2023 Appellate court opinions: Automotive

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In 2023, the courts of appeal were faced with several issues related to Lemon Law cases including the impact of Statutory Offers to Compromise pursuant to Code of Civil Procedure section 998, the enforceability of arbitration agreements contained in deal contracts, and the impact of trade-ins on restitution. The “big issue” that the California Supreme Court will decide in 2024 or 2025 is whether a manufacturer can enforce an arbitration agreement signed by the buyer and the dealership. Several courts of appeal have published opinions on the issue, many of which are in conflict. The issue will be resolved by the California Supreme Court.

California Supreme Court grants petitions to review Court of Appeal opinions from four different appellate districts in Lemon Law cases where the trial courts denied motions to compel arbitration brought by automotive manufacturers that were not signatories to the arbitration agreements in the sales agreements.

In Ford Motor Warranty Cases multiple plaintiffs filed claims against the Ford Motor Company (“FMC”) for alleged defects in vehicles the company manufactured. FMC filed a motion to compel arbitration of plaintiffs’ claims based on the arbitration provision in the sale contracts. Plaintiffs opposed FMC’s motion, including on the grounds that FMC had waived its right to compel arbitration through its litigation conduct. The trial court denied FMC’s motion on its merits.

The Second Appellate District affirmed, although on separate grounds than waiver. The court explained that it agreed with the trial court that FMC could not compel arbitration based on plaintiffs’ agreements with the dealers that sold them the vehicles. According to the court, equitable estoppel does not apply because, contrary to FMC’s arguments, plaintiffs’ claims against it in no way rely on the agreements. Furthermore, the court held that FMC was not a third-party beneficiary of those agreements, as there is no basis to conclude plaintiffs and their dealers entered into them with the intention of benefitting FMC. Finally, the court held that 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.

Note: In July of 2023, the California Supreme Court granted a petition to review the Court of Appeal opinion. The issue to be briefed and argued is limited to the following: “Do manufacturers’ express or implied warranties that accompany a vehicle at the time of sale constitute obligations arising from the sale contract, permitting manufacturers to enforce an arbitration agreement in the contract pursuant to equitable estoppel?”

According to the Supreme Court, pending review, the opinion of the Court of Appeal may be cited, not only for its persuasive value, but also for the limited purpose of establishing the existence of a conflict in authority that would in turn allow trial courts to exercise discretion under Auto Equity Sales, Inc. v. Superior Court (1962) 57 Cal.2d 450, 456, to choose between sides of any such conflict.

In Montemayor v. Ford Motor Co. Ford Motor Company (“FMC”) appealed from an order denying its motion to compel arbitration of plaintiffs’ causes of action for breach of warranty, violations of the Song-Beverly Consumer Warranty Act and for fraudulent omission arising from alleged defects in a sports utility vehicle plaintiffs purchased from the dealership, AutoNation Ford Valencia (“AutoNation”). As in the Ford Motor Cases (discussed above) the central question on appeal was whether FMC as the manufacturer of the vehicle, can enforce an arbitration provision in the sales contract between plaintiffs and AutoNation to which FMC was not a party under the doctrine of equitable estoppel or as a third-party beneficiary of the contract.

The Eighth Circuit affirmed the order denying the motion to compel arbitration. The court of appeal concluded FMC cannot enforce the arbitration provision in the sales contract because plaintiffs’ claims against FMC are founded on FMC’s express warranty for the vehicle, not any obligation imposed on FMC by the sales contract and, thus, plaintiffs’ claims are not inextricably intertwined with any obligations under the sales contract. Nor was the sales contract between plaintiffs and AutoNation intended to benefit Ford.

In Kielar v. Superior Court Mark Kielar challenged a superior court’s decision to grant Hyundai Motor America’s (“Hyundai”) motion to compel arbitration of his causes of action for violation of the Song-Beverly Consumer Warranty Act, and fraudulent inducement arising from alleged mechanical defects in the condition of his 2012 Hyundai Tucson. The superior court’s ruling followed Court of Appeal’s earlier decision in Felisilda v. FCA US LLC, 53 Cal.App.5th 486 (2020) and concluded Hyundai, a nonsignatory manufacturer, could enforce the arbitration provision in the sales contract between Kielar and his local car dealership under the doctrine of equitable estoppel.

The Court of Appeal joined recent decisions (Ford Motor Warranty Cases and Montemayor) that have disagreed with Felisilda and concluded the court erred in ordering arbitration. Therefore, it issued a preemptory writ of mandate compelling the superior court to vacate its order and enter a new order denying Hyundai’s motion.

