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.

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.

Tuesday, May 2, 2017

The Role of Arbitration in my Commercial Litigation Practice in Puerto Rico

Ricardo is a founder of Casellas Alcover & Burgos, P.S.C., a commercial litigation boutique in San Juan, Puerto Rico. His eight-lawyer firm handles complex commercial litigation and arbitrations for many Fortune 500 companies, local businesses, and individuals. He has been affiliated to Business Counsel Inc. with both his current firm and a predecessor law firm for almost 20 years.

Below are excerpts of a presentation by the author in Carlsbad, California during May, 2017 to Business Counsel Inc., a network of law firms across the United States and certain foreign countries. Ricardo was asked to lecture on alternative dispute resolution and the resources that his firm can offer to clients that may require an arbitrator in international disputes in Latin America, Spain, and of course, Puerto Rico.

Q. How relevant is mediation and arbitration in dispute resolution today?

A. Very relevant. According to the Federal Judicial Center, 1.1% of 274,262 federal civil cases nationwide in 2015 were tried by a jury to a final judgment. Cases are not being tried either because they settle, they are dismissed by motion practice, or are required to be arbitrated. Arbitration figures prominently today in clearing court dockets.As we all know, Congress enacted the Federal Arbitration Act which embodies a strong federal policy to enforce written arbitration agreements, and because of it, many cases do not end up being tried in court.

Q. Do federal courts in Puerto Rico order mediation in civil cases?

A. Yes. The Local Rules of the federal district court allow the court to order and supervise non-binding mediation. Mediation comes up at the request of a party or the court may suggest and even order mediation as part of a settlement initiative. In the First Circuit Court of Appeals, mediation is mandatory before the briefing process begins.

Q. How relevant is mediation and arbitration in your practice?

A. At least 50% of my litigation practice involves drafting mediation and arbitration provisions in commercial agreements, litigating commercial arbitration disputes at the AAA, and serving as a commercial arbitrator for the AAA’s ICDR Center.

Q. What is the ICDR Center of the AAA?

A. ICDR is the International Center for Dispute Resolution of the AAA. It handles all international (non-domestic) arbitrations. It is managed out of AAA offices in Atlanta and New York. I am on the list of roughly 12 commercial arbitrators of the ICDR from Puerto Rico and when disputes arise in Puerto Rico, I get vetted and appointed from that list.

Q. How and when did you become an arbitrator for the AAA?

A. After my three federal clerkships, I wanted to do some judging myself but in private practice. I also like to write opinions and briefs, so writing awards is natural for me. I got appointed to the Construction Roster of the AAA in 1991 and afterwards to the Commercial Panel. I take annual CLE arbitration courses to stay active and serve as an arbitrator in one or two cases a year.

Q. In what types of disputes have you served as an arbitrator for the AAA?

A. I’ve served in many different types of cases. I’ve served in three-arbitrator panels and single arbitration cases in employment and intellectual property disputes, lender’s liability, Law 75 dealer-manufacturer disputes, consumer-lender disputes, construction cases, breach of contract, and a personal injury tort claim arising in St. Croix, USVI. The dispute in St. Croix required me to apply the laws of the US Virgin Islands which is patterned after the common law.

Q. What expertise do you have that qualifies you as an arbitrator?

A. Over 30 years of experience as a commercial litigator and trial-appellate lawyer, particularly in distribution, trade regulation, and antitrust disputes. I’ve served for the AAA for two decades in many different kinds of cases applying federal law, common law, and civil law.

Q. Although you are admitted to practice law in Puerto Rico, does your civil law background qualify you to arbitrate disputes internationally?

A. Yes it does in some jurisdictions. I would be able to serve as an arbitrator in disputes involving the laws of civil code jurisdictions, including Latin American countries and Spain. I suppose that I would be able to serve too in Louisiana that remains a civil law jurisdiction. When we talk about the Civil Law we refer to the law of codes as opposed to the common law of precedents. Both systems have different approaches to dispute resolution.

