Puerto Rico, Law 75, and Forum Selection Clauses

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Many years ago, Puerto Rico’s legislature approved the Dealer’s Contract Act—known as Law 75—to protect local distributors. Law 75 provides that a principal dealing with a distributor in Puerto Rico may terminate a distribution agreement only for “just cause.” In an attempt to evade this law, out-of-state principals frequently write choice-of-law clauses and forum selection clauses choosing the laws and courts of other jurisdictions into their distribution contracts with Puerto Rican counterparties. The question is whether these provisions will be given effect by courts in Puerto Rico.

The answer, as it turns out, depends on whether the case is heard in commonwealth or federal court. The intermediate appellate court in Puerto Rico has applied Law 75 to conclude that forum selection clauses in distributor contracts are unenforceable. The federal district courts in Puerto Rico, by contrast, have consistently enforced these provisions notwithstanding Law 75. Although this disparity raises serious issues under Erie Railroad Company v. Tompkins and its progeny, the federal courts in Puerto Rico do not seem to be particularly troubled by this. Their indifference is on full display in Meta Med LLC v. Insulet Corporation.

Meta Med LLC v. Insulet Corporation

Lyvette Mercado Vélez (“Mercado”) is a resident of Puerto Rico. In September 2021, she entered into a contract with Insulet Corporation (“Insulet”), a company headquartered in Massachusetts, to provide trainings in Puerto Rico for diabetes treatment products. She subsequently created a limited liability company—Meta Med LLC (“Meta Med”)—which entered into a separate contract with Insulet relating to the same services.

In September 2023, Insulet terminated its agreements with Mercado and Meta Med and chose another company to be its exclusive distributor in Puerto Rico. In October 2023, Mercado and Meta Med sued Insulet in federal court in Puerto Rico, seeking a declaratory judgment that Law 75 applied to the facts at hand. They also asserted other claims, including breach of the covenant of good faith and fair dealing, under Puerto Rico law.

Insulet moved to dismiss or transfer Mercado’s claims on the grounds that the September 2021 contract contained a Massachusetts forum selection clause and choice-of-law clause:

This Agreement shall be governed by the laws of the Commonwealth of Massachusetts. Both parties hereby (1) irrevocably submit to the jurisdiction of any state or federal court sitting within Massachusetts in any action or proceeding brought to enforce or otherwise arising out of or relating to this Agreement, (2) irrevocably waive to the fullest extent permitted by law any objection that it may now or hereafter have to the laying of venue in any such action or proceeding in any such forum in Massachusetts, and (3) hereby further irrevocably waive any claim that any such forum is an inconvenient forum.

Mercado advanced three arguments as to why the forum selection clause should be not enforced. First, she argued that the clause was permissive rather than mandatory. Second, since the agreement with Meta Med lacked a forum selection clause, she argued that it would be inefficient for her to litigate in Massachusetts while Meta Med litigated in Puerto Rico. Third, she argued that enforcing the clause was contrary to the public policy of Puerto Rico as expressed in Law 75.

Is the Clause Mandatory?

The district court held that the Massachusetts forum selection clause was mandatory and required any and all disputes to be resolved in Massachusetts. This holding is difficult to defend.

The district court correctly stated the rule—the inquiry into whether a clause is mandatory or permissive “usually hinges on whether the provision includes any terms with a mandatory connotation, such as ‘shall’ or ‘must.’” The problem is that the forum selection clause here at issue did not contain the word “shall.” Nor did it contain the word “must.” Nor did it contain any other language with a mandatory connotation. Nevertheless, the court held that the clause was mandatory.

The court based its conclusion in part on the fact that the word “shall” appeared in the choice-of-law clause. But this fact is irrelevant. Although the choice-of-law clause and the forum selection clause appear in the same paragraph, they are distinct and separate provisions. The district court also placed significant weight on the fact that the parties had “irrevocably” submitted to jurisdiction in Massachusetts and had “irrevocably” waived their right to challenge venue or raise the issue of forum non conveniens. But nothing about the word “irrevocably” signifies an intent to litigate exclusively in Massachusetts.

