Judge: Daniel S. Murphy, Case: 24STCV17239, Date: 2024-12-04 Tentative Ruling

Case Number: 24STCV17239    Hearing Date: December 4, 2024    Dept: 32

BACKGROUND

            On July 11, 2024, Plaintiffs Janet Poggemeyer and Noel Lucio filed this action against Defendants GENSM LLC (GENSM), LBS Financial Credit Union (LBS), The Hanover Insurance Company (Hanover), and Toyota Motor Credit Corporation (TMCC).

            The complaint alleges that Plaintiffs purchased a 2023 Genesis G70 from the dealership, GENSM. As part of the purchase, Plaintiffs traded in their Toyota Camry, and GENSM allegedly agreed to pay off the amount that Plaintiffs owed to TMCC. GENSM allegedly failed to do this, requiring Plaintiffs to continue making monthly payments to TMCC. Plaintiffs allege that they would not have purchased the subject vehicle had they known that GENSM did not intend on paying off the trade-in.

            LBS is allegedly the holder who accepted assignment of the sales contract from GENSM. Hanover allegedly issued a bond to GENSM, payable to a purchaser in the event of fraud by GENSM. The complaint alleges that Hanover is liable to Plaintiffs under the bond.

            On August 26, 2024, GENSM and Hanover filed the instant motion to compel arbitration. Plaintiffs filed their opposition on November 19, 2024. GENSM and Hanover filed their reply on November 25, 2024.  

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.)

DISCUSSION

I. Prima Facie Proof of Agreement

            “The moving party ‘can meet its initial burden by attaching to the motion or petition a copy of the arbitration agreement purporting to bear the opposing party's signature.’” (Gamboa v. Northeast Community Clinic (2021) 72 Cal.App.5th 158, 165.)

            On April 30, 2024, Plaintiffs signed a Retail Installment Sales Contract (RISC) with GENSM. (Compl., Ex. 1.) The RISC contains an arbitration provision covering “[a]ny claim or dispute . . . between you and us or our employees, agents, successors or assigns, which arises out of or relates to your credit application, purchase or condition of this Vehicle, this contract or any resulting transaction or relationship.” (Ibid.)

            Plaintiffs do not dispute the existence of the RISC or the arbitration provision therein. Plaintiffs concede that the arbitration clause covers their claims against GENSM. However, Plaintiffs argue that arbitration should be denied because: (1) the action contains claims against LBS and TMCC, who have not moved for arbitration; (2) it would be unconscionable to force Plaintiffs to arbitrate with either the American Arbitration Association (AAA) or National Arbitration and Mediation (NAM); and (3) Hanover cannot enforce the arbitration clause.

II. Conflicting Rulings

            Plaintiffs argue that the Court should deny arbitration because the action involves claims between Plaintiffs and LBS and TMCC which are not subject to arbitration. However, the Court has discretion to “order arbitration among the parties who have agreed to arbitration and stay the pending court action or special proceeding pending the outcome of the arbitration proceeding.” (Code Civ. Proc., § 1281.2.) Thus, the claims against LBS and TMCC do not require the Court to deny arbitration outright. Staying the court action will sufficiently prevent conflicts while the arbitration is pending.

III. Unconscionability

Unconscionability has both a procedural and a substantive element. (Aron v. U-Haul Co. of California (2006) 143 Cal.App.4th 796, 808.) Both elements must be present for a court to invalidate a contract or clause. (Ibid.) However, the two elements need not be present in the same degree; courts use a sliding scale approach in assessing the two elements. (Carbajal v. CWPSC, Inc. (2016) 245 Cal.App.4th 227, 242.)

a. Procedural Unconscionability

Procedural unconscionability “focuses on two factors: ‘oppression’ and ‘surprise.’ ‘Oppression’ arises from an inequality of bargaining power which results in no real negotiation and ‘an absence of meaningful choice.’ ‘Surprise’ involves the extent to which the supposedly agreed-upon terms of the bargain are hidden in the prolix printed form drafted by the party seeking to enforce the disputed terms.” (Zullo v. Superior Court (2011) 197 Cal.App.4th 477, 484, internal citations omitted.)

