In Binder v. Medicine Shoppe International, Inc., No. 09-14046 (E.D.Mich. 2010), a breach of contract dispute between the plaintiff (a franchisor) and the defendant (a franchisee) arose out of a Uniform Franchise Offering Circular and subsequent License Agreement (“Agreement”). The Agreement was entered into in Michigan and provided that the parties would arbitrate any disputes regarding the Agreement in Missouri. Michigan's Franchise Investment Law (Mich. Comp. Laws § 445.1527), however, prohibits the parties to a franchise agreement from contracting for arbitration outside that state.

In accordance with the Agreement, the defendant sought to arbitrate the dispute before the American Arbitration Association (“AAA”) in Missouri. The plaintiffs, however, filed a lawsuit in Michigan state court. In response, the defendants removed the action to federal court – based on diversity jurisdiction – and moved to compel arbitration. The plaintiffs opposed the motion to compel on the basis that Michigan law prohibited franchise agreements that require arbitration of disputes to be held outside of Michigan.

The Binder court, in ruling for the defendant, held “Michigan’s statutory prohibition on out-of-state arbitration is without effect” because “this restriction is preempted by the Supremacy Clause of the United States Constitution, Art. VI, cl. 2, and the FAA.” The Binder court based its “preemption” holding on the court’s analysis in Flint Warm Air Supply Co. v. York Int’l Corp., 115 F. Supp. 2d 820, 825 (E.D. Mich. 2000), which reads in pertinent part as follows:

Both the Supreme Court and the Sixth Circuit have repeatedly and emphatically reminded lower courts that when parties have contracted for extra-judicial resolution of their disputes through arbitration, “any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration.” (Citations omitted.)

It was specifically to codify a national policy favoring arbitration that the Federal Arbitration Act was enacted. (Citations omitted.)

The Supreme Court has recognized only two limitations on the enforceability of arbitration agreements subject to the FAA: (1) they must be a part of either a maritime contract or a contract dealing with interstate commerce; and (2) arbitration agreements may be revoked “upon grounds as exist at law or in equity for the revocation of any contract.” (Citation omitted). The Supreme Court has construed this “grounds at law or in equity” revocation exception as applying only to claims of “fraud in the inducement” in the making of the agreement to arbitrate, not to claims that the contract, as a whole, was fraudulently induced. (citations omitted).

The Binder court found that neither of these two exceptions applied and therefore the FAA preempted Michigan’s statute prohibiting out-of-state arbitrations.

For a complete copy of the District Court’s decision, click here.