Casa Del Caffe Vergnano S.P.A. v. Italflavors, LLC , 816 F.3d 1208 ( 2016 )

FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
CASA DEL CAFFE VERGNANO S.P.A., No. 13-56091
a corporation organized under the
laws of the Italian Republic; CAFFE D.C. No.
VERGNANO USA CORP., a Delaware 3:12-cv-00655-
Corporation, JAH (DHB)
Petitioners-Appellees,
v. OPINION
ITALFLAVORS, LLC, a Delaware
limited liability company;
ITALFLAVORS SAN DIEGO, LLC, a
California limited liability company,
Respondents-Appellants.
Appeal from the United States District Court
for the Southern District of California
John A. Houston, District Judge, Presiding
Argued June 5, 2015
Submitted March 15, 2016
Pasadena, California
Filed March 15, 2016
2 CASA DEL CAFFE VERGNANO V. ITALFLAVORS
Before: Alex Kozinski and Consuelo M. Callahan, Circuit
Judges, and Edward R. Korman, Senior District Judge.*
Opinion by Judge Korman;
Dissent by Judge Callahan
SUMMARY**
Arbitration
The panel reversed the district court’s order granting a
petition to compel arbitration pursuant to the Convention on
the Recognition of Foreign Arbitral Awards.
The panel held that the parties’ franchise agreement,
referred to as the “Commercial Contract,” did not constitute
a binding agreement under federal common law because there
was no mutual intention to be bound. Reading the
Commercial Contract and the parties’ contemporaneously
executed “Hold Harmless Agreement” together, the panel
concluded that the Commercial Contract was no more than a
sham agreement. Accordingly, the arbitration clause in the
Commercial Contract was not enforceable.
*
The Honorable Edward R. Korman, Senior District Judge for the
United States District Court for the Eastern District of New York, sitting
by designation.
**
This summary constitutes no part of the opinion of the court. It has
been prepared by court staff for the convenience of the reader.
CASA DEL CAFFE VERGNANO V. ITALFLAVORS 3
Dissenting, Judge Callahan wrote that the parties did
initially agree to be bound by the Commercial Contract. She
therefore would affirm the district court’s order referring to
arbitration the question of whether and when the Commercial
Contract was terminated.
COUNSEL
James R. Ballard and Owen M. Prasckievicz (argued),
Schwartz Semerdjian Ballard & Cauley LLP, San Diego,
California, for Respondents-Appellants.
Calvin E. Davis (argued) and Gary A. Collis, Gordon & Rees
LLP, Los Angeles, California, for Petitioners-Appellees.
OPINION
KORMAN, District Judge:
This appeal from an order pursuant to the Federal
Arbitration Act granting a motion to compel arbitration raises
a significant issue of whether a party to a contract containing
an arbitration clause may enforce the clause notwithstanding
compelling evidence that the contract was not a binding
agreement. The facts underlying the appeal are largely
undisputed. Specifically, in early 2010, Cesar and Hector
Rabellino began planning to open an Italian-style coffee shop
in the United States. At the time, Hector was living in
Argentina, but hoped to move to the United States and
operate his own business. The Rabellinos formed ItalFlavors,
LLC and began discussions with Caffe Vergnano, an Italian
corporation, to open a franchise in America.
4 CASA DEL CAFFE VERGNANO V. ITALFLAVORS
On September 23, 2010, the Rabellinos met with
Tommaso Lambert, a representative of Caffe Vergnano, in
Italy. During the course of their three-hour meeting, the
parties signed two agreements. The first—dated September
23, 2010 and which the parties refer to as the Commercial
Contract—appears to be a franchise agreement setting forth
the rights and responsibilities of the parties. That agreement
contains an arbitration clause providing that:
Any dispute, controversy or claim arising out
of or in connection with this Agreement, or
the breach, termination or validity thereof,
which is not [resolved] directly between the
Parties, shall be settled by final and binding
arbitration in accordance with the
UNCITRAL Arbitration Rules as presently in
force.
Per the terms set forth, the contract was to be construed
according to Italian law with arbitration to be held in Geneva,
Switzerland.
A Second Agreement—which the parties refer to as the
Hold Harmless Agreement—was also signed that day.
Although this agreement is dated September 24, 2010, neither
party disputes that it was signed on September 23 during the
same three-hour meeting as the Commercial Contract. The
Hold Harmless Agreement provides in relevant part:
At the express request of Mr. Hector
Rabellino, as the legal representative of the
company Italflavors LLC, with registered
offices in Greenwhich [sic; Greenwich] CT
06831 USA, Casa del Caffe Vergnano S.p.A.
CASA DEL CAFFE VERGNANO V. ITALFLAVORS 5
has prepared and herewith delivers a copy of
the contract denominated “Commercial
Contract” dated September 23, 2010.
