Tuesday, July 9, 2019
Enforcement of mandatory forum selection clause generates multiple/multi-state litigation and a mandamus petition in the First Circuit
Why do Puerto Rico distributors sign agreements with foreign or stateside forum selection and choice of law clauses when the performance of the agreement will be in Puerto Rico? What suppliers are after is obvious: to minimize the exposure to risk that comes from litigating Law 75 or Law 21 claims in Puerto Rico courts or the potential exposure to substantial economic damages. Of course, many distributors- often the principal players in the market- refuse to sign non-Puerto Rico forum or law provisions in distribution agreements routinely or as a policy or practice. What distributors want to avoid should be obvious too: prevent waivers of Law 75 rights.
Other distributors go ahead and sign those types of agreements often with little to no negotiation. Three reasons come to mind as to why they do and the first two are more probable than the third: 1) distributors lack commercial leverage and bargaining power or are not well informed and those clauses, which often include ADR provisions (arbitration and mediation), are deal breakers for the suppliers; 2) distributors, like other businesses, do a risk-reward analysis and knowingly and willingly assume the risk that comes with accepting those clauses as a condition to receive a new appointment leaving the fight to challenge those provisions in a Puerto Rico court for another day, or 3) the distributor is fraudulently induced to agree to ADR or forum selection provisions under false pretenses or with provisions that are hidden in fine print or reside in the internet for their click box acceptance. The third possibility presents one of the few and rare exceptions that may legally provide grounds to invalidate those types of clauses.
What should be clear is that once a distributor agrees to a written ADR or forum selection provision it is most probably stuck with it. Let’s be realistic, the chances are virtually nil that a federal court will invalidate a mandatory forum selection clause even in an agreement governed by Law 75. Chances in a Puerto Rico local court improve somewhat depending on the court or judge, but removal to federal court is likely to nip the local court’s intervention at its bud.
The case that I’m about to brief, Vitalife, Inc. v. Omniguide, Inc., 353 F. Supp. 3d 150 (D.P.R. 2018), is a run of the mill federal case validating a mandatory forum selection clause but with a twist of mandamus. There, a U.S. supplier of medical devices terminated unilaterally a distribution agreement with a Puerto Rico distributor. The Puerto Rico distributor threatened preliminary injunctive relief under Law 75, but the supplier quickly responded with a declaratory judgment action of its own in Massachusetts federal court. The agreement had both a mandatory forum selection clause and choice of law clause of Massachusetts. Not to be outdone, the distributor responded a day later with a suit in local Puerto Rico court for Law 75 termination damages and other remedies. The supplier removed the case to federal court on diversity jurisdiction grounds and moved to dismiss or transfer the case to enforce the forum selection clause.
Here comes the rub. The federal district court denied the supplier’s dispositive motion without prejudice. It’s not clear from the opinion why. Obviously, a denial without prejudice meant that, if the action in Puerto Rico moved forward, it would have mooted the forum selection clause. The order denying without prejudice a motion to dismiss on those grounds is not appealable. In a daring and bold move, the supplier filed a petition for a writ of mandamus in the First Circuit. The First Circuit denied the writ without prejudice pending a determination on the merits of the motion to dismiss or transfer the case to Massachusetts federal court.
After settlement negotiations failed, the federal court (Besosa, J.) in a thoughtful opinion discussing the relevant Supreme Court cases, analyzed the standards to evaluate transfer motions when there is an enforceable agreement with a mandatory forum selection clause. The court found that the relevant analysis did not require an evaluation of the private interests at stake in considering whether or not to transfer the case. As the federal court in this district has uniformly held in other cases, the court determined that Law 75’s provision invalidating litigation outside Puerto Rico yields to precedent enforcing mandatory forum selection provisions. The court in a footnote made it clear that it was not passing judgment on the validity of the choice of law provision. With that, the court transferred the case putting an end to the Puerto Rico litigation. Cf. Aurora Casket Company v. Caribbean Funeral Supply Corp., 2017 WL 5633102 (D.P.R. 2017) (granting in part transfer motion and severed claims against parties not signatories to agreement with forum selection clause).
How likely or not is it that the Massachusetts federal court will apply Law 75 to the agreement or its termination? That was the risk that this distributor apparently willingly or knowingly assumed at its own peril when it signed the agreement.