Court Opinion

ID: 2793204
Source: CourtListenerOpinion
Date Created: 2015-04-13 15:04:25.302177+00
Date Added: 2024-06-11T11:13:57.400203
License: Public Domain

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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.