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Arizona returns franchise case to Ohio

Arizona commercial or business law does not always govern businesses, such as out-of-state franchisees, who have contracts with businesses in this state. These entities may try to have their cases resolved in other jurisdictions, which may have laws more favorable to their case.

Earlier this month, a federal judge issued an order in favor of four Ohio franchises in a lawsuit over the franchisor's dispute resolution provisions and returned the lawsuit for litigation in Ohio. That state is viewed as enforcing laws that strongly protect franchisees.

The Arizona-based franchisor enters franchise agreements with third parties to run retail hearing aid centers that offer hearing devices and merchandise under the franchisors' trade name. It has been franchising for six years and has franchisees in 32 states.

The four hearing aid franchisees filed this action in an Ohio state court in May 2016. They claimed alleged disclosure violations under Ohio law, fraud, and other violations of Ohio law concerning the sale of the franchises to the franchisees.

The Arizona franchisor claimed that the franchises did not first undergo mediation, required under the franchise agreement, before filing their lawsuit. The franchisor asked the Ohio state court to dismiss the case or move the case to Arizona because the franchisees did not engage in mediation and violated a clause in the agreement prohibiting the filing of joint lawsuits. The Ohio court transferred the case to Arizona but did not rule on the substantive legal issues.

The federal judge in Ohio said that Ohio's disclosure laws bind the Arizona franchisor. Laws protecting investors override any freedom of contract right to waive legal protections afforded to franchisees.

These legal rights cannot be dodged by having the case moved to a state with different laws. Franchisors cannot escape these legal requirements through contracts that remove cases to states with more liberal laws especially when Ohio had the most significant relationship to the business transaction and its parties, according to the judge.

The judge also pointed out that Arizona and other states have no special laws protecting investors in franchises. Except for fraudulent terms, most contract terms are valid in this state.

This decision could affect cases involving franchises in other states. Businesses operating in Arizona and other states should seek legal assistance to protect their rights and assure regulatory compliance.

Source: Blue MauMau, "Arizona judge rules in Zounds hearing franchisees' favor, sends case back to Ohio," Janet Sparks, Oct. 2, 2017

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