Antitrust Law Daily Wrap Up, STATE UNFAIR TRADE PRACTICES—E.D. Pa.: Cleaning service franchisee’s claims of employee misclassification scheme subject to arbitration, (Feb 9, 2015)

By Linda O’Brien, J.D., LL.M.

A cleaning service franchisee was required to arbitrate his claims on an individual basis in his putative class action against a commercial cleaning service franchisor and its two sub-franchisors for allegedly engaging in a misclassification scheme to enlist employees as franchisees and misclassify them as independent contractors in order to avoid employer obligations, the federal district court in Philadelphia has decided (Torres v. CleanNet, U.S.A., Inc., February 5, 2015, Brody, A.).

CleanNet U.S.A. is a commercial cleaning service franchisor that operates through two sub-franchisors, MKH Services and CleanNet Systems of Pennsylvania (CleanNet PA), in Pennsylvania. In March 2012, Eddy Torres entered into a franchise agreement with MKH to become a CleanNet franchisee. In the agreement, MKH agreed to provide Torres with a certain amount of gross monthly billings if Torres paid an initial franchise fee. When CleanNet failed to provide Torres with the required gross monthly billings, Torres sought a refund of the franchise fee. After CleanNet refused to issue a refund, Torres filed suit against CleanNet, MKH, and CleanNet PA, alleging violations of the Pennsylvania Unfair Trade Practices and Consumer Protection Law, among other claims. Torres alleged that CleanNet misrepresented the terms of the relationship between CleanNet and its franchisees, misclassified them as independent contractors, and evaded obligations of an employer under state law. Torres also contended that CleanNet maintained control over all aspects of the janitorial service performed by Torres and, as a result of the misclassification scheme, owed Torres wages.

Torres originally filed the case in state court; however, the defendants removed the diversity class action to the district court pursuant to the Class Action Fairness Act (CAFA). In November 2014, Torres’ motion for remand based on the home state and local controversy exceptions to subject matter jurisdiction under CAFA was denied. Subsequently, the defendants moved to stay the proceedings pending arbitration.

Arbitration agreement. The court found that the arbitration provision in the franchise agreement compelled the plaintiff to arbitrate his claims against the defendants on an individual basis. The franchise agreement between Torres and MKH expressed provided that the parties agreed to resolve disputes through mediation administered through the American Arbitration Association (AAA). Torres’ argument that the arbitration provision was unenforceable because it prevented him from vindicating his state statutory rights by requiring the payment of a filing fee, precluding recovery of attorneys’ fees and all available statutory damages, and limiting discovery was rejected. The court noted that the U.S. Supreme Court decision, Am. Express Co. v. Italian Colors Rest., 133 S.Ct. 2304 (2013), held that arbitration was not prevented when a person could not effectively vindicate his state statutory rights.

Torres’ argument that CleanNet and CleanNet PA could not enforce the agreement to arbitrate since those entities were not signatories to the franchise agreement was also rejected. The defendants were allowed to enforce the arbitration provision against Torres on the basis of equitable estoppel because they established that a close relationship existed between the defendant entities and the plaintiffs’ claims against them were founded in and intertwined with the underlying contractual obligations of the franchise agreement.

Classwide arbitration. Finally, Torres’ contention that the class action waiver of the arbitration provision did not cover his suit since the dispute did not arise out of the franchise agreement was rejected. In the court’s view, there was no contractual basis to determine that the parties agreed to class arbitration. Since the class action waiver prevented classwide arbitration, Torres was compelled to arbitrate his claims on an individual basis.

The case is No. 14-2818.

Attorneys: Charles J. Kocher (Saltz Mongeluzzi Barrett & Bendesky PC) for Eddy Torres. Martha J. Keon (Littler Mendelson, PC) for CleanNet U.S.A., Inc. and CleanNet Systems of Pennsylvania, Inc. David Kraut (Kraut Harris PC) for MKH Services, Inc.

Companies: CleanNet U.S.A., Inc.; MKH Services, Inc.; CleanNet Systems of Pennsylvania, Inc.

Cases: StateUnfairTradePractices FranchisingDistribution PennsylvaniaNews