Court Opinion

ID: 174992
Source: CourtListenerOpinion
Date Created: 2010-09-08 19:45:59+00
Date Added: 2024-06-11T17:25:32.753086
License: Public Domain

United States Court of Appeals
                        For the First Circuit

No. 09-2163

                    RAFAEL RODRÍGUEZ BARRIL, INC.,

                         Plaintiff, Appellant,

                                  v.

                      CONBRACO INDUSTRIES, INC.,

                         Defendant, Appellee.

             APPEAL FROM THE UNITED STATES DISTRICT COURT

                    FOR THE DISTRICT OF PUERTO RICO

           [Hon. Jay A. García-Gregory, U.S. District Judge]

                                Before

                      Boudin, Selya and Gajarsa,*

                            Circuit Judges.

     Angelique Doble Bravo with whom José A. Gallart and Gallart
Law Firm were on brief for appellant.
     Annette Cortés Arcelay with whom Eric Pérez-Ochoa and Adsuar
Muñiz Goyco Seda & Pérez-Ochoa, P.S.C. were on brief for appellee.

                           September 8, 2010

     *
         Of the Federal Circuit, sitting by designation
            BOUDIN, Circuit Judge.       The question in this case is

whether a forum selection clause in a contract between the parties

is displaced by Puerto Rico's Sales Representatives Act of 1990,

P.R. Laws Ann. tit. 10, §§ 279-279h (2009) ("Law 21").                  The

district court held that it was not displaced and dismissed the

suit without prejudice.    Although there are disputed facts as to a

supposed breach of contract, the facts relating to the forum

selection clause are not disputed, and that issue is dispositive on

this appeal.

            Conbraco Industries, Inc. ("Conbraco"), based in North

Carolina, manufactures valves and other industrial products.             On

January 1, 1999, Conbraco and Rafael Rodríguez Barril, Inc. ("RRB")

executed a Sales Representative Agreement ("the agreement") in

North    Carolina,   appointing   the    latter   as   a   Conbraco   sales

representative in Puerto Rico.     One provision required RRB and its

staff to "refrain from any activities which may reflect adversely

upon the reputation or credibility of Conbraco or the Products."

Conbraco terminated the contract on June 27, 2008, claiming a

breach of this provision by RRB several days earlier.1

            On August 11, 2008, RRB sued Conbraco in Puerto Rico

Superior Court under Puerto Rico's Law 21.         Law 21 provides inter

     1
      In a nutshell, Conbraco alleged that at a Puerto Rico hotel
on June 23, 2008, RRB's president verbally attacked and threatened
both Conbraco's executive vice president and the owner of
Conbraco's largest distributor, and engaged in other improper
actions.

                                   -2-
alia that regardless of any contractual language to the contrary,

(1)   sales      representation    contracts   covering   the    geographic

territory of Puerto Rico "shall be construed pursuant to, and shall

be governed by" Puerto Rico law, P.R. Laws Ann. tit. 10, § 279f,

and   (2)   no   principal   may   terminate   a   contract   with    a   sales

representative absent "just cause," id. § 279a.           RRB alleged that

Conbraco terminated the contract without cause and requested a

declaratory judgment, specific performance of the contract, and

compensation for Conbraco's allegedly tortious conduct.

            However, the agreement contains a forum selection clause,

a choice of law clause, and a severability clause.                   The first

provides: "In the event that either party brings suit to enforce

the terms of this [a]greement both [RRB] and Conbraco consent and

agree that jurisdiction for such action will lie only in the state

and federal courts sitting in Mecklenburg County, North Carolina";

the second, that the contract "shall be governed and construed in

all respects" according to North Carolina law; and the third, that

if any provision is held unlawful or unenforceable, "the remaining

portions of the [a]greement shall remain in full force and effect."

