Judge: Nathan Vu, Case: 30-2022-01287695, Date: 2023-07-24 Tentative Ruling
Motions to Compel Arbitration
Defendant Nissan North America, Inc.’s Motion to Compel Arbitration is DENIED and Defendant Nissan North America, Inc.’s Motion to Stay Proceedings is GRANTED.
Defendant Riverside Metro Auto Group, LLC d/b/a Riverside Nissan’s Motion to Compel Arbitration and Stay Proceedings is GRANTED.
This action, including all claims brought against Defendant Nissan North America, Inc. and Defendant Riverside Metro Auto Group, LLC d/b/a Riverside Nissan, shall be STAYED.
The stay shall be automatically lifted upon the completion of the arbitration proceedings against Defendant Riverside Metro Auto Group, LLC d/b/a Riverside Nissan.
The court SETS an ADR Review Hearing for January 11, 2024, at 8:30 a.m. in Department N15.
Defendants Defendant Nissan North America, Inc.’s and Riverside Metro Auto Group, LLC d/b/a Riverside Nissan’s evidentiary objections to the Declaration of Plaintiff Daniel Madrid are OVERRULED.
Defendant Nissan North America, Inc. (Defendant Nissan) and Defendant Riverside Metro Auto Group, LLC d/b/a Riverside Nissan (Defendant Riverside) move to compel arbitration of all of the claims brought by Plaintiff Daniel Madrid and to stay these proceedings pending completion of arbitration.
Standard for Compelling Arbitration
The right to arbitration depends upon contract, and thus, a motion to compel arbitration is akin to a suit in equity seeking specific performance of that contract. (See Little v. Pullman (2013) 219 Cal.App.4th 558, 565.) The parties may, among other things, agree that the arbitration agreement will be controlled by the Federal Arbitration Act (FAA), which includes both procedural and substantive provisions.
The FAA states that written arbitration agreements “shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” (9 U.S.C. § 2.) The United States Supreme Court has described this provision as reflecting both a “liberal federal policy favoring arbitration,” and the “fundamental principle that arbitration is a matter of contract.” (AT & T Mobility LLC v. Concepcion (2011) 563 U.S. 333.)
The FAA permits agreements to arbitrate to be invalidated by “generally applicable contract defenses, such as fraud, duress, or unconscionability.” (Id.) When deciding whether a valid arbitration agreement exists, courts generally apply “ordinary state-law principles that govern the formation of contracts.” (First Options of Chicago, Inc. v. Kaplan (1995) 514 U.S. 938, 944.) “[T]he party resisting arbitration bears the burden of proving that the claims at issue are unsuitable for arbitration.” (Green Tree Fin. Corp. v. Randolph (2000) 531 U.S. 79, 91.)
On a motion to compel arbitration under the FAA, the court’s role is limited to deciding: “(1) whether there is an agreement to arbitrate between the parties; and (2) whether the agreement covers the dispute.” (Brennan v. Opus Bank (9th Cir. 2015) 796 F.3d 1125, 1130.) If these conditions are satisfied, the court is without discretion to deny the motion and must compel arbitration. (9 U.S.C. § 4; Dean Witter Reynolds, Inc. v. Byrd (1985) 470 U.S. 213, 218 [“By its terms, the [FAA] leaves no place for the exercise of discretion by a district court, but instead mandates that district courts shall direct the parties to proceed to arbitration.”].)
Applicability of the Federal Arbitration Act
Defendants seek to compel arbitration pursuant to the terms of a retail installment sales contract (RISC) entered into between Plaintiff and Defendant Riverside on or about January 4, 2022, in which the subject arbitration provision (Arbitration Provision) appears. (See Supp. Decl. of Edgard J. Salinas dated May 17, 2023 (Salinas Supp. Decl.), ¶ 2, Exh. D.)
The Arbitration Provision states that “Any arbitration under this Arbitration Provision shall be governed by the Federal Arbitration Act (9 U.S.C. s 1 et seq.) and not by any state law concerning arbitration.” (See Salinas Supp. Decl., ¶ 2, Exh. D at p. 2.) Thus, the Federal Arbitration Act (FAA) applies here.
