Opinion ID: 814391
Heading Depth: 2
Heading Rank: 1

Heading: The Threshold Question of Arbitrability

Text: The FAA provides that upon being satisfied that the making of the agreement for arbitration or the failure to comply therewith is not in issue, the court shall make an order directing the parties to proceed to arbitration in accordance with the terms of the agreement. 9 U.S.C. § 4. [A] gateway dispute about whether the parties are bound by a given arbitration clause raises a 'question of arbitrability' for a court to decide. Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79, 84 (2002). Parties may delegate questions of arbitrability to the arbitrator, but [u]nless the parties clearly and unmistakably provide otherwise, the question of whether the parties agreed to arbitrate is to be decided by the court, not the arbitrator. AT&T Techs., Inc. v. Commc'ns Workers of Am., 475 U.S. 643, 649 (1986). This case is different from the prior appeal to us in Awuah I, where a different group of plaintiffs conceded that they had franchise agreements containing arbitration clauses, and those arbitration clauses incorporated by reference rules delegating certain issues to the arbitrator. 554 F.3d at 9. In Awuah I, we held that the arbitrator should decide whether the arbitration clause was unconscionable, id. at 12, but that the court should determine whether the arbitration remedy in this case was illusory. Id. at 13. Here the district court was correct, as to this different group of plaintiffs, to address the predecessor -10- question of whether there was an agreement at all to arbitrate. Rosenberg v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 170 F.3d 1, 19 (1st Cir. 1999); see also Fantastic Sams Franchise Corp. v. FSRO Ass'n Ltd., 683 F.3d 18, 25 (1st Cir. 2012) (There is no dispute here that the district court, quite appropriately, first looked for whether there was a valid, contractual agreement to arbitrate.). The question of whether the Unbound Owners assumed obligations under the arbitration clause of the Franchise Agreements is for the court. See McCarthy v. Azure, 22 F.3d 351, 354-55 (1st Cir. 1994) ([A] party seeking to substitute an arbitral forum for a judicial forum must show, at a bare minimum, that the protagonists have agreed to arbitrate some claims. . . . The federal policy presumes proof of a preexisting agreement to arbitrate disputes arising between the protagonists.) (emphasis omitted). Nonetheless, the district court got the answer to the question wrong, as a matter of both state and federal law. B. Incorporation by Reference of the Arbitration Clause When deciding whether the parties agreed under the FAA to arbitrate a certain matter, courts 'generally . . . should apply ordinary state-law principles that govern the formation of contracts.' Rosenberg, 170 F.3d at 19 (alteration in original) (quoting First Options of Chi., Inc. v. Kaplan, 514 U.S. 938, 944 (1995)). The district court determined, and the parties do not -11- dispute, that Massachusetts law governs this controversy. See Awuah II, 843 F. Supp. 2d at 175. '[T]raditional principles' of state law allow a contract to be enforced by or against nonparties to the contract through 'assumption,[5] piercing the corporate veil, alter ego, incorporation by reference, third-party beneficiary theories, waiver and estoppel[6] . . . .' Arthur Andersen LLP v. Carlisle, 556 U.S. 624, 631 (2009) (quoting 21 R. Lord, Williston on Contracts § 57:19, at 183 (4th ed. 2001)). Under Massachusetts law, 'the language used in a contract to incorporate extrinsic material by reference . . . must clearly communicate that the purpose of the reference is to incorporate the referenced material into the contract.' NSTAR Elec. Co. v. Dep't of Pub. Utils., 968 5 Coverall argues that the Transfer Agreements should be read as assignments, and that the Unbound Owners therefore assumed all of the prior franchisees' obligations under their Franchise Agreements. The Transfer Agreements merely state that Franchisee executed a Janitorial Franchise Agreement and related documents (the 'Franchise Agreement') on [date], under which the Franchisee was to operate a Coverall janitorial franchise (the 'Franchise'), and that Franchisee desires to sell the following assets of his Franchise to Transferee, and Transferee desires to purchase the following assets of the Franchise. This language does not accomplish an assignment of the prior franchisees' rights and obligations under the Franchise Agreement. 