide in develOur standing Historical Committee is

oping and implementing an impressive historical document preservation project. To date, hundreds of documents have been carefully preserved and maintained in a beautiful room located in the Civil District Courthouse. The first phase of the project focused on documents dated 1920 and earlier. Many, but not all, of the relevant documents have been preserved; more work remains. With the recent passage of HB 1559 by the Texas Legislature, documents dating to 1951 will be protected from destruction, which provides a natural transition to the development of the second phase of the project. The HBA’s Historcial Committee will evaluate the breadth of the project and determine the best means by which HBA members can assist.

Finally, every year, the HBA runs a very successful blood drive for the Gulf Coast Regional Blood Center. This year, the HBA will add a bone marrow registry component to the blood drive in partnership with the Be The Match Foundation.

Thousands of people of all ages are diagnosed annually with a form of a blood cancer (leukemia and the like) and other life-threatening diseases. Many of them require a bone marrow or stem cell transplant from a matching donor in order to survive, but roughly 70 percent do not have a donor in their family. They depend on the Be The Match Registry to find a donor. The registration process is simple and non-invasive, and the potential to save someone’s life is real. Dates and locations for the registration drives will be announced bi-monthly in the Bulletin.

In addition to our Day of Family Service, the Historical Initiative, and the Be The Match Drive, the HBA will continue to offer all of the other professional and community service projects for which our organization has been honored by the State Bar and other community groups.

There really is a project for everyone – if you have not already, I hope you will find yours this year. thehoustonlawyer.com

July/August 2011

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from the editor

By Tamara Stiner Toomer Attorney at Law

Associate Editors

Julie Barry Attorney at Law

Keri Brown Baker Botts L.L.P.

Angela L. Dixon Attorney at Law

The Houston Lawyer

Robert W. Painter Painter Law Firm PLLC

Don Rogers Harris County District Attorney’s Office

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July/August 2011

Are You Ready for Some THL?

N

ot only is football back for the 20112012 season, but so is The Houston Lawyer. I am excited to head up The Houston Lawyer editorial board for the upcoming bar term with a great team of dedicated HBA members.

Special thanks to Managing Editor, Tara Shockley, and the Associate Editors (just turn your head ever so slightly to the left and you will see who they all are) who magically turn all the articles we receive into a great publication for our readers. I would be remiss not to mention HBA President Denise Scofield simply for the fact that she appointed me Editor in Chief and can bench me anytime during the season. Thanks to Denise, we have a great lineup of six publications this bar term featuring historical and medical issues, topics on professionalism and labor and employment, THL’s signature volunteerism issue, and something new with a year-in-review issue. But enough about Denise—she has her own column.

Since I have been given blank space to fill, I’d like to spend the rest of this column discussing a very important topic that impacts a majority of HBA members— fantasy football. What else did you think I was going to talk about? Given the recent end to the NFL lockout, there are going to be cuts to personnel and lots of reshuffling in the upcoming months. Thus, I will share with you some of my best practices in an effort to equip you with the best fantasy football team possible.

One, pick blindly. Do not spend much time or effort studying stats of players trying to correlate this to how they may perform during the upcoming season. Players, like lawyers, get injured or fall short of the previous year’s performance. Thus, pick the players whose names just roll off the tip of your tongue. Can anyone say Houshmandzadeh? I’d pick the Steelers’ defense based on the name Polamalu alone. Bottom line: if your spell check can identify a player’s name, do not add him to your roster. thehoustonlawyer.com

Two, choose players from teams with nice-looking uniforms. Having some color swatches handy for this step will give you a leg up on your competition. I know you may be thinking this is the girl in me focusing on inconsequential things like a cute outfit, but trust me when I tell you my method has been scientifically proven and is 99.9 percent fail-safe. Let’s face it. You only perform as well as you’re dressed. I mean why do you think seersucker in legal circles is making a comeback? More to the point, when was the last time any player with the Cleveland Browns had a decent season (Peyton Hillis being the 0.1 percent exception to my method)? Let’s just say the Browns might consider changing the team’s color scheme to generate better player performance. A final word to the wise, bench any player on your roster whose team switches to retro uniforms.

Finally, don’t be afraid to pick players who are not in the league anymore. I did this one year with some Bret Favre guy and this racked up a lot of points for me.

Despite being retired, the computer still gave me credit for putting him in my weekly lineup. Go figure.

Well, there you have it folks—my guaranteed tips to a successful fantasy football season. While on the topic of sports, this issue of The Houston Lawyer has a great article by Scott Marrs and Sean Milligan regarding duties owed to spectators at sporting events. Debra Hatter and Rikiya Thomas also discuss duties in terms of the fiduciary duties owed by managers and members of limited liability companies. Keeping with the “duty” theme, Kent Altsuler writes about a landlord’s duty to mitigate damages when a tenant abandons the leased premises. Adding to the great collection of articles in this issue, Erin Hopkins provides us with a useful overview of contort law. As always, THL’s columns allow you to easily follow the activities of HBA members and committees and keep you in the know about developing legal trends and the latest books or software. I hope you enjoy reading this issue. Until next time...

BOARD OF DIRECTORS President

Secretary

Denise Scofield

Alistair B. Dawson

President-Elect

Treasurer

Brent Benoit

David A. Chaumette

First Vice President

Past President

Laura Gibson

T. Mark Kelly

Second Vice President

M. Carter Crow

DIRECTORS (2010-2012)

Benny Agosto, Jr. Warren W. Harris

Todd M. Frankfort John Spiller

Hon. David O. Fraga Neil D. Kelly

DIRECTORS (2011-2013) Jennifer Hasley Daniella D. Landers

editorial staff Editor in Chief

Tamara Stiner Toomer Associate Editors

Julie Barry Angela L. Dixon Don Rogers

Keri D. Brown Robert W. Painter

Sharon D. Cammack Don D. Ford III Sammy Ford IV Polly Graham John S. Gray Al Harrison Farrah Martinez Judy L. Ney Edward J. (Nick) Nicholas Caroline C. Pace Benjamin K. Sanchez Joy E. Sanders Hannah Sibiski Gary A. Wiener N. Jill Yaziji

Editorial Board

Managing Editor

Tara Shockley

HBA office staff Membership and Technology Services Director

Executive Director

Kay Sim

Ronald Riojas

Administrative Assistant

Ashley G. Steininger

Membership Assistant

Administrative Assistant

Billy Salinas

Bonnie Simmons

Committees & Events Director

Receptionist/Resource Secretary

Claire Nelson

Lucia Valdez

Committees & Events Assistant

Director of Education

Lucy Fisher

Brian Edwards

Continuing Legal Education Assistant

Communications Director

Amelia Burt

Tara Shockley

Community Education Assistant

Communications/Web Designer

Natasha Williams

Brooke Eshleman

Advertising sales Design & production QUANTUM/SUR

12818 Willow Centre, Ste. B, Houston, TX 77066 281.955.2449 • www.quantumsur.com Publisher

Leonel E. Mejía Production Manager

Marta M. Mejía Advertising

Mary Chavoustie

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sporting events:

Ticket to a Lawsuit?

How the law Treats Spectator Injuries at Sporting Events

By Scott D. Marrs and Sean P. Milligan I. SPECTATOR LIABILITY A. The Danger of the Flying Souvenir The one time I forgot my glove at a baseball game as a child, a family member got tattooed by a line-drive foul ball. Naturally, the whole family pointed the finger at me, the sure-handed kid who always brought his trusty glove to the ball game. I looked back at my family and under immense pressure, said the first thing that came to mind: “I didn’t hit the ball.” Why was it my fault, or my family member’s fault? Why don’t we blame the guy who couldn’t get his bat around quick enough? Better yet, why don’t we blame the stadium owner?

Doesn’t the stadium owner have an obligation to protect us from foul balls? Why not? Why is it okay for the screened area to cover only the area right behind the plate between the two dugouts?

What if someone is hit by a ball when they are distracted by something else at the game, like the San Diego Chicken pestering an umpire? Modern sporting events are often more about the extracurricular activities and distractions than the game itself. The JumboTron displays bloopers, couples kissing, interesting facts about your favorite players, and highlights from other games. Between innings, T-shirts are launched into the stands and fans do their best impression of “Y-M-C-A” or sing “Take Me Out to the Ball Game.” The beer guy paces the stands, the cotton candy guy is obstructing your view, somebody starts the wave, or you are distracted by reading the game’s program. For a variety of reasons, your eyes are not always glued to the field of play. Given the wide range of distractions inherent at every contemporary sporting event, what happens when a spectator is injured?

Attending a sporting event carries the inherent risk that one might be injured by objects flying into the stands. As a tragic example of the potential risks involved, a Texas Rangers fan died on July 7, 2011, after reaching over the outfield railing to catch an incoming ball and falling 20 feet

onto the concrete below.

B. Duties Owed To Spectators A spectator seriously injured at a sporting event may intuitively seek recovery from the facility owner. After all, facility owners, as any other property owner, owe spectators a duty to provide reasonably safe premises. However, many states completely bar recovery, or substantially limit recovery for injured spectators.

Although spectators are considered invitees, and are thus owed a duty of reasonable care by the facility owner, this duty cannot expand to cover every injury sustained when a ball or other object goes into the stands. Otherwise, the risk and cost of liability would be too great, and stadium owners would likely require each spectator to sign a liability waiver when purchasing a ticket. Courts are therefore left to grapple with striking a balance between safety and unlimited liability to facility owners.

1. The Limited Duty Rule Most jurisdictions follow the “limited duty rule”: a facility or stadium owner must provide adequate screening for spectators subject to the highest risk of being hit by an object from the playing field. The various rationales for the rule are simple: (1) stadium owners generally cannot foresee every possible situation where an object may travel into the stands, (2) contributory negligence should be considered when a spectator’s injury is due to his own failure to pay attention, and (3) spectators assume the risk of being injured when they sit in unprotected areas. The primary justification for the limited duty rule is that the risk of being injured by an object is an obvious risk inherent in the sport.

In 1929, the famous Supreme Court Justice Benjamin Cardozo summarized the way the law views spectator injuries: “The timorous may stay at home.”1 Justice Cardozo echoed the prevalent attitude about sports injuries which continues today; i.e., we all understand the possibility of being injured while at a sporting event; if you are risk averse, watch the game on TV.

The limited duty rule provides that a sports facility owner has no legal duty to eliminate risks inherent in the sport itself.

For instance, the risk of getting hit by a foul ball on the third base line at a baseball game is inherent in the game. Likewise, the risk of a flying puck at a hockey match is inherent if you are seated in the lower section. Those injured at a sporting event are not, however, without recourse.

Courts have set forth various legal standards in determining whether an injured spectator is entitled to recovery from the facility owner. a. Liability to Spectators at Baseball Games Most courts use a two-part test to determine the extent to which an owner must protect spectators at a baseball event under the limited liability rule: (1) What is the most dangerous area of the ballpark?

(2) How many protected seats (i.e., how much screening) must be provided to reasonably fulfill requests from spectators on an ordinary sporting occasion?

A facility owner must provide adequate screening to avoid liability – but what is “adequate screening?” One New York court has held that the facility owner must prevent injury to those who watch the game, but is not required to screen the entire field of play.2 The court held that the facility owner’s duty is limited to screening the most dangerous section of the field (i.e., behind home plate), and to provide sufficient screening for spectators that might reasonably desire protected seats. The court did not require the facility owner to provide screened seating on the first base line.

The limited duty of stadium owners is perhaps attributed to the fact that baseball is our national pastime and is therefore afforded greater protection by courts and the risk of being hit by a foul ball are well known to the public.

Indeed, one of the exciting parts of attending a baseball game is the prospect of catching a foul ball. The lesson to spectators: bring your glove or sit behind the screen. b. Limited Duty in Other Sports? thehoustonlawyer.com

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Hockey. The limited duty rule has been applied in hockey cases as well. In one New York case, a court dismissed a lawsuit where a child was hit by a hockey puck in the face, reasoning that the owner had fulfilled its limited duty by installing a Plexiglas shield behind the hockey goals.3 Like the limited duty rule in baseball, hockey facility owners satisfy their limited duty to spectators by: (1) providing a sufficient number of protected seats for spectators who may

be reasonably anticipated to desire protected seats; and (2) providing screening for spectators in the most dangerous areas of the arena. This court held that the hockey facility owner satisfied its duty by providing screening behind the goals.

A spectator at a hockey match has a different experience than a baseball fan. As opposed to catching a foul ball at a baseball game, no one in their right mind wants to catch a hockey puck

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going 100 mph into the stands. Thus, while baseball attendees have developed a sport within a sport of chasing after foul balls, hockey fans have not embraced a similar tradition with the flying puck. Despite this, most courts have adopted a limited duty rule for hockey-related injuries and deny relief to an injured spectator where the facility owner provides protective seating in the most dangerous areas of the arena. The most likely explanation for the application of the limited duty rule in hockey injury cases is that most of these injuries have occurred in northern states where hockey is part of the culture and the public understands and appreciates the risk of being hit with a puck.

Basketball. Basketball spectators do not face the same risk of injury that hockey and baseball spectators face. A basketball flying into the stands is generally less harmful than a baseball or puck. As a result, there is not a wide body of case law addressing the right of recovery for injured basketball spectators.

