Locke Lord QuickStudy: The Federal Circuit Clarifies the Law of ‎Proper Venue in Patent ‎Cases Involving the Presence of a ‎Purported Agent in a Given ‎Fora

The Court of Appeals for the Federal Circuit has recently clarified the law concerning whether patent ‎venue is proper under agency law, specifically in the context of whether the presence of a franchisee ‎in a given fora is sufficient to support venue. Typically, automobile manufacturers sell their new cars ‎to distributors which, in turn, sell those new cars to independent, franchised dealers which, in turn, ‎sell those cars to general public consumers and service the sold cars under warranty. Prior to this ‎recent decision, district courts were split on whether the dealership operations could be imputed to ‎the distributors for finding patent venue under 28 U.S.C. § 1400(b) based on an agency theory. In In ‎re Volkswagen, Appeal Nos. 2022-108, 2022-109, 2022 WL 697526 (Fed. Cir. Mar. 9, 2022), the Court ‎held that under distributor-dealer franchise agreement, the dealers were not agents of the distributor ‎for purposes of establishing patent venue under § 1400(b), based on the terms of the franchise ‎agreement. As a result of this recent decision, patent venue for distributors will be proper only in ‎those districts where the distributor is incorporated or has itself a place of business. ‎

On December 11, 2020, StratosAudio, Inc. (“Stratos”) filed patent infringement complaints in the ‎Western District of Texas against five new car distributors including Volkswagen Group of America, ‎Inc. (“VWGoA”) and Hyundai Motor America (“HMA”). Neither VWGoA nor HMA are incorporated in ‎Texas or own/lease a physical place of business in the Western District of Texas. In its complaints, ‎Stratos pled that venue is proper in the Western District of Texas because: VWGoA and HMA ‎‎“conducts its business of the exclusive distribution of new automobiles to the consuming public in ‎this judicial district through its authorized dealers in this judicial district;” the Volkswagen and ‎Hyundai “dealerships in this judicial district are held out to the consuming public as places of ‎‎[Volkswagen or Hyundai] where [VWGoA or HMA] through its dealers, sells [VWGoA or HMA] cars;” ‎and VWGoA and HMA “conducts business through its authorized dealers in this judicial district by ‎providing new purchase warranties and service pursuant to those warranties to the consuming ‎public.” See Stratos v. VWGoA Complaint, 6:20-cv-1131 (W.D. Texas) at ¶¶ 10-14; Stratos v. HMA ‎Complaint, 6:20-cv-1125 (W.D. Texas) at ¶¶ 10-14.

VWGoA and HMA moved to dismiss or transfer the cases under 28 U.S.C. § 1406(a) and Fed. R. Civ. ‎P. 12(b)(3). Judge Albright denied both motions, holding that in each case, venue is proper in the ‎Western District of Texas. An essential component of the district court’s holding was its conclusion ‎that independently owned and operated new car dealerships that sell Volkswagen-branded and ‎Hyundai vehicles are, in fact, agents of VWGoA and HMA which regularly conduct VWGoA and HMA ‎business in the Western District of Texas. StratosAudio, Inc. v. Volkswagen Grp. Of Am., 2021 WL ‎‎7367229 (W.D. Tex. Sept. 20, 2021); StratosAudio, Inc. v. Hyundai Motor Am., 2021 WL 7367228 ‎‎(W.D. Tex. Sept. 17, 2021). VWGoA and HMA then filed petitions for writ of mandamus, seeking an ‎order vacating the district court’s denial of the motions and instructing the district court to either ‎dismiss the action or to transfer it to the Eastern District of Michigan in the case of VWGoA and to the ‎Central District of California in the case of HMA. The Federal Circuit initially determined that the ‎disagreement among district courts on the recurring issue of whether independent car dealerships ‎are sufficient to establish venue over car distributors, constitutes exceptional circumstances ‎warranting immediate review. In re Volkswagen Grp. Of Am., Inc., 2022 WL 697526, *2 (Fed. Cir. Mar. ‎‎9, 2022) (citing conflicting district court decisions). ‎‎

Under the patent-specific venue statute, 28 U.S.C. § 1400(b), “[a]ny civil action for patent ‎infringement may be brought in the judicial district where the defendant resides, or where the ‎defendant has committed acts of infringement and has a regular and established place of business.” ‎Under the first prong of § 1400(b) “a domestic corporation ‘resides’ only in its State of incorporation ‎for purposes of the patent venue statute.” TC Heartland LLC v. Kraft Foods Group Brands LLC, 137 ‎S.Ct. 1514, 1517 (2017). Because VWGoA and HMA are incorporated in New Jersey and California, ‎respectively, neither VWGoA nor HMA “resides” in Texas for the purpose of patent venue, and the ‎first prong of § 1400(b) is, therefore, inapplicable.‎

