Ernst & Young, LLP v. Ryan, LLC

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ERNST & YOUNG, LLP AND S.K. THAKKAR, Appellants v. RYAN, LLC, Appellee

No. 01-21-00603-CV

Court of Appeals of Texas, First District

June 29, 2023

On Appeal from the 281st District Court Harris County, Texas Trial Court Case No. 2020-35770

Panel consists of Justices Kelly, Landau, and Farris. Justice Farris, concurring.

MEMORANDUM OPINION

Sarah Beth Landau Justice

Ernst & Young, LLP (EY) and S.K. Thakkar (collectively appellants), moved to dismiss Ryan, LLC's claim against EY for tortious interference with prospective business relations under the Texas Citizens Participation Act (TCPA).^[1] See TEX. CIV. PRAC. & REM CODE §§ 27.001-.011. Ryan alleges that EY obtained information on Ryan's proprietary methods for calculating certain oil-and-gas-related tax credits when it audited some of Ryan's existing clients and then used that information to develop competing services and solicit Ryan's prospective clients. Appellants assert that EY's public audits involve communications and conduct that are protected exercises of free speech, association, and petitioning rights under the TCPA. They further assert that Ryan's tortious interference claim is based on or in response to that activity and therefore is subject to dismissal. The trial court disagreed and denied the motion to dismiss.

In three issues on appeal, appellants contend: (1) the trial court erred by concluding that the TCPA does not apply to Ryan's claim for tortious interference with prospective business relations, (2) the trial court misconstrued the TCPA's commercial speech exemption, and (3) Ryan failed to establish by clear and specific evidence a prima facie case for each essential element of tortious interference with prospective business relations.

Because we conclude that appellants did not satisfy their burden to show that Ryan's claim for tortious interference with prospective business relations falls within the TCPA's scope, we affirm.

Background

EY is an accounting, audit, and professional services firm. Ryan is a competing accounting and tax consulting firm. Ryan provided consulting services to certain energy-sector companies whose financial statements EY audited. Ryan sued EY and its employee, Thakkar, alleging that EY obtained Ryan's proprietary information during EY's audits, including Ryan's "fee arrangements" and its methodologies for "federal royalty" and "severance tax" consulting services, and then used this information to interfere with and usurp potential contracts between Ryan and third parties for consulting engagements.

Ryan alleges that it "strategically developed [an] oil and gas severance tax and royalty practice group" that "serves most of the oil and gas companies in the Fortune 500" by "helping those companies realize savings and obtain refunds of state taxes and federal royalties." A principal in Ryan's severance tax and royalty group described, "[C]ompanies who extract oil and gas from federal land and waters pay royalties to the federal government, namely, the Office of Natural Resources Revenue ('ONRR'), which is in the Department of Interior." These companies may deduct from their royalty burden certain expenses incurred in transporting and processing the oil and gas extracted. Ryan developed a proprietary methodology for identifying, calculating, and supporting allowable deductions to federal royalty payments that realizes savings for its clients. Ryan earns a portion of its clients' savings, typically on a contingency basis, as payment for its service.

Ryan also earns fees for severance-tax consulting services. A severance tax is a state charge imposed on the extraction production, and sale of oil and gas. As Ryan explained, companies that pay severance taxes can deduct certain expenses, like transportation and operation costs. "Tax-services companies like Ryan and EY help producers reduce their tax burden by, among other methods, maximizing these deductions."

Ryan alleges that "[u]nder the guise of 'auditing' clients," EY "misappropriated a substantial trove of Ryan['s] intellectual property," which it made available to its employees in a new, competing federal royalty and severance tax group. Then, "in violation of fundamental accounting rules prohibiting auditors such as EY from using their attest function to profit from consulting services, at least two EY employees, including [] Thakkar . . ., used Ryan's work papers to interfere with Ryan's relationships with its existing clients and compete for business with new clients."

