Henderson v. SMC Promotions, Inc.

2014 Ohio 4634

• Court: Ohio Court of Appeals
• Decided: October 17, 2014
• Docket: E-12-068, E-13-047
• Status: Published

Opinion

[Cite as Henderson v. SMC Promotions, Inc., 2014-Ohio-4634.]

IN THE COURT OF APPEALS OF OHIO SIXTH APPELLATE DISTRICT ERIE COUNTY

John Henderson, et al. Court of Appeals Nos. E-12-068 E-13-047 Appellants/Cross-Appellees Trial Court No. 2009-CV-0576 v.

SMC Promotions, Inc., et al. DECISION AND JUDGMENT

Appellees/Cross-Appellants Decided: October 17, 2014

*****

D. Jeffery Rengel and Thomas R. Lucas, for appellants/cross- appellees.

Robert J. Gilmer and Jeffrey M. Stopar, for appellees/cross- appellants.

JENSEN, J.

{¶ 1} This matter is before the court upon cross-appeals filed by plaintiffs-

appellants/cross-appellees, John and Dawn Henderson (“the Hendersons”), and

defendants-appellees/cross-appellants, SMC Promotions, Inc. (“SMC Promotions”), Specialty Merchandise Corp. (“SMC”), and eMerchantClub, LLC (“EMC”) (referred to

collectively as simply “defendants”). For the reasons that follow, we reverse the

August 3, 2013 judgment of the Erie County Court of Common Pleas and remand for

further proceedings.

I. Factual Background

{¶ 2} SMC is an import distribution company headquartered in California. It

distributes merchandise through independent individual distributors, referred to as

“members,” who pay a membership fee. In the summer of 2008, the Hendersons viewed

an SMC infomercial, featuring actor Tom Bosley, which advertised an opportunity to

earn money from home by selling merchandise on the Internet as an SMC member. The

infomercial invited potential members to contact SMC to receive a free information

packet.

{¶ 3} On June 12, 2008, amid financial woes, Mr. Henderson contacted SMC via

telephone. He was provided information about SMC membership and its business plan.

He was told that he would receive one-on-one business coaching for 60 days,

instructional manuals, and suggested methods of sale. He was assured that he could

cancel his membership within 30 days and receive a full refund. Mr. Henderson verbally

agreed to purchase a membership for $264.95, which he charged to his MasterCard

account. SMC claims that its representatives advise potential members that by

purchasing a membership, they agree to be bound by SMC rules, which are both mailed

2. to the member in a membership kit and are available on SMC’s website. SMC’s records

show that the Hendersons’ membership kit was delivered on June 18, 2008.

{¶ 4} As an SMC member, the Hendersons could purchase goods below the

suggested retail price which they could then mark-up and re-sell. SMC provided supply

catalogues, sales circulars, and brochures. On June 19, 2008, Mr. Henderson logged onto

the eMerchantClub Gift Card Central Website, an e-commerce service offered by EMC,

an affiliate of SMC. According to defendants, Mr. Henderson clicked to accept EMC’s

standard rules, then purchased a non-refundable gift card website package for $5,195.

This included a special account credit of $4,450 which could be used to purchase SMC

merchandise or other services.

{¶ 5} Both SMC’s and EMC’s rules contained provisions for cancellation, refunds,

arbitration, and venue. SMC’s pertinent rules provided as follows:

4. Cancellation. If you cancel your membership within 30 days of

joining SMC, you may be eligible for a refund of your membership fees

(excluding shipping and handling). Call toll-free 1-877-523-9088 for

eligibility and cancellation instructions. If you cancel after 30 days, you

will remain responsible for any remaining fees until paid in full.

9. Arbitration. Any controversy, dispute or claim of any nature

whatsoever arising out of, in connection with or in relation to your SMC

membership or these Rules, or involving you and SMC, including the issue

or arbitrability of any such claims, will be resolved by binding arbitration

3. before a retired judge at JAMS in Santa Monica, California. If you are not

a resident of the United States, the UNCITRAL Arbitration Rules shall

apply and JAMS will be the appointing authority. The prevailing party will

be awarded all costs and expenses, including without limitation all

arbitration, expert witness and attorney fees, costs and expenses.

10. California Law and Venue. Your membership is deemed to be

entered into and performed in Santa Monica, California. These Rules shall

be governed by and construed in accordance with the laws of the State of

California without regard to conflicts of law provisions. You consent to

exclusive personal jurisdiction and venue in Los Angeles County,

California, and agree that it shall be the sole forum and venue for any and

all disputes involving SMC, including without limitation small claims

actions.