Existence of An Arbitration Agreement
Parties moving to compel arbitration “may meet their initial burden to show an agreement to arbitrate by attaching a copy of the arbitration agreement purportedly bearing the opposing party's signature.” (Espejo v. Southern California Permanente Medical Group (2016) 246 Cal.App.4th 1047, 1060; see also Cal. Rules of Ct., rule 3.1330 [in motion to compel arbitration, arbitration provision must be stated verbatim or copy must be attached to motion and incorporated by reference].)
Here, Defendants attach the RISC, which contains the Arbitration Provision, to the Supplemental Declaration of Edgard J. Salinas, Defendants’ counsel. (See Salinas Supp. Decl., Exh. D.) The description of the vehicle and the Vehicle Identification Number (VIN) alleged in the Complaint matches the description of the vehicle and VIN identified in the RISC. (Compare Compl. ¶ 7, with Salinas Supp. Decl., Exh. D at p. 1.) Plaintiff’s name is also listed in the RISC. (See Salinas Supp. Decl., ¶ 2, Exh. D at p. 1.)
The RISC provides in relevant part that:
1. EITHER YOU [PLAINTIFF] OR WE MAY CHOOSE TO HAVE ANY DISPUTE BETWEEN US DECIDED BY ARBITRATION AND NOT IN COURT OR BY JURY TRIAL.
. . .
Any claim or dispute, whether in contract, tort, statute or otherwise (including the interpretation and scope of this Arbitration Provision and the arbitrability of the 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 (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.
(Salinas Supp. Decl. ¶ 2, Exh. D, p. 2.)
Thus, there is no dispute that the Arbitration Provision of the RISC is an agreement to arbitrate. Defendants have met their initial burden to show an agreement to arbitrate.
Unconscionability
Plaintiff asserts, however, that the Arbitration Agreement is unenforceable because it is unconscionable.
The doctrine of unconscionability refers to “an absence of meaningful choice on the part of one of the parties together with contract terms which are unreasonably favorable to the other party.” (Sonic-Calabasas A, Inc. v. Moreno (2013) 57 Cal.4th 1109, 1133.) It consists of both procedural and substantive components – “the former focusing on oppression or surprise due to unequal bargaining power, the latter on overly harsh or one-sided results.” (Ibid.)
In order to be unenforceable due to unconscionability, “’[procedural and substantive unconscionability] must both be present.’” (Armendariz v. Found Health Psychcare Servs., Inc., supra, 24 Cal.4th at p. 114, quoting Stirlen v. Supercuts, Inc. (1997) 51 Cal.App.4th 1519, 1533; see Wherry v. Award, Inc. (2011) 192 Cal.App.4th 1242, 1246 [“To be voided on [unconscionability] ground[s], the agreement must be both procedurally and substantively unconscionable.”) However, “they need not be present in the same degree.” (Armendariz v. Found Health Psychcare Servs., Inc., supra, 24 Cal.4th 83, 114; Parada v. Superior Court (2009) 176 Cal.App.4th 1554, 1570.)
“Essentially a sliding scale is invoked which disregards the regularity of the procedural process of the contract formation, that creates the terms, in proportion to the greater harshness or unreasonableness of the substantive terms themselves. In other words, the more substantively unconscionable the contract term, the less evidence of procedural unconscionability is required to come to the conclusion that the term is unenforceable, and vice versa.” (Armendariz v. Found Health Psychcare Servs., Inc., supra, 24 Cal.4th 83 at p. 114.)
“The party resisting arbitration bears the burden of proving unconscionability.” (Pinnacle Museum Tower Ass’n v. Pinnacle Market Dev. (US), LLC (2012) 55 Cal.4th 223, 247.)
Procedural Unconscionability
Procedural unconscionability concerns the manner in which the contract was negotiated and the parties' circumstances at that time. It focuses on the factors of surprise and oppression. (Kinney v. United Healthcare Servs. (1999) 70 Cal.App.4th 1322, 1329.)
These factors “include, but are not limited to (1) the amount of time the party is given to consider the proposed contract; (2) the amount and type of pressure exerted on the party to sign the proposed contract; (3) the length of the proposed contract and the length and complexity of the challenged provision; (4) the education and experience of the party; and (5) whether the party’s review of the proposed contract was aided by an attorney.” (OTO, L.L.C. v. Kho (2019) 8 Cal.5th 111, 126-127.)
