BRANDAO v. JAN PRO FRANCHISING INTERNATIONAL INC (2019)

MEMORANDUM AND ORDER PURSUANT TO RULE 1:28

The plaintiff, Claudio Brandao, filed a complaint in Superior Court against the defendant, Jan-Pro Franchising International, Inc. (Jan-Pro), alleging that he was misclassified as an independent contractor and other violations of the Massachusetts Wage Act. G. L. c. 149, §§ 148 and 148B. After being compelled to arbitrate and proceeding in arbitration for some time, the arbitrator ordered him to deposit fifty percent of the estimated costs of arbitration. When Brandao failed to obey that order, the arbitrator terminated the arbitration. Brandao then moved in the Superior Court to reopen evidence and for a declaratory judgment, arguing that he was unable to vindicate his statutory rights in arbitration. Jan-Pro appeals, pursuant to G. L. c. 251, § 18, from the order granting Brandao's motion. We vacate the order and remand for further proceedings on Brandao's motion.

Background. 1. Relationship of the parties. Jan-Pro is a franchisor of commercial cleaning services. Jan-Pro sells the right to use the Jan-Pro name to franchisees. Franchisees then sell similar rights to subfranchisees, and those subfranchisees are the individuals who provide commercial cleaning services to customers. Brandao was a subfranchisee who performed cleaning services under the Jan-Pro name.

2. Procedural history. Because Brandao's contract with his franchisee contained an arbitration provision, a Superior Court judge issued an order compelling them to arbitrate.

During arbitration, a dispute arose as to whether Jan-Pro was solely responsible for the arbitration fees pursuant to the employment dispute resolution rules (employment rules) of the American Arbitration Association (AAA), or whether those fees should be split between Jan-Pro and Brandao pursuant to the AAA's commercial rules. The arbitrator initially found that the AAA's employment rules applied. The arbitrator explained that “[t]he essence of ․ Brandao's claims is that Jan-Pro violated the Massachusetts Wage Act because it converts an employment relationship into a franchise” and that “[a]t its core this is an employment case.” In reaching her decision, the arbitrator also balanced any irreparable harm to either of the parties. The arbitrator stated that an affidavit signed by Brandao was sufficient to establish that he did not have the financial means to split the arbitration fees and that Jan-Pro had not demonstrated any financial or other harm that would result from having to pay those fees in full.

Jan-Pro first moved for reconsideration on the basis that Brandao was not likely to succeed on the merits. The arbitrator denied Jan-Pro's motion. Jan-Pro then moved for reconsideration a second time based on inaccuracies in Brandao's financial affidavit. The arbitrator noted that she was “troubled by the inaccuracies and misrepresentations” in Brandao's affidavit and required Brandao to deposit fifty percent of the estimated arbitration fees.² Acting on additional motions, the arbitrator subsequently clarified that she was “not persuaded by [Brandao's] assertion that his failure to pay the required deposits is due to his inability to do so.” Brandao moved for reconsideration and submitted additional financial affidavits. The arbitrator denied Brandao's motion without addressing the substance of the additional financial affidavits, instead explaining that she “imposed the requirement of a fee deposit ․ to deter any further misrepresentations or omissions” and to “impress upon [Brandao] the seriousness of this arbitration proceeding.”

Brandao responded by seeking to reopen his case in Superior Court. He argued that he was unable to vindicate his statutory rights in arbitration and, in essence, requested reconsideration of the order compelling arbitration. A different Superior Court judge (the judge) granted Brandao's motion, noting that Brandao “does not appear able to pay the sums imposed by the arbitrator.”

Discussion. 1. Jurisdiction. As an initial matter, Brandao argues that this court does not have jurisdiction to hear Jan-Pro's appeal. Brandao's argument is premised on the fact that he sought relief through Mass. R. Civ. P. 60 (b), 365 Mass. 828 (1974), from which he argues there is no right of appeal. However, through his rule 60 (b) motion, Brandao was asking the judge to reopen the case for the purpose of reconsidering the order compelling arbitration. By granting Brandao's motion, the judge was, in effect, denying Jan-Pro's application to compel arbitration. See Commonwealth v. Geagan, 339 Mass. 487, 495 (1959) (“the substance and not the name of a pleading controls”). This order is reviewable pursuant to G. L. c. 251, § 18 (a) (1).³

