The US Court of Appeals for the Federal Circuit vacated a district court’s denial of motions made by two car distributors to transfer cases out of the Western District of Texas for improper venue, finding that the patent owner failed to establish that franchised car dealerships in the judicial district were agents of the manufacturers for venue purposes under § 1400(b). In re Volkswagen Grp. of Am., Inc., Case Nos. 22-108; -109 (Fed. Cir. Mar. 9, 2022) (Dyk, Reyna, Chen, JJ.) (per curiam).

StratosAudio filed complaints in the Western District of Texas against Volkswagen and Hyundai, asserting infringement of infotainment-related patents. Volkswagen and Hyundai are car distributors incorporated in New Jersey and California, respectively. Both distributors moved to dismiss or transfer their cases for improper venue under § 1406(a). The district court denied the motions, concluding that venue was proper because independently owned Volkswagen and Hyundai car dealerships operated in the district. The district court found that franchise agreements gave the car distributors sufficient control over their respective dealerships such that they constituted regular and established places of business in the district. The district court reached this finding despite the fact that Texas law prohibited direct or indirect operation or control of a franchise by a car manufacturer or distributor. Volkswagen and Hyundai petitioned the Federal Circuit for writ of mandamus to vacate the district court’s order or transfer for improper venue.

The Federal Circuit first considered whether mandamus review was appropriate. The Court explained that it may only issue a writ if the petitioner has no other means adequate to attain the desired relief. In contrast to a motion to transfer to a more convenient venue under § 1404(a), denial of a motion to dismiss or transfer for improper venue under § 1406(a) can be remedied on appeal from final judgment. The Court explained that mandamus relief is therefore only available for a ruling on a § 1406(a) motion where the issue presented doing so is important to “proper judicial administration.” Citing to its ruling in In re. Google LLC, the Court explained that this condition may be met when there are a significant number of district court decisions that adopt conflicting views on a basic legal issue. The Court described the disagreement among district courts over whether independent car dealerships establish venue over vehicle manufacturer and distributors and determined that the situation warranted immediate review.

The Federal Circuit turned to the merits to analyze the factors for determining whether a defendant has a “regular and established place of business” for the purposes of establishing proper venue under 28 U.S.C. § 1400(b). There was no dispute that the car dealerships were physically located in the Western District of Texas, and that the defendants did not have any employees at these locations. The Court thus identified the three operative statutory requirements that StratosAudio had the burden of establishing:

• Whether the dealerships were the agents of the defendants

• Whether the dealerships conducted the defendants’ business

• Whether the defendants ratified the dealerships as their places of business.

Addressing the first factor, the Federal Circuit reapplied its agency analysis from In re. Google. In that case (which found that the ISPs hosting Google’s servers were not agents), the Court emphasized that an agency relationship requires “interim control,” which means that the principal has the right to control the agent’s acts through the duration of the relationship. The Court explained that this rule is subject to multiple caveats, including that control over one aspect of a party’s activities does not affect the agency analysis for a different activity. Applying this rule to the present case, the Court found that StratosAudio failed to show that the defendants maintained an influence over the sale of vehicles to customers once the vehicles were sold to the dealerships. While StratosAudio did identify some contractual constraints related to the sales process (displaying logos, providing sales reports, etc.), the Court found that these did not sufficiently evidence control over the actual sales process. The Court also cited decades of case law uniformly finding that similar franchising terms did not establish an agency relationship between car dealerships and car distributors. The Court concluded that StratosAudio failed to establish that dealerships in the Western District of Texas were agents of Volkswagen or Hyundai, vacated the district court’s order and remanded.

Practice Note: The Federal Circuit’s ruling in this case was fact specific and should not be construed as a blanket holding that franchised car dealers can never establish a franchisor auto manufacturer’s presence in a district. The Court readily acknowledged that circumstances may arise where the requisite relationship exists. With this case and In re, Google as a guide, practitioners should apply the rules of agency law to the specifics of the relationship between the defendant and alleged agent.