Superior Court of California 

County of Los Angeles – West District  

Beverly Hills Courthouse / Department 205 

 

 

 

BACKGROUND 

 

  This case arises from a dispute over an allegedly defective 2021 Mercedes Benz S580V4.  Plaintiff Houshang Shabani leased the car.  Defendant Mercedes-Benz USA, LLC (“Mercedes-Benz”) issued a written warranty for the car.  Plaintiffs claim the car was delivered with serious defects and non-conformities to warranty including defects to improper warning lights and key recognition.  

Plaintiffs signed a Motor Vehicle Lease Agreement (“Lease”) containing an arbitration provision.  The agreement to arbitrate is prominently displayed with a distinctive heading that states “IMPORTANT ARBITRATION DISCLOSURES.”  (Ex. 2 to Ameripour Decl. at p. 4.)  The provision states that “if either you or we choose, any dispute between you and us will be decided by arbitration and not in court.”  (Id.)  It further states that “[a]ny 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 or assigns, which arises out of or relates to a credit application, this lease, or any resulting transaction or relationship arising out of this lease shall, at the election of either you, or us, or our successors or assigns, be resolved by a neutral, binding arbitration and not by a court action.”  (Id.)  The parties to the Lease were Plaintiff and the dealership (WI Simonson).  (Id. at p.1.)   

The operative complaint asserts claims for (1) violation of the Song-Beverly Act, (2) breach of express warranty and (3) application of Lemon Law presumption.   

This hearing is on Mercedes Benz’s motion to compel arbitration.  Mercedes Benz seeks to compel Plaintiff to arbitrate his claims and for a stay of the proceedings pending the completion of arbitration.     

REQUEST FOR JUDICIAL NOTICE 

Mercedes Benz requests judicial notice of the Complaint filed in this action.  The request is denied.  It is¿unnecessary¿to ask the court to take judicial notice of materials previously filed in this case.  A party may “simply¿call the court's attention to such papers.”  (Weil & Brown, Cal. Practice Guide: Civil Procedure Before Trial (The Rutter Group 2019) ¶ 9:53.1a.) 

LEGAL STANDARD 

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 Lease states that “Any arbitration under this lease shall be governed by the Federal Arbitration Act (9 U.S.C. 1 et seq.).”  (Ex. 2 to Ameripour Decl. at p. 4).  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.)  

DISCUSSION 

Equitable Estoppel 

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”).)¿¿¿¿¿¿¿  

Here, the dispute centers on whether Mercedes-Benz (a non-signatory to the Lease) can also seek to enforce the arbitration agreement under the doctrine of equitable estoppel.  Mercedes-Benz relies on two federal court cases, MS Dealer Service Corp. v. Franklin (11th Cir. 1999) 177 F.3d 942, 947 and Mance v. Mercedes Benz USA (N.D. Cal. 2012) 901 F. Supp.2d 1147, 1155.  While the Lease provides that the¿FAA applies, that does not mandate application of federal law.  State law determines whether a non-signatory to an agreement containing an arbitration clause may compel arbitration.  (Arthur Andersen LLP v. Carlisle¿(2009) 556 U.S. 624, 630.)¿ The FAA does not “alter background principles of state contract law regarding the scope of agreements (including the question of who is bound by them).”  (Id.)¿ 

Looking to state law, the Court notes there is a split of authority in the Court of Appeals on the application of equitable estoppel to claims against non-signatory manufacturers.¿¿ 

In Felisilda v. FCA US LLC, plaintiffs sued the manufacturer (FCA) and dealer for breaches of the Song Beverly Act, and the manufacturer was not a signatory to the sales contract.¿ The agreement in Felisilda required arbitration of “[a]ny claim or dispute, whether in contract, tort, statute or otherwise … which arises out of or relates to … 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).”¿ (53 Cal.App.5th at 490 (emphasis in original).)¿  

Relying on the doctrine of equitable estoppel, the Third District¿Court of Appeal concluded the plaintiffs were bound to arbitrate with FCA under the plaintiffs’ sale¿contract with the dealer for three reasons.¿ First, the court reasoned that the condition of the car was within the subject matter of the claims made arbitrable¿under the sale contract.¿(Id.¿at p. 496.)¿ Second, based on the plaintiffs’ allegation that the vehicle was covered by FCA’s warranties, the court found “the sales contract was the source of the warranties,” and equitable estoppel applies where the claims against the non-signatory are founded in and inextricably bound up with¿the obligations imposed by the agreement containing the arbitration clause.¿ (Id.)¿ Third, the court noted the plaintiffs had “expressly agreed to arbitrate claims arising out of the condition of the vehicle—even against third party nonsignatories to the sales contract.” (Id.¿at p. 497.)¿ ¿¿¿ 

