Texas Supreme Court Holds Foreign Auto Manufacturers Subject to Texas Jurisdiction

After taking care of some preliminary matters,[1] the Texas Supreme Court settled a personal jurisdiction question at issue in State of Texas v. Volkswagen Aktiengesellschaft.[2] In a 6-3 decision, the Supreme Court of Texas held that two German car manufacturers were subject to specific personal jurisdiction in Texas because (1) their contacts with the state were purposeful even though they acted through legally distinct intermediaries that they controlled and (2) nationally targeted contacts do not prevent an individual state from exercising jurisdiction over businesses.[3]

The case arose out of the infamous scandal known as “Dieselgate” that led to Volkswagen pleading guilty in federal court to three felonies for intentionally installing “defeat devices” that manipulated the results of vehicle emission testing.[4] The State of Texas and several local governments brought civil actions against Volkswagen for violating state environmental laws.[5] The corporate defendants were the foreign car manufacturer Volkswagen Aktiengesellschaft (“VW Germany”), Volkswagen Group of America, Inc. (“VW America,” a subsidiary of VW Germany), and other distributors and dealerships that managed distribution of VW Germany automobiles while VW Germany maintained contractual control over much of their operations.[6] The case was consolidated with State of Texas v. Audi Aktiengellschaft, which concerned a foreign subsidiary of VW Germany that had similar contacts.[7] The question before the court was whether the foreign manufacturers were subject to jurisdiction in Texas state courts.[8]

VW Germany developed and installed the illegal defeat devices in certain vehicles starting in 2009.[9] These defeat devices were designed to recognize when the vehicle was undergoing emissions testing and switch to an operating mode that would comply with U.S. emission standards; when the test was complete, the device would switch the vehicle back to the high emissions mode.[10] After a few years, the defeat devices began to cause malfunctions in the vehicles, leading VW Germany to develop a software update for the defeat devices to solve the malfunctions and maintain the charade.[11] VW Germany, without informing VW America of its true intention, initiated voluntary recalls during which VW America would install the software update.[12] The practice lasted about eight years.[13] It was this “secondary tampering” through the software update that the court analyzed for whether it established sufficient contacts in this case.[14]

The majority opinion began its analysis with the well-trodden case law concerning personal jurisdiction.[15] Texas courts can exercise personal jurisdiction over foreign defendants who have “such contacts with the forum state that the maintenance of the suit is reasonable in the context of our federal system of government and does not offend traditional notions of fair play and substantial justice.”[16] Specific jurisdiction arises through these “minimum contacts” when (1) the defendant engages in an act which “purposefully avails itself of the privilege of conducting activities within the forum state” and (2) the plaintiff’s claims arise out of or relate to those contacts with the forum.[17]

VW Germany contended that it did not meet the purposeful availment prong of the analysis. Purposeful availment requires that (1) the court consider only the defendant’s contacts, “not the unilateral activity of a third party,” (2) contacts the court relies on be purposeful and not “random, fortuitous, or attenuated,” and (3) the defendant sought “some benefit, advantage[,] or profit by availing itself of [Texas’s] jurisdiction.”[18]

The manufacturers first argued that any contacts with Texas were from its distributors and dealerships and could not be attributed to the manufacturer itself. The court swiftly rejected that argument by pointing to a list of eleven factors that showed VW Germany controlled the circumstances of the software update.[19] These included that VW Germany had the sole authority to initiate the recall, and it contractually required its distributors and dealerships to perform the recall and install the software updates according to VW Germany’s instructions.[20] The court explained that while VW America personnel may have clicked the download button, the “process was essentially put into unstoppable motion by the manufacturers and did not derive from unilateral or independent action.”[21] By directing the recall and software implementation, knowing that the importer/distributor and local dealers were contractually obligated to follow instructions, VW Germany purposefully availed itself of the Texas market.[22]

