Audi Aktiengesellschaft v. State of Texas and Travis County

Opinion

TEXAS COURT OF APPEALS, THIRD DISTRICT, AT AUSTIN

NO. 03-19-00453-CV

Volkswagen Aktiengesellschaft, Appellant

v.

The State of Texas and Travis County, Texas, Appellees

NO. 03-20-00022-CV

Audi Aktiengesellschaft, Appellant

State of Texas and Travis County, Appellees

FROM THE 353RD DISTRICT COURT OF TRAVIS COUNTY NO. D-1-GN-16-000370, THE HONORABLE TIM SULAK, JUDGE PRESIDING

DISSENTING OPINION

VW Germany and Audi Germany installed defeat-device software to evade

compliance with state and federal emissions standards in cars that they manufactured in

Germany for sale in the United States, including Texas. After vehicles equipped with the defeat-

device software developed hardware failures, VW Germany and Audi Germany provided

updated “tampering” software to VW America to correct the hardware problems on their vehicles in order to continue to evade compliance with emissions laws. VW Germany and Audi

Germany directed VW America to install the new tampering software by conducting a series of

voluntary recall campaigns and by also installing the software on vehicles brought in for regular

maintenance. Ultimately, the software was installed on 23,319 Volkswagens at 60 Volkswagen

dealerships in Texas and at least 486 Audis at 12 Audi dealerships in Texas. The Court has

concluded that VW Germany and Audi Germany lack the requisite minimum contacts with

Texas required for Texas courts to exercise jurisdiction over them because these “recall-

tampering activities” were directed to the United States as a whole and so could not be

purposefully directed to Texas. See TV Azteca v. Ruiz, 490 S.W.3d 29, 36 (Tex. 2016) (“[A]

state court can exercise jurisdiction over a nonresident defendant only if (1) the defendant has

established ‘minimum contacts’ with the state and (2) the exercise of jurisdiction comports with

‘traditional notions of fair play and substantial justice.’” (quoting International Shoe Co. v.

Washington, 326 U.S. 310, 316 (1945))); see also Retamco Operating, Inc. v. Republic Drilling

Co., 278 S.W.3d 333, 338 (Tex. 2009) (“A defendant establishes minimum contacts with a state

when it ‘purposefully avails itself of the privilege of conducting activities within the forum state,

thus invoking the benefits and protections of its laws.’” (quoting Hanson v. Denckla, 357 U.S.

235, 253 (1958))). Because I cannot agree with this conclusion, I dissent.

Instead, I would conclude that VW Germany and Audi Germany cannot evade

personal jurisdiction in Texas merely because the recall-tampering activities, which they

controlled, were directed to the United States instead of solely to Texas. By directing those

activities to the United States as a whole, they necessarily directed those activities to Texas, a

state where they required VW America to install software on thousands of vehicles. To hold

2 otherwise is to hold that by targeting every state, a foreign manufacturer is not accountable in

any state.

I. VW Germany and Audi Germany purposefully availed themselves of the United States market as a whole, and the Texas market in particular, thus establishing minimum contacts with Texas

When a court conducts a minimum-contacts analysis to determine whether a

defendant has purposefully availed itself of the privilege of conducting activities within that

state, “[t]he defendant’s activities, whether they consist of direct acts within Texas or conduct

outside Texas, must justify a conclusion that the defendant could reasonably anticipate being

called into a Texas court.” Retamco, 278 S.W.3d at 338 (emphasis added) (quoting American

Type Culture Collection, Inc. v. Coleman, 83 S.W.3d 801, 807 (Tex. 2002)). Specific

jurisdiction arises when (1) the defendants’ contacts with the forum state are purposeful, and

(2) the cause of action arises from or relates to the defendants’ contacts. Spir Star AG v. Kimich,

310 S.W.3d 868, 873 (Tex. 2010). “A court has specific jurisdiction over a defendant if its

alleged liability arises from or is related to an activity conducted within the forum.” Id. In this

case, I would conclude that the alleged liability of VW Germany and Audi Germany arises from

the purposeful recall-tampering activities that they controlled by directing VW Germany’s

wholly owned subsidiary VW America to install the tampering software in Texas and

elsewhere.1

“Purposeful availment” is “the touchstone of jurisdictional due process,” and in

my view, the recall-tampering conduct of VW Germany and Audi Germany satisfies the three

guiding principles for finding that defendants have purposefully availed themselves of a forum.

