Non-Signatory Compels Arbitration by Signatory Party

Occasionally there are cases where one party to an arbitration agreement attempts to compel arbitration with a non-signatory party. The Massachusetts Supreme Judicial Court issued a decision on April 13, 2015, however, supporting the action of a non-signatory party to compel arbitration with parties who had signed the agreement, based on the theory of equitable estoppel.
The plaintiffs were System4 franchisees. They had entered into franchise agreements with NECCS, Inc., d/b/a System4 of Boston. Unhappy with the manner in which business had developed – or, more accurately, had allegedly not developed – they sued NECCS and System4 LLC, described as “regional ‘sub-franchisor’” and “master franchisor,” respectively. The plaintiffs claimed that NECCS misclassified them as independent contractors, when they were in reality employees. And that System4 participated in this misclassification. (There were other claims, but the misclassification claim was central to the argument about the scope of arbitration.) When System4, which had not signed any of the franchise agreements, attempted to compel arbitration, the plaintiffs argued that System4 was not signatory to the arbitration agreements and could not force that process. They also argued that statutory wage act claims were not subject to arbitration, based on a prior SJC decision holding that a release did not bar statutory wage claims unless the release specifically referenced such claims and/or the wage act.
The SJC, relying on U.S. Supreme Court precedent, held that System4 could compel the plaintiffs to arbitrate their claims against System4. The court noted that the wage act claims were intertwined with the terms of the franchise agreement. The decision states: “the plaintiffs here must rely, in part, on the terms of the franchise agreements in asserting that the provisions are unenforceable and that they were mischaracterized as independent contractors. The plaintiffs cannot avoid arbitration with System4 when the issues System4 is seeking to resolve in arbitration are intertwined with the agreements that the plaintiffs signed.” Thus, the plaintiffs were equitably estopped to deny the validity and scope of the arbitration agreement as it pertained to the allegations they had made against System4.
Even the plaintiffs’ argument that several franchise agreement terms were unconscionable, and rendered the agreement unenforceable, was addressed succinctly by the court. The SJC stated first that “not all of these provisions are unconscionable.” It noted that an arbitrator applying the statutory wage act could override a cost-splitting provision in the franchise agreement. And the plaintiffs “presented no evidence to suggest that the shortened statute of limitations at issue is unreasonable or contrary to public policy.” Finally, although a confidentiality clause might be suspect, the SJC declared that if so it could be severed from the franchise agreement without affecting the validity of the rest of the agreement.
This decision reinforces the ability of companies to utilize arbitration to cover a broad range of prospective disputes. Fueled by Supreme Court decisions upholding broad arbitration clauses, courts in Massachusetts (which we commented on two years ago, see here) and other states are likely to read arbitration clauses broadly, to encompass many causes of action that have historically been fought mostly in the courts.
The case is Machado v. System4 LLC, Civil Action No. SJC-11681 (April 13, 2015).

About Stan Martin

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Stan Martin holds a law degree and an undergraduate degree in architecture. He has been involved with the construction industry for more than 45 years, working in construction prior to law school and beginning his construction law practice. Over the course of his career, he has served on boards and committees for organizations including the Associated General Contractors of Massachusetts, the Boston Society of Architects, and the Massachusetts Building Congress.

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