Wednesday, October 2, 2019

Federal Court confirms arbitration award as a judgment for the dealer under Law 75

On May 9, 2019, this blog reported that a three-member panel of the AAA issued an award finding that Johnson & Johnson International terminated a non-exclusive distribution agreement without just cause in violation of Law 75 and awarded damages, fees, and interest to the dealer. Subsequently, the dealer moved in federal court to confirm the award under the FAA. The supplier moved to vacate the award under the Puerto Rico Arbitration Act (PRAA).

In Johnson & Johnson International v. Puerto Rico Hospital Supply, 2019 WL 4723892 (D.P.R. Sept. 25, 2019)(Besosa, J.), the court denied the motion to vacate and confirmed the award in its entirety. The court decided that the standards of review of arbitration awards under the FAA and the PRAA are different. Puerto Rico law permits review of arbitration awards under standards comparable to judicial review of determinations by administrative agencies and the FAA does not. The court held that the FAA governed here because the transactions at issue satisfied the "in commerce" requirement and a general Puerto Rico choice of law provision in the distribution agreement did not manifestly reflect an intent to have the PRAA govern judicial review of the award to the exclusion of the FAA. Applying the highly deferential standard in the FAA and the First Circuit's authoritative jurisprudence, the court held that "[t]he arbitration award sets forth a well-reasoned and methodical approach to the Law 75 dispute, citing the relevant statutes, case law, and evidence." The dealer stands to recover as a judgment almost $1.2 million in damages plus interest that continues to accrue until repayment.

Thursday, July 11, 2019

Reputation damage with clients after a termination suggests a possible loss of goodwill

I came across an old case decided by Judge Jaime Pieras, Antilles Carpet, Inc. v. Milliken Design Center, 26 F. Supp. 2d 345, 348-349 (D.P.R. 1998), that discusses what evidence is relevant to goodwill damages in the context of a summary judgment motion, and there’s not much case law on this subject. This case involved a Law 75 dispute between a brand-name supplier of carpets and its Puerto Rico distributor. The parties disputed who terminated or impaired the relationship (the supplier denied a termination but the court found an issue of fact). The dispute also turned contentious on damages. The supplier urged that the distributor suffered no damages because it did not lose any revenues and clients from the termination. The court disagreed with the premise of the argument (though granted the MSJ on that ground because plaintiff failed to refute those allegations) since those are not the only two factors, citing a prior decision, to the effect that damages for lost profits are measured by Section 278(b).

On goodwill, the court found that the distributor’s deposition testimony (presumably not hearsay and otherwise admissible) created an issue of fact on whether reputational damage with clients suggests a possible loss of goodwill, which is an element of damages under Law 75. The witness said: “when you go to one of your major clients and say you no longer handle Milliken [the brand name], which is a major name in the carpet industry, it affects you image wise, and that's why I thought…”. The best evidence might have been testimony by the clients themselves but in this case was absent. The court granted and denied in part the MSJ but allowed the Law 75 claim to proceed on elements of damages other than lost revenues and clientele.

Wednesday, July 10, 2019

AAA Arbitration Award under Law 75 is published in federal court confirmation proceedings

As I reported previously, a three-member panel of the International Center for Dispute Resolution of the American Arbitration Association by majority decision (former U.S. District Court Judge José A. Fusté and Manuel San Juan, Esq.) issued a 63-page Award in favor of the distributor Puerto Rico Hospital Supply finding that Johnson & Johnson International violated Law 75 by terminating a non-exclusive distribution agreement without just cause and awarding damages, costs, and fees in excess of $1.1 million plus interest. The Panel dismissed J&JI’s counterclaim of $540,000 with prejudice. Panelist Edgardo Cartagena, Esq. dissented on the Law 75 award and concurred on the dismissal of the counterclaim.

Puerto Rico Hospital Supply filed a motion in the U.S. District Court for the District of Puerto Rico in Civil No. 17-1405 (FAB) to confirm the Award as a judgment under the FAA and attached the Panel’s majority and dissenting decisions as exhibits.

Tuesday, July 9, 2019

Can a Puerto Rico corporation state a claim for Law 75 damages when it did not make a profit or loss on the sale of the relevant products, but a non-party related corporation did?

Heartland acquired the assets worldwide of the Splenda-branded sweetener from Johnson & Johnson in an asset purchase agreement (APA). Puerto Rico Supplies had been J&J’s distributor for Splenda and other consumer products in Puerto Rico. After the APA, Heartland considered various distribution alternatives and selected Plaza Provisions, its long-standing Puerto Rico distributor, for the new Splenda product line. After Puerto Rico Supplies wrote to Heartland claiming that it had become J&J’s successor and was bound to assume its prior relationship with J&J, Heartland filed a declaratory judgment action in federal court alleging, among other things, that it never conducted any business with Puerto Rico Supplies and it was not J&J’s successor under the APA. Puerto Rico Supplies counterclaimed for Law 75 termination damages and raised a bad faith claim under Article 1802 of the Civil Code. Puerto Rico Supplies decided not to sue J&J with whom it continued to have a business relationship for non-Splenda products. Heartland v. Puerto Rico Supplies Group, Inc., 2017 WL 432694 (D.P.R. 2017) (denying Heartland's motion to dismiss alleging that Johnson & Johnson was an indispensable party) provides an overview of the factual background prior to the summary judgment motion.

Discovery revealed that Puerto Rico Supplies, during the five-year period prior to the APA, had purchased Splenda and other products from J&J without a written agreement and transferred the Splenda inventory at cost to a non-party Premium Brands, Inc., an entity related to it by common ownership. It was Premium Brands the corporation that sold and distributed Splenda to customers in Puerto Rico and reported a gain or loss on those sales in its audited financial statements and tax returns. Both corporations operated for tax purposes as a pass through to reduce the tax liability of its owner. Mid-litigation, the two corporations merged and Puerto Rico Supplies became the sole surviving entity.

Heartland moved for summary judgment arguing, among other things, that the Law 75 claim had to be dismissed for lack of damages, an essential element of the claim. Heartland argued that First Circuit precedent in the Unilever case holds that the assets of separate corporations are distinct including the value of distribution contracts, and an affiliated corporation is not a party to an agreement under Law 75 simply because of its relationship to the signatory. Under this rationale, Puerto Rico Supplies, argued Heartland, suffered no damages under Law 75 because it transferred the Splenda inventory at cost and did not report a profit on any sales. Puerto Rico Supplies responded that for equitable reasons it should be allowed to reverse-pierce the veils of the corporations and treat both as one for Law 75 purposes. Puerto Rico Supplies also argued that both corporations functioned as a single entity with Premium Brands operating as a sales arm or division. Heartland countered that neither Puerto Rico nor Delaware law recognized standing to a corporate insider to reverse-pierce a corporate veil to state a claim to derive a financial or economic benefit and that the corporate separation of each had to be respected.

The issue was fully briefed on summary judgment but remained undecided by the pretrial conference.

The undersigned was lead counsel for Heartland in the case with CAB's Carla Loubriel and Diana Perez joining as attorneys of record.

