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Texas Supreme Court Declines (Again) to Create a Common-law Action for Whistleblowers

By Patrice Pujol

In Ed Rachal Foundation v. D’Unger, No 03-1101, 2006 Tex. LEXIS 278, 2006 WL 1043081, 49 Tex. Sup. J. 537 (April 21, 2006) (per curiam), the Supreme Court of Texas followed precedent and again refused to create a common-law cause of action for all whistleblowers.
Claude D’Unger was an officer and director of the Ed Rachal Foundation, a charitable organization located in Webb County on the Texas-Mexico border. Due to its location, Mexican migrants often cross the Foundation’s property. D’Unger became concerned that a foreman, Ed DuBose, was harassing the migrants. He reported his concerns to the Foundation’s CEO, who told him “to drop it”; D’Unger took this as an instruction not to report DuBose to law enforcement. Later, DuBose caught three migrants and turned them over to Border Patrol agents. D’Unger then contacted the Border Patrol agents, who told him they had no knowledge or record of the incident. Concerned that a crime may have been committed, D’Unger contacted a congressman, two sheriffs, the Texas Attorney General’s office, a senator, the IRS, a district judge, and the Mexican Consulate. When the Foundation’s CEO learned of D’Unger’s activities, he first suspended him, and then fired him when he refused to resign.
D’Unger sued the Foundation for breach of contract and wrongful termination, and the Foundation’s CEO for tortious interference. Despite conclusive evidence from the Border Patrol confirming that no crime had occurred—DuBose had safely delivered the migrants to the Border Patrol the same day he caught them—a Nueces County jury found for D’Unger on all his claims, and the trial court rendered judgment for $364,194 in lost wages and $193,001 in attorney’s fees. A unanimous Corpus Christi Court of Appeals reversed the breach of contract and tortious interference claims, but split on the wrongful termination claim, with the majority affirming the judgment.
The Supreme Court affirmed the appellate court’s holding on the breach of contract claim, finding no evidence to support D’Unger’s breach of contract claim because he was merely an at-will employee. The Court reversed D’Unger’s wrongful termination claim, however, a claim based on the whistleblower exception to at-will employment, making it unlawful to terminate an employee if the sole reason is his refusal to perform an illegal act. But here, D’Unger was not asked to perform any illegal act. When D’Unger was told “to drop it,” his silence was not a criminal act. Nor was there evidence that D’Unger was asked to join any criminal conspiracy. The only possible crimes related to the CEO‘s instruction were those criminalizing harassment, or conspiracies to intimidate potential witnesses. However, D’Unger was not himself a witness, nor was he asked to tamper with any witnesses.

Patrice Pujol practices with the firm of Forman Perry Watkins Krutz & Tardy LLP. She is a former editor in chief of The Houston Lawyer and serves on the editorial board.

Never Obscure Your Own “Starry Night”

By Fred A. Simpson

Sharpe The San Antonio Court of Appeals cautions us about the unlawful effect of certain license plate frames, considering the scope of a 2003 statute on the subject of license plate visibility. State v. Johnson, ___ S.W.3d __ (Cause 04-04-00332-CR, June 7, 2006).
Police in Fredericksburg stopped a vehicle solely because the license plate was partially obscured by a dealer-installed license plate frame that covered the phrase “THE LONE STAR STATE” as well as the space shuttle and “starry night” images. The traffic stop resulted in Mr. Johnson’s subsequent arrest for felony driving while intoxicated. Defense moved to suppress all fruits of the arrest and search. The trial court granted Johnson’s motion to suppress on grounds that the license plate number was not obscured, “and you can tell that it’s a Texas plate.” The appellate court reversed.
After reviewing the problems of applying the prior statute to license plate visibility situations, the court considered the current Section 502.409 of the Texas Transportation Code, as carefully amended by the Legislature in 2003, to read as follows:

A person commits an offense if the person attaches to or displays on a motor vehicle a number plate or registration insignia that: . . . (5) has letters, numbers, or other identification marks that because of blurring or reflective matter are not plainly visible at all times during daylight; (6) has an attached illuminated device or sticker, decal, emblem, or other insignia that is not authorized by law and that interferes with the readability of the letters or numbers on the plate or the name of the state in which the vehicle is registered; or (7) has a coating, covering, or protective material that: (A) distorts angular visibility or detectability; or (B) alters or obscures the letters or numbers on the plate, the color of the plate, or another original design feature of the plate.

The San Antonio Court of Appeals construed the statute to prohibit “a . . . covering . . . that obscures . . . [an] original design feature of the plate” and therefore prohibits a license plate frame “that is placed over” a license plate if the frame “conceal[s] or hide[s]” an original design element of the plate. The phrase “LONE STAR STATE” and the space shuttle and the starry night artwork were “original design elements of the plate” that should not be obscured.
Accordingly, the police officer who made the traffic stop had reasonable suspicion of a statutory violation and therefore had a valid basis to make the stop, and the trial court erred in granting the motion to suppress.

