Vernet v. Serrano-Torres

United States Court of Appeals
For the First Circuit

No. 07-2699

RUTH VERNET; FRANK VERNET; CONJUGAL PARTNERSHIP
VERNET-VERNET; ALEXANDER VERNET; DAVID VERNET,

Plaintiffs, Appellants,

v.

JOSÉ SERRANO-TORRES; COOPERATIVA DE SEGUROS MÚLTIPLES;
FORD MOTOR COMPANY; BLUE WATER PALMAS, LTD.,

Defendants,

ICN PHARMACEUTICALS DUTCH HOLDINGS B.V.

Defendant, Appellee.

APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF PUERTO RICO

[Hon. Daniel R. Domínguez, U.S. District Judge]

Before

Torruella, Stahl, and Howard,
Circuit Judges.

Jorge M. Suro-Ballester, for appellants.
Luis G. Martínez-Lloréns, with whom Luis Martínez Lloréns Law
Offices, P.S.C., was on brief for appellee.

May 21, 2009
 TORRUELLA, Circuit Judge. This action arises from a car

accident that occurred after a Christmas party held by defendant-

appellee ICN Pharmaceuticals ("ICN") for its employees. The party

was held at Palmas del Mar resort complex ("Blue Water Palmas").

José Serrano Torres ("Serrano"), an employee of ICN, allegedly left

the party legally drunk and crashed into plaintiff-appellant Ruth

Vernet's vehicle in a residential area in Palmas del Mar.

Plaintiff-appellants1 ("plaintiffs") claim that under Articles 1802

and 1803 of the Civil Code of Puerto Rico, ICN is liable for the

physical and economic injuries that she suffered as a result of the

car accident.2 ICN moved to dismiss the complaint and the district

1
Plaintiff-Appellants include the victim, Ruth Vernet; her
spouse, Frank Vernet; and her two sons, Alexander Vernet and David
Vernet.
2
Article 1802 of the Puerto Rico Civil Code states that "[a]
person who by an act or omission causes damage to another through
fault or negligence shall be obliged to repair the damage so done."
P.R. Laws Ann. tit. 31, § 5141.

Article 1803 of the Puerto Rico Civil Code states:

The obligation imposed by [Article 1802] is demandable,
not only for personal acts and omissions, but also for
those of the persons for whom they should be responsible.
. . . Owners or directors of an establishment or
enterprise are likewise liable for any damages caused by
their employees in the service of the branches in which
the latter are employed or on account of their duties.
. . . The liability referred to in this section shall
cease when the liable persons mentioned therein prove
that they employed all the diligence of a good father of
a family to preclude the damage.

P.R. Laws Ann. tit. 31 § 5142.

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court granted ICN's motion. It relied on the Supreme Court of

Puerto Rico's decision in López v. Porrata Doria to dismiss the

plaintiffs' Article 1802 claim. See 2006 TSPR 149, 2006 WL 2873349

(P.R. 2006) (certified translation provided by parties). The

district court dismissed plaintiffs' Article 1803 claim by

concluding that Serrano was not acting within the scope of his

employment when the accident occurred.

After careful consideration we affirm the district

court's ruling with respect to plaintiffs' Article 1802 claim, but

reverse and remand to the district court with respect to

plaintiffs' Article 1803 claim.

I. Background

In their second amended complaint, plaintiffs allege the

following facts relevant to the instant case. On the afternoon of

December 17, 1999, ICN sponsored a Christmas party held at Blue

Water Palmas in Humacao, Puerto Rico. Plaintiffs maintain that one

of ICN's objectives in having the party was "to develop and enhance

ICN's business relationship with clients and others." Plaintiffs

point out that although ICN decided that alcohol would be served at

the party, the company failed to "circulate to its employees a

written memorandum instructing them not to drink alcohol in

excess." Further, plaintiffs claim that ICN "did not create a

committee among its employees to be on the lookout during the party

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for its employees and other attendees that might be having too much

to drink."

Serrano, an employee of ICN, drank liquor provided by ICN

at the party. He left the party that afternoon intoxicated and

proceeded to drive his vehicle. As a result of his condition,

which was beyond the legal limit permissible to drive a vehicle,

Serrano's automobile struck a car driven by Vernet, causing her

multiple physical and economic injuries. An officer present at the

scene after the accident concluded that Serrano caused the

accident.