New edition of the ABA’s Franchise Desk Book has been released

The Franchising Forum of the American Bar Association released its new edition of the Franchise Desk Book, a two-volume compendium of franchising and relationship laws in selected states and Puerto Rico. This collection provides an overview of the legal requirements and standards in franchising and distribution laws and regulations in the United States and Puerto Rico. The Puerto Rico chapter has an overview of Law 75 and interpretive case law.

This author was a contributor to the Puerto Rico law chapter of this year’s edition of the Franchise Desk Book.

Enforcement of mandatory forum selection clause generates multiple/multi-state litigation and a mandamus petition in the First Circuit

Why do Puerto Rico distributors sign agreements with foreign or stateside forum selection and choice of law clauses when the performance of the agreement will be in Puerto Rico? What suppliers are after is obvious: to minimize the exposure to risk that comes from litigating Law 75 or Law 21 claims in Puerto Rico courts or the potential exposure to substantial economic damages. Of course, many distributors- often the principal players in the market- refuse to sign non-Puerto Rico forum or law provisions in distribution agreements routinely or as a policy or practice. What distributors want to avoid should be obvious too: prevent waivers of Law 75 rights.

Other distributors go ahead and sign those types of agreements often with little to no negotiation. Three reasons come to mind as to why they do and the first two are more probable than the third: 1) distributors lack commercial leverage and bargaining power or are not well informed and those clauses, which often include ADR provisions (arbitration and mediation), are deal breakers for the suppliers; 2) distributors, like other businesses, do a risk-reward analysis and knowingly and willingly assume the risk that comes with accepting those clauses as a condition to receive a new appointment leaving the fight to challenge those provisions in a Puerto Rico court for another day, or 3) the distributor is fraudulently induced to agree to ADR or forum selection provisions under false pretenses or with provisions that are hidden in fine print or reside in the internet for their click box acceptance. The third possibility presents one of the few and rare exceptions that may legally provide grounds to invalidate those types of clauses.

What should be clear is that once a distributor agrees to a written ADR or forum selection provision it is most probably stuck with it. Let’s be realistic, the chances are virtually nil that a federal court will invalidate a mandatory forum selection clause even in an agreement governed by Law 75. Chances in a Puerto Rico local court improve somewhat depending on the court or judge, but removal to federal court is likely to nip the local court’s intervention at its bud.

The case that I’m about to brief, Vitalife, Inc. v. Omniguide, Inc., 353 F. Supp. 3d 150 (D.P.R. 2018), is a run of the mill federal case validating a mandatory forum selection clause but with a twist of mandamus. There, a U.S. supplier of medical devices terminated unilaterally a distribution agreement with a Puerto Rico distributor. The Puerto Rico distributor threatened preliminary injunctive relief under Law 75, but the supplier quickly responded with a declaratory judgment action of its own in Massachusetts federal court. The agreement had both a mandatory forum selection clause and choice of law clause of Massachusetts. Not to be outdone, the distributor responded a day later with a suit in local Puerto Rico court for Law 75 termination damages and other remedies. The supplier removed the case to federal court on diversity jurisdiction grounds and moved to dismiss or transfer the case to enforce the forum selection clause.

Here comes the rub. The federal district court denied the supplier’s dispositive motion without prejudice. It’s not clear from the opinion why. Obviously, a denial without prejudice meant that, if the action in Puerto Rico moved forward, it would have mooted the forum selection clause. The order denying without prejudice a motion to dismiss on those grounds is not appealable. In a daring and bold move, the supplier filed a petition for a writ of mandamus in the First Circuit. The First Circuit denied the writ without prejudice pending a determination on the merits of the motion to dismiss or transfer the case to Massachusetts federal court.

After settlement negotiations failed, the federal court (Besosa, J.) in a thoughtful opinion discussing the relevant Supreme Court cases, analyzed the standards to evaluate transfer motions when there is an enforceable agreement with a mandatory forum selection clause. The court found that the relevant analysis did not require an evaluation of the private interests at stake in considering whether or not to transfer the case. As the federal court in this district has uniformly held in other cases, the court determined that Law 75’s provision invalidating litigation outside Puerto Rico yields to precedent enforcing mandatory forum selection provisions. The court in a footnote made it clear that it was not passing judgment on the validity of the choice of law provision. With that, the court transferred the case putting an end to the Puerto Rico litigation. Cf. Aurora Casket Company v. Caribbean Funeral Supply Corp., 2017 WL 5633102 (D.P.R. 2017) (granting in part transfer motion and severed claims against parties not signatories to agreement with forum selection clause).

How likely or not is it that the Massachusetts federal court will apply Law 75 to the agreement or its termination? That was the risk that this distributor apparently willingly or knowingly assumed at its own peril when it signed the agreement.

Thursday, May 9, 2019

Collateral fee issues under Law 75 litigated in post-default judgment proceedings

This is a follow up of the Law 75 case that I reported previously in this blog. See November 18, 2018. After entry of a default judgment on the counterclaim resulting from the distributor Skytec’s misconduct in discovery and the lifting of the distributor’s bankruptcy stay, the district court in Skytec, Inc. v. Logistic Systems, Inc., 2019 WL 1271459 (D.P.R. 2019)(BJM) held a post-default hearing to determine the award of damages due Logistic. Logistic, a Montana company, contracted to develop and implement various dispatch, geographic information, and records systems for public safety agencies in Puerto Rico, which were Skytec’s local clients. The court awarded Logistic $3.2 million in program installations, license fees, service charges and assessed pre-judgment interest at the rate of 6% under the Civil Code.

Logistic, the purported principal, moved for an award of expert witness and attorney’s fees under Law 75. In the absence of any objection, the court awarded recovery of expert witness fees of $32,847. The court did not address the legal issue, because it was waived, that Law 75 tracks the intent of Section 1988 of the federal Civil Rights Act, and under federal law, a prevailing defendant can recover fees only upon a showing of temerity or contumacy. Not unsurprisingly, Logistic grounded the request for attorney’s fees on temerity under Rule 44, Law 75, and the subcontract agreements which made an award of reasonable fees mandatory to the prevailing party in an action.

Interestingly, and citing Section 278e of Law 75, the court found that plain statutory language does not require an award of attorney’s fees to be reasonable (quaere, if or because the Civil Rights Act upon which Section 278e rests does). “In every action filed pursuant to the provisions of this chapter, the court may allow the granting of attorney’s fees to the prevailing party, as well as a reasonable reimbursement of the expert’s fees.” Logistic proposed its attorney’s fees be calculated using the lodestar method, which is the First Circuit’s “method of choice for calculating fee awards.” The court believed that the attorneys had failed to present itemized billing statements to enable the court to scrutinize the entries and the services performed.

As to fees, the court’s assessment was that “attorney’s fees awarded in the District of Puerto Rico indicates hourly rates hovering around $250 to $300 for experienced attorneys, $150 to $200 for associates, and $100 for law clerks and paralegals.” The court reduced Logistic’s local lead counsel’s hourly rate from $325 to $275 “in light of his [thirty-five] years of experience.” Other less experienced attorney’s hourly rates were reduced to $150-$130.

