Judge: Anne Richardson, Case: 23STCV29585, Date: 2024-07-02 Tentative Ruling

Case Number: 23STCV29585    Hearing Date: July 2, 2024    Dept: 40

Superior Court of California

County of Los Angeles

Department 40

I. Background

Plaintiffs Rosita Vallejo and Salvador Cifuentes sue Defendants LAD-MB, LLC dba Mercedes Benz of Los Angeles, Mercedes-Benz USA, LLC (MBUSA), and Does 1 through 10 pursuant to a December 4, 2023, Complaint alleging claims of (1) Violation of Song-Beverly Act – Express Warranty, (2) Violation of Song-Beverly Act – Implied Warranty, and (3) Negligent Repair. The first and second causes of action are alleged against MBUSA and Does 1 through 10, and the third cause of action is alleged against LAD-MB, LLC and Does 1 through 10.

On March 27, 2024, MBUSA filed a motion to compel binding arbitration of all of Plaintiffs’ claims pursuant to an arbitration provision in the lease agreement for the subject vehicle. The agreement is only signed by Plaintiffs and LAD-MB, LLC.

On June 20, 2024, Plaintiffs filed an opposition, and on June 25, 2024, MBUSA filed a reply.

MBUSA’s motion is now before the Court.

II. Motion to Compel Binding Arbitration: DENIED.

A. Request for Judicial Notice

Per MBUSA’s request, the Court takes judicial notice of the Complaint in this action. (Mot., RJN, Ex. 1; Evid. Code, §§ 452, subd. (d), 453, subds. (a)-(b).)

B. Legal Standard

The Federal Arbitration Act (“FAA”), while a federal statute, applies in California courts and requires state courts to enforce arbitration agreements as required by the federal common law developed under the FAA. (See Southland Corp. v. Keating (1984) 465 U.S. 1, 15-16 (Southland Corp.); Broughton v. Cigna Healthplans (1999) 21 Cal.4th 1066, 1074-78, superseded by statute on another ground as stated in Ferguson v. Corinthian Colleges, Inc. (9th Cir. 2013) 733 F.3d 928, 937.).) The FAA preempts and invalidates state law and state judicial decisions that disfavor arbitration or require arbitration provisions to pass higher scrutiny. (Southland Corp., supra, at p. 12; Perry v. Thomas (1987) 482 U.S. 483, 490.) If the parties designate the FAA applies, then California arbitration law is preempted. (See, e.g., Rodriguez v. American Techs., Inc. (2006) 136 Cal.App.4th 1110, 1121-1122.) However, courts have found that where the FAA is found not to apply, the California Arbitration Act (Code Civ. Proc., § 1280 et seq.) applies. (See Valencia v. Smyth (2010) 185 Cal.App.4th 153, 178 (Valencia).)

 A court’s inquiry is limited to a determination of (1) whether a valid arbitration agreement exists and (2) whether the arbitration agreement covers the dispute. (9 U.S.C. § 4; Chiron Corp. v. Ortho Diagnostics Systems, Inc. (9th Cir. 2000) 207 F.3d 1126, 1130; Howsam v. Dean Witter Reynolds, Inc. (2002) 537 U.S. 79, 84; see Simula, Inc. v. Autoliv, Inc. (9th Cir. 1999) 175 F.3d 716, 720 [if the finding is affirmative on both counts the FAA requires the Court to enforce the arbitration agreement in accordance with its terms]; see Omar v. Ralphs Grocery Co. (2004) 118 Cal.App.4th 955, 961 [In determining the enforceability of an arbitration agreement, the court first considers “two ‘gateway issues’ of arbitrability: (1) whether there was an agreement to arbitrate between the parties, and (2) whether the agreement covered the dispute at issue”] Lacayo v. Cataline Restaurant Group Inc. (2019) 38 Cal.App.5th 244, 257 (Lacayo) [Where moving party meets initial burden, “the party opposing arbitration must prove by a preponderance of the evidence any defense to the petition”].)

Even where the FAA governs the interpretation of arbitration clauses, California law governs whether an arbitration agreement has been formed in the first instance. (Baker v. Osborne Development Corp. (2008) 159 Cal.App.4th 884, 893.) 