6 Coverall also argues on appeal that because the Unbound Owners enjoyed the benefits of the Franchise Agreement, they are bound by the arbitration clause of this agreement under the doctrine of equitable estoppel. Coverall did not make this argument before the district court and we do not address it. -12- N.E.2d 895, 905 (Mass. 2012) (quoting Northrop Grumman Info. Tech., Inc. v. United States, 535 F.3d 1339, 1345 (Fed. Cir. 2008)). The Transfer Agreements, as we have described, do not all use the traditional language of incorporating by reference the arbitration clause of the Franchise Agreement. But no such magic terms are required. For some Transfer Agreements at issue, other language in the agreements clearly communicated the purpose of incorporating the arbitration clause. These agreements7 provided that the transferees succeed to all of Franchisee's rights and obligations under Franchisee's Janitorial Franchise Agreement, or become liable with the Franchisee for all of the obligations imposed by the Janitorial Franchise Agreement. Since the arbitration clause of the Franchise Agreement creates a right and an obligation to submit all controversies, disputes or claims between Coverall . . . and Franchisee for arbitration, these Transfer Agreements sufficiently incorporated by reference the arbitration clause. Moreover, the Transfer Agreements are not the only pertinent documents executed by the parties. All of the Unbound Owners also signed Guaranties under which they jointly, severally 7 Other Transfer Agreements included no reference to the arbitration clause or to general rights and obligations under the Franchise Agreement, so those agreements do not of themselves incorporate the arbitration clause and require referral to arbitration. But the Transfer Agreements are not the only agreements which require interpretation. -13- and unconditionally guarantie[d] to Coverall performance of all responsibilities, duties, indebtedness and obligations of the Franchisee under the [Franchise] Agreement (emphasis added). By like reasoning, they incorporate the responsibilities, duties, and obligations with respect to arbitration. Appellees argue, to the contrary, that: This provision, which does not mention the arbitration clause, cannot suffice to bind these workers to arbitrate their claims with Coverall. Indeed, it is clear from the examples that the Guaranty provides of what these “responsibilities, duties, indebtedness and obligations” are that they all relate to the workers’ substantive obligations to pay money and/or otherwise be financially indebted to Coverall in exchange for cleaning work. We disagree. 'All means all, or if that is not clear, all, when used before a plural noun . . . means [t]he entire or unabated amount or quantity of, the whole extent, substance, or compass of, the whole.' Instrument Indus. Trust ex rel. Roach v. Danaher Corp., No. 033960BLS, 2005 WL 3670416, at  (Mass. Super. Nov. 28, 2005) (quoting Hollinger, Inc. v. Hollinger Int'l, Inc., 858 A.2d 342, 377 (Del. Ch. 2004)). Moreover, the Guaranties' explicit references to responsibilities, duties, and obligations undercut appellees' claim that the Guaranties only concerned obligations to pay money. Massachusetts case law leads to this result. See, e.g., Mass. Org. of State Eng'rs & Scientists v. Labor Relations Comm'n, 452 N.E.2d 1117, 1122 (Mass. 1983) (discussing duty to arbitrate) (emphasis added); Norton v. Mass. Bay Transp. Auth., 336 N.E.2d 854, 855 (Mass. 1975) (discussing -14- obligation to arbitrate) (emphasis added). The Guaranties clearly communicate[d] that the purpose of th[is] reference [was] to incorporate responsibilities, duties, and obligations under the Franchise Agreement, NSTAR Elec. Co., 968 N.E.2d at 905, which included those under the arbitration clause. At oral argument, appellees belatedly raised a new argument, citing Black's Law Dictionary to support the proposition that what the Guaranty says is, the franchisee has to do these things, but if the franchisee doesn't do it, you're on the hook. This is too late, so the argument is waived, see United States v. Santiago-Pérez, 666 F.3d 57, 60 n.6 (1st Cir. 2012), but beyond that, it does not work. The Guaranties expressly identify the transferees as both the Franchisees and the Guarantors. Plaintiff-appellees are not just guarantors, they are also franchisees. They are like the other franchisees who signed the Franchise Agreement directly and it would be odd in these circumstances to treat the two groups differently. The Guaranties do not merely impose responsibilities upon transferees for the obligations of other persons. C. The District Court's Erroneous Adoption of a Special Heightened Notice Requirement for Such Commercial Arbitration Clauses The district court's reasoning essentially adopted the view that arbitration clauses cannot be enforced unless there is heightened notice to the party sought to be bound. It did not -15- purport to find this heightened notice requirement in state law, but rather in a series of cases from this court, cases where the underlying claim was based, unlike here, on special provisions in federal employment statutes. Appellees argue not only that they did not enter into the arbitration clause in the Franchise Agreement, but that it would be unconscionable to bind [them] to an arbitration clause that they never even saw, citing Skirchak v. Dynamics Research Corp., 508 F.3d 49 (1st Cir. 2007). Skirchak is clearly distinguishable from this case, since in Skirchak the parties . . . affirmatively stated their intention that the court decide the unconscionability . . . question[]. Id. at 56. There is no such agreement between the parties