The “Valid When Made” Doctrine

Recently, I attended two seminars that both addressed the “valid when made” doctrine. It is often used with the “true lender” doctrine and whether the Depository Institutions Deregulation and Monetary Control Act of 1980, 112 U.S.C. §1831(d) governs and preempts the interest rate.

The “valid when made” doctrine is based on long-standing case-law holding that a loan cannot become usurious due to a subsequent assignment. See Nichols v. Fearson, 32 U.S. 103, 106, 8 L.Ed. 623 (1833) (holding that the rule of law is everywhere acknowledged, that a contract, free from usury in its inception, shall not be invalidated by any subsequent usurious transactions upon it); Gaither v. Farmers’ & Mechs. Bank of Georgetown, 26 U.S. 37, 43, 7 L.Ed. 43 (1828).

The “valid when made” doctrine often arises where the loan is made in a state with a high interest ceiling. The loan is assigned to a state with a much lower interest rate ceiling that also defines any interest charged above the ceiling as being usury. The borrower then claims the loan is usurious and seeks the extreme penalties that go with a usurious loan. See Robinson v. Nat’l Collegiate Student Loan Trust 2006-2, 2021 U.S. Dist. LEXIS 68342 (D.C. Mass April 7, 2021); see also Kaur v. World Bus. Lenders, LLC, 440 F. Supp. 3d 111 (D. Mass. 2020); Rent-Rite SuperKegs West Ltd. V. World Bus. Lenders, LLC, 623 B.R. 335 (D. Colo. 2020).

In reviewing the many cases that deal with the “valid when made” doctrine, it does appear to have widespread acceptance with one caveat. If the underlying loan assigned is modified or materially changed, the assigned loan may no longer receive the protections of the “valid when made” doctrine and becomes subject to the new interest rate cap and the usury limitations because the loan is treated as a new loan.

The opinions in this blog are solely the author’s and any comments, replies, or suggestions may be sent to john@jrjoneslaw.com. Happy Father’s Day to all.

A Single Unsolicited Text is Sufficient in 5th Circuit for Standing Under the Telephone Consumer Protection Act

No one likes Robocalls and its ugly twin, robotexts. The Telephone Consumer Protection Act of 1991 (“TCPA”) banned them, but they are still with us. While there is a split in the United States Circuit courts, companies in the United States Court of Appeals for the Fifth Circuit’s (the Fifth Circuit) jurisdiction of Texas Louisiana, and Mississippi are now on notice that the TCPA will be strictly enforced in the Fifth Circuit.

Yesterday, the Fifth Circuit in Cranor v. 5 Star Nutrition, LLC, Case No. 19-51173. 2021 U.S. App. LEXIS 15795 (5th Cir. May 26, 2021) answered whether a single text message constituted an “injury of fact” sufficient to support standing for a claim under the TCPA. Reversing the District Court’s dismissal under Federal Rule of Civil Procedure 12(b) (1) for lack of subject matter jurisdiction, the Fifth Circuit held that a single unsolicited text was an alleged cognizable injury in fact – nuisance arising out of an unsolicited text advertisement. The Fifth Circuit’s analysis is a road map for any future challenges to standing under the TCPA. The Court reviews the actions of Congress and analogous common law actions to assist it in reaching its holding.

The TCPA prohibits four telemarketing practices. It prohibits the use of a automatic telephone dialing system or an artificial or prerecorded voice to call an emergency telephone line, a guest room or patient room of a hospital or other healthcare facility; or any telephone number assigned to a paging service, cellular telephone service, specialized mobile radio service, or other radio common carrier service, or any service for which the called party is charged for the call, unless such call is made solely to collect a debt owed to the United States. It also prohibits using an “artificial or prerecorded voice to deliver a message” to “residential telephone line” without prior consent. See 47 U.S.C. § 227(b)(1)(A) & (B). The TCPA also prohibits sending unsolicited advertisements via fax machines or using an auto dialer to tie up more than one business lne simultaneously. Id. § 227(b)(1)(C) & (D).

One of the more important provisions of the TCPA is that it created a private right of action and authorizes a “person” to sue and allows injunctive relief, actual monetary loss from such a violation, to receive $500 in damages for each such violation, or to seek both damages and injunctive relief. Id. § 227(b)(3). This is a significant provision because many federal or state statutes only allow the government to sue.

