Machado v. System4 LLC

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SJC-11681
EDSON TELES MACHADO & others1 vs. SYSTEM4 LLC & another.2
Norfolk. December 4, 2014. - April 13, 2015.
Present: Gants, C.J., Spina, Cordy, Botsford, Duffly, Lenk, &
Hines, JJ.
Massachusetts Wage Act. Contract, Franchise agreement,
Arbitration. Arbitration, Damages, Arbitrable question.
Civil action commenced in the Superior Court Department on
March 24, 2010.
Following review by this court, 465 Mass. 508 and 466 Mass.
1004 (2013), a motion for a ruling that an arbitration clause
did not apply to certain claims was heard by Patrick F. Brady,
J.
The Supreme Judicial Court granted an application for
direct appellate review.
Eric H. Karp for the defendants.
Shannon Liss-Riordan for the plaintiffs.
1
Jocilene da Silva, Stenio Ferreira, Poliane Santos,
Glaucea de Oliveira Santos, and Luiz Santos.
2
NECCS, Inc., doing business as System4 of Boston, LLC
(NECCS).
2
CORDY, J. This case was filed in 2010 by a franchisee
janitorial worker, on behalf of himself and other similarly
situated individuals, against System4 LLC (System4), a "master
franchisor," and NECCS, Inc., doing business as System4 of
Boston, LLC (NECCS), a regional "subfranchisor," originally
alleging, in relevant part, breach of contract, rescission of
contract, and misclassification as independent contractors in
their franchise agreements.3 The franchise agreements are signed
only by the plaintiffs and NECCS; however, the complaint as
originally filed, and as subsequently amended, does not
differentiate NECCS from System4 and alleges that the former is
"the agent of" and "exists solely to conduct [the] business" of
the latter. The agreements govern a franchisee's right to
customer account referrals and the use of System4's proprietary
information in operating commercial janitorial cleaning
businesses. They also require the franchisee plaintiffs to
arbitrate virtually all disputes.
While the plaintiffs raise a number of arguments on appeal,
of central importance is the question whether System4, a
nonsignatory, can compel the franchisee plaintiffs to arbitrate
3
Edson Teles Machado, Jocilene da Silva, Poliane Santos,
and Luiz Santos (collectively, franchisee plaintiffs) are
parties to agreements to operate System4 LLC (System4)
franchises. Two other plaintiffs, Stenio Ferreira and Glaucea
de Olivera Santos, have not signed franchise agreements and
appear to be employees of the franchisee plaintiffs.
3
their substantive claims in accord with the arbitration
provision in the plaintiffs' franchise agreements. We conclude
that by reason of equitable estoppel they can do so in the
circumstances of this case.
Background. System4, an Ohio limited liability company,
contracts with a regional subfranchisor in the Boston area,
NECCS, who subsequently enters into franchise agreements with
franchisees, such as the plaintiffs.4 Although System4 is not a
signatory to these agreements, the agreements provide the
franchisees with access to System4's marketing expertise,
business practices, training, and use of trademarks, by way of a
separate agreement between System4 and NECCS.
1. Arbitration clause. The franchisee plaintiffs are
parties to agreements to operate System4 franchises (franchise
agreements). Under these agreements, NECCS offers its
franchisees customer accounts to service, which the franchisees
are free either to accept or refuse. The agreements purport to
guarantee gross monthly billings to the franchisees based on the
value of the customer accounts offered to them. In addition,
the agreements authorize the franchisees to use System4's
proprietary information, including its brand and trademarks.
4
The subfranchisor of System4 used to be System4 of Boston,
LLC (System4 of Boston), but in March, 2008, NECCS purchased
System4 of Boston and assumed all of its rights under the
franchise agreements. Consequently, we will refer to NECCS,
rather than System4 of Boston, throughout this opinion.
4
The agreements characterize the franchisees as independent
contractors, a characterization they contest, and each agreement
contains an arbitration clause.
The arbitration clause is broad in scope, requiring
arbitration of any claims between the franchisee and NECCS and
its subsidiaries, affiliates, shareholders, officers, directors,
managers, representatives, and employees, arising out of or
related to:
(1) the franchise agreement or any other agreement between
the parties, including claims related to the validity of the
franchise agreement or any other agreement;
(2) NECCS's relationship with the franchisee; or
(3) claims relating to the operation of the franchised
business.
Accordingly, virtually all claims arising out of the franchise
relationship are subject to arbitration.5
2. Plaintiffs as franchisees. Machado, the original named
plaintiff in this action, signed a franchise agreement with
NECCS on February 14, 2008, initialing each page. After signing
his franchise agreement, Machado both rejected and accepted
offers extended to him by NECCS to service customer accounts.
In October, 2008, Machado informed NECCS that he wished to sell
5
The only types of claims not subject to the arbitration
clause are those by NECCS involving a threat or danger to public
health or safety in connection with the operation of a
franchise, actions by NECCS to protect its trademarks, and
actions by either NECCS or the franchisee to obtain a temporary
restraining order or injunction.
5
his franchise, and he stopped performing services for his
accounts. In November, 2008, Machado spoke with the president
of NECCS, Jonathan Caffrey, and asked for his franchisee fees
back. When Caffrey declined to return the fees, Machado ceased
communication with NECCS.
