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A recent case out of the Ninth Circuit Court of Appeals provides
a good reminder that it is not always best to incorporate your own
state's law as governing law in your contracts. In fact,
sometimes your own state's law can be more beneficial to the
other party.
In Red Lion Hotels Franchising, Inc. v. MAK, LLC, 663
F.3d 1080 (9th Cir. 2011), the Ninth Circuit Court of Appeals
allowed a franchisee from California to take advantage of the
franchise law from the state of Washington. The franchisor offered
franchise agreements incorporating its own state
law—Washington law—as the governing law. When
the parties had a dispute over termination, the franchisee sued the
franchisor and asserted a claim under the Washington's
Franchise Investment Protection Act. The franchisor objected,
arguing that the Washington franchise law applies only to
franchisees in Washington, not California. But the court
found in favor of the franchisee because of the choice of law
clause in the franchise agreement. The court specifically noted
that that the pertinent portion of Washington's franchise law
did not specifically say that the law was limited only to
franchisees in Washington. By contrast, other provisions of
Washington's law did explicitly limit application only to
actions "in this state." The Ninth Circuit reminded that,
as a general principle, "if a state law does not have
limitations on its geographical scope, courts will apply it to a
contract governed by that state's law, even if parts of the
contract are performed outside of the state."
In hindsight, if the franchisor had known that its own state
franchise law contained no geographical limits and that its
protections could effectively be "exported" to
franchisees outside of Washington, it might have selected a
different law to govern its franchise agreement. This also happened
several years ago to another supplier who had incorporated
California law into its contract, which allowed a foreign
distributor to sue it using California's equipment dealer
law.
The lesson from these cases is an important one. While contract
drafters certainly cannot eliminate every potential problem that
may result from the selection of a particular governing law, they
can be aware of the laws most likely to come into play in the types
of disputes most likely to occur. For example, franchisors and
suppliers might be well advised to get a better understanding of
their own home states' franchise and dealer laws before they
inadvertently "export" the protections of those laws to
franchisees and dealers in other states or countries by virtue of a
choice of law clause.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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