Title: Machado v. System4 LLC

State: massachusetts

Issuer: Massachusetts Supreme Court

Document:

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SJC-11681 
 
EDSON TELES MACHADO & others1  vs.  SYSTEM4 LLC & another.2 
 
 
 
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. 
 
 
 
 
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. 
 
 
                     
 
1 Jocilene da Silva, Stenio Ferreira, Poliane Santos, 
Glaucea de Oliveira Santos, and Luiz Santos. 
 
 
2 NECCS, Inc., doing business as System4 of Boston, LLC 
(NECCS). 
2 
 
 
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 System4 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.3  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 System4 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 System4'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 System4, a 
nonsignatory, can compel the franchisee plaintiffs to arbitrate 
                     
 
3 Edson Teles Machado, Jocilene da Silva, Poliane Santos, 
and Luiz Santos (collectively, franchisee plaintiffs) are 
parties to agreements to operate System4 LLC (System4) 
franchises.  Two other plaintiffs, Stenio Ferreira and Glaucea 
de Olivera Santos, have not signed franchise agreements and 
appear to be employees of the franchisee plaintiffs. 
3 
 
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.  System4, 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.4  Although System4 is not a 
signatory to these agreements, the agreements provide the 
franchisees with access to System4's marketing expertise, 
business practices, training, and use of trademarks, by way of a 
separate agreement between System4 and NECCS. 
 
1.  Arbitration clause.  The franchisee plaintiffs are 
parties to agreements to operate System4 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.  
                     
 
4 The subfranchisor of System4 used to be System4 of Boston, 
LLC (System4 of Boston), but in March, 2008, NECCS purchased 
System4 of Boston and assumed all of its rights under the 
franchise agreements.  Consequently, we will refer to NECCS, 
rather than System4 of Boston, throughout this opinion. 
4 
 
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.5 
 
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 
                     
 
5 The only types of claims not subject to the arbitration 
clause are those by NECCS involving a threat or danger to public 
health or safety in connection with the operation of a 
franchise, actions by NECCS to protect its trademarks, and 
actions by either NECCS or the franchisee to obtain a temporary 
restraining order or injunction. 
5 
 
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 
6 
 
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 class6 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.7 
 
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, 
                     
 
6 A motion for class certification has yet to be filed. 
 
 
7 The amended complaint did not contain a breach of contract 
claim, although it alleged that the defendants made numerous 
misrepresentations in connection with the franchise agreements, 
including that they would provide the plaintiffs with business 
leads and make prompt payments as promised in their agreements. 
7 
 
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 
posthearing 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 
8 
 
to Wage Act claims);8 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. 
                     
 
8 This argument was first presented to this court by the 
plaintiffs in July, 2013, in a postargument letter after our 
decision in Machado v. System4 LLC, 465 Mass. 508 (2013), was 
released. 
9 
 
 
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 
Warfield 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 System4, a 
nonsignatory 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, 
10 
 
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 System4's franchising business in 
Massachusetts; that the franchise agreements are System4's 
standard form contracts; and that System4 controls the 
relationships between the parties and between the plaintiffs and 
their clients.  Therefore, they argue, System4 is just as liable 
for the misclassification in their franchise agreements as 
NECCS, even though System4 did not sign them.  Although denying 
liability and an agency relationship with NECCS, System4 
essentially argues that where the plaintiffs contend that 
System4 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 
11 
 
a similar legal framework.  Traditionally, courts have 
recognized six theories for binding nonsignatories to 
arbitration agreements:  (1) incorporation by reference;9 (2) 
assumption;10 (3) agency;11 (4) veil-piercing/alter ego;12 (5) 
equitable estoppel, and (6) third-party beneficiary.13  See J.E. 
Grenig, Alternative Dispute Resolution § 7:4 (3d ed. 2005).  See 
                     
 
9 Under the "incorporation by reference" theory, "[a] 
nonsignatory may compel arbitration against a party to an 
arbitration agreement when that party has entered into a 
separate contractual relationship with the nonsignatory which 
incorporates the existing arbitration clause."  Thomson-CSF, 
S.A. v. American Arbitration Ass'n, 64 F.3d 773, 777 (2d Cir. 
1995). 
 
