Soto et al v. American Honda Motor Co., Inc.

Filing 44

ORDER DENYING MOTION TO COMPEL ARBITRATION 16 (Illston, Susan) (Filed on 10/3/2012)

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IN THE UNITED STATES DISTRICT COURT

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FOR THE NORTHERN DISTRICT OF CALIFORNIA

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ALEX SOTO and VINCE EAGEN, on behalf of
themselves and all others similarly situated,

No. C 12-1377 SI

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United States District Court
For the Northern District of California

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ORDER DENYING MOTION TO
COMPEL ARBITRATION

Plaintiffs,
v.
AMERICAN HONDA MOTOR CO., INC.,

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Defendant.
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Defendant American Honda Motor Co., Inc. (“AHM”) filed a motion to compel arbitration and

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stay proceedings as to plaintiff Vince Eagen. The Court finds this matter appropriate for disposition

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without oral argument. See Civil Local Rule 7-1(b). Having considered the parties’ papers and the

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evidentiary record, the Court hereby DENIES defendant’s motion

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.

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BACKGROUND

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Plaintiffs Vince Eagen and Alex Soto current or former owners of 2008 Honda Accord

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automobiles manufactured by defendant AHM. Plaintiffs allege that the vehicles suffer from a systemic

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design defect that results in burning motor oil at a faster rate than intended. They alleged five causes

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of action in their First Amended Complaint: (1) that the Honda Accord had an undisclosed material

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defect in violation of the Consumer Legal Remedies Act, Cal. Civ. Code § 1750 et seq.; (2) that AHM’s

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failure to disclose the defect constituted an unlawful, unfair, and fraudulent business practice in

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violation of Cal. Bus. & Prof. Code § 17200 et seq.; (3) that AHM breached its written warranty in

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violation of the Magnuson-Moss Warranty Act, 15 U.S.C. § 2301 et seq.; (4) that AHM breached its

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express warranty in violation of Cal. Comm. Code § 2313; and (5) that AHM was unjustly enriched in

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the sale of the defective vehicles.

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When Vince Eagen purchased his vehicle, he signed an Installment Sale Contract with the

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dealership San Leandro Honda, which assigned its rights in the contract to American Honda Finance

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Corp., Inc. (“AHFC”). The Installment Sale Contract contained an arbitration clause.1
The Installment Sale Contract between Eagen and AHFC provides in pertinent part: “Either you

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or we may choose to have any dispute between us decided by arbitration and not in court or by jury

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trial.” Declaration of Michael L. Marlow in Support of Motion to Compel Arbitration (“Marlow

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Decl.”), Exh. A at 6. The parties do not dispute that the “you” referred to in the contract is Eagen and

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the “we” is AHFC, but not AHM. The arbitration clause covers “[a]ny claim or dispute . . . between you

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United States District Court
For the Northern District of California

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or us or our employees, agents, successors or assigns,” and which arises out of, inter alia, the condition

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of the vehicle or “any resulting transaction or relationship (including any such relationship with third

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parties who do not sign this contract).” Id. The arbitration clause states that “the interpretation and

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scope of this Arbitration Clause, and the arbitrability of the claim or dispute” must be decided by the

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arbitrator and not by the courts. Id.

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Defendant AHM, which was not a signatory to the Eagen/AHFC Installment Sale Contract, now
seeks to compel arbitration of Eagen’s claims.

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LEGAL STANDARD

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Section 4 of the Federal Arbitration Act (“FAA”) permits “a party aggrieved by the alleged

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failure, neglect, or refusal of another to arbitrate under a written agreement for arbitration [to] petition

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any United States District Court . . . for an order directing that . . . arbitration proceed in the manner

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provided for in [the arbitration] agreement.” 9 U.S.C. § 4. Upon a showing that a party has failed to

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comply with a valid arbitration agreement, the district court must issue an order compelling arbitration.

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Id.

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When plaintiff Alex Soto purchased his vehicle, did not sign an arbitration agreement.
Defendant’s motion to compel arbitration is directed only at plaintiff Vince Eagen.
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The Supreme Court has stated that the FAA espouses a general policy favoring arbitration

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agreements. Moses H. Cone Mem’l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24-25 (1983); see also

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Hall Street Assoc., L.L.C. v. Mattel, Inc., 552 U.S. 576, 581 (2008). Federal courts are required to

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rigorously enforce an agreement to arbitrate. See Hall Street Assoc., 552 U.S. at 582. Courts are also

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directed to resolve any “ambiguities as to the scope of the arbitration clause itself . . . in favor of

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arbitration.” Volt Info. Sciences, Inc. v. Bd. of Trustees of Leland Stanford Jr. Univ., 489 U.S. 468, 476

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(1989).
In determining whether to issue an order compelling arbitration, the court may not review the

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merits of the dispute but must limit its inquiry to (1) whether the contract containing the arbitration

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United States District Court
For the Northern District of California

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agreement evidences a transaction involving interstate commerce, (2) whether there exists a valid

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agreement to arbitrate, and (3) whether the dispute(s) fall within the scope of the agreement to arbitrate.

