Court Opinion

ID: 9475968
Source: CourtListenerOpinion
Date Created: 2023-08-05 05:44:08.935639+00
Date Added: 2024-06-11T17:45:03.344943
License: Public Domain

MILBURN, Circuit Judge,
dissenting.
Because I believe that the Ohio Business Opportunity Purchasers Protection Act (“the Act”), Ohio Rev. Code § 1334.01 et seq., is applicable in the present case, I must respectfully dissent.
The issue presented is whether an out-of-state seller of business opportunity plans may avoid application of the Act by means of a contractual choice-of-law provision. The purpose of the Act is “to regulate the sale of business opportunity plans and [to provide] significant remedies ‘to those who have been misled by dishonest or negligent franchisors.’ ” Peltier v. Spaghetti Tree, Inc., 6 Ohio St.3d 194, 451 N.E.2d 1219, 1221 (1983) (quoting Comment, The Business Opportunity Purchasers Protection Act: The Unfulfilled Promise to Ohio Franchisees, 41 Ohio St. L.J. 477, 498 (1980)). The Act requires sellers of business opportunity plans to provide purchasers written disclosure statements, Ohio Rev.Code §§ 1334.02, 1334.06, and prohibits certain practices and representations, Ohio Rev.Code §§ 1334.03, 1334.06. Those who violate the Act may be liable for civil penalties, Ohio Rev.Code § 1334.08, and may be subject to criminal sanctions, Ohio Rev. Code § 1334.99. When a seller violates any provision, the purchaser may rescind the transaction and recover the greater of three times the amount of actual damages or $10,000.00, plus a reasonable attorney’s fee. Ohio Rev.Code § 1334.09.
A federal court sitting in a diversity case must apply the conflict of laws rules prevailing in the state in which the court sits. Klaxon v. Stentor Electric Manufacturing Co., 313 U.S. 487, 496, 61 S.Ct. 1020, 1021, 85 L.Ed. 1477 (1941); Colonial Refrigerated Transportation, Inc. v. Worsham, 705 F.2d 821, 825 (6th Cir.1983). This court is not permitted to fashion its own rules and must, whenever possible, reach the identical result the state court would reach in deciding the same issue. See Goodwin v. George Fischer Foundry Systems, Inc., 769 F.2d 708, 711 (11th Cir.1985). Therefore, this court is required, as was the district court, to function as an Ohio court in deciding whether to enforce the contractual choice-of-law provision.
Under Ohio law, a contractual choice-of-law provision will not be given effect where “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 the particular issue and which ... would be the state of the applicable law in the absence of an effective choice of law by the parties.” Schulke Radio Productions, Ltd. v. Midwestern Broadcasting Co., 6 Ohio St.3d 436, 438-39, 453 N.E.2d 683, 686 (1983) (quoting and expressly adopting Restatement (Second) of Conflict of Laws § 187(2)(b) (1971)); see also Jarvis v. Ashland Oil, Inc., 17 Ohio St.3d 189, 191, 478 N.E.2d 786, 788-89 (1985). Although Ohio courts accord considerable deference to contractual choice-of-law provisions, the extent to which Ohio courts will allow “deft draftmanship” to override Ohio public policy and bypass legislative judgments is limited. Barnes Group, Inc. v. C & C Products, Inc., 716 F.2d 1023, 1029 (4th Cir.1983) (per curiam). Fulfillment of the parties’ expectations is an important consideration in contract law, but “regard must also be had for state interests and *1125state regulation.” Restatement (Second) of Conflicts of Laws § 187 comment g (1971).
Ohio has a clearly expressed fundamental policy of protecting small, inexperienced purchasers of business opportunity plans from the unfair and misleading practices often utilized by economically superior sellers of business opportunity plans. See Business Incentives Co. v. Sony Corp., 397 F.Supp. 63 (S.D.N.Y.1975) (contractual choice of New York law unenforceable because it contravened New Jersey’s statutory policy of protecting small investors from unfair franchise practices); Restatement (Second) of Conflicts of Laws § 187 comment g (1971) (“a fundamental policy may be embodied in a statute ... which is designed to protect a person against the oppressive use of superior bargaining power.”). The Act implicitly recognizes that oftentimes individuals with little economic wealth or business experience are lured into purchasing business opportunity plans “by exaggerated profit claims made by sellers who fail to provide full and complete information regarding crucial aspects of the plan.” Meaney, Ohio’s Business Opportunity Law: A Practical Guide, 11 Ohio N.U.L.Rev. 651, 652 (1984). The fact that the Ohio legislature considered these protections fundamental is evidenced by the fact that Ohio provided criminal sanctions for violations of the Act. See MGM Grand Hotel, Inc. v. Imperial Glass Co., 65 F.R.D. 624, 632 (D.Nev.1974), rev’d on other grounds, 533 F.2d 486 (9th Cir.), cert. denied, 429 U.S. 887, 97 S.Ct. 239, 50 L.Ed.2d 168 (1976).1
Moreover, Ohio has a clearly expressed fundamental policy of prohibiting enforcement of contractual choice-of-law provisions abrogating the protections afforded by the Act. See Industrial Indemnity Insurance Co. v. United States, 757 F.2d 982 (9th Cir.1985) (Idaho expressed a fundamental policy of strict adherence to the statute of limitations period by statutorily prohibiting any condition in a contract that would reduce the period); Forney Industries, Inc. v. Andre, 246 F.Supp. 333 (D.N.D.1965) (North Dakota expressed a fundamental policy against covenants not to compete by virtue of a statute which rendered contracts in restraint of trade void). Ohio Rev.Code § 1334.15 provides that “[a]ny waiver by a purchaser of sections 1334.01 to 1334.15 of the Revised Code is contrary to public policy and is void and unenforceable.” Moreover, Ohio Rev.Code § 1334.-06(E)(2) provides that “no seller shall ... [ijnclude in any agreement ... any waiver of any rights to which the purchaser is entitled under sections 1334.01 to 1334.15 of the Revised Code____”2
Ohio also has a “materially greater interest” than New Jersey in resolution of this controversy. See Barnes, 716 F.2d at 1030 (Alabama’s interest in regulating business relationships within the state is materially greater than Ohio’s generalized interest in protecting the interstate contracts of its domiciliary); Stickney v. Smith, 693 F.2d 563, 565 (5th Cir.1982) (Louisiana’s interest in protecting persons injured within the *1126state is materially greater than Michigan’s interest in construing the insurance contracts issued by its domiciliary); Business Incentives, 397 F.Supp. at 67 (New Jersey’s interest in protecting small businessmen and powerless consumers is materially greater than New York’s interest in protecting interstate contract of its domiciliary). Ohio’s interests in applying its own law are to maintain its ability to regulate the sale of business opportunity plans within the state and to protect its citizens from dishonest or negligent franchisors. In my view, Ohio courts would hold that these interests materially outweigh any generalized interest New Jersey might have in applying its own law to protect the interstate contracts of its domiciliary.
Ohio would be the state of applicable law in the absence of an effective choice of law by the parties. Winer Motors, Inc. v. Jaguar Rover Triumph, Inc., 208 N.J.Super. 666, 506 A.2d 817 (1986) (New Jersey legislature intended Franchise Practices Act to govern the relationship between an out-of-state franchisor and a New Jersey franchisee and this intent constitutes a statutory directive regarding choice of law). Ohio has adopted Restatement (Second) of Conflicts of Laws § 188 (1971) to deal with the situation where the parties have not made an effective choice of law. Gries Sports Enterprises, Inc. v. Modell, 15 Ohio St.3d 284, 473 N.E.2d 807, 810 (1984), cert. denied, 473 U.S. 906, 105 S.Ct. 3530, 87 L.Ed.2d 654 (1985). Section 188(1) requires application of the law of the state which “has the most significant relationship to the transaction and the parties under the principles stated in § 6.” Section 6(1) of the Restatement provides that “[a] court, subject to constitutional restrictions, will follow a statutory directive of its own state on choice of law.”
Application of section 6(1) is not limited to those situations where the legislature has expressly directed a court “to apply the local law of one state, rather than the local law of another state, in the decision of a particular issue.” Restatement (Second) of Conflicts of Laws § 6 comment b (1971). Section 6(1) requires a court to “give a local statute the range of application intended by the legislature when these intentions can be ascertained and can constitutionally be given effect. If the legislature intended that the statute should be applied to the out-of-state facts involved, the court should so apply it unless constitutional considerations forbid.” Id. The Ohio legislature intended to offer Ohio residents the protection of the Act no matter where the seller deals, and this intent constitutes a statutory directive respecting choice of law.3
Even if the choice-of-law provision is not “contrary to a fundamental policy of a state which has a materially greater interest than the chosen state,” section 6(1) requires application of Ohio law. “Provided that it is constitutional to do so, the court will apply a local statute in the manner intended by the legislature even when the local law of another state would be applicable under usual choice-of-law principles.” Restatement (Second) of Conflicts of Laws § 6 comment b (1971). The Ohio legislature expressly intended the Act to apply to these facts, and this court, while functioning as an Ohio court for purposes of diversity, may not disregard the directions of the Ohio legislature. Restatement (Second) of Conflicts of Laws § 6 comment a (1971).
Accordingly, I would REVERSE the district court’s entry of summary judgment and REMAND for further proceedings.