 
10 Under an "assumption" theory, "a party may be bound by an 
arbitration clause if its subsequent conduct indicates that it 
is assuming the obligation to arbitrate," despite being a 
nonsignatory.  Thomson-CSF, S.A., 64 F.3d at 777. 
 
 
11 Under an "agency" theory, a nonsignatory who is an agent 
of a signatory may compel arbitration for liability arising 
under the contract in question.  Bridas S.A.P.I.C. v. Government 
of Turkmenistan, 345 F.3d 347, 356-358 (5th Cir. 2003), cert. 
denied, 541 U.S. 937 (2004).  Here, while an agency relationship 
arguably might exist between System4 and NECCS, System4 denies 
that it "exercises sufficient control over NECCS" to create such 
a relationship. 
 
 
12 Under a "veil-piercing/alter ego" theory, a party "may be 
bound by an agreement entered into by its subsidiary regardless 
of the agreement's structure or the subsidiary's attempts to 
bind itself alone to its terms, 'when their conduct demonstrates 
a virtual abandonment of separateness.'"  Bridas S.A.P.I.C., 345 
F.3d at 358-359, quoting Thomson-CSF, S.A., 64 F.3d at 777.  
System4 explicitly denies having control over NECCS. 
 
 
13 Under a "third-party beneficiary" theory, "a court must 
look to the intentions of the parties at the time the contract 
was executed" and examine whether the contract displays a clear 
intent to make a nonsignatory a third-party beneficiary.  See 
Bridas S.A.P.I.C., 345 F.3d at 362 (citation omitted). 
12 
 
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 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). 
13 
 
 
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."14  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 
                     
 
14 Not all jurisdictions apply this test.  See, e.g., Smith 
v. Mark Dodge, Inc., 934 So. 2d 375, 380-381 (Ala. 2006), 
quoting Ex parte Napier, 723 So. 2d 49, 51 (Ala. 1998) (court 
will consider whether arbitration may be compelled under 
equitable estoppel doctrine only if arbitration agreement is 
written in broad language so that it applies, e.g., to "[a]ll 
disputes, claims or controversies arising from or relating to 
this [c]ontract or the relationships which result from this 
[contract]"). 
14 
 
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.15  "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). 
                     
15 Not all jurisdictions consider the intertwining nature of 
the claims to be, on its own, a sufficient basis for equitable 
estoppel.  For example, the United States Court of Appeals for 
the Second Circuit has said that while this is an essential 
prerequisite, there must also be a relationship among the 
parties of a nature that justifies a conclusion that the 
signatory should be estopped from denying an obligation to 
arbitrate a dispute with a nonsignatory.  See Sokol Holdings, 
Inc. v. BMB Munai, Inc., 542 F.3d 354, 358-359 (2d Cir. 2008).  
See also Ross v. American Express Co., 547 F.3d 137, 143-144 (2d 
Cir. 2008).  Echoing this sentiment, the United States Court of 
Appeals for the Tenth Circuit in Lenox MacLaren Surgical Corp., 
v. Medtronic, Inc., 449 Fed. Appx. 704, 710 (10th Cir. 2011), 
held that allegations of collusion alone are insufficient; the 
claims must also be "intimately founded in and intertwined with 
the obligations imposed by the contract containing the 
arbitration clause" (citation omitted).  Additionally, one 
Missouri court has held that even if claims are "inextricably 
intertwined," compelling a signatory to arbitrate with a 
nonsignatory is inconsistent with the general principle that 
arbitration is ultimately a matter of agreement between the 
parties.  Jones v. Paradies, 380 S.W.3d 13, 17-18 (Mo. Ct. App. 
2012). 
15 
 
