Awuah v. Coverall North America, Inc.

• Decision Date: 23 January 2009
• Docket Number: No. 08-1920.,08-1920.
• Citation: 554 F.3d 7
• Parties: Pius AWUAH, Nilton Dos Santos, Geraldo Correia, Benecira Cavalcante, Denisse Pineda, Jai Prem, Aldivar Brandao, Phillip Beitz, Richard Barrientos, Marian Lewis, Stanley Stewart, and all others similarly situated, Plaintiffs, Appellees, v. COVERALL NORTH AMERICA, INC., Defendant, Appellant.
• Court: U.S. Court of Appeals — First Circuit

554 F.3d 7

Pius AWUAH, Nilton Dos Santos, Geraldo Correia, Benecira Cavalcante, Denisse Pineda, Jai Prem, Aldivar Brandao, Phillip Beitz, Richard Barrientos, Marian Lewis, Stanley Stewart, and all others similarly situated, Plaintiffs, Appellees, v. COVERALL NORTH AMERICA, INC., Defendant, Appellant.

No. 08-1920.

United States Court of Appeals, First Circuit.

Heard October 6, 2008.

Decided January 23, 2009.

Norman M. Leon with whom Michael D. Vhay, John F. Dienelt, and DLA Piper U.S. LLP were on brief for appellant.

Hillary Schwab with whom Shannon Liss-Riordan, Harold Lichten, and Pyle, Rome, Lichten, Ehrenberg, & Liss-Riordan, P.C. were on brief for appellees.

Before BOUDIN, STAHL, and HOWARD, Circuit Judges.

BOUDIN, Circuit Judge.

The question before us is whether a dispute over the validity of an arbitration agreement should be decided by a court or by an arbitrator. Appellant is Coverall North America, Inc., itself the subsidiary of still larger enterprises. Coverall contracts to provide commercial janitorial cleaning services to building owners or operators throughout the United States. It "franchises" other companies or individuals to do the actual cleaning of the premises and has more than 5,000 such franchises in place in the United States.

The franchise agreements promise to supply the franchisee with equipment, training, a quality control program, and billing and collection services, as well as a set amount of initial cleaning business per month for buildings whose owners or operators have contracted with Coverall. In exchange, Coverall receives from the franchisee up-front fees in the range of $12,000 to $21,500, and additional payment for each cleaning job a franchisee performs.

Disputes have arisen between Coverall and a number of its franchisees over whether Coverall made misrepresentations kept its contractual promises, wrongly classified franchisees as independent contractors, and over other aspects of the relationship. On February 15, 2007, a dozen or so franchisees filed a class action against Coverall in federal district court in Massachusetts, alleging fraud, misrepresentation, breach of contract, lost benefits, improper deductions of earnings, and violations of minimum wage, overtime, and consumer protection laws. It appears from the record that the plaintiffs in many cases are recent immigrants and persons with limited education.

Among the nearly dozen named plaintiffs, three had franchise agreements containing arbitration clauses—Pius Awuah, Denisse Pineda, and Richard Barrientos, who are the appellees in this court. Apparently Coverall only recently introduced such provisions into its standard franchise contract. For two of the three appellees, the franchise agreement states that if required mediation processes are not successful,

all controversies, disputes or claims between Coverall, its officers, directors, agents and/or employees (in their respective capacities) and Franchisee ... arising out of or related to the relationship of the parties, this Agreement, any related agreement between the parties, and/or any specification, standard or operating procedure of Coverall, including those set forth in the Coverall Policy and Procedure Manual ... shall be submitted promptly for arbitration.

The third contract has a similar provision but also states that parties agree to submit to arbitration disputes about the validity of the franchise agreement or related agreements. However, the agreements signed by all three appellees also provide that "unless otherwise provided or the parties agree otherwise, arbitration shall be in accordance with the then current Rules of the American Arbitration Association." Rule 7(a) of those rules provides that "[t]he arbitrator shall have the power to rule on his or her own jurisdiction, including any objections with respect to the existence, scope or validity of the arbitration agreement."

Citing these provisions, Coverall filed motions to stay the district court proceedings as to these three franchisees pending arbitration. The three franchisees responded that the arbitration agreements were unconscionable, citing various provisions of the agreements which they said made arbitration costly or unfair.¹ Coverall responded in turn that, by the terms of Rule 7(a), a challenge to the validity of the arbitration provision was itself a matter for the arbitrator to determine.

In a decision dated July 1, 2008, the district court held that the franchise agreements did not clearly and unmistakably reflect such an intention, and the district judge referred plaintiffs' claims of unconscionability to a magistrate judge. Awuah v. Coverall N. Am., Inc., 563 F.Supp.2d 312 (D.Mass.2008). Coverall then appealed to this court, which stayed proceedings before the magistrate judge pending this appeal.

