Stereo Gema, Inc. v. Magnadyne Corp.

• Decision Date: 23 September 1996
• Docket Number: Civil No. 95-1484(HL).
• Citation: 941 F.Supp. 271
• Parties: STEREO GEMA, INC., Plaintiff, v. MAGNADYNE CORPORATION, Defendant.
• Court: U.S. District Court — District of Puerto Rico

941 F.Supp. 271

STEREO GEMA, INC., Plaintiff, v. MAGNADYNE CORPORATION, Defendant.

Civil No. 95-1484(HL).

United States District Court, D. Puerto Rico.

September 23, 1996.

Ana M. Sabbagh-Thorne, San Juan, PR, for Stereo Gema, Inc.

Jorge I. Peirats, Pietrantoni Mendez & Alvarez, Hato Rey, PR, for Magnadyne Corporation.

OPINION AND ORDER

LAFFITTE, District Judge.

Before the Court is Defendant Magnadyne Corporation's motion to dismiss pursuant to Federal Rule 12(b)(3). Magnadyne is a California corporation that imports and distributes car alarms. Plaintiff Stereo Gema ("Gema") is a Puerto Rico corporation that bought and distributed Magnadyne's products in Puerto Rico. Gema brings this action for damages under the Sherman Anti-Trust Act,¹ Puerto Rico's anti-monopoly laws,² breach of contract, and the Puerto Rico Dealers' Act,³ commonly known as "Law 75." Gema alleges jurisdiction both on the basis of a federal question⁴ and on the basis of diversity of the parties.⁵

In its complaint Gema alleges that it was the exclusive distributor of Magnadyne products in Puerto Rico; that Gema developed the Puerto Rico market for Magnadyne's products; that Magnadyne terminated the parties' relationship without just cause; that this termination constituted a breach of contract and that Magnadyne's pricing structure with its current distributor violates both federal anti-trust and Puerto Rico anti-monopoly laws. In its motion to dismiss, Magnadyne invokes the forum selection clause in an "Agreement for Purchase of Goods on Open Book Account" that was signed by Carlos Arbucia Yero, Gema's president. Paragraph twelve of the agreement reads as follows:

In the event that suit is instituted to enforce collection of any obligation of the Buyer to the Seller then the laws of the State of California shall be exclusively applicable with respect to such dispute. Further, all disputes between the Buyer and Seller arising out of their relationship and arising out of the terms of this Agreement or any purchase of goods from the Seller subsequent to the execution date of this Agreement, shall be submitted to a court of original jurisdiction which jurisdiction shall be the County of Los Angeles, State of California. In this regard, the parties acknowledge that Los Angeles County not only represents the principal place of business of the Seller but also the place of consummation of this Agreement; final negotiations of such terms and full performance of the Seller and delivery of said goods to Buyer's risk.

Docket no. 14. The agreement identifies Gema as Buyer and Magnadyne as Seller. In its motion to dismiss, Magnadyne argues that the agreement's forum selection clause should be enforced and the complaint should be dismissed. Gema opposes the motion and argues that enforcement of the clause would inconvenience Plaintiff and deprive it of its day in court. For the reasons set forth below, the Court grants the motion to dismiss.

DISCUSSION

1. The Erie issue

At the outset, the Court must first determine what law to apply in reviewing the forum selection clause. One of Gema's claims is based on the Sherman Anti-Trust Act. To the extent that this Court's jurisdiction is based on a federal question, federal law applies. See Bense v. Interstate Battery System of America, Inc., 683 F.2d 718, 720-22 (2nd Cir.1982) (applying federal common law on forum selection clauses to an anti-trust claim); see also Stewart Organization, Inc. v. Ricoh Corp., 487 U.S. 22, 26 n. 3, 108 S.Ct. 2239, 2242 n. 3, 101 L.Ed.2d 22 (1988) (In a case where jurisdiction was based both on diversity and a federal question, the presence of a federal question would "cut only in favor of the application of federal law.").

However, Gema also alleges jurisdiction based on diversity of the parties. In this context, the determination of what law to apply is not quite so straightforward, although the Court ultimately reaches the same conclusion. A federal court sitting in diversity must determine, pursuant to the holdings of Erie R. Co. v. Tompkins, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188 (1938) and its progeny, whether federal or state law is controlling. Under the Erie doctrine, a federal court with diversity jurisdiction applies state substantive law and federal procedural law. Gasperini v. Ctr. for Humanities, Inc., ___ U.S. ___, ___, 116 S.Ct. 2211, 2219, 135 L.Ed.2d 659 (1996). In this case, the Court must determine whether federal or Puerto Rico law on forum selection clauses is applicable.

