System4, LLC v. Ribeiro

Filing 20

Judge Rya W. Zobel: ORDER entered denying 4 System4, LLC's Motion to Vacate denied. Its request for attorneys' fees and costs is also denied. Luis Ribeiro's Cross Motion to Confirm (Docket # 11) is allowed. Judgment may be entered for respondent. (DiBlasi, Lily)

UNITED STATES DISTRICT COURT
DISTRICT OF MASSACHUSETTS

CIVIL ACTION NO. 17-10455-RWZ

SYSTEM4, LLC
v.
LUIS RIBEIRO

MEMORANDUM OF DECISION AND ORDER
August 11, 2017

ZOBEL, S.D.J.
System4, LLC (“System4”) petitions the court to vacate a February 16, 2017 final
arbitration award and several “related findings and rulings.” Docket # 4, at 1. It further
seeks attorneys’ fees and costs. Respondent Luis Ribeiro moves to confirm the award.
Docket # 11.
I.

Background
The following facts are drawn from the arbitrator’s findings of fact, which this

court must accept. See Mercy Hospital, Inc. v. Mass. Nurses Ass’n, 429 F.3d 338, 344
(1st Cir. 2005) (“[A]n inquiring court is bound by the arbitrator’s findings of fact.”)
(citation omitted).
A.

Procedural History of Putative Class Action

This arbitration arose against the backdrop of a complicated procedural history.

In 2010, a putative class action suit1 was filed in Norfolk Superior Court against
System4 on behalf of cleaning workers who were unit franchisees and who claimed to
have been misclassified as independent contractors by System4, the master franchisor,
and NECCS, Inc., d/b/a System4 of Boston, LLC (“NECCS”), the master franchisee, in
violation of the Massachusetts Wage Act, M.G.L. c. 149, § 148 (“Wage Act”). The case
made its way to the Massachusetts Supreme Judicial Court (“SJC”) twice. Central to
the issues here is the SJC’s later decision, which addressed System4’s motion to
compel plaintiffs to individual arbitration under the Franchise Agreement (“Agreement”)
that each plaintiff entered into with NECCS. The SJC held that System4 could compel
the cleaning worker franchisees to bring their claims against System4 in individual
arbitration. See Machado v. System4 LLC, 28 N.E.3d 401, 413 (Mass. 2015).
B.

Arbitration Proceedings

Accordingly, following the court’s decision in 2015, respondent Luis Ribeiro, who
was a putative class member of the suit, filed a demand for arbitration against System4
with the American Arbitration Association (“AAA”) to challenge his employment status
under the Wage Act. The AAA appointed arbitrator Jessica Block to oversee the
proceedings, which concluded two years after Ribeiro filed his demand. At the outset of
the arbitration, Ribeiro requested that the arbitrator make an initial determination that
the proceedings should be governed by the AAA’s Employment Rules rather than the
AAA’s Commercial Rules, and that the cost of the arbitration should be borne by
System4. The arbitrator reviewed Ribeiro’s request under a preliminary injunction
analysis. On October 7, 2015, after receiving briefing by both parties, she issued a

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The class was never certified.

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memorandum of decision and held that she would apply the AAA Employment Rules
because Ribeiro was likely to succeed on the merits of his Wage Act claim, and ordered
System4 to advance the cost of the arbitration proceedings. She noted, however, that
because this was a preliminary ruling, she would be willing to hear additional argument
from System4 “at a later stage of the proceedings,” Docket # 1-3, at 12, that Ribeiro
was in fact an independent contractor.
On August 23, 2016, the arbitrator issued a memorandum of decision on the
parties’ cross-motions for summary judgment on liability. She found that Ribeiro was
not barred by the statute of limitations because he was part of the putative class and
the class action tolling doctrine applied to his arbitration demand. Accordingly, she
found that the statute of limitations was tolled until April 13, 2015, when the SJC ruled
in Machado that System4 could compel arbitration, and Ribeiro timely filed his demand
for arbitration two months later on June 12, 2015. She also ultimately found that
Ribeiro should have been classified as an employee—not an independent
contractor—under the Wage Act. System4 filed a motion for reconsideration of the
arbitrator’s decision on liability, which she denied because it failed to meet the standard
for reconsideration. Subsequently, System4 filed three additional motions relating to
sanctions against Ribeiro’s counsel for allegedly violating the confidentiality provision of
the Agreement and motion for attorneys’ fees and costs. The arbitrator denied each
motion and issued separate decisions that set forth her reasons. On February 16,
2017, the arbitrator issued her final decision containing the award (the “Award”), which
awarded Ribeiro damages in an amount stipulated to by the parties, as well as
attorneys’ fees and costs.

