Judge: Ronald F. Frank, Case: 23TRCV00323, Date: 2023-08-23 Tentative Ruling

Case Number: 23TRCV00323    Hearing Date: August 23, 2023    Dept: 8

Tentative Ruling¿ 

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HEARING DATE:                 August 23, 2023¿ 

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CASE NUMBER:                  23TRCV00323

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CASE NAME:                        Alejandro Chavez v. American Honda Motor Co., Inc. 

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MOVING PARTY:                (1) Defendant, American Honda Motor Co., Inc. 

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RESPONDING PARTY:       (1) Plaintiff, Alejandro Chavez

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TRIAL DATE:                        Not Set.   

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MOTION:¿                              (1) Motion to Compel Arbitration 

Tentative Rulings:                  (1) Hyundai’s Motion to Compel Arbitration is DENIED.

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I. BACKGROUND¿¿ 

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A. Factual¿¿ 

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On February 3, 2023, Plaintiff, Alejandro Chavez (“Plaintiff”) filed a Complaint  against Defendants, American Honda Motor Co., Inc, and DOES 1 through 10. The Complaint alleges causes of action for: (1) Violation of Song-Beverly Act – Breach of Express Warranty; and (2) Fraudulent Inducement – Concealment.

The Complaint is based on a September 29, 2022 purchase by Plaintiff of a 2021Honda Accord with corresponding identification number VIN: 1HGCV1F35MA100568  (hereafter "Vehicle") from Scott Robinson Honda. Plaintiff’s Complaint notes that the vehicle was manufactured by American Honda Motor Co., Inc (“Honda”). (Complaint, ¶ 11.) Plaintiff further notes that the causes of action contained in his complaint arise out of warranty and repair obligations of Honda. (Complaint, ¶ 5.) Plaintiff contends that the defects and nonconformities to warranty manifested themselves within the applicable express warranty period, and include the Honda Sensing Defect, which suffers from: frequent malfunctions, causing (1) numerous warning messages to intermittently appear on the vehicles’ instrument cluster alerting drivers to a problem with Honda Sensing safety and driver-assist system, (2) the vehicles to fluctuate their highway speed without warning when adaptive cruise control is set, (3) the vehicles to alert drivers to apply brakes immediately although no obstruction is present, (4) the vehicles to apply brakes although no obstruction is present, (5) the vehicles to falsely alert drivers that they fail to drive their vehicle within road lane markings, and (6) the vehicles to steer themselves outside lane of travel. (Complaint, ¶ 17.)

            Defendant, Honda now files a Motion to Compel Binding Arbitration.

B. Procedural¿¿ 

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On July 26, 2023, Honda filed a Motion to Compel Arbitration. On August 10, 2023, Plaintiff filed an opposition. On August 16, 2023, Honda filed a reply brief.

III. ANALYSIS

A.    Legal Standard

The purpose of the Federal Arbitration Act (“FAA”) is “to move the parties in an arbitrable dispute out of court and into arbitration as quickly and easily as possible.”¿ (Moses H. Cone Memorial Hosp. v. Mercury Constr. Corp. (1983) 460 U.S. 1, 23.)¿ California Code of Civil Procedure, Section 1281 provides that “[a] written agreement to submit to arbitration an existing controversy or a controversy thereafter arising is valid, enforceable, and irrevocable, save upon such grounds as exist for the revocation of any contract.”¿ “California law, like federal law, favors enforcement of valid arbitration agreements.”¿ (Armendariz v. Foundation Health Psychcare Services, Inc. (2000) 24 Cal.4th 83, 97.)¿ “On petition of a party to an arbitration agreement alleging the existence of a written agreement to arbitrate a controversy and that a party to the agreement refuses to arbitrate that controversy, the court shall order the petitioner and the respondent to arbitrate the controversy” unless grounds exist not to compel arbitration.¿ (Code Civ. Proc. § 1281.2.) The Song-Beverly Act also favors arbitration of Lemon Law disputes with a series of “carrot and stick” provisions that immunize a warrantors from a species of civil penalty if, like Defendant Honda, they have a certified lemon arbitration program in place.