In one case from New Mexico, a spectator was injured at a Harlem Globetrotters game when a player threw a ball into the stands, striking the spectator in the face.4 The court held that the spectator could recover because he did not assume the risk of being struck by a basketball. The court appeared to reject the limited duty rule in the context of a flying basketball, reasoning that it is outside the inherent risks of a basketball game.

Basketball has grown in popularity over the last 30 years. Seats at basketball games are placed very close to the court, sometimes within arm’s length of the players. One can easily recall the verbal exchanges between Reggie Miller of the Indiana Pacers and Knicks fan/ film producer and director Spike Lee in the 1994 Eastern Conference Finals, which demonstrated how close spectators can be to the action at a basketball game. While the limited duty rule has not been widely accepted in the context of basketball-related injuries, it seems

likely that some courts may apply the limited duty rule for basketball spectators, and allow recovery only if the facility owner did not provide adequate protective seating.

2. How Safe are the Stands?

What are the civil liability implications when players cause injuries to spectators?

There are countless instances of spectators and players getting involved in altercations. It seems like every season, whether in baseball, basketball or hockey, spectators and players are caught mixing it up.

When the dust settles from these melees, you can bet the lawsuits will fly.

One of the more publicized baseball melees involved players and fans at a 2004 Oakland A’s game against the Texas Rangers. During the 9th inning of the game, the Rangers’ bench and bullpen cleared after an argument erupted between the Rangers’ bullpen and Oakland fans. The Texas Rangers’ reliever (Frank Francisco) was in the bullpen on the first-base line, picked up a chair being used by a bat-boy, and threw it into the stands. The chair hit a woman in the face and broke her nose. Francisco was arrested the following morning, and pleaded no contest to assault charges. The injured fan sued Francisco in civil court and the case was settled in 2007.

In another case, a minor-league pitcher in the Chicago Cubs organization, Julio Castillo, was convicted of felony assault when he threw a baseball during an onfield melee in 2008, seriously injuring a fan. Castillo testified that he threw the ball toward the opposing team’s dugout and not at any person in particular. The prosecutor argued that even though he missed his intended target (players on the opposing team), he should not get a free pass.

In August 2009, Castillo was convicted of felonious assault causing serious physical injury and was sentenced to 30 days in jail and three years of probation.5 In April 2010 a judge released Castillo from probation “on the condition that he leave the United States and not return for a minimum of three years.”6 One of the most memorable sporting-

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events brawls between players and fans occurred on November 19, 2004 during a Detroit Pistons-Indiana Pacers basketball game. With less than one minute left in the game, Ron Artest of the Pacers and Ben Wallace of the Pistons became involved in a minor altercation. During the argument, Artest laid down on the scorer’s table when a spectator threw a cup of beer at Artest. Artest ran into the stands and punched the spectator he believed to be the culprit. Other fights broke out between

Pacers players and spectators. At the end of the melee, nine spectators were injured.

Several fans and players were charged with assault and battery.

In the aftermath, several lawsuits were filed by spectators against some of the players. In one case, a spectator who walked down to the floor to confront Pacers’ players was punched in the face and injured by Pacers’ center, Jermaine O’Neal. The spectator sued O’Neal, but the lawsuit was dismissed in 2006 because the District Court

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held the punch was justified to protect O’Neal’s teammates. In another case, two spectators sued the players, both teams and the facility owner, Palace Sports & Entertainment, Inc., for injuries sustained during the melee. The lawsuit was settled in 2008 for an undisclosed amount.

C. Liability for Injuries to Spectators Caused by Distractions Modern-day sporting events contain many distractions and side-shows throughout the game. The more common distractions include beer vendors, games or trivia being displayed on the big screen, or a team mascot starting “the wave.” This has arguably increased the appeal of attending sporting events as ticket sales are at an all-time high. However, the legal effect of such distractions could be very significant for spectators and facility owners alike.

The Distraction Theory. Under the Distraction Theory, a facility owner may be liable if it creates the distraction which causes an injury and the distraction is not self-induced by the spectator’s inattention to obvious risks. In one California case, a mascot bumped a spectator several times with its tail, causing the spectator to be distracted from the game.7 During the distraction, the plaintiff was hit in the face with a foul baseball. The stadium owner argued that it had satisfied its limited duty by providing adequate protective screening, which the plaintiff failed to use. The court held that while foul balls are an inherent risk at a baseball game (and indeed essential to the enjoyment of the game), the presence of a mascot distracting participants is not an inherent risk – nor essential to the game. Because the mascot’s antics were not essential to the game, the spectator could take his case to the jury.

In these cases, the question will likely come down to whether the distraction at issue is inherent or incidental to the event itself (or merely a marketing tool by the facility owner). Given the fact that a spectator does not assume the risk of a distraction in the same way they assume the risk of a foul ball or errant puck, spectators injured during a non-event related dis-

traction are more likely to have their cases heard by a jury.

II. CONCLUSION Spectators attending sporting events generally assume risks inherent in the game.

Facility owners are generally immune from liability for spectator injuries if they provide adequate protective screening in the most dangerous areas of the facility.

Spectators may seek recovery for injuries that are not inherent in the sport. For example, if a player goes into the stands and assaults a spectator, the player (and perhaps his team) may be liable for injuries sustained by the spectator. Also, liability may be imposed on a facility owner where a spectator’s injuries are caused by a distraction that is not inherent to the game itself.

Like all areas of the law, courts must balance the need to foster athletic competition while reasonably protecting participants and spectators in their enjoyment of the sport.

The authors dedicate this article to veteran Texas firefighter Shannon Stone who recently lost his life during a Texas Rangers game.

Scott D. Marrs is a partner at Beirne, Maynard & Parsons, LLP, and Sean P. Milligan is an associate of Winstead, PC. They represent clients in commercial disputes, trials, and arbitrations both in Texas and throughout the country.

Marrs is an arbitrator on the American Arbitration Association’s Energy and Commercial panels.

Endnotes 1.

2.

3.

4.

5.

6.

7.

Murphy v. Steeplechase Amusement Co., 250 N.Y. 479, 166 N.E. 173 (1929).

Akins v. Glens Falls City Sch. Dist., 53 N.Y.2d 325, 424 N.E.2d 531, 441 N.Y.S.2d 644 (1981).

Gilchrist v. City of Troy, 113 A.D.2d 271, 495 N.Y.S.2d 781 (1985).

McFatridge v. Harlem Globe Trotters, 69 N.M. 271, 365 P.2d 918 (1961).

Associated Press, Castillo gets jail, probation (Aug. 6, 2009), available at http://sports.espn. go.com/minorlbb/ news/story?id=4381593.

USA Today, No jail time for minor league pitcher in brawl (Apr. 14, 2010), available at http:// www.usatoday.com/sports/baseball/2010-04-14minor-league-brawl_N.htm.

Lowe v. California League of Prof. Baseball, 56 Cal. App. 4th 112, 65 Cal. Rptr. 2d 105 (1997).

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By Erin Hopkins

Contort vs. Tort:

Are We There Yet?

T

he doctrine of “contort” is a complex and seemingly amorphous rule of law employed by Texas courts.

Black’s Law Dictionary defines “contort” as “[t]he overlapping domain of contract law and tort law,” or “a specific wrong that falls within that domain.”1 But one of the courts charged with applying the doctrine more aptly described it as “a muddy area, devoid of bright line rules or easy answers as to what conduct constitutes a tort, and what a breach of contract. The acts of a party may breach duties in tort or contract alone, or simultaneously in both.”2 The doctrine bars plaintiffs from bringing tort claims when a contract between the parties defines their relationship.3 As a consequence, a plaintiff that sues for economic loss under a tort theory is almost always barred from recovery.4 The cases suggest that tort claims require physical injury to person or property.

The question is, are we there yet? Is the line clear: Economic loss belongs to contract alone while tort recovers for physical harms? The answer is that we are much closer than the Airborne Freight case5 would lead one to think.

The “contort” doctrine has evolved in two phases as courts have struggled with the problem of separating claims based on torts from claims based on contracts.

The first phase of cases laid a foundation upon which the doctrine was built.6 However, these cases, while tailored to fit the problems at hand, left many things unresolved. The continued confusion led to a second phase nearly half a century later when the Texas Supreme Court considered the doctrine again in an attempt to reconcile its earlier decisions.7 These later cases furthered the framework for analysis and established the rule as it stands today.

I. Source of Duty One of the earliest cases to deal with the problem of whether a claim sounds in tort or in contract is International Printing Pressmen and Assistants’ Union of North America v. Smith (“Pressmen”).8 Although a member in good standing of a union for more than ten years,9 Smith was expelled from the union. After he was expelled, Smith could not work in his profession because the union refused to reinstate him or allow him to work on a union job.10 The union, however, did not follow its strict guidelines for bringing charges against a member when Smith was expelled.11 Smith brought suit and was awarded damages by the jury for his wrongful expulsion.12 The union obtained a judgment non obstante veredicto on the premise that Smith’s claim was a tort claim and thus barred by the statute of limitations.13 Smith appealed to the Texas Supreme Court, which analyzed whether the action was based in tort and barred by limitations, or one sounding in contract and timely brought under the longer limitations period for contracts.

The court first acknowledged the difficultly of its position. “It is said that while the general distinction between actions in contract and in tort is clearly defined and well understood, it is often difficult to determine whether a particular action is the one or the other.”14 The court attempted to distinguish the two actions: “an action in contract is for the breach of a duty arising out of a contract either express or implied” and “an action in tort is for a breach of duty imposed by law.”15 When the duty is imposed by law, then the action is one in tort but “in cases where the duty imposed upon the defendant arises purely by virtue of a contract, the action for a breach must necessarily be in contract.”16 The Court concluded that the relationship between Smith and his Union was contractual and that his action was for damages for his union’s failure “to do the things expressly or impliedly imposed upon it by the contract.”17 Thus the court in-

troduced the first step in the “contort” analysis: the source of the duty test.

II. Contract and the Law Imposed Duty In the following year, the court again faced the dilemma of whether an action was based in contract or tort. In Montgomery Ward & Co. v. Scharrenbeck,18 the court undertook the “contort” analysis in a claim based on negligent repairs arising out of a repair contract. At Scharrenbeck’s request, a repairman from Montgomery Ward came to Scharrenbeck’s home and repaired a kerosene heater.19 When the repairman left the house, he left the heater on.20 The house caught fire and was destroyed.21 Scharrenbeck sued, alleging that the repairman’s negligent repairs caused the destruction of the house. Montgomery Ward asserted that Scharrenbeck’s suit failed to state a breach of any duty that gave rise to a claim of negligence.22 The Texas Supreme Court granted writ to consider whether the action was based in tort or contract.

At first glance the case appeared to be rooted in contract. The repairman agreed to repair the heater, provided Scharrenbeck pay Montgomery Ward for his services.23 Thus, a bargained-forexchange was in place when the incident occurred. Under Pressmen, the cause of action sounded in contract. However, the Scharrenbeck court allowed the tort recovery: “A contract may create the state of things which furnishes the occasion of a tort.”24 According to the court, “Accompanying every contract is a common-law duty to perform with care, skill, reasonable expedience and faithfulness the thing agreed to be done, and a negligent failure to observe any of these conditions is a tort, as well as a breach of the contract.”25 Where a general duty exists, although it arises from the relation created by contract or from the terms of a contract, “and that duty is violated, either by negligent performance or negligent nonperformance, the breach of the duty may constitute actionable negligence.”26 The Scharrenbeck

decision confused the contort issue because litigants had two competing viewpoints they could argue. Under Pressmen they could argue that breach of a duty arising from a contract is not a tort; under Scharrenbeck they could argue that implied duties run with contracts and breach of these duties is a tort. Although further clarity was needed, the court waited nearly forty years before approaching the issue of “contort” again.

III. Economic Loss Rule and the Type of Injury Suffered The modern “contort” doctrine rests on two Texas Supreme Court cases, Jim Walter Homes v. Reed27 and Southwestern Bell Telephone Co. v. DeLanney.28 Reed introduced the need to look at the type of injury complained of and barred tort recovery in claims where the plaintiff suffered only an economic loss.

In Reed, the plaintiffs sued for damages that arose from the sale and construction of a house.29 The Plaintiffs sought actual and punitive damages, alleging that the homebuilder was grossly negligent in its supervision of the construction.30 Citing both Pressmen and Scharrenbeck the Court concluded: “The acts of a party may breach duties in tort or contract alone or simultaneously in both. The nature of the injury most often determines which duty or duties are breached. When the injury is only the economic loss to the subject of a contract itself, the action sounds in contract alone.”31 The court determined that plaintiffs were injured because the house they were promised and paid for was not the house they received.32 The court concluded that the claim “can only be characterized as a breach of contract, and breach of contract cannot support recovery of exemplary damages.”33 The court thus reconciled the apparent confusion by concluding that there can be no tort recovery if an injury is based solely on the economic loss that is the subject matter of a contract.

