Sunday, September 7, 2014

A true conflict exists between federal and local courts on the validity of forum selection clauses in Law 75 contracts

A mandatory, as opposed to a permissive, forum selection selection clause requires litigation in the chosen forum. Generally, as a matter of federal law, mandatory forum selection agreements are prima facie valid and enforceable. In Bremen v. Zapata, 407 U.S. 1 (1972), the U.S. Supreme Court held, however, that whether a forum selection clause offends a forum state's public policy can be one of a number of grounds for invalidation. Since 1972, most courts have not taken Bremen at its word and have analyzed the facts and circumstances of each case to determine enforcement.

Law 75 has a provision that a forum selection clause mandating litigation outside of Puerto Rico is null and void as against public policy. Some other dealer-friendly states like California have similar provisions. This is the same section of Law 75 that also invalidates arbitration outside of Puerto Rico in favor of the home field advantage. One would think that the Federal Arbitration Act preempts Law 75 in that respect and that enforcement of the litigation forum selection prohibition is questionable, at best. Why should arbitration receive preferential treatment from a federal policy standpoint if there are also strong federal interests at stake that weigh in favor of validating forum selection clauses? The strong public policy favoring arbitration is to enforce private agreements on their terms and that same policy of respecting liberty of contract is present when enforcing forum selection clauses.

Most federal court decisions, of which Caribbean Restaurants v Burger King Corporation, 2014 WL 2465133 (D.P.R. June 3, 2014)(Perez-Gimenez, J) is the most recent, have enforced forum selection clauses in dealer's contracts governed by Law 75. Federal courts have reasoned that important federal interests of respecting liberty of contract and freedom of commerce outweigh parochial provisions in legislation like Law 75 requiring litigation of dealer disputes in home courts. Further, federal courts have predicted that the Supreme Court of Puerto Rico would, after a series of decisions adopting federal law on the enforcement of forum selection clauses, disregard the prohibition in Law 75 and give more weight to federal policy interests.

Wait. Is it so clear? An intermediate appellate court decision in Caribe RX v. Grifols Inc., 2014 WL 2527399 (TA April 14, 2014) bucks the trend and it does, in the most simplistic and superficial of holdings: Article 3-B of Law 75 means that the clause in the distributor agreement providing for litigation in North Carolina, U.S.A. is illegal and that's dispositive. Forget that federal courts over the past decade have held to the contrary, or that Puerto Rico's highest court has been predicted to validate such a clause in a Law 75 contract. No mention was made of those federal decisions on point.

Never mind that the distribution agreement in Grifols was valid, there was negotiation between sophisticated commercial parties, consent and valid consideration. No fraud or duress etc. Never mind either that North Carolina, the chosen forum in Grifols, predictably would have been led to apply Law 75's just cause requirement from its adoption and application of the Restatement of Conflict of Laws. The forum selected in Grifols was not a rogue foreign state. The Puerto Rico dealer did not have to litigate with Grifols in Iraq or Syria. This would not be Mr.Tom Hanks poised as Captain Phillips had he been contractually required to litigate in Somalia a case against his carrier-employer for his damages resulting from his abduction and torture on Somalia's coastline. It is after all North Carolina, U.S.A.

Is Grifols a one of its kind decision? Is the message that contracts in Puerto Rico should not be respected? If so, how can that result be reconciled with the strong, if not imperative, public policy in Puerto Rico's legislation enacted to attract foreign capital investment? How is the Grifols decision conducive for Puerto Rico to establish the "business friendly" environment that the Federal Reserve Bank of New York recommended in its report as one of the steps for Puerto Rico to climb out of our economic malaise? This Grifols ruling is under the radar screen but the repercussions for business interests in Puerto Rico are huge.

In the meantime, and subject matter jurisdiction permitting, who would blame the principal for choosing to litigate PR dealer disputes in the federal forum? Forum shopping takes a new twist in PR dealer contract cases involving choice of forum provisions.

Stay tuned. Maybe the PR legislature will listen and amend Law 75 or the PR Supreme Court will pay attention to take action when the proper case comes before it.

The author represented Grifols in the case.