Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—WDMich: Choice of Ohio Law Provision Enforceable Because Franchise Laws of Ohio and Michigan Lacked Significant Differences, (Oct 17, 2012)

By Peter Reap, J.D., LLM

The choice of Ohio law provision in an agreement between ITW Food Equipment Group, LLC, an Ohio manufacturer of food service equipment, and Donald Walker, authorized Michigan parts and repairs provider was valid and enforceable under a Michigan conflicts of law analysis because the franchise laws of Ohio and Michigan lacked significant differences, the federal district court in Grand Rapids, Michigan, has decided (ITW Food Equipment Group, LLC v. Donald L. Walker, October 15, 2012, Bell, R.). Thus, Walker’s counterclaim alleging numerous violations of the Michigan Franchise Investment Law (MFIL) by ITW was dismissed.

Background

Hobart has a network of authorized parts and service providers around the country, including Walker, that it uses to sell parts and provide installation, maintenance, and repair service to customers. The parties disagreed as to whether these authorized providers are independent contractors or franchisees.

ITW filed suit against Walker, alleging breach of contract, tortious interference, and trade secret misappropriation. Walker’s counterclaim alleged MFIL violations including ITW’s failure to repurchase Walker’s inventory and its alleged misrepresentations in the contract that the parties were only entering into an independent contractor arrangement and that this arrangement would be governed by Ohio law.

Choice of Law

Walker pled sufficient facts establishing a plausible violation of the MFIL, according to the court. However, ITW raised the issue of whether Michigan law even applied because of their agreement’s choice of Ohio law provision.

Michigan adopted the approach in 1 Restatement (Second) of Conflict of Laws § 187 (1971), which provides that a contractual choice of law provision will govern unless:

1. the chosen state has no substantial relationship to the parties or the transaction and there is no other reasonable basis for the parties’ choice, or

2. application of the law of the chosen state would be contrary to a fundamental policy of a state which has a materially greater interest than the chosen state in the determination of the particular issue and which, under the rule of § 188, would be the state of the applicable law in the absence of an effective choice of law by the parties.

Walker did not dispute that Ohio had a substantial relationship to the parties. Instead, Walker relied on the second alternative under the Restatement, and argued that under the terms of the MFIL, parties could not contract away the statute’s protection. Walker was incorrect, the court determined. Caselaw indicated that under the MFIL, choice of law provisions choosing the law of another state were not specifically voided.

In the alternative, Walker argued that the application of Ohio law was contrary to Michigan’s public policy. However, even if true, that alone was insufficient to resolve the choice of law issue, the court noted. Instead, the key issue was whether there was a substantial erosion of the quality of protection that the MFIL would otherwise provide. This erosion could be shown by significant differences in the application of the law of the two states.

Walker failed to argue that such significant differences existed, the court held. Ohio had a statute that governed franchises, the Business Opportunity Protection Act (“BOPA”) and the only difference Walker pointed out was that under the MFIL, a contract provision was void if it permitted a franchisor, absent six month notice, to refuse to renew a franchise without fairly compensating the franchisee through the repurchasing of inventory.

In contrast, under the BOPA, a franchisor could decide the conditions under which a franchise could be terminated or renewed. Although these two provisions were different, Walker failed to show that this difference was significant, the court held. The fact that a different result could be achieved under the law of the chosen forum did not suffice to show that the law of the chosen state was contrary to a fundamental policy of the forum state.

The one case Walker relied upon for his conclusion that this minor difference was significant was Martino v. Cottman Transmission Sys., Inc., 554 N.W.2d 17, 20 (Mich. Ct. App. 1996), a state court decision with distinguishable facts, according to the court. Martino involved a much broader protection under the MFIL than the six month notice of termination requirement Walker noted as different. Martino regarded the MFIL’s complete ban on any contract creating a franchise agreement that was not preceded by a disclosure to the franchisee of every type of contract provision listed as unenforceable and void under the MFIL.

In contrast, the section of the MFIL Walker pointed out as different under Ohio law was one that voided only a provision of a contract, not the entire contract. Moreover, Walker did not show that the section he cited was designed to protect against oppressive bargaining power. Pointing out one small difference between the MFIL and the BOPA and then relying on a state court decision involving a completely different section of the MFIL, was insufficient to show that a contracted-for Ohio choice of law provision should not be enforced, the court ruled. This was especially true because Walker alleged seven separate violations of the MFIL, and the difference in law Walker noted only affects one of them.

The case is File No. 1:12-CV-119.

Francis Daniel Balmert (Vorys Sater Seymour and Pease LLP) for ITW Food Equipment Group LLC. Michael P. Donnelly (Fraser Trebilcock Davis & Dunlap PC) for Donald L. Walker.

Cases: FranchisingDistribution MichiganNews