Case 6:20-cv-01125-ADA Document 60 Filed 09/17/21 Page 1 of 12
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`IN THE UNITED STATES DISTRICT COURT
`FOR THE WESTERN DISTRICT OF TEXAS
`WACO DIVISION
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`STRATOSAUDIO, INC.,
`Plaintiff,
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`v.
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`HYUNDAI MOTOR AMERICA
`Defendant.
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`§
`§
`§
`§
`§
`§
`§
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`6:20-CV-01125-ADA
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`MEMORANDUM OPINION AND ORDER
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`Before the Court is Defendant Hyundai Motor America’s (“HMA” or “Hyundai”) Rule
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`12(b)(3) Motion to Dismiss for improper venue pursuant to 28 U.S.C. §§ 1400(b), 1406. Dkt. 12.
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`After careful consideration of the relevant facts, applicable law, and the parties’ oral arguments,
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`the Court DENIES HMA’s Motion.
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`I.
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`BACKGROUND
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`Plaintiff StratosAudio, Inc. (“StratosAudio”) filed this action against HMA on December
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`11, 2020, asserting infringement of seven patents by HMA’s vehicles with certain infotainment
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`systems. Dkt. 1. On February 22, 2021, HMA moved to dismiss the action for improper venue
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`under Rule 12(b)(3). Dkt. 12. HMA is a California corporation with its principal place of business
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`in Fountain Valley, California. Dkt. 1 at 2, ¶ 7. HMA may be served through its registered agent
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`for service in the State of Texas and has been registered to do business in the State of Texas since
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`at least May 13, 1986. Id.
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`For propriety of venue, Plaintiff alleges the following: HMA distributes new automobiles
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`in this judicial district exclusively through its five authorized HMA dealerships in this District. Id.
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`at 3, ¶ 10; Dkt. 21 at 3. All authorized HMA dealerships in this District are named with the
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`“Hyundai” designation and prominently display Hyundai trademarks and use the Hyundai trade
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`StratosAudio Exhibit 2007
`Hyundai v. StratosAudio
`IPR2021-01267
`Page 1 of 12
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`name. Dkt. 1 at 3, ¶ 11. HMA dealerships in this District are displayed on HMA’s website as places
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`of Hyundai, where users can locate the Hyundai dealerships, check available inventory, and
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`schedule a test drive. Id. at ¶ 12. HMA provides new purchase warranties and warranty service and
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`repairs through its authorized dealerships. Id. at 4, ¶ 13. HMA also directly controls various aspects
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`of its dealerships’ operations, including the sale of automobiles, training service technicians
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`through its Car Care Express program, and offering financing through Hyundai Motor Finance. Id.
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`at ¶ 14. HMA further controls the sale or ownership transfer of its authorized dealers, including
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`the right to refuse transfer and the operating location of the dealers. Id.
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`II. LEGAL STANDRD
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`Federal Rule of Civil Procedure 12(b)(3) allows a party to move to dismiss an action for
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`“improper venue.” FED. R. CIV. P. 12(b)(3). 12 U.S.C. § 1440(b) is the “sole and exclusive
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`provision controlling venue in patent infringement actions.” TC Heartland LLC v. Kraft Foods
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`Group Brands LLC, 137 S. Ct. 1514, 1519 (2017). “Whether venue is proper under § 1400(b) is
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`an issue unique to patent law and is governed by Federal Circuit law,” rather than regional circuit
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`law. In re ZTE (USA) Inc., 890 F.3d 1008, 1012 (Fed. Cir. 2018). “[U]pon motion by the Defendant
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`challenging venue in a patent case, the Plaintiff bears the burden of establishing proper venue.” Id.
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`at 1013–14. Plaintiff may carry this burden by establishing facts that, if taken to be true, establish
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`proper venue. Castaneda v. Bradzoil, Inc., No. 1:20-CV-1039-RP, 2021 WL 1390423, at *1 (W.D.