Under the second prong of § 1400(b), there are three general requirements to establishing that the ‎defendant has a “regular and established place of business” under the patent-specific venue statute: ‎‎“(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, 871 F.3d 1355, 1360 (Fed. Cir. ‎‎2017). The second Cray factor requires “the regular, physical presence of an employee or other ‎agent of the defendant conducting the defendants’ business at the alleged ‘place of business’”. In re ‎Google, 949 F.3d 1338, 1345 (Fed. Cir. 2020) (emphasis added). “If any [of these] statutory ‎requirement[s] [are] not satisfied, venue is improper under § 1400(b).” Cray, 871 F.3d at 1360. In ‎Volkswagen, the Federal Circuit held that a patent venue was improper in the Western District of ‎Texas under the second Cray factor for both VWGoA and HMA.‎

Before the Federal Circuit, Stratos argued that the dealerships are VWGoA’s and HMA’s agents for ‎conducting their business of (i) selling cars to consumers and (ii) providing warranty services to ‎consumers. The Federal Circuit observed that Stratos “must show that [VWGoA and HMA] have the ‎requisite control over the dealerships with respect to those activities, including the right to provide ‎‎‘interim instructions.’” Volkswagen, 2022 WL 697526, * 5 (citing Google, 949 F.3d at 1345-46). In ‎Google, the Federal Circuit emphasized that the control required in an agency relationship is one of ‎‎“interim control.” Google, 949 F.3d at 1345-46. (“The power to give interim instructions distinguishes ‎principals in agency relationships from those who contract to receive services provided by persons ‎who are not agents”, citing Restatement (Third) of Agency § 1.01 cmt. f(1)).‎

The Federal Circuit held that the provisions of the VWGoA and HMA franchise agreements with their ‎dealers fail to give VWGoA and HMA “interim control over either the dealerships’ car sales or ‎warranty work.” Volkswagen, 2022 WL 697526, * 6. “At best, Stratos cites various constraints placed ‎on the dealerships that are arguably related to sales (minimum inventory, sales staff, displaying the ‎parent company’s logo, providing sales reports, etc.), but none of these provisions evidence any ‎control over the sales process itself.” Id. There are no “step-by-step” instructions from VWGoA and ‎HMA that their dealerships must follow when selling a car to a consumer. Id. at *7. “Thus, the terms ‎and conditions set forth in the franchise agreements fail to give rise to an agency relationship ‎between the [car distributors] and dealerships when it comes to selling cars to consumers.” Id. ‎

The Federal Circuit held that “[t]he same is true as to the dealerships’ performance of warranty ‎services.” Volkswagen, 2022 WL 697526, *7. The VWGoA and HMA franchise agreements with their ‎dealers “require the dealerships to perform warranty services, which are reimbursed by [VWGoA and ‎HMA], or require the dealership to keep certain parts on hand and use certain tools when performing ‎repairs. But Stratos fails to cite any language giving [VWGoA and HMA] control over how the ‎dealerships perform warranty services once those parameters are set. [VWGoA’s and HMA’s] lack of ‎‎‘interim control’ over how the dealerships perform warranty work again precludes a finding that the ‎dealerships are [the distributors’] agents for warranty services.” Id.‎

The Federal Circuit therefore vacated the district court’s orders denying the motions to dismiss or ‎transfer, and remanded the case for further proceedings consistent with the Federal Circuit’s Order. ‎Volkswagen, 2022 WL 697526, *8. On remand, Judge Albright transferred the suit against VWGoA to ‎the Eastern District of Michigan where VWGoA has a place of business and transferred the suit ‎against HMA to the Central District of California where HMA is incorporated and headquartered. ‎StratosAudio, Inc. v. Volkswagen Grp. Of Am. Inc. 2022 WL 764976 (W.D. Tex. Mar. 10, 2022); ‎StratosAudio, Inc. v. Hyundai Motor Am., 2022 WL 770119 (W.D. Tex. Mar. 10, 2022).‎

When answering a patent infringement complaint alleging proper venue under 28 U.S.C. § 1400(b), ‎based solely on the presence and operations of its independent dealerships within the district, a ‎distributor should not reflexively concede that venue is proper. Instead, the defendant distributor ‎should first analyze the terms of its franchise agreement with its dealers to assess whether its dealers ‎within the district are, in fact, its agents under Cray and Volkswagen. We have a great deal of ‎experience in district court patent litigation and would welcome any questions regarding this new ‎case law guidance.‎