Court: District Court, D. Massachusetts; February 9, 2012; Federal District Court
The Plaintiffs, current and former franchisees of Coverall North America, Inc., have filed six causes of action, including breach of contract and deceptive trade practices, on behalf of themselves and similarly situated individuals. The Massachusetts Supreme Judicial Court has established that Coverall’s franchises qualify as employers. Consequently, a class was certified for individuals who owned Coverall franchises in Massachusetts since February 15, 2004, without signing an arbitration agreement or having their claims previously adjudicated.
A dispute has arisen regarding whether thirty individuals who obtained franchises via "Consent to Transfer" agreements are included in the certified class, as they did not receive class notice. The Plaintiffs have requested a court ruling to clarify that these Transferees belong to the class. Coverall franchises can be acquired either through a direct Janitorial Franchise Agreement or by transfer via the Consent to Transfer agreement. The Consent to Transfer agreement does not include an arbitration clause, although it references the Janitorial Franchise Agreement, which does.
The Plaintiffs argue that the Transferees are not subject to the arbitration clause since there is no evidence that they signed any agreement containing such a clause. In contrast, Coverall contends that the language in the Consent to Transfer agreements binds Transferees to all terms of the Janitorial Franchise Agreement, including the arbitration clause, and asserts that each Transferee signed a Guaranty to ensure compliance with the obligations of the Franchisee under the agreement.
Fifteen out of thirty Transferees received Coverall's Franchise Offering Circular, which included an exemplar of the Franchise Agreement, before signing their Consent to Transfer agreements. The central issue is whether these Transferees demonstrated mutual intent to be bound by the arbitration clause in the Janitorial Franchise Agreement, particularly concerning the applicability of this clause to nonsignatories. If the Transferees are bound by the arbitration agreement, they would fall outside the certified class, which consists solely of individuals who have not signed such agreements.
Regarding legal matters, the Consent to Transfer agreements lack a choice of law clause; however, the Janitorial Franchise Agreement specifies that it is governed by the laws of Massachusetts, which applies since the certified class includes only individuals with Massachusetts-based franchises. Both parties agree on the application of Massachusetts law.
Coverall contends that any dispute regarding the existence or validity of the arbitration agreements should be resolved by an arbitrator. Arbitration is fundamentally contractual, meaning parties cannot be compelled to arbitrate unless they have agreed to do so. While there is a strong federal policy favoring arbitration, this does not extend to parties not explicitly included in the original agreement. The determination of whether the parties are bound by the arbitration clause is a question of arbitrability, which typically falls to the court unless the parties have explicitly delegated this authority to an arbitrator. Courts have consistently ruled that they must respect the parties' clear intentions regarding the scope of arbitration agreements.
In Microchip Technology Inc. v. U.S. Philips Corp., the court determines that it is responsible for deciding if a nonsignatory successor corporation is bound by an arbitration agreement signed by its predecessor. Similarly, Fluehmann v. Associates Financial Services underscores that the court should assess a nonsignatory's obligation to arbitrate. The Supreme Court's ruling in First Options clarifies that courts should not assume parties agreed to arbitrate issues of arbitrability without clear evidence. In the case discussed, Kaplan contended that he, as the owner of an investment company, was not personally bound to arbitrate a dispute because he did not sign the arbitration agreement, despite the company being bound. The Supreme Court held that ambiguity regarding the agreement's terms did not empower arbitrators to decide on arbitrability, which remains a judicial question.
In the current case regarding the Consent to Transfer agreements between Coverall and the Transferees, there is no clear evidence that these parties agreed to arbitrate disputes related to the Janitorial Franchise Agreement, as the agreements do not mention arbitration. Thus, the ambiguity in the agreements means the court, not an arbitrator, must determine if the Transferees are bound by the arbitration clause. The court distinguishes this situation from Apollo Computer, where a prima facie agreement to arbitrate was established, allowing the arbitrator to resolve disputes. Here, the court must first ascertain whether any agreement to arbitrate exists between the parties before addressing arbitration obligations. Consequently, the determination of whether the parties agreed to arbitrate is a matter for judicial resolution, reaffirming that the Transferees cannot be compelled to arbitrate without a binding arbitration clause.
The court must determine if non-signatory workers are bound to arbitrate under the arbitration clause in the Janitorial Franchise Agreement, despite not signing it. The First Circuit allows for nonsignatories to be bound by agreements signed by others under certain contract and agency principles. The Second Circuit outlines five grounds for binding non-signatories, including incorporation by reference, assumption, agency, veil-piercing/alter ego, and estoppel. Courts analyze the relationships between parties and the connection between claims and the arbitration contract. The determination relies on state contract law principles, specifically Massachusetts law, which emphasizes a reasonable interpretation of the entire contract consistent with its language and intent. A party seeking arbitration must demonstrate that it aligns with the contract's clear intent. For incorporation by reference, arbitration clauses can be included through separate agreements that reference them. The court will assess if the Consent to Transfer agreements contain adequate language to incorporate the arbitration clause, particularly the phrase stating that the "Transferee shall succeed to all of Franchisee’s rights and obligations under Franchisee’s Janitorial Franchise Agreement."
