Sixth Circuit Court of Appeals holds that forum-selection clause in franchise agreement was unenforceable as against Michigan public policy
Franchisors doing business in Michigan may need to revisit the forum-selection provisions in their franchise agreements based on a recent opinion arising out of the United States Court of Appeals for the Sixth Circuit.
On October 15, 2021, the Sixth Circuit issued its opinion in Lakeside Surfaces, Inc. v. Cambria Company, LLC, 16 F.4th 209 (6th Cir. 2021), whereby the court concluded that a contractual forum-selection clause (designating a non-Michigan forum) in a putative franchise agreement was unenforceable because it violated a strong public policy of Michigan as reflected in the Michigan Franchise Investment Law (MFIL).
The background of the case is relatively straightforward. Cambria Company, LLC (Cambria), a Minnesota company, is a leading manufacturer of countertop products. Lakeside Surfaces, Inc. (Lakeside) bought products from Cambria and fabricated them for customers. In 2011, the parties memorialized their relationship by executing a series of agreements, collectively titled the “Business Partner Agreements” (BPA). The BPA is a fifteen-page document consisting of five separate “agreements,” but was treated by the court as a franchise agreement.
After several years of doing business together, Cambria informed Lakeside that it was terminating its relationship because Lakeside allegedly breached certain of the BPA’s requirements. However, according to Lakeside, Cambria never specified how Lakeside breached, and never gave Lakeside a chance to cure any breach. Rather, Cambria immediately stopped all shipments of its product to Lakeside and informed Lakeside’s customers of the termination. As a result, litigation ensued.
Lakeside filed a lawsuit in the United States District Court for the Western District of Michigan citing federal diversity jurisdiction. In its complaint, Lakeside asserted claims for (i) breach of contract; (ii) violations of the MFIL; (iii) violation of the Uniform Commercial Code; and (iv) promissory estoppel. Cambria moved to dismiss citing the BPA’s choice-of-law provision (Minnesota law) and forum-selection clause (disputes must be commenced in a Minnesota state court). The District Court dismissed the complaint finding that the BPA’s choice of law and forum-selection provisions were proper and that the Western District of Michigan was the incorrect forum for the lawsuit.
In Lakeside’s appeal, the parties only disputed whether the forum-selection clause in the BPA was enforceable. The Sixth Circuit reversed the lower court finding that enforcing the BPA’s forum-selection clause contravened a fundamental public policy of Michigan because the MFIL expressly renders “void and unenforceable” any provision in a franchise agreement “requiring that...litigation be conducted outside this state.” MCL § 445.1527(f). In so doing, the Sixth Circuit referenced the provision of the MFIL that requires franchisors to provide franchisees with a list of the specific provisions that the statute renders void, along with a written statement advising a franchisee that the inclusion of such provisions in franchise documents would be void and cannot be enforced against the franchisee. According to the Sixth Circuit, the MFIL’s protections provided to franchisees by the list of void provisions demonstrated that the MFIL’s prohibition on forum-selection clauses was a central part of the protection that the Michigan legislature sought to guarantee to franchisees.
The Sixth Circuit also addressed Cambria’s argument that the Minnesota choice-of-law provision in the BPA made the MFIL’s forum-selection-clause prohibition irrelevant because a Minnesota choice of law provision would prevent the parties from “litigating in Michigan” in the first instance. In other words, Cambria was seeking to use something the MFIL did not prohibit (choice-of-law provisions) to do something the law otherwise expressly prohibits (forcing a franchisee to litigate in an out-of-state forum). The Sixth Circuit concluded that the text of the MFIL was not intended to let franchisors easily sidestep the MFIL’s forum protections. Otherwise, an absurd result would ensue if a franchisor could simply insert a choice-of-law provision into the franchise agreement and thus relieve itself of the obligation to provide any of the other notices to the franchisee that certain provisions may be void under the MFIL. The Sixth Circuit was, however, careful to point out that its ruling did not negate any choice-of-law provisions with respect to the other non-MFIL causes of action.
In the instant case, despite Michigan’s general public policy of favoring contractual forum-selection clause, the Sixth Circuit found that the specific provisions of the MFIL represented a clear and specific policy distinction drawn by the Michigan legislature as applied to franchise agreements. Such a policy distinction is important for franchisors and franchisees doing business in Michigan – the parties cannot simply contract away forum-selection rights in the franchise agreement. Despite the Sixth Circuit’s opinion being limited to a Michigan law, there is another lesson here. This case should serve as a useful reminder to both franchisors and franchisees of the importance of not simply accepting boilerplate provisions in all circumstances and to review and understand relevant state law when negotiating and drafting a franchise agreement.