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See Republic of Nicaragua v. Standard Fruit Co., 937 F.2d 469, 477-478 (9th Cir. 1991), cert denied,

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503 U.S. 919 (1992). If the answer to each of these queries is affirmative, then the court must order the

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parties to arbitration in accordance with the terms of their agreement. 9 U.S.C. § 4.

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However, the strong presumption in favor of arbitration “does not confer a right to compel

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arbitration of any dispute at any time.” Volt, 489 U.S. at 474. The FAA provides that arbitration

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agreements are unenforceable “upon such grounds as exist at law or in equity for the revocation of any

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contract.” 9 U.S.C. § 2. “Thus, generally applicable contract defenses, such as fraud, duress, or

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unconscionability, may be applied to invalidate arbitration agreements without contravening” federal

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law. Doctor’s Assoc., Inc. v. Casarotto, 517 U.S. 681, 687 (1996). This is because “arbitration is a

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matter of contract and a party cannot be required to submit to arbitration any dispute which he has not

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agreed so to submit.” United Steelworkers v. Warrior & Gulf Navigation Co., 363 U.S. 574, 582 (1960).

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Accordingly, the Court reviews plaintiff's arbitration agreement in light of the “liberal federal policy

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favoring arbitration agreements,” Moses H. Cone, 460 U.S. at 24, and considers the enforceability

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according to the laws of the state of contract formation. See First Options of Chicago, Inc. v. Kaplan,

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514 U.S. 938, 944 (1995); Ingle v. Circuit City Stores, 328 F.3d 1165, 1170 (9th Cir. 2003).

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DISCUSSION

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The main issue to be decided in this motion is whether defendant AHM, as a third party non-

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signatory, can assert the arbitration clause against Eagen. It argues three alternative grounds in its

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motion to compel arbitration: (1) the Installment Sale Contract directly incorporates third parties; (2)

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under the principle of equitable estoppel, AHM can compel arbitration pursuant to the Installment Sale

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Contract because Eagen must rely on the contract to assert his claims; and (3) under an agency theory,

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it may compel arbitration because AHFC signed the arbitration agreement as AHM’s agent. As an

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initial matter, Defendant AHM also argues that the question of whether they may compel arbitration as

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a third-party nonsignatory must be decided by the arbitrator and not the courts.

United States District Court
For the Northern District of California

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The Court’s Authority to Determine the Parties Covered by the Contract.

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When parties empower the arbitrator to decide certain threshold issues in a delegation clause,

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the courts are divested of the authority to decide those issues. United Broth. of Carpenters & Joiners

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of Am., Local No. 1780 v. Desert Palace, Inc., 94 F.3d 1308, 1310 (9th Cir. 1996). The “question of

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arbitrability is an issue for judicial determination unless the parties clearly and unmistakably provide

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otherwise.”

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Technologies, Inc. v. Commc’ns Workers, 475 U.S. 643, 649 (1986) (emphasis added). Thus, the

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Court’s role is narrowed from deciding whether there is an applicable arbitration agreement to only

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deciding whether there is a valid delegation clause. See Rent-A-Center, West, Inc. v. Jackson, 130 S.

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Ct. 2772, 2779 (2010). This scheme “merely reflects the principle that arbitration is a matter of

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contract.” Id. at 2776.

Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79, 83 (2002) (quoting AT&T

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Here, the Installment Sale Contract grants the arbitrator the authority to decide the threshold

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issues of “the interpretation and scope of this Arbitration Clause, and the arbitrability of the claim or

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dispute.” Marlow Decl., Exh. A at 6. However, the threshold issue of whether the delegation clause

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is even applicable to a certain party must be decided by the Court. The provisions granting authority

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to the arbitrator to decide issues of scope are by definition are only applicable to the parties of the

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agreement. Thus, the Court must first decide which parties are bound by delegation clause, before the

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arbitrator can decide the interpretation and scope of the arbitration clause. See In re Toyota Motor Corp.

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Hybrid Brake Mktg., Sales, Practices & Products Liab. Litig., 828 F. Supp. 2d 1150, 1159 (C.D. Cal.

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2011) (finding that the defendant “cannot invoke the right to the benefits of the Purchase Agreement

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because it was not a party to the agreement; thus, the threshold issue of whether [the defendant], as a

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nonsignatory, may compel Plaintiffs to submit to arbitration under the Purchase Agreements must be

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decided by this Court”); accord In re Toyota Motor Corp. Unintended Acceleration Mktg., Sales

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Practices, & Products Liab. Lit., 838 F. Supp. 2d 967, 987 (C.D. Cal. 2012). None of the cases cited

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by AHM in support of its position counsel otherwise.