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`Tex. Apr. 13, 2021). “On a Rule 12(b)(3) motion to dismiss for improper venue, the court must
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`accept as true all allegations in the complaint and resolve all conflicts in favor of the plaintiff.” Id.
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`(citing Braspetro Oil Servs. Co. v. Modec (USA), Inc., 240 F.App’x 612, 615 (5th Cir. 2007) (per
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`curiam)). In determining whether venue is proper, “the Court may look beyond the complaint to
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`StratosAudio Exhibit 2007
`Hyundai v. StratosAudio
`IPR2021-01267
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`evidence submitted by the parties.” Ambraco, Inc. v. Bossclib, B.V., 570 F.3d 233, 237–38 (5th
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`Cir. 2009).
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`Section 1400(b) provides that venue in patent cases is proper “[1] where the defendant
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`resides, or [2] where the defendant [a] has committed acts of infringement and [b] has a regular
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`and established place of business.” 28 U.S.C. § 1400(b). Under the first prong, the Supreme Court
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`has held that “a domestic corporation ‘resides’ only in its State of incorporation for purposes of
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`the patent venue statute.” TC Heartland, 137 S. Ct. at 1517. Under the second prong, the Federal
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`Circuit interpreted, in In re Cray Inc., 871 F.3d 1355 (Fed. Cir. 2017), “regular and established
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`place of business” to impose three general requirements: “(1) there must be a physical place in the
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`district; (2) it must be a regular and established place of business; and (3) it must be the place of
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`the defendant.” Id. at 1360. Regarding the first requirement, a “place” refers to a “‘building or a
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`part of a building set apart for any purpose’ or ‘quarters of any kind’ from which business is
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`conducted.” Id. at 1362 (citations omitted). Regarding the second requirement, “regular” means
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`that the business must operate in a “‘steady, uniform, orderly, and methodical’ manner,” and
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`“sporadic activity cannot create venue.” Id. (citations omitted). And the third requirement means
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`that the place cannot be solely a place of the defendant’s employee – “the defendant must establish
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`or ratify the place of business.” Id. at 1363.
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`Subsequently, in In re Google LLC, 949 F.3d 1338 (Fed. Cir. 2020), the Federal Circuit
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`added a fourth requirement: “a ‘regular and established place of business’ requires the regular,
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`physical presence of an employee or other agent of the defendant conducting the defendant’s
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`business at the alleged ‘place of business.’”1 Id. at 1345.
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`1 In Google, Federal Circuit considered this requirement as part of the second Cray factor. In re Google
`LLC, 949 F.3d 1338, 1344 (Fed. Cir. 2020) (“We agree . . . that under the second Cray factor, a ‘place of
`business’ generally requires an employee or agent of the defendant to be conducting business at that
`place.”). However, this Google requirement is essentially a different requirement than the original second
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`StratosAudio Exhibit 2007
`Hyundai v. StratosAudio
`IPR2021-01267
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`III. DISCUSSIION
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`The main dispute before the Court is whether Defendant HMA has “a regular and
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`established place of business” in this District. The parties do not dispute that defendant HMA does
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`not “reside” in this District and therefore the first prong of Section 1400(b) does not apply. Under
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`the second prong, the parties do not dispute that Plaintiff has plausibly pled that “defendant has
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`committed acts of infringement” and the parties also do not dispute that the dealerships are
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`“physical places” in this District and are “regular and established” under the first and second Cray
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`requirements. Therefore, the Court discusses below whether the third and fourth requirements are
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`met in this case to establish proper venue in this District.
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`A.
