Breach of Contract Cases

Edson Teles Machado & others vs. System4 LLC & another. Norfolk. December 4, 2014. April 13, 2015. Present: Gants, C.J., Spina, Cordy, Botsford, Duffly, Lenk, & Hines, JJ. Massachusetts Wage Act. Contract, Franchise agreement, Arbitration. Arbitration, Damages, Arbitrable question. In a class action brought by franchisee janitorial workers (plaintiffs) who had signed agreements with a regional subfranchisor of the master franchisor, the master franchisor (a nonsignatory to the agreements) could compel, under principles of equitable estoppel, the plaintiffs to pursue their substantive claims in arbitration based on their agreements with the regional subfranchisor, where the plaintiffs asserted multiple claims that arose out of and related directly to terms within the agreements, which contained the arbitration clause [209-215], and where the plaintiffs consistently had alleged concerted misconduct by the defendants [215-216]; further, the plaintiffs’ claims under the Wage Act, G. L. c. 149, § 148, were arbitrable, given that the plaintiffs had not unwittingly relinquished their right to recovery under the Wage Act upon signing the agreements [216-218]; finally, there was no merit to the plaintiffs’ claim that the agreements were permeated with a series of unconscionable provisions that rendered them invalid under Massachusetts law, especially in light of the presence of a severability clause and the strong public policy in favor of arbitration [218-220]. Civil action commenced in the Superior Court Department on March 24, 2010. Following review by this court, 465 Mass. 508 and 466 Mass. 1004 (2013), a motion for a ruling that an arbitration clause did not apply to certain claims was heard by Patrick F. Brady, J. The Supreme Judicial Court granted an application for direct appellate review. Eric H. Karp for the defendants. Shannon Liss-Riordan for the plaintiffs. Jocilene da Silva, Stenio Ferreira, Poliane Santos, Glaucea de Oliveira Santos, and Luiz Santos. NECCS, Inc., doing business as System4 of Boston, LLC (NECCS). Cordy, 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 SystemA 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. 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 SystemA 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 SystemA’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 SystemA, 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. SystemA, 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. Although SystemA is not a signatory to these agreements, the agreements provide the franchisees with access to SystemA’s marketing expertise, business practices, training, and use of trademarks, by way of a separate agreement between SystemA and NECCS. 1. Arbitration clause. The franchisee plaintiffs are parties to agreements to operate SystemA 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. 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, 131 S. Ct. 1740 (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 class 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. 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, 133 S. Ct. 2304 (2013). See Machado v. System4 LLC, 465 Mass. 508 (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 (2013) (Machado II). See also Machado I, supra at 513-517. 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 post-hearing 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 (2012) (holding that release of claims must specifically reference Wage Act in order to apply to Wage Act claims); 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 (2011); Feeney v. Dell Inc., 454 Mass. 192, 199 (2009), S.C., 465 Mass. 470, and 466 Mass. 1001 (2013). See also War- field v. Beth Israel Deaconess Med. Ctr., Inc., 454 Mass. 390, 395 (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 (2007), quoting Home Gas Corp. of Mass., Inc. v. Walter’s of Hadley, Inc., 403 Mass. 772, 774 (1989). “[T]he lack of a written arbitration agreement is not an impediment to arbitration.” Sunkist Soft Drinks, Inc. v. Sunkist Growers, Inc., 10 F.3d 753, 757 (11th Cir. 1993), cert. denied sub nom. Sunkist Growers, Inc. v. Del Monte Corp., 513 U.S. 869 (1994). 1. Nonsignatory compulsion of signatory to arbitrate. We begin our discussion with a consideration of whether SystemA, a non-signatory to the franchise agreements, can compel the plaintiffs to pursue their substantive claims in arbitration based on the agreements they entered into with NECCS. In Depianti v. Jan-Pro Franchising Int’l, Inc., 465 Mass. 607, 622, 624-625 (2013), we recently held that a franchisee, much like the plaintiffs in this case, could hold a nonsignatory to his franchise agreement liable for misclassifying him as an independent contractor in that agreement if the nonsignatory had attempted to insulate itself from liability by “causing or creating another entity to [enter the agreement].” This is essentially what the plaintiffs allege here, that is, that NECCS was created solely to conduct SystemA’s franchising business in Massachusetts; that the franchise agreements are SystemA’s standard form contracts; and that SystemA controls the relationships between the parties and between the plaintiffs and their clients. Therefore, they argue, SystemA is just as liable for the misclassification in their franchise agreements as NECCS, even though SystemA did not sign them. Although denying liability and an agency relationship with NECCS, SystemA essentially argues that where the plaintiffs contend that SystemA was effectively the franchisor, the creator of the agreements and their terms, the violator of those terms, and the beneficiary of the purported misclassification term, any dispute arising out of the agreements should be resolved in accord with the arbitration clause that provides for such dispute resolution. While a nonsignatory attempting to bind a signatory to an arbitration agreement is distinct from a signatory attempting to bind a nonsignatory, courts often consider both scenarios under a similar legal framework. Traditionally, courts have recognized six theories for binding nonsignatories to arbitration agreements: (1) incorporation by