The above-mentioned contract does not have
any validity or effectiveness between the
parties, as it was prepared and delivered by
Casa del Caffe Vergnano S.p.A. solely for the
purpose of allowing Mr. Hector Rabellino to
submit a copy of it to the pertinent
international agencies in order to obtain an
entry visa to work in the United States of
America. . . .
This contract does not produce any effect
between the parties, who as agreed 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.
According to the Rabellinos, the parties entered into the
Hold Harmless Agreement because Caffe Vergnano had
concerns that the Commercial Contract did not conform to
U.S. franchise law and so sought to shield itself from liability
by making the contract void while, at the same time, allowing
Hector to use the Contract to obtain his visa. They contend
that the parties intended to sign a binding contract at a later
date. According to Lambert, the representative from Caffe
Vergnano, the purpose of the Hold Harmless Agreement was
not to render the Commercial Contract void, but rather to
protect Caffe Vergnano from any liability in the event that
Hector used the contract in a way that ran afoul of U.S.
immigration laws.
6 CASA DEL CAFFE VERGNANO V. ITALFLAVORS
ItalFlavors then began the process of opening a Caffe
Vergnano franchise location in San Diego. This included
signing an agreement with Caffe Vergnano regarding website
domain registration and purchasing furniture, equipment, and
coffee from Caffe Vergnano. ItalFlavors opened its franchise
branch on April 20, 2011, but after months of struggles and
financial failures, the store closed on December 20, 2011.
Blaming the failure of the venture on Caffe Vergnano’s
alleged failure to offer promised support, ItalFlavors filed suit
in California, alleging a series of violations of California’s
Franchise Investment Law and Business and Professions
Code. Subsequently, that action was stayed after Caffe
Vergnano filed the petition to compel arbitration in the
district court. The jurisdiction of the district court was
properly invoked under 28 U.S.C. § 1331 and 9 U.S.C. § 203
(the Federal Arbitration Act) because the case arose under the
Convention on the Recognition of Foreign Arbitral Awards.
The district court ultimately held that “the issue of whether
the broad arbitration clause contained in the Commercial
Contract survives after the September 24, 2010 agreement
took effect should be submitted to the arbitrator.” Thus, it
granted Caffe Vergnano’s petition and issued an order
compelling arbitration. This appeal followed.
STANDARD OF REVIEW
We review a district judge’s order to compel arbitration
de novo. In re Eber, 687 F.3d 1123, 1126 (9th Cir. 2012).
Similarly, legal conclusions regarding the existence of a
valid, binding contract are reviewed de novo and factual
findings underlying it for clear error. U.S. for Use of
Youngstown Welding & Eng’g Co. v. Travelers Indem. Co.,
802 F.2d 1164, 1169 (9th Cir. 1986).
CASA DEL CAFFE VERGNANO V. ITALFLAVORS 7
DISCUSSION
Starting with first principles, we reiterate the Supreme
Court’s repeated admonition that “[a]rbitration is strictly a
matter of consent.” Granite Rock Co. v. Int’l Bhd. of
Teamsters, 561 U.S. 287, 299 (2010) (internal quotation
marks omitted); see also E.E.O.C. v. Waffle House, Inc.,
534 U.S. 279, 294 (2002); United Steelworkers of Am. v.
Warrior & Gulf Navigation Co., 363 U.S. 574, 582 (1960);
Goldman, Sachs & Co. v. City of Reno, 747 F.3d 733, 741–42
(9th Cir. 2014). Thus, “a party cannot be required to submit
to arbitration any dispute which he has not agreed so to
submit.” United Steelworkers, 363 U.S. at 582. Moreover,
it is “well settled that where the dispute at issue concerns
contract formation, the dispute is generally for courts to
decide.” Granite Rock, 561 U.S. at 296–97. While the
Commercial Contract at issue here contained a clause
committing the parties to arbitrate, the threshold issue is
whether that document constituted a binding agreement at all.
If it did not constitute such an agreement, it follows that the
arbitration provision is not enforceable.
Because this case arises under Chapter 2 of the Federal
Arbitration Act, the issue of whether the Commercial
Contract constituted a binding agreement is governed by
federal common law, Certain Underwriters at Lloyd’s
London v. Argonaut Ins. Co., 500 F.3d 571, 577–78 (7th Cir.