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`Ratification
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`Under the third Cray requirement, a plaintiff must show that the place of business at issue
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`is “the place of the defendant.” In re Cray, 871 F.3d at 1360. To meet this requirement, “the
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`defendant must establish or ratify the place of business.” Id. at 1363. There is no bright-line rule
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`for this inquiry. Id. at 1362 (“In deciding whether a defendant has a regular and established place
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`of business in a district, no precise rule has been laid down and each case depends on its own
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`facts.”). The Federal Circuit set forth a number of considerations to determine whether the
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`defendant has ratified the place of business, including: (1) “whether the defendant owns or leases
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`the place, or exercises other attributes of possession or control over the place”; (2) “whether the
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`defendant conditioned employment on an employee’s continued residence in the district or the
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`storing of materials at a place in the district so that they can be distributed or sold from that place”;
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`(3) whether the defendant has made “representations that it has a place of business in the district”;
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`and (4) “the nature and activity of the alleged place of business of the defendant in the district in
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`Cray requirement, which places more focus on the phrase “regular and established.” Therefore, this Court
`treats the Google requirement as a fourth requirement in addition to the three Cray requirements.
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`StratosAudio Exhibit 2007
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`comparison with that of other places of business of the defendant in other venues.” Id. at 1363-64.
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`These considerations are not exhaustive but are more illustrative in nature. Blitzsafe Texas, LLC v.
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`Bayerische Motoren Werke AG, No. 2:17-CV-00418-JRG, 2018 WL 4849345, at *6 (E.D. Tex.
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`Sept. 6, 2018).
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`More recently, the Federal Circuit found additional factors relevant to this analysis,
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`including: “the nature of [the defendant’s] relationship with [its] representatives [in the District],
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`or whether it has any other form of control over any of them”; “whether [the defendant] possesses,
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`owns, leases, or rents the [facility] . . . or owns any of the equipment located there”; “whether any
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`signage on, about, or relating to the [facility] associates the space as belonging to [the defendant]”;
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`and “whether the location of the [facility] was specified by the defendant or whether [a third party]
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`would need permission from the defendant to move [the facility] outside of the . . . District or to
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`stop working for [the defendant].” In re ZTE (USA) Inc., 890 F.3d 1008, 1015–16 (Fed. Cir. 2018).
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`1. Defendant exercises control over the dealerships’ places in this District.
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`HMA argues that it does not exercise any control over its dealerships in this District
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`because the Texas Occupation Code “specifically prohibits auto manufactures and distributors
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`from owning, operating, controlling, or acting in the capacity of an auto dealership.” Dkt. 12 at 4–
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`5; Tex. Occ. Code § 2301.476(c) (“[A] manufacturer or distributor may not directly or indirectly .
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`. . operate or control . . . a franchised dealer or dealership.”). However, this does not mean that
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`HMA does not exercise de facto control of the dealerships to some degree, nor does it mean that
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`the dealerships are not places of HMA as a matter of law. See, e.g., Blitzsafe, 2018 WL 4849345,
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`at *7.
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`As Plaintiff points out, HMA controls numerous aspects of the dealerships’ operations
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`through the Hyundai Dealer Sales & Service Agreement. Dkt. 21 at 6-12. HMA’s alleged control
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`StratosAudio Exhibit 2007
`Hyundai v. StratosAudio
`IPR2021-01267
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`over its dealers include: (1) the dealers’ premises and facilities (“DEALER agrees that all of its
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`facilities will be satisfactory as to space, appearance, amenities, layout, equipment, and signage
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`and will at all times be in accordance with HMA’s minimum facilities standards, as amended from
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`time to time.”); (2) the dealers’ inventory (“DEALER agrees . . . that it will, at all times, maintain
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`at least the minimum inventory of Hyundai Motor Vehicles requested by HMA”; “Dealer shall not
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`move or permit to be moved any Inventory from the Premises without the prior written consent of
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`Lender.”); (3) the price and manner of payment (“DEALER agrees to pay for Hyundai Products
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`pursuant to such procedures as HMA may designate from time to time. . . . DEALER will make
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`arrangements with its designated financial institution to accommodate the use of such systems.”);
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`(4) the dealers’ minimum net working capital amount (“DEALER agrees to establish and maintain
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`actual net working capital in an amount not less than the minimum net working capital . . . . If
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`HMA determines, in its sole discretion, that changed circumstances require it to adjust the net
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`working capital requirement hereunder, DEALER agrees to revise its minimum net working
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`capital to be used in the dealership’s operation accordingly.”); (5) the price and the terms upon
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`which dealers purchase HMP vehicles and maintenance service (“HMA reserves the right, without
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`prior notice to DEALER, to establish and revise prices and other terms of sale for all Hyundai
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`Products sold to DEALER under this Agreement.”); (6) the terms and scope of warranties to be
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`included in its vehicle sales (“DEALER is free to sell warranty or service contract protection for
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`Hyundai Motor Vehicles which is different from and independent of HMA’s warranties . . .
