Machado v. System4 LLC

• Decision Date: 12 June 2013
• Docket Number: SJC–11175.
• Citation: 465 Mass. 508,989 N.E.2d 464
• Court: United States State Supreme Judicial Court of Massachusetts Supreme Court
• Parties: Edson Teles MACHADO & others v. SYSTEM4 LLC & another.

465 Mass. 508

989 N.E.2d 464

Edson Teles MACHADO & others¹

v.SYSTEM4 LLC & another.²

SJC–11175.

Supreme Judicial Court of Massachusetts, Norfolk.

Submitted Dec. 4, 2012.

Decided June 12, 2013.

Eric H. Karp, Boston, (Brigid Harrington with him) for the defendants.

Shannon Liss–Riordan (Claret Vargas & James W. Simpson, Jr., with her) for the plaintiffs.

The following submitted briefs for amici curiae:

Audrey R. Richardson & Donald J. Siegel for Massachusetts AFL–CIO & others.

Victoria W. Ni, Leslie A. Bailey, & Spencer J. Wilson, of California, Scott L. Nelson & F. Paul Bland, Jr., of the District of Columbia, & Matthew W.H. Wessler for Public Justice, P.C., & another.

Robin S. Conrad, Kate Comerford Todd, & Shane B. Kawka, of the District of Columbia, Alan E. Schoenfeld, of New York, & Mark C. Fleming for Chamber of Commerce of the United States of America.

Ben Robbins & Martin J. Newhouse for New England Legal Foundation.

Present: IRELAND, C.J., SPINA, CORDY, BOTSFORD, GANTS, DUFFLY, & LENK, JJ.

CORDY, J.

The plaintiffs are individuals who have entered into contracts, called “local franchise agreements,” with defendants System4 LLC (System4) and NECCS, Inc. (NECCS) (collectively, defendants), for the provision of commercial janitorial services to third-party customers.³ The plaintiffs commenced this action in the Superior Court as a class action, alleging that the defendants misclassified the named plaintiffs and other similarly situated individuals as independent contractors and committed other violations of the Massachusetts Wage Act, G.L. c. 149, §§ 148, 148B, and 150 (Wage Act). The defendants moved to stay the court proceedings pending arbitration according to the terms of the arbitration clause contained in the parties' franchise agreements. A judge in the Superior Court denied the motion, concluding that because the arbitration clause barred class proceedings and prohibited an award of multiple damages, it was invalid and unenforceable under Massachusetts public policy as set forth in Feeney v. Dell Inc., 454 Mass. 192, 908 N.E.2d 753 (2009)( Feeney I ).

Following the decision of the United States Supreme Court in AT&T Mobility LLC v. Concepcion, ––– U.S. ––––, 131 S.Ct. 1740, 1746, 179 L.Ed.2d 742 (2011)( Concepcion ), which held that the Federal Arbitration Act (FAA) preempted a California rule that “classif[ied] most collective-arbitration waivers in consumer contracts as unconscionable,” the defendants filed a motion for reconsideration, which the motion judge denied.⁴ The defendants petitioned for interlocutory review of the denial of their motion for reconsideration to a single justice of the Appeals Court, who referred the case to a full panel of the Appeals Court. The plaintiffs then filed an application with this court for direct appellate review, which we granted.

This case, which was paired for argument with Feeney v. Dell Inc., 465 Mass. 470, 989 N.E.2d 439 (2013)( Feeney II ), presents two questions: whether Feeney I survives Concepcion and, if so, whether our ruling in Feeney I may apply to invalidate a class action waiver in an arbitration clause of an employment contract. In light of our interpretation of Concepcion and its impact on Feeney I, as set forth in Feeney II, supra, we conclude that because Massachusetts public policy in favor of class proceedings in certain contexts may no longer serve, in and of itself, as grounds to invalidate a class waiver in an arbitration agreement, and because the plaintiffs here are unable to demonstrate that they lack the practical means to pursue their relatively substantial claims on an individual basis, we must reverse the order invalidating the arbitration clause.⁵

1. Background. At this stage in the proceedings, the facts are not particularly well developed.⁶ System4 is an Ohio limited liability company with offices in Massachusetts that, by its own account, acts as a “master franchisor” to commercial janitorial cleaning businesses. NECCS, doing business as “System 4 of Boston, LLC,” is also an Ohio limited liability company with offices in Massachusetts. System4 contracts with regional “sub-franchisors” like NECCS who, in turn, enter into “local franchise agreements” with “franchisees” like the plaintiffs who ultimately perform the cleaning services.

