Q Holding Company v. Repco, Inc.

Filing 15

Opinion & Order signed by Judge James S. Gwin on 5/22/17 denying defendant's motion to stay or decline jurisdiction and denying defendant's motion to dismiss for the reasons set forth in this order. (Related Doc. 12 ) (D,MA)

UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF OHIO
------------------------------------------------------:
Q HOLDING COMPANY,
:
:
Plaintiff,
:
:
v.
:
:
REPCO, INC., dba PETERSON
:
ENTERPRISES,
:
:
Defendant.
:
:
-------------------------------------------------------

CASE NO.: 5:17-CV-445

OPINION AND ORDER
[Resolving Doc. 12]

JAMES S. GWIN, UNITED STATES DISTRICT JUDGE:
On March 3, 2017, Plaintiff Q Holding Company filed a fraudulent inducement claim
against Defendant Repco, Inc., otherwise known as Peterson Enterprises (“Peterson”).1 The parties
are currently involved in arbitration in Minnesota.
On April 28, 2017, Defendant Peterson filed a motion to dismiss or in the alternative to
stay the action pending arbitration or decline jurisdiction.2
For the following reasons, the Court DENIES Defendant’s motion to stay or decline
jurisdiction and DENIES Defendant’s motion to dismiss.
I.

Background

This case involves a sales representative agreement between Plaintiff Q Holdings and
Defendant Peterson. Plaintiff claims Peterson fraudulently induced it to enter the contract.
Plaintiff Q Holdings is a rubber and plastic manufacturer for medical and automotive
devices. Defendant Peterson is a sales and marketing company. 3 In 2016, the parties were

1

Doc. 1.
Doc. 12. Plaintiff opposes. Doc. 13.
3
Doc. 1 at 3.
2

Case No. 5:17-CV-445
Gwin, J.
negotiating a potential sales agreement.4 However, in March 2016, Defendant informed Plaintiff
that Defendant was obligated to do sales work exclusively for Plaintiff’s primary competitor,
Flexan Corporation.5 Defendant Peterson’s negotiations with Plaintiff were on hold pending
Defendant breaking ties with Flexan.6
Later, in June 2016, Defendant representative Steve Fischer told Plaintiff representative
Craig Stark that Defendant was “free and clear” to do sales work for Plaintiff.7 The parties signed
the sales agreement on September 7, 2016.8
On December 16, 2016, Plaintiff received a letter from its competitor Flexan informing
Plaintiff that Defendant was still obligated to work for Flexan.9 The letter said the arrangement
between Plaintiff and Defendant violated Defendant’s non-compete agreement with Flexan.10
Defendant states that its non-compete with Flexan did not apply when it entered the
contract with Plaintiff. Defendant and Flexan are currently arbitrating that issue.11
Plaintiff sent Defendant a notice of termination of their relationship on March 3, 2017.12
Defendant has commenced arbitration against Plaintiff in Minnesota under the Minnesota
Termination of Sales Representative Act (“MTSRA”).13 Defendant argues that the MTSRA limits
Plaintiff’s right to terminate the relationship and to litigate in this Court.

4

Id.
Id.
6
Id.
7
Id.
8
Id. at 4.
9
Id. Flexan had terminated its formal contractual relationship with Defendant in December 2015. Doc. 12 at 4.
10
Doc. 1 at 5.
11
Id. at 6.
12
Id. at 8.
13
Doc. 12 at 15; Doc. 12-9 (demand for arbitration).
5

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Case No. 5:17-CV-445
Gwin, J.
Procedural History
On March 3, 2017, Plaintiff Q Holding filed a fraudulent inducement claim against
Defendant Peterson.14 Plaintiff seeks a declaratory judgment that their contract was invalid from
the outset.15
On April 28, 2017, Defendant Peterson filed a motion to dismiss or in the alternative to
stay the action or decline jurisdiction.16 Defendant argues that the fraudulent inducement claim
underlying Plaintiff’s declaratory judgment action cannot survive. 17 In the alternative, Defendant
asks this Court to stay the action pending resolution of the parties’ Minnesota arbitration or decline
jurisdiction altogether.18
II.