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System4 now moves under section 10 of the Federal Arbitration Act (“FAA”) to
vacate the Award and the six related decisions discussed above. See Docket # 5, at
6–7.
II.

Standard of Review
“[A] district court=s review of arbitral awards must be ‘extremely narrow and

exceedingly deferential.’” Bull HN Info. Sys., Inc. v. Hutson, 229 F.3d 321, 330 (1st Cir.
2000) (quoting Wheelabrator Envirotech Operating Services Inc. v. Mass. Laborers
Dist. Council Local 1144, 88 F.3d 40, 43 (1st Cir. 1996)). “We have found arbitral
awards ‘nearly impervious to judicial oversight’ because both parties ‘have contracted to
have disputes settled by an arbitrator’ and therefore ‘it is the arbitrator=s view of the
facts and the meaning of the contract that they have agreed to accept.’” UMass Mem=l
Med. Ctr., Inc. v. United Food and Commercial Workers Union, 527 F.3d 1, 5 (1st Cir.
2008) (quoting Teamsters Local Union No. 42 v. Supervalu, Inc., 212 F.3d 59, 61 (1st
Cir. 2000); United Paperworkers Int’l Union v. Misco, Inc., 484 U.S. 29, 37–38 (1987)).
The FAA, 9 U.S.C. § 1–16, provides four specific grounds for which federal courts can
vacate an arbitration award, two of which are relevant to System4’s motion: (1) “where
there was evident partiality or corruption in the arbitrators,” 9 U.S.C. § 10(a)(2); or (2)
“where the arbitrators exceeded their powers, or so imperfectly executed them that a
mutual, final, and definite award upon the subject matter submitted was not made.” Id.
at § 10(a)(4).
III.

Discussion
System4 moves the court to vacate the Award under sections 10(a)(2) and

10(a)(4) because, it alleges, there was evident partiality by the arbitrator and she
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exceeded her powers. “To obtain vacatur of an arbitration award, ‘[i]t is not enough for
[a party] to show that the panel committed an error—or even a serious error.’”
Raymond James Fin. Serv., Inc. v. Fenyk, 780 F.3d 59, 63 (1st Cir. 2015) (quoting
Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp., 559 U.S. 662, 671 (2010)). Rather, A[t]he
challenging party has the burden to establish ‘substantially more than an erroneous
conclusion of law or fact.=@ Rogers v. Ausdal Fin. Partners, Inc., 168 F.Supp.3d 378,
385 (D. Mass. 2016) (quoting Local Union No. 251 v. Narragansett Imp. Co., 503 F.2d
309, 312 (1st Cir. 1974)).
A.

Evident Partiality – 9 U.S.C. § 10(a)(2)