EMC’s rules provided:

3. Fees.

All fees paid are non-refundable. * * *

4. Cancellation

You may cancel your membership, website or any other

eMerchantClub services any time by notifying us in writing by confirmed

email to cancel@emerchantclub.com, confirmed fax to 1-888-201-2680, or

first-class, registered or certified mail, return receipt requested, addressed to

4. eMerchantClub, Attn: Website Cancellation, 996 Flower Glen Street, Simi

Valley, California 93065. Any incoming E-mail sent to canceled or

terminated accounts will not be bounced back or forwarded to another

account. Everything regarding the website that is stored on our servers may

be deleted. Cancellation will not entitle you to refund or relieve you of

your obligation to pay the remaining balance of your account. However if

you cancel within 30 days of purchasing an eMerchantClub website, we

may apply the purchase price in the form of a merchandise credit to your

SMC account.

18. Arbitration

Any controversy, dispute or claim of any nature whatsoever arising

out of, in connection with or in relation to your eMerchantClub

membership, website or the Rules, or involving you and eMerchantClub or

its affiliates, including the issue or arbitrability of any such disputes, will be

resolved by binding arbitration in Santa Monica, California before a retired

judge at JAMS in accordance with its rules. If you are not a resident of the

United States, the UNCITRAL Arbitration Rules will apply and JAMS will

be the appointing authority. The prevailing party will be awarded all costs

and expenses, including arbitrator, expert witness and attorney fees, costs

and expenses.

5. 19. California Law

Your membership is deemed to be entered into and performed in Los

Angeles, California. These rules will be governed by and construed in

accordance with the laws of the State of California without regard to

conflicts of law provisions. You consent to exclusive personal jurisdiction

and venue in Los Angeles County California and agree that it will be the

sole forum and venue for any and all disputes involving eMerchantClub.

{¶ 6} Shortly after becoming SMC members, the Hendersons experienced

difficulty in connecting with their business coach. They decided to exercise their

cancellation rights within the 30-day period and they provided the requisite notices.

SMC refunded their membership fee as it was obligated to do under the rules. EMC

would not, however, refund the $5,195 remitted by the Hendersons. It agreed only to

issue the special account credit of $4,450 which could be used to purchase SMC

merchandise.

{¶ 7} The Hendersons wrote letters demanding return of their money and they

registered complaints with the Ohio and California attorneys general to no avail. In the

meantime, they conducted Internet research through which they learned that others had

fallen victim to defendants’ “scheme.”

6. II. Procedural Background

A. The Hendersons’ Complaint and the Defendants’ Failure to Answer

{¶ 8} On July 8, 2009, the Hendersons filed a complaint against defendants in the

Erie County Court of Common Pleas alleging violations of the Business Opportunity

Purchasers Protection Act, R.C. Chapter 1334, et seq., violations of the Consumer Sales

Practices Act, R.C. Chapter 1345, et seq., fraud, unjust enrichment, successor liability,

and breach of contract. Along with that complaint, the Hendersons served discovery

requests, including requests for admission, requests for production of documents, and

interrogatories. Defendants failed to answer the complaint or to provide responses to

discovery requests.

{¶ 9} In the discovery requests, the Hendersons sought admissions from

defendants that they refused to refund money to them in the amount of $5,950;1 that their

refusal to refund the money was intentional and with knowledge that they were not

entitled to retain the Hendersons’ funds; that they did not provide EMC standard

membership rules to the Hendersons; that all allegations in the Hendersons’ complaint

were true; and that the Hendersons had been damaged in the amount of $5 million in

compensatory damages and $10 million in punitive damages.

{¶ 10} On September 2, 2009, the Hendersons moved to deem matters admitted

due to defendants’ failure to provide responses to requests for admission. In a judgment

entry dated September 9, 2009, the court expressed concern over (1) whether the

1 It is unclear why the amount in the request was $5,950 as opposed to $5,195.

7. Hendersons had served an electronic copy of the discovery requests, and (2) whether it

was proper to establish damages through unanswered requests for admission. The court

suggested that it would be more appropriate and customary to establish damages in a

default judgment case by conducting a damages hearing. It ordered the Hendersons to

file a supplemental memorandum with case law to support their request to establish the

amount of damages by deeming admitted unanswered requests for admissions.

