Tuesday, April 1, 2014

Has the bar been raised for a distributor to prove exclusivity?


After it had been relatively clear in the jurisprudence that the traditional requirements for preliminary injunctive relief do not apply automatically in Law 75 cases, in light of the policies served by the Act, in Next Step Medical v. Bromedicon, CC-2012-0647 (Mar. 6, 2014), the Supreme Court of Puerto Rico accepted an invitation to settle once and for all the issue of the governing standards for preliminary injunctions in Law 75 cases.

There, the distributor Next Step sold and distributed medical equipment to hospitals in Puerto Rico, including those of the principal Bromedicon, without a formal written agreement. Claiming to be the only one and the exclusive distributor of Bromedicon in Puerto Rico, Next Step filed suit for impairment of contract under Law 75 when Bromedicon began to sell its products through another distributor. At Next Step’s insistence, Bromedicon had sent a letter to the trade that Next Step was an “authorized distributor.” There was no evidence corroborating exclusivity, except for the distributor’s contention that it had been de facto over the years the sole and exclusive distributor in Puerto Rico. The Court of First Instance denied a request for a preliminary injunction and the intermediate court of appeals denied certiorari. Undeterred, the dealer appealed.

The Supreme Court affirmed the order denying the preliminary injunction. After finding that this dealer qualified for protection under Law 75, the Court held that the statutory remedy of a preliminary injunction is not automatic, but rather the analysis requires a balance of the interests of all the parties and the public policy behind Law 75. The opinion is unexceptional for the part that it reiterates precedent that the classic standards for preliminary injunctions in civil cases are treated as guidelines and this should mean that a court could grant or deny a preliminary injunction in a Law 75 case when those factors are weighed with the other factors (e.g., policies and balance of interests in Law 75). What is exceptional about the case is that, although the plaintiff fit the bill of a Law 75 dealer, it failed to prove with “clear and convincing evidence” that it was an exclusive distributor. In the end, the dealer failed to prove likelihood of success for a preliminary injunction, one of the factors deserving the most weight in ordinary civil cases, and this doomed the dealer’s case.

What can also be inferred is that, without a clear and complete written exclusive distributor agreement, a distributor relying on verbal evidence or a course of dealings of de facto exclusivity will have to prove with “clear and convincing” evidence(evidencia clara y contundente in Spanish)of the principal’s agreement to grant exclusivity. It is not enough to prove the principal’s ratification of its appointment of the dealer as an authorized distributor. More will be required.

It is open to debate if the Court intended to create a new standard for the sufficiency or weight of the evidence in Law 75 impairment cases, beyond the preponderance of the evidence, or if a new standard does apply in the context of a request for extraordinary and equitable relief and there is no conclusive evidence of an exclusive written dealer agreement. The "clear and convincing" terminology will have repercussions in pending and future Law 75 cases.

Friday, February 21, 2014

One on one interview with Mr. José Arturo Alvarez, President of Méndez & Co. Inc., a leader in the distribution industry


The blog has a fresh focus. Besides analyzing legal developments, I will also report the perspective of business leaders in the distribution industry whose views should be important to comprehend the impact of government regulation and market realities in Puerto Rico. The goal is to convey the collective sentiment of business leaders and trade organizations whose views may be lost in the coverage afforded by traditional media.

This is the first of a series of periodic one on one chats with industry leaders in Puerto Rico about market conditions, challenges and opportunities that lie ahead for the distribution industry. The author’s first exclusive interview was with Mr. José Arturo Alvarez, President of Méndez & Co. Inc., a company founded in 1912 and one of the leading food, beer and liquor distributors in Puerto Rico.

RFC. How do you see the state of the distribution industry in Puerto Rico at the moment? JAA. “It is challenging and highly competitive. There is pressure to be more efficient and to reduce operating costs. I do not see significant growth in the demand for food products and the market is showing signs of decline. There are more supermarkets that are necessary to meet demand. Factors contributing to a slowdown in the industry include migration (there are less mouths to feed), high operational costs to run the business, a local government imposing more tax burdens, permits, regulations and oversight, and a generalized feeling of malaise in the population.”

RFC. What effect would the implementation of a value added tax (IVA) have in the distribution industry? JAA. “An IVA would impose on the distributor the obligation to collect the tax on the product at the port of entry and pay the tax to the authorities before the product is sold to the consumer. During the period of time it takes for the distributor to claim and receive a tax credit, the distributor ends up financing the sale to the tune of at least 7%. The effect is an increase in the distributor’s receivables and this has a negative impact on cash flow.”

RFC. There’s a lot of talk about the “furgonazo” e.g., the fee of roughly $70 imposed on each container shipped to our shores. What is your view about that? JAA. “This is a surcharge imposed supposedly to inspect containers in order to detect the illegal trafficking of weapons and drugs. Thing is, of the thousands of containers that are shipped to P.R. each year, only one that I am aware of has been found in violation and that was because the federal government alerted the local authorities. A federal court in part decided that it was unreasonable to collect a fee for containers that have never been inspected as well as for break bulk cargo. My view is that the surcharge is unreasonable as an added cost which at the end of the day is passed on down the chain to consumers and is ineffective for the intended purpose. This is another example of sunken or hidden costs that add to the cost of business and to the price for goods and services.”

RFC. There’s also litigation about the “patente nacional” or the tax imposed on gross receipts. Does this tax have a disproportionate impact on the retail and distribution sector and if so, why? JAA. “It does cause more impact to the food industry because the profit margins for food products are generally lower. Because the margins are low and the tax is imposed on gross receipts, I am aware of studies where businesses accounting for 40% of the volume in the food industry in P.R. will see their effective tax rates jump to over 80%. This will inevitably lead to more bankruptcies. While a court validated the constitutionality of the tax, the trial court determined that the Secretary of the Treasury had to regulate the practice of granting tax waivers. What the Secretary has done is to determine that businesses whose gross profits exceed 6.66% will not be able to claim any waivers. It remains to be seen if that’s arbitrary or not and if the “patente” itself is fair for our industry.”

RFC. How important is the federal assistance program subsidy (PAN) to the consumption of food products in P.R.? JAA. “Very important. Every year the federal Department of Agriculture transfers roughly $2 billion to the P.R. Department of the Family for appropriations to persons in need. 25% of the allocated amount can be used by consumers as cash to purchase items in supermarkets that are not strictly food. The 25% cash allocation should continue until 2017 but studies are underway to determine if the allocation serves the public good. It is not that the total subsidy will change; it is whether consumers will be able to use 25% in cash to purchase non-food items.”

RFC. There are critics who say that distributors are intermediaries that make products and services more expensive to consumers. What would you say to those critics in terms of the value that an efficient distributor can add the sale of products and services? JAA. “For distributors to remain in business, they have to provide relevant services. Those include: adequate warehousing, storage and inventory of products, support marketing and advertising efforts, distribute the product down the trade to the ultimate point of sale, make sure that there’s sufficient product in the shelves, rotate and inspect for damaged goods, assume those costs of merchandising, deal with our clients- the retailers, do collections etc. There’s a reason for why our customers continue to buy from us and use our services, and that is, we provide relevant services for them.”

RFC. What is the future of Law 75? JAA. “It has served distributors and the market well. I hope it continues in effect.”

RFC. How is Méndez & Co. prepared to meet the challenges that lie ahead? JAA. “First, by being more efficient and reduce costs. Second, by maximizing the use and capacity of our physical facilities. Third, by continuing to serve our lines well and look for new lines. For instance, there are a number of multinationals with direct sale and marketing operations in P.R. that I believe would be more efficient in our hands. Our structure allows us to maximize the distribution, logistics and reduce costs. Fourth, by being in the forefront to embrace new technologies so that our employees can provide utmost service.”

Saturday, February 1, 2014

The tide is turning and our local civil courts are making great strides


Our local courts are making significant progress in the efficient administration of justice in civil cases. Speaking as a civil practitioner, I’ve been one to say and still do that the federal district court in Puerto Rico is efficient and produces consistently uniform and predictable outcomes. Despite the “specter” of a jury, a stateside or foreign defendant would invariably prefer to litigate in the federal court if it had a choice of forum. Our federal judiciary is top notch and judicial review in the First Circuit stands as a reliable safety net to correct legal errors in the court below. And, lifetime appointments are designed to guarantee judicial independence in the decision-making process.

