Tuesday, December 29, 2015

Have Puerto Rico Laws 75 and 21 become federal laws?

Puerto Rico has been federalized but how far would that go?

Would the federal district court have original federal question jurisdiction under 28 USC Sec. 1331 over any claims brought under Puerto Rico law, including Law 75, if Puerto Rico is considered to be a territory under Congress' plenary authority?

I suppose most would argue that there is no federal question jurisdiction because even a territory can enact local laws over matters of local concern without them becoming Acts of Congress. End of story.

But, the recent position adopted by the United States in a case pending before SCOTUS (Puerto Rico v. Sanchez Valle) certainly raises questions as to whether narrow and legally permissible (or cute) distinctions can be drawn that would not have far-reaching repercussions beyond deciding whether Puerto Rico can accuse persons for the same crimes being accused by the federal goverment.

In the PR case, the Solicitor General of the US filed an amicus brief arguing that Puerto Rico is subject to Congress' plenary authority under the territorial clause of the US Constitution so that, unlike the States, Puerto Rico has no separate sovereignty for purposes of the Double Jeopardy Clause. You can argue for the next millenium that the position of the US is limited to the Double Jeopardy Clause. I don't think so and the US should not get off the hook so easily.

In effect, according to the US, the US and PR are constitutionally one and the same- with you know who- having the absolute power and control over the other. If true, then it follows that Congress can't have the cake and eat it too. Being the sovereign, all local laws enacted by Puerto Rico under the plenary authority of Congress are federal in character which could theoretically be amended or repealed by an Act of Congress. What is there to constitutionally limit Congress from repealing local laws if it has absolute authority over a territory? We are not talking about acquired fundamental rights of US citizens. That is another matter. But I don't see the 10th Amendment as a bar if Congress can do as it pleases when it comes to Puerto Rico's welfare (and benefit entitlements). And, one of the many consequences of really being a territory might be that there would be federal question jurisdiction over all "territorial" law claims. To be sure, this would require revisiting years of precedent and expanding federal jurisdiction. Take the good with the bad, but be consistent, either way.

Maybe federal civil cases will come up as a test with local "federalized" claims when there is no diversity jurisdiction. As I said, there will be many repercussions from the pending SCOTUS cases involving Puerto Rico.

Tuesday, September 15, 2015

Plaintiff, like Rip Van Winkle, slept on its rights and the First Circuit affirmed the dismissal of a Law 75 case on statute of limitations grounds

The reader might recall the story of Rip Van Winkle where this character drank moonshine to the point of falling asleep for roughly 20 years only to find that the American Revolution had passed, among other personally more important things. In the case before us, Quality Cleaning Products S.C. v. SCA Tissue N.A., 794 F. 3d 200 (1st Cir. 2015), a distributor of cleaning products sued the principal under Law 75 eleven years after an alleged breach of the distribution agreement. The distributor basically alleged that the principal breached the agreement by selling certain products to other distributors at reduced and preferential rates and granting price discounts to its competitors. Not surprisingly, the principal’s primary defense was that the action was time barred by Law 75’s three year statute of limitations. The district court dismissed the case as time barred and the First Circuit affirmed the judgment below.

The First Circuit’s decision has a number of interesting substantive issues regarding accrual and tolling of statutes of limitations and procedural waivers in the context of actions brought under Law 75. The first issue, whose result did not favor the distributor, was that the “continuing violation doctrine” did not apply to prevent the accrual of the Law 75 claim from the time that the distributor first became aware of the principal’s breach at least ten before filing suit. After a thoughtful and complete consideration of the issue, the court held that a federal court sitting in diversity must apply the relevant state’s statute of limitations (not federal law), including the state’s accrual rules. And, finding no authority on point under Law 75, the First Circuit predicted that the continuing violation doctrine has been largely confined to civil rights cases and Puerto Rico’s Highest Court has not applied it in contract cases. The court also found support not to apply the doctrine from the “need for expeditious resolution of commercial disputes.”

But plaintiff was not to be outdone. Plaintiff alleged that under the “discovery rule” it did not have knowledge of the breach- for reasons unknown- until 2011, but the record did not help plaintiff on this issue. The court left open the question whether the discovery rule applies in Law 75 cases. It left the issue undecided because plaintiff failed to raise the discovery rule in its opposition to the motion to dismiss but brought it only in a Rule 59(e) motion for reconsideration. But that doomed consideration of the alleged error because judicial review of a denial of the Rule 59(e) motion is for abuse of discretion, not an issue susceptible of plenary or de novo review. Finding no abuse of discretion, the court affirmed the dismissal.

Monday, July 6, 2015

What will become of Law 75 after the Krueger report? Where does the Puerto Rico Supreme Court fit in?

Those who have read the Ann Krueger report on Puerto Rico or its summary, and those of us who are attentive and affected residents of Puerto Rico or have economic interests in our shores, have reason for concern (should I say, alarm) about what is to come from Puerto Rico's endemic and historic structural problems identified in the report.

Most of the recommendations coming from the Krueger report are not new. All require hard to find political party consensus and political will. Most require U.S. Congressional or political oversight and legislation. Some of the recommendations include enacting federal bankruptcy protection for public corporations, the repeal or modification of the Jones Act, increasing local income tax and property tax collections, reducing the federal minimum wage for Puerto Rico, obtaining parity for federal welfare programs, reinstating Section 936 or similar federal tax credits, passing reforms of local labor laws and construction permits, among others.

More relevant to the subject matter of my blog, however, are business law reforms needed to make Puerto Rico's economic environment more competitive and business friendly. While the Krueger report is not too specific about the commercial legislation that can or should be revisited, it is not hard to predict that laws protecting Puerto Rico dealers and sales agents, among others, will come under the microscope as they have in the past. But before one jumps to conclusions about whether Laws 75 and 21 produce inefficiencies (or not) or contribute (or not) to public welfare, I'd like to add a factor that is far more conducive to commercial instability than is political inaction to change existing legislation.

