This is an action filed by Plaintiff, Cottman Transmission Systems, Inc. for alleged violations of a franchise agreement by Defendants Melody. Plaintiff alleges fraud, copyright infringement, and breach of contract.
Defendants' counterclaim alleges fraud, negligent misrepresentation, and violation of the California Franchise Investment Law ("CFIL").
The issue currently before the Court is whether California or Pennsylvania law should be applied to the litigation's substantive claims.
Defendants have moved to apply California law on the grounds that 1) California has more numerous and substantial contacts with the subject matter of the suit; and 2) California has a strong public policy against choice of law provisions. Defendants argue that this public policy against choice of law provisions, embodied in CFIL § 3100, overrides the parties' agreement to be bound by Pennsylvania law in the event of litigation.
By way of response, Plaintiff asserts that 1) Pennsylvania, not California, has more substantial and numerous contacts with the subject matter of the suit; 2) the policy articulated in § 3100 of the CFIL is not "fundamental" and thus does not void a freely negotiated choice-of-law provision.
FACTS AND PROCEDURAL HISTORY
In March of 1993, Defendant Lee Melody answered an advertisement from Joseph Sanfellipo, a franchise broker in California and the two met to discuss Defendant's interest in acquiring a Cottman franchise owned by Mr. Sanfellipo. From March, 1993 to April, 1993 negotiations between Mr. Sanfellipo and Defendants were conducted in California for the sale of a Cottman franchise.
Defendants' attorney reviewed the franchise agreement before Defendants executed the contract in Philadelphia. The franchise agreement provided that the parties chose to apply Pennsylvania law in the event of any dispute.
Defendant Lee Melody travelled to Pennsylvania for three weeks of training. Defendant Donna Melody attended the third week of training in Pennsylvania. The franchise agreements and other contracts were entered into at Plaintiff's offices in Pennsylvania on May 6, 1993.
Subsequent to the purchase of the Cottman franchise, Defendants received various training and informational materials sent from Plaintiff in Pennsylvania to their offices in California. Additionally, Plaintiff's personnel visited California to render assistance to Defendants in conducting their business.
Defendants operated a Cottman Center in La Habra, California until early March, 1994. Defendants were unable to profit from the franchise, and in fact had substantial losses. In March, 1994, Defendants advised Plaintiff of their intention to rescind the License Agreement and began to operate an independent transmission business at the site.
Defendants filed suit against Plaintiff and Sanfellipo in the Superior Court of Orange County, California on March 2, 1994. Plaintiff filed the instant action against Defendants in the Court of Common Pleas of Montgomery County, Pennsylvania on March 8, 1994, which was removed to this Court.
When jurisdiction is based on diversity of citizenship, the district court generally applies the conflict of law rules of the state in which it sits. Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487, 496, 85 L. Ed. 1477, 61 S. Ct. 1020 (1941). As previously stated by this Court, "the laws of Pennsylvania and California are substantially in agreement insofar as the enforcement of choice of forum and choice of law clauses are concerned." Cottman Transmission Systems, Inc. v. Melody, 851 F. Supp. 660, 670 (E.D. Pa. 1994).
Both Pennsylvania courts and California courts will uphold an express choice of law provision in a contract so long as the provision bears a "reasonable relationship" to the state whose law is chosen to govern, and the chosen law does not violate a "strong public policy" that would otherwise protect a party.
Both of these standards stem from § 187 of the Restatement (Second) of Conflict of Laws. § 187 states that the parties' choice of law provision will govern unless :
(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 a particular issue, and which,
under the rule of Section 188,
would be the state of
the applicable law in the absence of an effective choice
of law by the parties.
Restatement § 187(2).
I. REASONABLE BASIS FOR THE CHOICE OF PENNSYLVANIA LAW
Pennsylvania courts have traditionally held that a choice of law provision in a contract will be upheld as long as the transaction bears a "reasonable relationship to the state whose law is governing." Novus Franchising Inc. v. Taylor, 795 F. Supp. 122, 126 (M.D. Pa. 1992) (citing Churchill Corp. v. Third Century, Inc., 396 Pa. Super. 314, 578 A.2d 532, 537 (1990), app. denied, 527 Pa. 628, 592 A.2d 1296 (1991)); Instrumentation Assoc. Inc. v. Madsen Elecs. Ltd., 859 F.2d 4, 5-6 (3d Cir. 1988). See also AmQuip Corp. v. Pearson, 101 F.R.D. 332, 337 (E.D. Pa. 1984). Thus Pennsylvania courts will honor contractual choice-of-law provisions where the parties have sufficient contacts with the chosen state. Jaskey Fin. and Leasing v. Display Data Corp., 564 F. Supp. 160 (E.D. Pa. 1983).
Neither party contests that the purchase of the Cottman franchise bears a "reasonable relationship" to Pennsylvania law. The contract was partially negotiated at meetings in Pennsylvania, made with a Pennsylvania corporation, executed by all the parties in Pennsylvania, and Defendants were required to make continuing payments to Pennsylvania for a period of fifteen years. These facts demonstrate that the transaction at issue bears a reasonable relationship to Pennsylvania law, and thus the choice of law provision is valid.
