Court Opinion

ID: 9478883
Source: CourtListenerOpinion
Date Created: 2023-08-05 07:01:26.72353+00
Date Added: 2024-06-11T17:46:40.686948
License: Public Domain

HEANEY, Senior Circuit Judge,
with whom LAY, Chief Judge, joins,
dissenting.
I respectfully dissent. The majority opinion allows foreign franchisors to avoid the applicability of the Minnesota Franchise Act. I believe enforcing the choice of law provision nullifies Modern Computer’s statutory rights under this Act, violating a clearly articulated public policy of the State of Minnesota.
I. Enforceability of the Choice of Law Provision
The majority determines that Minnesota law does not apply to this dispute. In deciding whether Nebraska or Minnesota governs this action, a federal district court sitting in Nebraska must follow Nebraska’s conflict of laws rules. See Klaxon Co. v. Stentor Electric Mfg. Co., 313 U.S. 487, 496, 61 S.Ct. 1020, 1021, 85 L.Ed. 1477 (1941); Birdsell v. Holiday Inns, 852 F.2d 1078, 1079 (8th Cir.1988). The district court determined that Nebraska follows the Restatement (Second) of Conflicts of Law, and noted that Nebraska courts have honored choice of law provisions in past cases. See Shull v. Dain, Kalman & Quail, Inc., 201 Neb. 260, 267 N.W.2d 517, 520 (1978); Exchange Bank & Trust Co. v. Tamerius, 200 Neb. 807, 265 N.W.2d 847, 850 (1978).
The choice of law provision in the distributor agreement provides that it “shall be governed by the laws of the State of Nebraska.” This provision implicates section 187 of the Restatement which provides:
Laws of the State Chosen by the Parties
(1) The law of the state chosen by the parties to govern their contractual rights and duties will be applied if the particular issue is one which the parties could have resolved by an explicit provision in their agreement directed to that issue.
(2) The law of the state chosen by the parties to govern their contractual rights and duties will be applied, even if the particular issue is one which the parties could not have resolved by an explicit provision in their agreement directed to that issue, unless either
(a) the chosen state has no substantial relationship to the parties or the transaction and there is no other reasonable basis for the parties’ choice, or
(b) application of the law of the chosen state would be contrary to a fundamental policy of a state which has a materially greater interest than the chosen state in the determination of the particular issue and which, under the rule of § 188, would be the state of the applicable law *741in the absence of an effective choice of law by the parties.
(3) In the absence of a contrary indication of intention, the reference is to the local law of the state of the chosen law.
Restatement (Second) of Conflict of Laws § 187 (1971).
The first step is to determine whether the contested issue is one which could have been resolved by a contractual provision. See Sheldon v. Munford, Inc., 660 F.Supp. 130, 137 (N.D.Ind.1987) (court enforced choice of law provision in franchise agreement because parties could have included, and did include provision as to the contested grant of exclusive territory in the agreement). Comment c to section 187(1) indicates that if the dispute centers on rules relating to construction, to conditions precedent and subsequent, to sufficiency of performance or to excuse for nonperformance, the forum should apply the provisions of the chosen law. Comment d to section 187(2) cites examples of questions which typically cannot be determined by explicit agreement: capacity, formalities, substantial validity, or illegality. The issue in this case is more than a dispute over contract interpretation; rather, the parties essentially dispute the legality of the choice-of-law provision itself. I do not see how either party could have avoided this issue by stating in the contract that the provision does not violate Minnesota public policy.
The next step is to determine whether under section 187(2)(b), Minnesota has a materially greater interest than Nebraska in the outcome of this issue, and whether Minnesota would be the state of the applicable law if no choice of law provision had been made. Comment g reflects the rationale for this: “Fulfillment of the parties’ expectations is not the only value in contract law; regard must also be had for state interests and state regulation.”
There is no question that Minnesota has a greater interest in the issue of whether its public policy would void the choice of law provision. I think it equally clear that Minnesota has the most significant relationship to the transaction.1
First, Nebraska has declined to take any interest in regulating franchises outside of Nebraska. Although Nebraska has a franchise statute similar to that of Minnesota, see, Neb.Rev.Stat. § 87-401 et seq., section 87-403(1) provides that the Nebraska act only applies “to a franchise the performance of which contemplates or requires the franchise to establish or maintain a place of business within the State of Nebraska * * *.” Minnesota, on the other hand, has a significant interest in regulating the agreement between Modern Computers and Modern Banking and has attempted to do so by enacting the Minnesota Franchise Act. See Barnes Group, Inc. v. C & C Products, Inc., 716 F.2d 1023, 1030 (4th Cir.1983) (per curiam) (Alabama’s interest in regulating business relationships within the state is materially greater than Ohio’s generalized interest in protecting the interstate contracts of its domiciliary).