According to the Krueger report, Puerto Rico ranks squarely in the middle of all foreign states in the world when it comes to respecting contracts. That is, 50% of all the countries have more respect for the validity and enforcement of private contracts than we do. What would those investing millions of dollars in Puerto Rico's real estate ventures and infrastructure think of this? An alarming statistic to be sure and nothing to be proud of. But why? Courts, administrative agencies, and contracting parties who sue are all responsible for this. I've reported before an increasing tendency of our local courts not to respect civil and commercial contracts as written. Under the guise of the Civil Code's disposition to ascertain the true intent of the parties, courts have used this as a license to ignore clear and unambiguous contractual terms and to reform contracts for the benefit of one of the contracting parties, usually the one who is perceived to be weaker or economically disadvantaged. But often the government itself is the beneficiary of contractual reform. This activisim or protectionism creates a spiral or doom of uncertainty and unpredictability in legal outcomes. As troublesome is the whole body of law that virtually makes private contracts worthless when contracting with the government. Estoppel and unjust enrichment doctrines do not apply, and I could go on.

The short of all this is that commercial legal reform and economic progress cannot be successful without judicial restraint and a predictable and uniform rule of law.

The Supreme Court of Puerto Rico, as the ultimate spokesman of what Puerto Rico law is, has the power if not a constitutional obligation to put an end to judicial activism in our local courts below and bring stabilty to our rule of law that is so badly needed. Maybe then we can begin to move up the "rankings" and improve our business climate to stimulate investment, create more jobs, and stop human capital from leaving Puerto Rico. Half the countries in the world are better than us at respecting contracts. What a shame.

Tuesday, June 30, 2015

Federal district court invalidates forum selection clause in an agreement governed by Law 21

Law 21 protects an exclusive sales representative in Puerto Rico from an unjustified termination of the agency or brokerage agreement. Law 21 is the counterpart of Law 75 (protecting dealers). As of late, courts have been all over the map on whether forum selection clauses (providing for litigation in state courts not arbitration) in agreements governed by Laws 75 or 21 violate Puerto Rico’s public policy, and are therefore, unenforceable.

In Victory Management Solutions, Inc. v. Grohe America, Inc., 2015 WL 2183148 (D.P.R. May 11, 2015)(Fusté, J.), the supplier Grohe moved to dismiss on grounds of forum non conveniens (not for failure to state a claim under Rule 12(b)(6)). Grohe alleged that the Law 21 claim for alleged wrongful termination of contract fell under a mandatory forum selection clause providing for litigation in Illinois. The district court found many problems with the chosen venue which made the clause unreasonable and unenforceable under the Court’s Bremen analysis. The district court determined that the clause had no connection to the parties, the agreement, or the dispute. Grohe’s lease of a third party warehouse for storage, logistics, distribution and service support was insufficient and made it unfair for the agent to litigate in Illinois. The court also gave weight to the fact that an Illinois court would most probably apply Puerto Rico law despite a contrary choice of law clause in the agreement.

The court also held that the clause was not invalid under Law 21’s public policy. While this part of the court’s decision is dicta, it opines on an issue previously left unresolved by the First Circuit in the Rodríguez Barril case but is consistent with other decisions validating forum selection clauses in distribution agreements governed by Law 75.

Wednesday, May 13, 2015

Local intermediate appellate court affirms Law 75 preliminary injunction issued under Next Step

Next Step v. Bromedicon, 2014 TSPR 30 ("Next Step") continues to produce different outcomes in the local trial courts and this could be explained by the different facts and circumstances or the equities of each case. What provides food for thought is that Next Step is tilting the balance in favor of a distributor's choice to sue in the local courts, as opposed to the federal court, when obtaining a preliminary injunction would be vital to ensure the survival of the distributor's business. One of the reasons for this is that, under Rule 65 of the Federal Rules of Civil Procedure, a federal court may not issue a preliminary injunction without proof that the traditional requirements for injunctive relief have been satisfied, which include proof of irreparable harm and likelihood of success on the merits. Next Step holds that the traditional requirements for injunctive relief are not mandatory for a statutory Law 75 injunction. It is debatable whether the statutory remedy of a preliminary injunction under Law 75 can override the norm that federal law controls matters of procedure even where the substantive law of the forum state supplies the rule of decision. The prospect that a preliminary injunction can be legally harder to obtain in federal court tilts the balance in favor of a distributor filing the action in the local court and the defendant removing the case to federal court.

In a recent case, Novavit, a Florida corporation engaged in the business of manufacturing and supplying “natural products”, executed an exclusive distribution agreement with Life Energy Inc., a Puerto Rico distributor. A few years into the relationship, the distributor complained that the supplier was not providing client leads for new business and was breaching the agreement by selling the products in the exclusive territory through another entity. What broke the proverbial camel’s back was that the supplier terminated the agreement because the distributor was selling products through the internet and had not made any purchases during a two month period. The distributor maintained that the agreement did not prohibit internet sales.

The distributor sued the supplier under Law 75 and requested preliminary injunctive relief to preserve the status quo. Life Energy Corp. v. Novavit, Inc. 2015 WL 1538250 (Feb. 25, 2015). After an evidentiary hearing, the trial court in San Juan (Hon. Angel Pagán) entered a preliminary injunction. On appeal, the supplier raised only two issues: 1) that the trial court erred by not dismissing the complaint against the individual defendants, and 2) that the trial court erred in concluding that the contract was amended to permit internet sales.