3. Procedural history. Machado filed a complaint in the
Superior Court in March, 2010, on behalf of himself and "other
similarly situated individuals." In so doing, Machado named
both System4 and NECCS as defendants, and claimed that both had
committed a breach of the franchise agreement by not providing
him with sufficient customer accounts. In addition, Machado
claimed that both defendants misclassified him as an independent
contractor in the agreement and committed other violations of
the Massachusetts Wage Act, G. L. c. 149 §§ 148, 148B, and 150
(Wage Act).
In June, 2010, the defendants, citing the arbitration
clause in Machado's franchise agreement, filed a motion to stay
the court proceedings pending arbitration. A judge denied the
motion, holding that the arbitration agreement was unenforceable
because it contained waivers of class proceedings and multiple
damages. Subsequently, in April, 2011, the United States
Supreme Court held in AT&T Mobility LLC v. Concepcion, 131
S. Ct. 1740 (2011) (Concepcion), that the Federal Arbitration
Act, 9 U.S.C. §§ 1 et seq. (2012) (FAA), prohibits States from
6
conditioning the enforceability of arbitration agreements on the
availability of class action procedures.
Thereafter, Machado amended his complaint, adding
additional named plaintiffs as well as a putative class6 of
individuals who had performed cleaning services for NECCS and
System4. The amended complaint again asserted claims against
both defendants without differentiation, seeking rescission of
the franchise agreements and damages for misclassification among
other violations of the Wage Act.7
In December, 2011, the defendants moved for reconsideration
of the denial of their motion to compel arbitration in light of
Concepcion. The judge denied the defendants' motion, and the
defendants petitioned for interlocutory review. A single
justice of the Appeals Court referred the issue to a full panel
of the Appeals Court, and we granted the plaintiffs' application
for direct appellate review. The appellate filings of both the
plaintiffs and the defendants in that interlocutory appeal
addressed the enforceability of the arbitration clause as a
whole and made no argument as to whether the arbitration clause,
6
A motion for class certification has yet to be filed.
7
The amended complaint did not contain a breach of contract
claim, although it alleged that the defendants made numerous
misrepresentations in connection with the franchise agreements,
including that they would provide the plaintiffs with business
leads and make prompt payments as promised in their agreements.
7
if enforceable, would require arbitration of the plaintiffs'
claims only against NECCS and not System4.
We issued a decision in June, 2013, but stayed issuance of
the rescript until August, 1, 2013, pending submissions by the
parties on the effect, if any, of the United States Supreme
Court's decision in American Express Co. v. Italian Colors
Restaurant, 133 S. Ct. 2304 (2013). See Machado v. System4 LLC,
465 Mass. 508 (2013) (Machado I). In light of the decisions of
the United States Supreme Court, we concluded that a class
action waiver provision was not an adequate ground on which to
invalidate an agreement to arbitrate. See Machado v. System4
LLC, 466 Mass. 1004, 1004 (2013) (Machado II). See also Machado
I, supra at 513-517. We then remanded the case to the Superior
Court judge for proceedings consistent with our decision. See
Machado II, supra.
Subsequently, the plaintiffs filed a motion, as well as a
posthearing letter, again asking the judge to deny the
defendants' motion to compel arbitration on several grounds:
first, that the arbitration clause could not apply to their Wage
Act claims because it did not specifically reference the Wage
Act, an argument that was based on our decision in Crocker v.
Townsend Oil Co., 464 Mass. 1, 14 (2012) (holding that release
of claims must specifically reference Wage Act in order to apply
8
to Wage Act claims);8 second, that the arbitration clause was
unenforceable, as it contained multiple unconscionable
provisions; and third, that the plaintiffs were not bound to
arbitrate their claims against System4 because it was not a
signatory to the franchise agreements. The judge rejected the
plaintiffs' Wage Act claim and also held that issues of
unconscionability of the arbitration clause could be decided by
an arbitrator. However, the judge agreed with the plaintiffs
that, because System4 was not a signatory to the franchise
agreements, the plaintiffs could proceed to litigate their
claims against System4 in court.
System4 appealed the judge's decision regarding the
enforceability of the arbitration clause as applied to it. The
plaintiffs did not file a cross appeal regarding the judge's
decision denying them relief on their other grounds, but filed
an application for direct appellate review, which we granted.
The plaintiffs ask us to affirm the judge's reasoning in
declining to enforce the arbitration clause with respect to
System4 or, in the alternative, to affirm the ruling on one of
the grounds rejected by the judge.
8
This argument was first presented to this court by the
plaintiffs in July, 2013, in a postargument letter after our
decision in Machado v. System4 LLC, 465 Mass. 508 (2013), was
released.
9
Discussion. Denials of applications to compel arbitration
are reviewed de novo. See Joulé, Inc. v. Simmons, 459 Mass. 88,
92-93 (2011); Feeney v. Dell Inc., 454 Mass. 192, 199 (2009),
S.C., 465 Mass. 470, and 466 Mass. 1001 (2013). See also
Warfield v. Beth Israel Deaconess Med. Ctr., Inc., 454 Mass.