Here, the analysis is somewhat different because Honda is not a party to the arbitration agreement, although one of its authorized dealers is a party to the agreement upon which Honda’s motion rests, and Plaintiff is a party at that same arbitration agreement.

B.     Discussion

a.      Existence of Arbitration Agreement

Here, the parties agree that there was a written agreement, the Lease Agreement, that included an arbitration agreement. However, as noted in Plaintiff’s opposition, that agreement is between Plaintiff and Scott Robinson Honda, the dealership. Plaintiff also notes that she brought this case against Honda based on its breach of its statutory obligations under the Song-Beverly Act and the express warranty it gave on the subject vehicle. The arbitration agreement in the Lease Agreement states as follows:

1. EITHER YOU OR WE MAY CHOOSE TO HAVE ANY DISPUTE BETWEEN US DECIDED BY ARBITRATION AND NOT IN COURT OR BY JURY TRIAL.

2. IF A DISPUTE IS ARBITRATED, YOU WILL GIVE UP YOUR RIGHT TO PARTICIPATE AS A CLASS REPRESENTATIVE OR CLASS MEMBER ON ANY CLASS CLAIM YOU MAY HAVE AGAINST US INCLUDING ANY RIGHT TO CLASS ARBITRATION OR ANY CONSOLIDATION OF INDIVIDUAL ARBITRATIONS.

3. DISCOVERY AND RIGHTS TO APPEAL IN ARBITRATION ARE GENERALLY MORE LIMITED THAN IN A LAWSUIT, AND OTHER RIGHTS THAT YOU AND WE WOULD HAVE IN COURT MAY NOT BE AVAILABLE IN ARBITRATION.

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. If federal law provides that a claim or dispute is not subject to binding arbitration, this Arbitration Provision shall not apply to such claim or dispute. Any claim or dispute is to be arbitrated by a single arbitrator on an individual basis and not as a class action. You expressly waive any right you may have to arbitrate a class action. You may choose the American Arbitration Association, 1633 Broadway, 10th Floor, New York, New York 10019 (www.adr.org). or any other organization to conduct the arbitration subject to our approval. You may get a copy of the rules of an arbitration organization by contacting the organization or visiting its website.

Arbitrators shall be attorneys or retired judges and shall be selected pursuant to the applicable rules. The arbitrator shall apply governing substantive law and the applicable statute of limitations. The arbitration hearing shall be conducted in the federal district in which you reside unless the Seller-Creditor is a party to the claim or dispute, in which case the hearing will be held in the federal district where this contract was executed. We will pay your filing, administration, service or case management fee and your arbitrator or hearing fee all up to a maximum of $5000, unless the law or the rules of the chosen arbitration organization require us to pay more. The amount we pay may be reimbursed in whole or in part by decision of the arbitrator if the arbitrator finds that any of your claims is frivolous under applicable law. Each party shall be responsible for its own attorney, expert and other fees, unless awarded by the arbitrator under applicable law. If the chosen arbitration organization's rules conflict with this Arbitration Provision, then the provisions of this Arbitration Provision shall control. Any arbitration under this Arbitration Provision shall be governed by the Federal Arbitration Act (9 U.S.C. § 1 et. seq.) and not by any state law concerning arbitration. Any award by the arbitrator shall be in writing and will be final and binding on all parties, subject to any limited right to appeal under the Federal Arbitration Act.

You and we retain the right to seek remedies in small claims court for disputes or claims within that court's jurisdiction, unless such action is transferred, removed or appealed to a different court. Neither you nor we waive the right to arbitrate by using self-help remedies, such as repossession, or by filing an action to recover the vehicle, to recover a deficiency balance, or for individual injunctive relief. Any court having jurisdiction may enter judgment on the arbitrator's award. This Arbitration Provision shall survive any termination, payoff or transfer of this contract. If any part of this Arbitration Provision, other than waivers of class action rights, is deemed or found to be unenforceable for any reason, the remainder shall remain enforceable. If a waiver of class action rights is deemed or found to be unenforceable for any reason in a case in which class action allegations have been made, the remainder of this Arbitration Provision shall be unenforceable.