            After removing the action to federal court, Conbraco

sought to enforce the forum selection clause by filing a motion to

dismiss.    Fed. R. Civ. P. 12(b)(6).      The magistrate judge, to whom

the matter was referred, recommended that the motion be granted,

finding the forum selection clause to be valid and stating that an

                                     -3-
attack under Law 21 on the validity of the choice of law clause was

properly to be presented in the North Carolina forum specified in

the   forum    selection   clause.     The    district   court   adopted    the

magistrate      judge's    Report    and     Recommendation,     and   granted

Conbraco's motion to dismiss without prejudice.            RRB now appeals.

              We review de novo a district court's Rule 12(b)(6)

dismissal based on a forum selection clause.              Rivera v. Centro

Médico de Turabo, Inc., 575 F.3d 10, 15 (1st Cir. 2009).                   This

being a case based on diversity jurisdiction, the initial question

is whether for Erie purposes, see Erie R.R. Co. v. Tompkins, 304

U.S. 64 (1938), we treat the issue of whether a forum selection

clause is enforceable as "procedural" and look to a federal test of

validity or instead treat it as "substantive" and look to pertinent

state law, starting with the choice of law rules that would be

followed by the local court in the jurisdiction where the district

court sits.

              The Erie question has been reserved by the Supreme Court,

Stewart Org., Inc. v. Ricoh Corp., 487 U.S. 22, 25-26, 32 & n.11

(1988), and by this court, Rivera, 575 F.3d at 16-17, although most

circuits that have spoken favor a uniform federal standard to test

the validity of forum selection clauses, see Wong v. PartyGaming

Ltd., 589 F.3d 821, 827 (6th Cir. 2009) (collecting cases).                  It

remains unnecessary for us to decide the issue here because both

North Carolina,      Perkins v. CCH Computax, Inc., 423 S.E.2d 780,

                                      -4-
783-84 (N.C. 1992),2 and Puerto Rico, Unisys P.R. v. Ramallo Bros.

Printing, Inc., 128 P.R. Dec. 842, 856-57 (1991), follow the

federal standard announced by the Supreme Court in The Bremen v.

Zapata Off-Shore Co., 407 U.S. 1 (1972).

            Under Bremen, an opening question is whether the forum

specified    in   the   selection   clause   is   mandatory   or   merely

permissive, Rivera, 575 F.3d at 17, but that question is easily

answered because the clause before us states that jurisdiction

would lie "only" in North Carolina.       The next question is the scope

of the clause; here, it operates when "either party brings suit to

enforce the terms of this [a]greement." This language embraces the

present suit insofar as RRB is suing for breach of contract and for

injunctive and declaratory relief seeking specific performance of

the contract.

            Admittedly, the contract by its terms permits termination

without cause and without consequential or punitive damages, and

RRB's theory is that, contrary to those terms, Law 21 prohibits

termination without cause and gives RRB a right to certain damages

that are specifically excluded by the contract.       But the effect of

the relief sought is to "enforce" the primary terms of the contract

     2
      Perkins was partly modified by a North Carolina statute, see
Szymczyk v. Signs Now Corp., 606 S.E.2d 728, 732 n.2 (N.C. App.
2005), but Perkins continues to apply to contracts, like ours, that
do not require disputes to be heard in a state other than North
Carolina, see N.C. Gen. Stat. § 22B-3, and has remained otherwise
valid precedent, see Sec. Credit Leasing, Inc. v. D.J.'s of
Salisbury, Inc., 537 S.E.2d 227, 232 (N.C. App. 2000).

                                    -5-
and to exclude only certain of its provisions.      Anyway, RRB does

not dispute that its suit falls within the terms of the forum

selection clause.

           Rather, RRB's position is that the clause, although

applicable by its terms, is invalid.    This in turn brings us to the

third question under Bremen, which is whether there is some reason

the presumption of enforceability should not apply; "the forum

clause should control absent a strong showing that it should be set

aside,"   Bremen, 407 U.S. at 15.   The Court has listed four grounds

for finding a forum selection clause unenforceable:

           (1) the clause was the product of "fraud or
           overreaching," id. at 15;

           (2) "enforcement would be unreasonable and
           unjust," id.;

           (3) proceedings "in the contractual forum will
           be so gravely difficult and inconvenient that
           [the party challenging the clause] will for
           all practical purposes be deprived of his day
           in court," id. at 18; or

           (4) "enforcement would contravene a strong
           public policy of the forum in which suit is
           brought, whether declared by statute or by
           judicial decision," id. at 15.

