California Mediation and Arbitration

Third Party Beneficiaries: Second Dist., Div. 6 Rejects Argument Third-Party Ford Could Benefit From Arbitration Clause With Non-Party Dealer

One More Opinion Rejects Reasoning In Felisilda.

        In Rivera et al. v. Superior Court of Ventura County, B334522 (2/6  9/23/24) (Gilbert, P.J.) petitioners Rivera and Espinosa sued Ford Motor Company under California's Song-Beverly Consumer Warranty Act (the "lemon law") after their Ford F-250 truck experienced repeated mechanical issues. They also included Ford of Ventura, an authorized repair service, in their complaint but did not sue the selling dealer. FMC moved to compel arbitration based on an arbitration clause in the sale contract signed between the petitioners and the non-party dealer.

        The trial court granted FMC's motion, relying on the case Felisilda v. FCA US LLC, which allowed a manufacturer to enforce an arbitration clause as a third-party beneficiary of the sale contract. However, the petitioners sought reconsideration after several appellate courts disapproved Felisilda. The trial court denied reconsideration, citing the unresolved status of Felisilda. The petitioners then sought a writ of mandate. The appellate court ruled that Ford Motor Company was not a third-party beneficiary and that petitioners were not equitably estopped from rejecting arbitration. The appellate court thus granted the writ and ordered the trial court to vacate its order compelling arbitration.

        COMMENT. Why did the court reject Felisilda?  Unlike Felisilda, the petitioners in this case sued only the manufacturer, and not the selling dealer. The obligations under manufacturer's warranty are independent of the sale contract, and the manufacturer is neither a party to nor a beneficiary of that contract. The court emphasized that petitioners’ claims stemmed from statutory warranty obligations under the lemon law, not the sale contract, thus rendering Felisilda inapplicable. We posted on the Felisilda case way back on 8/29/20. Since then, the law has tipped against Felisilda.

Ford F-250. Photo: Scott Beeton.  Creative Commons Attribution-Share Alike 4.0 International license

 

Automobiles, Nonsignatories: Fourth Dist. Div. 2 Rejects Equitable Estoppel Doctrine Of Felisilda

One More California Appellate Case Rejects Felisilda.

        We have written before about courts rejecting the application of the equitable estoppel doctrine to allow vehicle manufacturers to piggyback on to the arbitration provision in sales contracts between customers and automobile dealerships. In Davis v. Nissan North America, Inc. v. Nissan North America, Inc., D083006 (4/1  3/15/24) (Buchanan, Do; Irion dsst) an automobile manufacturer and an authorized vehicle repair facility tried to take advantage of the arbitration agreement in the dealership contract, even though the manufacturer and the repair facility were not signatories to the arbitration agreement. Once more, the Court of Appeal rejected the equitable estoppel doctrine of Felisilda that would have allowed nonsignatories to rely on the arbitration agreement.

        Justice Irion dissented, relying on the equitable estoppel doctrine.

Automobiles, Nonsignatories: Hyundai Is Unable To Piggback Onto Dealership's Arbitration Agreement

California Court of Appeal, 3rd District, Disagrees With California Court of Appeal, 3rd District.

        A Third District California Court of Appeal panel composed of Justices Renner, Earl, and Hull, disagrees with an earlier Third District panel composed of Justices Hoch, Robie, and Murray. The issue is whether an automobile manufacturer can rely on an arbitration agreement between a dealership and a customer to compel the customer to arbitrate a breach of warranty claim with the nonsignatory automobile manufacturer. The earlier case, Dina C. Felisilda et al., v. FCA US LLC, 53 Cal.App.5th 486 (2020), held that the manufacturer could rely, because the customer had to rely on the contract with the dealer to sue the manufacturer. We posted about the Felisilda case on 8/29/20.

        In light of developing case law, Justice Renner, writing for the court, disagrees with Felisilda. The customer's claim that the manufacturer breached its warranty does not rely on the customer's contract with the dealership. The manufacturer's warranty is not part of the dealership contract. Mark Kielar v. Superior Ct. of Placer County (Hyundai Motor America, Real Party in Interest), C096773 (3rd Dist. 8/16/23).