In Yeh v. Superior Court the plaintiffs leased a Mercedes-Benz B250E from a dealer. In 2020, at the end of the lease, they signed a Retail Installment Sales Contract (“RISC”) with the dealer to finance the purchase of the vehicle. Both the lease and the RISC contained arbitration agreements.

The plaintiffs allege that Mercedes-Benz USA (“MBUSA”), as the manufacturer or distributor of the vehicle, provided them with two express warranties and a separate implied warranty of merchantability and that the vehicle had undisclosed defects covered by the warranties, They took the vehicle to the dealer, which was authorized by MBUSA for repairs, but despite multiple attempts, the vehicle could not be fixed.

The plaintiffs filed suit, alleging violations of the Song-Beverly Consumer Warranty Act. MBUSA moved to compel arbitration, arguing that it had standing to compel arbitration as a third-party beneficiary of both the lease and the RISC, and equitable estoppel. While the trial court rejected MBUSA’s argument that it was a third-party beneficiary of the agreements, it agreed with MBUSA’s equitable estoppel argument.

The court of appeal reversed. The court reasoned that MBUSA is not a party to the agreements with the vehicle dealer and the claims against MBUSA are not intertwined with those agreements.

The California Supreme Court first granted FMC’s petition for review in the Ford Warranty Cases. Thereafter, the Court granted defendants’ petitions for review in Montemayor, Kielar and Yeh. Since all four cases involve substantially similar issues, we expect the Supreme Court to consolidate the cases and issue one omnibus opinion.

Courts of Appeal issue opinions on the impact of a manufacturer’s statutory offer to compromise in Lemon Law cases.

In Smalley v. Subaru of America Michael Smalley sued Subaru of America, Inc. (“Subaru”) under California’s Lemon Law. Pursuant to Code of Civil Procedure section 998, Subaru made a statutory offer compromise to Smalley in the amount of $35,001 plus either $10,000 for plaintiff’s costs (including attorney’s fees) or the amount of costs and fees to be determined by the trial court. Smalley did not accept the offer. The matter went to trial, and Smalley prevailed, but recovered a total of $27,555.74 which was less than the section 998 offer. In accordance with the fee shifting rules of section 998, the trial court awarded Smalley his pre-offer costs, but awarded Subaru its post-offer costs. Smalley appealed.

The Court of Appeal concluded the section 998 offer was valid, reasonable, and made in good faith. Specifically, the court rejected Smalley’s argument that the 998 offer was invalid because it did not specify whether he would be the prevailing party for purposes of a motion for attorneys’ fees. The Court noted that Section 998 does not require that language. The Court also rejected Smalley’s argument that the offer was invalid because it did not distinguish expenses from costs. Relying on prior case law the Court noted “Where a section 998 offer is silent on costs and fees, the prevailing party is entitled to costs and, if authorized by statute or contract, fees.” Therefore, Smalley still would have been entitled to recover expenses, and the failure to include the word “expenses” in the offer does not make it invalid.

In Madrigal v. Hyundai Motor America the plaintiffs sued the defendant manufacturer under the Song-Beverly Consumer Warranty Act (“Act”) alleging breach of express and implied warranties arising out of their purchase of an allegedly defective vehicle. Early in the case, the defendant manufacturer made two statutory offers to compromise under Code of Civil Procedure section 998, but the plaintiffs allowed both offers to expire. Litigation continued, and after a jury was sworn in, the parties settled for an amount that was less than the amount offered in the defendant manufacturer’s second 998 offer in exchange for the plaintiffs dismissing their complaint with prejudice. The stipulation for settlement included a provision that attorney’s fees and costs would be decided by way of motion.

The plaintiffs then filed a motion for attorney’s fees and costs. In response, the defendant manufacturer moved to strike or tax recovery of any costs and expenses incurred after the second 998 offer on the basis that the plaintiffs failed to obtain a judgment that was more favorable than the defendant manufacturer’s second 998 offer. The defendant manufacturer also filed an opposition to plaintiffs’ motion for attorney’s fees on that same basis and argued that plaintiffs were precluded from recovering costs or attorney’s fees incurred after the second 998 offer. The trial court held for the plaintiffs, reasoning that section 998’s cost-shifting provisions do not apply to cases that end in settlement, and that because there was no trial, there was no judgment. The defendant appealed.