Plaintiffs brought suit against ICN, as well as other

defendants,3 claiming that ICN was negligent in failing to control

its employees' alcohol consumption at the company activity, and in

not foreseeing that Serrano's condition could endanger third

parties such as Vernet. Specifically, plaintiffs claimed that from

3
Other defendants included Serrano, his insurance company, Ford
Motor Company, and Blue Water Palmas. On March 7, 2001, plaintiffs
filed a Notice of Voluntary Dismissal as to Ford Motor Company. On
March 22, 2001 the district court entered judgment, dismissing the
complaint without prejudice as to Ford Motor Company. On April 3,
2002, plaintiffs, Serrano, and Serrano's insurance company filed a
settlement stipulation. On April 25, 2002, the district court
entered a partial judgment, dismissing with prejudice plaintiffs'
claim against Serrano and his insurance company. On September 25,
2006 Blue Water Palmas and plaintiffs filed a settlement agreement
in the amount of $300,000 for their alleged liability in having
served Serrano excessive amounts of liquor during the course of the
ICN company party. On October 3, 2006 the district court entered
partial judgment, dismissing with prejudice plaintiffs' claim
against Blue Water Palmas. Consequently, the only remaining
parties are the plaintiffs and ICN.

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the facts alleged in the second amended complaint, ICN was liable

under Article 1802 for failing to implement reasonable measures to

control the amount of alcohol available to its employees during a

work-related activity and to control the behavior of its employees

during a work-related activity. Also, plaintiffs claimed that ICN

was liable under Article 1803 due to the fact that Serrano, its

employee, became intoxicated at and during the course of his

employment with alcoholic beverages provided by and paid for by his

employer.

ICN responded to plaintiffs' claims by filing a second

motion to dismiss. As to plaintiffs' Article 1802 claim, ICN

contended that in López, the Puerto Rico Supreme Court recognized

limited dram-shop liability applicable only to commercial

establishments in the business of selling alcoholic beverages.4

Furthermore, ICN argued that even if López were applicable to

business hosts such as itself, the Puerto Rico Supreme Court

explicitly ruled that its decision would only have prospective

effects. Thus, because López was issued after Serrano's car

accident, ICN asserted that it should not face liability.

4
We have previously described the theory of dram-shop liability
as one where "a bar or tavern may be liable for the wrongful or
injurious actions of a patron if it served alcohol to that patron
after it knew, or should have known, that the patron was already
intoxicated." Phoung Luc v. Wyndham Mgmt. Corp., 496 F.3d 85, 88
n.2 (1st Cir. 2007) (referring to dram-shop liability under
Massachusetts law). Puerto Rico does not have a dram-shop statute.

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 Regarding plaintiffs' Article 1803 claim, ICN argued that

plaintiffs' settlement with Serrano legally extinguished any

possible vicarious liability on the part of ICN because any such

liability was contingent upon the existence of Serrano's primary

liability, which no longer existed by virtue of the settlement.

ICN further argued that plaintiffs' claim under Article 1803 would

nevertheless fail on the merits because Serrano was not acting

within the scope of his employment when the accident occurred.

The district court ruled in favor of ICN and dismissed

the complaint. Plaintiffs appeal the district court's ruling.

II. Discussion

A. Standard of Review

We apply de novo review to a district court's grant of a

motion to dismiss pursuant to Federal Rule of Civil Procedure

12(b)(6). Díaz Ramos v. Hyundai Motor Co., 501 F.3d 12, 15 (1st

Cir. 2007). "[W]e, like the district court, must assume the truth

of all well-plead facts and give the plaintiff[s] the benefit of

all reasonable inferences therefrom." Ruiz v. Bally Total Fitness

Holding Corp., 496 F.3d 1, 5 (1st Cir. 2007). In this respect, to

survive a motion to dismiss, a complaint must establish "a

plausible entitlement to relief." Bell Atl. Corp. v. Twombly, 550

U.S. 544, 559 (2007).

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 B. Applicable Law

In diversity cases, such as the present one, state law

controls the substantive outcome. See Erie R.R. Co. v. Tompkins,

304 U.S. 64, 78 (1938); Univ. Emergency Med. Found. v. Rapier

Invs., Ltd., 197 F.3d 18, 19 n.1 (1st Cir. 1999). In dismissing

the complaint against ICN, the district court correctly ruled that

the substantive law of Puerto Rico favors ICN with respect to

plaintiffs' Article 1802 claim. However, we disagree with the

district court's ruling regarding plaintiffs' Article 1803 claim.

1. Article 1802 and López

A brief review of López supports our conclusion that the

district court acted correctly in dismissing plaintiffs' Article

1802 claim. See generally López, Certified Translation.5 López

involved an action against a commercial establishment pursuant to

Puerto Rico's negligence statute, contained in Article 1802 of the

Civil Code. Id. at **1-2. In López, Ricardo Calderón and Rafael

Lugo-Porrata met some friends at a local bar. Id. at *3.