Fred A. Simpson is a litigation partner at Jackson Walker L.L.P. He is an associate editor for The Houston Lawyer.

Estate-Planning Attorneys Now More Vulnerable
To Malpractice Claims

By John S. Gray

In Belt v. Oppenheimer, Blend, Harrison & Tate, Inc, ___ S.W.3d ___ (Tex. 2006), the Texas Supreme Court reversed a trial court’s grant of summary judgment to the attorneys hired to prepare the late David Terk’s will. The court grounded its decision on the fact that an estate’s personal representative does not lack privity of contract with the decedent’s attorneys because the estate “stands in the shoes” of the decedent. In dicta, the court noted that estate planning attorneys were essentially immunized from liability if both beneficiaries and personal representatives were precluded from bringing estate planning malpractice suits. Thus, the court stated that its holding “strikes the appropriate balance between providing accountability for attorney negligence and protecting the sanctity of the attorney-client relationship.” The court felt that by providing accountability it is creating an incentive for lawyers to use greater care in estate planning. On the flip-side, the court believed that by limiting the class of potential estate-planning malpractice claimants to personal representative, it ensured that estate-planning attorneys are not subject to “almost unlimited liability.”
In this case, Mr. Terk’s children, who were also the joint, independent executors of their father’s estate, sued several attorneys for legal malpractice. They claimed that the attorneys were negligent in drafting their father’s will and in advising him on asset management. They claimed that the estate incurred over $1,500,000 in tax liability that could have been avoided by competent estate planning. The attorneys moved for, and were granted, summary judgment on the ground that estate planners owe no duty to the personal representatives of a deceased client’s estate.
In affirming the summary judgment, the San Antonio Court of Appeals held that they were constrained to follow precedent set fourth in Barcelo v. Elliott which held that attorneys owed no duty to beneficiaries intended to benefit under a will. See Belt, 141 S.W.3d 706, 707-08 (Tex. Civ.—San Antonio 2004). (citing Barcelo, 923 S.W.2d 923 S.W.2d 575, 576 (Tex. 1996)). The Supreme Court, however, distinguished Barcelo by noting that this suit was brought on behalf of the decedent by his estate’s personal representatives. On an issue of first impression, the court held that a legal malpractice claim in the estate-planning context survives the deceased client if it involves the improper depletion of the estate’s property. The court reasoned that while the primary damage at issue here – the increased tax liability – occurred after the decedent’s death, the lawyer’s negligence occurred while the decedent was alive. Furthermore, had the decedent discovered the negligence he could have brought suit to recover the fees paid to the estate planners and the costs incurred to restructure the estate to minimize the tax liability.
While Barcelo’s ban against malpractice claims by intended beneficiaries is still good law, the Texas Supreme Court has opened a crack in this wall by allowing disgruntled trust and estate beneficiaries to sue estate planning attorneys as long as they are also the executors of the estate. Henceforth, in Texas, legal malpractice claims alleging pure economic loss survive in favor of a deceased client’s estate. Because they survive, the estate has a justiciable interest in the controversy sufficient to confer standing. In estate cases involving the negligent depletion of the decedent’s estate, the personal representative need only demonstrate that the decedent intended to minimize tax liability for the estate as a whole.

John S. Gray is a partner with Gardere Wynne Sewell LLP, practicing in the area of environmental law. He received his J.D. from Southern Methodist University and his M.B.A. from the University of Notre Dame. He is a member of the editorial board of The Houston Lawyer and is a Registered Professional Engineer.

Contract Ratification Doctrine Cannot Be Used to Circumvent Statutory Bar to Holding Individual Liable for Corporate Obligation