2. How to proceed. The parties present two very different frameworks for deciding this appeal. Jan-Pro argues that the arbitrator's order terminating the arbitration proceedings should be treated as a final award in Jan-Pro's favor and that there are no grounds for vacatur of that award. In essence, Jan-Pro asks us to conclude that Brandao has had his arbitration and that he has no further recourse, either in arbitration or in Superior Court. Brandao, on the other hand, argues that the judge properly determined that he cannot vindicate his statutory rights in arbitration and that he may proceed in Superior Court. In the unique facts presented here, we do not believe either party is correct.

We address Jan-Pro's arguments first. Jan-Pro has not offered any support for the position that an order terminating arbitration proceedings for nonpayment of arbitration fees is a final award in the nondefaulting party's favor.⁴ Courts that have addressed the question have instead concluded that there is no final award on the merits in those circumstances. See, e.g., Tillman v. Tillman, 825 F.3d 1069, 1074 (9th Cir. 2016) (arbitration proceedings terminated “without issuance of an award”); Pre-Paid Legal Servs., Inc. v. Cahill, 786 F.3d 1287, 1293-1294 (10th Cir. 2015) (plaintiff's recourse was to proceed in court after defendant sought arbitration but arbitration proceedings terminated due to defendant's failure to pay arbitration fees); Gutierrez v. Drill Cuttings Disposal Co., 319 F. Supp. 3d 856, 859 (W.D. Tex. 2018) (no res judicata where parties compelled to arbitration, arbitration proceedings terminated, and “no final arbitration decision was made on the merits”); Ray v. Chafetz, 236 F. Supp. 3d 66, 80-81 (D. D.C. 2017) (no award where arbitration proceedings terminated). Having established that there was not a final award in Jan-Pro's favor, we need not address whether any such award was improperly vacated.

Brandao argues the other extreme: his case should proceed in Superior Court. As a preliminary matter, Brandao's argument depends on whether courts should decline to compel arbitration when individuals are unable to vindicate their statutory rights in arbitration because they cannot afford arbitration fees. This argument is grounded in a judge-made “effective vindication” exception to the Federal Arbitration Act, which would otherwise require the parties to arbitrate their dispute pursuant to their arbitration agreement. American Express Co. v. Italian Colors Restaurant, 570 U.S. 228, 235-236 (2013) (describing effective vindication exception). The problem we encounter is that, while declining to compel arbitration may be an appropriate option in certain circumstances, we cannot say based on the record before us that this is one of those circumstances.

Turning first to whether declining to compel arbitration is ever an appropriate option when someone cannot afford arbitration fees, the United States Supreme Court has noted, “It may well be that the existence of large arbitration costs could preclude a litigant ․ from effectively vindicating [a] federal statutory right[ ] in the arbitral forum.” Green Tree Fin. Corp.-Ala. v. Randolph, 531 U.S. 79, 90 (2000). See American Express Co., 570 U.S. at 236 (effective vindication exception may cover “filing and administrative fees ․ that are so high as to make access to the forum impracticable”). When presented with situations where arbitration fees make the arbitration forum inaccessible, such that a party would be prevented from vindicating a statutory right, lower courts have indeed denied motions to compel arbitration. See, e.g., Phillips v. Associates Home Equity Servs., Inc., 179 F. Supp. 2d 840, 847 (N.D. Ill. 2001); Camacho v. Holiday Homes, Inc., 167 F. Supp. 2d 892, 897 (W.D. Va. 2001).

Turning next to whether that is an appropriate option here, Brandao relies extensively on Tillman, 825 F.3d at 1072, where the plaintiff sued a law firm for malpractice. The law firm invoked an arbitration provision in the parties' contract, and the parties proceeded in arbitration until the plaintiff was unable to pay required arbitration fees. Id. Based on the record in that case, in which the lower court judge found that the plaintiff could not afford the arbitration fees after conducting a review of evidence on the matter, the United States Court of Appeals for the Ninth Circuit concluded that the plaintiff could proceed in court. Id. at 1076.