United States District Court
For the Northern District of California

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2.

The Contract’s Direct Reference to Third Parties.

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Defendant AHM first agues that the terms of the arbitration agreement directly incorporate third

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parties. In support of this assertion, AHM points to the portion of the Arbitration Clause that outlines

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the scope of arbitration, which covers any dispute which arises out of, inter alia, “any resulting

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transaction or relationship (including any such relationship with third parties who do not sign this

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contract).” Marlow Decl., Exh. A at 6 (emphasis added). AHM argues that it is covered by this clause

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of the agreement. However, this clause is inapposite. AHM’s relationship with Eagen began at the

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moment he bought his Accord, and thus could not be a “resulting” relationship that occurred afterward.

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This clause is more properly understood to refer to a secondary sale of the car, and not the relationship

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with the manufacturer AHM.

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AHM’s Authority to Compel Arbitration Under an Equitable Estoppel Theory.

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The Ninth Circuit has recognized that third parties may enforce an arbitration agreement under

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ordinary contract and agency principles, including equitable estoppel and agency. Comer v. Micor,

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Inc., 436 F.3d 1098, 1101 (9th Cir. 2006). In the arbitration context, the Ninth Circuit has recognized

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two types of equitable estoppel. The first type is inapplicable, because it concerns a signatory seeking

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to compel a nonsignatory to arbitrate. Mundi v. Sec. Life Ins. Co., 555 F.3d 1042, 1046 (9th Cir. 2009).

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The second type allows a nonsignatory to compel arbitration against a signatory if there is both a “close

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relationship between the entities involved,” and a “relationship of the alleged wrongs to the

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non-signatory’s obligations and duties in the contract and the fact that the claims were intertwined with

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the underlying contractual obligations.” Id. (citing E.I. DuPont de Nemours and Co. v. Rhone Poulenc

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Resin and Fiber Intermediates, S.A.S., 269 F.3d 187, 201 (3rd Cir. 2009). Thus, the Court must inquire

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whether there is a “close relationship” between AHM and AHFC, and whether the plaintiffs’ claims are

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“intertwined” with the Installment Sale Contract.
First, it is clear that there is a close relationship between the entities because AHFC is a wholly-

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United States District Court
For the Northern District of California

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owned subsidiary of AHM. See In re Apple & AT & TM Antitrust Litig., 826 F. Supp. 2d 1168, 1178

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(N.D. Cal. 2011) (finding a close relationship between Apple and AT & TM even in the absence of a

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parent-subsidiary relationship).

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Second, the Court looks to the relatedness of the plaintiffs’ claims with the Installment Sale

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Contract. “In conducting this inquiry, the Court must keep in mind that this is an equitable test–one

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designed to ensure fairness by forcing a party who reaps the benefits of an agreement to accept the

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agreement’s accompanying burdens.” In re Toyota Motor Corp. Unintended Acceleration Mktg., 838

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F. Supp. 2d at 991 (citing Grigson v. Creative Artists Agency L.L.C., 210 F.3d 524, 527-28 (5th Cir.

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2000).

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The plaintiffs’ five causes of action are based on products liability claims arising from an alleged

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defect that causes the Honda Accord to use motor oil too rapidly. These claims rely on AHM’s

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warranties and marketing materials. They do not rely on any terms or conditions in the Installment Sale

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Contract, which covers Eagen’s financing and insurance obligations. Indeed, the Installment Sale

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Contract expressly disclaims such warranties, stating that “the Seller makes no warranties, express or

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implied, on the vehicle, and there will be no implied warranties of merchantability or of fitness for a

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particular purpose.” Marlow Decl., Exh. A at 4. Thus, the plaintiffs’ claims cannot rely on the

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Installment Sale Contract, but must rely on warranties issued by AHM.

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Defendant AHM argues that because Eagen’s claims rely on the purchase of his vehicle, he will

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need to use the Installment Sale Contract to show that he entered into a transaction when he purchased

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the car. However, AHM “mistakenly equates the mere purchase of the vehicles and the mere fact that

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Plaintiffs executed a purchase agreement with the interrelatedness between Plaintiffs’ claims and the

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obligations in the Purchase Agreements.” In re Toyota Motor Corp. Hybrid Brake Mktg., 828 F. Supp.

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2d at 1161; accord In re Toyota Motor Corp. Unintended Acceleration Mktg., 838 F. Supp. 2d at 991.