2007) (collecting cases), which, in turn, looks to “general
principles for interpreting contracts.” GECCMC 2005-C1
Plummer St. Office L.P. v. J.P. Morgan Chase Bank, 671 F.3d
1027, 1033 (9th Cir. 2012) (quoting Klamath Water Users
Prot. Assoc. v. Patterson, 204 F.3d 1206, 1210 (9th Cir.
1999)); accord InterGen N.V. v. Grina, 344 F.3d 134, 143–44
(1st Cir. 2003). Often, those general principles are found in
8 CASA DEL CAFFE VERGNANO V. ITALFLAVORS
the Restatement (Second) of Contracts. See Clevo Co. v.
Hecny Transp., Inc., 715 F.3d 1189, 1194 (9th Cir. 2013)
(looking to the Restatement (Second) of Contracts when
determining basic principles of contract law in the maritime
context where federal common law applies).
Under these principles, “the formation of a contract
requires a bargain in which there is a manifestation of mutual
assent to the exchange and a consideration.” Restatement
(Second) of Contracts § 17 (1981); see also Bowsher v.
Merck & Co., Inc., 460 U.S. 824, 863 (1983) (White, J.,
concurring in part, dissenting in part) (“In its ordinary
meaning, a ‘contract’ is a legally enforceable bargain, formed
by mutual consent and supported by consideration.”). The
mutual intention to be bound by an agreement is the sine qua
non of legally enforceable contracts and recognition of this
requirement is nearly universal. See Restatement (Second) of
Contracts §§ 2, 17; Cal. Juris. 3d Contracts § 67 (“Mutual
consent for a contract is determined under an objective
standard applied to the outward manifestations or expressions
of the parties . . . .”). “Where all the parties to what would
otherwise be a bargain manifest an intention that the
transaction is not to be taken seriously, there is no such
manifestation of assent to the exchange as is required by this
Section.” Restatement (Second) of Contracts § 18 cmt. c.
Indeed, although our decision does not turn on Italian law, on
this point Italian law is in accord with American law. See
Principles of European Contract Law and Italian Law 94
(Luisa Antoniolli & Anna Veneziano eds., 2005)
(“[P]romises made out of courtesy, as a joke, or in any other
way that denotes the absence of a serious intention to create
a binding legal relationship are not deemed enforceable.”).
CASA DEL CAFFE VERGNANO V. ITALFLAVORS 9
Thus, under federal common law—or, indeed, under any
law of which we are aware—where the parties to a “contract”
have not mutually consented to be bound by their agreement,
they have not formed a true contract. “[M]utual consent is
gathered from the reasonable meaning of the words and acts
of the parties, and not from their unexpressed intentions or
understanding.” Reigelsperger v. Siller, 150 P.3d 764, 767
(Cal. 2007) (internal quotation marks omitted); accord
Restatement (Second) of Contracts § 2 cmt. b (“The phrase
‘manifestation of intention’ [or consent] adopts an external or
objective standard for interpreting conduct; it means the
external expression of intention as distinguished from
undisclosed intention.”).
Looking to their external expression of intent, the parties
did not manifest their intent to be bound by the Commercial
Contract containing the arbitration clause. Reading the
Commercial Contract and the contemporaneously executed
Hold Harmless Agreement side by side, it is plain that the
Commercial Contract was nothing more than a sham
agreement designed as a ploy to aid Hector Rabellino’s visa
application. Notwithstanding Lambert’s declaration that he
understood the Hold Harmless Agreement to mean something
other than it said, we look to the external indications of intent,
not a party’s undisclosed intentions. Here, the objective
evidence contradicts Lambert’s gloss on events. Indeed, even
apart from the language in the Hold Harmless Agreement
expressly declaring 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”
makes little sense if the Commercial Contract—which
10 CASA DEL CAFFE VERGNANO V. ITALFLAVORS
purportedly regulated their commercial relationship—was a
binding agreement.
Moreover, it is appropriate to read the Commercial
Contract and the Hold Harmless Agreement together because
[w]hat appears to be a complete and binding
integrated agreement may be a forgery, a joke,
a sham, or an agreement without
consideration, or it may be voidable for fraud,
duress, mistake, or the like, or it may be
illegal. Such invalidating causes need not and
commonly do not appear on the face of the
writing.
Restatement (Second) of Contracts § 214 cmt. c. The parol
evidence rule, which generally bars consideration of oral or
written evidence altering the terms of a written integrated
contract, does not prohibit us from considering the Hold
Harmless Agreement because that agreement goes to the issue
of whether the parties entered into a binding contract. Jinro
Am. Inc. v. Secure Invs., Inc., 266 F.3d 993, 999 (9th Cir.