(See Exhibit “A,” attached to the Declaration of Mike Cirona.)

b.      Equitable Estoppel

The parties concede that Honda is not a signatory to the contract. Generally, only parties to a contract containing an arbitration agreement may enforce that arbitration clause. (Thomas v. Westlake (2012) 204 Cal.App.4th 605, 613.) There are exceptions to the general rule. Under one such exception, the doctrine of equitable estoppel, a nonsignatory defendant may move to enforce an arbitration clause. (JSM Tuscany, LLC v. Superior Court (2011) 193 Cal.App.4th 1222, 1236.) Honda’s motion relies on Felisilda and the First District’s reasoning on the equitable estoppel exception to the non-signatory rule. However, there has been a recent conflict in the Courts of Appeal in Lemon Law litigation as to the enforceability of an arbitration agreement by a non-signatory manufacturer to the dealer’s contract containing the arbitration provision. On April 4, 2023, Division Eight of the Second District Court of Appeal declined to follow Felisilda in its decision of Martha Ochoa v. Ford Motor Company (2023) 89 Cal.App.5th 1324, as did Division Seven of the Second District in Montemayor v. Ford Motor Co. (2023) 92 Cal.App.5th 958, 961 and the Third District in Kielar v. Superior Court of Placer County (Cal. Ct. App., Aug. 16, 2023, No. C096773) 2023 WL 5270559, at *1. 

The Court notes that on July 19, 2023, the Supreme Court of California granted review of Ochoa and instructed that California Rules of Court, Rule 8.1115(e)(3) applies. However, the Supreme Court clarified that the Second District’s opinion may be cited to, “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 (1962) 57 Cal.2d 450, 456, to choose between sides of any such conflict.” This Court is exercising its discretion to follow Ochoa and Montemayor rather than Felislida as the better-reasoned appellate decisions.

Honda argues that Plaintiff is bound to arbitrate by equitable estoppel because his claims are “intimately founded in and intertwined” the underlying with the obligations in and arising from the Lease Agreement.

Honda further contends that here, as in Felisilda, Plaintiff expressly agreed to arbitrate her claims against a third-party non-signatory and that Plaintiff’s claims against Honda fall under the express terms of the Arbitration Agreement as they relate directly to the “lease, performance and warranties for the subject vehicle.” Honda assert that it has standing to enforce the Arbitration Agreement as to all of Plaintiff’s claims because they are directly related to the condition of the Vehicle and the resulting warranty relationship that arose out of the execution of the Lease Agreement.

“Inextricable Intertwined with the Underlying Contract”

            As noted above, Honda argues that Plaintiff is bound by the doctrine of equitable estoppel to arbitrate because his Song-Beverly claims are intimately founded in and intertwined with the obligations of the Lease Agreement giving rise to his claims. Honda argues that Plaintiff read the arbitration provision containing functionally identical language as the Felisilda plaintiff’s arbitration provision and expressly agreed to arbitrate claims arising out of the lease, and/or condition of the vehicle, including any claims against third party non-signatories. Based on this, Honda contends that pursuant to the express terms of the lease agreement, which accounts for third parties such as Honda, Plaintiff’s claims against it should be resolved through binding arbitration.

            To be sure, this case presents facts akin to Felisilda. For example, the arbitration agreements have similar language, the plaintiffs causes of action are very similar, and the charging allegations of the complaints are similar. However, the facts here are also very similar to those presented in Ochoa and Montemayor. The Ochoa and Montemayor courts disagreed with Felisilda because the Felisilda plaintiffs and the dealer agreed in their sale contract to arbitrate disputes between them about the condition of the vehicle but did not expressly or impliedly agree to arbitrate disputes under the consumer protection statutes governing manufacturer warranties as distinct from promises or warranties made in the sales contract with the dealer. Ochoa noted that equitable estoppel would apply if the plaintiffs had sued FCA based on the terms of the sale. But that was not the gravamen of the Lemon Law suit in Felisilda, Montemayor, Ochoa, or here. Like the plaintiffs in those cases, Plaintiff here predicates the suit on Honda’s claimed breach of its statutory duties and for breach of the express and implied warranties, not based on plaintiff’s lease agreement with the dealer.   The causes of action are not “dependent on and inextricably intertwined with the obligations imposed by the sales contract.”  (Montemayor, supra, 92 Cal.App.5th at p. 970.)

