By a 6-3 majority, the Texas Supreme Court has held that a Travis County trial court has specific jurisdiction over claims brought by the state in response to a nationwide scandal involving foreign automobile manufacturers that tampered with emissions control devices.
The State of Texas v. Volkswagen Aktiengesellschaft (No. 21-0130; delivered May 5, 2023) (consolidated with The State of Texas v. Audi Aktiengesellschaft; No. 21-0133) arose from a civil enforcement action by the State of Texas, Travis County, and other local governmental entities against Volkswagen and Audi (VW Germany) based on VW Germany’s decision in 2006 to develop “defeat-device” software for its diesel vehicles in order to evade U.S. emissions tests. The EPA discovered the fraud in 2015 and brought a civil enforcement action for violations of the federal Clean Air Act, resulting in VW Germany’s agreement to pay billions in civil penalties. VW Germany also paid a $2.8 billion criminal fine. Texas’ share of the booty amounted to $209 million for environmental remediation, $1.45 billion of relief for Texas consumers, and $92 million to compensate Texas dealers. The Texas Attorney General’s office, joined by numerous local governments, launched its own enforcement proceeding for violations of the Texas Clean Air Act. Those cases were consolidated in a multi-district litigation court in Travis County.
VW Germany (as well as Audi Germany, which the state likewise added to the lawsuit) filed a special appearance contesting the trial court’s jurisdiction. The MDL court denied VW Germany’s special appearance. On interlocutory appeal, the Austin Court of Appeals, in a 2-1 decision, reversed and rendered for VW Germany. In an opinion by former Chief Justice Rose and joined by Justice Smith, the court of appeals found that VW Germany did not have the requisite minimum contacts with Texas for personal jurisdiction to attach. Applying the “purposeful availment” test, which requires a nonresident defendant to “purposefully direct” activities to the forum state for the purpose of receiving some benefit, advantage, or profit by availing itself of the jurisdiction, the majority concluded that VW Germany’s activities were purposefully directed at the United States as a whole, not to Texas.
The court of appeals reached this decision based on VW Germany’s lack of direct interface with VW America, which purchases vehicles from VW Germany and then distributes them across the country to VW America’s franchise dealers. When VW Germany developed recall software fixes for the original defeat-device software (the recall software is at issue in the Texas case because the federal MDL court has ruled that state claims relating to the original software are preempted), they downloaded them to VW America, which handled the recall through its dealerships. The state argued that: (1) VW Germany knew full well that there were affected vehicles in Texas; (2) it controlled VW America, directed its actions, and reimbursed the cost of the recall; (3) it developed the recall software, downloaded it to VW America, and provided the technical description of the recall while withholding the purpose of the recall from the dealers. The court of appeals rejected all of these arguments, finding that at most the state proved that VW Germany directed activities at the United States in general rather than to any particular forum state.
Justice Triana dissented. She took issue with the majority’s reliance on the plurality opinion in J. McIntyre Machinery, Ltd. V. Nicastro, 564 U.S. 873 (2011), which on similar facts reached the same conclusion as the majority did, observing that SCOTX has not adopted Nicastro’s reasoning. She would have found that VW Germany purposefully availed itself of Texas by virtue of its importer agreement with VW America, in which VW Germany exercises a “significant degree of control over the recall-tampering activities in Texas and elsewhere.” Put another way, the dissent agreed with the state’s characterization of VW Germany’s minimum contacts. “I would not conclude,” Justice Triana stated, “that a nonresident may purposefully avoid a particular jurisdiction merely by conducting activities directed at every state in the United States, and by avoiding any special treatment of one or a few states.” Having found purposeful availment, the dissent would likewise have found thatthat the exercise of personal jurisdiction over VW Germany would comport with traditional notions of fair play and substantial justice based on the state’s strong regulatory interest and absence of an undue burden on VW Germany.
In an opinion by Justice Devine, joined by Justices Lehrmann, Boyd, Busby, and two justices sitting by commission, Fort Worth Court of Appeals Chief Justice Sudderth and Corpus Christi Court of Appeals Justice Jaime Tijerina, SCOTX reversed, largely adopting Justice Triana’s reasoning in her dissenting opinion. Justice Devine’s lengthy analysis of the factual background of the case emphasizes the direct control exercised by VW Germany over local Texas dealerships (as well as those in other states) with respect to the fraudulent recalls and software fixes necessary to perpetuate the scheme to defeat emissions testing. All in all, more than 23,000 vehicles received these automatic software updates, which VW Germany uploaded to a “mirror” server hosted by VW America for subsequent downloading by local dealerships. As Justice Devine notes several times in the opinion, VW Germany’s contractual relationships with VW America required it to perform recall and service campaigns at VW Germany’s direction and to require local VW dealerships to install the software updates at VW Germany’s behest. VW Germany then reimbursed, through VW America, the dealerships’ cost of “the manufacturer-mandated after sale services physically rendered to customers in Texas.”