{¶ 11} As ordered, the Hendersons filed a supplemental brief confirming that they

had served discovery requests via CD. As to the second issue, the Hendersons provided

citation to authorities discussing the types of matters that are the proper subject of

requests for admissions, including the 1976 staff notes to Civ.R. 36(A) (indicating that

requests for admission may include statements of fact, opinions as to fact, and opinions as

to the application of law to fact), and our decision in Youseff v. Jones, 77 Ohio App.3d

500, 509, 602 N.E.2d 1176 (6th Dist.1991) (“Regarding requests for admissions, it is

irrelevant that the matters requested to be admitted are central to the case or must be

proven by the requesting party at trial.”). They also cited our decision in C.J. Tower &

Sons of Buffalo, Inc. v. D & H Machinery, Inc., 6th Dist. Lucas No. L-85-260, 1986 WL

4378 (Apr. 11, 1986), where we accepted unanswered requests as admitted which

established the amount due and owing from defendant. The Hendersons also cited State

of Ohio-Ohio State University v. Cordell, 10th Dist. Franklin No. 08AP-361, 2008-Ohio-

6124, where the court found the amount owed by defendant was conclusively established

by her failure to respond to requests for admission.

8. {¶ 12} On October 9, 2009, the Hendersons moved for default judgment under

Civ.R. 55(A). They stated that the clerk of courts successfully served the complaint and

discovery requests on July 20, 2009; defendants’ deadline for answering was August 17,

2009; and defendants failed to file an answer. They claimed that no hearing on damages

was required because the defendants had effectively conceded compensatory damages of

$5 million and punitive damages of $10 million by failing to answer requests for

admission.

{¶ 13} The Hendersons satisfied the court that they had properly served discovery

requests upon defendants, however, they did not convince the court that defendants’

failure to respond to requests for admission entitled them to a damages award totaling

$15 million without an evidentiary hearing to support such an award. The court was not

persuaded by the cases cited by the Hendersons and it remained concerned that

defendants’ due process rights would be infringed upon. The court granted the

Hendersons’ motion for default judgment on November 16, 2009, and set the matter for

an oral damages hearing on January 8, 2010.

B. The Damages Hearing

{¶ 14} The matter proceeded to hearing as scheduled in front of a magistrate. The

Hendersons both testified, as did Steven Miedema, a business broker with First National

Business Corporation, whom the Hendersons retained to provide expert opinions

concerning the calculation of damages. At the hearing, they dismissed without prejudice

their unjust enrichment and successor liability claims.

9. {¶ 15} The magistrate issued a decision dated February 10, 2010, summarizing the

facts and the applicable law. He found that the Hendersons purchased an SMC

membership for $264.95 via credit card with the understanding that there was a 30-day

money back guarantee. They were issued a password needed to establish a “pre-pay pal

account.” The account was required to be set up by website and was necessary to enable

them to purchase goods from defendants to offer for sale. There was a $5,000 fee to set

up the account. They paid $5,195 cash to defendants through two Western Union wire

transfers on June 19, 2009 [sic].

{¶ 16} The magistrate found that there were various membership levels offered,

and the Hendersons opted for the level that would enable them to offer defendants’ entire

catalog of goods for sale on their website. Included in their membership was free

business coaching for the first 60 days. The Hendersons spoke with their assigned coach

only once. When they were unable to reach him again, “red flags” went up, prompting

them to cancel their membership within the 30-day window. They promptly returned

four or five boxes of cards, brochures, and catalogs that defendants had shipped to them

and they never ordered any merchandise. The magistrate concluded that they “effectively

rescinded or canceled this venture without buying a single item.”

{¶ 17} The magistrate recognized that after canceling, $264.95 was credited to the

Hendersons’ credit card account. Mrs. Henderson testified that someone at SMC told her

that if everything was mailed back by July 31, 2008, the $5,195 they paid for the website

would be refunded, however, defendants refused to refund the $5,195.

10. {¶ 18} As to damages, Mr. Henderson testified that SMC’s website boasted that a

mother-daughter team had made $45,000 in sales in six months. He testified that he

heard reports that people had made $400,000-$500,000 per year. He said that Travis

Prouty, of SMC, told him that he could make $500,000 within 14 months if he bought

defendants’ entire catalog.

{¶ 19} Miedema, who evaluates open and active businesses and markets them for

sale, rendered a number of opinions to assist in calculating damages. Assuming annual

gross sales of $300,000 and $500,000, and using a 10-year earnings cycle, he opined that

the fair market values of the business would be $1,339,117 and $2,268,555, respectively.

