Judge Edward B. Moreton, Jr., Case 22SMCV02121 2023-02-10 Tentative Ruling

Judge: Edward B. Moreton, Jr., Case: 22SMCV02121, Date: 2023-02-10 Tentative Ruling

Superior Court of California

County of Los Angeles – West District

Beverly Hills Courthouse / Department 205

SUE MORSE,

Plaintiff,

TESLA MOTORS, INC. and DOES 1 through 100, inclusive,

Defendants.

Case No.: 22SMCV02121

Hearing Date: February 10, 2023

[TENTATIVE] ORDER RE:

DEFENDANT’S MOTION TO

COMPEL ARBITRATION AND STAY

PROCEEDINGS

MOVING PARTY: Tesla Inc.

RESPONDING PARTY: Plaintiff Sue Morse

This case arises from a dispute over an allegedly defective Tesla. Plaintiff Sue Morse ordered a car from Tesla, Inc. pursuant to a motor vehicle order agreement (“MVOA”). (Ex. A to Kim Decl.) The MVOA is between Plaintiff and Tesla Inc. and is not signed by Plaintiff. The MVOA contains an arbitration provision which states that “you [Plaintiff] agree that any dispute arising out of or relating to any aspect of the relationship between you [Plaintiff] and Tesla will not be decided by a judge or jury but instead by a single arbitrator in an arbitration administered by the American Arbitration Association (AAA) under its Consumer Arbitration Rules.” (Ex. A to Kim Decl.)

Plaintiff subsequently purchased a car from Defendant Tesla Motors, Inc. pursuant to a Retail Installment Sale Contract (“RISC”). The RISC is between Plaintiff and Tesla Motors, Inc. and is signed by Plaintiff. Tesla Inc., the moving party, does not explain the nature of its relationship with Defendant, Tesla Motors, Inc. In any event, under the RISC, Plaintiff agreed to arbitrate “[a]ny claim or dispute whether in contract, tort, statute or otherwise between you [Plaintiff] and us [Tesla Motors, Inc.] 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 (including any such relationship with third parties who do not sign this contract).” (Ex. B to Kim Decl.)

Plaintiff alleges that at the time the car was delivered to Plaintiff, it was “not in a merchantable condition, was not safe, and did not conform to the quality and safety guidelines reasonably expected of a [car].” (Compl. ¶9.) The operative complaint asserts claims for (1) breach of implied warranty, (2) breach of express warranty, (3) violation of the Song-Beverly Act and (4) violation of the Uniform Commercial Code.

This hearing is on Tesla Inc.’s motion to compel arbitration. Tesla, Inc. seeks to compel Plaintiff to arbitrate her dispute with the American Arbitration Association (“AAA”) and for a stay of the proceedings pending the completion of arbitration.

The¿Federal Arbitration Act (“FAA”)¿applies to contracts that involve interstate commerce (9 U.S.C. §§ 1,¿2), but since arbitration is a matter of contract, the¿FAA¿also applies if it is so stated in the agreement. (See¿Victrola 89, LLC v. Jaman Properties 8 LLC¿(2020) 46 Cal.App.5th 337, 355 [260 Cal. Rptr. 3d 1]¿(“[T]he presence of interstate commerce is not the only manner under which the¿FAA¿may apply. … [T]he parties may also voluntarily elect to have the¿FAA¿govern enforcement of the Agreement”].)

Here, the parties’ arbitration agreement in the RISC contains a provision that states, “Any arbitration under this Arbitration Provision shall be governed by the Federal Arbitration Act (9 U.S.C. 1 et seq.) and not by any state law concerning arbitration.” (Ex. B to Kim Decl. at p. 7). The language of this provision is unambiguous: the parties specified that the¿FAA¿governs the arbitration agreement.¿(Cf.¿Victrola 89, LLC, 46 Cal.App.5th at pp. 343, 348¿(contracting parties’ explicit “reference to ‘enforcement’ under the¿FAA required the court to consider the [defendants’] motion to¿compel arbitration under the¿FAA.”).)