390, 395 (2009) (motion to compel arbitration treated summarily
and judge's order reviewed de novo). The Massachusetts
Arbitration Act, G. L. c. 251, similarly to the FAA, "expresses
a strong public policy favoring arbitration as an expeditious
alternative to litigation for settling commercial disputes."
Miller v. Cotter, 448 Mass. 671, 676 (2007), quoting Home Gas
Corp. of Mass., Inc. v. Walter's of Hadley, Inc., 403 Mass. 772,
774 (1989). "[T]he lack of a written arbitration agreement is
not an impediment to arbitration." Sunkist Soft Drinks, Inc. v.
Sunkist Growers, Inc., 10 F.3d 753, 757 (11th Cir. 1993), cert.
denied sub nom. Sunkist Growers, Inc. v. Del Monte Corp., 513
U.S. 869 (1994).
1. Nonsignatory compulsion of signatory to arbitrate. We
begin our discussion with a consideration of whether System4, a
nonsignatory to the franchise agreements, can compel the
plaintiffs to pursue their substantive claims in arbitration
based on the agreements they entered into with NECCS.
In Depianti v. Jan-Pro Franchising Int'l, Inc., 465 Mass.
607, 622, 624-625 (2013), we recently held that a franchisee,
10
much like the plaintiffs in this case, could hold a nonsignatory
to his franchise agreement liable for misclassifying him as an
independent contractor in that agreement if the nonsignatory had
attempted to insulate itself from liability by "causing or
creating another entity to [enter the agreement]." This is
essentially what the plaintiffs allege here, that is, that NECCS
was created solely to conduct System4's franchising business in
Massachusetts; that the franchise agreements are System4's
standard form contracts; and that System4 controls the
relationships between the parties and between the plaintiffs and
their clients. Therefore, they argue, System4 is just as liable
for the misclassification in their franchise agreements as
NECCS, even though System4 did not sign them. Although denying
liability and an agency relationship with NECCS, System4
essentially argues that where the plaintiffs contend that
System4 was effectively the franchisor, the creator of the
agreements and their terms, the violator of those terms, and the
beneficiary of the purported misclassification term, any dispute
arising out of the agreements should be resolved in accord with
the arbitration clause that provides for such dispute
resolution.
While a nonsignatory attempting to bind a signatory to an
arbitration agreement is distinct from a signatory attempting to
bind a nonsignatory, courts often consider both scenarios under
11
a similar legal framework. Traditionally, courts have
recognized six theories for binding nonsignatories to
arbitration agreements: (1) incorporation by reference;9 (2)
assumption;10 (3) agency;11 (4) veil-piercing/alter ego;12 (5)
equitable estoppel, and (6) third-party beneficiary.13 See J.E.
Grenig, Alternative Dispute Resolution § 7:4 (3d ed. 2005). See
9
Under the "incorporation by reference" theory, "[a]
nonsignatory may compel arbitration against a party to an
arbitration agreement when that party has entered into a
separate contractual relationship with the nonsignatory which
incorporates the existing arbitration clause." Thomson-CSF,
S.A. v. American Arbitration Ass'n, 64 F.3d 773, 777 (2d Cir.
1995).
10
Under an "assumption" theory, "a party may be bound by an
arbitration clause if its subsequent conduct indicates that it
is assuming the obligation to arbitrate," despite being a
nonsignatory. Thomson-CSF, S.A., 64 F.3d at 777.
11
Under an "agency" theory, a nonsignatory who is an agent
of a signatory may compel arbitration for liability arising
under the contract in question. Bridas S.A.P.I.C. v. Government
of Turkmenistan, 345 F.3d 347, 356-358 (5th Cir. 2003), cert.
denied, 541 U.S. 937 (2004). Here, while an agency relationship
arguably might exist between System4 and NECCS, System4 denies
that it "exercises sufficient control over NECCS" to create such
a relationship.
12
Under a "veil-piercing/alter ego" theory, a party "may be
bound by an agreement entered into by its subsidiary regardless
of the agreement's structure or the subsidiary's attempts to
bind itself alone to its terms, 'when their conduct demonstrates
a virtual abandonment of separateness.'" Bridas S.A.P.I.C., 345
F.3d at 358-359, quoting Thomson-CSF, S.A., 64 F.3d at 777.
System4 explicitly denies having control over NECCS.
13
Under a "third-party beneficiary" theory, "a court must
look to the intentions of the parties at the time the contract
was executed" and examine whether the contract displays a clear
intent to make a nonsignatory a third-party beneficiary. See
Bridas S.A.P.I.C., 345 F.3d at 362 (citation omitted).
12
also Walker v. Collyer, 85 Mass. App. Ct. 311, 319 (2014);
Bridas S.A.P.I.C. v. Government of Turkmenistan, 345 F.3d 347,
356 (5th Cir. 2003), cert. denied, 541 U.S. 937 (2004).
Notably, while Federal courts have been "hesitant to estop a
nonsignatory seeking to avoid arbitration," they generally "have
been willing to estop a signatory from avoiding arbitration with
a nonsignatory." InterGen N.V. v. Grina, 344 F.3d 134, 145-146
(1st Cir. 2003), quoting Thomson-CSF, S.A. v. American
Arbitration Ass'n, 64 F.3d 773, 779 (2d Cir. 1995).
