Preserving and Enhancing the Texas Miracle.
Last week TCJL published its Statement of Conservative Business Principles, together with a “funnel” that graphically represents the questions we ask of legislation that may have a significant liability impact on Texas businesses. How will these principles be applied in practice and what will we do with the resulting analysis?
First, which bills will we review? Generally speaking, we look for bills that impose new legal duties and standards on businesses, professionals, and health care providers, particularly those that establish new or expanded causes of action or civil or administrative penalties. Some bills do this explicitly, but others create liability by requiring compliance with ever-increasing levels of regulation and mandates. We will also scrutinize bills that affect the separation and balance of powers between the three branches of government, particularly those that enhance the power of one branch over the others or involves the courts in which matters we believe are better left to the legislature and executive. Currently, we are tracking nearly 400 bills, and the lion’s share of those fall into these categories. We should note that our review will include bills that affect civil and political rights, since businesses as well as individuals enjoy constitutional protections and any erosion of those protections will have a substantial adverse impact on businesses and their employees.
Second, what will we do with our analyses? In the first instance, we will publish them on our website. What happens after that is still a work in progress, but we hope to make our analyses accessible and actionable by cross-referencing them to our tracking list for easy identification and reference. As we noted in the statement, the purpose of this exercise is to raise these questions so that policymakers may consider them during their deliberations. We are by no means the final arbiter—that job belongs to the Legislature, the Governor, and ultimately the courts. But we have learned from the passage of SB 8 in 2021 that if we do not state our views openly and honestly of the potential effects of liability-creating legislation, then we cannot expect policymakers to be either aware of its implications or seek remedies for them.
So what will an analysis look like? HB 645 presents one of the clearest examples we have seen thus far of a bill that raises several concerns based on our filter. As you may recall, this bill creates an SB 8-style no-injury cause of action by any person against a financial institution that uses so-called “value-based criteria” in its business practices. It contains a broad definition of “value-based criteria,” but the bill is generally focused on “ESG,” i.e., social credit, environmental, and social governance scoring. A prevailing claimant shall recover at least $100,000 in statutory damages, plus costs and attorney’s fees, as well as injunctive relief. Let’s see what the filter tells us about this bill.
- Does the proposal violate the Texas or U.S. Constitutions?
In our view, the answer is yes in at least three ways. First, the bill may violate a private business’s free speech and association rights under the federal and state constitutions. The problem lies in the vague, overbroad definition of “value-based criteria” and its application to the institution’s “business practices.” As we know from SCOTUS’s decision in Citizens United v. Federal Election Commission, 558 U.S. 310 (2010), corporations and other associations have the same speech rights under the First Amendment as individuals, meaning that courts will apply a strict scrutiny standard to any statute that purports to limit that speech. Under HB 645, a corporation would be subject to theoretically unlimited punitive damages (the caps in Chapter 41, CPRC, do not apply) for conducting its “business” in a way that may be construed to “discriminate against, advocate for, or give disparate treatment to a person using value-based criteria.” Presumably, this can mean anything from either loaning money or not loaning money to certain individuals or organizations to having corporate policies that respond to shareholder, investor, and customer interests and demands. While Citizens United struck down federal and state bans of independent campaign expenditures by corporations, there is, in our view, no meaningful distinction between the speech acts involved in that case and those that would be regulated by HB 645. As SCOTUS stated, “The First Amendment bars attempts to disfavor certain subjects or viewpoints, as well as restrictions distinguishing among different speakers, allowing speech by some but not by others.” 558 U.S. at 340. HB 645 does both.
Additionally, we believe a strong argument can be made that HB 645 (1) violates procedural due process under the Fifth and Fourteenth Amendments, (2) impermissibly extends Texas law to activities wholly conducted in other states and nations and not involving Texas citizens, and (3) violates the separation of powers. Part of the analysis is given below in the discussion of constitutional standing, which rests on separation of powers and the constitutional requirement that a person suffer a concrete, particularized injury in order to have standing to sue. Beyond the standing problem, however, the bill imposes a quasi-criminal penalty (unlimited punitive damages) that may be recovered without a showing of actual harm. This means that the defendant business can only escape liability by proving a negative, that is, the business did not violate a vague and overly broad standard subjecting it to such liability. That may well be a due process violation. To the extent that the bill punishes conduct that occurs wholly outside of Texas, it could also run afoul of the due process clause and, though offering a high hurdle, the dormant commerce clause on the basis that it attempts the direct regulation of business activities occurring far from Texas. Finally, we believe that the private enforcement mechanism the bill borrows from SB 8 puts the courts squarely in the business of social and economic regulation, thus violating separation of powers.
