In re Toyota Motor Corp. Hybrid Brake Marketing, Sales, Practices & Products Liability Litigation

Citations: 828 F. Supp. 2d 1150; 2011 U.S. Dist. LEXIS 143490; 2011 WL 6189467Docket: Case No. 8:10-ml-02172-CJC(RNBx)

Court: District Court, C.D. California; December 12, 2011; Federal District Court

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The court denied Toyota's motion to compel arbitration for claims brought by Plaintiffs Amelia Nash and Marciano and Miriam Ramirez regarding alleged defects in the anti-lock braking system (ABS) of certain Toyota and Lexus hybrid vehicles purchased between 2004 and 2010. The plaintiffs, representing a putative class, allege that the defective ABS leads to extended stopping distances, resulting in accidents and safety risks. They have asserted multiple claims including violations of the California Legal Remedies Act, the California Unfair Competition Law, breach of implied warranty, and unjust enrichment under various state laws, seeking repair funds, damages, and restitution.

Toyota's motion for arbitration was denied on two grounds: first, Toyota lacked standing to compel arbitration as it was not a party to the purchase agreements which contained the arbitration clauses; second, even if Toyota had standing, it had waived any right to arbitration by actively litigating the case in federal court for nearly two years. The purchase agreements referenced were made with authorized dealerships and included clauses that allowed either party to choose arbitration over court proceedings, while also waiving the right to participate in class actions.

Claims or disputes arising from a credit application, vehicle purchase, or related contracts between the parties, including their employees and agents, are to be resolved through neutral, binding arbitration, not court action. Arbitration will be conducted on an individual basis, with a waiver of class action rights. The Purchase Agreements were signed by plaintiffs Nash and Ramirez along with Toyota dealership representatives, but Toyota itself did not sign. 

The procedural history includes the initial Complaint filed on February 8, 2010, followed by a First Amended Complaint on September 27, 2010, which added plaintiffs. In a Joint Case Management Stipulation filed on July 26, 2010, Toyota raised defenses concerning the identification of defects in non-recall Toyota Hybrid Class Vehicles. Toyota moved to dismiss all claims on October 28, 2010, leading to a Court order that granted dismissal of some claims while denying others on January 20, 2011. Toyota subsequently answered the First Amended Complaint on February 23, 2011, asserting arbitration as a defense.

Discovery conferences were held throughout 2011, with significant developments including the Supreme Court ruling in AT&T Mobility LLC v. Concepcion on April 27, 2011, which upheld the enforceability of class action waivers in arbitration agreements, contradicting prior California case law that deemed such waivers unconscionable in certain contexts. The Supreme Court highlighted that class arbitration undermines the informal nature of arbitration, increases costs, and presents greater risks for defendants.

Between July and October 2011, extensive discussions and mediation occurred between the parties regarding case resolution and alternatives to Toyota’s production of ABS source code for a class certification motion. On June 24, 2011, Toyota served amended deposition notices to Plaintiffs Nash and Ramirez, with Nash being deposed for approximately seven hours on July 6, 2011. A third Joint Case Management Stipulation was submitted by the parties on July 8, 2011, revising discovery terms, which the Court adopted on July 15, 2011. On October 14, 2011, Judge Block issued a discovery order establishing deadlines for Toyota to produce specifications for the Toyota Highlander and Lexus Hybrid, setting the source code information production deadline for January 23, 2011, and outlining costs related to security measures if Toyota chose not to use a secured facility in Japan. A proposed protective order concerning source code exchange was filed under seal on October 18, 2011, and approved by the Court on October 24, 2011. 

On November 1, 2011, Toyota moved for reconsideration of the October 14 order regarding security costs, but the Court denied this motion on December 2, 2011, citing procedural defects and affirming that the original order was not clearly erroneous. On October 10, 2011, Toyota also moved to compel arbitration of Plaintiffs’ claims, with Plaintiffs opposing the motion on November 14, 2011. Toyota contended that it could compel arbitration based on the principle of equitable estoppel despite not being a signatory to the Purchase Agreements, arguing that Plaintiffs’ claims were intertwined with the agreements. Toyota maintained it did not waive arbitration rights and acted promptly after the AT&T Mobility LLC v. Concepcion decision. Conversely, Plaintiffs argued that the arbitration provision was unconscionable and unenforceable.

Plaintiffs contend that Toyota, as a nonsignatory to the Purchase Agreements, lacks the authority to enforce the arbitration provision. They assert that equitable estoppel is inapplicable since their claims do not arise from the Purchase Agreements. Additionally, Plaintiffs argue that Toyota has waived its right to compel arbitration, having been aware of such a right prior to the Supreme Court's Concepcion decision, yet continued to engage in discovery that contradicts any intention to enforce arbitration. They claim that allowing Toyota to compel arbitration at this late stage would unfairly prejudice them due to the significant time, resources, and efforts already invested in litigation and discovery.

