Federal court of appeals rules that Toyota cannot enforce consumer-dealership arbitration agreements

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by Charles Miller

A class action filed in a California federal court by owners of 2010 Toyota Prius and Lexus HS vehicles alleges defective antilock brake systems, resulting in increased stopping distances. The plaintiffs further allege that Toyota had notice of the defect as early as July 2009 but failed to disclose the defect and continued to manufacture and sell vehicles with defective ABS.

The plaintiffs purchased their vehicles on credit by entering into either a “Retail Installment Sale Contract” or “Purchase Agreement” with their respective dealerships. The Purchase Agreements contained similarly worded arbitration provisions. For example, the agreement entered by Plaintiff Michael Scholten states,

  1. EITHER YOU OR WE MAY CHOOSE TO HAVE ANY DISPUTE BETWEEN YOU AND US DECIDED BY ARBITRATION, RATHER THAN IN COURT OR BY JURY TRIAL.
  2. IF A DISPUTE IS ARBITRATED, YOU WILL GIVE UP YOUR RIGHT TO PARTICIPATE AS A CLASS REPRESENTATIVE OR CLASS MEMBER ON ANY CLAIM YOU MAY HAVE AGAINST US. YOU WILL GIVE UP ANY RIGHT TO CLASS ARBITRATION AND TO ANY CONSOLIDATION OF INDIVIDUAL ARBITRATIONS.

The arbitration clauses in the Purchase Agreements employ the language “you” and “we” or “buyer” and “dealer” to identify who may elect arbitration. The Purchase Agreements were signed by and entered into between the Plaintiffs and the Dealerships. However, Toyota is not a signatory to any of the Purchase Agreements.

In response to the putative class action lawsuit, Toyota asserted arbitration as an affirmative defense and moved the court to compel arbitration of the plaintiff’s individual claims. The district court denied the motion, finding in part that Toyota, as a nonsignatory to the Purchase Agreements between Plaintiffs and the dealerships, could not compel arbitration, and equitable estoppel did not require arbitration. Toyota appealed and the Ninth Circuit Court of Appeals has now affirmed the district court’s ruling [Kramer v. Toyota Motor Corp., No. 12-55050 (9th Cir. January 30, 2012)].

The first issue on appeal was whether the district court or an arbitrator should decide whether Toyota had a right to compel arbitration under the purchase agreements even though it was a nonsignatory to the agreement. Toyota argued that because the Purchase Agreements expressly provide that the arbitrator shall decide issues of interpretation, scope, and applicability of the arbitration provision, the arbitrator should decide the issue of whether a nonsignatory may compel Plaintiffs to arbitrate.

The Ninth Circuit rejected Toyota’s argument because the arbitration agreements do not contain clear and unmistakable evidence that Plaintiffs and Toyota agreed to arbitrate arbitrability. The court found that “[w]hile Plaintiffs may have agreed to arbitrate arbitrability in a dispute with the Dealerships, the terms of the arbitration clauses are expressly limited to Plaintiffs and the Dealerships. … The language of the contracts thus evidences Plaintiffs’ intent to arbitrate arbitrability with the Dealerships and no one else.” Thus, the district court had the authority to decide whether the instant dispute is arbitrable.

The United States Supreme Court has held that a litigant who is not a party to an arbitration agreement may invoke arbitration under the FAA if the relevant state contract law allows the litigant to enforce the agreement. See Arthur Andersen LLP v. Carlisle, 556 U.S. 624, 632 (2009). Accordingly, the Ninth Circuit looked to California contract law to determine whether Toyota, as a nonsignatory, could compel arbitration.

Under California law, a nonsignatory can enforce an arbitration clause under the doctrine of equitable estoppel (1) when a signatory must rely on the terms of the written agreement in asserting its claims against the nonsignatory or the claims are “intimately founded in and intertwined with” the underlying contract, and (2) when the signatory alleges substantially interdependent and concerted misconduct by the nonsignatory and another signatory and “the allegations of interdependent misconduct [are] founded in or intimately connected with the obligations of the underlying agreement.”

Toyota’s overarching argument was that Plaintiffs’ claims are intertwined with the Purchase Agreements because Plaintiffs’ claims rely on the existence of Plaintiffs’ vehicle purchase transactions. The court of appeals disagreed:

Here, Plaintiffs’ claims are premised on California consumer law, unfair competition, false advertising, breach of the implied warranty of merchantability, and breach of contract. In order for Toyota’s equitable estoppel argument to succeed, Plaintiffs’ claims themselves must intimately rely on the existence of the Purchase Agreements, not merely reference them. Toyota is correct that Plaintiffs’ claims presume a transaction involving a purchase of a Class Vehicle. The claims do not, however, rely upon the existence of a Purchase Agreement. For illustration, a consumer who purchased a vehicle with cash instead of credit would still state a claim for which relief could be granted, absent a Purchase Agreement.

The court determined that the Plaintiffs’ claims “arose independently of the terms of the agreements containing arbitration provisions. “ Thus, the court concluded that that Toyota could not compel the Plaintiffs to arbitrate their claims.