Swanson v. Image Bank, Inc., CV-02-0176-PR.

• Court: Supreme Court of Arizona
• Citation: 206 Ariz. 264,77 P.3d 439
• Docket Number: No. CV-02-0176-PR.,CV-02-0176-PR.
• Parties: Mary Virginia SWANSON, Plaintiff/Appellee, v. THE IMAGE BANK, INC., and Swanstock, Inc., Defendants/Appellants.
• Decision Date: 06 October 2003

77 P.3d 439
206 Ariz. 264

Mary Virginia SWANSON, Plaintiff/Appellee,
v.
THE IMAGE BANK, INC., and Swanstock, Inc., Defendants/Appellants

No. CV-02-0176-PR.

Supreme Court of Arizona.

October 6, 2003.

77 P.3d 440

Snell & Wilmer LLP, Tucson, by Tibor Nagy, Jr., Mark E. Konrad, Wade R. Swanson, for Plaintiff/Appellee

Stinson Morrison Hecker LLP, Phoenix, by David A. Selden, Christine A. Bailey, for Defendants/Appellants.

OPINION

JONES, Chief Justice.

¶ 1 Appellants, The Image Bank, Inc. and Swanstock, Inc. (collectively "TIB"), sought review of the court of appeals' decision affirming the trial court's grant of partial summary judgment in favor of Appellee, Mary Virginia Swanson ("Swanson"). See Swanson v. Image Bank, Inc., et al., 202 Ariz. 226, 43 P.3d 174 (App.2002). The judgment awarded treble damages under Arizona Revised Statutes ("A.R.S.") § 23-355 (1995) for bad faith breach of an employment contract. We granted review to determine whether the contract's express choice-of-law provision assigning Texas substantive law to govern any controversy arising out of the contract precludes recovery of a statutory claim for treble damages under A.R.S. § 23-355. After full review, we hold that the contractual choice of Texas law governs the remedies available to Swanson for breach of the contract and we reverse the treble damage award. Jurisdiction is established under Article 6, Section 5(3) of the Arizona Constitution and A.R.S. § 12-120.24 (2003).

FACTS

¶ 2 From 1991 to 1997, Swanson owned Swanstock, Inc., an Arizona corporation that represented owners of fine art photography. She resided permanently in Arizona and operated Swanstock, Inc. from this state. The Image Bank, Inc. is a New York corporation with its home office in Texas. In June 1997, The Image Bank purchased Swanstock, Inc. and retained Swanson to operate the company as its president, creative director, and chief executive officer pursuant to a negotiated employment contract. The contract contained provisions regarding compensation to be received upon termination and the application of Texas law as the law under which the contract should be governed and construed. Each party was represented by counsel during the contract negotiations.

¶ 3 TIB terminated Swanson in July 1999 "other than for cause" but refused to make the severance payments required by the contract. Swanson filed suit, followed by a motion for partial summary judgment, alleging breach of the employment contract and claiming TIB violated A.R.S. § 23-352 (1995) which provides that "[n]o employer may withhold or divert any portion of an employee's wages...." In addition to damages at law for the breach, Swanson sought treble damages pursuant to A.R.S. § 23-355.¹ The trial court determined that TIB breached the employment contract with Swanson and awarded Swanson $150,000 in severance pay. Notwithstanding the parties' express agreement that Texas law should control, the trial court trebled the damages under § 23-355, finding that the statute set forth a "fundamental public policy" of Arizona and, as such, should supersede the choice-of-law provision in the contract.

77 P.3d 441

¶ 4 TIB appealed on two grounds. First, the company contended Swanson was not entitled to receive severance pay because she failed to perform her duties and therefore anticipatorily repudiated the contract. The court of appeals disagreed and applied Texas law to this issue, concluding that Swanson's actions did not constitute an anticipatory breach. This court declined review of that issue

¶ 5 Second, TIB asserted the treble damage award under § 23-355 was improper and based its argument on the choice-of-law provision requiring the application of Texas law to the contract. The court of appeals, again disagreeing with TIB, applied Restatement (Second) of Conflict of Laws § 187 (1971) (hereafter "Restatement") and upheld the treble damage award on the theory that Arizona law does not permit prospective contractual waiver of claims under § 23-355 in the case of unreasonable, bad-faith withholding of wages. The choice-of-law provision was held to be invalid as a violation of a "fundamental policy" of Arizona under both subsections (1) and (2) of Restatement § 187.

DISCUSSION

¶ 6 Arizona courts apply the Restatement to determine the applicable law in a contract action. Cardon v. Cotton Lane Holdings, Inc., 173 Ariz. 203, 207, 841 P.2d 198, 202 (1992). If a contract includes a specific choice-of-law provision, we must determine whether that choice is "valid and effective" under Restatement § 187. Id. at 208, 841 P.2d at 203. Choice-of-law issues are questions of law, which we decide de novo. See Garcia v. General Motors Corp., 195 Ariz. 510, 516, ¶ 19, 990 P.2d 1069, 1075 (App.1999).

A. Applicability of the Restatement

¶ 7 The choice-of-law provision in the employment contract reads:

This Agreement shall be governed by and construed in accordance with the internal laws of the State of Texas, without regard to the principles of conflicts [sic] of laws.

(Emphasis added.) TIB claims this provision forecloses the application of conflict of laws principles set forth in the Restatement because the parties, by including the last phrase, expressed their unequivocal intent that Texas law control the relationship. TIB argues the court of appeals improperly overrode that intent by engaging in a § 187 analysis. TIB further contends that absent fraud or overreaching, parties are always free to preclude a § 187 analysis by choosing the state whose law will govern their relationship and the available remedies. These arguments are not sound and we do not adopt them.²

¶ 8 When more than one state has a relationship to or an interest in a contract, courts apply a conflicts analysis to determine which state's law should govern. Cardon, 173 Ariz. at 207, 841 P.2d at 202 (citing Restatement § 187). However, neither a statute nor a rule of law permitting parties to choose the applicable law confers unfettered freedom to contract at will on this point. See Restatement § 187 cmt. d. Consistent with this principle, Restatement § 187, comment g reads:

Fulfillment of the parties' expectations is not the only value in contract law; regard must also be had for state interests and for state regulation. The chosen law should not be applied without regard for the interests of the state which would be the state of the applicable law

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