This new test added another layer to the “contort” analysis. First, a court thehoustonlawyer.com

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property damage.”34 Further, physical must look to see from where the duty arose. Next, a court must look at the injury or property damage is defined as type of injury the court is being asked “some physical destruction of tangible to redress. When this two-step test is property.”35 If the plaintiff fails to show applied to the early cases, the conflict a physical injury or property damage seems to be resolved. In Pressmen, the separate from the subject of the contract, injury was purely economic—the loss the tort claim is barred. Economic losses of wages and privileges that arose out “may be pursued only via contractual of the union contract. Applying the rearemedies ‘even when the breach might soning from Reed, the outcome would be reasonably be viewed as a consequence the same if the claim was one based in of a contracting party’s negligence.’”36 contract. The duty Thus, under the ecoarose from a contract nomic loss rule of “The injury analysis and the injury was Reed and its progeny, stated in Reed led “to the subject of the a plaintiff may not to the development of contract itself.” In bring a tort claim Scharrenbeck, damwithout physical the economic loss rule. ages were sought for damage to property Many courts the destruction of a or person. have held that, house while the contract concerned the IV. Independent if a plaintiff sues repair of a heater.

Injury solely for economic loss, The injuries were The court advanced non-economic actual the injury analysis in a tort action is barred. physical injuries to Southwestern Bell v.

As one court stated, property. The duty DeLanney. In DeLan“The economic loss arose from a contract ney, a businessman but the injury was advertised his real rule provides that, not “to the subject of estate business in in tort cases economic the contract itself.” the Yellow Pages damages are not The Reed analysis for several years.37 again seems to supWhen he slightly recoverable unless port the Scharrenbeck changed his account, they are accompanied court’s conclusion.

Southwestern Bell’s The duty, while arisinternal procedures by actual physical ing out of a contract, automatically reinjury or property was imposed by law moved his ad from damage.” in performance of the Yellow Pages.38 the contract and DeLanney sued for the injury was for physical damnegligence alleging that omission of the ages outside the scope of the conad from the Yellow Pages harmed his tract; therefore the claim was founded business.39 Southwestern Bell countered in tort. that the claim failed to state a cause of The injury analysis stated in Reed led action for negligence.40 The jury awardto the development of the economic loss ed DeLanney past lost-profits and future rule. Many courts have held that, if a lost-profits.41 Applying Scharrenbeck, the plaintiff sues solely for economic loss, a appellate court affirmed the trial court tort action is barred. As one court statdecision. The court focused on the reaed, “The economic loss rule provides soning that with every contract comes that, in tort cases economic damages a duty to perform with care, skill, reaare not recoverable unless they are acsonable expedience and faithfulness the companied by actual physical injury or things agreed to be done.42 18

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The Supreme Court immediately set about clarifying its previous holding in Scharrenbeck. “In failing to repair the water heater properly, the defendant breached its contract. In burning down plaintiff’s home, the defendant breached a common-law duty as well, thereby providing a basis for plaintiff’s recovery in tort.”43 The court emphasized that the duty breached in Scharrenbeck was not rooted in contract but was rooted in a duty imposed by law because of the contract. The court then introduced another step for the “contort” analysis, the need for an independent injury: “Tort obligations are in general obligations that are imposed by law—apart from and independent of promises made and therefore apart from the manifested intention of the parties—to avoid injury from others.”44 Thus, the court reasoned: If the defendant’s conduct—such as negligently burning down a house— would give rise to liability independent of the fact that a contract exists between the parties, the plaintiff’s claim may also sound in tort. Conversely, if the defendant’s conduct— such as failing to publish an advertisement—would give rise to liability only because it breaches the parties’ agreement, the plaintiff’s claim ordinarily sounds only in contract.45 The framework for a proper “contort” analysis is found in the cases detailed above. The first step is to look at the source of the duty as shown in Pressmen.

Does the duty arise from contract or is it imposed by law? Next, the type of injury is analyzed. Is the injury an economic loss that is part of the subject of the contract as in Reed or is it a physical harm as in Scharrenbeck? Finally, the independence of the injury is analyzed. Does the conduct give rise to liability independent of the fact that a contract exists?

In this framework does a tort claim require physical harm while only a contract provides relief for economic loss injuries? In other words, have we arrived at a point where damages and injuries can be labeled pure tort or pure contract? Is

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loss damages.49 The court reasoned that because the plaintiff failed to prove an independent injury, it was barred from bringing the tort claim.50 As stated in a later case, “A plaintiff may not bring a claim for negligent misrepresentation unless the plaintiff can establish that he suffered an injury that is distinct, separate and independent from the economic losses recoverable under a breach of contract claim.”51 The “contort” bar has been extended to include claims of fraud as well. In Classical Vacations, Inc. v. Air France, the plaintiff alleged fraud based on complications arising from ticket sales by a travel agent.52 Because the only loss suffered was from economic loss relating to the subject of the contract, the plaintiff’s claim sounded solely in contract.53 The court held that fraud that occurs after the formation of a contract and results only in loss to the subject of a contract is not actionable in tort.54 The courts have also used the “con-

a plaintiff barred from recovering economic loss damages in the absence of a breach of contract claim? The answer is a definite maybe!

V. The Current Case Law When negligence is the tort alleged, the courts have consistently used the economic loss rule to bar recovery when there is no independent physical injury or property damage.46 Therefore, “To be entitled to damages for negligence a party must plead and prove either a personal injury or property damage as contrasted to mere economic harm.”47 The courts have also used the source of the duty test to bar negligence actions where the duty is derived from contract.48 But what other areas are included in the “contort” bar?

The courts have drawn firm lines in the area of negligent misrepresentation.

In D.S.A., Inc., v. Hillsboro I.S.D., the Court held that negligent misrepresentation cannot be used to recover economic

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tort” bar to exclude claims based on breach of a fiduciary duty where the duty arose from contract55 and claims of duress.56 In Thomason v. Collins & Aikman Floorcoverings, Inc., the court found that “because Thomason’s claims for breach of fiduciary duty and for breach of good faith and fair dealing are based on C & A’s alleged failure to pay him commissions, summary judgment on these claims was proper.”57 The court reasoned that the injury suffered was only an economic loss and the “contort” bar applied. In First Nat’l Bank of Bellaire v. Showalter, P.C., the focus was on the source of duties. The court stated, “[T]he duties upon which the claim of economic duress was based arose under the note and P.C.’s fee agreement... therefore, there was no distinct tort injury with actual damages to support an award of punitive damages for economic duress.”58 The above cases show that the “contort” bar is a vibrant doctrine in the Texas legal landscape, but are we there yet?

Have we reached a point where physical injury is required in order to recover in tort? As shown above, the courts continue to apply the “contort” bar in a consistent fashion to bar a plaintiff’s tort claim when it involves a purely economic loss.

A plaintiff may succeed in tort only when it can show a duty imposed by law and a physical injury or certain collateral torts. The answer seems to be... almost yes!

Erin Hopkins is an associate in the Corporate and Litigation practices of law firm DLA Piper. Erin would like to thank Ileana Blanco, managing partner of DLA Piper’s Houston office, for her input and assistance in researching and developing the article, and Jessie Amos of DLA Piper’s Houston office for her assistance in preparing the article for publication.

Endnotes 1.

2.

BLACK’S LAW DICTIONARY 365 (9th ed.

2004).

Airborne Freight Corp. v. C.R. Lee Enter., 847 S.W.2d 289, 293 (Tex. App.—El Paso

1992, writ denied).

This can be done at various stages in litigation. See Hou-Tex, Inc., v. Landmark Graphics, 26 S.W.3d 103 (Tex. App.— Houston [14th Dist.] 2000, no pet.) (trial court granted defendant’s motion for summary judgment based on the “contort” bar); see also Classical Vacations, Inc. v. Air France, 2003 WL 1848247 (Tex. App.—Houston [1st Dist.] 2003, no pet.) (overturning jury verdict because the only injury suffered was economic loss and “therefore, its cause of action was for breach of contract, not for any tort”).

4. There is an exception to this statement in that economic damages are allowed in the torts of fraudulent inducement and tortious interference of contract, but the courts have refused to extend these exceptions beyond these torts.

5. See supra note 2.

6. See Int’l Printing Pressmen & Assistants’ Union of N. Am. v. Smith, 198 S.W.2d 729 (Tex. 1946); Montgomery Ward & Co. v.

Scharrenbeck, 204 S.W.2d 508 (Tex. 1947).

7. See Jim Walter Homes v. Reed, 711 S.W.2d 617 (Tex. 1986); Southwestern Bell Tel. Co. v.

DeLanney, 809 S.W.2d 493 (Tex. 1991).

8. 198 S.W.2d 729 (Tex. 1946).

9. Id. at 731.

10. Id. at 731-732.

11. Id. 12. Id. at 731.

13. Id. at 735.

14. Id. 3.

15. Id. 16. Id.

at 736.

17. Id. 18. 204

S.W.2d 508 (Tex. 1947). at 508-509.

20. Id. at 509.

21. Id. 22. Id. at 510.

23. Id. at 509.

24. Id. at 510.

25. Id. 26. Id. 27. 711 S.W.2d 617 (Tex. 1986).

28. 809 S.W.2d 493 (Tex. 1991).

29. Reed, 711 S.W.2d at 617.

30. Id. 31. Id. at 618.

32. Id. 33. Id. 34. Zurich Am. Ins. Co. v. Hughes, Watters & Askanase, L.L.P., 2006 WL 1914689 at *2 (Tex. App.—Eastland July 13, 2006, pet. denied).

35. Id. at *3.

36. General Electric Co. v. M & M X-Press Service, Ltd., 2008 WL 4747211 at *3 (S.D. Tex. Oct. 27, 2008).

37. DeLanney, 809 S.W.2d at 493.

38. Id. 39. Id. at 493-494.

40. Id. at 494.

41. Id. 42. Id. 43. Id. 44. Id. (quoting W. KEETON ET AL., PROSSER 19. Id.

AND KEETON ON THE LAW OF TORTS § 92 at 655 (5th ed. 1984)).

45. Id. 46. See Express One Int’l, Inc., v. Steinbeck, 53 S.W.3d 895 (Tex. App.—Dallas 2001, no pet.); see also Blanche v. First Nationwide Mortgage Corp., 74 S.W.3d 444, 453 (Tex. App.—Dallas 2002, no pet.) (holding that claims of economic damages are not recoverable in a simple negligence action).

47. Express One, 53 S.W.3d at 899.

48. Casteel v. Crown Life Ins. Co., 3 S.W.3d 582, 589 (Tex. App.—Austin 1997), aff’d in part, rev’d in part on other grounds, 22 S.W.3d 378 (Tex. 2000) (court struck down plaintiff’s negligence claim because the duty was derived from contract).

49. 973 S.W.2d 662 (Tex. 1998).

50. Id. at 663.

51. Sterling Chemicals, Inc., v. Texaco Inc., 259 S.W.3d 793, 797 (Tex. App.—Houston [1st Dist.] 2007, pet. denied).

52. 2003 WL 1848247 (Tex. App.—Houston [1st Dist.] Apr. 10, 2003, no pet.).

53. Id. at *2.

54. Id. at *3.

55. Thomason v. Collins & Aikman Floorcoverings, Inc., 2004 WL 624926 (Tex. App.—San Antonio Mar. 31, 2004, pet. denied).

56. First Nat’l Bank of Bellaire v. Showalter, P.C., 1998 WL 350518 (Tex. App.—Houston [14th Dist.] June 25, 1998, no pet.).

57. Thomason, 2004 WL 624926 at *3.

58. Showalter, 1998 WL 350518 at *5 n.11.

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Swimming in Unsettled Waters:

Fiduciary Duties and Limited Liability Companies

By Debra Hatter and Rikiya Thomas

T

he duties owed by governing persons and owners of corporations and partnerships are well-settled. Officers and directors generally owe the corporation and its shareholders a duty of loyalty, care, and obedience.1 General partners owe the partnership, whether general or limited, and their fellow partners, similar duties of loyalty and care.2 Shareholders enjoy freedom from owing fiduciary duties to the corporation or their fellow shareholders, allowing them flexibility to engage in competing business activities, except in limited circumstances.3 Unlike in corporations and partnerships, the duties owed by governing persons and owners (known as members) in a limited liability company (LLC) remain unsettled in most jurisdictions. The reason for the unsettled law seems to stem from the relatively new existence of limited liability companies as business entities. In fact, the emergence of LLCs did not occur until the late 1970s when Wyoming became the first state to adopt an LLC statute in 1977. Texas and Delaware subsequently adopted LLC statutes in 1991 and 1992, respectively.

Despite the absence of well-settled law for LLCs, they have continued to gain popularity as the “entity of choice” because of their advantageous hybrid characteristics of corporations and partnerships. The owners of an LLC, known as members, are afforded the same limited liability as shareholders. Members also have the ability to receive pass-through tax incentives which were only provided to partnerships. In addition, one of the best features of an LLC is the ability to structure the company and the business relationships of the parties through the use of an operating agreement. Members are able to draft the company’s inner workings to their liking or to modify default provisions found in the governing LLC statutes. Despite the broad discre-

tion afforded to structure the company, the parties often fail to address fiduciary duties. In the alternative, ambiguous provisions regarding fiduciary duties are included in the LLC agreement that fail to clearly express the members’ intent.