But, over the last ten years, the federal bench in Puerto Rico has been swamped by multi-defendant criminal cases which, adding to budget constraints, have created a backlog in the resolution of civil cases. Dispositive motions in federal court may stand submitted for six months or more without a ruling. Dispositive motions are rarely heard for oral argument and the pretrial conference may be the only or the final resting place to argue motions. Jury trials are two or three years down the road, if not more. To be sure, experiences vary depending on the judge and the complexity of the case. There is an increasing pressure to mediate and settle cases or to consent to the jurisdiction of U.S. Magistrate Judges. That is fine to deal with heavy caseloads but may not be the best or most effective solution for a litigant that needs emergency relief to save its business.

Should a party needing emergency relief go to federal court or try our local courts? My “default or automatic setting” primarily for the defense had been a preference for the federal court at least in Law 75 cases. But if you represent a client who is a dealer in a Law 75 case or a sales representative in a Law 21 case, think twice, for the local courts may be your best option, even without the right to trial by jury. If a dealer needs emergency or equitable relief, the local court, specially in San Juan, may be your best option. The defendant could benefit from an expedited proceeding too.

The Court of First Instance in San Juan has two civil trial judges assigned solely to hear requests for equitable relief, such as injunctions, mandamus etc. These experienced civil judges have become specialized in matters that require urgent and immediate attention. There is no room for delay. Just this month, it is commendable that our local judiciary implemented an electronic filing system for the special emergency courts which should expedite the filings and make litigation more cost effective. Although the civil dockets of the judges in the emergency court are huge and they lack the resources that federal judges have with multiple law clerks and unlimited access to electronic research, the cases in these special civil local courts are being heard and resolved quickly. Dispositive motions are heard with oral arguments in which counsel for both sides are afforded an adequate opportunity to argue (not counted in minutes) and the judges are keen, prepared and ready to grill the lawyers on the facts and the law. The long-established practice endorsed by the Supreme Court of P.R. of lawyers drafting opinions and orders to assist the local court judges certainly helps to expedite resolution of disputes and make up for the limited resources that our local court judges have.

Local judges in these emergency or special civil local courts are getting things done and quickly with limited resources. There are still situations in Law 75 cases where no matter what a defendant would prefer the federal forum because there is a body of developed federal case law or there is a federal question in the pleadings.

Winds are changing. There is reason for defendants to rethink before removing a case to federal court. Our local courts can be the right forum selection for a fair, prompt, and cost effective resolution of commercial disputes.

Thursday, January 2, 2014

An employee must abide by a trade secrets injunction but is free to compete and solicit his former employer’s clients

There have been few if any reported cases until now involving the recently-enacted Puerto Rico Law of Commercial and Trade Secrets. It is not difficult to discern that controversy is likely to arise at the intersection between non-competition agreements (especially in their absence) and confidentiality obligations created by the new trade secrets law.

As shown by American Paper Corporation v. Irizarry, 2013 WL 5522747 (TCA Aug. 9, 2013), confidentiality and non-competition agreements have ramifications in distribution cases. There, an employee of plaintiff American Paper, a Puerto Rico distributor of paper products, defected to form his own company to compete for the same business. Not thrilled by the prospect that the defendant–employee would make a living and form a company to compete, plaintiff sued the employee under Puerto Rico’s trade secret law and sought enforcement of a non-compete agreement.

The employer alleged that one of its most important customers transferred business to the employee’s new company. The trial court issued an order compelling defendant not to use or divulge plaintiff’s “trade secrets” which include contact persons of plaintiff’s clients, profit margins, and marketing strategies. As far as reaching out to bar defendant from using his knowledge or information to compete with the clientele, the trial court invalidated the non-competition agreement as a matter of Puerto Rico law.

Only plaintiff appealed the order invalidating the non-competition agreement. In granting certiorari and affirming the judgment below, the appellate court held that the non-compete obligation was overbroad for it was not restricted to commercial activities similar to his employer and was excessive in terms of the clients that could not be served. “Said another way, Mr. Irizarry could not make any type of solicitation or offering of service directly or indirectly to no one, that has been a client of the employer or is engaged in the paper distribution business.” (translation ours). Because the non-compete clause is legally incapable of being reformed by the court, the entire agreement was declared to be null and void.

The trial court’s injunction under Puerto Rico’s Trade Secrets Law and the appellate court's invalidation of the non-compete agreement can be reconciled. This case demonstrates that a non-compete agreement is severable from an obligation imposed by law or required by contract to preserve the confidentiality of trade secrets. A prohibition from using or divulging confidential information or trade secrets does not necessarily extend in scope to prohibit the employee from using his knowledge, information, or business acumen to compete or solicit business from his employer’s customers at least when there is no non-competition agreement or it is determined to be invalid.

During 2013, local intermediate appellate courts remained active in Law 75 cases

In Marchosky Kogan v. Antillas Marketing, 2013 WL 5522664 (TCA Aug. 20, 2013), the local appellate court affirmed the dismissal of a tortious interference and damages action finding just cause under Law 75 for termination of a sub-distribution agreement.

Plaintiff Marchosky, an individual, was a sub-distributor of Defendant Antillas Marketing, the defendant and the distributor-grantor. The principal Golden Omega Inc. had appointed Antillas as the exclusive distributor of Linoflax products in Puerto Rico. A google search of Linoflax USA reveals that Linoflax products are health and nutritional supplements. The sub-distributor filed suit in the Court of First Instance Humacao Part against the distributor and others (apparently not against the principal) alleging a breach of exclusive sub-distribution rights in a designated region. The claims sounded in tortious interference and damages for emotional distress. In the answer and counterclaim, Defendants denied the existence of an exclusive contract, asserted just cause, and that plaintiff’s acts breached Antilles’ agreement with its principal.

After a bench trial, the trial court found for defendants and dismissed both the complaint and the counterclaim for damages. The judge determined that there was an insufficient basis to pierce the corporate veil and no actionable claim existed under Law 75 as there was just cause and no evidence of actual damages. It is unclear from the opinion if the issue of just cause should have been decided without joinder of the principal as a party or if the distributor had standing as the grantor to allege just cause (sub silentio it did). Plaintiff appealed. The appellate court affirmed the dismissal of the action. The appellate court determined that the trial court had correctly found just cause for termination based on a breach of an essential contractual obligation or acts that adversely and substantially affected the principal’s or grantor’s interest in Puerto Rico.

The sub-distributor had encroached upon an exclusive territory of other resellers which affected the marketing activities of other distributors. The sub-distributor had also refused to collect and administer payments by certain customers within the assigned territory; issued post-dated checks; and made hiring decisions and negotiated prices with pharmacies without obtaining the distributor’s authorization. It is unclear if any of those actions breached an essential contractual obligation. After applying a deferential standard of review to factual determinations and judgments about the weight or credibility of the evidence, the court held that the totality of the circumstances established that plaintiff’s actions and omissions caused the defendant-grantor to suffer financial harm and cash flow problems which adversely affected the “good functioning of the business.”

An interesting and unusual case came up in Jimenez Ayala v. BC Services, Inc., 2013 WL 4073349 (TCA May 31, 2013). The case involves the issue whether a Law 75 counterclaim may be interposed to defeat a summary procedure to adjudicate an eviction action. There, BC Food Services signed Lease and Operating Business Agreements (“acuerdos de negocio en marcha”) to lease real property and operate the restaurant franchise of Bebo’s Café in Condado. Plaintiff paid money of what was ostensibly a royalty or license fee to use the mark or brand of Bebo’s Café. After expiration of the agreement, Plaintiff filed suit under Law 75 for injunctive relief to compel the lessor or franchisor to renew the agreements. The case settled by stipulation and a dismissal without prejudice. The stipulation required the lessee to pay back rent and commit to pay monthly rent in consideration for a renewal of the agreements. The lessor filed an eviction action when the lessee fell behind in its payments and invoked the summary procedure which does not legally permit any defenses other than proof of payment of rent. Lessee counterclaimed for wrongful termination under Law 75. The trial court in San Juan found for plaintiff and evicted defendant which appealed. On appeal, the lessee argued that the trial court erred when it failed to convert the action into an ordinary proceeding to adjudicate the Law 75 claim. The trial court found that the lessee breached the settlement agreement by issuing rent payments with insufficient funds. The appellate court affirmed and ruled that the Law 75 counterclaim would be decided in the ordinary course and was legally inadmissible to convert the summary eviction procedure into an ordinary action. The majority opinion did not decide any issues under Law 75.