 
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 
16 
 
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 Grocery 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 
17 
 
delineated within their agreements.  See Liles v. Ginn-La West 
End, Ltd., 631 F.3d 1242, 1255-1257 (11th Cir. 2011) (per 
curiam) (nonsignatory defendants could invoke forum-selection 
clause under equitable estoppel theory as plaintiffs' claim of 
rescission depended on contract containing clause); Townsend v. 
Quadrant Corp., 173 Wash. 2d 451, 461-462 (2012) (nonsignatory 
defendants could compel arbitration under equitable estoppel in 
part because plaintiffs' claim of contract rescission related 
directly to agreement containing arbitration clause).  See also 
Villanueva v. Barcroft, 822 F. Supp. 2d 726, 738-739 (N.D. Ohio 
2011) (forum selection clause applicable under equitable 
estoppel where plaintiff's claim relied on contract containing 
clause); World Gym, Inc. vs. Pla-Fit Franchise, LLC, U.S. Dist. 
Ct., No. 12-11620-DJC (D. Mass. July 19, 2013) (permitting 
nonsignatory to compel arbitration by way of equitable estoppel 
where plaintiffs' claims depended on provisions of franchise 
agreement that contained arbitration clause).  Contrast InterGen 
N.V., 344 F.3d at 138, 140, 145-146 (no basis for equitable 
estoppel where, inter alia, complaint did not allege breach of 
contract nor sought to enforce any contractual right).16 
                     
 
16 Moreover, as both the plaintiffs' rights and the 
responsibilities of NECCS were delineated under the franchise 
agreements, the plaintiffs inevitably rely on the terms 
contained therein when asserting the unenforceability of various 
contractual provisions. 
18 
 
 
As for assessing the merits of the plaintiffs' claim 
regarding misclassification, a decision maker would be compelled 
to, among other things, compare the rights and responsibilities 
assigned to the plaintiffs in the franchise agreements to the 
elements of employee status under the Wage Act.  Section 148B, 
commonly referred to as the independent contractor statute, 
requires an entity to demonstrate that a purported independent 
contractor is "free from control and direction in connection 
with the performance of the service, both under his contract for 
the performance of service and in fact" (emphasis added).  G. L. 
c. 149, § 148B (a) (1).  This statutory language directs a look 
both at the worker's agreement, if any, as well as the actual 
working relationship.  See Depianti, 465 Mass. at 622; 
Subcontracting Concepts, Inc. v. Commissioner of the Div. of 
Unemployment Assistance, 86 Mass. App. Ct. 644, 649 n.7 (2014) 
(addressing similar language in G. L. c. 151A, § 2).  Therefore, 
courts commonly look to contractual language as a starting point 
for assessing how a worker ought to be classified.  See, e.g., 
Subcontracting Concepts, Inc., supra at 647-648 (looking to 
plain terms of employment contract to assess contention that 
entity was not "employing unit" and did not require worker to 
submit to control or direction); Rogers vs. MIT Lincoln Lab., 
Mass. Superior Ct., No. 10-04587 (July 5, 2012) (in employment 
discrimination case, under G. L. c. 151B, employment and payment 
19 
 
structure established by agreement weighed in favor of finding 
that plaintiff was independent contractor); Rainbow Dev., LLC 
vs. Department of Indus. Accs., Mass. Superior Ct., No. 2005-
00435 (Nov. 17, 2005) (examining written provisions of agreement 
to assess whether entity, despite classifying workers as 
independent contractors, asserted control over worker 
performance by way of contract). 
 
