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9 Franchise L.J. 1 (1989-1990)

handle is hein.journals/fchlj9 and id is 1 raw text is: Choice of Law in Franchise Agreements by Thomas M. Pitegoff* New York, New York I. Introduction Franchise relationships com- monly cross state lines, and fran- chise agreements usually contain a choice-of-law provision. For the sake of uniformity, the franchisor typically chooses the same law to govern all agreements, regardless of where the prospective franchi- sees are located, and the chosen law is usually the law of the state in which the franchisor's principal office is located. A number of states have laws aimed at protecting local franchisees.' Many of these laws restrict the ability of the franchisor to terminate a franchise agreement without good cause. When a franchisor terminates a franchisee agree- ment, the terminated franchisee may seek to invoke the pro- tection of the franchise law of the state in which the franchisee is located, notwithstanding the fact that the agreement provides that the law of the franchisor's state applies. Will a court honor the contractual. choice of law in. such a case or will it apply the franchise law of the state in which the franchisee is located? The answer depends on whether application of the law chosen in the contract violates the fundamental policy of the franchisee's state. If so, as a rule, the chosen law will not apply. Where the franchise business is located in a state that has a protective franchise law, most courts have applied such franchise law regardless of the choice of law set forth in the contract, holding that application of the chosen law would be contrary to a fundamental policy of the franchisee's state. In two recent cases, however, the Sixth and Eighth Cir- cuits applied the law chosen by parties. These courts did not hold that the application of such law was not contrary to the fundamental policy of the franchisee's state as a general matter. Instead, the court in each case examined the rela- tionship of the parties and determined that the franchisee in that particular case did not need the special protection *Mr. Pitegoff is counsel in the New York office of Hunton & Williams. of the local franchise law. Based on a determination that the litigating parties were of equal bargaining power, these courts declined to find that application of the law chosen by the parties was contrary to the fundamental policy of the fran- chisee's state. In Modern Computer Systems v. Modern Banking Systems,2 the Eighth Circuit declined to apply the franchise relationship law of Minnesota, the state in which the franchise was located, citing the parties' choice of Ne- braska law. In Tele-Save Merchandising v. Consumers Dis- tributing,, the Sixth Circuit declined to apply the Ohio Business Opportunity Plans Act, citing the contractual choice of the law of New Jersey, the franchisor's state. This article reviews these cases. It also reviews cases in which franchisees have sought to invoke the protection of the franchise law of the franchisor's state rather than the law of the state in which the franchisee is located, citing the contractual choice of the law of the franchisor's state. Will the franchise law of the franchisor's state apply because the contract calls for the application of the law of the franchi- sor's state? Can such a choic' extend the territorial reach of such law? These issues will typically arise where there is no franchise law in the franchisee's state. The holdings in these cases usually turn on the territorial reach of the particular (continued on page 16) Elsewhere in This Issue The Applicability of Business Opportunity Laws to Franchisors .................................. 3 Franchising in the European Common Market under the New Franchise Agreement Regulation ...................................... 7 Franchising Currents .............................. I I (Including: Recent Seventh Circuit Opinion Em- phasizes Right of Franchisor to Obtain Monetary Relief Against Trademark Infringement by For- mer Franchisee; Courts Continue to Define Scope of the Implied Duty of Good Faith and Fair Deal- ing in Claims by Dealers and Franchisees; Illinois Common-Law and Statutory Claims by AAMCO Franchisee Pared Substantially; and others) Twelfth Annuil Forum Meeting Program ......... 13

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