Under the FAA, “any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration …”. Moses H. Cone Memorial Hospital v. Mercury Constr. Corp.¿(1983) 460 U.S. 1, 24–25. This federal policy favoring arbitration preempts any state law impediments to the policy’s fulfillment. If a state law interferes with the FAA’s purpose of enforcing arbitration agreements according to their terms, the FAA preempts the state law provision, no matter how laudable the state law’s objectives. (AT&T Mobility LLC v. Concepcion (2011) 563 U.S. 333, 352.) Under the¿supremacy clause of the United States Constitution (art. VI, cl. 2), the FAA requires any conflicting state law to give way. (Nitro-Lift Technologies, L. L. C. v. Howard¿(2012) 133 S.Ct. 500, 504).

However, while the arbitration agreement here is governed by the FAA, the agreement may be enforced via the summary procedures provided by California arbitration law. (Rosenthal v. Great Western Financial Securities Corp. (1996) 14 Cal. 4th 394, 409-410.) It is a “general and unassailable proposition . . . that States may establish the rules of procedure governing litigation in their own courts,” even though the controversy is governed by substantive federal law. (Felder v. Casey¿(1988) 487 U.S. 131, 138.) By the same token, however, a state procedural rule must give way “if it impedes the uniform application of the federal statute essential to effectuate its purpose, even though the procedure would apply to similar actions arising under state law.” (McCarroll v. L.A. County etc. Carpenters¿(1957) 49 Cal. 2d 45, 61, 62.)

“We think it plain¿the California procedures for a summary determination of the petition to compel arbitration serve to further, rather than defeat, the enforceability policy of the [FAA.]” ¿(Rosenthal, 14 Cal. 4th at 409.) Code Civ. Proc. § 1281.2 and¿1290.2¿are neutral as between state and federal law claims for enforcement of arbitration agreements. (Id.) “They display no hostility to arbitration as an alternative to litigation; to the contrary, the summary procedure provided, in which the existence and validity of the arbitration agreement is decided by the court in the manner of a motion, is designed to further the use of private arbitration as a means of resolving disputes more quickly and less expensively than through litigation.” (Id.)

As with federal law, under California¿law,¿public policy favors arbitration as an efficient and less expensive means of resolving private disputes. (Moncharsh¿v.¿Heily¿&¿Blase¿(1992) 3 Cal.4th 1, 8-9;¿AT&T Mobility LLC v. Concepcion,¿563 U.S. at 339.)¿ To further that policy, Code Civ. Proc. §1281.2 requires a trial court to enforce a written arbitration agreement unless it finds (1) no written agreement to arbitrate exists, (2) the right to compel arbitration has been waived, (3) grounds exist for rescission of the agreement or (4) litigation is pending that may render the arbitration unnecessary or create conflicting rulings on common issues.

When seeking to compel arbitration, the initial burden lies with the moving party to demonstrate the existence of a valid arbitration agreement by a preponderance of evidence.¿ (Ruiz v. Moss Bros. Auto Group (2014) 232 Cal.App.4th 836, 841-42; Gamboa v. Northeast Community Clinic (2021), 72 Cal.App.5th 158, 164-65.)¿ It is sufficient for the moving party to produce a copy of the arbitration agreement or set forth the agreement’s provisions.¿ (Gamboa, 72 Cal.App.5th at 165.)¿ The burden then shifts to the opposing party to prove by a preponderance of evidence any defense to enforcement of the contract or the arbitration clause.¿ (Ruiz, 232 Cal.App.4th at 842; Gamboa, 72 Cal.App.5th at 165.) The trial court then weighs all the evidence submitted and uses its discretion to make a final determination.¿ (Id.)¿ “California law, like [federal law], reflects a strong policy favoring arbitration agreements[.]”¿ (Wagner Const. Co. v. Pacific Mechanical Corp. (2007) 41 Cal.4th 19, 31 (internal quotations omitted).)

If the court orders arbitration, then the court shall stay the action until arbitration is completed.¿ (See Code Civ. Proc., § 1281.4.)