He rendered no opinions as to whether sales of $300,000 and $500,000 were feasible

estimates of how the Hendersons’ business would have fared had they gone forward.

{¶ 20} In analyzing the Hendersons’ claims, the magistrate found the Business

Opportunity Protection Plan Act to be applicable. However, because this was a

commercial venture, he found that it was not a “consumer transaction” to which the

Consumer Sales Practices Act would apply. He recognized that R.C. 1345.09(A) [sic] of

the Business Opportunity Plans Act2 allows a purchaser to rescind an agreement and

recover three times the amount of actual damages or $10,000, whichever is greater. The

magistrate also noted that the damages available for fraud and breach of contract are

those proximately resulting from the fraud or breach.

2 The correct provision is R.C. 1334.09(A).

11. {¶ 21} Ultimately, the magistrate found that the Hendersons rescinded the

transaction and that $5,195 was not properly refunded. Although he specifically found

the Hendersons’ and Miedema’s testimony to be credible, he determined that the

Hendersons were not entitled to damages for the loss of prospective or future business

because those damages were speculative. Because the Hendersons had taken no action

toward sales, he concluded that Miedema’s calculations were predicated on assumptions

that had no basis in reality and he characterized defendants’ promotional materials

estimating members’ potential for success as mere “puffing” as opposed to fraudulent

misrepresentation. The magistrate also articulated its struggle with using defendants’

failure to answer requests for admissions as the basis for determining damages and found

that it would be an “abdication of judicial responsibility” to do so.

{¶ 22} The magistrate determined that the Hendersons’ actual damages were

$5,195 and awarded three times that amount for the violation of the Business Opportunity

Plan Act. He concluded that defendants’ refusal to return the Hendersons’ money,

despite representing that there was a 30-day money back guarantee, constituted a

conscious disregard for their known rights that had great probability of causing

substantial harm. He found defendants’ conduct to be fraudulent, giving rise to a punitive

damages award. He doubled the amount of actual damages for an award of $10,390. He

12. summarized the total award as $31,070 [sic].3 He also awarded attorneys fees and

ordered the Hendersons’ attorney to submit an itemized fee bill.

{¶ 23} The Hendersons’ counsel submitted documentation of attorneys fees, costs,

and expenses totaling $46,862.76. He later filed a supplemental brief requesting a

lodestar multiplier enhancement for an award of $90,800, plus court costs and expenses

of $1,462.76.

C. The Hendersons’ Objections to the Magistrate’s Decision

{¶ 24} On February 23, 2010, the Hendersons filed objections to the magistrate’s

decision, challenging his conclusions that (1) the Consumer Sales Protection Act was not

applicable; (2) defendants’ representations were mere “puffing”; (3) it was not

appropriate to determine damages by way of unanswered requests for admission; and

(4) they were entitled to no damages for breach of contract. They also argued that the

magistrate had miscalculated damages. The Hendersons ultimately withdrew the first and

fourth objections.

{¶ 25} The Hendersons argued that Ohio courts had adopted an expectational

analysis or “benefit of the bargain” rule in determining whether future lost profits are too

speculative. They contended that the magistrate was required to look at their

expectations rather than defendants’ actions. They urged that proof of the amount of

damages rises above mere speculation when they are calculated by “some fairly definite

3 Three times $5,195 equals $15,585. Added to the actual damages of $5,195, that would equal $20,780 for a total, including punitive damages, of $31,170.

13. standards such as market value, established experience, or direct inference from known

circumstances.” They insisted that their expert’s calculations comported with these

standards, especially given the magistrate’s explicit determination that Miedema’s

testimony was credible.

{¶ 26} The Hendersons also continued to argue that defendants had effectively

admitted damages by failing to respond to requests for admission. They contended that

by failing to deem those requests admitted, the magistrate improperly considered facts

not in evidence, actively protected the defendants, and advocated positions and defenses

not put forth by any party.

{¶ 27} Finally, the Hendersons claimed that the magistrate’s decision was

ambiguous and that damages had been miscalculated. They interpreted that the

magistrate intended to award $20,680 in compensatory fraud damages, $10,390 in

punitive fraud damages, and $15,585 for violation of R.C. Chapter 1334. This would

total $46,655.

{¶ 28} On September 26, 2012, the court issued judgment entries on the

Hendersons’ objections to the magistrate’s decision and their request for attorneys fees.

The trial court’s judgment entry recited the magistrate’s findings and addressed the three

objections that the Hendersons did not withdraw.

