“The CAFC said that the cited contract provisions failed to give Petitioners ‘interim control’ over the dealerships’ car sales or warranty services.”
Just as some sources had begun to speculate that Judge Alan Albright had received the United States Court of Appeals for the Federal Circuit’s (CAFC’s) message on transfer—in light of a slew of decisions reversing his refusals to move cases out of his court—the CAFC yesterday granted two more petitions for mandamus relief, holding the United States District Court for the Western District of Texas clearly abused its discretion in not granting a change of venue.
In December 2020, StratosAudio, Inc. (Stratos) filed patent infringement complaints in the Western District of Texas against Volkswagen and Hyundai (the Petitioners) which are incorporated in New Jersey and California, respectively. The two cases were consolidated on appeal. Since both Volkswagen and Hyundai reside outside of the Western District of Texas, the two companies moved to dismiss or transfer the cases under 28 U.S.C. §1406(a) and Federal Rule of Civil Procedure 12(b)(3). The district court denied these motions, concluding that the Western District was the proper venue. In its denial, the district court relied on the existence of both Volkswagen and Hyundai dealerships in the Western District of Texas that sell and service vehicles under franchise agreements that impose operating regulations on the dealerships. The district court concluded that these agreements gave Petitioners sufficient control over the dealerships to establish them as regular places of business of the Petitioners, notwithstanding the fact that Texas law prohibits auto manufacturers and distributors from directly or indirectly “operating or controlling a franchised dealer or dealership.” Tex. Occ. Code (TOC) §2301.476(c)(2)(A).
Volkswagen and Hyundai both petitioned the CAFC for a writ of mandamus, presenting similar challenges to the district court’s conclusions that the dealerships are Petitioners’ agents and therefore the business conducted there is under Petitioners’ control.
Reviewing the Standard for Mandamus
Citing Cheney, the CAFC noted at the outset, that before a court may issue a writ of mandamus, three conditions must be satisfied: “(1) the petitioner must have no other adequate means to attain the relief he desires; (2) the petitioner must show that the right to the writ is clear and indisputable and (3) the court in exercise of its discretion, must be satisfied that the writ is appropriate under the circumstances.” Cheney v. U.S. Dist. Ct. for D.C., 542 U.S. 367, 380–81 (2004). Further, citing Westech Aerosol Corp., the CAFC recognized that “the burden to establish venue in patent infringement cases rests with the plaintiff.” See Westech Aerosol Corp. v. 3M Co., 927 F.3d 1378, 1382 (Fed. Cir. 2019).
According to 28 U.S.C. §1400(b), “any civil action for patent infringement may be brought in the judicial district where…the defendant has committed acts of infringement and has a regular and established place of business.” Referencing Cray, the CAFC reasoned that there are three general requirements for an establishment to be considered a regular and established place of business: “(1) there must be a physical place in the district; (2) it must be a regular and established place of business; and (3) it must be the place of the defendant.” In re Cray Inc., 871 F.3d 1355, 1360 (Fed. Cir. 2017). The CAFC, citing In re Google, noted that the second prong requires “the regular physical presence of an employee or other agent of the defendant conducting the defendant’s business at the alleged ‘place of business.’” In re Google LLC, 949 F.3d 1338, 1345 (Fed. Cir. 2020). The dispute, the CAFC recognized, turns on 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.” If any of these conditions is not met, the CAFC reasoned, venue is improper under §1400(b).
Turning to the first issue, the CAFC recognized, citing In re Google, “a regular and established place of business requires the regular, physical presence of an employee or other agent of the defendant conducting the defendant’s business at the alleged place of business.” 949 F.3d at 1345. Stratos did not argue that Petitioners’ employees work at the individual dealerships or that the individuals working at the dealerships are employees of the Petitioners. Instead, Stratos argued that the dealerships entities themselves are Petitioners’ agents. The CAFC noted that an agency relationship arises when one person or entity (a principal) manifests assent to another person or entity (agent) that it will act in the principal’s behalf and will be subject to the principal’s control. Citing Meyer, the CAFC recognized that qualities essential to an agency relationship include: “(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.” Meyer v. Holley, 537 U.S. 280, 286, 123 S. Ct. 824, 154 L.Ed.2d 753 (2003). The CAFC noted, referencing In re Google, that the level of control required for an agency relationship is “interim control,” that is, having “the power to give interim instructions distinguishes principals in agency relationships from those who contract to receive services by persons who are not agents.” 949 F.3d at 1345-46.
Here, Stratos argued that the dealerships are Volkswagen’s and Hyundai’s agents for conducting the business of selling cars and providing warranty services to consumers. Stratos alleged that the contractual provisions common to both the Volkswagen and Hyundai dealership agreements give Petitioners the requisite control for an agency relationship. The contractual provisions at issue require dealerships to, among other things, employ certain types of employees, receive mandatory training, and comply with distributors’ standards regarding use of signs and brand logos.
Alternatively, Petitioners asserted that they do not have the right to control the day-to-day operations of the dealerships, as is required for agency. Instead, the dealerships maintained that the contract provisions at issue are merely “quality controls” insufficient to establish agency. Further, Petitioners highlighted contractual provisions that explicitly disclaim the existence of an agency agreement between Petitioners and the respective dealerships. They also cited to TEX. OCC. CODE ANN. § 2301.476(c)(2), which provides that it would be a violation of Texas law to interpret the agreements as giving Petitioners control over the dealerships and would thereby make the contracts unenforceable.
The CAFC concluded that it need not rule on whether the dealership agreements violate Texas law. Further, the CAFC said that the cited contract provisions failed to give Petitioners “interim control” over the dealerships’ car sales or warranty services. The CAFC reasoned that nothing Stratos cited was able to overcome the explicit provisions in the agreement giving dealerships full control of their day-to-day operations. Accordingly, the CAFC held that Stratos failed to carry its burden to show that the dealerships located in the Western District are agents of either Volkswagen or Hyundai. Therefore, the CAFC reasoned that it was a clear abuse of discretion for the district court to deny Petitioners’ motions and vacated the district court’s decisions, remanding the cases for further consideration.