By: Sarika Angulo, Senior Associate at CAB and invited blog contributor.
It is widely known that Puerto Rico is presently in the midst of a major financial quandary. The Commonwealth has amassed over $73 billion dollars in government-debt alone. This economic downturn has led to many sources of financial distress, which has inevitably had a significant negative ripple effect on the private sector as a result of the brain drain to the mainland, the rise in unemployment, mortgage and foreclosure crises, and the tightening of consumer credit. In an effort to assist Puerto Rico put its fiscal house in order, Congress appointed a “Financial Oversight & Management Board for Puerto Rico” pursuant to “The Puerto Rico Oversight, Management, and Economic Stability Act.” See Public Law 114-187 of June 30, 2016, tit. 1, Art. 101(b)(2) (colloquially known as “PROMESA”).
While the abstract policies behind PROMESA are laudable as they are aimed at reducing costs drastically, increase revenues, and expand economic growth, a comprehensive and concrete plan to abate the crisis is yet to be outlined. Until then, this financial uncertainty may continue to have dire consequences for the private sector. Local businesses bearing the brunt of a sluggish economy may have no other option but to turn to the last resort of filing for bankruptcy to obtain a respite and perhaps start anew. But, if the local business that files for bankruptcy is a party to an ongoing distribution agreement, what happens to the agreement as of the time of the filing of the bankruptcy petition? Does the agreement remain in full force and effect, thereby becoming property of the debtor’s (distributor) bankruptcy estate or is it automatically terminated? If the latter, does such “termination” constitute a breach of the distribution agreement by the debtor/distributor? If so, can such breach by the debtor/distributor be considered “just cause” to terminate the distributorship under Puerto Rico’s Dealer and Franchise Statute (commonly known as “Act 75”)? See P.R. Laws Ann. tit. 10, §§278 et seq.
A thorough research on these issues has yielded only one case from the District of Puerto Rico. In American Healthcare Corp. v. Beiersdorf, Inc., 2006 WL 753001 (D.P.R. March 23, 2006), the Court addressed this particular controversy, but in the context of a Chapter 11 reorganization. There, the court held that there was no valid basis for a Law 75 claim after the dealer’s contract had been rejected and did not become part of the estate in a Chapter 11 proceeding. So, Plaintiff was not the “owner” of any dealer’s contract or had no valid basis to assert a subsequent judicial claim under Law 75 against the principal because it breached the contract by rejecting it.
Accordingly, based on controlling case law, here I address what could be expected to occur to an ongoing distribution agreement at the time of the filing of a bankruptcy petition by the debtor/distributor as seen through the prism of Chapter 11. Under the U.S. Bankruptcy Code (the “Code”), Chapter 11 is ordinarily used by businesses to reorganize their debts and continue operating. When a debtor files for relief under this chapter, an estate in bankruptcy is created. See 11 U.S.C §541(a).This estate may include contracts, such as executory contracts. While the Code has an expansive provision addressing “executory contracts” (see 11 U.S.C. §365), as well as an elaborate section defining the terms contained therein, it does not describe the term “executory contracts.” For this reason, courts and practitioners alike have adopted the definition coined by Professor Vern Countryman of Harvard Law School in a 1973 article in the Minnesota Law Review where he defined such contracts as “a contract under which the obligation of both the bankrupt and the other party to the contract are so far unperformed that the failure of either to complete performance would constitute a material breach excusing the performance of the other.” See Vern Countryman, Executory Contracts in Bankruptcy: Part I, 57 Minn. L. Rev. 439, 460 (1974). Under this definition, an ongoing distribution agreement under Act 75 falls squarely within the meaning of “executory contract.” See American Healthcare Corp. v. Beiersdorf, Inc., 2006 WL 753001, at *2.
Despite the cult status enjoyed by Countryman’s test, some courts have departed from it as they believe the test is too static and rigid, creating a higher threshold for the definition of an executory contract than Congress intended. See, e.g., In re Riodizio, Inc., 204 B.R. 417 (Bankr. S.D.N.Y. 1997) (citing Mitchell v. Streets (In re Streets & Beard Farm P’ship), 882 F.2d 233 (7th Cir. 1989)); In re Spectrum Info. Tech., Inc., 190 B.R. 741 (Bankr. E.D.N.Y. 1996). Instead, these courts have replaced Countryman’s test with a more functional approach under which the focus is on whether or not the estate will benefit from the assumption or rejection of the contract. See In re Gen. Dev. Corp., 84 F.3d 1364 (11th Cir. 1996); see also In re Cardinal Indus., 146 B.R. 720 (Bankr. S.D. Ohio 1992). The U.S. Bankruptcy Court for the District of Puerto Rico is one of these courts. See American Healthcare Corp., 2006 WL 753001, supra.
