The Franchise Memorandum

The Massachusetts Supreme Judicial Court found that a franchisor could compel subfranchisees to arbitrate their disputes under arbitration clauses in the sub-franchise agreements, even if the franchisor was not a signatory to such agreements. Machado v. System4 LLC, 2015 Mass. Lexis 163 (Mass. Apr. 13, 2015). The plaintiff franchisees of a System4 subfranchisor filed a complaint against the subfranchisor and System4 alleging breach of contract and violations of the Massachusetts Wage Act. The subfranchisor and System4 filed a motion to stay proceedings pending arbitration, which was denied with respect to System4 on the grounds that it was not a party to the subfranchise agreements. System4 appealed and the subfranchisees filed an application for direct appellate review, which was granted by the Massachusetts Supreme Judicial Court.

The court found that because the subfranchisees agreed to arbitrate virtually all claims arising out of the sub-franchise agreements, they were equitably estopped from avoiding arbitration of their breach of contract and other claims against System4 on the grounds that System4 was not a signatory to the subfranchise agreements. The court noted that equitable estoppel typically allows a nonsignatory to compel arbitration when a signatory must rely on the terms of the written agreement in asserting claims against the nonsignatory, or a signatory raises allegations of "interdependent and concerted" misconduct by a signatory and nonsignatory. Because the subfranchisees' claims were so "intimately founded in and closely related" to the subfranchise agreements which mandated arbitration, and because the subfranchisees failed to distinguish between System4 and the subfranchisor in their complaint, the court found that System4 could compel arbitration.