C&C Insights

Judge Albright: Regular and Established Place of Business of Hyundai at Authorized Dealers

Last week, Judge Alan Albright denied Hyundai’s motion to dismiss StratosAudio’s patent infringement claims for improper venue.  Although Hyundai does not directly control any regular and established place of business in the Western District of Texas, it does have authorized dealers there.  Based on the contractual control exerted over those dealerships by Hyundai, Judge Albright found that Hyundai had ratified the places of business of the authorized dealers.  Even though Hyundai did not directly lease or operate the places of business, the ratification of the places of business of the authorized dealers in the Western District meant that Hyundai had a regular and established place of business in the Western District of Texas for purposes of determining proper venue.

StratosAudio Sues Multiple Auto Manufacturers Providing Apple CarPlay

In December of 2020, StratusAudio brought claims of patent infringement based on seven patents that it alleges cover Hyundai’s infotainment systems.  For example, the patents in suit discuss the concept of associating and displaying song information with a song being played and/or other content such as advertisements and comments on a song. StratusAudio alleges that infotainment systems integrating software such as Apple CarPlay and HD Radio are infringing.

StratusAudio also sued Volkswagen, Volvo, Subaru, and Mazda in the Western District of Texas in separate lawsuits filed on the same day.  Volkswagen contested venue and later filed a mandamus petition with the Federal Circuit on the grounds that Judge Albright has not yet ruled on its venue motion.  The Federal Circuit denied that petition, finding that Judge Albright’s standing order that venue motions in patent cases in his court will be decided before the Markman Hearing was sufficient. All of these cases are set for a Markman Hearing next week on September 27, just over nine months after the cases were filed.

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Meaning of “Regular and Established Place of Business”

Defendant Hyundai is a California corporation with a principal place of business in Fountain Valley, California.  Texas law prohibits manufacturers from selling directly to consumers, and thus, authorized dealers must sell Hyundai’s vehicles.  However, Hyundai does not have its own physical place of business in the Western District.  After the TC Heartland decision, venue in a patent case is proper:  “(1) where the defendant resides, or (2) where the defendant (a) has committed acts of infringement and (b) has a regular and established place of business.” Under the first prong, the Supreme Court held that “a domestic corporation ‘resides’ only in its State of incorporation for purposes of the patent venue statute.” Under the second prong, the Federal Circuit has found that “a regular and established place of business” requires the following: “(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.”

Regarding the first requirement, a “place” refers to a “‘building or a part of a building set apart for any purpose’ or ‘quarters of any kind’ from which business is conducted.” Regarding the second requirement, “regular” means that the business must operate in a “‘steady, uniform, orderly, and methodical’ manner,” and “sporadic activity cannot create venue.” As to the third requirement, the place cannot be solely a place of the defendant’s employee, but rather, “the defendant must establish or ratify the place of business.”  The Federal Circuit has also required that the place of business must have the regular, physical presence of an employee or other agent conducting the defendant’s business.

Hyundai argued that it does not have a place of business in Texas, while StratusAudio alleged that the authorized dealers present in the Western District constituted Hyundai’s place of business. Thus, the dispute centered on whether the authorized dealer’s place of business should be considered Hyundai’s “place” of business.  Or in other words, Judge Albright was tasked with determining whether Hyundai had “ratified” the place of business of the authorized dealers.

In determining whether a place of business has been ratified by a defendant, the Federal Circuit has set forth a number of considerations, including: (1) “whether the defendant owns or leases the place, or exercises other attributes of possession or control over the place”; (2) “whether the defendant conditioned employment on an employee’s continued residence in the district or the storing of materials at a place in the district so that they can be distributed or sold from that place”; (3) whether the defendant has made “representations that it has a place of business in the district”; and (4) “the nature and activity of the alleged place of business of the defendant in the district.”

