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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