Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—S.D. Ill.: Indiana law governed franchise agreement, despite Illinois choice-of-law provision, (Dec 16, 2014)

By Edward L. Puzzo, J.D.

The Indiana Deceptive Franchise Practices Act governed the terms of a franchise agreement between an Illinois restaurant franchisor and an Indiana franchisee, despite the presence of a choice-of-law provision in the agreement stating that Illinois law would govern, the federal district court in Benton, Illinois has ruled (Show-Me’s Franchises, Inc. v. Sullivan, December 11, 2014, Gilbert, J.).

In 2011, Indiana resident Brad Sullivan entered into a franchise agreement with Show-Me’s Franchises, Inc., an Illinois corporation, for the operation of a Show-Me’s restaurant in Muncie, Indiana. In 2013, both parties brought claims against each other alleging violations of the franchise agreement. Show-Me’s now moved for summary judgment.

Choice-of-law provision. The franchise agreement contained a choice-of-law provision stating that the franchise relationship would be governed by Illinois law. However, Sullivan claimed that it was a violation of the Indiana Deceptive Franchise Practices Act (Indiana Act) for the franchise agreement of a franchise operated in Indiana to contain a choice-of-law provision removing the agreement from the protections of the Indiana Act.

Reviewing the question, the court stated that Indiana public policy overrode the contractual choice of law only when Indiana had a materially greater interest in the litigation than the contractually chosen state. The court determined that to be the case here, because the franchise was located in Indiana, the witnesses and documents were there, and the contract was performed there. However, the choice-of-law provision in the franchise agreement further stated that, other than any portion superseded by applicable law, the remainder of the provisions would remain enforceable as originally made. Therefore, the court would view the agreement in a way to be consistent with the Indiana Act while enforcing the remaining provisions.

Based on the fact that the court was sitting in Illinois, Illinois choice-of-law rules applied, the court stated. Under those rules, when execution and performance occur in different states, the law of the place of performance applies. Consequently, since the contract was performed in Indiana, Indiana law governed the agreement, the court ruled.

Rescission. Sullivan argued that he was entitled to rescind the contract due to Show-Me’s alleged failure to provide disclosures 14 days prior to contract execution, as required by the Illinois Franchise Disclosure Act (Illinois Act). The court noted that signed receipts for the franchise disclosure document showed that Sullivan was in possession of the disclosures for over 30 days, which complied with the disclosure requirements of both the Illinois Act and the Indiana Act. Therefore, the court ruled, Sullivan was not entitled to rescind the agreement.

Voiding contract. Sullivan claimed that the agreement was voided by Show-Me’s allegedly fraudulent conduct concerning fire occupancy and accounting “cheat sheets.” The court found that the conduct in question occurred after the formation of the contract and that both parties participated in the wrongdoing, so this did not void the contract.

Profit potential. Sullivan further alleged fraud regarding Show-Me’s statements or promises regarding the potential profit he could expect, in order to entice him into signing the franchise agreement. However, the court stated, Indiana law expressly forbids fraud or misrepresentation claims based on future actions.

Training and support. Sullivan also alleged that Show-Me’s failed to provide the proper training and support as required by the franchise agreement. This did raise a factual dispute regarding a possible breach of contract, the court found. Thus, the court denied Show-Me’s motion for summary judgment.

The case is Civil Action No. 13-cv-00409-JPG-SCW.

Attorneys: Donald K. Schoemaker (Greensfelder, Hemker & Gale, P.C.) for Show-Me’s Franchises, Inc. Jason R. Delk (Delk McNally, LLP) for Brad Sullivan.

Companies: Show-Me’s Franchises, Inc.

Cases: FranchisingDistribution IllinoisNews