Rafael Rodriguez Barril, Inc. v. Conbraco Industries, Inc.

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-