Texas Supreme Court Update

The following is a summary of a selected opinion issued by the Supreme Court of Texas in May 2023. The summary is intended as an overview of selected aspects of the opinion only; please review the entire opinion.

PERSONAL JURISDICTION: “Dieselgate” auto manufacturers subject to specific personal jurisdiction in Texas, despite contacts with Texas being undifferentiated from those with other states involved in nationwide scheme.

State v. Volkswagen Aktiengesellschaft, No. 21-0130 (Tex. May 5, 2023).

This consolidated interlocutory appeal arises out of the “Dieselgate” scandal, which involved the intentional installation and use of illegal “defeat devices” by certain German auto manufacturers into imported vehicles in order to avoid compliance with U.S. emissions standards. The vehicles were marketed as environmentally friendly “clean diesels,” but in fact the defeat devices would cause the vehicles to perform differently during emissions testing than during normal operation, when the vehicles’ emissions would be “substantially higher”— up to 40 times the legal limits.

The scheme was active from approximately 2006 to 2015, and involved tampering both prior to the initial sale of the vehicles and during post-sale recall and service campaigns. The manufacturers initially installed the illegal defeat-device software before importing the vehicles to the United States for sale.

All of the vehicles in question were imported through an exclusive distributor, which had entered into detailed Importer Agreements with the manufacturers. Pursuant to the Importer Agreements, the manufacturers retained both direct and indirect control over post-sale recalls, warranty repairs, and other service work, such that the distributor was contractually required to deploy its network of local dealerships to complete recall and service campaigns in accordance with the manufacturers’ directions, and the manufacturers retained contractual control over the dealerships with regard to these campaigns. The dealerships were also required to use the manufacturers’ proprietary software distribution system in servicing the vehicles. Finally, the Importer Agreements established that the manufacturers had to pay for all costs associated with all warranty repairs and recall work.

After the vehicles in question had been sold, malfunctions in the defeat-device technology began to cause issues in certain vehicles, requiring expensive repairs that were covered under the manufacturers’ warranty. In response, the German manufacturers developed updates to the defeat-device software that were designed to prevent further damage, facilitate continued use of the defeat devices, and avoid the devices being discovered. The software updates were uploaded to servers in Germany, which then synchronized with the distributor’s and dealerships’ servers. The manufacturers then created fake recall campaigns and took advantage of regularly scheduled dealer services to ensure that the updates were automatically installed in all affected vehicles.

VW Germany previously pled guilty to federal criminal charges for violations of the Clean Air Act and agreed to pay a criminal fine of $2.8 billion. The German manufacturers also settled federal civil claims filed by the EPA, but no agreement was entered to bar further civil suits by state or local governments; instead, each state expressly reserved the ability to sue the manufacturers for damages. The manufacturers’ total liability from the federal claims is estimated to exceed $20 billion.

In this case, the State of Texas and several local governments sued the manufacturers for violations of state environmental laws. Summary judgment on the basis of preemption was granted in favor of the defendants on the pre-sale claims, but the post-sale recall claims survived. The manufacturers filed special appearances contesting personal jurisdiction, contending that there was no basis for specific personal jurisdiction because (1) all contacts with Texas were limited to the distributor and dealerships, and could not be imputed to the manufacturers; and (2) any U.S. contacts by the manufacturers were targeted at the country as a whole, and not Texas specifically.

The trial court denied the jurisdictional challenge, and the manufacturers appealed. A divided appellate court reversed and dismissed, finding that the defendants’ actions were directed towards the United States as a whole and not Texas specifically, and thus were insufficient to constitute purposeful availment of the privileges of conducting activities in Texas.

The plaintiffs appealed to the Texas Supreme Court, which framed the issue before it as “whether a foreign defendant can be subject to personal jurisdiction in this forum when its contacts in Texas are undifferentiated from its contacts with other states”— specifically, whether the relevant facts gave rise to Texas courts’ specific personal jurisdiction over the manufacturers based on the manufacturers’ intentional post-sale tampering with vehicles owned, operated, and serviced in Texas.

The Supreme Court found that the manufacturers had established minimum contacts with Texas by exercising their direct contractual control over the distributor and their direct and indirect control over the dealerships.

The Court also noted that the manufacturers’ control over the entire scheme, which was granted and exercised under the Importer Agreements, allowed them to “perpetrate a fraud on the State of Texas and its citizens under the guise of recall and service campaigns.” Noting that states have an interest in protecting against torts that take place within their jurisdiction, and that the U.S. Supreme Court has recognized state interests in protecting regulatory schemes, the Court found that “engaging the forum with the specific intent to take actions to thwart the enforcement of an applicatory scheme could not be more purposeful.”

As for the argument that a nationwide campaign wherein the contacts among states were undifferentiated in kind and quality could not form the basis for purposeful availment, the Court held that personal jurisdiction is a forum-specific inquiry which requires no consideration of behavior that may or may not have been directed elsewhere. As the Court explained, “[t]he contacts an entity forms with one jurisdiction do not negate its purposeful contacts with another.”

The Court held that the manufacturers were subject to specific personal jurisdiction in Texas; accordingly, it reversed the court of appeals’ judgment and remanded to the trial court for further proceedings. AL

Rachael K. Jones is the editor-in-chief of Austin Lawyer. Her primary practice areas include civil appeals, contracts, and complex motion practice.