{¶ 29} With respect to the Hendersons’ objection concerning the failure to award

future earnings, the trial court concluded that there were many variables which made the

measure of damages speculative. The court agreed with the magistrate that defendants’

14. advertisements of potential profits constituted mere puffing. It observed that the

Hendersons quickly “smelled a rat” and tried to get out of the situation as soon as they

could.

{¶ 30} With respect to the magistrate’s refusal to accept defendants’ unanswered

requests for admissions as evidence of damages, the court indicated that it had

extensively researched the issue and found the cases cited by the Hendersons to be

inapplicable. The court concluded that it was within its discretion to decide whether a

hearing on damages was necessary. It suggested that to do otherwise would have

subverted justice and violated the defendants’ due process rights.

{¶ 31} Finally, as to the Hendersons’ claim that the magistrate had miscalculated

damages, the court agreed with the Hendersons that there was ambiguity in the

magistrate’s ruling which required clarification. It noted that the Hendersons did not

challenge the punitive damages award, thus it left it at $10,390, as stated in the

magistrate’s decision. It found that the Hendersons’ actual damages were $5,195. Under

R.C. 1334.09(A), the Hendersons were entitled to three times the amount of actual

damages or $10,000, whichever is greater. It, therefore, awarded $15,585 for damages

under the Business Opportunity Plan Act. The court awarded an additional $5,195 as

damages for the fraud claim. This resulted in a total award of $31,170. It awarded

attorneys fees of $74,150. It affirmed and modified the magistrate’s decision consistent

with the rulings described in the September 26, 2012 judgment entry.

15. {¶ 32} The Hendersons appealed the court’s September 26, 2012 judgment entry.

Their assignments of error related to the court’s refusal to deem admitted the unanswered

requests for admission as they concerned the amount of damages, its decision to ignore

the Hendersons’ unopposed expert witness’s damages calculation, and the overall amount

of damages as calculated by the court. They filed their brief in this court on January 22,

2013.

D. Defendants’ Motion to Vacate Judgment

{¶ 33} On February 20, 2013, defendants appeared for the first time and requested

an extension of time by which to file an appellee brief. On March 18, 2013, they filed a

motion to remand the matter to the trial court so that they could move to vacate the

judgment for lack of personal jurisdiction, and they filed the motion to vacate in the

common pleas court the same day. Despite the Hendersons’ objections, we granted

defendants’ motion.

{¶ 34} In their motion to vacate, defendants observed that the Hendersons had

failed to attach to their complaint the SMC and EMC standard membership rules, both of

which contained forum selection clauses and provided for mandatory arbitration. They

argued that the judgment entries were void and must be set aside because the court lacked

personal jurisdiction over them pursuant to the exclusive forum selection clause.

{¶ 35} The Hendersons opposed the motion to vacate. They argued that the court

had acquired personal jurisdiction over the defendants because service of process was

successfully accomplished. They also argued that the membership agreements were

16. invalid and unenforceable because (1) defendants failed to offer any evidence that the

Hendersons had knowingly agreed to the terms; (2) the forum selection clause was the

result of fraud or overreaching, was contrary to Ohio public policy, had not been

negotiated, and would limit litigation to a jurisdiction so inconvenient as to be

unreasonable; (3) the magistrate awarded nothing for breach of contract and found that

they had rescinded the agreement; (4) defendants were barred by laches, waiver, and

estoppel from asserting the forum selection and arbitration clauses because they waited

over three years to assert them; and (5) the terms of the agreements were procedurally

and substantively unconscionable given, inter alia, the Hendersons’ relative lack of

sophistication, defendants’ failure to explain the terms, the financial stress they were

experiencing, the commercial unreasonableness of the terms, and the inconvenience of

the forum.

{¶ 36} While they acknowledged defendants’ claim that Mr. Henderson accepted

the terms by clicking a button to proceed to the EMC website, the Hendersons contended

that this did not demonstrate a true meeting of the minds and that defendants’ affidavit

spoke in generalities and not to any specific evidence that the Hendersons had agreed to

their rules. They also insisted that because defendants, in their opening brief, had not

challenged jurisdiction on the basis of Ohio’s long-arm statute or on due process grounds,

they had effectively conceded the court’s jurisdiction without the need for the trial court

to undertake such an analysis.

17. {¶ 37} Defendants replied. They clarified that although their initial focus was on

the forum selection clause, they were, in fact, challenging the court’s judgment for lack

of personal jurisdiction. They submitted an additional affidavit from SMC employee,

Scott Palladino, articulating pertinent facts to defeat jurisdiction under Ohio’s long-arm

statute and on due process grounds. They argued that because the court lacked personal

jurisdiction, they had no obligation to appear to raise the defense of lack of personal

jurisdiction or to assert the arbitration provisions. They could instead collaterally attack

the judgment in California based on the judgment being void in the first place.

