Judge: Alison Mackenzie, Case: 25STCV01236, Date: 2025-04-18 Tentative Ruling

Case Number: 25STCV01236    Hearing Date: April 18, 2025    Dept: 55

NATURE OF PROCEEDINGS: Hearing on Defendant’s Motion to Compel Arbitration

Defendant’s Motion to Compel Arbitration is granted.

BACKGROUND

Plaintiff Nelli Ovsepyan (Plaintiff) filed this lemon law action against Mercedes-Benz USA, LLC (Defendant).

The causes of action are: (1)Violation of Subdivision (d) of Civil Code Section 1793.2 2; (2) Violation of Subdivision (b) of Civil Code Section 1793.2; (3) Violation of Subdivision (A)(3) of Civil Code Section 1793.2 (4) Breach of Express Written Warranty (Civ. Code, § 1791.2, Subd. (a); § 1794); (5) Breach of Implied Warranty of Merchantability (Civ. Code, § 1791.1; § 1794); and (6) Violation of Tanner Consumer Protection Act.

Defendant filed a Motion to Compel Arbitration. Plaintiff filed an Opposition.

LEGAL STANDARD

“On petition of a party to an arbitration agreement alleging the existence of a written agreement to arbitrate a controversy and that a party to the agreement refuses to arbitrate that controversy, the court shall order the petitioner and the respondent to arbitrate the controversy if it determines that an agreement to arbitrate the controversy exists….” Code Civ. Proc. § 1281.2. “The party seeking arbitration bears the burden of proving the existence of an arbitration agreement, and the party opposing arbitration bears the burden of proving any defense, such as unconscionability.” Pinnacle Museum Tower Assn. v. Pinnacle Market Development (US), LLC (2012) 55 Cal.4th 223, 236 (Pinnacle). A party meets its initial burden simply by reciting the terms of the governing provision, or by attaching a copy of the provisions. Sprunk v. Prisma LLC (2017) 14 Cal.App.5th 785, 793. Once the petitioner meets its burden, “the burden shifts to the party opposing the motion to compel, who may present any challenges to the enforcement of the agreement and evidence in support of those challenges.” Baker v. Italian Maple Holdings, LLC (2017) 13 Cal.App.5th 1152, 1160.

ANALYSIS

I. Agreement to Arbitrate

The parties agree that Plaintiff’s lease agreement includes an arbitration provision. Opp. at p. 6:16-17.

The arbitration provision states, in relevant part, “Any claim or dispute, whether in contract, tort or otherwise (including any dispute over the interpretation, scope, or validity of this lease, arbitration section or the arbitrability of any issue) between you and us or any of our employees, agents, successors, assigns, or the vehicle distributor, including Mercedes- Benz USA LLC (each a “Third Party Beneficiary’), which arises out of or relates to a credit application, this lease, or any resulting transaction or relationship arising out of this lease (including any such relationship with third parties who do not sign this contract) shall, at the election of either you, us, or a Third Party Beneficiary, be resolved by a neutral, binding arbitration and not by a court action.” White Decl. Ex. A at p. 7.

II. Magnuson-Moss Warranty Act

First, Plaintiff argues that the arbitration provision is unenforceable under the Magnuson-Moss Warranty Act (MMWA) (15 U.S.C. § 2301 et seq.).

Plaintiff argues that the Song-Beverly Act (SBA) (Civil Code § 1790 et seq.) incorporates federal standards set by the MMWA. Plaintiff further argues that, per the FTC regulations, the MMWA precludes enforcement of binding arbitration agreements for claims under a written warranty. Plaintiff argues that the SBA incorporates the MMWA as well as its corresponding Federal Trade Commission (FTC) regulations. MMWA provides that if a warrantor establishes an “informal dispute settlement procedure,” it must provide “[i]nformation respecting the availability of the informal dispute settlement procedure offered by the warrantor and a recital ... that the purchaser may be required to resort to such procedure before pursuing any legal remedies in the courts.” 15 U.S.C. 2302(a)(8). Plaintiff argues that “informal dispute settlement procedure” includes arbitration. Under the MMWA, the arbitration cannot be binding as MMWA expressly contemplates that the consumer can subsequently “pursu[e] legal remedies in the courts.” Ibid.

Additionally, Plaintiff cites Federal Trade Commission (FTC) regulations. The FTC has adopted a regulation stating that informal dispute settlement procedures under the MMWA cannot be legally binding on any person. See 16 C.F.R. § 703.5(j). The FTC, therefore, has found that written warranties cannot require binding arbitration. Fed. Trade Com., Final Action Concerning Review of Interpretations of Magnuson-Moss Warranty Act…, 80 FR 42710-01 at pp. 42718-42720 (July 20, 2015) (“‘[R]eference within the written warranty to any binding, non-judicial remedy is prohibited by the Rule and the Act.’” [quoting 80 FR 42710-01 40 Fed. Reg. 60168, 60211 (1975)]).