Under this functional approach —which Puerto Rico follows— if the debtor wishes to continue with an executory contract because it considers it to be a valuable asset of the bankruptcy estate, it may request leave of Court to assume the contract. See 11 U.S.C. §365(a). On the other hand, if it deems the contract to be too onerous and cumbersome, the debtor may likewise request the Court to reject it. Id. Although the debtor may, under the Code, select which executory contract to assume or reject, the debtor cannot cherry pick particular clauses to assume or reject. The executory contract must be entirely assumed or entirely rejected. See American Healthcare Corp., 2006 WL 753001, at *3.
Now, the rejection of a distribution agreement by a Chapter 11 debtor entails certain critical consequences, particularly where an interplay exists between the rejection and Act 75. This is so because for Chapter 11 purposes a rejection of an executory contract (in this case the distribution agreement) constitutes a breach of contract. See 11 U.S.C. §365(g)(1) and 502(g). Under Act 75, an entire breach of the contract by the distributor constitutes “just cause” for the termination of the distributorship by the principal. See P.R. Laws Ann. Tit. 10 §§278(d), 278a, 278a-1. In other words, the principal can walk away from the distribution agreement without any liability. That means that the principal will not be liable to the debtor/distributor for damages, which pursuant to Act 75 encompass the amount of the profits obtained in the distribution of the merchandise or in the rendering of the services, as the case may be, during the last five (5) years, or if less than five (5), five (5) times the average of the annual profit obtained during the last years, whatever they may be (see P.R. Laws Ann. Tit. 10 §278(b)) and, should the debtor/distributor be the prevailing party, attorneys’ fees. See P.R. Laws Ann. Tit. 10 §278e.
As history has shown, a dire financial environment is a breeding ground for bankruptcies. In a distributorship context, trends have proven that bankruptcy filings seldom occur without warning as they are generally reasonably foreseeable based on signs of financial distress shown by the distributor. Nevertheless, many of these signs are not readily identified until it is too late for the principal to intervene. For that reason, principals should be keenly alert to an inclination by the debtor to repeatedly incur in financial delinquencies and/or request debt restructuring. In such circumstances, legal counsel should always be consulted to ensure proper analysis to devise the most appropriate course of action in order to reach a favorable outcome for all parties involved.
Wednesday, November 30, 2016
Monday, July 11, 2016
A dealer’s expectation of a promise of future exclusive rights does not convert a clearly non-exclusive Law 75 contract into an exclusive contract
Caribe RX Service Inc. v. Grifols Inc., ____D.P.R.___(June 30, 2016)(Judgment without opinion), is another case on appeal from the issuance of a Law 75 preliminary injunction. Caribe RX is a Puerto Rico dealer of plasma medical products. Grifols, the supplier, appointed Caribe RX in a written contract as an exclusive dealer of certain products (GBI) but non-exclusive as to others (GTI). What is more, during pre-contractual dealings, Grifols told Caribe that it could not grant exclusive rights over GTI products as Caribe RX wanted because of existing distribution relationships with other resellers in Puerto Rico. The written agreement expressly captured the essence of those representations and included an integration clause that superseded prior representations making the written agreement the only agreement between the parties.
Caribe RX filed a complaint for Law 75 impairment in local court and moved for a preliminary injunction claiming that the reseller Cardinal Health 120 Inc. was interfering in P.R. with its “verbal” exclusive rights over the clearly non-exclusive GTI products in the agreement. After unsuccessful attempts to remove the case to federal court and on remand to dismiss the case to enforce a mandatory North Carolina choice of forum clause in the agreement, the trial court held a hearing and granted a preliminary injunction barring Grifols from selling any and all GBI and GTI products except through Caribe RX. The intermediate appellate court affirmed, reasoning that the testimony of Caribe’s President (a lawyer) to the effect that Caribe had an expectation of a promise to obtain future exclusive distribution rights over GTI products reflected the true intention of the parties- which Grifols did not controvert with verbal testimony at the hearing. It is important to stress that there was no allegation of error, fraud or deceit either in the formation or the performance of the contract. As the Supreme Court later made clear by reversing the appellate court, the written agreement should have been the "best evidence" reflecting the intent of the parties.