Further, the court drew parallels to its own precedents in Spir Star AG v. Kimich and Luciano v. SprayFoamPolymers.com.[23] In each of those cases, the court held that Texas courts had specific jurisdiction over a foreign defendant in Texas based on the defendant’s relationship with an agent-like intermediary that acted within the state. It concluded that because of the controlling, agency-like relationship VW Germany had over the distributors, the court could attribute the contacts in Texas to the manufacturer, even though the distributors and dealerships performed the conduct.[24] The court went on to conclude that there was no need to pierce the corporate veil with theories such as alter ego because the corporation perpetrated fraud on the state and its citizens.[25] While VW Germany could have organized its relationships to insulate itself from the jurisdiction of individual states, it had not done so, and it had thus sacrificed its ability to use its passthrough departments as a haven from Texas jurisdiction.[26]

Second, VW Germany contended that any contacts that the court could attribute to it based on the after-sale tampering were targeted at the United States as a whole, not Texas specifically, and thus that its availment of Texas was not purposeful.[27] The court again disagreed.[28] Personal jurisdiction is a forum-specific inquiry, and a defendant’s contacts with other states do not shield it from the jurisdiction of Texas.[29] The court clarified that a defendant need not single out Texas specifically to satisfy constitutional mandates.[30] If it were to hold otherwise, it would “unduly constrain” each state’s ability to hold nonresidents accountable for actions within the state’s borders and would turn the specific jurisdiction test “into a wholly subjective inquiry into the defendants’ state of mind.”[31]

The court also concluded that VW Germany certainly sought “some benefit, advantage, or profit”[32] in Texas, as its actions attempted to avoid the costs the malfunctioning defeat devices would require in repairs.[33] The court explained that Audi, which may not have ultimately had borne the financial burden of warranty claims, also sought a benefit by covering up the fact that its cars did not comply with federal emissions standards and thereby avoiding adverse publicity in Texas and beyond.[34]

Next, the court addressed the whether the state’s claims arose out of VW Germany’s contacts with Texas.[35] It held that the state’s claims were unavoidably connected to the manufacturer’s contacts with Texas.[36] The conduct at issue took place in Texas and was subject to Texas law.[37] The court also briefly discussed whether some other reason to deny jurisdiction would exist under “traditional notions of fair play and substantial justice,” noting that such a standard is “imprecise” and the car manufacturers conceded at oral argument that nothing would preclude the court from exercising personal jurisdiction if the standard for specific jurisdiction was otherwise satisfied.[38] The court concluded by reversing the decision of the court of appeals and remanding to the trial court.[39]

Justice Rebeca Huddle, joined by Chief Justice Nathan Hecht and Justice Jane Bland, dissented, arguing that the manufacturers had merely put their products in “the stream of commerce with the awareness that those goods [would] eventually enter Texas.”[40] The dissenting members of the court disagreed with the majority on two key points.[41] First, they took issue with finding jurisdiction on what was essentially an agency theory. Second, they said the state failed to show that VW Germany “targeted Texas.”[42]

The dissenters noted that the court had only ever found personal jurisdiction by imputing one entity’s contacts to another when one entity was the alter ego of the other or where an agency relationship had been established. The majority agreed that the record did not support an alter ego theory. The majority’s use of the agency theory, however, failed to recognize that, to find an agency relationship under Texas law, the principal must be able to (1) assign the agent’s task and (2) control the means and details by which the agent will accomplish it. The dissent pointed to, among other evidence, an express disclaimer of an agency relationship in the terms of the importer agreement.[43] The dissent argued that while a parent company will always control the operations of a subsidiary in some fashion, that does not always suffice to establish an agency relationship if there is not the requisite degree and type of control.[44]

Second, the dissent said it would hold that VW Germany’s nationwide actions did not constitute purposeful availment of Texas.[45] The dissenting justices contended the majority misread the court’s recent precedents in Spir Star and Luciano.[46] They claimed that, properly read, those cases stand for the conclusion that specific jurisdiction is dependent on Texas-specific contacts, not actions that just happened to occur in Texas.[47] The dissent further explained that, based on the court’s precedent, it could only exercise specific jurisdiction over the German manufacturer if it had purposefully targeted Texas, which the evidence does not suggest it had.[48]

This case is a warning to large businesses everywhere, at least those who distribute products in the United States. Businesses cannot maintain control over the operations of their subsidiaries that act within Texas, then turn and use those very subsidiaries as a jurisdictional shield. Nor can a distribution plan aimed at the entire nation protect it from specific jurisdiction in Texas.[49]

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