These resulting omissions and ambiguous provisions leave members and managers susceptible to unintended default provisions found in the governing LLC statutes.4 With the surge of derivative actions and lawsuits being asserted for breach of fiduciary duties, members and managers of LLCs should be aware of their fiduciary duties and the implications of inadvertently or intentionally omitting or ambiguously including fiduciary duty provisions within operating agreements.

This article will focus on fiduciary duties of managers and members of LLCs formed under Delaware and Texas law.

A. Statutory Law In most states, the statutes governing LLCs contain provisions explicitly stating the fiduciary obligations owed by managers and members to the LLC and to each other.5 The Delaware Limited Liability Company Act (DLLCA) does not address the fiduciary duties of managers and members.6 The DLLCA does provide, however, that fiduciary duties and liabilities may be expanded, restricted or eliminated by including provisions within the LLC operating agreement.7 The legislative intent of the DLLCA is to give maximum effect to the principle of freedom of contract and to the enforceability of the LLC operating agreement.8 Similarly, the statute governing LLCs in Texas, the Texas Business Organizations Code (TBOC), contains fiduciary duty provisions similar to the provisions found in the DLLCA.9 The Texas statute does not address the fiduciary duties of members and managers. Instead, it provides that such fiduciary duties may be expanded or restricted.10 In the absence of statutory law, the issue of fiduciary duties has been developed by common law.

B. Common Law 1. Members The general consensus of the jurisdictions that have addressed the issue of fiduciary duties among members of LLCs is that members do not owe fiduciary duties to fellow members as a matter of law, except in limited circumstances.11 To date, no Delaware court has held that members do not owe fiduciary duties to fellow members as a matter of law. However, Delaware courts have held that members owe fiduciary duties to fellow members under circumstances involving member-managed entities or where the members exercise control or dominion over the entity and its assets.12 Additionally, members who hold a controlling interest in the LLC owe minority members the same traditional fiduciary duties that controlling shareholders owe to minority shareholders.13 Based on these holdings, it appears that Delaware has applied corporate principles when examining fiduciary duties within a LLC.14 To date, no Texas court has directly held that fiduciary duties are owed between members of LLCs as a matter of law.15 One Texas court has inferred that members do not owe fiduciary duties to other members as a matter of law, after analogizing members to co-shareholders in a closely-held corporation.16 Currently in Texas, fiduciary duties are only owed as a matter of law in formal relationships.17 Formal relationships that have been recognized by Texas courts include the attorney-client relationship, the principal-agent relationship and the directorshareholder relationship. The relationship among members of an LLC has not been recognized as a formal relationship

by Texas courts. However, fiduciary duties may be owed by members upon a factual finding that an informal relationship has been established.18 In a business transaction context, an informal relationship may give rise to fiduciary duties where the relationship existed prior to, and apart from, the agreement forming the basis of the lawsuit.19 Most jurisdictions that have included thehoustonlawyer.com

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fiduciary duty provisions within their governing statutes have not included provisions that address the fiduciary duties owed by non-managing members to the entity. These statutes only address the duties of member-managers, which suggests that fiduciary duties of nonmanaging members to the entity do not exist. Texas courts have not addressed whether duties are owed by members to the entity as a matter of law. Similarly, in Delaware, courts have left this issue unanswered, but have imposed fiduciary duties on members to the entity in instances where the member served as a membermanager.20 This trend is consistent with principles applied to limited partners and shareholders. In any event, courts in both jurisdictions have enforced fiduciary duty provisions of operating agreements on members.21 2. Managers It is well-settled within most jurisdictions that fiduciary duties are owed by managers in a manager-managed LLC and members in a member-managed LLC.22 However, it is often unclear what duties are actually owed. Under the Uniform Limited Liability Company Act (ULLCA), these fiduciary duties normally include duties of loyalty and care similar to those found in partnerships.23 In Delaware, absent a contrary provision in the operating agreement, managers owe traditional fiduciary duties of loyalty and care to the members.24 Similarly, in Delaware, member-managers have been held to owe the same fiduciary duties required by managers within a manager-managed entity.25 There are no Texas cases that have directly addressed whether fiduciary duties are owed by member-managers as a matter of law. However, one Texas case suggests that individuals tasked with managing a LLC, specifically member-managers, will owe the same duties owed by directors in a corporation.26 It appears that in both Delaware and Texas, courts have applied corporate principles when addressing the issue of fiduciary duties of managers and member-managers and have held these 24

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parties to the same standards as directors and officers.

C. Recommendations In both Texas and Delaware, no reliable trends have been established regarding the fiduciary duties owed by parties within an LLC. Thus, members seeking to defer to default statutory provisions of these jurisdictions should be advised to the contrary. Because of such uncertainty, it is imperative that parties include provisions addressing fiduciary duties in operating agreements and do so in a clear and plain manner. Without such provisions, members, managers, and thirdparties associated with the LLC are at the mercy of the courts. Accordingly, drafters of LLC agreements should consider the following when drafting fiduciary duty provisions: (1) Discuss and understand the interrelationships of the parties. The first step to drafting a fiduciary duty provision is to understand the intended relationships of the parties of the LLC. This includes examining issues such as the management and the ownership rights of the members. Parties should consider how they want to transact business with their fellow members and to what extent they want to limit or prohibit certain actions, such as engaging in competing activities.

This action will provide the drafter with a clear understanding of how the parties will interact with each other and will provide helpful insight for drafting the fiduciary duty provisions.

(2) Draft clear provisions on the fiduciary duties of parties, if any. Drafters should include clear provisions to carry out the intent and expectations of the parties. It has become a common practice of courts to impose their own laws in situations where ambiguity has been identified. Taking this action will likely ensure that the intent of the parties is applied in the event a breach of fiduciary claim arises.

Debra G. Hatter is a partner at Haynes and Boone, LLP in the Corporate Securities

practice group where her practice includes M&A, corporate governance and securities.

Rikiya Thomas is an associate at Haynes and Boone, LLP in the Corporate Securities practice group.

Endnotes

Gantler v. Stephens, No. 132, 2008, slip op. (Del. Jan. 27, 2009).

2. Gotham Partners, L.P. v. Hallywood Realty Partners, L.P., No 371, 2001, slip op. (Del. Aug. 29, 2002); see also Boxer v. Husky Oil Co., 429 A.2d 995, 997 (Del. Ch. 1981) (stating that the general partner in a limited partnership is generally required “to exercise the utmost good faith, fairness, and loyalty”).

3. Gradient OC v. NBC Universal, 903 A.2d 104 (Del. Ch. 2007) (holding that as a general rule, a shareholder owes fiduciary duties only if it (a) owns a majority interest in or (b) exercises control over the business affairs of the corporation).

4. Bay Center Apts. Owner, LLC v. Emery Bay PKI, LLC, No. 3658-VCS, 2009 WL 1124451, slip op. (Del. Apr. 20, 2009).

5. See CALLISON AND VESTAL, THEY’VE CREATED A LAMB WITH MANDIBLES OF DEATH: SECRECY, DISCLOSURE, AND FIDUCIARY DUTIES IN LIMITED LIABILITY FIRMS, 76 Ind. L.J. 271 (2001) (discussing state fiduciary duty provisions).

6. See generally, DEL. CODE ANN. Tit. 6, § 18-1101(a)(f) (2009).

7. DEL. CODE ANN. Tit. 6, § 18-1101(c) (2009) provides: To the extent that, at law or in equity, a member or manager or other person has duties (including fiduciary duties) to a limited liability company or to another member or manager or to another person that is a party to or is otherwise bound by a limited liability company agreement, the member’s or manager’s or other person’s duties may be expanded or restricted or eliminated by provisions in the limited liability company agreement; provided, that the limited liability company agreement may not eliminate the implied contractual covenant of good faith and fair dealing.

8. DEL. CODE ANN. Tit. 6, § 18-1101(b) (2009).

9. TBOC §101.401 provides: The company agreement of a limited liability company may expand or restrict any duties, including fiduciary duties, and related liabilities that a member, manager, officer, or other person has to the company or to a member or manager of the company.

10. See supra note 9.

11. See generally UNIFORM LLC ACT § 409(g)(5) (members who are not mangers shall have no fiduciary duties to the LLC or their fellow members solely by reason of being a member).

12. VGS, Inc. v. Castiel, No. C.A. 17995, 2000 WL 1277372, at *4 (Del. Ch. Aug. 31, 2000); see also Shamrock Holdings, Inc. v. Arenson, 456 F. Supp. 2d 599, 608-609 (D. Del. 2006) (majority member which employed three of the five LLC supervisory board members “exercised dominion and control” over the LLC and therefore owed fiduciary duty in connection with selling firm’s operating units).

13. Kelly v. Blum, No. 4516-VCP, 2010 Del. Ch. LEXIS 31, at *54 (Del. Ch. Feb. 24, 2010) (court defined “controlling shareholders” as shareholders who have voting power to elect directors, cause a break-up of the company, merge the company with another, or otherwise materially alter the nature of the corporation and the public shareholder’s interests).

14. Bay Center Apts. Owner, LLC, 2009 WL 1124451, slip op., n.33.

15. Gadin v. Captrade, No. 08-CV-3373, 2009 WL 1.

1704049, at *3 (S.D. Tex. June 16, 2009); Entm’t Merch. Tech., L.L.C. v. Houchin, 720 F. Supp. 2d 792, 797 (N.D. Tex. 2010).

16. Suntech Processing Sys., LLC v. Sun Communications, Inc., No. 05-99-00213-CV, 2000 WL 1780236, at *6 (Tex. App.—Dallas Dec. 5, 2000, pet. denied) (not designated for publication). In Suntech, a minority member filed a claim against the majority member for, among other things, breach of fiduciary duty.

In its holding, the court noted that no provisions discussing fiduciary duties of members were stipulated in the LLC agreement. Further, the court asserted that no Texas courts had examined the issue of whether fiduciary duties are owed between members. The court referred to a case which examined the fiduciary duties of co-shareholders in a closely-held corporation.

17. Gadin, 2009 WL 1704049, at *2.

18. Id. 19. Id. 20. VGS, Inc., 2000 WL 1277372, at *4.

21. Fisk Ventures, LLC v. Segal, No. 3017-CC, 2008 WL 1961156 (Del. Ch. May 17, 2008); Suntech Processing Sys., LLC, 2000 WL 1780236, at *6.

22. See generally W. VA. CODE § 31B-4-409; OR. REV. STAT. § 63.155 (2001); CA. LLC ACT §17153.

23. The fiduciary duties stated in the Uniform Limited Liability Company Act are similar to those found in the Revised Uniform Partnership Act. The duty of loyalty includes: (1) accounting to the LLC, (2) refraining from dealing with LLC in an adverse manner and (3) refraining from competing with the LLC’s business. The duty of care prohibits engaging in grossly negligent or reckless conduct, intentional misconduct or knowing violation of law.

24. Bay Center Apts. Owner, LLC, 2009 WL 1124451, at *8.

25. Id. 26. Pinnacle Data Serv., Inc. v. Gillen, 104 S.W.3d 188, 198-199 (Tex. App.—Texarkana 2003, no pet.).

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A Landlord’s Duty to Mitigate in Texas:

What If You Build It, and They Don’t Come?

1

By Kent Altsuler A. Introduction and TEX. PROP. CODE § 91.006 There is no doubt that in Texas a landlord has the duty to mitigate his or her damages when the tenant breaches and abandons. Texas Property Code § 91.006 provides: (a) A landlord has a duty to mitigate damages if a tenant abandons the leased premises in violation of the lease. (b) A provision of a lease that purports to waive a right or to exempt a landlord from a liability or duty under this section is void.2 To “abandon” a place, one must leave.3 But what happens if a commercial tenant does not technically abandon the leased premises, and instead never shows up in the first place?

Let’s say, for example, a shopping center has a signed long-term lease with a big-box retail anchor tenant. The shopping center developer has already spent a great deal of time and money on design, construction, and negotiations with the city. But right after the structure is built, the tenant informs the landlord that it is not coming, stocking the shelves, staffing up, or opening the store. This is an obvious default under the lease and a breach of the standard clause obligating the tenant to open for business for at least one day. But what is the proper measure of damages for the landlord? Can the landlord argue that he or she has no duty to mitigate because the tenant never took possession in the first place?

B. Austin Hill Country No Texas case squarely covers this issue.

To answer these questions one must piece together (1) language from the abovequoted statute and (2) the results of cases that involve slightly different scenarios.

The starting point is Austin Hill Country, the seminal Texas Supreme Court opinion that provoked the passage of Section 91.006.4 In that litigation, Palisades owned and operated an office complex.

Austin Hill Country executed a five-year lease, which was originally estimated to begin on November 15, 1992; but construction came to a halt on October 21, 1992 when Palisades received conflicting instructions about the completion of the suite. After the parties tried to resolve their differences, Palisades sued Austin Hill Country for anticipatory breach of the lease. At trial the latter attempted to prove that Palisades failed to mitigate the damages resulting from Austin Hill Country’s breach by rejecting other offers to lease the premises. Palisades won the trial. The court of appeals affirmed.

