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Ninth Circuit Undoes Arbitration Order, Citing 'Sham' Contract

The Ninth Circuit recently overruled an arbitration clause that would have forced ItalFlavors LLC to arbitrate its claims against Caffe Vergnano USA Corporation in a case arising from a failed venture to open a Caffe Vergnano franchise in Caifornia. The Ninth Circuit's three-judge panel ruled 2-1 that the agreement to arbitrate claims cannot be enforced because it was merely a sham to help one of the franchisees, Hector Rabellino, obtain a visa for work within the United States.

The Rabellinos originally filed suit in California state court against the Italian company Caffe Vergnano, blaming the San Diego coffee shop franchise's failure on its lack of support and asserting claims under violations of California's Franchise Investment Law and Business and Professions Code. Caffe Vergnano filed a petition to compel arbitration, which a district court ultimately granted in May 2013, finding that an arbitrator should rule on the issue of whether the arbitration clause in the commercial contract survives the hold harmless agreement. Both parties disputed the purpose of the hold harmless agreement but agreed that the purpose was to protect Caffe Vergnano from potential liability caused by the commercial contract.

U.S. District Judge Edward R. Korman wrote in the opinion that the signing of the hold harmless agreement, concurrently with the commercial contracts, proved that the business venture was a sham and therefore rendered the arbitration clause unenforceable. The commercial contract was deemed to be solely for the purpose of providing Hector Rabellino with a visa that would allow him to work with his cousin in the United States. Because the commercial contract was deemed to be a sham by the Ninth Circuit, the arbitration clause cannot be enforced pursuant to the Convention on the Recognition of Foreign Arbitral Awards.

The legal team at SFMS has significant experience with arbitration matters. If you have any questions regarding this subject or this posting, please contact Alec Berin ([email protected]) or Chiharu Sekino ([email protected]). We can also be reached toll-free at (866) 540-5505.

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