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`however, DEALER agrees that if it elects to sells such independent warranties . . . DEALER will
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`conspicuously disclose in writing upon the Customer’s purchase order the extent to which the
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`independent warranty or service contract protection purchased by the Customer overlaps that
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`provided by HMA.”); (7) monthly or even daily reporting of finances and operations by each dealer
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`(“Dealer shall provide to [HMA] (A) Dealer’s monthly factory/distributor financial statements . .
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`. (B) . . . Dealer’s adjusted calendar year-end factory/distributor financial statements …(C ) …
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`Dealer’s balance sheet as at the end of each fiscal year …, in each case reviewed by an independent
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`certified public accountant acceptable to [HMA]…, and (D) Dealer’s corporate tax returns for each
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`calendar year”; “DEALER agrees to … [a]ccurately report to HMA, with such relevant
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`information as HMA may reasonably require, the delivery of each new motor vehicle to a
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`purchaser by the end of the day in which is the vehicle is delivered to the purchaser thereof.”); (8)
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`the IT equipment such as computers and data processing systems that its dealers must use and
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`maintain (“Dealer shall provide [HMA] or its designee full access to Dealer’s computer systems
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`and take such other action as may be requested by [HMA.]”); (9) the number of personnel that its
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`dealers must have on-site and their certifications and training (“DEALER agrees to establish and
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`maintain a complete service and parts organization, including a service manager, a parts manager
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`and a sufficient number of Customer relations, service and parts personnel who meet such
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`educational, management, technical training and competency standards as HMA may establish or
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`approve.”); (10) performance reviews on the dealers’ sales, service, and parts, customer
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`satisfaction, and even the dealer’s maintenance of its premises and facilities; and (11) restricting
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`whether and to whom a dealer may sell or transfer its business (“[A]ny change in ownership,
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`regardless of the share or relationship between parties, or any change in General Manager, from
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`the person(s) identified herein, requires the prior written consent of HMA;” “Dealer shall not
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`change its type of organization, jurisdiction of organization or other legal structure except with the
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`prior written consent of [HMA.]”). Dkt. 21 at 6–21.
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`This Court is not persuaded by HMA’s argument that Texas law deters HMA’s exercise
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`of control over its dealerships. As explained above, HMA boasts a broad scope of control over its
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`IPR2021-01267
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`dealerships. Requiring dealerships to send daily reports to HMA is just one of many examples of
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`its extensive control. Nevertheless, HMA argues that “[i]f any contractual term constituted
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`‘control,’ then the provision would be illegal and would therefore be unenforceable.” Dkt. 24 at
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`7. But HMA cannot have its cake and eat it, too. HMA cannot enter into the Sales & Service
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`Agreement with dealers in this District and try to enforce the Agreement on the one hand, and on
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`the other hand argue that provisions of the Agreement are unenforceable for venue purposes.
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`2. Defendant’s relationship with the dealerships is conditioned on the dealerships’
`continued presence in this District.