{¶ 38} Defendants complained that the Hendersons were trying to selectively

enforce one provision of the agreements (the cancellation provisions), while avoiding

other provisions. They cited case law indicating that even if the Hendersons had been

induced to enter into the agreement by fraud, deceit, or misrepresentation, it would not

affect the validity of the forum selection clause. They urged that the Hendersons’ relative

lack of sophistication was an insufficient basis to invalidate the forum selection clause.

And they argued that the inconvenience of the location of the forum did not render the

provision so unreasonable or unjust as to invalidate the clause.

{¶ 39} On August 2, 2013, the trial court denied defendants’ motion to vacate. It

remarked that it was unaware of the forum selection clauses due to the Hendersons’

failure to attach the rules to their complaint. But the court found that the Hendersons

agreed to the rules based on the affidavits from defendants’ representative indicating that

every prospective member was advised that by joining, they were agreeing to be bound

18. by SMC rules. It found that the Hendersons agreed to the EMC rules by logging in and

clicking through to the website.

{¶ 40} The court stated that discussion and argument about whether the court has

long-arm jurisdiction was immaterial and irrelevant in considering the validity of a forum

selection clause in what it deemed was a commercial contract. It indicated that there was

insufficient information before it to make such a determination. It agreed with

defendants that they were not barred from challenging the validity of the judgment

because if the court lacked personal jurisdiction over defendants, the judgment would be

void.

{¶ 41} The court also found the Hendersons’ argument that the contract was

rescinded to be without merit because they had accepted the benefits and sued for breach

of the contract. It found the discussion relative to arbitration to be immaterial given the

procedural posture of the case. And it recognized that the burden of demonstrating

unenforceability of a forum selection clause falls on the party challenging its validity,

thus the Hendersons bore the burden.

{¶ 42} The court acknowledged that forum selection clauses in commercial

contracts should generally control as long as both parties are commercial entities, there

was no fraud or overreaching, and enforcement of the clause would not be unreasonable

or unjust. The court found that this was a commercial contract between business entities,

regardless of the fact that one party was more sophisticated than the other. It found that

the forum selection clause was part of the transaction and that it did not matter that the

19. Hendersons lacked sophistication, were relatively inexperienced, lacked legal knowledge,

and were unfamiliar with the terms. It explained that a claim of fraud must relate directly

to the negotiation or acceptance of the forum selection clause. It found that there was no

evidence that the clause was the product of fraud and there was no public policy that

would be violated by enforcement of the clause.

{¶ 43} Turning to whether the clause was unreasonable or unjust, the court

recognized that the test is whether under the circumstances of the case, enforcement

would result in litigation so unreasonably difficult and inconvenient that plaintiff would

for all practical purposes be deprived of his day in court. It addressed the factors to be

considered including which law controls the dispute, what residency the parties maintain,

where the contract will be executed, where the witnesses and parties are located, and

whether the forum’s designated location is inconvenient. The court noted that it is rare

for consideration of these factors to result in overriding the forum agreed to by the

parties.

{¶ 44} The court acknowledged that at first blush, it would appear that the

Hendersons were unable to meet the high hurdle of showing that litigating the case in

California would effectively deprive them of their day in court. However, it explained,

there were unrefuted facts that persuaded the court that the forum clause would do just

that.

{¶ 45} Henderson attested that he was unemployed in 2008 and would not have

been able to afford to travel to California to dispute any claim with defendants. He made

20. clear that he was so desperate to make this concept work that he withdrew most of his

retirement savings to pay defendants. The court indicated that it could find no cases

where the party seeking to avoid the forum selection clause argued that he or she could

not afford to travel to California, that there was a period of unemployment, and that most

of his or her retirement savings had been expended in transacting with the opposing

party. It concluded that the financial inability of the Hendersons to travel to California

would indeed deprive them of their day in court and on the unique facts of this particular

case, it found that enforcement of the forum selection clause compelling plaintiff to

litigate in California was unreasonable or unjust.

E. The Parties Cross-Appeal

{¶ 46} Following the trial court’s judgment on the motion to vacate, we reinstated

the case to our docket on September 4, 2013. The parties filed cross-appeals.

