When can a foreign company be haled into Texas court? For many years, the Texas Supreme Court has hewed closely to US Supreme Court precedent when it comes to exercising personal jurisdiction over a party. In a recent decision, however, the Texas Supreme Court has signaled it is open to applying a broader standard, making it easier to bring and keep suit against foreign companies.

On May 5, 2023, the Texas Supreme Court ruled that Texas courts may exercise personal jurisdiction over a foreign entity when that entity controls the means, details, and manner in which an American subsidiary conducts business. Texas v. Volkswagen Aktiengesellschaft and Texas v. Audi Aktiengesellschaft are two Texas cases that emanated from the “dieselgate” scandal in which Volkswagen designed and intentionally installed parts and software in their cars to circumvent emissions standards, so called “defeat devices”. Texas filed suit against VW and Audi for violation of the Texas Clean Air Act and rules issued by the Texas Commission on Environmental Quality.

VW and Audi, both German-based companies, contested the ability of a Texas court to hear the case against them, arguing that the Court lacked personal jurisdiction over them.  Their primary argument was that any contacts with Texas were solely by the distributor and dealerships, not the German parent companies.  Simply put, jurisdiction could not be imputed to VW and Audi.

In finding that Texas courts have personal jurisdiction over VW and Audi, the Texas Supreme Court reasoned that VW and Audi “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.” The Court noted that VW and Audi targeted specific cars in which  it had previously installed defeat devices to have specific software installed to enhance/fix the defeat devices during recall or routine service.  VW and Audi also controlled the way the software would be installed and the information dealerships and consumers would receive about the software.

The Court’s ruling that Texas courts have jurisdiction over VW and Audi was based on a stream-of-commerce-plus theory. Under that theory, because VW and Audi exercised specific control, through its importer agreement, over the recall and service procedures and mechanisms, they “effectively—and knowingly—dropped the tampering software down a chute that guaranteed it would land in Texas”.

While the majority opinion found that Texas courts have jurisdiction over VW and Audi, three justices dissented, finding that the Court’s decision went against established Texas law for two primary reasons. First, the dissent believes the Court improperly relied on VW and Audi, as agents of VW America, having contacts with Texas. Second, the dissent believes that specific availment of Texas is required, not just intent to serve the entire US market. The dissent argues that the majority opinion will adversely affect consumers in Texas because manufacturers, who in the past could avoid jurisdiction by structuring their companies in a certain manner, may now hesitate to issue recalls or after-sale service requirements in order to prevent availing themselves of jurisdiction in Texas.

So, why does this new opinion matter? In the past, foreign companies have been able to structure their companies in such a manner that the companies holding the bulk of the money were not subject to jurisdiction of an individual state. Now the careful structuring of a company may not serve the purpose it has in the past. In fact, with this ruling, if a parent company requires after-sale processes and directs the manner in which they take place, the company structure may provide very little protection as far as jurisdiction is concerned.

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