I highly recommend that Cranor v. 5 Star Nutrition be reviewed if you are contemplating a claim under the TCPA. It is a great road map on the policy behind the TCPA and sets out why, a single text constitutes injury in fact and allows standing under the TCPA. Because this opinion is coming from one of the most conservative courts in the United States, the opinion is also noteworthy as the United States Supreme Court has also become more conservative. The opinions in this blog are solely the author’s and any replies, comments, or suggestions may be sent to john@jrjoneslaw.com.

Foreign Entity Registration, Standing, and Capacity to Sue on Debt in Texas.

Recently in a case, my foreign corporate client’s standing to prosecute a lawsuit in Texas was raised after the case was pending for three years under Section 9.051(b) of the Texas Business Organizations Code (“BOC”) entitled “Transacting Business or Maintaining Court Proceeding Without A Registration.” The attempt continued the confusion over capacity and standing and the unsuccessful trend of arguing that every foreign company must be registered to do business to sue on a debt in Texas. Suing on a debt is not transacting business in Texas and there is a statutory exception for the registration requirement.

Section 9.051(a) states that on application by the attorney general, a court may enjoin a foreign filing entity or the entity’s agent from transacting business in this state. Section (b) states that a foreign filing entity or the entity’s legal representative may not maintain an action, suit, or proceeding in a court of this state, that arises out of the transaction of business (Emphasis added) unless the foreign entity is registered under this chapter.

However, Section 9.051 of the BOC appears to be limited to suit by the attorney general only and not private litigants based on the language of the section and these sections 9.052 and 9.053 of the BOC that set civil penalties and require venue in Travis County. Despite who can sue, let’s discuss suing on a debt by a non-registered foreign entity in Texas.

Reliance on this provision is misplaced and in error because suing on a debt claim does not, by the express language of Section 9.251 of the BOC, arise from the transaction of business in this state because the entity is suing to collect on debt owed to it that occurred in interstate commerce. See Section 9.251(1), (8), & (9) of the BOC.

Chapter 9, Subchapter F of the BOC entitled “Determination of Transacting Business in this State” and Section 9.251 entitled “Activities Not Constituting Transacting Business in the State” are the operative portions of the BOC for this Court’s determination. Section 9.251 of the BOC expressly sets out what activities do not constitute transacting business in this state. If an entity is not transacting business in the state, it need not obtain registration under Chapter 9 of the BOC.

Section 9.251 of the BOC expressly provides that “activities that do not constitute transaction of business in this state include: (1) maintaining or defending an action or suit; (8) securing or collecting a debt due the entity; and (9) transacting business in interstate commerce.  Because these activities do not constitute the transaction of business, no registration is required. Texas courts have held that entities, who are suing to collect on a debt and maintaining a lawsuit in Texas to do so, are not required to obtain registration under Chapter 9 of the BOC. A quick summary of key cases to help you get started should this challenge appear in your case.

In ColorSciences, LLC v. Gordon Group Enters., 2015 Tex. App. LEXIS 8361 (Tex. App. -Austin 2015, n.w.h.), the trial court granted judgment to Gordon Group. On appeal, ColorSciences challenged the trial court’s judgment asserting that Gordon Group, a foreign Corporation, lacked the capacity to sue (or lacked standing) in Texas because Gordon Group was not registered with the Texas Secretary of State under Chapter 9 of the Texas Business Organizations Code. See ColorSciences, LLC v. Gordon Group Enters., 2015 Tex. App. LEXIS 8361 (Tex. App. -Austin 2015, n.w.h.) (citing to 9.051(b) of the BOC). The Austin Court of Appeals affirmed the trial court’s judgment and discussed the distinction of capacity and standing and applying Section 9.251(8) of the BOC.

While finding the argument had been waived for failing to verify the challenge under TRCP 93, the Austin Court of Appeals in Gordon Group, found that the challenge to capacity (or standing) under Section 9.051(b) of the BOC was also without merit. The Austin Court of Appeals held that Section 9.251(8) of the BOC expressly excludes collecting a debt from the definition of activities constituting the transaction of business in Texas. Since Gordon Group’s lawsuit arose out of its attempts to collect a debt, it did not arise to a transaction of business in Texas and therefore, Section 9.051(b) of the BOC was not applicable, and no registration was required.

