Judge: Michael Shultz, Case: 22CMCV00234, Date: 2023-01-31 Tentative Ruling
Case Number: 22CMCV00234 Hearing Date: January 31, 2023 Dept: A
Tuesday, January 31, 2023, at 8:30 a.m.
[TENTATIVE] ORDER
I.
BACKGROUND
The complaint, filed on July 22, 2022,
alleges that Plaintiffs entered into an express warranty contract with Nissan
North America, Inc. (Nissan) regarding the purchase of a new 2020 Nissan
Altima. The vehicle allegedly developed defects relating to its emergency
braking system which Nissan was unable to repair. Nissan allegedly failed to
comply with its obligations to repair or replace the vehicle under the
Song-Beverly Consumer Warranty Act (the SBA). Plaintiffs allege claims for
breach of express warranty under the SBA, fraudulent inducement, and fraudulent
concealment against Nissan and a separate claim for negligent repair against
the dealer, K Motors SJC, LLC dba Glendale Nissan (Dealer).
II.
ARGUMENTS
A.
Nissan’s Motion filed October 27,
2022.
Defendant Nissan requests an order
to compel Plaintiffs to submit this matter to binding arbitration pursuant to
the Federal Arbitration Act (FAA) as required by the Retail Installment Sales
Contract (Sales Contract) signed by Plaintiffs in connection with the purchase
of the vehicle. The Sales Contract contains an arbitration provision. Plaintiffs
are equitably estopped from avoiding the arbitration provision since Plaintiffs’
claims are intimately founded in and intertwined with the Sales Contract.
Nissan is also a third-party beneficiary of the Sales Contract with standing to
enforce the arbitration provision, although it is a non-signatory. The FAA and
California law require the imposition of a stay pending the completion of
arbitration.
B.
Opposition filed January 18, 2023.
Plaintiffs argue that the motion
should be denied because Nissan did not sign the Sales Contract. As a
non-signatory, Nissan cannot compel arbitration. Plaintiffs acknowledge that
equitable estoppel is an exception to the general rule, however, Plaintiffs’ claims
do not arise from or relate to the contractual obligations in the Sales
Contract between Plaintiffs and the dealership, and Plaintiffs claims are not
“intimately found in, nor intertwined with” Plaintiffs’ contractual obligations
with the dealer. Equitable estoppel requires actual reliance on the terms of
the agreement to impose liability on the nonsignatory.
Nissan relies on Felisilda v.
FCA US, LLC, which is distinguishable as articulated by several federal
court opinions. In Felisilda, the plaintiffs sued the selling dealership
as well as the manufacturer on the warranty claims. Here, Plaintiffs sue only
the manufacturer for breach of warranty. Plaintiffs’ claim against the Dealer
is for negligent repair, and the Dealer is not moving to compel arbitration.
Plaintiffs argue that based on the
material terms of the Sales Contract, the definition of “We” or “Us” is limited
to the selling-creditor/dealership. Applying the requirement for arbitration to
Nissan requires the Court to fundamentally rewrite the Sales Contract and
arbitration clause. Equitable estoppel requires actual reliance on the terms of
the agreement to impose liability on the non-signatory.
Plaintiffs argue that while they
seek revocation of their acceptance, it is not premised on the California
Commercial Code or contract law, since revocation has a distinct meaning in the
Song-Beverly Act. The Sales Contract disclaims all warranties other than those
provided by the manufacturer; this does not affect Plaintiffs’ separate and
independent claims against the manufacturer.
Nissan has not established any
“close relationship” between itself and the selling dealership that would
entitle Nissan to compel arbitration of Plaintiffs’ claims, nor has Nissan
established it is a third-party beneficiary of the Sales Contract. Additionally,
the arbitration provision is procedurally and substantively unconscionable and
cannot be enforced.
C.
Reply filed January 24, 2023
Nissan argues that Plaintiffs do
not dispute that the scope of the arbitration provision includes arbitration of
any claim or dispute arising out of or relating to the purchase or condition of
the vehicle, including claims against third parties. Based on both the plain
terms of the Sales Contract and binding California precedent (Felisilda),
this matter belongs in arbitration. Federal court decisions are not binding. Plaintiffs’
unconscionability arguments are without merit.
III.
