Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—Mass. Sup. Jud. Ct.: Nonsignatory master janitorial franchisor can enforce arbitration clause, (Apr 14, 2015)

By Greg Hammond, J.D.

System4 LLC, a “master franchisor” of a janitorial franchise, was able to enforce an arbitration provision in a franchise agreement, despite not signing the instrument. In reversing the lower court’s decision holding that the arbitration clause cannot be enforced by System4, the Massachusetts Supreme Judicial Court determined that System4 could enforce the provision under the doctrine of equitable estoppel, because the plaintiffs’ claims rely on the terms of the agreement and raise concerted misconduct by System4 and the other defendant signatory (Machado v. System4 LLC, April 13, 2015, Cordy, R.).

Background. System4 allegedly contracts with a regional subfranchisor in the Boston area, NECCS, Inc., who subsequently enters into franchise agreements with franchisees. Edson Teles Machado signed a franchise agreement with NECCS in February 2008. Machado subsequently filed a class action suit against NECCS and System4, claiming both companies breached the franchise agreement by failing to provide sufficient customer accounts, and claiming that both defendants misclassified him as an independent contractor in the agreement and committed other violations of the Massachusetts Wage Act. The lower court determined that because System4 was not a signatory to the franchise agreements, the plaintiffs could proceed to litigate their claims against System4 in court.

The main issue on System4’s appeal was whether System4, a nonsignatory, can compel the franchisee plaintiffs to arbitrate their substantive claims pursuant to the arbitration provision in the plaintiffs’ franchise agreements.

Equitable estoppel. The court first noted that the doctrine of equitable estoppel usually allows a nonsignatory to compel arbitration in one of two situations: (1) when a signatory must rely on the terms of the written agreement in bringing 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.

Machado alleged that both System4 and NECCS misclassified the plaintiffs as independent contractors in the franchise agreements and used unfair and deceptive business practices that misrepresented the terms of their contractual relationships. Such claims, according to the court, are “inextricably intertwined” with and relate directly to the agreements containing the arbitration provision. In addition, the court noted that the plaintiffs “lumped” the two defendants together, thereby asserting “interdependent and concerted misconduct” between System4 and NECCS. Consequently, because the court must analyze the franchise agreements in assessing the merits of Machado’s claims and the plaintiffs alleged concerted misconduct between the two defendants concerning the agreements and their employment status thereunder, System4 could compel arbitration, the court concluded.

The arbitration clause was also found valid, because: (1) the plaintiffs did not “unwittingly relinquish” their right to recovery under the Wage Act when signing the franchise agreements; and (2) even if some provisions were deemed unconscionable, the franchise agreements contain a severability clause, requiring any unenforceable term to be severed. The lower court’s order granting plaintiffs’ motion for a ruling that the arbitration clause cannot be enforced by System4 was therefore reversed and remanded.

The case number is SJC-11681.

Attorneys: Eric H. Karp (Witmer, Karp, Warner & Ryan LLP) for System4 LLC. Shannon Liss-Riordan (Lichten & Liss-Riordan, PC) for Edson Teles Machado.

Companies: System4 LLC; NECCS, Inc.

Cases: FranchisingDistribution MassachusettsNews