Motion to Stay or Decline Jurisdiction

If the Court will not dismiss the case, Defendant argues the Court should decline
jurisdiction or impose a stay pending arbitration. Because sending the case to arbitration or
declining jurisdiction would make Defendant’s merits dismissal arguments irrelevant, the Court
first considers the motion to stay or decline jurisdiction first.
A. Motion to Stay
Defendant seeks to arbitrate the dispute under the Minnesota Termination of Sales
Representative Act (“MTSRA”). The MTSRA provides: “[t]he sole remedy for a manufacturer,
wholesaler, assembler, or importer who alleges a violation of any provision of this section is to
submit the matter to arbitration.”19

14

Doc. 1.
Id. at 1.
16
Doc. 12.
17
Id.
18
Id.
19
Minn. Stat. Ann. § 325E.37.
15

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Case No. 5:17-CV-445
Gwin, J.
Responding, Plaintiff argues the MTSRA does not apply here because the parties’
agreement includes an Ohio choice-of-law provision and an Ohio forum selection clause.20
The Court agrees with Plaintiff Q Holding. The choice-of-law provision selecting Ohio law
defeats Defendant’s argument.21
Federal courts in diversity cases apply the forum state choice-of-law principles.22 The Ohio
Supreme Court has adopted the Restatement (Second) of Conflict of Laws, which provides:
The law of the state chosen by the parties to govern their contractual rights and
duties will be applied, even if the particular issue is one which the parties could not
have resolved by an explicit provision in their agreement directed to that issue,
unless either
(a) the chosen state has no substantial relationship to the parties or the transaction
and there is no other reasonable basis for the parties’ choice, or
(b) 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, under the rule of § 188,
would be the state of the applicable law in the absence of an effective choice of
law by the parties.23
Neither exception applies here.
First, Ohio has a substantial relationship to the case—Plaintiff has its principle
place of business in North Canton, Ohio and Defendant does business here.24
Second, Minnesota also has an interest in the case because Defendant is a
Minnesota corporation and has its principal place of business in Minneapolis. However,
Minnesota’s interest is not “materially greater” than Ohio’s interest.

20

Doc. 13 at 10.
Doc. 1-1 at 6 (choice-of-law provision).
22
See Wallace Hardware Co. v. Abrams, 223 F.3d 382, 391 (6th Cir. 2000) (citing Klaxon Co. v. Stentor Elec. Mfg.
Co., 313 U.S. 487 (1941)).
23
Tele–Save Merch. Co. v. Consumers Distrib. Co., Ltd., 814 F.2d 1120, 1122 (6th Cir. 1987).
24
Doc. 1 at
21

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Case No. 5:17-CV-445
Gwin, J.
Because neither exception to the Restatement applies, the parties’ choice-of-law provision
controls and the MTSRA does not apply. The Court also notes that that where the parties agree to
non-Minnesota law in a choice-of-law provision, courts routinely find that the MTSRA does not
apply.25 Accordingly, the Court DENIES Defendant’s motion to stay pending arbitration.26
B. Motion to Decline Jurisdiction
The Declaratory Judgment Act provides that “[i]n a case of actual controversy within its
jurisdiction . . . any court of the United States . . . may declare the rights and other legal relations
of any interested party seeking such declaration, whether or not further relief is or could be
sought.”27 The Act is “an enabling Act, which confers discretion on the court rather than an
absolute right upon the litigant.”28 “Federal courts, and federal district courts in particular, have
‘unique and substantial discretion in deciding whether to declare the rights of litigants.’”29