1. Choice of Arbitration Provider

The agreement provides that “[y]ou or we may choose the American Arbitration Association (www.adr.org) or National Arbitration and Mediation (www.namadr.com) as the arbitration organization to conduct the arbitration. If you and we agree, you or we may choose a different arbitration organization.” (Compl., Ex. 1.)

Plaintiffs argue that “if the Arbitration Provision were read to authorize the procedure leading up to Dealer’s election to arbitrate but then allow Dealer to unilaterally select AAA, Plaintiffs would really have no choice in the matter at all.” (Opp. 9:23-25.) There is no indication that GENSM intends to unilaterally select AAA and leave Plaintiffs with no real choice. GENSM acknowledges in its reply that “Plaintiffs can initiate arbitration as against GENSM, LLC (and Hanover) either via a demand for arbitration with AAA or NAM, as provided in the contract.” (Reply 3:1-2.) Plaintiffs otherwise cite no authority for the proposition that limiting the choice of arbitration providers is unconscionable. Arbitration agreements are regularly upheld even when they offer no choice of arbitration provider. 

Plaintiffs’ citation to Sanchez v. Western Pizza Enterprises, Inc. (2009) 172 Cal.App.4th 154 is inapposite. There, the court found unconscionability because “the arbitration agreement suggests that there are multiple arbitrators to choose from” by referencing a “panel” of arbitrators, when in reality “the designated arbitration provider includes only one arbitrator.” (Id. at pp. 174-75.) This subjected the employees to “oppression and unfair surprise.” (Ibid.) By contrast, there is nothing false or deceptive about the arbitration provision here. The clause states that the parties may initiate arbitration with either AAA or NAMS, and Plaintiffs have presented no evidence that this is untrue.

            2. Contract of Adhesion

Plaintiffs argue that the agreement is unconscionable because it is adhesive. However, the adhesive nature of a contract represents only a minimal degree of procedural unconscionability. (Serpa v. California Surety Investigations, Inc. (2013) 215 Cal.App.4th 695, 704.) Moreover, Plaintiffs have not shown that GENSM “had superior bargaining strength or that plaintiffs had no real alternatives available to them at the time they entered into the Agreement.” (See Walnut Producers of California v. Diamond Foods, Inc. (2010) 187 Cal.App.4th 634, 646.) Plaintiffs were free to not purchase the vehicle or to purchase from another dealership.  

b. Substantive Unconscionability

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.)  

            1. Minimal Discovery

“[A]rbitration is meant to be a streamlined procedure. Limitations on discovery . . . is one of the ways streamlining is achieved.” (Dotson v. Amgen, Inc. (2010) 181 Cal.App.4th 975, 983.) Therefore, an arbitration agreement is only required to “provide[] for more than minimal discovery.” (Armendariz v. Foundation Health Psychcare Services, Inc. (2000) 24 Cal.4th 83, 102.)

Plaintiffs complain that AAA and NAM rules do not guarantee certain types of discovery or a certain quantity of discovery. However, Plaintiffs cite no authority for the proposition that this creates unconscionability. Discovery in arbitration is specifically designed to be more limited. Plaintiffs cite no authority finding AAA or NAM discovery rules to be unconscionable. Under both sets of rules, arbitrators may order discovery as needed to address the claims. There is no indication that AAA or NAM rules allow an arbitrator to curtail discovery to such an extent that the arbitration could be considered overly harsh or one-sided as to shock the conscience. The agreement here satisfies the “more than minimal” standard.

2. Unbiased Arbitrator

Plaintiffs argue that AAA rules allow AAA to unilaterally appoint an arbitrator from its confidential National Roster instead of using a rank-and-strike process. However, AAA only resorts to the National Roster when “the parties have not appointed an arbitrator and have not agreed to a process for appointing the arbitrator.” (AAA Rule 16(a).) Furthermore, Plaintiff cites no authority finding AAA Rule 16(a) to be unconscionable. There is no indication that the National Roster will fail to provide a neutral arbitrator.  

Plaintiffs also argue that both AAA and NAM rules only permit, rather than require, the disqualification of an arbitrator who has a conflict of interest. Plaintiffs cite no authority finding AAA or NAM rules to be unconscionable in this regard. There is no indication that AAA and NAM rules allow conflicted arbitrators to unfairly hear cases.