The theory with clearest application to the facts of this
case is equitable estoppel, a doctrine governed by State
contract law. See Arthur Andersen LLP v. Carlisle, 556 U.S.
624, 632 (2009). There are no reported Massachusetts appellate
decisions determining whether this doctrine may be applied to
extend the reach of an agreement to compel a signatory into
arbitration with a nonsignatory. Nevertheless, we are guided in
our analysis by several circuit courts of the United States
Court of Appeals that have applied equitable estoppel in this
precise context. And while "[t]he [Federal circuit courts] have
not uniformly articulated the standards for application of
estoppel, . . . their formulations have contained common
elements." Lenox MacLaren Surgical Corp. v. Medtronic, Inc.,
449 Fed. Appx. 704, 708 (10th Cir. 2011).
13
Equitable estoppel typically allows a nonsignatory to
compel arbitration in either of two circumstances: (1) when a
signatory "must rely on the terms of the written agreement in
asserting its claims against the nonsignatory" or (2) when a
signatory "raises allegations of substantially interdependent
and concerted misconduct by both the nonsignatory and one or
more of the signatories to the contract."14 Grigson v. Creative
Artists Agency, L.L.C., 210 F.3d 524, 527 (5th Cir.), cert.
denied, 531 U.S. 1013 (2000), quoting MS Dealer Serv. Corp. v.
Franklin, 177 F.3d 942, 947 (11th Cir. 1999). In such
situations, a reviewing court may consider all of "the
relationships of persons, wrongs and issues" in the case.
Merrill Lynch Inv. Managers v. Optibase, Ltd., 337 F.3d 125, 131
(2d Cir. 2003), citing Chocotaw Generation Ltd. Partnership v.
American Home Assur. Co., 271 F.3d 403, 406 (2d Cir. 2001).
a. Reliance on terms of written agreement. When the
signatory's claims against a nonsignatory refer to or presume
the existence of the written agreement that compels arbitration,
the signatory’s claims may be considered to arise out of and be
14
Not all jurisdictions apply this test. See, e.g., Smith
v. Mark Dodge, Inc., 934 So. 2d 375, 380-381 (Ala. 2006),
quoting Ex parte Napier, 723 So. 2d 49, 51 (Ala. 1998) (court
will consider whether arbitration may be compelled under
equitable estoppel doctrine only if arbitration agreement is
written in broad language so that it applies, e.g., to "[a]ll
disputes, claims or controversies arising from or relating to
this [c]ontract or the relationships which result from this
[contract]").
14
directly intertwined with that agreement, rendering arbitration
appropriate. See CD Partners, LLC v. Grizzle, 424 F.3d 795, 798
(8th Cir. 2005). Essentially, if a party's claims are so
intimately founded in and closely related to an agreement which
also mandates arbitration, the party opposing arbitration is
equitably estopped from denying the arbitrability of its claims,
even against a nonsignatory.15 "The plaintiff's actual
dependence on the underlying contract in making out the claim
against the nonsignatory defendant is therefore always the sine
qua non of an appropriate situation for applying equitable
estoppel." Lenox MacLaren Surgical Corp., 449 Fed. Appx. at 710
(citation omitted).
15
Not all jurisdictions consider the intertwining nature of
the claims to be, on its own, a sufficient basis for equitable
estoppel. For example, the United States Court of Appeals for
the Second Circuit has said that while this is an essential
prerequisite, there must also be a relationship among the
parties of a nature that justifies a conclusion that the
signatory should be estopped from denying an obligation to
arbitrate a dispute with a nonsignatory. See Sokol Holdings,
Inc. v. BMB Munai, Inc., 542 F.3d 354, 358-359 (2d Cir. 2008).
See also Ross v. American Express Co., 547 F.3d 137, 143-144 (2d
Cir. 2008). Echoing this sentiment, the United States Court of
Appeals for the Tenth Circuit in Lenox MacLaren Surgical Corp.,
v. Medtronic, Inc., 449 Fed. Appx. 704, 710 (10th Cir. 2011),
held that allegations of collusion alone are insufficient; the
claims must also be "intimately founded in and intertwined with
the obligations imposed by the contract containing the
arbitration clause" (citation omitted). Additionally, one
Missouri court has held that even if claims are "inextricably
intertwined," compelling a signatory to arbitrate with a
nonsignatory is inconsistent with the general principle that
arbitration is ultimately a matter of agreement between the
parties. Jones v. Paradies, 380 S.W.3d 13, 17-18 (Mo. Ct. App.
2012).
15
Courts frequently rule in favor of nonsignatories in such
circumstances because "it would be unfair to allow the signatory
to rely on the agreement in formulating its claims but to
disavow availability of the arbitration clause of that same
agreement." PRM Energy Sys., Inc. v. Primenergy, L.L.C., 592
F.3d 830, 835, 836 (8th Cir. 2010) (permitting arbitration under
equitable estoppel theory in part because allegations were
intimately founded in and intertwined with agreement containing
arbitration clause). See CD Partners, LLC, 424 F.3d at 800-801(arbitration compelled where franchisee's claims arose directly
out of and related to its operation of franchises under
agreement containing arbitration clause).