here. Instead, since we conclude that the Unbound Owners effectively entered into an arbitration agreement with Coverall, any claim of the unconscionability of this agreement is for the arbitrator, as in Awuah I. See 554 F.3d at 12. In Massachusetts courts, it has long been the rule that [t]ypically, one who signs a written agreement is bound by its terms whether he reads and understands them or not. St. Fleur v. WPI Cable Sys./Mutron, 879 N.E.2d 27, 35 (Mass. 2008); see also Haufler v. Zotos, 845 N.E.2d 322, 333 (Mass. 2006); Cohen v. Santoianni, 112 N.E.2d 267, 271 (Mass. 1953); Wilkisius v. Sheehan, 155 N.E. 5, 6 (Mass. 1927); Atlas Shoe Co. v. Bloom, 95 N.E. 952, 953 (Mass. 1911); Rice v. Dwight Mfg. Co., 2 Cush. 80, 87 (Mass. -16- 1848). Massachusetts law is explicit that it does not impose a special notice requirement upon agreements containing arbitration clauses. See St. Fleur, 879 N.E.2d at 34-35 (error to conclude that party bore the risk of [counter-party's] ignorance of the nature and contents of the arbitration agreement). Moreover, the FAA provides that arbitration agreements shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract. 9 U.S.C. § 2. This clause preempts state-law defenses that apply only to arbitration or that derive their meaning from the fact that an agreement to arbitrate is at issue. AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740, 1746 (2011). Indeed, the Supreme Court recently vacated a state supreme court decision which applied a state law standard inconsistent with the FAA and remanded for application of the FAA rule. Nitro-Lift Tech., LLC v. Howard, 133 S. Ct. 500 (2012) (per curiam). Even if the district court had identified a principle of state law that imposed a special notice requirement before parties such as these could enter into an arbitration agreement, as it did not, such a principle would be preempted by the FAA. See Doctor's Assocs., Inc. v. Casarotto, 517 U.S. 681, 687 (1996) (holding that FAA displaces Montana statute that conditions the enforceability of arbitration agreements on compliance with a special notice requirement not applicable to contracts generally); Morales v. Sun Constructors, -17- Inc., 541 F.3d 218, 224 (3d Cir. 2008) ([A]pplying a heightened 'knowing and voluntary' standard to arbitration agreements would be inconsistent with the FAA.). In addition, the cases from which the district court purported to find a special notice requirement for these contracts do not impose such a requirement. To begin, the district court erred in consulting cases arising under federal law rather than Massachusetts law, which governs here. State law imposes no such heightened notice requirement upon contracts, including arbitration agreements. Moreover, two of the three cases from this court that the district court cited -- McCarthy, 22 F.3d at 354-55, and Brennan v. King, 139 F.3d 258, 264 (1st Cir. 1998) -- stood not for the proposition that a special notice requirement applied to arbitration agreements, but only for the unremarkable principle that a party seeking to substitute an arbitral forum for a judicial forum must show, at a bare minimum, that the protagonists have agreed to arbitrate some claims. McCarthy, 22 F.3d at 354-55 (emphasis omitted); see also Brennan, 139 F.3d at 264 (quoting McCarthy, 22 F.3d at 354-55). The district court also cited Campbell v. Gen. Dynamics Gov't Sys. Corp., 407 F.3d 546 (1st Cir. 2005), which involved claims of violation of federal statutes whose terms and language provide particular protections for claimants. Campbell concerns language in the ADA which provides that “[w]here appropriate and to -18- the extent authorized by law, the use of alternative means of dispute resolution, including . . . arbitration, is encouraged to resolve disputes arising under this chapter.” 42 U.S.C. § 12212. Campbell interpreted this language, 407 F.3d at 553-55, as did Rosenberg, a prior case addressing identical language in the Civil Rights Act of 1991. 170 F.3d at 18-19. These cases construed this language to require minimally sufficient notice, Campbell, 407 F.3d at 559, or some minimal level of notice, Rosenberg, 170 F.3d at 21, that those statutory claims are subject to arbitration. Campbell limited its holding to purported waiver[s] of the right to litigate ADA [Americans with Disabilities Act] claims. 407 F.3d at 559. In turn, Rosenberg expressly stated that this case does not implicate any broader questions of enforceability of the arbitration clause when the 1991 CRA [Civil Rights Act] or ADEA [Age Discrimination in Employment Act] are not involved. 170 F.3d at 19. The Supreme Judicial Court of Massachusetts has reached the same conclusion that we do. It has stated that [t]he Rosenberg court explicitly limited its holding to claims brought under Federal civil rights laws and held that the Rosenberg holding does not apply in the absence of the precise wording of Federal civil rights statutes. St. Fleur, 879 N.E.2d at 35. The -19- district court erred in applying the requirements of Campbell and Rosenberg to appellees' state-law claims.8