1 As noted in the Court’s opinion, Audi Germany is a subsidiary owned by VW Germany. 3 Michiana Easy Livin’ Country, Inc. v. Holten, 168 S.W.3d 777, 784-85 (Tex. 2005). First, VW

Germany and Audi Germany directed VW America’s contacts with Texas—both the initial acts

of marketing and sales of affected vehicles in Texas and the later suit-specific recall-tampering

activities. Those indirect contacts by VW Germany and Audi Germany with Texas through VW

America are not solely “the result of . . . the ‘unilateral activity of another party or a third

person.’” Id. at 785 (quoting Burger King Corp. v. Rudzewicz, 471 U.S. 462, 475 (1985)).

Second, the recall-tampering activities were “purposeful” contacts with Texas residents, not

“random, isolated or fortuitous.” Id. (explaining that “[s]ellers who ‘reach out beyond one state

and create continuing relationships and obligations with citizens of another state’ are subject to

the jurisdiction of the latter in suits based on their activities” (quoting Burger King, 417 U.S. at

473)). Third, VW Germany and Audi Germany undeniably profited by availing themselves of

the Texas market, albeit indirectly through their relationships with VW America and its franchise

dealerships, relationships that VW Germany and Audi Germany controlled through the Importer

Agreements. Id.; see also Moki Mac River Expeditions v. Drugg, 221 S.W.3d 569, 577 (Tex.

2007) (“In determining whether the defendant purposefully directed action toward Texas, we

may look to conduct beyond the particular business transaction at issue . . . .”).

The Court’s opinion acknowledges that “the evidence in the record establishes

that VW Germany [and Audi Germany] directed [their] recall-tampering conduct towards the

United States as a whole,” but it concludes that the conduct is insufficient to establish specific

jurisdiction over them because the conduct was not directed “to Texas specifically.” Slip op. at

11, 17. The Court’s opinion adopts the reasoning in the United States Supreme Court’s plurality

opinion in J. McIntyre Machinery, Ltd. v. Nicastro, 564 U.S. 873 (2011), and concludes that

absent evidence in the record that VW Germany and Audi Germany directed their conduct

4 specifically toward Texas, as opposed to the United States market as a whole, the recall-

tampering conduct does not satisfy the purposeful-availment test. However, the Nicastro

“plurality opinion does not speak for the Court,” as the dissenting opinion pointed out. See id. at

910 (Ginsburg, J., dissenting). And the Texas Supreme Court has not adopted its reasoning in

any case with a fact pattern similar to this one involving foreign manufacturers who “exclude[]

no region or State from the market they wish[] to reach,” see id. at 893, and who directed their

conduct toward the United States market as a whole, including Texas.2 I would not adopt the

Nicastro plurality’s reasoning in this case; instead, for the reasons explained below, I would

conclude that under established jurisprudence, the State has shown that VW Germany and Audi

Germany have purposefully availed themselves of the benefits of the Texas market and are

therefore subject to the jurisdiction of Texas courts.3 Accordingly, I would affirm the trial

court’s orders denying their special appearances.

2 The only two Texas Supreme Court cases that cite Nicastro did not involve jurisdictional facts similar to the ones here. See generally TV Azteca v. Ruiz, 490 S.W.3d 29 (Tex. 2016); Searcy v. Parex Res., Inc., 496 S.W.3d 58 (Tex. 2016). In TV Azteca, the supreme court considered whether Texas courts could exercise jurisdiction in a defamation suit over “Mexican citizens who broadcast television programs on over-the-air signals that originate in Mexico but travel into parts of Texas.” 490 S.W.3d at 34. In Searcy, the supreme court considered whether Texas courts could exercise jurisdiction in a suit arising out of a failed business transaction in which a Texas entity sued a Canadian entity and a Bermudian shareholder for tortious interference with a share purchase agreement and sued a Bermudian owner of Colombian oil-and-gas operations for fraud. 496 S.W.3d at 62. Neither case involved jurisdictional allegations against an entity that targeted its activities toward all states, or even multiple states. 3 The Fifth Circuit has explained that “[c]ircuit courts interpreting McIntyre have concluded that under Marks v. United States, 430 U.S. 188, 193 (1977), Justice Breyer’s concurring opinion ‘furnished the narrowest grounds for the decision and controls.’ . . . [T]he narrowest ground, as expressed in Justice Breyer’s concurrence, is that the law remains the same after McIntyre, and that circuit courts may continue to attempt to reconcile the Supreme Court’s competing articulations of the stream of commerce test.” In re Chinese-Manufactured Drywall Prods. Liab. Litig., 753 F.3d 521, 541 (5th Cir. 2014) (quoting Ainsworth v. Moffett Eng’g, Ltd., 716 F.3d 174, 178 (5th Cir. 2013)).

5 The crux of my disagreement with the Court’s analysis is that it concludes that the

State has failed to establish that VW Germany and Audi Germany engaged in conduct

purposefully directed at Texas because that conduct was directed to the United States as a whole.

