Judge Timothy Patrick Dillon, Case 22STCV07970 2022-10-19 Tentative Ruling

Judge: Timothy Patrick Dillon, Case: 22STCV07970, Date: 2022-10-19 Tentative Ruling

On July 28, 2021, Plaintiff purchased a used 2017 Mercedes-Benz vehicle. The parties to the sales contract are Plaintiff, as buyer, and CarMax Auto Superstores California, LLC, as seller. The sales contract provides “you,” “your,” and “yours” refer to the Buyer or Co-Buyer; “we,” “us,” and “our” refer to the Seller or “anyone to whom the Seller transfers its rights under this Contract.” The sales contract contains an arbitration provision.

On March 4, 2022, Plaintiff filed a complaint against Mercedes-Benz USA, LLC. The complaint contains causes of action for breach of implied warranty of merchantability under the Song-Beverly Warranty Act and breach of express warranty under the same statute. Mercedes-Benz is the manufacturer of Plaintiff’s purchased vehicle. On June 15, 2022, although not a signatory to the lease, Mercedes-Benz filed a motion to compel arbitration.

Mercedes-Benz has adequately shown the existence of the contract containing the arbitration provision. (Condee v. Longwood Management Corp. (2001) 88 Cal.App.4th 215, 218.) Plaintiff argues that Mercedes-Benz has waived its right arbitrate and that the arbitration provision is procedurally unconscionable. Mercedes-Benz contends that it has not waived the right to arbitrate and further argues that it can compel arbitration under equitable estoppel and third-party beneficiary theories. The Court does not reach Plaintiff’s unconscionability argument for the reasons set forth below.

In determining waiver, a court can consider: (1) whether the party’s actions are inconsistent with the right to arbitrate; (2) whether the “litigation machinery has been substantially invoked” and the parties “were well into preparation of a lawsuit” before the party notified the opposing party of an intent to arbitrate; (3) whether a party either requested arbitration enforcement close to the trial date or delayed for a long period before seeking a stay; (4) whether a defendant seeking arbitration filed a counterclaim without asking for a stay of the proceedings: (5) whether important intervening steps [e.g.. taking advantage of judicial discovery procedures not available in arbitration] had taken place; and (6) whether the delay affected, misled, or prejudiced the opposing party. (St. Agnes Medical Center v. PacifiCare of California (2003) 31 Cal. 4th 1187, 1196.)

Plaintiff argues that Mercedes-Benz waived its right to arbitrate by invoking the “litigation machinery.” Mercedes-Benz has provided responses to Plaintiff’s discovery requests without demanding arbitration. (Hayes Decl. ¶ 5.) Mercedes-Benz served a meet and confer letter indicating its intent to file a Motion for Judgment on the Pleadings without demanding arbitration. (Hayes Decl., ¶ 6.) And, Mercedes-Benz filed a motion to compel arbitration nearly two months after filing an answer to Plaintiff’s complaint.

Mercedes-Benz argues otherwise. Contrary to Plaintiff’s assertions, its sole filings in this matter comprise an answer with an affirmative defense for arbitration and the instant motion to compel arbitration. Citing Khalatian v. Prime Time Shuttle, Inc. (2015) 237 Cal.App.4th 651-52, Mercedes-Benz further argues that courts have held that waiver is not found even when a fourteen-month period separates the filing of the original complaint and the filing of the motion to compel. Here, Mercedes-Benz filed the instant motion just over three months from the filing of the complaint. Mercedes took no other actions in court.

Accordingly, the Court finds that Mercedes-Benz has not waived its right to compel arbitration.

In Felisilda v. FCA US LLC (2020) 53 Cal.App.5th 486, under an equitable estoppel theory, the court enforced an arbitration clause in favor of a non-signatory care manufacturer. The arbitration clause provided:

“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

. . . 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.”

In compelling arbitration, the court in Felisilda relied on the language in the arbitration clause: “which arises out of or relates to . . . condition of this vehicle” and “(including any such relationship with third parties who do not sign this contract).” Here, the arbitration clause is materially different. The clause contains the language “arises from or relates to . . . the Vehicle” which is more expansive than, but not nearly as specific as, the clause in Felisilda because it does not mention the “condition” of the vehicle. “Condition” would include alleged defects in the vehicle. The clause in Felisilda also contains “or any resulting transaction or relationship . . . . .” The clause here, however, does not contain “(including any such relationship with third parties who do not sign this contract).” Thus, the arbitration provision in this action provides:

“If you or we choose arbitration, then arbitration shall be mandatory and: Any claim will be decided by arbitration and not in court or by a jury trial. Discovery and rights to appeal are limited by the arbitration rules of the arbitration administrator. You give up your right to participate as a representative or member of a class action (“class action waiver”). . . [¶] What claims are covered. A “Claim” is any claim, dispute, or controversy between you and us that in any way arises from or relates to this consumer credit sale, the purchase you are financing by way of this Contract, the Vehicle and related goods and services that are the subject of the purchase and this Contract, or the collection or servicing of this Contract[.] . . . [¶] This Arbitration Provision is governed by the Federal Arbitration Act and not by any state arbitration law.”

