Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—9th Cir.: Franchise agreement was sham for visa application, (Mar 16, 2016)

By Greg Hammond, J.D.

An Italian café franchisor could not enforce an arbitration provision in a “sham” franchise agreement designed as a ploy to aid an individual’s visa application. The U.S. Court of Appeals consequently reversed an order entered by the federal district court in Brooklyn that compelled arbitration (Casa del Caffe Vergnano S.P.A. v. ItalFlavors, LLC, March 15, 2016, Korman, E.).

The owners of ItalFlavors, LLC and ItalFlavors San Diego, LLC signed a “Commercial Contract” and later a Hold Harmless Agreement with Casa del Caffe Vergnano S.P.A. and Caffe Vergnano USA Corp. The Commercial Contract, which served as a franchise agreement, contained an arbitration provision. After ItalFlavors filed suit against Caffe Vergnano, alleging violations of California’s Franchise Investment Law and Business and Professions Code, the district court held that “the issue of whether the broad arbitration clause contained in the Commercial Contract survives after the [Hold Harmless Agreement] took effect should be submitted to the arbitrator.”

The appellate court disagreed with the trial court’s decision, finding that the Commercial Contract was not a binding agreement. In particular, the appellate court concluded that the parties did not manifest their intent to be bound by the Commercial Contract containing the arbitration clause because it was plain that the agreement was “nothing more than a sham agreement designed as a ploy to aid” one of the ItalFlavors owner’s visa application. Besides language in the Hold Harmless Agreement that expressly declared that the Commercial Contract was not a binding agreement, the provision that the parties “will sign a future contract which will regulate their commercial relationship as soon as it is prepared in accordance with the federal and national laws of the United States of America” made little sense if the Commercial Contract was supposed to be a binding agreement.

Because the court found that the Commercial Agreement was a sham, the arbitration clause was not enforceable, and the lower court erred in compelling the parties to arbitrate their dispute, the appellate court concluded.

Dissent. Judge Callahan wrote a dissenting opinion, concluding that the parties did initially agree to be bound by the Commercial Contract. He also noted that the majority incorrectly treated the Commercial Agreement and Hold Harmless Agreement as a single document. Because the Commercial Contract was entered into before the Hold Harmless Agreement, Judge Callahan determined that the lower court properly determined that the dispute over whether and when the Commercial Contract was terminated should be referred to arbitration.

The case is No. 13-56091.

Attorneys: James R. Ballard and Owen M. Prasckievicz (Schwartz Semerdjian Ballard & Cauley LLP) for ItalFlavors, LLC and ItalFlavors San Diego, LLC. Calvin E. Davis and Gary A. Collis (Gordon & Rees LLP) for Casa del Caffe Vergnano S.P.A. and Caffe Vergnano USA Corp.

Companies: ItalFlavors, LLC; ItalFlavors San Diego, LLC; Casa del Caffe Vergnano S.P.A.; Caffe Vergnano USA Corp.

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