As to the first issue, the court held that it was waived as law of the case. The trial court had denied a motion for summary judgment on that same ground and the appellant had failed to file a timely appeal. Quaere, whether a denial of a motion for summary judgment becomes law of the case since review can still be had after a final judgment. What was clear, however, is that an appeal (certiorari) from a preliminary injunction does not allow interlocutory review of a prior order. As to the second issue, the court held that the trial court had not made a factual determination that the contract had been amended to permit internet sales. The injunction simply restrained the defendant from making defamatory statements against plaintiff that the products sold through the internet were false.

Citing Next Step and the legislative intent behind the “liberal” statutory remedy in Law 75, the appellate court held that the propriety of injunctive relief “depends in large measure” on whether the distributor proves prima facie that it qualifies as a protected Law 75 dealer. In the analysis, the court should consider the equities and the interests of the parties and the purposes served by the legislation. Id. at *6. The moving party has the burden to prove the damages that it would suffer if injunctive relief were to be denied, the impact to the public interest, and the reasons to enforce the agreement. According to the court, the existence of irreparable injury or the absence of just cause is not a required element for a preliminary injunction under Law 75.

The court affirmed the trial court’s order that plaintiff qualified as a Law 75 distributor and was worthy of injunctive relief in light of Next Step.

The appellate court’s decision in this case did not raise or involve a factual issue that, under Next Step, trial courts have discretion to deny injunctive relief based on any equitable defense, such as unclean hands, estoppel or laches. Next Step itself involved an order denying injunctive relief because the agreement there was non-exclusive and the scope of the remedy sought would have altered the status quo and re-written the agreement of the parties.

Monday, February 2, 2015

Are franchise agreements protected by Law 75? Is there room for Law 75 to be used as a shield in summary eviction and lender's liability cases?

One would think of a Law 75 dealer as a distributor in the ordinary meaning of the word; an entity that sells or provides services to products down the distribution chain. But, labels can be deceptive. Mom and pop stores could qualify for Law 75 protection, depending on the facts. This was the main issue in Hernandez Alonso v. Ricomini Bakery Cabo Rojo, 2013 WL 3356669 (TCA 2013), and yes, the bakery shop franchisee in that case may have Law 75 protection if it satisfies the factors in “Roberco” and progeny to distinguish between qualified dealers and other non-qualified resellers. This fact-intensive inquiry under “Roberco” does not hinge solely on the terms of the contract but requires a consideration of the nature of the commercial relationship between the parties and the obligations and rights that flow from that relationship.

This case raises interesting questions of the extent to which Law 75 can be used as a shield in summary eviction or lender's liability cases.

There, an eviction notice of the bakery shop operator led to the Law 75 lawsuit in question and to the consolidation of a separate eviction action. Plaintiff Hernández Alonso, an operator of the bakery shop, sued his franchisor-lessor, the defendant Ricomini Bakery Cabo Rojo Inc., alleging wrongful eviction and termination under Law 75 of both the franchise agreement and the lease agreement (for non-payment of rent). The trial court granted defendant’s motion for summary judgment dismissing the action. The trial court ruled that the Law 75 claim with respect to the termination of the lease agreement was “absurd” since leases are governed by the Civil Code (and presumably, summary eviction procedures would clash with preliminary injunctive relief under law 75) and Law 75 did not protect the franchise agreement as a matter of law. The trial court found that the franchise agreement in question did not have many of the attributes of Law dealerships, such as, marketing and publicity, coordination of market activities, delivery of merchandise, collections, maintaining and inventory, and the promotion and closing of sales contracts.

Not so fast, the appellate court decided in Hernandez Alonso v. Ricomini Bakery Cabo Rojo, 2013 WL 3356669 (TCA May 21, 2013). The appellate court reversed the grant of summary judgment finding that there were disputed questions of material fact on the record that required a trial. During proceedings below, the lessee deposited the rent in court and cured the default with disbursement of the payments to the lessor. The parties also mooted the request for injunctive relief by continuing with the franchise pending a judicial determination on whether Law 75 applies to the franchise agreement. As to whether Law 75 applies, the appellate court held “…we should emphasize that although the franchise agreement is not regulated in our jurisdiction, in certain circumstances it could be resolved that Law 75 applies to such contracts. The Supreme Court of Puerto Rico suggested as much in Martin’s BBQ, 178 D.P.R. 978 n. 10 (2010)…”. (translation ours).

On remand, the appellate court held that it is relevant in the Law 75 threshold inquiry not only the language of the agreement but also oral testimony and course of dealings that would reflect the full intent of the parties. “Especially, to determine what representations were made to the plaintiff, if any, that created an expectation in the continuity of the franchise, if any such representations were made to other franchisees; and if there were any agreements or practices between the parties that modified the written agreements or the initial commercial relationship.” Id at *12 (translation ours).

Author's note: This holding opens the door to an argument by the franchisee that discovery of any discriminatory or preferential treatment of other franchisees should be permitted because it can be relevant and material to the threshold issue whether it qualifies for Law 75 protection.

Law 75 is also employed or can be misused as a weapon to halt a franchisee's eviction from leased or dealer-owned premises. There is a tension, that courts have only begun to confront, between the summary eviction procedures in the civil law or procedure and the public policy interest in Law 75 to provide a preliminary injunction remedy in appropriate circumstances. Law 75 would come in as a counterclaim which is not necessarily permitted or suitable in a summary eviction proceeding.

It is also not hard to imagine that Law 75 can be interposed as a shield in lender's liability collection cases where the debtor is a franchisee or distributor and the leased or owned (and to be foreclosed) premises are vital to the functioning of the dealer's operations. During the past seven or eight years of the recession, how many foreclosures of premises operated or owned by retail franchisees have there been where the foreclosure requires or causes the termination of the franchise? This theory of Law 75 creeping in is not so farfetched and some judges are catching up to it if this case and another local appellate court case (albeit, the dissent) are any indication.