As to an out-of-state law firm of Logistic requesting fees, the court determined that “Puerto Rico must serve as the relevant community to determine fees, rather than the law firm or lawyers’ community in the United States, i.e. Seattle, because there are local lawyers more than able to handle the civil litigation at issue in this case.” The court reduced the hourly fees of the stateside attorneys from a top of $570 to $300 and associates from $260-$335 billed per hour to $150 and paralegals and contract attorneys to $75 an hour. Based on the record and without a finding of temerity, the court awarded Logistic $758,915 in fees and $101,047 in expenses.

AAA ICDR Panel rules that Johnson & Johnson International violated Law 75 and awards damages, fees, and costs to Puerto Rico distributor in excess of $1.1 million plus interest

The proceeding between Claimant Puerto Rico Hospital Supply Group, Inc. (“PRHS”) and Respondent Johnson & Johnson International (“J&JI”) Case No. 01-17-0007-4506 before a three-member panel of the International Center for Dispute Resolution of the American Arbitration Association (referred to as the “AAA arbitration”) presented interesting and substantial questions under Puerto Rico Law 75, including:

«Is a termination actionable for damages when the manufacturer’s purported intention is to terminate all of the distribution agreements except one and its actions are consistent with a complete refusal to deal?

«Do preexisting financial motivations and economic interests of the manufacturer suggest that the business reason it ostensibly gives for a termination is a pretext?

«When is pretext sufficient to overcome the manufacturer’s proffer of just cause for termination?

«Must contractual payment terms that underlie the termination decision be reasonable and adjust to market conditions in the territory at relevant times?

«Does an offer of a payment and performance bond to secure the payment of a debt under the distribution agreement qualify as a payment in cash or its equivalent?

Claimant PRHS is one of Puerto Rico’s oldest and largest distributors of medical devices and products. For decades after 1964, PRHS sold and distributed Johnson & Johnson (and Ethicon) branded sutures and medical devices used in patient-critical surgical procedures by hospitals and other medical providers throughout Puerto Rico. There were various written distribution agreements in effect between the parties: most of the agreements were exclusive, but one was non-exclusive. The non-exclusive agreement had a mandatory arbitration provision while the exclusive agreements did not. J&J’s products represented approximately 20% of PRHS’s total sales, including roughly 5% for the non-exclusive product lines. There was a history of prior federal litigation between the parties that resulted, among other things, in agreeing to 90-day payment terms for all the contracts.

For the past 12 years, Puerto Rico’s economy has slumped leading up to the eventual public bankruptcy. Private and public hospitals have not been immune from this economic downturn and remain exposed to the mass migration of thousands of Puerto Rican residents (many are patients) to the mainland, the closing of beds and aisles in hospitals, and as if that were not enough, to catastrophic damages and business interruptions to the general population caused by Hurricanes Irma and María in 2017.

In 2015, the liquidity of hospitals grew tighter aggravating delays in payments to their suppliers, including to PRHS. While the days sales outstanding (DSO’s) of PRHS’s invoices to hospitals increased to roughly 183 days on average (some public hospitals took over 300 days to pay), PRHS’s distribution contracts with J&JI all had 90-day payment terms. During 2016, PRHS started falling behind in its payments to J&JI but continued making partial payments of millions of dollars.

J&JI decided to make a preemptive move to judicially enforce the 90-day payment terms. In March 2017, J&JI sued PRHS in federal court in Puerto Rico. J&JI requested a declaration that it had just cause under Law 75 to terminate all the agreements between the parties for non-payment of invoices and have PRHS cease and desist from using any of J&J’s brands and trademarks for the sale and distribution of its products. J&JI requested the collection of monies from PRHS exceeding $4.5 million allegedly due for products sold and delivered under all the agreements. What is more, J&JI filed a motion for preliminary injunctive relief to attach PRHS’s bank accounts to secure the payment of the total alleged debt. PRHS opposed the request for equitable relief and moved to dismiss or stay the action in favor of arbitration. J&JI resisted arbitration.

The federal court denied J&JI’s request for equitable relief and granted in part PRHS’s motion to dismiss and stay the case in favor of arbitration concerning the non-exclusive contract. See Johnson & Johnson v. Puerto Rico Hospital Supply, 258 F. Supp. 3d 255 (D.P.R. 2017) (granting, in part, motion to dismiss) and 322 F.R.D. 439 (D.P.R. 2017) (denying J&JI’s motion for reconsideration). The court explained the stay reasoning essentially that an arbitration award could be dispositive of issues and claims in the federal action and there is a possibility of inconsistent determinations if the two proceedings could move forward simultaneously.

Meanwhile, J&JI sent a notice to PRHS in September 2017 unilaterally terminating all the exclusive agreements ostensibly for lack of payment but informing PRHS that it had decided not to terminate the non-exclusive agreement with the arbitration clause (as if that could have prevented PRHS from initiating the court-sanctioned arbitration). The termination of the exclusive contracts would become effective a day after Hurricane María made landfall over Puerto Rico. By the effective termination date, J&JI also took over the direct sale and distribution to customers of all the products previously sold and distributed by PRHS. In October 2017, J&JI informed PRHS that it was not, among other things, authorized to place any purchase orders for any products of J&J’s brands and demanded the return of all the inventory. In November 2017, PRHS complied and returned all its inventory of J&J’s products, including the products sold under the non-exclusive agreement, which J&JI later resold to customers.

PRHS filed a Demand for Arbitration at the AAA alleging a claim under Law 75 for termination without just cause of the non-exclusive agreement and requesting damages over $400,000 plus an award of fees and costs. PRHS also filed a separate action in federal court in Puerto Rico (Civ. No. 17-2281 (DRD)) under Law 75 for termination of the exclusive contracts allegedly worth over $10 million. The federal actions were not consolidated. J&JI responded in the AAA arbitration with a counterclaim for collection of monies which, as amended during the hearings, allegedly exceeded $540,000.

After extensive discovery, seven days of evidentiary hearings, and the lifting of an automatic stay resulting from the distributor’s intervening Chapter 11 bankruptcy petition, on May 2, 2019, the AAA Panel rendered a final reasoned and written award. In a 63-page majority 2-1 decision (joined by Chair José A. Fusté and Manuel San Juan, Esq.) with one panelist concurring and dissenting in part (Edgardo Cartagena, Esq.), the Panel determined that J&JI had terminated the non-exclusive agreement and it had done so without just cause in violation of Law 75. The Panel awarded PRHS five years of lost profits on the line, the cost of the returned inventory, AAA fees, the pro rata share of fees it paid for panel compensation, attorney’s and expert witness fees as the prevailing party under Law 75, and costs and interest at the annual rate of 6.25% for a sum exceeding $1.1 million. The Panel credited fully the testimony on damages of PRHS’s expert Carlos Baralt, CPA. PRHS did not claim a loss of goodwill from the termination of the non-exclusive line. The Panel also unanimously concluded that J&JI had failed to prove the existence of the debt or its amount and dismissed the counterclaim with prejudice.

Whether or not there was just cause for termination was a fact-intensive question and the Panel heard live witness testimony and received in evidence documents relevant to this issue. Having its ultimate burden of persuasion on the issue of just cause and needing to rebut a legal presumption of lack of just cause in P.R. Laws Ann. tit. 10, 278a-1(b)(1) from having sold the products previously handled by the distributor, J&JI argued that PRHS’s breaches of the 90-day payment term, without more, were just cause under Law 75.

