Khachatryan v. Mercedes_Benz, USA LLC

Background

Tigran Khachatryan sued Mercedes-Benz USA, LLC (MBUSA) under California’s Song-Beverly Consumer Warranty Act. He alleged that he leased a 2024 Mercedes-Benz EQS 45 on July 25, 2024, that the vehicle had serious defects and warranty nonconformities when delivered, and that repeated repair attempts did not successfully fix it. He further alleged that MBUSA refused to repurchase the vehicle. The complaint asserted claims for breach of express warranty, breach of implied warranty, and failure to comply with the Act’s repair-service requirements.

The case was originally filed in Contra Costa Superior Court and was later removed to the federal court based on diversity jurisdiction. MBUSA moved to compel arbitration under the Motor Vehicle Lease Agreement that Khachatryan signed. Khachatryan opposed the motion.

Arbitration agreement

The lease’s arbitration provision covered claims or disputes arising out of or relating to the lease or a resulting transaction or relationship, including disputes involving third parties who did not sign the contract. The provision specifically identified MBUSA as a “Third-Party Beneficiary” and allowed such a beneficiary to elect arbitration.

The parties’ dispute was whether MBUSA, which was not a signatory to the lease, could enforce its arbitration provision. MBUSA relied on third-party-beneficiary status and equitable estoppel. The court did not reach equitable estoppel because it resolved the motion on third-party-beneficiary grounds.

Court’s analysis

Applying California contract law and the Federal Arbitration Act, the court held that MBUSA was an intended third-party beneficiary of the lease’s arbitration provision. Under California law, a nonsignatory seeking to enforce a contract must show that it would benefit from the contract, that providing the benefit was a motivating purpose of the contracting parties, and that enforcement is consistent with the contract’s objectives and the parties’ reasonable expectations.

The court found that all three requirements were met. The lease expressly named MBUSA as a third-party beneficiary and expressly gave it the power to compel arbitration in the circumstances covered by the provision. The court also concluded that the arbitration language covered warranty disputes with the vehicle distributor, including MBUSA. To the extent the parties disputed the provision’s scope, the court noted that the lease delegated that dispute to the arbitrator and that Khachatryan had not challenged the delegation clause.

Ruling and case status

The court granted MBUSA’s motion to compel arbitration and stayed the lawsuit pending arbitration. It vacated the scheduled motion hearing and Initial Case Management Conference and administratively closed the case for case-management purposes. The parties must file a joint status report within 30 days after a final arbitration order; filing that report will lift the stay and reactivate the case. The order did not decide the merits of Khachatryan’s Song-Beverly Act claims.