DISCUSSION
A. Legal Standards
The
court can order the parties to arbitrate the matter on petition of a party to
an arbitration agreement. Code Civ. Proc., § 1281.2. The petitioner’s burden is to
establish that a valid arbitration agreement exists. The opposing party’s burden
is to establish a defense to enforcement based on a preponderance of
evidence. Molecular Analytical Systems v.
Ciphergen Biosystems, Inc. (2010) 186 Cal.App.4th 696, 705.
B.
Plaintiffs’ objection to the
Declaration of Scott D. Sharp and the Sales Contract (Exhibit B) is OVERRULED
Plaintiffs
argue that the Sales Contract is inadmissible hearsay, lacks authentication,
foundation, and is speculative and prejudicial. However, Nissan’s burden in
moving to compel arbitration is to show the existence of an agreement, not its validity. Espejo v. Southern California
Permanente Medical Group (2016) 246 Cal.App.4th 1047, 1058 ["as a preliminary matter the
[trial] court is only required to make a finding of the agreement's existence,
not an evidentiary determination of its validity.”]. To meet its burden, the
moving party need only attach a copy of the agreement to the petition and
incorporate it by reference. Id. at 1058; California Rules of Court, rule 3.1330 [“The provisions must be stated
verbatim or a copy must be physically or electronically attached to the petition and incorporated by
reference."].
C.
Nissan has established that equitable
estoppel applies to permit Defendant, a non-signatory, to enforce the
arbitration provision in the Sales Contract between Plaintiffs and the dealer.
The Sales
Contract at issue is made between Plaintiffs and Carson Nissan. Sharp Declaration, Ex. B. Defendant is not a party
to the contract. Id. The Sales Contract defines “we” or “us” as the
“Seller-Creditor.” Ex. B, p. 1. The Sales Contract states that “[a]ny
arbitration under this Arbitration Provision shall be governed by the Federal
Arbitration Act … .” Ex. B, p. 7, ¶ 5. However, even if the FAA governs
arbitration, the court applies state law to determine who is bound and who may
enforce an arbitration agreement. Thomas v. Westlake (2012) 204 Cal.App.4th 605, 614, n.7; Rosenthal v. Great Western Fin.
Securities Corp. (1996) 14 Cal.4th 394, 410 ["Because the California
procedure for deciding motions to compel [arbitration] serves to further,
rather than defeat, full and uniform effectuation of the federal law's
objectives, the California law, rather than section 4 of the USAA, is to be
followed in California courts."].
Under
Section 2 of the FAA, written arbitration agreements are valid, irrevocable,
and enforceable “save upon such grounds as exist at law or in equity for the
revocation of a contract.” Arthur Andersen LLP v.
Carlisle (2009) 556 U.S. 624, 629–630; 9 U.S.C.A. § 2 (West).
Section 3 of the FAA requires the court
on application of one of the parties to stay the action if it involves issues
referable to arbitration. 9 U.S.C.A. § 3 (West).
Under
California law, the general rule is that “only a party to an arbitration
agreement is bound by or may enforce the agreement. (Code Civ. Proc., §
1281.2); … ." Thomas v. Westlake (2012) 204
Cal.App.4th 605, 613. However,
there are exceptions to the general rule in where a nonsignatory can invoke an
arbitration clause to compel a signatory plaintiff to arbitrate its claims. JSM Tuscany, LLC v. Superior
Court (2011) 193 Cal.App.4th 1222, 1237.
One
exception is the principle of equitable estoppel which applies "when the
causes of action against the nonsignatory are ‘intimately founded in and
intertwined’ with the underlying contract obligations … .” Under those
circumstances , where a plaintiff relies “on contract terms in a claim against
a nonsignatory defendant, even if not exclusively, a plaintiff may be equitably
estopped from repudiating the arbitration clause contained in that agreement[,]”
Boucher v. Alliance Title Co.,
Inc. (2005) 127 Cal.App.4th 262, 272.
Equity
is the “lynchpin” for equitable estoppel, “and the point of applying it to
compel arbitration is to prevent a situation that ‘would fly in the face of
fairness.’ [Citation.] The purpose of the doctrine is to prevent a plaintiff
from, in effect, ... ‘relying on the contract when it works to [his/her]
advantage [by establishing the claim] and repudiating it when it works to [his/her]
disadvantage [by requiring arbitration].’ [Citation.] The plaintiff's
actual dependence on the underlying contract in making out the claim against
the nonsignatory defendant is therefore always the sine qua non of an
appropriate situation for applying equitable estoppel.’" Goldman v. KPMG, LLP (2009) 173
Cal.App.4th 209, 229 [italics
in original].