One judge (Hon. Migdalia Fraticelli Torres) dissented. The dissent reasoned at length that the lease agreements were also license or franchise agreements that deserved special protection under Law 75. The dissent reasoned that, as a matter of public policy, the counterclaim under Law 75 should receive treatment as an ordinary action when joined in a summary eviction proceeding. The dissent emphasized that market conditions and the diminished value of rental properties required the lessee to renegotiate the monthly rent of $52,000 and that the lessor’s refusal to negotiate in good faith was not just cause for termination under Law 75. The claims, said the dissent, should have been consolidated and allowed both to proceed in the ordinary course.

In V. Suarez v. Bacardi Corporation, 2013 WL 4037215 (TCA June 25, 2013), cert. pending, the appellate court affirmed the trial court’s confirmation of a final partial arbitration award in favor of Bacardí and dismissal of the sub-distributor’s motion to vacate. A Panel of the AAA determined that contractual provisions for the computation of damages in the event of an unjustified termination of the sub-distribution agreement were valid and enforceable under Law 75 and did not have the effect of waiving any rights. The local appellate court ruled that there was no cause under the Federal Arbitration Act, which was the exclusive procedure, to set aside the award. The sub-distributor filed a petition for certiorari in the Puerto Rico Supreme Court. On related note, the U.S. Supreme Court denied certiorari of the Judgment of the First Circuit in Bacardí International Limited v. V. Suarez & Co., 719 F. 3d 1 (1st Cir. 2013) abstaining under Colorado River from deciding Bacardi’s parallel federal proceeding to confirm the award. Note: the author is lead counsel for Bacardi in these cases.

Thursday, October 31, 2013

A much-awaited federal decision provides some clarity about the scope of exclusive distribution rights under Law 75 over sales of new products and products in different packages to retail club channels


In Medina & Medina, Inc. v. Hormel Foods Corporation, No. 09-1098 (JAG)(Sept. 30, 2013)(Docket Doc. No. 170), the federal district court (Garcia-Gregory, J.) held a bench trial over the distributor Medina’s Law 75 claims that the principal Hormel had impaired an exclusive distribution relationship. There was no written agreement spanning a “twilight zone-absent clear parameters” of a 20-year business relationship; the distributor claimed to be exclusive for product line extensions (the Supreme Party Platter) of refrigerated products sold to clubs (Costco); the principal had been selling products to mainland distributors for over 20 years who resell into Puerto Rico; and the principal denied any exclusive arrangement with Medina. The “Supreme Party platter” is an array of Hormel-branded concoctions including “all-natural meats” and cheeses and is a larger display than the original party platters that the Puerto Rican distributor had sold to Costco. Medina had been the only distributor of new products introduced by Hormel in Puerto Rico.

In a 45-page thoughtful opinion, the court found for the distributor and for the supplier, in part. A detailed narrative of all the relevant facts is beyond our scope, but suggested reading in the opinion. “The Court finds, after preceding over the bench trial and examining the issues as framed by the parties, the following controversies pending: (1) whether Medina is Hormel’s exclusive distributor for the Commonwealth of Puerto Rico for the Hormel retail refrigerated products and fresh pork and, if that is true, whether Hormel is precluded from selling to other mainland distributors who then resell any of those products in Puerto Rico; (2) whether Hormel’s sales to Costco of the Supreme Party Platter impaired Medina and Hormel’s relationship; (3) whether Hormel impaired the distribution relationship by refusing to sell the new refrigerated retail products to Medina in 2009; and finally, (4) whether Hormel is obligated to sell to Medina all new retail products it introduces into the market.”

Exclusivity over retail refrigerated products:

At the outset and consistent with federal case law, the court approved the use of oral testimony and the course of dealings of the commercial practice between the parties to establish the existence of an exclusive relationship- absent a written agreement. The court rejected Hormel’s argument that the Commerce Code requires written corroboration to prove exclusivity.

Most significantly, the court dismissed Medina’s exclusivity claim over retail refrigerated products on caducity grounds. Medina had started complaining on or before 2005 about mainland distributors selling Hormel products to Puerto Rican retailers in breach of its alleged exclusive rights. Relying on the First Circuit’s Basic Controlex decision, the court held that the three-year caducity period in Law 75 started to run from notice of Hormel’s first denial of exclusivity in 2006 and this precluded any claims from subsequent sales and continuing violations. The suit filed in 2009 was time-barred. “[D]istributors are forced to fiercely prosecute breaches to its [sic] exclusivity or risk losing exclusivity forever”, said the court. As part of its rationale, the court noted that selling to stateside distributors would be the kind of detrimental act triggering the limitations period, adopting Gussco’s definition of exclusivity in the context of antitrust law: that is, “a mechanism by which a supplier agrees to sell its products for resale to a single distributor in a given region. This implies not authorizing other distributors for the same area.” The court held that, because the exclusivity claim is time-barred, Medina was not Hormel’s exclusive distributor and therefore, lost all the exclusive rights it claims to have had.

The court’s adoption of Gussco’s definition and the implication that sales to stateside distributors could impair exclusive rights could prove to be a gold nugget for distributors, though Medina lost on caducity grounds.

Supreme Party Platter sales to Costco:

Hormel did not dispute that Medina has been its sole distributor based in Puerto Rico. Although the court made no distinctions between marketing concepts involving line and brand extensions, the issue here was whether the distributor has a right to sell the same brand and type of products when marketed and sold in a different package.

This claim did not hinge on proof of exclusivity, but rather, involved a product line of party platters that had been introduced and developed by Medina for Costco. The court noted that Law 75 intends to proscribe this type of situation where the supplier takes advantage and leaves the distributor stranded after the dealer has created a market and a clientele for the principal’s products. The court found irrelevant that Hormel had not developed the Supreme Party platter line specifically for Costco in Puerto Rico. “The Court finds that Hormel, under its agreement with Medina, was bound to protect its distributor, and sell through Medina the upgraded version of a product for which Medina had developed the market.” An offer by Hormel to pay commissions, held the court, would neither release Hormel from its legal obligation nor cure Hormel’s violation of Law 75 from sales of the platter line to Costco. The court found Hormel liable under Law 75. The case had been bifurcated so that the court did not decide the damages issues.

New products:

The court found that Hormel had refused to introduce any new products into the market. The court held that Law 75 does not contemplate and Medina cannot dictate “whether a particular product will enter the Puerto Rico market”, citing the First Circuit’s earlier Medina decision. Medina produced no evidence that Hormel was contractually obligated to sell any new products to it and the court dismissed that claim, citing the First Circuit’s Vulcan Tools case. Simply because Hormel, for some years, had in the past sold new products to Medina, does not mean that it is contractually obligated to continue to do so. “The court finds that Hormel is not obligated to introduce new retail refrigerated products to Medina once it decides to enter the Puerto Rico market.”


Author’s Note: I find it hard to reconcile the holding that Hormel violates Law 75 because Medina developed the party platter line to Costco and has a right to distribute the "enhanced" "Supreme" party platter line from the separate holding that Medina has no right to "new" refrigerated retail products- though it distributed many new products over the years- because Hormel was not contractually "obligated" to introduce or grant any additional new products. The fine point may be that, although Costco's Supreme platter is a “new” form of packaging it is the same brand of products; Medina developed it and Hormel is obligated for that “enhanced line” only. According to the court, this should not mean that Medina has a right to brand or line extensions or to new products of the same brand, absent contractual rights.