On appeal to the Texas Supreme Court, Austin Hill Country sought the recognition of a landlord’s duty to make reasonable efforts to mitigate damages when a tenant breaches a lease. The court began its analysis by acknowledging that the traditional common law rule dictated that landlords have no duty to mitigate.

Texas adopted the rule in 1897. Since then Texas courts have consistently followed the no-mitigation rule in cases involving past rent. But some Texas courts required a landlord to mitigate when he sought a remedy that was contractual in nature (like anticipatory breach), or when he reentered the premises. Recognizing that a lease possesses elements of both a contract and a conveyance, and that public policy justifies the duty to mitigate, the court held the following: (1) a landlord has a duty to make reasonable efforts to mitigate damages when the tenant breaches the lease and abandons the property; (2) the landlord’s duty to mitigate requires him to use objectively reasonable efforts to fill the premises when the tenant vacates in breach of the lease; and (3) the landlord is not required to simply fill the premises with any willing tenant; the replacement tenant must be suitable under the circumstances.5 C. Opinions Issued Since Austin Hill Country After Austin Hill Country the question re-

mained: Is an abandonment of the premises necessary for the mitigation duty to kick in? Some decisions since Austin Hill Country glossed over the abandonment precondition in Section 91.006.

In Western Skies Partnership/Physician’s Healthcare Assocs., L.C. v. Physician’s Healthcare Assocs., L.C., a dispute arose over a commercial lease.6 The lease was signed by Western Skies (the landlord) and PHA (the tenant) on March 15, 1994.

Because the property needed remodeling, PHA was not obligated to occupy the premises until 120 days after the premises became available. Western Skies did not hire anyone to do the improvements until April 27, 1994. In May 1994, Western Skies suspected that PHA was not going to move into the premises, and in July 1994, the broker informed Western Skies that PHA indeed was not going to occupy the premises. To replace PHA, the broker presented a proposal from a Kenny Rogers Roasters franchise to sublease the premises. Instead, Western Skies entered into a new lease with SouperSalad and then filed a lawsuit to recover damages caused by PHA’s breach. The jury found that both sides breached and did not award any damages. On appeal Western Skies argued that the trial court erred in admitting evidence of mitigation because it was irrelevant. As an extension of this argument, Western Skies argued that the following jury instruction was improper: Do not include in your answer any amount that you find Western Skies could have avoided through reasonable efforts to mitigate its damages.

You are instructed that a landlord has a duty to make reasonable efforts to mitigate damages when the tenant breaches the lease and abandons the property.

Even though the concept of abandonment was mentioned in the jury charge, the body of the opinion stated only that a landlord has a duty to make reasonable efforts to mitigate damages when a tenant “defaults on the lease.” In other words, the El Paso court ignored the fact that thehoustonlawyer.com

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the tenant never moved in, and overruled Western Skies’ assertion.7 In another matter involving a 1994 lease, Health United rented office space from GFIC Management, an agent for the landlord, Frontier Land.8 Because of problems with a doctor at the medical facility, Health United never took possession of the premises. GFIC filed suit in July 1995 and won. On appeal Health United contended that GFIC failed to mitigate its damages because the premises remained vacant from November 1994 through May 1996.9 The appellate court stated: Since [Austin Hill Country] it has been the law in Texas that “a landlord has a duty to make reasonable efforts to mitigate damages when the tenant breaches the lease and abandons the property, unless the commercial landlord and tenant contract otherwise”10... The duty to mitigate requires the landlord to use “objectively reasonable efforts’ to fill the premises when the tenant breaches the lease.”11 The fact that the tenant had never taken

possession did not relieve GFIC from its mitigation duty, or alter the court’s analysis.

Finally, the most helpful case on this topic may be Broken Spoke Club, Inc. v. Butler.12 There, Butler (the landlord) agreed to lease the subject premises to the operators of the Broken Spoke Saloon for three years. The term was supposed to run from February 1998 through January 31, 2001. Although the tenant did occupy the premises from 1998 to 2000, Broken Spoke still offers guidance because the saloon did not breach and abandon in the normal fashion: the building burned down. Much of the opinion discusses the amount of offset the tenant was entitled to in light of rent received from substitute lessees during the term of the original lease, as opposed to whether the tenant is entitled to a mitigation offset at all. This is telling because nowhere in the decision does Justice Gardner, who cites both Austin Hill Country and Section 91.006, relieve Butler from the obligation to mitigate. The fact that the tenant failed to pay

rent (and did not come back after the fire) was enough to trigger the duty to mitigate.13 D. Conclusion Although no case directly addresses the issue of whether a commercial landlord has a duty to mitigate when the tenant never shows up, it is clear that the main policy underlying mitigation is to avoid waste.14 Texas law—like nature—abhors a vacuum when it comes to commercial space.15 Thus, no matter what created the emptiness out of premises that are under a lease, it is the duty of the landlord to make reasonable efforts to fill it.

Kent Altsuler is a commercial litigator and shareholder at the Houston law firm of Nathan Sommers Jacobs, A Professional Corporation.

Endnotes 1.

2.

Adapted from a line in the 1989 movie “Field of Dreams.”

2. TEX. PROP. CODE § 91.006 (effective September 1, 1997) (emphasis added). Section 16(a) of Acts 1997, 75th Leg., ch. 1205, provides, “Section 91.006,

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Property Code, as added by this Act, applies only to a lease entered into on or after the effective date of this Act.” A statutory duty to mitigate is imposed on commercial landlords only in Texas and five other states. Milton R. Friedman, Friedman on Leases, Chapter 16 (2010). Compare TEX. PROP. CODE § 91.006 with 735 ILCS 5/9-213.1 (Illinois) (“After January 1, 1984, a landlord or his or her agent shall take reasonable measures to mitigate the damages recoverable against a defaulting lessee.”) (emphasis added).

3. Webster’s New World Dictionary 2 (2d College Ed. 1980).

4. Austin Hill Country Realty, Inc. v. Palisades Plaza, Inc., 948 S.W.2d 293 (Tex. 1997).

5. Id. at 295-99.

6. Western Skies P’ship/Physician’s Healthcare Assocs., L.C. v. Physician’s Healthcare Assocs., L.C., 2004 WL 1078491, at *1 (Tex. App.—El Paso 2004, no pet.).

7. Id. at *1-2. See also Aero DFW, LP v. Swanson, No. 2-06-179-CV, 2007 WL 704911, at *4 n.4 (Tex. App.—Fort Worth 2007, no pet.) (mem. opinion) (not designated for publication) (“Section 91.006 of the Texas Property Code requires a landlord to mitigate his damages after the breach of a lease and declares void any lease provision to the contrary”) (emphasis added); but compare Hoppenstein Props., Inc. v. Schober, No. 02-09-00312-CV, 2010 WL 4676938, at *2 (Tex. App.—Fort Worth 2010, no pet. h.) (“A landlord has a duty to make reasonable efforts to mitigate damages when the tenant breaches the lease and abandons the property”) (emphasis added).

8. Health United Family Care, Inc. v. GFIC Mgmt., Inc., No. 01-98-01195-CV, 2001 WL 395004, at *1 (Tex. App.—Houston [1st Dist.] 2001, pet. denied) (not designated for publication).

9. Id. at *1-6.

10. Section 91.006(b) eliminated this option for contracting parties: “A provision of a lease that purports to waive a right or to exempt a landlord from a liability or duty under this section is void.”

11. Health United Family Care, Inc., 2001 WL 395004, at *6-7 (emphasis added).

12. Broken Spoke Club, Inc. v. Butler, No. 2-02-116CV, 2004 WL 1858119 (Tex. App.—Fort Worth 2004, no pet.) (mem. opinion) (not designated for publication).

13. Id. at *1-3.

14. Hoppenstein Props., Inc., 2010 WL 4676938, at *2.

15. The quote “Nature abhors a vacuum” is attributed to the philosopher Baruch Spinoza.

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Family Ties The Houston Lawyer talked to new HBA president Denise Scofield about her legal career, her plans for the bar year, and her commitment to providing opportunities for community service to HBA members and their families.

THL: Where did you grow up?

Scofield: I was born in Omaha, Nebraska, and lived there until I was in third grade.

After Omaha, my family lived in Cincinnati for 16 months, then Minneapolis for 14 months. We moved to Plano when I was just starting sixth grade, which is where I lived through my senior year in high school. When I moved to Nashville to attend Vanderbilt, my parents moved to Atlanta, which is where they’ve been ever since.

THL: Tell me about your family.

Scofield: I met my husband, John, on our first day of college at Vanderbilt. We went to law school together at SMU and became engaged during our second year.

When John, who is a native Houstonian, proposed, he said “Will you marry me?...

But we have to live in Houston,” all in the same breath! Having moved several times during my childhood, I’ve felt fortunate to plant roots in Houston for our family.

John has a plaintiff’s

practice in commercial and catastrophic injury litigation and is a partner in Caddell & Chapman. We have three children – Ellen, who is 16 and beginning her junior year; Mary Caroline, who is 13 and going into eighth grade; and Jack, who is 10 and starting fifth grade. Our kids attend Kinkaid.

They spend several weeks at camps in the Hill Country during the summer, which is a welcome break from the hectic school year but makes for an awfully quiet house at the time of this interview.

THL: What made you decide on Vanderbilt for college?

Scofield: I went to Vanderbilt because of an opportunity that I had to participate on its debate team. I started debating in sixth grade. Growing up, I spent almost every weekend competing at debate tournaments throughout the state. In fact, I met many current Houston lawyers at high school debate tournaments! I debated during my first two years as an undergraduate at Vanderbilt, and I later coached the SMU undergraduate debate team during my third year in law school.

THL: What did you study in your undergraduate work?

Scofield: I majored in communication and political science.

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THL: Was your ultimate goal to go to law school?

Scofield: I really had no idea starting college that I would want to be a lawyer. The only lawyers who I had ever seen were on TV. I had no realistic notion of what a lawyer did. As I was getting ready to graduate from college, I was offered an opportunity to pursue a masters degree in communications at the University of Texas, but I did not see that providing professional opportunities in which I was interested.

I decided instead on law school. Because of my debate and public speaking background, it was a natural segue to move into a law school track.

THL: How has debate helped you?

Scofield: Debate teaches you to think critically. You learn to process information in a very different way as you consider complex civic dilemmas that can range from nuclear proliferation to American subsidies for various industries. And debate makes you more comfortable with public speaking – albeit you may also speak too quickly! This past year, I watched my daughter Mary Caroline debate the merits of deep water drilling at a high school debate tournament. To see a sixth grader be able to stand on her feet and argue so-

phisticated concepts in front of adults and against much older children reinforced to me the significance of the skills learned through competitive debate.

THL: Tell me about your legal career.

Scofield: I started with what was then Bracewell & Patterson in 1992 in the bankruptcy and creditor’s rights practice.

When I passed the bar in 1992, the legal environment was very much like it has been over the past couple of years, with tough economic times. The creditor’s rights/bankruptcy practice was one of the few really busy practices at that time.

Over the years, I have had a varied commercial litigation practice, litigating about everything from adulterated apple juice to securities to oil and gas matters. My practice has evolved primarily into the defense of environmental and mass tort claims. I have had the opportunity to practice at several of the country’s finest law firms and count myself as very fortunate to now practice with the very best of the best at Morgan Lewis. The firm is comprised of incredibly talented lawyers who get the concept of work-life balance, who are entrenched in pro bono work because it is the right thing to do, and who were using innovative billing arrangements long before they were in-vogue – it is a very forward-thinking environment.

THL: How did you get involved in bar work?

Scofield: An “older” young lawyer at Bracewell & Patterson, Richard Sanders, asked me to help him with the Adopt an Angel Program sponsored by the Houston Young Lawyers Association back in 1993. That program became a passion of mine, and it still is. Each year, the HYLA collects wish lists from children at two elementary schools that are located in underprivileged locations, and then they enlist law firms, corporate legal departments, and the judiciary to “adopt” the children by purchasing the items on the wish lists. A donor is matched with a specific child and not only receives the child’s wish list, but also receives impor-

tant information about the child, which really personalizes it. For instance, a donor learns that her “angel” Sally is a third grader in Mrs. Peterson’s class and has a real need for shoes, socks and underwear.

My family and I have spent years shopping for gifts at all hours of the day and night, wrapping the treasures, then going to the school and passing out the gifts to the children. Many of these kids would not receive much of anything if it were it not for Houston’s lawyers.

The first year that I passed out gifts, I noticed a very cute little boy from the pre-K program who was in line to get on the bus for home. He was barely taller than my knees, and he had his arms around a huge Hefty trash bag, completely filled with toys. I was talking to him and teased, “Are you going to go home and peek at your toys right away, are you so excited?”

And he responded, “No ma’am, then I wouldn’t have anything to open on Christmas.” I can picture that little boy, even now, and remember exactly what he looked like and how his voice sounded. Adopt an Angel has been a big part of my family’s holiday season regardless of how busy we are during that time of the year.