reference; (2) assumption; (3) agency; (4) veil-piercing/alter ego; (5) equitable estoppel, and (6) third-party beneficiary. See J.E. Grenig, Alternative Dispute Resolution § 7:4 (3d ed. 2005). See also Walker v. Collyer, 85 Mass. App. Ct. 311, 319 (2014); Bridas S.A.P.I.C. v. Government of Turkmenistan, 345 F.3d 347, 356 (5th Cir. 2003), cert. denied, 541 U.S. 937 (2004). Notably, while Federal courts have been “hesitant to estop a nonsignatory seeking to avoid arbitration,” they generally “have been willing to estop a signatory from avoiding arbitration with a nonsignatory.” InterGen N. V. v. Grina, 344 F.3d 134, 145-146 (1st Cir. 2003), quoting Thomson-CSF, S.A. v. American Arbitration Ass’n, 64 F.3d 773, 779 (2d Cir. 1995). The theory with clearest application to the facts of this case is equitable estoppel, a doctrine governed by State contract law. See Arthur Andersen LLP v. Carlisle, 556 U.S. 624, 632 (2009). There are no reported Massachusetts appellate decisions determining whether this doctrine may be applied to extend the reach of an agreement to compel a signatory into arbitration with a nonsignatory. Nevertheless, we are guided in our analysis by decisions of several circuit courts of the United States Court of Appeals that have applied equitable estoppel in this precise context. And while “[t]he [Federal circuit courts] have not uniformly articulated the standards for application of estoppel, . . . their formulations have contained common elements.” Lenox MacLaren Surgical Corp. v. Medtronic, Inc., 449 Fed. Appx. 704, 708 (10th Cir. 2011). Equitable estoppel typically allows a nonsignatory to compel arbitration in either of two circumstances: (1) when a signatory “must rely on the terms of the written agreement in asserting 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.” Grigson v. Creative Artists Agency, L.L.C., 210 F.3d 524, 527 (5th Cir.), cert. denied, 531 U.S. 1013 (2000), quoting MS Dealer Serv. Corp. v. Franklin, 177 F.3d 942, 947 (11th Cir. 1999). In such situations, a reviewing court may consider all of “the relationships of persons, wrongs and issues” in the case. Merrill Lynch Inv. Managers v. Optibase, Ltd., 337 F.3d 125, 131 (2d Cir. 2003), citing Chocotaw Generation Ltd. Partnership v. American Home Assur. Co., 271 F.3d 403, 406 (2d Cir. 2001). a. Reliance on terms of written agreement. When the signatory’s claims against a nonsignatory refer to or presume the existence of the written agreement that compels arbitration, the signatory’s claims may be considered to arise out of and be directly intertwined with that agreement, rendering arbitration appropriate. See CD Partners, LLC v. Grizzle, 424 F.3d 795, 798 (8th Cir. 2005). Essentially, if a party’s claims are so intimately founded in and closely related to an agreement which also mandates arbitration, the party opposing arbitration is equitably estopped from denying the arbitrability of its claims, even against a nonsignatory. “The plaintiff’s actual dependence on the underlying contract in making out the claim against the nonsignatory defendant is therefore always the sine qua non of an appropriate situation for applying equitable estoppel.” Lenox MacLaren Surgical Corp., 449 Fed. Appx. at 710 (citation omitted). Courts frequently rule in favor of nonsignatories in such circumstances because “it would be unfair to allow the signatory to rely on the agreement in formulating its claims but to disavow availability of the arbitration clause of that same agreement.” PRM Energy Sys., Inc. v. Primenergy, L.L.C., 592 F.3d 830, 835, 836 (8th Cir. 2010) (permitting arbitration under equitable estoppel theory in part because allegations were intimately founded in and intertwined with agreement containing arbitration clause). See CD Partners, LLC, 424 F.3d at 800-801 (arbitration compelled where franchisee’s claims arose directly out of and related to its operation of franchises under agreement containing arbitration clause). For example, in JLM Indus., Inc. v. Stolt-Nielsen SA, 387 F.3d 163, 177-178 (2d Cir. 2004), the court held that nonsignatory ship owners could compel arbitration when charterers alleged that the owners conspired to inflate price terms in contracts between the charterers’ and the owners’ subsidiaries, as these claims were “undeniably intertwined” with the contracts containing an arbitration clause. Additionally, in Grigson, 210 F.3d at 529-531, a different court held that allegations that nonsignatories tortiously interfered with a film distribution agreement containing an arbitration clause were sufficiently intertwined with the agreement to compel arbitration where the very essence of the claims required a determination whether the nonsignatories had fulfilled their obligations under the agreement. Similarly, here, the plaintiffs assert multiple claims that arise out of and relate directly to terms within the franchise agreements containing the arbitration clause. Contrast In re Wholesale Gro eery Prods. Antitrust Litig., 707 F.3d 917, 921-924 (8th Cir. 2013) (no equitable estoppel where signatory alleged no violation of contract terms and signatory’s claims existed independently of agreement containing arbitration clause). Specifically, the plaintiffs allege both that the defendants misclassified the plaintiffs as independent contractors in the agreements and used unfair and deceptive business practices that misrepresented the terms of their contractual relationship. Indeed, it is the franchise agreements themselves that the plaintiffs allege created the service relationship between them and the defendants, mischaracterized the relationship as one of independent contractor rather than employee, and “contain[ed] numerous provisions that are unfair, unconscionable, [and] against public policy.” These claims are inextricably intertwined with and relate directly to the franchise agreements containing the arbitration provision. In particular, the plaintiffs’ request for contract rescission and allegations of unenforceability necessarily depend on an analysis of the terms, provisions, and warranties delineated within their agreements. See Liles v. Ginn-La West End, Ltd., 631 F.3d 1242, 1255-1257 (11th Cir. 2011)