Beginning with suits filed on or after September 1, 2015, defendants in Texas will get additional protection for their financial information. In the past, plaintiffs could secure net worth information simply by making a discovery request. Now, plaintiffs are required to file a motion for seeking the information and show they have a “substantial likelihood” that their claim will be successful. This new law, designed to promote settlement, it is almost a pseudo-trial on the sufficiency of the punitive damage case.
With SB 735, the Texas Legislature amended Section 41.001 of the Texas Civil Practice and Remedies Code, which provides the definitions to be used in the chapter, adding a definition for net worth to mean “the total assets of a person minus the total liabilities of the person on a date determined appropriate by the trial court.”
Currently, Section 41.011, entitled “Evidence Relating to Amount of Exemplary Damages,” states:
(a) In determining the amount of exemplary damages, the trier of fact shall consider evidence, if any, relating to:
(1) the nature of the wrong;
(2) the character of the conduct involved;
(3) the degree of culpability of the wrongdoer;
(4) the situation and sensibilities of the parties concerned;
(5) the extent to which such conduct offends a public sense of justice and propriety; and
(6) the net worth of the defendant.
(b) Evidence that is relevant only to the amount of exemplary damages that may be awarded is not admissible during the first phase of a bifurcated trial.
The Legislature decided it was necessary to clarify and codify the discovery of net worth to prevent use of Section 41.011(a)(6) for harassment purposes. To that end, Section 41.011 of the Civil Practice and Remedies Code was amended by adding the following:
Sec. 41.0115. Discovery of Evidence of Net Worth for Exemplary Damages Claim.
(a) On the motion of a party and after notice and a hearing, a trial court may authorize discovery of evidence of a defendant’s net worth if the court finds in a written order that the claimant has demonstrated a substantial likelihood of success on the merits of a claim for exemplary damages. Evidence submitted by a party to the court in support of or in opposition to a motion made under this subsection may be in the form of an affidavit or a response to discovery.
(b) If a trial court authorizes discovery under Subsection (a), the court’s order may only authorize use of the least burdensome method available to obtain the net worth evidence.
(c) When reviewing an order authorizing or denying discovery of net worth evidence under this section, the reviewing court may consider only the evidence submitted by the parties to the trial court in support of or in opposition to the motion described by Subsection (a).
(d) If a party requests net worth discovery under this section, the court shall presume that the requesting party has had adequate time for the discovery of facts relating to exemplary damages for purposes of allowing the party from whom net worth discovery is sought to move for summary judgment on the requesting party’s claim for exemplary damages under Rule 166a(i), Texas Rules of Civil Procedure.
TEX. CIV. PRAC. & REM. CODE §41.0115. (Emphasis added).
Significantly, by requiring plaintiffs file a motion to obtain net worth, defendants have the opportunity to present evidence, prior to a dispositive motion, that may significantly lessen the threat of a substantial amount of claimed damages. Because the procedure dictates that prior to granting a plaintiff’s request for net worth discovery that adequate time for merits discovery has elapsed, a defendant can argue either that not enough time has elapsed to file a plausible no-evidence motion for summary judgment, or, argue that that plaintiff’s exemplary damages claim is unsupported, setting up a later dispositive motion on the issue.
If the trial court determines net worth discovery is needed, it is mandated to order only the “least burdensome” method. This could include tax returns, financial statements, or Securities and Exchange Commission filings. To the extent the information is already public, i.e., 10-K or 10-Q filings, a defendant objecting to a request for net worth information could plausibly defeat such a motion by arguing that the publicly available information is equally available to both parties and therefore defendant is not required to produce documents or information in response to request.
Still unclear, however, is the extent of plaintiff’s burden. The plaintiff has a clear and convincing burden to secure an award of exemplary damages but legislative history suggests that the phrase “substantial likelihood is not intended to be the same as the clear and convincing standard” nor is it even a “preponderance standard.” The intent is that, for the “the plaintiff to be entitled to net worth discovery, it’s only necessary that the claimant present a prima facie case, but not to demonstrate that he is certain to win.” The plaintiff need only raise “questions on the merits to make them fair ground for more deliberative investigation.”
This change in the law is a welcome one for defendants who are facing meritless exemplary damages claims.