Existence of an Agreement

In ruling on a motion to compel arbitration, the Court must first determine whether the parties actually agreed to arbitrate the dispute, and general principles of California contract law help guide the court in making this determination. (Mendez v. Mid-Wilshire Health Care Center (2013) 220 Cal.App.4th 534, 541; Victoria v. Superior Court (1985) 40 Cal. 3d 734, 835.)¿¿

Although “[t]he law favors contracts for arbitration of disputes between parties” (Player v. Geo. M. Brewster & Son, Inc. (1971) 18 Cal.App.3d 526, 534), “there is no policy compelling persons to accept arbitration of controversies which they have not agreed to arbitrate[.]” (Weeks v. Crow (1980) 113 Cal. App. 3d 350, 353..)¿ “[A]rbitration is a matter of contract and a party cannot be required to submit to arbitration any dispute which he has not agreed so to submit.” (AT&T Technologies v. Communications Workers (1986) 475 U.S. 643, 648 (citations and internal quotations omitted); see also Sparks v. Vista Del Mar Child & Family Services (2012) 207 Cal.App.4th 1511, 1518¿ (“Because arbitration is a contractual matter, a party that has not agreed to arbitrate a controversy cannot be compelled to do so”).)¿¿¿¿¿¿¿

Defendant presents evidence of two arbitration agreements, both of which require Plaintiff to arbitrate the present dispute. The MVOA requires arbitration of “any dispute arising out of or relating to any aspect of the relationship between you [Plaintiff] and Tesla”. (Ex. A to Kim Decl.). The RISC requires arbitration of any dispute which “arises out of or relates to” “this contract or any resulting transaction or relationship.” (Ex. B to Kim Decl.) Both arbitration clauses are broad enough to cover Plaintiff’s suit regarding a defective Tesla.

However, the MVOA is unsigned, and the MVOA requires a signature for the agreement to arbitrate to be effective. (Ex. B to K Decl. (“You may opt out of arbitration within 30 days after signing this Agreement …") (emphasis added).) As it is unsigned and the agreement requires a signature, the Court finds that the MVOA is unenforceable against Plaintiff. (Donohoe v. Orange County Global Med. Ctr., 2019 Cal. Super. LEXIS 58421, at *2 (“[W]here an arbitration agreement requires a signature to be effective, courts have found that unsigned arbitration agreements are unenforceable.”), citing Gorlach v. Sports Club Co. (2012) 209 Cal.App.4th 1497, 1509; Mitri v. Arnel Management, Co. (2007) 157 Cal.App.4th 1164, 1170-71.)

The only applicable arbitration agreement, therefore, is the RISC. But Tesla Inc. is not a signatory to the RISC, and the question arises whether as a non-signatory, Tesla Inc., can enforce the arbitration provision. The Court concludes it can, and Plaintiff does not argue otherwise. Courts have held that under the doctrine of equitable estoppel, a non-signatory car manufacturer can enforce an arbitration agreement between a consumer and a dealer. (Felisilda v. FCA US LLC (2020) 53 Cal.App.5th 486, 495-497; Howard v. Ford Motor Co., 2020 Cal. Super. LEXIS 33600 at *4-*5; Reykhel v. BMW of N. Am. LLC, 2019 U.S. Dist. LEXIS 233073 at *10-*11; Mance v. Mercedez-Benz USA, 901 F. Supp. 2d 1147, 1155-56 (N.D. Cal. 2012).) Estoppel is appropriate in such scenarios because the signatory cannot have its cake and eat it too — seeking to hold the nonsignatory liable under the terms of the contract but also evading the contract’s clear mandate to arbitrate. (Reykhel, 2019 U.S. Dist. LEXIS 233073 at *11; Mance, 901 F. Supp.2d at 1156.) A party should not be allowed to claim the benefit of the contract and simultaneously avoid its burdens.

The Court must next consider Plaintiff’s argument that the Song-Beverly Act (“SBA”) precludes binding arbitration. Plaintiff argues that the SBA incorporates the Magnuson-Moss Warranty Act (“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) (emphasis added).) Plaintiff argues that “informal dispute settlement procedure” includes arbitration, and under the MMWA, the arbitration cannot be binding as MMWA expressly contemplates that the consumer can go on to “pursu[e] legal remedies in the courts.”

Plaintiff also relies on 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. (40 Fed. Reg. 60168, 60211 (1975) (“[R]eference within the written warranty to any binding, non-judicial remedy is prohibited by the Rule and the Act.”).)