Thus,
in Felisilda v. FCA US LLC (2020) 53
Cal.App.5th 486 (petition
for review by the California Supreme Court denied November 24, 2020), the court
looked to the operative complaint to determine whether the plaintiff’s claims
were “founded on or intimately connected” with the sales contract.
The
contract at issue in Felisilda states:
“[a]ny claim
or dispute, whether in contract, tort, statute or otherwise ... between you and
us ... which arises out of or relates to ... [the] condition
of this vehicle ... shall ... be resolved by neutral, binding
arbitration and not by a court action.” Felisilda at 496 [italics in original].
Felisilda’s complaint alleged that "’express warranties
accompanied the sale of the vehicle to [them] by which FCA ... undertook to
preserve or maintain the utility or performance of [their] vehicle or provide
compensation if there was a failure in such utility or performance.’ Thus, the
sales contract was the source of the warranties at the heart of this case.”
Felisilda at 496.
The
arbitration provision at issue here states:
“[a]ny claim
or dispute, whether in contract, tort, statute or otherwise, … 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 (including
any such relationship with third parties who do not sign this contract) shall,
at your or our election, be resolved by neutral, binding arbitration and not by
a court action.” Sharp Declaration, Ex. B, p. 7, ¶ 4 [emphasis added].
Plaintiffs’ claims arise out of the
purchase or condition of the vehicle, namely that the causes of action arise
out of Nissan’s warranty obligations “in connection with” a vehicle for which
Nissan issued a written warranty. Complaint ¶ 5. The alleged condition of the
vehicle is the defective emergency braking system. Complaint ¶¶ 11-17. Plaintiffs
allegedly visited a car dealership in Carson where Plaintiffs reviewed
marketing brochures (the basis for the fraud claims) on which Plaintiffs relied
during the sales process. Complaint ¶ 62. Plaintiff alleges that Nissan drafted,
produced, and distributed, marketing brochures to the public containing factual
representations about the vehicle. Complaint ¶ 83. These materials were
allegedly distributed to Nissan dealerships. Complaint ¶ 84. Nissan’s
authorized dealerships are agents for the purposes of the sale of Nissan to
consumers. Complaint ¶ 86. Accordingly,
the Sales Contract expressly contemplated arbitration of disputes arising out
of the purchase or condition of the vehicle or any resulting relationship with
nonsignatory third parties.
To
distinguish Felisilda, Plaintiff relies in part on Ngo v. BMW of North America,
LLC (9th Cir. 2022) 23 F.4th 942. Federal opinion interpreting state law is not binding; rather the
court may rely upon federal court opinions "for their cogent reasoning and
persuasive value.” McCann v. Lucky Money, Inc. (2005)
129 Cal.App.4th 1382, 1396. Ngo disagreed with Felisilda’s interpretation of the provisions
of the purchase agreement and concluded that equitable estoppel did not apply
since the manufacturer’s warranties arose “independently from the Purchase
Agreements, rather than intimately relying on them.” Ngo at 950. The Ninth Circuit criticized the manufacturer’s
contention that its warranties would not apply absent the purchase agreement as
an “attenuated chain of reasoning.” Ngo at 949.
Plaintiffs
contends that they did not sue the dealership in this action, which is a
materially distinguishable fact rendering Felisilda inapposite. However,
Felisilda required an examination of Plaintiff’s alleged claims to determine
whether it was inextricably intertwined with the sales contract,
notwithstanding who made the motion below to compel arbitration.
Plaintiffs
rely on Jarboe v. Hanlees Auto
Group (2020) 53 Cal.App.5th 539 for the contention that Nissan has not proven a close relationship
between Plaintiffs and Nissan. Jarboe was a wage and hour action against
an employer and 12 affiliated dealerships, wherein the employee signed an
employment agreement requiring arbitration of disputes. Jarboe at 544. The nonsignatories moved to compel
arbitration of the claims as third-party beneficiaries of the employment
agreement and under the doctrine of equitable estoppel. Id. The
appellate court determined that the nonsignatories did not establish both
theories in part because they did not establish that Plaintiff’s claims against
the nonsignatories were “rooted” in the plaintiff’s employment agreement with
the employer or that their relationship with the employer was a “close
relationship.” Id. at 554. Jarboe is inapposite.