Plaintiffs Edson Teles Machado, Jocilene da Silva, Poliane Santos, and Luiz Santos entered into franchise agreements with the defendants.^7,8 The franchise agreements included an arbitration clause that, among other things, prohibits class actions and the award of multiple damages. ⁹

The substance of the complaint alleges that the defendants have utilized the services of the named plaintiffs and others similarly situated under the guise of a “franchisee” relationship, when the plaintiffs were in fact employees of the defendants as defined by G.L. c. 149, § 148B. The complaint further alleges that the defendants have committed numerous violations of the Wage Act stemming from their misclassifying the plaintiffs as independent contractors. In their prayer for relief, the plaintiffs seek among their damages the refund of all “franchise fees” paid to the defendants, which range from a low of $9,541.83 to a high of $21,818.38 per plaintiff.

In his order denying the defendants' motion to stay the proceedings pending arbitration and invalidating the arbitration agreement, the motion judge stated simply that “[t]he arbitration clause ..., which precludes class actions under [G.L. c. 93A] and the wage/hour laws [G.L. c. 149, § 150] and multiple damages [,] is contrary to public policy and therefore invalid,” citing Feeney I for support. The defendants' motion for reconsideration in light of Concepcion was similarly denied without any findings of fact or analysis. Although the motion judge relied, at least in part, on public policy considerations outlined in Feeney I that he presumed were also applicable to Wage Act claims, he did not decide whether the plaintiffs were in fact misclassified and are thus entitled to the protections of the Wage Act. Although the parties contest the misclassification issue in their briefs, it is not before us on appeal. Therefore, to the extent our analysis depends on the plaintiffs' status as employees and the resultant applicability of the Wage Act, we assume for the purposes of this appeal that they are in fact employees under the Wage Act.¹⁰ 2. Discussion. a. Class waiver. Our interpretation of Concepcion and its impact on Feeney I is set forth in detail in Feeney II, supra at 485–507, 989 N.E.2d 439, and does not require extensive recitation here. Feeney I survives Concepcion to the extent that a consumer plaintiff “can demonstrate that he or she effectively cannot pursue a claim against [a] defendant in individual arbitration according to the terms of the [arbitration] agreement.” Feeney II, supra at 472, 989 N.E.2d 439. On such a demonstration, a court may invalidatea class waiver in an arbitration agreement without risking preemption by the FAA as interpreted by Concepcion. However, Feeney II limits Feeney I in two important respects: First, after Concepcion, a court's decision to invalidate a class action waiver in circumstances similar to those presented in the Feeney cases must be based not on the “fundamental policy of the Commonwealth favoring consumer class actions under G.L. c. 93A,” Feeney I, supra at 193, 908 N.E.2d 753, but on the demonstrated inability of that consumer to “pursue their statutory claim under the individual claim arbitration process required by the arbitration agreement.” Feeney II, supra. Second, on making the requisite finding, a court must invalidate the entire arbitration agreement and allow class litigation to proceed, as Stolt–Nielsen S.A. v. AnimalFeeds Int'l Corp., 559 U.S. 662, 130 S.Ct. 1758, 176 L.Ed.2d 605 (2010) (Stolt–Nielsen ), clearly prohibits a court from compelling nonconsensual class arbitration.

We see no principled reason to limit Feeney I (as refined by Feeney II ) to consumer claims under G.L. c. 93A, because many of the same public policy arguments apply equally well to claims by employees under the Wage Act. Pursuant to Feeney II, it is clear that a plaintiff must demonstrate that he or she lacks the practical means to pursue a claim in individual arbitration or, put differently, that the class waiver, when combined with the other terms of the arbitration agreement, “effectively denies [the plaintiff] a remedy and insulates the defendant from private civil liability for violations of State law.” Feeney II, supra at 471, 989 N.E.2d 439. If a plaintiff bringing a claim under the Wage Act could make such a showing, we would not hesitate to apply Feeney II to claims under the Wage Act.¹¹

Critically however, following Concepcion, it is of no avail that a particular State statute like the Wage Act provides for a substantive right to bring a class proceeding. See G.L. c. 149, § 150 (“employee claiming to be aggrieved by a violation of [the Wage Act] may ... institute and prosecute in his own name and on his own behalf, or for himself and others similarly situated, a civil action”). We do not dispute the very legitimate policy rationales underlying the Legislature's decision to provide for class proceedings under the Wage Act,¹² nor are we blind to the fact that the Legislature may find its purposes frustrated by this outcome. See Feeney II, supra at 493 n. 18, 989 N.E.2d 439. Nonetheless, where the right to a class proceeding has been waived as part of an agreement to arbitrate, Concepcion interprets the FAA to require enforcement of that class waiver regardless of any State law or policy to the contrary. See Concepcion, supra at 1753. See also Southland Corp. v. Keating, 465 U.S. 1, 10, 104 S.Ct. 852, 79 L.Ed.2d 1 (1984) (antiwaiver provision of California franchise investment law preempted by FAA to extent it had been interpreted to require judicial forum).

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