649 F.2d 36 (1st Cir. 1981), 80-1350, Cordova & Simonpietri Ins. Agency Inc. v. Chase Manhattan Bank N.A.

Docket Nº:80-1350.
Citation:649 F.2d 36
Party Name:CORDOVA & SIMONPIETRI INSURANCE AGENCY INC., et al., Plaintiffs, Appellants, v. CHASE MANHATTAN BANK N.A., et al., Defendants, Appellees.
Case Date:May 19, 1981
Court:United States Courts of Appeals, Court of Appeals for the First Circuit

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649 F.2d 36 (1st Cir. 1981)


Plaintiffs, Appellants,


CHASE MANHATTAN BANK N.A., et al., Defendants, Appellees.

No. 80-1350.

United States Court of Appeals, First Circuit

May 19, 1981

Heard Feb. 5, 1981.

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Gilberto Mayo Aguayo, Hato Rey, P. R., with whom Cancio, Cuevas & Mayo, Hato Rey, P. R., was on brief, for plaintiffs, appellants.

Jay A. Garcia Gregory, San Juan, P. R., with whom Fiddler, Gonzalez & Rodriguez, San Juan, P. R., was on brief, for defendants, appellees.

Before CAMPBELL, BOWNES and BREYER, Circuit Judges.

BREYER, Circuit Judge.

Plaintiffs brought an antitrust action alleging that defendants entered into an agreement violating sections 1 and 3 of the Sherman Act. 1 Section 1 forbids agreements "in restraint of trade or commerce among the several States"; section 3 forbids agreements "in restraint of trade or commerce in any Territory of the United States." The district court dismissed the complaint, holding that plaintiffs did not make sufficient showing of an effect upon interstate commerce to fall within the reach of section 1, and that, in light of the change in Puerto Rico's status from "territory" to "Commonwealth", section 3 no longer applies to Puerto Rico. We affirm the judgment of the district court.


Plaintiffs are an insurance broker and its president who, among other activities, arranged for automobile dealers to obtain "single interest" insurance policies. These policies insure a dealer against loss of the unpaid amount of the loan on each car that he sells. If, for example, a customer buys a $5,000 car, finances it with a $3,000 loan, and then refuses to pay the loan, the policy satisfies the dealer's obligation on the loan and would pay $3,000 directly to the bank that had financed the purchase of the car. Typically, these policies are issued under a master agreement, insuring loans on all cars sold by the dealer, financed through whatever bank is the dealer's customary source of funds. 2

Plaintiffs claim that they were the agent (or broker) for two car dealers who obtained their financing for auto sales from the Puerto Rico branch of the Chase Manhattan Bank. In seeking policies, plaintiffs, as a broker, would contact a general agent ("Benitez") who, in turn, obtained the policies from Puerto Rico Fire and Casualty Company. Evidently, Chase, the ultimate beneficiary of the policies, approved the arrangement.

Plaintiffs' antitrust claim, in essence, asserts that after Puerto Rico Fire and Casualty cancelled the policies because of losses, 3 Chase and Puerto Rico Fire and Casualty agreed with each other to reinstate the policies, but without making use of plaintiffs' brokerage services. Rather, the auto dealers were to place their order for policies directly through Benitez, Puerto Rico Fire and Casualty's general agent. Plaintiffs assert

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that this arrangement among Chase, Benitez, Puerto Rico Fire and Casualty (and presumably the auto dealers) amounts to an agreement in restraint of trade, injuring competition in the Puerto Rico "single interest" insurance policy business and depriving plaintiffs of commissions.

After depositions were taken and a pre-trial order was approved, defendants moved to dismiss the complaint for lack of subject matter jurisdiction. They claimed an inadequate showing of effect upon interstate commerce. Plaintiffs' reply referred to evidence in the depositions, which stated that the Puerto Rico insurance companies reinsured policies on the mainland United States, and plaintiffs attached two exhibits purporting to demonstrate this reinsurance. After reviewing the motion, response, and this evidence on "commerce effects", the district court dismissed the complaint.