Here, the agreement is replete with references to the 
plaintiffs' duties and responsibilities as a franchisee, and 
System4's liability, if any, could not be determined without 
reference to it.  See McBro Planning & Dev. Co. v. Triangle 
Elec. Constr. Co., 741 F.2d 342, 344 (11th Cir. 1984) (signatory 
equitably estopped from asserting that lack of written agreement 
precluded arbitration where basis of claim was breach of duties 
assigned under agreement that contained arbitration clause).  
While the terms of an employment contract are not, on their own, 
dispositive, see Commissioner of the Div. of Unemployment 
Assistance v. Town Taxi of Cape Cod, Inc., 68 Mass. App. Ct. 
426, 430 n.9 (2007), the language employed may be a significant 
factor in evaluating the merits of a misclassification claim and 
making a "status determination."  Boston Bicycle Couriers, Inc. 
v. Deputy Director of the Div. of Employment & Training, 56 
Mass. App. Ct. 473, 483-484 (2002).  Further, any determination 
as to whether the plaintiffs have satisfied the statutory 
20 
 
requirements of the Wage Act, and established their status as 
employees, ought to "be based upon a comprehensive analysis of 
the totality of relevant facts and circumstances of the working 
relationship."  Id. at 484.  While "[n]o one factor is outcome-
determinative," id., it is fair to say that an important element 
of a working relationship is the contract responsible for 
creating it. 
 
This is not a situation in which the franchise agreement is 
merely factually significant to the plaintiffs' claims or has a 
"but-for" relationship with them.  See Lenox MacLaren Surgical 
Corp., 449 Fed. Appx. at 709.  Contrast VSR Fin. Servs., Inc. v. 
McLendon, 409 S.W.3d 817, 832-833 (Tex. Ct. App. 2013) 
(plaintiff did not rely on terms of agreement in asserting 
claims where pleading only made reference to or presumed 
existence of agreement).  Rather, 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. 
 
b.  Concerted misconduct.  The plaintiffs have consistently 
alleged concerted misconduct by System4 and NECCS.  See Sanders 
v. Swift Transp. Co. of Arizona, LLC, 843 F. Supp. 2d 1033, 
21 
 
1037-1038 (N.D. Cal. 2012) (nonsignatory could compel 
arbitration under equitable estoppel where concerted misconduct 
alleged between signatory and nonsignatory).  In assessing 
whether a plaintiff has advanced sufficient allegations of 
concerted misconduct, courts frequently look to the face of the 
complaint.  See Holden v. Deloitte & Touche LLP, 390 F. Supp. 2d 
752, 768 (N.D. Ill. 2005).17 
 
The plaintiffs have lumped the two defendants together, 
asserting each claim in their complaint against System4 and 
NECCS collectively.  See Amstar Mtge. Corp. v. Indian Gold, LLC, 
517 F. Supp. 2d 889, 897 (S.D. Miss. 2007) (concerted misconduct 
prong met where action was "averred against all defendants" and 
complaint was "littered with references of substantially 
interdependent and concerted misconduct" by all defendants); 
Hagan vs. GreenPoint Credit Corp., U.S. Dist. Ct., No. 07-17-KKC 
(E.D. Ky. Aug. 3, 2007) (allegation of concerted misconduct 
demonstrated where plaintiffs collectively referred to all 
defendants in complaint as "the defendants").  Contrast Bailey 
v. ERG Enters., LP, 705 F.3d 1311, 1321 n.12 (11th Cir. 2013) 
(where plaintiffs only alleged misconduct against nonsignatory 
and did not name other signatory as party in complaint, second 
                     
 
17 Some jurisdictions require allegations of "pre-arranged, 
collusive behavior" between the signatory and nonsignatory 
defendants in order to meet the concerted misconduct test.  See 
Donaldson Co. v. Burroughs Diesel, Inc., 581 F.3d 726, 734-735 
(8th Cir. 2009) (citation omitted). 
22 
 
