The Franchise Memorandum

A franchise agreement’s arbitration clause was not rendered entirely void under Ohio’s business opportunity laws the Northern District of Ohio recently held, granting the franchisor’s motion to stay the federal court proceedings pending arbitration. Party Princess Toledo, LLC v. Party Princess USA LLC, 2019 WL 524186 (N.D. Ohio Feb. 11, 2019). After an Ohio franchisee sued Party Princess for a variety of claims arising under the parties’ franchise agreement, Party Princess moved to stay the proceedings pursuant to the agreement’s arbitration clause, which specifically designated Denver, Colorado as the venue for any arbitration proceeding. Seeking to avoid arbitration, the franchisee argued the clause was void under Section 1334.06(E) of Ohio’s business opportunity laws, which prohibits any provision in a franchise agreement restricting venue to a forum outside of the state.

In a measured application of Ohio’s business opportunity laws, the court declined to void the entire arbitration clause and instead severed the choice-of-venue provision setting Denver, Colorado as the place of arbitration. Under Section 1334.06(E), “any provision in an agreement restricting jurisdiction or venue to a forum outside of this state . . . is void.” The court interpreted this language as only voiding choice-of-venue provisions — all other valid provisions contained in the arbitration clause would remain in effect, including the provision that required arbitration of disputes arising under the franchise agreement.