Based on these allegations, Ryan pleaded multiple causes of action against either EY or Thakkar or both, including for misappropriation of trade secrets, breach of contract, common law fraud, tortious interference with existing contracts, and tortious interference with prospective business relations. Ryan also sought to enjoin appellants from, among other things, seeking, retaining, or using Ryan's confidential or proprietary information to conduct audits or provide severance tax or federal royalty services.

Appellants jointly moved to dismiss Ryan's cause of action against EY for tortious interference with prospective business relations under the TCPA. The TCPA motion did not challenge Ryan's other causes of action.

In Ryan's original, first amended, and second amended petitions, the claims for tortious interference with existing contracts and prospective business relations were pleaded together. The petitions did not identify the specific factual allegations underpinning the prospective relations claim beyond that the claim incorporated "the preceding paragraphs" in the respective petitions, which included descriptions of the public-audit communications and conduct. But after appellants filed their TCPA motion, Ryan filed a third amended petition, which separated the two tortious interference claims and alleged interference with its prospective business relations "via a variety of unlawful means."^[2] While still incorporating the petition's previous paragraph about public audits, Ryan's third amended petition more specifically alleges that EY is liable to Ryan for tortiously interfering with Ryan's prospective business relations because:

• "Ryan had a reasonable probability of obtaining the prospective contracts in federal royalty and severance tax services that were subject to EY's interference."

• "The interference was intentional because EY's employees and agents specifically knew of Ryan's prospective contract in which EY interfered."

• "[EY and Thakkar] were aware of facts and circumstances that would lead a reasonable person to believe[] that Ryan's prospective business relationship existed, including specific knowledge that this was a small market of competitors[,] with Ryan being EY's only other competitor in the federal royalty space, and the dominant force and only other competitor with the requisite expertise in the severance tax space."

• "EY interfered in Ryan's prospective business relations for the provision of federal royalty and severance tax services via a variety of unlawful means, each of which would be independently actionable as a recognized tort. This includes the misappropriation of Ryan's trade secrets, tortious interference in the contractual confidentiality obligations of others to Ryan, tortious interference in the restrictive covenants of former employees, and making fraudulent misrepresentations to Ryan and prospective customers, as set forth below."

• "These unlawful acts committed by EY as part of its intentional interference were the but-for and proximate cause of Ryan losing, and EY gaining, prospective contracts to perform federal royalty and severance tax services, including at least two specific such instances . . . . These losses resulted in millions of dollars in lost revenue and profits suffered by Ryan."

Appellants argued that Ryan's cause of action for tortious interference with prospective business relations is based on or in response to EY's audits, which implicate protected speech and association under the TCPA. They explained that public companies file auditor's reports with the Securities and Exchange Commission (SEC). The SEC and the Public Company Oversight Board (PCAOB) have regulatory authority over public-company auditors to further the public's interest in "the preparation of informative, accurate, and independent audit reports." Consequently, independent auditors, like EY, "play an essential role in the regulation and efficient function of the country's capital markets, both public and private," making EY's audits matters of public concern subject to the TCPA's protections.

Alternatively, appellants argued that Ryan's tortious interference with prospective relations claim is based on or in response to communications that "fit[] within the broad definition of the right to petition" because "[t]he audit reports EY authored in connection with its public company audits referenced in [Ryan's] [p]etition were subject to review by both the SEC and the PCAOB."

Ryan responded that appellants' arguments for the TCPA's application miscast its tortious interference claim. According to Ryan, the claim "targets [EY's] interference with Ryan's federal royalty and severance tax business, not either party's auditing business." Ryan added that it had identified two prospective clients who were the subject of EY's alleged tortious interference, and that EY does not provide auditing services to either prospective client.

After a two-day hearing, the trial court denied appellants' TCPA motion. The trial court stated from the bench:

I disagree with [EY and Thakkar] that the TCPA applies on a couple of levels in part because I see a separation between the allegations . . . that touch on the auditing function . . . [and] the

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