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US: Authorized automobile dealerships drive discussion on patent venue in the Eastern District of Texas

In May 2017, the Supreme Court tightened the rule for venue over domestic defendants in patent infringement cases finding that, under 28 U.S.C. § 1400(b), venue is proper only “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.” TC Heartland LLC v. Kraft Foods Group Brands LLC (2017). TC Heartland did not explore the meaning of “where the defendant . . . has a regular and established place of business.” As such, U.S. district courts and the U.S. Court of Appeals for the Federal Circuit have since been developing this area of law. For example, the Federal Circuit has clarified that the place of business at issue must be “of the defendant.” In re Cray Inc. (Fed. Cir. 2017).

Nevertheless, district courts disagree over what constitutes a “place of business” in the context of automobile dealerships. In West View Research, the District Court for the Southern District of California concluded that independent automobile dealerships were not a basis for venue over domestic defendant BMW of North America, LLC (“BMWNA”). West View Research, LLC v. BMW of North Am., LLC et al. (S.D. Cal. Feb. 5, 2018). More recently in Blitzsafe, Judge Gilstrap in the Eastern District of Texas reached the opposite conclusion regarding BMWNA, finding that it “conducts its own business through the dealerships” via the exclusive distribution of new BMW automobiles and the provision of new purchase warranties and service. Blitzsafe Texas, LLC v. Bayerische Motoren Werke AG, et al. (E.D. Tex. Sept. 6, 2018).

Case Background

Blitzsafe alleges that Bayerische Motoren Werke AG (“BMWAG”) and BMW North America, LLC (“BMWNA”) infringe certain patents related to audio and multimedia integration systems in BMW automobiles. In January 2018, both filed a motion to dismiss for improper venue. The Court found that venue was proper over BMWAG as a foreign defendant under 28 U.S.C. §1391. Regarding the domestic defendant, BMWNA, the court focused its analysis on whether the independent automobile dealerships were BMWNA places of business.

Court: BMWNA “Adopts and Ratifies” the Dealerships as BMWNA Places of Business

BMWNA argued that the dealerships are independently owned and operated and that BMWNA is in fact prohibited from owning and operating such dealerships under Texas law. BMWNA also argued that its marketing campaign is “nationwide” and that it “does not have any unique contacts with Texas as compared to any other state.” Despite those assertions, Judge Gilstrap concluded that the dealerships were BMWNA’s places of business under Section 1400(b) for two independent reasons: the exclusive sale and distribution of new BMW automobiles and the provision and service of BMW warranties.

The court noted that “BMWNA has undoubtedly adopted and ratified the dealerships within this District as its places of business” for at least four reasons. First, because the authorized dealers are the only entities permitted to sell new BMW automobiles in Texas, venue is proper under Section 1400(b). Second, the “dealerships are named “BMW” . . . and referred to by BMWNA as ‘BMW Centers.’” Third, the dealerships display the BMW logo without any reservations such as “authorized dealer” or “exclusive distributor.” Fourth, the BMW website “represents [that] the dealerships . . . are places of BMWNA with respect to the purchase of new BMWs” in that a customer could search for a new vehicle, schedule a test drive, contact a BMW Center, obtain a quote, customize their own car, or place an order – and all of those tasks could be routed to a dealership in the Eastern District of Texas. Moreover, “BMWNA ratifies the BMW Centers in this District as places of its business, going so far as to solicit orders on its own website for its BMW Centers.” Thus, Judge Gilstrap concluded that the sale and distribution of BMW automobiles through the independent dealerships satisfied the venue requirements of Section 1400(b).

Turning to the second basis for its holding, the court found that “[s]eparate and distinct from the sale and distribution of BMW vehicles through dealerships within the District, BMWNA’s provisioning of warranty service to new BMW and Mini customers through such dealerships makes venue in this District proper under § 1400(b).” The court reasoned that “the warranty purchased by the BMW purchaser is the warranty of BMWNA, not its affiliated BMW dealer,” in part because BMWNA develops the warranty, acts as the warrantor, and makes decisions as to whether to cover certain losses under the warranty. In addition, the court noted it was “of interest” that under the Texas Occupations Code, the state considers BMWNA to be engaged in business in Texas through “directly or indirectly reimburse[ing] another person to perform warranty repair services on a vehicle.”

Distinguishing West View Research: Lack of Control Over Independent Dealerships Not Dispositive

Judge Gilstrap sought to distinguish the holding in West View Research in a number of ways. First, he noted the West View court did not address BMWNA’s provision of warranties and service through the dealerships. Second, he found that the West View court focused on BMWNA’s lack of “control” over the dealerships and not on the business interactions between BMWNA and the dealership, upon which he relied. He explained that “in conducting its business through the dealerships, either in provisioning warranties and subsequent service or through the distribution and sale of automobiles, BMWNA ratifies the dealerships as to that business and the dealerships constitute places ‘of the defendant’ for those select business purposes . . . the business of BMWNA in Texas is necessarily done by and through its BMW Centers.” Thus, in Judge Gilstrap’s view, lack of control over the independent dealers was not dispositive on whether the dealers’ locations were BMWNA’s places of business.

The Court’s Conclusion and Potential Next Steps

Judge Gilstrap ultimately found that BMWNA “conducts its own business through the dealerships” via the exclusive distribution of new BMW automobiles and the provision of new purchase warranties and service and that either of those activities was sufficient to make the dealerships BMWNA’s places of business for purposes of Section 1400(b). While the court contrasted that case from “a situation where a generic retailer independently acquires and sells goods to consumers,” the question remains whether application of the same reasoning would subject other similarly-situated domestic defendants to the type of nationwide patent venue that the Supreme Court disagreed with in TC Heartland.

Given the developing nature of this area of patent venue law – and in particular the apparent conflict between Blitzsafe and West View Research – this issue may soon be before the Federal Circuit, potentially through an expedited approach such as a writ of mandamus.