In a brief Judgment, the Supreme Court held that Next Step I controlled and reversed that portion of the preliminary injunction that granted the dealer exclusive distribution rights over GTI products and affirmed the injunction over GBI (although there was no proof on record that Grifols had ever sold any GBI products through anyone other than Caribe RX, but Caribe offered testimony that Grifols advertised those products for sale through the internet). The court agreed that the preliminary injunction erroneously granted exclusive rights which the dealer never had.
Three Justices of the court wrote a 31-page separate concurring opinion. In an insightful opinion worthy of the days when Justice Trias Monge searched for answers in Spanish Civil Code commentators, Justice Anabelle Rodríguez, would have held that a party’s pre-contractual expectation of exclusive rights cannot supersede the clear and unambiguous terms of the contract. She wrote that a contrary result would frustrate legitimate expectations and the duty of loyalty inherent in contractual obligations. Justice Rodríguez did a commendable job in reconciling the apparent conflict between the Civil Code’s provision that states that literal provisions of a contract, when clear, must be strictly observed, with the mandate that a trier of fact should consider prior, coetaneous, and subsequent acts of the parties to determine the true intention. She wrote that, "to dispel any suspicions of what was intended", the dealer’s pre-contractual expectations never rose to the formation of a bilateral contract because the principal was willing to consider granting future exclusive rights over GTI depending on circumstances but could not do so presently because of other dealers in the territory. This is also what the contract said in no uncertain terms.
The concurring opinion is a fine template of the law that should be followed when courts interpret civil and commercial contracts.
CAB’s Carla Loubriel and the undersigned defended Grifols at the preliminary injunction hearing and at the intermediate court of appeals.
Waiver of just cause defense neither moots nor makes issuance of Law 75 preliminary injunction automatic
In Next Step v. Bromedicon, 190 D.P.R. 474 (P.R. 2014)(“Next Step I”), the court held that the issuance of a Law 75 preliminary injunction to a dealer, that qualified for protection, required weighing the policies served by the statute and balancing all the relevant interests. The traditional standards for preliminary injunctions are relevant but do not necessarily apply in this context, although traditional defenses to equitable relief, such as laches and estoppel, still apply.
Another Next Step case, Next Step v. Biomet Inc., 2016 TSPR 120 (2016), involved Biomet’s termination of a Law 75 contract after the dealer’s distribution rights had been expressly assumed by the principal’s successor. After the trial court scheduled a preliminary injunction hearing, the principal admitted lack of just cause and argued that the request for a preliminary injunction had become moot for all that remained was a prompt hearing on damages. The trial court agreed with the principal. The intermediate appellate court not only reversed but, concluding that the principal had admitted lack of just cause, entered a preliminary injunction on appeal without a hearing.
This procedural imbroglio came before the P.R. Supreme Court on two issues, first, whether the principal’s admission of liability mooted the preliminary injunction remedy (it did not), and two, did the appellate court err by granting a preliminary injunction on appeal (it did). The preliminary injunction, held the court, was not moot. The purpose of the Law 75 provisional remedy was to lessen the impact to the dealer from its loss of the dealer’s contract until a final judgment on the merits. Because the case was not over only with an admission of lack of just cause, the provisional remedy was not moot. The intermediate appellate court, however, erred in granting the preliminary injunction without a hearing because the dealer still had the burden to prove the reality of its damages and that the balancing of the relevant factors justified injunctive relief under Next Step I. The case was remanded for further proceedings.
Thursday, June 16, 2016
Law 75 dispute between Florida supplier and Puerto Rico reseller of fish and seafood products stays in Puerto Rico federal court after a finding of fraudulent joinder
The underlying issue on the merits of this case is whether the Puerto Rico reseller (Sea World) has any basis to claim an exclusive distribution relationship protected by Law 75. The dispute began when the reseller's counsel threatened, in a letter, to sue for damages when, after many months of the reseller's failure to place even one purchase order for product, the supplier (Seafarers) sold product to a competing Puerto Rico reseller (Axa).
Not to be outdone, Seafarers first filed suit in federal court for declaratory judgment based on diversity of citizenship. Sea World's next move was to sue Seafarers in local Puerto Rico court for alleged impairment damages under Law 75 from sales made to Axa, the competing reseller, and also requested preliminary injunctive relief. Sea World also joined Axa as a defendant in the local court case alleging tortious interference and this would have defeated removal to federal court for lack of complete diversity of citizenship. The local court quickly scheduled a preliminary injunction hearing, but Seafarers timely removed the case to federal court depriving the local court of jurisdiction. Seafarers alleged that Axa, the diversity-defeating Puerto Rico co-defendant, should be disregarded for fraudulent joinder. The federal court would have diversity jurisdiction but for Axa's fraudulent joinder in the case.