Here, however, the record is less than clear whether Brandao can pay the arbitration fees. The arbitrator initially found that Brandao lacked the financial means to split the arbitration fees. When Jan-Pro later raised inaccuracies in Brandao's financial affidavit, the arbitrator required Brandao to submit to the AAA fifty percent of the estimated arbitration fees. Still, the matter did not end there. Brandao moved for reconsideration and submitted additional financial affidavits. Considering the arbitrator's failure to address those additional affidavits, it is unclear whether the arbitrator still believed that Brandao was unable to pay or whether she simply desired to impress upon him the seriousness of the arbitration proceedings.⁵ When the matter returned to the Superior Court, the judge noted that Brandao “does not appear able to pay the sums imposed by the arbitrator.” However, the judge did not indicate whether she reviewed Brandao's finances or whether her determination was instead based on something else, such as Brandao's failure to pay the arbitration fees. Accordingly, we will remand for the judge to conduct a hearing and to issue findings on Brandao's ability to pay the arbitration fees.⁶

If the judge determines that Brandao does not have the ability to pay the arbitration fees, the question remains whether the only available option is for Brandao to proceed in Superior Court. Both parties represented at oral argument that there is another option, and we agree. Courts faced with this situation usually give the party who seeks arbitration two options: agree to bear the arbitration fees or waive the right to proceed in arbitration. Weiler v. Marcus & Millichap Real Estate Inv. Servs., Inc., 22 Cal. App. 5th 970, 981 (2018). Cf. Phillips, 179 F. Supp. 2d at 847 (denying motion to compel but stating that court would be willing to reconsider if other party agreed to bear costs associated with arbitration); Camacho, 167 F. Supp. 2d at 897 (same). In other words, if the judge determines that Brandao does not have the ability to pay, Jan-Pro may elect to pay the arbitration fees in full. If the judge determines that Brandao does not have the ability to pay and Jan-Pro declines to pay the arbitration fees in full, Brandao may proceed in Superior Court.

Conclusion. The order allowing Brandao's motion to reopen his case in Superior Court is vacated. The matter is remanded to the Superior Court for further proceedings consistent with this memorandum and decision.

So ordered.

Vacated and remanded.

FOOTNOTES

2.   The arbitrator's order required Jan-Pro to submit one hundred percent of the estimated arbitration fees and Brandao to submit fifty percent of the estimated arbitration fees so she could “leave open the question of allocation of the arbitration fees as part of any remedy.”

3.   While the facts of this case are not likely to repeat themselves, we note that Brandao sought to accomplish two feats with his rule 60 (b) motion: first to reopen the case, and second to obtain reconsideration of the order compelling arbitration. The second feat would have been better accomplished through a motion for reconsideration once the case was reopened.

4.   For the first time at oral argument, Jan-Pro cited Banco de Seguros del Estado v. Mutual Marine Office, Inc., 344 F.3d 255 (2d Cir. 2003) (Banco). However, Banco addresses whether an interim order on prehearing security is reviewable, and does not address what would have happened if the security had not been posted. Id. at 263-264. To the extent Jan-Pro instead argues that the arbitrator's order on fee allocation was an interim order subject to review only under G. L. c. 251, § 12, this argument misses the mark. Whether the arbitrator properly allocated the arbitration fees is not the issue before us, and Brandao does not seek review of that order. The issue before us is whether, in light of the arbitrator's order, Brandao may now proceed in Superior Court.

5.   The parties have not raised or addressed whether any of the arbitrator's statements should be given preclusive effect. While Jan-Pro argues that Brandao has not met the standard for vacating any of the arbitrator's orders, that is a different matter than whether any subsidiary statements regarding Brandao's ability to pay should be given preclusive effect in the context of this case.

6.   In dicta, Tillman, 825 F.3d at 1075 n.1, notes that a different result may be warranted if a party “has the ability to pay but simply chooses not to.” In such circumstances, Tillman suggests that it would be inappropriate to allow that party “to benefit from their intentional noncompliance with an arbitrator's rules.” Id. Jan-Pro relies on this dicta, and other similar cases, to argue that Brandao had his opportunity to arbitrate, that the arbitration proceedings were terminated due to Brandao's “refusal” to pay the arbitration fees, and that we should either compel the parties back to arbitration or conclude that Brandao has no further recourse. Tillman does not support either party's position here because it is unclear whether Brandao has the ability to pay the arbitration fees.