Wednesday, December 24, 2014

The defense of unclean hands defeats a motion for a preliminary injunction under Law 75 and force majeure does not apply to excuse the dealer’s anticipatory breach of contract

In Next Step v. Bromedicon,2014 TSPR 30, 190 D.P.R.__, the Supreme Court of Puerto Rico ratified the norm that equitable defenses, such as estoppel, laches, and unclean hands (“actos propios y manos sucias”), are affirmative defenses to a motion for a preliminary injunction under Law 75.

The case of Automatic Teller Machine Group Corp. v. Qualtex Corporation, 2014 WL 5024070 (TCA Aug. 29, 2014), cert. denied, (P.R. 2015),, aptly illustrates the application of the principle in Next Step and prior cases that a party who requests equitable relief must come to the court with clean hands. There, ATM Group, a Puerto Rico corporation dedicated to selling, leasing, and servicing ATM cash machines, sued Qualtex, a stateside corporation that provides electronic data processing services to the ATM machines and their customers and end-users. The parties signed a Distributor and Service Agreement in which, in relevant part, ATM Group was bound to use Qualtex’s data processing services exclusively during the duration of the agreement.

ATM Group sued Qualtex in local court under Law 75 for termination of the agreement and requested damages and injunctive relief. Plaintiff alleged that Qualtex terminated the agreement after plaintiff had “transferred” 131 ATM’s from Qualtex to National Link, a competitor of Qualtex that provides data processing services. ATM Group alleged that it was justified in breaching the exclusivity obligation in the distribution agreement because of alleged “force majeure” in which Cash Connect, a company that supplied cash to replenish the ATM machines, withdrew from the Puerto Rico market. This allegedly unforeseen market withdrawal had occurred at least 60 days before plaintiff unilaterally and without prior notice decided to convert the 131 machines to Qualtex’s competitor. Qualtex responded that the defense of unclean hands and exceptio non adimpleti contractus under Article 1077 of the Civil Code barred the request for a preliminary injunction because ATM Group repudiated the exclusivity provision and force majeure did not apply as plaintiff’s damages were of its own making.

After an evidentiary hearing, the trial court agreed with Qualtex and denied plaintiff’s motion for a preliminary injunction. The trial court held that plaintiff qualified prima facie as a Law 75 dealer, but that applying the factors in Next Step, the balance of the equities weighed against the granting of injunctive relief as plaintiff breached its contractual obligation before Qualtex terminated the agreement, the doctrine of unclean hands applied, and there was no force majeure.

The intermediate appellate court in a reasoned opinion denied certiorari, and plaintiff filed a cert. petition in the Supreme Court of Puerto Rico, which is pending to date.

Diana Pérez, CAB’s associate, and the undersigned as lead counsel, tried the case for Qualtex and are defending it in the appellate courts.

Monday, December 22, 2014

The Supreme Court of Puerto Rico grants certiorari to review important questions of contractual interpretation arising from an order granting a preliminary injunction under Law 75

The Court has decided to review another case granting a preliminary injunction under Law 75. In an earlier case, Next Step, the Court determined that a dealer had not clearly established the existence of an exclusive distribution agreement to claim a right to preliminary injunctive relief for impairment of contract under Law 75. In Caribe RX v. Grifols Inc. and Cardinal Health, Consolidated Nos. CC-2014-772, CC-2014-773, cert. granted, (P.R. Dec. 12, 2014), the main issue is similar: whether the Court of First Instance, San Juan Part (Hon. Giselle Romero, since then appointed to the intermediate local appellate court), abused its discretion in granting a Law 75 preliminary injunction.

After an evidentiary hearing and the posting of a bond of only $3,500, the trial court enjoined Grifols Inc., a global healthcare company, from selling and distributing any plasma-derived protein therapies for critical care patients in Puerto Rico through any distributor, hospital, or provider other than through plaintiff Caribe RX, a Puerto Rico distributor. The distribution agreement between Grifols and Caribe RX is expressly non-exclusive for certain products and expressly exclusive for others. The agreement has integration and completeness provisions that supersede prior verbal agreements and understandings. The intermediate court of appeals denied the petition for certiorari. See Caribe RX v. Grifols, Inc., 2014 WL 3831632 (TCA June 30, 2014).

Caribe RX claimed, and both the trial court and the intermediate appellate court agreed, that the parties had entered into a “verbal agreement”, before execution of the written agreement, in which Caribe RX would have exclusive full-line distribution rights in the future upon expiration of Grifols’ agreements with certain stateside resellers. This promise never materialized, and the parties knowingly, willingly and voluntarily signed the non-exclusive distribution agreement that expressly disavowed any such promise. The contract was renewed annually on the same terms and conditions. There was no claim in the action of fraudulent inducement of contract or any defect in the consent. No evidence was introduced at the hearing that Grifols had impaired the written agreement by selling to another distributor any of the products over which Caribe RX had written exclusive distribution rights. However, Caribe RX claimed that Grifols allegedly breached the verbal agreement by offering new products (over which it also claimed to have exclusivity and had never sold them before) to Cardinal Health for resale in Puerto Rico.

In the view of the lower courts, a verbal promise of exclusivity, especially when it is not rebutted by oral testimony, should have more weight than the clear and unambiguous terms of the valid non-exclusive contract. This is, of course, not the law. The lower courts appeared to side with Caribe RX for two reasons, first, because Caribe RX’s principal (who is also a lawyer) testified that the contract that he signed did not mean what it said and Grifols presented no witness at the hearings to rebut the lawyer’s account of the facts before execution of the contract (in effect, shifting to the respondent Grifols the ultimate burden of proof on a Law 75 claim). Second, the lower courts accepted Caribe RX’s argument that the Civil Code allows verbal evidence to find the “true intent” of the parties despite a clear and unambiguous written agreement.

