Ninth Circuit Refuses To Enforce Arbitration Clause In Sham Franchise Agreement
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A short new opinion from the Ninth Circuit may run counter to long-standing Supreme Court precedent. In Casa Del Caffe Vergnano v. Italflavors, 2016 WL 1016779 (9th Cir. Mar. 15, 2016), the court refused to enforce an arbitration agreement in a contract that the parties admitted signing, because the parties simultaneously signed a second agreement declaring the first one a sham.
The story is that two undocumented immigrants chose to become a franchisee of an Italian corporation, Caffe Vergnano, and open an Italian-style coffee shop in San Diego. They signed two contracts on the same day: a “commercial contract,” which was a standard franchise agreement including an arbitration clause; and a “hold harmless agreement” that said the commercial contract “does not have any validity” because it was designed simply to allow the immigrants to obtain visas to work in the U.S. The hold harmless agreement stated the parties “will sign a future contract which will regulate their commercial relationship.”
However, the parties did not enter into a new contract. Instead, the franchisees opened their Italian coffee shop and it folded within eight months. The franchisees sued the franchisor for violations of California statutes and the franchisor moved to compel arbitration. The district court compelled arbitration and the Ninth Circuit reversed.
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