Judge Andrew E. Cooper, Case 22CHCV01453 2023-05-15 Tentative Ruling

B Nonsignatory Standing

Here, the agreement is executed solely between Plaintiffs and nonparty Galpin Honda, located in Mission Hills, CA. The right to arbitration may generally only be invoked by parties to the purported arbitration agreement. (Code of Civ. Proc. § 1281.2.) Here, Defendant argues that it may nevertheless enforce the arbitration agreement of the RISC under the theories of equitable estoppel and third-party beneficiary standing.

The parties disagree on whether this Court should rule in accordance with Felisilda v. FCA US LLC¿(2020) 53 Cal.App.5th 486, or the recently decided Ochoa v. Ford Motor Company (2023) 306 Cal.Rptr.3d 611. Both Felisilda and Ochoa discuss a non-signatory vehicle manufacturer’s right to invoke the arbitration provision of a sales contract entered into between a plaintiff buyer and a nonparty dealership.

In Felisilda, the Third District Court of Appeal found that the plaintiffs’ agreement to the sales contract constituted express consent to arbitrate their claims regarding the vehicle’s condition, even against third parties, as the agreement unambiguously included “an express extension of arbitration to claims involving third parties that relate to the vehicle's condition.” (53 Cal.App.5th at 498.)

In Ochoa, the Second District Court of Appeal declined to follow Felisilda, and instead found that the non-signatory manufacturer did not have the right to compel the plaintiffs’ claims to arbitration under either theory of equitable estoppel or third-party beneficiary standing.

Under the doctrine of stare decisis, superior courts are bound by all published decisions of the Court of Appeal, but where there is a split in authority, the superior court may choose which appellate decision to follow. (Auto Equity Sales, Inc. v. Superior Court (1962) 57 Cal.2d 450, 456.) Here, this Court elects to follow the Second District Court of Appeal’s reasoning in Ochoa, for the reasons set forth below.

Equitable Estoppel

The doctrine of equitable estoppel allows for a non-signatory party to compel arbitration “when the causes of action against the non-signatory are ‘intimately founded in and intertwined’ with the underlying contract obligations.” (Felisilda, 53 Cal.App.5th at 495–496; JSM Tuscany, LLC v. Superior Court¿(2011) 193 Cal.App.4th 1222, 1237; Goldman¿v. KPMG, LLP¿(2009) 173 Cal.App.4th 209, 217–218; Crowley Maritime Corp. v. Boston Old Colony Ins. Co.¿(2008) 158 Cal.App.4th 1061, 1070 [Under equitable estoppel, a party cannot avoid participation in arbitration, where the party received “a¿direct¿benefit under¿the contract containing an arbitration clause…”]; Boucher¿v. Alliance Title Co, Inc.¿(2005) 127 Cal.App.4th 262, 271.)

Here, Defendant argues that equitable estoppel applies because Plaintiffs’ claims are “intimately founded in and intertwined with” the obligations of the RISC, as “it furnishes [Plaintiffs] withstanding under the Song-Beverly Consumer Warranty Act.” (Def.’s Mot. 15:18–19.) Defendant further asserts that “the express warranty is an additional term of the Sales Contract that imposes obligations on AHM, and Plaintiffs allege a violation of those obligations.” (Id. at 15:24–25.)

The Court notes that the arbitration provision in the instant action is identical to that in Felisilda, which includes a provision extending the scope of the agreement to claims involving third parties. (Ex. 1 to Decl. of Patrick J. Raue, p. 2.) Plaintiffs, in opposition, nevertheless seek to distinguish Felisilda and the number of cases enforcing an arbitration clause by a third party, instead characterizing the instant sales contract as a mere financing agreement that is separate and distinct from the manufacturer’s warranties. (Pls.’ Opp. 7:1–2.) Plaintiffs further argue that Defendant cannot invoke the arbitration provision of an agreement that Plaintiffs do not seek to enforce through the instant action. (Id. at 6:10–14 “Plaintiffs do not allege that AHM somehow violated their dealership’s financing contract. They allege that AHM violated the Song-Beverly Act by failing to repair the defects in their car and refusing to provide restitution; and that it committed fraud by concealing problems it knew to be widespread. These claims do not ‘rely’ in any way “on the terms” of Plaintiffs dealership’s financing contract.”)

The Ochoa court, in accordance with Plaintiffs’ argument, found that equitable estoppel would apply where plaintiffs had sued defendant based on a breach of the terms of the sale contract, however this was not the case in Ochoa. (306 Cal.Rptr.3d at 620.) The Ochoa court ultimately found that “manufacturer vehicle warranties that accompany the sale of motor vehicles without regard to the terms of the sale contract between the purchaser and the dealer are independent of the sale contract.” (Id. at 619–620.)