More recently, the Federal Circuit has identified additional factors relevant to this analysis, including the nature of the defendant’s relationship with its representatives located in the district, and any control exerted over any of them; whether the defendant possesses, owns, leases, or rents the physical location or owns any of the equipment; whether any signage on, about, or relating to the physical location suggests that the space belongs to the defendant; and whether the location was specified by the defendant or whether a third party must get permission from the defendant to move the location outside of the district or to stop working for the defendant.

Hyundai Argues No Control Over Dealerships Means No Regular and Established Place of Business

Hyundai argued that it does not have control over the dealerships because Texas law specifically prohibits auto manufacturers from  “owning, operating, controlling, or acting in the capacity of an auto dealership.” However, Judge Albright found that this provision of the law does not preclude a finding that a manufacturer exercised de facto control over a dealer.  On the contrary, Hyundai controls numerous aspects of the dealerships’ operations through its Dealer Sales & Service Agreement. Examples of the control provided to Hyundai by the Agreement include 1) requirements as to appearance, layout, and equipment of facility 2) inventory requirements, 3) price and manner of payment for vehicles, 4) minimum working capital, 5) control of vehicle prices and terms of sale, 6) terms of warranties provided with vehicle sales, 7) monthly and daily reports of sales, finances, and operations. 8) IT equipment to be used by the dealer, 9) number and type of personnel that the dealer must have on site, 10) required performance reviews of the dealer’s operations and customer satisfaction, and 11) restrictions on whether and to whom the dealer may sell its business.

Judge Albright Says Hyundai Can’t Have Its Cake and Eat It Too

Given the long list of requirements in the Agreement purporting to exert control over the dealer, Judge Albright was not buying Hyundai’s argument that any attempt to exert “control” over the dealer was unenforceable under Texas law:  “But [Hyundai] cannot have its cake and eat it, too. [Hyundai] cannot enter into the Sales & Service Agreement with dealers in this District and try to enforce the Agreement on the one hand, and on the other hand, argue that provisions of the Agreement are unenforceable for venue purposes.”

Also significant in the analysis is that the authorized Hyundai dealers are prohibited from doing business other than at the location specified in the Agreement.  Thus, the dealers are not free to move outside the Western District.  In determining that Hyundai does business through the authorized dealers, Judge Albright reasoned that Hyundai advertises on its website that it is doing business in the Western District through authorized dealers, actually does business at those dealerships by selling its vehicles there, and further provides warranty support in the Western District. Thus, the authorized dealerships in the Western District of Texas had been ratified by Hyundai for venue purposes.

Finally, Judge Albright concluded that the authorized dealers acted as agents for Hyundai.  Hyundai argued that it could not be an agent of the dealers because its agreement with the dealers specifically provides that it is not an agent.  Again, Judge Albright refused to elevate form over substance.  Because of the substantial control exercised by Hyundai over the dealers as well as the consent of both parties that the dealers would act on behalf of Hyundai in conducting various transactions, Judge Albright concluded that the dealers were agents of Hyundai at least for venue purposes.

In conclusion, Judge Albright continues in his efforts to keep patent cases in the Western District of Texas where possible.  Given the rationale provided and the evidence of how Hyundai contractually controls its authorized dealers, it is unlikely this decision will get overturned on appeal if it is appealed.  Most of the attention given to Judge Albright’s decisions on venue by the Federal Circuit have related to refusals to transfer cases not because of improper venue but on the grounds that another forum is “clearly more convenient” based on the location of evidence and witnesses.  The Federal Circuit is not likely to disturb Judge Albright’s ruling here if a mandamus petition is filed as there does not appear to be a plausible argument that he abused his discretion in assessing the facts and applying the law.

 

*Vincent Allen is a partner focusing his practice on intellectual property litigation and management of IP portfolios.  He earned his law degree from Baylor Law School in Waco, where the firm has an office. If you need help with patent litigation or portfolio management in Waco or elsewhere, please give Vincent Allen a call at 972-367-2001 or send an email to allen@cclaw.com.