A civil enforcement action by the State of Texas, Travis County, and other local governmental entities against Volkswagen Aktiengesellschaft (VW Germany) has spawned a jurisdictional dispute that will be heard by the Texas Supreme Court later this month. The State of Texas v. Volkswagen Aktiengesellschaft (No. 21-0130) arose out of 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 Texas 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 in order to receive 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.
It reached this decision based on the structure of VW Germany’s lack of direct interface with VW America, which purchases vehicles from VW Germany and then distributes them across the county 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. Thus although VW Germany did not have directly avail itself of Texas, it did so indirectly through its U.S. affiliate. Additionally, the state asserted its regulatory interest in an effort to lessen the minimum contacts it would have to prove up. 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 J. McIntyre Machinery, Ltd. V. Nicastro, 564 U.S. 873 (2011), which on similar facts reached the same conclusion as the majority, and noted that SCOTX has not adopted Nicastro’s reasoning. She would find 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 agrees with the state’s characterization of VW Germany’s minimum contacts. “I would not conclude,” Justice Triana states, “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 find that 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.
Multi-state or multi-national businesses should pay close attention to this case. While jurisdictional issues are certainly fact specific, it seems to us that this case may present a broader question of when a state court can exercise personal jurisdiction over a nonresident entity whose only business activities in the state are carried on indirectly through an affiliated company, agreement, or some other arrangement. If the nonresident entity, as VW Volkswagen claims it does here, simply directs its activities through an intermediary to any number of jurisdictions but none specifically, does it really expect to be hauled into local courts in every one of them?