“Evident partiality is more than just the appearance of possible bias. Rather,
evident partiality means a situation in which ‘a reasonable person would have to
conclude that an arbitrator was partial to one party to an arbitration.’” JCI
Communications, Inc. v. Int’l Broth. of Elec. Workers, Local 103, 324 F.3d 42, 51 (1st
Cir. 2003) (quoting Nationwide Mut. Ins. Co. v. Home Ins. Co., 278 F.3d 621, 626 (6th
Cir. 2002)).
As an initial matter, courts generally will not hear claims of partiality first raised
after the arbitration proceedings conclude. See Fort Hill Builders, Inc. v. Nat’l Grange
Mut. Ins. Co., 866 F.2d 11, 13 (1st Cir. 1989) (“[A]bsent exceptional circumstances, we
will not entertain a claim of personal bias where it could have been raised at the
arbitration proceedings but was not.”) System4 did not raise any such challenge during
the proceedings, nor has it identified any evidence in the record that the arbitrator failed
to disclose a pre-existing bias or conflict of interest.
In any event, no reasonable person would conclude that the arbitrator was partial
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to Ribeiro. In support of its argument, System4 asserts that: (1) the arbitrator
conducted an “independent investigation,” Docket # 5, at 10, by—without prompting
from either parties—reviewing the previous state court procedural history, and including
those procedural facts in her memorandum of decision on the parties’ cross-motions for
summary judgment on liability; (2) the arbitrator ruled in respondent’s favor regarding
System4’s statute of limitations defense even though Ribeiro failed to present an
opposition; and (3) the arbitrator “was not willing to perform her own independent
inquiry . . . with regard to one of System4, LLC’s arguments concerning Claimant’s
Petition for Attorneys’ Fees and Costs.” Id. at 12. First, System4 has failed to present
any evidence supporting its contention that the arbitrator reviewed the procedural
background because “she perceived it to be in the interest of Ribeiro.” Docket # 5, at
10; see JCI Communications, Inc., 324 F.3d at 51 (explaining that petitioner bears the
burden of establishing the arbitrator’s partiality by presenting evidence of her motives).
Indeed, System4 characterizes it as an “independent investigation,” Docket # 5, at 10
(emphasis added), and fails to point to any facts that the arbitrator included in her
decision that was in the interest of, or more favorable to, Ribeiro. Second, System4’s
repeated allegation that Ribeiro did not present argument in opposition to System4’s
statute of limitations defense is belied by the record. See Docket # 5-7, at 16–20.
Moreover, System4’s principal evidence in support of its argument regarding partiality is
the arbitrator’s unfavorable rulings against System4. But, “the fact that any [arbitrator],
in exercising [her] authority, makes an unfavorable ruling does not, alone, provide
evidence of bias.” Rogers, 168 F.Supp.3d at 390. None of System4’s claims of
“evident partiality” are persuasive, and accordingly, it has failed to meet its “high burden
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of demonstrating ‘objective facts inconsistent with impartiality.’” Kolel Beth Yechiel
Mechil of Tartikov, Inc. v. YLL Irrevocable Trust, 729 F.3d 99, 105 (2d Cir. 2013)
(quoting Scandinavian Reinsurance Co. v. St. Paul Fire and Marine Ins. Co., 668 F.3d
60, 72 (2d Cir. 2012).
B.

Exceeding Power – 9 U.S.C. § 10(a)(4)

System4 also claims that the Award should be vacated under section 10(a)(4) of
the FAA because the arbitrator exceeded her powers in two ways: “(1) she refused to
adhere to the clear and unambiguous terms of the franchise agreement; and (2) she
‘manifestly disregarded’ applicable statutory and common law in each and every one of
her major decisions in the case.” Docket # 5, at 13. “A party seeking relief under [this]
provision bears a heavy burden.” Oxford Health Plans LLC v. Sutter, 133 S.Ct. 2064,
2068 (2013). “[T]he sole question for [the court] is whether the arbitrator (even
arguably) interpreted the parties’ contract, not whether [s]he got its meaning right or
wrong.” Id.
1.