The rationale of the lower courts clashes on its head with the holding in Marina Industrial v. Brown Boveri, where the Supreme Court of P.R. enforced an integration clause in an agreement governed by Law 75 to render inadmissible verbal evidence offered to modify or contradict the clear terms of a commercial agreement. The Grifols decision also raises an important question of public policy whether stateside investors, who are lured by government incentives and special laws providing significant tax advantages from transferring their wealth and fortunes to Puerto Rico, can reasonably expect to rely on our local courts to enforce the terms of clear and unambiguous written commercial contracts as the sole expression of the intent of the parties.

Giving effect to Marina Industrial, and the evidence presented at the hearings, the Court should conclude, after applying Next Step, that it was an abuse of discretion to grant a preliminary injunction in this case and remand for further proceedings.

Carla Loubriel, CAB’s associate and the undersigned, as lead counsel, tried the case for Grifols at the Court of First Instance and briefed the certiorari at the intermediate court of appeals.

Thursday, October 23, 2014

What could be more straightforward? A mandatory arbitration clause in a written distribution agreement governed by Law 75 is enforceable despite the distributor’s alleged but unproven financial incapacity to arbitrate

A distributor of specialty pharmaceutical devices sued the manufacturer in Puerto Rico local court alleging wrongful termination and damages under Law 75. The case, Ryvelix Company v. Onset Dermatologics, Inc., 2014 WL 4924473 (D.P.R. Sept. 2014)(Cerezo, J.) got removed and defendant moved to compel arbitration pursuant to a mandatory arbitration clause in a distribution agreement requiring arbitration of “any dispute or difference.” The Law 75 claim fell within the scope of the arbitration provision.

We all should know by now the importance of federal arbitration policy to respect arbitration agreements as written and get cases out of court. So what could be the distributor’s objection to arbitration or to arbitration in New York City for that matter? For one thing, cost. Is it too costly for an allegedly financially-strapped distributor to arbitrate in a "difficult and inconvenient" forum such as New York City? The argument that arbitration may be prohibitively expensive and could deny a party access to justice finds support in dictum in Green Tree v. Randolph, 531 U.S. 79, 91 (2000). But wait, is it really less costly to litigate a case in Puerto Rico than to arbitrate in New York? The answer is, it depends, but that was legally irrelevant. The court determined that the distributor’s argument had no support in any evidence that in fact it could not afford to arbitrate. It did not end there. The distributor had another creative argument that the doctrine of rebuc sic standibus (unforeseen change of circumstances renders compliance extremely burdensome) justified excusing compliance with the arbitration provision because the principal breached the agreement. The court held that the doctrine did not apply because it is for the arbitrator to decide whether the principal had just cause to terminate the agreement. Absent proof that it was prohibitively costly to arbitrate, the doctrine did not facilitate excusing compliance with only the arbitration clause. Case dismissed without prejudice in favor of arbitration.

This case did not involve arbitration under the International Chamber of Commerce Rules which can make it very expensive to arbitrate given the administrative fees that apply depending on the amount of the claim. The larger the dollar amount of the claim the more fees the claimant would have to pay. By the fee structure of the ICC, those fees can run in the tens of thousands of dollars, not including the fees of the arbitrator. There is some authority in case law that upholds arbitration with the ICC despite the high cost to arbitrate. There is some reason for concern that the Ryvelix case may have opened the door in other situations to excuse a party from having to arbitrate if financial hardship can be established with admissible evidence.

Monday, October 20, 2014

Federal Court in Massachusetts grants to the Dunkin’ Donuts franchisor a preliminary injunction for trademark infringement and enjoins the Puerto Rico franchisees from prosecuting a subsequent federal action brought under Law 75

This case presents the interplay between federal trademark law and Law 75 and raises a jurisdictional conflict between federal courts in substantially similar cases. In Dunkin’ Donuts Franchised Restaurants LLC v. Wometco Donas Inc., 2014 WL 4542956 (D. Mass. Sept. 11, 2014), appeal pd'g, No. 14-2002 (CTA 1),the court enjoined the prosecution of a subsequently filed Law 75 federal case. The franchisor of Dunkin’ Donuts filed suit in federal court in Massachusetts for trademark infringement and breach of contract against Wometco, the franchisee of 18 stores in Puerto Rico. The complaint requested relief to enjoin the franchisees from trademark infringement and to enjoin the prosecution by franchisees of a related action for Law 75 termination damages pending in the federal court in Puerto Rico.

The crux of the case, and what provoked the termination of the franchise agreement and the resulting trademark infringement from continuing to operate the Dunkin’ retail stores without a valid license, was the franchisees’ failure to pay $190,000 in royalty and renewal fees. The franchisees alleged that termination of the franchise agreement was unjustified and violated Law 75. Defendants also alleged that the license agreement was amended by a prior verbal agreement that waived or excused collection of fees.

The court found that this argument was “not credible” and agreed with the licensor that the agreement had an integration clause that superseded any prior agreements. Thus, there was just cause under Law 75 for termination from the licensees’ breach of the payment obligation. The court concluded at the preliminary injunction stage that the termination was not arbitrary or capricious. Finding that there was irreparable harm from the licensor’s loss of control over its trademark caused by the licensees’ unauthorized use, the court granted the licensor’s request for a preliminary injunction, despite the fact that the relief would cause the closure of all Dunkin’ retail outlets in Puerto Rico.

Finally, the court exercised its discretion to enjoin prosecution of the subsequently filed and “substantially similar” federal case pending in Puerto Rico federal court (Cerezo, J.). The court noted that special circumstances would exist to warrant deviating from the first-filed federal rule where one party races to the courthouse and misleads the other or when the second lawsuit is substantially more convenient. “While Law 75 is not regularly interpreted in Massachusetts courtrooms, Puerto Rico courts have held that other jurisdictions “are fully capable of resolving claims brought under [it]” citing, BMJ Foods P.R., Inc. v. Metromedia Steakhouses Co., L.P., 562 F.Supp.2d 229, 234 (D.P.R.2008). Id. at 10. The court applied the relevant factors and held that there was no justification to depart from the first-filed rule. Thus, it enjoined the franchisees from prosecuting their Law 75 federal action in Puerto Rico.

