The Song-Beverly Act's fee-shifting: Lemon law cases proliferate

California's Song-Beverly Act provides some of the nation's strongest pro-consumer statutes, providing remedies which include not only a full repurchase but also (potentially) double civil penalties plus (and this is the real issue) the consumer's costs/expenses and attorneys' fees. Likely due to this fee-shifting (given that attorneys' fees are often higher than the cost of the product itself), recently the number of Song-Beverly Act lemon law claims filed against manufacturers in California has skyrocketed. From 2018-2021, there were 34,397 total lemon law cases filed in California state courts. See The Auto Lemon Index (publicinterestnetwork.org). Although exact numbers are not yet available, these amounts have nearly doubled again since 2021.

The repurchase demand: Early evaluation is crucial

Because of the potential for civil penalties and attorneys' fees, it has become of crucial importance to manufacturers' in-house counsel (or retained outside counsel) to evaluate any repurchase demands early. The first step that in-house counsel can take is upon the very first notification of a potential Song-Beverly Act claim. Before a claimant can file suit, they must first notify the manufacturer of the alleged "nonconformity" in the product and allow the manufacturer - or, more typically, its authorized dealer or repair facility - to cure the issue. Having a robust set of authorized dealers and warranty processes can often fix issues well before there are several attempts to repair and/or more than the minimum days out of service. But even after such has occurred and a claimant's attorney sends a formal repurchase "demand" to the manufacturer, most claims can still be resolved without filing suit. Sometimes this may involve a repurchase, but at least it does not involve civil penalties, and any claim for attorneys' fees at this stage would be relatively small.

Controlling costs: Arbitration or mediation versus litigation

However, sometimes claims cannot be resolved early (for a variety of reasons) and the consumer then files suit against the manufacturer (and often the dealer). Commonly the next question for the manufacturers' counsel is whether to proceed with litigation or instead seek to push the claim into arbitration. After all, lemon law litigation can quickly become lengthy and expensive, mainly because creative plaintiff's attorneys will "run up the bill" by increasing litigation costs and expenses which they can then seek later under the Song-Beverly Act.

One way to potentially curb these costs/fees is to seek arbitration when possible. Always the particular facts of each case should control the decision, as not every case is right for arbitration. That said, in general many manufacturers favor arbitration because (1) it is less public (and therefore more confidential); (2) it involves much less discovery; and (3) it proceeds much more quickly than litigation, which can often take several years at a minimum. By shortening discovery and the timeline, plaintiffs' attorneys will have less onerous fee bills later on.

In place of (or in addition to) arbitration, manufacturers can also often seek to immediately mediate any Song-Beverly claims. The mediation process (with a practiced mediator) can cut through the red tape of a plaintiff's attorney's desire for more fees, demonstrate the strengths and weaknesses of each side's position, and allow the parties to settle a claim without either arbitration or litigation.

Current issue: California may limit a manufacturer's ability to enforce arbitration

In recent years, California appellate courts have issued problematic rulings that threaten a manufacturer's ability to enforce an arbitration provision that is typically contained in the purchase contract between the consumer and the retailer/dealer. In most cases, the consumer has not purchased directly from the manufacturer and therefore there is a lack of privity between them, and manufacturers typically are not signatories to the sale contract between the consumer and retailer/dealer.

California's appeals courts are currently split on this very issue. In 2020, the California 3rd District Court of Appeals held that a manufacturer could enforce an arbitration provision contained in a vehicle sale contract (between the buyer and the dealer), even though the manufacturer was not a signatory and had no privity. See Felisilda v. FCA US LLC, 53 Cal. App. 5th 486, 496, 266 Cal. Rptr. 3d 640, 647 (2020) (holding that under the theory of equitable estoppel, the plaintiff could not seek to enforce certain terms of the warranty while simultaneously avoiding the arbitration provision). However, in 2023 the same court (albeit a different panel of judges) later disagreed. See Kielar v. Superior Ct. of Placer Cnty., 94 Cal. App. 5th 614, 312 Cal. Rptr. 3d 426 (2023); see also Ford Motor Warranty Cases (2023) 89 Cal.App.5th 1324, 1333-1336, 306 Cal.Rptr.3d 611, review granted July 19, 2023, S279969 (denying the manufacturers' attempts to force arbitration).

At this very moment, the California Supreme Court is reviewing the Ford Motor Warranty Cases decision. As of April 4, 2024, the case was fully briefed, and it is expected that the Court will issue its ruling sometime in 2024. This ruling will have an enormous impact on a manufacturer's decision-making, especially when it comes to Song-Beverly repurchase demands.

Conclusion

Until the California Supreme Court makes its decision, manufacturers should know that while it is currently possible to enforce a mandatory arbitration provision in the contract between the consumer and retailer, it may not be possible for long. In the meantime, manufacturers should continue to evaluate Song-Beverly demands early to avoid the potential for onerous attorneys' fees and civil penalties down the line, especially if they are forced into lengthy and expensive litigation.