In the second and removed federal case, Sea World LLC v. Seafarers Inc., 2016 WL 3258360 (D.P.R. June 10, 2016)(PG), the plaintiff Sea World moved to remand the action alleging that Axa had not timely joined Seafarers' notice of removal and its claim of tortious interference under Puerto Rico law defeated the allegation of fraudulent joinder. The federal court denied the motion to remand. The court first held that Axa's two-day delay in joining the notice of removal complied with the unanimity requirement in the interest of justice. In any event, Axa's joinder for removal was moot because the court found fraudulent joinder. Seafarers also argued that Sea World's reactive and subsequent suit in local court after the first-filed federal case demonstrated an improper purpose to circumvent federal jurisdiction, but the court did not have to reach that issue to find fraudulent joinder.
The court articulated the test of fraudulent joinder as whether Sea World stated a cognizable claim of tortious interference under the Rule 12(b)(6) standard. It held it did not. Puerto Rico law does not recognize a tortious interference claim of an alleged distribution contract with an indefinite term. Plaintiff Sea World failed to allege in its complaint that the alleged exclusive distribution agreement with Seafarers (with which Axa is said to have been interfering) had a fixed term or duration. Failing to state a valid claim against Axa, the court found fraudulent joinder and determined it had subject matter jurisdiction, thus ending the procedural chess match in local and federal courts. Pending before the federal court in the two cases are motions for consolidation.
CAB represents the supplier Seafarers Inc. in these cases. Natalia Morales and this author are counsel of record for the supplier in the federal cases.
Monday, May 16, 2016
In Trafon Group, Inc. v. Butterball, LLC, 2016 WL 1732742 (1st Cir. May 2, 2016), the First Circuit affirmed both an order denying a preliminary injunction and the ensuing judgment dismissing a Law 75 action as time-barred. A Puerto Rico-based wholesale food distributor, Trafon, acquired certain assets from Packers Provisions including an existing distribution agreement with Butterball for whole bird and turkey products. The Asset Purchase Agreement (APA) did not reference an alleged exclusive distribution relationship between Packers and Butterball. Nor did Trafon secure the manufacturer’s consent or a representation of exclusivity prior to completing the asset purchase transaction. While Trafon may have believed that the distribution rights it had acquired were exclusive, Butterball disagreed and openly refuted the allegations of exclusivity in its counsel’s letter of October 2009 and in disclaimers made in each subsequent invoice. Trafon sued Butterball in September, 2013 after Butterball had made sales to Costco and refused to pay commissions on direct sales made during 2011 and 2012.
Essentially, the legal issue on appeal was when did the Law 75 claim accrue to start the running of the three-year limitations period? Did it begin to run in October 2009 when on notice of Butterball’s repudiation of the allegation of exclusivity or when it started to sell product directly in 2011? Applying Basic Controlex v. Klockner, 202 F. 3d 450 (1st Cir. 2000), the First Circuit held that the limitations period began to run from Butterball’s counsel’s letter in October, 2009 and the action filed in September, 2013 was time-barred.
At least three lessons could be learned from the facts and the court’s holding. The first and most obvious is that a proper due diligence protocol in the APA transaction should have required obtaining the manufacturer’s consent or written confirmation of an alleged existing exclusive distributorship appointment before making the purchase. The second lesson can be that clear and unequivocal notice of the supplier’s repudiation of exclusivity triggers the running of the statute of limitations and a direct sale of an exclusive product is not necessary for an impairment claim to accrue under Law 75. The third lesson may be to state the obvious: Trafon should have sued for injunctive relief earlier than it did and not wait for Butterball to commit a more costly breach.
This author was Butterball’s outside counsel before the litigation.
Monday, March 21, 2016
Federal court grants supplier's motion for summary judgment dismissing Law 75 case for lack of timely payment
There are a number of permutations for when lack of timely payment may or may not be just cause as a material breach of contract under Law 75. The legal proposition is that paying on time is "normally" one of the dealer's essential obligations, the breach of which may be just cause for termination. But that proposition has never been an absolute rule because paying on time is not always an essential obligation. Saying otherwise that, as a matter of law, paying of time is always essential would lead to absurd or unjust results (for example, is late payment by one day of one invoice automatically just cause to terminate a long-standing business relationship?) or may ignore the commercial reality of the relevant industry, the terms of the contract itself, or the course of conduct of the parties.
