1st_Circuit_seal.pngBy Lynn Kappelman and Anthony Califano

In Awuah, et al. v. Coverall North America, Inc., No. 12-1301 (1st Cir. Dec. 27, 2012), the First Circuit reversed a district court’s ruling and ordered arbitration of workplace disputes for certain franchisees even though they had not signed, received, or reviewed an arbitration agreement. The First Circuit found that the district court had erroneously adopted a special heightened notice requirement for arbitration clauses that does not exist and, even if Massachusetts law had imposed such a notice requirement, the FAA would preempt it. Id. at 4. The decision is important for employers in the context of workplace arbitration agreements.

The Facts Of The Case

Coverall North America, Inc. (“Coverall”) contracts to provide commercial janitorial cleaning services to building owners or operators, and its “franchisees” do the cleaning. In their complaint, the franchisees asserted a variety of state law claims against Coverall including breach of contract, misrepresentation, deceptive and unfair business practices, misclassification as independent contractors, and failure to pay the wages due to them. Many (but not all) of the franchisees signed Franchise Agreements with Coverall providing that, with certain exceptions not implicated here, “all controversies, disputes or claims between Coverall . . . and Franchisee . . . shall be submitted promptly for arbitration.” Id. The district court readily enforced the arbitration agreements in those instances where a franchisee signed a Franchise Agreement containing an arbitration clause. Id. at 7. 

However, the Franchise Agreements also permitted franchisees to assign the Agreement to a person (‘the assignee’) meeting the qualifications established by Coverall for granting new franchises. Thirty-one  of the franchisees, including the sixteen appellees, did not enter into the Franchise Agreement with Coverall but rather became Coverall franchisees either by signing Consent to Transfer Agreements (“Transfer Agreements”) and Guaranties to Coverall Janitorial Franchise Agreements (“Guaranties”), or by signing only the latter Guaranties. Id. at 3-6. The sixteen appellees at issue in the appeal never even received a copy of the Franchise Agreement, but did execute the Transfer Agreements and/or the Guaranties, both of which incorporated the Franchise Agreement by reference.

The Underlying District Court Ruling

On September 22, 2011, the district court refused to enforce the arbitration agreement for certain of the franchisees and certified a class consisting of “all individuals who have owned a Coverall franchise and performed work for Coverall customers in Massachusetts at any time since February 15, 2004, who have not signed an arbitration agreement or had their claims previously adjudicated.” Id. at *7 (emphasis added) (citing Awuah II, 843 F. Supp. 2d at 174). On November 29, 2011, plaintiffs filed a motion for a ruling on the scope of the class, arguing that “those who purchased their Coverall franchises through certain ‘Consent to Transfer’ agreements[ ] that do not contain arbitration clauses” should be added to the class. Id. The district court found that some of the transferee plaintiffs had received copies of the Franchise Agreement and therefore had notice of the arbitration clause. Id. at 8. Thus, the district court’s resolution of whether or not to order franchisees to arbitrate was based on whether they had received copies of the Franchise Agreement containing the arbitration clause.

With respect to the sixteen franchisees who had not received copies of the Franchise Agreement, the district court concluded that “Coverall did not give the Transferees information sufficient to put a reasonably prudent employee on adequate notice of the agreement to arbitrate.” Id. at 9. Thus, the district court “expanded the class to include these new plaintiffs who had not been given copies of the Franchise Agreement, [although it was] referred to in the documents they did receive.” Id. The district court also held that a franchisee could not be bound to an arbitration clause if he does not have notice of it,” and that “Coverall . . . has not produced any evidence that the transferees were ever themselves shown the transferors’ franchise agreements or that they were in any other way informed about the existence of an arbitration clause.” Id. at 8. Coverall argued that “[p]laintiffs’ assertion that some specific level of notice is required before the Transferee-Owners may be bound by their agreements to arbitrate is contrary to settled law.” Id.

The First Circuit’s Decision

On appeal, the First Circuit agreed with Coverall, holding that while the Transfer Agreements did not all use the traditional language of “incorporating by reference” the arbitration clause of the Franchise Agreement, no such magic terms are required and other language in the agreements clearly communicated the purpose of incorporating the arbitration clause. Id. at 13. These agreements provided that the transferees “succeed to all of Franchisee’s rights and obligations under Franchisee’s Janitorial Franchise Agreement,” or “become liable with the Franchisee for all of the obligations imposed by the Janitorial Franchise Agreement.” Id. (internal quotation marks omitted). Moreover, the First Circuit held that the Transfer Agreements were not the only pertinent documents executed by the parties and other Transfer Agreements incorporated the responsibilities, duties, and obligations with respect to arbitration.

Implications For Employers

This case is an interesting one for employers because while it is always preferable to have an employee execute the arbitration agreement itself, this ruling implies that an employer may enforce an arbitration agreement where the employer has incorporated it by reference into another document it has provided to the employee.