Nonsignatories, Automobiles: Ford Motor Company Could Not Rely On Dealership Agreements To Compel Arbitration With Auto Buyers

Order Denying Ford Motor Company's Motion To Compel Arbitration Is Affirmed.

        In the Ford Motor Warranty Cases, No. B312261 (2/2  4/4/23) (Grimes, Stratton, Viramontes), FMC  sought to compel arbitration with plaintiffs who purchased automobiles and complained about manufacturing defects. However, FMC's argument relied on dealership contracts with arbitration clauses to which FMC was not a signatory. The trial court denied the motion, and the Court of Appeal affirmed.

        Justice Grimes explained: "Equitable estoppel does not apply because, contrary to FMC’s arguments, plaintiffs’ claims against it in no way rely on the agreements. FMC was not a third party beneficiary of those agreements as there is no basis to conclude the plaintiffs and their dealers entered into them with the intention of benefitting FMC. And FMC is not entitled to enforce the agreements as an undisclosed principal because there is no nexus between plaintiffs’ claims, any alleged agency between FMC and the dealers, and the agreements."

Arbitration, Discovery, Appealability: In An Uninsured Motorist Arbitration, The Only Way To Challenge A Discovery Order Before Judgment Is With A Writ

A Case Of First Impression.

        Unless you practice in this area, you may not  know that in an uninsured motorist arbitration between the motorist with uninsured motorist coverage and her insurance company, discovery disputes are addressed to the court, not to the arbitrator. State Farm Mutual Automobile Insurance Company v. Cora Robinson, A158467 (1/1  3/14/22) (Humes, Margulies, Banke). "The question of first impression here is whether trial court discovery orders in these proceedings are reviewable on appeal from a judgment confirming the arbitration award. We hold that they are not." 

        The bases for vacating a judgment are found in California Code of  Civ. Proc. § 1286.2 (vacatur). And unhappiness with the trial judge's discovery order is not among the bases. Here, the insured argued that 1286.2(a)(4) provided a reason for  vacatur. That section allows vacatur when the arbitrator exceeded the arbitrator's power, and the award cannot be corrected without affecting the merits of the decision. However, the insured's complaint here was not addressed to the arbitrator, but rather  to the judge's discovery order. So there was no statutory route for vacating the arbitrator's decision. 

        The insured alternatively argued that her appeal should be considered as a writ. But that was not  possible, once a judgment had already been rendered.

        COMMENT: Suppose the arbitrator, rather than the judge, had issued a discovery order, as arbitrators routinely do in other types of proceedings. How easy would it be to attack the arbitrator's order in an appeal of a judgment confirming the award? Not easy. The arbitrator's discovery order would be scrutinized under the same standard as the award, and awards are not set aside just because the  arbitrator makes a mistake of law or fact.

Arbitration, Automobiles: Insurance Code Makes Underinsured Motorist Claim Arbitrable

Insurance Code Section 11580.2 Was Dispositive.

        California Insurance Code section 11580.2, subdivision (f) provides that disputes between insureds and insurers over entitlement to recover damages caused by an uninsured or under insured motorist [UIM], or the amount of damages, must be resolved by agreement or arbitration. When Brett McIsaac sued Foremost Insurance over an UIM, he argued that the matter was exempt  from arbitration, because he was suing for breach of contract and for bad faith, and a bad faith action is not a dispute over coverage or the amount of the UIM claim. The trial court sided with McIsaac; the Court of Appeal did not. Brett McIsaac v. Foremost Insurance Company Grand Rapids, Michigan, A160389 (1/1 filed 4/30, cert. for pub. 5/19/21) (Margulies, Humes, Banke). Justice Margulies explained that, while McIsaac had sued for bad faith, the insurance company also made a showing that the parties disputed the amount of damages due to plaintiff on his UIM. Thus, the insurance company was entitled to arbitrate.

        COMMENT: The Court of Appeal agreed that the bad faith claim did not need to be arbitrated. But the action for bad faith could be stayed while other claims were arbitrated.