Here, Honda argues that Plaintiff signed a contract that bound Plaintiff to arbitration against third party non-signatories. Such language was also present in the contracts at issue in Felisilda, Montemayor, and Ochoa. The Second District in both Montemayor and Ochoa disagreed with the Felisilda court’s interpretation of the sales contract as broadly calling for arbitration of any claims concerning the condition of the vehicle “against third party nonsignatories,” and instead noted that it did not read that language as consent by the purchaser to arbitrate any or all claims with third-party nonsignatories. Rather, the Ochoa and Montemayor Courts read it as a further delineation of the subject matter of claims the purchasers and dealers agreed to arbitrate, noting the purchaser(s) 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.” The Ochoa Court further noted that the “third-party” language in the arbitration clause means that if a purchaser asserts a claim against the dealer (or its employees, agents, successors or assigns) that relates to one of these third-party transactions (such as electing to buy insurance, theft protection, extended warranties, and the like), the dealer can elect to arbitrate that claim. The Second District found that such language says nothing of binding the purchaser to arbitrate with the universe of unnamed third parties. IF Plaintiff had sued the individual owners or sales personnel at the leasing dealership regarding fraud in the inducement of the sale, or refusal to perform services listed on the Due Bill, or for leasing a vehicle with scratches on the paint finish (i.e., the condition of the vehicle) that were not visible at the time of retail delivery, or for failure to obtain a promised insurance binder, such third-party claims would be arbitrable. But that is not what Plaintiff here is claiming.

            Honda’s warranty is not intertwined with the leasing agreement. Song-Beverly claims are not intimately founded in the leasing agreement. Honda and its dealer are separate entities. The warranty and the leasing agreement are separate legal documents, neither of which refer to or incorporate each other. Most automotive manufacturers prohibit their authorized dealers from binding the manufacturer to warranties. Applying Ochoa and Montemayor to this case, the Arbitration Agreement present in Plaintiff’s leasing agreement does not bind him to arbitrate non-lease agreement issues with Honda. While a Lemon Law case arguably is related to the “condition” of the vehicle sold via the Leasing Contract/Financing Agreement, the gravamen of Plaintiff’s suit here is not as to the condition of the vehicle at the time of sale, but rather as to subsequent events that manifest only after Plaintiff drove the vehicle off the lot, later experienced malfunctions or defect, and unsuccessfully sought to have those post-sale matters remedied within a reasonable number of repair attempts.

Breach of Warranty versus Breach of Contract

            The second argument the Court in Ochoa rejected was that breaches of warranties are generally treated as breaches of contract, so breaches of any warranties that accompanied the sale contract are necessarily intertwined with the sale contract. Similar to the defendant in Felisilda, Honda also argues that Plaintiff’s Song-Beverly breach of express warranty claim is necessarily intertwined with the Lease Contract/Financing Agreement, Plaintiff would lack standing to sue under the statute. Honda contends that Plaintiff read the arbitration provision containing functionally identical language as the Felisilda plaintiff’s arbitration provision and expressly agreed to arbitrate claims arising out of the lease, and/or condition of the vehicle, including any claims against third party non-signatories.