The Austin Court of Appeals also explained the difference between standing and capacity. The issue was not standing but capacity because a plaintiff has standing when it is personally aggrieved whether or not it has the legal authority to act. ColorSciences, LLC v. Gordon Group Enters., 2015 Tex. App. LEXIS 8361, *3 fn 2 (Tex. App. -Austin 2015, n.w.h.), citing, Nootsie, Ltd. v. Williamson County Appraisal District., 925 S.W.2d 659, 661 (Tex. 1996). Because the Gordon Group was suing on a claim based on a promissory note, it had standing. Id., see, e.g. See Haddox v. Fannie Mae, 2016 Tex. App. LEXIS 4798 (Tex. App. – Austin 2016, n.w.h.) (holding that Haddoxes were confusing concepts of standing and capacity, and while not directly applicable, Section 9.251 of the BOC was useful in the concept of an eviction proceeding and challenge and an eviction suit did not amount to the transaction of business in Texas).

In Case Funding Network, L.P. v. Anglo-Dutch Petroleum Int’l Inc., 2012 Tex. Dist. LEXIS 11465 (127th Dist. Court Harris County April 12, 2012, J. Sandill), the District Court faced challenges to Plaintiff’s ability to bring claims under section 9.051(b) of the BOC because Plaintiffs were Nevada corporations whose Nevada charter had been administratively revoked. In setting out his findings of fact and conclusions of law, Judge Sandill held that such administrative revocation did not result in termination of the capacity and standing to sue.

In addition, Judge Sandill held that Section 9.051(b) of BOC precludes unregistered foreign filing entities only from pursuing Texas litigation if such litigation involves the transaction of business in the state. Section 9.251 of the BOC states that “activities that do not constitute transaction of business in this state include: (9) transacting business in interstate commerce. Since the causes of action brought by Prosperity Settlement Funding and Anzar constituted transacting business in interstate commerce, they did not arise out of the “transaction of business” in this state and Plaintiffs could prosecute their claims in Texas despite whether they are registered to do business in Texas. See Case Funding Network, L.P. v. Anglo-Dutch Petroleum Int’l Inc., 2012 Tex. Dist. LEXIS 11465, *43-44 (127th Dist. Court Harris County April 12, 2012, J. Sandill).

Judge Sandill also found that because Prosperity Settlement Funding and Anzar were not transacting business in this state under Section 9.251 of the BOC, Section 9.001(b) of the BOC was inapplicable, and Plaintiffs were permitted under Texas law to bring and prosecute their claims despite whether they are registered to do business in Texas. See Case Funding Network, L.P. v. Anglo-Dutch Petroleum Int’l Inc., 2012 Tex. Dist. LEXIS 11465, *43-45 (127th Dist. Court Harris County April 12, 2012, J. Sandill).

The Eastland Court of Appeals in Ganter Group, L.L.C. v. Choice Health Services, 2014 Tex. App. LEXIS 11991 (Tex. App. -Eastland 2014, n.w.h.) faced whether a collection agency, as assignee, had standing and capacity to sue the healthcare company under a challenge based on Section 9.051(b) of the BOC. The healthcare company moved to dismiss challenging capacity and standing under Section 9.051(b) of the BOC because the collection agency was not registered during the transaction in Texas. The trial court granted the motion to dismiss, and Ganter Group appealed.

The Eastland Court of Appeals reversed and held that the collection agency, as assignee, had standing to sue and to hold otherwise would be to hold that no assignee, collateral or otherwise, nor subsequent holder of an account, could ever sue on it, and would contravene Section 9.051(b) (2) that states that the failure of a filing entity to register does not affect the validity of any contract or act of the foreign filing entity. See Ganter Group, L.L.C. v. Choice Health Services, 2014 Tex. App. LEXIS 11991, *7 -*9 (Tex. App. -Eastland 2014, n.w.h.).

These challenges are not going to go away, but nearly every state allows a foreign company to take certain actions in other states without registration. Besides interstate debt collection, states allow enforcement of foreign judgments under the Uniform Enforcement of Foreign Judgments Act. The opinions in this blog are solely the author’s and any replies, suggestions, or comments can be sent to john@jrjoneslaw.com.