Second, Minnesota has more material “contacts” with this transaction. Nebraska’s primary contact is that Modern Banking has its place of business there and the distributor agreement was signed there. Minnesota, however, is the place of performance of the contract, as well as the place of incorporation of Modern Computers. Modern Banking delivers its product to Minnesota and enters into contractual arrangements in Minnesota with Minnesota *742customers for use of its software packages. Clearly, Minnesota would be the state of the applicable law if no choice of law provision existed.
The final step under section 187 is to determine whether application of Nebraska law violates a fundamental policy of Minnesota. Specifically, may we enforce this provision when to do so eliminates the statutory remedies provided to Modern Computers by the Minnesota Franchise Act? Contrary to the views of the majority, Modern Computers does not seek to invalidate the choice of law provision because the distributor agreement is an adhesion contract. Nor does it wish to invalidate the provision because Modern Banking has superior bargaining power which it took advantage of during negotiations. Rather, Modern Computer seeks to invalidate the choice of law provision because it limits its rights and remedies as a franchisee against a franchisor. Thus, the focus should be whether Modern Computer’s rights and remedies have been limited, and if so, whether such a limitation violates Minnesota public policy.
First, MinmStat. § 80C.21 provides: “Any condition, stipulation or provision purporting to bind any person acquiring any franchise to waive compliance with any provision of sections 80C.01 to 80C.22 or any rule or order thereunder is void. See also Minn.Rules pt. 2860.4400 subpt. D (1987) (prohibits any franchisor from requiring a franchisee to agree to any term in a contract which relieves any person from liability imposed by the Act).2
Second, Nebraska’s Franchise Practices Act only extends to franchisees within the State of Nebraska. Thus, application of Nebraska law will leave Modern Computers without the remedies available under either state franchise act. Such an outcome negates the decision of the legislature to offer franchisees in Minnesota more protection than the traditional common law remedies, which had proven ineffective in regulating abuses in the franchise industry. See Note, Regulation of Franchising, 59 Minn.L.Rev. 1027, 1028-36 (1975).3
Third, any attempt to narrow the applicability of the Minnesota Franchise Act has been found to violate public policy. In Chase Manhattan Bank, N.A. v. Clusiau Sales, 308 N.W.2d 490 (Minn.1981), the Supreme Court of Minnesota held that a franchise agreement provision in which a franchisee waived all defenses against a franchisor narrowed the remedial reach of the Minnesota Franchise Act, thereby violating state public policy. It wrote: “As the trial court pointed out, enforcement of waiver of defense provision against Minnesota residents who have entered franchise agreements with franchisors who failed to comply with the franchise statute would adversely affect the remedial reach of that statute. * * * We hold the [waiver of defense] provisions contrary to public policy * * 308 N.W.2d at 494.
The choice of law provision in the present case similarly affects the remedial reach of the Minnesota Franchise Act. It becomes in effect a waiver of all rights statutorily afforded to Modern Computers, a waiver rendered void by Minn.Stat. § 80C.21.
*743Finally, the majority relies heavily on Tele-Save Merchandising v. Consumers Distributing, 814 F.2d 1120 (6th Cir.1987) to find that the choice of law provision in this case violates no “fundamental” state policy. In my view, Tele-Save is based on faulty reasoning. To determine whether a choice of law provision rendering the Ohio Business Opportunity Act inapplicable violated a fundamental public policy of Ohio, the Sixth Circuit focused on the number of contacts each party had with the two states and the absence of unequal bargaining strength between the parties. This analysis, however, misses the mark. The key to determining whether a statute embodies a fundamental public policy is whether the state legislature enacted a statute to protect persons from the oppressive use of superior bargaining power, not whether this power is used in a particular case. Furthermore, the number of contacts a transaction has with a state sheds absolutely no light on the public policy issue.4
It is clear that, without an affirmative statement by a state legislature, there can be no clear-cut delineation of those policies that are sufficiently “fundamental” within the meaning of section 187(2)(b) of the Restatement to warrant overriding a contractual stipulation of controlling law.5 Yet, a well reasoned approach to this issue can be found in Barnes Group, Inc. v. C & C Products, Inc., supra. In Barnes, the Fourth Circuit refused to enforce a choice of law clause in an employment contract because a restrictive covenant in the contract violated a fundamental public policy of one employee’s home state. It stated “it seems apparent that where the law chosen by the parties would make enforceable a contract flatly unenforceable in the state whose law would otherwise apply, to honor the choice-of-law provision would trench upon that state’s ‘fundamental policy.’ ” 716 F.2d at 1031. Thus, if a state has rendered certain transactions void by statute, that act is sufficient to demonstrate a fundamental public policy. In this case, the Minnesota Legislature prohibits any transaction intended to narrow or eliminate the applicability of the Minnesota Franchise Act. Thus, the choice of law provision itself, not merely its application in this case, violates the Act and violates a fundamental public policy.
