On March 9, the Federal Circuit held that, without exercising interim control on the day-to-day operation of dealerships, independent dealerships are not agents of the original equipment manufacturers (“OEMs”) for the purposes of establishing venue over OEMs in patent cases. Leading up to this decision, District Courts were split on the question of whether automobile dealerships are “regular and established places of business” for OEMs such as Volkswagen. Ruling on mandamus, the Federal Circuit resolved that split in favor of the OEMs.
A patent infringement action may be brought (1) in the judicial district where the defendant resides, or (2) where the defendant (i) has committed acts of infringement and (ii) has a regular and established place of business.[1] The Supreme Court has held that “a domestic corporation ‘resides’ only in its State of incorporation for purposes of the patent venue statute.”[2] Thus, for corporations that are not incorporated in a state where the action is brought, venue is proper only if they have committed acts of infringement and have a regular and established place of business in that district. Since allegations of infringement are sufficient for a venue determination,[3] whether a defendant “has a regular and established place of business” is the primary question in deciding if venue is proper.
In West View Research LLC v. BMW of North Am., LLC, the district court for the Southern District of California held that BMW dealerships located in that district are not “physical locations carrying on a regular and established business that are owned, controlled or possessed by Defendants.”[4] In that case, the plaintiff argued that numerous sales people and dealerships in that district along with defendants’ prominent advertisement of their brand at the dealerships and “near complete control” over the dealers made the venue proper. The court disagreed.
In contrast, the district court for the Eastern District of Texas, in Biltzsafe Tex., LLC v. Bayerische Motoren Werke AG, found dealerships to be regular and established places of business for the OEM defendants.[5] As in the West View Research case, the defendant argued that the dealerships are independently owned and operated, and that their “place” should not be imputed to the defendant.[6] In addition, the defendant argued that, per the Texas Occupations Code, it is prohibited from directly or indirectly owning, operating, controlling, or acting in the capacity of the dealers.[7] The court, however, was unpersuaded for two reasons.
First, the court ruled that Texas’ Occupations Code prohibiting the defendant from owning, operating, or controlling dealerships does not mean that dealerships are not “places” of the defendant.[8] Rather, as a relevant consideration, the court focused on the defendant’s representation that it has a place of business within the district.[9] While the court acknowledged that a defendant’s representation regarding its place of business is not dispositive, the court found the defendant to have “adopted and ratified the dealerships . . . as its places of business.”[10] The court reasoned that the dealerships are held out to the consuming public as the defendant’s place of business because the defendant does not permit sales of any new BMW from any location but the authorized dealers, the dealers use the defendant’s name and logo prominently, and that defendant’s website represents the dealerships as its place.[11]
Second, the court found that the defendant’s provisioning of new purchase warranty and services, offered through the dealerships, indicated that dealerships are the place of the defendant.[12] In doing so, the court distinguished West View Research because it did not address defendant’s provisioning of new vehicle warranties through the dealerships.[13]Accordingly, the court found the venue to be proper.