Loose Lips Sink Ships – Defend Trade Secret Act of 2016

The five-year anniversary of the Defend Trade Secrets Act of 2016 is fast approaching. With Texas reopening March 10, 2021 and many people coming back to the office, it is a good time to remind everyone of their obligations to protect trade secrets again. But first, a brief reminder of the Defendant Trade Secrets Act of 2016 (the “Act”) and why it was passed and what it does for employers and employees. The Act is codified at 18 U.S.C. § 1836.

The Act extended the Economic Espionage Act of 1996, which criminalized trade secret misappropriation, to allow civil lawsuits and establishes a three-year statute of limitations. The Act allowed a civil private right of action in federal court for trade secret misappropriation. Congress also hoped by passing the Act it would make trade secret misappropriation litigation more uniform and less costly across the fifty states. Because the Act does not preempt state trade secret laws, that goal has largely failed, and the Act is used with state trade secret misappropriation laws.

The Defend Trade Secrets Act allows an owner of a trade secret misappropriated to file a civil lawsuit if the trade secret is related to a product or service used in, or intended for use in, interstate or foreign commerce. The Act also allows for civil seizure including ex parte civil seizure in extraordinary circumstances. The civil seizure provisions are very detailed and specific and must be reviewed to ensure compliance.  The reverse side of this provision is that it allows for an action if the civil seizure is determined to be wrongful. The Act also allows for injunctive relief to prevent any actual or threatened misappropriation. While the Act has made it easier for an owner of a trade secret to prevail, the owner must take reasonable steps.

For employees, the Act also includes an immunity provision, which exempts whistleblowers from liability for any trade secret disclosure made solely for the purpose of reporting or investigating a suspected violation of law to attorneys or government officials. An employee who pleads this immunity provision under the Act in a proceeding will cause the burden to shift to the trade secret owner to prove that the accused party intends to use or disclose the alleged trade secrets for another unprotected purpose. 

Section 1839 of the Act requires trade secret owners to take reasonable measures for the information at issue to be protected as a trade secret under the Act. So, what should employers do as everyone comes back to the office? At a minimum, employers should remind their employees of company policies and send them around to everyone to remind them of their obligations. In the age of zoom, make sure everyone adjusts their zoom settings to disable file sharing, notify hosts when someone joins a meeting, enable automatic muting, limit or password protect the call and any printed materials provided during the zoom meeting. If the office system has not been regularly used due to remote work, make sure all the systems and software including any security updates have been downloaded and checked out before employees use the local network again.

The opinions in this blog are solely the author’s and any comments, suggestions, or replies can be sent to john@jrjoneslaw.com. Stay safe everyone.

General Contractors and Subcontractors

In a recent case that went to trial, one of the issues before the court was whether a person was a general contractor or a subcontractor. While it seems like the distinction would be obvious, it does not hurt to restate the obvious. Fortunately, the court cut through the smoke and mirrors and correctly made the distinction.

The term “general contractor” has a specific legal definition and is sometime known as the “direct contractor” or “prime contractor.” https://www.levelset.com/blog/general-contractor-defintion.  A general contractor enters a prime contract with the property owner. This is determined by who the agreement is with, not the nature of the work, the name of the company, or any other factor. The general contractor is the primary person or firm solely accountable to perform the contract. See https://thelawdictionary.org/general-contractor. For example, when a roof needs to be replaced or repaired, a roofer might be hired directly by the property owner to do the work. Here, the roofer would be the direct (general) contractor. See https://www.levelset.com/blog/general-contractor-defintion.

A subcontractor is a person who has an agreement with the general or prime contractor to provide labor or materials for a construction or improvement project. The key difference is that the subcontractor is responsible to the general contractor and has a contract directly with the general contractor, not the property owner. Remember, a general contractor is an original contractor who, as part of the contract with the owner, is responsible overseeing the overall coordination of a project. There is usually only one general contractor on a project. A person or company is an original contractor if they are in privity with the owner – that is, they have a written agreement with the property owner.

One other big difference between a subcontractor and a general contractor is the lien rights and procedures they have under statute. The procedures for making a lien claim depend on your position on the construction “food chain”. Each state has very different materialman and mechanic’s lien statutes and the general contractor has different notice requirements than the subcontractor. Some states require a pre-lien notice of intent to file a lien and some do not. Always check with someone who knows the requirements for the location where the work is being performed.

