AUSTIN, Texas (Legal Newsline) - Volkswagen can be sued in Texas over the “dieselgate” scandal even though it is based in Germany and its VW and Audi vehicles are distributed by a New Jersey subsidiary, the Texas Supreme Court ruled, reversing an appellate court decision dismissing the case for lack of personal jurisdiction.
Because VW specifically targeted cars in Texas with updates to the illegal software it used to defeat emissions tests, the high court said, it met the test for allowing Texas courts to exercise jurisdiction over it. VW argued any contacts with the state were through its distributor and independent dealers and it didn’t target Texas specifically, since the same software was used across the U.S.
The Texas Supreme Court rejected that theory, saying VW “purposely structured their relationships with the distributor and dealerships to retain control over after-sale recalls and repairs and then used that control to tamper with vehicles in Texas after the initial sale to consumers.” Unlike other software updates, which consumers can initiate on their own, the court said, VW initiated the process in Texas.
"We agree with the three dissenters on the Texas Supreme Court that Texas courts do not have personal jurisdiction over these German companies and intend to petition the U.S. Supreme Court to review this case," a spokesperson for Volkswagen said.
"Neither Volkswagen AG nor Audi AG targeted any of the challenged conduct at Texas, and we remain confident in the strength of our factual and legal defenses."
VW of America is incorporated in New Jersey with headquarters in Virginia and is exclusive distributor of VA and Audi vehicles in the U.S. As emissions standards for diesel engines tightened, the manufacturer decided it couldn’t produce a compliant diesel that consumers would buy. It began installing “dual-mode” emissions systems instead in 2009, illegal defeat systems that detected whether a car was being tested or driven normally on the road and adjusting emissions accordingly.
After several years, VW noticed warranty claims were rising and discovered cars were being driven in “test mode” for too long, causing the diesel particulate filter to overheat and crack. To fix the problem, VW issued a voluntary recall where, based on a car’s Vehicle Identification Number or VIN, VW would send out a software fix to the dealer. The fix was designed in Germany synched to VW of America’s computers in Virginia.
More than 23,000 vehicles in Texas received the update. But the scheme unraveled after about eight years and VW ultimately paid a criminal fine of $2.8 billion to the federal government and paid $209 million to Texas plus $1.6 billion to Texas consumers and dealers in a settlement that preserved the right of states and cities to sue for more. Texas did just that, along with several counties in cases that were consolidated into multidistrict litigation.
VW contested personal jurisdiction at the MDL court and when it lost, sought an interlocutory appeal. A divided court of appeals reversed and dismissed claims against the manufacturer, finding that at most, VW “directed recall-tampering conduct toward the United States as a whole, not to Texas specifically.” A dissenting judge said by that logic, a company that targeted every state could be sued in none.
On appeal to the Texas Supreme Court, the only question was whether a Texas court had specific jurisdiction, or jurisdiction arising from an out-of-state company’s deliberate contact with Texas consumers.
“Unlike many personal-jurisdiction disputes in which a nonresident manufacturer has merely placed a product in a stream of commerce that fortuitously carried the product to the forum state, the German manufacturers effectively—and knowingly—dropped the tampering software down a chute that guaranteed it would land in Texas,” the Texas Supreme Court concluded. “The manufacturers developed the product, controlled the distribution stream that brought the product to Texas, and called all the shots.”