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`As HMA points out, under Texas law, HMA is not permitted to directly sell vehicles to
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`consumers in this District. Dkt. 12 at 4; Tex. Occ. Code § 2301.476(c) (“[A] manufacturer or
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`distributor may not directly or indirectly . . . act in the capacity of a franchised or nonfranchised
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`dealer.”). Therefore, the only way that HMA can sell its vehicles to consumers in this District is
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`through authorized dealerships that it currently has in the District. As Plaintiff alleges, new
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`Hyundai vehicles are available for purchase exclusively through these authorized dealers. Dkt. 21
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`at 3. Thus, it is not surprising that HMA imposed stringent restrictions on the locations and
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`ownership transfer of its authorized dealership in this District: “DEALER agrees not to display
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`Hyundai marks or to conduct any dealership operations . . . at any location other than the location(s)
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`approved herein, without the prior written consent of HMA”; and “[A]ny change in ownership,
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`regardless of the share or relationship between parties, or any change in General Manager, from
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`the person(s) identified herein, requires the prior written consent of HMA.” See id. at 5 and 12.
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`3. Defendant represents to the public that it has a place of business in this District.
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`Under this factor, “[p]otentially relevant inquiries include whether the defendant lists the
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`alleged place of business on a website, or in a telephone or other directory; or places its name on
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`IPR2021-01267
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`a sign associated with or on the building itself.” In re Cray, 871 F.3d at 1363–64. “But the mere
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`fact that a defendant has advertised that it has a place of business or has even set up an office is
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`not sufficient; the defendant must actually engage in business from that location.” Id. at 1364.
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`“Marketing or advertisements also may be relevant, but only to the extent they indicate that the
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`defendant itself holds out a place for its business.” Id. at 1363.
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`HMA represents to the public that it has a place of business in the Western District of
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`Texas. When a user searches for Hyundai dealerships in the District, HMA’s website displays a
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`list of its authorized dealerships, allows the user to search for these dealerships’ inventory, and
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`gives the user an opportunity to schedule a test drive. Dkt. 21 at 4. HMA also allows all its
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`dealerships in this District to display the “Hyundai” logo and use its Hyundai trademarks and
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`tradenames. Id. at 3.
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`In fact, HMA actually engages in business from the locations of its dealerships in this
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`District. First, HMA conducts business in this District by distributing Hyundai vehicles to its
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`authorized dealers. Second, and more importantly, HMA provides new purchase warranties to
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`consumers at the dealerships in this District. Dkt. 1, ¶ 13; Dkt. 21 at 9. HMA contends that the
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`warranty services are performed by independent dealerships selected by vehicle owners. Dkt. 12
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`at 11. However, HMA does not deny that it pays for the warranty services. Under Texas law, that
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`means HMA engages business in the state. Tex. Occ. Code § 2301.251(c) (“A manufacturer or
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`distributor that directly or indirectly reimburses another person to perform warranty repair services
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`on a vehicle is engaged in business in this state regardless of whether the manufacturer sells or
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`offers for sale new motor vehicles in this state.”).
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`IPR2021-01267
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`In view of the above, the Court finds that HMA ratifies the places of business of its
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`authorized dealerships in this District and those dealerships are therefore “place[s] of the
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`defendant” under the third Cray requirements.
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`B.
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`Agents Conducting Defendant’s Business in this District
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`In In re Google, the Federal Circuit also ruled that “a ‘regular and established place of
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`business’ requires the regular, physical presence of an employee or other agent of the defendant
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`conducting the defendant’s business at the alleged ‘place of business.’” In re Google, 949 F.3d at
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`1345.
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`1.
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`The authorized dealers are HMA’s agents.
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`“An agency relationship is a ‘fiduciary relationship that arises when one person (a
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`‘principal’) manifests assent to another person (an ‘agent’) that the agent shall act on the principal’s
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`behalf and subject to the principal’s control, and the agent manifests assent or otherwise consents
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`to act.’” Id. at 1345 (citing Restatement (Third) of Agency § 1.01). “The essential elements of
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`agency are (1) the principal’s right to direct or control the agent’s actions, (2) the manifestation of
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`consent by the principal to the agent that the agent shall act on his behalf, and (3) the consent by
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`the agent to act.” Id. (citing Meyer v. Holley, 537 U.S. 280, 286 (2003)) (internal quotation marks
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`omitted).
