Casa Del Caffe Vergnano S.P.A. v. Italflavors, LLC
2016 U.S. App. LEXIS 4720
| 9th Cir. | 2016Background
- In Sept. 2010 ItalFlavors (the Rabellinos) met with Caffe Vergnano in Italy and signed two documents: an 18‑page "Commercial Contract" (franchise agreement with a broad arbitration clause) and a one‑page "Hold Harmless Agreement."
- The Hold Harmless Agreement expressly stated the Commercial Contract "does not have any validity or effectiveness between the parties" and said the parties "will sign a future contract" complying with U.S. law.
- ItalFlavors used the relationship to open a Caffe Vergnano franchise in San Diego (opened Apr. 2011, closed Dec. 2011) and then sued in California alleging franchise law and business‑practice violations.
- Caffe Vergnano petitioned in federal court under the Convention/FAA to compel arbitration pursuant to the Commercial Contract’s arbitration clause; the district court granted the petition and stayed the litigation.
- The Ninth Circuit majority reversed, holding the Commercial Contract was a sham (not a binding agreement) in light of the contemporaneous Hold Harmless Agreement and objective manifestations of intent; therefore the arbitration clause could not be enforced.
- Judge Callahan dissented, concluding the parties initially agreed to the Commercial Contract (including arbitration) and that whether it was later terminated or superseded should be decided by an arbitrator.
Issues
| Issue | Plaintiff's Argument (ItalFlavors) | Defendant's Argument (Caffe Vergnano) | Held |
|---|---|---|---|
| Whether the Commercial Contract constituted a binding agreement (threshold formation question) | The Hold Harmless Agreement shows the Commercial Contract was not intended to be binding; it was a sham to secure a visa | The Commercial Contract was a valid, binding agreement; the Hold Harmless Agreement did not negate it | Held: Not a binding contract — objective evidence (Hold Harmless Agreement and conduct) shows no mutual assent to be bound; arbitration clause unenforceable |
| Whether extrinsic/parol evidence may be considered to show the written agreement was a sham | Parol evidence is admissible to show a writing was a sham or not intended to create legal obligations | Parol evidence cannot be used to defeat a clear integrated written contract | Held: Parol/extrinsic evidence is admissible on whether an apparent written agreement was a sham; parol rule does not bar that inquiry |
| Whether a prior pleading in state court binds ItalFlavors to the existence of the Commercial Contract (judicial admission/estoppel) | Prior state complaint admitted execution of contracts but does not bind or estop ItalFlavors here | Caffe Vergnano contends ItalFlavors’ state pleadings concede the Commercial Contract’s validity | Held: Judicial admission doctrine inapplicable (different case); judicial estoppel not available because the state court did not rely on any inconsistent position |
| Whether the question of contract existence vs. termination is for court or arbitrator | The formation question is for the court; if a valid contract existed, termination/repudiation could be for arbitrator | If parties initially agreed to arbitrate, disputes about termination should go to arbitrator | Held: Court decides formation here because it concluded no contract was formed; dissent would have sent termination issue to arbitrator if a contract existed |
Key Cases Cited
- Granite Rock Co. v. Int’l Bhd. of Teamsters, 561 U.S. 287 (2010) (arbitration is based on consent; formation questions are generally for courts)
- E.E.O.C. v. Waffle House, Inc., 534 U.S. 279 (2002) (arbitration is a matter of consent)
- United Steelworkers v. Warrior & Gulf Navigation Co., 363 U.S. 574 (1960) (parties cannot be compelled to arbitrate disputes they have not agreed to submit)
- Jinro Am. Inc. v. Secure Invs., Inc., 266 F.3d 993 (9th Cir. 2001) (parol evidence admissible to show a written agreement was a sham)
- McKinney v. Emery Air Freight Corp., 954 F.2d 590 (9th Cir. 1992) (distinguishing court‑decided formation issues from arbitrator‑decided termination/repudiation issues)