Opinion
Civ. 04-4170-KES.
January 18, 2006
ORDER
Plaintiff, Pinnacle Pizza Company, Inc., operates Little Caesars franchises in Sioux Falls, South Dakota. Little Caesar Enterprises, Inc., (LCE) is a Michigan corporation. Pinnacle sued LCE for breach of contract and several other causes of action related to the alleged misappropriation of the "Hot n' Ready" marketing concept. On July 19, 2005, this court granted Pinnacle's motion to amend its complaint, partially granted LCE's motion for judgment on the pleadings, and found that Michigan law applied to the breach of contract claim, while South Dakota law governed the tort claims. The court reserved ruling on the motion for judgment on the pleadings for breach of implied duty of good faith and ordered additional briefing on whether an addendum to the choice of law and venue portion of the franchise agreement affected the claim. See Order Granting in Part and Denying in Part Def.'s Mot. for J. on the Pleadings (July 19, 2005).
DISCUSSION
This dispute centers on whether South Dakota or Michigan law applies to the implied covenant of good faith and fair dealing claim. The South Dakota Supreme Court recognizes a claim for breach of the implied covenant of good faith and fair dealing, but not a new cause of action in tort. Garrett v. BankWest, Inc., 459 N.W.2d 833, 843 (S.D. 1990). A claim for breach of an implied covenant of good faith and fair dealing has not been recognized by the Michigan courts and is properly subject to dismissal. Belle Isle Grill Corp. v. City of Detroit, 666 N.W.2d 271, 279 (Mich.App. 2003). As a result, if Michigan's substantive law applies, the claim must be dismissed.In diversity cases, federal courts apply the choice of law rules of the forum state to determine which state's substantive law applies. Retail Associates, Inc. v. Macy's East, Inc., 245 F.3d 694, 697 (8th Cir. 2001). Thus, the court will apply South Dakota's choice of law rules.
Under South Dakota's choice of law rules, parties may stipulate to the application of a particular state's law. Dunes Hospitality, LLC v. Country Kitchen Int'l, Inc., 623 N.W.2d 484, 488 (S.D. 2001). These stipulations are subject to limitation and invalidation by the overriding public policy of the forum state.Id. Declarations of South Dakota public policy are found in the constitution, judicial decisions, and statutes. State ex rel. Meierhenry v. Spiegel, Inc., 277 N.W.2d 298, 300 (S.D. 1979).
Here, the addendum to the Little Caesar franchise agreement provides as follows:
A. The law regarding franchise registration, employment, covenants not to compete, and other matters of local concern will be governed by the laws of the State of South Dakota; but as to contractual and all other matters, this agreement and all provisions of this instrument will be and remain subject to the application, construction, enforcement and interpretation under the governing law of Michigan.
B. Any provision which designates jurisdiction or venue or requires the Franchise Owner to agree to jurisdiction or venue in a forum outside of South Dakota is void with respect to any cause of action which is otherwise enforceable in South Dakota.
Ex. 1, ¶ XXIV.
LCE contends that because paragraph B of the addendum is a forum selection provision, it is irrelevant to the choice of law issue of whether Michigan or South Dakota law applies to the implied duty of good faith claim. LCE claims that the choice of law is governed by paragraph A. Pinnacle argues that the phrase "designates jurisdiction or venue" in paragraph B must mean something other than "agree to jurisdiction" because "the term `designates' seems more at home in a choice of law provision [and] it is reasonable to conclude that Paragraph B's reference to provisions that designate jurisdiction encompasses any provision that designates a particular jurisdiction as supplying the controlling law." Pl.'s Resp. to Def.'s Supp. Br. at 2. Pinnacle contends that because LCE chose these words, the selection of Michigan law cannot be used to dismiss the breach of the implied covenant of good faith claim, which is only enforceable under South Dakota law.
Based on the plain meaning of the words in paragraph B of the addendum, the court finds that it refers to the choice of forum provision of the contract. The court has no reason to believe that the term "designates" could only refer to a choice of law provision, and Pinnacle cites no authority for this argument. Parties may agree to resolve disputes under the laws of a particular state, even if the forum is in another state, as long as the choice of law provision was not obtained by duress or mistake and does not violate public policy. See Dunes Hospitality, 623 N.W.2d at 488. While Pinnacle is a much smaller business than LCE, there is no evidence of duress or mistake to suggest that Pinnacle did not voluntarily agree to the selection of Michigan law.
Relying on Dunes Hospitality, 623 N.W.2d at 488, Pinnacle contends that its interpretation of the addendum squares with South Dakota's rule precluding the enforcement of a choice of law clause that would violate South Dakota public policy. Governing law agreements may be invalidated by the overriding public policy of the forum state. Id. South Dakota applies the provisions of the Restatement (Second) of Conflicts of Laws in order to determine which state's laws apply to a particular case. Id. The Restatement provides that a choice of law provision may be refused if: 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 in the absence of an effective choice of law by the parties.