For example, in JLM Indus., Inc. v. Stolt-Nielsen SA, 387
F.3d 163, 177-178 (2d Cir. 2004), the court held that
nonsignatory ship owners could compel arbitration when
charterers alleged that the owners conspired to inflate price
terms in contracts between the charterers' and the owners'
subsidiaries, as these claims were "undeniably intertwined" with
the contracts containing an arbitration clause. Additionally,
in Grigson, 210 F.3d at 529-531, a different court held that
allegations that nonsignatories tortiously interfered with a
film distribution agreement containing an arbitration clause
were sufficiently intertwined with the agreement to compel
arbitration where the very essence of the claims required a
16
determination whether the nonsignatories had fulfilled their
obligations under the agreement.
Similarly, here, the plaintiffs assert multiple claims that
arise out of and relate directly to terms within the franchise
agreements containing the arbitration clause. Contrast In re
Wholesale Grocery Prods. Antitrust Litig., 707 F.3d 917, 921-924
(8th Cir. 2013) (no equitable estoppel where signatory alleged
no violation of contract terms and signatory's claims existed
independently of agreement containing arbitration clause).
Specifically, the plaintiffs allege both that the defendants
misclassified the plaintiffs as independent contractors in the
agreements and used unfair and deceptive business practices that
misrepresented the terms of their contractual relationship.
Indeed, it is the franchise agreements themselves that the
plaintiffs allege created the service relationship between them
and the defendants, mischaracterized the relationship as one of
independent contractor rather than employee, and "contain[ed]
numerous provisions that are unfair, unconscionable, [and]
against public policy."
These claims are inextricably intertwined with and relate
directly to the franchise agreements containing the arbitration
provision. In particular, the plaintiffs' request for contract
rescission and allegations of unenforceability necessarily
depend on an analysis of the terms, provisions, and warranties
17
delineated within their agreements. See Liles v. Ginn-La West
End, Ltd., 631 F.3d 1242, 1255-1257 (11th Cir. 2011) (per
curiam) (nonsignatory defendants could invoke forum-selection
clause under equitable estoppel theory as plaintiffs' claim of
rescission depended on contract containing clause); Townsend v.
Quadrant Corp., 173 Wash. 2d 451, 461-462 (2012) (nonsignatory
defendants could compel arbitration under equitable estoppel in
part because plaintiffs' claim of contract rescission related
directly to agreement containing arbitration clause). See also
Villanueva v. Barcroft, 822 F. Supp. 2d 726, 738-739 (N.D. Ohio
2011) (forum selection clause applicable under equitable
estoppel where plaintiff's claim relied on contract containing
clause); World Gym, Inc. vs. Pla-Fit Franchise, LLC, U.S. Dist.
Ct., No. 12-11620-DJC (D. Mass. July 19, 2013) (permitting
nonsignatory to compel arbitration by way of equitable estoppel
where plaintiffs' claims depended on provisions of franchise
agreement that contained arbitration clause). Contrast InterGen
N.V., 344 F.3d at 138, 140, 145-146 (no basis for equitable
estoppel where, inter alia, complaint did not allege breach of
contract nor sought to enforce any contractual right).16
16
Moreover, as both the plaintiffs' rights and the
responsibilities of NECCS were delineated under the franchise
agreements, the plaintiffs inevitably rely on the terms
contained therein when asserting the unenforceability of various
contractual provisions.
18
As for assessing the merits of the plaintiffs' claim
regarding misclassification, a decision maker would be compelled
to, among other things, compare the rights and responsibilities
assigned to the plaintiffs in the franchise agreements to the
elements of employee status under the Wage Act. Section 148B,
commonly referred to as the independent contractor statute,
requires an entity to demonstrate that a purported independent
contractor is "free from control and direction in connection
with the performance of the service, both under his contract for
the performance of service and in fact" (emphasis added). G. L.
c. 149, § 148B (a) (1). This statutory language directs a look
both at the worker's agreement, if any, as well as the actual
working relationship. See Depianti, 465 Mass. at 622;
Subcontracting Concepts, Inc. v. Commissioner of the Div. of
Unemployment Assistance, 86 Mass. App. Ct. 644, 649 n.7 (2014)
(addressing similar language in G. L. c. 151A, § 2). Therefore,
courts commonly look to contractual language as a starting point
for assessing how a worker ought to be classified. See, e.g.,
Subcontracting Concepts, Inc., supra at 647-648 (looking to
plain terms of employment contract to assess contention that
entity was not "employing unit" and did not require worker to
submit to control or direction); Rogers vs. MIT Lincoln Lab.,
Mass. Superior Ct., No. 10-04587 (July 5, 2012) (in employment
discrimination case, under G. L. c. 151B, employment and payment
19
structure established by agreement weighed in favor of finding
that plaintiff was independent contractor); Rainbow Dev., LLC
vs. Department of Indus. Accs., Mass. Superior Ct., No. 2005-
00435 (Nov. 17, 2005) (examining written provisions of agreement
to assess whether entity, despite classifying workers as
independent contractors, asserted control over worker
performance by way of contract).