This week, the Federal Circuit resolved this split.[14] Plaintiff sued defendants Volkswagen and Hyundai for patent infringement in the Western District of Texas.[15] The defendants, who were not incorporated in Texas, moved to dismiss or transfer the case.[16] The district court, denied their motions and concluded that the defendants exercised enough control over independent dealerships, using franchise agreements, to establish a “regular and established place of business” for the defendants.[17]
Ruling on a petition for a writ of mandamus, the Federal Circuit stated that the dispute over “regular and established place of business” boils down to three issues: “(1) whether the dealerships are the agents of Petitioners; (2) whether the dealerships conduct Petitioners’ business; and (3) whether Petitioners have ratified the dealerships as Petitioners’ places of business.”[18] The Court continued, if any of these three independent requirements are not satisfied, the venue is improper.[19]
Evaluating the first element—agency—the Court held that “dealerships located in the Western District do not constitute regular and established places of business of [petitioners] . . . under . . . agency law.”[20] Within the framework of Restatement (Third) of Agency, referring to its recent decision in Google II,[21] the Court focused its analysis on the interim “control required in an agency relationship,” as opposed to mere constrains on how business is conducted.[22] In particular, the Court stated that “an agency relationship requires the principal ha[ve] the right throughout the duration of the relationship to control the agent’s acts.”[23]
The Court further recognized the inherency of “some degree of control” in any franchise relationship and emphasized the importance of the “nature and extent of such control as defined in the franchise agreement or by the actual practice of the parties.”[24] Applying this requirement to the case at hand, the Court found the constrains of the agreements between the petitioners and the dealership to be insufficient to establish the requisite control requirement.[25] These constrains generally required 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).[26]
The Court found that, since “there are no ‘step-by-step’ instructions from Petitioners that dealerships must follow when selling a car to a consumer,” and there is no evidence that “undermines [the dealerships] . . . full control over their day-to-day operations . . . the terms and conditions set forth in the franchise agreements fail to give rise to an agency relationship between the Petitioners and dealerships when it comes to selling cars to consumers.”[27] The Court reached the same conclusion “as to the dealerships performance of warranty services,” despite the constrains placed on the dealerships by the petitioners “to perform warranty services, which are reimbursed by Petitioners, or require the dealerships to keep certain parts on hand and use certain tools when performing repairs.”[28] The Court reached its conclusion because of “[p]etitioners “lack of ‘interim control’ over how the dealerships perform warranty work.”[29]
It is now settled that absent interim control by the OEMs over dealerships, the existence of dealerships in a district, alone, cannot be used to establish venue in patent cases. Accordingly, if you plan to file a lawsuit against an OEM, you will need to file it where it is incorporated or has a regular and established place of business, such as its headquarters’ location. As for the OEMs, provided that there is no operation in a district beyond dealerships, tailor your franchise agreements in accordance with the holdings of this case, to avoid litigating outside of your home turf.
[1] See 28 U.S.C. § 1400(b).
[2] TC Heartland LLC v. Kraft Foods Grp. Brands LLC, 137 S. Ct. 1514, 1517 (2017).
[3] In re Cordis Corp., 769 F.2d 733, 737 (Fed. Cir. 1985).
[4] West View Research LLC v. BMW of North Am., LLC, No. 16-CV-2590 JLS (AGS), 2018 WL 4367378 (S.D. Cal. Feb. 5, 2018).
[5] Biltzsafe Tex., LLC v. Bayerische Motoren Werke AG, No. 2:17-CV-00418-JRG, 2018 U.S. Dist. LEXIS 173065, at *30 (E.D. Tex. Sep. 5, 2018), vacated, 2019 U.S. Dist. LEXIS 129945, at *5 (E.D. Tex. Aug. 1, 2019).
[6] Id. at *13.
[7] Id. n. 4.
[8] Id. at *19.
[9] Id.
[10] Id. at *20.
[11] Id. at *21.
[12] Id. at *25.
[13] Id. at *30 n. 15
[14] In re Volkswagen Grp. of Am., No. 2022-108, 2022 U.S. App. LEXIS 6094, at *23 (Fed. Cir. Mar. 9, 2022).
[15] Id. at *2–3.
[16] Id.
[17] Id. at *3.
[18] Id. at *8.
[19] Id. (citing In re Cray Inc., 871 F.3d 1355, 1360 (Fed. Cir. 2017)).
[20] Id.
[21] In re Google LLC, 949 F.3d 1338, 1345 (Fed. Cir. 2020).
[22] In re Volkswagen Grp. of Am., 2022 U.S. App. LEXIS 6094, at *9 (“The essential elements of agency are (1) the principal’s right to direct or control the agent’s actions, (2) the manifestation of consent by the principal to the agent that the agent shall act on his behalf, and (3) the consent by the agent to act.”) (citing In re Google LLC, 949 F.3d at 1345).
[23] Id. at *11 (citation and quotation marks omitted).
[24] Id. at *12.
[25] Id. at *17–18.
[26] Id. at *14.
[27] Id. at *17–18.
[28] Id. at *19–20.
[29] Id. at *20.
