State v. Aktiengesellschaft

• Decision Date: 03 December 2018
• Docket Number: A18-0544
• Parties: State of Minnesota, by its Attorney General, Lori Swanson, et al., Respondents, v. Volkswagen Aktiengesellschaft d/b/a Volkswagen Group and/or Volkswagen AG; et al., Appellants, Audi AG; et al., Defendants.
• Court: Minnesota Court of Appeals

State of Minnesota, by its Attorney General, Lori Swanson, et al., Respondents, v. Volkswagen Aktiengesellschaft d/b/a Volkswagen Groupand/or Volkswagen AG; et al., Appellants,Audi AG; et al., Defendants.

A18-0544

STATE OF MINNESOTA IN COURT OF APPEALS

December 3, 2018

This opinion will be unpublished and may not be cited except as provided by Minn. Stat. § 480A.08, subd. 3 (2016).

Affirmed in part and reversed in part

Reilly, Judge

Concurring in part, dissenting in part, Smith, Tracy M., Judge

Hennepin County District Court

File No. 27-CV-16-17753

Lori Swanson, Minnesota Attorney General, Alan I. Gilbert, Solicitor General, Katherine T. Kelly, Jason Pleggenkuhle, Assistant Attorneys General, St. Paul, Minnesota (for respondents)

Mickey W. Greene, Mary E. Bolkcom, Hanson Bolkcom Law Group, Ltd., Minneapolis, Minnesota; and

David M. J. Rein (pro hac vice), Sullivan & Cromwell LLP, New York, New York (for appellants)

Considered and decided by Tracy M. Smith, Presiding Judge; Reilly, Judge; and Rodenberg, Judge.

UNPUBLISHED OPINION

REILLY, Judge

Appellant car manufacturer Volkswagen Aktiengesellschaft d/b/a Volkswagen Group and/or Volkswagen AG (Volkswagen), challenges a district court decision partially denying a motion to dismiss the State of Minnesota's environmental-protection claims. Volkswagen asserts that (1) the state lacks specific personal jurisdiction over the company, and (2) the state's claims are preempted by federal law. We determine that the state has personal jurisdiction over Volkswagen. However, because the state's claims are preempted by federal law, we reverse.

FACTS

This appeal concerns the use of "defeat devices" designed and controlled by Volkswagen and installed in vehicles driven throughout the United States, including within the state of Minnesota. In May 2006, Volkswagen developed for sale in the United States a line of environmentally friendly diesel-engine vehicles delivering fuel efficiency, high performance, and low emissions of nitrogen oxides (NOx). See generally In re Volkswagen "Clean Diesel" Mktg., Sales Practices, & Prod. Liab. Litig., 264 F. Supp. 3d 1040, 1042-44 (N.D. Cal. 2017) (Wyoming) (providing relevant factual background in federal action initiated by states, including Wyoming, on Volkswagen's use of software in certain diesel engine vehicles to mask true emission levels in violation of federal law). NOx is a generic term for a group of nitrogen-based compounds produced by the combustion engines of motor vehicles, among other sources. Exposure to NOx has been linked with health and environmental dangers. The emission of high levels of NOx is recognized as a particularproblem for diesel engines, prompting Volkswagen to design a line of environmentally friendly diesel vehicles.

During the design process, Volkswagen faced numerous challenges in attempting to engineer diesel engines that did not generate excessive NOx and soot. But instead of altering the design of its vehicles, Volkswagen developed technology that activates the vehicle's air pollution control systems when it detects that the vehicle is being tested during emissions testing, making it appear that the vehicle complies with federal emission standards. This technology is known as a "defeat device" and is defined as an auxiliary emission control device (AECD) "that reduces the effectiveness of the emission control system under conditions which may reasonably be expected to be encountered in normal vehicle operation and use." Wyoming, 264 F. Supp. 3d at 1042-43 (quoting 40 C.F.R. § 86.1803-01). Defeat devices are prohibited in all new passenger vehicles under federal law. Id. at 1043. The defeat device activates or increases the effectiveness of the vehicle's emissions controls when the device detects that the vehicle is being tested under laboratory conditions, but deactivates the vehicle's air pollution control systems when the vehicle is operated under normal driving conditions.

In September 2015, Volkswagen publicly admitted using illegal technology to tamper with the air pollution control systems in certain vehicles sold in the United States from 2008 to 2015. A number of states filed state-court actions against Volkswagen based on the operation of the "clean diesel" vehicles in their respective jurisdictions. Id. at 1042. In addition, counties in Florida and in Utah filed tampering claims against Volkswagen in federal court alleging that Volkswagen "perhaps even added new defeat devices, throughsoftware updates during vehicle maintenance and post-sale recalls." In re Volkswagen "Clean Diesel" Mktg., Sales Practices, & Prod. Liab. Litig., 310 F. Supp. 3d 1030, 1032 (N.D. Cal. 2018) (Counties). The federal-court cases against Volkswagen were consolidated in the United States District Court for the Northern District of California as part of a multidistrict litigation (the MDL) before United States District Judge Charles Breyer. Wyoming, 264 F. Supp. 3d at 1044. The State of Minnesota is not a party to the MDL.