circumstance of equitable estoppel not implicated).  In 
addition, the plaintiffs have consistently charged both System4 
and NECCS with equal wrongs, failing to distinguish them 
throughout the evolution of this case, thereby effectively 
asserting "interdependent and concerted misconduct" between 
them.  Grigson 210 F.3d at 257.  See Maldonado vs. Mattress 
Firm, Inc., U.S. Dist. Ct., No. 13-CV-292-T-33AEP (M.D. Fla. 
June 3, 2013) (equitable estoppel warranted to compel 
arbitration where signatory failed to distinguish among 
defendants in alleging claims).  For example, the plaintiffs 
allege that both defendants, "together," subjected them to 
"numerous misrepresentations" and "misclassified" them as 
independent contractors.  Additionally, the plaintiffs allege 
that "[t]he written contracts between Defendants and the 
plaintiffs . . . are unenforceable" and unconscionable (emphasis 
added).  There is not a single claim alleged against System4 or 
NECCS as a separate entity.  See Brown v. Pacific Life Ins. Co., 
462 F.3d 384, 398-399 (5th Cir. 2006) ("[a]s the [plaintiffs] 
fail to allege tortious acts by [nonsignatories] that are 
separate and apart from [signatories], we can only conclude that 
the complaint asserts concerted misconduct by all parties"). 
 
In sum, because a decision maker must analyze the franchise 
agreements in assessing the merits of the plaintiffs' claims, 
and the plaintiffs have pointedly alleged concerted misconduct 
23 
 
between System4 and NECCS with respect to the agreements and 
their employment status thereunder, System4 can compel 
arbitration. 
 
2.  Validity of arbitration clause.  a.  Wage Act claims. 
Although System4 can compel arbitration despite being a 
nonsignatory, the plaintiffs further argue that their Wage Act 
claims are not arbitrable.  Specifically, they ask us to extend 
our decision in Crocker, 464 Mass. at 14-15, and hold that the 
arbitration clause does not apply to their Wage Act claims given 
that it makes no explicit mention of such claims.18  We decline 
to do so at this time. 
 
The Wage Act provides, in relevant part:  "[e]very person 
having employees in his service shall pay weekly or bi-weekly 
each such employee the wages earned by him to within six days of 
the termination of the pay period during which the wages were 
earned if employed for five or six days in a calendar week 
. . . .  No person shall by a special contract with an employee 
or by any other means exempt himself from this section . . ." 
(emphasis added).  G. L. c. 149, § 148.  "We have consistently 
held that the legislative purpose behind the Wage Act (and 
especially the 'special contract' language) is to provide strong 
                     
 
18 That the agreement makes no mention of wage claims is of 
little surprise, as it classifies the plaintiffs as independent 
contractors. 
24 
 
statutory protection for employees and their right to wages."  
Crocker, 464 Mass. at 13. 
 
In Crocker, we considered whether a general release of 
liability contained in a termination agreement barred Wage Act 
claims.  See id. at 12-15.  We held that, given the Wage Act's 
strong statutory protection for employees and their right to 
wages, as seen through its specific prohibition on exemption 
attempts, general releases fail to waive Wage Act claims unless 
they explicitly and clearly refer to such claims.  Id. at 14-15.  
Crocker, although referencing our decision in Warfield, 454 
Mass. at 398-402 (arbitration clause applies to gender 
discrimination claims only if clause specifically mentions such 
claims), was not a case concerning arbitration.  Rather, our 
overarching concern was that if general releases applied to Wage 
Act claims, employees might find themselves "unwittingly 
waiv[ing] their rights under the Wage Act."  Crocker, 464 Mass. 
at 14-15.  This, of course, was particularly problematic given 
the Wage Act's specific prohibition of contractual waivers of 
its rights and protections.  The "special contract" prohibition 
within the Wage Act was "intended to thwart . . . schemes" to 
avoid compliance.  DiFiore v. American Airlines, Inc., 454 Mass. 
486, 497 (2009). 
 
The instant case is distinguishable, as arbitration 
agreements are not the equivalent of claim releases.  See, e.g., 
25 
 
Barbieri v. K-Sea Transp. Corp., 566 F. Supp. 2d. 187, 192 
(E.D.N.Y. 2008) ("An agreement to arbitrate is not a release of 
any claim . . .").  An arbitration agreement, as opposed to a 
general release, does not permit an employer to thwart or exempt 
itself from Wage Act obligations, but solely dictates the forum 
in which the plaintiffs' right to recovery will be determined.  
Accordingly, here, the plaintiffs did not unwittingly relinquish 
their right to recovery under the Wage Act upon signing the 
franchise agreements.19 
 
b.  Unconscionable provisions.  The plaintiffs additionally 
argue that the arbitration agreements are permeated with a 
series of unconscionable provisions which render them invalid 
under Massachusetts law.  Specifically, the plaintiffs take 
issue with three aspects of the agreements:  (1) a cost-
splitting provision, (2) a shortened statute of limitations, and 
(3) a confidentiality provision.  They argue that, taken 
together, these provisions ought to render the entire agreement 
unenforceable. 
 
