Smalheiser v. Mercedes-Benz USA LLC

Background

Howard and Muriel Smalheiser sued Mercedes-Benz USA LLC (MBUSA) for alleged breach of warranty under California’s Song-Beverly Consumer Warranty Act. The lawsuit concerned a Mercedes-Benz vehicle that the plaintiffs leased in May 2023. The plaintiffs alleged that the vehicle was delivered with serious defects, including engine, electrical, and emissions-system defects. MBUSA removed the case to federal court based on diversity jurisdiction.

Arbitration agreement

The lease contained an arbitration clause covering claims or disputes arising out of or relating to the lease or any resulting transaction or relationship. The clause expressly identified MBUSA as a “Third Party Beneficiary” and allowed a third-party beneficiary to elect binding arbitration instead of a court action.

MBUSA moved to compel arbitration as a third-party beneficiary. The plaintiffs argued that MBUSA did not clearly benefit from the lease. The court rejected that argument because MBUSA was expressly named as a beneficiary. The court distinguished a Ninth Circuit decision involving an arbitration clause that did not give the vehicle manufacturer the power to compel arbitration.

Scope of arbitration clause

The plaintiffs also suggested that their warranty dispute fell outside the arbitration clause. The court disagreed. It concluded that the relationship between MBUSA and the plaintiffs arose from the plaintiffs’ agreement to lease the vehicle, so the warranty dispute related to the lease and fell within the arbitration provision.

Ruling

The court ordered the case to arbitration and stayed the case pending arbitration. It directed the parties to jointly file status reports every 90 days, beginning September 6, 2024.