Sixth Circuit Holds Michigan Franchise Investment Law Voids Forum Selection Clause | Newsletters | Legal News: Distribution & Franchise

The Sixth Circuit ruled that a contractual choice of court clause in a franchise agreement was unenforceable because it violated state law.

In Lakeside Surfaces, Inc. v. Cambria Company, LLC, Lakeside Surfaces, a manufacturer of stone countertops, entered into a franchise agreement with Cambria. Lakeside Surfaces has agreed to purchase stone parts and products from Cambria, fabricate countertops from these materials, and then sell the fabricated countertops to retailers, builders and designers. The agreement contained a choice of law provision and a choice of court clause requiring that Minnesota laws govern and that any proceedings involving the agreement take place in Minnesota.

Lakeside Surfaces subsequently filed suit in the Western District of Michigan, claiming (1) breach of contract, (2) violations of the Michigan Franchise Investment Act (MFIL), (3) violations of the UCC and (4) promissory estoppel. . Cambria successfully dismissed the case based on the agreement’s choice of court clause. On appeal, the Sixth Circuit reversed the dismissal, finding that the forum selection clause was unenforceable because it conflicted with the MFIL.

MFIL renders void and unenforceable any provision of a franchise agreement requiring litigation to occur outside of Michigan. The MFIL applies to franchises based in Michigan or in situations where the offer or acceptance of the sale of the franchised business occurs in Michigan. The court noted that the Michigan Legislature had made a specific public policy decision to modify the presumption of default for the application of forum selection clauses. In the narrow realm of franchise agreements, MFIL would govern, overriding any choice of court clauses requiring litigation to take place outside of Michigan. Further, while the legislature has specifically prohibited choice of court clauses in franchise agreements, it has declined to enact any similar prohibition on choice of law clauses. Thus, the parties must litigate in Michigan, but Michigan law does not always have to govern the dispute. In other words, Cambria could not use the choice of law provision to do something that MFIL expressly prohibited (forcing a franchisee to litigate in an out-of-state forum). Further, the court noted that this was limited to causes of action arising out of the MFIL.

Parties to a franchise agreement should review choice of court laws and assess whether any state law might prevent its application.

Harry L. Blanchard