Rafael RodrÍguez Barril Inc. v. Conbraco Indus. Inc.

• Decision Date: 08 September 2010
• Docket Number: No. 09-2163.,09-2163.
• Citation: 619 F.3d 90
• Parties: RAFAEL RODRÍGUEZ BARRIL, INC., Plaintiff, Appellant, v. CONBRACO INDUSTRIES, INC., Defendant, Appellee.
• Court: U.S. Court of Appeals — First Circuit

619 F.3d 90

RAFAEL RODRÍGUEZ BARRIL, INC., Plaintiff, Appellant,

v.CONBRACO INDUSTRIES, INC., Defendant, Appellee.

No. 09-2163.

United States Court of Appeals,First Circuit.

Heard July 27, 2010.

Decided Sept. 8, 2010.

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.

Before BOUDIN, SELYA and GAJARSA, ^* Circuit Judges.

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 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 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, 58 S.Ct. 817, 82 L.Ed. 1188 (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, 108 S.Ct. 2239, 101 L.Ed.2d 22 (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., 333 N.C. 140, 423 S.E.2d 780, 783-84 (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, 92 S.Ct. 1907, 32 L.Ed.2d 513 (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 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, 92 S.Ct. 1907. 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, 92 S.Ct. 1907;

(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, 92 S.Ct. 1907; 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, 92 S.Ct. 1907.

See also Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 632, 105 S.Ct. 3346, 87 L.Ed.2d 444 (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 that the clause was inserted in bad faith. See Carnival Cruise Lines, Inc. v. Shute, 499 U.S. 585, 595, 111 S.Ct. 1522, 113 L.Ed.2d 622 (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. 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...