- Does the proposal confer standing on an uninjured party?
Yes. HB 645 authorizes “any person” to sue a business or financial institution. Quoting In re Abbott, 601 S.W.3d 802, 807 (Tex. 2020), “The Texas standing doctrine derives from the Texas Constitution’s provision for separation of powers among the branches of government, which denies the judiciary the authority to decide issues in the abstract, and from the open courts provision, which provides court access only to a ‘person for an injury done him.’” The harm requirement for purposes of determining constitutional standing requires “actual injury, as opposed to one that is general or hypothetical. Thus, as a general rule, to have standing an individual must demonstrate a particularized interest in a conflict distinct from that sustained by the public at large.” South Texas Water Authority v. Lomas, 223 S.W.3d 304, 307 (Tex. 2007).
Texas constitutional standing doctrine closely follows federal law. According to the United States Supreme Court, standing requires plaintiffs to “demonstrate, among other things that they have suffered a concrete harm. No concrete harm, no standing. Central to assessing concreteness is whether the asserted harm has a ‘close relationship’ to a harm traditionally recognized as providing a basis for a lawsuit in American courts—such as physical harm, monetary harm, or various intangible harms including . . . reputational harm.” TransUnion LLC v. Ramirez, 141 S.Ct. 2190, 2200 (2021). Although HB 645 purports to grant standing to any person to sue . . . , “courts’ constitutional jurisdiction cannot be enlarged by statute.” In re Allcat Claims Serv. L.P., 356 S.W.3d 455, 462 (Tex. 2011). The United States Supreme Court recently echoed this longstanding rule. “Congress may ‘elevate to the status of legally cognizable injuries concrete, de facto injuries that were previously inadequate in law. . . . But even though ‘Congress may “elevate” harms that “exist” in the real world before Congress recognized them to actionable legal status, it may not simply enact an injury into existence, using its lawmaking power to transform something that is not remotely harmful into something that is. . . . [I]f the law of Article III did not require plaintiffs to demonstrate a ‘concrete harm,’ Congress could authorize virtually any citizen to bring a statutory damages suit against virtually any defendant who violated virtually any federal law.’” Transunion LLC v. Ramirez, 141 S.Ct. 2204-2208.
HB 645, in our view, clearly violates the constitutional standing doctrine because it allows any person to sue a business or financial institution without a showing of concrete, particularized harm.
- Does the proposal create a new cause of action?
Yes, as discussed above.
- Does the proposal undo prior reforms?
Yes. HB 645 lifts the cap on punitive damages as it applies to the bill’s new cause of action.
- Does the proposal impose new civil or criminal liability on business?
Yes, as discussed above.
- Does the proposal interfere with freedom of contract?
Yes. The bill is designed to have a chilling effect on a business’s or financial institution’s right to contract with employees, investors, partners, vendors, and customers and to direct their lawful business practices as they, their shareholders, and officers and directors see fit, based on conduct that is constitutionally protected.
HB 645 demonstrates how our categories of analysis may overlap when constitutional issues interact with the expansion of liability exposure. Because the bill raises so many constitutional due process and standing concerns, those concerns dominate the analysis in this case. Discussion of most other bills will likely fall within questions 3-6. In any event, as we refine the process, we will make every effort to make it as useful and informative as possible. Given the unusually large number of bills creating new liability exposure filed so far, we will do our best to make our analyses available in a timely way. And, as always, we are cognizant that our reading of these bills, while informed by our understanding of the law and longtime experience in the civil justice arena, represents a perspective that privileges the liberty of businesses and health care providers to make decisions based on the best interests of their customers, patients, employees, shareholders, and investors. Texas is winning the international economic competition in large part because it stays out of business’s business. We hope that providing information about proposed legislation that steps over that line will help keep it that way.
