Articles / Alternative Dispute Resolution
Casa Del Caffe Vergnano v ItalFlavors, LLC
Caffe Vergano addresses, in the words of the Court, the “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.” Fair warning: the following discussion is highly technical and will likely be of little interest to my non-lawyer readers or lawyers who are not involved in arbitration. For my arbitrator readers, however, the case addresses several important issues.
The matter arises out of two agreements, both executed by the same parties on the same day. The first is a franchise agreement (“Franchise Agreement”) between Caffe Vergano and ItalFlavors, a company formed by two brothers to open and operate a Caffe Vergano franchise in the US. The Franchise Agreement contained an arbitration clause which provided that all disputes were to be resolved by “binding arbitration in accordance with the UNCITRAL Arbitration Rules as presently in force.”
The second agreement, which the parties referred to as a Hold Harmless Agreement, referenced the Franchise Agreement, but provided “The [Franchise Agreement] does not have any validity or effectiveness between the parties . . .as it was prepared and delivered . . . .solely for the purpose of allowing Hector [one of two brothers]. . . 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.”
Per the Court of Appeals, the facts are fairly straight-forward and “largely undisputed.” The two brothers and Caffe Vergano met and entered into the two agreements in Argentina, where Hector lived at the time. All intended that Hector would move to the US and all understood that ItalFlavors intended to use the Franchise Agreement to secure a visa for Hector.
After the two agreements were signed by all parties, ItalFlavors opened in the US and operated a Caffe Vergano coffee shop. The coffee shop was not a success, struggled, and closed after several months.
ItalFlavors blamed the business’ failure on Caffe Vergano’s alleged failure to provide promised support, and filed suit in the California courts. Caffe Vergano responded by filing suit in Federal District Court under the Federal Arbitration Act seeking to bar the State Court action and compel arbitration under the Franchise Agreement’s arbitration clause.
The District Court held that whether the arbitration clause of the Franchise Agreement survived the Hold Harmless Agreement was an issue to be determined by the arbitrators. It should be noted here that UNCITRAL Rule 23(1) provides: “The arbitral tribunal shall have the power to rule on its own jurisdiction, including any objections with respect to the existence or validity of the arbitration agreement.” Nevertheless, the Court of Appeals disagreed with the lower court’s ruling and reversed. Curiously, the Court of Appeals opinion is silent regarding the UNCITRAL jurisdictional rule.
Explaining its decision, the Court of Appeals first considered the standard of review, holding: “We review a district judge’s order to compel arbitration de novo. [citation omitted] Similarly, legal conclusions regarding the existence of a valid, binding contract are reviewed de novo and factual findings underlying it for clear error.” The Court then held that “Because this case arises under Chapter 2 of the Federal Arbitration Act, the issue of whether the [Franchise Agreement] constituted a binding agreement is governed by federal common law, [citation omitted] which, in turn, looks to ‘general principles for interpreting contracts.’”
Finally, the Court reviewed the facts and came to the conclusion that “the declaration in the Hold Harmless Agreement signed contemporaneously with the [Franchise Agreement] proves that the latter was a mere sham to help Hector . . . obtain a visa. Thus, we conclude that the [Franchise Agreement] was not a contract and is thus unenforceable.” Finding the Franchise Agreement void, its embedded arbitration agreement was also found to be void, although the Court did not expressly state such.
The full opinion, Casa Del Caffe Vergnano USA Corp V. Italflavors LLC,
UTHE Tech. Corp. v. Aetrium, Inc.
In UTHE, the Court of Appeals for the Ninth Circuit (albeit by a different panel of judges than those deciding the Caffe Vergano case) considered whether plaintiffs may bring an action against defendants under the Racketeer Influenced and Corrupt Organizations Act (RICO) notwithstanding having arbitrated their dispute, an arbitration award having been made, and defendants having paid that award in full. Additionally, the Court considered whether plaintiff’s RICO suit was barred by the “one satisfaction” rule, “an equitable principle designed to prevent double recovery of damages arising from the same injury.”
The Court of Appeals, in what at first blush seems a remarkable decision, found for plaintiff and permitted the RICO action to be filed. Analysis of the facts make the decision less remarkable. Of note with respect to the “one satisfaction” rule – RICO permits treble damages, and the RICO claim was not addressed in the arbitration.