Emphasizing the importance of the precise arbitration language at issue, in Felisilda, the court pointed out: “In signing the sales contract, the Felisildas agreed that ‘[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.’ (Italics added.) Here, the Felisildas’ claim against FCA relates directly to the condition of the vehicle.” (Id. at p. 496.) The court held: “The Felisildas’ claim against FCA directly relates to the condition of the vehicle that they allege to have violated warranties they received as a consequence of the sales contract. Because the Felisildas expressly agreed to arbitrate claims arising out of the condition of the vehicle–even against third party nonsignatories to the sales contract–they are estopped from refusing to arbitrate their claim against FCA. Consequently, the trial court properly ordered the Felisildas to arbitrate their claim against FCA.” (Id. at p. 497.)

The court in Felisilda distinguished Kramer v. Toyota Motor Corp. (9th Cir. 2013) 705 F.3d 1122 because the language of the arbitration clause in Kramer did not contain a reference to “third parties.” The Felisilda court reasoned: “In Kramer, purchasers of Toyota vehicles agreed to arbitrate between themselves and dealerships. [Citation.] The retail sales contracts in Kramer did not contain any language that could be construed as extending the scope of arbitration to third parties. [Citation.] By contrast, the arbitration provision in this case provides for arbitration of disputes that include third parties so long as the dispute pertains to the condition of the vehicle. As the operative complaint makes clear, the Felisildas’ claim arises out of the condition of the vehicle.” (Felisilda, supra, 53 Cal.App.5th at p. 497.)^{^[1]}

The court in Felisilda also distinguished Soto v. American Honda Motor Co. (N.D. Cal. 2012) 2012 WL 5877476 (Soto I) and Mance v. Mercedes-Benz USA (N.D. Cal. 2012) 901 F.Supp.2d 1147 (Mance). According to the court in Felisilda, in Soto I, the court held that “a vehicle purchaser’s product liability claim against the manufacturer was not ‘intertwined’ with the sales contract merely because there would have been no warranty in the absence of a sale.” (Felisilda, supra, 53 Cal.App.5th at p. 497.) In Mance, the court held: “[I]t would not be fair to allow Mr. Mance to rely upon his signing the contract to buy the car and get the warranty but to prevent Mercedes-Benz from attempting to enforce the contract’s arbitration clause.” (Mance, supra, 901 F.Supp.2d at p. 1157.) The court in Felisilda again focused on the differences in arbitration clauses, holding: “We need not resolve the conflict between the Soto I and Mance federal district courts regarding the applicability of the ‘but-for test’ for equitable estoppel as it relates to arbitrability.” (Felisilda, supra, 53 Cal.App.5th at p. 497.) The court explained:

Soto I involved an arbitration provision that did not expressly include third parties as does the language of the sales contract in this case. The district court’s decision in Soto I was issued on a motion for reconsideration after the manufacturer’s original motion to compel arbitration was denied. (Soto v. American Honda Motor Co. (N.D. Cal. 2012) 946 F.Supp.2d 949, 952 (Soto II).) Soto II is illuminating because it notes that the arbitration provision in that case stated that “[e]ither you [ (i.e., the purchaser) ] or we [ (i.e., dealership) ] may choose to have any dispute between us decided by arbitration and not in court or by jury trial.” (Id. at pp. 952.) As in Kramer, supra, 705 F.3d 1122, the arbitration provision lacked the key language present in this case, namely an express extension of arbitration to claims involving third parties that relate to the vehicle’s condition. The express language of the arbitration agreement in this case sets it apart from the arbitration provisions in the Soto and Kramer decisions.

The court in Felisilda further criticized another federal decision that involved the same language as in its case; “condition of this vehicle” and “third parties.” The court held: “We decline to follow the Jurosky court’s glossing over language in an arbitration clause that expressly includes third party nonsignatories.” (Id. at p. 498.) Finally, the court in Felisilda again emphasized the importance of the contractual language: “We also reject the Felisildas’ contention that the rule requiring mutual consent to arbitrate is violated for lack of the Felisildas’ consent to arbitrate their claim against FCA. As explained above, the Felisildas’ agreement to the sales contract constituted express consent to arbitrate their claims regarding vehicle condition even against third parties. Their consent preceded the motion to compel filed in this case.” (Ibid.)

As stated, the arbitration provision in Felisilda contains materially different language than the arbitration provision in this case. The arbitration provision here is lacking the language repeatedly relied on by the court in Felisilda. Here, there is no language: “(including any such relationship with third parties who do not sign this contract).” Nor is the condition of the vehicle language present. Given the material difference in language, there is no basis for application of the equitable estoppel doctrine. The causes of action asserted against Mercedes-Benz are not intimately founded in and intertwined with the sales contract. This result is consistent with established California authorities. For example, in Goldman v. KPMG, LLP, supra, 173 Cal.App.4th 209, the court explained when a nonsignatory could be compelled to arbitrate under equitable estoppel, as follows:

· As to the first circumstance, merely “mak[ing] reference to” an agreement with an arbitration clause is not enough. Equitable estoppel applies "when the signatory to a written agreement containing an arbitration clause ‘must rely on the terms of the written agreement in asserting [its] claims’ against the nonsignatory.” (MS Dealer Service Corp. v. Franklin (11th Cir. 1999) 177 F.3d 942, 947 (MS Dealer).) The difference between “reference,” the word chosen by KPMG/Sidley, and “reliance,” as employed by MS Dealer and others, is significant.