I served on the HYLA board of directors for many years and became president in 1999. The HYLA president serves as an ex officio member of the Houston Bar Association board, so I first served on the HBA board back in 1999. I remember sitting at the first few board meetings feeling very young and somewhat intimidated – I was relieved at how welcoming the HBA board was to me. When I completed that ex officio year, I was encouraged to run for the HBA board, and I have thoroughly enjoyed the friendships and opportunities I have had over the past 12 years.

THL: What are some of the committees you’ve chaired through the HBA? Scofield: I chaired LegalLine for a number of years, and that is probably my favorite HBA committee. It is a unique program that gives you direct contact with the public and a feeling of instantaneous gratification that you’ve helped someone. I also chaired the Speakers Bureau, the Law Week Committee, and the Committee on Minority Opportunities in the Legal Profession. I was one of the founding members of the Gender Fairness Task Force. I chaired the HBA’s Houston Volunteer Lawyers Program, spending more than half a dozen years on that board, and I chaired the Dispute Resolution Center.

THL: What do you see as the role of the bar association today?

Scofield: We serve a dual purpose. While we provide charitable and educational services for the public and the profession, we also play an important social role in lawyers’ lives by providing opportunities to interact with one another on a personal basis.

THL: What do you see as the president’s role within that?

Scofield: The president has a responsibility to ensure that the bar is offering programs and projects that serve the current needs of the community and that enhance thehoustonlawyer.com

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professionalism and collegiality among lawyers.

THL: Who have been mentors in your career?

Scofield: I am not sure I have had a mentor in the traditional sense of that word, but there are a number of Houston lawyers who have demonstrated to me the importance of being a steward of the community and the profession. I have had the great pleasure of practicing with Kelly Frels, Gib Walton, and Harry Reasoner, for example, each of whom I hold in the highest regard for, not only their professional acumen but also for their service to the community.

THL: What are some of the things you’d like to focus on this year?

Scofield: I am most excited about the Day of Family Service that the bar will host in the spring. We will participate in ten community services projects in ten different locations, all on one Saturday. Unlike traditional programs of this nature, this project will give our lawyers the opportunity to bring their children to ageappropriate volunteer activities. There are studies that suggest that the best way for our children to learn about the value of service is through participation, and that has precipitated a rise in service learning programs in schools. My kids have always participated in a variety of differ32

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ent bar activities with me. It makes them understand how truly fortunate they are, and shows them the value of being able to donate their time and their resources to assist others who are not so fortunate.

THL: What are some of the other things you want to do this year?

Scofield: There are two other special onetime programs for this year. One is a historical initiative in celebration of Texas’s 175th anniversary. As part of that celebration, we are running a series of six articles in the Houston Bar Bulletin that focus on the contributions of a specific Houston lawyer to Texas history. Judge Mark Davidson has agreed to spearhead that effort for us. His command of Texas history is remarkable, and I am pleased to give him a forum to demonstrate to others the importance of Houston lawyers not only in our legal community, but in the state of Texas. In connection with the historical initiative, we are fortunate that the 1910 Courthouse is reopening in late summer. The HBA is playing a role in raising funds to underwrite display cases in a public area within the courthouse, where historical documents and objects can be viewed. In a similar vein, the Texas Supreme Court is focusing on the preservation of historical documents statewide, modeled largely on what we have done here in Harris County.

We have work left to be done in Houston and recognize that it will take time and money. Our Historical Committee will help craft a plan to complete the document preservation project in a reasonable period of time.

The other is a project in connection with the Be The Match Foundation. Every year, the HBA runs a very successful blood drive in connection with Gulf Coast Regional Blood Center. This year, we will add a bone marrow registry component to the blood drive at several locations. Judge R.K. Sandill and Doug Daniels have of-

fered to spearhead that effort for us. We hope to partner with the Asian-American Bar Association, Houston Lawyers Association, the Hispanic Bar Association, and the Mexican American Bar Association to register donors from populations that are under-represented in the bone marrow registry.

THL: What is the test process for the registry?

Scofield: A registrant need only complete a very simple health history form then collect a DNA sample from the inside of his cheek with cotton swabs supplied by the marrow registry – no needles involved. The form and the swabs are sent to a laboratory for analysis. The whole process takes five to 10 minutes, depending on how fast the registrant fills out the form.

THL: You have a personal connection to this type of project.

Scofield: Yes. I was treated for leukemia when I was in my 30s, and I was surprised by how many lawyers, members of lawyer’s families, and law firm staff passed through the halls of M.D. Anderson while I was there. I saw many people there who needed a bone marrow transplant and did not have a familial match. While I am perfectly healthy now, I have the peace of mind knowing that my brother is a match for me. The relief you feel within that first month of diagnosis, to have a match should you ever need a transplant, is a huge comfort. There are so many people who do not have that, who have to go to the National Bone Marrow Registry. The best way to offer hope and opportunity for survival is to make sure that the registry is as large as possible. Our drive will kick off in early fall, and the largest drive will take place in the spring at the courthouse.

THL: Are there any other focus areas for this year?

Scofield: We are also going to continue expanding the veterans program. Under Travis Sales’ leadership, the HBA developed an incredible resource for area veterans, not just for benefits and disability

issues, but on legal issues ranging from family law to consumer issues to wills and probate. We have been able to offer those services in Harris County through a number of grants and because of the generosity of the Houston Bar Foundation. Over this next year we are planning to bring in additional funds to reach beyond Harris County and to partner with a number of other bar associations to expand the geographical reach of the services we offer veterans.

THL: What has changed most about the practice of law since you started?

Scofield: The most significant change has been technology. Twenty years ago, fax machines were a relatively new invention, networked computers were a growing trend, and cell phones were essentially nonexistent. With a BlackBerry in hand or a wireless card, you now can be accessible to clients anywhere, anytime – technology has enabled me to be a completelypresent mother to my children, and at the same time a completely-devoted lawyer to

my clients. The down-side to these conveniences of course is the loss of down time and the increasing inability to get away from the office.

THL: What do you like to do outside the practice of law?

Scofield: I’ve enjoyed volunteering at Kinkaid over the past twelve years. At the lower school level, Kinkaid offers an International Fair, which focuses on two countries every year. It is a complete immersion program that takes place throughout much of the school year and culminates in a festival in January, during which time two classrooms are completely, totally transformed into the two respective countries they’ve been studying that year.

This is not just a few poster boards; it’s the kind of sets you would see at the Alley. I spent many years either chairing the fair or chairing a specific country for the fair.

It was hard to do as a working mom, but it was a great way to get to spend time with my kids and to get to know their friends, their friends’ parents, and their teachers.

Now that Jack has moved on to middle school and I no longer have anyone in the lower school, I’m looking for my next gig!

John and I also enjoy spending time at our kids’ different sports activities. Typically we spend the fall watching our girls cheer at football games, the winter watching church-league and school basketball, and the spring watching Post Oak Little League games. I’ve had a great time being team mom for Jack’s Post Oak Little League baseball team for the past two years and enjoy being up at the field with the boys and their parents.

THL: Is there anything else you would like our members to know about you?

Scofield: Even on the toughest days on the job, I have loved being a lawyer. I’m very proud of the collegiality we share in the Houston bar and our long tradition of service to those who need our help. I’m really looking forward to getting to play a small role in the great things the HBA will do this year.

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Scofield Takes Office as HBA President

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enise Scofield of Morgan, Lewis & Bockius LLP took up the gavel as the 2011-2012 president of the Houston Bar Association at the organization’s Annual Dinner Meeting, held May 19 at River Oaks Country Club. Scofield succeeded T. Mark Kelly of Vinson & Elkins LLP. The gala evening was dedicated to the accomplishments of the HBA and its members during the past year. Kelly presented the President’s Awards to outstanding committee and program chairs for 2010-2011, and the HBA honored its emeritus members who reached their 50th year of practice during the last bar year.

Denise Scofield presents Mark Kelly with recognition of an outstanding year.

Photos by Temple Webber

John Scofield, Denise Scofield, Kim Kelly and Mark Kelly.

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John Scofield, Denise Scofield, Andi Durham, president of the Houston Bar Association Auxiliary, and Michael Durham.

Former Houston Bar Foundation Chairs at the May 19th Annual Dinner Meeting. Front row, from left: Scott E. Rozzell (93), John F. Rhem, Jr. (95), John D. Ellis, Jr. (86), Otway B. Denny, Jr. (98), Michael Moehlman (89), William K. Kroger (05). Back row, from left: James B. Sales (83), James V. Derrick, Jr. (97), Ronald C. Lewis (00), Stewart W. Gagnon (09), William C. Lowrey (11), Debra Tsuchiyama Baker (08), Lynn Kamin (04), Marcy E. Kurtz (02), T. Mark Kelly (01), D. Gibson Walton (94) and Kenneth R. Wynne (90).

Former Houston Bar Association presidents attended the May 19th Annual Dinner Meeting. Front row, seated from left: Randall O. Sorrels (05-06), John L. McConn (76-77), Roland Garcia (01-02), Hon. Eugene A. Cook (89-90), Tom Godbold (02-03), William Key Wilde (82-83), T. Mark Kelly (10-11), Charles R. (Bob) Dunn (79-80), D. Gibson Walton (98-99), Glenn A. Ballard, Jr. (06-07), Scott E. Rozzell (96-97), W. Thomas Proctor (07-08). Back row, from left: Otway B. Denny, Jr. (92-93), James B. Sales (80-81), James Greenwood III (78-79), Charles R. Gregg (95-96), Kelly Frels (94-95), Barrett H. Reasoner (09-10), Hon. Ewing Werlein, Jr. (88-89), Amy Dunn Taylor (00-01), Hon. Richard Trevathan (97-98), Denise Scofield (11-12), Michael Connelly (03-04), Lynne Liberato (93-94), Raymond C. Kerr (87-88), Harold Metts (86-87), Albert B. Kimball, Jr. (83-84), and Travis J. Sales (08-09).

50-Year Lawyers...

50-year member Perry Archer and his wife, Shirley Milton Archer.

50-year member Frank Bean and his wife, Melanie Bean.

50-year member David Burrow and his wife, Diana Burrow. thehoustonlawyer.com

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50-Year Lawyers...

50-year member Hon. Angel Fraga, his sister in law Lupe Fraga, and his brother, Felix Fraga.

50-year member Charles R. Gregg and his wife, Marilyn Gregg.

50-year member James (Jim) Greenwood III and his wife, Cody Greenwood.

50-year member Joel Kay and his wife, Marilyn Kay.

50-year member Harold Lloyd and his wife, Beth Lloyd.

50-year member Nick Nichols and his wife, Linda Nichols.

50-year member Joe Roady and his wife, Edwina Roady.

50-year member Donald Royall and his wife, Joann Royall.

50-Year Lawyers...

50-Year Lawyers...

50-year member Walter Carl Dudensing and his wife, Linda Dudensing.

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50-Year Lawyers...

50-year member Leonard Tatar and his wife, Millie Tatar.

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50-year member Hon. Ewing Werlein, Jr. and his wife, Kay Werlein.

50-year member Jim Westmoreland and his wife, Mary Sue Westmoreland.

President’s Awards and Special Recognition www.hba.org

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Mark Kelly presented the 2010-2011 President’s Awards and Special Recognitions to www.hba.org www.hba.org www.hba.org www.hba.org outstanding committee chairs and programwww.hba.org leaders during the HBA’s Annual Dinner Meeting.

Susan Bickley and Amy Tabor were honored as cochairs of the Communities in Schools Committee.

Brent Benoit was honored as chair of the HBA’s Houston Volunteer Lawyers Program.

Debra Tsuchiyama Baker of Connelly•Baker •Wotring LLP was honored for her longtime service to Night Court. thehoustonlawyer.com

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President’s Awards and Special Recognition

Ellyn Josef, Greg Ulmer and Lynn Kamin were honored as cochairs of the H.A.Y. Center Project.

Adam Walmus, director of the Michael E. DeBakey VA Medical Center, and Miguel Ortega, social work executive at the VA Medical Center, were honored for their support of the HBA’s Veterans’ Legal Clinic and Texas Lawyers for Texas Veterans.

Mitch Reid and Michael Killelea were honored as co-chairs of the Special Olympics Committee.

[photo top] Joseph C. Dilg of Vinson & Elkins LLP, Shauna Johnson Clark of Fulbright & Jaworski L.L.P., Maria Boyce of Baker Botts L.L.P.; and Mark Evans of Bracewell & Giuliani LLP [photo bottom] Robert Jewell of Andrews Kurth LLP and Ken Simon of Locke Lord Bissell & Liddell. These partners represented their respective firms as honorees for longtime support and exemplary service to the LegalLine Program.

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Phil Archer, Mark Babineck and Scott Durfee were honored as co-chairs of the Law & the Media Committee.

Equal Access

Champions

What does it take to become an “Equal Access Champion”? The firms and corporations listed below have signed 5-year commitment forms that indicate they will uphold a pledge to provide representation in a certain number of cases each year, based on the number of attorneys in the firm or legal department. The goal is to provide pro bono representation in at least 1,500 cases through the Houston Volunteer Lawyers Program each year, and to increase that goal each year. For more information contact Kay Sim at (713) 759-1133.