Whether a valid choice of law provision is enforceable under the more stringent requirements of § 187(2)(b) and Pennsylvania law is in part determined by which state has "materially greater interest" in the outcome of the case. In Shannon v. Keystone Sys., 827 F. Supp. 341, 343 (E.D. Pa. 1993), our Court stated that Pennsylvania's choice of law principles require "the state having the most interest in the controversy and which is most intimately concerned with the outcome [to be] the forum whose law should be applied."
In order to determine which forum has the most significant contacts, we must consider, "1) the place of negotiation, contracting and performance of the contract in question; 2) the location of the subject matter of the contract; and 3) the parties' citizenship." Id. at 343; Restatement § 188.
It appears to this Court that there are an equal number of contacts with California and Pennsylvania. Defendants assert substantial contacts by virtue of the fact that they were California residents, that documents were received in California, they received training at the franchise in California, and that the majority of negotiations regarding the purchase took place in California.
Plaintiff has an equally compelling argument for substantial contacts as its principal office was in Pennsylvania, negotiations were completed in Pennsylvania, the contracts were signed in Pennsylvania, payments were to be sent to Pennsylvania, and Defendants allegedly received "all" of their training there.
As there are an equal number of contacts with Pennsylvania and California and therefore neither state has a "materially greater" interest in the outcome of the case, we must consider whether enforcement of the contract's choice of law provision contravenes a "fundamental public policy" of the state not chosen under the agreement.
III. PUBLIC POLICY
Defendants contend that the broad language of § 3100 of the CFIL establishes a "fundamental public policy" that would be violated by applying Pennsylvania law.
Plaintiff argues, though, that even if the statute establishes a public policy, California upholds and enforces freely negotiated choice of law provisions.
Further, they argue that courts should act cautiously when invalidating contractual agreements on public policy grounds.
To date, no Pennsylvania court has spoken on whether a statutory provision such as § 3100 of the CFIL expresses a "fundamental public policy" that should void a contractual choice of law provision. However, the reasoning of other courts is instructive.
Several circuits have held that a statutory provision such as the CFIL expresses a "fundamental public policy" that may invalidate a contractual choice of law provision. For example, in Hengel Inc. v. Hot N' Now, Inc. 825 F. Supp. 1311 (N.D. Ill. 1993), relying on the reasoning of the Seventh Circuit,
the District Court decided that a statute almost identical to CFIL
expressed a fundamental public policy that would void a choice of law provision.
In contrast, the Sixth Circuit has expressed caution in invalidating choice of law contract clauses on public policy grounds. Banek Inc. v. Yogurt Ventures U.S.A., Inc., 6 F.3d 357 (6th Cir. 1993). The anti-waiver statute in Banek, also virtually identical to the CFIL, made "void and unenforceable" any "release, assignment, novation, waiver, or estoppel which deprives a franchisee of rights and protections provided in this Act." While acknowledging that this provision was motivated by some policy considerations, the Court decided that this provision of the statute was not motivated by a policy that was "fundamental." Id. at 362. As it was not "fundamental," it could not void a contractual choice of law clause unless the choice of law eroded protections established under the statute.
Quoting Tele-Save Merchandising v. Consumers Distributing, 814 F.2d 1120, 1123 (6th Cir. 1987), the Banek Court stated that "in order for the chosen state's law to violate the fundamental policy of [the forum state], it must be shown that there are significant differences in the application of the law of the two states." Thus the Court concluded that it was not enough that Michigan had a policy to protect franchisees; rather, the central question was whether the choice of law "caused a substantial erosion of the quality of protection" the statute would have otherwise provided. Banek at 362.
This Court finds the Sixth Circuit's analysis more persuasive, and therefore will review the law of both California and Pennsylvania to discern any "significant differences" between the two states' application of the law. If the choice of Pennsylvania law would cause a "substantial erosion of the quality of protection" afforded under the CFIL, then California law must be applied. However, if this is not true, then the CFIL does not represent a "fundamental policy" that would be violated by the application of Pennsylvania law.
In the present matter, Defendants' claims include allegations of fraud, negligent misrepresentation and violation of the CFIL. The definition of a cause of action for fraud under California law and Pennsylvania law are virtually identical.
The remedies in both California and Pennsylvania include damages and/or recision of contract.
"Negligent misrepresentation" under California
and Pennsylvania law
is likewise treated similarly. Not surprisingly, the remedies under both states' laws entitle Plaintiff to the same relief.
As the protections and remedies for fraud and negligent misrepresentation under both states' laws are virtually the same, the application of Pennsylvania law would result in no "erosion of the quality of protection" offered under California law.
Accordingly, we DENY Defendants' Motion to apply California law. An appropriate Order follows.
AND NOW, this 26th day of October, 1994, upon consideration of Defendants' Motion Seeking Application of California Law, and responses thereto, the Motion is hereby DENIED.
BY THE COURT:
J. CURTIS JOYNER, J.