The legal framework for a motion to compel arbitration is governed by the Federal Arbitration Act (FAA), which mandates that arbitration agreements in interstate commerce are valid and enforceable unless grounds exist for contract revocation. The FAA promotes a liberal federal policy favoring arbitration, treating arbitration agreements equally with other contracts. Courts must stay proceedings and order arbitration if a valid agreement exists and encompasses the dispute. Determining the validity of an arbitration agreement involves state law contract interpretation. The FAA allows for arbitration agreements to be deemed unenforceable only on grounds applicable to contracts generally. California law permits courts to refuse enforcement of unconscionable contracts, which involves assessing both procedural (oppression or surprise) and substantive (overly harsh outcomes) unconscionability. The scope of arbitration agreements is governed by federal substantive law.

The Federal Arbitration Act (FAA) mandates resolving any uncertainties regarding the scope of arbitrable issues in favor of arbitration, encompassing contract language disputes and defenses to arbitrability such as waiver and delay. However, arbitration is fundamentally contractual, meaning a party cannot be compelled to arbitrate disputes they have not mutually agreed to submit. Generally, only parties to an arbitration agreement can invoke the right to compel arbitration; this right cannot be extended to nonsignatories. Nonetheless, under specific legal principles, such as equitable estoppel, a nonsignatory may compel a signatory to arbitrate claims. Federal substantive law governs these matters, preempting state laws. Equitable estoppel may apply in two scenarios: when a signatory's claim is closely related to the nonsignatory’s obligations, or when the signatory alleges coordinated misconduct involving both the nonsignatory and one or more signatories. The purpose of equitable estoppel is to prevent a party from enjoying the benefits of a contract while evading its obligations. In the ongoing case, Toyota contends that the plaintiffs must arbitrate their claims, asserting that these claims are encompassed by the broadly-worded arbitration provision.

The arbitration provision in the Purchase Agreements explicitly allows only the signatories, namely the Nash and Ramirez Plaintiffs and the Toyota dealerships, to invoke arbitration for claims arising from their credit application, vehicle purchase, or related transactions. It does not grant non-signatory parties, such as Toyota, the right to compel arbitration. Toyota's argument relies on the principle of equitable estoppel, claiming that the Plaintiffs' allegations are intertwined with the Purchase Agreements because they involve the purchase of Toyota vehicles and involve misconduct by both Toyota and its dealerships. However, the critical issue is whether the Plaintiffs' claims are inherently linked to the Purchase Agreements. The Ninth Circuit's test for equitable estoppel requires both a close relationship between the parties and that the claims must be intertwined with the contractual obligations. Toyota fails to demonstrate that the claims for violations of the CLRA, UCL, and breach of implied warranty are sufficiently interconnected with the Purchase Agreements to warrant arbitration. The analysis indicates that simply presuming the existence of the Purchase Agreements does not suffice to compel arbitration against a non-signatory.

Plaintiffs' purchase of a Toyota vehicle and execution of purchase agreements are relevant to the estoppel principle, but the key question is whether their claims are interconnected with the contractual obligations in those agreements. The court references the precedent that equitable estoppel applies when claims rely on terms of the purchase agreement, not merely on vehicle purchase itself. In Agnew v. Honda Motor Co., the court ruled that claims entangled with an agreement could compel arbitration. However, Toyota incorrectly assumes that mere execution of purchase agreements correlates with the interrelation of Plaintiffs' claims and the agreements' obligations, which primarily involve financing and insurance.

The Purchase Agreements include disclaimers of warranties, indicating no express or implied warranties on the vehicles. Plaintiffs do not challenge these terms but focus on Toyota's marketing materials that allegedly contained false representations about the braking system's safety. Their claims assert that the braking system is defective, that Toyota was aware of these defects and failed to disclose them, and that misleading statements influenced their purchase decisions. Plaintiffs cite violations of the CLRA, UCL, breach of implied warranty under the Song-Beverly Act, and breach of implied warranty of merchantability, asserting these claims are independent of the Purchase Agreements, which are not referenced in their claims. The only potential connection to the Purchase Agreements might involve the implied warranty claim under the Song-Beverly Act, which mandates implied warranties for consumer goods in California.

Plaintiffs are claiming a breach of the manufacturer’s implied warranty against Toyota, not against the dealerships from which the vehicles were purchased. The Purchase Agreements include a disclaimer stating that the seller provides no express or implied warranties, which limits claims against the dealerships. However, they also acknowledge that any warranties from the manufacturer, Toyota, remain intact, allowing for a potential independent claim against Toyota.

Toyota argues that the claims should be subject to equitable estoppel, citing alleged interdependent and concerted misconduct between itself and its authorized dealerships. However, the cited sections from the First Amended Complaint (FAC) do not support claims of such misconduct; they merely reference minor interactions with the dealerships without any indication of collusion or interdependence. The claims in the FAC primarily focus on Toyota's wrongdoings, not on any actions by the dealerships.