Tuesday, September 10, 2013

AAA amends the Commercial Arbitration Rules and Mediation Procedures, effective October 1, 2013

Many distribution agreements require mandatory arbitration of disputes and a substantial number falls under the supervision of the American Arbitration Association. AAA arbitration matters arising from Puerto Rico are managed by AAA’s International Center for Dispute Resolution in New York. The procedures for Large, Complex Commercial Disputes incorporated in the AAA’s Commercial Rules apply to claims that meet or exceed $500,000. It goes without saying that the AAA Rules are important to practitioners when drafting arbitration agreements or when litigating disputes governed by the AAA Rules.

The Commercial Arbitration Rules, including procedures for large complex cases have been substantially revised with the changes becoming effective October 1, 2013. The new rules and amendments “shall apply in the form in effect at the time the administrative filing requirements are met for a demand for arbitration or submission agreement received by the AAA.” Apparently, the amendments would not apply retroactively to a pending arbitration, unless the parties consent. Rule 38 (governing emergency measures of protection) applies to arbitration agreements entered after October 1, 2013.

A significant amendment is that, for claims over $75,000, the Rules require mediation under the AAA’s Commercial Mediation Procedures. Any party may unilaterally opt out of the mediation. Unless otherwise provided, the mediation runs concurrently with the arbitration. Unless all parties and the mediator agree, the mediator shall not serve as an arbitrator in the dispute. R-9.

There are new rules governing the preliminary hearings with a checklist of topics to be addressed by the parties and the arbitrator(s). P-1-2.

New rules include the duty of the parties to disclose conflicts with the arbitrator(s) and failure to disclose may constitute a waiver to later object.

Other significant changes include:

Dispositive Motions – guidance is provided on the standards to be applied by arbitrators when considering dispositive motions. R-33. That is, the arbitrator(s) may allow the filing of dispositive motions only upon a determination that the moving party has shown it is likely to succeed and dispose of or narrow the issues. (Author’s Note: allowing the filing of dispositive motions as of right can be inconsistent with a streamlined and cost-effective arbitration process and that may be why the rule does not allow filings as of right. The new standard, however, appears to be similar to the standard for preliminary injunctions but in the context of summary judgment. As it stands, the new rule may invite collateral litigation on the propriety of summary adjudication and may require the filing of dispositive motions for the arbitrator to determine likelihood of success. It remains to be seen how the arbitrator can avoid prejudging the merits of the dispute to decide whether to allow any dispositive motions without the benefit of the motion itself and the opposition).

Emergency relief- formerly existed as optional procedures, but are now included in the Rules themselves. R-37-38.

Greater Arbitrator Control
o over the exchange of information, power to order reasonable document exchange
o with the ability to put boundaries on discovery and e-discovery
o with the power to allocate costs
o with sanction power for abusive or objectionable behavior
o and guidelines for dealing with non-paying parties



Monday, September 9, 2013

Puerto Rico Supreme Court “federalizes” summary judgment practice with implications in all civil cases

Depending on whose interests are at stake, one of many factors to consider on whether to remove a Law 75 or Law 21 case to federal court should be the difference in the procedural rules and the approach for the resolution of summary judgment motions between local and federal courts.

Generally, principals in Law 75 cases perceive the federal court, with its history of Law 75 precedents, as being more receptive to resolve by summary judgment in some measure due to the rigorous and uniform summary judgment procedure, and the “anti-ferret” rule (where the opponent cannot rest on vague and unsubstantiated factual allegations). At the federal district court level, the Local Rules incorporate the “anti-ferret” rule demanding litigants to specify and support their allegations and counter-allegations of the undisputed and disputed material facts.

On the other hand, for decades, at least since the Bishop case in 1986 (Corp. Presiding Bishop v. Purcell, 117 D.P.R. 714 (1986)), the Puerto Rico Supreme Court has been reluctant to approve the use of summary judgment in civil cases treating it as an “extraordinary remedy” appropriate in the clearest of cases where the “court has before it the truth of all the relevant facts.” As a result, summary judgment practice in the local courts has become increasingly rare if not a dead letter (First Amendment cases may be an exception), unpredictable, and procedurally disjointed as some litigants successfully defeat summary judgment motions with vague, unsubstantiated, contradictory, and generalized allegations.

The change to adopt federal procedural practice may have begun in 2010 with the amendments to Puerto Rico’s Rules of Civil Procedure tracking many of the Federal Civil Rules, including Rule FRCP 56 and leading up to the case under consideration: José Zapata Berrios v. J.F. Montalvo Cash & Carry, Inc., CC-2012-0152 (T.S. Aug. 27, 2013). There, by a vote of 5-4, the Court held that Rule 36(b)(c) of the Rules of Civil Procedure (2010) incorporate “anti-ferret” requirements whereby the moving party must substantiate its allegations with evidence and record support and the opponent must answer the factual allegations with admissible evidence and cites to the record. The Court also held that the lower court must disregard a “sham” affidavit; one that is directly and materially contradictory to the declarant’s deposition testimony-a rule having widespread acceptance in the federal courts.

More to say about the facts. Defendant JF Montalvo, a wholesaler and retail groceries chain, terminated Plaintiff, an Assistant to the President, because of an alleged bona fide restructuring of its operations for economic conditions and a substantial reduction in sales. Plaintiff filed suit alleging a termination without cause under P.R. Law 80, a special law protecting certain employees from unjustified termination of their employment. Defendant filed an MSJ with proposed uncontested facts citing to the record. Plaintiff failed to contest each of the facts and opted to allege that the termination was pre-textual based on an additional set of facts. For Plaintiff’s failure to comply with the anti-ferret rule, the Court held that the proposed uncontested facts should have been admitted as uncontroverted. Disregarding the sham affidavit and accepting the undisputed facts, the Court concluded that summary judgment was appropriate as a matter of law; the termination was justified under Law 80; and reversed the judgment below declining to enter summary judgment for the employer.

Time will tell, but it may now be that the difference in procedural standards may not be so prominent a factor when deciding whether to remove a Law 75 case to federal court.

Tuesday, June 25, 2013

Consumer trends in the grocery business and the market may be shrinking

Marían Díaz, a reputable business reporter of El Nuevo Día, published on June 21st an interesting piece highlighting the results of a market study commissioned by Ferdysac Márquez, President of MIDA (la Cámara de Mercadeo, Industria, y Distribución de Alimentos) that was discussed during MIDA’s recent convention. The study relies on a survey conducted by Gaither International of the spending habits of consumers of groceries in Puerto Rico during April and May, 2013.

Market studies can become useful or probative to support or rebut allegations of just cause in distribution cases at least when evidence of market or economic conditions is an issue in the case. This evidence can also be relevant to corroborate the reasonableness of rules of conduct or sales quotas or goals or even to explore the “best efforts” that distributors can undertake to serve or promote the principal’s products or services. To paraphrase, just cause under Law 75 means a material breach of an essential contractual obligation on the dealer’s part or conduct that adversely and substantially affects the principal’s interests in the Puerto Rico market.

The study points out that consumers are spending less each month of this year in groceries when compared to the previous year and about the same dollar amount as four years ago. Díaz reports that the “study also measures factors that can affect the groceries industry in the future,” including the fact that the market could be shrinking from residents leaving or intending to leave Puerto Rico. The study highlights a number of factors that consumers take into account when buying groceries, such as:

New products. 31% of those surveyed are attracted to new products on the shelves but prefer to try the product first hand in the supermarket before making a purchase.

Out of stocks (OOS). This can be a recurrent issue in Law 75 cases and is a growing problem for retailers. 19% of those surveyed did not return to a particular supermarket with OOS in 2013 versus 12% in 2012. 60% blame the supermarket for the OOS.

Packaging. 32% of those surveyed prefer to purchase only products that have clearly identified expiration dates or are described as fresh.

Generic or Private Label Brands are becoming increasingly attractive for price and quality. 83% of those surveyed this year purchase private label products- an increase of 7% over the previous year.

The study also underscores trends of consumers in growing products in their homes and buying more frozen and locally manufactured products.