Thus, the Supreme Court has instructed courts to first determine whether an arbitration agreement is adhesive. (See Armendariz v. Found. Health Psychcare Servs., Inc., supra, 24 Cal. 4th 83, 114–15.) “Oppression generally takes the form of a contract of adhesion, which, imposed and drafted by the party of superior bargaining strength, relegates to the subscribing party only the opportunity to adhere to the contract or reject it.” (Carmona v. Lincoln Millennium Car Wash, Inc. (2014) 226 Cal.App.4th 74, 84, quotations and citations omitted.)
Plaintiff argues that the Arbitration Provision is procedurally unconscionable because it was found in a preprinted form contract and presented to Plaintiff on a take-it-or-leave-it basis. Plaintiff asserts that he was not given an opportunity to negotiate the specific terms of the RISC and was pressured to sign it before he could read it in its entirety.
In Sanchez v. Valencia Holding Co. (2015) 61 Cal.4th 899, the California Supreme Court reviewed a motion to compel arbitration by a car dealer against car buyers based on an arbitration provision in a sale contract. (Id at p. 906.) The plaintiffs argued that the sale contract was unconscionable as it was a contract of adhesion. (Id. at p. 915.) While the court agreed that the adhesive nature of the sale contract established some degree of unconscionability, “a finding of procedural unconscionability does not mean that a contract will not be enforced.” (Ibid., citations omitted.)
The Supreme Court also stated in Sanchez v. Valencia Holding Co. that the dealership is under no obligation to highlight or explain to buyers the arbitration provision in the RISC. (Id. at p. 914.) Nonetheless, Arbitration Provision cannot be described as hidden or inconspicuous. (Salinas Supp. Decl., ¶ 2, Exh. D at p. 2.) The RISC itself is only two legal-size pages long. The RISC points out the existence of the Arbitration Provision on the front page, directly above the signature lines for the buyer. (See id. at p. 1.)
The Arbitration Provision is highlighted on the second page in that it is outlined with a large box, by far the largest box of the three boxed-in provisions on the page. The provision’s boldface, all capital heading further highlights its presence.
Generally, a party cannot avoid the terms of a contract, even a contract of adhesion, because the party failed to read it before signing it when the provisions are conspicuous and clear and do not defeat the reasonable expectations of the parties. (See Madden v. Kaiser Foundation Hospitals (1976) 17 Cal.3d 699, 710.) Thus, while the adhesive nature of the RISC creates some procedural unconscionability, the level of the procedural unconscionability is low.
Substantive Unconscionability
Even if an arbitration agreement is adhesive and procedurally unconscionable, that “does not as a matter of law render [it] unenforceable.” (McManus v. CIBC World Markets Corp. (2003) 109 Cal. App. 4th 76, 91.) “[The] adhesive aspect of an agreement is not dispositive.” (Serpa v. California Surety Investigations, Inc. (2013) 215 Cal.App.4th 695, 704; see also Lagatree v. Luce, Forward, Hamilton & Scripps (1999) 74 Cal. App. 4th 1105, 1127 [“As we have seen, the cases uniformly agree that a compulsory pre-dispute arbitration agreement is not rendered unenforceable just because it is required as a condition of employment or offered on a ‘take it or leave it’ basis.”].)
In order to be invalid, the arbitration agreement must also be substantively unconscionable. “Substantive unconscionability pertains to the fairness of an agreement's actual terms and to assessments of whether they are overly harsh.” (Carmona v. Lincoln Millennium Car Wash, Inc., supra, 226 Cal.App.4th at p. 85, quotations and citations omitted.) A contract term is not substantively unconscionable when it merely gives one side a greater benefit; rather, the term must be so one-sided as to ‘shock the conscience.’” (Ibid.)
The “paramount consideration” is the mutuality of the obligation to arbitrate. (Nyulassy v. Lockheed Martin Corp. (2004) 120 Cal.App.4th 1267, 1287.) “Substantive unconscionability focuses on the one-sidedness or overly harsh effect of the contract term or clause.” (Harper vs. Ultimo (2003) 113 Cal.App.4th 1402, 1406-1407.) An arbitration agreement “lacks basic fairness and mutuality if it requires one contracting party, but not the other, to arbitrate all claims arising out of the same transaction or occurrence or series of transactions or occurrences.” (Armendariz v. Found Health Psychcare Servs., Inc., supra, 24 Cal.4th at p. 120.)
