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CARIBBEAN WHOLESALES & SERV. CORP. v. US JVC CORP.

June 14, 1994

CARIBBEAN WHOLESALES & SERVICE CORPORATION, Plaintiff,
v.
US JVC CORPORATION, Defendant.


Leisure


The opinion of the court was delivered by: PETER K. LEISURE

LEISURE, District Judge:

 In this action, plaintiff ("Caribbean Wholesales") seeks to recover for violations of Puerto Rico's Dealers' Contracts Act, Law No. 75 of June 24, 1964, P.R. Laws Ann. tit. 10 § 278 (1978 & Supp. 1989) ("Law 75"). The defendant ("JVC") has moved to dismiss this case pursuant to Fed. R. Civ. P. 12(b)(6) for failure to state a claim upon which relief can be granted. For the reasons stated below, the motion is denied.

 BACKGROUND

 Caribbean Wholesales and JVC are parties to an agreement (the "Distribution Agreement") which provides that Caribbean Wholesales is a distributor of JVC products in Puerto Rico. The Distribution Agreement contains a forum selection clause specifying that suits brought by JVC relating to the agreement must be brought in New York State Supreme Court or in the District Court for the Southern District of New York. The Distribution Agreement also contains a choice of law clause specifying that the agreement shall be construed in accordance with New York law.

 On or about April 27, 1993, Caribbean Wholesales filed suit in Puerto Rico Superior Court contending that JVC had violated Law 75. JVC removed the case to United States District Court for the District of Puerto Rico. JVC then moved to dismiss the action pursuant to Fed. R. Civ. P. 12(b)(3) and 12(b)(6) and 28 U.S.C. § 1406(a) contending that Puerto Rico was an improper venue in light of the Distribution Agreement's forum selection clause. The district court held that it would not be in the interests of justice to dismiss the case, but ordered the case transferred to this Court pursuant to 28 U.S.C. 1404(a).

 DISCUSSION

 JVC contends that the law of New York, rather than that of Puerto Rico, is applicable to this action and, consequently, that Caribbean Wholesales, whose claims are premised on the application of Puerto Rico law, has failed to state a claim upon which relief can be granted.

 I. WHAT CHOICE OF LAW RULES GOVERN THIS DISPUTE?

 As an initial matter, this Court must determine whether to apply the choice of law rules of New York or of Puerto Rico. To do so, the Court must address a question of first impression in this Circuit: whether, subsequent to a transfer based on a forum selection clause, the transferee court should apply the law of the state in which it sits, or that of the state in which the transferor court sat.

 As a general matter, the law applicable subsequent to a transfer depends upon the statutory provision pursuant to which the transfer was made. If the transfer was made pursuant 28 U.S.C. 1406(a), because venue was improper in the transferor court, then the transferee state's law is applicable. Martin v. Stokes, 623 F.2d 469, 472 (6th Cir. 1980); Geehan v. Monahan, 382 F.2d 111, 114 (7th Cir. 1967); see also Davis v. Costa-Gavras, 580 F. Supp. 1082, 1086 (S.D.N.Y. 1984). If the transfer was made pursuant to 28 U.S.C. 1404(a), for the convenience of the parties and related considerations, then the transferor state's law is generally applicable. See Van Dusen v. Barrack, 376 U.S. 612, 639, 11 L. Ed. 2d 945, 84 S. Ct. 805 (1964).

 The courts that have addressed the question of what law should apply subsequent to a transfer based on a forum selection clause have considered the governing statutory provision to be § 1406(a), reasoning that venue is improper when an action is brought contrary to a forum selection clause. Accordingly, these courts have applied the transferee state's law. See Koutsoubos v. Casanave, 816 F. Supp. 472, 475 & n.5 (N.D. Ill. 1993); Hoffman v. Burroughs Corp., 571 F. Supp. 545, 550-51 (N.D. Tex. 1982) (transferring case pursuant to § 1406(a) so that the transferee state's law would apply); see also Julia L. Erickson, Comment, Forum Selection Clauses in Light of the Erie Doctrine and Federal Common Law: Stewart Organization v. Ricoh Corporation, 72 Minn. L. Rev. 1090, 1092 (1988) (advocating application of transferor state's law); Full-Sight Contact Lens Corp. v. Soft Lenses, Inc., 466 F. Supp. 71, 74 (S.D.N.Y. 1978) (not discussing applicable law, but transferring case pursuant to § 1406(a) based on forum selection clause).

 The application of the transferee court's law is a result with considerable appeal. By agreeing to litigate their dispute in a particular forum, parties implicitly agree to the application of the forum's law -- or more accurately, to the application of the forum's choice of law rules since these rules may in turn direct the application of another forum's substantive law. *fn1" Cf. The Bremen v. Zapata Off-Shore Co., 407 U.S. 1, 14 n.15, 32 L. Ed. 2d 513, 92 S. Ct. 1907 (1972) ("It is . . . reasonable to conclude that the forum clause was also an effort to obtain certainty as to the applicable substantive law.") Applying the transferee state's law effects this anticipated result and thereby supports the parties' efforts to ameliorate the vicissitudes and complexities of our federal system. Cf. id. at 13 ("The elimination of all such uncertainties by agreeing in advance on a forum acceptable to both parties is an indispensable element in international trade, commerce, and contracting."); Stewart Organization, Inc. v. Ricoh Corp., 487 U.S. 22, 33, 101 L. Ed. 2d 22, 108 S. Ct. 2239 (1988) ("Courts should announce and encourage rules that support private parties who negotiate [forum selection] clauses.") (Kennedy, J., and O'Connor, J., concurring).

 The viability of applying the transferee state's law, however, has been thrown into considerable doubt by the United States Supreme Court's decision in Stewart Org., Inc. v. Ricoh Corp., 487 U.S. 22, 101 L. Ed. 2d 22, 108 S. Ct. 2239 (1988). In Stewart, the Court undermined the rationale of those cases applying the transferee court's law because it held that a motion to transfer premised on a forum selection clause is to be decided under the rubric, not of § 1406(a), but of § 1404(a). Id. at 28. Indeed, though the question was not directly at issue in Stewart, the proposition that a forum selection clause transfer would not result in a change in applicable law was an important element in the Court's decision. At issue between the majority and Justice Scalia in dissent was whether the validity of a forum selection clause should be determined by state or federal law. Justice Scalia argued that the validity of a forum selection clause is a question of substantive law, and that state law should therefore govern under Erie R. Co. v. Tompkins, 304 U.S. 64, 82 L. Ed. 1188, 58 S. Ct. 817 (1938). See Stewart, 487 U.S. at 37-40 (Scalia, J., dissenting). The basis for the majority's rejection of this argument was that a § 1404(a) transfer is a "housekeeping measure" that does not carry with it a change in applicable law. Id. at 32 (quoting Van Dusen, ...


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