This morning a new statute goes into effect that will alter the procedure in Texas and provide increased protection for defendants who are asked to produce discovery of net worth data in connection with claims for exemplary (i.e., punitive) damages. SB 735 will make it much more difficult for plaintiffs to obtain such discovery and less expensive for defendants to produce it. The new law is effective September 1, 2015 and is codified in sections 41.001 and 41.015 of the Texas Civil Practices and Remedies Code (“CPRC”). The law applies prospectively to cases filed on or after the effective date.  

The new law overturns the Texas Supreme Court’s holding in Lunsford v. Morris, a 1988 case in which the Court held that evidence of a defendant’s net worth was relevant to a claim for exemplary damages and was, therefore, discoverable. 746 S.W. 2d 471 (Tex. 1988). Although the Lunsford Court recognized that such discovery might be curtailed if it “involves unnecessary harassment or invasion of personal or property rights,” id. at 473, the Court provided little guidance and few limitations regarding when such discovery could be obtained or how extensive the discovery had to be. As the dissent in Lunsford noted, the Court “needlessly planted the seeds of confusion that will result in years of litigation as practitioners and the bench strive to comply with this opinion.” Id. at 474.

Ever since Lunsford, defendants sued for exemplary damages have faced the prospect of having to turn over data about their net worth. Whether and in what context such discovery would be obtained depended on rulings from the trial court. For defendants, not only was such discovery invasive, often involving information defendants would prefer to keep confidential, but also it could be expensive to calculate and to produce.

Earlier this year, the Texas Legislature introduced SB 735. The author’s statement of intent reflects that the purpose of the bill was to “restore[] the Young [v. Kuhn, 9 S.W. 860, 862 (Tex. 1888)] rule that net worth evidence is not relevant to the issue of exemplary damages.” In passing the bill, the Legislature effectively amended the law relating to the availability and use of net worth evidence in connection with claims for exemplary damages. The law changes two parts of the CPRC: (1) it defines “net worth” in section 41.001; and (2) it adds a new procedural requirement in section 41.015 before a plaintiff can seek discovery of such evidence.

For cases filed on or after September 1, 2015, the new law requires a plaintiff to file a motion requesting authorization from the trial court before seeking discovery of a defendant’s net worth. Discovery of net worth is not permitted unless the plaintiff proves a “substantial likelihood” that the claim for exemplary damages will be successful, and even if the court allows discovery of net worth, it may order only the “least burdensome” method. The motion may not be filed until enough discovery has already taken place for the defendant to file a no-evidence summary judgment motion. Moreover, before the trial court can order net worth discovery it must hold a hearing. During the hearing, both sides may support their position via affidavit and discovered evidence, but the court is limited to consideration of the evidence presented. 

The result of the new statute is that the Lunsford rule is largely nullified. Plaintiffs can no longer seek discovery of financial net worth early in a case. Later, in order to get such discovery at all, plaintiffs must prove a substantial likelihood of success on the merits of their claim. Finally, extensive discovery of financial data may become unlikely because the court is allowed to permit only the “least burdensome” method to obtain the net worth evidence.

For defendants, the new procedure not only protects against burdensome discovery, it also provides a means to discourage exemplary awards and to encourage settlement. Indeed, according to the Legislature, SB 735’s purpose was to “prevent claimants from using frivolous claims of exemplary damages and requests to discover a defendant’s net worth to harass the defendant…[and] force defendants to settle to keep their net worth information private, to expend resources compiling net worth information, or to bear the costs of fighting motions to compel discovery.” SB 735 will accomplish these goals. A ruling from a court that the plaintiff is not entitled to conduct discovery on the defendant’s net worth will enhance the defendant’s ability to negotiate settlement and limit exposure of sensitive financial information. If nothing else, plaintiffs can no longer use discovery of net worth to increase litigation costs or request sensitive data.

In sum, the new law will protect defendants from invasive discovery, help foster settlement and potentially chill frivolous claims for exemplary damages.