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`HMA argues that the dealerships are not HMA’s agents because the agreement explicitly
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`specifies that “[t]his Agreement does not make DEALER the agent or legal representative of HMA
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`. . . for any purpose whatsoever.” Dkt. 42 at 1. Again, it is the substance of the agreement that
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`controls, rather than the label the parties assign to their purported relationship. See, e.g., In re
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`MyFord Touch Consumer Litig., 46 F. Supp. 3d 936, 956 (N.D. Cal. 2014) (agency is a fact-
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`dependent relationship). “While cases generally find that dealership agreements do not create
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`general principal-agent relationships, it is not—as a matter of law—impossible to find a specific
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`agency relationship as to matters subject to manufacturer control.” Stevens v. Ford Motor Co.,
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`2020 U.S. Dist. LEXIS 256298, *17 (S.D. Tex. Nov. 2, 2020).
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`As discussed above, HMA exercises a broad scope of control over its authorized
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`dealerships in this District through their agreements. Among others, HMA requires daily reports
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`regarding sales and deliveries from the dealerships, restricts the locations and ownership transfers
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`of the dealerships, and provides warranty services to consumers through the dealers. Taken
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`together, HMA has a substantial control over its dealerships. Further, the agreements between
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`HMA and its dealerships clearly show that there is manifestation of consent by HMA to the
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`dealerships that the dealerships shall act on HMA’s behalf, and the consent by the dealerships to
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`act. Therefore, the Court finds that Hyundai authorized dealerships in this District are agents of
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`HMA at least for venue purposes. In fact, it is not uncommon for a district court to find a principal-
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`agency relationship between an auto manufacturer and its dealers. For example, the District of
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`New Jersey found that “the dealer acted as BMWNA’s agent, or at least that the two acted
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`together.” Morano v. BMW of N. Am., LLC, 928 F. Supp. 2d 826, 837-38 (D.N.J. 2013); see also
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`Kent v. Celozzi-Ettleson Chevrolet, Inc., No. 99 C 2868, 1999 WL 1021044, at *4 (N.D. Ill. Nov.
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`3, 1999) (“While it is certainly true that the mere fact that Celozzi–Ettleson is an authorized
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`General Motors dealer does not make it General Motors’ agent, it is equally true that an automobile
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`dealership may under certain circumstances be an agent of the manufacturer.”). Particularly, the
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`Morano court found that “BMWNA and the dealer function as an integrated, two-part seller”
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`because BMWNA makes all of its consumer sales or leases through its authorized dealers and
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`services the vehicles through BMWNA’s Warranty or Maintenance Program, while the dealers
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`handle the mechanics of the sale or lease and the warranty services. Morano, 928 F. Supp. 2d at
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`837-38.
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`2.
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`The authorized dealers conduct HMA’s business.
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`The authorized dealerships are also conducting HMA’s business in this District. HMA is
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`in the business of manufacturing and distributing vehicles to consumers. As explained above, the
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`only way that HMA can distribute its vehicles to consumers in this District is through its authorized
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`dealerships in this District. Further, HMA provides new purchase warranties and services to the
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`consumers through its dealerships.
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`Therefore, the Court finds that the Hyundai dealerships in this District are agents of HMA
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`conducting HMA’s business in this District.
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`IV. CONCLUSION
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`For the reasons above, the Court finds that Defendant has a “regular and established place
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`of business” in the Western District of Texas and venue is proper in this District under Section
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`1400(b). The Court therefore DENIES Defendant’s Motion to Dismiss or Transfer.
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`SIGNED this 17th day of September, 2021.
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`ALAN D ALBRIGHT
`UNITED STATES DISTRICT JUDGE
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