          United States Court of Appeals
                     For the First Circuit


No. 17-1157

                        H. LEE FARTHING,

                      Plaintiff, Appellant,

                               v.

               COCO BEACH RESORT MANAGEMENT, LLC,

                      Defendant, Appellee,

                         JOHN DOE, INC.,

                           Defendant.


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

       [Hon. Camille L. Vélez-Rivé, U.S. Magistrate Judge]


                             Before

                  Lynch, Thompson, and Kayatta,
                         Circuit Judges.


     Richard Schell-Asad and Troncoso & Schell on brief for
appellant.
     Alejandro Suárez Vincenty, Hugo Rodríguez Díaz, and Rodríguez
& Rodríguez, PSC on brief for appellee.


                          July 21, 2017
             LYNCH, Circuit Judge.   H. Lee Farthing, a South Carolina

resident, brought this diversity suit against Coco Beach Resort

Management, LLC ("Coco Beach"), a Puerto Rico company that employed

Farthing for just over three months on a one-year contract as its

"Marketing and Sales Director."      Farthing alleges that Coco Beach

breached his employment agreement by unilaterally terminating it

early.   He seeks damages to compensate him for unpaid base salary

and anticipated commissions on real estate sales that Farthing

alleges were imminent when Coco Beach fired him.

             The court below granted Coco Beach's motion for summary

judgment, holding that the employment agreement was void as against

public policy because Puerto Rico law requires a person working as

a real estate broker to have a license.        It is undisputed that

Farthing had no such license before or after he was employed, and

that no term of the employment agreement required him to have such

a license.

             We vacate and remand.    Summary judgment was entered in

error because issues of law and issues of material fact remain in

dispute. It is disputed whether Coco Beach was aware that Farthing

did not have a broker's license at any relevant time, including

when the agreement was signed, and it is disputed whether at least

some of the work Farthing performed and was intended to perform

was permissible without a broker's license.      It was error to hold




                                 - 2 -
on summary judgment that Farthing has no viable claim against Coco

Beach for breach of contract.

                                     I.

            We briefly review the relevant background, highlighting

along the way the facts that remain in dispute.

            Under Puerto Rico law, it is a misdemeanor to "engage[]

in   the   profession   of   real   estate   broker   .   .   .   without   the

corresponding license."      P.R. Laws Ann. tit. 20, § 3057(a).         "Real

estate broker" is defined by statute as

            [a] natural person who holds a license to
            practice the profession . . . and acts as
            intermediary, through the payment or the
            promise of payment of any compensation
            previously and mutually agreed upon between
            the parties that contract to execute in Puerto
            Rico a sales transaction, promise of sale,
            purchase or sale option, exchange, lease,
            auction, property management, or in the
            offering, promotion, or negotiation of the
            terms of all sales, sales options, promise of
            sale, lease management, or exchange of real
            property located in or outside of the
            Commonwealth of Puerto Rico.

Id. § 3025(g).1    The parties agree that Farthing, at all relevant

times, has lacked the license required to work as a real estate

broker in Puerto Rico.




      1   Farthing alleges that there are "discrepancies" between
this translation of § 3025(g), drawn from online databases, and
the official translation that accompanied the provision's
legislative enactment. We need not decide which translation is
more accurate.    The minor differences between them are not
pertinent to this opinion.


                                    - 3 -
          Farthing alleges that, in the past, he was employed in

South Carolina as a "real estate broker with an expertise in 'high

end' or 'luxury resorts.'"    On March 24, 2016, he signed a one-

year employment agreement with Coco Beach; the agreement had no

early termination clause and no requirement that Farthing obtain

a Puerto Rico real estate broker's license.   Farthing, in a sworn

affidavit, alleges that Coco Beach's president knew when he hired

Farthing that Farthing was not a licensed real estate broker in

Puerto Rico and that he "specifically told [Farthing] that under

Puerto Rico's law [Farthing] did not need a real estate license,

as [Farthing] would be an employee of Coco Beach selling [Coco

Beach's own] property."   Coco Beach disputes that allegation and

maintains that it "did not have knowledge that [Farthing] did not

have a real estate license nor that [a license] was required,"

because Coco Beach "was inadequately informed and advised" at that

time.