Adherence to the Terms of the Agreement

Here, System4 argues that the arbitrator refused to adhere to the clear terms of
the Agreement in three ways: (1) when she “refused to enforce the Commercial
Arbitration Rules [as expressly provided for in the Agreement].” Docket # 5, at 14; (2)
when she refused to enforce paragraph 19(B), the confidentiality provision, of the
Agreement; and (3) when she refused to enforce paragraph 19(C), the attorneys’ fees
and costs provision, of the Agreement.
System4 correctly notes that the Agreement expressly states that the arbitration
will be “conducted in accordance with [the AAA’s] current commercial arbitration
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rules . . . on the demand of either party.” Docket # 1-1, at 21. Under Rule 54 of the
Commercial Arbitration Rules, “[a]ll other expenses of the arbitration . . . shall be borne
equally by the parties . . . unless the arbitrator in the award assesses such expenses or
any part thereof against any specified party or parties.” AAA Commercial Arbitration R54. Instead of applying Rule 54 and ordering both parties to equally bear the expenses,
the arbitrator granted Ribeiro’s request to apply the AAA Employment Rules, which
shifts all of the costs to the employer. Accordingly, she ordered System4 to advance
the full costs of the arbitration “as if the arbitration clause contained in the
nonnegotiable franchise agreement were part of an employer-promulgated plan.”
Docket # 1-3, at 10.
“If the arbitrator ignores the plainly stated procedural rules incorporated in the
agreement to arbitrate while arriving at the arbitral award, that award is subject to a
manifest disregard of the law challenge.” Kashner Davidson Sec. Corp. v. Mscisz, 531
F.3d 68, 77 (1st Cir. 2008) (citation omitted). Here, however, the arbitrator did not
arrive at the final Award based on her application of the AAA Employment Rules.
Instead, the Award was based on her determination of the substantive issue finding that
Ribeiro was an employee, and thus, System4 had violated the Wage Act. As the
Supreme Judicial Court explained, “the Wage Act would override [the cost-splitting]
provision if the plaintiffs were successful in arbitration.” Docket # 1-3, at 6 (quoting
Machado, 28 N.E.3d at 414). In other words, even had the arbitrator applied the AAA
Commercial Rules at the outset, the Wage Act would override it. Here, the arbitrator
ultimately ordered System4 to bear all the costs as mandated by the Wage Act because
Ribeiro was the prevailing party. Moreover, the Agreement further provides that “[t]he
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arbitrator will have the right to award or include in the award any relief which the
arbitrator deems proper in the circumstances including without limitation money
damages (with interest on unpaid amounts from the date due), specific performance,
injunctive relief, attorneys fees and costs (including the costs of arbitration) . . . .”
Docket # 1-1, at 21 (emphasis added). The arbitrator’s decision and award is
conclusive and binding. Id. Accordingly, even if the arbitrator erred in applying the AAA
Employment Rules, that error is not of the kind that would permit this court to overturn
the award. See Advest, Inc. v. McCarthy, 914 F.2d 6, 8 (1st Cir. 1990).
System4’s other arguments with respect to paragraphs 19(B) and 19(C) of the
Agreement are in effect substantively attacking the arbitrator’s unfavorable rulings. The
arbitrator, contrary to System4’s contention, did not “refuse to enforce” these provisions.
Docket # 5, at 15. Rather, she interpreted paragraph 19(B) of the Agreement (i.e., the
confidentiality provision) and rejected System4’s construction, and ultimately denied its
request for sanctions because she found that Ribeiro’s counsel had not violated the
terms of the provision. See Wonderland Greyhound Park, Inc. v. Autotote Sys., Inc.,
274 F.3d 34, 36 (1st Cir. 2001) (“It was within the province of the arbitrator to construe
the contract . . . in the first instance.”) (citations omitted). Similarly, the arbitrator denied
System4’s request for attorneys’ fees under paragraph 19(C) of the Agreement
because she found that its request to recover legal fees “associated with the five-year
court battle should have been timely made to the Supreme Judicial Court in System4’s
appellate brief.” Docket # 1-7, at 2. It is not for this court to decide “whether the
arbitrator[] made the correct decision, or even whether the arbitrators were rational or
fair. Instead, it is whether the arbitrator[] had the authority to decide as they did.”
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Rogers, 168 F.Supp.3d at 389 (citing Raymond James Fin. Servs., Inc., 780 F.3d at
67). It is clear that the arbitrator here analyzed the contractual provisions in order to
render her decisions and did not “exceed[] [her] powers.” 9 U.S.C. § 10(a)(4); see
Sutter, 133 S.Ct. at 2070 (“So long as the arbitrator was ‘arguably construing’ the
contract—which this one was—a court may not correct [her] mistakes under § 10(a)(4).”
(quoting Eastern Associated Coal v. Mine Workers, 531 U.S. 57, 62 (2000)).
2.

Manifest Disregard2

System4 also claims that the arbitrator exceeded her powers by acting in
manifest disregard of the law when she decided the misclassification issue and
addressed its statute of limitations defense. An arbitrator manifestly disregards the law
“where it is clear from the record that the arbitrator recognized the applicable law—and
then ignored it.” McCarthy, 914 F.2d at 9. System4 bears the burden of showing that
the award was: “(1) unfounded in reason and fact; (2) based on reasoning so palpably
faulty that no judge, or group of judges, could ever conceivably have made such a
ruling; or (3) mistakenly based on a crucial assumption that is concededly a non-fact.”
Ramos-Santiago v. United Parcel Serv., 524 F.3d 120, 124 (1st Cir. 200) (citation
omitted).
It fails to meet its burden. Here, System4 re-argues the merits and fails to