Coverall's interlocutory appeal to this court is pursuant to the Federal Arbitration Act ("FAA"), 9 U.S.C. § 16(a)(1)(A) (2000), which entitles a party to appeal a refusal to stay court proceedings pending arbitration. Fit Tech, Inc. v. Bally Total Fitness Holding Corp., 374 F.3d 1, 5 (1st Cir.2004).² Although the district court has not yet definitively rejected arbitration on the merits of the three appellees' claims, it has rejected arbitration on the issue—which Coverall claims to be committed to the arbitrator—as to whether the arbitration clause itself is so unconscionable that an interlocutory appeal is permitted. Madol v. Dan Nelson Automotive Group, 372 F.3d 997, 998-99 (8th Cir.2004).

The FAA provides that where "the making of the agreement for arbitration or the failure to comply therewith is not in issue," arbitration should be ordered. 9 U.S.C. § 4. Based on this language, the Supreme Court has determined that whether an issue is subject to arbitration under an agreement containing an arbitration clause is itself presumptively a matter for the court to decide before ordering arbitration. First Options v. Kaplan, 514 U.S. 938, 943-44, 115 S.Ct. 1920, 131 L.Ed.2d 985 (1995). However, this general rule can be qualified by agreement of the parties.

Thus, where the parties have themselves "clearly and unmistakably agreed" that the arbitrator should decide whether an issue is arbitrable, the Supreme Court has held that this issue is to be decided by the arbitrator. E.g., Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79, 83, 123 S.Ct. 588, 154 L.Ed.2d 491 (2002). Additionally, a challenge to the validity of the contract itself is subject to arbitration and that allocation of authority to the arbitrator will also be respected by the court. Buckeye Check Cashing v. Cardegna, 546 U.S. 440, 443-45, 126 S.Ct. 1204, 163 L.Ed.2d 1038 (2006).

Yet where the parties merely agree that the validity of the contract should be subject to arbitration, this does not commit to the arbitrator a dispute about whether the arbitration clause is valid. Id. at 445-46, 126 S.Ct. 1204; Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 404, 87 S.Ct. 1801, 18 L.Ed.2d 1270 (1967). Unfortunately, the Supreme Court has not said definitively whether the arbitrator gets to decide the latter question where, as here, arbitration rules incorporated in the contract say that the arbitrator should decide whether the arbitration clause is valid.

How the Court would decide such a case is not entirely clear. On the one hand, one might think that Howsam's principle of party autonomy might extend to such a case. On the other, Buckeye did not cite Howsam and conceivably the Court might regard the validity of the arbitration clause as a special case in which challenges should be decided by the judge, either as a matter of policy or because of statutory language.³ If the matter were completely open in this circuit, we are not certain of the outcome.

However, this court has said expressly that the validity of an arbitration clause is itself a matter for the arbitrator where the agreement so provides. In Apollo Computer v. Berg, 886 F.2d 469 (1st Cir.1989), the parties had consented to International Chamber of Commerce rules, which stipulate that challenges to the "validity of the arbitration agreement" shall be decided by an arbitrator. Apollo said:

These provisions clearly and unmistakably allow the arbitrator to determine her own jurisdiction when, as here, there exists a prima facie agreement to arbitrate whose continued existence and validity is being questioned. The arbitrator should decide whether a valid arbitration agreement exists....

Id. at 473-74.

Apollo accords with the views of at least one other circuit, see Terminix Int'l Co. LP v. Palmer Ranch Ltd., 432 F.3d 1327, 1332-33 (11th Cir.2005), and has been taken at face value by a district court within our own circuit. Morris v. Regis Corp., No. 08-68-P-H, 2008 WL 2945431, *1-2, 2008 U.S. Dist. LEXIS 56612, at *3 (D.Me., July 25, 2008). Morris held that district court should adjudicate the validity of the arbitration clause only because the contract at issue contained ambiguous language with respect to whether a court or arbitrator should decide this gateway dispute. Morris, 2008 WL 2945431, at *2-3, *3-4, 2008 U.S. Dist. LEXIS 56612, at *6, *9-10.

Admittedly, the precise controversy in Apollo involved the question whether one party had authority to bind the other to arbitrate rather than (as here) a question of unconscionability. Still, the language quoted above, although perhaps broader than necessary to resolve the controversy, did constitute the rationale for the decision. Given that the Supreme Court has not clearly spoken, the interests of predictability are served by respecting our own prior language unless either the Supreme Court or an en banc panel say otherwise. United States v. Holloway, 499 F.3d 114, 118 (1st Cir.2007).

The district court did not disagree with Apollo's premise—that the parties can contract for the arbitrator to decide challenges to his own authority—but the court held that the parties in ...