          Per the employment agreement, Farthing's job title was

"Marketing and Sales Director."     In that capacity, Farthing led

Coco Beach's Marketing and Sales department, which consisted of

Farthing and Rosselyn Pérez, who mainly performed secretarial work

for Farthing.   The parties agree that Farthing's responsibilities

included "identify[ing] potential buyers" for units in the Las

Casas   apartment   complex   and   "offer[ing],   promot[ing]   and

negotiat[ing] with [potential buyers] options and sale agreements


                               - 4 -
o[n] behalf of Coco Beach."     Farthing alleges that his job also

included several other responsibilities, including "[h]iring real

estate brokers," meeting with bank officials to discuss financing,

following up on inquiries and potential clients, negotiating with

venues that might host a "sales concierge" space at which Coco

Beach would recruit buyers for the Las Casas units, and contacting

brokers in the United States for assistance in promoting the Las

Casas units.

          Coco Beach alleges by affidavit that the Las Casas units

are managed and operated by Coco Beach but that the units are owned

by a different company, O'Horizons LLC.    Farthing's complaint, by

contrast, alleges that the Coco Beach Golf Club, which contains

the Las Casas units, is "own[ed] and operate[d]" by "Coco Beach

and/or John Doe, Inc."     In his opposition to Coco Beach's motion

for summary judgment, Farthing stated that "Las Casas is property

of Coco Beach, not owned by any third party."   The record does not

clear up this confusion.

          Coco Beach terminated Farthing's employment in late

June, 2016.    The parties disagree on several details of the

circumstances of Farthing's termination.     In Farthing's account,

Coco Beach unilaterally terminated the agreement.      On June 28,

Farthing alleges, Coco Beach's president told Farthing that he

"had done an amazing job and accomplished more than [Coco Beach]

had ever hoped for," but that Coco Beach was "letting [Farthing]


                                - 5 -
go because [Coco Beach] had decided not to sell real estate and to

start selling timeshares [at Las Casas] instead."        Coco Beach

admits that its president made these statements to Farthing.

          On June 29, Farthing further alleges, he was offered two

weeks' severance pay in exchange for agreeing not to pursue any

claims against Coco Beach, but he did not accept the offer.

          In support of its motion for summary judgment -- at least

on its affirmative defense of accord and satisfaction -- Coco Beach

submitted sworn statements from Rafael Rovira Ronda, O'Horizons

LLC's Vice President of Real Estate, and from John W. Wilson Gomez,

Coco Beach's Operations Director.       Each statement alleges that

Coco Beach offered Farthing a termination agreement, effective

June 30, 2016, which "consisted of liquidating any unpaid salaries

up to June 30[] . . . plus a severance equivalent to two . . .

additional weeks of his base salary."    Each statement also alleges

that Coco Beach agreed to pay Farthing a commission on the sale of

Unit 401G in the Las Casas complex, per the compensation formula

in the employment agreement, if that sale were ever finalized;

that Farthing "expressly accepted and agreed to the termination

agreement" on those terms; that Farthing was handed a check for

$6750.40, "for [his] services rendered up to that date"; that

Farthing agreed to return to Coco Beach's offices on July 5, 2016

to collect the agreed severance; and that Farthing never returned.




                              - 6 -
           Neither party alleges that Farthing's lack of a broker's

license was the reason for terminating the agreement or that it

was stated as the reason.    The record shows that Coco Beach first

alleged that the contract was illegal after the fact, in its answer

to Farthing's complaint.

           Farthing brought this suit in federal district court on

July 22, 2016.     He demanded a jury trial and pled a single count

of breach of contract, seeking as relief $102,083.31 in "unpaid

base salary" and $294,000.00 in anticipated commissions on real

estate sales, which Farthing alleges were imminent when Coco Beach

terminated the agreement.

           After   the   parties   filed   cross-motions   for   summary

judgment, the magistrate judge, sitting by consent,2 issued an

order granting Coco Beach's motion for summary judgment on January

3, 2017.   She found that Farthing's employment agreement was "null

and void because [Farthing] was effecting real estate broker duties

without a license under Puerto Rico law," and therefore that

Farthing was entitled to no relief.

                                    II.

           We review de novo both the entry of summary judgment for

Coco Beach and the interpretation of the parties' contract.         See




     2    The parties voluntarily consented to have a federal
magistrate judge conduct all proceedings in the case, including
the entry of final judgment. See Fed. R. Civ. P. 73.


                                   - 7 -
Dukes Bridge LLC v. Beinhocker, 856 F.3d 186, 189 (1st Cir. 2017).

