2:16-cv-01467
D. Ariz.Sep 15, 2017Background
- Zounds Hearing Franchising (Arizona) and Zounds Hearing, Inc. (Delaware) sold four Ohio franchises in 2013; franchisees sued in Ohio alleging violations of the Ohio Business Opportunity Purchasers Protection Act (insufficient disclosures, false representations, and missing five-day cancellation right).
- Franchise agreements contained identical clauses selecting Arizona law, requiring exclusive Arizona venue, and imposing mandatory pre-suit mediation in Arizona at Zounds’ election (mediation could be ended only by Zounds or the mediator).
- Zounds filed four declaratory-judgment actions in Arizona seeking declarations enforcing the Arizona mediation/choice-of-law/venue terms; the Ohio court removed/transferred the Ohio action to Arizona under § 1404(a) and left substantive choice-of-law issues to this Court.
- The consolidated question: whether parties can contractually choose a less-protective out-of-state law and venue to avoid in-state investor-protection (franchise) statutes—in particular Ohio’s statute that voids out-of-state venue or choice-of-law provisions for claims under the Act.
- The Court applied Restatement (Second) of Conflict of Laws §§ 6, 187, 188 and concluded Ohio has the most significant relationship and a fundamental policy protecting in-state franchise purchasers, so the Arizona choice-of-law and venue clauses (including the pre-suit Arizona mediation condition) are invalid as to the Ohio Act claims.
- The Court (1) denied Zounds’ renewed motion to dismiss or compel Arizona mediation, (2) declared the Arizona choice-of-law and venue/mediation provisions unenforceable for the Ohio claims, (3) ordered transfer of the Ohio-origin case back to the Northern District of Ohio under Ohio statutory venue, and (4) allowed franchisees to seek attorney fees.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the Arizona choice-of-law clause can displace Ohio franchise-protection statutes | Zounds: parties may choose Arizona law; clause should be enforced | Franchisees: Ohio law governs because statutes protect in-state franchisees and void out-of-state choice/venue | Ohio law governs; Arizona choice-of-law unenforceable for Ohio Act claims |
| Whether pre-suit Arizona mediation/venue condition is enforceable | Zounds: mediation clause is valid and must be in Arizona before suit | Franchisees: mediation/venue condition effectively restricts Ohio venue and is void under Ohio law | Mediation/venue requirement to litigate in Arizona is invalid as to Ohio Act claims; mediation may occur in Ohio |
| Whether contractual limitations on joinder/class/ consolidation of claims and mediations are enforceable | Zounds: agreement prohibits consolidation and requires individual proceedings | Franchisees: Ohio statute voids class/joinder prohibitions for Act claims; consolidation/joinder permitted | Non-joinder/class prohibition unenforceable under Ohio law for these claims; group mediation/joinder allowed |
| Entitlement to attorney fees after Zounds’ declaratory suits | Zounds: seeks fees under one-way contractual clause and Ariz. statute | Franchisees: seek fees under Arizona and Ohio statutes because Zounds pursued multiple Arizona actions and lost | Court found fees may be awarded to franchisees; permitted them to submit fee applications under applicable rules |
Key Cases Cited
- Jorgensen v. Cassiday, 320 F.3d 906 (9th Cir.) (federal courts in diversity apply forum state's choice-of-law rules)
- Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487 (U.S. 1941) (federal courts must apply forum state's choice-of-law rules)
- Swanson v. Image Bank, Inc., 206 Ariz. 264 (Ariz. 2003) (Arizona follows Restatement approach to contractual choice-of-law)
- Schulke Radio Prods., Ltd. v. Midwestern Broad. Co., 6 Ohio St. 3d 436 (Ohio 1983) (Ohio follows Restatement in choice-of-law for contracts)
- Wright-Moore Corp. v. Ricoh Corp., 908 F.2d 128 (7th Cir.) (applying forum state's franchise-protection law over chosen law when forum has greater interest)
- Ticknor v. Choice Hotels Int’l, Inc., 265 F.3d 931 (9th Cir.) (applying local franchise law despite different contractual choice-of-law)
- Cottman Transmission Sys., LLC v. Kershner, 492 F. Supp. 2d 461 (E.D. Pa.) (voiding choice-of-law when forum state's franchise laws serve strong public policy)
- Barnes Group, Inc. v. C & C Products, Inc., 716 F.2d 1023 (4th Cir.) (one state's interest in regulating business within its borders can outweigh chosen-law interests)
- Tele-Save Merchandising Co. v. Consumers Distributing Co., 814 F.2d 1120 (6th Cir.) (historical decision that prompted legislative amendment in Ohio regarding non-waivability of venue/choice clauses)