The U.S. Court of Appeals for the Ninth Circuit recently held that a car dealership inspection certificate violated California statutory law that required that a vehicle seller provide a “completed inspection report” prior to the sale of any “certified” used car.

In so ruling, the Court held that the term “inspection report” was a term of art in the auto industry and in other state statutes, and that the California Legislature must have been aware of its usage.

A copy of the opinion in Gonzales v. CarMax Auto Superstores, LLC is available at: Link to Opinion.

An individual purchased a vehicle from a car dealership. The individual alleged that he was drawn to the car dealership after hearing advertisements regarding the benefits of purchasing a “certified” vehicle that had passed the car dealership’s rigorous “125-point” certification inspection. The individual alleged that he would have paid less, or possibly not even purchased the car, had it not been a “certified” vehicle.

According to the individual, it is the car dealership’s policy to simply provide purchasers of used vehicles with a pre-printed car dealership “Quality Inspected Certificate” listing the vehicle components that were inspected. The individual received two versions of the certificate: a one-sided certificate provided to him prior to sale, and a two-sided certificate, which was placed in the glove compartment before he took possession of the vehicle.

In addition to the two certificates that the car dealership provides to purchasers of used vehicles, the car dealership also uses a third document known as a “CQI/VQI Checklist.” This checklist contains 236 points of inspection and is filled out by a technician during the inspection process.

The CQI/VQI Checklist, unlike the certificates, indicates the condition of each individual component inspected. Rather than provide the CQI/VQI Checklist to consumers, the car dealership destroys the document after the inspection results are entered into its electronic system, and no copy of the checklist is retained.

Shortly after purchasing the vehicle, the individual experienced some difficulty with the car. The individual filed suit in state court alleging violation of California consumer protection laws — (1) the Consumer Legal Remedies Act (“CLRA”); (2) the Song-Beverly Consumer Warranty Act (“Song-Beverly”); (3) common law fraud and deceit; and (4) the Unfair Competition Law (“UCL”).

The individual’s central theory was that the car dealership violated state law by failing to provide him with a “completed inspection report” prior to the sale of the “certified” vehicle.

The car dealership removed to federal court asserting diversity jurisdiction. A week after removal, the car dealership filed a motion to dismiss, as well as a motion to strike the individual’s punitive damages claim.

The following month, while the motion to dismiss the first amended complaint was pending, the district judge issued an order to show cause regarding subject matter jurisdiction, noting that he had “serious doubts” as to whether the case met the amount-in-controversy requirement.

After the parties responded to the order to show cause, the district judge found that the car dealership had shown by a preponderance of the evidence that the amount in controversy was more than $75,000 and thus the action was properly removable.

The district court then granted the car dealership’s motion to dismiss on all claims except for the CLRA and UCL claims. Following discovery, the car dealership filed a motion for summary judgment on the CLRA and UCL claims. The district court granted the motion, holding that there was no material legal difference between the one-sided form and the two-sided form, and that both forms were legally sufficient.

The individual appealed the district court’s dismissal and summary judgment orders. In this opinion, the Ninth Circuit only considered the appeal of the summary judgment.

The Court of Appeals for the Ninth Circuit first addressed the potential lack of subject matter jurisdiction. As you may recall, to establish original jurisdiction based on diversity of parties, the amount in controversy must exceed the sum or value of $75,000, exclusive of interest and costs. The Ninth Circuit explained that the amount in controversy is the amount at stake in the underlying litigation and includes damages, the cost of complying with an injunction, as well as attorney’s fees awarded under fee shifting status. The Court of Appeals held that the amount in controversy in this matter exceeded the minimal required when the potential cost of complying with injunctive relief was considered along with the individual’s claims for compensatory and punitive damages.

Next, the Court of Appeals considered the individual’s claims under the California CLRA and UCL claims.

Section 11713.18 of the California Vehicle Code prohibits a car dealer from either advertising for sale or selling a used vehicle as “certified” under nine circumstances, including if: “[p]rior to sale, the dealer fails to provide the buyer with a completed inspection report indicating all the components inspected.” Cal. Veh. Code § 11713.18(a)(6). The statute further provides that a violation of any of these provisions is actionable under the CLRA, the UCL, false advertising statutes, or any other applicable state or federal law. Cal. Veh. Code § 11713.18(b).

Applying the state law, the Ninth Circuit held that the car dealership’s certificates did not satisfy the requirements of § 11713.18. The Court found support for its ruling in the plain meaning of the statutory language, as the statute requires a completed “inspection report.”

The Court explained that, while the term is not defined in the statute, an “inspection report” is a term of art in the automobile industry. Specifically, the Ninth Circuit noted, the term “inspection report” is understood to mean a report that lists the components inspected, with a space corresponding to each component in which the inspector designates whether or not that component is functional.

The Ninth Circuit also noted that a “completed inspection report” is one in which those spaces have been appropriately marked so as to indicate the result of the inspection. The Court further noted that these terms are common in California state statutes, regulations, and everyday usage in the auto industry, and other states also use such a term of art for a document that requires an area for marking the components for defects.

The Court held it had to assume that the California legislature was aware of the meaning of “inspection report” and intended the meaning to control. In disregarding this meaning, the Court would have improperly made the word “completed” superfluous.

The Ninth Circuit also found support for its ruling in the purpose, history, and public policy of the statute. The Court noted that section 11713.18(a)(6) was part of California’s “Car Buyer’s Bill of Rights,” which, according to the author of the bill, aimed to “strengthen the protections afforded [to] California car buyers by improving laws regarding the sales, marketing, and financing of new and used vehicles.” Assembly Judiciary Comm., 2005-2006 Session, Analysis of AB-68 5 (March 1, 2005).

Prior to the enactment of this bill, the California legislature noted that there was no legal standard for use of the term “certified,” despite the growing trend for dealers to use this term. According to the Court, the legislature enacted this statute to protect consumers and assure that they received a fair bargain and for there to be transparency in the sale of “certified” vehicles.

The Ninth Circuit emphasized that the car dealership’s certificates did not provide the status of the individual components inspected under its inspections. Instead, the Court noted, the certificates merely guaranteed that the vehicle’s overall condition satisfied its certification program and listed the components under the program. The Court found dispositive the fact that the consumer did not know neither the condition of the individual components nor which, or how many, components must pass the test before a vehicle is “certified.” In other words, the Court explained, the individual did not know what it meant to pass the inspection.

The Ninth Circuit rejected the car dealership’s argument based on the drafting history of the legislation. In drafting the bill, the California legislature deleted the phrase “and certifies that all of the inspected components meet the express written standards of the vehicle certification program.” The Court explained that this deletion spared dealers from another substantive obligation, while leaving the requirement to provide a “completed inspection report” intact.

Accordingly, the Ninth Circuit reversed the district court’s grant of summary judgment in favor of the car dealership and sua sponte granted summary judgment in favor of the individual.