By Mark Trachtenberg

In Willis v. Donnelly, 2006 WL 1506258, 49 Tex. Sup. Ct. J. 661 (Tex. June 2, 2006), the Texas Supreme Court addressed the ratification doctrine and fiduciary duty law, while sidestepping other issues addressed by the lower courts that attracted the interest of many Texas practitioners, including whether a majority shareholder in a closely-held corporation owes a minority shareholder a fiduciary duty under Texas law.
This commercial dispute arose out of the formation of a spa in Houston. Michael Willis and several colleagues set up two corporations to operate the spa – Urban Retreat of Houston, Inc. (URH) and Willis/Hite Enterprises, Inc. (WHI). Willis was a shareholder, director and officer of both corporations. To develop the business, Willis reached an agreement with Dan Donnelly, whereby Donnelly agreed to use his best efforts to transfer his hair salon business to the spa and to manage the spa. In exchange, URH and WHI promised Donnelly a salary and future stock transfers, which were partially dependent on the success of the business. The parties memorialized this arrangement in a letter agreement that Willis signed on behalf of the corporations. Though the conditions for certain stock transfers to Donnelly eventually were met, Donnelly orally agreed to delay the transfer of stock until the business “turned the corner” financially. Eventually, differences between the parties became irreconcilable. Litigation ensued before any stock transfers occurred.
Following a jury trial, Donnelly prevailed on his breach of contract claim against the signatories of the letter agreement, WHI and URH, as well as against Willis under a ratification theory. The trial court also found that Willis, in his capacity as a majority shareholder, owed and violated a fiduciary duty to Donnelly, and entered judgment on that claim as well. The court of appeals affirmed the fiduciary duty claim, affirmed the finding of contract liability, but reversed and remanded the contract claim for new trial based on its conclusion that the jury had received an erroneous instruction on damages.
The supreme court rendered judgment in favor of Willis on the breach of contract claim brought against him in his individual capacity, rejecting the ratification theory adopted by the lower courts. The court concluded that the doctrine could not circumvent the “corporate shield from liability” set forth in Article 2.21 of the Business Corporations Act, absent fraud or an express agreement to assume personal liability. Here, Willis expressly refused to be bound personally by the contract. The supreme court agreed with the court of appeals that the jury was given an improper damages instruction on the contract claim against URH and WHI, and affirmed the court of appeals’ order of a remand for new trial.
Finally, the supreme court reversed the fiduciary duty claim against Willis but did so without addressing whether a majority shareholder owes a duty to a minority shareholder in a closely-held corporation – an issue that had attracted significant attention to this case. Instead, the court held that because Donnelly never obtained the stock of URH and WHI, and was operating under an oral agreement to postpone the stock transfer when the alleged breaches of fiduciary duty occurred, Donnelly could not bring a fiduciary duty claim based on his “purported” status as minority shareholder.

Mark Trachtenberg is an associate in the Appellate Section of Haynes and Boone LLP. He is a member of the editorial board of The Houston Lawyer.

The Da Vinci Code May be Cracked, but It Isn’t Stolen

By Crystal J. Parker

Some say imitation is the sincerest form of flattery. But that sentiment doesn’t apply when someone steals the ideas from your book to create a best selling novel. Or so Lewis Perdue, the author of The Da Vinci Legacy and Daughter of God might argue. Unfortunately for him, the United States Court of Appeals, Second Circuit, the United States District Court for the Southern District of New York and London’s High Court don’t agree that his ideas were stolen.
After claims that Dan Brown, bestselling author of The Da Vinci Code, had infringed the copyright of Perdue’s books, Brown and his book’s publisher, Random House, Inc., brought an action in the Southern District of New York against Perdue, Brown et. al. v. Perdue, 2005 WL 1863673 (S.D.N.Y. 2005), seeking a declaratory judgment that his work does not infringe upon Perdue’s. Perdue counterclaimed for copyright infringement and unjust enrichment, seeking damages totaling $150 million and a permanent injunction barring distribution of The Da Vinci Code and the motion pictured adaptation.
Judge George B. Daniels, writing for the Southern District of New York, in an opinion that reads more like literary criticism than a legal analysis, held on August 4, 2005, that Brown’s book, The Da Vinci Code, does not infringe the copyrights of Lewis Perdue’s books, Daughter of God and The Da Vinci Legacy. The United States Court of Appeals, Second Circuit, affirmed the decision in Brown v. Perdue, 2006 WL 1026098 (2nd Cir. 2006) “for substantially the reasons given by the district court.”
To establish copyright infringement, two elements must be proven. First, the plaintiff must prove the ownership of a valid copyright, and second, the plaintiff must prove copying of constituent elements of the work that are original. In this case, the parties agreed that a valid copyright existed, so Perdue’s burden was to show that Brown copied original, constituent elements of his books.
In the absence of direct evidence, copying may be proven by showing access to the copyrighted work and substantial similarity between the copyrighted work and the defendant’s work. It was conceded in the lawsuit that Brown had access to Perdue’s work, so the question at issue was whether the works were substantially similar. In deciding this issue, the Southern District of New York applied the “average lay observer” test, which involves deciding whether a reasonable lay observer would conclude that the works were substantially similar.
In its analysis, the New York Court noted that historical facts and a thematic concept of scenes that must necessarily follow from similar plot situations, or a scene a faire, are not protected by copyright law. The Court found that, while there are similarities in the themes of the books, the ideas originated in historical facts, events and figures and that Perdue “made no factual allegations… to support a finding that Brown copied his expression of these ideas.” In so finding, the Court conducted a detailed analysis of the two books’ thematic expressions, total concepts and feel, plots, characters, sequence, pace, and setting. For each category, the Court held that the similarities are not substantial enough to support an infringement claim.
The London High Court also ruled against Perdue in a similar lawsuit filed in the U.K. However, the battle may not be over for Brown. Several sources have claimed that Perdue will appeal to the United States Supreme Court. The U.S. Supreme Court may take the case to settle a disagreement between the circuit courts regarding whether the “average lay observer” test applied by the Second Circuit or some other test should be applied to copyright cases.

Crystal J. Parker practices business litigation at Boyar & Miller. She is also a member of the editorial board of The Houston Lawyer and a graduate of the University of Houston Law Center.

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