In cases where federal law and state law coincide on the issue in question, it is unnecessary for the court to make a full Erie analysis. See Lambert v. Kysar, 983 F.2d 1110, 1116-17 (1st Cir.1993); Instrumentation Assoc. v. Madsen Elec. (Canada) Ltd., 859 F.2d 4, 6-8 (3rd Cir.1988); Coastal Steel Corp. v. Tilghman Wheelabrator Ltd., 709 F.2d 190, 201-02 (3rd Cir.1983). With regard to forum selection clauses, federal courts enforce them as a matter of federal common law. See M/S Bremen v. Zapata Off-Shore Co., 407 U.S. 1, 8-18, 92 S.Ct. 1907, 1912-17, 32 L.Ed.2d 513 (1972); Lambert, 983 F.2d at 1116. The Puerto Rico Supreme Court has adopted the federal jurisprudence on this issue. See Unisys Puerto Rico, Inc. v. Ramallo Brothers Printing, Inc., 91 J.T.S 69, 8855-56 (1991); Banco Popular de Puerto Rico v. Airborne Group PLC, 882 F.Supp. 1212, 1215 (D.P.R.1995). California courts also favor the enforcement of forum selection clauses. See Smith, Valentino & Smith, Inc. v. Superior Court of Los Angeles County, 17 Cal.3d 491, 495-96, 551 P.2d 1206, 131 Cal.Rptr. 374 (1976); Bancomer, S.A. v. Superior Court, 44 Cal. App.4th 1450, 1457, 52 Cal.Rptr.2d 435 (Cal. App. 2nd Dist.1996). Because federal courts, California state courts, and the Puerto Rico Supreme Court all favor forum selection clauses, it would appear that this Court need not resolve an Erie issue in this case. This is true with regard to Gema's claims for breach of contract and for violations of Puerto Rico's anti-monopoly laws.

The Erie issue arises, however, with regard to Gema's Law 75 claim. Law 75 contains a provision dealing with forum selection clauses. It reads in pertinent part as follows:

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 (Supp.1991). This provision of Law 75 disfavors forum selection clauses; federal common law favors them. Accordingly, the Court must determine whether federal common law or Puerto Rico law controls on this issue.

The Court is unaware of any First Circuit decisions on the enforceability of forum selection clauses in the context of a Rule 12(b)(3) motion to dismiss a Law 75 claim. The First Circuit has ruled, however, on a motion to dismiss a Law 75 claim on the grounds of forum non conveniens.⁶ See Royal Bed and Spring Co. v. Famossul Industria, 906 F.2d 45 (1st Cir.1990). In Royal Bed, the contract at issue contained a provision designating the judicial district of Curitiba in Brazil as competent to settle any dispute between the parties. 906 F.2d at 46. The First Circuit acknowledged the Law 75 provision disfavoring forum selection clauses. Id. at 48. However, the court noted that forum non conveniens "`is a rule of venue, not a rule of decision.'" Id. at 50 (quoting Sibaja v. Dow Chem. Co., 757 F.2d 1215, 1219 (11th Cir.1985)). The First Circuit concluded that state forum non conveniens laws are not binding on federal courts sitting in diversity courts and decided the case based upon federal principles and considerations of forum non conveniens. Id. at 50. In its decision the court affirmed the district court's ruling that Brazil was the most convenient forum for the parties' dispute. Id. at 50-53. The Royal Bed decision indicates that the First Circuit's position is that the enforceability of forum selection clauses should be decided by federal, rather than state, rules. A subsequent First Circuit case, however, categorized the Royal Bed decision as "tentatively treat[ing] a forum selection clause as procedural for the limited purposes of the factor analysis required under the forum non conveniens doctrine." See Lambert, 983 F.2d at 1116-17 n. 10. Notwithstanding this cautionary note in Lambert, the Court finds the Royal Bed decision to be highly persuasive in the present analysis. Royal Bed involved a motion to dismiss a Law 75 case based on a forum selection clause that required the dispute be brought in Brazil; the present case involves a motion to dismiss a Law 75 case based on a clause that requires the dispute be brought in California. Because of the similarity of the cases, the Court finds that the enforceability of the forum selection clause at issue should be decided by federal common law.

A majority of other courts have reached similar conclusions and held that a forum selection clause is a procedural issue governed by federal law. The Second, Ninth, and Eleventh Circuits have all applied federal common law in ruling on the enforceability of these clauses. See Jones v. Weibrecht, 901 F.2d 17, 19 (2nd Cir.1990); Manetti-Farrow Inc. v. Gucci America, Inc., 858 F.2d 509, 512-13 (9th Cir.1988); Stewart Organization, Inc. v. Ricoh Corp., 810 F.2d 1066, 1067-69 (11th Cir.1987) (en banc), aff'd on other grounds, 487 U.S. 22, 108 S.Ct. 2239, 101 L.Ed.2d 22 (1988). Other district courts have followed suit and applied federal common law. See Frediani & Delgreco, S.P.A. v. Gina Imports, Ltd., 870 F.Supp. 217, 219-20 (N.D.Ill.1994); Knutson v. Rexair, Inc., 749 F.Supp. 214, 216-17 n. 1 (D.Minn.1990); American Performance, Inc. v. Sanford, 749 F.Supp. 1094, 1096-97 (M.D.Ala.1990); Moretti & Perlow Law Offices v. Aleet Assoc., 668 F.Supp. 103, 105-06 (D.R.I.1987); Northeast...