Plaintiff relies on Chevron U.S.A. Inc. v. NRDC (1984) 467 U.S. 837 (Chevron) for the proposition that the Court must defer to the FAA’s reasonable construction of the MMWA. Opp. at p. 9:16-19. While Defendant acknowledges that Chevron has recently been overturned, she argues that should not change the outcome here. Id. at p. 9 fn. 1 (citing Loper Bright Enters. v. Raimondo (2024) 603 U.S. 369 (Loper Bright)). Specifically, Plaintiff argues that in Loper Bright, the Supreme Court held “[b]y overruling Chevron, though, the Court does not call into question prior cases that relied on the Chevron framework. The holdings of those cases that specific agency actions are lawful … are still subject to statutory stare decisis despite the Court’s change in interpretive methodology.” Loper Bright, supra, 603 U.S. 369, 376. However, reliance on stare decisis does not help Plaintiff because she fails to cite any binding authority affirming the FAA’s interpretation. Instead, Defendant cites three district court cases and a withdrawn Ninth Circuit case, all predating Loper Bright.

Moreover, even before Chevron was overturned, the Fifth and Eleventh Circuit Courts of Appeal rejected the FAA’s interpretation. See, e.g., Walton v. Rose Mobile Homes LLC, 298 F.3d 470, 473-479 (5th Cir. 2002) (Walton) (“the text, legislative history, and purpose of the MMWA do not evince a congressional intent to bar arbitration of MMWA written warranty claims.”); Davis v. Southern Energy Homes, Inc., 305 F.3d 1268, 1271-1272 (11th Cir. 2002) (Davis) (“After a thorough review of the MMWA and its legislative history, the FAA and the Supreme Court’s application of the FAA to other federal statutes, we conclude that the MMWA permits the enforcement of valid binding arbitration agreements within written warranties.”).

The Fifth Circuit applied the three-part test established by the United States Supreme Court in Shearson/American Express v. McMahon (1987) 482 U.S. 220 (McMahon), to determine whether Congress intended to limit or prohibit waiver of a judicial forum in the MMWA. Walton, supra, 298 F.3d at p. 475. In McMahon, the Supreme Court held that “[l]ike any statutory directive, the Arbitration Act’s mandate may be overridden by a contrary congressional command. The burden is on the party opposing arbitration, however, to show that Congress intended to preclude a waiver of judicial remedies for the statutory rights at issue. If Congress did intend to limit or prohibit waiver of a judicial forum for a particular claim, such an intent ‘will be deducible from [the statute’s] text or legislative history,’ or from an inherent conflict between arbitration and the statute’s underlying purposes.” McMahon, supra, 482 U.S. at p. 227 (quoting Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth (1985) 473 U.S. 614, 628).

The Fifth Circuit found no congressional intent to preclude binding arbitration of claims in the MMWA’s text, legislative history, or purpose. Walton, supra, 298 F.3d at pp. 473-479. The court noted that “binding arbitration is not normally considered to be an ‘informal dispute settlement procedure,’ and it therefore seems to fall outside the bounds of the MMWA and of the FTC’s power to prescribe regulations.” Id. at p. 476 It therefore held “[t]he clear congressional intent in favor of enforcing valid arbitration agreements controls in this case,” and that “the MMWA does not preclude binding arbitration of claims pursuant to a valid binding arbitration agreement, which the courts must enforce pursuant to the FAA.” Id. at 478-479.

The dissent in Walton argued that the majority failed to apply Chevron deference properly, but that criticism is no longer relevant in light of Loper Bright. See Walton, supra, 298 F.3d at pp. 480- 492 (dis. opn.) Accordingly, the Court finds Walton persuasive and adopts its reasoning and conclusion. The Court finds that the MMWA and SBA do not preclude binding arbitration of claims under a binding arbitration agreement for claims under a written warranty.

III. Fraud in the Execution

Next, Plaintiff argues that the arbitration agreement is not enforceable because it was surreptitiously inserted into the lease agreement. Opp. at pp. 11:27, 12:1.

“[F]raud in the execution renders a contract void from its inception ‘where the grantor intends to execute one instrument but another is surreptitiously substituted in its place and the grantor is fraudulently made to sign, seal, and deliver an instrument different from that intended … .’” Hotels Nevada v. L.A. Pacific Center, Inc. (2006) 144 Cal.App.4th 754, 764 (Hotels Nevada) (quoting Erickson v. Bohne (1955) 130 Cal. App. 2d 553, 556).

