Vehicle Defect Class Actions: Recent Trends in Arbitration

Over the last decade, vehicle defect cases against car manufacturers have become a mainstay in the class action world. There are currently nine pending multidistrict litigation matters involving vehicle defect claims and dozens more class cases pending in district courts across the country. These cases assert claims related to material or design defects that plaintiffs assert are uniform across vehicle models and years. The typical claims include breaches of implied and express warranties, violations of state consumer protection statutes, and federal Magnuson-Moss claims, among others. The general theory of these cases is that the vehicle manufacturers had knowledge of the defect and misrepresented or failed to disclose the defect at the time of purchase, thereby depriving plaintiffs of the “benefit of the bargain”—the amount the plaintiffs paid in excess of what they would have paid had they known of the defect.

Vehicle manufacturers in these cases often move to compel arbitration based on the arbitration clause contained in the plaintiff’s lease or purchase agreement with the dealership. As non-signatories of the agreements, they typically attempt to compel arbitration under one or more of the following three doctrines: (1) equitable estoppel, (2) third-party beneficiary, and (3) agency.

This article highlights common arbitration-related issues in class action litigation involving vehicle manufacturers. It first discusses a recent decision concerning the threshold question of arbitrability and whether a vehicle manufacturer may invoke a delegation provision in the plaintiff’s lease or purchase agreements. It then addresses the three main arguments that manufacturers make when seeking to compel arbitration and provides some advice to attorneys who may be pursuing or defending class actions involving vehicle manufacturers.

Delegation Provisions in Vehicle Purchase or Lease Agreements

Before a court addresses whether a vehicle manufacturer can invoke one of these three theories to compel arbitration, it must first decide the threshold issue of whether the court is the proper forum to make that decision or if that decision has been delegated to the arbitrator. A delegation provision in an arbitration clause addresses who will decide the scope of an arbitration clause. As the Supreme Court recently held in Henry Schein, Inc. v. Archer & White Sales, Inc., 139 S. Ct. 524 (2019), when the parties delegate the question of arbitrability to an arbitrator, a court lacks the power to resolve this threshold issue.

The case of Banh v. American Honda Motor Co., Inc., 2020 WL 5035095, at *1 (C.D. Cal. July 28, 2020), provides an interesting example of this issue in the context of a vehicle defect class action. In Banh, plaintiffs from 18 states brought a class action stemming from alleged defects in their vehicles’ infotainment systems. The plaintiffs sought to represent a class of consumers who had purchased or leased an Acura RDX vehicle manufactured by Honda.

There were two different delegation provisions implicated by the contracts in the case. Each agreement’s delegation provision indicated that it was for the arbitrator and not the court to interpret the scope of the arbitration clause. However, there was one important difference: The lease agreements consumers entered into with Acura specifically defined “Acura” to include Honda. The purchase agreements, however, did not define Acura to include Honda.

The plaintiffs argued that Honda, as a non-signatory to the agreement, did not have standing to compel arbitration under either agreement. Honda countered that this was an issue for the arbitrator to decide under the delegation provisions in the agreements. The court focused on the definition of “Acura” in each agreement and held that Honda could enforce the delegation provision in the lease agreements because it was expressly included in the definition of Acura but that Honda could not enforce the delegation provision in the purchase agreements because it was a non-signatory to the agreement.

Bahn illustrates that even as a non-signatory, vehicle manufacturers may seek to have the arbitrator decide threshold arbitrability issues based on a delegation provision in the lease or purchase agreement. The ability of vehicle manufacturers to do so often turns on the specific language of the provision and the doctrines discussed below.

Equitable Estoppel

Equitable estoppel principles apply when a signatory relies on the terms of an agreement in asserting claims against the non-signatory or the signatory’s claims are intimately connected or intertwined with the agreement. Vehicle manufacturers frequently rely on this doctrine in moving to compel arbitration.

