Venue Analysis of Relationships Between Automaker Defendants and In-District Dealerships Led to “Patently Erroneous Result”

  • March 13, 2022
  • Category: Patent Litigation Feature
    Market Sector: Automotive

The Federal Circuit has issued another writ of mandamus directed at Western District of Texas Judge Alan D. Albright, remanding for dismissal or transfer of the underlying cases out of that district. In September 2021, Judge Albright ruled that venue tied to in-district dealerships can be proper, prompting Hyundai and Volkswagen to seek the Federal Circuit’s help (2022-0108, 2022-0109). Multiple courts and litigants across various campaigns have stalled while awaiting the appeals court’s response, and now they have it, in the form of a per curiam precedential opinion noting that while mid-litigation remedies are not typically available after the denial of a motion to dismiss for improper venue (as opposed to a ruling on a motion for a convenience transfer), “these cases involve exceptional circumstances warranting immediate review”.

The underlying litigation began in December 2020, when plaintiff StratosAudio, Inc. filed separate cases against automakers Hyundai, Mazda, Subaru, Volkswagen, and Zhejiang Geely (Volvo). Infringement allegations centered on the provision of vehicle infotainment systems, but a venue question quickly roiled the campaign: could venue lie in the Western District of Texas based on the presence of and relationships with car dealerships there? Judge Albright answered with a yes (here for Hyundai and here for Volkswagen), reaching that conclusion based on the fact that in-district dealerships “sell and service cars after purchasing them from the [automakers] under franchise agreements imposing, inter alia, transfer restrictions, staffing and reporting requirements, minimum inventory levels, employee training, and equipment requirements on the dealerships”. The district court concluded that these relationships, governed mainly by the franchise agreements, make those dealerships the agents of the respective automakers, that the automakers ratify the in-district dealerships as their own places of business, and that the dealerships are conducting the business of the automakers in West Texas.

The Federal Circuit cut through each of those determinations, ruling instead that StratosAudio “failed to carry its burden to show that the dealerships are agents of Volkswagen or Hyundai under a proper application of established agency law”. As a result, the appellate court determined that the in-district dealerships “do not constitute regular and established places of business of Volkswagen and Hyundai under [Section] 1400(b)”. Noting that the plaintiff did not argue either that automaker personnel conduct business at dealerships or that dealership personnel act as the agents of automakers there, StratosAudio was left having to show that a dealership itself is the agent of the automaker.

Taking instruction from the February 2020 holding in In re: Google (2019-0126), involving whether in-district servers constitute regular and established places of business on which to hang venue, the Federal Court centered its analysis on whether, even if a dealership does conduct an automaker’s business in the district by “(i) selling cars to consumers and (ii) providing warranty services to consumers”, the automaker has “the requisite control over the dealerships with respect to those activities, including the right to provide ‘interim instructions’” to them. StratosAudio pointed to myriad alleged indicia of such agency, including “contractual provisions [that] generally require the dealerships to: (1) employ certain types of employees, such as a general manager, and service and sales staff; (2) maintain a minimum amount of inventory; (3) perform warranty work on consumer vehicles; (4) use specified tools when performing warranty and maintenance work; (5) use distributor-approved computer hardware and software; (6) comply with the distributors’ standards regarding dealership appearance and use of signs and brand logos; (7) comply with the distributors’ working capital requirements; and (8) attend mandatory training sessions (Hyundai) or require staff to have certain training certifications (Volkswagen)”.

Not enough, ruled the Federal Circuit: “Stratos has not cited any evidence that Volkswagen or Hyundai maintain influence over the sales process once they have sold a car to a dealership. Once the cars leave Petitioners’ possession, Petitioners ‘retain[] no authority over the manner in—or price for—which the [car] will be [sold].’ At best, Stratos cites various constraints placed on the dealerships that are arguably related to sales (minimum inventory, sales staff, displaying the parent company’s logo, providing sales reports, etc.), but none of these provisions evidence any control over the sales process itself”. With respect to warranty services, the court reaches the same conclusion, noting that “contractual provisions require the dealerships to perform warranty services, which are reimbursed by [the automakers], or require the dealerships to keep certain parts on hand and use certain tools when performing repairs. But Stratos fails to cite any language giving the Petitioners control over how the dealerships perform warranty services once those parameters are set”. This analysis suggests that the automaker-dealership relationship involves far fewer “interim instructions” from principal to alleged agent (read none, with respect to the sales process and warranty services, once the framework is established) than the Google-ISP (Internet service provider) relationship previously analyzed.

Given this view of the facts and law, the Federal Circuit ruled that “the district court’s venue conclusions were a clear abuse of discretion for erroneously interpreting governing law and reaching a patently erroneous result”. Volkswagen had sought transfer to the Eastern District of Michigan; Hyundai, outright dismissal. The appeals court remanded, which appears to have prompted the transfer of the Volkswagen case to its requested district. The end result in the Hyundai case remains pending.

This ruling will likely ripple through other campaigns. As noted in the Federal Circuit opinion itself, other district court cases have stalled awaiting the result, pointing to certain litigation filed by Arigna Technology Limited, an NPE associated with Dublin-based monetization firm Atlantic IP Services Limited, against a fleet of automakers in the Eastern District of Texas. For background concerning that litigation, including how this new ruling might reverberate through it, see “ITC Investigations Heating Up, Three Atlantic IP NPEs Fuel Yet More Litigation” (March 2022).

Combined with the Federal Circuit’s ruling in the Google servers case—see “Servers Are Not ‘Sentient’: Parties Debate Whether Machines Can Be Agents for Venue Purposes” (February 2020) for coverage of the decision and its aftermath—and that court’s decision in the Netflix content servers opinion—see “Netflix Appeals Ruling from Judge Gilstrap That Content Servers Establish Venue” (November 2021) for background and here for the (nonprecedential) Federal Circuit opinion (which reverses on the lower court’s convenience analysis, prompting transfer out of the Eastern District of Texas)—this additional result strikes a serious blow to ongoing efforts by Texas federal courts to keep patent cases filed there in the wake of the 2017 TC Heartland decision.

There, the US Supreme Court significantly altered the distribution of patent suits through its ruling that a corporation “resides” for venue purposes in its state of incorporation—ending the reign of the Eastern District of Texas as the most popular district for NPE litigation. However, tension remained over the other prong of the patent venue statute not addressed in TC Heartland, under which venue is proper in part where a defendant “has a regular and established place of business”. Judges Albright and Gilstrap have repeatedly handed down decisions that rely on that tension to keep cases before them (in West and East Texas, respectively), even when those decisions are “patently erroneous” requiring mid-course correction from the Federal Circuit.

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