First, there is no actionable termination claim under Law 75 unless the manufacturer terminates the contract, but detrimental acts that impair the contract are also actionable. Once the distributor proves a termination or impairment of the agreement, the burden shifts to the manufacturer to prove just cause. The Panel determined that, although the manufacturer may proclaim in writing not to have terminated the non-exclusive agreement, its subsequent actions and course of conduct proved its intent to refuse to deal and effectuate a termination of all the contracts. The Panel found sufficient evidence of a termination of all the contracts from conduct by J&JI prohibiting PRHS from honoring any purchase orders from its customers for the sale of any products of J&J’s brands, from prohibiting the use of any trademarks for marketing purposes, from ordering the return of all products on inventory, and later selling the inventory directly to the distributor’s former customers. The Panel held that J&JI’s “intention in 2017 was simply to terminate all commercial relations with PRHS and move from an indirect to a direct sales strategy, completely cutting out PRHS from the equation.” Award at 31.

Second, the Panel observed that, under Puerto Rico law, lack of timely or complete payments is not just cause without considering the terms of the agreement, whether the payment terms are essential obligations or not, how material are the breaches, and the conduct of the parties. The Panel gave weight to J&JI’s inconsistent conduct alleging the termination of the exclusive agreements but not the non-exclusive agreement when the basis of the distributor’s alleged breaches of contract was identical. The evidence established that the 90-day payment term in the non-exclusive agreement was not an essential obligation because the supplier alleged to have kept the non-exclusive contract in full force and effect despite the defaults in payment.

Regardless, the Panel found that J&JI’s reasons proffered for the termination were pretextual. Pretext can rebut a showing of just cause under Law 75. Before PRHS fell behind in its payments, J&JI’s internal marketing plans and strategies had devised a plan to implement a direct distribution model to bypass its Puerto Rico distributor. The Panel also gave weight to evidence derived from J&JI’s audited financial statements filed as public records proving that its Puerto Rico division had operational losses at relevant times after its parent company divested itself of another franchise causing the loss of millions of dollars in sales. The Panel had sufficient evidence from which to infer that J&JI had a motive to appropriate for itself the market and clientele created by PRHS which gave way to a convenient excuse to terminate the agreements for lack of payment.

It was also highly probative that J&JI’s manager in Puerto Rico took credit in her job evaluation for implementing, after PRHS’s termination, a “PRHS legal strategy” to move the organization from an indirect model to a direct model for the Ethicon franchise. “[The Panel] finds that the need to increase revenue, and not PRHS’s payment delays, was the driving force” behind J&JI’s move to conveniently cut PRHS out of the market. (Award at 39).

The Panel also decided novel issues of Puerto Rico law which should be relevant to any manufacturer or supplier considering the termination of a dealer’s contract for lack of payment in the context of adverse economic or market conditions. Section 278a-1(c) of Law 75 provides that any “rules of conduct” or distribution quotas or goals in a dealer’s contract must adjust to the realities of the Puerto Rico market at the relevant moment of the dealer’s non-performance, or else, are unenforceable.

From plain language, context, and statutory history, the Panel concluded that the prohibition in Section 278a-1(c) was not limited to performance standards set in a distribution contract, but also applied to payment terms. Because J&JI failed to present any evidence that the 90-day payment terms- as standards of conduct- adjusted to the realities of the relevant health care market in Puerto Rico during 2016-2017, the Panel credited the testimony of PRHS’s experts Julio Galíndez, CPA and Gustavo Vélez that the payment terms were unreasonable, and therefore, null and void under Law 75.

In the end, critical to the Panel’s analysis of just cause was sufficient evidence that, a few weeks before the termination notice, PRHS made an offer to J&JI to guarantee payment in full of the total amount of the debt outstanding on all the agreements by posting a payment and performance bond. An internal J&JI’s memorandum prepared contemporaneously with the offer corroborated this evidence. J&JI rejected the offer out of hand without any serious consideration or explanation to PRHS. The Panel found that the payment and performance bond would have operated like cash in hand to J&JI because under Puerto Rico law a surety steps in to pay the creditor for a default in payment by the debtor. The Panel concluded that a payment and performance bond would have obviated any need to terminate the distributor. Accordingly, the Panel held that the rejection of the bond proposal was “unreasonable and ill-considered” (Award at 46) and “adds to the Panel’s suspicions of pretextual motivations.” (Award at 49). The dissenting panelist was of the view that the termination notice, without more, proved no termination of the non-exclusive agreement but concurred with the majority’s dismissal of J&JI’s counterclaim.

On this record, the Award made the distributor whole for the full amount requested of compensatory damages for termination of the non-exclusive agreement, fees, interest, and costs, and the manufacturer took nothing on its counterclaim. The final award is subject to judicial enforcement.

The author is lead counsel for the Puerto Rico distributor in the arbitration and related federal litigation. Heriberto Burgos, Mariano Mier, and Mercedes Rodriguez are part of CAB's litigation team.

Sunday, December 2, 2018

Puerto Rico’s commercial litigation boutique law firm launches a new website

Casellas Alcover & Burgos, P.S.C., one of Puerto Rico’s leading commercial litigation and alternative dispute resolution law firms, has a new face on the web. We are excited to announce the launch of our new website at

Our goal with this new designed website is to create a user-friendly browsing experience for our trusted clients, potential customers, and other visitors. As it concerns Puerto Rico’s relationship statutes, the news section of the site has links to articles on Puerto Rico Law 75, including a piece our Junior Partner Carla Loubriel and I wrote on Litigating Dealer Termination Cases in Puerto Rico published in the Franchise Law Journal of the American Bar Association, and a short piece I wrote on preliminary injunctions under Law 75 and federal rules preemption for the Puerto Rico Chapter of the Federal Bar Association.

We invite you to enjoy our website and let us know what you think.

Monday, November 19, 2018

P.R. Appellate Court affirms trial court’s judgment for agent in Law 21 case

In Ram-Rel, Inc. v. NCR International, Inc., 2018 WL 1941655 (TA Mar. 27, 2018), a panel of Puerto Rico’s appellate court affirmed the judgment of the Court of First Instance, San Juan Part, in favor of a sales representative after holding a bench trial and finding liability and awarding damages under Law 21, the special statute protecting sales representatives (who do not qualify for protection as Law 75 dealers).

For over 37 years, Plaintiff had served as an agent in Puerto Rico for NCR’s hardware and software computer products. In 1993, Plaintiff signed a new distribution agreement under which NCR agreed not to appoint other distributors or resellers to market the product to certain customers under specified circumstances. A claim arose after NCR sold directly the products that Plaintiff had a right to sell exclusively. And, in 2008, NCR terminated the distribution agreement.

Plaintiff’s complaint in the local court pleaded only a claim of damages and breach of contract under Law 75. The Pretrial Conference Report did not raise a Law 21 claim. During trial, the court determined that Plaintiff did not qualify as a Law 75 dealer. Based on the evidence admitted at trial, however, the court held that Plaintiff qualified for protection as a Law 21 agent and awarded the alternative compensation under Article 5 consisting of 5% of the total sales generated by the agent during 8 years prior to termination, for a total compensation of $243,319 plus taxable costs.

