McCarthy v. Toyota: Manufacturer Cannot Hitch a Ride on Car Dealers’ Arb Agreements with Buyers

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In McCarthy v. Toyota Motor Corporation, C.D. Cal., Oct. 20, 2020 (slip op. available here), the district court recently held that Toyota could not compel three class action plaintiffs to arbitrate their auto defect claims based on arbitration provisions in purchase agreements and a lease that they had entered into with their Toyota dealers. Although Toyota was a non-signatory to the agreements, it argued that it had standing to enforce the agreements based on a theory of equitable estoppel and as a third party beneficiary to one of the agreements.

“The theory behind equitable estoppel is that a plaintiff may not, ‘on the one hand, seek to hold the non-signatory liable pursuant to duties imposed by the agreement, which contains an arbitration provision, but, on the other hand, deny arbitration’s applicability because the defendant is a non-signatory.’” In re Henson, 869 F.3d 1052, 1060 (9th Cir. 2017) (quoting Murphy v. DirecTV, Inc., 724 F.3d 1218, 1229 (9th Cir. 2013). Toyota’s equitable estoppel theory was that “‘Plaintiffs’ claims against [it] rely upon and are intimately founded on and intertwined with Plaintiffs’ agreements’ [with the dealers] such that Toyota may enforce the arbitration provision in Plaintiffs’ agreements based on equitable estoppel.”

The Ninth Circuit rejected this argument in Kramer v. Toyota Motor Corp., 705 F.3d 1122 (9th Cir. 2013), and the district court held that Kramer controlled. As in Kramer, the district court found that the plaintiffs’ claims against Toyota (fraudulent, deceptive, and/or misleading conduct in failing to disclose the defect, and breach of manufacturer warranties) arose independently from the terms of the agreements containing the arbitration agreements. None of the plaintiffs’ claims referenced or relied on the terms of the agreements with the dealers.

Toyota also argued that under the terms of the lease agreement it was an “affiliate” of the dealer within the meaning of the arbitration provision and was therefore a “Covered Party” under that provision. Applying basic rules of contractual interpretation, the district court rejected the argument.

Among other observations, the district court noted that the term “affiliate” was not defined in the provision and there was nothing in the provision that indicated the term was meant to apply broadly to any entity with a corporate tie to the dealer. On the contrary, all of the parties listed as “Covered Parties” in the provision had a direct connection to the lease. Further, for third parties to be “Covered Parties,” they not only had to provide products and services in connection with the lease, but they also had to be sued as co-defendants with the other Covered Parties. Toyota’s position that the term “affiliate” should be read to include any corporate entity with any ties to the dealer or other listed entities (all of whom had direct connections with the lease) was “incongruously broad,” in the view of the court. The lease agreement also explicitly disclaimed any effect on the manufacturer’s warranties at issue in the action.

In sum, the automobile lease and purchase agreements in McCarthy are contracts between consumers and car dealers; they pertain to that relationship only. They are not drafted to protect the manufacturer from the consequences of its own fraud against consumers, product defects, or breach of manufacturer warranties. Consequently, they provide no road to arbitration for Toyota.

Authored by:
Robert Friedl, Senior Counsel