The Ochoa court proceeded to distinguish Felisilda by reading the “third party” language in the arbitration provision “as a further delineation of the subject matter of claims the purchasers and dealers agreed to arbitrate” rather than the parties’ consent to arbitrate claims with non-signatories to the agreement. (Id. at 620 [emphasis in original].) Ultimately, the Ochoa court found that the plaintiffs’ claims did not rely on the sales contracts with the dealership, and therefore equitable estoppel did not apply. (Id. at 621.)

This Court exercises its discretion to follow the Court of Appeal’s holding in Ochoa, particularly where here, as in Ochoa, “the sale contracts include no warranty, nor any assurance regarding the quality of the vehicle sold, nor any promise of repairs or other remedies in the event problems arise,” and Plaintiffs do not otherwise allege any violation of the RISC’s express terms. (Id. at 620.)

Based on the foregoing, the Court finds that Plaintiffs’ claims against Defendant concern the express manufacturer warranty issued by Defendant, which is independent of and not “intimately founded in and intertwined with” the RISC. Accordingly, equitable estoppel does not apply to allow Defendant to compel arbitration of Plaintiffs’ claims.

Agency Relationship

Defendant seeks to distinguish the instant case from Ochoa, arguing that here, unlike in Ochoa, Plaintiffs have sufficiently alleged an agency relationship between the signatory dealership and Defendant such that Defendant may compel arbitration under the RISC as an undisclosed principal. (Def.’s Reply, 6:5–7.)

“A non-signatory to an agreement to arbitrate may be required to arbitrate, and may invoke arbitration against a party, if a preexisting confidential relationship, such as an agency relationship between the non-signatory and one of the parties to the arbitration agreement, makes it equitable to impose the duty to arbitrate upon the non-signatory.” (Ochoa, 306 Cal.Rptr.3d at 624, quoting Westra v. Marcus & Millichap Real Estate Inv. Brokerage Co. (2005) 129 Cal.App.4th 759, 765.)

The Ochoa court found that plaintiffs alleged no agency relationship between the defendant manufacturer and the dealership, where the sole dealer/manufacturer agency allegation that was “clearly articulated” was that the dealers were authorized “agents for vehicle repairs.” (306 Cal.Rptr.3d at 625.) The Court of Appeal further found that all other references to the manufacturer’s “agents” were ambiguous as to whether those agents were connected to the dealership in any way. “These allegations could be read to refer to the dealers’ employees; but they could just as well be read as referring to FMC's employees who prepared the vehicle window stickers or authorized the copy in the marketing brochures.” (Ibid.)

Here, Defendant directs the Court to portions of Plaintiffs’ complaint which reference Defendant’s “agents,” including in paragraphs 52, 61, 66, 108, 112, and 114–118 thereof. The Court notes that these provisions reference Defendant’s “agents” with respect to Plaintiffs’ concealment allegations against Defendant. The referenced portions provide, inter alia, that “AMERICAN HONDA and its agents intentionally concealed and failed to disclose facts relating to the Transmission Defects” and “AMERICAN HONDA’S authorized dealerships are its agents for purposes of the sale of HONDA vehicles to consumers such as Plaintiff.” (Compl. ¶¶ 108, 112.)

However, these arguments were specifically addressed by the Ochoa court, which found “no allegations that the dealers from which plaintiffs bought their cars knew the legally significant information that FMC allegedly concealed from plaintiffs. To have fraudulently concealed information on FMC's behalf, it is necessary that the dealers had that information.” (306 Cal.Rptr.3d at 626.) Here, like in Ochoa, any references Plaintiffs make to Defendant’s “agents” do not allege any wrongdoing by dealership employees in connection with their concealment allegations or the obligations under the RISC. Therefore, as the Ochoa court concluded, “any nexus with the sale contracts, and thus the right to compel arbitration, is lacking. There are no allegations to support the conclusion that the dealers acted as [the manufacturer]'s agent in executing the sale contracts.” (Ibid.)

Based on the foregoing, the Court finds that Plaintiffs have not alleged a sufficient agency relationship between the signatory dealership and Defendant which would entitle Defendant to compel arbitration as an undisclosed principal.

Third-Party Beneficiary

“A contract, made expressly for the benefit of a third person, may be enforced by him at any time before the parties thereto rescind it.” (Civ. Code § 1559.) “Third parties may enforce a contract with an arbitration provision … where they are intended third party beneficiaries or are assigned rights under the contract.” (Cohen v TNP 2008 Participating Notes Program, LLC (2019) 31 Cal.App.5th 840, 856.)

