Welcome to Texas: Texas Governor Signs Law Creating Specialized Business Courts

Last Friday, Gov. Greg Abbott signed into law House Bill 19, creating Texas “business courts” to hear certain types of complex commercial disputes. These courts will open on September 1, 2024. The creation of these courts raises a host of strategic questions for litigants, as described in detail below. In-house lawyers would do well to start familiarizing themselves with the business courts’ structure and the strategic issues and decision points that may arise when the courts open their doors next year.

Under House Bill 19, the new business courts will have jurisdiction and powers concurrent with district courts in certain business disputes, such as derivative actions on behalf of companies; certain securities actions; claims alleging breach of a duty by reason of a person’s status as an owner, manager, or controlling person of an organization; and certain actions involving transactions and in which the amount in controversy exceeds $10 million. The business court may have supplemental jurisdiction over other types of claims if the claims form part of the same case or controversy as a claim within the business court’s jurisdiction, but only if the parties and the court agree to proceed in business court.

The business courts do not have jurisdiction over medical malpractice, personal injury, or legal malpractice claims, regardless of their relationship to a claim within the business court’s jurisdiction. Importantly, in cases where the business court has jurisdiction, the plaintiff may file in business court, or the defendant may remove a case filed in district court or a county court at law to the business court. Additionally, the judge of a court in which an action is filed may request that the presiding judge for the court’s administrative region transfer an action to the business court, which the presiding judge may do after a hearing.

The business court will be composed of seven judges, appointed by the Governor with the advice and consent of the Senate. The business court judges will serve for only two-year terms and may be reappointed at the end of a term. To be eligible to serve on the business court, a judge must have 10 or more years of relevant experience, such as practicing complex civil business litigation or business transaction law or serving as a judge of a Texas court with civil jurisdiction.

Appeals from the business court would go to the newly created statewide Fifteenth Court of Appeals (created by Senate Bill 1045, also signed last Friday), which will hear appeals of cases from the business court and certain other matters (such as matters brought by or against the state or challenging the constitutionality or validity of a state statute or rule). The Fifteenth Court of Appeals will begin operations on September 1, 2024. For the first three years, the court will consist of a single chief justice and two additional justices, meaning that the same three-justice panel will hear all cases appealed to the Fifteenth Court of Appeals. After September 1, 2027, the court will have a chief justice and four additional justices.

As companies and other future litigants look toward the changes these business courts may bring to business litigation in Texas, there are several strategic issues that may need to be considered once those courts begin to operate. For example:

• The business courts may affect whether a litigant prefers to be in federal or Texas state court. For example, a litigant that previously preferred to litigate claims in federal court might find the Texas business courts to be an attractive option given their specialized nature and (possibly) shorter time to resolution. This could add an extra layer of strategic decision-making during the prelitigation stage and alter how litigants decide to craft their litigation.

• The rules for removal to and remand from business courts likely will create new complexities around related or parallel cases, if parties disagree about where the case should be litigated, similar to removal disputes in the state/federal context. For example, can claims be aggregated to satisfy the minimum amount in controversy for certain claims? What if an action involves some claims that are within the business court’s jurisdiction and others that are not? What counts as being “part of the same case or controversy” for purposes of supplemental jurisdiction? Additionally, because all parties and the court must agree to the business court exercising its supplemental jurisdiction, litigants will have to consider whether it is to their advantage to agree to supplemental jurisdiction. If the parties do not agree, litigants with some claims within the business court’s jurisdiction and other claims outside of the business court’s jurisdiction may have to split those claims across multiple courts (or perhaps litigate them together outside of business court).

• The new law could also have implications for choice of venue. If a party files in a district court or a county court at law in which there is not an operating business court, removal to the business courts is not possible. The business courts are divided into 11 “divisions” matching Texas’s 11 judicial administrative districts. However, the governor cannot appoint judges to six of those 11 divisions until July 1, 2026, and those six divisions will be “abolished” on September 1, 2026, unless reauthorized and funded by the legislature. Thus, there is a high likelihood that there will not be an “operating business court” in at least some parts of the state. In those circumstances, a litigant wanting to avoid the business courts or the newly created Fifteenth Court of Appeals could strategically choose a venue without an operating business court to avoid the possibility of removal.

• The creation of business courts may also have implications for midcase judicial turnover and case resolution speed. With judges having only two-year terms, litigants may face an increased risk of having to re-educate new judges on the complex facts of their disputes throughout the life of the case in the business courts. However, it’s also possible that the two-year term limit, specialized judicial knowledge, and a potentially lighter caseload could motivate judges to move cases along more swiftly.

• The business courts, unlike district courts, may be more likely to issue written opinions. An early version of the bill would have required business courts to issue written opinions, to “facilitate the establishment of a coherent body of law.” The enacted bill requires only that the Texas Supreme Court “adopt rules for the issuance of written opinions by the business court.” Given the legislature’s interest in developing a coherent body of law through written opinions, however, it seems likely that we will see many more written opinions from the business courts than we do from district courts. Early litigants may have the opportunity to affect the development of this body of law in briefing before the business courts. Later litigants will have a much more developed source of precedent to consult, which should improve the certainty and consistency of outcomes but also will require additional legal research and analysis as the volume of written opinions increases.

• Finally, there has been some suggestion that the business courts may be subject to constitutional challenges. During debates about the creation of these courts, opponents argued that the courts — primarily because of their statewide jurisdiction — are inconsistent with the Texas Constitution, which requires the state to be “divided” into “districts.” The enacted bill divides the business court into “divisions” (some of which arguably are illusory), but the business court’s “district” remains the entirety of the state. Additionally, opponents have argued that appointing the judges, rather than electing them, violates the Texas Constitution. The constitutionality of the Fifteenth Court of Appeals has been criticized on similar grounds. Although these constitutionality arguments might be resolved prior to the courts’ opening their doors in September 2024, if they are not, it’s possible that early decisions from the business courts may be subject to constitutional attack.

The creation of these new courts may eventually make Texas an even more attractive location for resolving business disputes. But as has been seen with similar courts in other states, business courts do not always operate as originally envisioned, and there are likely to be some growing pains and a number of unexpected effects (positive and/or negative). Navigating these new issues, among many others, will take skilled counsel and a higher level of strategic decision-making.

This post is as of the posting date stated above. Sidley Austin LLP assumes no duty to update this post or post about any subsequent developments having a bearing on this post.