2

In Hall Street Assoc., LLC v. Mattel, Inc., 552 U.S. 576 (2008), the Suprem e Court held
that “§ 10 . . . provide[s] the FAA’s exclusive grounds for expedited vacatur [of an arbitral award].” 552
U.S. at 584. Following Hall Street, “m anifest disregard of the law is not a valid ground for vacating or
m odifying an arbitral award in cases brought under the [FAA].” Ram os-Santiago, 524 F.3d at 124 n.3. To
the extent the standard survives, “Hall Street com pels the conclusion that it does so only as a judicial
gloss on § 10.” Ortiz-Espinosa v. BBVA Sec. of P.R., Inc., 852 F.3d 36, 46 (1st Cir. 2017); see Hall Street,
552 U.S. at 585 (“Or, as som e courts have thought, ‘m anifest disregard’ m ay have been shorthand for §
10(a)(3) or § 10(a)(4)[.]”). Here, System 4 appropriately advances its m anifest disregard of the law
argum ent as a “gloss” on its section 10(a)(4) argum ent.

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identify any controlling applicable law that the arbitrator ignored. Rather, the record
shows that the arbitrator carefully considered—and rejected—System4’s arguments,
and reasoned that Ribeiro was a putative member of the class, and thus, the class
action tolling doctrine applied to him. She found that the statute of limitations for the
class was tolled until April 13, 2015, when the SJC decided the specific issue of
whether System4 could compel arbitration under the Agreement notwithstanding its
status as a non-signatory. Further, the arbitrator analyzed the cases related to the
misclassification issue and distinguished Depianti v. Jan-Pro Franchising Int’l Inc., 39 F.
Supp. 3d 112 (D. Mass. 2014) (“Depianti-D.Mass”), from the facts of this case, and
instead followed the reasoning of the SJC in Depianti v. Jan-Pro Franchising Int’l Inc.,
990 N.E.2d 1054 (Mass. 2013) (“Depianti-SJC”) in finding that System4 could be liable
for employee misclassification even when no contract existed between it and Ribeiro.
She explained that:
[t]he prohibition articulated by the Supreme Judicial Court [in
Depianti] against the use of an intermediate entity to
misclassify service workers compels the conclusion that the
factfinder cannot limit his or her analysis by focusing
exclusively on the relationship (or lack thereof) between the
master franchisor and the unit franchisee, as did the
[Georgia Court of Appeals] in Depianti-Georgia and the
federal district court in Depianti-D.Mass, but also must
scrutinize the relationship between master franchisee and
unit franchisee that the master franchisor designed and
implemented.”
Docket # 1-4, at 26. In scrutinizing the facts here, she found that System4 designed
and implemented a structure that “unlawfully attempted to exempt itself from the wage
statute by special contract (the master franchisee agreement) and other means (the
three tier system).” Id. at 30–31. System4 argues that the arbitrator manifestly
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disregarded the law by refusing to follow the holding in Depianti-D.Mass, which also
involved a three-tier franchise system and in which the master franchisor was not found
to be an employer under the Wage Act. Depianti-D.Mass, however, is not controlling
law that the arbitrator was required to follow. Even assuming that it was and that the
arbitrator misapplied the law, that error is not of the kind that would permit this court to
overturn the Award. See McCarthy v. Citigroup Global Markets Inc., 463 F.3d 87, 95
(1st Cir. 2006) (“[O]ur precedents forbid a district court from conducting such a review
[of legal error] of an arbitration award.”) (citing Poland Spring Corp. v. United Food and
Commercial Workers Int’l Union, AFL-CIO-CLC, Local 1445, 314 F.3d 29, 33 (1st Cir.
2002). Accordingly, this Award is supported in reason and fact, and not so “palpably
faulty that no judge, or group of judges, could ever conceivably have made such a
ruling.” Ramos-Santiago, 524 F.3d at 124.
IV.

Conclusion
System4, LLC’s Motion to Vacate Arbitration Award (Docket # 4) is DENIED. Its

request for attorneys’ fees and costs is also DENIED. Luis Ribeiro’s Cross Motion to
Confirm (Docket # 11) is ALLOWED. Judgment may be entered for respondent.

August 11, 2017

/s/Rya W. Zobel

DATE

RYA W . ZOBEL
SENIOR UNITED STATES DISTRICT JUDGE

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