While the Act is set to take effect on September 1, 2023, the new business courts will not begin to hear cases until after September 1, 2024. The additional period is designed to give the state time to confirm judges, promulgate rules, and erect the necessary administrative infrastructure. Initially, there will be five judicial divisions that correspond with the state’s population centers in and around Austin (third), Dallas (first), Fort Worth (eighth), Houston (eleventh), and San Antonio (fourth). Two judges will sit in each division. The Texas legislature left open the possibility of funding another six divisions (to correspond with the more rural judicial districts) at the next legislative session.
Unlike other Texas courts, business court judges will be appointed to two-year renewable terms by the governor with the advice and consent of the Texas Senate. To serve, a candidate must be: (1) at least thirty-five years of age; (2) a U.S. citizen; (3) a resident of the division for at least five years; and (4) a licensed attorney with more than 10 years’ experience in a qualified field including corporate transactional work, complex civil business litigation, previous experience as a civil court judge in Texas, or some combination of the three. Moreover, HB 19 confers the newly-created Fifteenth Court of Appeals with exclusive intermediate appellate jurisdiction over the business courts. The Fifteenth Court of Appeals will be comprised of five justices who will hear sensitive matters of statewide importance (e.g., challenges of state law). Initially, the justices will be appointed by the governor, and thereafter, they will be subject to statewide election. As with the creation of the business courts, there are forthcoming legal challenges to the statutory scheme that established the Fifteenth Court of Appeals.
The business courts will have concurrent jurisdiction (shared with the district courts) over a variety of business disputes. HB 19 creates tiers of jurisdiction for the business courts based upon the amount in controversy, the type of action brought, and whether a company is publicly traded.
1. The business courts have jurisdiction over the following actions where the amount in controversy exceeds $5 million (excluding interest, statutory damages, exemplary damages, penalties, attorney’s fees, and court costs):
- A derivative proceeding.
- An action regarding the governance, governing documents, or internal affairs of an organization.
- An action where a claim under federal or state securities or trade regulation is asserted against an organization, a controlling or managerial officer acting in their official capacity, an underwriter, or the auditor.
- An action brought by an organization or the owner of an organization if the action (1) is brought against the owner, manager, or other controlling individual or (2) alleges an act or omission by an owner, manager, or controlling individual in their official capacity.
- An action alleging that an owner, manager, or controlling individual breached a duty owed to an organization or an owner of an organization by reason of the person’s status as owner, manager, or controlling individual.
- An action seeking to hold an owner or governing person of an organization liable for an obligation to the organization, other than on account of a written contract signed by the person to be held liable in a capacity other than as owner or governing person.
- An action arising out of the Business Organizations Code.
2. Regardless of the amount in controversy, if a company is publicly traded, the business court will have jurisdiction if it pertains to any of the above-described actions.
3. The business courts will have jurisdiction over the following actions if the amount in controversy exceeds $10 million (excluding interest, statutory damages, exemplary damages, penalties, attorney’s fees, and court costs):
- An action arising out of a qualified transaction.
- An action that arises out of a contract or commercial transaction in which the parties agreed in the contract or subsequent agreement that the business court has jurisdiction over the action, except an action that arises out of an insurance contract.
- An action that arises out of a violation of the Finance Code or the Business and Commerce Code by an organization, or an officer or governing person acting on behalf of an organization, other than a bank, credit union, or savings and loan association (subject to certain jurisdictional restrictions).
- The business courts will have authority to hear actions requesting injunctive or declaratory relief provided that they have statutory jurisdiction.
- The business courts may exercise supplemental jurisdiction over any claim related to a case or controversy within the court’s original jurisdiction only if all parties (including the judge) agree.
Absent supplemental jurisdiction, HB 19 expressly carves out certain claims. The business courts do not have jurisdiction over:
1. Actions brought by or against a governmental entity.
2. A claim to foreclose on a lien on real or personal property.
3. Claims arising out of Subchapter E, Chapter 15 and Chapter 17 of the Business and Commerce Code.
4. Claims arising out of the Estates Code, the Family Code, the Insurance Code, and Chapter 53 and Title 9 of the Property Code.
5. A claim arising out of the production or sale of a farm product.
6. A claim related to a consumer transaction to which a consumer in the state is a party, arising out of a violation of federal or state law.
7. A claim related to the duties and obligations under an insurance policy.
The adoption of HB 19 is very likely to influence how parties address venue and jurisdiction in their commercial agreements. Indeed, HB 19 expressly authorizes parties to consent to venue via contract. Due to the small number of business court divisions and the appointment of judges, sophisticated parties will, as expected, likely develop a preference for having their commercial disputes heard in the business courts, as opposed to the district courts. Moreover, HB 19 expressly authorizes parties to consent to the jurisdiction of the business court via contract (provided that there is more than $10 million in controversy). Given that the business courts are designed to have institutional expertise in high dollar business disputes, it will be to the advantage of all large commercial parties to have their claims heard in the business courts, the more so given the required commercial experience of the judges, as well as the smaller dockets. Furthermore, the ability to appeal any adverse finding to the Fifteenth Court of Appeals will provide the business courts with yet another potential advantage that is not otherwise available with arbitration awards (given the extreme deference provided to the arbitrator(s) on appeal).
Initiating an action before the business courts can be done in a variety of ways. Suits may be filed directly in the business courts or removed from the courts in which they were originally filed. When originally filing within the business court, the complainant must plead sufficient facts to establish venue. For a removed action, absent the agreement of all parties, the notice of removal must be filed: (1) not later than the thirtieth day after the date the party requesting removal of the action discovered or reasonably should have discovered the facts establishing the business court’s jurisdiction or (2) if there is a pending application for a temporary injunction on the date the facts allowing for removal are discovered or should have been discovered, then no later than the thirtieth day after the date the application is granted, denied, or denied as a matter of law.
While the establishment of business courts in Texas is congruent with a number of other jurisdictions throughout the United States, it appears likely to face legal challenges. If the business courts are able to endure these challenges, they are likely to become the favored venue for large, complex business disputes within the state.
Client Alert 2023-188