2001) (“Given the Restatement view . . . we conclude that
parol evidence could be admitted, despite a seemingly valid,
integrated agreement, to show the agreement was, in fact, a
sham or cover-up for otherwise illegal activity.”). As one
commentator has aptly observed, when considering whether
the parties have made a contract, “there is no ‘parol evidence
rule’ to be applied. On [this] issue[], no relevant evidence,
whether parol or otherwise, is excluded.” 6 Peter Linzer,
Corbin on Contracts § 25.2 at pgs. 8–9 (rev. ed. 2010).
Nor is there any merit to Caffe Vergnano’s argument that
ItalFlavors is bound by a judicial admission as to the
CASA DEL CAFFE VERGNANO V. ITALFLAVORS 11
existence of a contract in California court. We need not tarry
long with the details of the dispute between the parties as to
whether ItalFlavors either implicitly or explicitly conceded
validity of the Commercial Contract in the complaint that it
filed in California. Although Caffe Vergnano presents the
issue as one of binding judicial admission, that doctrine is
inapplicable because the alleged admission was made in a
separate case from the present action. See Universal Am.
Barge Corp. v. J-Chem, Inc., 946 F.2d 1131, 1142 (5th Cir.
1991) (holding that admission in arbitration was not binding
in district court suit on the same subject matter); Int’l Tel. &
Tel. Corp. v. Gen. Tel. & Elecs. Corp., 518 F.2d 913, 932
n.71 (9th Cir. 1975), disapproved on other grounds by
California v. Am. Stores Co., 495 U.S. 271, 277–78 (1990).
Instead, if any doctrine bars consideration of the issues here,
it would arguably be judicial estoppel, which “generally
prevents a party from prevailing in one phase of a case on an
argument and then relying on a contradictory argument to
prevail in another phase.” New Hampshire v. Maine,
532 U.S. 742, 749 (2001) (quoting Pegram v. Herdrich,
530 U.S. 211, 227 n.8 (2000)). In contrast to judicial
admissions, “the doctrine of judicial estoppel is not confined
to inconsistent positions taken in the same litigation.”
Rissetto v. Plumbers & Steamfitters Local 343, 94 F.3d 597,
605 (9th Cir. 1996). Nevertheless, we have “restricted the
application of judicial estoppel to cases where the court relied
on, or ‘accepted,’ the party’s previous inconsistent position.”
Hamilton v. State Farm Fire & Cas. Co., 270 F.3d 778, 783
(9th Cir. 2001) (citing Interstate Fire & Cas. Co. v.
Underwriters at Lloyd’s, London, 139 F.3d 1234, 1239 (9th
Cir. 1998); Masayesva v. Hale, 118 F.3d 1371, 1382 (9th Cir.
1997)). Thus, Caffe Vergnano cannot assert judicial estoppel
because the California case has been stayed almost since its
inception, making any judicial reliance impossible.
12 CASA DEL CAFFE VERGNANO V. ITALFLAVORS
In sum, the declaration in the Hold Harmless Agreement
signed contemporaneously with the Commercial Contract
proves that the latter was a mere sham to help Hector
Rabellino obtain a visa. Thus, we conclude that the
Commercial Contract was not a contract and is thus
unenforceable.
CONCLUSION
Because we find that the document the parties described
as the Commercial Contract was a sham, the arbitration
clause is no more enforceable than any other provision in that
document. Under these circumstances, the district judge
erred in compelling the parties to arbitrate their dispute.
Thus, the order of the district judge is REVERSED.
CALLAHAN, Circuit Judge, dissenting:
My colleagues cite the correct applicable law, but in my
opinion they come to an incorrect factual conclusion. They
conclude that the parties “did not manifest their intent to be
bound by the Commercial Contract containing the arbitration
clause.” Op. at 9. I, on the other hand, agree with the district
court that the parties did initially agree to be bound by the
Commercial Contract. Accordingly, I would affirm the
district court’s order referring the question of whether and
when the Commercial Contract was terminated to arbitration.
The Commercial Contract, which all admit was the first
agreement to be signed, is an 18-page document that details
the parties’ agreement and obligations. However, it appears
CASA DEL CAFFE VERGNANO V. ITALFLAVORS 13
that the parties had misgivings about the Commercial
Contract. They were concerned that the Commercial
Contract would not conform to California’s Franchise
Investment Law and Business and Professions Code, but they
also wanted to allow Hector to use the Commercial Contract
to obtain a visa to work in the United States.