Allegedly, Lugo-Porrata, even though he was visibly intoxicated,

was served alcoholic beverages at a pub. See id. at **3, 5. Later

that evening, both Calderón and Lugo-Porrata left the bar and

decided to go drag racing, during which Lugo-Porrata, the driver,

lost control of the vehicle and crashed. Id. at *4. As a result

5
There does not appear to be an official translation. However,
the parties cite to an undisputed certified translation, which we
cite to as well.

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of the crash, Lugo-Porrata was killed and Calderón was severely

injured. Id. Calderón and his parents sued the bar claiming that

it was negligent in serving Lugo-Porrata alcohol when he was

visibly intoxicated and its employee knew or should have known that

he was going to drive a car. Id. at **4-5.

The specific issue before the court was whether, pursuant

to Article 1802, a commercial establishment could be held liable

"for supplying alcoholic beverages to a person that is visibly

intoxicated and who afterward causes damages while driving an

automobile under the influence of alcohol." Id. at **1-2. The

court concluded that commercial establishments could be held

liable, yet stressed that its ruling would only have "prospective

effects." Id. at *2. In its analysis, the López court stated that

despite public policy pronouncements acknowledging the dangers

posed by intoxicated drivers, no specific legislation dealt with

the controversy in that case. Thus, the court reasoned that it

must apply general Puerto Rico tort law principles under Article

1802, noting that the provisions of Article 1802 "must be

interpreted expansively." Id. at *7 (emphasis in original).

To "enrich [its] analysis," id. at *16, the court turned

to comparative law sources in common law jurisdictions in the

United States which have faced similar situations. In looking at

jurisdictions in the United States, the court remarked that several

courts were now "imposing liability [on] those who sold alcoholic

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beverages to intoxicated . . . persons who subsequently caused

injury." Id. at *17 (emphasis in original deleted). The court

then pointed to dram-shop legislation in the United States directed

at public commercial establishments, especially bars and

restaurants. Id. at **19 & n.8. The court stated that many of

these laws were passed in part to incentivize commercial vendors of

alcoholic beverages to behave responsibly. Id. at *19.

In view of these decisions and its prior case law, the

court reasoned that those who irresponsibly sell alcoholic

beverages with knowledge of the risk it creates "violate[] the

general duty of correctness and prudence" and do so "in clear

disregard of the safety of others." Id. at *26. The court further

noted that "the granting of a license is a privilege, not a right"

and that "[w]hoever profits from an activity that puts at risk the

health and life of individuals has the obligation to act prudently

and diligently." Id.

The court thus concluded that under Article 1802 it was

"clearly appropriate" to impose liability on commercial vendors who

provide alcoholic beverages to "visibly intoxicated" individuals

who then cause harm to third parties by driving a vehicle while

intoxicated. Id. at *27. The court emphasized that "this duty of

diligence when providing alcoholic beverages is only extended to

public commercial establishments engaged in the sale of alcoholic

beverages." Id. (emphasis in original). The court reasoned that

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commercial establishments should be singled out because unlike

social hosts, for example, commercial vendors "economically

profit[] from furnishing alcohol and, therefore, ha[ve] an

incentive to encourage excess consumption." Id. Further,

commercial establishments can procure insurance "against the risks

assumed in getting [a business] up and running." Id. at *28.

These factors, the court concluded, support limiting the duty of

diligence to commercial sellers of alcoholic beverages. Id.

a. Whether López Controls

Plaintiffs argue that López does not determine the

outcome of this case. They maintain that López limited its ruling

to commercial establishments and that we are presented with a

different factual scenario here, emphasizing that there was an

employee-employer relationship between ICN and Serrano.6

We disagree and hold that López controls here. Simply

put, López does not contemplate extending liability to business

hosts like ICN. Moreover, under López, plaintiffs' Article 1802

6
Plaintiffs stress in their brief that "[o]ne of the principal
purposes of ICN in having the party during working hours, on a work
day, and where employee-attendance was mandatory was to foment and
preserve a good relationship between management and regular
employees, as well as between regular employees." Plaintiffs also
claim that during the planning phase of the party, ICN budgeted for
and took as a business expense the cost of providing alcoholic
beverages. Further, plaintiffs allege that prior to the day of the
party, ICN neither circulated a memorandum among its employees
instructing them to refrain from drinking excessively so as to not
jeopardize the well being of third persons during or after the
party; nor did ICN create a committee to watch over employees so
that they would not drink excessively.

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claims would not be cognizable because the court made clear that

its decision was to be applied only prospectively.