See also Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc.,

473 U.S. 614, 632 (1985) (discussing Bremen's factors).

           Three of the factors are easily put aside. No fraudulent

inducement   is   alleged.    Nor   would   enforcement   be   clearly

unreasonable or unjust, as Conbraco is based in North Carolina, the

agreement was executed in that state, and no suggestion is made

                                -6-
that the clause was inserted in bad faith.                See Carnival Cruise

Lines,     Inc.   v.   Shute,   499   U.S.   585,   595   (1991)    (discussing

fundamental fairness review). Nothing suggests that North Carolina

is too burdensome a place for RRB to litigate or otherwise so

inappropriate as to deprive RRB of an effective forum.

             Here, we are concerned with only the fourth factor: RRB

alleges that enforcing the agreement's forum selection clause and

compelling it to litigate in North Carolina would violate Puerto

Rico public policy as expressed in Law 21.                Law 21 protects an

"independent entrepreneur who establishes a sales representation

contract of an exclusive nature, with a principal or grantor, and

who   is   assigned    a   specific   territory     or    market,   within   the

Commonwealth of Puerto Rico."          P.R. Laws Ann. tit. 10, § 279(a).3

             Law 21 does reflect what Bremen calls "strong public

policy of the forum." Its provisions pertain to "public order" and

"shall be liberally construed," P.R. Laws Ann. tit. 10, § 279g, and

it is modeled on the Puerto Rico Dealers Act of 1964, P.R. Laws

Ann. tit. 10, §§ 278-278e ("Law 75"), which provides similar

protections to distributors, Re-Ace, Inc. v. Wheeled Coach Indus.,

Inc., 363 F.3d 51, 57 (1st Cir. 2004), and has been held to embody

a "strong public policy" of Puerto Rico, A.M. Capen's Co., Inc. v.

      3
      Conbraco denies that RRB ever had such exclusive rights, but
on a motion to dismiss, we accept RRB's assertion that it had
effective exclusivity before the agreement was disavowed by
Conbraco.   AVX Corp. v. Cabot Corp., 424 F.3d 28, 29 (1st Cir.
2005).

                                       -7-
Am. Trading & Prod. Corp., 74 F.3d 317, 321 (1st Cir. 1996)

(quoting Medina & Medina v. Country Pride Foods, Ltd, 858 F.2d 817,

820 (1st Cir. 1988)).

          However, Law 21 does not by its terms forbid a forum

selection clause but only a choice of law clause insofar as the

latter would prevent Law 21's substantive protections from being

given effect. See Triangle Trading Co. v. Robroy Indus., Inc., 952

F. Supp. 75, 81 (D.P.R. 1997).    Specifically, Law 21 states:

          The sales representation contracts referred to
          in this chapter shall be construed pursuant
          to, and shall be governed by the laws of the
          Commonwealth   of   Puerto   Rico,   and   any
          stipulation to the contrary shall be null.

P.R. Laws Ann. tit. 10, § 279f.    By contrast,   Law 75, upon which

Law 21 was modeled, Re-Ace, 363 F.3d at 57, includes both a

prohibition on choice of law clauses and a prohibition on forum

selection clauses.4

          RRB argues that in this case the forum selection clause

appears in the agreement under the heading "Limitations on Damages"

and also includes a limitations on damages clause, a clause that

RRB claims violates Law 21's damages provisions, P.R. Laws Ann.

tit. 10, §§ 279c-279e.   But the agreement states that the headings

     4
      Law 75 provides: "Any stipulation that obligates a dealer to
adjust, arbitrate or litigate any controversy that comes up
regarding his dealer's contract outside of Puerto Rico, or under
foreign law or rule of law, shall be likewise considered as
violating the public policy set forth by this chapter and is
therefore null and void." P.R. Laws Ann. tit. 10, § 278b-2.

