Machado v. System4 LLC

Citation28 N.E.3d 401,471 Mass. 204
Decision Date13 April 2015
Docket NumberSJC–11681.
PartiesEdson Teles MACHADO & others v. SYSTEM4 LLC & another.
CourtUnited States State Supreme Judicial Court of Massachusetts

Eric H. Karp, Boston, for the defendants.

Shannon Liss–Riordan for the plaintiffs.




, 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 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. 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 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, ––– U.S. ––––, 131 S.Ct. 1740, 179 L.Ed.2d 742 (2011)

(Concepcion ), that the Federal Arbitration Act, 9 U.S.C. §§ 1 et seq. (2012) (FAA), prohibits States from 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, 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, ––– U.S. ––––, 133 S.Ct. 2304, 186 L.Ed.2d 417 (2013)

. See Machado v. System4 LLC, 465 Mass. 508, 989 N.E.2d 464 (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, 993 N.E.2d 332 (2013) (Machado II ). See also Machado I, supra at 513–517, 989 N.E.2d 464. 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, 979 N.E.2d 1077 (2012)

(holding that release of claims must specifically reference Wage Act in order to apply 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.

Discussion. Denials of applications to compel arbitration are reviewed de novo. See Joulé, Inc. v. Simmons, 459 Mass. 88, 92–93, 944 N.E.2d 143 (2011)

; Feeney v. Dell Inc., 454 Mass. 192, 199, 908 N.E.2d 753 (2009), S.C., 465 Mass. 470, 989 N.E.2d 439, and 466 Mass. 1001, 993 N.E.2d 329 (2013). See also

Warfield v. Beth Israel Deaconess Med. Ctr., Inc., 454 Mass. 390, 395, 910 N.E.2d 317 (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, 863 N.E.2d 537 (2007), quoting Home Gas Corp. of Mass., Inc. v. Walter's of Hadley, Inc., 403 Mass. 772, 774, 532 N.E.2d 681 (1989). [T]he lack of a written arbitration agreement is not an impediment to arbitration.” Sunkist Soft...

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