California Mediation and Arbitration

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.”

Class Actions, Unconscionability, Automobiles: California Supreme Court Reverses Court of Appeal, Enforces Class Action Waiver, Holds Automobile Sales Contract Is Not Unconscionable

Application of Concepcion Is Decisive.

     At last, the California Supreme Court has decided Sanchez v. Valencia Holding Company, LLC, S199119 (Cal. Sup. Ct. Aug. 3, 2015) (Liu, J., author).  The case has been pending since Defendant and Appellant Valencia filed its petition for review on January 4, 2012.  The majority opinion, authored by Justice Liu, holds:  “Concepcion requires enforcement of the class waiver but does not limit the unconscionability rules applicable to other provision of the arbitration agreement.  Applying those rules, we agree with Valencia that the Court of Appeal erred as a matter of state law in finding the agreement unconscionable.”

     Sanchez’ lawsuit alleged Valencia violated the Consumer Legal Remedies Act by making false representations about the condition of the automobile he purchased.

     The automobile sales contract at issue contained four arbitration provisions that some Courts of Appeal have found to be unfairly one-sided:  (1) an award could be appealed to a panel of three arbitrators if the award was $0 or over $100,000; (2) an award of injunctive relief could be appealed; (3) the appealing party had to pay in advance the filing fee and other arbitration, through the arbitrators could later apportion costs; (4) repossession is exempted from arbitration.  Because the California Supreme Court finds that none of those provisions is unconscionable, and because those provisions are common in automobile sales contracts, automobile dealers will breathe a collective sigh of relief. 

     Justice Chin, concurring and dissenting in part, agrees that the class arbitration waiver is enforceable and that Sanchez fails to carry his burden of establishing that the contract is unconscionable.  However, Justice Chin disagrees with some of the majority’s analysis.  He questions whether an adhesive contract is necessarily procedurally unconscionable, and states that the majority does not need to reach the issue of procedural unconscionability, because it holds that the arbitration provisions are not substantively unconscionable.  He also argues in favor of a single substantive unconscionablility “shocks the conscience” test, rather than a smorgasbord of legal formulations.

     COMMENT:  The opinion also contains an interesting discussion of Cal. Code Civ. Proc. section 1284.3, concerning responsibility for fees in consumer arbitrations.  While the Court agrees that a requirement that a consumer front appellate filing fees or other arbitration costs “has the potential to deter the consumer from using the appeal process”, the Court applies a case-by-case “affordability of arbitration” analysis to determine whether fees and costs would make arbitration unaffordable.  Here, the dispute involved “a high-end luxury item” – a “preowned” Mercedes-Benz S500V.  Sanchez simply failed to claim or show that appellate arbitration filing fees were unaffordable to him. 

     Unconscionability and the “affordability of arbitration” will have to be left for another day.

Arbitration, Automobiles, Enforceability: Fraud In The Inception Means No Enforceable Arbitration Agreement

Automobile Trade-In Goes Sideways.

    Above:  Old car and truck outside the “Vehicles-You-Deserve” Used Car Dealership in Mesquite, Texas.  Photographer:  Carol M. Highsmith.  2014.  Library of Congress.

      At first glance, this seems like a fairly common scenario.  A daughter trades in her father’s used car for a new one, and payments are not made for the new car.  Bank sues alleged buyers, buyers cross-claim against bank and dealership, and assert affirmative defenses.  Because automobile sales contracts typically contain arbitration clauses (indeed, “Arbitration: Automobiles” is one of our sidebar categories), cross-defendants then petition to compel arbitration.  The trial court denies the petition based on “unconscionability.”  But this case involves more than mere unconscionability.  Bank of the West v. Ruiz, B253980 (2/5 April 13, 2015) (Turner, Mosk, Kriegler) (unpublished).

      This case involves fraud in the inception – fraud that “goes to the inception or execution of the agreement, so that the promisor is deceived as to the nature of his act and actually does not know what he is signing . . . “

      The Court of Appeal held that substantial evidence supported “implied findings” of fraud in the inception.  The dealer’s agent allegedly went to the father’s home late at night to obtain his signature.  The father did not speak or read English, and was shown documents solely in English.  The father was told that he needed to sign the documents in connection with the trade-in, not in connection with the purchase, as the car was for his daughter.  He was pressured to sign quickly.  He never received a copy of the sales contract, despite asking for it.  Supposedly, he was told in Spanish by the agent that the documents would be changed to his daughter’s name, but this was never done.

      Affirmed.

     COMMENTS:    Several cases are currently pending before the California Supreme Court addressing the issue of unconscionability in automobile sales contracts.  Those cases should have no impact on this case, because the dispositive issue is now defined as fraud in the inception.

     We have blogged about cases in which the fact that a customer or an employee spoke only a foreign language, but received documents in English, weighed on the scale of unconscionability.  Here, that factor was one among several that supported the implied finding of fraud in the inception.

Automobiles: On Balance, Arbitration Provisions In Auto Sales Contract Are Found Not To Be Unconscionable

Unconscionability Challenge To Identical Arbitration Provision In Industry-Drafted Automobile Sales Contract Is Still Pending In Sanchez Before California Supreme Court.

      Our next case is a fine example of ad hoc justice, for the Court of Appeal concludes that “on balance”, the arbitration provisions in a standard automobile industry sales contract are not unconscionable.  A touch of procedural unconscionability here, but not so much substantive unconscionability as to overpower the recipe.  Self-help and small claims court exclusions were noted, as were exceptions to finality that favored the dealer.  “On balance,” concludes the Court, “the arbitration clause provides the parties with greater efficiency and speed, lower costs, and a more focused dispute resolution forum than would litigation.”  Hernandez v. Thomas, Case No. D064036 (4/1 Jan. 8, 2015) (Haller, McConnell, McIntyre) (unpublished).

     The Court notes that during “almost three years that Sanchez [v. Valencia Holding Co., LLC, 201 Cal.App.4th 74, review granted Mar. 21, 2012] has been pending, the high court has granted and held numerous petitions for review of Court of Appeal decisions addressing similar (if not identical) challenges to the identical arbitration provision.”  Citing nine cases in addition to Sanchez, the Court observes, “intermediate courts have reached conflicting conclusions based on several different theories and rationales.”