. The majority suggests that whether a state’s policy is fundamental depends on the number of contacts the state has with the transaction. To the contrary, Restatement (Second) of Conflicts of Laws § 187 comment g (1971), provides only "that the more contacts the transaction has with the chosen state, the stronger the public policy must be to overcome the stipulation." E. Scoles & P. Hay, Conflict of Laws § 18.9, at 648 (1984).

. The majority suggests that Ohio’s policy of protecting small investors and prohibiting contractual waivers of rights provided in the Act is not implicated in the present case because TeleSave and Consumers "were not of unequal bargaining strength." To the contrary, Consumers was one of the largest chains of catalog showroom operations in the United States and Canada, while Tele-Save, having been capitalized with only a $150,000 investment, was seriously undercapitalized. Joint Appendix at 53-57, 87. This gross disproportionality in economic strength is not indicative of equal bargaining power.
The majority also suggests that Ohio’s public policy would not be undermined by requiring Tele-Save to pursue New Jersey’s common law fraud remedy. To the contrary, in the absence of a fiduciary relationship, nondisclosure does not constitute fraud under New Jersey law. Nappe v. Anschelewitz, Barr, Ansell & Bonello, 189 NJ.Super. 347, 460 A.2d 161 (1983), aff’d in part and rev’d in part, 97 N.J. 37, 477 A.2d 1224 (N.J.1984).

. The majority suggests that the Ohio legislature did not intend the Act to apply to a contract between an Ohio purchaser and an out-of-state seller unless the contract is one of adhesion. To the contrary, the Act is expressly applicable to "any claim arising from the sale or lease of a business opportunity plan" in Ohio, Ohio Rev. Code § 1334.10(A), and there is no evidence that the Act was intended to apply only to adhesion contracts.