Monday, September 8, 2014

Worth reading: the First Circuit finally takes a stance on the fraudulent joinder test

Fraudulent joinder is a term of art referring to the doctrine that allows district courts to disregard for removal purposes the presence of a diversity-defeating defendant in a complaint. The issue comes up almost routinely in Law 75 cases where the defendant, usually the principal in Law 75 or 21 cases, seeks to remove the case filed in local court to federal court and the dealer has joined as a co-defendant a diversity-defeating Puerto Rico distributor.

Is the standard of fraudulent joinder the same as for a Rule 12(b)(6) motion to dismiss? They are similar standards to be sure but not necessarily identical. Both tests present challenges to the insubstantiality of the local law claims against the diversity-defeating defendant. In Universal Truck v. Southworth-Milton, Inc., 2014 WL 4290458 (1st Cir. Sept. 2, 2014), the First Circuit concurred with the Seventh and Ninth Circuits and held that fraudulent joinder exists where "there is no reasonable possibility that the state's highest court would find that the complaint states a claim upon which relief may be granted against the non-diverse defendant."

This sounds like the familiar Rule 12(b)(6) standard but since the Seventh Circuit's decision requires the district court to construe all issues of fact and law in the defendant's favor, and the First Circuit remained silent, I am not so sure that the standards are identical. Let's leave that for another day.

Sunday, September 7, 2014

A true conflict exists between federal and local courts on the validity of forum selection clauses in Law 75 contracts

A mandatory, as opposed to a permissive, forum selection selection clause requires litigation in the chosen forum. Generally, as a matter of federal law, mandatory forum selection agreements are prima facie valid and enforceable. In Bremen v. Zapata, 407 U.S. 1 (1972), the U.S. Supreme Court held, however, that whether a forum selection clause offends a forum state's public policy can be one of a number of grounds for invalidation. Since 1972, most courts have not taken Bremen at its word and have analyzed the facts and circumstances of each case to determine enforcement.

Law 75 has a provision that a forum selection clause mandating litigation outside of Puerto Rico is null and void as against public policy. Some other dealer-friendly states like California have similar provisions. This is the same section of Law 75 that also invalidates arbitration outside of Puerto Rico in favor of the home field advantage. One would think that the Federal Arbitration Act preempts Law 75 in that respect and that enforcement of the litigation forum selection prohibition is questionable, at best. Why should arbitration receive preferential treatment from a federal policy standpoint if there are also strong federal interests at stake that weigh in favor of validating forum selection clauses? The strong public policy favoring arbitration is to enforce private agreements on their terms and that same policy of respecting liberty of contract is present when enforcing forum selection clauses.

Most federal court decisions, of which Caribbean Restaurants v Burger King Corporation, 2014 WL 2465133 (D.P.R. June 3, 2014)(Perez-Gimenez, J) is the most recent, have enforced forum selection clauses in dealer's contracts governed by Law 75. Federal courts have reasoned that important federal interests of respecting liberty of contract and freedom of commerce outweigh parochial provisions in legislation like Law 75 requiring litigation of dealer disputes in home courts. Further, federal courts have predicted that the Supreme Court of Puerto Rico would, after a series of decisions adopting federal law on the enforcement of forum selection clauses, disregard the prohibition in Law 75 and give more weight to federal policy interests.

Wait. Is it so clear? An intermediate appellate court decision in Caribe RX v. Grifols Inc., 2014 WL 2527399 (TA April 14, 2014) bucks the trend and it does, in the most simplistic and superficial of holdings: Article 3-B of Law 75 means that the clause in the distributor agreement providing for litigation in North Carolina, U.S.A. is illegal and that's dispositive. Forget that federal courts over the past decade have held to the contrary, or that Puerto Rico's highest court has been predicted to validate such a clause in a Law 75 contract. No mention was made of those federal decisions on point.

Never mind that the distribution agreement in Grifols was valid, there was negotiation between sophisticated commercial parties, consent and valid consideration. No fraud or duress etc. Never mind either that North Carolina, the chosen forum in Grifols, predictably would have been led to apply Law 75's just cause requirement from its adoption and application of the Restatement of Conflict of Laws. The forum selected in Grifols was not a rogue foreign state. The Puerto Rico dealer did not have to litigate with Grifols in Iraq or Syria. This would not be Mr.Tom Hanks poised as Captain Phillips had he been contractually required to litigate in Somalia a case against his carrier-employer for his damages resulting from his abduction and torture on Somalia's coastline. It is after all North Carolina, U.S.A.

Is Grifols a one of its kind decision? Is the message that contracts in Puerto Rico should not be respected? If so, how can that result be reconciled with the strong, if not imperative, public policy in Puerto Rico's legislation enacted to attract foreign capital investment? How is the Grifols decision conducive for Puerto Rico to establish the "business friendly" environment that the Federal Reserve Bank of New York recommended in its report as one of the steps for Puerto Rico to climb out of our economic malaise? This Grifols ruling is under the radar screen but the repercussions for business interests in Puerto Rico are huge.

In the meantime, and subject matter jurisdiction permitting, who would blame the principal for choosing to litigate PR dealer disputes in the federal forum? Forum shopping takes a new twist in PR dealer contract cases involving choice of forum provisions.

Stay tuned. Maybe the PR legislature will listen and amend Law 75 or the PR Supreme Court will pay attention to take action when the proper case comes before it.

The author represented Grifols in the case.