{¶ 47} The Hendersons filed a supplemental brief on December 13, 2013, this time

assigning the following errors for our review with respect to the trial court’s September 26,

2012 and August 2, 2013 judgments:

I. THE TRIAL COURT ERRED WHEN IT FAILED TO DEEM

ADMITTED PROPERLY SERVED REQUESTS FOR ADMISSION TO

WHICH APPELLEES NEVER RESPONDED[.]

II. THE TRIAL COURT ERRED WHEN IT FAILED TO

CONSIDER THE UNOPPOSED EXPERT TESTIMONY ON THE

21. AMOUNT OF APPELLANTS’ DAMAGES SUFFERED AT THE

HANDS OF APPELLEES[.]

III. THE TRIAL COURT ERRED IN ITS AUGUST 2, 2013

JUDGMENT FINDING THAT APPELLANTS/CROSS APPELLEES DID

NOT RESCIND THE CONTRACT AND AGREED WITH ITS “RULES”

CONTAINING A FORUM SELECTION CLAUSE[.]

{¶ 48} The assignments of error identified in defendants’ cross-appeal relate to the

trial court’s August 2, 2013 judgment refusing to enforce the forum selection and

arbitration clauses:

1. The Trial Court erred by failing to determine whether it had

personal jurisdiction over defendants.

2. The Trial Court erred by refusing to enforce the parties’

agreement to resolve any dispute through binding arbitration.

3. The Trial Court erred by refusing to enforce the California forum

selection clause contained within the parties agreement.

III. Law and Analysis

{¶ 49} We begin by addressing the defendants’ first assignment of error relating to

the trial court’s exercise of personal jurisdiction over them. “Personal jurisdiction is a

question of law that appellate courts review de novo.” Kauffman Racing Equip., L.L.C. v.

Roberts, 126 Ohio St. 3d 81, 2010-Ohio-2551, 930 N.E.2d 784, ¶ 27. In its decision, the

trial court deemed that “discussion and argument about whether Ohio and this Court has

22. ‘long arm jurisdiction’ of Defendants [is] immaterial and irrelevant.” Defendants claim

that this was error. They contend that the trial court was required to determine whether

personal jurisdiction was proper before addressing whether the forum selection or

arbitration clauses in the parties’ agreement were enforceable.

{¶ 50} Generally, a court must undertake a two-step process in determining

whether a state court has personal jurisdiction over a non-resident defendant. Fraley v.

Estate of Oeding, 138 Ohio St.3d 250, 2014-Ohio-452, 6 N.E.3d 9, ¶ 12. The court must

first consider whether Ohio’s long-arm statute, R.C. 2307.382, or the civil rules confer

jurisdiction. Id. If they do, the court must then consider whether asserting jurisdiction

over the non-resident defendant would deprive the defendant of the right to due process

under the law, as guaranteed by the Fourteenth Amendment to the U.S. Constitution. Id.

To satisfy due process, the defendant must maintain “certain minimum contacts with the

state so that the suit does not offend traditional notions of fair play and substantial

justice.” Clark v. Connor, 82 Ohio St.3d 309, 314, 695 N.E.2d 751 (1998).

{¶ 51} The trial court bypassed this analysis, focusing instead on whether the

parties’ agreement contained a valid and enforceable forum selection clause. Relying on

the Ohio Supreme Court’s opinion in Kennecorp Mtge. Brokers, Inc. v. Country Club

Convalescent Hosp., Inc., 66 Ohio St.3d 173, 175, 610 N.E.2d 987 (1993), it reasoned

that “a minimum contacts analysis * * * is not appropriate in determining the validity of

Forum Selection clauses in commercial contracts.” It adduced that we had remanded the

case for it to decide only the motion to vacate, implying that this did not include a

23. personal jurisdiction analysis, and that the record before it was insufficient to make such

a determination.

{¶ 52} In Kennecorp, commercial parties entered into a multi-million dollar

financing arrangement. Under the express terms of the parties’ agreement, the parties

agreed that Ohio law would control and that jurisdiction would lie with Ohio courts.

Plaintiff, an Ohio corporation, filed suit in Ohio against the defendants, both California

residents. Despite the forum selection clause in their agreement, defendants moved for

dismissal for lack of personal jurisdiction. The trial court granted the defendants’

motion, but we reversed, concluding that the forum selection clause was enforceable.

