On January 12, 2022, the Ninth Circuit held that BMW North America, LLC (“BMW”) could not enforce an arbitration clause in a dealership purchase agreement because, under California law, BMW (1) was not a third-party beneficiary to the agreement and (2) could not satisfy the test for equitable estoppel. The case underscores that, as noted in our last issue, a court’s resolution of arbitration-clause enforcement issues frequently turns on nuances in state decisional law and the precise meaning of the terms used in the arbitration provision.

• Plaintiff Kim Ngo purchased a new BMW sedan from a car dealership in 2012. Because the dealership financed the purchase, Ngo entered into a purchase agreement that identified Ngo as the “Buyer,” the dealership as the “Creditor-Seller,” and BMW Bank of North America (the financing company) as the “Assignee.” The agreement included an arbitration clause stating that “[e]ither you [Ngo] or we [the dealership or the Bank] may choose to have any dispute between us” referred to arbitration, “whether in contract, tort, statute, or otherwise,” that “arises out of or relates to your credit application, purchase or condition of this vehicle, this contract or any resulting transaction or relationship (including any such relationship with third parties who do not sign this contract).”
• Ngo allegedly experienced a variety of persistent problems with her BMW that defied multiple repair attempts, including an engine that shook violently on start-up and a leaky radiator. Accordingly, she sued BMW in California federal district court for breach of warranty under California and federal law. She named only BMW (U.S. distributor for BMW vehicles) as the defendant.
• BMW moved to compel arbitration based on the arbitration clause in the purchase agreement, claiming that it was a third-party beneficiary and that equitable estoppel allowed it to invoke the arbitration clause. The district court agreed with the first argument, did not address the second, and dismissed the complaint. Ngo appealed.
• The Ninth Circuit reversed. Under California law, a non-signatory to an arbitration agreement can move to compel arbitration as a third-party beneficiary only if it can prove that the “express provisions of the contract” show that (1) the non-signatory would benefit from the contract; (2) a “motivating purpose of the contracting parties was to provide a benefit to the third party”; and (3) permitting the “third party to enforce the contract is consistent with the objectives of the contract and the reasonable expectations of the contracting parties.” The court held that BMW could not satisfy any of these three prongs:
  • Under the first prong, BMW was not a party to the agreement, was not identified as an assignee, and the agreement did not cover any affiliates of the dealership or BMW Bank. The court also held that under Ninth Circuit precedent (Kramer v. Toyota Motor Corp., 705 F.3d 1122 (9th Cir. 2013)), “[l]anguage limiting the right to compel arbitration to a specific buyer and a specific dealership (and its assignees) means that extraneous third parties may not compel arbitration.”
  • BMW could not satisfy the second prong because the purchase agreement was not “inherently formed with third parties in mind.”
  • Finally, nothing in the purchase agreement “evince[d] any intention that the arbitration clause should apply to BMW.” According to the court, “BMW’s relative proximity to the contract confirm[ed] that the parties easily could have indicated that the contract was intended to benefit BMW—but did not do so.”
• The court also held that BMW could not enforce the arbitration clause under the doctrine of equitable estoppel. That doctrine prevents a plaintiff from “seeking to hold a non-signatory liable for obligations imposed by an agreement, while at the same time repudiating the arbitration clause of that very agreement.” BMW sought to invoke this doctrine by showing that Ngo’s claims were “inextricably bound up” with the agreement because the warranties were additional terms of the agreement, her claims arose out of the agreement, and the agreement gave Ngo standing to sue. The court rejected all three arguments:
  • Under California law, warranty terms are not part of a sales contract where the manufacturer is not a party to the contract and, in any event, the purchase agreement itself stated that it did not disturb any warranty provided by BMW. As for the second argument, BMW asserted that it never would have issued the warranties if Ngo had not signed the agreement. But the court held that California courts had rejected this argument, describing it as involving an “attenuated chain of reasoning.” The court also held that the retail sale (not the purchase agreement) gave Ngo standing to sue.
• Finally, the court distinguished a recent California appellate decision (Felisilda v. FCA US LLC, 53 Cal. App. 5th 486 (2020)) enforcing an arbitration clause in a suit against a manufacturer because the plaintiff in that case also sued the dealership, which was a signatory to the purchase agreement and moved to compel arbitration. In contrast, Ngo sued only BMW (the distributor).
• As Ngo indicates, the ability of non-parties to enforce arbitration clauses is a question of state law. After Ngo, manufacturers and/or distributors sued in the Ninth Circuit (especially under California law) may face an uphill battle if they attempt to compel arbitration based on a purchase agreement to which they are not parties and if the dealership (or another signatory) is not named in the suit. But this decision does suggest that, if a purchase agreement is drafted with language that empowers the manufacturer to enforce the arbitration clause, courts may find that manufacturers are third-party beneficiaries authorized to compel arbitration over defect claims.

The case is Ngo v. BMW of North America, LLC, and you can read more here.