Dealers, take notice: Choice-of-law provisions may be more significant than they appear. A recent decision issued by the United States Court of Appeals for the Ninth Circuit held that contractual choice-of-law provisions are valid and enforceable, unless the party challenging the provision shows that its application would contradict the policy goals of another state whose interests are “materially greater.”

In this case, plaintiff ACD Distribution, LLC, a toy-and-game distributor based in Middleton, Wisconsin, sued defendant and Washington State game manufacturer Wizards of the Coast, LLC under the WFDL in the U.S. District Court for the Western District of Wisconsin, alleging that Wizards terminated its distribution agreement without “good cause.” Wizards moved to transfer the case to the Western District of Washington, in accordance with the agreement’s forum selection clause. ACD opposed the transfer and claimed that doing so would undermine the purpose of the WFDL; however, the district court held that contractually valid forum selection clauses are enforceable, absent “extraordinary circumstances unrelated to the convenience of the parties,” and transferred the case. The present dispute then emerged over a choice-of-law provision in the parties’ contract, which required that Washington state law governed the agreement in all respects. Importantly, Washington state law lacks a dealer-friendly “good cause” termination requirement, as does the WFDL. ACD argued that the choice-of-law provision was therefore invalid because the application of Washington law would directly contradict Wisconsin’s policy favoring dealers.

The Ninth Circuit disagreed and upheld the district court’s decision to apply Washington law. The court noted that under Washington’s rules governing conflict of laws, the law of the state chosen by the parties controls unless its application “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.” Although Wisconsin has enacted policies favoring dealers like ACD, Washington has not. The court emphasized that ACD specifically agreed to a contract requiring the application of out-of-state law as well as venue in Washington courts. Because ACD failed to demonstrate how Wisconsin’s interest in protecting in-state dealers overrides a party’s “justifiable expectations” contained in a “freely negotiated contract,” the Ninth Circuit held that the district court properly rejected the WFDL in favor of Washington law.

Key Takeaways:

• The WFDL is a dealer-friendly statute – by restricting its reach, this decision benefits manufacturers significantly.
• Unless a dealer can demonstrate that Wisconsin’s interests are “materially greater” than the state whose law the parties agreed to, the WFDL cannot be used to avoid enforcement of manufacturers’ choice-of-law provisions.
• This decision strengthens the reliability of distribution contracts and gives manufacturers greater latitude in choosing how to conduct business.

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