NCR did not contest the liability determination of lack of just cause on appeal but only the award of damages. The appellate court affirmed the judgment and the court’s rationale is significant in various respects. First, the appellate court held that Rules 42.4 and 71 of the P.R. Rules of Civil Procedure permitted the trial court to award any remedy at law permitted by the admissible evidence, including Law 21 damages that were not pleaded or requested in the Complaint and the Pretrial Conference Report.

Second, the court held that expert testimony was not required to prove the amount of damages permitted by the alternative compensation formula in Article 5 because there was admissible evidence of the total sales generated by the sales representative prior to termination.

Third, the court held that the alternative compensation formula does not require discounting any costs incurred in generating the sales, so that the calculation is based on gross sales as established by the statute. The court explained that this alternative compensation is meant to simplify the process and facilitate the agent, who lacks the resources, to be able to prove its claim.

Fourth, the court affirmed the trial court’s dismissal of the claims made by Plaintiff’s shareholders in their individual capacities and against officers or employees of the Defendant. The court reasoned that Law 21, as a special law, did not codify a right of action by or against anyone other than a sales representative against its principal.

Finally, the court affirmed the trial court’s decision to partially award taxable costs to Plaintiff as the prevailing party. Unlike Law 75 that has a special provision allowing attorney’s and expert witness fees to the dealer as prevailing party without a showing of temerity, Law 21 has no such provision, and there was no finding of temerity to award attorney’s fees against the principal in this case.

Sunday, November 18, 2018

Law 75 case dismissed as a sanction for discovery abuses

In Skytec, Inc. v. Logistics Systems, Inc., 2018 WL 4372726 (D.P.R. September 12, 2018)(BJM), the dealer sued the principal for impairment under Law 75 and the principal counterclaimed both for breach of contract and implied covenant of good faith and fair dealing. The record supports multiple violations by the dealer of its discovery obligations to answer interrogatories and produce documents, including repeated missed deadlines by months and violations of court orders after warnings that failure to comply would result in severe sanctions.

The dealer's own doings fatally set it up for what was bound to happen: a dismissal of the Law 75 claims with prejudice and an entry of default on the counterclaim.

Mandatory forum selection clause in the Netherlands is held valid and enforceable to litigate Law 75 claims

In MD Distributors, Corp. v. Dutch Ophthalmic Research Center, 322 F. Supp. 3d 272 (D.P.R. 2018) (FAB), a Puerto Rico dealer sued a Dutch medical devices manufacturer in local court for termination of the dealer’s contract and damages under Law 75. The manufacturer removed the case to federal court and moved to dismiss under FRCP 12(b)(6) to enforce a forum selection clause providing for litigation in the Netherlands. After canvassing applicable federal jurisprudence and rejecting every conceivable argument that the dealer could make to escape litigation in the Netherlands, the court held that the dealer had failed to meet the “exceedingly high threshold” to invalidate the forum selection clause. Basically, the Netherlands provided an adequate forum to seek redress for the Law 75 claim. It was unlike Iran or South Korea that did not provide an adequate forum or did not recognize the validity of the claim.

The court also followed precedent in federal district court cases holding that the forum selection clause providing for litigation in a foreign country or in the States for that matter (with a connection to one of the parties or to the claims) was valid and enforceable despite Law 75’s express mandate for litigation in Puerto Rico. This aspect of the court’s ruling is more controversial as there is some authority in the Puerto Rico appellate courts invalidating a forum selection clause providing for litigation of Law 75 claims in a State (as there would be no FAA preemption issue concerning forum selection clauses within an arbitration agreement). This issue was not raised in this case and it may come up in a timely request for certification to PR’s Supreme Court.

Dealers beware! The forum selection clause in this case became part of an amended contract to the dealer's agreement. Seldom do dealers have a choice or leverage to negotiate amendments like this and face a difficult choice between a subtle or direct threat of termination or a refusal to deal if the amendment is not accepted. It should be clear by now that arbitration and forum selection clauses are amongst the few valid legal options available for manufacturers to minimize any Law 75 liability. But signing the agreement proves no solace to a dealer that eventually faces a termination and is forced to litigate its claims in a distant forum at a great cost and expense and before judges or arbitrators who have no clue about Law 75. Biting the bullet and refusing to accept a mandatory non-Puerto Rico litigation clause may be worth the business risk since that is the only real option to preserve litigation of a Law 75 claim in the local courts. This is particularly true when the manufacturer seeks to add the forum selection clause by an amendment to the established relationship. On the other hand, for the manufacturer, demanding arbitration and forum selection clauses as conditions to do business should be the standard protocol since the federal courts are more hospitable than ever to enforce the arbitration and forum selection provisions as written.

The FAA preempts Law 75 if applied to void an arbitration agreement

In Cooper Tire & Rubber Company v. Premium Tire & Parts Corp., 2018 WL 3047747 (D.P.R. June 18, 2018) (DRD), the principal sued the dealer and the individual guarantors for breach of contract and collection of monies of $736,000. The dealer counterclaimed for impairment and de facto termination of the dealer’s contract for alleged price discrimination and other unfavorable business terms and for “insidious machinations” to void the personal guarantees.

A stumbling block for the dealer’s suit in federal court was that the contract had a broad and mandatory provision compelling arbitration for arising out of or related to claims and disputes. To no avail, the dealer argued that the arbitration agreement did not apply to post-termination claims and disputes and that Law 75 rendered the arbitration agreement unenforceable.

After dissecting well-established precedent of the Supreme Court and the First Circuit, the court held that the Law 75 claims were arbitrable, the obligation to arbitrate survived termination of the dealer’s contract, and that the FAA preempted Law 75 to the extent that it nullified the arbitration agreement. Finding that it would avoid inconsistent determinations, the court stayed the claims pending arbitration against the guarantors as they were not bound by the arbitration agreement. See also Apindo Corporation v. Toschi Vignola, 2018 WL 718437 (D.P.R. January 31, 2018)(PAD)(enforcing arbitration agreement of Law 75 claim and also discussing issues of service of process and personal jurisdiction); Johnson & Johnson v. PRHS, 322 F.R.D. 439 (D.P.R. 2017)(denying principal's motion to reconsider order compelling arbitration and staying case).

What this case underscores is that, by now, a written arbitration agreement should be virtually fool-proof unless there is proof of fraud in the inducement of the arbitration agreement itself or the forum-selection provision is unreasonable as to make it unconscionable to arbitrate in a distant forum, usually in a foreign jurisdiction with little to no connection to the parties or the disputes. Even clauses compelling litigation or ADR in civilized or developed foreign countries are generally enforceable, unless the foreign state does not recognize the validity of the claim or does not provide adequate remedies (countries like Iran come to mind).

Saturday, May 19, 2018

Abusing or misusing motions to dismiss and a case for a new standing order

It is no exaggeration that federal civil cases in the District of Puerto Rico have stalled on their tracks by motions to dismiss (“MTD’s”), especially Rule 12(b)(6) motions that have proliferated after Iqbal/Twombly (the Supreme Court’s plausibility standard).

