First Circuit enforces forum selection clause in agreement protected by Law 21

Puerto Rico Law 21 protects sales representatives from unjustified actions by their principals, much like Law 75 protects dealers. Law 21 provides that, regardless of a contractual provision to the contrary, sales representation agreements covering the Puerto Rico territory shall be governed by Law 21 and no such agreement can be terminated without just cause.

The agreement in the case had both a choice of law clause providing for North Carolina law and a compulsory choice of forum provision for litigation in North Carolina. The principal terminated the agreement and, after removal of the dealer’s complaint to federal court, the district court enforced the choice of forum clause granting a Rule 12b6 motion and dismissed the action without prejudice.

In Barril v. Combraco Industries, No. 09-2163 slip op. (Sept. 8, 2010), the First Circuit affirmed. The court followed the federal standard in Bremen v. Zapata, 407 U.S. 1 (1972), and skirted the issue whether enforcement of a forum selection clause is procedural or substantive, noting that both Puerto Rico and North Carolina follow the Zapata standard. Appellant argued that enforcement of the clause, under Zapata’s fourth prong, was invalid because it contravened the strong public policy of the forum behind Law 21. The court disagreed. The court noted that Law 21 does not by its terms forbid the enforcement of a choice of forum clause, but only a choice of law clause insofar as it “would prevent Law 21’s substantive protections from being given effect.” (citation omitted). The court rejected the argument that North Carolina law precludes courts from giving effect to the laws of another state or territory, so that North Carolina courts are just as capable to enforce Law 21 to the extent that it otherwise applies despite the choice of law clause.


Author’s note: Combraco paves the way to enforce choice of law clauses of states other than Puerto Rico to the extent those laws otherwise apply. PR Law 21 presumptively governs the substantive aspects of the contract’s termination and resulting damages, but other substantive aspects governing other claims or the interpretation of the agreement would be governed by the chosen law when not offensive to Law 21. As to Law 21’s preemption, the analysis is circumscribed to contractual provisions that render Law 21’s substantive protections inoperative. That is, where an agreement permits termination without cause or disallows any recovery of compensatory damages to an exclusive sales representative there would be preemption under Law 21. Where the agreement is not contrary to express substantive provisions in Law 21 (or Law 75 for that matter) or when consistent with those laws, it is likely that the chosen law of another state will apply to govern the enforcement of those other provisions in the agreement. If the agreement were to be governed by Puerto Rico law, then the Civil Code, or other provisions of the Commerce Code, would oversee the enforcement of provisions not expressly governed by Laws 21 or 75. An example is the Supreme Court of Puerto Rico’s recent case holding that the enforcement of a non-compete provision in a franchise agreement (to which Law 75 applies on its face) is governed by the Civil Code as Law 75 is silent on the issue. With Combraco, it remains to be seen if there is a change in the body of federal cases enforcing forum selection clauses despite Law 75’s express prohibition and what weight will be given to Law 75 under Zapata. My prediction is that the strong federal law interest to enforce reasonable forum selection clauses under Zapata (and the Federal Arbitration Act when the clause requires arbitration outside Puerto Rico) will continue to continue to override Law 75’s public policy interests.

Is the federal court a more favorable forum for principals in Law 75 or Law 21 cases? Federal court enforces choice of law and forum selection clauses

Despite the possible disadvantages to defendants of trial by jury in federal civil cases (there is no right to trial by jury for ordinary civil cases in local Puerto Rico courts), many defendants opt to file first in federal court or remove to federal court cases filed against them in the local courts. A perception may exist that federal courts are more receptive or uniform in the resolution of cases by summary judgment than the local courts. With Daubert's requirements for the admission of expert testimony, one could argue that federal courts are more rigorous in their gatekeeping function to limit or exclude expert testimony in commercial cases than the local courts in bench trials generally are. The U.S. District Court of Puerto Rico and the First Circuit have also developed over decades a body of jurisprudence settling many Law 75 and Law 21 issues raised in diversity cases. For these reasons, a defendant may have reason to think that the federal court is a more favorable forum even considering the risk of trial by jury.

One example is Rodriguez Barril v. Conbraco Industries, 2009 WL 1940424 (D.P.R. June 30, 2009)(Garcia-Gregory, J.), where a sales representative filed a termination action against the principal under Law 21 in the local court. After defendant removed the case on grounds of diversity jurisdiction, plaintiff attacked with a motion for a preliminary injunction. Defendant responded with a motion to dismiss to enforce a forum selection clause selecting the law and courts of North Carolina. The court referred the motions to a U.S. Magistrate Judge (Velez-Rive) who recommended a dismissal of the action. After de novo review, the court agreed with the Magistrate and dismissed the action without prejudice. The court concluded that federal law favored the enforcement of forum selection clauses, the clause in the agreement was mandatory not permissive, and Law 21 did not proscribe the enforcement of forum selection clauses. As to the choice of law clause of North Carolina, to the exclusion of Puerto Rico law, the court concluded that “Plaintiff knew that these provisions would be enforced in the event of an alleged breach.” Note that the court did not have before it a Law 75 claim and the outcome may not necessarily be the same in that situation.

Lesson learned: choose carefully where to file or defend a Law 75 or Law 21 case depending on the legal issues at stake as the forum may determine the outcome.