Large Firm Champions Andrews Kurth LLP Baker Botts L.L.P. Bracewell & Giuliani LLP Fulbright & Jaworski L.L.P. Locke Lord Bissell & Liddell LLP Vinson & Elkins LLP Corporate Champions Baker Hughes Incorporated BP CenterPoint Energy, Inc. ConocoPhillips Continental Airlines, Inc. Exxon Mobil Corporation Marathon Oil Company Port of Houston Authority Rosetta Resources Inc. Shell Oil Company Intermediate Firm Champions Beirne, Maynard & Parsons, L.L.P. Gardere Wynne Sewell LLP Haynes and Boone, L.L.P. King & Spalding LLP Thompson & Knight LLP Mid-Size Firm Champions Akin Gump Strauss Hauer & Feld LLP Adams & Reese LLP Baker Hostetler LLP Chamberlain, Hrdlicka, White, Williams & Martin Greenberg Traurig, LLP Jackson Walker L.L.P. Jones Day Morgan, Lewis & Bockius LLP

Porter Hedges, L.L.P. Strasburger & Price, L.L.P. Susman Godfrey LLP Weil, Gotshal & Manges Winstead PC Small Firm Champions Abraham, Watkins, Nichols, Sorrels, Agosto & Friend Beck, Redden & Secrest, L.L.P. Gibbs & Bruns LLP Hays, McConn, Rice & Pickering, P.C. Hughes Watters Askanase LLP Johnson DeLuca Kurisky Gould PC Kroger | Burrus Schwartz, Junell, Greenberg & Oathout, L.L.P Sutherland Asbill & Brennan LLP Weycer, Kaplan, Pulaski & Zuber, P.C. Yetter Coleman LLP Boutique Firm Champions Abrams Scott & Bickley, L.L.P. Coane & Associates Connelly • Baker • Wotring LLP Edison, McDowell & Hetherington LLP Fullenweider Wilhite PC Funderburk & Funderburk, L.L.P. Hicks Thomas LLP Jenkins & Kamin, L.L.P. Ogden, Gibson, Broocks, Longoria & Hall, L.L.P. Squire, Sanders & Dempsey L.L.P. Strong Pipkin Bissell & Ledyard, L.L.P. Wilson, Cribbs & Goren, P.C.

Solo Champions Law Office of O. Elaine Archie Basilio & Associates, PLLC Peter J. Bennett Law Office of J. Thomas Black, P.C. Law Office of Fran Brochstein Law Office of David Hsu Brogden Law Office of Robbie Gail Charette De la Rosa & Chaumette Law Office of Papa M. Dieye The Ericksen Law Firm Frye & Cantu, PLLC Fuqua & Associates Terry L. Hart Law Office of James and Stagg, PLLC Katine & Nechman L.L.P. The Keaton Law Firm, PLLC Gregory S. Lindley Law Office of Maria S. Lowry Martin R. G. Marasigan Law Offices The Law Office of Evangeline Mitchell, PLLC Morley & Morley, P.C. Bertrand C. Moser Pilgrim Law Office Robert E. Price W. Thomas (Tommy) Proctor Law Offices of Judy Ritts Cindi L. Robison Scardino & Fazel Shortt & Nguyen, P.C. Jeff Skarda Teal & Associates Tindall & England, P.C. Diane C. Treich Norma Levine Trusch

A Profile in professionalism

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The Honorable Mark Davidson MDL Judge and Judge, 11th District Court (Retired)

The Houston Lawyer

s a Boy Scout, I learned that it was not enough to leave a campsite you had visited as good as you had found it – you should always strive to leave it better. This aspiration was a way of expressing thanks for the opportunity to enjoy nature’s bounty and also making sure that those who followed you to the site could do the same.

So it should be for lawyers. We should not

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seek to practice law to make a living without also advancing our profession. Lawyers can provide affordable legal services for all, mentor the next generation of attorneys, preserve the history of the bar, or champion any number of other worthwhile projects. Whatever path we choose, our goal should be to advance professionalism by doing what we can to make sure the legal system of the future serves the ends of justice better than the one we joined on the day each of us took the attorney’s oath.

COMMITTEE SPOTLIGHT

The Senior Lawyers Committee

By Caroline Pace

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pproximately 15 years ago, the Houston Bar Association surveyed its more experienced members to ascertain interest in forming a group dedicated to legal topics uniquely tailored to senior lawyers and their contemporaries. Encouraged by the responses, the HBA formed the Senior Lawyers Committee, which in turn sponsors the Senior Lawyers Forum.

The Senior Lawyers Forum hosts quarterly luncheons and invites all HBA members and members of other neighboring bar associations and local specialty bars to attend. The committee promotes the luncheons through HBA publications, e-Bulletins, the website and mailings in order to apprise attorneys of the date, topic, and featured speaker associated with an upcoming luncheon.

Typically, 50-80 people attend the quarterly luncheons.

According to Mike Karchmer of Dishaw & Karchmer Group at UBS Financial, who served as the 2010-2011 committee chair, the luncheons provide a venue for attorneys to enjoy the relationships that they have developed throughout their years of practice, and an opportunity to enjoy engaging presentations provided by guest speakers who are also members of the bar or leaders in the community.

A subcommittee convenes each fall to brainstorm current topics of interest and identify people who are qualified and available to speak on the chosen topics.

Although the subcommittee choses and schedules the speakers, it appreciates suggestions for future speakers, and feed-

back from luncheon attendees. Attendees at the last four luncheons have enjoyed the following speakers and topics: • Donald Guter, Dean of South Texas College of Law and Rear Admiral, Judge Advocate General Corps, U.S. Navy (Ret.), spoke on the topic “Legal Assistance for Veterans – How It’s Changed Since 9/11.”

• Dr. Michael Keating of the M.D. Anderson Cancer Center spoke on the topic “Leukemia and Lymphoma Show the Path to Curing Cancer.”

• Charles Foster of FosterQuan, LLP spoke on the topic “Illegal Immigration: What are the Best Legal and Policy Options?”

• Drayton McLane, Jr., the owner of the Houston Astros, spoke on the topic “The Importance of Leadership in Today’s World.”

The Senior Lawyers Committee endeavors to provide a distinguished list of presenters at the Senior Lawyers Forum luncheons each year. In fact, in addition

to those previously mentioned, the presenters during the past two years have included such notables as Bill White, a former Houston mayor; Gib Walton, a former president of the HBA and the State Bar of Texas who is a high-stakes litigator; Richard “Racehorse” Haynes, a famous criminal defense lawyer; Oliver Luck, a former Houston Dynamo president and current athletic director of West Virginia University; Renu Khator, the president of the University of Houston; and Erik Eriksson, the Port of Houston Authority’s senior vice president and general counsel.

An attorney must be at least 55 years of age and a member of the HBA to join the Senior Lawyers Forum. While membership in the group includes a minimum age, participation in the group’s activities has no age restrictions. Participation is not limited to practicing attorneys, so those who are no longer practicing or are employed outside the legal profession are also welcome.

Dan Leightman of Gardere Wynne Sewell LLP will chair the committee in 2011-2012. Please contact Bonnie Simmons at the HBA (713-759-1133 or bonnies@hba.org) to find out more information about the Senior Lawyers Forum or provide suggestions for future speakers and topics. And please come to the next quarterly luncheon to enjoy fellowship and networking opportunities while listening to an engaging speaker.

Caroline Pace practices with Kane Russell Coleman & Logan PC and is a member of The Houston Lawyer editorial board. thehoustonlawyer.com

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Media Reviews

HIPAA for the General Practitioner

By Melanie D. Bragg ABA Publishing; www.ababooks.org Price $69.95 (CD included)

The Houston Lawyer

I

Reviewed by Al Harrison n her book entitled, “HIPAA for the General Practitioner,” Houston attorney Melanie D. Bragg presents a thoughtful and clear explanation of the inner workings of the federal Health Insurance Portability and Accountability Act (“HIPAA”). The book handily emphasizes its focus on rules and regulations for assuring patient privacy and security implicated both in storing and communicating patient information.

The book is divided into four parts.

Part I addresses the essence of HIPAA as promulgated in 1996 and its evolving regulations, guidelines, and rules. This first part includes a chapter that explains several of the esoteric definitions that underlie HIPAA and is targeted for use by general practitioners. Aptly described by the author as “demystifying HIPAA,” her book indeed demystifies HIPAA by effectively unraveling it into a more straightforward explanation of its myriad rules and regulations. Bragg regularly cites relevant sections of Title 45 of the Code of Federal Regulations (“CFR”), which concerns public welfare, as authority for the implicated statutory definitions. Readers will appreciate the author’s virtual Rosetta Stone for clarifying key terms. For example, the definition of the key term “Protected Health Information” (“PHI”) is cross-referenced to “Individually Identifiable Health Information,” which interestingly is commonly invoked in state statutes and should be reconciled with comparable federal terms to determine scope and preemption issues.

Part II addresses HIPAA’s logistics and criteria for ascertaining if and when state law is preempted. The author notes that, while 42

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the majority of states have enacted statutes to safeguard confidentiality of medical information, Congress nevertheless established a minimum national standard of care for protecting patient medical and health information. Accordingly, in the “Preemption Statute” chapter, the author articulates that HIPAA’s privacy regulations preempt a state’s statute unless the state statute is more stringent. She wisely highlights the significance of what HIPAA contemplates as constituting a “more stringent” state standard, requirement or implementing-specification by enumerating six crucial considerations. If a state statute satisfies at least one of these six considerations, then the statute is deemed to be more stringent than the implicated HIPAA regulations, whereupon the state statute is deemed to trump HIPAA. Part II also discusses Bragg’s “3-Q’s” perspective: Quicksand --> Quagmire --> Quantum Leap. That devolves to a stepwise transition of knowledge progressing from essentially being engulfed in “quicksand,” i.e., being clueless; to being on the cusp of acquiring rudimentary HIPAA knowledge, albeit still suffering from a seemingly unavoidable HIPAA “quagmire,” i.e., not quite being there yet; to being sufficiently conversant with HIPAA’s basic elements and concomitant requirements for preventing disclosure of patients’ PHI and for assuring secure storage and retrieval thereof.

Part III teaches what threshold HIPAA knowledge and understanding a general practitioner should have to adequately provide legal services. Chapter 8, aptly titled “Where Lawyers Come In” is the heart of Part III - “What a General Practitioner Should Know.” The author explains that there are a plethora of situations in which a non-health lawyer may encounter HIPAA

and for which the first issue to be resolved is whether state law or HIPAA applies. Following this carefully laid preemption predicate, the author then tackles the key issue of this book: What nexus does HIPAA have with a general practitioner? As perceived by the author, a general practitioner reasonably might inquire: “What does HIPAA have to do with me?” Her response? “Whether you are a probate, personal injury, or patent lawyer, it is likely you will run into a HIPAA issue at some point in your practice.” Accordingly, Bragg handily paints a Yellow Brick Road for the lawyer to serve as a compass for clients striving to safely navigate through an evolving and chameleon-like maze of government regulations, guidelines and rules.

Part IV features a threefold treasure trove constituting: Appendix 1, a useful collection of HIPAA Forms; Appendix 2, an enumeration of the Health Information Technology for Economic and Clinical Heath Act (“HITECH”) corresponding to the $19 billion portion of the $789 billion economic stimulus package of the American Recovery and Reinvestment Act of 2009 (allocated to hospitals and physicians demonstrating “meaningful use” of electronic medical records ); and Appendix 3, HIPAA Privacy and Security Regulations under Title 45 of the CFR. Conveniently, all of the documents contained in the Appendices are also stored on an enclosed CD in Microsoft Word and pdf formats.

General practitioners endeavoring to guide and counsel healthcare-related clientele through the plethora of ever-changing HIPAA and HITECH patient privacy and security regulations will find Bragg’s book comparable to an excellent Rosetta Stone.

Al Harrison is a patent attorney practicing intellectual property law with Harrison Law Office, P.C. and is a member of The Houston Lawyer Editorial Board. As outside IP counsel for corporate clients, he has developed guidelines for attaining and sustaining compliance with HIPAA and HITECH Rules & Regulations.

OFF THE RECORD

Lindsay Lambert:

Firefighter, Woodworker

By Tara Shockley

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spends hours each month in training and on call, carrying a pager or Lindsay Lambert, it’s all about being part of the sowith him at all times to hear the fire department communications lution instead of part of the problem. That philosophy loop. Volunteer firefighters, he explains, provide an important serguides him through his vocation as a lawyer and two of vice in supplementing the paid crews in many situations. They also his avocations: woodworking and volunteer firefighting. appear at public events, speak at schools and teach safety education Lindsay is a classes. “When my pager goes off for an emergency somewhere, the partner and comvery first thought in my mind is always, ‘There’s somebody out there mercial litigator at Hughes right now having the worst day of his or her life. How can I help?’”