Tuesday, June 4, 2013

Law 75 case gets thrown out of federal court for failing to meet the jurisdictional amount requirement

I don’t recall a single case, but this one, dismissing a Law 75 action for not meeting the jurisdictional amount requirement for diversity jurisdiction. This one, Industria de Refrigeracion v. Gutierrez, 2013 WL 2378580 (D.P.R. June 3, 2013)(FAB) was skeletal from the start. But see General Motors v. Royal Motors Corp., 769 F. Supp. 2d 73 (D.P.R. Feb. 1, 2011)(Gelpí, J.)(reported on 12/5/2011); Ramirez de Arellano v. Budenheim USA, Inc. 2010 WL 3810078 (D.P.R. Sept. 22, 2010)(Perez-Gimenez,J)(reported on 11/23/2010).

There, plaintiff-supplier, a Colombian corporation, filed suit against a Puerto Rico distributor for breach of contract and collection of moneys of past due bills of lading totaling $45,653 and for declaratory judgment that termination of the non-exclusive distribution contract was with cause. Defendant’s sales of plaintiff’s products exceeded $300,000 over the past five years.

The court entered an order to show cause why the complaint should not be dismissed and the defendant followed with a motion to dismiss. Plaintiff opposed dismissal arguing that aggregation of the two claims exceeded the jurisdictional amount. See FRCP 18. The claim for declaratory judgment had to exceed $29,347 to establish jurisdiction, and it did not. The court framed the test as whether the “object giving value to plaintiff’s claim for declaratory judgment is the economic stake in the agreement.” To meet its burden, plaintiff filed an affidavit “on information and belief” attesting that the value of the agreement exceeded $40,000 based on sales of $300,000. Trouble loomed on the horizon. The Court disregarded the affidavit holding that it contained “bald statements based on round numbers as to the value of the contract.” Finally, it dismissed the action holding that “anyone familiar with the applicable law could [not] objectively view that the aggregate claims reach the jurisdictional minimum.”

First Circuit overturns jurisdictional dismissal in a Law 75 case

In Bacardi Intern. Ltd. v. V. Suarez & Co. Inc., 2013 WL 1919578 (1st Cir. May 8, 2013), the parties filed parallel proceedings in local and federal court to vacate and confirm a commercial arbitration award in a Law 75 dispute. An arbitration panel of the AAA had issued a partial final award in a bifurcated arbitration concluding that offset provisions in a sub-distributor agreement of the measure of damages were valid and enforceable under Law 75. The sub-distributor sought to vacate the award in the local court, a case that Bacardi removed and was remanded, and Bacardi filed a separate motion under Title 9 of the FAA to enforce it in federal court. It turned out that the federal court dismissed Bacardí’s proceeding for lack of jurisdiction and the local court confirmed the Award under the FAA. The sub-distributor appealed the local court’s judgment.

The First Circuit did not find it necessary to reach Bacardí’s “lively” argument that Titles 6 and 9 of the FAA preempt FRCP 19 by virtue of FRCP 81. Instead, the court concluded that the lower court had abused its discretion by dismissing the action for lack of jurisdiction because Bacardí Corporation, an affiliate, was not an indispensable party. Significantly, the First Circuit made a preliminary assessment of the merits of the motion to confirm to make a pragmatic determination that there was no risk of inconsistent obligations from Bacardi Corporation’s absence. After all, Bacardi International had been vigorously defending its identical interests to confirm the Award in their favor, the affiliate had not moved to intervene, and “review of arbitration awards is extremely narrow and exceedingly deferential” under the FAA. Touching but not deciding the broader preemption argument, the court rejected a blanket rule that would make indispensable all the parties to the arbitration in order to decide a motion to confirm. The court found that subject matter jurisdiction existed.

The First Circuit reversed the judgment and remanded to the federal court with instructions to stay pending the parallel certiorari proceeding in the local appellate court. Bacardi filed a petition for rehearing en banc of the decision to stay the motion to confirm and V. Suarez moved to reconsider the finding that Bacardi Corporation was neither required nor indispensable.

The author argued the appeal as lead counsel for Bacardí International.

Monday, April 15, 2013

It can matter who files first: the race to the courthouse has allure in Law 75 cases

Should I file first or wait to get sued and defend or respond? Aside from the legal merits of claims or defenses, there are procedural advantages to the first-filed rule and that rule is that federal courts in different jurisdictions may, but not always, defer to the first-filed case in parallel cases as a matter of courtesy and convenience. Abstention doctrines come into play when there are parallel state and federal cases. There is no certainty about the application of the rule as one court may decide to keep a case despite the first-filed rule and another may not be persuaded to transfer it on grounds of alleged inconvenience. This increases the risk of inter-jurisdictional conflicts.

One would think that filing first would be a wise strategy at least when you know that your client will get sued or where you want the benefit of a presumptive more convenient or favorable forum. You may still end up defending in two jurisdictions if both courts refuse to transfer their respective actions, but at least you have one forum of your choice.

This is what the supplier must have thought in Ace Hardware Int’l Holdings Inc. v. Masso Expo Corp., 2012 WL 182236 (N.D. Ill. Jan. 23, 2012) when it sued the Puerto Rico distributor for declaratory judgment in federal court in Illinois. Instead of counterclaiming in the Illinois action, Masso, the distributor, responded with a Law 75 action against Ace in federal court in Puerto Rico. 2011 WL 5525381 (D.P.R. Nov. 14, 2011). The case in Illinois was filed first and months before the Puerto Rico action. Still, the federal court in Puerto Rico (Gelpí, J. adopting Vélez Rivé’s recommendations) denied a motion to transfer the parallel action to Illinois.

For its part, the federal court in Illinois was not moved to reconsider its ruling refusing to transfer the parallel action to Puerto Rico. First, it held that, the fact that Puerto Rico law applies is not sufficient to transfer and there is no choice of law provision mandating litigation in Puerto Rico or for that matter, in Illinois. Second, the court disagreed with the Puerto Rico Magistrate Judge’s dictum that Law 75 prohibited litigation of Law 75 claims outside of Puerto Rico courts and distinguished the permissive forum selection clause at issue in the agreements that would not offend Section 278(b) as opposed to mandatory forum-selection clauses that arguably would, but cites to numerous authorities enforcing mandatory forum-selection clauses in Law 75 disputes. While the Illinois court was careful not to cast blame on the Puerto Rico court for refusing to transfer, reading between the lines and citing a case transferring a Puerto Rico case to Texas based on the first-filed rule and Section 1404(a), the court found a way to disagree and keep the action in Illinois. Finally, the court also disagreed with the distributor’s pleas of inconvenience retorting that it was of its own making for having filed the Puerto Rico action instead of filing counterclaims in the Illinois action.

Thursday, February 21, 2013

Law 21 claim in the face of an expressly non-exclusive agreement does not survive partial summary judgment, but Court acknowledges important textual interpretation of standing to sue under Law 21

In a previous blog (Jan. 14, 2013), I reported that the question remains unanswered whether a sales representative in Puerto Rico- who represents exclusively the supplier’s products but no competing lines and does so without a written agreement (or is silent on exclusivity)-states a claim under Law 21.

Most courts, and Gonzalez v. Hurley International LLC, 2013 WL 371766 (D.P.R. Jan. 31, 2013)(SEC), is no exception, endorse the view that the exclusivity contemplated by Law 21 means either a restriction on the supplier’s right to appoint a competitor or the grant of an intra-brand monopoly to the sales representative. It is fairly predictable that, as in Hurley, most Law 21 cases fail to state an actionable claim when the de facto exclusive representative (like a “sole” distributor, meaning there is no one else but him or her representing the line in the territory) does business with an expressly non-exclusive written agreement. There should be no ambiguity there and that explains why the claim fails. Still, the question of statutory interpretation lingers whether one of the formulations of exclusivity that textually is possible under Law 21 is something different; that is, the representative has assumed the obligation not to represent competing lines, so that the character of his representation is “exclusive” for his principal. His or her attention is dedicated exclusively to the principal.

