Banek Inc. v. Yogurt Ventures U.S.A., Inc.
6 F.3d 357 (1993)
Rule of Law:
A contractual choice of law provision, designating the law of a state with a substantial relationship to the parties or transaction, is valid and enforceable under Michigan law unless applying the chosen law would violate a specific, fundamental public policy of Michigan that has a materially greater interest, and the application of the chosen state's law does not offer comparable protections.
Facts:
- Banek Inc., owned by Mr. and Mrs. Banek, negotiated with Yogurt Ventures U.S.A., Inc., a Georgia corporation owned by John and Richard Stern, to purchase a Freshens Yogurt franchise.
- The intended location for the Freshens Yogurt franchise was Monroe, Michigan.
- After negotiating several changes to the standard agreement, Banek Inc. and Yogurt Ventures U.S.A., Inc. signed a “Franchise and Development Agreement” in February 1990.
- The agreement contained a choice of law provision stating that it was made and entered into in Georgia, and all rights and obligations would be governed by and construed in accordance with the laws of the State of Georgia.
- Sales at the Monroe franchise location were not as expected.
- Banek Inc. closed its Freshens franchise in March 1992.
Procedural Posture:
- In October 1991, Banek Inc. filed suit in Michigan state court against Yogurt Ventures U.S.A., Inc., alleging breach of contract, violations of the Michigan Franchise Investment Law (MFIL), violations of Federal Trade Commission Franchise Rules, common law fraud and misrepresentation, and negligence.
- In May 1992, Banek Inc. filed a separate action against John and Richard Stern.
- The two state court cases were consolidated.
- Defendants removed the consolidated case to federal court based on diversity jurisdiction.
- Defendants moved for dismissal of all counts on various theories.
- The district court granted defendants' motion in part and denied it in part, ruling that the choice of law provision in the parties' agreement was valid and enforceable under Michigan law, thereby dismissing Banek Inc.'s claim alleging MFIL violations.
- The district court also dismissed Banek Inc.'s claim under the Federal Trade Commission Franchise Rules (holding no private right of action) and its negligence claim.
- Banek Inc. appealed the district court's ruling concerning the choice of law provision to the United States Court of Appeals for the Sixth Circuit on interlocutory appeal.
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Issue:
Does a choice of law provision in a franchise agreement, designating Georgia law to govern all rights and obligations, constitute a void waiver of rights under the Michigan Franchise Investment Law (MFIL) or violate Michigan's fundamental public policy, thereby preventing its enforcement and broad application to all claims?
Opinions:
Majority - Ralph B. Guy, Jr.
No, the choice of law provision in the franchise agreement is valid, enforceable under Michigan law, and applies broadly to all claims, including fraud and misrepresentation, because it does not operate as a void waiver of MFIL rights, nor does the application of Georgia law violate a specific fundamental public policy of Michigan. The court first determined that the choice of law clause was valid and not a prohibited waiver under Mich.Comp.Laws Ann. § 445.1527. The Michigan legislature explicitly listed forum selection clauses as void but did not include choice of law provisions; the court declined to imply such a prohibition, noting that other states' statutes expressly include choice of law provisions if that is the legislative intent. Second, applying Michigan's conflict of law rules, which adopt Restatement (Second) of Conflict of Laws § 187, the court found the provision enforceable. It was undisputed that Georgia had a substantial relationship to the parties and transaction. The court then assessed whether applying Georgia law would violate a fundamental public policy of Michigan. While acknowledging the MFIL represents Michigan public policy, Banek failed to demonstrate specific significant differences between Georgia's Sale of Business Opportunities Act and the MFIL that would constitute a violation of a fundamental Michigan public policy. The Georgia act provides similar disclosure standards and remedies, including for fraud, attorney fees, and treble damages. The court also noted that Banek had successfully negotiated multiple changes to the agreement, indicating it was not an adhesion contract. Finally, the court concluded that the choice of law provision, stating "all rights and obligations of the parties hereto shall be governed by and construed in accordance with the laws of the State of Georgia," was sufficiently broad to encompass claims for fraud and misrepresentation, as these claims were directly related to the franchise agreement.
Analysis:
This case provides important clarification on the enforceability and scope of choice of law provisions within franchise agreements under Michigan law, particularly when challenged by state-specific anti-waiver statutes. It establishes that a general anti-waiver provision does not implicitly void a choice of law clause unless the statute explicitly states so or the application of the chosen state's law would fundamentally undermine a specific, significant public policy of the forum state, creating a substantial erosion of protections. The ruling provides greater predictability for franchisors operating across multiple states but places a high burden on franchisees to demonstrate a direct and fundamental conflict with forum state public policy rather than merely pointing to different legal outcomes. This decision influences how courts analyze similar contract clauses in diversity cases, requiring a nuanced comparison of the specific protections offered by each state's laws.