Watters Askanase by day. In Maintaining certification as a firefighter and first responder takes the evenings and on weekdozens of hours of mandatory training each year and firefighters need ends, he is likely to be found to stay in excellent shape to keep up with the physically demanding making furniture and other nature of their work. Lindsay says his training has kicked in several items from wood or metal, times when he encountered severe emergency situations while off often while on call as a memduty. “During Hurricane Ike, I secured my family in our home, then ber of the Bellaire Volunpacked up and moved to the fire station for four days,” Lindsay says. teer Fire Department. “As “When you have a major emergency a firefighter, every call is a event like that, there is an entire commusituation that you adapt your nity in need, not just your home.” skills and resources to,” says Lindsay also is a leader in his sons’ Boy Lindsay. “As a woodworker, you get all of the Scout Troop. In June, he was one of five angles of the problem or project together and adults leading 19 boys, including his two create a solution.” sons, on a 12-day hiking and camping trip Lindsay makes “just about anything” from to Philmont, the premier high-adventure wood and metal, including furniture, toys, Boy Scout camp in the nation. His older ink pens, decorative items, gates and any son is an Eagle Scout and his younger son number of handyman projects around the is on track to make that distinction. house. He still uses the first ink pen he ever “Being able to adapt, to be creative and made, crafted from leftover cherry wood he Lindsay Lambert says the skills he has learned as a used to build his family’s dining room table. woodworker and volunteer firefighter apply in every to be flexible is essential to every area He is known in his community as the go- aspect of his life, including his litigation practice of my life,” says Lindsay. “Whether it’s in litigation, scouting, firefighting and to guy for getting something built. Lindsay with Hughes Watters Askanase. emergency management, you prepare to the best of your abilities and recently built a storage and entertainment center for the Bellaire Volresources for what you may encounter, but when you’re in the situaunteer Fire Department. tion, you adapt and use what you have and what you know to find a Lindsay has turned his love of building things into a ministry at creative, positive solution.” the church his family attends, Bellaire United Methodist. Along with a dedicated group of men from the church, he spends one Saturday each quarter doing home projects for needy residents, from building Tara Shockley is the communications director for the Houston Bar wheelchair ramps and checking fluids in people’s cars, to changing Association and managing editor of The Houston Lawyer. She would light bulbs and fixing home computers. like to thank Erin Franco of Pennino and Partners for assistance with As a volunteer for the Bellaire Volunteer Fire Department, Lindsay this article. thehoustonlawyer.com

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LEGAL TRENDS

The Mark THUMBDRIVE Granted Principal Trademark Registration Status

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By Al Harrison

The Houston Lawyer

rek 2000 International Ltd., based in Singapore, has recently been granted registration for the trademark “THUMBDRIVE” on the Principal Register of the U.S. Patent and Trademark Office. See In re Trek 2000 International Ltd., 97 U.S.P.Q.2d 1106, 2010 WL 5099653 (Trademark Tr. & App. Bd.). To many computer users who have incorporated the term “thumbdrive” into their vernacular as a synonym for “flash drive,” this is a shocking development.

But, a review of the Trademark Office record shows that the term “thumbdrive” was coined and first used in commerce as early as 2000.

Historical Background In 2000, Trek 2000 International coined the term “thumbdrive” to suggest a unique portable storage device related to its underlying patented technology, and THUMBDRIVE has been used continuously thereafter as a brand. In January 2005, an application was filed for registration of the THUMBDRIVE mark on the Supplemental Register of the U.S. 44

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Trademark Office in conjunction with goods identified in International Class 9 as: portable digital electronic devices for recording, organizing, transferring, storing, and reviewing text, data, image, audio and video files; computer software for use in recording, organizing, transferring, storing, and reviewing text, data, image, audio and video files on portable digital electronic devices.

This Supplemental Registration was granted in November 2006, and based upon continuous use of the THUMBDRIVE trademark in commerce, Trek 2000, in February 2007, filed an application to register THUMBDRIVE on the Principal Register (under the Lanham Act, 15 U.S.C. § 1052) in order to attain a plethora of statutory benefits not available to Supplemental Registrations.

Registration on the Supplemental Register Under United States trademark law, the Supplemental Register is the secondary register of trademarks maintained by the United States Patent and Trademark Office. See Lanham Act, 15 U.S.C. § 1091.

Among other reasons for having a secondary register, the Supplemental Register permits registration of marks that do not meet all the requirements for trademark registration on the Principal Register, but that nonetheless are capable of distinguishing goods or services. Unlike registration on the Principal Register, registration on the Supplemental Register confers no rights beyond otherwise available common law rights. Marks registered on the Supplemental Register afford constructive notice of purported use for trademark purposes and may also constitute the basis for filing suit for trademark infringement. With continuous use, usually at least five years, an application may be filed seeking to elevate

registration status from the Supplemental Register to the Principal Register (as was ultimately achieved by Trek 2000).

Prosecution of Application for Registration on Principal Register On behalf of the Commissioner For Trademarks, a trademark attorney assigned to examine Trek 2000’s application initially refused registration on the basis that the THUMBDRIVE mark was merely descriptive and the accompanying declaration of acquired distinctiveness was insufficient to establish trademark status. After Trek 2000 submitted additional evidence of acquired distinctiveness, this refusal of registration was withdrawn and the application was approved for publication. In spite of sailing through the Publication Stage without an opposition to registration being filed, as occasionally occurs when trademark applications are being prosecuted in the Trademark Office, the examining attorney — after walking through procedural hoops — refused registration on the basis that the proposed mark was generic and unregisterable.

Rebounding from the shock of this unexpected refusal of registration, Trek 2000 filed a request complaining of the examining attorney’s allegedly overreaching behavior. But the petition was denied and the examining attorney subsequently issued a final refusal. Undaunted, Trek 2000 filed an appeal to the Trademark Trial and Appeal Board (“TTAB”) with a simultaneous request for reconsideration by the examiner. Once the examining attorney denied the request for reconsideration, the appeal moved forward.

Appeal of Refusal to Issue Registration on Principal Register The issue to be decided by the TTAB was whether THUMBDRIVE was generic for the specified goods. Whether a term is generic and, accordingly, not worthy of serving as a trademark, is a question of

LEGAL TRENDS

fact. When a proposed mark is refused registration as being generic, the examining attorney has the burden of proving genericness under a “clear evidence” standard. This issue devolves to whether the record shows that members of the relevant public primarily use or understand the term sought to be registered as referring to the class of goods in question. A twofold inquiry is prerequisite for the TTAB to arrive at this determination: (1) What is the genus of goods at issue? (2) Is the term sought to be registered understood by the relevant public primarily to refer to a particular genus of goods?

Evidence of the public’s understanding may be derived from a panoply of competent sources including the Internet, deposition testimony, surveys, dictionaries, trade journals, and newspapers.

The TTAB emphasized that, pursuant to determining whether FLASHDRIVE was generic, the focus should be to prevent competitive harm. Generic terms, inherently incapable of indicating source, are the antithesis of trademarks, and can never attain trademark status. Citing the Court of Appeals for the Seventh Circuit, the TTAB stated: To determine that a trademark is generic and thus pitch it into the public domain is a fateful step. It penalizes

the trademark’s owner for his success in making the trademark a household name and forces him to scramble to find a new trademark. And it may confuse consumers who continue to associate the trademark with the owner’s brand when they encounter what they thought a brand name on another seller’s brand... The fateful step ordinarily is not taken until the trademark has gone so far toward becoming the exclusive descriptor of the product that sellers of competing brands cannot compete effectively without using the name to designate the product they are selling.

Ty Inc. v. Softbelly’s Inc., 353 F.3d 528, 69 USPQ2d 1213, 1215 (7th Cir. 2003).

The protection of the public interest includes assuring that sellers are not precluded from using a particular term prerequisite to competing effectively in the marketplace. It is well-established that competitors opting to invoke similar words or other terms do not necessarily transform a generic term into trademarkeligibility. But, under circumstances in which the evidence of record fails to show that competitors use the designation in issue, sufficient doubt may be created whether a term primarily refers

to a genus of goods such that sellers of competing brands cannot compete effectively without invoking the particular name or term to designate the product being sold.

In support of the refusal of registration, the examining attorney posited several commercial illustrations including a webpage from www.google.com defining THUMBDRIVE as “one of many terms used in popular language for USB flash drive” and an article dated August 22, 2007, that was printed in The Houston Chronicle. The examining attorney contended that the evidence of record was competent and diverse and adequately showed relevant consumers’ understanding of the term THUMBDRIVE as identifying a genus of goods, thereby supporting the finding the mark is generic for the identified goods. Ironically, the examining attorney turned the Supplemental Registration on its end, contending that this prior registration and simultaneous extensive usage of the term thumb drive or thumbdrive had enabled the term to become generic during the elapsed time frame — since original examination in 2005. Trying to drive a nail in the coffin, the relentless examiner further noted that “[a] term that was once arbitrary or suggestive may lose its distinguish-

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The Houston Lawyer

LEGAL TRENDS

ing and origin-denoting characteristics through use in a descriptive sense over a period of time, and can thus come to be regarded by the purchasing public as nothing more than a descriptive designation.”

To traverse the examining attorney’s refusal, Trek 2000 argued to the TTAB that the Commissioner For Trademarks’ evidentiary burden had not been satisfied and that the prosecution history, prior Supplemental Register Registration and the evidence of record, demonstrated “doubt” whether the mark is actually generic. Trek 2000 tendered proof of its continual strengthening and protecting of its mark. The declaration of Trek 2000’s CFO with exhibits illustrated domestic THUMBDRIVE brand sales and uses of THUMBDRIVE on the Internet and on products and product packaging. Further evidence was submitted that Trek 2000 designs, manufactures and sells a family of THUMBDRIVE branded products, including THUMBDRIVE Touch, THUMBDRIVE Swipe and THUMBDRIVE Tuner portable USB storage devices. The pièce de résistance was proof that Trek 2000 authorized other companies to co-brand and domestically sell USB storage devices bearing the THUMBDRIVE trademark —including such reputable companies as Memorex, Creative Technology, Imation, Iomega and TEAC. A convincing showing was also made that Trek 2000 actively “policed” its asserted trademark rights, wherein cease and desist agreements were routinely achieved.

The TTAB found that the genus of goods at issue was adequately defined by portable digital storage devices and software used in connection therewith. The Board noted that to assess the public’s understanding of the term thumbdrive, the relevant public consisted of the ordinary consumer interested in purchasing flash drives or portable digital storage devices. The TTAB reiterated that the evidentiary burden of establishing that 46

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a term is generic rests squarely upon the shoulders of the Commissioner For Trademarks acting for the United States Patent and Trademark Office and that the showing must be based on clear evidence. While the record showed use of the term thumbdrive to refer to a genus of goods, it also showed its origin for trademark purposes and its extensive and continuous use as a trademark.

From the outset, Trek 2000 used other terminology to describe implicated goods, e.g., “external storage device.” The record also showed that “flash drive” is the commonly used term of art for these portable digital storage devices.

The TTAB found that no examples of competitors using the thumbdrive term subsisted, whereupon the evidence of record failed to “demonstrate a competitive need for others to use” this term. Interestingly, the Federal Circuit noted that a similar case had been addressed where there was a mixed record on the question of genericness. See In re America Online Inc., 77 USPQ2d 1618, 1623 (Trademark Tr. & App. Bd. 2006), citing In re Merrill Lynch, Pierce, Fenner & Smith, Inc., 828 F.2d 1567, 1570, 4 USPQ2d 1141, 1143 (Fed. Cir. 1987).

Observing that “the evidence of generic use is offset by applicant’s evidence that shows not only a significant amount of proper trademark use but also trademark recognition” by third parties, the TTAB declined to conclude that “members of the relevant public primarily use or understand the thumbdrive term sought to be protected to refer to the genus” of the goods, and found in favor of Trek 2000. Consequently, Principal Registration No. 3,942,519 issued on April 12, 2011.

Al Harrison is is a patent attorney practicing intellectual property law with the firm of Harrison Law Office, P.C. in Houston.

He is a member of The Houston Lawyer Editorial Board.

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1. In order to place an ad, attorneys and law firms must complete a registration record.

Once registration is complete, your position wanted or available will be registered with the placement service for six months. If at the end of the six-month period you have not found or filled your position, it will be your responsibility to re-register with the service in writing.

2. If you are registered, resumes will be sent out under their assigned code numbers. Once a firm has reviewed the resumes, they are to contact the placement office with the numbers they are interested in pursuing. The placement coordinator will then contact the attorney, give him/her some background information on the inquiring firm, and the attorney will then let the coordinator know if he/she wishes personal information to be released to the firm. This process will insure maximum confidentiality and get the information to the firms and attorneys in the most expedient manner.

3. In order to promote the efficiency of the Houston Lawyer Placement Service. PLEASE NOTIFY THE PLACEMENT COORDINATOR OF ANY POSITION FOUND OR FILLED. 4. To reply for a position available, send a letter to HBA, placement coordinator at the Houston Bar Association, 1300 First City Tower, 1001 Fannin Street, Houston, Texas 77002 or e-mail Brooke Eshleman at BrookeE@hba.org.

Include the code number and a resume for each position. The resume will be forwarded to the firm or company. Your resume will not be sent to your previous or current employers.

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If you need information about the Lawyer Placement Service, please contact HBA, placement coordinator, at the HBA office, 713-759-1133.

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The Houston Bar Association Lawyer Placement Service will assist members by coordinating placement between attorneys and law firms. The service is available to HBA members and provides a convenient process for locating or filling positions.

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