The first, and most important, question that this case presents is whether section 3 of the Sherman Act applies to Puerto Rico. If so, no effect on interstate commerce need be shown, for section 3 governs restraints of trade within "any territory". The Supreme Court, in 1937, specifically held that section 3 applied to Puerto Rico. Puerto Rico v. Shell Co., 302 U.S. 253, 58 S.Ct. 167, 82 L.Ed. 235 (1937). But, in 1951 Congress passed the Puerto Rican Federal Relations Act, 64 Stat. 319, ("FRA") pursuant to which Puerto Rico adopted its own Constitution. Does the coming into effect of the FRA and this Constitution mean that certain federal acts, such as the Sherman Act, which apply within territories but not within states, can no longer be given greater effect as applied to Puerto Rico than as applied to states of the Union? Chief Judge Magruder first posed this question in 1953. 4 This court discussed the question, but did not answer it definitively, in Mora v. Mejias, 206 F.2d 377 (1st Cir. 1953). 5 Subsequently, the District Court for the District of Puerto Rico in a series of opinions refused to apply to "intra-commonwealth" activities the Federal Firearms Act, the Federal Alcohol Administration Act, and the Sherman Act all statutes which, by their terms, apply to "intra-territory", but not to "intra-state", activities. 6 These district court judges reasoned that, for purposes of these statutes, the Commonwealth of Puerto Rico is to be treated like a state and not like a territory. The district court in this case followed their approach. We hold that the district court is correct.


Whether Puerto Rico is now to be treated as a state or a territory for purposes of the Sherman Act

depends upon the character and aim of the act. Words generally have different shades of meaning and are to be construed if reasonably possible to effectuate the intent of the lawmakers; and this meaning in particular instances is to be arrived at not only by a consideration of the words themselves, but by considering, as well, the context, the purposes of the law, and the circumstances under which the words were employed.

Puerto Rico v. Shell Co., 302 U.S. at 258, 58 S.Ct. at 169. Using these criteria, the Court, in Shell, held that Sherman Act section 3 did apply to Puerto Rico and coexisted with Puerto Rico's own local antitrust

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law. The Court noted that Congress wished to deal comprehensively with restraints of trade, that it wished to exercise all the constitutional power that it possessed, see Atlantic Cleaners and Dyers v. United States, 286 U.S. 427, 433, 52 S.Ct. 607, 608, 76 L.Ed. 1204 (1932), and that there "is no reason why Puerto Rico should not be held to be a 'territory' within the meaning of section 3 of the Sherman Act." Puerto Rico v. Shell Co., 302 U.S. at 259, 58 S.Ct. at 170. The Shell Court was considering, however, whether the Sherman Act's framers would have intended it to apply to Puerto Rico as a "territory" or not to apply at all.

We consider the quite different question of whether the Sherman Act's framers, if aware of Puerto Rico's current constitutional status, would have intended it to be treated as a "state" or "territory" under the Act. And, we consider that question in light of the subsequent enactment into law of the Federal Relations Act and the promulgation of the Puerto Rico Constitution. Did these subsequent events so change the legal status of Puerto Rico that the Shell decision no longer has effect?


The FRA and the Puerto Rico Constitution were intended to work a significant change in the relation between Puerto Rico and the rest of the United States. In its last years of Spanish rule Puerto Rico had achieved a measure of independence, 7 but, under the Treaty of Paris, which ceded Puerto Rico to the United States, the island lost its autonomy. It became a "territory" of the United States 8 and subject to the command of Congress. 9 From 1900 to 1917, Puerto Rico was governed by the First Organic Act, 10 which created a body politic known as the "People of Porto Rico", imposed a short-lived tariff, and made no provisions for United States citizenship. 11 In 1917, Congress enacted a Second Organic Act, 12 providing for a greater measure of self-government. 13 The Second Organic Act contained a bill of rights 14 and a grant of collective United States citizenship to the people of Puerto Rico. 15 In the Supreme Court's view, the effect of these acts was to give Puerto Rico a legislative autonomy similar to that of the states in local matters. Puerto Rico v. Shell Co., 302 U.S. at 261-63, 58 S.Ct. at 171-172. Yet, Congress retained major elements of sovereignty. In cases of conflict, Congressional statute, not Puerto Rico law, would apply no matter how local the subject; 16 and Congress insisted that acts of the Puerto Rico legislature be reported to it, retaining the power to disapprove them. 17 Those federal acts applying to territories by and large applied to Puerto

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Rico. 18 Thus, prior to 1950, Puerto Rico's legal status was closer to that of a "territory" than of a "state". 19

The FRA was intended to end this subordinate status. It was introduced into the House of Representatives by the Puerto Rico resident commissioner on March 13, 1950. It was titled, "A bill to provide for the organization of a constitutional government by the People of Puerto Rico". 20 It was approved by the 81st Congress as Public Law 600. 21 A short preamble suggested that its object was to provide additional self-government. 22 After a favorable vote on the Act, a constitutional convention was held in Puerto Rico. A constitution was adopted with support of a majority of the voters of Puerto Rico and, upon recommendation of the President, Congress approved the Constitution as a "compact" with the people of Puerto Rico on July 3, 1952. 23

The theme that consistently runs throughout the legislative history of Puerto Rico's attainment of Commonwealth status is that Commonwealth represents the...

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