Source: http://www.mulcahyllp.com/blog/doesmichiganlawprovideablueprintforcaliforniatoreviseitsfranchiserelationsacttoavoidoutofstatearbitrationforums.html
Timestamp: 2019-04-20 16:51:20+00:00

Document:
Despite the strong public policy behind Section 20040.5, the effect of the statute was later significantly reduced by the Ninth Circuit’s decision in Bradley v. Harris Research Inc., 275 F.3d 884 (9th Cir. 2001), finding that the Federal Arbitration Act (the “FAA”) preempted Section 20040.5’s limitation on out-of-state forum selection clauses in agreements to arbitrate.
By its terms, the FAA was enacted “[t]o make valid and enforceable written provisions or agreements for arbitration of disputes arising out of contracts, maritime transactions, or commerce among the States or Territories or with foreign nations.” 68 P.L. 401 (emphasis added).
Bradley’s finding of FAA preemption, followed by several U.S. Supreme Court opinions – including AT&T Mobility v. Concepcion, 131 S.Ct. 1740 (2011) – abruptly changed the individual State’s ability to legislate terms contrary to those contained within an otherwise valid agreement to arbitrate.
This brings us to the unique pre-sale, pre-contracting disclosure requirement of the Michigan Franchise Investment Law (the “MFIL”) that appears to avoid the FAA preemption problem faced by Section 20040.5 and other similar state franchise statutes.
As background, the MFIL was enacted in 1974 for the stated general purpose of protecting the rights of franchisees. See General Aviation v. Cessna Aircraft Co., 13 F.3d 178, 181 (6th Cir. Mich. 1993). Among its various limitations on franchisor rights, the MFIL contains two separate provisions – Section 8 and Section 27 – that seek to restrict arbitrations involving Michigan franchisees to the State of Michigan.
Section 27(f) – much like that of Section 20040.5 – expressly renders “void and unenforceable” any provision in a franchise agreement “requiring that arbitration or litigation be conducted outside of [Michigan].” MCLS § 445.1527. As recently as 1991, Michigan courts relied upon Section 27(f) to void out-of-state arbitration provisions in franchise agreements. See Hambell v. Alphagraphics Franchising Inc., 779 F. Supp. 910, 911 (E.D. Mich. 1991)(Holding “that the provision in the franchise agreement requiring that all arbitrations be conducted in Tucson, Arizona is void and unenforceable pursuant to Michigan law.”).
More recently, however, courts have uniformly found Section 27(f) to be preempted by the FAA to the extent it invalidated contractual provisions that required arbitration outside the state. See Flint Warm Air Supply Co. v. York Int’l Corp., 115 F. Supp. 2d 820 (E.D. Mich. 2000)(contractual provision in distributor sales agreement requiring disputes to be arbitrated in Pennsylvania found to be enforceable); Binder v. Med. Shoppe Int'l, Inc., 2010 U.S. Dist. LEXIS 72614, 16-17, 2010 WL 2854308 (E.D. Mich. July 20, 2010)(Section 27(f) “is preempted by the Supremacy Clause of the United States Constitution, Art. VI, cl. 2, and the FAA.”); see also, Alphagraphics Franchising v. Whaler Graphics, 840 F. Supp. 708 (D. Ariz. 1993)(finding that the FAA requires arbitration agreements to be enforced according to their terms, thus, preempting Section 27(f)).
For the reasons stated above, judicial precedent finding Section 27(f) to be preempted by the FAA has grown stronger over the years. Now, Section 27(f) – like that of Section 20040.5 – has virtually no effect on out-of-state arbitration provisions in franchise agreements.
While both Section 8 and Section 27 seek the same result – to restrict arbitrations involving Michigan franchisees to the State of Michigan – the timing of the restrictions imposed by these sections differ dramatically.
Section 27 is a post-contract venue restriction that is designed to void portions of existing agreements to arbitrate. Alternatively, Section 8 is a pre-sale, pre-contracting disclosure requirement that (1) precludes the franchisor from including an out-of-state venue provision as part of the franchise agreement in the first instance, or (2) conceivably compromises any “meeting of the minds” the parties’ reached with respect to any out-of-state venue clause in the franchise agreement.
Because Section 27 seeks to invalidate a portion of an otherwise valid and enforceable agreement to arbitrate, the FAA – protecting existing “written provisions or agreements for arbitration of disputes” – is triggered. However, Section 8 applies to the disclosure period of the parties’ relationship and before the existence of any written agreement to arbitrate.
Unfortunately, Michigan jurisprudence is not helpful in this regard. The few cases that do address Section 8’s out-of-state venue prohibition do so in the context of out-of-state court actions – not out-of-state arbitral forums. See, e.g., Buist v. Digital Message Sys. Corp., 2002 Mich. App. LEXIS 2271 (Mich. Ct. App. Dec. 27, 2002)(court enforces Section 8 to void out-of-state court action).
Bradley, 275 F.3d at 891 (9th Cir. Cal. 2001)(internal citations omitted).
While informative, the Laxmi and Bradley decisions addressed contract formation and not any potential conflict between the FAA and the state’s power to limit its citizens’ ability to freely enter into agreements to arbitrate.
Although judicial precedent has ingrained in lawyers the notion that the FAA preempts all restrictions on arbitration, the FAA was enacted to validate parties’ existing agreements to arbitrate. There is no indication in the legislative records to suggest that the FAA was intended to preempt state legislation limiting the parties’ ability to contract as to the terms of the arbitration.
Because the FAA only governs written agreements to arbitrate, California can (and should) look to Section 8 of the MFIL as a means to again enforce its strong public policy to protect in-state franchisees from having to travel to foreign jurisdictions to litigate franchise-related disputes.

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