Arbitration, Automobiles, FAA, Public Policy: A "Satellite Service Facility" Agreement With Subaru Was Not Subject To Statutory Exception To Arbitration That Would Apply To Manufacturer-Dealer Franchise Agreements

Automobile Dealerships Are Subject To A Narrow Exception To Arbitration -- But The Exception Did Not Apply Here.

1958 Subaru 360. Licensed under the Creative Commons Attribution-Share Alike 3.0 Unported, 2.5 Generic, 2.0 Generic and 1.0 Generic license. Author: Mytho88.

        Who knew? Automobile dealer franchises are subject to a narrow statutory exception to arbitration under the Motor Vehicle Franchise Arbitration Fairness Act, 15 USC section 1226. The key issue in Subaru of America, Inc. v. Putnam Automotive, Inc., No. A159686 (1/2  2/10/21) (Kline, Stewart, Miller) was whether Putnam's "Satellite Service Facility" agreement to service Subarus was part of Putnam's franchise agreement as an automobile dealer with Subaru. Because the arbitrator construed the two agreements to be separate, rather than a single integrated agreement, Putnam did not fall under a statutory exception that would have allowed it to escape arbitration.

        Putnam also argued that forcing it to arbitrate was contrary to the public policy protecting dealers from mandatory arbitration. However, since the arbitrator and  the court concluded the service agreement was not a  dealer franchise  agreement, this argument did not prevail.

        COMMENT: The statutory exemption that allows dealers to avoid having to arbitrate with distributors or manufacturers of motor vehicles is a  narrow exception. Apparently it  exists to level the playing field between the dealers and  economically more powerful manufacturers and distributors. We surmise that, though they may have less economic clout than manufacturers and distributors, dealers nevertheless had enough influence in the legislative process to obtain the narrow carve-out from arbitration. While the same "level the playing field" logic might apply to consumers and borrowers seeking an escape hatch from mandatory arbitration, evidently they have been less successful obtaining legislative carve-outs from arbitration.

Arbitration, Nonsignatories, Automobiles: Third District Affirms Confirmation Of Arbitrator's Award In Favor Of Nonsignatory

The Court Distinguishes Or Refuses To Follow Similar Cases Involving Nonsignatories.

    The Court affirms the confirmation of  an arbitrator's award in favor of a nonsignatory auto manufacturer in Dina C. Felisilda et al., v. FCA US LLC, No. C086043 (3rd Dist.  7/24/20) (Hoch, Robie, Murray) (filed 7/24, certified for publication 8/14/20). "The Felisildas' 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 [with the dealer]. 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 [the manufacturer]."

Automobiles, Consumers: Buyer’s Arbitration Award Exceeded $100K, And Auto Dealer Gets A “Do-Over” If Not Exactly An Appeal

Dealer Wanted To Go To Three-Arbitrator Panel After Receiving Adverse Arbitration Award, And Everyone Agreed That ADR Arbitral Forum Lacked “Appellate” Rules.  So?

      Plenty of arbitration disputes arise from arbitration clauses in auto sales contracts and leases – hence our sidebar category, “Automobiles.”.  Here’s an unusual one, based on fairly common arbitration provisions.  Condon v. Daland Nissan, Inc., No. A145613 (1/1 filed 11/4/16, order to pub. 11/29/16) (Banke, Humes, Dondero).

     Many auto sales agreements now contain an arbitration provision allowing a party to request a new arbitration under the rules of the arbitration organization if the arbitration award for a party is $0, or against a party in excess of $100K, or includes an award of injunctive relief against a party.  Here, the buyer, Mr. Condon, received an award in excess of $100K (based on attorney’s fees and costs), and the defendants, which were the dealership, the insurer, and the entity acquiring the sales contract, sought a new arbitration with the arbitral forum, ADR, in accordance with the terms of the parties’ arbitration provision. 

      The prevailing party, Mr. Condon, objected, and ADR punted, concluding “it lacked authority to resolve the parties’ disagreement over whether a new arbitration was proper,” absent a court order.  We surmise that ADR and the parties could not agree as to whether a “new arbitration” was an “appeal,” and whether deciding that issue by ADR was within the scope of the arbitration clause.