The Second District Court of Appeal in In re Ford Motor Warranty Cases (2023) 89 Cal.App.5th 1324 explicitly rejects the holding and analysis in Felisilda.¿ First, the Court rejected from a contract interpretation standpoint that the reference to claims based on relationships with nonsignatory third parties means that the manufacturer can compel arbitration of the buyer's claims. (Id. at 1334 (the arbitration provision “says nothing of binding the purchaser to arbitrate with the universe of unnamed third parties”).)¿ Second, the Court reasoned that the claims for breach of express and implied warranties and fraudulent concealment in that case were not founded on obligations set forth in the sales contract.¿ As the Court explained, none of the plaintiffs “alleged violations of the sales contracts’ express terms” or “sued on any express contractual language in the sale contracts.” (Id. at 1335.)¿ The Court also found “it does not ‘naturally follow’ from any contractual character of the manufacturer warranty claims that they inhere in a retail sale contract containing no warranty terms.” (Id. at 1336.)¿ Finally, the Court rejected the application of the equitable estoppel doctrine because there is no inequity in not compelling the buyer to arbitrate those claims.  As the Court stated, “Again, the ‘fundamental point’ of using equitable estoppel to compel arbitration is to prevent a party from taking advantage of a contract’s substantive terms while avoiding those terms requiring arbitration. Plaintiffs’ claims in no way rely on the sale contracts. Equitable estoppel does not apply.”¿ (Id. at 1336 (internal citations and quotation marks omitted).)   

Because Felisilda and Ford Motor Warranty reach conflicting holdings on the application of equitable estoppel to claims against a non-signatory manufacturer, the Court must choose which holding to follow.¿ (Auto Equity Sales, Inc. v. Superior Court (1962) 57 Cal.2d 450, 455-456.)¿ In accordance with Auto Equity Sales, the Court chooses to follow the holding and analysis in Ford Motor Warranty. The Court finds the reasoning of Ford Motor Warranty persuasive in its application of the equitable estoppel doctrine.   

The fact that the lease transaction results in the manufacturer providing express and implied warranties to the lessee for the goods leased does not mean that the lessee is relying on or basing his claims on the Lease, such that it would be inequitable for Plaintiff to rely on enforcing certain contract terms or obligations while avoiding the arbitration provision in the contract.¿ Mercedes-Benz does not point to anything in the Complaint that alleges Mercedes Benz violated the Lease.   

The Lease does not require Defendant to provide a warranty – indeed, the Lease expressly disclaims any effect on any warranty a manufacturer may choose to offer.  (Ex. 2 to Ameripour Decl. at p. 4.)  The Lease also does not impose upon Mercedes Benz any obligation to comply with its warranty.  The obligation comes from the Song-Beverly Act itself.  Mercedes Benz would be required to repurchase the Car under the Song-Beverly Act, regardless of whether the Lease existed.  Plaintiff’s claims would be exactly the same if he had paid cash for his car and never even entered a lease agreement.       ¿¿¿¿¿ 

The Court also notes that the Third District’s recent decision in Kielar v. Superior Court (2023) 94 Cal.App.5th 614, 620 rejects its prior holding in Felisilda.  In abandoning¿Felisilda, the Third District in¿Kielar adopted instead the ruling of¿Ford Motor Warranty.  A few weeks after Keilar was decided, the First District Court of Appeal joined the anti-Felisilda chorus.  It did so in¿Yeh v. Superior Court (2023) 95 Cal.App.5th 264.  In that case, the First District expressed agreement with the reasoning of Ford Motor Warranty and Kielar. 

While the California Supreme Court has granted the petition for review of Ford Motor Warranty and Kieler and those decisions have no precedential value, they are still persuasive authority on which the Court may rely.  (California Rules of Court, Rule 8.1115.)  The Supreme Court has held that the cases “may be cited, not only for its persuasive value, but also for the limited purpose of establishing the existence of a conflict in authority that would in turn allow trial courts to exercise discretion under Auto Equity Sales, Inc. v. Superior Court … to choose between sides of any such conflict.”  (Ochoa v. Ford Motor Co. (Jul. 19, 2023) 2023 Cal. LEXIS 4235¿*1.) 