The majority makes much of the fact that there was no disparity of bargaining power between the parties in this case. The Minnesota Legislature, however, did not exempt from the scope of the franchise act those franchisors who have equal bargaining power with their franchisees. The presumption on the part of the Legislature is that all franchise transactions must be regulated to avoid unfair trade practices. The Legislature has decided that all such agreements are subject to state regulation, not just those found unfair after the fact.
I believe that the language of the Minnesota Franchise Act clearly shows that franchise agreements entered into with Minnesota residents must comply with the Act’s requirements and any attempt to circumvent this law violates a fundamental public policy. See also Winer Motors, Inc. v. Jaguar Rover Triumph, Inc., 208 N.J.Super. 666, 506 A.2d 817, CCH Bus.Fran. Guide ¶ 8576 (1986) (court will disregard choice of law in franchise agreement in order to preserve the fundamental public policy of the franchisee’s home state where its statutes afford greater protection).
II. Irreparable Injury
Only after the Court determines what substantive law applies can it correctly as*744sess whether a party will be irreparably harmed if no injunction issues. See Rittmiller v. Blex Oil, Inc., 624 F.2d 857, 860-62 (8th Cir.1980) (Court examined issue of irreparable injury under each legal claim). I recognize that this Court in Rittmiller and many other Circuits have limited the situations in which a distributor can be awarded a preliminary injunction.6 See Rittmiller, 624 F.2d at 861-62 (antitrust damages an available remedy at law); Jackson Kahn Music Co., Inc. v. Baldwin Piano & Organ, 604 F.2d 755, 763 (2d Cir.1979) (plaintiff failed to show that loss of franchisor’s products would result in lost customers or that sale of franchisor’s products constituted cornerstone of plaintiff’s marketing efforts).
We must remember, however, that state franchise acts were enacted because of the inadequacy of the common law and antitrust remedies for franchisees. See 59 Minn.L.Rev. at 1028-36 (common law actions for fraud, for violations of securities act, and for antitrust violations have all proven ineffective in dealing with problems encountered in the franchise relationship). Minnesota’s Legislature enacted chapter 80C in 1973 as remedial legislation to protect franchisees within Minnesota from unfair contracts and other previously unregulated abuses in a growing national franchise industry. Clapp v. Peterson, 327 N.W.2d 585, 586 (Minn.1982); Martin Investors, Inc. v. Vander Bie, 269 N.W.2d 868, 872 (Minn.1978). Nebraska’s Franchise Practices Act also acknowledges that the regulation of distribution and sales through franchise arrangements was necessary to protect the general economy of the state, the public interest and the public welfare. Neb.Stat. § 87-401. See also McArtor v. Mobil Oil Corp., 212 Neb. 592, 324 N.W.2d 399, 400 (1982) (prior to enactment of Nebraska Franchise Practices Act, franchisors could terminate franchises for any reason). By refusing to nullify Modern Banking’s choice of law clause, the majority removes any adequate remedy available to Modern Computers as neither Minnesota’s nor Nebraska’s franchise act applies to this case. The lack of an adequate remedy provides a basis for granting injunctive relief.
Furthermore, a substantial portion of Modern Computers business is derived from its relationship with Modern Banking. Approximately 72.5% of Modern Computer’s business involves the sale and maintenance of Modern Banking’s software, the sale and maintenance of hardware, and the sale of supplies to banking customers using Modern Banking’s data processing system. While Modern Computers would not be precluded from performing some of these services, it would lose a very significant percentage of its business and an immeasurable amount of goodwill. See John B. Hull, Inc. v. Waterbury Petroleum, 588 F.2d 24, 29 (2d Cir.1978), cert. denied, 440 U.S. 960, 99 S.Ct. 1502, 59 L.Ed.2d 773 (1979) (preliminary injunction properly issued when injury to goodwill and reputation would force plaintiff out of business); Al Bishop Agency, Inc. v. Lithonia-Division of National Service Industries, Inc., 474 F.Supp. 828, 835 (E.D.Wis.1979) (potential loss of 60% of plaintiff’s business justified preliminary relief preventing dealership termination); Paul Reilly Co. v. Dynaforce Corp., 449 F.Supp. 1033, 1035 (E.D.Wis.1978) (potential loss of goodwill and confusion in marketplace constitute irreparable injury if dealership terminated); Brennan Petroleum Products Co. v. Pasco Petroleum Co., 373 F.Supp. 1312, 1316-17 (D.Ariz.1974) (potential loss of goodwill and ability to compete effectively in marketplace justified preliminary relief).
If the Minnesota Franchise Act applies, as I believe it must, injunctive relief is Modern Computer’s sole remedy for Modern Banking’s alleged unfair trade practices. See Minn.Stat. § 80C.14(1) (Supp.1987) (a violation is enjoinable by a court of com*745petent jurisdiction). The civil liabilities section of the Act, Minn.Stat. § 80C.17, which provides for damages, excludes section 80C.14, the section outlining the notice, cure and good cause requirements for termination. See also Mason v. Farmers Ins. Co., 281 N.W.2d 344, 348 (Minn.1979) (in-junctive relief is the only available remedy for violation of Minn.Stat. § 80C.14). By making injunctive relief the sole remedy, the Minnesota Legislature appears to have expressed a policy that the inadequacy of the remedy at law is statutorily presumed when there is a termination without good cause or proper notice.
Because I believe the choice of law provision in the distributor agreement violates a fundamental public policy of Minnesota, I would refuse to enforce it in this case. As I feel that Modern Computers has no adequate remedy under either Nebraska or Minnesota law, I would reverse the judgment of the district court denying Modern Computer’s request for preliminary relief.

