Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—MassSupJudCt: Class Waiver Sustained in Franchisees’ Wage Act Claims Against Franchisor, (Jun 12, 2013)

By Jody Coultas, J.D.

The Massachusetts Supreme Judicial Court declined to invalidate a class waiver provision in an arbitration clause contained in franchise agreements between System4 LLC and its franchisees (Machado v. System4 LLC, June 12, 2013, Cordy, R.). AT&T v. Concepcion, 131 S.Ct. 1740 (2011) did not require a finding that the clause was preempted by the Federal Arbitration Act (FAA), according to the court.

System4 franchisees filed a Massachusetts Wage Act class action alleging that System4 misclassified the franchisees as independent contractors. Employees that prevail on Wage Act claims shall be awarded treble damages for lost benefits and wages, and cannot contract with an employer to exempt himself from that Wage Act provision. A superior court judge held that the arbitration clause barring class proceedings and prohibiting an award of multiple damages was invalid and unenforceable under Massachusetts public policy. Dell sought reconsideration of the ruling based on Concepcion.

Concepcion overturned a California rule that most collective-arbitration waivers in consumer contracts were unconscionable, noting that the rule impermissibly interfered with the purpose of the FAA. The Supreme Court also held that the FAA did not envision class arbitration and class arbitration may not be required by state law. Although small-value claims may slip through the cracks in the absence of class proceedings, the Court noted that states cannot require procedures that are inconsistent with the FAA based on such policy concerns.

A number of cases following Concepcion have noted that the savings clause was not invalidated by the decision, and that there were circumstances where an agreement containing a class waiver may be voided. Section 2 of the FAA, the savings clause, permits invalidation of arbitration agreements by applicable contract defenses, but not defense that apply only to arbitration. The issue in these cases is whether a state court’s invalidation of an arbitration agreement that precludes consumers from obtaining a remedy to which they are entitled stands as an obstacle to the accomplishment of the FAA.

The court noted that there was not an irreconcilable conflict between the FAA’s interest in ensuring the enforceability of arbitration agreements and a state’s interest in voiding contracts that create de facto immunity for violations of state law merely because that immunity was procured through the arbitration clause.

Enforcement of the multiple damages and antiwaiver provisions of the Wage Act did not interfere with the purpose of the FAA, according to the court. A party must show that there is no practical way of pursuing a claim in individual arbitration, or that the class waiver denied the party a remedy and insulated a business from private civil liability. The court was not persuaded that the claims were “nonremediable” in individual arbitration simply because the costs of arbitration would surpass the amount of potential recovery.

The Supreme Judicial Court, however, declared the contractual waiver of multiple damages unenforceable with respect to viable Wage Act claims. While class waivers enjoy special status under the FAA, the availability of statutorily-mandated multiple damages does not impinge on any fundamental characteristic of arbitration. Nor does it frustrate the purpose of the arbitral forum, the court concluded.

“The mandatory award of treble damages to a prevailing plaintiff under the Wage Act simply affects the clerical task of calculating damages,” the court found.

The case was paired for argument with Feeney v. Dell Inc.

The case is No. SJC-11175.

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

Companies: System4 LLC

Cases: FranchisingDistribution MassachusettsNews