Briefly, in 1993 UTHE filed suit against US defendants (“US Defendants”) and a “number of individuals in Singapore (“Foreign Defendants”) alleging a conspiracy to unlawfully take over one of UTHE’s overseas subsidiaries.” UTHE’s complaint claimed RICO violations against both the US Defendants and the Foreign Defendants. That “action was dismissed on the basis of forum non conviens because an arbitration clause in a relevant agreement required that UTHE arbitrate its claims against the Foreign Defendants in a proceeding governed by Singapore law (the Singapore arbitration). Additionally, “UTHE’s suit against the US Defendants was stayed by the district court pending the resolution of the Singapore arbitration against the Foreign Defendants.” Per the Court of Appeals, “UTHE’s right to eventually pursue its own claims against the [US] Defendants in federal court remained unaffected by the district court’s order.”
Flash forward 20 years. The arbitration against the Foreign Defendants finally concluded in 2012 with the arbitration panel finding in favor of UTHE and awarding UTHE damages in excess of US$ 9 million. The Foreign Defendants paid such award in full. Nonetheless, UTHE filed a motion in the US District Court to re-open the stayed proceedings there so that it could pursue its RICO action. The District Court permitted the re-opening of the case, but granted summary judgement against UTHE “holding that the full satisfaction of the arbitration damages award extinguished UTHE’s claim against the [US] Defendants for treble damages under RICO.”
The Court of Appeals reversed, holding:
“The Singapore arbitration was limited in scope to those claims against the Foreign Defendants arising under Singapore law, and could not fully resolve UTHE’s legal claims against the [US] Defendants, which were pending in the federal court action. Specifically, Singapore law could not provide for the resolution of Plaintiff’s RICO claims, which were asserted in the original federal lawsuit. As UTHE’s legal expert noted, “the concept of treble damages is not recognized under Singapore law.” Accordingly, as more fully explained below, the one satisfaction rule does not operate to extinguish Plaintiff’s claim to RICO damages.”
Continuing, the Court noted:
Because the Singapore-based arbitral tribunal had no jurisdiction over the [US] Defendants, who were not parties to the Purchase Agreement or to its arbitration clause, it could not circumscribe UTHE’s rights to pursue the full measure of its legal remedies against the [US] Defendants in federal court. Accordingly, the arbitration award states that it is made “without prejudice to [UTHE’s] rights in the U.S. Action.” Thus, neither the arbitration award nor the one satisfaction rule forecloses UTHE’s ability to pursue a treble damage award against the [US] Defendants; it does not amount to double recovery, nor does it permit UTHE to obtain any damages beyond which it could have otherwise been entitled in the federal district court lawsuit.
The full opinion, UTHE Technology Corporation v. Aetrium, Inc., Harry Allen,No. 13-16917 (9th Cir. 2015)
WTO v Regional Trade Agreement Dispute Resolution
While arbitration is often the form of dispute resolution employed in sovereign state trade disagreements, the dispute resolution mechanisms of the World Trade Organization (WTO) and applicable bi-lateral or multi-lateral trade agreements are also employed. “Many consider the large number of dispute reports a testament to the success of the WTO’s dispute settlement system, but others fear that the future success of that system is by no means assured. Recently, there have been delays in the dispute settlement process. Some argue that the factual intensity and overall complexity of disputes is pushing the limits of the system’s capacity and stretching the resources of the WTO’s Secretariat to the breaking point.” In light of those challenges, “[s]ome suggest that the dispute settlement mechanisms in regional trade agreements (RTAs) may offer appealing alternatives to the WTO, especially where underlying disciplines in RTAs are more expansive than those offered under the WTO covered agreements.”
Such is the backstory and introduction to a conference organized by the law firm Sidley Austin in Geneva titled: “WTO Dispute Settlement in 2016: Blue Skies or Storm Clouds Ahead?” While the subject and report are too arcane for this newsletter, those of my readers who practice in the area (or aspire to practice in the area) will find the conference report and discussion well worth the read.
Sidley Austin LLP, “WTO Dispute Settlement in 2016: Blue Skies or Storm Clouds Ahead?”