With respect to López's controlling effect, López did

more than just comment on the liability surrounding social hosts

and commercial vendors. Rather, the López court, in reaching its

decision, reviewed both the principles underlying Article 1802 and

the various approaches courts throughout the United States have

taken historically towards dram-shop liability. After this

comprehensive review, which included a case involving a business

host, see McGee v. Alexander, 2001 OK 78 (2001), the López court

concluded that "the duty of diligence when providing alcoholic

beverages is only extended to public commercial establishments

engaged in the sale of alcoholic beverages." López, Certified

Translation at *27 (emphasis in original). Although plaintiffs

characterize the court's holding as a narrow one, the court's

analysis instead suggests that it was opining on the larger

question of when liability extends to someone who has provided

alcohol to an intoxicated person who then causes harm to a third

party. It is clear from our reading of López that the Puerto Rico

Supreme Court did not contemplate that dram-shop liability would

extend to business hosts like ICN.

Even if we were to conclude that ICN should be treated

like a commercial vendor under López, plaintiffs' claims would

still fail. The López court explicitly stated that its ruling was

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to apply prospectively from October 6, 2006, the date of its

decision. Plaintiffs' action would have arisen, had they otherwise

qualified, seven years before the operative date.

2. Article 1803

As a preliminary matter, we must determine whether, under

Puerto Rico law, plaintiffs' claims were extinguished by their

settlement with Serrano. "[T]he default rule under Puerto Rico law

. . . recognizes the settling parties' intent as controlling." Río

Mar Assocs., LP v. UHS of P.R., Inc., 522 F.3d 159, 166 (1st Cir.

2008) (citing Szendrey v. Hospicare, Inc., 158 D.P.R. 648, 657-58,

2003 WL 751582 (P.R. 2003)). Plaintiffs' settlement agreement

provides as follows: "Notwithstanding, plaintiffs expressly reserve

the right to continue prosecuting their causes of actions against

codefendants [ICN , Blue Water Palmas], their insurance companies

and any other person or entity who might be liable to them, all in

accordance with Merle v. West Bend, Co., 97 D.P.R. 403, [1969 WL

21616 (P.R. 1969)]." From this language it is evident that

plaintiffs did not intend for the settlement agreement with Serrano

to extinguish their claims against ICN under either Articles 1802

or 1803. See Hopgood v. Merrill Lynch, Pierce, Fenner & Smith, 839

F. Supp. 98, 106 (D.P.R. 1993) (noting the Merle court's conclusion

that "[t]he clear terms of the settlement agreement reflected the

intention of the parties at the time they entered into the contract

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and controlled the outcome of the case").7 We are not aware of,

and ICN has not cited to, a case under Puerto Rico law that holds

that a plaintiff's settlement with an employee extinguishes a

vicarious liability claim against the employer.8 Rather, Puerto

Rico law suggests that the intent of the settling parties is

controlling. See Merle, 97 D.P.R. at 409. Thus, the language the

parties used in the settlement agreement controls here.

7
We have previously remarked upon "the Puerto Rico courts'
'general hostility to double recovery.'" Río Mar, 522 F.3d at 166
(quoting Villarini-García v. Hospital del Maestro, 112 F.3d 5, 8
(1st Cir. 1997)). The instant case, however, does not present us
with an issue of double recovery because the settlement agreement
here does not represent plaintiffs' actual damages. Cf. Villarini-
García, 112 F.3d at 8 (favoring dollar-for-dollar setoff of an
employer's settlement in case concerning vicarious liability where
there existed a jury award against employee physician).
8
Jurisdictions across the United States are split regarding this
proposition of law. The most recent Restatement sets out the
majority position as follows:

d. Vicariously liable parties. When multiple parties are
treated as a single entity for the purpose of assigning
responsibility . . . a settlement with one of those
parties extinguishes the liability of the others.

See Restatement (Third) of Torts: Apportionment of Liability § 16
cmt. d (2000).

However, we note that several jurisdictions have declined to
follow this majority common law rule. See Ritter v. Technicolor
Corp., 103 Cal. Rptr. 686 (Cal. Ct. App. 1972); Kellen v. Mathias,
519 N.W.2d 218 (Minn. Ct. App. 1994); Van Cleave v. Gamboni Constr.
Co., 706 P.2d 845 (Nev. 1985); Cartel Capital Corp. v. Fireco of
New Jersey, 410 A.2d 674 (N.J. 1980); Vanderpool v. Grange Ins.
Ass'n, 756 P.2d 111 (Wash. 1988); Swanigan v. State Farm Ins. Co.,
299 N.W.2d 234 (Wis. 1980).