The majority opinion, which runs to 58 pages, conducts a thorough review of the relevant U.S. Supreme Court and Texas case authority, specifically the Nicastro decision over which the court of appeals disagreed. A products liability case, Nicastro involved a foreign manufacturer that placed machinery into the stream of commerce in the United States. When sued in New Jersey, the manufacturer contested jurisdiction on the basis that simply distributing a product in a national distribution system “that might lead to those products being sold in any of the fifty states” was not enough to subject the manufacturer to specific jurisdiction in any one state.” A plurality of justices agreed that New Jersey did not have personal jurisdiction over the manufacturer. VW Germany argued that since it targeted the U.S. market generally and not in any specific state more than any other, Nicastro controlled.
The majority, however, found Nicastro inapposite because: (1) it reaffirmed the principle that personal jurisdiction must be determined on a forum-by-forum basis; and (2) whereas in Nicastro the mere foreseeability that a manufacturer’s product would end up in a particular state was not enough to show purposeful availment of the forum state, in this case VW Germany’s conduct “[rose] above foreseeability.” As Justice Devine wrote, “[in] contrast to the circumstances in Nicastro, the after-sale recall and service campaigns initiated at the German manufacturers’ direction on specifically identified vehicles goes for beyond a mere subjective awareness that the campaigns might be conducted in Texas. It demonstrates the German manufacturers’ intent to avail themselves of the benefits and protections of each and every market in which the recall and service campaigns were carried out. They did not simply anticipate that those campaigns would have an effect in Texas—they intentionally reached into this market with certainty that the fraudulent campaigns would be carried out on vehicles that were already here.”
Having determined that VW Germany purposefully availed itself of Texas’s jurisdiction, the majority had no trouble finding that so availing itself was for the benefit, advantage, or profit of VW Germany, both in monetary terms and “in the form of enhanced relationships with consumers and the avoidance of adverse publicity” (which clearly failed spectacularly). “These contacts,” Justice Devine concluded, were not accidental, and, instead, allowed the German manufacturers to exploit the Texas market to their benefit and advantage until the artifice was uncovered.”
Justice Huddle, joined by Chief Justice Hecht and Justice Bland, dissented. The dissent took issue with the majority’s determination that VW Germany’s actions met the “plus factor” requirement, which “may be satisfied by a foreign defendant’s design of a Texas-specific product, advertisements in Texas, solicitation of business in Texas, or by its exercise of control over the means and details of the distribution system that brought goods into Texas.” Specifically, Justice Huddle took the majority to task for relying on an agency theory to impute to VW Germany a “physical presence” in Texas where indisputably none existed, which she sees as evading an alter-ego or veil-piercing theory, which the evidence clearly did not support. She further disagreed with the majority’s analysis of Nicastro. “Under today’s holding, any foreign manufacturer directing its U.S. distributor to conduct a nationwide recall will be subject to personal jurisdiction in Texas courts regardless of whether it targeted Texas,” the dissent concluded. “Such a rule eviscerates the plus-factor requirement and dilutes our personal jurisdiction framework to the very stream-of-commerce theory our precedents reject.”
Who is right? Does the majority opinion’s heavy dependence on the fact that VW Germany deliberately violated U.S. and state environmental laws and masterminded a fraud on regulators and consumers to hide the violations make the decision something of a unicorn? Or are the dissent’s fears justified that the decision has significantly watered down the purposeful availment analysis when it comes to foreign manufacturers that place their products into the stream of commerce through a U.S. domestic subsidiary? In any event, foreign manufacturers with business structures similar to that of VW Germany had better take note of this decision. Although it may be the case that VW’s actions, to which it admitted in a federal consent decree and paid for to the tune of several billion dollars, were so egregious that this case will not (it is to be hoped) duplicated any time soon, it’s not absolutely clear from the majority opinion that the degreeof the misconduct was the determining “plus factor.”