Courts are mindful of commercial "reality" when deciding competing summary judgment motions in Law 75 cases

In Casco Sales v. John Deere, 2014 WL 4233241 (D.P.R. Aug. 26, 2014)(Gelpi, J.), the dealer sued the principal for constructive termination, impairment, and unjustified termination of contract under Law 75 and for fraudulent inducement or "dolo" to enter into a settlement agreement. Plaintiff Casco Sales had been the exclusive dealer in Puerto Rico of the John Deere construction equipment line for decades.

Supported by an expert report, Casco claimed damages of $1.6 million for five years of net profits and loss of goodwill if the termination occurred in March, 2013. Had the base period of the termination been in 2009, damages computed under Law 75 were $4.6 million. A steep decline in the construction industry and the demand for construction equipment over that recessionary five year period explain the discrepancy in the financial results and the significantly lower measure of damages.

Casco Sales alleged that John Deere had fraudulently induced it to settle a prior Law 75 federal case in 2009 based on representations in the settlement agreement that it would cooperate to grow sales and it breached those representations. Thus, recovery for fraud (dolo) includes all damages whether or not foreseeable, including the actual damages Casco Sales would have recovered under Law 75 had the case not settled with 2009 as the base period. It is a fraud claim under the Civil Code that is related to the success of a showing of impairment under Law 75.

What triggered the second lawsuit was that in March, 2013, John Deere notified the unilateral termination of the distributor agreement. John Deere alleged that failure to pay bills on time, failure to comply with new model qualification requirements, among other alleged breaches of contractual provisions, were just cause for termination.

The dealer's termination had a tormented history of its own. As noted, in 2009, Casco Sales sued John Deere in federal court for impairment of contract under Law 75 alleging that John Deere had unilaterally altered credit or sales terms and had been arbitrary in their business dealings. In 2009, the case settled and the parties resumed their business relationship. Three years later, and coincidentally after the three-year caducity period in Law 75 expired, in December 2012, John Deere refused to honor a substantial purchase order of $264,000 placed by Casco Sales for the sale of an excavator because it claimed that the dealer was not qualified to serve that machine. Yet, two months later, John Deere would have sold through Casco Sales a similar machine to one of its national accounts in Puerto Rico, although Casco Sales had not completed the same training requirements. Casco alleged that this refusal to deal affected its cash flow and the ability to pay bills in full and was an unjustified impairment and constructive termination of contract.

The Court denied the parties' competing motions for summary judgment finding genuine and material disputes of fact and citing the First Circuit's Welch case for the proposition that just cause generally involves issues of fact precluding summary judgment. Because the Court understood that the fraud claim under the Civil Code was tied to the success of the Law 75 impairment claim it also survived summary judgment.

The decision is notable for a few other points.

First, when it is alleged that the principal refuses to honor a purchase order without just cause, Law 75 activates the rebuttable presumption of lack of just cause. Thus, the principal has the burden of proof of justifying its decision to refuse to deal and the actual subsequent termination.

Second, the Court declined to accept Casco Sales' invitation to navigate unchartered waters and hold that Law 75 recognizes a right of action for constructive termination. In dicta, the Court opined that such a claim would require a court to legislate for it does not appear to be codified in the statute. The Court construed Casco Sales' constructive termination claim as "emphasizing" the extent or degree of the impairment.

Third, and perhaps most important when it comes to surviving an MSJ for alleged lack of timely payment, the Court held "...to ignore the possibility that John Deere’s refusal to honor the purchase order (in December 2012) may have impacted Casco’s ability to timely pay its debt (before the termination in March 2013) would ignore reality. This is yet another issue that turns on fact."

Casco Sales alleged that the dealer's contract in this case did not define payments on time as an essential obligation. The Court cited First Circuit precedent under Law 75 excusing the timeliness of payments where there has been some conduct attributable to the principal that has contributed to payment delays. The Court denied the parties' "substantial" and competing MSJ's.

This author represents Casco Sales in that case.

Friday, June 6, 2014

Is an automobile manufacturer obligated to reimburse sales and use taxes (IVU) levied on repair parts used by the dealer in warranty repairs and maintenance services?

The case at hand, Autogermana, Inc. v. BMW of North America, 2014 WL 2159557 (D.P.R. May 23, 2014)(BJM), involves interesting issues of contract interpretation in the context of claims for impairment of contract under Law 75. Does a refusal to reimburse the dealer for IVU taxes impair contractually-acquired rights, the litmus test for an impairment claim under Law 75? Navigating the waters of the Civil Code, the canons at issue include: “contract terms are clear when lucid enough to be understood in one sense alone…”; “where a contract is ambiguous or silent on an issue, the intent of the parties at the time of contracting controls”; “the terms of a contract should be read as a whole…”; and where a contract dispute centers on the intent of the parties, summary judgment is disfavored but not precluded.

In 2006, Puerto Rico enacted the IVU of 5.5% for the Commonwealth and 1.5% for the municipalities. Under a closing agreement with the Treasury, Autogermana, a BMW dealer, paid to the Treasury over $728,000 in back IVU taxes for parts used in repairs and maintenance services between 2006 and 2010. Autogermana reached a similar agreement with the Municipality of San Juan and paid over $74,000. While BMW reimbursed Autogermana for IVU taxes prospectively after 2010, it refused to reimburse it for the prior years. And a lot of money was at stake.

That’s where the contractual documents come into play and the Court found competing and conflicting inferences that preclude summary judgment. For the dealer’s benefit, the manufacturer’s reimbursement policies provide that dealers are entitled to recover reasonable and justified costs associated with warranty repairs. The Court found an ambiguity as to whether the parties intended to reimburse IVU taxes on parts used for repairs and maintenance. For the manufacturer’s benefit, the documents provide that dealers receive a 40% handling charge (reimbursement or payment) for parts and warranty repairs and this reasonably could be meant to include sales and use taxes; and the IVU was not contemplated as a specific reimbursable item. The solution? Let the jury decide.