As an initial matter, we note that not all of these 
provisions are unconscionable.  "The determination that a 
                     
 
19 Even if Massachusetts law did require an arbitration 
clause to specifically mention applicability to claims under the 
Wage Act, "such a principle" might be "preempted by the [Federal 
Arbitration Act],"  Awuah v. Coverall N. Am., Inc., 703 F.3d 36, 
45 (1st Cir. 2012), as it could be interpreted to prohibit or 
disproportionately disfavor arbitration.  See AT&T Mobility LLC 
v. Concepcion, 131 S. Ct. 1740, 1747 (2011). 
26 
 
contract or term is or is not unconscionable is made in the 
light of its setting, purpose and effect" (quotation omitted).  
Miller, 448 Mass. at 679.  Under Massachusetts law, "[t]o prove 
that the terms of a contract are unconscionable, a plaintiff 
must show both substantive unconscionability (that the terms are 
oppressive to one party) and procedural unconscionability (that 
the circumstances surrounding the formation of the contract show 
that the aggrieved party had no meaningful choice and was 
subject to unfair surprise)."  Storie vs. Household Int'l, Inc., 
U.S. Dist. Ct., No. 03-40268 (D. Mass. Sept. 22, 2005), citing 
Zapatha v. Dairy Mart, Inc., 381 Mass. 284, 293 n.13 (1980). 
 
As for cost-splitting,20 we made clear in Machado I that the 
mandates of the Wage Act would override this provision if the 
plaintiffs were successful in arbitration.  See 465 Mass. at 
516-517.  See also Awuah v. Coverall N. Am., Inc., 791 F. Supp. 
2d. 284, 287-288, 290-291 (D. Mass. 2011) (recognizing award of 
attorney's fees and costs to prevailing plaintiff is mandatory 
under Wage Act and awarding over $37,000 in fees and costs on 
individual arbitration awards of approximately $1,600 and 
$5,700).  Accordingly, given that the arbitrator would be bound 
                     
 
20 The agreement mandates that arbitration take place in 
accordance with the commercial arbitration rules of the American 
Arbitration Association (AAA rules).  Rule 54 of the AAA rules 
provides that most arbitration costs "shall be borne equally by 
the parties, unless they agree otherwise or unless the 
arbitrator in the award assesses such expenses or any part 
thereof against any specified party or parties." 
27 
 
to award the plaintiffs, on prevailing, both the costs of their 
action as well as reasonable attorney's fees, this provision of 
the agreement is enforceable. 
 
The agreement additionally provides for a one year or 
eighteen-month statute of limitations, which is shorter than the 
three-year period provided by G. L. c. 149 § 150.  Massachusetts 
law permits contractually shortened limitations periods so long 
as they are "reasonable" and "not contrary to other statutory 
provisions or to public policy."  Creative Playthings 
Franchising, Corp. v. Reiser, 463 Mass. 758, 760-761 (2012) 
(holding contractual limitations period shortening time within 
which claims must be brought from six years to one year or 
eighteen months was valid and enforceable under Massachusetts 
law).  "[W]e have long allowed the limitations period within 
which a claim arising from a contract may be brought to be 
shortened by contractual agreement."  Id. at 759.  The 
plaintiffs have presented no evidence to suggest that the 
shortened statute of limitations at issue is unreasonable or 
contrary to public policy.  Accordingly, it remains enforceable. 
 