The opinions in this blog are solely the author’s and any comments, suggestions, or replies can be sent to john@jrjoneslaw.com.

Supreme Court of Texas Creates Remote Proceedings Task Force

Borrowing liberally from announcements by the State Bar of Texas Litigation and Appellate Sections, the Texas Supreme Court has created a Remote Proceedings Task Force to review any legal barriers to remote proceedings even in a post-pandemic world. The Task Force, in turn, has asked the Litigation (and other) Section to assist by answering the following question: Are there rules, statutes, or traditions that require proceedings to be held in person, in a courthouse, or any other particular location? “Proceedings” include not only trials and hearings, but also depositions and other events normally conducted in person.

To be clear, this effort is not an attempt to require remote hearings or even to build best practices for judges who wish to proceed remotely. The Task Force’s charge is simply to identify and catalogue any rules or statutes that prevent remote proceedings for those litigants and judges who desire to do so. By way of an example, in the Family Code, there’s a provision that requires judges to interview in chambers a child who is 12 years of age or older. Some judges are taking that provision to mean that the interview cannot be done remotely. These are the types of barriers to remote access that the Task Force is trying to identify and catalogue.

If you have comments or suggestions, I recommend that you contact one of the members of the Remote Proceedings Task Force and provide your suggestions. Remote proceedings are here to stay and personally, I believe it is a good change because ultimately there are many types of proceedings that will be able to make access to justice more affordable. However, there are issues on the lack of access to technology in rural and underserved communities that need to be addressed. If you have suggestions, please contact a member of the Remote Proceedings Task Force.

The opinion’s in this blog are solely the author’s and any comments, suggestions, or replies may be sent to john@jrjoneslaw.com.

Changes to Texas Discovery Rules Are Effective January 1, 2021

The changes to Texas discovery rules went into effect and applies to all lawsuits filed after January 1, 2021. If you have not looked at the changes, it dramatically changes how the rules apply, shortens the time periods for discovery, requires disclosure without a request to disclose, and prevents service of discovery until after the initial disclosures are due.

Texas Rule of Civil Procedure 190.2 changes expedited actions to claims of $250,000 or less. Expedited actions reduce the time for and amount of discovery allowed. Responses to Request for Disclosures under Rule 194 are now required without a request for disclosure and must be met within 30 days after the first defendant files an answer. These initial disclosures also trigger the discovery period. Under Rule 192.2 a party also cannot serve discovery until after the initial disclosures are due. This will prevent service of discovery with a citation.

Discovery periods for all levels of discovery have been shortened. Under Level 1, the discovery period begins when initial disclosures are due and continues until 180 days (i.e., approximately 6 months) after the date the initial disclosures are due. Level 2 discovery runs from the date the initial disclosures are due to the earlier of 30 days before the date set for trial, or nine months after the initial disclosures are due. For family law cases, the discovery period is from the date initial disclosures are due until 30 days before the date set for trial. Level 3 discovery control plans are still set by order.

The other significant change is that documents not previously required to be disclosed must now be disclosed automatically.  Without awaiting a discovery request, a party must in its initial disclosures provide to the other parties a copy or a description by category and location of all documents, electronically stored information, and tangible things the responding party has in its possession, custody, or control, and may support its claims or defenses, unless used solely for impeachment. There are also several changes to the requirements for expert disclosures and reports under Texas Rule of Civil Procedure 195.5. Rule 195.5 also specifies what communications with an expert is protected and states that a draft expert report or draft disclosure under Rule 195.5 is protected from discovery, regardless of the form in which it recorded.

There are many other changes to the Texas Rules of Civil Procedure beginning at Rule 190 through Rule 215 as it relates to discovery including discovery from nonparties. The changes were designed to reduce the cost and efficiency of discovery. The changes will require much more focused discovery and preparation before filing a lawsuit because the first defendant’s answer triggers the clock. The opinions in this blog are solely the author’s and any comments, suggestions, and replies may be sent to john@jrjoneslaw.com.

