Judge Kerry Bensinger, Case Number: 24STCV15713, Date: 2024-10-31 Tentative Ruling

This is a lemon law action. Shahram Hosseini (Hosseini or Plaintiff) alleges that he entered into an agreement with car dealership Mercedes Benz of Walnut Creek to lease a new 2023 Mercedes-Benz EQS 450, VIN W1KCG2DB4PA033674 (the Vehicle). The agreement has an arbitration clause. Mercedes-Benz USA, LLC (MBUSA or Defendant) is the manufacturer of the Vehicle. Hosseini received express and implied warranties related to the Vehicle. The Vehicle was delivered with serious defects and nonconformities. Hosseini presented the Vehicle for repair at an authorized service and repair facility. The authorized facility failed to conform the Vehicle to the applicable warranties. Further, MBUSA failed to issue a refund or replace the Vehicle. This action followed.

California law incorporates many of the basic policy objectives contained in the Federal Arbitration Act, including a presumption in favor of arbitrability. (Engalla v. Permanente Medical Group, Inc. (1997) 15 Cal.4th 951, 971-72.) Under both the FAA and California law, arbitration agreements are valid, irrevocable, and enforceable, except on such grounds that exist at law or equity for voiding a contract. (Winter v. Window Fashions Professions, Inc. (2008) 166 Cal.App.4th 943, 947.) Arbitration agreements can be invalidated by “generally applicable contract defenses, such as fraud, duress, or unconscionability.” (AT&T Mobility LLC v. Concepcion (2011) 563 U.S. 333, 339.)

“California law strongly favors arbitration. Through the comprehensive provisions of the California Arbitration Act (Code Civ. Proc., § 1280 et seq.), the Legislature has expressed a ‘strong public policy in favor of arbitration as a speedy and relatively inexpensive means of dispute resolution. As with the FAA (9 U.S.C. § 1 et seq.), California law establishes a presumption in favor of arbitrability. An agreement to submit disputes to arbitration “is valid, enforceable and irrevocable, save upon such grounds as exist for the revocation of any contract.” (OTO, L.L.C. v. Kho (2019) 8 Cal.5th 111, 125 (OTO).)

The petitioner bears the burden of proving the existence of a valid arbitration agreement by a preponderance of the evidence, the party opposing the petition then bears the burden of proving by a preponderance of the evidence any fact necessary to demonstrate the agreement should not be enforced, and the trial court sits as a trier of fact to reach a final determination on the issue. (Rosenthal v. Great Western Financial Securities Corp. (1996) 14 Cal.4th 394, 413.) Pursuant to Code of Civil Procedure section 1281.2, the court can compel parties to an arbitration agreement to arbitrate their dispute.

There is no dispute Plaintiff signed an agreement for purchase of the Vehicle which contains an arbitration clause. There is also no dispute the Federal Arbitration Act governs the arbitration clause. The court must decide two issues: (1) does MBUSA, as a nonsignatory to the Agreement, have standing to enforce the arbitration agreement? If so, (2) does the court or the arbitrator decide whether the arbitration agreement is enforceable? Because the court finds there is a valid delegation clause, the court will compel Plaintiff’s claims to arbitration.

“Although threshold questions of¿arbitrability¿are ordinarily for courts to decide in the first instance under the [Federal Arbitration Act (FAA)], the ‘[p]arties to an¿arbitration agreement¿may agree to¿delegate¿to the arbitrator, instead of a court, questions regarding the enforceability of the agreement.’” (Pinela v. Neiman Marcus Group, Inc. (2015) 238 Cal.App.4th 227, 239 (Pinela) quoting¿Tiri v. Lucky Chances, Inc. (2014) 226 Cal.App.4th 231, 241.) “Just as the arbitrability of the merits of a dispute depends upon whether the parties agreed to arbitrate that dispute, … so the question who has the primary power to decide arbitrability turns upon what the parties agreed about that matter.” (Aanderud v. Superior Court (2017) 13 Cal.App.5th 880, 891 (Aanderud).) The delegation issue is a “gateway” question. (Rent-A-Center, West, Inc. v. Jackson (2010) 561 U.S. 63, 69 (Rent-A-Car).)

“There are two prerequisites for a delegation clause to be effective. First, the language of the clause must be clear and unmistakable. Second, the delegation must not be revocable under state contract defenses such as fraud, duress, or unconscionability. The ‘clear and unmistakable’ test reflects a ‘heightened standard of proof’ that reverses the typical presumption in favor of the arbitration disputes.” (Aanderud, supra, 13¿Cal.App.5th at p. 892 (cleaned up).) Thus, “[u]nless the parties clearly and unmistakably provide otherwise, the question of whether the parties agreed to arbitrate is to be decided by the court, not the arbitrator.’” (Pinela, supra, at pp. 239-40 (cleaned up).)

Here, Plaintiff clearly and unmistakably agreed to commit questions of arbitrability to the arbitrator. The Agreement states, in relevant part, “Any claim or dispute, … (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, assigns, or the vehicle distributor, including Mercedes-Benz USA LLC (each a “Third Party Beneficiary”), which arises out of or relates to a credit application, this lease, or any resulting transaction or relationship arising out of this lease (including any such relationship with third parties who do not sign this contract) shall, at the election of either you, us, or a Third Party Beneficiary, be resolved by a neutral, binding arbitration and not by a court action” (Agreement, p. 4, emphasis added.)

