Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca9-13-56091/USCOURTS-ca9-13-56091-0/pdf.json

Parties Involved:
Caffe Vergnano USA Corp.
Appellee
Casa del Caffe Vergnano S.p.A.
Appellee
Italflavors San Diego, LLC
Appellant
Italflavors, LLC
Appellant

Document Text:

FOR PUBLICATION

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

CASA DEL CAFFE VERGNANO S.P.A.,

a corporation organized under the

laws of the Italian Republic; CAFFE

VERGNANO USA CORP., a Delaware

Corporation,

Petitioners-Appellees,

v.

ITALFLAVORS, LLC, a Delaware

limited liability company;

ITALFLAVORS SAN DIEGO, LLC, a

California limited liability company,

Respondents-Appellants.

No. 13-56091

D.C. No.

3:12-cv-00655-

JAH (DHB)

OPINION

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

Case: 13-56091, 03/15/2016, ID: 9901736, DktEntry: 38-1, Page 1 of 16
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.

Case: 13-56091, 03/15/2016, ID: 9901736, DktEntry: 38-1, Page 2 of 16
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. Praskievicz (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.

Case: 13-56091, 03/15/2016, ID: 9901736, DktEntry: 38-1, Page 3 of 16
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.

Case: 13-56091, 03/15/2016, ID: 9901736, DktEntry: 38-1, Page 4 of 16
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.

Case: 13-56091, 03/15/2016, ID: 9901736, DktEntry: 38-1, Page 5 of 16
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).

Case: 13-56091, 03/15/2016, ID: 9901736, DktEntry: 38-1, Page 6 of 16
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

Case: 13-56091, 03/15/2016, ID: 9901736, DktEntry: 38-1, Page 7 of 16
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.”).

Case: 13-56091, 03/15/2016, ID: 9901736, DktEntry: 38-1, Page 8 of 16
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

Case: 13-56091, 03/15/2016, ID: 9901736, DktEntry: 38-1, Page 9 of 16
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

Case: 13-56091, 03/15/2016, ID: 9901736, DktEntry: 38-1, Page 10 of 16
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.

Case: 13-56091, 03/15/2016, ID: 9901736, DktEntry: 38-1, Page 11 of 16
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

Case: 13-56091, 03/15/2016, ID: 9901736, DktEntry: 38-1, Page 12 of 16
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.

Case: 13-56091, 03/15/2016, ID: 9901736, DktEntry: 38-1, Page 13 of 16
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.”).

Case: 13-56091, 03/15/2016, ID: 9901736, DktEntry: 38-1, Page 14 of 16
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.

Case: 13-56091, 03/15/2016, ID: 9901736, DktEntry: 38-1, Page 15 of 16
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.

Case: 13-56091, 03/15/2016, ID: 9901736, DktEntry: 38-1, Page 16 of 16