Ninth Circuit Rules Arbitration Clause in Sham Franchise Agreement Cannot be EnforcedA panel of the U.S. Court of Appeals for the Ninth Circuit has reversed a California court’s order compelling arbitration of a franchise agreement, finding that the agreement was not binding because there was no mutual consent to be bound.

In Casa Del Caffe Vergnano v. Italflavors, Cesar and Hector Rabellino formed Italflavors LLC in order to open an Italian coffee shop in the U.S. In September 2010, the Rabellinos traveled to Italy to meet with franchisor Casa Del Caffe Vergnano and the parties signed two agreements: (1) a franchise agreement that contained an arbitration clause specifying that all disputes would be settled by binding arbitration under United Nations Commission on International Trade Law arbitration rules with Geneva as the venue; and (2) a hold harmless agreement designed to allow Hector Rabellino to obtain a U.S. work visa that explicitly stated, “This contract does not produce any affect 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.”

Italflavors opened a Caffe Vergnano franchise in San Diego in April 2011 and the store closed eight months later. Italflavors sued Caffe Vergnano, saying that the franchisor did not provide the promised support to the franchise, which led to its failure. In May 2013, a federal judge in the Southern District of California issued an order compelling arbitration, holding that the issue of whether the arbitration clause survived the second agreement was a matter for the arbitrator to determine.

In a 2-1 decision, the Ninth Circuit panel said that when parties to a contract have not mutually agreed to be bound by the agreement, there is no contract. The panel found that the franchise agreement was not a contract, and was therefore unenforceable.

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