For its part, BMW moved for summary judgment relying on a quasi-statute of limitations in the contract for submitting warranty claims within a specific time frame, provisions that the Court also found to be ambiguous. The Court found ambiguity as to when the 30 day deadline began to run to submit the claim. If it was from the date of actually incurring the expense, as opposed to the last repair, then a jury could reasonably find that the 30 day period was not a bar because the claim accrued in 2011 with the closing agreement and by then, BMW had been on notice of the claim. All motions for summary judgment were, therefore, denied.

Wednesday, June 4, 2014

Incorrect advice under Law 75 results in legal malpractice

It has been judicially settled that Law 75 contracts, unlike civil contracts with indefinite terms, are not terminable at will by the principal unless there is just cause. Because of public policy considerations, a Law 75 contract does not expire automatically at the end of its term, unless there is just cause to refuse to renew or terminate.

These legal precepts under Law 75, as well as the variable standards for legal malpractice claims depending on whether those turn on pre-litigation advice or malpractice in ongoing litigation (applying doctrine of a case within a case), causation, damages and insurance coverage, are at the heart of the controversy in Citrus World, Inc. v. Ferraiuoili et. al., 2014 WL 1007744 (D.P.R. March 14, 2014)(JAG/SCC)(granting in part and denying in part cross motions for summary judgment).

The imbroglio began when the principal Florida Natural, a producer of fresh orange juice, unilaterally cancelled the Puerto Rico distributor’s non-exclusive contract. Not surprisingly, the distributor Méndez & Co. sued Florida Natural in federal court for wrongful termination and damages under Law 75. During discovery, the principal explained that the agreement had expired on its terms, so essentially it believed there was no agreement in effect and had no obligation to continue the relationship. As a backup affirmative defense, the principal alleged that the distributor had breached certain marketing obligations (that provided just cause) but those obligations had not been part of the four corners of the contract. On this contractual interpretation issue, Méndez prevailed on partial summary judgment and successfully persuaded the Court (J. Fusté) to strike the just cause defense for it relied on extrinsic evidence. Without proof of just cause, the termination of a non-exclusive contract, the entry of partial summary judgment, and proof of actual damages, the case fell into mediation and promptly settled a few weeks before trial.

After the settlement, Florida Natural went after its trial lawyers and its insurer in the now pending federal malpractice case. There, Florida Natural waived the attorney client privilege to put at issue counsel’s communications and claimed that it terminated the non-exclusive agreement after relying on an incorrect opinion of counsel that it had expired on its own terms. While the Court (Sylvia Carreno, U.S. Magistrate Judge) agreed in her report that litigation counsel gave negligent advice about existing Puerto Rico law on that issue, it determined that there were issues of fact as to whether Florida Natural contributed to the negligence by terminating the agreement and if the firm’s incorrect legal advice proximately caused the damages. The court also ruled that litigation counsel had been negligent by not filing a compulsory counterclaim for collection of monies based on the incorrect belief that it required an independent basis of subject matter jurisdiction. As to the insurer, it denied the MSJ to the extent there is coverage under the policy for the legal fees incurred by Florida Natural in the underlying litigation, but there is no coverage for the fees incurred in the malpractice case unless otherwise required by the policy. The parties’ respective MSJ’s were granted in part and denied in part.

Saturday, April 26, 2014

Say Cheese: is written corroboration needed for exclusivity?

In Distribuidora VW, Inc. v. Old Fashioned, Inc., 2014 WL 1309955 (D.P.R. March 31, 2014)(J, García-Gregory), plaintiff, a Puerto Rican cheese distributor, sued the defendant-principal, a Wisconsin cheese manufacturer, claiming improper termination of their 10 year-old relationship under the sales representative Law 21 and for breach of contract. The distributor had continued without a written agreement the business relationship that existed between the prior distributor and the manufacturer.

Defendant moved for summary judgment arguing that plaintiff could not prove exclusivity, an essential element of a Law 21 claim. Defendant’s primary argument was that the First Circuit’s decision in Garita Hotel v. Ponce Federal, 122 F. 3d. 88, 89 (1st Cir. 1997) compelled the conclusion that the Commerce Code required written corroboration of all the essential elements of a contract and there was no evidence to corroborate a written exclusivity appointment. Not so fast, retorted the District Court. Garita is “wrong”. Why? For one thing, according to the Commerce Code, commercial contracts are valid and binding regardless of “the form”, but the “testimony of witnesses shall not in itself be sufficient” to prove the existence of “a contract” unless it concurs with other evidence. It is the existence of the contract that cannot be admitted on the basis of oral testimony alone but must concur with other evidence. Citing Vila & Hmnos, 17 P.R. Trans. 987 (1986). If you read the plain language of Article 82 of the Commerce Code this strikes me as being right; that is, unless Garita was right.

While no one appeared to dispute the existence of a sales representation agreement from a course of dealings, including business records that must have corroborated the existence of an agreement, the Commerce Code did not require written corroboration of the exclusivity element or any other essential element of that verbal contract. “In a nutshell, after a contract is proven to exist with something more than just oral testimony, the contours of the contract’s scope may be mapped with whatever admissible evidence is available.” This brave holding tests the waters of First Circuit precedent on an issue of Puerto Rico substantive law and is admittedly a significant departure from what distribution law practitioners have understood or misunderstood for over two decades.

Further, the Court noted two legal permutations of exclusivity: where the defendant agreed not to appoint another agent or sell directly in the territory or the agent agreed to sell exclusively the products of the principal and no other competing product. Because the Court found a dispute of material fact as to whether there was an exclusive contract from a course of dealings as plaintiff was de facto the only distributor, the Court denied the motion for summary judgment. The Court determined that it was for the jury to give weight to any “smoking gun evidence”, if it existed, whether the principal “made an affirmative concession of exclusivity to the representative.” Finally, the Court dismissed the breach of contract claim because there was no evidence that the contract had a definite period; thus, was terminable at will.

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.