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 Turning to merits of plaintiffs' Article 1803 claim, in

Borrego v. United States, we stated that we must consider the

following three elements in deciding whether to impose liability

under the doctrine of respondeat superior consistent with Puerto

Rico law: an employee's "a) [d]esire to serve, benefit, or further

his employer's business or interest[;] b) [whether] the act is

reasonably related to the scope of the employment[; and] c)

[whether] the agent has not been prompted by purely personal

motives." 790 F.2d 5, 7 (1st Cir. 1986) (internal quotation marks

omitted). Among these elements, "[t]he fundamental consideration

for determination of an employer's liability is whether or not the

employee's acts fall within the scope of his employment in the

sense that they furthered a desire to serve and benefit the

employer's interest, resulting in an economic benefit to the

employer." Id. (citing Martínez v. Comunidad Mateo Fajardo, 90

D.P.R. 461, 1964 WL 14313 (P.R. 1964) & Lloréns v. Lozada, 73

D.P.R. 271, 1952 WL 8040 (P.R. 1952)); see also Meléndez Colón v.

United States Dep't of the Navy, 56 F. Supp. 2d 147, 151 (D.P.R.

1999) (citing to rule in Borrego).

After noting that "[t]he general rule in Puerto Rico is

that a trip made by an employee simply in order to get from his

home to his work is not one in the course of his employment,"

Borrego, 790 F.2d at 7, the Borrego court nevertheless concluded

that a supervisor working for the government was acting within the

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scope of his employment when he struck another car while driving an

assigned vehicle from his home to the office. Id. The court so

held because the employee used the assigned vehicle as "an

essential part of his work and [] is obligated to take the car home

so that he can perform his duties more effectively." Id. The

court further stated that the employer was the principal

beneficiary of the "more efficient use of the employee's time."

Id.

The instant case turns on our determination of whether

Serrano was acting within the scope of his employment when the

accident occurred. However, gaps in the present complaint make our

task difficult. Most notably, the complaint is unclear regarding

the extent to which ICN relied on Serrano's use of the car he was

driving at the time of the accident, an important factor in

Borrego. While plaintiffs allege that Serrano's vehicle was

insured by ICN's insurance policies -- an alleged fact suggesting

that ICN accepted a degree of responsibility for the vehicle and

that the vehicle may have been pertinent to Serrano's job -- the

complaint does not provide any additional details regarding the

nature of Serrano's relationship to his vehicle. Further, the

complaint does not state whether Serrano was leaving the Christmas

party to go home. If Serrano was traveling from a remote work site

to home, under Borrego he may be covered. See id. at 7-8.

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 Although this is a close case, we conclude that from the

facts alleged in the complaint, drawing all reasonable inferences

in favor of the plaintiffs, it could reasonably be inferred that

Serrano's use of the vehicle that evening was done with ICN's

economic interest in mind and that ICN benefitted from the "more

efficient use of the employee's time." See Borrego, 790 F.2d at 7.

We are confident that pre-trial proceedings will help shed light on

any factual disputes regarding Serrano's use of the vehicle, and

whether ICN benefitted therefrom, but at this stage of the

proceedings, it remains possible that plaintiffs have stated a

claim for recovery under Article 1803.9

III. Conclusion

In sum, we hold that under Article 1802 and the Puerto

Rico Supreme Court's holding in López, ICN is not liable on

plaintiffs' claims because it is not a public commercial

establishment engaged in the sale of alcoholic beverages. However,

we hold that plaintiffs' vicarious liability claim under Article

9
We note that in reaching its conclusion as to plaintiffs'
Article 1803 claim, the district court went outside the complaint
and impermissibly relied on facts from Serrano's unsworn
declaration. These facts included that ICN, as part of a
compensation package, gave Serrano an automobile allowance of $9000
per year; that Serrano owned the vehicle, not ICN; and that Serrano
purchased the vehicle from his previous employer. Even if we
assume these facts to be true, other facts, including Serrano's
destination, are relevant to a proper scope-of-employment analysis.
Therefore, mindful of the fact that at this stage we are required
to draw all inferences in favor of the plaintiff, we believe remand
to the district court for additional factfinding on this issue is
the prudent course to take.

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1803 survives because the facts as alleged in the complaint support

a reasonable inference that Serrano was acting within the scope of

his employment when the tragic accident occurred.

The decision of the district court is affirmed with

respect to plaintiffs' Article 1802 claim and reversed and remanded

to the district court with respect to plaintiffs' Article 1803

claim.

Affirmed in part and Reversed and Remanded in part. No

costs are awarded.

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