In a thoughtful opinion, Hurley addresses that question, although it concedes that it is not necessary for its holding. Hurley involved a motion for summary judgment to dismiss plaintiff’s claim brought under Law 21. Plaintiff, a representative of surfing wear clothing and equipment, filed suit alleging an unjustified termination of a sales representative agreement. Plaintiff alleged that Hurley’s founder had verbally appointed her as the exclusive representative and required her not to compete by offering similar products. Plaintiff was not the sole representative as Hurley offered its products for sale in Puerto Rico through other channels, including licensees and national accounts, such as Costco. Much to plaintiff’s chagrin, she signed an expressly non-exclusive agreement which expired, but the parties continued doing business under the same terms and conditions until the unilateral termination of the business relationship.

The thrust of the decision granting partial summary judgment for Hurley is that where, as here, the terms of the contract are clear and unambiguous, those terms must be enforced under the Civil Code so that plaintiff is clearly a non-exclusive representative and has no actionable claim under Law 21 for at least claims arising during the duration of the agreement. It does not matter that, verbally or from a course of dealings, plaintiff may have been the sole representative or was bound by a verbal agreement not to compete.

Plaintiff then argued that the court should disregard the non-exclusive terms of the agreement and accept the business reality that the “arrangements of the parties” evidenced exclusivity. For this proposition, plaintiff argued that Law 21 is of public order and the rights cannot be waived. The Court correctly noted that the anti-waiver provision in Law 21 was meant to prevent situations where the principal purposefully conceals aspects of the business relationship to avoid liability under Law 75, citing Advance Exp., Inc. v. Medline Indus., No. 06–1527, 2007 WL 853745, at *2 (D.P.R. Mar.19, 2007), not to excuse the parties from clear and unambiguous contracts they have willingly subscribed. As the Court carefully noted, “[s]he cannot now use Law 21’s liberal undertone as a sword with which to cut down what she voluntarily agreed to in the first place.” So, the waiver argument fails. The written agreement overrides the verbal allegations of exclusivity. Accordingly, the Court dismissed the Law 21 claim stemming from 2007-2009 for the duration of the agreement.

With respect to claims arising before entering into the agreement, the court also granted summary judgment reasoning that the claims were time barred. As to the six-month gap where the parties continued to do business after expiration of the agreement, Hurley failed to prove extinctive novation and the Law 21 claim for that period survived termination. There was a triable jury issue on whether the parties’ modus operandi evinced exclusivity.

The Court went further. In dicta, the Court delved into the unanswered question of statutory interpretation and acknowledged the textual meaning of Law 21: “Whether an agent is the sole sales representative within a defined territory, and whether her sole business is to represent the principal’s products or services (like González), then, should be of some consequence to the exclusivity determination. At the outset, this interpretation (the “Traditional Interpretation”) comports with the ordinary meaning (or at the very least one meaning) of the word exclusive. See, e.g., City of Vicksburg v. Vicksburg Waterworks Co., 202 U.S. 457, 471 (1906) (finding that exclusive means ‘[a]ppertaining to the subject alone; not including, admitting, or pertaining to any other or others; undivided; sole: as, an exclusive right or privilege ...” (citation and internal quotation marks omitted; emphasis added); Webster’s Ninth New Collegiate Dictionary 433 (1986) (defining exclusive as “limiting or limited to possession, control, or use by a single individual or group” or as “single, sole”). The Traditional Interpretation is also in accord with the Civil Code’s provision that “[t]he words of a law shall generally be understood in their most usual signification, taking into consideration, not so much the exact grammatical rules governing the same, as their general and popular use.”

Further, as I had observed in my Blog, the Court noted: “Cruz–Marcano seems to have left unanswered the question whether exclusivity is simply a limitation on the principal’s right to compete (the mercantile law definition), or whether it can also encompass the Traditional Interpretation: a non-compete obligation by a sole sales representatives whose business is solely to represent the principal’s products. Sales representatives like González would greatly benefit from this latter interpretation, which may further the objective behind Law 21 of placing the sales representatives on equal footing with the distributors currently protected by Law 75.”

In the end, the Court held that plaintiff “has completely ignored this important argument” and was waived. Having ruled that plaintiff’s Law 21 claim partially survived summary judgment, the Court then held that Hurley’s just cause defense was a factual issue for the jury.

Wednesday, February 20, 2013

The question of exclusivity in a declaratory judgment action under Law 75 is for the jury

The exclusivity imbroglio continues. In Medina & Medina v. Hormel Corporation, No. 09-1098 (JAG)(D.P.R. Feb. 20, 2013), Plaintiff, a distributor of meat products, filed an action for breach of contract, damages, and declaratory judgment under Law 75. After motion practice, the Court found that summary judgment was inappropriate on the issue whether an exclusive distributorship existed and ordered a jury trial as demanded in the Complaint. The parties agreed to bifurcate liability and damages to try first the issue of liability. During the pretrial conference, defendant Hormel objected to having juries decide the ultimate question whether there was an exclusive agreement arguing that it is an issue of law for the Court. The Court, however, holds that an action for declaratory relief is both legal and equitable and the constitutional right to a jury trial requires the jury to decide the exclusivity question. Mind you, under Puerto Rico law, exclusivity is apparent from the agreement of the parties or the course of dealings. Stating the Court’s Opinion differently, the distributor’s claim for impairment of an alleged exclusive contract under Law 75 requires the jury to decide if the facts demonstrate the existence of a meeting of the minds to appoint Medina as the exclusive distributor, and if so, the scope of the exclusivity. In other words, was there a breach of contract? Bifurcation of the case and the declaratory judgment action do not override the right to a jury trial on this question.

Monday, January 14, 2013

What does exclusivity mean in Law 21? The question should be revisited.

Dear readers, I’d like to start the New Year with a provocative thought.

There is a substantial body of case law holding that a sales representative cannot have an actionable Law 21 claim without an exclusive contract with a manufacturer or grantor. See, e.g., Cruz Marcano v. Sanchez Tarazona, 172 D.P.R. 526 (2007)(adopting a commercial definition of exclusivity). Plain text of Law 21 defines a sales representative as “an independent entrepreneur who with a character of exclusivity establishes a sales representative contract with a principal or grantor…” 10 Laws of P.R. Annot. §279 (a)(translation ours).

One has to wonder- from a public policy standpoint- the legislative wisdom behind the exclusivity requirement in Law 21. After all, Law 21 is patterned after Law 75 and Law 75 does not require exclusivity for an actionable claim brought by a non-exclusive dealer. Further, Law 21 was enacted precisely to provide a remedy to those commercial agents left unprotected by Law 75, Roberco v. Oxford, 88 J.T.S. 102 (1988). It seems counterintuitive that a remedial statute enacted to fill gaps in another special law would leave the beneficiaries, i.e., non-exclusive sales representatives, without a remedy for unjustified actions by their grantors when their dealer counterparts have legal protection. See Statement of Motives, P. of S. 793, December 5, 1990.

Legislative wisdom aside, the plain text of Law 21 requires exclusivity and courts cannot overlook the statute as written, but the question arises what does exclusivity mean? Without statutory or contractual definitions, the word exclusive, by itself, may turn out to be vague or ambiguous, especially in this new age of sales through the internet, the expansion of club stores and the presence of national accounts doing business without borders. Courts have defined exclusivity as limiting the supplier’s right to sell directly or appoint another competing distributor in the territory. Exclusivity can be airtight to prohibit all intra-brand competition or limited in scope by products, clientele, or territory. These are commercial definitions of exclusivity that have been developed from a course of dealings, precedent, commercial contracts, and treatises.

What the cases have left unanswered, however, as the issue may not have been raised, is whether exclusivity is simply a limitation on the supplier’s right to compete or can it be something else. What else could it be? Start with plain text (and the Spanish language controls). The qualifier of exclusivity in §279 (a) appears before not after the definition of the object of the “sales representative agreement” which is the grant of a specific territory or market within Puerto Rico. The statute does not say an “exclusive contract with a principal or grantor”, but rather, defines the sales representative as an “independent entrepreneur quién con carácter de exclusividad (who with a character of exclusivity) establishes a sales representative contract with a principal or grantor…”. Moreover, “sales representative contract” is a defined term in §279(c) and nowhere does that definition mention exclusivity as an element of a claim. Does the order or sequence of the exclusivity qualifier in the plain statutory text make a difference? Certainly, an argument can be made that it does. Had the Legislature intended to define exclusivity as a restriction or self-limitation on the supplier’s grant it would have chosen to add exclusivity after but not before the reference to the sales representative contract.