The Court’s opinion also concludes that some of the recall-tampering activities relied on by the

State are more properly characterized as the activities of VW America, not VW Germany or

Audi Germany. Although the Court’s opinion acknowledges that a nonresident’s purposeful

availment of a local market may be indirect—“through affiliates or independent distributors”—

Spir Star AG, 310 S.W.3d at 874, and that VW Germany and Audi Germany retained a

significant degree of control over the recall-tampering activities carried out by VW America, the

Court does not find persuasive the State’s argument that VW Germany and Audi Germany

indirectly purposefully availed themselves of Texas by directing VW America to carry out the

recall-tampering activities on their behalf in Texas. I do.

The Court’s opinion characterizes the following activities as only VW America’s

activities:

• the sale of affected vehicles to VW America franchise dealers in the United States, including franchise dealers in Texas;

• the sale by VW America franchise dealers of those vehicles to customers in the United States, including customers in Texas;

• the distribution of the technical description of the recalls to VW America technicians and customers in the United States, including technicians and customers in Texas;

• the distribution of the software updates to VW America franchise dealerships in the United States, including franchise dealerships in Texas;

• the installation by VW America franchise dealerships of the software updates on vehicles in the United States, including 23,319 Volkswagens at 60 Texas Volkswagen dealerships and at least 486 Audis at 12 Texas Audi dealerships; and

6 • the reimbursement of the VW America dealers nationwide for the costs of the recall.

However, under the Importer Agreements between VW Germany and VW America and between

Audi Germany and VW America, which govern the relationship between each set of entities

throughout the United States as a whole, VW Germany and Audi Germany retained a significant

degree of control over the recall-tampering activities in Texas and elsewhere. VW Germany

developed the tampering software for Volkswagen vehicles in the United States, deliberately

designing it to evade state and federal emissions regulations, and Audi Germany tested it for

compatibility with Audi vehicles. They both directed VW America to notify its authorized

Volkswagen and Audi dealers and customers in the United States, including those in Texas,

about the software updates using messaging they approved. They both electronically distributed

the tampering software to VW America for installation on vehicles in the United States,

including in Texas. They both directed VW America to install the tampering software on

vehicles in the United States, including in Texas. They each reimbursed VW America for the

costs of implementing the recall, with VW Germany reimbursing VW America $1,233,609 for

its reimbursements to Texas dealers and Audi Germany reimbursing VW America $29,590 for

its reimbursements to Texas dealers.

I agree that VW America’s contacts and its franchise dealers’ contacts cannot be

attributed to VW Germany and Audi Germany as direct contacts with Texas, but in my view, the

evidence supporting the German entities’ control of the recall-tampering conduct directed at

Texas establishes purposeful availment carried out indirectly through VW America and its

franchise dealers. VW Germany and Audi Germany, through VW America and its franchise

dealers, marketed and sold the affected vehicles to Texas residents on a large scale. They

7 subsequently carried out the recall-tampering activities on the same large scale, knowing that

affected vehicles had been sold and were located in Texas and tracking the progress of the

recalls. Moreover, the electronic delivery of the software to VW America for installation on

vehicles in Texas is a physical entry into Texas that I consider to be a relevant jurisdictional

contact with the forum. See Walden v. Fiore, 571 U.S. 277, 285 (2014) (“[P]hysical entry into

the State—either by the defendant in person or through an agent, goods, mail or some other

means—is certainly a relevant contact.”); see also Burger King, 471 U.S. at 476 (explaining that

“an absence of physical contacts” will not defeat personal jurisdiction if nonresident

“commercial actor’s efforts are ‘purposefully directed’ toward” forum). The quality and nature

of this contact with Texas—the delivery of software designed to allow Volkswagen- and Audi-

branded vehicles to evade Texas regulations—further persuades me that VW Germany and Audi

Germany, through VW Germany’s wholly owned subsidiary VW America, purposefully availed

themselves of the privilege of conducting activities in Texas.