      The trial court concluded that ADR lacked “a process by which a new arbitration may be had before a three-arbitrator panel,” and denied a request for an order to further arbitrate with a three-member panel.  This was a bit of a head-scratcher, because in fact, ADR does have a process for appointing a three-arbitrator panel following an initial arbitration. 

      The way to make sense of this dispute is to note that the parties and the Court of Appeal addressed whether the arbitration clause provided for “an appeal” – because everyone agreed that ADR did not have rules providing for an appeal.  The Court made sense of the dealership’s request by explaining that the dealership was really asking for a “do-over” or “repeat” of the arbitration with a three-member panel, and that the arbitration clause reference to the “appealing party” in the arbitration context simply meant a do-over of the arbitration with a three-person panel.  

     COMMENT:  If the arbitration clause had referred to the “party requesting new arbitration in the arbitral forum” rather than to the “appealing party requesting new arbitration,” perhaps some confusion would have been avoided.

Automobiles, Waiver, FAA, Class: Federal Arbitration Act Preempts Application Of Consumers Legal Remedies Act

Court Distinguishes Imburgia v. DIRECTV, Inc., Case Pending Before SCOTUS.

       Automobile purchases and leases have generated quite a few disputes about the enforcement of arbitration clauses.  Exhibit 1:  The Sanchez case decided by the California Supreme Court on August 3, about which I posted on August 4, 2015.  We have a sidebar category for Arbitration: Automobiles.

     Now we have yet another automobile case – coincidentally as with Sanchez, involving a Mercedes Benz.  Plaintiff Kaghazchi sued Mercedes-Benz Financial Services USA LLC in connection with his lease of a Mercedez-Benz.  The key issue in the appeal is whether “the FAA preempts application of the CLRA’s [California Legal Remedies Act] rule prohibiting a waiver of class actions.”  In Kaghazchi v. Mercedes-Benz Financial Services USA LLC, G049981 (4/3 Aug. 10, 2015) (Thompson, O’Leary, Rylaarsdam) (unpublished), the Court of Appeal answers:  Yes.  Perhaps not without qualms, for the Court “acknowledge[s] the CLRA’s antiwaiver section serves an important purpose of protecting California’s consumers.”  But the Court concludes, relying on Concepcion, that “[s]tates cannot require a procedure that is consistent with the FAA, even if it is desirable for unrelated reasons.”

      NOTE:  The Court is at pains to distinguish Imburgia v. DIRECTV, Inc., 225 Cal.App.4th 338 (2014), certiorari granted sub nom. DIRECTV, Inc. v. Imburgia (Mar. 23, 2015) ___ U.S. __ [135 S.Ct. 1547] (Imburgia).  As posted on SCOTUSblog, the issue in Imburgia is:  “Whether the California Court of Appeal erred by holding, in direct conflict with the Ninth Circuit, that a reference to state law in an arbitration agreement governed by the Federal Arbitration Act requires the application of state law preempted by the Federal Arbitration Act.” 

      The contract in Imburgia contained a reference to the “law of your state,” interpreted by the California Court of Appeal to operate as “a specific exception to the arbitration agreement’s general adoption of the FAA.”  Therefore, in Imburgia, the FAA did not trump the application of California law.  However, in Kaghazchi, the Court of Appeal explains that while the automobile lease stated it was “subject to” California law, arbitration under the lease was to be governed by the FAA.  Thus, unlike Imburgia, there was no “specific exception” to FAA governance of arbitration.  In other words, the parties in Imburgia and in Kaghazchi struck different deals as to choice of law for purposes of arbitration.  Far from impairing the deal parties strike, according to Concepcion, the FAA ensures private arbitration agreements are enforced according to their terms. 

      Regardless of what SCOTUS does in Imburgia, we predict that automobile dealers, lessors, and financing parties will draft documents that follow the Kaghazchi model – i.e., they will preemptively make it clear that whatever substantive law applies to the contract, the FAA applies to arbitration procedure.  To steal a line from one of our local judges, “that’s the way the cow chews its cud.”