            In Ochoa, the Court noted that most of the plaintiffs there attached their sale contracts as an exhibit to their complaints; some did so in support of general allegations about when they bought their vehicles and to identify their vehicles by make and model; and others attached their sale contracts in support of allegations the sale contracts were accompanied by implied warranties under the Song-Beverly Consumer Warranty Act. However, the Second District specifies that no plaintiffs have alleged violations of the sales contracts’ express terms. Rather, Plaintiff’s claims in a Lemon Law case are based on a manufacturer’s statutory obligations to reimburse consumers or replace their vehicles when unable to repair in accordance with the manufacturer’s warranty. Similarly here, Plaintiff has alleged, against Honda, that Honda violated the Song-Beverly Act by failing to repair or replace the Sensing Defect or to promptly make restitution in accordance with that statute, not based on any provision of the Lease Agreement. Just as Plaintiff asserts in his opposition to Honda’s Motion to Compel Arbitration, these claims do not rely on the terms of the dealership’s lease agreement/financing agreement.

c.       Third-Party Beneficiary

Honda also argues that it can compel arbitration as a third-party beneficiary to the arbitration provision. “ ‘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, 226 Cal.Rptr.3d 797; 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, at p. 302, 226 Cal.Rptr.3d 797.) Nor does knowledge that the third party may benefit from the contract suffice. (Goonewardene v. ADP, LLC (2019) 6 Cal.5th 817, 830, 243 Cal.Rptr.3d 299, 434 P.3d 124 (Goonewardene).) Rather, the parties to the contract must have intended the third party to benefit.

In order for a third party to show that the contracting parties intended to benefit it, 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.” (Ochoa, citing Goonewardene, supra, 6 Cal.5th at p. 830.) Here, Honda argues that it is a member of the class of persons for whose benefit the contract was made. The Court also understands that Plaintiff agreed to arbitrate claims including “[a]ny claim or dispute . . . which arises out of or relates to . . . any resulting transaction or relationship (including any such relationship with third parties who do not sign this contract.

However, this Court does not believe that such language relates to Honda as a third party. The Lease Agreement/Financing Agreement here benefits those persons who might rely on it to avoid proceeding in court – the purchaser, the dealer, and the dealer’s employees, agents, successors or assigns. Honda is none of the aforementioned persons. (See Ngo, supra, 23 F.4th at p. 947.) Second, “there is no indication that a benefit to [Honda] was the signatories’ ‘motivating purpose’ in contracting for the sale and purchase” of the Subject Vehicle or a motivation for including the arbitration clause (Goonewardene, supra, 6 Cal.5th at p. 830; see Montemayor, supra, 92 Cal.App.5th at p. 974.) 

Honda argues that because the Arbitration Provision explicitly embraces claims arising out of relationships with third parties who do not sign the Sales Contract, Plaintiff’s warranty claims necessarily require her to contend that Honda benefitted from the Sales Contract. While the argument is a reasonable one, this Court disagrees with the conclusion that a benefit to the manufacturer motivated either buyer or seller to enter into the lease/financing agreement. As noted above, and as noted by the Ochoa and Montemayor Courts, the plaintiff’s and dealer’s intent was to lease and finance a car, and to allow 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.” This language does not include “franchisors” or “principals”, language which would more clearly have expressed an intention to include Honda within the scope of arbitrability.

Lastly, the Montemayor and Ochoa Courts noted that allowing a manufacturer to enforce the arbitration provision as a third party beneficiary would be inconsistent with the “reasonable expectations of the contracting parties” where they specifically vested the right of enforcement in the purchaser and the dealer only. Here as in Montemayor, the plaintiffs’ contract with the dealer covered “terms for the financing and purchase [or lease] of the vehicle . . . , and they agreed to arbitrate disputes between them arising out of the credit application, purchase [or lease], or condition of the purchased [or leased] vehicle. In no way was the . . . contract ‘made expressly for the benefit of a third person.’ (Civ. Code, § 1559.)”  (Montemayor, supra, 92 Cal.App.5th at p. 974.) 

Based on the foregoing, this Court exercises its discretion to hold that the Arbitration Agreement does not apply to Honda as an undisclosed but allegedly intended third party beneficiary, and as such, it may not enforce it against Plaintiff. Thus, Honda’s Motion to Compel Arbitration is tentatively denied.