Finally, the district court pointed to a handful of decisions where the courts had concluded that clauses containing similar language were mandatory. These decisions are, however, inconsistent with the vast majority of cases holding that merely “submitting” to jurisdiction or “waiving” objections to venue does not convey an intent to litigate there and nowhere else.

Purely as a matter of contract interpretation, therefore, the district court erred in concluding that the forum selection clause was mandatory. This was a permissive clause. It did not require litigation to occur exclusively in Massachusetts.

Would Enforcement Lead to Litigation Inefficiency?

The district court devoted virtually no attention to Mercado’s argument that it would be “impractical, cumbersome, and illogical” to require her to litigate in Massachusetts while Meta Med’s parallel claims arising out of the same facts proceeded in Puerto Rico. This argument is routinely accepted by state courts across the United States as a reason not to enforce a forum selection clause. The argument has garnered less traction with the federal courts. If I had been the judge hearing this case, I might very well have ruled in Mercado’s favor and refused to enforce the clause as a matter of judicial efficiency. I cannot say, however, that the district court’s decision on this issue was unusual given the long line of federal cases enforcing clauses in the face of similar arguments.

Is Enforcement Contrary to Puerto Rico Public Policy?

The Puerto Rico legislature has made it crystal clear that Law 75 represents the strong public policy of Puerto Rico. In an article published in 2017, Daniel Limes Rodriguez noted that the “original text of Act 75 expressly declared the ‘public order’ of the provisions contained therein and proscribed any waiver of the rights provided by the statute.” Federal courts in many U.S. states—including, most notably, California—routinely refuse to enforce forum selection clauses choosing the courts of other jurisdictions in the face of laws declaring that rights conferred may not be waived. These courts have reasoned that if the forum selection clause is enforced, then the chosen court will probably enforce the choice-of-law clause. And if the choice-of-law clause is enforced, then the plaintiff will be deprived of the protections conferred by the law. To avoid this outcome, and to validate the legislature’s command that the rights conferred may not be waived, these courts refuse to enforce the forum selection clause.

This is not what the district court did in Meta Med. It acknowledged that the U.S. Supreme Court has long held that a forum selection clause should not be given effect when “enforcement would contravene a strong public policy of the forum in which suit is brought, whether declared by statute or by judicial decision.” But the court concluded that forum public policy was only one factor to consider in deciding whether a clause should be given effect. The list of other factors includes whether (1) the clause was the product of fraud or overreaching; (2) its enforcement would be unreasonable and unjust; or (3) proceedings in Massachusetts will be so gravely difficult and inconvenient that Mercado will be deprived of her day in court.

The court then proceeded to weigh these factors. Since they all cut in favor of enforcing the clause, it concluded that the clause should be given effect even though it was contrary to Puerto Rico public policy. In so holding, the court cited half-dozen other cases where the federal district courts in Puerto Rico rejected a similar argument. There are, however, at least two problems with the court’s decision.

First, the relevant passage in The Bremen states that a clause is not enforceable when it is contrary to the public policy of the forum. Full stop. Nothing in that decision contemplates a weighing of public policy against other factors. To the extent that prior decisions in the U.S. District Court for the District of Puerto Rico have held otherwise, they have simply misread the Supreme Court’s seminal decision on this issue.

Second, the commonwealth courts of Puerto Rico almost certainly would not have enforced the Massachusetts forum selection clause if the case had been litigated there. Daniel Limes Rodriguez has pointed out that a 2014 decision by the intermediate appellate court in Puerto Rico, Caribe RX Services, Inc. v. Grifols, Inc., specifically held that a forum selection clause in a distribution agreement was unenforceable because it was contrary to the public policy of Puerto Rico as expressed in Law 75.

The very existence of this decision raises serious questions about the propriety of the federal cases cited by the district court in Meta Med. The line of cases beginning with Erie Railroad Company v. Tompkins stands for the proposition that federal courts sitting in diversity should not create incentives for litigants to forum shop for law as between state and federal courts in the same jurisdiction. As things currently stand in Puerto Rico, forum selection clauses choosing the courts of other states in distribution agreement are enforceable in federal court but unenforceable in commonwealth court. The opportunities for forum shopping—and the resultant Erie problems—are obvious.