The
complaint demonstrates Nissan’s “close relationship” with its authorized
dealer, from whom Plaintiffs purchased the vehicle. As previously discussed,
Plaintiffs’ claims arise out of or relates to the purchase and condition of the
vehicle and includes arbitration of claims arising from “any resulting transaction
or relationship including any such relationship with third parties who do not
sign this contract.” Sharp Decl. p. 7, ¶ 4. Plaintiffs expressly allege that Nissan’s
authorized dealers are its agents, and therefore, any misrepresentations in
sales material given to Plaintiffs during the sales process are imputed to
Nissan.
Accordingly,
Defendant has demonstrated that equitable estoppel applies to preclude
Plaintiffs from disavowing the arbitration provision in the Sales Contract while
simultaneously relying on the same agreement for their claims.
D. Nissan has established that it may
enforce the contract as a third-party beneficiary.
A
contract that is made expressly for the benefit of a third person, “may be
enforced by him at any time before the parties thereto rescind it." Civ. Code, § 1559. Persons who are “only incidentally or
remotely benefited by it" are excluded. Lake Almanor Associates L.P. v.
Huffman-Broadway Group, Inc. (2009) 178 Cal.App.4th 1194, 1199. To establish that it is an intended,
third-party beneficiary of the contract, Defendant must show "(1) whether
the third party would in fact benefit from the contract, but also (2) whether a
motivating purpose of the contracting parties was to provide a benefit to the
third party, and (3) whether permitting a third party to bring its own breach
of contract action against a contracting party is consistent with the
objectives of the contract and the reasonable expectations of the contracting
parties. All three elements must be satisfied to permit the third-party action
to go forward." Goonewardene v. ADP, LLC (2019) 6
Cal.5th 817, 830.
As discussed
previously, the Sales Contract expressly contemplated arbitration of disputes
arising out of the purchase or condition of the vehicle or any relationship
with nonsignatory third parties. Sharp Declaration, Ex. B, p.7, ¶ 4. Accordingly,
Defendant has established its right to compel arbitration as a third-party
beneficiary although it is not a signatory to the Sales Contract.
E.
Plaintiffs have not established that
the arbitration provision is procedurally or substantively unconscionable.
Plaintiffs contend the agreement is not enforceable because it is
unconscionable. There are two elements for determining whether an agreement is
unconscionable. There must be evidence of “procedural unconscionability” –
namely that circumstances of oppression or surprise due to unequal bargaining
power exist. The second element involves “substantive unconscionability,”
defined as the presence of overly harsh, one-sided terms. Both elements must be
present for the Court to exercise its discretion to refuse to enforce the
arbitration provision. De La Torre v. CashCall,
Inc. (2018) 5 Cal.5th 966, 982.
The
Court examines the entire bargaining process and the degree to which each
element exists. No one term of the contract determines its application. Rather,
Plaintiffs must establish the factual context to determine whether both
elements exist. Id. 982-983.
The
second element, substantive unconscionability, requires a determination that
the terms are overly harsh or one sided. More precisely, “substantive
unconscionability examines the fairness of a contract's terms. This analysis
‘ensures that contracts, particularly contracts of adhesion, do not impose terms
that have been variously described as ‘overly harsh’ [citation], ‘unduly
oppressive’ [citation], so one-sided as to ‘shock the conscience’ [citation],
or ‘unfairly one-sided’ [citation]. All these formulations point to the central
idea that the unconscionability doctrine is concerned not with ‘a simple
old-fashioned bad bargain’ [citation], but with terms that are ‘unreasonably
favorable to the more powerful party.” Prima Donna Development Corp. v. Wells
Fargo Bank, N.A. (2019) 42 Cal.App.5th 22, 38.
Plaintiffs
have not proffered any evidence to establish that the Sales Contract was a
contract of adhesion. Plaintiffs argue generally that purchase agreements in
“the auto sales world” are routinely presented to auto consumers as a “take it
or leave it” agreement in a high-pressure sales environment at a car dealership,
leaving no real opportunity to negotiate. Opp. 17:12-14. Consumers purportedly
have no choice but to accept all of the selling dealership’s terms “as is.” Opp.