Generally, because the Federal Civil Rules regulate when discovery can begin, the filing of an MTD will excuse a defendant from answering the complaint and will stay discovery. For some securities cases, federal substantive law stays all discovery pending a ruling on an MTD. With the existing Federal Rules in other non-securities civil cases, an MTD will de facto stay discovery unless the court enters an order setting a Rule 26(f) conference and the parties are bound to meet and confer to stipulate a joint discovery plan. With a pending MTD and no scheduling order in sight, all discovery will be stayed pending resolution of the MTD. So, if all that happens in the case is that the defendant files an MTD and the court does not decide the motion or enter a Rule 26 order pending a decision on the MTD, the case is stayed for how long it takes the court to decide the dispositive motion.

There is colloquially-speaking a "Cheo" rule (as in "estas en las paginas de Cheo" or like you are on a watch list) that requires district judges to report to the First Circuit all motions that remain undecided for three months or longer. Compliance with the Cheo rule varies depending on the judge or the case. In our district, with the clogged criminal docket and depending on the complexity of the case, we are talking about months if not years in some cases for the court to decide an MTD. If the MTD is denied, the defendant will have to answer the complaint, and this will trigger a scheduling order, the obligation to have the Rule 26(f) meeting, and finally, discovery can begin. By then, if a long time has passed without a ruling on the MTD, memories of witnesses will fade and proof may be lost (witnesses and parties include human beings who die). Delays take the wind out of the sails of dispute resolution. Parties also lose interest in prosecuting the cases. Lawyers are usually not working on those submitted cases. Nothing good comes from nothing happening in cases, for all those concerned.

You can argue one way or the other whether it is wise or even fair to stay discovery pending a ruling on an MTD. The argument is stronger for a stay when the MTD raises an objection to subject matter or personal jurisdiction because a case cannot move forward without jurisdiction over the complaint and the parties. It is another matter entirely when the MTD raises a failure to state a claim upon which relief can be granted because the legal sufficiency of the pleadings may depend on facts which have not yet been uncovered through discovery because the information is within the defendant’s possession or control or need to be explored or developed by full discovery. Iqbal/Twombly seem to have generated an increasing number of Rule 12(b)(6) motions challenging indiscriminately the sufficiency of the allegations in pleadings without the benefit of any discovery. As I reported in my previous blog, a few recent cases in both our district and the First Circuit are gaining traction in denying Rule 12(b)(6) motions to dismiss and postponing a decision on the legal sufficiency of plausible claims until a later stage (summary judgment, for example) after the benefit of discovery.

Perhaps one solution might be for the court to enter a standing order in civil cases that a defendant has to file an answer to the complaint and start discovery while an MTD based solely on Rule 12(b)(6) grounds remains submitted for decision. One way to accommodate competing concerns about wasteful and unnecessary litigation costs and fees if the MTD were to have merit would be to apply such a standing order in every civil case unless the defendant shows cause or proves prejudice from having to conduct discovery pending the MTD. This approach is consistent with long-established Supreme Court precedent in the "Landis" case requiring a showing of prejudice by a party moving to stay a federal case. This standing order approach would minimize incentives to abuse Rule 12(b)(6) motions.

Federal district court denies Rule 12(b)(6) motion to dismiss a Law 21 complaint

In Vilá del Corral v. D’Accord, Inc., 2017 WL 1184002 (D.P.R. March 28, 2017) (“D’Accord”) (Domínguez, J.), plaintiff filed suit for collection of unpaid commissions and injunctive relief, invoking Puerto Rico’s Sales Representative Act No. 21 (a special law modeled after Law 75). Plaintiff alleged that Defendant breached an exclusive agreement existing, for over “twenty-nine years”, that authorized him to represent D’Accord branded menswear clothing in Puerto Rico. Defendant attacked the sufficiency of the allegations under Rule 12(b)(6), Fed. R. Civ. P., arguing that “there are no contract documents” to support Plaintiff’s argument that he was an exclusive sales agent for D’Accord in Puerto Rico. Id. at *2.

The court noted that it was “unclear [from the Complaint’s allegations] whether the agreement was written or oral and whether it was later novated.” Id. at *4 n. 2. What is more, the court was “skeptical” on whether Law 21, enacted in 1990, applied retroactively to the alleged business relationship predating the enactment of Law 21, but lacked the “requisite clarity to reach a properly-founded conclusion” at the pleadings stage without the contract documents. Id. at *4 n. 3. Considering the well-established plausibility standard governing a Rule 12(b)(6) motion, the court denied the motion to dismiss holding that “Plaintiff has made a satisfactory showing of a plausible Act 21 claim, which the Court deems sufficient to level up and proceed to discovery.” Id. at *4 (quoting) Triangle Trading Co. v. Robroy Indus., 952 F. Supp. 75 (D.P.R. 1997) (Providing that determinations of whether a person is a dealer or exclusive sales representative is fact-intensive and should not be made on the pleadings).

The takeaway of the D’Accord decision is that, no matter how dubious a claim might seem on the pleadings without the benefit of full discovery, a plaintiff is not required to plead the particulars of a binding contract or establish an extinctive novation to state a plausible claim under Law 21 (or for that matter, Law 75) and survive a Rule 12(b)(6) motion to dismiss. This holding is aligned with recent First Circuit authority. APB Realty, Inc. v. Georgia-Pacific LLC, No. 17-1906 slip op. at 9 (May 7, 2018) (vacating Rule 12(b)(6) dismissal of breach of contract claim because “the complaint alleges facts from which the court can plausibly infer the making and breaking of a contract”). D’Accord applies correctly the plausibility standard governing a Rule 12(b)(6) motion to dismiss an action brought under any one of Puerto Rico’s representation statutes (Law 75 or Law 21).

Friday, February 16, 2018

Demystifying Juries

I've been invited as a panelist with a federal public defender and a federal prosecutor to speak to young members of our federal bar on the subject of "demystifying juries." I will speak about my experience trying federal civil cases to juries over the past thirty years.

Less than 1 per cent of the federal civil cases nationwide get tried by a jury. So, why care?

Because you should. Once in a blue moon the deposition that you took not anticipating that it would matter because the case won't get to trial, does get to trial and then it matters. You should take every deposition in every case planning for trial, because that deposition whether it is a 30(b)(6) or a cross is going to be an incredibly valuable tool to convince the jury to side with your client or improve your odds of winning.

What are your odds if you get to the jury? Jurors in P.R. tend to side with the Plaintiff roughly 75 per cent of the time. Why? Jurors seem to side with those parties they can identify with. It can be your client, an individual or a small corporation, a witness for your client, but rarely with a Fortune 500 company. Jurors also watch the news and how they think and react is influenced by the news. For example, this should not be a good time for the defense to try employment discrimination cases, in particular, sexual harassment cases (domestic abuse/sexual harassment are front and center in the news). To understand juries, you have to try to understand their environment and circumstances. When you try a case what's happening in the society around you matters. With the economy like it is in Puerto Rico, money is hard to come by, and juries generally tend to be more conservative in their awards, though they may be more inclined to find liability.

