Legislature Tries to Protect Texans from Frivolous Regulatory Actions

by | Aug 20, 2019 | Government Investigations and Enforcement Actions

Individual Texans and small businesses navigating regulatory actions and administrative proceedings by state agencies are often at a severe disadvantage. Agencies have virtually unlimited resources and can take nearly any action against a private citizen or business without recourse. The process piles up legal fees and other costs, which most Texans have neither the time nor resources to combat.

The Texas Legislature recognized this power imbalance in a civil litigation context, so in 1985 passed the Texas Frivolous or Unreasonable Claims Act, codified as section 105 of Texas Civil Practice and Remedies Code. Section 105 provided that a person against whom a state agency—which section 105.001(3) defines as a state-level executive branch unit created by the constitution or statute and has statewide jurisdiction, i.e., not political subdivisions—makes a claim that is “frivolous, unreasonable, or without foundation” can recover costs and attorney fees.

But the original section 105 had a gap: it applied only to original suits brought in civil courts with the state as a party to the suit. Yet many disputes are resolved outside civil courts; individuals and businesses are often embattled with state agencies in administrative proceedings, which were not covered by the original section 105. Section 105 thus left Texans unable to recover damages or costs for regulatory actions taken by overzealous regulators.

Many businesses fell through this civil litigation-administrative proceeding gap. For example, Cuvee Coffee lost tens of thousands of dollars defending itself against regulatory action taken by the Texas Alcoholic Beverage Commission, which tried to stop Cuvee from “repackaging” beer with its growler-can crimping machine. Another example is the Texas Workforce Commission’s regulatory action against SDS Petroleum Consultants about whether certain workers were employers or independent contractors. SDS Petroleum had to produce tens of thousands of documents over the course of 18 months and spend thousands of dollars to ensure it was compliant—all to be ultimately vindicated by the TWC. Despite SDS’s “victory,” it had no recourse against the TWC to collect expenses and attorney fees. (Watch the Senate Committee on State Affairs hearing here from 1:39:40–2:01:25 for these and other examples.)

The Legislature first attempted to fill the civil litigation-administrative proceeding gap in 2015 with HB 3662. While the bill passed the House, it never got out of committee in the Senate. So in 2017 during the 85th Legislative Session, the Legislature tried again and passed Senate Bill 813. The bill modified section 105 of the Texas Civil Practice & Remedies Code to allow a party to recover expenses and attorney fees from a state agency if the agency’s regulatory action was, among other things, deemed “frivolous, unreasonable, or without foundation.”

But in June 2017, Governor Abbott vetoed SB 813. In his veto proclamation, Abbott agreed that the bill was “well-intentioned” and that “State agencies should be held accountable when they abuse their authority.” But he believed that the bill would ultimately “entic[e] trial lawyers to sue the taxpayers for damages.” Senate Bill 813, he said, “was inspired by legitimate concerns about regulatory overreach, but,” because there were no financial caps on how much a claimant could recover, “exposing the State fisc to limitless jury verdicts” just because a judge thinks the state’s action is “unreasonable” was the wrong solution. The veto killed SB 813, but the Legislature resolved to pick it up again during the next session.

Fast forward to 2019’s 86th Legislative Session. This time, the Legislature passed a bill like 813—SB 27—but modified to address the Governor’s prior concerns. Specifically, SB 27 changed the legal standard from “frivolous, unreasonable, or without foundation” to simply “frivolous”—reducing a judge’s choices (notice the disjunctive “or”) from three possible legal standards to one. The bill also caps the amount that a claimant can recover at $1 million. These changes address both of Governor Abbott’s 2017 concerns that SB 813’s standards were too subjective and would expose taxpayers and their State agencies to unlimited verdicts.

Senate Bill 27 was passed 31-0 in the Texas Senate and 136-3 in the House. Governor Abbott signed the bill on June 7, 2019. The full text of the law can be found here.

What “frivolous” means in this context is not particularly clear, though it generally applies when “the totality of the tendered evidence fails to demonstrate any arguable basis for the claim.” Brainard v. State, 12 S.W.3d 6, 30 (Tex. 1999), disapproved of by Martin v. Amerman, 133 S.W.3d 262 (Tex. 2004) (citations, quotations, and punctuation omitted). It’s a difficult standard to prove, and it’s unlikely to meaningfully restrain agency overreach. But Senate Bill 27 gives clients a new yet untested way to protect themselves.

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