Plaintiff’s arguments have been considered and rejected by multiple courts including two circuit courts. (See, e.g., Walton v. Rose Mobile Homes LLC, 298 F.3d 470, 473-479 (5th Cir. ) (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) (“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.”); Sheinfeld v. BMW Fin. Servs. NA, LLC, 2019 U.S. Dist. LEXIS 163984 at *6-*12 (D. Nev. Sept. 24, 2019) (in a federal claim under the MMWA, defendant was entitled to compel arbitration because the MMWA did not preclude binding arbitration of claims); McManigal v. Jaguar Land Rover N. Am. LLC, 2021 Cal. Super. LEXIS 46145 at *4 (rejecting plaintiff’s claim that SBA and MMWA prohibit pre-dispute binding arbitration of “lemon law” claims).

In Walton, the Fifth Circuit applied the three part test established by the Supreme Court in Shearson/American Express Inc. v. McMahon (1987) 482 U.S. 220, to determine whether Congress intended to limit or prohibit waiver of a judicial forum in the MMWA. Under the McMahon test, the court must consider (1) the statute’s text; (2) its legislative history; and (3) whether there is an “inherent conflict between arbitration and the statute’s underlying purposes.” (Id. at 227.) McMahon cautions that “[t]he burden is on the party opposing arbitration ... to show that Congress intended to preclude a waiver of judicial remedies for the statutory rights at issue,” (Id.) and absent a clear showing to the contrary, courts must “rigorously enforce agreements to arbitrate.” (Id. at 226.)

In Walton, the plaintiffs sued their mobile-home manufacturer and dealer, asserting state-law claims and an MMWA claim, and the defendants moved to compel arbitration under the binding arbitration provisions in the manufacturer’s warranty and other contracts. (298 F.3d at 471-472.) As in this case, the plaintiffs argued that the MMWA precluded binding arbitration of any of their claims. (Id. at 472.)

The district court concluded the plaintiffs were partly right and compelled arbitration of their non-MMWA claims only. (Id. at 472-473.) The Fifth Circuit reversed, holding that the plaintiffs were bound to arbitrate all of their claims. (Id. at 479.) Applying the McMahon test, the Fifth Circuit carefully walked through the FAA and the MMWA, their history, and their application. Through extensive analysis, the Fifth Circuit found no congressional intent to preclude binding arbitration of claims in the MMWA’s text, legislative history, or purpose. (Id. at 475-478.) So it held that “[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 [under] the FAA.” (Id. at 478-479.)

In doing so, the Fifth Circuit rejected contrary holdings from other courts. It noted that some of those cases relied on the FTC’s interpretation of the MMWA that binding arbitration is impermissible under the MMWA. (Id. at 475, 479). But the Fifth Circuit concluded “it is improper to use the FTC regulations themselves to determine congressional intent here” because “[a]n agency's regulations . . . are not part of” the McMahon test. (Id. at 479). The regulations may only be considered if, after working through the McMahon test, congressional intent remains ambiguous. (Id.)

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 that must be enforced under the FAA. Plaintiff, therefore, is bound to arbitrate her claims under the RISC’s binding arbitration provision.

The Court must next consider whether the RISC is unconscionable. 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.) Unconscionability has both a ‘procedural’ and a ‘substantive’ element.” (A & M Produce Co. v. FMC Corp. (1982) 135 Cal.App.3d 473, 486.) An agreement to arbitrate is unenforceable only if both procedural and substantive unconscionability is shown. (Stirlen v. Supercuts, Inc. (1997) 51 Cal.App.4th 1519, 1533.)

Procedural unconscionability focuses on whether there is “oppression” arising from an inequality of bargaining power or “surprise” arising from buried terms in a complex printed form. (Id. at 1280.) Substantive unconscionability addresses the existence of overly harsh or one-sided terms. (Id.)