The Court of Appeal reversed holding that the terms of the settlement constituted a “judgment” within the meaning of section 998(c), and that the trial court erred by not analyzing the parties’ entitlement to costs and attorney’s fees through the lens of that statute.

Note: On August 30, 2023, the California Supreme Court granted plaintiffs’ petition for review. According to the Court, the issue to be decided is: “Do Code of Civil Procedure section 998's cost-shifting provisions apply if the parties ultimately negotiate a pre-trial settlement?”

In Chen v. BMW of North America Chen sued BMW for breach of warranty and for violating the Song-Beverly Consumer Warranty Act and the Consumers Legal Remedies Act. After the suit was pending for about a year, the defendants communicated an offer under Code of Civil Procedure section 998, to have a $160,000 judgment entered against them; the defendants would pay Chen’s reasonable attorney’s fees and costs, as determined by the court. Chen would return the vehicle. Chen rejected the offer as “fatally vague and uncertain.” The litigation continued for another two years. The parties settled on the day of the trial. The terms of the settlement were essentially identical to the section 998 offer.

Chen moved as a prevailing party for attorney fees and costs of $436,071.82. The trial court awarded only $53,509.51, including only fees and costs accrued through July 2017, 45 days after the section 998 offer was made.

The court of appeal affirmed holding that BMW’s 998 offer complied with the statutory requirements and Chen did not achieve a result more favorable than its terms. The statute, therefore, disallowed recovery of attorney fees and costs accrued after the offer was made.

Court of Appeal holds that under California’s Song-Beverly Consumer Warranty Act’s restitution provision, the actual price paid for a defective truck was the cost buyers paid in total in order to obtain the vehicle at the time they purchased it, exclusive of any trade-in value.

In Williams v. FCA US LLC plaintiffs-buyers Melissa and Geoffrey Williams sued defendant FCA US LLC (manufacturer) for violation of the Song-Beverly Consumer Warranty Act (popularly known as the Lemon Law), seeking restitution for a defective truck that was manufactured and warranted by manufacturer. Specifically, the buyers sought restitution from the manufacturer after trading in the defective truck for another vehicle at an unrelated dealership. The parties disputed whether the manufacturer was entitled to a credit for the trade-in value of the truck in calculating “the actual price paid or payable by the buyer” under the restitution provision.

Instead of resolving the question of statutory interpretation presented, the trial court transmitted the question to the jury and told the parties the jury would decide, based on the parties’ closing arguments, what should be included in “the actual price paid.” The jury found manufacturer breached its express written warranty to buyers when it (or its authorized repair facility) failed to repair the defects in buyers’ truck “to match the written warranty after a reasonable number of opportunities to do so.” The jury further found manufacturer willfully failed to promptly replace or repurchase the defective truck and awarded buyers damages and a civil penalty. The trial court subsequently denied buyers’ motion for a new trial, in which buyers argued the damages were inadequate as a matter of law because the jury’s calculation of “the actual price paid or payable” impermissibly deducted the $29,500 credit buyers previously received when they traded in the defective truck for a new vehicle.

Buyers appealed, raising the issue of whether the jury impermissibly deducted the trade-in credit when it calculated “the actual price paid or payable by the buyer,” as provided in the restitution provision. The Court of Appeal reversed, finding the jury inappropriately and prejudicially deducted the $29,500 trade-in value of the defective vehicle from the buyers’ statutory restitution award, and thus the damages awarded were inadequate as a matter of law.

Court of Appeal holds that consumers fighting tax fees assessed after vehicle lease’s termination were required to exhaust their administrative remedies prior to filing suit.

In Stettner v. Mercedes-Benz Financial Services USA, LLC Lisa Stettner and Michele Zousmer (“Lessees”) sued Mercedes-Benz Financial Services USA, LLC (“Mercedes Benz”) for violating California’s Unfair Competition Law and for declaratory relief. The dispute centered on a vehicle “turn-in fee” that Mercedes-Benz charges at the end of their lease agreements. Stettner and Zousmer considered this fee to be taxable and filed suit. Mercedes Benz filed a demurrer which was sustained by the trial court. The lessees appealed.

The Court of Appeal found that the plaintiffs did not exhaust their administrative remedies before bringing the lawsuit, which is a prerequisite for a taxpayer to challenge the validity of a tax in court. Specifically, the lessees were required to exhaust challenge to legality of tax before California Department of Tax and Fee Administration, as prerequisite to suit. Moreover, the court ruled that the plaintiffs were not entitled to a judicial remedy because there was no prior legal determination resolving the taxability issue.