Q. What do you like the most about serving as an arbitrator?

A. It’s great! It’s like being a judge in private practice. I learn about so many different areas of substantive law, which I find very interesting and rewarding. I am also rewarded by helping parties to solve disputes as efficiently and as quickly as I can. I make it a point to issue written awards within 30 days or less after the closing of an evidentiary hearing. That’s the hallmark of arbitration. What I really find practical for me, is what I learn from the arbitration process that I am able to apply to my own trial practice. I see first hand how the lawyers try the arbitration cases and what makes the presentation of their cases persuasive and what does not work so well.

Q. Do you have examples of things lawyers have done that work and things that don’t work so well?

A. I had a case where defense counsel presented videotaped trial depositions of all the experts. By trial deposition, I mean that the testimony was presented as a direct examination and the opposing party had an opportunity to object and cross-examine. I thought this was cost-effective, saved time, and was helpful. What is more, I didn’t have to order or allow this method of presenting evidence because the lawyers for both sides were civil about it and stipulated to it. I’ve been most persuaded by lawyers that are civil and do not argue or object unnecessarily. One of the best presented cases I’ve presided over was tried by two distinguished lawyers from the bar in St. Croix.

Q. How about a lawyer doing something that didn’t work so well?

A. In a personal injury case, the claimant’s lawyer tried to get his client on direct examination to re-enact an accident to portray the facts as he testified happened. Over respondent’s objection, I allowed the recreation. It was an experiment that did not go so well for claimant because it failed to prove his or her case. It reminded me of when the prosecutor in the O.J. Simpson case had Mr. Simpson try the gloves on for size and the gloves didn’t fit. At best, it was a failed experiment.

Q. What are some of the advantages of arbitration?

A. Privacy and confidentiality of the process. There’s no public record like a court docket. Arbitration awards are rarely published, but some may be available through Westlaw or Lexis. Arbitration agreements may provide for procedural safeguards, like prohibiting punitive damages, the consolidation of disputes or disallowing class action arbitrations, controlling the locale of the arbitration and specifying the qualifications that the arbitrator(s) must have to be appointed. All of these safeguards are designed to minimize financial exposure and risks of liability.
Another benefit is the finality of the arbitration award, but enforcement proceedings in court can take a long time and be as costly as an appeal.

Q. What do critics say about arbitration?

A. It is not without force to argue that arbitration can be as expensive as or more so than litigation. A lot of the costs are related to lawyers trying an arbitration dispute like a court case, with all the usual trappings of discovery and motion practice. There’s now a provision in the AAA Rules permitting the parties to agree to appeal an arbitration award. Some entities like the Economic Policy Institute are of the view that arbitration is pro-business and anti-consumer. See There’s draft legislation in Congress-the Arbitration Fairness Act- that would prohibit arbitration of certain claims, involving antitrust, civil rights, labor employment, and consumer disputes. It does not appear that it will be passed anytime soon.

Q. Do you recommend arbitration for all disputes?

A. It depends on who is your client. Arbitration agreements serve to protect corporate defendants and add predictability in dispute resolution especially in international disputes where foreign law might apply. On the other hand, consumers and small businesses might prefer a jury trial over arbitration.

Thursday, December 8, 2016

Law 21 federal case dismissed for failing to meet jurisdictional amount requirement

Plaintiff Grupo Alimentaria had been an exclusive sales representative of food products of Defendant Conagra’s predecessor company. Conagra acquired the assets and liabilities of the predecessor, including Plaintiff’s contract. After a two-year relationship, Conagra terminated the agreement. In Grupo Alimentaria, LLC v. Conagra Foods, Inc., 2016 WL 5415651 (D.P.R. Sept. 28, 2016) (Gelpí, J.), Plaintiff sued Conagra in federal court and asserted a Law 21 claim for unjustified termination of the sales representative agreement and a Civil Law claim for breach of contract. The complaint alleged damages of $200,000.

Defendant moved to dismiss under Rule 12(b)(1) for not meeting the jurisdictional amount. The relevant First Circuit test shifts the burden to Plaintiff, once Defendant contests subject-matter jurisdiction, to prove with affidavits or an amended pleading that the claim is not to a legal certainty less than the jurisdictional amount in excess of $75,000.

