Background

On September 1, 2024, the court established under Texas HB 19[1] (the “Texas Business Court”) was authorized to begin hearing cases in a new court system designed to promote efficient, reliable, and expedited adjudication of business disputes. Shields Legal has previously written about the Texas Business Court here. Although this new forum will primarily impact litigation matters of Texas residents and businesses, it will have upstream effects on transaction planning and contract drafting. Specifically, adept drafters will need to update traditional “Governing Law & Venue” clauses to avert a complex and expensive outcome potentially overlooked by HB 19. In short, under the current law, litigious parties could force parallel actions on certain related claims by withholding consent to the Texas Business Court’s supplemental jurisdiction.

Concurrent Jurisdiction, Generally

Concurrent jurisdiction is common in the U.S. legal system. It occurs most often between federal and state courts and describes the type of claim that could be validly heard in two different venues. Although concurrent jurisdiction presents an intrinsic complexity to civil procedure and case administration, the doctrine of supplemental jurisdiction and the procedural tools of removal and remand are available and reasonably tailored to simplify and consolidate trials of related causes into one action.

Supplemental jurisdiction grants courts the power to exercise jurisdiction over “all other claims that are so related to claims in the action . . . that they form part of the same case or controversy. . .”[2] Although a court’s exercise of supplemental jurisdiction is discretionary, and 28 U.S.C. § 1367 enumerates multiple exceptions, the doctrine favors consolidation of related claims into one forum. “Whenever a federal court has supplemental jurisdiction under section 1367(a), that jurisdiction should be exercised unless [a specific exception applies].”[3] This principle avoids the disorderly outcome of parallel litigation on related issues because the exceptions are limited to circumstances warranting such complexity, and the dilemma is resolved by judicial analysis—not arbitrary choice of either party. Note that none of the exceptions of federal supplemental jurisdiction involve the “consent” of litigation parties, which could be withheld to increase cost of litigation.

Jurisdiction of  the Texas Business Court

The Texas Business Court has been empowered with jurisdiction over an array of commerce and corporate governance-focused claims.[4] Jurisdiction is concurrent with the Texas Judicial District Courts, except that certain claims are specifically removed from the Texas Business Court’s jurisdiction.[5] For those claims that are not part of the Texas Business Court’s original jurisdiction, but are not excluded either, the Texas Business Court is granted supplemental jurisdiction by Tex. Gov. Code § 25A.004.(f), which states:

“Except as provided by subsection (h)[6], the business court has supplemental jurisdiction over any other claim related to a case or controversy within the court’s jurisdiction that forms part of the same case or controversy. A claim within the business court’s supplemental jurisdiction may proceed in the business court only on the agreement of all parties to the claim and a judge of the division of the court before which the action is pending. If the parties involved in a claim within the business court’s supplemental jurisdiction do not agree on the claim proceeding in the business court, the claim may proceed in a court of original jurisdiction concurrently with any related claims proceeding in the business court.” (emphasis added)[7]

Contrary to federal supplemental jurisdiction, this system conditions supplemental jurisdiction on the consent of the litigation parties, and without that consent, claims relating to the same case or controversy must be adjudicated separately—but simultaneously—by another court with concurrent jurisdiction. This outcome would be extremely problematic for litigants with disparate access to legal resources; furthermore, it could lead to different courts reaching different decisions on substantively similar issues, or on whether the trial will be put before a jury. Ultimately, this could increase reliance on the appeals system to reach efficient and consistent adjudication, which directly contradicts the legislature’s goals for this new system.

The Key Issue and Recommendations

Transaction counsel should be cautious in updating “Governing Law & Venue” clauses, because simplistic revisions could contribute to this problematic situation for clients. If an updated clause simply mandates that eligible actions be brought in the Texas Business Court, the client remains exposed to risk that the counterparty will withhold its consent to supplemental jurisdiction on other claims.  Also, ineligible claims under subsection (h) could not be consolidated regardless of consent. In essence, a simplistic revision sets a pincer trap for your client, with one prong from the contract requiring adjudication of certain claims in the Texas Business Court, and another prong where the nature of the related claim, or the opposing litigant, prevents consolidation via supplemental jurisdiction.

Savy contract drafters should ensure any updates to ‘Governing Law & Venue’ provisions obtain irrevocable consent of each party to the Texas Business Court’s supplemental jurisdiction over all related claims, and should also consider addressing removal in the case of prohibited claims. For now, attorneys should embed these procedural rules directly into contracts, because the Texas legislature has left them open-ended.

[1] []

[2] 28 U.S.C. § 1367(a).

[3] Parker v. Scrap Metal Processors, Inc., 468 F.3d at 74.

[4] See Ramsey, D.G. Texas Governor Greg Abbott Signs Bill Creating New Texas Business Court To Open September 2024. available at: https://shieldslegal.com/texas-governor-greg-abbott-signs-bill-creating-new-texas-business-courts-to-open-september-2024/

[5] Tex. Gov. Code § 25A.004.(h)

[6] Referring to claims specifically excluded from the Texas Business Court’s jurisdiction.

[7] Tex. Gov. Code § 25A.004.(f)