In addition, an arbitration provision must provide an adequate forum to adjudicate the parties’ claims. (Id. at p. 101.) An arbitration provision is adequate if it provides for the following:
1. Neutral arbitrator(s);
2. Adequate discovery;
3. A written award;
4. No limitation on remedies; and
5. No unreasonable costs and arbitration fees to be paid by the party compelled to arbitrate.
(Id. at p. 102.)
Because the level of procedural unconscionability is low, Plaintiff must demonstrate a higher degree of substantive unconscionability to support a finding that the RISC is unconscionable. Substantive unconscionability determines if the terms of the agreement are so one-sided as to “shock the conscience.” (Kinney v. United HealthCare Services, Inc. (1999) 70 Cal.App.4th 1322, 1330.)
Plaintiff argues that the Agreement is substantively unconscionable because it allows the arbitrator to award costs of the arbitration and gives the arbitrator the discretion to deny attorneys’ fees while the Song-Beverly Consumer Warranty Act requires that costs and fees to be awarded to a prevailing plaintiff.
The Arbitration Provision states, “Each party shall be responsible for its own attorney, expert and other fees, unless awarded by the arbitrator under applicable law.” (Salinas Supp. Decl., ¶ 4, Exh. C at p. 2.) Thus, the Arbitration Provision allows the arbitrator to award costs and fees to both parties, and not just to one side.
More importantly, the Arbitration Provision requires the arbitrator to make an award pursuant to “applicable law”. Plaintiff points to nothing in the Arbitration Provision that would allow the arbitrator to make an award of costs and fees when not allowed under Civil Procedure Code section 1032 or the Song-Beverly Consumer Warranty Act, or to refuse to award costs and fees when required to do so.
Plaintiff has failed to show that there is any substantive unconscionability here. Because both substantive and procedural unconscionability are required before the court may refuse to enforce a valid arbitration agreement, and Plaintiff has failed to make a showing of substantive unconscionability, the arbitration agreement is valid and enforceable.
The court will order that Plaintiff arbitrate its claims against Defendant Riverside.
Compelling Arbitration Against Non-Signatory
However Plaintiff points out that, unlike Defendant Riverside, Defendant Nissan is not a signatory to the RISC. Defendant Nissan does not contest this assertion and instead argues that non-signatories may compel arbitration under certain circumstances, which are found here.
Courts recognize “six theories by which a nonsignatory may [compel or] be bound to arbitrate: ‘(1) incorporation by reference; (2) assumption; (3) agency; (4) veil-piercing or alter ego; (5) estoppel; and (6) third-party beneficiary.’” (Suh v. Superior Ct. (2010) 181 Cal.App.4th 1504, 1513, quoting 2 Oehmke, Commercial Arbitration (3d ed. 2006 update) § 41.57 at pp. 41–195.)
These exceptions to the general rule that one must be a party to invoke or be bound by an arbitration agreement “generally are based on the existence of a relationship between the nonsignatory and the signatory, such as principal and agent or employer and employee, where a sufficient ‘identity of interest’ exists between them.” (Jones v. Jacobson (2011) 195 Cal.App.4th 1, 18, fn. 9.)
Defendant Nissan contends that it may enforce the Arbitration Provision under the doctrine of equitable estoppel and as a third-party beneficiary.
Standard for Equitable Estoppel
The doctrine of equitable estoppel allows ”a nonsignatory defendant [to] 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, quoting McBro Planning & Development Co. v. Triangle Elec. Constr. Co., Inc. (11th Cir. 1984) 741 F.2d 342, 344.)
As the Court of Appeal has explained: “By relying 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., supra, 127 Cal.App.4th at p. 272.)
“In any case applying equitable estoppel to compel arbitration despite the lack of an agreement to arbitrate, a nonsignatory may compel arbitration only when the claims against the nonsignatory are founded in and inextricably bound up with the obligations imposed by the agreement containing the arbitration clause.” (Goldman v. KPMG, LLP (2009) 173 Cal.App.4th 209, 219, italics original.) In determining whether the plaintiff’s claim is founded on or intimately connected with the sales contract, the court examines the facts of the operative complaint. (Id. at pp. 229-230.)
Felisilda v. FCA US LLC
Defendant Nissan argues that the holding of Felisilda v. FCA US LLC applies to this case. The plaintiffs in Felisilda v. FCA US LLC were buyers of a vehicle who brought claims against the manufacturer under the Song-Beverly Consumer Warranty Act, Civil Code § 1790, et seq. (See Felisilda v. FCA US LLC, supra, 53 Cal.App.5th at p. 489.) The complaint in that case alleged that there were “express warranties [that] accompanied the sale of the vehicle to [the plaintiffs] by which [the manufacturer] . . . undertook to preserve or maintain the utility or performance of [the plaintiffs’] vehicle or provide compensation if there was a failure in such utility or performance.” (Id. at p. 496.)