 Moreover, the general rule is that the FAA governs all agreements to arbitrate in contracts “involving interstate commerce.” (Higgins v. Superior Court (2006) 140 Cal.App.4th 1238, 1247.) The term “involving” commerce “is broad and is indeed the functional equivalent of “affecting’ commerce.” (Allied-Bruce Terminix Companies, Inc. v. Dobson (1995) 513 U.S. 265, 273-274.) The U.S. Supreme Court has held that this broad interpretation includes employment contracts. (See Circuit City Stores v. Adams (2001) 532 U.S. 105, 106.) The defendant bears the burden of proving applicability of the FAA by showing that its activities constitute interstate commerce. (Hoover v. Am. Income Life Ins. Co. (2012) 206 Cal.App.4th 1193, 1207.) Failure to demonstrate that the employment agreement affects interstate commerce renders the FAA inapplicable. (See Lane v. Francis Capital Management LLC (2014) 224 Cal.App.4th 676, 687-688 (Lane); Woolls v. Superior Court (2005) 127 Cal.App.4th 197, 212.)

C. Analysis

1. Standing

a. Third-Party Beneficiary

i. Relevant Law

“‘A third[-]party beneficiary is someone who may enforce a contract because the contract is made expressly for his benefit.’” (Jensen v. U-Haul Co. of California (2017) 18 Cal.App.5th 295, 301 (Jensen); see also Civ. Code, § 1559 [“A contract, made expressly for the benefit of a third person, may be enforced by him …”].) A person “only incidentally or remotely benefited” from a contract is not a third-party beneficiary. (Lucas v. Hamm (1961) 56 Cal.2d 583, 590.) 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.)

ii. Court’s Determination

A reading of the entire arbitration provision leads the Court to conclude that only Plaintiff and LAD-MB, LLC or its “employees, agents, successors or assigns” benefit from and have the standing to request an order compelling arbitration of Plaintiffs’ claims arising out of issues related to the vehicle such that:

(1) MBUSA is not directly intended to benefit from the vehicle’s lease agreement and is, at most, incidentally benefited by either Plaintiff or LAD-MB, LLC exercising their rights to invoke arbitration from the lease agreement (scope of arbitration including “any claim or dispute” “arising out of th[e] lease,” where the Court determines the SBA obligations owed by MBUSA do not arise from the lease);

(2) The lease agreement does not contain terms showing that a motivating purpose for entering that agreement was to benefit MBUSA; and

(3) Permitting MBUSA to enforce the contract is beyond the objectives of the lease agreement and reasonable expectations of Plaintiffs and LAD-MB, LLC where the relief in that agreement was limited to invocation by Plaintiffs or by LAD-MB, LLC and its “employees, agents, successors or assigns.”

(See Mot., Ameripour Decl., Ex. 2, Lease agreement, pp. 4-5, Arbitration Provision; see also Goonewardene v. ADP, LLC, supra, 6 Cal.5th at p. 630.)

Again, such a framework, at most, incidentally benefits MBUSA insofar as LAD-MB, LLC could perhaps submit to arbitration Plaintiffs’ claims against MBUSA, but where MBUSA itself does not have the power to invoke the arbitration provision in the lease agreement. (See Ford Motor Warranty Cases (Ochoa) (2023) 89 Cal.App.5th 1324, 1338-1340 [discussing Goonewardene elements and reaching similar conclusion], review granted Jul. 19, 2023, S279969 [532 P.3d 270] (cited for persuasive value only, Cal. Rules of Court, rule 8.1115, subd. (1).) As reasoned by the court of appeal with respect to another manufacturer, to permit MBUSA to invoke the arbitration clause based on third-party beneficiary status would mean that “any nonparties with whom [Plaintiffs] might have a dispute relating to the vehicle or its purchase, including parties whose existence or relationship [Plaintiffs] could not have contemplated, could claim they are intended beneficiaries of the arbitration agreement simply because they would benefit from arbitration.” (Montemayor v. Ford Motor Co. (2023) 92 Cal.App.5th 958, 974, review granted Sep. 20, 2023, S281237 [2023 WL 6151774] (Montemayor) (cited for persuasive value only.)

Based on these determinations, the Court finds that MBUSA lacks standing to enforce the arbitration clause in the lease agreement as a third-party beneficiary.

b. Promissory Estoppel

i. Relevant Law

Under the doctrine of equitable estoppel, “a nonsignatory defendant may invoke an arbitration clause to compel a signatory plaintiff to arbitrate its claims when the causes of action against the nonsignatory are ‘intimately founded in and intertwined’ with the underlying contract obligations.” (JSM Tuscany, LLC v. Superior Court (2011) 193 Cal.App.4th 1222, 1237.) The doctrine applies in either of two circumstances: (1) when the signatory must rely on the terms of the written agreement containing the arbitration clause in asserting its claims against the nonsignatory or (2) when the signatory alleges “substantially interdependent and concerted misconduct” by the nonsignatory against a signatory and the alleged misconduct is “founded in or intimately connected with the obligations of the underlying agreement.” (Goldman v. KPMG, LLP (2009) 173 Cal.App.4th 209, 218-219.) At bottom, “the linchpin for equitable estoppel is equity—fairness.” (Id. at p. 220.) A nonsignatory seeking to enforce an arbitration agreement has the burden to establish at least one of these circumstances applies. (Jones v. Jacobson (2011) 195 Cal.App.4th 1, 16.)