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Eagen need not rely on the Installment Sale Contract to prove his purchase of the vehicle, or for the

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ultimate success of his claims.
Defendant’s reliance on recent cases from this district are inapposite. In In re Apple & AT & TM

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United States District Court
For the Northern District of California

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Antitrust Litig., 826 F. Supp. 2d 1168, (N.D. Cal. 2011), and in In re Apple iPhone 3G Products Liab.

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Litig., 2012 WL 1622643 (N.D. Cal. 2012), the courts found an intertwining between the claims against

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Apple and the AT & TM service contracts. However, in those cases the subscribers’ warranty

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allegations against the manufacturer necessarily implicated the provider’s network and wireless services

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agreement. In re Apple & AT & TM Antitrust Litig., 826 F. Supp. 2d at 1178 (plaintiffs themselves

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contended that their claims arose from their AT & TM service contracts); In re Apple iPhone 3G

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Products Liab. Litig., 2012 WL 1622643, at *7. Indeed, in In re Apple iPhone 3G Products Liab. Litig.,

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the court distinguished In re Toyota Motor Corp. Unintended Acceleration Mktg. because the Toyota

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purchase agreement explicitly disclaimed any warranties, while the AT & TM service agreement

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expressly included a limited warranty. 2012 WL 1622643, at *7.

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The Court finds that AHM cannot use the Installment Sale Contract to compel arbitration under
an equitable estoppel theory.

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AHM’s Authority to Compel Arbitration Under an Agency Theory.

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The Ninth Circuit has indicated that, in certain circumstances, a nonsignatory can compel a

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signatory to arbitrate based on agency principles. See Letizia v. Prudential Bache Secs., Inc., 802 F.2d

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1185, 1187 (9th Cir. 1986) (finding a nonsignatory agent of a signatory principal can compel arbitration

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against a signatory). But the claims must “relate to or arise out of the contract containing the arbitration

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clause.” Britton v. Co-op Banking Group, 4 F.3d 742, 747 (9th Cir.1993) (finding that the agent’s

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wrongdoing did not relate to the contract and therefore declining to compel arbitration); see also

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Pritzker v. Merrill, Lynch, Pierce, Fenner & Smith, Inc., 7 F.3d 1110, 1122 (3d Cir.1993) (“The Letizia

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court noted that brokers and employees were integral to, if not directly responsible for, the alleged

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statutory violations of the principal corporation.”).
Courts have generally applied the agency principle to prevent parties from evading arbitration

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obligations by suing a signatory’s agents instead of the principal. See Arnold v. Arnold Corp., 920 F.2d

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1269, 1281 (6th Cir. 1990); Bel-Ray Co. v. Chemrite Ltd., 181 F.3d 435, 444 (3d Cir. 1999); Amisil

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United States District Court
For the Northern District of California

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Holdings Ltd. v. Clarium Capital Mgmt., 622 F. Supp. 2d 825, 833 (N.D. Cal. 2007). Given this

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purpose, some courts have declined to apply the agency principle to compel where, as here, the

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nonsignatory is the principal and not the agent. See Legacy Wireless Services, Inc. v. Human Capital,

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L.L.C., 314 F. Supp. 2d 1045, 1055 (D. Or. 2007) (finding that an agency relationship generally does

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not, alone, justify departure from the principle that a nonsignatory may not be compelled to arbitrate

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without the related purpose of avoiding a nullification of the arbitration agreement). But see Garcia

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v. Stonehenge, Ltd., 1998 WL 118177 (N.D. Cal. Mar. 2, 1998) (finding that a non-signatory principal

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may compel arbitration under general contract and agency principles, but failing to consider the purpose

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of the agency principle).

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Even assuming that the agency principle applies to a nonsignatory principal and not just

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nonsignatory agents, the plaintiffs still fail in their agency claim. AHFC is a wholly-owned subsidiary

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of AHM and acts as its captive in-house finance corporation. However, AHFC’s agency relationship

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to AHM is limited to the financing of Honda vehicle sales and leases; it has no involvement with

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AHM’s design and manufacture of vehicles. Moreover, the Installment Sale Contract relates to the

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financial obligations of the buyer, and expressly disclaims any warranties. Thus, because Eagen’s

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warranty and products liability claims do not arise from or relate to the Installment Sale Contract, AHM

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cannot compel arbitration under an agency theory.

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CONCLUSION

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Therefore, because AHM as a third-party nonsignatory may not compel arbitration under the

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terms of the contract, an equitable estoppel theory, or an agency theory, the Court DENIES defendant’s

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Motion to Compel Arbitration and Stay Proceedings as to Plaintiff Vince Eagen. (Docket 19).

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IT IS SO ORDERED.

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Dated: October 3, 2012
SUSAN ILLSTON
United States District Judge

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United States District Court
For the Northern District of California

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