Machado v. System4 LLC, 471 Mass. 204

Background

Franchisees (including Machado) signed standard-form franchise agreements with NECCS, a regional subfranchisor, giving access to System4’s marks, methods, and account referrals; the agreements classify franchisees as independent contractors and contain a broad arbitration clause.
System4 (master franchisor) is a nonsignatory; plaintiffs allege NECCS exists to conduct System4’s business and that System4 controlled the franchise relationship.
Plaintiffs sued System4 and NECCS asserting misclassification, Wage Act violations, rescission and related claims, often pleading the defendants collectively.
Trial court denied defendants’ motion to compel arbitration as to System4 (nonsignatory), finding System4 could not enforce the arbitration clause; the court otherwise left unconscionability issues for arbitration.
The Supreme Judicial Court granted direct review to decide (1) whether a nonsignatory (System4) can compel arbitration under equitable estoppel, and (2) whether Wage Act claims or specific arbitration provisions render the clause unenforceable.

Issues

Issue	Plaintiff's Argument	Defendant's Argument	Held
Can nonsignatory System4 compel signatory franchisees to arbitrate?	Machado: System4 never signed; thus cannot enforce arbitration against plaintiffs.	System4: equitable estoppel and related doctrines permit a nonsignatory to compel arbitration where claims are intertwined with the contract or concerted misconduct is alleged.	Yes. Court applied equitable estoppel: plaintiffs’ claims depend on and are intertwined with the franchise agreements and they allege concerted misconduct by System4 and NECCS, so System4 may compel arbitration.
Are Wage Act claims non-arbitrable because the arbitration clause does not explicitly mention the Wage Act?	Machado: Crocker requires explicit reference to wage claims to waive or limit Wage Act rights; arbitration clause does not mention Wage Act.	System4: arbitration is a forum-selection mechanism (not a release); federal law favors arbitration and may preempt a state rule requiring explicit mention.	No extension of Crocker. Court held arbitration clause can cover Wage Act claims; arbitration is a forum choice, not a waiver of wage rights, and FAA policy supports arbitrability.
Are challenged arbitration provisions unconscionable (cost-splitting; shortened limitations; confidentiality) so as to void the clause?	Machado: cumulative and specific provisions are oppressive and prevent effective enforcement.	System4: provisions are lawful or severable; AAA rules and Wage Act protections (attorney’s fees/costs) mitigate cost concerns.	Clause survives. Cost-splitting is mitigated by Wage Act remedies; shortened limitations upheld as permissible where reasonable; confidentiality concern not shown to pervade arbitration. Severability clause preserves the remainder.
Should unconscionability questions be decided by court or arbitrator?	Machado: some unconscionability questions are for the court.	System4: procedural defenses were for arbitrator where appropriate.	Court left many unconscionability factual determinations to arbitration and reaffirmed strong federal policy favoring arbitration.

Key Cases Cited

Machado v. System4 LLC, 465 Mass. 508 (Mass. 2013) (state court decision bearing on class-waiver/arbitrability issues)
Depianti v. Jan-Pro Franchising Int'l, Inc., 465 Mass. 607 (Mass. 2013) (nonsignatory liability and franchisor control analyzed)
Crocker v. Townsend Oil Co., 464 Mass. 1 (Mass. 2013) (general releases and Wage Act protection requiring explicit waiver)
AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (U.S. 2011) (FAA preempts state rules invalidating class-waiving arbitration clauses)
American Express Co. v. Italian Colors Restaurant, 133 S. Ct. 2304 (U.S. 2013) (Supreme Court on enforceability of arbitration provisions limiting class actions)
Arthur Andersen LLP v. Carlisle, 556 U.S. 624 (U.S. 2009) (equitable estoppel and state contract law govern nonsignatory arbitration questions)