. Section 188 of the Restatement provides that, in the absence of an effective choice of law by the parties, the governing law will be that of the state which has the most significant relationship to the transaction, considering (1) the place of contracting; (2) the place of negotiation of the contract; (3) the place of performance; (4) the location of the subject matter of the contract, and (5) the domicile, residence, nationality, place of incorporation and place of business of parties. Restatement (Second) Conflicts of Laws § 188(2). Section 188 of the Restatement must be read in conjunction with the principles contained in section 6 of the Restatement, which include any statutory directives on choice of law in the forum state; the needs of the interstate and international systems; relevant policies of the forum; relevant policies of other interested states and their interest in resolution of the dispute; protection of justified expectations; basic policies underlying the particular field of law; certainty, predictability and uniformity of result; and ease in the determination and application of the law to be applied.

. Neb.Rev.Stat. § 87-406(1) contains an anti-waiver provision similar to that found in section 80C.21. It provides:
It shall be a violation of sections 87-401 to 87-410 for any franchisor, directly or indirectly, through any officer, agent or employee, to engage in any of the following practices:
(1) To require a franchisee at the time of entering into a franchise arrangement to assent to a release, assignment, novation, waiver or estoppel which would relieve any person from liability imposed by sections 87-401 to 87-410; * * *.
Neb.Rev.Stat § 87-406(1) (1977).

. In Jurisdiction, Choice of Law and Choice of Venue in the Wake of Burger King Corp. v. Rudzewicz, 3 Franchise Legal Digest 19 (1987),
one commentator agreed with the interpretation advanced by the Minnesota Attorney General:
State franchise disclosure and franchise relationship/termination statutes, however, frequently contain provisions that directly or indirectly make choice of law provisions inapplicable if their effect would be to deprive a resident franchisee of the protections of the state's laws. * * * Such statutes purport to express a rule of substantive law, and for that reason, state choice of law rules (such as those contained in the Restatement) do not come into play. The statute renders void the party’s choice of law as a matter of substantive law.
Id. at 26, citing Minn.Stat. § 80C.21 (footnotes omitted, emphasis added).

. As the dissent in Tele-Save pointed out:
The majority suggests that whether a state’s policy is fundamental depends on the number of contacts the state has with the transaction. To the contrary, Restatement (Second) Conflicts of Laws § 187 Comment g (1971), provides only “that the more contacts the transaction has with the chosen state, the stronger the public policy must be to overcome the stipulation.” E. Scoles & P. Hay, Conflict of Laws § 18.9, at 648 (1984).
814 F.2d at 1125 n. 1 (Milburn, L, dissenting).

. There exists no clear statement from the Minnesota Legislature indicating how "fundamental” the public policy set forth in the Minnesota Franchise Act is. As the majority’s decision is merely a matter of statutory interpretation, it would be subject to reversal if the state legislature were to clearly indicate that the Minnesota Franchise Act overrides choice of law clauses if they operate as waivers under Minn.Stat. § 80C.21.

. Preliminary injunctions, however, are considered extremely important in franchise termination suits. “When a distributor decides to seek injunctive relief against termination, the preliminary injunction is all important. If the dealer loses that motion * * * the status quo prior to litigation will not be preserved and a future permanent injunction is meaningless and inappropriate.” Faruki, The Defense of Terminated Dealer Litigation: A Survey of Legal and Strategic Considerations, 46 Ohio L.Rev. 925, 993 (1985).