To show the contracting parties intended to benefit it, a third party must show that, under the express terms of the contract at issue and any other relevant circumstances under which the contract was made, (1) “the third party would in fact benefit from the contract”; (2) “a motivating purpose of the contracting parties was to provide a benefit to the third party”; and (3) permitting the third party to enforce the contract “is consistent with the objectives of the contract and the reasonable expectations of the contracting parties.” (Goonewardene v. ADP, LLC (2019) 6 Cal.5th 817, 830.)

Here, Defendant argues that “the intent to benefit AHM is apparent from the plain language of the Sales Contract.” (Def.’s Mot. 17:13.) Defendant argues that it is an intended third-party beneficiary to the RISC because “Plaintiffs purchased of the Subject Vehicle, memorialized by the Sales Contract, created a resulting warranty relationship between AHM and Plaintiffs. Because the Arbitration Provision explicitly embraces the type of claim Plaintiffs assert against AHM — which encompasses claims arising out of relationships with third parties who do not sign the Sales Contract—Plaintiffs’ warranty and fraud claims necessarily require them to contend that AHM benefitted from the Sales Contract.” (Id. at 17:18–22.)

Plaintiffs argue in opposition that Defendant is unable to satisfy any of the Goonewardene elements to establish its status as a third-party beneficiary to the RISC. Specifically, Plaintiffs argue that Defendant does not stand to benefit under the RISC, as “the contract expressly and repeatedly states that only two parties may compel arbitration:” Plaintiffs and the dealership. (Pls.’ Opp. 10:25–26.) Furthermore, no “motivating purpose” can be shown because “specifying exactly which parties are entitled to invoke the contract, as the clause does, ‘affirmatively disproves any intent’ to benefit parties not so listed.” (Id. at 11:7–9, quoting Fuentes v. TMCSF, Inc. (2018) 26 Cal.App.5th 541, 552.) Finally, “the objective of the contract was to finance Plaintiffs’ car purchase; and the objective of the arbitration clause specifically was to enable Plaintiffs and their dealership (‘you’ and ‘we’) to compel arbitration. Permitting AHM to take advantage of the arbitration clause does not ‘effectuate’ either objective.” (Id. at 11:17–20.)

The Ochoa court discussed the issue of third-party beneficiary standing and found that “the sale contracts reflect no intention to benefit a vehicle manufacturer under Goonewardene.” (306 Cal.Rptr.3d at 623.) The court further asserted that “if the signatories had intended to benefit [defendant], such a purpose would have been easy to articulate,” and the contract’s reference to “third parties” concerns only “what may be arbitrated, not who may arbitrate.” (Ibid. [emphasis in original].)

Here, the Court agrees with Plaintiffs that Defendant is not an intended third-party beneficiary of the RISC because the contract specifies that only Plaintiffs or the dealership are entitled to compel arbitration of the claims. (Ex. 1 to Raue Decl., p. 2.) Any assertion that Defendant may “incidentally or remotely” benefit from the contract, without a further showing of the parties’ specific motivation to provide Defendant with a benefit under the RISC, does not render Defendant a third-party beneficiary to the contract. (Ochoa, 306 Cal.Rptr.3d at 621.)

The Court follows the reasoning set forth in Ochoa, and notes that if the parties to the RISC had intended to benefit Defendant, they could have easily articulated as such in the contract. (Id. at 623.) Here, as in Ochoa, “the parties’ choice of the subject of the disputes they agree to arbitrate does not evince an intention to benefit nonparties so as to affect who is entitled to compel arbitration.” (Ibid.) Here, the contractual language is unambiguous that only Plaintiffs or the nonparty dealership may invoke the arbitration agreement. (Ex. 1 to Raue Decl., p. 2.)

Based on the foregoing, the Court finds that Defendant is not an intended third-party beneficiary to the RISC, and therefore cannot compel Plaintiffs’ claims to arbitration.

C. Unconscionability

Unconscionability generally includes the absence of meaningful choice on the part of one of the parties together with contract terms that unreasonably favor the other party. (Carboni v. Arrospide (1991) 2 Cal.App.4th 76, 82-83.) As the party asserting unconscionability, a plaintiff has the burden of proving both procedural and substantive unconscionability. (Crippen v. Central Valley RV Outlet. Inc. (2004) 124 Cal.App.4th 1159, 1165). Courts analyze the unconscionability standard in Civil Code section 1670.5 as invoking elements of procedural and substantive unconscionability. (Nyulassy v. Lockheed Martin Corp. (2004) 120 Cal.App.4th 1267, 1280–1281.)

As the Court finds that Defendant has no basis to compel the arbitration of Plaintiffs’ claims in the instant action, it need not reach Plaintiffs’ arguments that the arbitration provision is unconscionable.