CFPB Issues Final Rule Related To Debt Collection Disclosures

The Consumer Financial Protection Bureau (CFPB) issued its final rule to implement Fair Debt Collection Practices Act requirements for certain disclosures to consumers. As stated by CFPB Bureau Director Kathleen Kraninger, the “final rule provides clear rules of the road for debt collectors on how to disclose details about a consumer’s debt and informs consumers how they may respond to the collector, if they choose to do so,” and ensures consumers are better informed; informed consumers are empowered consumers.

Before a collector furnishes information about a debt to a consumer reporting agency, the final rule generally requires the collector to take one of several actions to contact the consumer about the debt. These actions include speaking with consumers about their debts by telephone, mailing a letter to the consumer, or sending an electronic message about the debt to the consumer. If mailing a letter or sending an electronic message to the consumer, the collector must wait a reasonable period of time to receive a notice of undeliverability, such as 14 days, before furnishing information to a consumer reporting agency and must not furnish if a notice of undeliverability is received unless the collector takes additional steps. Collectors are also prohibited from, and will be strictly liable for, suing or threatening to sue a consumer to collect a time-barred debt, which is defined as a debt for which the applicable statute of limitations has passed.

Under the final rule, collectors will be also be required to provide readily understandable disclosures that contain more information than consumers currently receive when the collector first begins to communicate with the consumer to collect the debt. The disclosures must include details about the debt and consumer protections, including the right to dispute the debt and to request information about the original creditor. The disclosures also must continue to include a statement that indicates the communication is from a collector and is about a debt. The disclosures will help ensure that consumers are able to recognize debt they may owe and raise concerns about unfamiliar debts. A model form in plain language is provided that debt collectors may use to comply with the rule.

The final rule is found here: https://files.consumerfinance.gov/f/documents/cfpb_debt-collection_final-rule_2020-12.pdf. Happy New Year’s to everyone and as always, the opinions in this blog are solely the author’s and any comments, suggestions, and replies can be sent to john@jrjoneslaw.com.

Email Exchanges and Enforceable Agreements

With electronic communication, the issue as to whether a settlement has been agreed to and is enforceable via email arises often. Several good cases serve as a guide when litigating the issue in Texas and the Fifth Circuit.

In Celtic Marine Corp. v. James C. Justice Companies, 760 F. 3rd 477 (5th Cir. 2014), the issue was whether an email exchange amended a prior settlement agreement and waive an acceleration clause. Acknowledging that emails could amend a settlement agreement, the court looked at the emails and determined that the email correspondence did not prove the parties intend to amend the settlement agreement. Instead the emails merely requested and demanded payment.

In Branch Banking & Trust Co. v. Mellow Mushroom Three Peat, Inc., 2020 U.S. Dist. LEXIS 16848 N.D. Tex. Feb. 3, 2020), BB&T moved to enforce a settlement agreement. The parties had entered into a settlement agreement but declined to formalize the settlement. BB&T asked the court to enforce and find that the email exchange constituted a binding settlement. Since the case was a diversity case sitting in Texas, Texas law was applied under Texas Rule of Civil Procedure 11. Rule 11 requires that no agreement between parties or attorneys touching any suit pending will be enforced unless it is in writing, signed, and filed with the court. Rule 11 is a minimum requirement to enforce all agreements about pending suits, including, but not limited to, agreed judgments. See Kennedy v. Hyde, 682 S.W.2d 525, 528 (Tex. 1984). For several reasons (vagueness, lack of pleading, etc.), the Court refused to enforce the email exchange and enter judgment.

In Cunnigham v. Zurich Am. Ins. Co., 352 S.W.3d 519, 529 (Tex. App.-Fort Worth 2011, pet. denied), the Court held that the mere sending of an email containing a signature block does not satisfy the signature requirement under Texas Rule of Civil Procedure 11. Without a graphical signature or the /s/ for an electronical signature, the email did not contain a signature and did not meet the requirements of Rule 11. But see Khoury v. Tomlinson, 517 S.W.3d 568 (Tex. App. – Houston [1st Dist.], no pet.) (rejecting Cunningham and enforcing agreement under the Texas Uniform Electronic Transactions Act and finding that name or email address in “from” field functions as a signature in an email).