Kennecorp Mtge. Brokers, Inc. v. Country Club Convalescent Hosp., Inc., 6th Dist. Lucas

No. L-91-157, 1992 WL 32032 (Feb. 21, 1992). The Supreme Court affirmed our

decision. It recognized that “the requirement that a court have personal jurisdiction over

a party is a waivable right and there are a variety of legal arrangements whereby litigants

may consent to the personal jurisdiction of a particular court system.” Kennecorp at 175.

It observed that a forum selection clause in a commercial contract should control, absent

a strong showing that it should be set aside. Id. It ultimately held that “absent evidence

of fraud or overreaching, a forum selection clause contained in a commercial contract

between business entities is valid and enforceable, unless it can be clearly shown that

enforcement of the clause would be unreasonable and unjust.” Id. at 176.

{¶ 53} In the present case, the trial court considered the three Kennecorp

requirements. It found that the parties’ dispute concerned a commercial transaction and

24. that there was no evidence of fraud or overreaching in connection with the forum

selection clause. It concluded, however, that enforcement of the clause would be

unreasonable or unjust given Mr. Henderson’s unemployment and the Hendersons’

financial inability to travel to California to litigate the case. It denied defendants’ motion

to vacate.

{¶ 54} Although it is proper to apply the Kennecorp factors in considering whether

a forum selection clause is enforceable, Kennecorp cannot be relied upon in this case as

authority for dispensing with the two-step process for determining personal jurisdiction.

This is because in Kennecorp, the forum selection clause provided for jurisdiction over

the non-resident defendants in Ohio. The forum selection clause in this case provides for

jurisdiction in California. The Kennecorp defendants had already waived due process

and consented to the jurisdiction of the Ohio courts. The defendants here have not.

Thus, if personal jurisdiction is lacking under the two-part analysis, the court would be

prevented from proceeding to exercise jurisdiction over defendants. By considering the

enforceability of the forum selection clause without first conducting the two-step

personal jurisdiction analysis, the trial court effectively put the cart before the horse.

{¶ 55} To this end, we must also observe that even if the court had not erred by

considering the enforceability of the forum clause before determining personal

jurisdiction, it was still necessary to perform the due process analysis. The effect of

finding the forum selection clause unenforceable was merely to remove the requirement

25. that suit be filed exclusively in California. The effect was not to automatically vest Ohio

with personal jurisdiction over defendants.

{¶ 56} Finally, we acknowledge defendants’ contention that the trial court’s

decision refusing to enforce the California forum selection clause is inconsistent with

Salehpour v. Just a Buck Licensing, Inc., 12th Dist. Warren No. CA2013-03-028, 2013-

Ohio-4436 (holding that mere distance, expense, and hardship are insufficient to render

forum selection clause unreasonable), as well as numerous federal court cases. However,

we conclude that the issue that must first be resolved is whether the court has personal

jurisdiction. The Hendersons have the burden to establish the court’s jurisdiction.

Dahlhausen v. Aldred, 187 Ohio App.3d 536, 2010-Ohio-2172, 932 N.E.2d 949, ¶ 21

(12th Dist.). We, therefore, remand this matter to the trial court for determination of

whether personal jurisdiction may properly be asserted over defendants. See generally

State ex rel. DeWine v. 9150 Group, L.P., 2012-Ohio-3339, 977 N.E.2d 112, ¶ 27 (9th

Dist.) (remanding to trial court for determination of personal jurisdiction).

{¶ 57} We find defendants’ first assignment of error well-taken. Given this

conclusion, it is unnecessary to consider the remaining assignments of error at this time.

IV. Conclusion

{¶ 58} We find that the trial court was required to determine whether defendants

were subject to the personal jurisdiction of the Ohio courts. We, therefore, find

defendants’ first assignment of error well-taken, reverse the August 3, 2013 judgment of

the Erie County Court of Common Pleas, and remand this matter to the trial court for

26. application of the two-step personal jurisdiction analysis. Our disposition of this

assignment of error obviates the need to address the remaining assignments of error at

this time. The costs of this appeal are assigned to the Hendersons pursuant to App.R. 24.

Judgment reversed.

A certified copy of this entry shall constitute the mandate pursuant to App.R. 27. See also 6th Dist.Loc.App.R. 4.

Arlene Singer, J. _______________________________ JUDGE Thomas J. Osowik, J. _______________________________ James D. Jensen, J. JUDGE CONCUR. _______________________________ JUDGE

This decision is subject to further editing by the Supreme Court of Ohio’s Reporter of Decisions. Parties interested in viewing the final reported version are advised to visit the Ohio Supreme Court’s web site at: http://www.sconet.state.oh.us/rod/newpdf/?source=6.

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