17:15. There is no evidence that Plaintiffs experienced any of these conditions
when negotiating the purchase of the vehicle at issue.
Plaintiffs
do not provide any authority that Plaintiffs waived their statutory rights
under the SBA. Plaintiffs invoke the principles articulated by Armendariz v. Foundation Health
Psychcare Services, Inc. (2000) 24 Cal.4th 83 and
cases involving employment contracts in particular which stand on different
footing since the employment contracts required a waiver of statutory rights
guaranteed by the Fair Employment and Housing Act. Armendariz concluded
that "an arbitration agreement cannot be made to serve as a vehicle for
the waiver of statutory rights created by the FEHA. We suggested as much in our
recent discussion of rights derived from the Consumer Legal Remedies Act
(Civ.Code, § 1750 et seq.), which the Legislature had declared to be
unwaivable. Armendariz at 101. The court did not consider the policies
at issue under the SBA with respect to vehicle sales purchase agreements.
Nor have
Plaintiffs established that the Sales Contract is “overly harsh” or “one-sided”
as to “shock the conscience.” The arbitration provision permits Plaintiffs to
choose the American Arbitration Association or any other organization subject
to “our approval.” Sharp declaration, Ex. B, page 7, ¶ 4. Plaintiffs are not
deprived of an arbitrator of their own choosing or a neutral arbitrator, which
was held "essential to ensuring the integrity of the arbitration process.”
Armendariz at 103; Ex. B, page 7, ¶ 4.
Plaintiffs
also rely on Chavarria v. Ralphs Grocery
Co. (9th Cir. 2013) 733 F.3d 916, which is factually distinguishable. First, Chavarria involved
an employment contract provision for arbitration. In that context, arbitration
requirements are a “condition of employment without an opportunity to negotiate
and are, therefore, adhesive in nature.” Armendariz at 114-115.
In Chavarria,
the employer’s arbitrator selection provision would always produce an
arbitrator proposed by Ralphs (the employer) in employee-initiated arbitration
proceedings. Secondly, the court cited the preclusion of institutional arbitration administrators, namely AAA or JAMS, which
have established rules and procedures to select a neutral arbitrator." Chavarria at 923. The arbitration at issue here is not
so one-sided. It specifically identifies AAA as a potential arbitrator. Sharp
decl., Ex. B, page 7, ¶ 4.
Plaintiffs
next contends that the fee shifting provision is incompatible with the SBA as
the dealer will pay up to $5,000 for arbitration fees routinely exceeded in
private arbitration. Opp. 18:23-28. Plaintiffs rely on Gutierrez v. Autowest, Inc. (2003)
114 Cal.App.4th 77 which
is factually distinguishable. In that case, the lessees were required to pay an
initial filing fee and a case service fee to initiate
arbitration. Gutierrez at 90. Here, the provision provides that the
dealership would advance costs up to $5,000 “unless the law or the rules of the
chosen arbitration organization require us to pay more.” Sharp decl. Ex. B,
page 7, ¶ 5. Therefore, contrary to Plaintiffs’ argument, the arbitration provision
does not vitiate the remedies available to consumers under the SBA.
Plaintiffs
have not established that the provision permitting both parties to retain the
right to seek remedies in small claims court, is one-sided. Plaintiffs argue
that in practice, the seller is more likely to avail itself of this remedy
“because the relatively low jurisdictional limits reduce the available actions
to those matters in which damages tend to be a fraction of the purchase price
of the vehicle.” Opp. 19:19-23. This argument is unintelligible. If Plaintiffs’
damages exceed the jurisdiction of the small claims court, then the claims
cannot be adjudicated in that forum. It is the amount of damages that controls the
court’s jurisdiction which does not favor one party over another.
Finally,
that the provision excludes from arbitration such remedies such as repossession
(Opp. 19:23-25) does not render the provision one-sided merely because in
practice, only the dealer would avail itself of that remedy. This provision
does not affect or limit Plaintiffs’ claims.
IV.
CONCLUSION
Based
on the foregoing, Defendant’s Motion to Compel Arbitration is GRANTED. The
action is stayed pursuant to 9 U.S.C. § 3 of the FAA. The court sets an Order
to Show Cause re: completion of arbitration for
_________________________________ at 8:30 a.m. in Department A of the Compton
courthouse.