In December 2016, Minnesota initiated this environmental-protection action in state court against Volkswagen for violations of Minnesota's motor vehicle air pollution control systems law, Minn. Stat. § 325E.0951 (2014), and the Minnesota Pollution Control Agency's air pollution control systems restrictions rule, Minn. R. 7023.0120 (2014). The complaint alleged that Volkswagen "knowingly designed and installed the illegal devices, known as 'defeat devices,' in all of its 2.0- and 3.0-liter [vehicles] sold and leased in the United States, including in Minnesota, from 2008 through 2015." Volkswagen removed the matter to the MDL, but the case was remanded back to state court on the ground that the state's claims did not necessarily raise a substantial and disputed federal question. See In re Volkswagen "Clean Diesel" Mktg., Sales Practices, & Prod. Liab. Litig., MDL No. 2672 CRB (JSC), 2017 WL 2258757, at *1 (N.D. Cal. May 23, 2017). Minnesota filed a first amended complaint in June 2017, and a second amended complaint in September 2017, asserting that Volkswagen's post-sale tampering software violated Minnesota's tampering laws under Minn. Stat. § 325E.0951, subd. 2(a), and Minn. R. 7023.0120.

In addition to the civil lawsuits filed by various states and counties, the United States Department of Justice (the DOJ) filed a criminal indictment against Volkswagen. Wyoming, 264 F. Supp. 3d at 1044. In January 2017, Volkswagen executed a partial consent decree with the DOJ, admitting that software in certain of its vehicles "enables the vehicles' engine control modules to detect when the vehicles are being driven on the road, rather than undergoing Federal Test procedures, and that this software renders certain emission control systems in the vehicles inoperative . . . when the vehicles are driven on the road." Volkswagen admitted installing this software in both new and used vehicles. Volkswagen entered a plea of guilty to three felony counts in March 2017, including conspiracy to defraud the United States and to violate the Clean Air Act (the CAA) by making false statements and representations to the Environmental Protection Agency (the EPA) in violation of federal law. Id. The agreement resolved the federal government's claims that Volkswagen knowingly installed software functions in the vehicles after they had been sold to the end-user. As part of the plea agreement and the EPA consent decree, Volkswagen agreed to pay $4.3 billion in civil and criminal penalties, invest in zero-emission vehicle technology, recall or repair affected vehicles, and contribute to an emissions mitigation trust. Id. The trust is "expected to fully mitigate the environmental harm caused by Volkswagen's emissions scheme." Id.

In August 2017, the MDL court issued a ruling granting Volkswagen's motion to dismiss Wyoming's claims as preempted by the CAA and dismissed the complaint. Id. at 1057. The court concluded that Wyoming's attempt to "enforce [a] standard relating to thecontrol of emissions from new motor vehicles" was expressly preempted by section 209(a) of the CAA. Id. at 1052, 1054, 1057 (citing 42 U.S.C. § 7543(a)).

Following this decision in the MDL, Volkswagen moved to dismiss this action on the grounds that the claims are expressly and impliedly preempted under the CAA, and that the state lacks personal jurisdiction over the company. The district court partially granted relief in March 2018. The district court (1) granted Volkswagen's motion to dismiss the state's claim related to the installation of defeat devices in new vehicles, (2) denied Volkswagen's motion to dismiss the claim related to the installation of "improved" defeat technology in "in use" vehicles during maintenance, (3) dismissed claims against Audi Ag, Dr. Ing. H.C.F. Porsche Ag D/B/A Porsche Ag, and Porsche Cars North America, Inc., and (4) denied Volkswagen's motion to dismiss for lack of jurisdiction. Relying on Wyoming, the district court determined that federal law preempted the state's claims related to the installation of defeat devices in new vehicles, but did not preclude the state's claim related to the installation of defeat devices in used vehicles. The district court also ruled that Volkswagen was subject to personal jurisdiction because it oversaw sales and marketing efforts in Minnesota, transacted business through ten Volkswagen-specific dealerships in Minnesota, and instructed its Minnesota-based affiliates to install new defeat devices in used vehicles brought in for maintenance.

Approximately one month later, the MDL court issued a ruling on the tampering claims brought by the Florida and Utah counties regarding the post-sale modification of software in used vehicles. Counties, 310 F. Supp. 3d at 1030. The federal court ruled thatthe counties' tampering claims regarding software updates to used vehicles were preempted by federal law, and dismissed the case. Id. at 1047, 1049-50.

Volkswagen now appeals the March 2018 decision in this action...