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). Both, however, need not be present to the same degree. A sliding scale is applied so that 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.” (Morris v. Redwood Empire Bancorp (2005) 128 Cal.App.4th 1305, 1317; see also A & M Produce Co., 135 Cal.App.3d at 486.)
Here, there is some degree of procedural unconscionability given the unequal bargaining power between Plaintiff and Defendant and the adhesive nature of the contract. (OTO, L.L.C. v. Kho (2019) 8 Cal. 5th 111, 126 (quoting Baltazar v. Forever 21, Inc. (2016) 62 Cal. 4th 1237, 1245) (“An adhesive contract is standardized, generally on a preprinted form, and offered by the party with superior bargaining power on a take-it-or-leave-it basis.”).) While Plaintiff was able to opt out of the arbitration agreement in the MVOA, there was no similar provision in the RISC. (Sanchez v. Valencia Holding Co., LLC (2015) 61 Cal. 4th 899, 914 (finding procedural unconscionability based on unequal bargaining power and fact that consumer could not opt out of the arbitration agreement).)

However, the showing of procedural unconscionability is slight given the language of the arbitration agreement was not buried in a complex form. The RISC was only 7 pages long, and the arbitration agreement stated in bold and capital letters “EITHER YOU OR WE MAY CHOOSE TO HAVE ANY DISPUTE BETWEEN US DECIDED BY ARBITRATION AND NOT IN COURT OR BY A JURY TRIAL.” The RISC further stated in bold and capital letters “DISCOVERY AND RIGHTS TO APPEAL IN ARBITRATION ARE GENERALLY MORE LIMITED THAN IN A LAWSUIT, AND OTHER RIGHTS THAT YOU AND WE WOULD HAVE IN COURT MAY NOT BE AVAILABLE IN ARBITRATION.”

Moreover, “a finding of procedural unconscionability does not mean that a contract will not be enforced, but rather that courts will scrutinize the substantive terms of the contract to ensure they are not manifestly unfair or one-sided.” (Gentry v. Superior Court (2007) 42 Cal.4th 443, 469.) We now address whether the RISC is substantively unconscionable.

Under the RISC, both parties have the right to demand arbitration. Plaintiff, moreover, has a choice of arbitration organizations, subject to Defendant’s approval. Plaintiff may choose the AAA as the arbitrator in which case the rules of the AAA govern, which courts have found to be neutral and fair. (Lagatree v. Luce, Forward, Hamilton & Scripps (1999) 74 Cal.App.4th 1105, 1126-1127.) The agreement also provides that Tesla will “pay your filing, administration, service or case management fee and your arbitrator or hearing fee all up to a maximum of $5000, unless the law or the rules of the chosen arbitration organization require us to pay more.” (Ex. B to Kim Decl.) It also states each party will bear their own attorney, expert, and other fees, “unless awarded by the arbitrator under applicable law.” (Ex. B to Kim Decl.) Courts have found no substantive unconscionability in cases involving similar fee provisions in consumer contracts. (Novoa v. Am. Honda Motor Co., 2022 Cal. Super. LEXIS 23543 at *14; Rios v. Cerritos Dodge, 2021 Cal. Super. LEXIS 84534 at *11.)

In sum, the Court finds a minimal degree of procedural unconscionability and no substantive unconscionability. Accordingly, the arbitration agreement is enforceable.

Arbitration with AAA

Defendant asks the Court to order this action to binding arbitration with AAA but the RISC provides Plaintiff may choose AAA or “any other organization to conduct the arbitration subject to [Defendant’s] approval.” (Ex. B to Kim Decl.) The arbitration agreement does not mandate that the arbitration be with AAA. Defendant cites Code Civ. Proc. § 1281.6 which states “[i]f the arbitration agreement provides a method of appointing an arbitrator, that method shall be followed.” But the method mandated in the arbitration agreement is that Plaintiff has a choice of AAA or any other organization subject to Tesla’s approval. Accordingly, Section 1281.6 does not compel the result Defendant seeks, and the Court denies Defendant’s request to compel arbitration with AAA.

Code Civ. Proc. §1281.4 provides that if the court has ordered the arbitration of a controversy, it “shall, upon motion of a party to such action or proceeding, stay the action or proceeding until an arbitration is had in accordance with the order to arbitrate or until such earlier time as the court specifies.” Pursuant to Section 1281.4, therefore, the Court stays this action pending conclusion of the arbitration proceedings.