Any notion that paying late or making incomplete payments is always or automatically just cause when the supplier protests, is legally incorrect and misguided. Paying on time is not essential and may not be just cause in at least three situations: when an integrated contract specifies all of the dealer's essential obligations and excludes timely payments (the Casco vs. John Deere contract was of this mold) or in the unusual situation where the supplier is not serious about or accepts late payments. To add to the mix, a dealer may also allege and prove to the trier of fact (as in Casco vs. John Deere) that the dealer's alleged breach of contract was a subterfuge or a pretext to terminate the agreement for ulterior motives or that the supplier contributed to payment problems.
But, when the dealer's contract clearly specifies that paying on time is essential and there is no evidence of a subterfuge or pretext and nothing on record indicates that the supplier has not cared about late payments (and what it has meant to "care or not" depends on the facts of each case) courts have uniformly granted summary judgment in the supplier's favor.
Kemko Food Distributors Inc. v. Schreiber Foods Inc., 2016 WL 814833 (D.P.R. Feb. 29, 2016)(Hon. Pedro Delgado, J.), is one of those cases where the contract and the facts hurt the dealer.
There, a supplier of food service products appointed the Puerto Rico dealer as its exclusive distributor, but the contract expressly made the appointment contigent on both making timely payments and making sales efforts. For 18 consecutive months before the termination, the dealer paid late and it became a serious concern to the supplier. Judge Delgado recognized situations where timely payments are not essential obligations and found them to be inapplicable to the facts of that case. With undisputed evidence of a breach of an essential payment obligation in the contract and absent any proof of a pretext or subterfuge, the court granted the supplier's motion for summary judgment.
Monday, March 14, 2016
Last week I tried to verdict in federal court a dealer termination case under Law 75. Fortunately, the jury favored my client, a Puerto Rico dealer, with an award covering 100% of the Law 75 claims.
Statistics show that 99% of federal civil cases are dismissed before reaching the jury, either by dispositive motions or settlements. In fact, my last Law 75 federal jury trial, representing the manufacturer, had been 6 years ago, and I settled before the jury took the case. The Casco v. John Deere case I tried last week, after three years of intense litigation against competent defense counsel, was the first Law 75 case to reach a jury in many years. Mind you that, while a lot of Law 75 cases are bench-tried in the local courts, there's no right to trial by jury in Puerto Rico and the only civil jury cases are heard in the federal court. And, the civil cases tried in our federal district court in Puerto Rico are few and far between and almost none is a commercial case. Criminal cases overwhelm the federal docket and there is no time or judicial resources for the few labor employment or civil rights cases that actually get tried.
It is no wonder then that the art of trying a case before a jury is getting lost. Even more perplexing, is the jury selection process in which lawyers get no meaningful participation in the voir dire to question the venire and the jurors that actually get picked are more of a lucky draw than a consciencious or scientific effort at jury selection.
Jury cases of Law 75 claims are so rare, that I'd like to share my insights into the backgrounds of the jurors that actually tried our case and the jurors who unanimously found for the dealer. These thoughts never get published except by word of mouth from some of the older or more experienced members of our federal bar.
Jury venire in the Casco v. John Deere case was composed of roughly 36 candidates. Some were excused for cause, either for medical reasons or some had prior travel arrangements or commitments or knew the lawyers or their law firms etc. For example, one of the potential jurors worked as a clerk for my firm's external auditors and was stricken for cause. From those who remained after 3 peremptories or strikes per side, the jury was initially composed of 4 men and 4 women. After a number of back-to-back recesses called by the Judge mid-trial, a middle-aged female juror had become sick or extenuated, from two weeks of trial or most likely after eating a federal lunch pack, and was rightly excused for cause. The remaining 4 men and 3 women were representive of all walks of life. We had an administrative assistant of a multinational corporation, two engineers, an attendant of an auto parts store, a public school physical education teacher, an accounts receivable clerk in a newspaper, and a housewife. There were no accountants or financial analysts per se in the jury, except perhaps for the accounts receivable clerk who must have known basic math and the engineers who have a fuller understanding of science and mathematics. I don't think, however, the two engineers had post-graduate degrees. Although their age was not disclosed, I guess that most were between the ages of 32-55. All lived in different municipalities across all over Puerto Rico, except for one juror from San Juan. As expected, fluency in English was mixed. The Judge required the second venire (the second pool of jurors who are left after others from the first badge are excused for cause) to read out loud on the record their responses to a set of a few boilerplate questions, such as, where they live and work and what their family members do for a living. Most of the jurors were naturally so soft-spoken in the intimidating courtroom environment that at least I could barely hear what they said. From what may have been a 20 second narrative by each of roughly 20 persons, the lawyers are supposed to discern all the facts to make an informed judgment to select the jury. No interrogation by counsel is allowed. Also, from this brief narrative, which is the only words ever spoken by a juror in the case, except for an individual assent to the verdict after a poll, you can tell about their fluency in English, sort of. In this case, jurors clearly spoke and understood English but not as a first language but some were actually very fluent. I'd say most spoke English like most Puertorricans do as a second language. The only common denominator, that may or may not have been relevant, is that none of the jurors had served before in any other case, civil or criminal, which implies that all had a fresh or open mind and were not contaminated by experiences in other cases. Judgment came after more than two hours of deliberations.