ii. Court’s Determination

In Ochoa—as noted above, cited only for its persuasive value—the court of appeal found that claims by a signatory vehicle purchaser against the vehicle’s manufacturer did not arise from the sales contract for the purchase of the vehicle because the claims did not rely on the sales contract insofar as “[t]he sale contracts include[d] no warranty, nor any assurance regarding the quality of the vehicle sold, nor any promise of repairs or other remedies in the event problems ar[o]se” and where “California law does not treat manufacturer warranties imposed outside the four corners of a retail sale[s] contract as part of the sale[s] contract.” (Ochoa, supra, 89 Cal.App.5th at pp. 1335-1336.)

The Court agrees with this reasoning and notes that, here, the Complaint’s claims against MBUSA arise from the SBA, not terms contained in the vehicle’s sales contract. (Compare, e.g., FAC, First and Second Causes of Action, with FAC, Third Cause of Action.)

This reasoning is in line with Montemayor—also cited for its persuasive value—where the court of appeal found that the plaintiffs’ claims there were not inextricably intertwined with the vehicle’s sales contract as to permit the non-signatory manufacturer to invoke the arbitration clause through the doctrine of equitable estoppel. (Montemayor, supra, 92 Cal.App.5th at p. 970.) The court reasoned that “the fact the [plaintiffs] purchased the defective vehicle from [a signatory dealer] pursuant to the sales contract, and as a result of their purchase … received separate express warranties from [the non-signatory manufacturer], d[id] not mean their causes of action against [the manufacturer] based on those express warranties [we]re founded in the sales contract.” (Ibid.)

Separately, the Court notes that the circumstances in Felisilda differed from those before this Court and before the Courts in Ochoa and Montemayor, where this difference is critical to understanding the Court’s conclusion. In Felisilda, the plaintiffs purchased an automobile pursuant to a sales contract that contained an arbitration clause and later sued their vehicle’s nonsignatory manufacturer and the signatory dealership. Then, the dealership moved to compel arbitration, which the trial court granted, after which the plaintiffs dismissed the dealership from the action and arbitrated the action against the manufacturer. The plaintiffs ultimately lost before the arbitrator and had judgment rendered against them thereon by the trial court, leading plaintiff to appeal on various grounds, including that the trial court erred by including the nonsignatory manufacturer in the arbitration. (Felisilda, supra, 53 Cal.App.5th at pp. 491-492, 494.) The court of appeal determined that “[b]ecause the [plaintiffs] expressly agreed to arbitrate claims arising out of the condition of the vehicle – even against third party nonsignatories to the sales contract – they [were] estopped from refusing to arbitrate their claim against [the manufacturer].” (See Id. at pp. 496-497.)¿However, as reasoned by the Ninth Circuit, in Felisilda, “[i]t ma[de] a critical difference that the Felisildas … sued the dealership in addition to the manufacturer[,] … [which] does not address the situation … here, where the non-signatory manufacturer attempted to compel arbitration on its own.” (Ngo v. BMW of North America, LLC (9th Cir. 2022) 23 F.4th 942, 950.)

The Court also notes that these opinions—Felisilda, Ochoa, and Montemayor—are not inconsistent insofar as “‘[t]he fundamental point’ [in Felisilda] [wa]s that a party is ‘not entitled to make use of [a contract containing an arbitration clause] as long as it worked to [his or] her advantage, then attempt to avoid its application in defining the forum in which [his or] her dispute ... should be resolved.’” (Felisilda v. FCA US LLC, supra, 53 Cal.App.5th at p. 496, quoting Jensen, supra, 18 Cal.App.5th at p. 306.) Unlike in Felisilda, Plaintiffs here are not trying to use the arbitration provision to their advantage against one defendant (or in one forum) and simultaneously trying to avoid arbitration against another defendant (or avoid arbitration in another forum).

Based on these determinations, the Court finds that MBUSA lacks standing to enforce the arbitration clause in the vehicle’s sales contract under the doctrine of equitable estoppel.

2. Disposition

Based on the above reasoning, the Court DENIES MBUSA’s motion. 

III. Conclusion

Defendant Mercedes-Benz USA, LLC’s Motion to Compel Binding Arbitration [Res ID # 8956] is DENIED.