Additionally, even if equitable estoppel were applicable, Toyota cannot compel arbitration because it has waived its right to do so. The Federal Arbitration Act allows courts to refuse enforcement of arbitration agreements if a party has waived this right, as established in relevant case law.

To establish waiver of the right to arbitration, a party must prove three elements: (1) awareness of the right to compel arbitration; (2) actions inconsistent with that right; and (3) prejudice to the opposing party due to these actions. In this case, Plaintiffs have met all three criteria. 

First, Toyota was aware of its right to compel arbitration, as demonstrated by its assertion of arbitration as an affirmative defense in its answer to the First Amended Complaint (FAC) on February 23, 2011, prior to the Supreme Court's Concepcion decision. Toyota's claim that prior attempts to compel arbitration would have been futile does not negate its awareness of the right, nor can it retroactively reset the timeline based on subsequent legal developments.

Second, Toyota acted inconsistently with any potential right to arbitration. It contends that raising arbitration in its answer preserved its argument, yet this assertion contradicts its claim of lacking knowledge of that right before Concepcion. Additionally, Toyota engaged in extensive litigation activities over nearly two years, including discovery and negotiations, without indicating any intention to compel arbitration. After the Concepcion ruling, Toyota continued litigating for six months, participating in multiple discovery conferences, serving deposition notices, and engaging in case management discussions, all without moving to compel arbitration promptly. This pattern of behavior demonstrates inconsistency with its purported right to arbitration.

Toyota filed a motion for reconsideration regarding certain aspects of Judge Block’s October 14, 2011 Order, asserting its efforts to meet the January 23, 2012 deadline for producing ABS source code information. Concurrently, on October 18, 2011, Toyota submitted a proposed protective order for the handling of source code materials, which the Court adopted on October 24, 2011. The record indicates that Toyota's actions have been inconsistent with its claim of intending to seek arbitration for the Plaintiffs' claims, undermining its credibility. 

Toyota compared its situation to the Ninth Circuit's decision in Fisher v. A.G. Becker Paribas Inc., where the court found that the defendant acted consistently with its arbitration rights. However, the Supreme Court's rejection of the intertwining doctrine in Dean Witter Reynolds, Inc. v. Byrd and the differences in the defendants' actions in both cases highlight that Toyota's position is not supported. Unlike the Fisher defendant, Toyota has actively engaged in litigation processes, including discovery activities and negotiations, suggesting a known right to arbitration that it has not consistently asserted.

Furthermore, granting Toyota's late motion to compel arbitration would prejudice the Plaintiffs, who have invested significant time and resources in the litigation over the past two years, and would have approached the case differently had they anticipated arbitration.

The court denied Toyota's motion to compel arbitration for the claims of Plaintiffs Nash and Ramirez, concluding that Toyota waived its right to arbitration. The plaintiffs made litigation choices based on the assumption that the case would proceed in federal court, significantly influenced by Toyota's prior actions and discovery obtained that would not be available in arbitration. Toyota had benefited from depositions and was unable to dismiss the claims, with a deadline approaching to produce crucial evidence. 

The court also rejected Toyota's argument that an arbitrator should decide whether a nonsignatory like Toyota could compel arbitration, stating that the arbitration provisions in the Purchase Agreements only apply to signatories. Consequently, the court maintained that it must determine the applicability of arbitration concerning Toyota. Additionally, the court noted uncertainties regarding the applicability of the Concepcion decision on class action waivers in this case. 

The Toyota Hybrid Class Vehicles involved are specified as certain model years of Prius, Highlander Hybrid, and Lexus vehicles, with a recall announced for some models to update ABS software in response to consumer complaints. The relevant case documentation is cited under specific case numbers.

Concepcion overturned the ruling in Discover Bank v. Superior Court, which deemed class action arbitration waivers in contracts of adhesion unconscionable for disputes involving small amounts of money. The Supreme Court determined that the Discover Bank rule, which mandated class arbitration, conflicted with the Federal Arbitration Act (FAA), intended to enforce arbitration agreements as written for efficient proceedings. In the current case, the dispute involves significant damages related to expensive cars, differing from the small-sum contexts of previous rulings. Toyota cited Villegas v. U.S. Bancorp and Estrella v. Freedom Financial to argue that failure to compel arbitration was not inconsistent with the right to enforce an arbitration agreement containing a class-action waiver. However, in those cases, the applicability of Concepcion was not contested, and the defendants acted promptly to compel arbitration post-Concepcion. The Court concluded that equitable estoppel does not enable Toyota to arbitrate claims against the Plaintiffs, and Toyota has waived its right to arbitration, thus not addressing the Plaintiffs' claims of unconscionability in the arbitration provisions of the Purchase Agreements.