Their “solution” was a curious second agreement, the
Hold Harmless Agreement. This single-page document states
that the Commercial Contract “does not have any validity or
effectiveness between the parties” and provides that they
“will sign a future contract which will regulate their
commercial relationship.” But they never signed the
envisioned contract. Instead, they proceeded to act as
contractually related parties for over a year, from September
23, 2010 until at least December 20, 2011, when Italflavors
closed its store in San Diego.
The majority, by treating the Commercial Contract and
Hold Harmless Agreement as a single document, concludes
that the parties “have not mutually consented to be bound by
their agreement, they have not formed a true contract.” Op.
at 9. Based on this factual finding, the majority, applying the
applicable law, determines that it is for the court, not an
arbitrator to determine whether a contract ever existed.
14 CASA DEL CAFFE VERGNANO V. ITALFLAVORS
I disagree with the majority’s factual premise.1 The
parties first entered into the Commercial Contract. They
mutually agreed to be bound by the Commercial Contract and
its broad arbitration clause. They then entered into a separate
and distinct Hold Harmless Agreement. They disagree as to
the effect of this document. Caffe Vergnano argues that the
Hold Harmless Agreement did not really terminate the
Commercial Contract, but was intended to protect it from
possibly violating U.S. franchise laws or misuse of the
Commercial Contract by Hector in seeking a visa.
Italflavors, however, argued that the Hold Harmless
Agreement terminated the Commercial Contract. For
example, Italflavors alleges that it was Caffe Vergnano that
1
In determining whether an arbitration provision is subject to the
Convention, the district court first asked whether there was “an agreement
in writing to arbitrate the dispute.” See Chloe Z Fishing Co., Inc. v.
Odyssey Re, Ltd., 109 F. Supp 2d 1236, 1243 (S.D. Cal. 2000). The
district court then implicitly found that there was such an agreement. It
held “that the issue of whether the broad arbitration clause contained in
the Commercial Contract survives after the September 24, 2010 agreement
took effect should be submitted to the arbitrator.” “When a district court
uses extrinsic evidence to interpret a contract, we review its findings of
fact for clear error.” Marlyn Nutraceuticals, Inc. v. Mucos Pharma GmbH
& Co., 571 F.3d 873, 878 (9th Cir. 2009). If the district court’s factual
determination is not adequately explained or supported by the record, we
should remand to the district court to make further findings or take further
evidence, rather than decide the contested factual issue. See DeMarco v.
United States, 415 U.S. 449, 450 n.1 (1974) (per curiam) (stating “that
factfinding is the basic responsibility of district courts, rather than
appellate courts, and that the Court of Appeals should not have resolved
in the first instance this factual dispute which had not been considered by
the District Court.”).
CASA DEL CAFFE VERGNANO V. ITALFLAVORS 15
“wanted to enter into a second agreement cancelling the Sept.
23 Agreement.”2
Because the Commercial Contract was entered into before
the Hold Harmless Agreement was signed, the district court,
properly applying our law, determined that the dispute over
whether and when the Commercial Contract was terminated
should be referred to arbitration. See McKinney v. Emery Air
Freight Corp., 954 F.2d 590, 593 (9th Cir. 1992) (“Precepts
laid down instruct us to distinguish between a dispute over
whether a contract ever existed and a dispute over whether a
contract has expired or has been terminated or repudiated. In
the former case, the issue is for the court; in the latter, the
issue is for the arbitrator if the breadth of the arbitration
clause is not in dispute.”); Camping Constr. Co. v. Dist.
Council of Iron Workers, 915 F.2d 1333, 1338 (9th Cir. 1990)
(holding that the district court “itself ruled on the arbitrability
question, and concluded that both the termination issue and
the repudiation issue were arbitrable.”).
Finally, I agree with the majority that Italflavors is not
“bound by a judicial admission as to the existence of a
contract in California court.” Op. at 10–11. Italflavors’
complaint in the state court asserted “[i]n September 2010,
the parties executed at least two commercial contracts, based
on Italian law, purporting to create a franchise relationship.”
Although this assertion may not be binding, it does reflect
that Italflavors knew and accepted that it had signed the
Commercial Contract before the Hold Harmless Agreement
was formulated. Thus, the record supports the district court’s
2
The assertion that the parties entered into a second agreement is, of
course, inconsistent with the position that the two agreements were
considered or should be considered one.
16 CASA DEL CAFFE VERGNANO V. ITALFLAVORS
factual determination that the parties agreed to contract with
a broad arbitration clause, but might thereafter have
terminated the Commercial Contract through the Hold
Harmless Agreement. The district court thus properly
referred the question of whether and when the Commercial
Contract terminated to arbitration. I respectfully dissent and
would affirm the district court’s order.