Third Party Beneficiary 

Mercedes-Benz also argues it may enforce the arbitration provision in the Lease as a third party beneficiary.  Again, the Court disagrees. 

“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; 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 [15 Cal. Rptr. 821, 364 P.2d 685].)  Thus, “the mere fact that a contract results in benefits to a third party does not render that party a third party beneficiary.” (Jensen, 18 Cal.App.5th at 302.)  Nor does knowledge that the third party may benefit from the contract suffice. ¿(Goonewardene v. ADP, LLC¿(2019) 6 Cal.5th 817, 830.)  Rather, the parties to the contract must have¿intended¿the third party to benefit.  (Hess v. Ford Motor Co.¿(2002) 27 Cal.4th 516, 524¿(putative third party’s rights under a contract are predicated upon the contracting parties’ intent to benefit it).) 

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, 6 Cal.5th at 830.)  Application of these factors shows Merdeces-Benz is not a third party beneficiary.   

First, nothing in the Lease or arbitration provision offers any direct “benefit” to Mercedes-Benz.¿ Its direct benefits are expressly¿limited to the lessee, the dealer, and the dealer’s employees, agents, successors or assigns.  Mercedes-Benz is none of these.   

Second, there is no indication that a benefit to Mercedes-Benz was the signatories' “motivating purpose”¿in contracting for the lease of a Mercedes-Benz vehicle. The manifest intent of the parties was to lease a car, and to allow either the lessee or the dealer to compel arbitration of the specified categories of disputes between them, or between the lessee and any of the dealer’s “employees, agents, successors or assigns.” (See¿Martinez v. BaronHR, Inc.¿(2020) 51 Cal.App.5th 962, 967¿(intent of arbitration agreement ascertained solely from words of written agreement, if possible; language controls if clear and explicit).) 

If the signatories had intended to benefit Mercedes-Benz, such a purpose would have been easy to articulate. They could have simply named Mercedes Benz—directly or by class as the vehicle’s manufacturer—as a person entitled to compel arbitration.  But they did not. What they said was that “if either you or we”—the lessee or the dealer—“choose, any dispute between you and us will be decided by arbitration and not in court.”  (Ex. 2 to Ameripour Decl. (italics added).) 

Third, allowing Mercedes Benz to enforce the arbitration provision as a third party beneficiary would be inconsistent with the “reasonable expectations of the contracting parties” (Goonewardene, 6 Cal.5th at 830) where they specifically vested the right of enforcement in the lessee and the dealer only.  (In re Ford Warranty Cases, 89 Cal.App.5th at 1336-1340 (non-signatory manufacturer was not a third party beneficiary to sales contract where arbitration provision only identified employees, agents, successors and assigns as intended beneficiaries; Ngo v. BMW of North America, LLC (9th Cir. 2022) 23 F.4th 942, 946-948 (non-signatory car manufacturer was not a third party beneficiary where the contract “defines ‘you’ as¿Ngo and ‘we’ as the dealership and its assignee,” and specified that “[e]ither you or we may choose to have any dispute between us decided by arbitration and not in court or by jury trial”). 

Mercedes-Benz argues that because the arbitration agreement covered any claims arising out of or relating to a “resulting relationship,” and the warranty created a “resulting relationship”, Mercedes Benz is a¿third party beneficiary.  To the contrary, the “resulting relationship” language defines the types of claims covered, not the third parties intended to benefit from the contract.  The lease did not create the warranty relationship between Mercedes Benz and Plaintiff.  Plaintiff's warranty relationship with Mercedes Benz was incidental to the lease, not formed by any term in the lease. 

In sum, Merdeces Benz is not a third party beneficiary to the arbitration agreement nor can it enforce the agreement under the doctrine of equitable estoppel.  Accordingly, the Court denies the motion to compel arbitration.     

CONCLUSION 

For the foregoing reasons, the Court DENIES Defendant Mercedes-Benz’s motion to compel arbitration and for a stay.   

DATED: August 15, 2024 ___________________________ 

Edward B. Moreton, Jr. 

Judge of the Superior Court