25

See, e.g., Warren E. Johnson Companies v. Unified Brand, Inc., 735 F. Supp. 2d 1099, 1109 (D. Minn. 2010)
(finding MTSRA claim bared where parties’ choice of provision stated the “[a]greement will be construed in accord
with the laws of Mississippi”); Automated Telemarketing Servs., Inc. v. Aspect Software, Inc., No. CIV 09-1308
DWF/FLN, 2009 WL 2461663, at *1 (D. Minn. Aug. 10, 2009) (finding the parties’ Georgia choice-of-law provision
prevents application of the MTSRA where the complaint “does not contain any allegation suggesting that ill motives
were at work when the Georgia choice-of-law provision was selected”); Hagstrom v. American Circuit Breaker
Corp., 518 N.W.2d 46, 48 (Minn.App.1994) (finding that parties can waive the rights afforded by the MTSRA by
agreeing to a choice of law clause which elects another state’s laws).
26
Defendant may argue Plaintiff cannot take advantage of the choice-of-law or forum-selection provisions in the
contract because Plaintiff argues the contract is void. This argument fails. Courts generally hold that like an arbitration
provision, forum-selection and choice-of-law are severable. Scherk v. Alberto-Culver Co., 417 U.S. 506, 519(1974)
(“Rather, it means that an arbitration or forum-selection clause in a contract is not enforceable if the inclusion of that
clause in the contract was the product of fraud or coercion.”); CIC Grp., Inc. v. Mitchell, No. 5:10-CV-02885, 2013
WL 774175, at *4 (N.D. Ohio Feb. 27, 2013) (“Plaintiff's general allegations that misrepresentations induced its entry
into the contract do not invalidate the clause: A choice-of-law provision is valid unless the choice-of-law provision,
itself, was induced by fraud. General allegations of fraud in the inducement do not invalidate a choice-of-law clause.”);
Liafail, Inc. v. Learning 2000, Inc., No. CIV.A. 3:01CV-336-H, 2001 WL 1555308, at *2 (W.D. Ky. Aug. 29, 2001)
(citing Hansworth v. The Corporation, 121 F.3d 956, 963 (5th Cir. 1997)) (“[f]raud and overreaching must be specific
to a forum selection clause in order to invalidate it”). The forum-selection or choice-of-law provision is unenforceable
only when a party argues that particular provision was fraudulently induced. Here, Plaintiff argues the entire contract
was fraudulently induced. Therefore, the choice-of-law provision selecting Ohio law still controls.
27
28 U.S.C. § 2201.
28
Pub. Serv. Comm’n of Utah v. Wycoff Co., Inc., 344 U.S. 237, 241 (1952).
29
W. World Ins. Co. v. Hoey, 773 F.3d 755, 758-59 (6th Cir. 2014) (quoting Wilton v. Seven Falls Co., 515 U.S. 277,
286 (1995) (listing five non-exclusive factors for courts to consider in exercising their discretion).

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Case No. 5:17-CV-445
Gwin, J.
Defendant Peterson argues the Court should decline jurisdiction because after Plaintiff
realized Defendant wanted to arbitrate in Minnesota, Plaintiff forum shopped. Specifically,
Plaintiff rushed to file in this Court before Defendant could file its arbitration claim.30
Plaintiff responds that this Court lacks discretion to decline jurisdiction because the
Complaint seeks more than a declaratory judgment—it also requests the alternative relief of
rescission, as well as attorney fees.
Plaintiff’s rescission claim provides an independent basis for jurisdiction.31 Because the
declaratory judgment and rescission claims are based on the same set of facts, it makes little sense
to consider the rescission claim but decline to hear the declaratory judgment claim.32 Accordingly,
the Court will not decline jurisdiction.
III.