Based on the above allegation, the 3rd District Court of Appeal ruled that the trial court had properly compelled arbitration because “the sales contract was the source of the warranties at the heart of this case”. (Ibid.) In other words, “the [plaintiffs’] claim against [the manufacturer] directly relates to the condition of the vehicle that they allege to have violated warranties they received as a consequence of the sales contract.” (Id. at p. 497.)
Ford Motor Warranty Cases and Montemayor v. Ford Motor Company
However, Plaintiff argues that this court should not follow Felisilda v. FCA US LLC and that instead, this case is controlled by a more recent opinion from the Court of Appeal.
In Ford Motor Warranty Cases (2023) 89 Cal.App.5th 1324, the 2nd District Court of Appeal held that a non-signatory vehicle manufacturer may not enforce an arbitration provision in a retail installment sales contract under the doctrine of equitable estoppel or as a third-party beneficiary. (See id. at pp. 1332-1339.)
The court in Ford Motor Warranty Cases explicitly stated:
We disagree with Felisilda that “the sales contract was the source of [FCA's] warranties at the heart of this case.” . . . [M]anufacturer vehicle warranties that accompany the sale of motor vehicles without regard to the terms of the sale contract between the purchaser and the dealer are independent of the sale contract.
(Ford Motor Warranty Cases, supra, 89 Cal.App.5th at p. 1334, quoting Felisilda v. FCA US LLC, supra, 53 Cal.App.5th at p. 496.)
The 2nd District Court of Appeal reasoned that “[the p]laintiffs’ claims are based on [Ford’s] statutory obligations to reimburse consumers or replace their vehicles when unable to repair in accordance with its warranty . . . . Not one of the plaintiffs sued on any express contractual language in the sale contracts.” (Ford Motor Warranty Cases, supra, 89 Cal.App.5th at p. 1335.)
Further, “[t]he sale contracts include no warranty, nor any assurance regarding the quality of the vehicle sold, nor any promise of repairs or other remedies in the event problems arise. To the contrary, the sale contracts disclaim any warranty on the part of the dealers, while acknowledging no effect on ‘any warranties covering the vehicle that the vehicle manufacturer may provide.’ In short, the substantive terms of the sale contracts relate to sale and financing and nothing more.” (Ibid.)
Last month, in Montemayor v. Ford Motor Company (June 26, 2023) 2023 WL 4181909, a different division of the 2nd District Court of Appeal reviewed an arbitration provision that was identical to the ones in Felisilda v. FCA US LLC and Ford Motor Warranty Cases. (Id. at p. *5.)
The court in Montemayor v. Ford Motor Company “look[ed] to the facts alleged in the complaint to determine whether the [plaintiffs’] claims against Ford are dependent on and inextricably intertwined with the obligations imposed by the sales contract” and determined that “[t]hey are not.” (Id. at p. *7.) The Court of Appeal instead found that “the [plaintiffs] allege as part of each cause of action against Ford at issue on appeal that Ford’s obligations arose out of its express written warranty, not the sales contract.” (Ibid.)
Montemayor v. Ford Motor Company acknowledged that “the [Plaintiffs] would not have sued Ford for the defective condition of the vehicle but for the sale of the vehicle by AutoNation pursuant to the sales contract [a]nd Ford provided an express warranty to the Montemayors as a result of the sale.” (Ibid.) However, that did not lead to the conclusion that “Ford’s obligation to provide a non-defective vehicle under its separate express warranty is in any way founded on an obligation imposed by the sales contract or is intertwined with those obligations.” (Ibid.)
Thus, the court in Montemayor v. Ford Motor Company concluded that “[w]e too decline to follow Felisilda and [instead] adopt the reasoning in Ford Warranty [Cases].” (Id. at *5.)
Applying the Precedent
The arbitration provision in this case is identical to that in Felisilda v. FCA US LLC, Ford Motor Warranty Cases, and Montemayor v. Ford Motor Company. Further, as in those cases, the manufacturer Defendant Nissan is not a signatory to the RISC or the Arbitration Provision. Finally, Plaintiff’s claims against Defendant Nissan are not based on violations of the RISC but instead arise out of separate warranties that Defendant Nissan provided to Plaintiff. (See Compl., ¶ 11-17.)
