Minnesota’s Implied Covenant of Good Faith and Fair Dealing May Not be Contracted Away

In Northwest, Inc. v. Ginsberg, 572 U.S. 273 (2014), the United States Supreme Court held that Minnesota’s implied covenant of good faith and fair dealing may not be contracted away.

 

In that case, the respondent was a member of airline’s frequent flyer program. Id. at 277. Shortly after achieving the highest level available in the program, the airline cancelled respondent’s membership because of respondent’s alleged “abuse” of the program. Id. Respondent subsequently filed a class action arguing that the airline discontinued respondent’s membership as a “cost-cutting measure,” and that the airline violated the implied duty of good faith and fair dealing. Id. at 278. The United States District Court for the Southern District of California held that respondent’s claims were pre-empted by the Airline Deregulation Act of 1978. Id. at 279. The Ninth Circuit reversed, and the United States Supreme Court granted certiorari. Id.

 

On the implied covenant of good faith and fair dealing issue, the Court noted that some states employ this doctrine as a mechanism to ensure neither party “violate[s] community standards of decency, fairness, or reasonableness.” Id. at 286 (internal quotations omitted). The Court stated that “the implied covenant must be regarded as a state-imposed obligation.” Id. As such, “under Minnesota law parties cannot contract out of the covenant.” Id. at 287 (emphasis added). The Court later went on to say that a State’s “unwillingness to allow people to disclaim the obligation of good faith . . . shows that the obligation cannot be implied, but is law imposed.” Id. (internal citations omitted). Therefore, Minnesota state law on this point was inconsistent with federal law and the Airline Deregulation Act governed (not Minnesota law).

 

Takeaway: Disclaimers of the covenant of good faith and fair dealing may be void under Minnesota law. Franchise agreements, along with many other agreements, commonly contain such disclaimers. Minnesota franchise attorneys and franchisees should keep this in mind when thinking of potential claims against franchisors for unreasonable or unfair conduct on the part of the franchisor.

 

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