Then, what does it mean the “character of exclusivity” of the “independent entrepreneur”? In this context, the ordinary meaning of exclusivity is subject to several connotations: “limiting or limited to possession, control, or use by a single group or individual”, “excluding others from participation.” See Merriam-Webster’s on line dictionary. An authoritative Spanish Dictionary, cited in Cruz Marcano, supra, defines exclusivity as “the privilege or right by which a person or entity can do something prohibited to others.” These definitions support the commercial meaning of exclusivity endorsed by the courts. El Diccionario de la Real Academia Espanola (8th ed.) also provides an ordinary meaning definition not mentioned by the Cruz Marcano court which is “único, solo, excluyendo a cualquier otro.” Webster’s alternative definition is similar: “whole, undivided” as in exclusive attention paid by him or her.

Should the text follow a commercial definition, as precedent requires, or should the text be construed by its ordinary meaning, especially when ordinary meaning also has a valid and established commercial use, as in a non-compete obligation by the agent? It is certainly arguable that the character of exclusivity means the “whole, undivided” attention paid by the independent entrepreneur to the supplier’s products to the exclusion of competing products which is akin to a non-compete obligation. A sales representative may have an obligation either not to compete with similar products of the supplier (the “exclusive” character of the agent’s business) or he or she may represent solely the supplier’s products not because it has agreed not to compete but because that is the character of his or her business. Cruz Marcano left the door open for this alternative reasoning because it defines one element of Law 21 as requiring evidence that the agent has “promot[ed] and transact[ed] in an exclusive manner contracts on behalf of a principal...” (translation ours).

Following an ordinary meaning of the word exclusive and assuming the absence of an expressly non-exclusive contract, the “exclusive” entrepreneur (dedicated to serve solely the grantor’s products) that has developed or expanded the market and clientele for the principal's products or services could have an actionable Law 21 termination claim even though the supplier or grantor never granted exclusivity to preclude intra-brand competition. As precedent now stands, these "exclusive" sales representatives, but "non-exclusive" in the commercial sense of the word, would have no relief under Law 21 for an unjustified termination of the relationship.

If it were proper to look at legislative history in this context, it is either inconclusive or suggestive of intent not to exclude agents from protection. There is no discussion about the scope of exclusivity other than to indicate the types of agents that previously had no protection and would have protection now, including representatives of pharmaceutical products (“representantes de fabrica”). There was some discussion not to limit the scope to mercantile transactions but to encompass civil contracts as well. The definition of sales representative underwent modifications as the bill passed through the House and the Senate. Initially, the statute defined the “exclusivity character or not”, see P. of S. 793, May 3, 1990, and the word “no” was deleted from the final bill. While this clearly suggests that a non-exclusive agent would not be protected as supported by plain text, legislative history seems inconclusive on the meaning and scope of exclusivity.

To be sure, non-exclusive sales representatives are left out in the cold unless the Legislature amends Law 21. But a class of agents whose business is solely to represent the principal's products or services, have a leg to stand on, if courts open the envelope and reconsider what exclusivity means.

Monday, November 19, 2012

After proving just cause, supplier wins on summary judgment to dismiss Law 75 federal action

In one of the most noteworthy Law 75 cases for suppliers since the Medina and Nike decisions of the 1980’s, the federal district court in Casco Sales v. Maruyama, No. 10-1145 (SEC)(D.P.R. Nov. 2, 2012), granted the supplier’s MSJ finding just cause for termination of an exclusive distribution agreement for the sale of landscape equipment.

The case is significant for respecting liberty of contract and sweeping aside multiple factors that in the past have been obstacles precluding summary judgment in Law 75 cases, such as: the materiality of essential contractual obligations, acceptance of late payments vs. acquiescence or tacit consent, the dealer’s knowledge of the grounds or basis of the termination and the sufficiency of the termination letter, cumulative effect of arguably non-essential breaches and the meaning of the statutory just cause prong of substantial and adverse effect to the principal’s interests, and whether looking for another distributor is sufficient to prove a pretext for the termination.

Endorsing the clear terms of the contract subscribed by the parties, the court found just cause for termination based on: 1) the dealer’s consistent breach of the payment terms; 2) the dealer's failure to provide inventory and sales reports as required by the agreement; 3) refusal to participate in the supplier’s “booking program”, and 4) the dealer’s failure to hire and train sales personnel to market the principal’s products and to maintain an adequate sales force.

Late payments. The court distinguished First Circuit precedent holding that summary judgment is inappropriate in “abnormal circumstances” where the supplier “does not care” about late payments. The court found that the contractual terms were essential obligations and the principal had not waived the payment terms or acquiesced to accepting late payments. According to the Court, accepting late payments is different from acquiescing or tacitly consenting to them. Failure to pay on time affected the principal’s ability to sell equipment and led to credit holds which satisfied the “independent ground” for just cause in Section 278. In sum, accepting late payments did not operate to novate the payment terms in the agreement. Nor does providing a payment plan proscribe the principal from terminating the agreement in the future. It certainly did not help the dealer that, at the time of termination, it owed the principal $57k in unpaid invoices.

Notice of termination. The Court rejected an argument that Law 75 or the agreement required a “warning” or “threat” that the dealer’s contractual non-compliance would be a ground for termination. Although the termination letter “could have been better drafted” to provide “a succinct explanation” of the breaches of the agreement, there is no requirement in Law 75 that the supplier send the dealer written notice detailing every possible basis for termination. The only requirement is the existence of just cause and the agreement provided notice of the grounds for termination. The court held that the “cumulative weight” of the dealer’s “other contractual breaches” even if deemed non-essential (besides failing to pay on time that breached an essential obligation), was detrimental to the parties’ relationship and adversely and substantially affected the principal’s interests (and proved just cause).

Pretext. The Court rejected the dealer’s argument that the termination was a pretext to switch distributors. The Court found nothing wrong that the principal, to avoid a serious disruption in sales, had been looking for other distributors at the time of termination. “Prohibiting such a sensible approach...would deal a severe blow to our free enterprise system.”

Note: Before discovery and the filing of the MSJ, the Author served as the mediator in the case.

Sunday, October 14, 2012

Measure of damages for lost income revisited: net profits and a new rebuttable presumption to deduct variable expenses

Although Law 75 characterizes the infringing act giving rise to a claim as a tort, the computation of damages for lost profits arising from an unjustified impairment or termination of a dealer’s contract has its origins in contract principles derived from the civil or common law. For as long as I can remember, reputable experts in Law 75 cases have offered contradictory opinions on whether the computation of lost profits should be made after deducting fixed or only variable expenses, or some formulation in between. These formulations are tagged as the “straight line” approach or a modified approach etc. This area of the law has provoked one of the last few “accounting” or ‘economic” damages controversies that remains under Law 75. It should be settled by now that recovery of lost profits and goodwill is not per se duplicative (but there is substantial authority that recovery of goodwill is not necessarily permissible even if not duplicative). It is also settled that recovery is pre-tax. The last remaining frontier that still divides franchise lawyers and experts had been the allocation of costs to compute lost profits. The reason should be obvious: less deductions equals more profits and vice versa. For their part, courts have largely declined to adopt bright line rules, and in federal cases tried to juries, the weight of conflicting expert opinions has been left for juries to resolve as a matter of credibility. This is a tall task for laymen or lay women sitting in juries producing in some cases “split the baby” awards. Not to digress too much, but if you read the First Circuit's Rubbermaid case carefully you will see what I mean when a jury faces two party appointed experts and one court appointed expert on damages. It split the award down the middle.


While the Supreme Court of Puerto Rico’s recent and thoughtful opinion that I am about to discuss still leaves work ahead for both accountants and lawyers alike, it does offer substantially more clarity as to the proper methodology to compute claims of damages for lost income in all civil cases. I anticipate that, after this decision, courts have greater leeway and more responsibility as the gatekeepers to ensure reliable expert opinions to determine whether experts have the adequate foundation (e.g.,evidentiary basis of the operational costs) before allowing opinions to reach the jury. This is not fundamentally different from what has existed since Daubert, but at least now, the proper computation of damages is not necessarily a jury issue.