· As to the second circumstance, while the cases recite the language which KPMG and Sidley proffer (interdependent and concerted misconduct by signatories and nonsignatories), the cases also show that this language subsumes an overarching element critical to the proper application of equitable estoppel. 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. In other words, allegations of substantially interdependent and concerted misconduct by signatories and nonsignatories, standing alone, is not enough: the allegations of interdependent misconduct must be founded in or intimately connected with the obligations of the underlying agreement.

So, if a plaintiff relies on the terms of an agreement to assert his or her claims against a nonsignatory defendant, the plaintiff may be equitably estopped from repudiating the arbitration clause of that very agreement. In other words, a signatory to an agreement with an arbitration clause cannot “‘have it both ways’”; the signatory “cannot, on the one hand, seek to hold the non-signatory liable pursuant to duties imposed by the agreement, which contains an arbitration provision, but, on the other hand, deny arbitration’s applicability because the defendant is a non-signatory.” (Grigson v. Creative Artists Agency (5th Cir. 2000) 210 F.3d 524, 528 (Grigson).) As Grigson sums it up, “[t]he linchpin for equitable estoppel is equity¿fairness.” (Ibid.)

Here, Mercedes-Benz argues that Plaintiff must rely on the existence of the sales contract because his possession of the vehicle is based on the sales contract. However, Plaintiff does not rely on the terms of the sales contract to assert his warranty claims against Mercedes-Benz. The warranties arise by statute and do not depend on the terms of the sales contract. The sales contract did not create the warranties upon which Plaintiff sues. That Plaintiff mentions the sales contract in his complaint by alleging that the contract “is in the possession of [CarMax]” is not sufficient to invoke the equitable estoppel doctrine. Mere reference to an agreement containing an arbitration provision is insufficient. (Goldman, supra, 173 Cal.App.4th at p. 218.)

“A third party beneficiary may enforce a contract made for its benefit. (Civ. Code, § 1559.) However, ‘[a] putative third party’s rights under a contract are predicted upon the contracting parties’ intent to benefit’ it. [Citation.] Ascertaining this intent is a question of ordinary contract interpretation.” (Hess v. Ford Motor Co. (2002) 27 Cal.4th 516, 524.) Mercedes-Benz argues it is an intended third party beneficiary because the arbitration provision “requires Plaintiff to arbitrate the claims against non-signatories such as MBUSA, if Plaintiff asserts a claim that arises out of or relates to the Vehicle.” Mercedes-Benz argues that warranty relationship between Plaintiff and Mercedes-Benz resulted from the purchase of the vehicle.

The arbitration clause states that “you” and “we” agree to be bound by the terms of this Arbitration Provision. “You” refers to the Buyer (Plaintiff), and “we” refers to Seller (CarMax), “including its respective subsidiaries, affiliates, agents, employees, officers, or anyone to whom the Seller transfers its rights under the Contract.” Thus, the express parties to the agreement do not include Mercedes-Benz. The arbitration agreement states that it covers any claim “between you and us.” The arbitration agreement is reasonably read to include claims between Plaintiff on one hand and CarMax’s subsidiaries, affiliates, agents, employees, officers, or anyone to whom CarMax transfers its rights under the sales contract. Mercedes-Benz does not fall into any of those categories of parties, and none of these categories includes third parties unrelated to CarMax.

Mercedes-Benz’s argument appears to be that because Plaintiff purchased the vehicle and because the vehicle was manufactured by Mercedes-Benz, Mercedes-Benz and Plaintiff’s warranty relationship arise out of and relate to the Vehicle and therefore the parties to the sale contract intended Mercedes to be a third party beneficiary. To the contrary, the “arises from or relates to” language defines the types of claims covered, not the third parties intended to benefit from the contract. The sales contract did not create the warranty relationship between Mercedes-Benz and Plaintiff. Plaintiff’s warranty relationship with Mercedes-Benz was incidental to the sales contract, not formed by any term in the contract. If the parties had intended Mercedes to be a third party beneficiary to the sales contract, CarMax could have included language stating the arbitration provision covered third parties, like the arbitration clause in Felisilda, supra, 53 Cal.App.5th 486.

^{^[1]} Mercedes-Benz reliance on Sanchez v. Valencia Holder Co. LLC (2005) 61 Cal.4th 899 is misplaced because in Sanchez the dealer, a signatory, sought to compel arbitration, not a non-signatory manufacturer. (Id. at p. 906.)