The language is clear and unmistakable. The delegation clause reserves to the arbitrator the issue whether the agreement is enforceable. For this reason, the court compels Plaintiff’s claims to arbitration. Plaintiff may present his unconscionability argument to the arbitrator.[1]

The court has found the delegation clause clearly and unmistakably reserves the issue of arbitrability to the arbitrator. Accordingly, the arbitrator must decide whether MBUSA has standing to compel arbitration as a third-party beneficiary. However, even if the court were to decide this issue, the court would find MBUSA has standing to compel arbitration as a third-party beneficiary of the Agreement.

There are exceptions to the general rule that a nonsignatory to an agreement cannot be compelled to arbitrate and cannot invoke an agreement to arbitrate, without being a party to the arbitration agreement.” (JSM Tuscany, LLC v. Superior Ct. (2011) 193 Cal.App.4th 1222, 1236-37.) For instance, a nonsignatory may compel arbitration as a third-party beneficiary to the arbitration agreement.¿(Ronay Family Ltd. Partnership v. Tweed (2013) 216 Cal.App.4th 830, 838;¿see also¿Civ. Code, § 1559¿(“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.”).]

“Any 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, assigns, or the vehicle distributor, including Mercedes-Benz USA LLC (each a “Third Party Beneficiary”), which arises out of or relates to a credit application, this lease, or any resulting transaction or relationship arising out of this lease (including any such relationship with third parties who do not sign this contract) shall, at the election of either you, us, or a Third Party Beneficiary, be resolved by a neutral, binding arbitration and not by a court action. Any claim or dispute is to be arbitrated on an individual basis and not as a class action. The arbitration shall be administered by the American Arbitration Association, or by any other organization that you may choose, subject to our or a Third Party Beneficiary’s approval.”

Under the express terms of the Agreement, MBUSA is a third-party beneficiary. And just like a signatory to the agreement, a third-party beneficiary is empowered to compel a claim arising from the transaction to arbitration. MBUSA thus has standing to compel arbitration as an enumerated third-party beneficiary.

Nonetheless, Plaintiff argues MBUSA cannot invoke the arbitration clause because MBUSA does not satisfy the elements to do so as a third-party beneficiary. A non-signatory seeking to compel arbitration as a third-party beneficiary must demonstrate (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 (Goonewardene).) In further support, Plaintiff cites several federal authorities for the proposition that a non-signatory, third-party beneficiary, like MBUSA, has no independent right to enforce a dealer’s clause when it is not expressly included in the arbitration language. (See Plaintiff’s Copies of Non-California Authorities Cited in Opposition to the Motion to Compel Arbitration and For a Stay.) Although not cited by the parties, the Second Appellate District also recently examined this issue in Rivera v. Superior Court of Ventura County (2024) 105 Cal.App.5th 288 (Rivera). In Rivera, a lemon law case, the Court of Appeal concluded that Ford (the car manufacturer) and its authorized service center were not intended third party beneficiaries of the plaintiff’s car sale contract with the dealership. Ford and its authorized service center were not expressly identified as third party beneficiaries in the sales contract. Consequently, Ford and the authorized service center could not compel arbitration based on a third-party beneficiary theory. (Rivera, at pp. 740-41.)

Goonewardene, Plaintiff’s “Non-California Authorities”, and Rivera are distinguishable. None of these cases dealt with an arbitration clause that explicitly identified the third-party beneficiary. As discussed above, the Agreement unequivocally provides that MBUSA is a “Third Party Beneficiary”. This ends the inquiry.[2] Having so concluded, the court need not and does not address whether MBUSA may compel arbitration under an equitable estoppel theory.

Given the foregoing, Defendant Mercedes-Benz USA LLC’s Motion to Compel Binding Arbitration is GRANTED. The action is stayed pending the conclusion of the arbitration.¿ (Code Civ. Proc., § 1281.4.) The court sets a post-arbitration status conference for July 31, 2025, at 9:00 a.m.

[1] Plaintiff asserts his unconscionability challenge as to the agreement to arbitrate and not to the delegation clause specifically. (See Malone v. Superior Ct. (2014) 226 Cal.App.4th 1551, 1559–60 citing (Rent-A-Center, supra, 561 U.S. at p. 70 [“when a party is claiming that an arbitration agreement is unenforceable, it is important to determine whether the party is making a specific challenge to the enforceability of the delegation clause or is simply arguing that the agreement as a whole is unenforceable. If the party's challenge is directed to the agreement as a whole--even if it applies equally to the delegation clause--the delegation clause is severed out and enforced; thus, the arbitrator, not the court, will determine whether the agreement is enforceable. [¶] In contrast, if the party is making a specific challenge to the delegation clause, the court must determine whether the delegation clause itself may be enforced (and can only delegate the general issue of enforceability to the arbitrator if it first determines the delegation clause is enforceable).”].)

[2] Alternatively, the inclusion of MBUSA as a third party beneficiary on its own, would satisfy the test elucidated in Goonewardene. (See also Baglieri v. Mercedes-Benz USA, LLC (N.D. Cal., Aug. 27, 2024, No. 24-CV-00520- MMC) 2024 WL 3970685, at *2 (stating that if parties intend their contract to benefit a third-party beneficiary, “they can ‘simply name[ ] [it] . . . as a person entitled to compel arbitration.”).)