Disputes over choice of law in litigation are common among suppliers or principals and their terminated distributors or sales representatives. Such disputes typically center on a contractual choice-of-law clause versus the distributor’s or agent’s preferred choice of law. Distributors and agents frequently try to invoke state statutes that offer additional protections, many of which also include provisions that attempt to void contractual choice-of-law clauses that would apply the law of a different state. When a distributor’s or agent’s territory encompasses multiple states – or even multiple countries – the challenge of identifying the correct law to apply is greater.
A recent decision from Ohio’s Second Appellate District sheds light on how these choice-of-law matters are resolved in Ohio and reveals that a state statute purporting to void contrary choice-of-law clauses is not an affirmative declaration of choice of law. The case, EnQuip Technologies Group Incorporated v. Tycon Technoglass S.r.l, 2012 Ohio 6181, 986 N.E.2d 469 (Montgomery Cty. 2012), was brought by a Florida-based sales representative (EnQuip) that had been terminated from representing the Italy-based defendant’s (Tycon) line of glass-lined steel chemical reactor vessels across a territory spanning the United States, Canada, Mexico and the Bahamas.
The suit was brought in Ohio because the defendant’s ultimate corporate parent was located there. Although the parties’ contract specified Italian law, and the bulk of EnQuip’s claims were brought and heard under Italian law, EnQuip also sought punitive damages under Ohio Revised Code §1335.11, a sales representative statute that specifies an award of up to three times actual damages if a principal fails to pay commissions due and payable upon termination within 30 days, or subsequently earned commissions within 13 days, and if the representative proves the failure was “willful, wanton, or reckless misconduct or bad faith” on the principal’s part. The trial court granted Tycon’s motion for a directed verdict on the statutory claim at trial.
On appeal, EnQuip argued that R.C. 1335.11(F) voided the choice of Italian law as to the statutory damages claim. The Court of Appeals agreed that the choice-of-law provision “does not apply” to the statutory claim but, importantly, concluded, “[b]ut this does not mean that Ohio law applies to determine these damages.” ¶45. The court noted several reasons why the potential application of Ohio law to the relationship at issue was troublesome:
- The parties selected Italian law.
- The contract was negotiated outside Ohio “between an Italian manufacturer and a Florida-based sales representative.”
- Only minimal relevant sales occurred in Ohio.
- Several other states have sales representative statutes with provisions purporting to void any contrary choice-of-law clause. ¶46.
On this last point, the court observed that “[t]he convoluted mess that could be created in trying to determine which state’s laws should apply in a multi-state contract must be avoided.” Id. The court determined that “Ohio’s choice-of-law rules ultimately determine the applicable law.” ¶47.
The Most Significant Relationship Test
Referring to Section 145 of the Restatement of the Law 2d, Conflict of Laws (Restatement) and treating the exemplary damages claim as a tort issue, the court ultimately used the familiar “most significant relationship” test of Section 6 of the Restatement to make its choice-of-law determination. It ultimately concluded that, of the three potentially most relevant choices (Ohio as the forum, Florida as the agent’s home state, and Italy as the supplier’s location and the contractual choice of law), Ohio had the least substantial interest in the matter. ¶50. The court also found considerable significance in the fact that EnQuip’s territory was national (indeed, international), but only a single small commission had been earned in Ohio. Id. Having resolved the issue before it by concluding that Ohio law did not apply, ¶52, and with the knowledge that neither Florida nor Italian law provided for exemplary damages similar to R.C. 1335.11, the court did not reach a final conclusion as to applicable law. ¶53.
Reconsidering the Appeal
EnQuip subsequently moved for reconsideration of the appellate court’s decision. In a July 18, 2013 per curiam decision and entry, the court indicated that “Ohio law does not apply because Ohio bears no relationship to the parties and little relationship to the claim.” It further explained its understanding of R.C. 1335.11, stating that “[W]e do not think that the General Assembly intended R.C. 1335.11 to apply to cases like the present one” and observing that the underlying claim in the case involved a Florida resident, an Italian company and only minimal connection to Ohio.
As an additional matter, the court rejected EnQuip’s contention that R.C. 1335.11(F) – the provision voiding contrary choice-of-law clauses – was a “statutory directive” on choice of law, instead concluding that the provision is not “expressly directed” to choice of law and that it “does not affirmatively direct the application of Ohio law.”
This last concept is the most important lesson to be taken from the EnQuip decision. The existence of statutory provisions purportedly voiding choice-of-law or forum clauses does not foreclose actual choice-of-law analysis or independently dictate a choice of law, at least in Ohio. The significance of the relationship between the forum state and another whose law is sought to be applied may well ultimately determine whether that law might actually apply.
When testing significance, the extent of the territory and the locations of actual sales at issue matter, as do the locations of the parties themselves. The forum state’s interest may well be limited if the parties’ actual connections to the forum are attenuated. Manufacturers, suppliers and principals should keep these principles in mind when considering the choice of forum and law in their arrangements with distributors and agents.