Defendant Nissan argues that Felisilda v. FCA US LLC was correctly decided and Ford Motor Warranty Cases and Montemayor v. Ford Motor Company were not.
Where decisions of the Court of Appeal are in conflict with each other, the trial court may follow either precedent. (See Auto Equity Sales, Inc. v. Superior Court (1962) 57 Cal. 2d 450, 455-456 [“Decisions of every division of the District Courts of Appeal are binding upon all the justice and municipal courts and upon all the superior courts of this state, and this is so whether or not the superior court is acting as a trial or appellate court. . . . Of course, the rule under discussion has no application where there is more than one appellate court decision, and such appellate decisions are in conflict. In such a situation, the court exercising inferior jurisdiction can and must make a choice between the conflicting decisions.”].)
In this case, the court will follow Ford Motor Warranty Cases and Montemayor v. Ford Motor Company. The holding in those cases – that the claims that defendant violated the manufacturer warranties were not founded on or intertwined with the sales contracts – correctly applies the principles of equitable estoppel.
As a general matter, claims involving breach of a written warranty provided by a manufacturer are not founded in or so inextricably intertwined with the obligations contained in the sales contract that the manufacturer, who did not sign the contract, should be able to enforce an arbitration provision contained in the contract. (See Goldman v. KPMG, LLP, supra, 173 Cal.App.4th at pp. 217-218 [equitable estoppel applies only if “the claims the plaintiff asserts against the nonsignatory [are] dependent upon, or founded in and inextricably intertwined with, the underlying contractual obligations of the agreement containing the arbitration clause.”].)
This holding applies with even more force given the allegations of the Complaint. (See Compl., ¶¶ 11-17.) Plaintiff’s first cause of action against Defendant Nissan is based on allegations of “an express written warranty” that the Plaintiff alleged he received “[u]pon Plaintiff’s purchase of the Subject Vehicle.” (Compl. ¶ 11.)
In fact, the RISC distinguishes manufacturer warranties from those of the dealer/seller. The RISC explicitly states that Defendant Riverside is not providing any warranty and that any warranty from the vehicle manufacturer is separate and independent from the RISC:
If you do not get a written warranty, and the Seller does not enter into a service contract within 90 days from the date of this contract, the Seller makes no warranties, express or implied, on the vehicle, and there will be no implied warranties of merchantability or of fitness for a particular purpose.
This provision does not affect any warranties covering the vehicle that the vehicle manufacturer may provide. If the Seller has sold you a certified used vehicle, the warranty of merchantability is not disclaimed.
(See Salinas Supp. Decl., ¶ 2, Exh. D at p. 2.)
In this case, the crux of Plaintiff’s action is the alleged breach of Defendant Nissan’s express warranties and alleged negligent repair of the subject vehicle. Thus, Plaintiff’s warranty and repair claim against Defendant Nissan are distinct from any claims that could arise from the RISC.
It is true that the causes of action against Defendant Nissan can be connected to the RISC and the Arbitration Provision, but the relationship is attenuated. Plaintiff’s claims are based on the Song-Beverly Act, which applies because the manufacturer made express warranties that covered the vehicle, which the manufacturer provided in order to induce Plaintiff to purchase the vehicle, which transaction is embodied in the RISC, which contained the Arbitration Provision.
It is possible to connect nearly any claim to an arbitration provision if enough intervening steps may be taken. However, that does not mean that the claim is “intimately founded in” and “inextricably bounded up” with the agreement containing the arbitration provision.
There is nothing in the Complaint that alleges that any provision of the RISC was violated. Thus, the claims against Defendant Nissan are not “founded on or intimately connected” with the RISC. (See Ford Motor Warranty Cases, supra, 89 Cal.App.5th at p. 1334 [equitable estoppel does not apply because “manufacturer vehicle warranties that accompany the sale of motor vehicles without regard to the terms of the sale contract between the purchaser and the dealer are independent of the sale contract”].)