In Norcia v. Samsung Telecommunications America, LLC (9th Cir. 2017) 845 F.3 1279 (Norcia), the Ninth Circuit, applying California law, held that a plaintiff was not bound to arbitrate non-warranty claims under an arbitration provision in the defendant’s warranty brochure where she had not consented to those terms.

Plaintiff argues that Defendant represented that “Plaintiff relied on the terms of the warranty and thus assented to any arbitration agreement hidden within a warranty booklet.” That is not the case. Defendant clearly argues that the motion is based on the parties’ lease agreement. Mot. at p. 2:22-23; White Decl. Ex 1. The arbitration provision appears on page four of the ten-page lease agreement, under a caption stating, “Important Arbitration Disclosures”. White Decl. Ex 1 at p. 7. Plaintiff initialed immediately under the arbitration provision. Ibid. Therefore, the Ninth Circuit’s holding in Norcia is irrelevant to this case.

Moreover, unlike in Hotels Nevada, Plaintiff does not argue that one document was surreptitiously substituted for another. Accordingly, she has failed to establish fraud in the execution.

III. Unconscionability

Plaintiff argues that the arbitration agreement is unenforceable because it is unconscionable.

Like any other contract, arbitration agreements are subject to a defense of unconscionability. Armendariz, supra, 24 Cal.4th at p. 113. “The general principles of unconscionability are well established. A contract is unconscionable if one of the parties lacked a meaningful choice in deciding whether to agree and the contract contains terms that are unreasonably favorable to the other party. Unconscionability has both a procedural and a substantive element. The party resisting enforcement of an arbitration agreement has the burden to establish unconscionability.” Ramirez v. Charter Communications, Inc. (2024) 16 Cal.5th 478, 492 (citations omitted) (internal quotation marks omitted).

“[P]rocedural and substantive unconscionability must both be present in order for a court to exercise its discretion to refuse to enforce a contract or clause under the doctrine of unconscionability. But they need not be present in the same degree. Essentially a sliding scale is invoked which disregards the regularity of the procedural process of the contract formation, that creates the terms, in proportion to the greater harshness or unreasonableness of the substantive terms themselves. In other words, the more substantively oppressive the contract term, the less evidence of procedural unconscionability is required to come to the conclusion that the term is unenforceable, and vice versa.” Baltazar v. Forever 21, Inc. (2016) 62 Cal.4th 1237, 1243-44 (Baltazar) (cleaned up).

Procedural unconscionability includes oppression arising from unequal bargaining power, causing an absence of meaningful choice and real negotiating, and surprise due to hidden terms drafted by the party seeking to enforce the provisions. Gatton v. T-Mobile USA, Inc. (2007) 152 Cal.App.4th 571, 581. Substantive unconscionability focuses on the actual terms of the agreement and evaluates whether they create overly harsh or one-sided results as to shock the conscience. Suh v. Superior Court (2010) 181 Cal.App.4th 1504, 1515.

Before the Court reaches the unconscionability issue, it must decide whether the lease agreement places jurisdiction of that threshold question in the arbitrator. “Under both federal and state law, courts presume that the parties intend courts, not arbitrators, to decide … disputes about arbitrability, including whether an arbitration clause in a concededly binding contract applies to a particular type of controversy. The parties may agree to delegate authority to the arbitrator to decide arbitrability, but given the contrary presumption, evidence that the parties intended such a delegation must be ‘clear and unmistakable’ before a court will enforce a delegation provision.” Mondragon v. Sunrun Inc. (2024) 101 Cal.App.5th 592, 603 (Mondragon) (citations omitted) (internal quotation marks omitted).

Here, the arbitration provision contains a delegation clause which provides that “any dispute over the interpretation, scope, or validity of … [the] arbitration section or the arbitrability of any issue … be resolved by a neutral, binding arbitration… .”

Plaintiff argues that the lease agreement’s delegation clause is also unconscionable.

“For a delegation clause to be effective, two prerequisites must be satisfied. First, the language of the clause must be clear and unmistakable. … Second, the delegation must not be revocable under state contract defenses to enforcement. … Among these defenses is unconscionability.” Pinela v. Neiman Marcus Grp., Inc., 238 Cal. App. 4th 227, 239-240 (2015) (citations omitted). “‘[The Supreme Court] explained [in Rent-A-Center] that any claim of unconscionability must be specific to the delegation clause.’” Id. at p. 242 (quoting Tiri v. Lucky Chances, Inc. (2014) 226 Cal.App.4th 231, 244 [citing Rent-A-Center, W., Inc. v. Jackson (2010) 561 U.S. 63; 73 (Rent-A-Center)] (alterations added by the Pinela court).

