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January 13, 2022

Federal Appeals Court in California Rules BMW Cannot Force Arbitration of Lemon Law Claim Based on Dealer Financing Agreement

The U.S. Court of Appeals for the Ninth Circuit rebuffed BMW North America’s attempt to compel arbitration of a customer’s California lemon law claim based on language in the customer’s dealer financing agreement. While BMW North America was not a party to the agreement, it claimed that it was entitled to compel arbitration based on its “affiliation” with the financing entity.

Firm founder Payam Shahian recently secured a noteworthy victory for one of the firm’s clients. The result in the U.S. Court of Appeals for the Ninth Circuit also establishes a key precedent for future cases in which vehicle manufacturers attempt to force buyers to arbitrate their California lemon law claims.

The case arose out of the client’s purchase of a BMW 535i in 2012. The client purchased the vehicle using dealer financing, and the client’s installment contract called for mandatory arbitration of claims by and against the dealer and BMW’s financing entity, BMW Bank. The arbitration clause made no reference whatsoever to BMW North America.

The vehicle proved to be a lemon, and our client made seven trips to the repair shop between 2015 and 2019. Our client filed a lemon law claim under the California Song-Beverly Consumer Warranty Act and the federal Magnuson-Moss Warranty Act, but BMW North America refused to repurchase or replace the 535i.

Our client subsequently filed suit in the U.S. District Court for the Central District of California in Los Angeles. In response, BMW North America not only denied liability but also filed a motion to compel arbitration. Somewhat perplexingly, BMW North America based its motion on the mandatory arbitration clause in our client’s installment agreement—which, again, made no reference to the company. As summarized by Reuters:

“Although [BMW North America] was not a party to [the purchaser’s] installment contract with the dealership, it argued that the contract was intended for its benefit and because of its ‘affiliation’ with BMW Bank.”

BMW North America won at the trial level. The U.S. District Court ruled that the company was a “third-party beneficiary” of our client’s installment contract and thus was entitled to enforce the contract’s mandatory arbitration clause. Fortunately, on appeal, the U.S. Court of Appeals for the Ninth Circuit reversed.

Writing for the U.S. Court of Appeals, Judge Barrington Parker wrote that BMW Bank “could have easily added BMW [North America]” to its installment contract but failed to do so. Judge Parker also noted that the contract specifically stated that it “does not affect any warranties covering the vehicle that the vehicle manufacturer may provide.” Since our client was pursuing a warranty claim against BMW North America, Judge Parker correctly ruled that our client is entitled to take BMW North America to court.

Do You Have a Lemon Law Claim in California?

Our firm’s practice is devoted to representing clients in California lemon law claims and other civil litigation matters. If you believe you may have a lemon law claim against BMW or any other manufacturer, we invite you to call 888-757-5366 or contact us online for a free consultation.