In Machado v. System4 LLC, the Massachusetts Supreme Judicial Court (SJC) held that Massachusetts courts must enforce class action waivers in employment arbitration agreements unless plaintiffs can establish that they lack practical means to pursue their claims on an individual basis. This is a good decision for employers who want to enforce arbitration agreements that bar class proceedings.
The plaintiffs were individuals who entered into "local franchise agreements" with defendants, System4, LLC and NECCS, Inc., for the provision of commercial janitorial services to third-party customers. The plaintiffs alleged that the defendants had misclassified them and other allegedly similarly situated individuals as independent contractors, rather than employees, and that defendants had committed other violations of the Massachusetts Wage Act, M.G.L. ch. 149, §§ 148, 148B, and 150 (Wage Act). The defendants moved to stay the court proceedings pending arbitration according to the terms of the arbitration clause contained in the parties' franchise agreements. The trial court denied the motion, concluding that the arbitration provision was invalid and unenforceable because it barred class proceedings and prohibited an award of multiple damages. The trial court relied on the SJC's 2009 decision in Feeney v. Dell Inc., 454 Mass. 192 (Feeney I ), in which the SJC invalidated Dell's arbitration agreements that contained class action waivers as being against public policy.
However, following the SJC's decision in Feeney, in AT&T Mobility, LLC v. Concepcion the U.S. Supreme Court held that the Federal Arbitration Act (FAA) preempted a California rule that "classif[ied] most collective-arbitration waivers in consumer contracts as unconscionable." Based on Concepcion, the defendants moved for reconsideration of their motion to stay. The trial court denied the motion, and the SJC granted direct appellate review.
In light of Concepcion, the SJC ruled that it was improper to deny enforcement of class action arbitration waivers based solely on Massachusetts' public policy favoring class proceedings in certain contexts, including in Wage Act claims. Rather, in order to avoid enforcement of a class action waiver in an arbitration agreement, a plaintiff must demonstrative that "the class waiver, when combined with other terms of the arbitration agreement, effectively denies the plaintiff a remedy and insulates the defendant from private civil liability for violations of [s]tate law." The Court noted that the magnitude of the potential damages may be the most important factor in determining whether a claim is remediable in individual arbitration; that is, the higher the potential damage award, the more likely that the claim will be found to be remedial on an individual basis, resulting in enforcement of the class waiver. The SJC held that the Machado plaintiffs could not sustain their burden based on the fact that their damages relating to franchise fees alone ranged from approximately $9,500 to $21,000. "[I]t would be difficult for us to conclude that potential damages of approximately $10,000 or greater are so small as to preclude the bringing of claims in individual arbitration."
Although the Court held that the class waiver was enforceable, it struck the provision that barred an award of multiple damages as being an illegal attempt to circumvent the Wage Act. According to the SJC, an arbitrator who finds for a plaintiff in a Wage Act claim must award treble damages and attorneys' fees. According to the SJC, striking the bar on multiple damages would not change the fundamental character of the proceedings or the purpose of the arbitral forum.
Employers are encouraged to review their arbitration agreements to ensure they comply with the SJC's holding in Machado. Employers may want to consider including provisions in their waivers that make individual-based arbitrations feasible for small-dollar claims.