Circuit courts differ on the requirements for effective incorporation of arbitration clauses. The Fourth and Sixth Circuits allow for general obligations in related agreements to suffice, as seen in Maxum Founds. Inc. v. Salus Corp. and Exchange Mut. Ins. Co. v. Haskell Co., where parties were bound to arbitrate due to incorporated terms. In contrast, the Seventh Circuit mandates explicit incorporation of the arbitration clause itself, as established in Grundstad v. Ritt. Guarantors and sureties are bound to arbitrate only if they explicitly agree to it.
The First Circuit emphasizes that the plaintiffs in relevant cases often lack sophistication, being recent immigrants or individuals with limited education. Under Massachusetts law, a contract requires a "meeting of the minds," focusing on mutual intent to arbitrate rather than strict adherence to formalities. Notably, an individual cannot be bound to an arbitration clause without notice of it, a principle upheld by the First Circuit in several cases.
The determination of whether an arbitration agreement exists hinges on whether Coverall provided adequate notice to employees regarding arbitration of statutory claims. This sufficiency is assessed objectively, considering if a reasonable employee would have been informed of the waiver of judicial rights. Massachusetts law indicates that minimal notice can be sufficient if an employee acknowledges understanding of the arbitration terms or if the employer highlights the manual containing such terms.
In the case at hand, while the Consent to Transfer agreements state that "Transferee shall succeed to all of Franchisee’s rights and obligations under Franchisee’s Janitorial Franchise Agreement," they do not mention the arbitration clause. Coverall contends that this language binds all Transferees to the arbitration clause despite its absence in the agreements.
Two distinct groups of Transferees are identified based on their receipt of Coverall’s Franchise Offering Circular. The first group, who signed Consent to Transfer Agreements without receiving the Circular, lacked adequate notice of the arbitration agreement, as neither the Circular nor their agreements indicated the existence of an arbitration clause. The Guaranty agreements they signed did not highlight the arbitration clause, failing to provide the necessary notice for enforcement.
In contrast, the second group received the Franchise Offering Circular, which explicitly stated that they must also receive a Franchise Agreement containing all material terms. This Circular included an exemplar of the Janitorial Franchise Agreement, which contained the arbitration clause, thereby putting a reasonably prudent employee on notice of the arbitration requirement. Consequently, these Transferees are bound by the arbitration clause.
The Court concluded that Coverall met its obligation to notify the second group but failed with respect to the first group. The Court granted in part and denied in part the Plaintiffs’ Motion for Court Ruling on Scope of Class, certifying that individuals from the first group who signed Consent to Transfer Agreements and worked for Coverall in Massachusetts since February 15, 2004, are included in the certified class.
Coverall incorporated an arbitration clause into its Janitorial Franchise agreements, which parallels its Consent to Transfer agreements. Courts have ruled that non-signatories may be compelled to arbitrate under specific conditions, particularly when seeking benefits from an arbitration agreement while trying to evade arbitration. The principle of clear and unmistakable intent mandates caution in enforcing arbitration when an agreement lacks clarity on arbitrability. Courts typically interpret contracts as a matter of law when material facts are undisputed and intent is derived solely from the written agreements’ language. This interpretation excludes jury involvement unless the agreement's wording is in dispute. The waiver of the right to a jury trial due to arbitration must be explicit, as this right is fundamental, and any waiver of statutory rights in Massachusetts must be both knowing and voluntary. The current ruling pertains only to the scope of the class in the Plaintiffs’ motion, not addressing the validity of Coverall's arbitration agreement, which remains unexamined by the court.
The First Circuit has not yet determined whether Coverall’s arbitration agreements offer only illusory relief, as this question is reserved for judicial review. The current focus is on whether the Transferees are bound by the arbitration clause, with the illusoriness issue not being addressed in this memorandum. The Court plans to first complete proceedings for the currently certified class before tackling the illusoriness question, utilizing this class as a control group for comparison with another group regarding recovery rates, access to adjudicatory processes, and other relevant parameters. The Court emphasizes the importance of individual autonomy in contracts, highlighting both the freedom to contract and the freedom from contract. Binding non-consenting workers to arbitration would violate their freedom from contract, which is essential for individuals to choose their contractual obligations.