This deliberate conduct goes beyond “[m]ere knowledge that the ‘brunt’ of the

alleged harm would be felt—or have effects—in the forum state.” Searcy v. Parex Res., Inc.,

496 S.W.3d 58, 68 (Tex. 2016). The recall-tampering conduct was deliberate activity designed

by VW Germany and Audi Germany specifically to evade Texas’s emission regulations (as well

as those of other states and the federal government) after directing VW America to exhaust all

United States market opportunities for Volkswagen- and Audi-branded vehicles. While it is true

that “a defendant may structure its transactions in such a way as ‘neither to profit from the

forum’s laws nor subject itself to jurisdiction’ there,” i.e., to “purposefully avoid” jurisdiction,

id. (quoting Michiana, 168 S.W.3d at 785), I would not conclude that a nonresident may

purposefully avoid a particular jurisdiction merely by conducting activities directed at every state

8 in the United States, and by avoiding any special treatment of one state or a few states. On the

record before the Court, I would conclude that the State has established that, by engaging in the

recall-tampering activities, VW Germany and Audi Germany have purposefully availed

themselves “‘of the privilege of conducting activities within the forum State, thus invoking the

benefits and protections of its laws.’” Michiana, 168 S.W.3d at 784 (quoting Hanson, 357 U.S. at

253).

II. Asserting jurisdiction over VW Germany and Audi Germany comports with traditional notions of fair play and substantial justice

Because I would conclude that VW Germany’s and Audi Germany’s Texas

contacts support specific jurisdiction, I must also determine whether the assertion of jurisdiction

comports with traditional notions of fair play and substantial justice. See Spir Star AG, 310

S.W.3d at 878. “Only in rare cases . . . will the exercise of jurisdiction not comport with fair

play and substantial justice when the nonresident defendant has purposefully established

minimum contacts with the forum state.” Guardian Royal Exch. Assur., Ltd. v. English China

Clays, P.L.C., 815 S.W.2d 223, 232 (Tex. 1991) (citing Burger King, 471 U.S. at 477). To

evaluate this component, appellate courts consider the defendants’ contacts in light of the

following factors: (1) “the burden on the defendant”; (2) “the interests of the forum state in

adjudicating the dispute”; (3) “the plaintiff’s interest in obtaining convenient and effective

relief”; (4) the interstate or international judicial system’s interest in obtaining the most efficient

resolution of controversies; and (5) the shared interest of the several nations or states in

furthering fundamental substantive social policies. Spir Star AG, 310 S.W.3d at 878 (citing

Guardian Royal, 815 S.W.2d at 231).

9 Generally speaking, “[w]hen a nonresident defendant has purposefully availed

itself of the privilege of conducting business in a foreign jurisdiction, it is both fair and just to

subject that defendant to the authority of that forum’s courts.” Id. at 872 (citing Burger King,

471 U.S. at 475). When a defendant that has directed its activities at a forum seeks to defeat

jurisdiction, it “‘must present a compelling case that the presence of some other considerations

would render jurisdiction unreasonable.’” Guardian Royal, 815 S.W.2d at 231 (quoting Burger

King, 471 U.S. at 475 (emphasis added in Guardian Royal)). Distance alone will not ordinarily

defeat jurisdiction. Guardian Royal, 815 S.W.2d at 231. “[M]odern transportation and

communication have made it much less burdensome for a party sued to defend himself in a State

where he engages in economic activity.” Id. (quoting McGee v. International Life Ins. Co., 355

U.S. 220, 222 (1957)).

Here, Texas has a strong interest in adjudicating this dispute in which the State

alleges that VW Germany’s and Audi Germany’s tampering scheme violated Texas law. “[A]

state’s regulatory interest in a certain area . . . is an important consideration in deciding whether

the exercise of jurisdiction is reasonable.” Id. at 229. While a state’s regulatory interest alone is

not sufficient to establish jurisdiction, “a state’s regulatory interest may establish the

reasonableness of jurisdiction upon a lesser showing of minimum contacts than would otherwise

be required.” Id. In addition, the State argues that its interest in obtaining convenient and

effective relief is implicated because VW America claims that it had no knowledge of the

tampering efforts. It will be more efficient to adjudicate the entire case in the same place, and

the State’s case against the other defendants will be heard in Texas. See Spir Star AG, 310

S.W.3d at 879. While I recognize “the unique and onerous burden placed on a party called to

defend a suit in a foreign legal system,” CSR Ltd. v. Link, 925 S.W.2d 591, 595 (Tex. 1996)

10 (citing Asahi Metal Indus. Co. v. Superior Ct., 480 U.S. 102, 114 (1987)), that burden is minimal

in this case and outweighed by the State’s interest in adjudicating the case in Texas, see Spir Star

AG, 310 S.W.3d at 879-80. Accordingly, I would conclude that asserting personal jurisdiction

over VW Germany and Audi Germany comports with traditional notions of fair play and

substantial justice.

CONCLUSION

For the reasons stated, I would hold VW Germany and Audi Germany answerable

in Texas for their recall-tampering activities that were purposefully directed to the United States

market as a whole, including to Texas.

__________________________________________ Gisela D. Triana, Justice

Before Chief Justice Rose, Justices Triana and Smith

Filed: December 22, 2020