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Machado v. System 4 LLC

Supreme Judicial Court of Massachusetts, Norfolk

April 13, 2015

Edson Teles Machado & others [1]
System 4 LLC & another. [2]

Argued December 4, 2014.

[As Modified On April 24, 2015]

Civil action commenced in the Superior Court Department on March 24, 2010.

Following review by this court, 465 Mass. 508, 989 N.E.2d 464 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.

Present: Gants, C.J., Spina, Cordy, Botsford, Duffly, Lenk, & Hines, JJ.


[28 N.E.3d 404] Cordy, J.

This case was filed in 2010 by a franchisee janitorial worker, on behalf of himself and other similarly situated

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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 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.


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 [28 N.E.3d 405] 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

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billings to the franchisees based on the value of the customer accounts offered to them. In addition, the agreements authorize the franchisees to use System4's proprietary information, including its brand and trademarks. The agreements characterize the franchisees as independent contractors, a characterization they contest, and each agreement contains an arbitration clause.

The arbitration clause is broad in scope, requiring arbitration of any claims between the franchisee and NECCS and its subsidiaries, affiliates, shareholders, officers, directors, managers, representatives, and employees, arising out of or related to:

(1) the franchise agreement or any other agreement between the parties, including claims related to the validity of the franchise agreement or any other agreement;
(2) NECCS's relationship with the franchisee; or
(3) claims relating to the operation of the franchised business.

Accordingly, virtually all claims arising out of the franchise relationship are subject to arbitration.[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 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

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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 ...

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