I've been on both the winning and losing sides of juries in civil cases many times and I have ten precepts that I find helpful to demystify juries:

1. Don’t be afraid of juries. Jurors do a great job in finding out what the facts are and what the truth is. Six minds in a civil case work better than one. Jurors work like a great lie detector machine. They are more focused on the facts and doing justice than finding our what the law is. Juries will do their best to apply the law in the instructions as they can remember them, and it helps when the judge gives them a copy after the charge. But to win, you must master the facts of your case.

2. Jurors are paying attention to more than the evidence admitted in the case. They pay attention to you and your client. Do you get to the court on time? Do you treat the court, the witnesses, and opposing counsel with dignity and respect? Are you organized in your presentation of the evidence? Are you prepared? Is your client making gestures while the other side testifies? They are watching everything.

3. Jurors tend to give more weight or remember the first witness and the last. First and last impressions count. Despite being instructed not to discuss the case until deliberations, do you really think they wait that long? Structure your case to be strongest at the beginning and end.

4. Jurors give more weight to eyewitness testimony that is backed up by contemporaneous documents. I've seen it with witnesses on the stand. Jurors pay close attention to both documents prepared before the litigation started and deposition transcripts used for impeachment.

5. Jurors give a lot of weight to expert witnesses that are not hired guns.

6. Don't be afraid to preserve the record when you absolutely have to. If you must object, object when it matters.

7. Don't try to pull a fast one with documents or witnesses. Concede weak points of your case, if you must, in the opening statement. Credibility is a virtue. Don't work to lose it.

8. Jurors dislike and distrust evidence kept from them. So don't object unnecessarily. You lose credibility points if you object just for the sake of objecting or every time you move to approach the bench. Choose your objections wisely.

9. Just be yourself. Don't pretend to be someone you are not when trying a case.

10. Don't sweat it to predict how the jury will come out in the case. Resist answering to your client if you think you are winning the case before deliberations have even begun. Predictions are an exercise in futility and often wrong. Do your best and enjoy the experience.


Sunday, January 7, 2018

It may sound like a broken record, but yes, Law 75 claims are arbitrable

By now it’s firmly settled law that Law 75 claims are arbitrable. While the question whether the claim at issue in a case is or not within the scope of an arbitration provision in an agreement depends on the particular facts of each case, only in exceptional circumstances would a Law 75 claim not be arbitrable. First, there is a risk that claims may not be arbitrable where the written arbitration agreement is narrow in scope and does not provide for arbitration of claims arising out of or related to the agreement or its termination. Second, where a party has waived arbitration by actively litigating in court or consenting to litigation instead of arbitration. Third, where there is an allegation of fraud in the inducement of the arbitration agreement itself. Fourth, court intervention may be appropriate to issue preliminary remedies in aid of arbitration or determine whether a dispute or claim is arbitrable. For the first three situations I have described above, it is rare to find cases upholding objections to arbitration and more so if you weigh in the strong federal policy in favor of arbitration.

The latest case in the rather long line of cases granting motions to dismiss or compel in favor of arbitration is Crespo v. Matco Tools Corporation, ___F. Supp. 3d.___,2017 WL 3534998 (Aug. 15, 2017)(Gelpí, J.). This case is of the first variety described above. Plaintiff, a dealer of automobile products, alleged that the Law 75 termination claim was outside the scope of the arbitration agreement as were claims of fraud that fit an exception in the agreement from the obligation to arbitrate. The court found that the reason given for termination was lack of payment-not fraud-and the termination claim was, therefore, arbitrable.

Another case along the same lines is Johnson & Johnson International v. Puerto Rico Supply, Inc., 258 F. Supp. 3d 255 (D.P.R. 2017), where the court (Besosa, J.) held that claims by a supplier of medical products for collection of monies and declaratory judgment for termination of a non-exclusive distribution agreement under Law 75 were arbitrable; stayed claims for termination of other exclusive agreements that had no arbitration provisions; and denied a motion to compel arbitration by Defendant's affiliate and a non-signatory of the arbitration agreement. On reconsideration, the court denied the supplier's motion to lift the stay pending arbitration and the order denying provisional remedies in aid of arbitration. This author represents the Defendant Puerto Rico Hospital Supply, Inc. in that action.

Add another one to the list. In Air-Con, Inc. v. Daikin Applied Latin America, LLC, 2019 WL 2606881 (D.P.R. June 25, 2019), the distributor challenged the obligation to arbitrate arguing that the agreement was unsigned, and in any event, expired on its own terms. The supplier countered that the parties adopted the unsigned agreement in their course of dealings and the agreement continued indefinitely after its expiration date unless terminated without just cause. The court determined that there was an obligation to arbitrate and dismissed the case.

Absence of written agreement makes proving just cause under Law 75 “significantly harder”

In Yacht Caribe Corp. v. Carver Yacht, LLC, ___ F. Supp. 3d___, 2017 WL 4083549
(Aug. 23, 2017), the federal court (Gelpí, J.) granted in part and denied in part the Defendant-supplier’s motion for summary judgment. The court denied summary judgment on the Law 75 termination claim on grounds that there were issues of material fact as to whether Plaintiff, a boat reseller, qualified for protection as a Law 75 dealer and if the supplier had just cause for termination of the existing relationship for failure to sell any products. The court granted summary judgment and dismissed a separate claim for breach of a duty of good faith and fair dealings for the absence of an enforceable mercantile contract containing all the terms and conditions.

It would appear to be contradictory on its face that the court would find a genuine issue of fact as to whether a protected contractual relationship existed under Law 75 from a course of dealings but there would be no issue that there was no meeting of the minds for an enforceable contract to activate the implied duty of good faith and fair dealings at the Civil Law. The difference is subtle but not contradictory. Law 75 protects a relationship, whether verbal or written, that could arise from a course of dealings in performing certain but not necessarily all the obligations of a dealer. For a contractual claim, however, the elements are different because there must be the concurrence of an offer and an acceptance with all the elements of a binding contract. An enforceable mercantile contract from a course of dealings could exist under Law 75 but a final mercantile agreement may not necessarily or be premature.

More to be said about the facts of this dispute between a boat dealer and the manufacturer. In this case, the dealer made claims of damages for termination of contract under Law 75 and for breach of the duty of good faith and faith dealings. The dealer acquired the rights and obligations that a previous dealer had in the line before going into bankruptcy. After the acquisition, the Plaintiff-dealer performed certain of the functions of Law 75 dealers with Defendant’s knowledge or consent, including promotion of products, but never sold any boats itself. The Plaintiff sued when the manufacturer appointed another dealer in the Puerto Rico territory and terminated the existing relationship. The Defendant claimed that plaintiff was a “friendly broker”, that the bankruptcy extinguished the contract with the predecessor, and Plaintiff suffered no damages because it never sold any products. The court determined that there was an issue of material fact precluding summary judgment as to Defendant’s core argument that Law 75 provided no protection.