At summary judgment, we must "credit[] the evidence favorable to

[Farthing] . . . and draw[] all reasonable inferences in [his]

favor," Burns v. Johnson, 829 F.3d 1, 8 (1st Cir. 2016), and we

may affirm only if "there is no genuine dispute as to any material

fact and [Coco Beach] is entitled to judgment as a matter of law,"

id. (quoting Fed. R. Civ. P. 56(a)).    "A fact is material if it

carries with it the potential to affect the outcome of the suit

under the applicable law."   García-González v. Puig-Morales, 761

F.3d 81, 87 (1st Cir. 2014) (quoting Newman v. Advanced Tech.

Innovation Corp., 749 F.3d 33, 36 (1st Cir. 2014)).    The parties

agree that Puerto Rico's substantive law applies in this diversity

case, and "[w]e follow [their] lead."   Dukes Bridge, 856 F.3d at

189 (citing Cochran v. Quest Software, Inc., 328 F.3d 1, 6 (1st

Cir. 2003)).

          The agreement between Farthing and Coco Beach was held

to be null and void on the reasoning that the agreement provided

on its face that Farthing would perform the duties of a real estate

broker but Farthing lacked the necessary license.      The holding

relies on title 31, section 3372 of the Laws of Puerto Rico: "The

contracting parties may make the agreement and establish the

clauses and conditions which they may deem advisable, provided

they are not in contravention of law, morals, or public order."

P.R. Laws Ann. tit. 31, § 3372; see also Cecort Realty Dev., Inc.


                              - 8 -
v. Llompart-Zeno, 100 F. Supp. 3d 145, 161 (D.P.R. 2015) ("[A]

contract is deemed null . . . if it is contrary to law, morals[,]

or public order.   In such cases of nullity, even a party that has

benefitted from it may challenge a contract for being contrary to

law, morals[,] or public order." (citations omitted) (quoting De

Jesús González v. Autoridad de Carreteras, 148 P.R. Dec. 255, 264

(1999))).    Consequently, it was held that Farthing could not be

heard to seek damages for Coco Beach's purported breach.

            The entry of summary judgment was error.    There are

important disputes of fact as to liability -- putting aside the

disputed assertion of accord and satisfaction -- each of which is

material to the question of whether Farthing may seek relief

despite the fact that his employment agreement, in whole or in

part, may have violated Puerto Rico's public policy.

            One disputed fact is whether Coco Beach was aware, or

should have been aware, at the agreement's signing that Farthing

did not have a Puerto Rico license and that one would be required.

Another is whether some or all of Farthing's duties under the

agreement required a license.3    The court thought it irrelevant




     3    Farthing has consistently argued that, as a Coco Beach
employee, he stepped into Coco Beach's shoes and was selling Coco
Beach's real estate as an "owner . . . acting in his/her own
interest," which the statute excludes from the definition of "real
estate broker." P.R. Laws Ann. tit. 20, § 3025(g). We need not
decide whether Farthing's reading of § 3025(g) is correct. Even
if the court below correctly adopted a contrary reading of the


                               - 9 -
whether "Coco Beach had knowledge or not that [Farthing] did not

possess a real estate license when it hired [Farthing]."                   We

disagree.     If Farthing was "excusably ignorant" of the fact that

his employment agreement may have violated Puerto Rico's public

policy -- and if Coco Beach was not excusably ignorant -- then

Farthing "has a claim for damages for [the agreement's] breach,"

notwithstanding       the      alleged   violation    of   public      policy.

Restatement (Second) of Contracts § 180 (Am. Law Inst. 1981); see

also P.R. Laws Ann. tit. 31, § 3516 (distinguishing between a

"crime or misdemeanor common to both contracting parties" and a

"crime or misdemeanor on the part of only one of the contracting

parties"); Sánchez Rodríguez v. López Jiménez, 16 P.R. Offic.

Trans. 214, 228 (explaining that "if both parties [to an illegal

contract] are at fault, they would be barred from bringing an

action against each other," but that this "doctrine requires that

the [plaintiff] knows or should know the circumstances from which

the illegality stems, or the illegality itself"), clarified on

reconsideration, 16 P.R. Offic. Trans. 480 (1985).

             "[T]he     rule     prohibiting   enforcement     of      illegal

contracts"     itself    has     exceptions,   as    the   citations     above

establish.     Am. Buying Ins. Servs., Inc. v. S. Kornreich & Sons,

Inc., 944 F. Supp. 240, 244–45 (S.D.N.Y. 1996) (explaining that



statute, material disputes of fact preclude entry of summary
judgment for the defendant.