Full of energy and enthusiasm after eating their nutritious federal lunch packs, our jury reached a unanimous verdict before the rush hour on a sunny Friday afternoon and left the court for home.
Saturday, March 12, 2016
John Deere Construction and Forestry Company gets hit with federal jury verdict in dealer termination case
Last Friday, March 11, 2016, a federal jury in the U.S. District Court of Puerto Rico found defendant John Deere Construction & Forestry Company liable for termination of a 27 year-old dealer's contract without just cause under Law 75 and awarded plaintiff Casco, the Puerto Rico distributor, impairment and termination damages of $1,763,934.
This is the first Law 75 case to reach a federal jury verdict in recent memory.
The federal court's pretrial in limine rulings in Casco v. John Deere (published in Westlaw) provide a more developed background of the disputes and claims between the parties than I will attempt here. In summary, Casco, a Puerto Rican distributor of construction equipment, claimed that John Deere, one of the leading manufacturers of construction equipment in the United States, terminated unilaterally the dealer's contract in 2013 without just cause and impaired the contract by cancelling in 2012 a purchase order for the sale of a John Deere excavator worth $268,000.
Only the separate claims for impairment and termination under Law 75 reached the jury. At trial, the Court (Hon. Pedro Delgado Hernandez, J) dismissed the dolus (fraud) claim holding that the alleged predicate for fraud of constructive termination of the contract in 2009 was not actionable under Puerto Rico Law 75, a pure issue of law and one of first impression with the P.R. Supreme Court. Mid-trial, as noted, the Court granted John Deere's Rule 50 motion to dismiss the dolus claim for fraudulent inducement and fraudulent performance of contract and also entered judgment for John Deere on its counterclaim for collection of a debt of roughly $200,000.
About Casco's success on the Law 75 claims, the Jury must have found that John Deere's ostensible reasons stated in two letters for the impairment and subsequent termination were false or a pretext. The jury credited Casco's version of the events that John Deere retaliated or discriminated against its Puerto Rican dealer over many years as a vendetta for the dealer's owner's business affiliation with Volvo Construction, a competitor.
Substantial evidence was introduced at trial that John Deere treated its Puerto Rican distributor differently from other construction equipment dealers in Latin America or the United States. Those other dealers received grace periods to comply with John Deere's requirements and were invited to attend important dealer conferences. Casco received no breaks and was the only dealer excluded from the dealer conferences. John Deere's executives admitted to being upset at Casco for standing up for its rights for many commercial issues in their relationship, and more upsetting was to John Deere its business dealings with Volvo. The John Deere dealer agreement with Casco also did not have a non-compete obligation, as do many of John Deere's newer dealer contracts with other distributors.
After a two-week trial and over two hours of deliberations, the Jury awarded Casco impairment damages of $323,440 and termination damages of $1,440,494, fully compensating Casco for 100% of its Law 75 claims. Puerto Rico law does not permit punitive damages. Puerto Rico Law 75 has a cost-shifting provision requiring the Court to award reasonable attorney's and expert witness fees in the dealer's favor as the prevailing party, and those fees are expected to be substantial in this case.
This author Ricardo Casellas was lead trial counsel for the dealer Casco in this case and CAB's attorneys Heriberto Burgos and Sarika Angulo and paralegal Mercedes Rodriguez formed CAB's team. Plaintiff's damages expert was Reynaldo Quinones Marquez, CPA, and Gustavo Velez, an economist who testified about market conditions affecting the construction industry in Puerto Rico. For defendant, Dr. Freyre, an economist, testified as rebuttal expert on damages.
Tuesday, December 29, 2015
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
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
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
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.