Motion to Dismiss

Defendant also argues that Plaintiff cannot support the Ohio fraudulent inducement claim
that lies beneath its declaratory judgment action.33
A. Legal Standard
“To survive a motion to dismiss, a complaint must contain sufficient factual matter,
accepted as true, to ‘state a claim for relief that is plausible on its face.”34 The plausibility
requirement is not a “probability requirement.”35 The Plaintiff need not try to prove his case in the

30

Doc. 12 at 18-19.
Doc. 1 at 10 (requesting that the Court declare “that the [Sales Representative Agreement] is void ab initio, or, in
the alternative, [rescind] the SRA such that it is of no legal force or effect”); Knowlton Const. Co. v. Liberty Mut. Ins.
Co., No. 2:07-CV-0748, 2007 WL 4365690, at *3 (S.D. Ohio Dec. 13, 2007) (citing Gov’t Employees Ins. Co. v.
Dizol, 133 F.3d 1220, 1225-26 n. 6 (9th Cir. 1998) (“Because claims of bad faith, breach of contract, breach of
fiduciary duty and rescission provide an independent basis for federal diversity jurisdiction, the district court is without
discretion to remand or decline to entertain these causes of action”) (emphasis added).
32
See Knowlton Const., 2007 WL 4365690, at *3; see also Farris v. State Farm Ins. Co., 617 F. Supp. 2d 654, 659
(N.D. Ohio 2008) (“jurisdiction over the entire complaint here [including the declaratory judgment claim], grounded
in the mandatory jurisdiction over the claims for breach, is properly exercised”).
33
The parties’ contract has a choice of law provision selecting Ohio law. Doc. 1 at 4.
34
Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atlantic v. Twombly, 550 U.S. 544, 570 (2007)).
35
Id.
31

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Case No. 5:17-CV-445
Gwin, J.
complaint. But there must be “more than a sheer possibility that the defendant has acted
unlawfully.”36
Federal Rule of Civil Procedure 8 provides the general pleading standard and only requires
that a complaint “contain . . . a short plain statement of the claim showing that the pleader is entitled
to relief.”37 In deciding a motion to dismiss under Rule 12(b)(6), “a court should assume the []
veracity” of “well-pleaded factual allegations.”38
B. Discussion
“Under Ohio law, a contract procured by fraudulent inducement may be rescinded [with]
clear and convincing evidence of fraud . . .”39 To prove fraudulent inducement, a plaintiff must
show “(1) a false representation concerning a fact . . . material to the transaction; (2) knowledge
of the falsity of the representation or utter disregard for its truthfulness; (3) intent to induce reliance
on the representation; (4) justifiable reliance upon the representation under circumstances
manifesting a right to rely; and (5) injury proximately caused by the reliance.”40
Defendant argues its statement that Defendant was “free and clear” to work with Plaintiff
is not actionable because it was (1) vague, (2) a legal rather than factual opinion, and (3) true.41
Vagueness
Defendant argues its representation that it was “free and clear” to work with Plaintiff was
too vague to be actionable.42 The Court disagrees.

36

Id.
Fed. R. Civ. P. 8(a)(2).
38
Id.
39
Micrel, Inc. v. TRW, Inc., 486 F.3d 866, 873–74 (6th Cir. 2007) (citing Household Fin. Corp. v. Altenberg, 214
N.E.2d 667, 669–70 (Ohio 1966)).
40
Id. at 874 (quoting Lepera v. Fuson, 613 N.E.2d 1060, 1063 (Ohio 1992); Cohen v. Lamko, Inc., 462 N.E.2d 407,
409 (Ohio 1984)).
41
Doc. 12 at 6-12.
42
Id. at 7 (citing Ullmo ex rel. Ullmo v. Gilmour Acad., 273 F.3d 671, 678 (6th Cir. 2001)) (finding no fraud where
defendant’s statements were “too indefinite to constitute a representation of fact for purposes of a fraud claim).
37