                                  -8-
are "for reference only and shall not be considered as substantive

parts of this [a]greement," and the agreement also includes a

severability clause quoted above providing that if a provision is

held invalid, the rest of the agreement is preserved.

          Alternatively, RRB argues that the forum selection clause

is against Puerto Rico public policy because it chooses North

Carolina as the designated forum, and--RRB claims--North Carolina

law precludes North Carolina courts from assessing the merits of

the contract termination under the laws of another state.              This

claim is not supported: none of the North Carolina provisions or

precedents cited by RRB precludes a court in North Carolina from

respecting Law 21 to the extent that its terms would apply to the

present dispute.

          RRB relies on language in North Carolina's statute on

contracts against public policy, which states that "any provision

in a contract entered into in North Carolina that requires the

prosecution of any action . . . that arises from the contract to be

instituted or heard in another state is against public policy and

is void and unenforceable."    N.C. Gen. Stat. § 22B-3.        But this is

a limitation on forum selection clauses that send North Carolina

contracts to other jurisdictions.        See Hickox v. R&G Group Int'l,

Inc., 588 S.E.2d 566, 568 (N.C. App. 2003).

          RRB   also   discusses   N.C.    Gen.   Stat.   §   22B-2,   which

prohibits choice of law and forum selection clauses in any contract

                                   -9-
"for the improvement of real property in [North Carolina], or

providing of materials therefor," and cites a judicial decision

interpreting the statute, Price & Price Mech. of N.C., Inc. v.

Miken Corp., 661 S.E.2d 775 (N.C. App. 2008).           But this statute

likewise has nothing to do with the agreement, which does not

involve real property.       Neither does a provision of the North

Carolina    Sales   Representatives   Act   governing   waivers   of   that

statute, N.C. Gen. Stat. § 66-190 et seq., which RRB cites but does

not discuss.

             Although the agreement contains a choice of law clause

specifying North Carolina law, "North Carolina will not honor a

choice-of-law provision if the law of the chosen state is contrary

to the fundamental policy of a state possessing a greater interest

in the issue than the chosen state."           Volvo Trademark Holding

Aktiebolaget v. Clark Machinery Co., 510 F.3d 474, 479 (4th Cir.

2007) (quoting Volvo Constr. Equip. N. Am., Inc. v. CLM Equip. Co.,

386 F.3d 581, 607 (4th Cir. 2004)); see also Cable Tel Servs., Inc.

v. Overland Contracting, Inc., 574          S.E.2d 31, 33-34 (N.C. App.

2002).     Thus, nothing prevents a court sitting in North Carolina

from honoring Law 21 to the extent it would otherwise apply.

            The possibility remains that a North Carolina state court

might decide not to respect Puerto Rico's asserted interest in

regulating the relationship of the parties in accord with Law 21.

If so, a federal district court in North Carolina would arguably be

                                  -10-
bound under Klaxon Co. v. Stentor Elec. Mfg. Co. Inc., 313 U.S.

487, 496 (1941), to reach the same result.       But RRB makes no

argument to show that this outcome is likely.   It merely says that

the agreement requires North Carolina substantive law to apply, and

this, as we have shown, is not necessarily the law that a North

Carolina court would find applicable.

          Finally, RRB asserts that the district court found that

the agreement's choice of law provision would be respected by the

North Carolina courts.     An ambiguous sentence in the court's

decision could be so read.    But no such ruling was made by the

magistrate judge whose recommendation was adopted by the district

court, nor was it necessary to the district court's result.      We

read the district court's holding as limited to the validity of the

forum selection clause and affirm solely on that issue.

          In sum, substantive issues as to choice of law, as well

as the merits of the contract termination controversy, are to be

resolved in the forum chosen by the parties.    The forum selection

clause in the agreement fixes North Carolina as the forum, and the

forum selection clause is not forbidden by Law 21.

          Affirmed.

                               -11-