                                     - 10 -
the rule is not "inflexib[le]" and admits of "myriad exceptions,"

including   situations    in   which   "the    plaintiff     was    excusably

ignorant, and the defendant was not").        In our view, the exception

for excusable ignorance does not undercut, but rather reinforces,

the rule's deterrence aims.        See, e.g., Juliet P. Kostritsky,

Illegal Contracts and Efficient Deterrence: A Study in Modern

Contract Theory, 74 Iowa L. Rev. 115, 138 (1988) (observing that

"it is costly to deter illegal contract formation by placing the

loss on unknowing parties" and that, in appropriate cases involving

excusable ignorance, courts "can further efficient deterrence by

regularly denying the knowledgeable party relief and by granting

recovery to the less knowledgeable party," so that "the person in

the best position to avoid the illegality can do so at the least

cost").     Whether Farthing can avail himself of the excusable

ignorance exception, or any other exception to the "void as against

public policy" doctrine, will require additional factfinding as to

the parties' knowledge, or excusable lack thereof, when Coco Beach

hired Farthing.

            Another disputed material fact is whether at least some

of   Farthing's   job   responsibilities      could   have   been    lawfully

performed in Puerto Rico without a broker's license.                Farthing

points out that the agreement had a severability clause, which he

argues would allow enforcement of the agreement's base salary

clause even if the clauses pertaining to sales commissions are


                                 - 11 -
illegal and void.   See Santiago-Sepúlveda v. Esso Standard Oil Co.

(P.R.), Inc., 643 F.3d 1, 8 (1st Cir. 2011) (noting that Puerto

Rico law permits enforcement of severability clauses to which

parties stipulated in their contract (citing McCrillis v. P.R.

Mar. Shipping Auth., 23 P.R. Offic. Trans. 109, 132–33 (1989))).

          If Farthing is correct that some of his duties did not

require a license, then there is also the issue of whether the

agreement is divisible.   Under McCrillis, even in the absence of

a severability clause, "[c]ivil law accepts that 'in some cases

partial nullity may be used as a means to guarantee the continuity

of a business whose fundamental content is not affected by the

void portion.'"     23 P.R. Offic. Trans. at 131 (citations to

Spanish-language authorities omitted); see also, e.g., Restatement

(Second) of Contracts § 184 (discussing partial enforcement of an

agreement where "the performance as to which the agreement is

unenforceable is not an essential part of the agreed exchange");

2 E. Allen Farnsworth, Farnsworth on Contracts § 5.8 (3d ed. 2004)

(stating that courts "often avoid an 'all or nothing' decision by

holding agreements unenforceable only in part" and that a court

will be "more likely to do so in favor of a party who has already

relied on the agreement, as by preparation or performance").

          Farthing claims that at least part of his job was

"organizing the basis of an infrastructure to support the marketing

of his employer's property," and, further, that he engaged in sales


                               - 12 -
activities as the employee of a real estate seller -- that is,

Coco Beach -- rather than as an intermediary between a seller and

buyer.      See P.R. Laws Ann. tit. 20, § 3025(g) (defining "real

estate broker" as one who "acts as intermediary" and distinguishing

such an individual from an owner-broker who "acts in his/her own

interest").       Coco Beach argues that Farthing's employment duties,

even   if   not    uniformly   those   of   a   real    estate   broker,   were

"thoroughly intermingled [and] interdependent," and that "[t]here

is nothing in [the agreement] or in the record . . . to suggest

that [Farthing's] bas[e] salary was not compensation for his real

estate brokering duties."       That, in itself, is a disputed issue of

fact, material to both severability and divisibility.

             Viewing the evidence in the light most favorable to

Farthing, we do not agree with the court below that "there is no

genuine [factual] dispute" relevant to these issues.               Burns, 829

F.3d at 8 (quoting Fed. R. Civ. P. 56(a)).             If further factfinding

were to reveal that at least some of Farthing's job duties could

be performed lawfully without a license, then Farthing might be

entitled to relief.        We express no view on whether Farthing's

employment agreement is severable or divisible, leaving those

questions for the district court to answer on remand with the

benefit of a more complete factual and legal record.




                                   - 13 -
                               III.

           We vacate the entry of summary judgment in favor of Coco

Beach and remand for further proceedings consistent with this

opinion.   No costs are awarded.




                              - 14 -