Finally, the plaintiff cites to cases in other 
jurisdictions in which confidentiality provisions have been 
deemed unconscionable because they may prevent potential 
plaintiffs from building similar cases against defendants.  
Courts have distinguished their own holdings on this issue based 
28 
 
on the size of the putative class.  Compare Ting v. AT&T, 319 
F.3d 1126, 1151-1152 (9th Cir.), cert. denied, 540 U.S. 811 
(2003) (confidentiality provision held substantively 
unconscionable when applied to large class of customers), with 
Kilgore v. KeyBank, Nat'l Ass'n, 718 F.3d 1052, 1059 n.9 (9th 
Cir. 2013) ("small number of putative class members . . . 
mitigates" confidentiality provision concerns).  Essentially, if 
the subject of arbitration is a contract that affects millions 
of people, the likelihood of future cases is increased.  In such 
a scenario, the unavailability of an arbitral decision will deny 
these potential plaintiffs with access to precedent, thereby 
putting the defendant "in a far superior legal posture."  Ting, 
319 F.3d at 1152.  Here, while a motion for class certification 
has yet to be filed, the putative class consists of franchisees, 
a relatively small and known quantity of individuals.  Any gains 
System4 might gather from the typical "repeat player" effect are 
therefore diminished.  This factual element is distinct from 
cases involving a large and unknowable class of customers.  Most 
importantly, however, "the enforceability of the confidentiality 
clause is a matter distinct from the enforceability of the 
arbitration clause in general."  Kilgore, 718 F.3d at 1059 n.9.  
The plaintiffs would still be "free to argue during arbitration 
that the confidentiality clause is not enforceable."  Id. 
29 
 
 
Nevertheless, even if we were to find any of the discussed 
provisions unconscionable, the franchise agreements contain a 
severability clause, requiring any unenforceable term to be 
severed.  This is not the type of case in which "illegality 
pervades the arbitration agreement," Booker v. Robert Half 
Int'l, Inc., 413 F.3d 77, 84-85 (D.C. Cir. 2005), nor are the 
arbitration provisions "so one-sided that their only possible 
purpose is to undermine the neutrality of the proceeding" 
(emphasis added; citations omitted).  Nino v. Jewelry Exch., 
Inc., 609 F.3d 191, 207-208 (3d Cir. 2010) (arbitration 
agreement unconscionable where employer permitted to strike more 
members of arbitration panel than employee, employee must give 
notice of claims he intends to arbitrate while employer is under 
no such obligation, and employee must file grievance within five 
days of underlying events or lose right to arbitration).  We are 
unconvinced that the contested provisions equate to such a level 
of unconscionability that the arbitration clause should not be 
enforced.  Not only do the franchise agreements contain a 
severability clause, but also the plaintiffs identify only one 
potentially unenforceable provision (confidentiality), which 
"does not infect the arbitration clause as a whole."  Booker, 
413 F.3d at 85. 
 
Last, "[f]or agreements governed by the FAA, the statute's 
presumption of arbitrability means that 'in applying general 
30 
 
state-law principles of contract interpretation to the 
interpretation of an arbitration agreement . . . due regard must 
be given to the federal policy favoring arbitration, and 
ambiguities . . . resolved in favor of arbitration.'"  Joulé, 
Inc., 459 Mass. at 94, quoting Volt Info. Sciences, Inc. v. 
Trustees of Leland Stanford Jr. Univ., 489 U.S. 468, 475-476 
(1989).  Given this strong public policy in conjunction with our 
holdings on the plaintiffs' Wage Act and unconscionability 
claims, we conclude that the arbitration clause at issue remains 
valid. 
 
Conclusion.  The denial of the plaintiffs' motion for a 
ruling that System4's arbitration clause is unconscionable and 
cannot apply to wage claims in light of Crocker is affirmed.  
The grant of the plaintiffs' motion for a ruling that the 
arbitration clause cannot be enforced by System4 is reversed.  
The case is hereby remanded to the Superior Court for further 
proceedings consistent with this opinion. 
 
 
 
 
 
 
 
So ordered.