Here, the agreement is replete with references to the
plaintiffs' duties and responsibilities as a franchisee, and
System4's liability, if any, could not be determined without
reference to it. See McBro Planning & Dev. Co. v. Triangle
Elec. Constr. Co., 741 F.2d 342, 344 (11th Cir. 1984) (signatory
equitably estopped from asserting that lack of written agreement
precluded arbitration where basis of claim was breach of duties
assigned under agreement that contained arbitration clause).
While the terms of an employment contract are not, on their own,
dispositive, see Commissioner of the Div. of Unemployment
Assistance v. Town Taxi of Cape Cod, Inc., 68 Mass. App. Ct.
426, 430 n.9 (2007), the language employed may be a significant
factor in evaluating the merits of a misclassification claim and
making a "status determination." Boston Bicycle Couriers, Inc.
v. Deputy Director of the Div. of Employment & Training, 56
Mass. App. Ct. 473, 483-484 (2002). Further, any determination
as to whether the plaintiffs have satisfied the statutory
20
requirements of the Wage Act, and established their status as
employees, ought to "be based upon a comprehensive analysis of
the totality of relevant facts and circumstances of the working
relationship." Id. at 484. While "[n]o one factor is outcome-
determinative," id., it is fair to say that an important element
of a working relationship is the contract responsible for
creating it.
This is not a situation in which the franchise agreement is
merely factually significant to the plaintiffs' claims or has a
"but-for" relationship with them. See Lenox MacLaren Surgical
Corp., 449 Fed. Appx. at 709. Contrast VSR Fin. Servs., Inc. v.
McLendon, 409 S.W.3d 817, 832-833 (Tex. Ct. App. 2013)
(plaintiff did not rely on terms of agreement in asserting
claims where pleading only made reference to or presumed
existence of agreement). Rather, the plaintiffs here must rely,
in part, on the terms of the franchise agreements in asserting
that the provisions are unenforceable and that they were
mischaracterized as independent contractors. The plaintiffs
cannot avoid arbitration with System4 when the issues System4 is
seeking to resolve in arbitration are intertwined with the
agreements that the plaintiffs signed.
b. Concerted misconduct. The plaintiffs have consistently
alleged concerted misconduct by System4 and NECCS. See Sanders
v. Swift Transp. Co. of Arizona, LLC, 843 F. Supp. 2d 1033,
21
1037-1038 (N.D. Cal. 2012) (nonsignatory could compel
arbitration under equitable estoppel where concerted misconduct
alleged between signatory and nonsignatory). In assessing
whether a plaintiff has advanced sufficient allegations of
concerted misconduct, courts frequently look to the face of the
complaint. See Holden v. Deloitte & Touche LLP, 390 F. Supp. 2d
752, 768 (N.D. Ill. 2005).17
The plaintiffs have lumped the two defendants together,
asserting each claim in their complaint against System4 and
NECCS collectively. See Amstar Mtge. Corp. v. Indian Gold, LLC,
517 F. Supp. 2d 889, 897 (S.D. Miss. 2007) (concerted misconduct
prong met where action was "averred against all defendants" and
complaint was "littered with references of substantially
interdependent and concerted misconduct" by all defendants);
Hagan vs. GreenPoint Credit Corp., U.S. Dist. Ct., No. 07-17-KKC
(E.D. Ky. Aug. 3, 2007) (allegation of concerted misconduct
demonstrated where plaintiffs collectively referred to all
defendants in complaint as "the defendants"). Contrast Bailey
v. ERG Enters., LP, 705 F.3d 1311, 1321 n.12 (11th Cir. 2013)
(where plaintiffs only alleged misconduct against nonsignatory
and did not name other signatory as party in complaint, second
17
Some jurisdictions require allegations of "pre-arranged,
collusive behavior" between the signatory and nonsignatory
defendants in order to meet the concerted misconduct test. See
Donaldson Co. v. Burroughs Diesel, Inc., 581 F.3d 726, 734-735
(8th Cir. 2009) (citation omitted).
22
circumstance of equitable estoppel not implicated). In
addition, the plaintiffs have consistently charged both System4
and NECCS with equal wrongs, failing to distinguish them
throughout the evolution of this case, thereby effectively
asserting "interdependent and concerted misconduct" between
them. Grigson 210 F.3d at 257. See Maldonado vs. Mattress
Firm, Inc., U.S. Dist. Ct., No. 13-CV-292-T-33AEP (M.D. Fla.
June 3, 2013) (equitable estoppel warranted to compel
arbitration where signatory failed to distinguish among
defendants in alleging claims). For example, the plaintiffs
allege that both defendants, "together," subjected them to
"numerous misrepresentations" and "misclassified" them as
independent contractors. Additionally, the plaintiffs allege
that "[t]he written contracts between Defendants and the
plaintiffs . . . are unenforceable" and unconscionable (emphasis
added). There is not a single claim alleged against System4 or
NECCS as a separate entity. See Brown v. Pacific Life Ins. Co.,
462 F.3d 384, 398-399 (5th Cir. 2006) ("[a]s the [plaintiffs]
fail to allege tortious acts by [nonsignatories] that are
separate and apart from [signatories], we can only conclude that
the complaint asserts concerted misconduct by all parties").