The court’s rationale for denying summary judgment on the separate question of just cause is interesting. Defendant argued that Plaintiff must have “clearly understood” that selling product was an essential obligation of a dealer’s contract whose breach would adversely and substantially affect its interests in Puerto Rico. The court highlighted the consequence of not having an integrated contract to define all the essential terms and conditions, holding that “the absence of a written dealer’s agreement makes their burden of showing just cause significantly harder…”. Further, “[t]he fact that a principal or grantor is in the business of selling a product does not necessarily imply that the sale of such product in a given period is an essential obligation of any dealer’s contract, especially one devoid of a specific agreement to that effect.” The court cited Section 278a-1(c) of Law 75 for the proposition that any provision in an agreement fixing rules of conduct or sales quotas or goals must be proven by the principal to be reasonable considering market conditions in Puerto Rico at the time of the non-performance or violation. The court determined that the principal had failed to meet its onus on summary judgment.

As to damages, the court held that Plaintiff had shown that the termination cut off potential sales of boats that were about to close until customers found out that Plaintiff had been removed from the supplier’s website as an authorized distributor and cancelled the orders. This implies that business opportunities, if a jury could find that they probably would have materialized in concrete sales, would cause actual damages or losses to the dealer. If so, those damages would not be speculative. This result is consistent with the principle at Civil Law that damages need not be proven with mathematical certainty.

As applied by the court to the just cause question, in a case where there was no contract defining the essential obligations, Section 278a-1(c) requires the principal to prove that compliance with quotas, goals, or sales expectations must be reasonable considering market conditions in Puerto Rico. This provision also applies on its terms to any “standards of conduct” fixed in a contract (a phrase not defined in Law 75) and is not limited to sales quotas or goals or to non-essential obligations. As a practical matter, with the presumption of lack of just cause activated in this case from the appointment of another dealer following the termination, this legal standard will prove to be a heavy burden for the supplier. The termination would have to be justified with proof that the standards of conduct or sales goals were reasonable at the relevant moment of the detrimental act considering the recessionary economic conditions in Puerto Rico affecting most industries across the board for over the past decade.

Saturday, January 6, 2018

Distribution law predictions in Puerto Rico for 2018 from the wrath of Hurricane María

2017 was an abnormal year for us, that we soon hope to forget. Hurricane María devastated Puerto Rico’s infrastructure. Local businesses are now focused on surviving and dealing with their own emergencies. With courts closed to business for many weeks and businesses focused on their internal problems, litigation went to the back burner. As operations normalize, however, firms will or should prioritize their own risk management, including insurance claims-handling and dealings with supplier-distributor relations.

One can predict that there will be a rise in the long run of insurance claims for property losses and business interruptions from the aftermath of the hurricanes (Irma and María). We have not seen these claims filed in court yet but one can expect there will be a surge in litigation as insurers either delay in paying up the claims or deny coverage. As the courts resume more normal operations and businesses are able to run with more stability from power provided by public utilities, they will re-focus on claims management and litigation issues.
The wake of the hurricanes will raise a number of issues relevant to supplier-dealer relations and one can expect that unresolved disputes will lead to arbitration and litigation at some point during the last quarter of 2018.

First, these natural catastrophes aggravated “pre-existing conditions”, so to speak. Before the hurricanes, there would have been issues typical in supplier-dealer relations, such as, disputes about performance, market development, encroachment with exclusive territories, and compliance with contractual obligations. Surely, the hurricanes must have made matters worse. Supply of product and services was interrupted. FEMA is said to have taken control of supplies at the ports, which is said to have caused delays and out of stocks at the point of sale. Whose fault was it? Many retailers were closed for weeks on end. So, too, there must have been payment delays by customers to their dealers and from dealers to their suppliers. To what extent there would be just cause for termination of dealer’s contracts after an aggravation of pre-existing conditions remains to be seen. Precipitous termination decisions and other detrimental acts would be risky in these trying times.

Second, I would expect there would be a surge in distribution law counseling from the wake of the hurricanes. Is performance excused? Should there be an accommodation in compliance with contractual obligations and what should reasonable accommodations be? Is there cause and effect between the dealer’s performance and the damages caused by what are acts of God? To what extent can the supplier waive or modify strict compliance with contractual obligations or performance standards or goals without affecting contractual rights and legitimate business expectations?

Third, the hurricanes have altered the structure of Puerto Rico’s economy, not to mention external political forces that may prove unfavorable to building a healthy economic environment. Migration of workers and other Puerto Rico residents in the thousands of persons should lead to a decline locally in the demand for goods and services. Assuming that interest rates will rise, and so does inflation, credit will continue to be tight and capital investments in brand development will dwindle. Although there will be an upside from an increase in the demand in the short run for provisions and certain hard goods after the damages or losses caused by these natural events, the environment will remain challenging for local businesses- that already face high tax rates and burdensome regulations- to run their operations profitably and cost-efficiently. There will be tensions with suppliers. The strongest local businesses will survive. But competition will be fierce. With an emphasis in improving the bottom line to shareholders and these natural events provoking a reassessment of existing business relations, I would expect a rise in dealer-supplier disputes after the wake of the hurricanes, and eventually, more litigation.

Fourth, keep an eye on important dealer contract litigation under Law 75 making its way through the federal courts. Cases include a challenge in the First Circuit to a jury verdict finding no just cause for termination of a dealer’s contract for the sale of construction equipment and a case in federal district court involving a claim of successor liability following a divestiture and sale of assets of a branded product. CAB is lead counsel in both cases.

Word to the wise to savvy suppliers and dealers alike, now it’s more important that ever to consult with your lawyer before changing existing business relationships in Puerto Rico or restructuring commercial relationships to account for these new realities. Reach out now (to us!) before it’s too late.

At CAB we were one of the few fortunate law firms in Puerto Rico to be fully operational after hurricane María. We continue to be fully staffed with highly skilled lawyers and support personnel and are up and running from day one. We have our offices in a state of the art facility at the Banco Popular Center in Hato Rey’s banking district, which was one of the few business properties that was fully operational after the hurricane’s devastation.

Friday, May 19, 2017

"Litigating Dealer Termination Cases in Puerto Rico" article for publication in the Franchise Law Journal

CAB's senior associate Carla Loubriel and I co-authored the article "Litigating Dealer Termination Cases in Puerto Rico" scheduled for publication in the Franchise Law Journal, Vol. 36, No. 4, Spring 2017.

Our article provides a top to bottom coverage of the substantive, procedural, and strategic considerations of litigating claims brought under Puerto Rico's relationship statutes from discussing the most appropriate forum to prosecute or defend the claims through jury trials in the federal court. The article explains the substantive elements of the relevant claims and defenses, discusses the interaction with the Civil Code, examines the differences between Puerto Rico's relationship statutes and the common law, and delves into pin pointing the implications of litigating these claims in Puerto Rico's local courts versus the federal court. We provide an overview of jury trials in Law 75 cases and conclude by sharing practical considerations that influence the litigation of distribution cases in Puerto Rico.

Feel free to contact Carla or this author for an advance copy of the article before publication.

The Franchise Law Journal, the quarterly scholarly publication of the American Bar Association's Forum on Franchising, seeks to inform and educate lawyers and other interested readers by publishing articles, columns, and reviews concerning legal developments relevant to franchising as a method of distributing products or services.