In El Coqui Landfill Inc. v. Municipio de Gurabo, 2012 TS 141 (P.R. Sept. 20, 2012)(Fiol-Matta, J.), the Court’s holding has four components, first, the proper computation is net, not gross profits; second, the expenses that must be deducted from the gross are those costs that claimant saved because of the impairment or termination of the contract (stated differently, those are generally called variable expenses in that claimant would have incurred those costs had defendant performed the contract and those costs may vary with the volume of sales); third, the definition of what is a variable or fixed cost is not rigid and may change depending on the industry or the business; fourth, and perhaps most important, claimant has the burden to overcome with business records and analysis the newly-created rebuttable presumption that costs are variable and should proportionally (depending on sales volumes) be deducted to compute net profits. In other words, claimant has the burden to prove that the costs are fixed or that it saved no costs because of the termination or impairment (two Justices dissented on this point).


The facts of El Coqui illustrate that the Court’s holding has far-reaching implications in Law 75 and tortious interference cases. There, plaintiff, a waste disposal company, had an exclusive contract to provide waste disposal services at the municipality’s landfill. The defendant municipality breached the contract with a third party who was liable in solidum for tortious interference. Plaintiff’s accounting manager, who was a CPA, testified that he computed the damages for the income lost during the duration of the contract, but did not deduct any costs from the gross because he said the costs of providing services were fixed not variable. The trial court awarded damages of $1.2 million plus interest at 4.25%, a judgment affirmed by the appellate court. The flaw in the accountant’s analysis, which caused the Supreme Court to modify and remand the judgment, was that the accountant’s conclusory testimony was devoid of business records, data, and analysis of the operational costs of the claimant’s business.


It remains unclear the quality or quantum of the evidence that a claimant must offer to overcome the rebuttable presumption that the costs are variable with the volume of sales and should be deducted from gross profits. I predict that there will be collateral litigation, as there has always been, over the allocation and amount of costs to determine the proper measure of lost profits. Another point that may go unnoticed is that the opinion of damages need not necessarily rest on an independent expert, but may rely on a certified public accountant employed by the company who has personal knowledge of the business. This may not bode well for independent experts at least when the claimant can count on a reliable in-house accountant or finance manager to testify about the measure of damages.

Friday, September 21, 2012

Newborn Law 75 cases are moving upstream in the federal court

Both involve declaratory actions. In V. Suarez & Co. v. Welch’s Foods, Inc., No. 12-cv-1490 (FB), Puerto Rico’s largest distributor struck first in federal court asking for declaratory judgment and alleged potential (but not actual) termination damages alleging that VSC did not breach an obligation prohibiting activites with competing products in the distributorship agreement with Welch’s, a producer of grape juice products, when it acquired Campofresco, a local producer of Lotus-branded 100% juices, including grape juice. The case also involves allegations of an alleged impairment of contract from sales to club stores. The case is at the pleading stage and Welch’s will appear in due course to answer or move with respect to the Complaint. Note: The author represents Welch’s. The other action, Quaker Oats Corp. v. Ballester Hermanos, Inc., No. 12-cv-1712 (GAG), involves an action by Quaker Oats for the Court to declare what the amount of damages will be under Law 75 in the event of an unjustified termination of the dealer’s contract. Quaker Oats concedes that Law 75 applies and that it would not have just cause, but the parties (or their experts) disagree as to the amount of potential damages. Quaker intends to terminate the relationship effective from the filing of the complaint and seeks a declaration of how much money it will cost. Stay tuned.

Tuesday, August 28, 2012

Is the floodgate open? McDonald Corporation’s disgruntled retail franchisees in Puerto Rico find coverage under Law 75

In a case with potentially far-reaching implications in the food services retail industry, the Court of Appeals, San Juan Division in AA& S Food Service Corp. v. McDonald’s Corporation, 2012 WL 2577784 (TCA, May 12, 2012), denied a petition for certiorari to vacate the lower court’s adoption of a report by a Special Commissioner (Angel Rossy, Esq.) that certain McDonald’s franchisees are protected by Law 75. According to the court’s opinion, the complaint alleges that defendants intend to impair and terminate the established dealer relationships and appropriate the goodwill by requiring the franchisees to invest significant amounts of money to remodel stores and then force the franchisees to sell their franchise rights. In response to the franchisees’ motion for preliminary injunctive relief, McDonald’s moved to dismiss arguing that the franchise agreements were not distribution contracts within the meaning of Law 75. McDonald’s main argument was that the franchising contracts are atypical and resemble the franchise agreement in the Supreme Court’s Martin BBQ case which, according to McDonald’s counsel, was outside the scope of Law 75. Applying the traditional factors in Lorenzana to determine who qualifies for Law 75 protection, the appellate court determined that the lower court was not arbitrary and capricious in adopting the report which found that the franchisees complied with most of the factors for Law 75 coverage, such as taking risks in signing the franchising agreements, investing in advertising and promotion, assuming the costs and responsibility of maintaining an inventory, and complying with standards of quality required by the franchisor. Author’s Note: Why did the Court of Appeals need to explain its reasons to deny certiorari, aside from maximizing the possibility of a denial of certiorari by the Supreme Court? It can hardly be said that the decision denying certiorari would be precedent in similar cases. The court’s reasoning could be criticized as dictum or as an advisory opinion. Be that as it may, the case may open the door to a potential class of Law 75 plaintiffs- including hundreds of retailers, franchisees, and mom and pop stores that resell products to the ultimate consumer. To me, the focus is not whether franchisees are excluded from Law 75 coverage as a matter of law- a proposition doubtful at best given Law 75’s broad definitions of “distributor” and “dealer’s contract” in §278(a)(b) to include a “franchise” … “on the market of Puerto Rico.” Rather, the opinion begs the threshold question whether retail franchisees have standing under Law 75 to claim the misappropriation of goodwill when the franchisor is the owner of its trademarks and associated goodwill developed from its investments worldwide in advertising and publicity. At least one federal case, Carana v. Jovani, 2009 WL 1299569 (D.P.R. 2009), held that Law 75 does not contemplate such recovery when the retailer free rides on the goodwill and clientele created by the franchisor of a famous or recognized brand.

Tuesday, August 7, 2012

Should an exclusive distributorship be implied from the supplier’s silence? Not according to a panel of the local appellate court.

In Next Step Medical Co. Inc. v. Bromedicon, Inc., 2012 WL 2399503 (TCA San Juan, May 23, 2012)(Dominguez-Irizarry, J.), the plaintiff-distributor filed suit for preliminary injunctive relief and damages under Law 75 in the Court of First Instance, San Juan Part, alleging an impairment with an alleged exclusive relationship for the distribution and servicing of medical products in Puerto Rico. The facts are somewhat unusual, but crucial for the court’s conclusion that there was no meeting of the minds over exclusivity. The parties exchanged and amended two drafts of an exclusive distribution agreement. The distributor signed and delivered the last draft to the supplier’s principal who never signed it. Subsequently, the parties met to discuss contractual expectations and differences of opinion arose as to whether the supplier would be bound by a purported obligation not to offer competing products for the services required by the distributor. At no time during those meetings did the distributor allege the existence of an exclusive relationship. Nor was an exclusive agreement ever signed. The distributor filed suit when the supplier began to offer the same medical services through other entities. The standards for preliminary injunctions in Law 75 cases are straightforward and addressed at length in the appellate court’s opinion. The appellate court affirmed the trial court’s denial of preliminary injunctive relief reasoning that the distributor had failed to establish irreparable harm as there was no evidence of actual damages and the sales of the line at issue were small when compared to total company sales; the distributor had failed to show convincingly the existence of an exclusive dealership necessary to prove likelihood of success on the merits; the allegation of harm to reputation was not substantiated and it incurred in laches. The court in effect affirmed the judgment by denying the petition for certiorari.