In sum, because a decision maker must analyze the franchise
agreements in assessing the merits of the plaintiffs' claims,
and the plaintiffs have pointedly alleged concerted misconduct
23
between System4 and NECCS with respect to the agreements and
their employment status thereunder, System4 can compel
arbitration.
2. Validity of arbitration clause. a. Wage Act claims.
Although System4 can compel arbitration despite being a
nonsignatory, the plaintiffs further argue that their Wage Act
claims are not arbitrable. Specifically, they ask us to extend
our decision in Crocker, 464 Mass. at 14-15, and hold that the
arbitration clause does not apply to their Wage Act claims given
that it makes no explicit mention of such claims.18 We decline
to do so at this time.
The Wage Act provides, in relevant part: "[e]very person
having employees in his service shall pay weekly or bi-weekly
each such employee the wages earned by him to within six days of
the termination of the pay period during which the wages were
earned if employed for five or six days in a calendar week
. . . . No person shall by a special contract with an employee
or by any other means exempt himself from this section . . ."
(emphasis added). G. L. c. 149, § 148. "We have consistently
held that the legislative purpose behind the Wage Act (and
especially the 'special contract' language) is to provide strong
18
That the agreement makes no mention of wage claims is of
little surprise, as it classifies the plaintiffs as independent
contractors.
24
statutory protection for employees and their right to wages."
Crocker, 464 Mass. at 13.
In Crocker, we considered whether a general release of
liability contained in a termination agreement barred Wage Act
claims. See id. at 12-15. We held that, given the Wage Act's
strong statutory protection for employees and their right to
wages, as seen through its specific prohibition on exemption
attempts, general releases fail to waive Wage Act claims unless
they explicitly and clearly refer to such claims. Id. at 14-15.
Crocker, although referencing our decision in Warfield, 454
Mass. at 398-402 (arbitration clause applies to gender
discrimination claims only if clause specifically mentions such
claims), was not a case concerning arbitration. Rather, our
overarching concern was that if general releases applied to Wage
Act claims, employees might find themselves "unwittingly
waiv[ing] their rights under the Wage Act." Crocker, 464 Mass.
at 14-15. This, of course, was particularly problematic given
the Wage Act's specific prohibition of contractual waivers of
its rights and protections. The "special contract" prohibition
within the Wage Act was "intended to thwart . . . schemes" to
avoid compliance. DiFiore v. American Airlines, Inc., 454 Mass.
486, 497 (2009).
The instant case is distinguishable, as arbitration
agreements are not the equivalent of claim releases. See, e.g.,
25
Barbieri v. K-Sea Transp. Corp., 566 F. Supp. 2d. 187, 192
(E.D.N.Y. 2008) ("An agreement to arbitrate is not a release of
any claim . . ."). An arbitration agreement, as opposed to a
general release, does not permit an employer to thwart or exempt
itself from Wage Act obligations, but solely dictates the forum
in which the plaintiffs' right to recovery will be determined.
Accordingly, here, the plaintiffs did not unwittingly relinquish
their right to recovery under the Wage Act upon signing the
franchise agreements.19
b. Unconscionable provisions. The plaintiffs additionally
argue that the arbitration agreements are permeated with a
series of unconscionable provisions which render them invalid
under Massachusetts law. Specifically, the plaintiffs take
issue with three aspects of the agreements: (1) a cost-
splitting provision, (2) a shortened statute of limitations, and
(3) a confidentiality provision. They argue that, taken
together, these provisions ought to render the entire agreement
unenforceable.
As an initial matter, we note that not all of these
provisions are unconscionable. "The determination that a
19
Even if Massachusetts law did require an arbitration
clause to specifically mention applicability to claims under the
Wage Act, "such a principle" might be "preempted by the [Federal
Arbitration Act]," Awuah v. Coverall N. Am., Inc., 703 F.3d 36,
45 (1st Cir. 2012), as it could be interpreted to prohibit or
disproportionately disfavor arbitration. See AT&T Mobility LLC
v. Concepcion, 131 S. Ct. 1740, 1747 (2011).
26
contract or term is or is not unconscionable is made in the
light of its setting, purpose and effect" (quotation omitted).
Miller, 448 Mass. at 679. Under Massachusetts law, "[t]o prove
that the terms of a contract are unconscionable, a plaintiff
must show both substantive unconscionability (that the terms are
oppressive to one party) and procedural unconscionability (that
the circumstances surrounding the formation of the contract show
that the aggrieved party had no meaningful choice and was
subject to unfair surprise)." Storie vs. Household Int'l, Inc.,
U.S. Dist. Ct., No. 03-40268 (D. Mass. Sept. 22, 2005), citing
Zapatha v. Dairy Mart, Inc., 381 Mass. 284, 293 n.13 (1980).
As for cost-splitting,20 we made clear in Machado I that the
mandates of the Wage Act would override this provision if the
plaintiffs were successful in arbitration. See 465 Mass. at
516-517. See also Awuah v. Coverall N. Am., Inc., 791 F. Supp.