For example, in Kramer v. Toyota Motor Corp., 705 F.3d 1122 (9th Cir. 2013), the plaintiffs brought consumer protection and warranty claims against Toyota over allegedly defective anti-lock braking systems. The district court denied Toyota’s motion to compel arbitration and Toyota appealed. In its appeal, Toyota broadly argued that the plaintiffs’ claims were intertwined with the purchase agreements because they “rel[ied] upon the existence of plaintiffs’ vehicle purchase transactions.” Id. at 1130. In other words, the plaintiffs could not bring any claims if they hadn’t purchased the vehicle in the first place. Toyota also argued that the plaintiffs’ claims were intertwined with the purchase agreements in two specific ways: (1) the prayer for relief sought “revocation of acceptance” and (2) the plaintiffs relied on the “price term” in the agreements in support of their diminution of value damage theory. Id. at 1131–32.

In affirming the district court, the Ninth Circuit first went through each of the plaintiffs’ claims to see if they were “intertwined” with the purchase agreement, and the court concluded that none of the claims relied on or even referenced the agreements. They were therefore not “intimately founded in” the agreements. Id. at 1130–31. Importantly, when addressing the warranty claims, the court noted that the agreements expressly differentiated dealer warranties from manufacturer warranties and thus the warranty claims arose independently of the purchase agreements.

The court then addressed Toyota’s arguments regarding the revocation of acceptance and the plaintiffs’ reliance on the price term for their damage theory. In rejecting both arguments, the Kramer court explained that instead of examining the relief requested by plaintiffs, courts should instead look to the causes of action asserted against the non-signatory in the complaint and whether they are intertwined with the purchase agreement. The court further stated that the key analysis is whether the plaintiffs would have a claim independent of the existence of the purchase agreement. Id. at 1132.

Following Kramer, courts have generally rejected efforts by vehicle manufacturers to compel arbitration based on the doctrine of equitable estoppel. See, e.g., Nation v. BMW of N. Am., LLC, 2020 WL 7868103, at *3–4 (C.D. Cal. Dec. 28, 2020); Gemilyan v. Rolls-Royce Motor Cars NA, LLC, 2020 WL 8184719, at *4–5 (C.D. Cal. Nov. 18, 2020).

Third-Party Beneficiary

A second argument defendant vehicle manufacturers often make when seeking to compel arbitration is that they are third-party beneficiaries of the purchase or lease agreement. Generally, a non-signatory to a contract may seek to enforce its terms if the parties to the agreement intended to benefit the non-signatory.

The manufacturer in Johnson v. Nissan North America, Inc., 2018 WL 6803741, at *1 (N.D. Cal. Sept. 14, 2018), moved to compel arbitration of a class action on this ground. The plaintiffs were purchasers of Nissan vehicles with allegedly defective panoramic sunroofs who brought a multistate consumer fraud class action. The arbitration clause in the purchase agreements contained the following language:

You and the Dealership agree that arbitration will be the sole method of resolving any claim, dispute, or controversy (collectively, “Claims”) that either Party has arising from Customer(s)/Dealership Dealings. Such Claims include, but are not limited to, the following: (1) Claims in contract, tort, regulatory, statutory, equitable, or otherwise; (2) Claims relating to any representations, promises, undertakings, warranties, covenants or service; (3) Claims regarding the interpretation, scope, or validity of this Agreement, or arbitrability of any issue; (4) Claims between you and Dealership; and (5) Claims arising out of or relating to your application for credit, this Agreement and/or any and all documents executed, presented or negotiated during Customer(s)/Dealership Dealings, or any resulting transaction, service, or relationship, including that with the Dealership, or any relationship with third parties who do not sign this Agreement that arises out of the Customer(s)/Dealership Dealings.