A recent Ninth Circuit decision, Ngo v. BMW of North America, LLC (9th Cir. 2022) 23 F.4th 942, although not binding, supports the adoption of the holding of Ford Motor Warranty Cases and Montemayor v. Ford Motor Company. (See Mesler v. Bragg Management Co. (1985) 39 Cal.3d 290, 299 [federal court decisions interpreting California law are “persuasive but not binding”].) There, the Ninth Circuit rejected the contention that equitable estoppel applied in a case similar to the one at bar. (See Ngo v. BMW of North America, LLC, supra, 23 F.4th at p. 950 [“. . . Felisilda does not address the situation we are confronted with here, where the non-signatory manufacturer attempted to compel arbitration on its own. We therefore decline to affirm on the ground of equitable estoppel.”].) (fn.1)
(fn.1) Here, it could be argued that, like in Felisilda v. FCA US LLC and unlike in Ford Motor Warranty Cases, Plaintiff brought suit against both the nonsignatory manufacturer and the signatory seller. However, the plaintiffs in Montemayor v. Ford Motor Company sued both the manufacturer and the seller and the 2nd District Court of Appeal held that this made no difference. (See Montemayor v. Ford Motor Company (June 26, 2023) 2023 WL 4181909, *8 [“[W]hether vehicle purchasers file suit against only the manufacturer, or the manufacturer and the car dealer, does not affect the analysis of whether a cause of action against the manufacturer may be compelled to arbitration.”].)
Third-Party Beneficiary
The Civil Code provides that: “A contract, made expressly for the benefit of a third person, may be enforced by him at any time before the parties thereto rescinded.” (Civil Code, § 1559.) Thus, third parties do not become “third party beneficiaries” simply because the contract benefits them; the contract must be “made expressly” for the third party’s benefit. (Pillar Project AG v. Payward Ventures, Inc. (2021) 64 Cal.App.5th 671, 677.)
The test is “whether an intent to benefit a third person appears from the terms of the contract.” (Jensen v. U-Haul Co. of Calif. (2017) 18 Cal.App.5th 295, 301-302.) It is not enough that the third party would incidentally have benefited from performance. (See Souza v. Westlands Water Dist. (2006) 135 Cal.App.4th 879, 891; see also Hess v. Ford Motor Co. (2002) 27 Cal.4th 516, 524 [fact that literal interpretation of contractual language will result in benefit to third party is not sufficient to entitle that party to demand performance where intent to benefit third party is not shown].)
“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.’” (Ford Motor Warranty Cases, supra, 89 Cal.App.5th at pp. 1336-1337, quoting Goonewardene v. ADP, LLC (2019) 6 Cal.5th 817, 830.)
Here, nothing in the RISC or the Arbitration Provision shows that they were made for the benefit of Defendant Nissan. The RISC itself only grants rights to “you” (“the Buyer” or Plaintiff) and “we” or “us” (“the Seller-Creditor” or Defendant Riverside). (See Salinas Supp. Decl., ¶ 2, Exh. D at p. 1.) The Arbitration Provision grants the right to compel arbitration only to Plaintiff, Defendant Riverside, or Defendant Riverside’s “employees, agents, successors, or assigns”. (Id. at p. 2.)
No argument is made that Defendant Nissan is an employee, agent, successor, or assign of Defendant Riverside, and neither the RISC nor Arbitration Provision mentions Defendant Nissan specifically.
Defendant Nissan instead argues that it is a third-party beneficiary because the Arbitration Provision covers disputes arising out of or relating to “this contract [the RISC] or any resulting transaction or relationship (including any such relationship with third parties who do not sign this contract).” (Id. at p. 2.)
However, the sentence in question must be read in its entirety to understand the meaning:
Any claim or dispute, whether in contract, tort, statute or otherwise (including the interpretation and scope of this Arbitration provision, and the arbitrability of the 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 (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 court action.
(Ibid., italics added.)
When read in context, it is apparent that the provision to which Defendant Nissan points expands the scope of the disputes that are covered under Arbitration Provision. However, it does not expand the scope of the parties that are covered under the Arbitration Provision.
As noted above, the express terms of the Arbitration Provision limit the scope of the agreement to disputes between Plaintiff on the one hand and Defendant Riverside and its “employees, agents, successors, and assigns,” on the other hand. Defendants’ proposed interpretation would render those words surplusage, a result that should be avoided. (See Rice v. Downs (2016) 248 Cal.App.4th 175, 186 [“An interpretation that leaves part of a contract as surplusage is to be avoided”].)