2d. 284, 287-288, 290-291 (D. Mass. 2011) (recognizing award of
attorney's fees and costs to prevailing plaintiff is mandatory
under Wage Act and awarding over $37,000 in fees and costs on
individual arbitration awards of approximately $1,600 and
$5,700). Accordingly, given that the arbitrator would be bound
20
The agreement mandates that arbitration take place in
accordance with the commercial arbitration rules of the American
Arbitration Association (AAA rules). Rule 54 of the AAA rules
provides that most arbitration costs "shall be borne equally by
the parties, unless they agree otherwise or unless the
arbitrator in the award assesses such expenses or any part
thereof against any specified party or parties."
27
to award the plaintiffs, on prevailing, both the costs of their
action as well as reasonable attorney's fees, this provision of
the agreement is enforceable.
The agreement additionally provides for a one year or
eighteen-month statute of limitations, which is shorter than the
three-year period provided by G. L. c. 149 § 150. Massachusetts
law permits contractually shortened limitations periods so long
as they are "reasonable" and "not contrary to other statutory
provisions or to public policy." Creative Playthings
Franchising, Corp. v. Reiser, 463 Mass. 758, 760-761 (2012)
(holding contractual limitations period shortening time within
which claims must be brought from six years to one year or
eighteen months was valid and enforceable under Massachusetts
law). "[W]e have long allowed the limitations period within
which a claim arising from a contract may be brought to be
shortened by contractual agreement." Id. at 759. The
plaintiffs have presented no evidence to suggest that the
shortened statute of limitations at issue is unreasonable or
contrary to public policy. Accordingly, it remains enforceable.
Finally, the plaintiff cites to cases in other
jurisdictions in which confidentiality provisions have been
deemed unconscionable because they may prevent potential
plaintiffs from building similar cases against defendants.
Courts have distinguished their own holdings on this issue based
28
on the size of the putative class. Compare Ting v. AT&T, 319
F.3d 1126, 1151-1152 (9th Cir.), cert. denied, 540 U.S. 811(2003) (confidentiality provision held substantively
unconscionable when applied to large class of customers), with
Kilgore v. KeyBank, Nat'l Ass'n, 718 F.3d 1052, 1059 n.9 (9th
Cir. 2013) ("small number of putative class members . . .
mitigates" confidentiality provision concerns). Essentially, if
the subject of arbitration is a contract that affects millions
of people, the likelihood of future cases is increased. In such
a scenario, the unavailability of an arbitral decision will deny
these potential plaintiffs with access to precedent, thereby
putting the defendant "in a far superior legal posture." Ting,
319 F.3d at 1152. Here, while a motion for class certification
has yet to be filed, the putative class consists of franchisees,
a relatively small and known quantity of individuals. Any gains
System4 might gather from the typical "repeat player" effect are
therefore diminished. This factual element is distinct from
cases involving a large and unknowable class of customers. Most
importantly, however, "the enforceability of the confidentiality
clause is a matter distinct from the enforceability of the
arbitration clause in general." Kilgore, 718 F.3d at 1059 n.9.
The plaintiffs would still be "free to argue during arbitration
that the confidentiality clause is not enforceable." Id.
29
Nevertheless, even if we were to find any of the discussed
provisions unconscionable, the franchise agreements contain a
severability clause, requiring any unenforceable term to be
severed. This is not the type of case in which "illegality
pervades the arbitration agreement," Booker v. Robert Half
Int'l, Inc., 413 F.3d 77, 84-85 (D.C. Cir. 2005), nor are the
arbitration provisions "so one-sided that their only possible
purpose is to undermine the neutrality of the proceeding"
(emphasis added; citations omitted). Nino v. Jewelry Exch.,
Inc., 609 F.3d 191, 207-208 (3d Cir. 2010) (arbitration
agreement unconscionable where employer permitted to strike more
members of arbitration panel than employee, employee must give
notice of claims he intends to arbitrate while employer is under
no such obligation, and employee must file grievance within five
days of underlying events or lose right to arbitration). We are
unconvinced that the contested provisions equate to such a level
of unconscionability that the arbitration clause should not be
enforced. Not only do the franchise agreements contain a
severability clause, but also the plaintiffs identify only one
potentially unenforceable provision (confidentiality), which
"does not infect the arbitration clause as a whole." Booker,
413 F.3d at 85.
Last, "[f]or agreements governed by the FAA, the statute's
presumption of arbitrability means that 'in applying general
30
state-law principles of contract interpretation to the
interpretation of an arbitration agreement . . . due regard must
be given to the federal policy favoring arbitration, and
ambiguities . . . resolved in favor of arbitration.'" Joulé,
Inc., 459 Mass. at 94, quoting Volt Info. Sciences, Inc. v.
Trustees of Leland Stanford Jr. Univ., 489 U.S. 468, 475-476
(1989). Given this strong public policy in conjunction with our
holdings on the plaintiffs' Wage Act and unconscionability
claims, we conclude that the arbitration clause at issue remains
valid.
Conclusion. The denial of the plaintiffs' motion for a
ruling that System4's arbitration clause is unconscionable and
cannot apply to wage claims in light of Crocker is affirmed.
The grant of the plaintiffs' motion for a ruling that the
arbitration clause cannot be enforced by System4 is reversed.
The case is hereby remanded to the Superior Court for further
proceedings consistent with this opinion.
So ordered.