Nissan argued that it was a third-party beneficiary based on the plain language of the agreement and its reference to “any relationship with third parties,” which Nissan asserted indicated an intent to encompass it as a third-party beneficiary. The court disagreed and instead found that the class of beneficiaries in the plaintiffs’ purchase agreements were limited to third parties involving “Customer(s)/Dealership Dealings.” Id. at *4. Among other things, the court found it notable that the agreement did not contain any reference to the manufacturer, that Nissan did not argue that it was one of the dealership’s “employees, agents, successors, assigns, subsidiaries, parents [or] affiliates,” and that it was of no import that one of the plaintiffs included allegations of her interactions with the dealership in the complaint. Id.

A similar conclusion was reached in McCarthy v. Toyota Motor Corp., 2020 WL 6156583, at *6 (C.D. Cal. Oct. 20, 2020), a class action against Toyota involving allegedly faulty inverters in Toyota vehicles. In that case, the court found no indication the term “affiliate” was intended to include Toyota and therefore Toyota could not enforce an arbitration provision as a third-party beneficiary.

Other courts, however, have concluded that vehicle manufacturers may seek to compel arbitration as a third-party beneficiary. Although not in the class action context, the matter of Zeto v. BMW of North America, LLC, 2020 WL 6708061, at *8 (S.D. Cal. Nov. 16, 2020), bears mentioning. There, the court compelled arbitration based on the third-party beneficiary argument after noting that the definition of a “claim” contained in the lease agreement included references to “affiliates” and disputes about the “condition of this [v]ehicle.” The court found that BMW North America was an affiliate of the BMW finance company that was a party to the agreement and that the plaintiff’s defect claims related to the “condition of the vehicle,” and the court granted the motion to compel arbitration. Another court reached a similar conclusion in a different case against BMW. See Tseng v. BMW of N., LLC, 2020 WL 4032305, at *3 (C.D. Cal. Apr. 15, 2020).

Agency Theory

A third argument a vehicle manufacturer may make is that the signatory to the contract (the dealership or the finance company) is acting as its agent and therefore the manufacturer can compel the plaintiff to arbitrate per the clause in the purchase agreement.

Honda made such an argument in Soto v. American Honda Motor Co., Inc., 946 F. Supp. 2d 949 (N.D. Cal. 2012). The plaintiffs in Soto filed a class action claiming that their vehicles suffered from a design defect that resulted in the vehicles burning motor oil at a faster rate than intended. The dealership for one of the two named plaintiffs had assigned its right under the sales contract to Honda’s wholly owned subsidiary American Honda Finance Corp. (AHFC). Honda argued that it could compel arbitration because AHFC signed the purchase contract as Honda’s agent. The Soto court, however, rejected this reasoning, pointing out first that courts have generally applied agency principles to prevent a plaintiff from evading arbitration obligations by suing a defendant signatory’s agents instead of the principal. In addition, the court held that even if the principal, Honda, could assert this theory, Honda’s agency relationship with AHFC was limited to the financing of vehicles and that AHFC had “no involvement with [Honda’s] design and manufacture of vehicles.” Id. at 957.

Conclusion

Although vehicle manufacturers have had only mixed success in seeking to invoke arbitration provisions contained in a plaintiff’s lease or purchase agreement, these decisions turned on the specific language of the agreements, the nature of the claims being asserted, and the relationship between the manufacturer and its subsidiaries. Because vehicle manufacturers are likely to continue seeking to compel arbitration based on one or more of the above theories, practitioners should be aware of how these doctrines may affect their cases. For instance, in assessing a vehicle defect class action and in vetting a class representative, plaintiffs’ counsel should carefully review the terms of the purchase or lease agreements for any potential issues: Do the agreements define the parties to include the vehicle manufacturer? Do the agreements incorporate the manufacturer’s warranties? In addition, care should be given to the allegations of the complaint, as a poorly drafted complaint may allow defense counsel to argue that the plaintiff’s claims relate to, rely on, or are intertwined with the vehicle’s purchase or lease agreement, and therefore subject to arbitration.