Restatement (Second) of Conflict of Laws § 187 (1988). "The chosen law should not be applied without regard to the interests of the state which would be the state of the applicable law . . . in the absence of an effective choice by the parties." Id. cmt. g. And the "forum will not refrain from applying the chosen law merely because this would lead to a different result[.]" Id.
In analyzing whether a policy of the state of the otherwise applicable law is "fundamental," an important consideration is the extent to which the significant contacts are grouped in this state. Id. "[T]he forum will be more inclined to defer to the policy of a state which is closely related to the contract and the parties than to the policy of a state where few contacts are grouped but which, because of the wide dispersion of contacts among several states, would be the state of the applicable law if effect were to be denied the choice-of-law provision." Id. Another important consideration is whether the significant contacts are grouped in the state of the chosen law. Id. "The more closely this state is related to the contract and to the parties, the more fundamental must be the policy of the state of the otherwise applicable law to justify denying effect to the choice-of-law provision." Id.
In this case, both states have significant contacts to the disputed contract. Pinnacle accepted the Agreement in Michigan (see Agreement, at Section XXIV.A.), the Agreement was made at Detroit, Michigan (id. at Preamble), and the place of business of LCE is Michigan. Furthermore, LCE provides essential franchise services to Pinnacle from Michigan. On the other hand, Pinnacle operates the franchises in South Dakota, and its place of business is South Dakota. Pinnacle alleges that it created the Hot n' Ready concept in South Dakota, but LCE allegedly stole its advertising idea and required all of its franchisees to adopt the concept from its base in Michigan. Accordingly, South Dakota is not more closely related to the contract than Michigan and significant contacts are grouped in Michigan, which is the state of the chosen law.
A statute that makes a certain type of contract illegal or which is designed to protect a person against the oppressive use of superior bargaining power may involve fundamental policies. Restatement (Second) of Conflict of Laws § 187 cmt. g (1988). For example, a statute protecting the rights of an individual against an insurance company is a fundamental policy. Id. Such a contract is not involved here. After considering the policies of § 187 of Restatement (Second) of Conflict of Laws, the court finds that Pinnacle has not shown that South Dakota has a materially greater interest than Michigan in the determination of whether or not an implied duty of good faith exists or that South Dakota would be the state of applicable law in the absence of an effective choice of law by the parties in the contract. Sufficient justification to deny the effect of the choice-of-law provision has not been shown.
Pinnacle relies on Wright v. Martek Power, Inc., 314 F. Supp. 2d 1065 (D. Colo. 2004), for its argument that this court should refuse to enforce the choice of law provision on public policy grounds. In Wright, the plaintiff was a sales representative in Colorado for the defendant, a Delaware corporation which had its principal place of business in California. Id. at 1067. Wright's employment contract contained a choice of law provision that stated that Texas law applied to resolve disputes. Id. Wright sued the defendant for breach of the implied duty of good faith and unjust enrichment. Id. at 1066. The defendant argued it was entitled to summary judgment because Texas does not recognize a cause of action for breach of the implied duty of good faith. Id. at 1067. The court refused to apply Texas law because Texas had no relationship to the parties or to the contract and the application of Texas law would be contrary to a fundamental public policy of Colorado. Id. at 1068.
Unlike Wright, the parties in this case have selected the laws of a state (Michigan) that does have a close relationship to the parties and the contract. Thus, Wright is not persuasive authority for Pinnacle's contention that the court must apply South Dakota law to the breach of implied duty of good faith claim.
The implied duty of good faith "acts merely as gap filler to deal with circumstances not contemplated by the parties at the time of contracting." Stone Motor Co. v. General Motors Corp., 293 F.3d 456, 467 (8th Cir. 2002). Even if South Dakota law applied, the implied duty of good faith might not apply in this case because the claim relates to the enforcement of a term specified in the contract. Pinnacle alleges that LCE misappropriated its intellectual property in the Hot n' Ready advertising campaign and marketing concept. The implied covenant of good faith covers circumstances not contemplated by the parties at the time of contracting and "has nothing to do with the enforcement of terms actually negotiated." Stone Motor Co., 293 F.3d at 467. In this case, the contract provides that the franchisee owns the advertising it creates and that LCE will not use it without permission.
The court has previously found that Michigan law applies to the contractual claims in this case. After considering the supplemental briefs, the court finds that Michigan law applies to the breach of implied duty of good faith claim. See Belle Isle Grill, 666 N.W.2d at 279. Because Michigan law does not recognize a cause of action for breach of implied duty of good faith, the claim is dismissed. Accordingly, it is hereby
ORDERED that LCE's motion for judgment on the pleadings (Docket 20) is granted as to Pinnacle's breach of the implied duty of good faith claim.