This is a very evolving area of the law. Courts in many states have looked at this issue. The safest course is to sign an actual document and return it to be enforceable. If you do not, I recommend that you manually add an electronic signature or /s/ to any emails in which an agreement is reached as opposed to relying solely on the automatically generated signature block and clarify that you are accepting the settlement offer. 

The opinions in this blog are solely the author’s and any suggestions, comments, or replies may be sent to john@jrjoneslaw.com.

Electronic v. Wet Signatures

Electronic signatures in a digital contract are well settled, but a reminder never hurts. Texas enacted Texas Business and Commerce Code § 322.007 entitled “Legal Recognition of Electronic Records, Electronic Signatures, and Electronic Contracts” in 2007 with an effective date of April 1, 2009. Recently, the United States District Court for the Eastern District of Texas was faced squarely with the enforceability of a contract based on a digital signature versus a “wet” signature. Kamel v. Avenu Insights & Analytics LLC, 2020 U.S. Dist. LEXIS 147391 (E.D. Tex. May 5, 2020). The Kamel case is also a primer on the elements of what is required for a contract. Id. at *4.

The real issue was whether there was an offer and acceptance. Kamel argued that the existence of a signature block indicated that the agreement required a “wet” or physical signature. In support of Kamel’s position, he referenced the merger clause, which requires that any alterations be made in writing and signed by all parties. Kamel v. Avenu Insights & Analytics LLC, 2020 U.S. Dist. LEXIS 147391, *10 (E.D. Tex. May 5, 2020). In response, Avenu argued that electronic signatures are acceptable; Kamel electronically signed the document; the existence of a signature block, alone, could not show that the parties intended a physical signature; and Courts require explicit language to show that a “wet” signature is necessary, which was not present. Id. at *11. Avenu also showed that the document management system registered Kamel’s nondisclosure, noncompete, and non-solicitation as acknowledged, and he admitted to acknowledgement online.

The court next looked at the sufficiency of the acknowledgment to create a contract. This question involved intent and the Court stated that signatures are not required if the parties give their consent to the terms, and there is no evidence of intent to require both signatures as a condition precedent to it becoming effective as a contract. Kamel v. Ave. Insights & Analytics LLC, 2020 U.S. Dist. LEXIS 147391, *12 (E.D. Tex. May 5, 2020), citing, Perez v. Lemarrov, 592 F.Supp.2d 924, 930-931 (S.D. Tex. 2008); see also Tricon Energy Ltd. v. Vinmar Int’l, Ltd., 718 F.3d 448, 454 (5th Cir. 2013) (A court can decide intent as a matter of law). The Court held that where a signature is required, that signature can be performed electronically. Kamel v. Ave. Insights & Analytics LLC, 2020 U.S. Dist. LEXIS 147391, *12 (E.D. Tex. May 5, 2020, citing, Tex. Bus. & Comm. Code Ann. §322.007. Under the uniform electronic transactions act, a contract may be enforceable despite an electronic record in its formation, and if a law requires a signature, an electronic signature satisfies the law. Kamel v. Ave. Insights & Analytics LLC, 2020 U.S. Dist. LEXIS 147391, *13 (E.D. Tex. May 5, 2020), citing, Cunningham v. Zurich American Inc. Co., 352 S.W.3d 519, 529 (Tex. App. – Fort Worth 2011, no writ).

The court went even further to cement its point. The court held that the term “electronic signature” means an electronic sound, symbol, or process attached to a record and executed or adopted by a person intending to sign the record. Id. An electronic signature is attributable to a person if it was the act of the person. Id. To determine if the signature is the act of this person, the “context and surrounding circumstances” are looked at to determine whether the signature was the act of the person. Here, the Court looked at the surrounding circumstances and the law and held that Texas Courts have required explicit language to show that the parties intend to require a wet or physical signature. Here there was no explicit language and no argument that the uniform electronic transaction act was inapplicable to the transaction. The court held that no physical signature was required. Kamel v. Ave. Insights & Analytics LLC, 2020 U.S. Dist. LEXIS 147391, *113 (E.D. Tex. May 5, 2020.

The Kamel case and the cases it cites are an excellent primer for issues regarding the enforceability of electronically signed contracts and signatures. It is also a primer on what needs to be shown for any contract to be enforceable.  The opinions in this blog are solely the author’s and any comments, suggestions, or replies to this blog can be sent to john@jrjoneslaw.com.