            3. Disclosure Requirements

Plaintiffs argue that AAA and NAM have failed to satisfy the disclosure requirements enumerated in Code of Civil Procedure section 1281.96. However, Plaintiffs cite no authority finding AAA and NAM in violation of the requirements, nor any authority suggesting that a violation of these requirements results in unconscionability that renders an arbitration agreement unenforceable.

            4. Illegal Provision

“No neutral arbitrator or private arbitration company shall administer a consumer arbitration under any agreement or rule requiring that a consumer who is a party to the arbitration pay the fees and costs incurred by an opposing party if the consumer does not prevail in the arbitration, including, but not limited to, the fees and costs of the arbitrator, provider organization, attorney, or witnesses.” (Code Civ. Proc., § 1284.3(a).)

Here, the arbitration provision states that “[t]he amount we pay may be reimbursed in whole or in part by decision of the arbitrator if the arbitrator finds that any of your claims is frivolous under applicable law.” (Compl., Ex. 1.) This essentially requires the losing party to bear the costs of the arbitration, which contravenes the statute. The provision is severed, but the arbitration clause otherwise remains enforceable. (See Armendariz, supra, 24 Cal.4th at p. 124.)

IV. Claims Against Hanover

            “Generally speaking, one must be a party to an arbitration agreement to be bound by it or invoke it.” (Pillar Project AG v. Payward Ventures, Inc. (2021) 64 Cal.App.5th 671, 675.) One exception is equitable estoppel, under which “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.” (Boucher v. Alliance Title Co., Inc. (2005) 127 Cal.App.4th 262, 271.) “So, if a plaintiff relies on the terms of an agreement to assert his or her claims against a nonsignatory defendant, the plaintiff may be equitably estopped from repudiating the arbitration clause of that very agreement. In other words, a signatory to an agreement with an arbitration clause cannot ‘have it both ways’; the signatory ‘cannot, on the one hand, seek to hold the non-signatory liable pursuant to duties imposed by the agreement, which contains an arbitration provision, but, on the other hand, deny arbitration's applicability because the defendant is a non-signatory.’” (Goldman v. KPMG, LLP (2009) 173 Cal.App.4th 209, 220.)

            However, “a nonsignatory defendant cannot compel arbitration merely because the scope of the arbitration agreement extends to the types of claims asserted by the plaintiff.” (Soltero v. Precise Distribution, Inc. (2024) 102 Cal.App.5th 887, 895.) “Rather, the critical question is whether the plaintiff's claims against the nonsignatory defendant actually rely on the terms of the contract containing the arbitration clause.” (Ibid.) “[I]t is not enough that the plaintiff's complaint presumes the existence of a contract that contains an arbitration clause.” (Ibid.) California courts have generally rejected the reasoning in Felisilda v. FCA US LLC (2020) 53 Cal.App.5th 486 that a non-signatory manufacturer could enforce an arbitration clause merely because the claims involved the condition of the vehicle, which made the claims “intertwined” with the sales contract containing the arbitration clause. (See Davis v. Nissan North America, Inc. (2024) 100 Cal.App.5th 825; Ford Motor Warranty Cases (2023) 89 Cal.App.5th 1324; Montemayor v. Ford Motor Co. (2023) 92 Cal.App.5th 958; Kielar v. Superior Court (2023) 94 Cal.App.5th 614; Yeh v. Superior Court (2023) 95 Cal.App.5th 264.)

            Here, there are no claims against Hanover which involve the actual terms of the RISC. Hanover’s alleged liability is based on a bond covering fraud by the dealership. The mere fact that the claims against Hanover presume the occurrence of a sale, and therefore imply the existence of the RISC, is not enough. Thus, Hanover cannot enforce the arbitration agreement.

CONCLUSION

            The motion to compel arbitration is GRANTED as to the claims against GENSM only. The case is stayed in its entirety pending the outcome of arbitration.

            The clause, “[t]he amount we pay may be reimbursed in whole or in part by decision of the arbitrator if the arbitrator finds that any of your claims is frivolous under applicable law,” is stricken from the agreement.