A. Procedural Unconscionability

Plaintiff argues that the delegation clause is procedurally unconscionable because it is part of a contract of adhesion.

A “contract of adhesion” is “a standardized contract, which, imposed and drafted by the party of superior bargaining strength, relegates to the subscribing party only the opportunity to adhere to the contract or reject it.” Armendariz, supra, 24 Cal.4th at 113 (quoting Neal v. State Farm Ins. Cos. (1961) 188 Cal. App. 2d 690, 694. “[C]ontracts of adhesion, although they are indispensable facts of modern life that are generally enforced, contain a degree of procedural unconscionability even without any notable surprises, and bear within them the clear danger of oppression and overreaching.” Baltazar, supra, 62 Cal.4th 1237, 1244 (citation omitted) (internal quotation marks omitted).

Here, Plaintiff states in her declaration that “The lease agreement was presented to me as a pre-printed, non-negotiable, standard form. I was not given the opportunity to modify or negotiate any of its terms.” Ovsepyan Decl. ¶ 4. Defendant does not dispute that it is a contract of adhesion, but merely argues that even if the lease agreement was a contract of adhesion, that alone does not render it unconscionable. The Court concludes that the lease agreement is a contract of adhesion and therefore contains at least a low level of procedural unconscionability.

B. Substantive Unconscionability

Next, Plaintiff argues that the delegation clause is substantively unconscionable because it lacks mutuality, as it only benefits Defendant.

In Murphy v. Check ‘N Go of California, Inc. (2007) 156 Cal.App.4th 138 (Murphy), the court considered a delegation clause that provided that “[c]overed claims include ‘any assertion by you or us that this Agreement is substantively or procedurally unconscionable[.]’” The court held that the delegation clause lacked mutuality because, while “facially mutual insofar as it covers assertions of unconscionability by ‘you or us’ … as plaintiff points out, the provision is entirely one sided because defendant cannot be expected to claim that it drafted an unconscionable agreement.” Id. at p. 145.

Here, the delegation clause does not refer specifically to unconscionability but covers any dispute over the validity of the arbitration clause. As the court explained in Malone v. Superior Court (2014) 226 Cal.App.4th 1551, 1564 (Malone), “[t]he Murphy court concluded that, despite the fact that this clause referred to assertions of unconscionability by both parties, the clause was, in effect, unilateral, as the party which drafted an agreement would not assert that it had drafted an unconscionable one. Yet, this factor is not present in the delegation clause at issue in this case. [The] delegation clause does not delegate only the issue of unconscionability; it delegates all issues of interpretation, applicability, and enforceability of the agreement.”

While a drafting party will likely not argue that the agreement they drafted is unconscionable, they may make any number of arguments about its interpretation, application, and validity. See ibid (“Perhaps CB&T would wish to argue that the instant matter is excepted from arbitration because Malone previously executed a settlement agreement.”).

Moreover, “[Murphy] ha[s] been undermined by the more recent United States Supreme Court decisions in Rent-A-Center and AT&T Mobility LLC v. Concepcion (2011) 563 U.S” (Concepcion). Tiri v. Lucky Chances, Inc. (2014) 226 Cal.App.4th 231, 248. “Rent-A-Center held that delegation clauses are valid absent a challenge specific to the delegation clause, and Concepcion held that courts may not issue categorical rulings that interfere with fundamental aspects of arbitration.” Ibid (citations omitted).

 “To conclude that [lack of mutuality and arbitrator bias] signify substantive unconscionability would be tantamount to concluding that delegation clauses in employment arbitration agreements are categorically unenforceable. Such a conclusion would conflict with Rent-A-Center’s indication that delegation clauses in employment agreements are enforceable so long as they are clear and unmistakable.” Id. at p. 249. Moreover, “[t]o deny enforcing a delegation clause without identifying an unfair term—different from the features and consequences inherent with such a clause—would interfere with “[t]he overarching purpose of the FAA … to ensure the enforcement of arbitration agreements according to their terms so as to facilitate streamlined proceedings,’ and would ‘interfere[] with fundamental attributes of arbitration and thus create[] a scheme inconsistent with the FAA.’” Id. at pp. 249-250 (quoting Concepcion, supra, (2011) 563 U.S. at p. 344.

Therefore, the Court holds that the delegation clause is not unconscionable, and the arbitrator must determine whether the arbitration provision, as a whole, is unconscionable.

CONCLUSION

Defendant’s Motion to Compel Arbitration is granted. The Court exercises its discretion to stay this case pending arbitration and will set a Post Arbitration Status Conference on a date agreeable to all parties.