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Case No. 5:17-CV-445
Gwin, J.
In context of the parties’ ongoing negotiations, Defendant’s promise was sufficiently
definite. The parties put negotiations on hold because Defendant was concerned it was still bound
by its contract with Flexan. When Defendant told Plaintiff that Defendant was “free and clear” of
its obligations to Flexan, it made a clear representation—the non-compete no longer applied.
Legal vs. Factual Opinion
Defendant’s next argument is more convincing but ultimately fails at the motion to dismiss
stage.
“It has been long held that, ‘under Ohio law, a representation of law is an opinion and
cannot form the basis of an action for fraud in the absence of a fiduciary relationship.’”43 Defendant
argues its statement was a legal opinion: Defendant was no longer bound by the non-compete
agreement with Flexan and could move forward with Plaintiff.
Plaintiff argues that a “statement couched in legal terms is actionable if it expressly or by
implication misrepresents the underlying facts.”44
Plaintiff’s argument defeats the motion to dismiss. Defendant’s statement that it was “free
and clear” to work with Plaintiff could be a misrepresentation of facts. Defendant had previously
told Plaintiff that Defendant was working to “unwind” its sales relationship with Flexan.45 When

43

Barnes v. Res. Energy Expl., 68 N.E.3d 133, 141 (Ohio Ct. App. 2016) (citing Lynch v. Dial Finance Co. of Ohio
No. 1, 656 N.E.2d 714, 720 (Ohio Ct. App. 1995)).
44
Doc. 13 at 6-8 (citing 50 Ohio Jur. 3d Fraud and Deceit § 31 (citing Restatement (Second) of Torts § 545 (1977))
(“[I]f a misrepresentation as to a matter of law includes, expressly or by implication, a misrepresentation of fact, the
recipient is justified in relying upon the misrepresentation of fact to the same extent as though it were any other
misrepresentation of fact. If a misrepresentation as to a matter of law is only one of opinion as to the legal consequences
of facts, the recipient is justified in relying upon it to the same extent as though it were a representation of any other
opinion.”). Plaintiff also cites a bankruptcy case that is distinguishable from the applicable law here. In that case, the
court found defendants’ representation that a parcel of land was “free and clear of all security interests” was a material
misrepresentation. In re Abdallah, No. 05-81475, 2007 WL 3047214, at *3 (Bankr. N.D. Ohio Oct. 18, 2007).
Importantly, however, the bankruptcy code provision the court interpreted requires “a material misrepresentation that,
at the time, the debtor knew was false or made with gross recklessness to its truth.” Id. (citing 11 USC § 523). Nowhere
in that portion of the code is a material misrepresentation of fact required. Under Ohio law, a misrepresentation of fact
is specifically required.
45
Doc. 1 at 3.

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Case No. 5:17-CV-445
Gwin, J.
Defendant told Plaintiff it was “free and clear” to move forward with a contract, Defendant implied
that Flexan and Defendant had finished the negotiation process.
Defendant’s statement implies a factual rather than legal opinion. Defendant was not giving
Plaintiff a legal opinion on the significance of Defendant’s Flexan non-compete agreement.
Rather, Defendant was making a representation as to where Defendant and Flexan stood in their
negotiations. Plaintiff’s story provides “more than a sheer possibility that the defendant has acted
unlawfully.”46
Truthfulness of Defendant’s statement
Defendant’s last argument is that its statement—that Defendant was “free and clear” to
work with Plaintiff and no longer bound by Defendant’s non-compete with Flexan—was true.
First, Defendant argues that the non-compete expired on April 26, 2016, before the “free and clear”
representation to Plaintiff.47 Second, even if it did not expire on April 26, 2016, Defendant argues
Flexan is not entitled to the non-compete’s benefit because Flexan terminated its contract with
Defendant without cause.48
Defendant and Flexan are currently arbitrating the merits of Defendant’s arguments.49 The
Court will not dismiss this case when the merits of Defendant’s arguments are being litigated
elsewhere.

46

Iqbal, 556 U.S. at 678 (quoting Twombly, 550 U.S. at 570).
Doc. 12 at 9.
48
Id.
49
Doc. 1 at 6; Doc. 12-1 at
47

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Case No. 5:17-CV-445
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IV.

Conclusion

For the above reasons, the Court DENIES Defendant’s motion to stay or decline
jurisdiction and DENIES Defendant’s motion to dismiss.

IT IS SO ORDERED.

Dated: May 22, 2017

s/
James S. Gwin
JAMES S. GWIN
UNITED STATES DISTRICT JUDGE

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