The 2nd District Court of Appeal came to the same conclusion:
We do not read this italicized language as consent by the purchaser to arbitrate claims with third party nonsignatories. Rather, we read it as a further delineation of the subject matter of claims the purchasers and dealers agreed to arbitrate. They agreed to arbitrate disputes “between” themselves—“you and us”—arising out of or relating to “relationship[s],” including “relationship[s] with third parties who [did] not sign th[e] [sale] contract[s],” resulting from the “purchase, or condition of th[e] vehicle, [or] th[e] [sale] contract.”
(See Ford Motor Warranty Case, supra, 89 Cal.App.5th at pp. 1334-1335, italics original; see also Montemayor v. Ford Motor Company, supra, 2023 WL 4181909 at p. *8 [”We agree with Ford Warranty that this language refers to the subject matter of covered claims, not the scope of who may enforce the arbitration provision.”].)
Thus, by entering into the RISC, the Plaintiff would not expect that he was granting the right to compel arbitration to Defendant Nissan or any other non-signatory to the RISC. (See Montemayor v. Ford Motor Company, supra, 2023 WL 4181909 at p. *9 [“Indeed, Ford’s argument, if accepted, would mean any nonparties with whom the Montemayors might have a dispute relating to the vehicle or its purchase, including parties whose existence or relationship the Montemayors could not have contemplated, could claim they are intended beneficiaries of the arbitration agreement simply because they would benefit from arbitration.”].)
Because nothing in the RISC or arbitration provision evinces an intent to confer the right to compel arbitration on the manufacturer of the subject vehicle, Defendant Nissan has failed to establish its right to enforce the arbitration agreement as a third-party beneficiary. (See Ford Motor Warranty Case, supra, 89 Cal.App.5th at pp. 1338, 1340 [finding that “the sale contract[] reflect[ed] no intention to benefit a vehicle manufacturer,” and that “allowing [the manufacturer] to enforce the arbitration provision as a third-party beneficiary would be inconsistent with the ‘reasonable expectations of the contracting parties.’”], quoting Goonewardene v. ADP, LLC, supra, 6 Cal.5th at p. 830; Montemayor v. Ford Motor Company, supra, 2023 WL 4181909 at p. *10 [finding that “[i]n no way was the sales contract ‘made expressly for the benefit of a third person.”], quoting Civil Code, § 1559; Ngo v. BMW of North America, LLC, supra, 23 F.4th at p. 947 [vehicle purchase agreement is “drafted with the primary purpose of securing benefits for the contracting parties themselves. In such an agreement, the purchaser seeks to buy a car, and the dealership and assignees seek to profit by selling and financing the car. Third parties are not purposeful beneficiaries of such an undertaking.”].)
Stay to Avoid Inconsistent Results
This litigation has now been placed on two tracks – Plaintiff’s claims against Defendant Riverside will be decided in arbitration while Plaintiff’s claims against Defendant Nissan will be decided in court.
This creates “a possibility of conflicting rulings on a common issue of law or fact”. (Code Civ. Proc., § 1281.2.) Section 1281.2 grants the court the authority in those circumstances to refuse to compel arbitration, to compel arbitration and stay the court proceedings, or to compel arbitration but stay the arbitration proceedings, based on the potential for conflicting rulings.
However, as stated above, the Federal Arbitration Act, and not the California Arbitration Act, controls here. Thus, Section 3 of the FAA, 9 U.S.C., § 3, applies rather than Civil Procedure Code section 1281.2.
The court thus lacks the authority to refuse to compel arbitration or to stay the arbitration pursuant to Section 1281.2. The court is left with only the one option authorized by Section 3, “which requires the court to stay the judicial proceeding and compel arbitration.” (Rodriguez v. American Technologies, Inc. (2006) 136 Cal.App.4th 1110, 1122; see also id. at p. 1115; 9 U.S.C., § 3.)
As the United States Supreme Court held in similar circumstances, the FAA requires courts to enforce arbitration agreements despite pending litigation involving a third party that might result in inconsistent or conflicting findings of fact or legal rulings, because it contains no exception similar to Code of Civil Procedure section 1281.2 that would permit the stay or denial of arbitration. (See Dean Witter Reynolds, Inc. v. Byrd (1985) 470 U.S. 213, 217.)
The court thus will stay the proceedings
against Defendant Nissan pending resolution of the arbitration between
Plaintiff and Defendant Riverside.
Defendants shall give notice of this ruling.