Plaintiff had sold roughly $83,000 in 2013 or 2014 so that applying the stipulated commission rate of 3% to the average historical sales volume for the two-year term of the relationship and multiplying that sum by 5 in Law 21 did not exceed $7,000. Because Plaintiff did not plead facts for any other items of damages in Law 21 and recovery of future loss of earning potential is not allowed by the statute, the Law 21 claim did not meet the jurisdictional amount requirement. The court noted that no Supreme Court of Puerto Rico precedent had interpreted the damages provisions of Law 21. Without citing any authority, the court dismissed the Civil Code claim as duplicative or derivative of the Law 21 claim.

Monday, December 5, 2016

Lesson repeated: if you do not sue on time, you lose, and a distributor is again kicked out of court

This case turns on the scope and reach of an exclusive distribution relationship arising from a verbal agreement or a course of dealings and the application of the three-year statute of limitations for Law 75 actions. The lengthy opinion of the First Circuit may be explained, as described by the court itself, by the “Alice in Wonderland” quality of inconsistent arguments raised by the parties rather than the complexity of any of the substantive issues at stake.

In Medina & Medina, Inc. v. Hormel Foods, 840 F. 3d 26 (1st Cir. 2016), the thrust of the First Circuit’s holding is unremarkable and finds support in the court’s Basic Controlex and Butterball line of cases. That is, the distributor in Medina failed to file in court a Law 75 claim for impairment of a gentleman’s handshake agreement for the alleged exclusive distribution of the Hormel refrigerated retail line of provisions in Puerto Rico within three years after Medina knew or should reasonably have known of the facts supporting its claim. More than three years elapsed from the moment when Hormel first clearly informed Medina that its exclusivity did not extend to sales of Hormel’s refrigerated products made to customers outside of Puerto Rico for resale to club stores within Puerto Rico.

That being said, the First Circuit reinforces in this case settled doctrine that the contours of Law 75 rights, in the absence of a specific remedial provision in the statute, are defined by the verbal or written agreements between the parties. The case also answered the lingering question, albeit in dicta that, if the parties agreed to an exclusive distribution arrangement, there would be no antitrust implications from it.

About line extensions, the First Circuit also affirmed on the merits the district court’s separate ruling that Medina had no basis to claim that it had a right to new Hormel products because it did not prove that Hormel had obligated itself to sell to Medina every new refrigerated product it developed or that Hormel had sold any new products through another Puerto Rico-based distributor for the statutory presumption of lack of just cause to apply.

The First Circuit ratified the Gussco and Irvine line of cases, among others, holding that Law 75 protects contractually-acquired rights, so that if the principal agreed to grant “airtight exclusivity” (a concept not defined in Law 75) to prevent competing sales not only by Puerto Rico-based distributors but by resellers outside of the territory for resale within Puerto Rico, the principal would have to take prompt affirmative action to curtail those sales practices. Thus, held the court, “[t]he dependency of Law 75’s protection on the terms of the contract applies equally to the scope of any protected exclusivity.” And, Medina should have sued promptly after learning that Hormel had a different understanding of Medina’s contractually-acquired rights. For the same rationale, the First Circuit reversed the lower court’s refusal to dismiss Medina’s claim of impairment for sales of the “party-platter” product line in Costco because it also hinged on the time-barred exclusivity claim.

Looking back, the distributor in this case should have sued earlier than it did and that’s not rocket science. But, it is understandable from a business standpoint, though perilous, that the distributor would first try to negotiate better terms with the principal, request better pricing, or demand the principal to take affirmative steps to protect its territorial exclusivity from intrabrand competition before resorting to litigation that would irreparably damage their business relationship. Distributors face a Hobson's choice where you lose rights if you do not sue and lose the trust of the partner if you do. This can be attributed to civil code rules and judicial interpretations on prescription of actions. The message of this case is clear for the distributor to sue on time and then talk.

On the other hand, there are lessons to be learned by the principal, too. Never mind, that before Medina, Hormel had an unpleasant business experience with a distributor in Puerto Rico and had been dissuaded from going into the market knowing that Law 75, according to Hormel, was a “cut-throat” law. This makes it difficult to understand why Hormel would agree to do business with Medina without a written contract having all the bells and whistles to avoid the uncertainty and problems created by different understandings of the parties as to the scope and reach of exclusive distribution rights.

Wednesday, November 30, 2016

Risky Business: The Impact of Filing for Bankruptcy on Distribution Agreements

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.

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.